Albertsons Companies, Inc. (ACI) Q3 2022 Earnings Call Transcript

Welcome to the Albertsons Companies Third Quarter 2021 Earnings Conference Call, and thank you for standing by. This call is being recorded. I would like to hand the call over to Melissa Plaisance, Senior Vice President, Investor Relations, Treasury and Risk Management. Please go ahead.

Good morning, and thank you for joining us for the Albertsons Companies' Third Quarter 2021 Earnings Conference Call. With me today from the company are Vivek Sankaran, our CEO; and Sharon McCollam, our President and CFO. Today, Vivek will share insights into our third quarter results as well as review our progress against our strategic priorities. Sharon will then go into the financial details of our third quarter as well as updated full year 2021 outlook, before handing it back over to Vivek for some closing remarks. After the prepared remarks, we will conduct a Q&A session. I would like to remind you that management may make statements during this call that are or could include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not limited to historical facts but contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are and will be contained from time to time in our SEC filings, including on Forms 10-Q, 10-K and 8-K. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. Please keep in mind that included in the financial statements and management's prepared remarks are certain non-GAAP measures, and the historical financial information includes a reconciliation of net income to adjusted net income and adjusted EBITDA. And with that, I'll hand the call over to Vivek.

Thanks, Melissa. Good morning, everyone, and thanks for joining us today. Before we begin, we want to thank our retail, distribution center and manufacturing teams for their commitment to safety and passion for serving our customers even as COVID-19 cases continue to rise once again. We also want to thank our pharmacy teams who have administered 11 million COVID-19 vaccines, including approximately 3 million in quarter 3. Sharon will talk more later about our updated expectations in light of COVID-19's developments, continued inflationary pressures, and momentum in our business. But before she does, let me share with you some details from our third quarter. In Q3 '21, ID sales increased 5.2% and 17.5% on a 2-year stacked basis. We also gained unit and dollar market share in food and MULO on both a 1- and 2-year basis. In addition, we delivered adjusted EBITDA dollars of $1.05 billion and adjusted EPS of $0.79 per share, well ahead of our expectations. Also during the quarter, we continue to see the benefits from our digital and omnichannel investments, including the ongoing expansion of Drive Up & Go and the opening of our first Midwest micro-fulfillment center. Q3 '21 digital sales increased 9% year-over-year and 234% on a 2-year stacked basis. Omnichannel households decreased by four times versus Q3 '19, and sales retention remained strong. As omnichannel households spend three times more than in-store-only shoppers, we continue to increase our investments in digital omnichannel and loyalty, which drove increased identified households and higher customer engagement and retention. In the Just for U Loyalty Program, ongoing benefit enhancements continued to accelerate membership growth, which increased 17% year-over-year to 28 million members, and actively engaged members continued to increase. Actively engaged members are defined as those that are redeeming fuel or grocery rewards and, on average, spend four times more than nonactive members. In addition, the retention rate of actively engaged members continues to be over 93%. Collectively, these results demonstrate the momentum being driven by our transformation strategy and the benefits of a strong consumer backdrop. I will now update you on our progress within the four key elements of this strategy: driving in-store excellence; accelerating our digital and omnichannel capabilities; increasing productivity; and strengthening our talent and culture. Driving in-store excellence anchors everything else we do, and our commitment to enhancing our customers' experience continues to drive innovation and transformation. This year, as customers consume more meals at home, elevating our fresh offerings and introducing new technologies were a top priority. To this end, we have been automating production planning and simplifying tasks in our fresh departments, resulting in better quality, higher in-stocks, and more time for customer interactions. These actions are continuing to drive better-than-expected results in fresh. And during the third quarter, fresh ID sales outpaced center store by 500 basis points year-over-year and over 400 basis points versus two years ago. We're also providing mobile tablets to store management to review