Good morning, and thank you for joining us for the Albertsons Companies Third 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 share insight into our third quarter results and recent progress against our strategic priorities. Bob will then provide the financial details of our third quarter and share our 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 would 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. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements will be contained from time to time in our SEC filings, including Form 10-Q, 10-K, 8-K and our 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 will hand the call over to Vivek.

Thank you, Melissa, and good morning, everyone, and thank you for joining us today. At Albertsons, we continue to be focused on taking care of our customers, our associates, and the communities we serve. As a result of this, I am pleased to report another quarter of robust results. Our Q3 identical sales came in at 12.3% with adjusted EPS growth of 275% versus the prior year to $0.66 per share. Adjusted EBITDA increased 53% to $968 million with robust flow-through. Our digital sales also grew 225% year-over-year. During the quarter, we continued to gain significant market share within both food and MULO in both dollars and units and experienced strong growth across geographies regardless of the level of COVID restrictions in place. This gives us confidence in the sustainability of our competitiveness in the future. We had over 6 million new households shopping with us this quarter, and we are retaining existing customers. Those who shopped with us last quarter have returned this quarter at a higher rate than in Q2. Customers continue to consolidate trips, and we continue to see fewer trips per household but larger baskets. And these households are spending more with us compared to last year. Our loyalty program continues to show strong growth. We now have 24.3 million registered users, an increase of 23.5% year-over-year, and these customers are spending 2.5x more on average than non-registered customers. In addition, actively engaged households in our loyalty programs have increased 17.5% year-over-year and encompass nearly 40% of transactions and 50% of sales. These customers spend 4.1x more than nonactive customers. The strong ID sales and EBITDA results year-to-date are also generating robust free cash flow, and we are delivering on our capital allocation priorities. We are continuing to reinvest in the business for growth in high-return projects. We have continued to pay down debt. We are returning cash to shareholders through our quarterly dividend and an active share repurchase program. The foundation of our 4 strategic priorities and the way we drive growth is guided by our constant focus on providing an excellent shopping experience to all our customers. This is anchored in the strength of our product assortment, our ability to engage and serve our customers across different platforms; our use of technology to enhance the customer experience; and the speed and flexibility of our nimble, locally focused operations. Our first priority is in-store excellence. Our stores remain the core of our business, and we are proud of our convenient locations and the broad assortment of products we offer to create a one-stop shopping experience for our customers. The quality, variety, and depth of our fresh and Own Brands offerings have been a key differentiator throughout the pandemic and will continue to be an advantage for us going forward. In fresh, we continue to see ID sales that are higher than our average, notably in seafood driven by service seafood and shrimp, as well as in meat driven by items such as bacon, beef, chicken, and in floral as customers who are spending more time at home are enjoying fresh flowers more often. We are encouraged the customers who are spending more time at home are looking to us for the high-quality fresh product we offer. We believe that purchases of fresh product drive trips as our loyal customers often stock up on shelf-stable items in one trip but come back frequently for fresh product. In Q3, our most loyal shoppers increased their average spend on fresh by 200 basis points compared to their average in-store total spend the prior year and continued to visit our stores over 2 times a week, with nearly 3 out of 4 trips including fresh. Fresh has also been a catalyst in omnichannel as fresh items, including our high-quality meat and produce, have increased in the basket compared to pre-pandemic levels. And to further capitalize on the strength we see in fresh, we are expanding our portfolio with meal solutions, ready-to-eat, ready-to-heat, and ready-to-cook that are growing in popularity as alternatives to cooking from scratch with plans to introduce these solutions more broadly in the weeks and months ahead. Our Own Brands portfolio also remains a competitive advantage for us with $14 billion in sales across 9 primary brands, 4 of which have over $1 billion in sales and with over 12,000 items across over 500 categories, our broad product portfolio fits all customer segments and styles. We have recently seen improving trends in penetration of Own Brands sales as temporary supply issues have been abating. Our Own Brands penetration exceeded 25% in the last 4-week period of the third quarter, and we remain on track to reach 30% penetration in the next few years. We're driving growth by expanding these products in underpenetrated markets and continue to have substantial opportunity in markets such as Jewel, Shaw's, and Southern California. In Q3, we also saw strong growth in categories that have been popular while customers are spending more time and cooking at home such as ingredient cheese, convenience salads, baking items, and nuts. We're also continuing to innovate and expand the portfolio. We've launched over 1,000 new items through Q3, exceeding our stated goal of 800-plus new items this fiscal year. Our innovation is tailored to contemporary customer needs. In addition to our Value Corner brand at a lower opening price point, we have expanded the selection of family packs with items such as Waterfront BISTRO frozen fish line that help stretch the family budget. In mainstream items, which include our Signature Select line, we continue to innovate to save time for our customers and recently introduced Signature Select frozen egg bites that