Ladies and gentlemen, welcome to the Albertsons Companies Second Quarter 2020 Conference Call, and thank you for standing by. This call is being recorded. I would like to turn the call over to Melissa Plaisance, GVP of Treasury and Investor Relations. Thank you. You may now begin.

Good morning, and thank you for joining us for the Albertsons Companies' Second Quarter 2020 Earnings Conference Call. With me today from the company are Vivek Sankaran, our President and CEO; and Bob Dimond, our CFO. Today, Vivek will start with some opening remarks, share insight into our strong results and outline recent progress against our strategic priorities. Bob will then provide the financial details of our second quarter and full year outlook before handing it back over to Vivek for some closing remarks. After management comments, we will conduct a question-and-answer session. I'd like to remind you that management may make statements during this call that 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. These risks and uncertainties include those related to the COVID-19 pandemic, about which there are still many unknowns, including the duration of the pandemic and the extent of its impact. 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 Form 10-Q, 10-K, 8-K and our Rule 424 prospectus dated June 25, 2020. 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.

Okay. Thanks, Melissa, and good morning, everyone. Thanks for joining us. Across the Albertsons Companies, we are focused on winning, which starts with executing consistently against our strategic priorities. I am pleased to say that our strategy is working as demonstrated by our results this quarter that, by all measures, were outstanding. Our identical sales came in at 13.8% with adjusted EPS growth of 253% versus the prior year. Adjusted EBITDA increased 67% to $948 million, with robust flow-through of approximately 20%, excluding fuel. Our digital sales also grew 243% year-over-year. And importantly, we continue to gain significant market share versus both food and MULO in both dollars and units. Our team remains focused on our customers, working hard to deliver an excellent shopping experience, whether they're new to Albertsons or have been shopping with us for years. To our associates, thank you, thank you for working through the daily challenges and striving to give our customers an easy, exciting, friendly and safe experience. Many customers have shifted their shopping habits during the pandemic, and we have adapted quickly. In general, we are seeing customers continue to come to our stores less often but are buying much larger baskets, including new categories, as we fill their one-stop shopping needs. And many have chosen to use our eCommerce offerings, both home delivery and Drive Up & Go, and overall have increased their household spending with us. This enduring secular shift in shopping habits is confirmed daily despite the economy opening in most parts of the country. Importantly, all income segments have increased their spend with us. We watch the impact of the recession closely, and we are increasing our traction even with lower-income shoppers who generally come a bit more often and spend less per trip. We're able to provide high-quality, fresh and great value to them through our opening price points in Own Brands and just for U personalized offers to make concentrating trips with us more attractive to this segment. With that as a backdrop, let me share with you some of the actions we've taken that led to our strong results this quarter and will drive continued performance going forward. Our first strategic priority is to maintain in-store excellence. Throughout this pandemic, our frontline teams have been nothing short of amazing, and we couldn't be more appreciative of their efforts. We have remained relentless in our focus on being in stock and maintaining a nimble supply chain and on customer and associate safety while, at the same time, reducing the cost of managing the pandemic. We have made material improvements quarter-over-quarter through efficiency and innovations. One example is our new health screening kiosks for associate temperature checks that we're deploying in our facilities, which will reduce associate contact, reduce labor and improve the accuracy of screening. Strengthening the breadth of our product assortment and mix has been a critical driver of results. Our focus on fresh continues to pay off during the pandemic and has been a key differentiator for us while people spend more time at home. One example is in our seafood category where sales are up 46% in the second quarter compared to a year ago as well as in other categories like floral where sales are up over 20% year-over-year in Q2. While these departments are relatively small, the growth we are seeing highlights how our sourcing team has helped us stand out with the supply of high-quality products and assortment breadth that meets our customers' needs with a one-stop shop. Our Own Brands portfolio is an important element of the assortment of products our customers look for. The portfolio is comprised of 9 brands and over 12,000 unique items. Remember that on average, our Own Brands drive a 1,000 basis point gross margin advantage compared to national brands. We continue to innovate and introduce new items to the portfolio, launching over 650 items so far this year as we expand into new categories. We're also driving further growth with these products in underpenetrated markets. We continue to expand our Own Brands portfolio to include offerings at different price points and to address varying lifestyle needs. For example, our Value Corner brand is available to our customers at a lower opening price point. Given higher price sensitivity in certain segments, we have leaned in and offered prices lower than the prior year on several Value Corner items, including milk and paper products, and have experienced large increases in sales on those items. We're also introducing additional family packs and new items to capture incremental demand for our value-seeking customers. Our mainstream brand, Signature, which includes Signature Select, Signature Pet and Signature Farms, is outpacing total store growth, up over 15% in Q2 as consumers continue to cook at home and seek out high-quality ingredients. We also continue to expand the portfolio and innovate in our lifestyle brands, O Organics and Open Nature, for those customers wanting better-for-you and more eco-friendly options. Together, they posted growth of 13.1% in Q2, and we launched 39 exciting new SKUs this quarter in these 2 brands during the second quarter. A true testament to the Own Brands team's dedication and hard work, the team was recently honored by Store Brands magazine as the retailer of the year. Finally, we continue to invest in our stores. We have completed 132 upgrade and remodel projects that continue to produce positive returns, and we've opened 2 new stores year-to-date. Since Albertsons and Safeway came together in 2015, we have remodeled approximately half our store base and plan to continue remodeling at least 