Albertsons Companies, Inc. (ACI) Q1 2022 Earnings Call Transcript

Thank you for standing by. Welcome to the Albertsons Companies First Quarter 2021 Earnings Conference Call. This call is being recorded.

Good morning, and thank you for joining us for Albertsons Companies First Quarter 2021 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 insights into our first quarter results as well as review our progress against our strategic priorities. Bob will then provide the financial details of our first quarter as well as an updated full year 2021 outlook before handing it back over to Vivek for some closing remarks. After management's comments, we will conduct a Q&A session. I would like to remind you that management may make statements during this call that may include forward-looking statements within the meaning of federal securities laws. Forward-looking statements are not limited to historical facts but contain information about future operating or financial performance. These forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to differ materially 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 are and will be contained from time to time in our SEC filings, including on Forms 10-Q, 10-K and 8-K. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements. 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.

Thanks, Melissa. Good morning, everyone, and thanks for joining us today. We entered uncharted territory in Q1 with comparisons to last year's pandemic stock-up period and the gradual reopening of various geographies as vaccination rates accelerated and COVID-related restrictions were lifted. In this dynamic environment, we remain focused on executing our strategy centered around deepening relationships with our customers and leveraging technology to run our business more efficiently and effectively. I am pleased to report that our results for the quarter exceeded our internal plans across all key metrics, increasing our confidence in the balance of this year. Our ID sales grew 16.5% on a 2-year basis, and we continue to gain market share in food on a 1-year basis and in MULO, which includes most food, drug, mass, club, dollar and military on a 2-year basis. In addition, we achieved adjusted EBITDA of $1.3 billion and adjusted EPS of $0.89 a share ahead of our expectations. Against the backdrop of growth exceeding 200% in every quarter in fiscal '20, our digital initiatives continue to resonate with our customers. And we retained the sales levels we achieved last year, with digital sales virtually flat year-over-year in Q1, and a 2-year stacked ID sales growth of 276%. With all the options we have in place, we have achieved 95% customer coverage with eCommerce and retention has been strong. At the same time, we have seen a pickup in in-store transactions versus Q1 '20, and many of those incremental in-store shopping trips are focused on fresh. At the end of Q1 '21, we had 3.6x the number of omnichannel households than we had 2 years ago in '19. We've seen that as customers move into omnichannel, they also increased their spending in our stores, with a net growth of 17% per household spend in the quarter and a total spend rate of 2x that of an exclusively in-store shopper. In fact, in Q1, with identified households, the average in-store-only shopper sales were down, while omnichannel customer sales were up year-over-year. We've grown our identified households by 8% year-over-year for the last 52 weeks, allowing us to better understand their needs so we can personalize our offerings for them and drive recurring and incremental spend. Membership in our Just for U loyalty program continued to accelerate and was up over 18% year-over-year in Q1 '21 to 26.7 million members. We also increased the number of actively engaged customers by almost 13%, and we have a 94% retention rate that engage Just for U households. Remember that actively engaged customers spend 4x more with us. In summary, our strategy of building lasting relationships with customers through a combination of digital and in-store engagement is driving our top line. Overall, our strategy is focused on 4 priorities: in-store excellence, accelerating our digital and omnichannel capabilities, driving productivity and strengthening our talent and culture. In-store excellence is demonstrated through the one-stop shopping experience we continue to provide for our customers, supported by the quality, variety and depth of our fresh and Own Brands offerings that give us a competitive advantage. In fresh, which has always been a strategic focus for us, we continue to see stickiness, giving us confidence that our strategy is working. The fresh department sales growth outpaced center store by approximately 200 basis points on a 2-year basis, with each of our fresh categories ahead of pre-pandemic levels as customers continue to consume more meals at home. As our markets have opened up, we've seen customers shopping in our stores more often and continue to see fresh as a key driver for growth. Our Own Brands portfolio also continues to appeal to our customers with strong sales driven by the introduction of new innovative products as well as our focus on Albertsons legacy divisions that were historically underpenetrated. Our Q1 sales penetration was 25.2%, up over 100 basis points from Q1 '20 when supply issues impacted sales. We continue to innovate, launching 318 new items in Q1 '21, many of which were Signature Farms bulk items, including trail mixes, various nuts and dried fruits, Open Nature almond butter and Signature select premium beef patties. We continue to expect to launch over 800 items this year. We're also proud of our Own Brands team that was named the Store Brand Magazine 2021 Game Changer as a private brand that revitalized the industry. We also continue to capitalize on the demand for convenient and fresh meals as consumers come to us for food beyond the purchase of ingredients. We have begun the rollout of our ready meals, our ready-to-eat, ready-to-heat and ready-to-cook meals program and expect to be in approximately 500 stores by our fiscal year-end. Finally, we continue to invest in our stores. We opened 5 new stores and completed 33 upgraded and remodeled projects during Q1 '21. Our second priority is the acceleration of our digital and omnichannel capabilities. Digital is an important growth driver for us as we strive to provide an area of convenient shopping experiences for our customers. We added a net 320 new DUG locations, Drive Up & Go locations, in Q1 '21, bringing our total to 1,740. And DUG sales grew 75% year-over-year. We now expect to have DUG in approximately 1,950 locations, representing approximately 98% coverage by the end of the second quarter. As part of our growth plans in digital, we also remain focused on delivering a superior customer experience as well as improving profitability. For example, we continue to achieve on-time filling and delivery rates in excess of 95%, demonstrating consistent on-time delivery and DUG pickups. We began the rollout of our integrated loyalty and eCommerce app offerings of connected customer experience through a single interface. We launched a new San Jose MFC, and that plans for an additional 6 MFCs before the end of our fiscal year, bringing the total to 9 MFCs. We sped up delivery times while reducing delivery cost per order by expanding our third-party delivery store network while also adding DoorDash 1-hour delivery to our eCommerce options, which has been rolled out to 9 divisions so far. We also implemented our enhanced picking software at all DUG locations to help optimize and standardize picking processes, increasing picks per hour and enhancing order prioritization. And we improved customer service by migrating all support to one IT platform. Our third strategic priority is driving productivity to support reinvestment in the business and help offset inflation. We are making progress against our productivity agenda, and we exceeded our internal expectations in Q1. During the quarter, we made significant progress in labor efficiency, shrink, promotions optimization and indirect expenses. We continue to expect to achieve $1.5 billion in gross savings by the end of fiscal '22. Our fourth priority is strengthening our talent and culture and supporting the communities we serve. We continue to add talent throughout the company at both the corporate and division levels, including the recent appointment of Jennifer Saenz, our new Chief Merchandising Officer, and are very proud of our store-level teams who are adapting well to a changing environment. Our pharmacy team also continues to come through for our communities. To date, they have administered 6 million COVID vaccine doses. Additionally, during Q1, our Nourishing Neighbors fundraising drive raised approximately $9 million from our generous customers at our check stands, which was matched by the Albertsons Companies Foundation, resulting in $18 million in funds to feed children and families this summer. As part of our ongoing focus on ESG, we recently announced that we are the first company in America to introduce a 100% zero-emission refrigerated grocery delivery truck. We have been enhancing our supplier diversity program through new partnerships and an improved database and tracking tool. In conjunction with our recently completed new materiality assessment, we're focused on quantifying our carbon reduction opportunities, baselining our food waste, plastic and packaging footprints, and further developing goals and targets for diversity, equity, and inclusion, and community stewardship. We expect to share our key focus areas and commitments later this year. And now I would like to ask Bob to cover the details of our first quarter financial results and outlook.

