Albertsons Companies, Inc.(ACI)Q3 2024 法說會逐字稿

Welcome to the Albertsons Companies Third Quarter 2024 Earnings Conference Call, and thank you for standing by. All participants will be in a listen-only mode until the Q&A session. This call is being recorded. The call will last approximately one hour. I would like to hand the call over to Melissa Plaisance, SVP, Investor Relations, Treasury, and Risk Management. Please go ahead.

Good morning, and thank you for joining us for the Albertsons Companies third quarter 2024 earnings conference call. With me today from the company are Vivek Sankaran, our CEO, and Sharon McCollam, our President and CFO. Today, Vivek will provide an update on what we have been working on since the merger was announced and give you an early view of our strategic priorities going forward. Then, Sharon will provide an overview of our third quarter 2024 financial results and fiscal 2024 outlook before handing it back over to Vivek for some closing remarks. After management comments, we will conduct a Q&A session. I'd like to remind you that management may make statements during this call that are or could include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not limited to historical facts, but contain information about future operating or financial performance.

Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are and will be contained from time to time in our SEC filings, including on Forms 10-Q, 10-K, and 8-K. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events, or otherwise. Please keep in mind that included in the financial statements and management's prepared remarks are certain non-GAAP measures. And the historical financial information includes a reconciliation of net income to adjusted net income and adjusted EBITDA. And with that, I'll hand the call over to Vivek.

Thanks, Melissa. Good morning, everyone and thanks for joining us today. First, let me say how wonderful it is to be back hosting all of you on today's call. While we are disappointed that the merger was terminated, we never stopped investing in our business or driving our Customers for Life strategy. I'd like to use my time with you today to provide an update on what we have been working on since the merger was announced and give you an early view of our strategic priorities moving forward. Over the last two years, we have continued to drive and evolve four priorities. One, driving customer growth and engagement through digital connection. Two, enhancing the customer value proposition. Three, modernizing capabilities through technology. And four, driving transformational productivity. To engage customers, we have continued to invest in growth through four digital platforms. These platforms are designed to drive increased sales, more deeply engage our most loyal customers, increase customer lifetime value, and generate digital space and robust data for the Albertsons Media Collective.

The first of these platforms is e-commerce. We run our e-commerce business out of our stores, so our inventory is close to our customers, and we can offer full access to our merchandise assortment. Our investments in e-commerce have driven sales penetration to over 7% of grocery revenue, with our top-performing market over 9%. This growth, which is higher in our first party versus our third-party business, has been driven by the development of new capabilities in our fully integrated mobile app and improvements in quality, speed, and convenience of DriveUp & Go and in-home delivery. While we have grown this business significantly and faster than the market, it is still under-penetrated compared to industry benchmarks and is one of our biggest growth customer acquisition and customer retention opportunities. To capture these opportunities, we are rolling out a store-based five-star certification program to ensure we are delivering a consistent and elevated level of customer service, as well as a series of targeted marketing initiatives to grow sales and penetration.

The second of these digital growth platforms is loyalty. Our loyalty program is integrated into our mobile app and is a key engagement tool for our business. It is the entry point for digital and personalized marketing and a primary contributor of data to our retail media collective. In April of 2024, we launched a simplified and enriched program to make it easier for our customers to earn points and redeem coupons, fuel, and grocery rewards. For the first time, it also allows customers to simply redeem points for dollars off their grocery bill. Since the launch, we've seen more frequent engagement, higher retention and increased customer spend. Going forward, we expect to continue to see increased adoption and we will leverage strategic partnerships to provide our members with even more ways to get rewarded. The third of these digital platforms is pharmacy and health. Our investments in pharmacy have driven sales penetration to over 11% of total annual revenue.

This penetration has been driven by industry-leading core script growth, including GLP-1s, excellence in immunization, and best-in-class service. It has also been driven by the integration of pharmacy offerings into our mobile app through the launch of Sincerely Health. Sincerely Health is a high-engagement, value-added wellness and rewards platform with over 1 million lives. Although the pharmacy business is financially dilutive, cross shoppers between grocery and pharmacy are exceptionally valuable customers, spending three times more and engaging across all service offerings. Going forward, we see Sincerely Health growing as a top loyalty driver and a catalyst for introducing immunization and pharmacist-administered treatments. We also expect to capitalize on continued script and immunization growth from traditional pharmacy store closures. The fourth of these digital platforms is integration of the mobile app for use in our stores, which is supported by excellence in store-level execution.

When our customers are in our stores, we want them to engage with us digitally. To enable this, we launched an in-store geo-located mobile feature that delivers real-time coupons, helps shoppers locate products and plan meals, and assists customers with their shopping lists. By the end of 2024, we expect over 8 million of our customers to have used this in-store feature. Going forward, we expect to see continued increases in customer utilization of this feature and are planning to launch additional capabilities to drive even deeper engagement over time. All these platforms working together are generating eyeballs, digital inventory and data with Albertsons Media Collective or AMC, which we brought in-house in fiscal '22. Since then, we have invested significantly in building industry-leading technologies to deliver an easy-to-use, dynamic and transparent measurement platform, which is improving endemic and non-endemic brand reach.