10% of the store base annually. Our second strategic priority is the rapid acceleration of our digital and eCommerce offerings. We continue to make exceptional progress in eCommerce, both pickup and delivery. Digital sales grew 243% year-over-year in Q2 driven by new customer acquisition, facilitated in part by the addition of over 200 Drive Up & Go stores, which we call DUG, bringing the total number of DUG locations to 950. We remain on track to have 1,400 DUG locations by the end of this fiscal year. We are also accelerating our plans for 2021 and now expect to be in at least 1,800 locations by the end of fiscal year '21, up from our prior goal of 1,600. In each of our eCommerce locations, we offer a broad assortment of fresh produce, meat, bakery items and center-of-store products that can ship the same day. We are committed to providing the high-quality selection our customers love in our stores at the same price to our eCommerce customers while increasing the convenience and speed of our service. For example, we have launched a pilot program offering our click-to-deliver services to give customers a more convenient option. This eCommerce growth is often incremental to overall household spend across all customer segments and on average, we see a 27% increase when in-store customers engage in eCommerce. It is even more incremental with our less engaged customers who increase their spend with us 2.7x when they use our eCommerce solutions. This incremental spend increases our overall profit per customer. DUG is the fastest-growing digital segment for us, growing over 1,000% year-over-year during the quarter, and it is overall accretive to earnings. We are also very pleased with our progress with micro-fulfillment centers. In fact, this quarter, we saw an increase of over 25% in labor productivity in our 2 MFCs as we optimize this capability. We have line of sight to profit improvement as we enhance the productivity of our MFCs. In addition to our existing MFCs, we have already started construction of 4 new locations and are planning 6 more in the next 18 months. And yesterday, we announced that we are piloting pickup lockers as an additional method of eCommerce fulfillment for our customers, which are located inside or outside the store and can be accessed using a unique pickup code. We also continued our efforts to engage our customers in our loyalty program, just for U. We had 23.5 million registered users, an increase of almost 5 million versus last year, approximately 27%. We are finding that our customers love the personalized coupons, and this approach is driving broader and deeper engagement as well as incremental purchases. We saw an increase in our engaged households by nearly 11.3% quarter-over-quarter. This is important as, on average, the loyalty-engaged household spends nearly 3.5x more per week than an unengaged loyalty household. Our third strategic priority, driving productivity, remains in full swing, and savings will help offset inflation and be used to reinvest in innovation to fuel growth. I'm pleased to report that we have fully launched VisionPro for production planning and are in the process of moving to a tablet-based solution to further enhance data capture, shrink savings and labor efficiencies. We're also pleased with our progress in launching FaR, our end-to-end demand planning system. To date, we have over 800 stores launching on this system, which has not only helped us reduce excess inventory but has also allowed us to save or reallocate over 30,000 hours in the second quarter. Furthermore, we have rolled out our promotions technology, which is designed to drive efficiency in our promotional plans and are beginning to see the benefits as our teams are able to proactively optimize promotional tactics and price points. In addition, we've continued to build our strategic sourcing capabilities. For example, we have numerous ongoing energy efficiency projects that helped us save $11 million in Q2 and reduced our carbon footprint. We have also been redesigning our circulars in response to shifts in consumer shopping patterns, which have been accelerated by COVID, resulting in a $25 million savings annually. We're very excited about the role technology is playing in transforming our company to be a modern retailer. We're focused on creating easy and exciting customer experiences across our stores and digital channels. For example, as we announced yesterday, the launch of an integrated loyalty and contactless payment application will allow our customers to easily access their discounts and provide them with greater choice on how they pay in a safe and easy process from the convenience of their phone. We're also on track to launch self-checkout in 481 stores this year, which will bring our total stores with self-checkout to over 1,600. In parallel, we're accelerating our investments to modernize our core technology platform. Last quarter, we completed the migration of our enterprise data to the public cloud, which is already being used for machine learning models and digital catalog for our eCommerce channels. We're also refactoring major applications on legacy platforms to be cloud native while leveraging SaaS offerings for our finance and human resource platforms. Through all these efforts and our focus on cost management, we remain on track to deliver on our goal of $1 billion in productivity savings over the next 3 years. Let me now turn to our fourth strategic priority, strengthening our talent and culture. We continue to hire talent to bolster our strong leadership team. We're actively involved in our communities and have been raising funds to provide support. Since mid-March, we have donated $48 million to the Nourishing Neighbors program to help feed 10 million people across 34 states. We've also established a $1 million fund for our associates impacted by the fires in the West. We also remain focused on improving our sustainable business practices. I'm pleased to report that we recently joined the Pacific Coast Collaborative voluntary agreement whose goal is to reduce food waste by 50% by 2030, which will have benefits that include reduction of greenhouse gas emissions, conserving water and land resources and supporting those facing food insecurity. We also recently announced that our O Organics coffee is now 100% certified sustainable by Fair Trade U.S.A., which means that the coffee farmers that supply us are earning fair wages and working in safe conditions. In addition, a part of the cost of the product goes directly back to the farmers and their communities through a community development fund, which to date has generated $2.5 million in support of farming communities. Finally, we recently announced that 100% of our seafood in our Waterfront BISTRO and Open Nature brands will soon display the Responsible Choice logo for sustainable sourcing. Finally, I'm proud that we have a strong presence with minority-owned suppliers in both women-owned businesses and minority-owned firms, which is a competitive market. And now I would like to ask Bob to cover the details of our second quarter results.