Thanks, Vivek, and hello, everyone. I am pleased to provide details on our strong first quarter results as well as an update to our fiscal 2021 outlook. In many cases, I will make comparisons back to our first quarter of fiscal 2019 period to demonstrate the performance versus our pre-pandemic levels. For the first quarter, total sales were $21.3 billion, up approximately 14% or $2.5 billion compared to the first quarter of fiscal 2019, which is primarily driven by our 16.5% 2-year stacked identical sales results. Our gross profit margin came in at 29.1% during the first quarter of 2021 compared to 29.8% in Q1 2020 and 28% in Q1 2019. Excluding the impact of fuel, our gross profit margin was up 10 basis points compared to Q1 of 2020, and increased over 90 basis points compared to Q1 2019. The increase compared to Q1 2019 is primarily driven by improvements in shrink expense, our productivity initiatives, sales leverage and improved pharmacy margins relating to administering COVID-19 vaccinations, partially offset by investments related to our growth in digital sales. Our SG&A as a percentage of sales, excluding fuel, increased 115 basis points year-over-year as we saw sales deleverage versus the period of significant heightened demand in the first quarter of last year. But importantly, on a 2-year basis, we decreased our SG&A as a percentage of sales by 75 basis points. COVID-19-related expenses during the quarter totaled approximately $130 million. Some of this was one-time in nature, including the write-off of some COVID-related inventory and supplies, so we expect these costs in future quarters will be lower. Interest expense was $153 million compared to $181 million in the first quarter a year ago. The reduction in interest expense is primarily driven by lower average interest rates due to our successful refinancing transactions during fiscal 2020 and our continued deleveraging. Adjusted EBITDA was $1.3 billion in the first quarter of 2021, representing compound annual growth of approximately 22% versus the first quarter of 2019. The growth in adjusted EBITDA versus the first quarter of 2019 represents strong flow-through of approximately 17%. Adjusted net income was $518 million or $0.89 per fully diluted share, representing compound annual growth of over 70% compared to Q1 2019. We ended Q1 with $2.2 billion in cash on the balance sheet and are pleased that this gives us flexibility to continue to invest in growth opportunities. Capital expenditures were approximately $513 million during the first quarter as we opened 5 stores, closed 5, completed 33 remodels and invested in our digital and technology platforms. We continue to expect our spend to be approximately $1.9 billion to $2 billion during fiscal 2021. During Q1, we also received upgrades from our debt rating agencies as Moody's upgraded us to BAA stable and S&P upgraded to BB stable. We ended the quarter with our net debt-to-adjusted EBITDA ratio at 1.5x on an LTM basis, consistent with the levels we exited the fourth quarter of fiscal 2020. Turning now to our updated outlook for fiscal year 2021. Given the outperformance in Q1 and recent trends, we have updated our guidance for fiscal '21. Some of the outperformance in Q1 is related to COVID vaccine revenue that was ahead of expectations. And this revenue source has begun to taper off as the pace of vaccinations slows. Nonetheless, our competitive advantages and the underlying stickiness of the business gained during the pandemic as well as the ability to pass along modest inflation and the continued consumer demand for premium items gives us confidence in the strength of the business for the balance of the year. We now expect identical sales on a 2-year stack basis to be in the range of approximately 11% to 12% compared to prior guidance of 9.5% to 11%. We expect adjusted EPS in the range of $2.20 to $2.30 per share, which represents a 2-year compounded annual growth of 47% at the midpoint of the range, up $0.25 from our prior guidance range. We expect adjusted EBITDA in the range of $3.7 billion to $3.8 billion, up $200 million from our previous guidance range and representing 2-year compound annual growth of approximately 16% at the midpoint of our range. In Q2 to date, we are seeing our core business sales on an average weekly dollar basis and market share gains continuing at similar levels to Q1. As a result of seasonality and the drop-off in the pace of COVID-19 vaccinations administered, we believe the current consensus expectation for Q2 EBITDA margin is still appropriate. We continue to believe that our productivity initiatives and seasonality will drive stronger EBITDA margins in the back half of the year compared to Q2 as we noted on the year-end call.