We've also improved our ability to define shopper audiences, run targeted media campaigns, enhance product offerings and achieve parity in campaign measurement. With these capabilities, while on a small base, AMC is currently growing faster than the market. Looking forward, we will continue to invest in delivering consistent omni execution for brand campaigns across our digital and physical assets. In addition, we expect to build new partnerships that add even more eyeballs, digital inventory and capabilities to our platform. AMC continues to be one of the largest opportunities we have to fuel reinvestment into our business. I'll now discuss our initiatives to enhance our customer value proposition, which includes not only price, but also the ease of the value-added services we provide to customers, both in-store and online. To date, loyalty memberships, digitally engaged customers, omnichannel households and transaction counts are all growing because our Customers for Life strategy places the customer at the center of everything we do.

So, as our customers' needs for value evolve due to inflationary pressures, so are our strategies to address these needs. These strategies to drive better value for customers in addition to increasing total category growth include working with our vendor partners to strategically invest in price in certain categories and markets and increasing Own Brands penetration. To deliver this, we will source products that customers trust and need at a better value to drive profitable unit growth and increase share of wallet from existing customers. In Own Brands, we will also offer products at an attractive entry price point so that customers always have an accessible alternative and more prominently feature existing Own Brands offerings. Our third priority is the modernization of our capabilities to technology. Our north star has been to use technology in everything we do. Over the last few years, we have invested strategically to make technology the key enabler of all major future growth and productivity initiatives.

These investments include migration to the cloud, the launch of our end-to-end e-commerce capabilities, the digitization of pharmacy and health, state-of-the-art tools for pricing and promotion, the enablement of self-checkout, productivity tools to manage replenishment, shrink and labor, new supply chain systems and an industry-leading retail media platform. These investments have created long-term capabilities that will continue to allow us to accelerate the transformation of our operating model going forward. They also position us well to take advantage of the evolution of AI and machine learning to elevate our core business processes. The final priority is driving transformational productivity. We have continued to develop our productivity engine, designed to systematically improve the efficiency of our business and reduce costs. Over the next three years, we plan to deliver $1.5 billion in savings to invest in our customer value proposition and growth initiatives as well as to offset inflationary headwinds.

To achieve this, we are leveraging our recent investments in technology and the latest innovations and business best practices to build industry-leading capabilities and reduce costs. The first of these initiatives is leveraging our consolidated scale to buy goods for resale. The next is transforming our ways of working, including rebalancing our onshore and offshore activities. In our supply chain, we are continuing to make significant progress on automation and the rollout of our new warehouse management system or WMS. By the end of 2025, we expect 30% of our distribution volume to be automated and our WMS to be fully implemented company-wide. These supply chain initiatives improve in-stock conditions, differentiate our fresh quality, lower our cost to serve and enhance our end-to-end data analytics capabilities. And finally, in store operations, we are leveraging a more robust technology platform to drive enhanced efficiency, improved customer experience and deeper associate engagement.

For example, we've implemented AI technologies that provide a prompt for missed scans, which is reducing inventory shrinkage and improving the customer and associate experience. We're also expanding the utilization of technology in our produce departments, which is driving increased sales, reduced inventory shrinkage, improved quality and enhanced labor productivity. I will now hand it over to Sharon for an overview of our third quarter and an update on our 2024 financial outlook.

Thank you, Vivek, and good morning, everyone. It's great to be here with you today. We are pleased with our third quarter results and the operational benefits we are seeing from the investments we have made in our business. We are a stronger company today than pre-merger, and the initiatives that have driven these results affirm our confidence in our future. We delivered solid operating and financial performance during the quarter across all key metrics in an environment where the consumer remains cautious. The financial highlights of the quarter included an identical sales increase of 2%, a digital sales increase of 23%, adjusted EBITDA of $1.065 billion and adjusted EPS of $0.71 per share. Loyalty members increased 15% to 44.3 million, and we increased our quarterly dividend by 25% to $0.15 per share. I'll now provide additional color on the financial details that drove these results. The ID sales increase of 2% was primarily driven by a 13% increase in pharmacy and a 23% increase in digital sales.

The digital sales increase was primarily driven by strong growth in first-party sales, fueled by continued innovation in our digital offerings and improved service levels. Our Q3 '24 gross margin was 27.9%. Excluding fuel and LIFO expense, the gross margin decreased by 27 basis points compared to Q3 last year. Strong growth in pharmacy sales, which carries an overall lower gross margin rate, and increases in picking and delivery costs related to the continued growth in our digital sales drove this decrease, but was partially offset by the benefits from our productivity initiatives. Our selling and administrative expense rate was 25.1% this quarter. Excluding fuel, the SG&A rate increased 6 basis points compared to last year. This increase was primarily driven by merger-related costs and an increase in occupancy-related expenses, including third-party store security services, partially offset by the leveraging of employee costs and benefits from our productivity initiatives.