daily sales, inventory, orders, and provide associate training. This allows store management to spend more time on the sales floor assisting customers, ensuring improved store conditions, and interacting with and training employees. In addition, we also are continuing to invest in our stores, completing 146 remodels and opening 9 new stores through the end of the third quarter. In Own Brands, the introduction of new products as well as the rollout into Albertsons legacy divisions continues to drive strong growth and improved margins. Q3 sales penetration increased 15 basis points year-over-year to 25.1%, with the strongest performance in the flour, deli and foodservice departments. Year-to-date, we have launched 540 new products, including 143 in the third quarter, and are on track to launch over 800 this year. Our next priority is the acceleration of our digital and omnichannel capabilities. This digital transformation is designed to fuel our growth as we aim to drive increasing customer engagement, customer satisfaction, and customer retention through an area of convenient shopping experiences. For example, in loyalty, our new unified mobile app consolidates the customer's entire digital experience into one place where they can shop, download deals, request pharmacy services, and utilize gas and grocery rewards. Since the launch, we are seeing increasing downloads, higher traffic, and deeper customer engagement. In Drive Up & Go, we expanded our store count in Q3 and now cover 96% of our households with first-party pickup offerings. We also rolled out faster pickup options. And heading into the fourth quarter, over 80% of our households are now able to receive their Drive Up & Go orders in 2 hours. In online delivery, we have established several third-party partnerships to meet the differing needs of our customers. Through these partnerships, we're able to accelerate the speed of delivery while reducing delivery costs per order, and allow customers to combine our delivery with an additional delivery from another retailer or restaurant in one trip through DoubleDash. We're also testing other new experimental pilots and concepts for last-mile delivery. In parallel to the rollout of our digital and omnichannel capabilities, we are also building a digital marketing platform that will allow our customers to engage with the food and brands they love. In November, we announced the launch of the Albertsons Media Collective, a retail media network that will offer business partners a digital marketing platform and omnichannel solutions to reach our extensive customer network. To offset the cost of inflation and fund future investment, our next priority is to continue to identify and drive productivity across all disciplines in our business. During the quarter, we continued to benefit from the retail and supply chain operations, merchandising, and procurement initiatives that we have previously laid out. And we continue to expect to achieve the targeted $1.5 billion in annual gross savings by the end of fiscal year 2022. Our fourth priority is strengthening our talent and culture and supporting the communities we serve. To find ways to enhance culture, our senior leadership recently conducted listening tours in our stores to personally connect with our frontline associates. In addition, we conducted another associate experience survey across the organization to understand what we are doing well and what we can do to create an even better work environment and culture, and are taking actions based on that feedback. Our pharmacy team also continues to serve our communities with various services, including COVID and flu vaccines. To date, the pharmacy team has administered 11 million COVID vaccine doses. To enable the delivery of 37 million healthy breakfasts to those in need, we collected $9 million, thanks to the generosity of our customers, and provided over 100,000 meals to those in need with the help of one of our third-party delivery partners. Due to our efforts in Own Brands, for the fourth consecutive year, we were awarded the EPA Safer Choice Partner Award for achievement in the design, manufacture, selection, and use of products with safer chemicals. We also earned recognition in transportation as a Top Green Fleet in 2021 from Heavy-Duty Trucking for our 100% zero-emission refrigerated grocery delivery trucks. We continue to install energy efficiency and refrigeration upgrades and have installed these in over 700 stores through Q3 '21. We also continue to take actions related to ESG and sustainability and are focused on a comprehensive set of goals in areas including climate action, waste reduction and circularity, community stewardship, and diversity, equity, and inclusion. And now I will turn to Sharon to provide remarks and cover the details of our third quarter fiscal results and outlook.