Thanks, Vivek, and hello, everyone. We again delivered strong performance as we continue to successfully execute against a rapidly evolving COVID-19 backdrop. First and foremost, I, too, want to thank our frontline workers for their hard work and dedication. They continue to raise the bar. Now for some color on the quarter. Total sales were $15.8 billion during the second quarter compared to $14.2 billion during the second quarter last year. Our increase in sales was primarily driven by our 13.8% increase in identical sales. Our gross profit margin increased to 29% during Q2 of 2020 compared to 27.8% in Q2 of 2019. Excluding the impact of fuel, our gross profit margin increased 85 basis points. The increase in gross profit margin was primarily driven by continued improvements in shrink expense and sales leverage on advertising and supply chain costs, which together drove about 65 basis points of benefit in the quarter. Gross profit margin also benefited from sales mix shifts. Turning to selling and administrative expenses. We saw significant sales leverage throughout the second quarter as our sales and administrative expense rate decreased to 25.6% of sales compared to 26.8% of sales for the second quarter of fiscal 2019. Excluding the impact of fuel, selling and administrative expenses as a percentage of sales were 175 basis points lower than the prior year. Overall, the improved sales leverage, including the benefits of strong cost control, more than offset the incremental COVID-19 cost totaling approximately $120 million during the second quarter as we optimized our procedures and procurement of PPE and cleaning supplies. We expect to continue to optimize these costs moving forward and as I just mentioned, we are seeing continued strong identical sales growth and believe that these expenses will continue to be more than offset by higher revenue. Interest expense was $128.6 million during the second quarter of fiscal 2020 compared to $177.5 million during the same quarter last year. The decrease in interest expense is primarily attributable to lower average outstanding borrowings compared to Q2 of '19 and lower average interest rates. The weighted average interest rate during the second quarter of fiscal 2020 decreased 40 basis points to 6% compared to Q2 of '19. Adjusted EBITDA was $948.4 million during Q2 of 2020 compared to $567.6 million during Q2 of 2019. The 67% increase in adjusted EBITDA primarily reflects our increased identical sales, improved gross margin and selling and administrative expenses. We generated quarterly adjusted net income of $356 million or adjusted EPS of $0.60 per share compared to $99 million or $0.17 per share during the second quarter last year. From a capital expenditure perspective, we spent approximately $700 million during the first 2 quarters this year. And we completed 86 remodels during the second quarter alone and have completed 132 so far this year and are also accelerating technology-related investments, including those in digital and eCommerce. For the full year, we plan to increase investments that will strengthen the business with excess free cash flow and now expect to spend approximately $1.9 billion in total capital expenditures. This represents incremental investments of approximately $300 million versus our update given in the first quarter. We are accelerating high-return projects in stores with both remodel and productivity initiatives, in manufacturing and supply chain, in merchandising to expand our meals program as well as in digital and eCommerce, including a faster Drive Up & Go rollout and potential partnerships and other technology initiatives intended to drive efficiencies and future productivity. We continue to generate strong free cash flow and are benefiting from better working capital trends. As a result, we finished the quarter with approximately $2.4 billion in cash, and our net debt to adjusted EBITDA improved to 1.6x on an LTM basis. During the second quarter, we also completed a refinancing at very attractive rates and paid off the 2020 Safeway notes with cash on hand. Together, those transactions will save the company approximately $52 million in annualized pre-tax interest expense. As we previously disclosed, subsequent to the end of the quarter, we were able to repurchase approximately 6.8 million shares of our common stock in a transaction with an entity that was in receivership, which was done at a very attractive price. Since the beginning of fiscal 2020, we have experienced significant increases in product demand and overall basket size in stores and in our eCommerce business due in part to COVID-19-related demand. As a result, we are providing an updated financial 2020 outlook as follows: identical sales in fiscal 2020 of at least 15.5%, adjusted EPS in the range of $2.75 per share to $2.85 per share, adjusted EBITDA in the range of $4.15 billion to $4.25 billion and an effective tax rate to be approximately 25% before discrete items. The implied growth in sales and related flow-through to EBITDA based upon this guidance is very strong, including adjusted EBITDA growth of approximately 18% in the second half of fiscal 2020, excluding the 53rd week of 2019, and over 50% for the year, which we believe demonstrates industry-leading growth. These results also include the impact of investments we are making in the business to drive our goal of long-term sustainable growth. We are executing our strategy very well and are increasingly confident that these changes in dynamics that we've seen as a result of the pandemic will have a lasting impact on our business and that we are well-positioned in response. We are also pleased that last week, the Board approved the first payment of our quarterly dividend of $0.10 per share, which will be paid on November 10 to shareholders of record on October 26. As part of our broader capital allocation framework, the company's Board of Directors recently authorized a $300 million share repurchase program. This open market authorization will give us added flexibility to create shareholder value by allowing us to take advantage of dislocations in the share price. We will begin execution of this program immediately and expect to use cash on hand to facilitate these purchases. And now Vivek will provide some closing remarks.