Interest expense decreased $7 million to $109 million during Q3 '24. This reduction was primarily driven by lower outstanding debt. Income tax expense in the third quarter was $14.5 million, a 3.5% effective tax rate compared to 20.8% effective tax rate in Q3 last year. This decrease was primarily driven by the recognition of an $81 million discrete state income tax benefit related to audit settlement. Excluding this discrete benefit, the effective income tax rate would have been approximately 23%. And as mentioned in the highlights, Q3 '24 adjusted EBITDA was $1.065 billion compared to $1.107 billion last year, and adjusted EPS was $0.71 per diluted share compared to $0.79 in Q3 '23. Turning now to the third quarter balance sheet and cash flow. Capital expenditures of $494 million were driven primarily by investments in the modernization of our store fleet and our digital and technology platforms.

We also returned approximately $70 million to our shareholders through common stock dividends. Net debt leverage at the end of the third quarter was 1.9 times, and the balance sheet remains strong. I'd now like to discuss our 2024 outlook. As we look forward to the balance of fiscal '24, we do so with continued confidence in our Customers for Life strategy and our operational execution. We are engaging customers in our digital platforms, driving traffic to our stores and leveraging the investments we have made to drive efficiency in our operations. So, with that as our backdrop and our Q3 results behind us, ID sales are now expected in the range of 1.8% to 2% versus 1.8% to 2.2%, and adjusted EBITDA in the increased range of $3.95 billion to $3.99 billion versus $3.90 billion to $3.98 billion. This increase in adjusted EBITDA is driven by the ongoing benefits of increased productivity. We are also increasing our adjusted EPS range to $2.25 to $2.31 per diluted share to reflect the corresponding increase in adjusted EBITDA.

Additionally, due to the $81 million discrete state income tax benefit recognized this year in the third quarter, we expect our full year tax rate to be in the range of 15% to 16%. Our capital expenditures remain in the range of $1.8 billion to $1.9 billion. Before I hand it back to Vivek for some closing comments, I would like to spend a minute on how we are thinking about capital allocation over the longer term. First and foremost, we will continue investing in our business to drive long-term sustainable growth. We also plan to maintain our quarterly dividend and seek to grow it over time, as demonstrated by the 25% increase that we declared this morning. And finally, we plan to opportunistically return excess cash to shareholders by repurchasing shares under our recently announced $2 billion share repurchase authorization. Our balance sheet is strong, and it provides flexibility as we drive our business forward and seek to generate long-term sustainable shareholder value. Consistent with our previous cadence, we will provide our outlook for fiscal '25 in our fourth quarter conference call in April. I will now turn the call back over to Vivek for closing remarks.

Thank you, Sharon. As we look forward, we start this next chapter in strong financial condition with a track record of positive business performance. Over the last two years, we have invested heavily in our core business, developed new sources of revenue and strengthened our capabilities through the rollout of new technologies. We have retained our best talent and even added and strengthened talent in critical positions. Our Customers for Life strategy is working. We have added loyalty members, digitally engaged customers, omnichannel households and increased transaction counts. Our stores are operating more effectively and efficiently as our new technologies take hold, and we are proactively managing our costs. Our productivity programs, both old and new, are creating fuel for investments and are an offset to inflationary headwinds. We believe all of this puts us in a strong position to continue to transform the business and adapt to an ever-changing consumer landscape.

We also know that we must elevate our performance to compete with the very best in our industry. We are energized by that challenge and see a path to doing so. We are confident in our ability to execute against these opportunities. We will share more of our long-term plans at the end of the fiscal year. I would like to thank our 285,000 associates for their loyalty and dedication to our customers and communities. We are so proud of the difference they make. In December, we published our latest Recipe for Change report and highlighted the role that our associates play in fighting food insecurity and helping reduce the impact of our operations on the environment. They are the ones who make all of this possible, and I want to applaud them for their hard work and dedication. We will now take your questions.

Our first questions come from Ken Goldman with JPMorgan. Please proceed with your question.

Hi, good morning. Thank you. I wanted to ask about guidance and the adjustments that were made, particularly on the top line. It's great to see, of course, EPS and EBITDA, the outlook coming up. Could you talk a little bit about the decision to maybe trim the top line or the top end rather of IDs ex fuel, what you're seeing as the fourth quarter started? And any specifics around that? Thank you.

Hey, good morning, Ken. It's Vivek here. Ken, December has been kind of a little wonky in that our four-week market share performance improved very materially in December. But what we're seeing, it looks like as the data is coming in, the food and beverage sector overall sequentially slowed down in December. And it's tough to get back a Christmas holiday. So we're just reflecting that slowdown, which we experienced too.