provide a quick and healthy breakfast ready in just over a minute. And we continue to expand the portfolio and innovate in the premium category and recently introduced Signature Reserve sparkling brut wine in time for the holidays. Our lifestyle brands, O Organics, and Open Nature, which appeal to customers looking for organic and better-for-you brands, saw continued growth, strong growth of 12% on a combined basis this quarter. Finally, we continue to invest in our stores. In October, we allocated an incremental $200 million of store-related capital to accelerate and pull forward priority projects. In addition to remodels, we are using some of the additional capital to accelerate the rollout of our module program, which are discrete high-return initiatives focused on customer checkout and new merchandising offerings. And we are accelerating replacement of unproductive self-serve features such as salad bars, with additional refrigerated cases in preparation for the rollout of our meals program. Moving to our second priority, the rapid acceleration of our digital and omnichannel capability. We continue to provide our customers with an easy and convenient shopping experience whether that is shopping in our stores, using curbside pickup or delivery. Digital continues to be a key growth driver for us as we achieved our third straight quarter of over 200% sales growth, up 225% in Q3. Drive Up & Go grew over 800% as we launched 231 new DUG locations during the quarter. DUG is now available in 1,181 stores. This puts us ahead of our schedule, and we expect to have DUG in more than 1,400 locations by the end of this fiscal year as well as more than 1,800 locations at the end of fiscal year 2021. We firmly believe some consumer behaviors adopted during the pandemic will continue post-pandemic. And we believe increased use of digital offerings will be one of the key behaviors that sticks. To capitalize on this trend, we are investing over $300 million in CapEx and OpEx to accelerate our offerings in this area during fiscal year 2020 to launch new capabilities that build on our strengths as well as drive scale and profitability. For instance, we rolled out zero-touch payments capabilities to all our stores in October, allowing in-store customers to enter their loyalty credentials for discounts and rewards and pay for their groceries from their phone without touching the PIN pad. We also set up the ability to accept SNAP for online payment on DUG orders in 199 stores and plan to expand to additional stores and to delivery orders in early fiscal 2021. From a customer experience and convenience perspective, we have made noticeable improvements to our app, which have resulted in increased usage and are piloting a number of walk-up and go options in select stores in Chicago and Northern California, involving walk-up counters, lockers, and stand-alone kiosks in our parking lots. In addition to improving the customer experience, we have continued to reduce operational costs and improve overall profitability. For instance, we have further reduced picking costs as a result of labor planning and process improvements driven in part by a new software that has simplified workflows. We're also planning on adding 7 additional MFCs by the end of fiscal 2021. Finally, we continue to leverage our large and growing customer database for our just for U loyalty program, an increasingly valuable asset, which allows us to utilize data insights to target customized promotions such as personalized coupons and offers on new products that can increase basket size and deepen engagement with our customers. Our third strategic priority is driving productivity to help offset inflation that naturally occurs in things such as wages and benefits and to support reinvestment in the business. We remain on track to deliver anticipated savings this year and to achieve our $1 billion in gross savings by the end of fiscal year 2022. We also continue to identify additional opportunities. Some examples of savings include aggressively partnering with vendors to reduce both indirect spend and the cost of Own Brands goods. For example, by partnering with suppliers in Own Brands and using comparative data and analysis, we were able to secure substantial savings in the procurement of Own Brands deli meat and paper goods in Q3; expanding our sourcing efforts around capital procurement, including equipment and items related to store models; and continuing to drive our ongoing energy efficiency projects, which saved an estimated $14 million in Q3 while also reducing our carbon footprint. Our fourth priority is strengthening our talent and culture and strengthening the communities we serve. We are guided by diversity and inclusion throughout our operations and recruiting efforts and have continued to add impressive talent to our team. We also continue to put our customers and associates first when it comes to safety and have now completed the implementation of contactless temperature and health screenings for our associates across all our facilities. In addition, we continue to value the contribution of our associates on the front lines and awarded another $45 million in discretionary appreciation bonuses during the quarter. We're also partnering with the Department of Health and Human Services to administer free COVID-19 vaccines in the communities in which we operate. We have begun to deliver doses of the vaccine in many of our market areas and plan to hire more than 800 pharmacists and pharmacy technicians to ensure our pharmacies meet the demand for vaccinations. At the same time, we continue to support the communities we serve and are proud that our foundation helped generate record-breaking numbers for childhood hunger relief in September, with $9.3 million in customer donations at our check stands that enabled 37.5 million healthy breakfasts for kids in our communities. Year-to-date, our combined company and customer donations have now topped $110 million. And importantly, we continue to focus on sustainability. We are proud to win the Sustained Excellence award for our commitment to energy efficiency in our Arizona stores from the annual Salt River Project Champions of Energy Efficiency awards. By leveraging the utilities rebate program, we saved energy and reduced peak demand in this region. And now I would like to ask Bob to cover the details of our third quarter financial results.