Thanks, Bob. As we look ahead, I could not be more excited about the future of our business. The Albertsons coming out of this pandemic is much stronger than the Albertsons you knew before the pandemic. We're gaining market share. Our value proposition, anchored in fresh and our breadth of product assortment, is more appealing as people eat more at home. We've improved our execution, and we've accomplished in months what would have taken us years in building new capabilities in eCommerce, loyalty and our technology backbone. As you heard today, we're investing to innovate and go even faster. In addition, our productivity initiatives are firmly anchored into the fabric of the company and are gaining traction. Yet we're only in the early stages of our transformation, and we are extremely well positioned to drive further market share gains and retain and grow spend from our customers. As the dynamics in the marketplace shift, we will execute and be agile, and we are confident in our ability to continue to win. There are multiple factors at play that give us confidence we will significantly beat the $3.2 billion EBITDA consensus estimate for fiscal year 2021, and we will grow from a new baseline when things return to whatever might be the new normal. I would like to close with a few themes that define our business today. One, the lines between food at home and food away from home have blurred. As such, we see ourselves competing in a much larger, approximately $1.6 trillion landscape of food and beverage. Building on our fresh equity and great locations to offer and deliver convenient, delicious and lifestyle-centric meals is central to our strategy. For example, in our United division in Texas, we have launched a meals destination in 60 stores with 340 unique offerings that are ready to eat, ready to heat and ready to cook. We have plans to expand across 4 more divisions this quarter with a selection of 40 additional meals. Our eCommerce business has achieved meaningful scale, and we will continue to expand it rapidly. We see significant potential to differentiate this offering after we have expanded and established the base eCommerce business. We're excited about the progress on the cost curves in MFCs, which give us line of sight to improved profitability. Third, our loyalty program and the increased engagement with it gives us rich data on the shopping patterns of our customers. As you heard me say earlier, we have launched a program to surgically target and retain customers and their spend with us across the store. Fourth, our P&L is stronger. Our management approach will center on finding gross margin tailwinds, investing that back into the customer experience, driving volumes so that we can leverage the middle of the P&L. We have a robust productivity agenda to give us capacity to further leverage the P&L and compete effectively in the marketplace to retain and grow share. And finally, our approach to capital allocation is balanced and leverages our strong free cash flow. The balance sheet is stronger, and we have meaningfully reduced our debt over the last few years. We continue to refinance our debt at better rates, and we'll continue to pay down debt over time. We're also investing more into the business to accelerate remodels and accelerate eCommerce. We continue to prudently evaluate strategic tuck-in and other M&A opportunities, like the Kings and Balducci's transaction, which expands our presence in the Mid-Atlantic division with a premium set of banners. We also recently instituted our quarterly dividend and established a share buyback authorization that will allow us to return capital to shareholders over time. In summary, we are well positioned to win. We're executing on our strategic priorities and see ample room for growth, particularly in the expanded addressable market by capitalizing on our strengths in fresh and the ramp-up of eCommerce capabilities. At the same time, our productivity initiatives remain on track and will help drive profit flow-through. We're confident in our long-term potential and expect to drive strong relative performance for the balance of fiscal 2020 and into fiscal 2021, holding on to and extending market share gains, establishing a new and higher baseline from which to grow. And with that, I'll turn it over to the operator for questions.

And our first question comes from the line of Kate McShane with Goldman Sachs.

My question is centered on the gross margins. I wondered if you could comment at all about the promotional environment during the quarter, how it compared to the end of Q1. And within the guidance that you've given for the rest of the year, what does that imply for gross margins in the second half?

Bob?

Yes. I believe the promotional environment has become quite rational as we have gone through the year. There are definitely some categories in the store where we might have limited supply, causing everyone to scale back a bit on promotions. However, this does not impact our overall capability to be a promotional player. As I mentioned regarding our year-over-year gross margin mix growth, a significant portion of that has been driven by our productivity measures. This includes reduced shrink and improvements in advertising and supply chain costs. Looking ahead, as Vivek noted, we plan to reinvest some of that back to boost our top line.