Do you believe it's more of a macro? I know you're not promising this, but just based on your data, more of a macro than a company-specific pressure point?

That is correct. The data indicates a general slowdown in the food and beverage sectors. It's also worth noting that the calendar was different, and we had a shorter window during an important holiday, making it challenging to recover. So, we wanted to be cautious about that.

And then quick follow-up, and thank you for that. Of the $1.5 billion you're talking about in terms of efficiencies, do you have any kind of rough idea at this time how much of that will be reinvested versus dropped to the bottom line?

Ken, we haven't provided an outlook on that, and we'll be providing an outlook on 2025 in our fourth quarter conference call in April.

Got it. Thank you.

Thank you, Ken.

Thank you. Our next questions come from the line of John Heinbockel with Guggenheim Partners. Please proceed with your questions.

Hey, Vivek, I wanted to start with when you think about all the new customers, right, that you've picked up over the last two years, how do you size or think about wallet share, right? Because they come on the system, their wallet share is not as high as households that have been around a while. How big is that opportunity? And how long does that take to move them up to where your more mature households are?

Good morning, John. That's a great question. We discuss the four different platforms we have, and we've observed that when customers engage with any one of those platforms, their engagement can increase significantly, possibly 2 to 3 times. Engaging with a second or third platform can amplify that further, potentially reaching 4 to 5 times. Our main challenge is to get customers active on any one platform and then encourage them to use multiple platforms. We understand that there is a ramp-up period for each platform. While I can't provide specific details on the ramp-up times, we are focused on managing these processes. That's why we're enthusiastic about engaging customers on these platforms, as it enhances their spending with us. Our goal is to attract more customers while also retaining our existing base. We're addressing aspects such as improving our value proposition to ensure we keep our momentum as we introduce more customers to these platforms. This will be part of our strategic planning as we approach the end of the fiscal year.

Maybe just a follow-up to that, right, so if you think about food volumes, right, I think if we take pharmacy and inflation out, and this is not just for you, I think it's for others, food volumes are still in negative territory. When do you think that flips to positive? And then in your secular algo of 2% plus, what do you think the food volumes are? Is it half that? Is it 1% or is it less? Or where does that shake out?

Typically, John, we've thought of that as around 1% to 1.25% for inflation. That's how we plan for it. Consider about 50 basis points of food volume growth. That's the long-term algorithm we have in mind, and there are also some share gains that accompany it. The share gains come from implementing the strategies I mentioned in response to your last question. However, 50 basis points would represent the typical food volumes in our country. It's difficult to predict when we will return to that level. I believe we are all trying to find that answer.

Thank you.

Thank you. Our next questions come from the line of Edward Kelly with Wells Fargo. Please proceed with your questions.

Hi, good morning, everyone and thanks for the update. I wanted to start with just a question around investment. I mean it's good to hear the sizable productivity initiatives. I think there's been a little bit of concern that Albertsons might require more significant upfront investment coming out of a deal break. The press release kind of suggests that productivity pays for investment. But I'm just curious about the timing of that as we think about next year because I think investors are maybe a little bit concerned around there being some near-term pressure and maybe some mismatch of productivity and investment. Could you just maybe provide a little bit more color around how you're thinking about all of that?

Yes, Ed, in line with our previous approach, we will share our outlook for fiscal '25 in April, at which point we can discuss it in more detail. We are evaluating productivity trends along with our investments and will have much to present in April. Of course, we need to assess our position at the end of the year, among other factors. Therefore, we will maintain this schedule for now.

Ed, I want to emphasize that investors should not worry about the investments we've made in the company to enhance our capabilities and optimize our assets. We've discussed the technologies we've implemented, and we have not limited any of those. On the contrary, with these investments, our productivity has increased, allowing us to achieve more with every dollar we invest.

And then maybe just a follow-up. I mean you have a lot of opportunity, whether it's the media, all of the cost saves, including central buying, private label, et cetera. How quickly do you think you can ramp those initiatives, whereas they become a more meaningful contributor to the P&L?

They all vary and will progress at different speeds. For instance, when we consider offshoring and onshoring, some elements will move quickly because we are somewhat late to that process. It's exciting to see companies that have built strong capabilities in these areas. Some aspects will advance more rapidly; we identify those as opportunities for faster movement. In terms of purchasing, there are elements we can acquire quickly, but we're cautious since we recognize that others have made mistakes in this area. We want to proceed carefully. To put it simply, I believe we will see a consistent increase in productivity from these initiatives over the three-year period Sharon mentioned.

Okay. Thank you.

Thank you. Our next questions come from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions.

Good morning, and thanks for taking my question. So going back to your earlier commentary about the industry slowed in December, just any thoughts in terms of what could be driving that slowdown?