Thanks, Vivek, and hello, everyone. I am pleased to provide details on our strong third quarter results. Total sales were $15.4 billion during the third quarter compared to $14.1 billion during the third quarter last year. This increase in sales was primarily driven by our 12.3% increase in identical sales, partially offset by lower fuel sales. Our gross profit margin increased to 29.3% compared to 28.3% in Q3 last year. Excluding the impact of fuel, our gross profit margin increased 25 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, partially offset by expenses related to driving growth in digital and Select investments in price, which supported top line and overall market share gains. Turning to sales and administrative expenses, we saw significant sales leverage and cost control throughout the third quarter, excluding the $286 million charge associated with the previously announced national pension fund settlement. Overall, the improved sales leverage, including strong cost control, more than offset incremental COVID-19 related costs totaling approximately $105 million, excluding the $45 million in discretionary appreciation bonuses during the third quarter. Interest expense was $115.9 million during the third quarter of fiscal 2020 compared to $154.8 million during the same quarter last year. This $38.9 million decrease in interest expense is primarily attributable to lower average interest rates and outstanding borrowings compared to last year. The weighted average interest rate decreased 80 basis points to 5.5% compared to Q3 last year, which is a testament to some of the recent refinancings we've completed at very attractive long-term borrowing rates. Adjusted EBITDA was $968 million compared to $634 million during Q3 last year. The 53% growth in adjusted EBITDA represents a flow-through of approximately 20%, excluding fuel. Adjusted net income was $387 million, and adjusted EPS grew 275% to $0.66 per share compared to $142 million or $0.24 per share during the third quarter last year. Turning to capital allocation. Our capital expenditures were approximately $1.1 billion during the first 3 quarters of the year, and we completed 225 remodels. We continue to accelerate technology-related investments, including those in digital and eCommerce. As a result of longer-than-expected ordering lead times and some construction backlogs, we now expect to spend approximately $1.65 billion to $1.75 billion in total capital expenditures during fiscal 2020 versus our prior guidance of $1.9 billion, with approximately $200 million of incremental capital spend shifting into early fiscal 2021. As we outlined last quarter, these high-return projects include both in-store and productivity initiatives in manufacturing and supply chain, in merchandising, to expand our meals program as well as in digital and eCommerce, including incremental DUG rollout and other technology initiatives intended to drive efficiencies and future productivity. We have successfully executed sale/leasebacks and asset sales in recent years. And during the third quarter, we have had the opportunity to sell a distribution center that was recently closed for proceeds of approximately $92 million. And together with other surplus properties, we have generated approximately $144 million of asset sale proceeds to date. Even after this activity, we continue to have a significant real estate portfolio, appraised at approximately $11 billion. Our strong results have generated very robust operating free cash flow of $1.9 billion year-to-date. Our capital allocation priorities remain unchanged and include reinvestment to drive profitable growth, continued deleveraging and returns to shareholders through our $0.40 per share annual dividend. And we will continue our methodical approach to share repurchase and intend to continue actively buying back undervalued shares. We were pleased to get credit rating upgrades after our second quarter results were announced based on our strong performance and debt reduction. On December 22, 2020, we completed a $600 million addition to our 3.5% 2029 notes, the proceeds from which were used to refinance our 5.75% 2025 notes. At the same time, we announced the paydown of an incremental $200 million of the 2025 notes with cash on hand. These actions will save the company approximately $25 million in annualized pretax interest expense. And combined with the refinancing and debt reduction from the second quarter, we've achieved approximately $77 million in annualized interest savings this year. Given these actions and the strength of our cash flows, our net debt to adjusted EBITDA is now 1.5x on an LTM basis. In line with our $0.40 per share annual dividend, we paid our first quarterly dividend of $0.10 per share on November 10. And earlier this morning, we announced the next payment date of our $0.10 per share quarterly dividend will be on February 10. And under our current $300 million share repurchase authorization, we actively repurchased 6.8 million shares we viewed as undervalued during the third quarter, which were at an average price of $15.10 per share for approximately $102.7 million. Turning to the outlook for the remainder of fiscal 2020. We continue to generate strong outperformance and illustrate the power of sales leverage on our P&L during the third quarter. As a result, we are increasing our outlook for the full fiscal 2020 as follows: identical sales in fiscal 2020 to be approximately 16.5% versus prior guidance of at least 15.5%; adjusted EPS in the range of $3.05 per share to $3.15 per share versus previous expectations of $2.75 to $2.85 per share; adjusted EBITDA in the range of $4.4 billion to $4.5 billion versus $4.15 billion to $4.25 billion previously; and an effective tax rate of approximately 25% before discrete items, unchanged from our prior outlook. The implied growth in sales and related flow-through to EBITDA based on this guidance continues to be industry-leading. And as you saw during the quarter, these results also include the impact of investments we are making in the business to drive our goal of long-term sustainable growth.