The next question is from the line of Robby Ohmes with Bank of America Merrill Lynch.

Vivek, I wanted to ask about your perspective on next year. With the productivity initiatives you're accelerating, which sound promising, are you hopeful that these could improve the adjusted EBITDA margin as we return to a normal environment? Should we consider that you're taking steps that might lead to a higher adjusted EBITDA margin for Albertsons in a normalized setting compared to what you would usually expect? Or is this more of a counterbalance to the fast rollout of pickup and possibly delivery? I’d also appreciate some insights on the impact of pickup on gross margin and EBITDA margin.

Yes, Robby, the answer is yes. We need to consider two key aspects. First, our confidence in the business is growing. The various top-line initiatives we are pursuing are effective, and our productivity efforts are showing results. This ongoing improvement in our strategy makes us believe that in this new normalized environment, we will emerge stronger than before. Secondly, we should reflect on what this new environment really means. There's a prevalent belief that everything will revert to how it was in 2019, but I don't share that view. Instead, I think we will go through this period and come out of it with changed behaviors. For example, after eight months of the pandemic, I believe more people will continue to eat at home. This shift creates a larger market for us to target. Together, these factors boost our confidence that we can exceed the $3.2 billion target we set for 2021. I hope that clarifies things, Robby.

Yes. No, that does help. And then just on accelerating the rollout of pickup and delivery, I'm just curious how the profitability of that looks to you guys.

Yes, that's a good question, Robby. We think of it as three platforms. First of all, our first-party business includes pickup and delivery, which is a significant part of our overall operations, and it's the fastest-growing segment. Regarding profitability, Drive Up & Go is more profitable than delivery, and there are times when we find it to be profitable on a transaction basis, which is exciting for us. Additionally, when we consider the micro-fulfillment centers (MFCs), we have visibility into profitability. We anticipate a decreasing cost curve in the MFCs over the next several months as we optimize operations and increase sales per center. This is why we're optimistic about achieving a profitable Drive Up & Go business and why we're investing more rapidly in it.

Terrific. Congrats.

Your next question is from the line of Ken Goldman with JPMorgan Chase.

It's actually Tom Palmer on for Ken. I just wanted to ask on the EBITDA guidance. So in the first half, EBITDA, up about $1.2 billion. Guidance for the second half implies it's going to increase between $120 million and $220 million. Beyond, I guess, potentially decelerating sales growth and lapping the extra week, are there any meaningful items that you expect to limit EBITDA growth in the second half of the year? For instance, have you seen any meaningful change in the quarter-to-date comp or margin structure of the company?

Yes. Good question, Tom. No, we are continuing to see a continuation of strong sales in the first part of Q3 in the low kind of double-digit range. And we're optimistic that this is going to continue on through the rest of the year. And as a result, that's what drives that greater than 15.5% ID, which kind of infers a 9.5% to 10% ID for the second half.

And just on the margin flow-through, any item to call out that could limit that? It just...

Yes. Well, the number that we quoted was year-over-year EBITDA growth. So second half last year to second half this year, an 18% increase in EBITDA growth, which is very, very solid, as you know. And that excludes our 53rd week in that calculation that was in 2019 so that it's comparable.

The next question is from the line of Edward Kelly with Wells Fargo.

Nice quarter, by the way. I wanted to ask you, Vivek, about 2021. You mentioned that certain behaviors are likely to continue. It sounds like you anticipate a much stronger two-year comparison on your ID next year than what you would have expected before COVID. I'm curious about how we should consider the incremental margin on that. Incremental margin is strong right now, around 21% or 22% on EBIT this quarter. How should we think about the incremental sales from 2021 compared to 2019 and what the incremental margin might look like? Your guidance for the second half seems to suggest something like low to mid-teens, and if we do the math, it indicates that EBITDA in 2021 could be significantly higher than the current consensus. I'm just interested in how we should be thinking about the incremental flow-through as we approach next year.

Here's how I think about it. Our philosophy is to separate it into gross margin and everything below the gross margin line. We have several tailwinds supporting our gross margin, including promotional effectiveness, shrink management, supply chain improvements, better buying, and mix management. These are all key factors that we consider as tailwinds for gross margin. The mix includes some of the meal programs I mentioned, which have good gross margins. Our intention is not to solely focus on bottom-line delivery through gross margin, so we will wisely reinvest some of those gains to remain competitive with customers. In our profit and loss statement, we see that when we increase volume through our stores, we achieve significant flow-through. This gives us confidence that our EBITDA in 2021 will be much stronger than we initially expected. Even if there’s a slight increase in volume compared to 2019, a lot of that will positively impact our profit and loss statement. With eight months into the pandemic and as we approach our new fiscal year starting in March or April, I anticipate that demand in the first half of next year will exceed our expectations. That’s how I’ve framed it in my mind, and I hope this provides some clarity for you.