Rupesh, honestly, I don't know. The only notable difference about December is that we had a much shorter window between the holidays. This is significant, especially in an environment where consumers are being cautious and sensitive to prices. I think we will all have a clearer understanding as more data becomes available, but that's the only reason I can think of that might have contributed to it.

Great. And then maybe my follow-up question. So, Sharon, just on the gross margin line, so we did see sequential improvement on gross margins, Q3 declined versus Q2, just curious how you're thinking about it for Q4.

We haven't provided guidance for Q4, but we expect the same factors to influence the margin. We anticipate growth in pharmacy sales and continued momentum in our e-commerce business, both of which will lead to a similar mix shift impact. It's important to note that these changes were balanced by productivity, which remains strong. Overall, we expect the situation to be comparable. Additionally, we're seeing benefits from shrink and will continue to implement initiatives. We've invested in technology, which we discussed with you a few weeks ago, and we believe this technology will yield positive results as it enhances its AI capabilities in our self-checkout systems.

Great. Thank you. I’ll pass it along.

Thank you. Our next questions come from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions.

Hi, good morning, everyone. So, in the last couple of years since we spoke, I wanted to hear about market share through your lens. You have better market-level information than we do. And specifically, excluding pharmacy, curious what your assessment is? Where do you stand? Obviously, Vivek, you made the comment that you're aspiring to get stronger. I don't know if that's a market share comment or just an overall growth level, but can you assess where you are, especially where you landed through the third quarter?

Simeon, good morning. When we think about market share, I'll tell you two things that are very, very clear to us. We have a mass retailer and a club retailer that are growing much faster than us. And no matter what anybody thinks, they are real competitors to us, okay? And we know that to win in the marketplace, we've got to compete with them. And until we compete with them, we can feel comfortable about market share in certain segments of our retail, but we've got to get to better performance to gain market share overall. And that's what I was reflecting on the notion of getting stronger is that we've got to accelerate our growth rates to compete with the very, very best in the industry, Simeon.

My follow-up, I want to talk about the volume growth. And Vivek, you mentioned, we're not sure when we'll get there. And I guess, across the chain, you have information on pharmacy, especially GLP-1. Do you think there is a direct correlation between the GLP-1 usage and then unit consumption? Is that part of the ingredients right now?

That could be, Simeon. It's challenging to overlook the growth we're witnessing in GLP-1s, which is evident across the industry. Having worked in food and beverage for over 15 years, I find it difficult to ignore the significant reduction in calories associated with these products. If 10% of people consume 10% less, instead of experiencing a 50 basis points reduction in volume, we could see a 100 basis points negative impact on volume. Therefore, while I can't definitively say that it's a problem, we are certainly examining it.

Okay. Thanks. Good luck.

Thank you. Our next questions come from the line of Mark Carden with UBS. Please proceed with your questions.

Hi, good morning. Thanks so much for taking the questions. So, to start, another follow-up on pharmacy. Just when you look at that business overall, how much of it do you think is being driven in terms of the growth by sales capture from competitor closures versus your own initiatives? And then you talked about GLP-1s being a positive. Just how has contribution trended relative to what you've seen in recent quarters? Thanks.

Good morning. I believe it's a mix of both factors. During the two years of COVID, we focused on making our pharmacy platform accessible on our app, allowing users to easily schedule services and receive constant updates. We introduced an application called Sincerely Health, which enhances the pharmacy experience and promotes user engagement on our app. Our in-store execution and Net Promoter Score have also improved, contributing to a better pharmacy experience overall. We're witnessing significant competitive closure, which is attracting new customers to our franchise, as well as grocery shoppers who are now interacting with our pharmacy services. Regarding GLP-1s, while their contributions are currently negative, it’s worth noting that GLP-1 customers are valuable to us, and we anticipate that the financial dynamics will improve over time, even though they remain negative for now.

Great. When analyzing your overall core grocery performance, are you noticing any changes in performance based on different income groups?

Not a whole lot. We serve a lot of different segments. We're not seeing anything material from a change in the income cohorts. I think what we are seeing is that customers in a cautious environment tend to shop more retailers. And so we're seeing that across the board. And so I think the monies are getting distributed differently from a year ago or two years ago.

Great. Thanks so much guys and good luck.

Thank you.

Thank you. Our next question comes from the line of Leah Jordan with Goldman Sachs. Please proceed with your questions.

Good morning, and thank you for taking my question. First, just if you could comment on how you view your store footprint today, I know you have opened some new stores and done remodels this year. But what other opportunities do you see for further optimization from here?

As we look ahead, Leah, we believe there are two key aspects to consider. First, we have opened several stores this year, and many of these openings have been exceptionally successful. Additionally, we have enhanced our data analytics capabilities in real estate, allowing us to identify markets where we perform well and can deliver an excellent experience for our customers. Therefore, there are opportunities for new store openings in certain markets, though I prefer not to specify which ones due to the competitive landscape. On the flip side, during the merger period, we faced challenges in rationalizing our footprint and maintaining the overall health of our real estate portfolio. However, we will soon begin to see some progress in this area. You can expect more store openings, but we want to clarify that this should not be interpreted as a sign of any issues. There may, however, be more store closures in the coming years than in the past due to the need for better management of our portfolio.