Thank you, Vivek, and happy new year, everyone. It's great to be here today. I will now share with you the details of our strong third quarter results and provide an update on our fiscal '21 outlook. As Vivek said earlier, we delivered Q3 2021 identical sales growth of 5.2% and 17.5% on a 2-year stacked basis. Retail price inflation and incremental COVID-19 vaccine revenue contributed to these increases, as well as unit and dollar market share gains in both food and MULO. Gross margin rate was 28.9% in Q3 2021 compared to 29.3% in Q3 2020 and 28.3% in Q3 2019. Excluding the impact of fuel, our gross margin rate increased 10 basis points compared to Q3 2020, primarily due to productivity initiatives, improved pharmacy margins related to COVID-19 vaccine revenue, and favorable product mix, including in fresh where sales outpaced center store by 500 basis points. These increases were largely offset, however, by a lower gross margin rate due to the impact of increased product costs driven by the current inflationary environment, as well as higher supply chain costs. Compared to Q3 '19, gross margin rate increased 60 basis points from 28.3% to 28.9%. Excluding the impact of fuel, gross margin rate increased by approximately 40 basis points, primarily driven by sales leverage, productivity initiatives, and improved pharmacy margins related to the COVID-19 vaccine, partially offset by investments related to our growth in digital sales and an increase in product and supply chain costs driven by the current inflationary environment. Selling and administrative expenses as a percentage of sales were 25.4% in Q3 2021 versus 28% in Q3 2020 and 27% in Q2 2019. Excluding fuel and a $286 million pension withdrawal charge in Q3 2020, selling and administrative expenses decreased 20 basis points versus Q3 2020. This decrease was primarily driven by lower COVID-19-related expenses and the benefit of productivity initiatives. These decreases were partially offset by higher employee costs, depreciation, and other expenses related to the acceleration of our digital and omnichannel capabilities and other strategic priorities. The increase in employee costs was primarily driven by market-driven wage rate increases and incremental labor to support the increase in fresh sales. On a 2-year basis, selling and administrative expenses decreased 160 basis points from 27% to 25.4%, and excluding fuel, decreased 170 basis points. This decrease was primarily driven by sales leverage and the benefit of productivity initiatives, partially offset by higher employee costs, expenses related to the acceleration of our digital and omnichannel capabilities and other strategic priorities, higher equity-based compensation, and incremental COVID-19 expenses. Q3 '21 adjusted EBITDA dollars were $1.05 billion compared to $968 million in the prior year. This increase was primarily driven by the 5.2% increase in ID sales. Q3 '21 adjusted net income was $457 million or $0.79 per fully diluted share compared to $387 million or $0.66 per fully diluted share in Q3 2020. I would now like to discuss free cash flow and capital allocation. During the third quarter and year-to-date, we have generated significant free cash flow, driven by strong operating results and lower working capital. From an investment perspective, capital expenditures through the third quarter were $1.2 billion as we continue to invest in our digital and technology platforms, completed 146 remodels, and opened 9 stores. Regarding debt reduction, during the quarter, we retired $330 million of outstanding notes, reducing annual interest expense by approximately $18 million. And finally, during the quarter, we returned $56 million, or $0.12 per share, in cash dividends to our common shareholders, bringing our year-to-date total to $149 million. I will now turn to our updated outlook. Given our outperformance in Q3 and recent trends, we are raising our guidance for fiscal '21. We now expect full-year ID sales in the range of negative 0.8% to negative 1.2% compared to previous guidance of negative 2.5% to negative 3.5%, representing an updated 2-year stacked ID range of 15.7% to 16.1% compared to prior guidance of 13.4% to 14.4%. We expect adjusted EBITDA dollars in the range of $4.25 billion to $4.3 billion compared to previous guidance of $3.95 billion to $4.05 billion and adjusted EPS in the range of $2.90 to $2.95 per share compared to previous guidance of $2.50 to $2.60 per share. We expect our tax rate to be in the range of 22.5% to 23.5% compared to a range of 23% to 24% previously. And finally, we expect our capital expenditures to now be in the range of $1.8 billion to $1.9 billion, slightly lower than our previous range of $1.9 billion to $2 billion due to supply-related constraints. I will now turn the call back over to Vivek for some closing remarks.