Thank you, Bob. Before we turn to Q&A, I want to share a few closing remarks. While it's hard to predict the impacts of COVID-19 on demand over the long term, we believe there are a few trends that will stick with us. First, we believe digital engagement with consumers in our sector will continue to increase. This provides us with an opportunity to gather more data and deliver a better, more personalized shopping experience for our customers. Second, even though we saw a step change in 2020, we believe consumers will increase their use of e-commerce solutions, especially pickup in store and rapid delivery. Particularly in our industry, consumers value speed and delivery, and we are committed to continuing to enhance speed by leveraging our great store locations. Lastly, we believe more remote work is here to stay. This means more meals at home, which will continue to benefit our business, particularly the demand for fresh ingredients and meals. Albertsons Companies is well positioned to capitalize on these trends given our unique competitive advantages. As we go forward, we'll remain focused on investing in technology to amplify our strengths and become a faster and more efficient business to better serve our customers and drive EBITDA flow-through in our P&L. With this as a backdrop, let me also share some insights on recent trends in our performance. Despite business reopening and people resuming travel, our sales momentum continues with growth in market share, and we are very focused on continuing these trends on market share. When looking at our average weekly sales dollars, sales in Q2 are continuing at the same levels as in Q1. We are seeing continued strength in sales of items that were elevated throughout the pandemic such as meat, seafood, produce and high-end wines, providing evidence that some important food and beverage categories remain shifted to food at home. While we are seeing higher cost inflation in some categories, we saw modest inflation during Q1, and we were generally successful in passing it through as the competitive environment has remained rational. We continue to see households upgrading to more quality and premium products indicating that the consumer is still strong. Overall, we are confident in our ability to continue to produce strong results. I want to extend my thanks to our entire team of approximately 290,000 associates who are continuing to take care of our customers and communities this quarter as well as throughout the pandemic. We will now take your questions.