Okay, that’s helpful information. Thank you. For my follow-up, I want to explore retail media further. Could you provide more detail on the opportunities you see there and how you perceive your competitive position in the market, especially since some competitors are ahead? Also, could you elaborate on when you believe this could become a significant contributor to profitability?

Sure, Leah. We brought our retail media business in-house last year and have invested significantly in building the technology platform for it. We are experiencing rapid growth from a smaller starting point, and we believe it will become significantly impactful in the next three years. Starting later does not prevent us from creating a successful business since we still have our customers and a solid presence in various markets. Our capability to deliver a comprehensive solution, both in-store and digitally, for clients investing in this area will be a key differentiator. We're enthusiastic about the opportunity ahead. We have all the necessary resources and are now focused on scaling the business by enhancing sales in addition to developing the platform.

And when you look at Vivek's prepared remarks, what we've been working on, what we've been building and where we're seeing success, it's within the growth in those four digital platforms. That is what was necessary in order to create the robust inventory we that we need for the Albertsons Media Collective, and we have invested heavily in those over the last several years, especially in the last two years. So, we are now prepared to step up and to really be able to start capturing our fair share of that market.

Great. Thank you.

Thank you. Our next questions come from the line of Robby Ohmes with Bank of America. Please proceed with your questions.

Good morning. Sharon, could you provide some insights into the FIFO gross margin excluding pharmacy and digital for this quarter and what the outlook is for that? It would be helpful to understand the current situation regarding your core FIFO gross margin.

Yeah. So, Robby, I just talked about the fact that what has been driving, and this has actually been consistent, in our gross margin, the mix shift that we've seen in pharmacy sales, which is going to carry a very mix shift impact to the margin, it's dilutive, of course. And then the increase in e-commerce, I mean, we are running this quarter 23%, and we've been in the 20% ranges all year. So we expect that to continue to stay robust. So that's going to mix shift the margin negatively. And then we do expect to continue to drive productivity initiatives into the gross margin. So I think those dynamics are going to continue, and you should expect those to continue into 2025, which we actually see as a huge positive. These are areas that drive outside customer lifetime value and seed AMC. So that's why we will continue to be very excited about both of those.

And Sharon, just ex the mix shift pressure from pharmacy and digital, are you seeing any kind of pressures competitive-wise or anything going on in the just sort of the core gross margins?

I think we continue to invest in price. So, as we do that, but we have other opportunities. In productivity, it also includes shrink and other things. So we believe that we have been doing a very good job balancing that. But over time, there could be margin pressure, and that’s why it is imperative that we drive this productivity engine that we just shared with you today, and we gave you that $1.5 billion target.

But nothing abnormal. Nothing anything abnormal, Robby.

Terrific. Great. Thanks so much.

Thank you. Our next questions come from the line of Scott Mushkin with R5 Capital. Please proceed with your questions.

Hey, guys. Welcome back. And I know you have some stores down there in Southern California, so our thoughts are with those associates down there.

Thank you, Scott.

I wanted to touch on something around pricing. Obviously, this topic comes up with a lot of people. But my thought, and I want to get your take on this, is that there are examples out there in the marketplace where there is a price gap between mass merchants, a decent one, yet they're gaining share. And so how do you balance as you think about investing kind of the store experience, enhancing merchandise versus just reducing prices?

Thank you, Scott. You're correct; this discussion about pricing isn't new. I want to provide you with some context. In the past year, 50 million households have shopped with us, and we're seeing growth in transactions and increased engagement across all our platforms. Overall, customers see value in our offerings relative to our prices, and that trend continues. However, we understand that customers are feeling pressure and are being cautious, exploring more shopping options. Some retailers are performing well and are competitive on pricing. We believe we don’t face a widespread macro issue, but we acknowledge that in certain markets and categories, we need to sharpen our pricing, and we will address that moving forward. We also recognize the need to drive productivity to fuel these adjustments. Many initiatives discussed earlier are aimed at enhancing productivity so we can become more competitive where it's necessary. Our philosophy has always focused on adding value, whether through our in-store experience or product offerings, which we believe provides benefits that customers may not find elsewhere.

That's great, Vivek. And then a follow-up question on this is when you think about the store experience, maybe the overall experience in CapEx, how do you think about your store fleet and what you might need to invest in? And I know, obviously, Walmart is investing a lot in their store fleet, and probably some of their market share gains are attributed to that. How do you think about the overall experience and the investment, vis-a-vis CapEx?