That's not unheard of.

That's not in our assumptions, right?

We have not completed our analysis fully for 2021 yet. We'll give you guidance on that in a future quarter. But that's currently where we're running.

That's correct.

That's consistent with what, as you said...

Within the incremental flow-through margins, that's right, Ed. The nature of the business is such that all our growth is achieved without increasing square footage. When you don't expand your space, you also don't incur significant costs.

I asked that question because it leads into a follow-up regarding concerns that post-COVID, everyone might experience a negative index. It might be less negative than what would typically be expected if the two-year comparison was normal. However, there’s a worry that companies might respond by promoting more aggressively to maintain their market share. Essentially, what you're suggesting is that you would prefer to evaluate the business based on a strong two-year comparison rather than solely focusing on an absolute decline in the index when considering how to defend share.

Yes. Consider it in terms of dollars. However, I want to emphasize that if the situation arises, we are prepared to compete. Our capability to compete comes from both the gross margin initiatives I mentioned and the productivity initiatives we've discussed. Therefore, we are equipped to compete. I cannot predict what will occur in that regard over the next 18 months.

The next question is from the line of John Heinbockel with Guggenheim.

Let me start by asking how the natural maturation of your loyal customers has been affected by COVID. Specifically, how has it impacted their progression in loyalty, especially among the newer customers you've acquired? Has this change accelerated their engagement with loyalty programs compared to before?

This is similar to airline miles: if you don't fly, you don't care. If you fly frequently, you pay more attention to airline miles. We're observing more people joining and advancing in loyalty. This trend positively impacts customer retention because we understand these engaged customers, have access to their data, and now they're exploring a wider range of categories with us than before or are new customers whose purchases we can track. This allows us to tailor our marketing efforts very specifically to retain them. We're seeing additional benefits from loyalty as well as from eCommerce.

Okay. As a follow-up, when you consider the breakdown by category or customer, can you share insights on the market share you've gained? Specifically, how does the share from food away from home compare to that from other retailers? If a significant portion of the share gain is from food away from home, it might suggest that you don’t need to respond with promotions, unlike if most of it came from other retailers in the food and home sector. Can you clarify the percentage? For instance, is 75% of it from food away from home or is it higher or lower? Do you have that information?

John, we track different customer segments, one of which includes those who enjoy cooking from scratch. This segment has seen an increase of about 48%. Interestingly, we can categorize them into those seeking quality and those focused on value, and both groups have also increased their cooking-at-home activities. We are observing this trend broadly. If we look at the well-performing categories, these too are related to cooking at home. While I can't provide specific details on how much we're drawing from restaurants, I can say that I often consider the ratio of our overall growth attributed to industry trends versus what we gain in market share. In my assessment, I believe at least 40% of our growth is due to market share gains, which we aim to sustain moving forward.

The next question is coming from the line of Scott Mushkin with R5 Capital.

I wanted to start off by asking about the short term and then follow up with a strategic question. We have some major holidays approaching, and I was curious how you are planning for that considering the rising COVID situation.

Yes, Scott, our surveys indicate that customers will be hosting more gatherings at home, although these gatherings will be smaller. We also anticipate that customers will begin shopping earlier. We are thus preparing accordingly. Typically, we would start ramping up our supply to match the concentrated demand during Thanksgiving and Christmas. However, we are increasing our purchases this year because we expect greater demand for the holidays compared to previous years. What remains uncertain, Scott, is that from both an employee and customer perspective, we are extremely well prepared in case the second wave of COVID-19 becomes more severe from a safety standpoint. I hope that we won't experience the overwhelming demand we saw in March and April, and instead see a more stable shopping behavior similar to what we are observing today.

And you guys prepared for an acceleration though if it were to take place.

We are. We are prepared for that acceleration, both from a supply standpoint and from a labor standpoint.

Terrific. And my second question is really much more strategic. Obviously, we all saw you guys make a small acquisition a couple of days ago. And this goes into kind of being more offensive stance. I think, Vivek, you talked about what a better position the company is in. And so I was wondering if you can maybe talk a little bit more about M&A as a growth factor. Would you ever consider some larger transactions? And if you were, will you be looking for them to be accretive right away? And how are you guys just framing that?

Yes. Let me explain why we are excited about Kings and Balducci's. First, we are performing exceptionally well in that market area. This business allows us to expand our presence there. Second, the price we acquired it at is beneficial from day one. Third, we see significant potential for synergies, particularly in the backend operations. We are optimistic about these opportunities. As they arise, we will pursue them, but our top priority remains to build on and enhance growth and productivity within our existing assets. After that, we will seek similar acquisitions. It's important to ensure that acquisitions do not become a distraction, so we prefer small acquisitions that can be quickly integrated and provide value.

The next question is from the line of Karen Short with Barclays.

Just actually following up on that. I'm actually wondering, could you give a little color on what the actual EBITDA multiple, if they even generated an EBITDA multiple, was of Kings and Balducci's? And then you just made a comment regarding synergies. Wondering if you could quantify that in any way in terms of what you saw of the synergy that was...