The first question is from John Heinbockel from Guggenheim Partners.

Vivek, I'm going to do 2 quick ones here. One, now that you've got another, I don't know, 20 weeks under your belt this year, what's your thought regarding the secular algo, right? And how that may have changed because of COVID? And then secondly, with all the capital, right, the cash and free cash flow you've got, what would you like to invest in strategically? And I'm not talking about dividends or stuff like that, but more either organic or M&A that you think would be additive to the business. Is there anything like that out there?

John and everybody, sorry about these glitches. Sorry about that, guys. John, let me answer your question first. On a secular trend basis, I'll point to a few things. One, a very healthy consumer, okay? We are still seeing no trade down. They're still buying many discretionary items in our store, traded on up meat, wines, et cetera. Second, it's clear to us that they're eating a lot more at home. Our fresh sales are higher than the rest of the store, and so that continues. I think partly driven by the fact that people are still working from home, and I've always maintained a point of view that, that will continue into the future. And also partly that people are more comfortable cooking at home. Our eCommerce continues to be strong. You know what, if I was to dissect that a little bit, you'll see that our eCommerce transactions are still higher over last year. But the baskets are smaller, as you would expect, because people bought everything and anything they could last year on eCommerce. But what's very interesting is that people are coming back to the store. The traffic to the store has gone up significantly, and it went up week-over-week-over-week through the last quarter, right? So I mean, those are a few things I'll say. And just a lot more digital engagement, which we love, John, because now we can get more data and we can personalize and do the right things for them. On cash, our priorities will still be the same, it's about growth. And we will first focus on organic growth. We'll continue to invest in our fleet. I think it's clear to us that stores still matter, and we'll continue to do that. We are going to put a lot of energy into digital growth, and that is both the software side and the hardware side. We're going to roll out more MFCs this year, and we see a lot of promise there, and we'll continue to do that. And we'll be opportunistic on M&As. The stronger we are, the better the returns will be on M&A as it's turning out for us and things are about to change.

The next question is from Paul Lejuez of Citibank.

Vivek, towards the end of your prepared remarks, I think you had a couple of comments about inflation. Just wondering if you could dig in a little bit deeper in terms of what you're seeing on the cost of goods side of that inflation equation? And how do you see that trending over the balance of the year? And then related to that, how does that change the way you think about pricing on national brands versus what you might do with your private label product pricing?

Do you want to touch on inflation, Bob, and I'll do the pricing piece.

You bet. Paul, what we saw in product cost inflation was somewhat modest, 1.5% to 1.7% during the quarter. So we saw that, that was increasing slightly as the quarter continued but still within a reasonable range.

Yes. I think our outlook suggests it might be slightly higher in the second half of the year, Paul. However, I believe that if it stays in the 3% to 4% range, it will actually benefit the business, especially with a strong consumer as I mentioned. This is something we can manage, and we see a significant advantage when it is in that range. Regarding our Own Brands, our penetration is increasing, which is a positive sign and supports our gross margins. There were concerns about whether Own Brands would decline, but they are recovering nicely. Our pricing strategy for Own Brands will include two aspects: one is setting an entry price point, and the other is pricing for certain products where we can be more competitive with national brands. We will monitor the situation in relation to national brand pricing.

Our next question is from Karen Short with Barclays.

I wanted to clarify a couple of points you made. Bob, you mentioned that you were comfortable with the EBITDA margin for the second quarter or that the consensus margin was appropriate for that period. From what I see, the consensus reflects a 5% EBITDA margin. Is that the correct way to assess the difference between the first and second quarters? There seems to be some deleverage, but I'm curious about the sequential change and how much of that change is due to the contribution of the vaccines primarily affecting the first-quarter gross margins. I'm trying to grasp the significance of the vaccine components on the first quarter.