Scott, over the past few years, we have gained a comprehensive understanding of the data and analytics related to our investments, not only in new stores but also in remodels. We now know how much of each dollar spent on a store goes towards maintenance compared to driving growth. When we focus on driving growth, these investments are aligned with key initiatives, such as enhancing e-commerce capabilities in the store or improving the ready meals experience. All of these investments support our growth strategies, and every single investment in a store is evaluated this way. This is why we have become more effective and efficient in how we allocate our capital.

And, Scott, if you look back on the history of CapEx in the company, we have invested more money in the last three to four years in capital than we had in our history. And even though we were in a merger situation, it had no impact on our CapEx related to what was in our strategic plans related to our fleet of stores. So, we continue through the merger to invest capital in the remodel of our stores. So, moving forward, we expect to do the same, and there has been a consistent strategy, as Vivek described, to continue to maintain our stores and invest in that deferred maintenance.

Perfect. Thanks, guys.

Thank you. Our next questions come from the line of Michael Montani with Evercore ISI. Please proceed with your questions.

Yes. Hi, good morning. Can you hear me?

Good morning, Michael. Yeah.

Great. Okay. Just wanted to unpack, I guess, two elements, if I could. One was on the ROIC front. I just wanted to think about how we should be looking at that moving forward and how important store rationalization could be to that one. And then secondly, I guess, was around the buyback side. And, Sharon, what would you think about for free cash flow this year? What's sustainable free cash flow? And then is that really how we should think about the pacing against the $2 billion authorization?

We will provide our 2025 outlook in April and discuss it in more detail then. We mentioned a long-term growth rate of about 2%, and we expect our adjusted EBITDA to grow somewhat faster than that. Our projected CapEx is between $1.8 billion and $1.9 billion. This aligns with our historical performance. We'll share more insight in April, Michael. Regarding share buybacks, we intend to buy shares opportunistically and will not be engaging in an ASR, as previously communicated. However, we do plan to repurchase shares using excess cash when the opportunity arises.

Thank you. Our next questions come from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your questions.

Yeah. Thanks. Good morning, guys. I wanted to dig in a little bit more with the productivity improvement effort. The $1.5 billion in cost reduction that you guys are targeting, are there, like, big buckets where you see opportunity or is it just lots of small things that you just can do more efficiently and it adds up to $1.5 billion?

Joe, it's both. If you look back at our history over the last five years, we've consistently delivered productivity, often exceeding our announcements about it. This productivity engine is ongoing, focused on identifying even the smallest savings, and we've developed a governance structure around it that has integrated into the company's fabric. We're also introducing new aspects, such as improvements in general and administrative costs and better purchasing practices, which are new areas of productivity we are pursuing. All of this contributes to the targeted $1.5 billion. So, it's a mix of both, Joe, and these are significant line items we are addressing.

And I think what's important is that we have been working on these productivity initiatives now for two years. In other words, we're not starting. This $1.5 billion is identified. We know what we're going after. We've got plans in place to do it. We didn't just come and lay out a plan today. So, it is very well underway. And you guys, even by our next call, will see some of these things unfolding.

Thank you for that. Vivek, you mentioned the differences in buying. Could you elaborate on that? It seems like you are planning to centralize the buying process a bit more. Could you explain how that will work?

Joe, I would frame it by saying that we plan to leverage our scale more effectively and enhance our support for our suppliers so they can achieve the growth potential I believe is possible with us. I want to clarify that I don't want people to take away the notion of centralizing, as that can lead to unproductive mental models. However, we can explore ways to utilize scale through data, technology, and improved decision-making.

That’s really helpful. Thanks, Vivek and Sharon. Good luck guys.

Thank you.

Thank you. Our next questions come from the line of Bill Kirk with ROTH. Please proceed with your questions.

Good morning. In the deal divestiture process, there were over 60 potential bidders interested in some of your stores. Have conversations with those bidders continued, particularly considering comments made in court about possibly closing stores or exiting markets?

Bill, we are intensely focused on running our business. There are numerous opportunities ahead of us that we are excited about. That is where our attention is directed. What Sharon mentioned earlier regarding store closures is more about returning to the normal business pace, as we haven't been able to maintain that speed over the past couple of years. But that is our primary focus. We are not currently engaging in discussions with others.

Okay. And then as a follow-up, Mark asked earlier about performance among different income cohorts. Maybe you could give us some detail on how, like, different food product categories are performing, like fresh versus frozen or packaged versus fresh, things like that.

We have a larger selection of fresh items, which is central to our value proposition. The breadth of our fresh assortment and the value we provide is key. For instance, when I mention ready meals, it's something you'll notice in our stores where we focus on convenience for our customers, making those sections popular destinations. We prioritize this area, and our ongoing challenge is to enhance our offerings in other categories, especially in the center store. That's our perspective on our value proposition.

Okay. Thank you.