So Karen, I can tell you that the multiple we paid for that is significantly lower than the multiple we were trading at, which is why it is so beneficial right from the start. While they were generating EBITDA, we acquired it at a great multiple. That’s my perspective. Additionally, in the Mid-Atlantic division, we just closed one of our distribution centers and consolidated two divisions. What used to be Acme and Eastern are now referred to as the Mid-Atlantic. A significant amount of the volume from Kings and Balducci's is also being directed to our existing distribution center. Our aim is to treat Kings and Balducci's similarly to how we treat Haggen and Pavilions. We appreciate these premium brands as they provide us with a nice market niche, and we are beginning to achieve some scale with them. This allows us to explore merchandising synergies across the country for these premium brands, along with operational synergies in local markets, distribution centers, and our management teams. That’s the concept behind it.

Okay. That's helpful. And then on your CapEx, obviously, you called out some things that you are accelerating, and you called out that $300 million increase. Maybe can you just give a little color on how much of that may have been related to the MFCs? And maybe just some color on actual cost per MFC, time line for when those 4 will actually open and then when the 6 for next year would open. And then can you maybe give a little more color on what you think they can do from a volume perspective and also a stem mile perspective?

Yes. To address your question about the additional capital, the MFC plan was already included in our capital allocation. This new capital isn’t linked to the speed-up of the MFCs. We had a strategy in place to ensure visibility on the labor costs associated with MFC locations, which we now have, allowing us to begin expansion. The capital is primarily directed towards accelerating Drive Up & Go, enhancing eCommerce technologies, remodeling, and improving productivity, many of which are being expedited. Regarding the MFCs, we see several benefits. They not only lower labor costs but also increase order accuracy and fill rates due to enhanced instant inventory management, which reduces human error. Additionally, MFCs enable us to significantly lower delivery times by creating catchment areas around them, facilitating quicker deliveries. Our plan involves opening these next four MFCs within this fiscal year, although I don’t have the exact dates at the moment. We aim to proceed with this plan. For the subsequent phase, we are exploring various formats for MFCs, which may not be directly linked to specific stores, and we will test some of these concepts as well.

And sorry, any color you could give on what volume they can actually do? And what the stem miles might be?

I don't want to delve into the stem miles because we believe that helps us consider various solutions, and I'd prefer to avoid that topic. However, you should think of a micro-fulfillment center as having the volume capabilities of a store. That's how we view a micro-fulfillment center, as equivalent to the volume of a store or half a store over the course of a year.

The next question is from the line of Kelly Bania with BMO Capital.

Wondering if you could just give a little bit of a breakdown of IDs, maybe over the past couple of months and as you look out to the back half, just between price, mix, basket and volume, and just how that has progressed and what your expectations are going forward.

Sure, Kelly. We haven't specifically broken things down by customer count and basket size. However, similar to what others have mentioned, our customer count has declined slightly due to changes in customer behavior, as they are shopping less frequently but purchasing more items per trip. It's important to note that although our customer count is down, we are seeing a significant increase in basket size. The main metric we monitor closely is our market share. We want to know if our market share is expanding, not just in terms of revenue but, more importantly, in the number of units sold. We are experiencing growth in both areas, in comparison to both food retailers and the broader market. This gives us confidence that we are succeeding.

The main factor driving our performance is the growth in units within our business. This unit growth is providing us with leverage in the middle of the profit and loss statement. The significant contributor to our 13.8% growth is indeed unit growth.

Yes. Hey, and just one other point. Obviously, some of us and our competitors have different fiscal quarter end dates. One thing I would point you to is that if you were to recalculate our IDs on any of our main competitors' quarter end dates, for example, if you were to back it up a period, you would find where our IDs are clearly in excess of each of the competitors. And we think we're leading the market from that perspective.

And I guess, just any more commentary just on inflation and how promotions are impacting that and expecting to impact that in the back half?

Yes. Regarding inflation, I’ll begin by noting that we’ve observed a slight decrease throughout the quarter. Recently, we’ve seen cost inflation at approximately 3.9%, primarily concentrated in a few areas. The highest inflation is in the meat, poultry, and egg categories. While egg prices have remained stable year-over-year, fresh meat prices have increased but are lower than their peaks earlier this year. There is some improvement in that area. On the dairy front, while butter prices have decreased from their earlier highs, cheese and milk prices have increased, leading to some volatility, particularly in these categories. In beverages, the inflation is mainly driven by canned beverages due to supply constraints related to aluminum. Overall, this aligns with the average inflation rate of 3.9%. I hope this provides some insight into our observations regarding promotions and related factors, which we believe are reasonable.

And we will continue to double down on personalized promotions, Kelly.

Perfect. That's very helpful. And maybe just to follow up. As you look at your gross margin, and shrink is clearly a meaningful factor there, is there any efforts or quantification you can talk about in your initiative to kind of keep some of those shrink benefits longer term into the next year or 2?