Thank you, Sharon. In closing, I would like to reinforce a few messages. First, our stores continue to be the foundation of our business and now allow us to serve our customers, both in-store and online. Our excellent locations near where people live provide us with a competitive advantage. A new technology is allowing us to take the customer experience to new levels. Our digital initiatives continue to drive engagement and growth, and we remain focused on elevating service quality, speed of delivery, and the value of our loyalty offerings. We continue to gain market share in units and dollars and did so in both food and MULO this quarter. Our productivity initiatives are delivering, and there is more to come to help offset inflation and fund our growth. And finally, we are navigating challenges like inflation, product supply, and labor shortages with agility and creativity. Our strong performance year-to-date and the continuing positive trends give us the confidence to raise the fiscal 2021 outlook for ID sales, adjusted EBITDA, and EPS that Sharon just provided. But none of this would be possible without the dedication and commitment of our 290,000 associates who take care of our customers and the communities we serve every day. We will now open the call for questions.

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

Let me start with the market share on the MULO side, right? So that's a shift relatively recently. So when did that occur? How broad-based is that? And what do you think is driving that? Is that share gains from restaurants that have accelerated because of COVID or for any other reason?

Vivek here. In terms of market share, you are correct. We observed an increase in unit share and dollar share over MULO in Q3. This shows a trend where it was the lowest in Q1, improved in Q2, and became positive in Q3 on a year-over-year basis. The first thing to note is that the lapses were more challenging in Q1 and Q2. What excites me most about Q3 is our customer retention rates, which have been steadily increasing from Q2 to Q1 to Q3. As we have mentioned before, we are putting significant effort into increasing our loyalty base, connecting them more with our pharmacy and e-commerce, and we are witnessing positive retention as a result. Additionally, our fresh portfolio is benefiting us, as people are eating at home more, and our fresh products are growing faster than the rest of the store.

Okay. And maybe secondly, if you consider the work you've done around wallet share, where do you think your wallet share stands even with your best customers? Additionally, where do you see the biggest opportunity in '22 among your different customer groups?

John, our top tier of loyal customers has the highest wallet share. Once they participate in our loyalty program, we see significant engagement. Additionally, we gain substantial wallet share when customers interact with us across multiple channels. There’s no reason for a household to suddenly increase their spending three to four times unless they are engaging with us in an omnichannel manner. We believe there's great potential for growth by encouraging more customers to ascend the loyalty ladder, which we are achieving through retention efforts, and by continuing to engage them across channels. We have plenty of room for improvement in both areas.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

My question is on inflation. Can you give us some color around volume and price? And then can you talk about the dynamic that's changing? I think Sharon mentioned a little more inflationary cost pressure. Is it that the rate of product cost inflation is just overwhelming, and you can't pass it through? Or are you resisting passing through because the market dynamics are changing?

Simeon, let me provide some context on inflation. First, the cost increases are real; we are experiencing them in our supply base. This includes ingredients, packaging, transportation, and labor, and we also see it impacting our own business, such as with our Own Brands program. The cost inflation is undeniable. In terms of what we are passing through, we have passed through less than the inflation we've actually incurred. We carefully choose the categories where we pass through price increases, being cautious not to do so on essential items that customers rely on daily. We aim for a balance in this regard. Regarding unit volume, while our unit share has increased, the degree of unit growth has not kept pace with inflation; however, it remains stable. Over the past few weeks, total consumption has been very stable. We hope that as the year progresses, inflation stabilizes at its current level and ideally improves in the second half.

Fair enough. My follow-up is a separate question.

One second. Sharon, go ahead.

Yes, I would just add one thing to that. We also, Simeon, are competing with a very broad set of competitors every day in the market where we compete. We've got grocery stores, vast merchants, dollar stores, discounted online players, you name it. So because of that, we have to stay competitive every day to win and retain our customers. So when we think about pass-through, we also have to be very focused on the competitive environment.

My follow-up is on a separate topic, just the labor inflation. Can you just give us a sense or just paint the picture? Does the supermarket wages, because of unionization, does that lag where the overall market be? Or are you ahead of the curve as far as reacting to state, local, and minimum wages?

Yes, Simeon, the way to view it is that we are currently experiencing increased overtime due to labor shortages. We manage this by allowing more overtime in certain markets, where we need to raise prices to attract employees, as market competitiveness varies. Generally, we pay wages that are higher than the market rate, providing us some flexibility. The extent to which this situation lags depends on when contracts and other agreements are renegotiated. However, we have renegotiated several contracts recently with favorable outcomes from the union.

Our next question comes from the line of Edward Kelly with Wells Fargo.

I want to just start by following up on the inflation topic. Can you just maybe talk a little bit about what you're seeing from a customer reception currently? And then if we were to look out from here, we are hearing more vendors talk about additional price increases from here. You can see PPI is well ahead of CPI still. But yet on the consumer front, right, we do have government stimulus rolling off, tax credit stops in January. Stat payments are coming down. Just curious as to how you are thinking about consumer reaction, the price increases from here to remaining price takers. How does this dynamic play out? And are you concerned at all from a margin standpoint incrementally?

Ed, let me share what we know. This is the big question, how will the consumer respond moving forward? Currently, the trends suggest we have a strong consumer base, and there hasn't been a significant change in their consumption patterns. They are still engaged with fresh products and overall in the store. However, we are uncertain if rising inflation will alter this behavior as we progress through 2022. If the consumer remains strong and continues to eat at home, we believe they will keep engaging with us. We are also unsure how a reduction in SNAP benefits might affect consumer behavior. To address what we can control, we are focusing on retaining customers, which we are improving. Additionally, we are implementing various initiatives like margin management, shrink management, and our COGS program that began in December 2020. These efforts provide us with a cushion in case we need to compete differently for customers. We are concentrating on the areas we can control and working hard on those.