Yes, great question, Karen. You’re partly correct. The vaccine income contributed, but it's actually a smaller part. If you look back over the past five years, especially since 2020, you'll notice a seasonal pattern where Q2 typically sees a decrease of 60 to 70 basis points every year. That decrease tends to rebound in Q3 and Q4. So primarily, the larger factor is just normal seasonality, along with some impacts from pharmacy and other areas.

And we're accelerating DUG rollout. We're pulling it further up into Q2 because we think we can go faster and should go faster in it. So it's a combination of things there, Karen.

The next question is from Scott Mushkin with R5 Capital.

Let's try to do this again. Hopefully, you guys can hear me this time.

I can hear you, Scott.

Okay. Perfect. I think maybe it was my phone, I don't know. Anyway, I wanted to ask a longer-term question around omnichannel, digital. And just really understanding 2 things. Number one, it seems like you guys are trying to pursue a much more asset-light model compared to some of your competitors, and I want to make sure my interpretation is correct there. Then the other thing I want to talk about or maybe you could answer is kind of keeping the store environment shoppable. I mean I was in a Walmart yesterday down in Houston. I think there was just fighting in the shelves with the pickers is difficult. So those are kind of 2 questions, and I have a follow-up.

Yes. I'll address the second question first. I don't view our eCommerce business as asset-light; our greatest asset is the store. We work tirelessly every day to operate our stores well. It's essential for our stores to be full, clean, and to offer fresh products as well as a variety of options and good service. Proper labor management is crucial, and we have a dedicated team focused on that. With this foundation, we can successfully build our eCommerce business, which is based on these stores. I don't consider it asset-light because I believe there’s potential for micro-fulfillment centers (MFCs) and their growth. While MFCs involve assets, they provide flexibility, allowing us to progress at our own pace and diversify our investments. Each year, we incorporate more technology into our strategies. We are transitioning from an asset-heavy delivery model to a more asset-light approach, as I don't think traditional delivery methods with trucks work well for groceries. Instead, we're focusing on point-to-point deliveries. However, our primary focus remains on operating excellent stores.

That's great. My follow-up is that your stock is currently just under 5x EBITDA in 2022, which is quite low and approaching concerning levels. Is there anything management can do to draw more attention to the company and increase that valuation? Do you even consider this issue?

Thank you, Scott. There is about $11 billion in pre-pandemic real estate value also included in this. We think you're right, and we hope that continuing to perform well in the coming quarters will make a difference.

The next question is from Ken Goldman with JPMorgan.

You mentioned that you were successful in passing along inflation. You're still well below that 3% to 4% range you said is beneficial for the business. Many of the packaged food companies we monitor are experiencing higher inflation than anticipated just a few months ago. Now some are considering seeking additional price increases from customers. I'm curious about your willingness to allow these additional increases in general. Historically, there has been significant resistance to this approach. However, given that elasticity is currently not a strong factor, perhaps you are more open to it than usual. I wanted to understand how you are addressing requests from your vendors for more pricing flexibility.

Yes. Ken, yes, let me put it this way. First, it's always on a case-by-case basis, okay? And I know that some of our CPG companies are facing challenges in labor, challenges in transportation, et cetera. We have our large Own Brands business. And because of that, we get tremendous transparency also to what's happening to cost. So we end up having good and constructive negotiations with our supplier partners. And where it is warranted and legitimate, we will pass it through. And when I say the 3% to 4%, recognize that, yes, we may have several CPGs where there is a legitimate cost increase requiring a price increase, and we'll do that. But it rallies that our entire portfolio goes up 3% to 4%. You're always something that is going down, especially when you have such a high fresh component. And that's what happens. That's why you end up with this 3% to 4% despite you hearing the noise about inflation in many of the CPG companies coming together. All that said, I do expect it to be a little higher in the back half of this year. There's no question about it. I do expect it to be higher, but in the range that we feel comfortable passing through.

Okay. That's helpful. And then a quick follow-up. Are there any signs that any of your major competitors are planning on stepping up discounting in the back half of the year? Are you pushing any of your major vendors to start spending back more in the stores? I know some of that is counterintuitive with the pricing that's going on, but just trying to get a sense of the environment you're seeing right now and what you're looking for there.