Yes. You are correct in your observation that we might be experiencing benefits from reduced shrink due to increased volume. That is indeed part of the equation. However, it’s important to highlight that we have several initiatives in place. For instance, VisionPro helps streamline our production process in stores, like cutting fruit, which allows us to maintain a tighter production schedule and manage quantities more effectively, thus reducing shrink. Additionally, our ordering program ensures we are procuring the appropriate amounts of frozen and dairy products, which also contributes to minimizing shrink. These are driven by technology initiatives that focus on operational improvements rather than just increased volume.

The next question is from the line of Simeon Gutman with Morgan Stanley.

Vivek or Bob, could you discuss the 14% increase in ID in relation to spending by your core customers compared to new customers? Also, Vivek, you mentioned something about a 60% market share growth. I'm not sure how that connects, but is there a way to relate that to the 14% increase?

Yes. So there are two types of growth that we are experiencing. One area that excites me the most is the existing customers who are now shopping through both eCommerce and our physical stores. We're seeing significant growth from them. Additionally, we have a segment of customers who are only purchasing through eCommerce, and we are thrilled about that as well. This is the most incremental growth we are observing. We are also seeing growth from our existing stores, contributing further to our overall growth. Thus, I would describe our growth in this way, with the most significant increase coming from those who engage with our eCommerce platform.

Has there been any change since the pandemic began? If we assume the ratio you've mentioned is correct, 60% to 40%, is that ratio changing as the pandemic progresses?

No, but I want to clarify what I said. When I analyze our growth, I find that our market share gains, which have been stable over the past few months, account for about 40% of our overall growth. This gives me confidence that we can maintain and sustain the additional revenue we are generating from these market share gains. That's my perspective on it.

The next question is from the line of Paul Trussell with Deutsche Bank.

And congrats on a strong quarter.

Thank you.

So a lot going on from a cash usage standpoint. Maybe let's just take a minute to dig into the priorities and overall capital allocation strategy with the dividend, the new buyback program, just how to think about CapEx maybe even over a longer time period as well as deleverage versus kind of ability to lower interest expense.

Yes, Paul, that’s a great question. We are in a fortunate position as we are generating a lot of cash. I want to emphasize that our first and most important use of cash is to strengthen the business. You have seen our spending; Bob mentioned the $300 million, but when you add up everything, including Kings and Balducci's, it's close to $500 million that we have invested in the business this year. These investments are focused on accelerating eCommerce, enhancing our market position, investing in technology, and improving productivity. These are all valuable projects that yield a high return on investment. Our second priority has been to ensure we pay the dividend, which we have done. The third priority is to continue managing our debt by refinancing and paying it down, as that is part of our strategy. We also recognize an opportunity in the market to buy shares and return value to shareholders. This is our approach, but our priority will always begin with investing in strengthening the business, and I hope you are noticing that.

That's helpful. Just a follow-up on gross margins, although we've touched on it on this call already. You've had very strong performance in the first half of the year. I just want to make sure, as we think about that line item ex fuel, what's the opportunity to see further strength from lower shrink and the supply chain gains, leveraging advertising, et cetera?

There are opportunities within our supply chain, in better purchasing, and particularly in shrink management. We're implementing lean best practices in-store to enhance shrink management. However, I want to emphasize that our goal is not to continually expand gross margin. We aim to achieve growth in gross margin in a sustainable manner while remaining competitive by investing in our customers. We intend to maintain a healthy gross margin, but our primary focus is on driving more volume through our stores to increase earnings. This is the message I want to share. We did achieve an 80 basis points expansion this quarter, and while we will continue to strive for that, we will also ensure we remain competitive in the market.

Our final question comes from the line of Chuck Cerankosky with Northcoast Research.

You mentioned that managing the product mix is a significant factor impacting gross margin, along with changes in customer behavior due to the pandemic. What steps are you taking to anticipate the direction in which customer preferences are heading, particularly regarding fresh foods and your Own Brands?

Yes. Let me discuss the idea of eating at home. Our Own Brands team has shifted focus to offer products and solutions that cater to home dining. We've enhanced our offerings in categories like flour, among others, as people are cooking more at home. Additionally, our seafood sales have surged by 40% this past quarter, reflecting this trend as people opt for home-cooked meals instead of dining out. Looking ahead, we recognize that if people are eating at home more often, they will seek convenient and appealing options, which is why we are rolling out our meals program. In our United banners, these stores are performing exceptionally well, providing a range of ready-to-eat or heat-and-serve meals that customers can easily take home. We are expanding this initiative across four more divisions, as we believe that meals and home dining are central to our strategy, and we will continue to adapt in this area. We also have many other initiatives in the pipeline that we plan to share in the upcoming quarters.

Thank you all for joining this call this morning. Cody and I will be available for any follow-up questions throughout the day. We appreciate your interest in Albertsons Companies. Have a great day.

Thank you all.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.