Okay. And then just one quick follow-up. Your CapEx this year is coming in, I guess, just slightly below where you initially guided the year. But can you help us in terms of how you're thinking about next year and beyond? Sharon, you've talked about investment. What levels of CapEx do you think that we may end up seeing here? And maybe refresh us on the priorities on that.

Absolutely. In 2022, my expectation is that what we were not able to receive this year, because of constraints, we will carry that over into 2022. So that $100 million that we had to wiggle on the guidance for 2021 will carry into 2022. When we look at 2022, I would expect that the CapEx is going to be in the low $2 billion range. We're not giving guidance on 2022. I'm not giving an outlook for 2022. But I know that this is a very important question, especially in light of my joining the company. So that's where we're thinking about it at this point. And we'll, of course, give you a bigger update later. But remember, we will carry over into 2022 on top of the 2022 plan. The areas that we will be continuing to invest in are the areas you would expect. Acceleration of digital and omnichannel is a top priority, investments in the digital support for our loyalty programs. Vivek spoke earlier about the Albertsons Media Collective, we'll be investing behind that in 2022. Then, of course, in the supply chain, that will be another area that we will continue to be working on various forms of acceleration of productivity in that space. We'll also be investing in additional productivity initiatives. I know the question will come up today, and I'll just speak to it here, Ed, just to preview it. But on productivity, as Vivek mentioned in his comments, we're making great progress on the productivity initiatives that we announced. We have started a full court press on the next generation of productivity initiatives that we'll be working on in 2022 and moving those into 2023 and 2024, and that's shaping up very nicely. I'll give you more color on that, but feeling very strong about the possibilities in additional productivity to offset some of the headwinds in 2023 and 2024. Remember, we still have the productivity initiatives coming in under the $1.5 billion program. But we'll definitely be announcing something above and beyond that.

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

So my first question has to do with the trends. If you can maybe provide color in terms of the monthly trends during the quarter and then any color on quarter-to-date trends as well.

Yes, Rupesh, the customer is still strong. Our trends remain strong, with a very good start to the quarter, Rupesh, is what I can tell you. More recently, with Omicron, I think you're seeing people eating more at home again, and so the trends remain very positive from a top line.

Okay, great. And my follow-up question is as we look towards 2022, I know you guys can't provide any specific guidance today, but is there any general thoughts on your ability to lap over this higher base next year?

Yes, let me put it this way, Rupesh. If we reflect on our January call from 2020, we had our e-commerce business operating in around 150 to 200 stores. At that time, we were just beginning to launch various initiatives. Fast forward to today, we have established a solid base in e-commerce, with DUG covering 96% and 2-hour DUG reaching 80%. We also have a new integrated app that includes our loyalty program, which now has 28 million members. We believe this gives us a strong foundation to enhance our focus on relationship building and customer retention. As Sharon mentioned earlier, our investments in digital are now geared towards scaling up because of this solid foundation. Additionally, we are set to expand our meal program throughout our network in 2022, which should drive further growth as more people opt to stay home. We are looking to build on the foundation we've created across various areas over the last few years.

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

I wanted to ask a quick follow-up to Ed Kelly's question. He had mentioned SNAP. You had talked about some uncertainty or, at least, you don't really know what the reaction will be from the consumer. Are there any early learnings that you have? There are some states where SNAP, I guess, benefits to the consumer. The dollars received by the consumer have pulled back from the peak. I don't know if you've done any analysis on that or if there's anything you can tell us on that. I know it's very early, so maybe not. But anything you can see early on that might enlighten us on what the trends might be?

Actually, we haven't observed any changes. You might have anticipated some shifts in December, but we have not seen that. The consumer remains strong, although there is some noise. December has also been affected by Omicron. I wish I could provide more insight, but we don't have any significant numbers to share at this point.

Okay. I wanted to ask if you've noticed any out-of-stock situations in various supermarket categories. How significantly is this impacting you, especially given that you may not be receiving full or any truckloads due to labor shortages? Is this likely a temporary issue, and are there specific departments where you're seeing these stock shortages? I would appreciate any insights you can share regarding the out-of-stock situation.