It's been about the same as it was for the last few quarters. I think there are two main factors to consider. One is the elasticity you mentioned. The other is supply. The types of products we typically promote during football season, such as soda, beer, and Gatorade, are currently in tighter supply. This makes it harder for us to engage in promotions. So, you're observing some discipline in the marketplace.

The next question is from Kate McShane with Goldman Sachs.

Kate, we can't hear you.

Kate, why don't you dial back in, and we'll pick you up. Let's go to the next caller.

Certainly. The next caller is Simeon Gutman with Morgan Stanley.

I hope you can hear me. Nice quarter.

Yes, we can hear you.

Great. For my first question, I'd like to discuss the revenue growth in the quarter. It appears that while the overall industry is not accelerating, your company is gaining market share. Can you share your perspective on the business? It seems to be accelerating compared to the first quarter. Could you break down the units in pricing, excluding fuel and adjusting for seasonality? Is this a fair assessment? Is it indeed accelerating, or is it about the same as the previous quarter? Vivek, you proposed early on that some consumer habits formed during COVID would persist, and it seems that has been the case so far. Why should we expect that to continue as we transition back to a post-COVID environment? Are there indicators that support your confidence in this hypothesis moving forward?

Yes. Let me address the second question first, and then Bob can tackle the first one. Let's explore what is sustaining this behavior. I believe the pandemic's most lasting impact is the shift towards working from home. Many companies are now adopting a hybrid model, typically asking employees to come into the office for just a few days. However, this usually translates to a substantial amount of time spent working from home. As long as this trend continues, we can expect to see increased at-home consumption, particularly for breakfast and lunch, which is significant. Additionally, we are noticing that people are cooking more at home. This observation comes from an increase in fresh sales compared to 2019, and these sales are relatively high compared to other items in the store. I’m not sure how long this trend will persist, but I anticipate seeing it for at least a year. The true test will be how behaviors change when schools and colleges reopen or when travel increases, which is why our sales outlook for the second half has been adjusted slightly downward. However, the current trends are looking quite positive.

Regarding the first item, Simeon, it's challenging to assess the ID rates accurately, particularly in the first quarter due to the unusual circumstances from last year. However, we do monitor these metrics on an average dollar basis weekly, and we observed strong performance and positive momentum throughout the quarter.

Consistent, right?

That's right. And as we said in our prepared remarks, we continue to see that into the second quarter at much the same level as we saw in the first quarter. So we're very optimistic on where sales are going.

The next caller is Kate McShane from Goldman Sachs.

Can you hear me?

Yes, Kate. Sorry about the technical stuff, but we can hear you well.

Okay. Good. No, no problem at all. I just wanted to follow up on the digital delivery piece, the third-party fulfillment. I just wondered, ultimately, what that looks like in terms of how many partners do ultimately have when it comes to third-party fulfillment? And what does it mean for profitability? And finally, just the last question related to that is just what does it mean when it comes to data and using these other third-party fulfillment marketplaces?

Certainly. Let me break that down into two parts. First, our fastest-growing area is Drive Up & Go, and we are really enthusiastic about its growth, which is outpacing the expansion of our Drive Up stations. Drive Up & Go includes comprehensive services. The second aspect involves customers placing orders through us while we rely on a third-party for the final delivery, which mainly enhances efficiency and allows for a two-hour delivery window. We strongly believe in the importance of speed in eCommerce. The third part of our operation involves a third-party that manages customer orders, selects products in-store, and handles delivery. We collaborate with multiple partners in this area, aiming to align with customer preferences. Many of our customers utilize both online and in-store shopping, and our store locations are ideally situated to cater to them and our partners by being close to where customers live. We are also increasingly focused on being transparent with data and enhancing our loyalty programs to strengthen our connection with customers and understand their purchasing habits. In summary, we are dedicated to reaching customers in various ways.

The next question is from Michael Montani with Evercore.

Just wanted to ask, if I could, on the 10% ID sales decline and then 16.5% 2-year. If you all could share what the traffic and ticket split was? It did sound like traffic is positive. So I thought that's an important point to tease up and then just a follow-up.

Yes. First of all, customer count or transactions is up, although the basket is down a little bit, of course. So we're seeing some of that. But we see that as a real positive thing. People are coming back to the stores more than where they were a year ago certainly. We're seeing strong sales and volumes as well.