Thank you, Bob. As we enter the new calendar year, we are in the throes of the third wave of the pandemic. Our hearts go out to the many who have been impacted by the disease. The promise of the vaccine is exciting, and we will do our part to dispense the vaccine and help the communities in which we operate, yet we realize this is no time to relax. We remain relentlessly focused on the safety of our associates and our customers. Despite the uncertainty we still have around the recovery from the pandemic, we see evidence that consumers will not revert to pre-COVID food consumption patterns anytime soon. For instance, several large companies are extending work-from-home policies, and some are committing to flexible workweeks or permanent work-from-home plans going forward. We believe that this will continue to drive more breakfast and lunches at home. For example, during the pandemic, we've seen large increases in sales of breakfast items such as cereal, eggs, and bacon, as people are eating a full breakfast at home rather than grabbing breakfast on the go. In addition, sales of items such as sandwich cheese and convenience salads have increased as well as lunches are largely consumed at home. Many consumers have also rediscovered their passion for cooking. We anticipate the consumption patterns we're seeing now will continue well into 2021 and should continue to favor us. As I mentioned in our last earnings call, we are a significantly stronger company coming out of the pandemic than we were going into it, yet we are only in the early innings of our transformation. We have so much more performance headroom and the wherewithal to invest behind it. I believe that we will sustain our share gains and improve customer growth and stickiness going forward for a number of reasons. Our customers are closer to us, spending more with us, shopping more of our stores and consolidating trips with us. Our customers are engaging more with us digitally. As a result, we also have more data on our customers than ever before, allowing us to personalize our offers to them, tailor assortment even better, and further improve our loyalty program. Our omnichannel business is at scale and our capabilities have achieved a step change, making shopping with us easier than ever, yet we have so much more headroom for growth, as we mentioned earlier, in our rollout plans for Drive Up & Go. Our productivity programs are in full flight and are yielding what we had envisioned and will be a strong offset to inflation and support future investment in growth. Our technology programs are also in full flight, modernizing our technology infrastructure and moving to the public cloud, making us faster, nimbler, and smarter with more prolific use of data and automation. And we are deploying capital prudently while, at the same time, making our balance sheet stronger. We're investing in growth such as our fleet of stores; our merchandising, especially meals; our omnichannel capacity and capabilities; and in our ability to personalize solutions for customers. We're investing to drive more productivity such as tools to improve promotions management, product ordering, labor scheduling, automation in stores and in DCs. We're investing in our technology backbone to support our growth and productivity agenda. We continue to prudently evaluate strategic tuck-in and other M&A opportunities. Our balance sheet is strong with a net debt-to-EBITDA of 1.5x, giving us ample flexibility to invest in the business to drive growth. At the same time, we have found opportunities to refinance our debt, extending maturities at better rates and plan to pay down incremental debt over time. And we continue to return capital to shareholders through our dividend and share repurchase program. We believe we are well positioned to continue to drive growth and emerge from the pandemic stronger, more resilient and more competitive than ever, delivering industry-leading performance.

Our first question comes from Edward Kelly with Wells Fargo.

I wanted to start just on the IDs. And I was hoping that you'd provide a bit more color around the cadence of the IDs through the quarter, particularly given that some restrictions around dining out and that type of stuff began to accelerate. And then could you comment on what you're seeing so far in Q4? And geographically, maybe just provide a bit more color around what you're seeing given that some of your markets have much tighter restrictions.

Yes. Ed, it's Vivek here. Let me give you a couple of perspectives. First, what was surprising this quarter is that we saw pretty similar IDs across the quarter, and a little more of a lift around Thanksgiving, which you would expect. I think a lot more people stayed at home at Thanksgiving. So we saw that, and so that's good. And then when we think about this quarter, we're still in the low double-digit number as we look at the last few weeks of the quarter. So we feel good about that trend, which is why it gives me some confidence that I ask myself if you'll think of the next 6 to 9 months in 2021, is it going to look more like the last 6 months? Or is it going to look more like 2019? And my bias is it's going to look more like the last 6 months and the pattern that we have seen there. Ed, what is the second part of your question?