And Bill, I’d just like to add to what Vivek mentioned regarding the question about other buyers and transactions. It’s important to emphasize that our primary objective is to generate long-term value for our shareholders. If a strategic transaction presents itself, we will certainly evaluate those opportunities. Vivek characterized our approach as more reactive than proactive at this time. However, despite the lengthy merger process that ultimately fell through, our Board and our company still believe this is a value-creating strategy; it will simply be reactive rather than proactive.

Thank you. Our next questions come from the line of Kelly Bania with BMO Capital Markets. Please proceed with your questions.

Good morning. Thanks for taking our questions. Appreciate the disclosures on e-commerce. I think if I heard it correctly, there was a comment that the 1P component of your e-commerce is bigger than 3P, but maybe correct me if I'm wrong there. But was curious just how you think about balancing that 1P growth versus 3P, along with the margin implications of those two components of e-commerce and particularly as you think about the Albertsons Media Collective opportunity within those different areas of e-commerce.

Good morning, Kelly. Yes, you're correct. The first-party component is larger than our third-party component and is growing at a faster pace. We appreciate this because, as you mentioned, it enhances our digital engagement and provides inventory for our advertising efforts. Additionally, it allows us to gather customer data, which helps us connect them to our various platforms. I often tell people that if they want to understand our business, they should open our app, where they can see everything we offer. We want users to explore and engage with all the features in the app. Economically, we are becoming increasingly efficient in our first-party operations, not only in terms of operating costs but also in the speed of delivery. We believe speed is essential, and we have intensely focused on ensuring that customers receive their products quickly, and we've excelled in that area. We value our first-party business for all these reasons, Kelly.

And, Kelly, I would just add that, what is most important to us is serving our customer where, when and how they want to be served. Thus, the 3P business is important because there are customers who choose that. And we support both, but 1P is by far the fastest-growing piece of our business, and that is due to the investments we made in those four digital platforms.

Well said, yeah.

And just a follow-up on that. Is that 1P largely a pickup? And how long should we think about the gross margin pressure associated with the picking and the labor associated with that? How long should we expect that gross margin pressure to continue?

We expect our digital business to grow significantly. Vivek mentioned that our e-commerce sales now account for 7% of our total grocery sales, and we anticipate continued growth in this area. The e-commerce segment is still relatively underrepresented in the overall grocery market, so I believe this trend will persist in the future. Additionally, the value generated from our data will benefit the media collective, and we want that growth to continue.

And that's where the customer is going to.

Thank you. We do have time for two more questions. Our next questions come from the line of Chuck Cerankosky with Northcoast Research. Please proceed with your questions.

Good morning, everyone. First off, the 23% tax rate ex the state tax benefit, is that the number that is being used in the guidance and that we should think about for next year, 23% tax rate?

You can calculate it, Chuck. That seems like a reasonable range. Tax can be a bit unpredictable, but that sounds good.

And then focusing on the automation of the distribution centers, how many are automated at this point? What number are you looking at to do over the next two years?

Chuck, we have completed three projects, with two or three more set to open very early this year. We are enthusiastic about our progress in this area. The Board has approved the necessary capital, and our team is improving in this execution. We believe this initiative is a key driver of our performance and productivity. Therefore, we will continue to expand it.

Thank you. Good luck.

Thank you.

Thank you. Our last question will come from the line of Jacob Aiken-Phillips with Melius Research. Please proceed with your question.

Hi, all. Thanks for the question. So I just wanted to see if you had any more color on changes in the consumer. I understand December was kind of wonky, but you provided a little detail on, like, income level. But maybe any more on that and then on, like, regional variations or changes since 2Q?

Not much more to add. We need to observe how the next few weeks develop to determine if December was an anomaly or if it indicates a longer trend. Currently, I don't have further insights on that. From a macro perspective, consumer behavior seems consistent with a few months ago; people are being more cautious and are price-sensitive. They're visiting more stores than they did before the pandemic, which alters the competitive landscape for wallet share. Additionally, we haven’t seen significant changes across the different segments we serve. Our focus remains on simplifying the experience for consumers, offering a strong fresh product assortment, and making it easy for them to engage with us across all our platforms. When they do, we capture a larger share of their spending, which is our priority.

The guidance suggests a broad range for the fourth quarter regarding comps, EBITDA, and EPS. Can you explain what factors would lead to achieving the upper end compared to the lower end of that range?

Yes. There were several significant events that occurred in our fourth quarter, which begins in December. This period includes important grocery shopping times around major events and holidays, such as the Super Bowl and Valentine's Day. These holidays are crucial for our business and contribute to the variability in our results. We've seen shifts in product mix and timing this year, especially between the Super Bowl and Valentine's Day. These factors influenced our performance during the quarter and led to variability in our outcomes.

Thank you.

Thank you. That does conclude today's question-and-answer session. I would now like to hand the call back over to Melissa Plaisance for closing remarks.

Thanks, everyone, for participating today. And we look forward to talking with you in follow-ups. Take care.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.