Yes, Michael, what has been interesting is that the transaction count is up both online and in-store compared to last quarter. While you would expect this in the store, it's encouraging to see that online transactions have also increased. The key factor is the number of items in the baskets, which is expected given the higher stock levels from last year.

The next question is from Robby Ohmes with Bank of America Securities.

Okay. My first question is, can you hear me?

Yes. We can.

Excellent. I apologize for missing part of the call, but I wanted to follow up on Simeon's question. It appears you gained market share this quarter. Is that correct? If so, what do you believe was the biggest driver? Do you think vaccines contributed to that? Were you improving stock management, or was it more about relative pricing? And where do you believe the market share gains are coming from?

If you analyze where we're gaining market share, it's significant in the food sector. While it’s less compared to MULO, we have maintained our market share in that category over the past two years. This retention is partly due to increased purchases in the fresh segment compared to other areas of the store. We've seen a rise in transactions as customers return more frequently for fresh items, which contributes to our market share growth. Interestingly, we’ve also done well with vaccines, which has allowed us to attract new customers, some of whom have continued to shop with us. However, the increase in our food sales market share is primarily driven by strong operational performance, effective store management, and the growth of our e-commerce business.

The next question is from Krisztina Katai with Deutsche Bank.

Congrats on a great quarter. I guess I wanted to, again, follow up on the market share that you continue to gain, like really good results there on a 2-year stack. So I was just curious how that has evolved throughout the first quarter compared to your expectations, really, as you started lapping some of those share gains from last year. A follow-up to that is going to be a question on your promotional strategies. You talked a lot about being more surgical with promotions. So maybe if you could give us an update on the progress that you have made. I was curious to see if there's anything to share that's interesting on the behavior of some of these newer customers that you have acquired over the last 12 to 15 months.

Yes, we had a strong last quarter last year with a 26% ID, and I am pleased to report that we are still gaining market share on top of that. Our market share gains have been consistent, and I monitor this weekly. We feel confident that we performed well during both holidays in the first quarter. Regarding customer behaviors, many of our new customers were acquired through eCommerce, with a smaller portion coming from vaccinations. The customers we are particularly excited about are those coming through eCommerce who also engage with us in-store. They tend to spend significantly more with us, and that's the general insight I can share about customer behaviors. You had another question, though. Do you have one other? Promotions. Yes. Promotions, yes. If you look around our markets you'll notice a couple of things. One is that we have fewer promotions. Our flyers are smaller. So at least the physical side of what you see. More of our promotions have gone digital. When you go digital, you'll see that more of our promotions are personalized to the individual. So that's from a broad reach perspective. Underlying that, we've talked about a promotion technology that we have, which is now implemented fully that makes sure we don't waste promotions. This notion of being surgical and digital is only getting better.

Got it. That's helpful. And then I had a follow-up question on digital sales. So the 2-year stack was still very strong, but it did decelerate versus the fourth quarter. So my question is around your expectations for the balance of the year. And if this kind of level on a 2-year stack basis is what you're expecting going forward now as consumers are increasingly coming back to the store?

I think let's break down the 2-year stack. I just want to emphasize that there are a couple of components that are still growing. Drive Up & Go is experiencing growth, with a 75% increase. Traffic in our eCommerce business remains higher than it was in 2020. What you're observing is a decrease compared to a very significant basket increase in Q1 2020. You're seeing those numbers come down for that reason. I suspect that if traffic remains the same, you'll see these numbers rebound as the baskets got smaller over the year since people are not panic buying like before. The positive traffic suggests these numbers will improve again.

The next question is from Robert Moskow with Crédit Suisse.

I wanted to ask you, Vivek, if you could share your insights on MFCs so far. It seems like your approach is rather cautious, focusing on testing and learning. What have you discovered about their operational effectiveness, and what challenges have you encountered?

Yes, you are correct. We are being cautious as we learn to operate the MFC and connect it to store activities. The goal with the MFC is to maximize what we can pick from it while also picking select items from the stores, ensuring we preserve the unique offerings that customers expect, like a bouquet of flowers or a special cut of meat. However, we need to focus on picking our core fast-moving items from the center of the store. The integration of orders is crucial, given that one store might now serve 6 or 7 stores. We must carefully consider the mix, especially if we are curating by store, so there’s a lot to learn. Additionally, the algorithm must continue to improve to optimize the inventory in the MFC and reduce picking time. A substantial amount of software needs to connect with the entire system, including the ordering system for the overall business, and we are currently learning these aspects. Another area of learning is in configuring the MFC. We have two connected to a store and are planning to open another that is less connected to one. We are also exploring the possibility of launching a fully dark store. Various options exist, and these configurations will suit different markets. We will test these throughout the year and expect to gather enough insights from several prototypes to begin scaling effectively. The positive aspect is that we don’t need to rush into launching 100 of these units quickly since the business is still growing with our existing store base. By the time we reach a sufficient scale, we will have solved these challenges.