Well, geographically and whether things are very different.

Yes. I've said this before. I look very hard at whether we see patterns with any particular market where the crisis is worse or better and if the sales change. What I see in our marketplace across everything in aggregate is that it seems to go up and down more with the national sentiment than anything that's happening in a particular market. And we see that again and again and again. And as I mentioned earlier, we are seeing that where COVID is less severe, we still see pretty strong sales.

Okay. And then just a follow-up on the gross margin. Just kind of curious how holiday went from a promotional standpoint, how we should be thinking about the gross margin in the fourth quarter related to that. And then as we look out into next year, how would you encourage us to think about the gross margin? Obviously, you've given some color on how to think about EBITDA, but just curious given what you're going to be lapping on that line item.

Yes. I’d like to share my thoughts on promotions, as others may have similar questions. In the overall industry, promotions have increased from the first to the third quarter since the beginning of the pandemic, but they have not yet returned to 2019 levels. Our focus is on being smarter with promotions, prioritizing quality over quantity moving forward. We have the tools and capabilities to achieve that. Additionally, you will notice that we are shifting towards more personalized promotions. We have a great system in place for this, with many customers registered, and we will be dedicating more resources to ensure these promotions are high-quality and targeted. Bob, could you provide some insights on the gross margins?

Sure. Ed, we have not provided definitive guidance for next year yet. However, in terms of gross margins, we typically look at the previous year's gross margin and do not expect to see significant year-over-year increases. We do experience some advantages in our gross margin, partly due to ongoing improvements in margin mix that work in our favor. Our approach is to reinvest some of this back into the top line to also enhance our bottom line. Hopefully, this gives you an idea that when we analyze it in more detail, the next quarter will likely be fairly flat compared to this year.

Our next question comes from the line of Rupesh Parikh with Oppenheimer.

This is actually Erica Eiler on for Rupesh. So I guess I wanted to start off talking about your market share. And it doesn't sound like this is the case, but as you look at your recent share gains, are you seeing any differences in where your share gains are coming from this quarter versus prior quarter? It sounded like it was pretty consistent to me, but I just want to confirm that. And then if we think about moving beyond the pandemic and into a post-COVID world, as you look at the share gains in recent quarters, where does your team believe you could see more permanent gains post-pandemic from a category perspective?

Yes. We track market share by monitoring both dollars and units and comparing these metrics to food retailers and the overall market, which includes all categories. Since the pandemic, we have consistently gained both dollar share and unit share against both food categories and the broader market. Our share gains are notably higher in this broader category. Fresh categories, in particular, have shown stronger share gains. I believe that as people continue to stay home and cook, which seems likely, this behavior will persist, and remote work will continue as well. Consequently, people may spend more on fresh products, and we have a competitive edge there. Therefore, I expect we will keep gaining share in those fresh categories.

Okay. That's helpful. And then you mentioned your expectations for people cooking at home more. And so with the robust comp growth you've seen so far this fiscal year, can you talk about how you're thinking about lapping the more difficult comparisons in fiscal '21 at this point? Just some of the puts and takes there maybe that you haven't necessarily touched on previously.

Yes. First of all, I agree with you. We appreciate positive comparisons, right? While we don't expect next year to have positive comparisons, we will focus on a two-year analysis, and we will share that with you. That's how we are approaching next year's business planning. Ultimately, many of our efforts are centered around promoting growth. From a financial perspective, our goal is to achieve growth that exceeds pre-pandemic figures over a two-year period. This is our mindset. Numerous initiatives, such as our ongoing investment in fresh products and expanding eCommerce, are clear indicators of this. We understand that these efforts are incremental. Our ongoing focus on meals and other areas will also contribute to growth. We're actively investing in eCommerce as part of our operational and capital expenditures. Additionally, we are dedicating resources to customer retention. We are implementing various strategies to ensure growth for next year.

Our next question comes from the line of Ken Goldman with JPMorgan.

Vivek, I wanted to revisit the topic of pricing. You previously expressed a strong reluctance to accept and pass on price increases from manufacturers. However, since your last report, there have been significant increases in the costs of corn, wheat, freight, and other inputs. Recently, Conagra mentioned that inflation is accelerating, possibly starting in the current quarter. I'm wondering if you still feel the same way about resisting vendor price hikes. It seems to me that this might be a prime opportunity to implement some of these higher prices, given the current strong consumer demand. I'd like to hear your updated thoughts on this.

Yes, my approach will always be to resist unnecessary price increases. I believe we should prioritize what's best for our customers, and that will remain my stance. However, we also need to consider the overall market conditions. While the market price per volume has increased slightly, it is not as high as it was in the first and second quarters; in fact, it has decreased somewhat overall. We have performed slightly better than the market in this regard. We will certainly address inflation when it arises, without a doubt. Nonetheless, we will continue to maintain a constructive dialogue with our suppliers to ensure that any price adjustments are truly warranted.

And then for my follow-up, San Francisco and L.A. have proposed mandated $5 hero pay for grocery workers. I don't think either of these have been formally adopted yet, but if they do get approved and if more California counties do take this on, how do you plan on sort of adopting this or pushing back in any way? $5 is obviously a lot more than what many companies are paying right now per hour in addition to typical wages.

Yes, in certain areas, some counties have suggested such proposals. It primarily relates to grocery workers, not non-grocery sectors. It's not straightforward, and we don't agree with that approach. We are addressing the situation and if necessary, we have various ways to manage it. A significant portion of our retail workforce is part-time, which allows us multiple strategies for cost improvements beyond just this type of proposal, including overall wage management. We have numerous options to address this, and we will continue to pursue them. However, it's important to note that this is a very small issue that we are currently aware of.

Our next question comes from the line of Robbie Ohmes with Bank of America.

Congrats on another great quarter.

Thank you, Robbie.

Vivek, I was hoping you could talk first a little more about digital. Could you give us some color on where you think digital penetration is going to end up for the year as a percent of sales? And then within that, how big is delivery as a percent of digital versus DUG? And then maybe you could comment on you guys moving over to DoorDash and the strategy on delivery.

Sure. Let me clarify that we did not state in our press release that we are halting delivery and switching to DoorDash. Some news outlets interpreted it that way, and that notion gained traction. The reality is that there are markets where we see delivery functioning effectively and others where our first-party delivery doesn't perform as intended. We believe there are additional alternatives worth exploring. You'll continually hear about our efforts to test various approaches, like lockers in Chicago, to enhance customer delivery. From an eCommerce perspective, the fastest-growing area for us is DUG, and our growth rate is outpacing the expansion of our DUG centers. Customers are showing strong loyalty towards DUG in our markets, prompting us to invest more heavily in this segment. It is soon becoming a larger part of our business than our own delivery services. While we’re currently behind others in terms of eCommerce mix, we are making strides to catch up. As we expand DUG and attract more customers into the franchise—who tend to spend significantly more with us—we expect to reach market levels, although we remain slightly beneath them at this time.

That's helpful. For my follow-up, can we get more details on the digital impact on gross margin for the quarter? You mentioned a 75 basis point fuel benefit. What kind of drag did that have? Looking ahead to next year, how should we consider the fuel benefit margins and the potential pressures if they go the other way?

Bob, can you take that, please?

Yes. Let me provide some details. As you noted, our margins excluding fuel increased by 25 basis points, as mentioned in our earnings release. Breaking it down into two main components: improvements in shrink and sales leverage on advertising and supply chain costs contributed approximately 70 basis points to that increase. However, this was offset by expenses related to digital initiatives and Select price investments, which accounted for about 45 basis points. I don't have an exact breakdown, but it's approximately a 50-50 split.

That's very helpful. And just any thoughts on fuel outlook for next year in terms of impact on gross margin?

Yes. As you know, fuel can be a tricky one to try to estimate. This year has certainly been a boon to everyone. I mean, on one hand, volumes are way down. But then on the flip side, the margins are a little higher. We would expect next year that the volumes will probably start returning a little bit as some people start going back to work. But at the same time, we're anticipating that some of the peaks of the spikes in gross margin and fuel might moderate just a little bit.

Our next question comes from the line of John Heinbockel with Guggenheim Partners.

Vivek, I want to start with behavior of new customers, right? You said 6 million new households for the quarter. I don't know how many for the year. But what percent of those are registered loyalty members roughly and what percent active members? And then how is their spend ramping as new customers? How is that ramping relative to the legacy base?

Yes, John. So we brought in 6 million new households. Out of that, about 900,000 to 1 million registered for our Just for U program, which is fantastic because they engage with the program. In certain areas, such as the East Coast, where we previously didn't have card pricing, we just launched Just for U, and it has gained traction quickly. Customers are shopping more in-store and spending more on groceries, which makes them see greater value in the rewards. This aspect is functioning well. When they engage with the program, their spending increases significantly. Our most loyal customers tend to spend four times more, averaging around $20,000 a year at the top tier.