Got it. And I'll exercise one more follow-up here. You said that you want to be very active in M&A and that you're good at it. What are you seeing in terms of deal flow coming across your desk? These regional stores got a bit of a lifeline from COVID. I'm sure their sales are good. So does that mean that there's fewer opportunities to buy? Or is it different than that?

The deal flow is, I think it was higher pre-COVID, let me put it that way. I think we're going to have to be patient. The opportunities will come. That's good as it gives us a tremendous opportunity to modernize every aspect of our business, learn how to leverage our customer data, learn how to apply technology everywhere, learn how to become personalized and extremely surgical. We can get even more synergies when we do it. That's how we're being patient, and we're going to continue to build our business.

Okay. We have time for 2 more questions.

The next caller is Joe Feldman with Telsey Advisory Group.

Many of my questions have been answered, but I would like to ask if you could provide more details about the prepared meals and the expansion you mentioned. I remember there were some adjustments made to the prepared meals program and the packaging in the stores. Are you considering going back to the salad bar style of prepared meal offerings moving forward?

Good question. Let me clarify two aspects. First, regarding salad bars and wing bars that we had before the pandemic, we've learned a lot from these disruptions. We are reintroducing them strategically. In some markets, we've successfully reintroduced the wing bar because it performs better when offered in bulk, which enhances the freshness perception. Customers feel it's freshly cooked when they see it in bulk. We've also reopened salad bars in certain areas with good results. However, some offerings won't be returning at all, as customers have shifted their preferences towards prepackaged items. Now, concerning the meals program, we aim to provide customers with the option of having meals that are prepared in-store, allowing them to enjoy a great meal at home in just 15 minutes. This approach is highly effective for us. This model relies heavily on our strong fresh food presence. For instance, having a butcher on-site to prepare meat daily is crucial. We are rolling this out and seeing significant success. I'm particularly proud of our team's ability to manage shrinkage, which has been the most challenging aspect of this entire process.

Our last question is from Kelly Bania with BMO Capital.

I have a quick question for clarification and another regarding wages. There's a lot of movement in the numbers right now. Could you help us break down the 2-year stack of 16.5% in terms of volume, price, mix, and trade-up? It would be helpful to have some numbers related to that so we can better understand the underlying components. Also, regarding wages, there has been a lot of noise in the market with announcements and increases in both wages and potentially benefits. Can you share your thoughts for this year and next year, and are you investing enough in that area for your employees?

Yes, Kelly, let me tackle the wages piece, and then Bob can come back to what we can share on the 2-year stack. On the wages piece, Kelly, we are not seeing the same challenges that you might hear from restaurant operators and others, okay? We're seeing some pressure on labor in certain markets and in some of our distribution centers. And the way we're seeing the pressure there is more from turnover and the ability to fill jobs. We are in a place where we can still quite comfortably cover it with overtime and things like that. So we feel good about that, and recognize that with union wages, our wages are typically higher than the market. We offer benefits. The increase we will see in wages as we go forward will be part of the negotiated contracts, and it typically ranges around 2%, as set of contracts come up and it ranges in that. So that's how we think about the planning horizon on wages. Bob, could you share because the units are significant....

Yes, you're exactly right. I would say on the 2-year stack, the most significant part of the increase there is certainly on units.

Yes.

Now if you try to look at things from a customer versus basket perspective, what we will say, and I think we said this a little bit earlier, we're pleased to see that we're favorable on customers versus a year ago, which was certainly down big time a year ago. But I don't think we're quite back to the levels that we were in 2019, but we see it trending that way.

Correct.

Okay. Well, thanks, everyone, for participating. We ran a little bit over given some of the glitches in this call. We appreciate your interest in Albertsons Companies. Cody Perdue and I will be available for follow-up calls. Thank you.

Thank you all.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.