And then maybe secondly, you guys talked about the 20% flow-through, right, on sort of an incremental comp. Maybe talk about how that works on a comp decline, right, compared to that 20%, assuming sort of a normal gross margin environment. And are there tweaks, right, you can make on labor and so forth to maybe to keep it to around 20%?

Yes. John, it's not a straightforward curve. There is a specific point where you see significant flow-through. For instance, we are not increasing the number of store directors or department managers, so some aspects are quite fixed. The volume threshold for next year will likely exceed that minimum point. Now, regarding the variable factors, they mainly include labor. We can manage labor hours in our stores since there's a lot of part-time labor available. We have several initiatives focused on reducing hours and enhancing productivity. These efforts began before COVID and are still effective now. We've seen improvements, such as better shrink numbers, which Bob highlighted in relation to gross margin. We have introduced production management and scheduling tools that optimize labor while also helping to manage shrink by ensuring we produce the correct quantities. These are some of the strategies we are implementing to maintain effective flow-through.

Our next question comes from the line of Paul Trussell with Deutsche Bank.

This is Krisztina Katai on for Paul. I wanted to ask about digital grocery economics. You did mention that you saw a reduction in picking costs that was driven by technology. So is there anything additional that you can provide on profitability of the channel? And secondly, how do you expect it to trend once DUG becomes a larger portion of that eCommerce buy?

We are excited about DUG becoming a larger part of our eCommerce portfolio. To give you an idea of how we view the economics of the eCommerce business, if we consolidate all eCommerce transactions into our P&L, our own eCommerce operations, including pickup and delivery, currently break even. It's important to note that this breakeven point occurs during a period of higher stock-outs, increased labor callouts, and more variable demand patterns than usual. Despite these challenges, we have initiatives in place to improve picking efficiency, and with the MFC coming, we are optimistic about our core business. DUG is proving to be the more profitable part and is growing at a faster rate. From a customer's perspective, it's even more encouraging because less engaged customers tend to spend more when they use eCommerce. This spending comes from the same store and utilizes the same resources. Ultimately, this creates additional marginal profit with significant potential for enhancing profitability.

Got it. That's really helpful. And secondly, I just wanted to touch on fresh. I mean you talked about fresh being a differentiator for Albertsons, and it is driving the market share gain. So to what degree do you think it sets you apart from your competition? And perhaps what are some of the areas and categories where you can improve your offering or service levels?

We will continually enhance our offerings and service levels, and we will never be satisfied with the status quo. For instance, we believe that expanding our meal programs will have a significant positive impact. We've seen success in areas where we've implemented this initiative, and we plan to expand it further. It's not just about providing the ingredients; it's about offering solutions for those nights when you may not want to cook but still want a delicious meal that feels homemade. We will keep improving in that area. The reason we excel in fresh products is largely due to our investment in store labor. We have specialized staff like butchers and bakers available in our stores. You can customize your cake or have your steak cut to your specifications. If you miss a restaurant experience, you can find it at our store. This investment in labor and the choices we make regarding our products would typically provide a marginal advantage, but during times like these, when more people are dining at home, it becomes an even greater competitive edge.

Great. Congrats on a great quarter.

Thank you so much.

Our next question comes from the line of Paul Lejuez with Citi.

This is Brandon Cheatham. I'm on for Paul. I was just wondering if you could talk a little bit about some of the technology improvements that you're investing in. I think last time you mentioned the on-demand planning system was in 800 stores. So I was just wondering how that rollout is going, if you're seeing any margin improvement in stores that have that versus stores that don't and if that contributed to the better shrink this quarter.

About 30% of our capital is allocated to technology. A significant portion goes towards enhancing our infrastructure, such as migrating to the cloud and ensuring our systems can scale quickly. Our eCommerce operations are cloud-based, and we experienced minimal disruption during peak times, which has improved our data and consolidation efforts. We plan to continue this focus for the next few years until most of it is completed. Another aspect is enhancing growth through customer-facing applications, like the automated lockers. We are also investing in productivity improvements both in-store and in our distribution centers. Specifically, we're enhancing ordering systems, and feedback from store employees indicates that these systems are beneficial. We are witnessing positive results from production systems in our fresh departments, which contributes to labor and shrink benefits, as well as improvements in sales due to better inventory management.

Understood. And on the Own Brands, are you facing headwinds with stock-outs? Has that kind of gotten easier as we've gotten through the pandemic?

Our Own Brands penetration in the last four weeks of the quarter has exceeded 25%. We finished 2019 at 25.4%, but it dropped by about 1.5 points before returning to 25%. We are optimistic about our stock levels. Additionally, the team is effectively identifying and addressing gaps in the market, including expanding into value packs and meeting new customer needs.

Got it. So it sounds like Own Brands kind of has accelerated through the year, and now you're back to where you were.

Yes. I think there are two important points about Own Brands. One is a supply challenge. The second point is that when you have a shelf with five national brands and an Own Brand, typically, two of the national brands sell well along with the Own Brands. When you restock the entire shelf, this naturally reduces your mix.

Our next question comes from the line of Robert Moskow with Credit Suisse.

Vivek, you mentioned enhancing the selection of ready-to-eat and ready-to-heat options. You also noted that we are relocating the salad bar to replace refrigerated space. I see this as a significant merchandising change in response to COVID and the consumer demand for simpler meals that they can easily pick up and prepare at home. However, I'm struggling to understand how widespread this change is across your chain and how many of your subchains are implementing it. Is there any way to quantify this and provide insight into how substantial this merchandising shift is in relation to offering more convenient meal solutions?

Yes. Let me explain the merchandising, Robert. It's a few refrigerated units located around the deli area of a store. The size of these units varies based on the store size. From a merchandising perspective, it's very focused and targeted. We view these as modules, and it's manageable, meaning we don't have to significantly remodel the store. We're not considering restaurants or anything similar. The bigger challenge lies in ensuring that the production is handled correctly and maintains high quality. We need to determine the right setup, what can be made in the store, and what needs to be produced outside the store, which can differ from market to market. That's what we're currently working on and implementing. While it isn't at a scale we would be proud of yet, we are moving in that direction. We have it in three markets currently. One market is rapidly expanding while in a couple of others, we are still in the experimental phase. However, it will be a major focus for us. Looking ahead to the next two to three years, we believe there is significant growth potential here.

What about salad bars? Are those still in the vast majority of your stores? Or are they slowly coming out?

Yes, they are. However, in many areas, they are not operational because it's not safe. In some locations, they are. It's important to know that salad bars don’t always provide the best return in all markets. There will be areas where their value is significant, such as near office complexes where there's a lot of lunch business, making a salad bar effective. Conversely, there are other markets where they aren't as effective. The question always has been what the alternative is. Now we have one.

Our next question comes from the line of Scott Mushkin with R5 Capital.

So I wanted to ask, obviously, this year has been just tremendous kind of a windfall. How do you guys think of accelerating some of your gross initiatives to, I guess, accelerate share gains and also enhance the customer experience? Obviously, the customer is changing quite a bit on what their expectations are. So I was wondering if you could talk about how do you accelerate share gains and what you can do with the customer experience.

Yes, Scott. First of all, hello. Our primary focus on gaining market share remains centered around eCommerce and fresh products. These are the two areas where we are dedicating more of our efforts. In terms of eCommerce, we are expanding Drive Up & Go and investing in enhancing the customer's front-end experience on our apps. For instance, in markets with limited parking, we have implemented a locker system or a service that allows someone to pick up their orders quickly, making it easier for customers living nearby, such as in high-rise buildings. Regarding fresh products, we are committed to not only continuing our current initiatives but also providing meal solutions that simplify the cooking process for customers without sacrificing quality. We are focusing on improving daily store operations, as there is no alternative to running excellent stores. I hope you notice the progress we are making.

So as a follow-up, is it possible to accelerate CapEx into productivity enhancing on the eComm? I know you guys are experimenting obviously with micro-fulfillment. But is there an opportunity to accelerate that investment? Any comments you guys have on some of the Amazon stores that have been opened up against you? And then I'll yield.

Yes. Regarding the expansion of micro-fulfillment centers, we plan to have seven next year. We are trying to identify various archetypes that we can implement across different markets. Currently, we have one archetype that is tied to a store. We will be exploring additional archetypes of micro-fulfillment centers in 2021, which will allow us to expand more quickly. In terms of capital investment in stores, such as improving ordering systems or enhancing customer experiences with self-checkouts, we're also experimenting in those areas. The pace of capital deployment isn't just about speed; it's about managing change effectively. We want to avoid deploying systems that lead to incorrect orders or poor customer experiences, as that is typically what limits our progress.

Ladies and gentlemen, this concludes our time allowed for questions. I'll turn the floor back to Ms. Plaisance for any final comments.

I apologize, but we ran out of time here. There are several people that we didn't get to, but Cody and I will be available for the balance of the day. We look forward to speaking with all of you. Thank you for participating, and have a great day.

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