Let's discuss out-of-stocks. We have experienced several months of ongoing out-of-stocks in various categories. As a company, we've adapted to manage this situation, ensuring that our stores remain appealing and that we provide consumers with as many choices as possible. We expected supply issues to improve as we entered this period, but Omicron has created some setbacks. Consequently, we anticipate additional supply challenges over the next four to six weeks. However, these supply issues are not impacting our business any more severely than they have in the past; we are managing them. On the other hand, we believe that with the current supply constraints, there remains untapped growth potential. We maintain this belief: when supply returns, there will indeed be opportunities for growth. While customers may have settled into specific consumption patterns, there is still unmet potential. Therefore, we are optimistic that as supply improves in 2022, we will also see growth in certain categories, particularly those with more expandable consumption.

Our next question comes from the line of Michael Montani with Evercore ISI.

Congrats on the quarter. So just to add two areas I wanted to hit on quickly. One was just from a food inflation perspective. If we see kind of food at home roughly 5% to 6% in the quarter, is that kind of the way to think about that? And wondering if you could share any rough estimates of how much the vaccine and booster shots might have contributed to the comp as well.

Yes, Michael, I believe you're correct about the inflation. The CPI inflation was around 5.4%, slightly above that. We anticipate that inflation will be a bit higher as we move into the next quarter, specifically in January, February, and March. We expect inflation to increase a little during this time and then, based on our assumptions, to eventually moderate as it stabilizes. That's how we are approaching it. Michael, can you remind me of your second question?

It's just related to the vaccine that you all have been administering, because you had mentioned in the press release that there was, obviously, a tailwind to ID sales from both inflation, but then also the vaccine and booster shots.

Yes, Michael, we have administered 11 million vaccines to date, which is likely one of the highest rates on a per-store basis from a pharmacy perspective, with 3 million in the quarter. This certainly contributes to ID sales and gross profit, and it's an important factor we should consider as we plan for the future.

Okay. And then switching gears a little bit just to the margin front. Just wanted to check in, Vivek, and see if things are rational in your view, if that's still the case? And also on the central procurement, if you could give us a feeling for how that initiative, in particular, is evolving and how to think about the build there into the fourth quarter?

Yes, Michael, let me first discuss the promotion environment. The pricing landscape remains very rational. I believe that when we return to promotions, which I can't predict when that will be, we will have significantly more technology at our disposal. We'll have enhanced data, improved analytics, and greater precision. This will allow us to approach the market more strategically, with an emphasis on quality over quantity in promotions. From our initiatives aimed at consolidating buying, everything is progressing very well. The main advantage is that it simplifies the process for suppliers. We are functioning as a unified entity, and this program is performing successfully, both financially and in terms of our organizational and cultural alignment.

And Michael, we are introducing that program on a category-by-category basis, and we have already seen benefits in the third quarter. We will see benefits again in the fourth quarter as we continue this rollout by category. This will also be a significant advantage moving into 2022.

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

This is Brandon Cheatham on for Paul. Wanted to follow up on Michael's question around the COVID vaccines. Just want to see if you wanted to quantify the benefit there on both ID sales and gross margin. And then what is baked into your 4Q guidance from the vaccine?

We have not quantified the amount of revenue coming from the COVID-19 vaccine, and we won't be quantifying that, of course. That's very competitive. But from a Q4 perspective, we do anticipate revenues being in line with where they were in Q3. And of course, it's hard to know what will happen with boosters going into 2022. I think we're going to get a lot more visibility to that. Certainly, the boosters are proving to be very good for the population and for the people. So we'll see how that plays out going into 2022. And we'll know a lot more, I think, during the fourth quarter.

Got it. And then I know it's early days on the retail media initiatives. I was just wondering if you could share any learnings there from November. And then follow-up to that, I mean what percentage of purchases are completed with the loyalty card? And how has that changed over time?

Yes, Bryan, regarding the Retail Media initiative, we are officially launching it at the end of February. We'll provide more details in the next call, and we are excited about it because we have developed it from the ground up to appeal to the Chief Marketing Officer of a company. We will get back to you on that. Now, what was your second question again?

The percentage of purchases that are completed with a loyalty card.

Yes. Substantial, Bryan. It's a substantial portion of it is completed within our loyalty program. Remember that if you think of our business in two ways, one is sales we can identify with an identifier, which is the majority of our business; and then sales that are on our loyalty card. So it's a substantial portion of the business. And as that increases, we get even more insights through it.

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

Great quarter. I have two quick follow-ups. First, it seems the guidance suggests around a 2% internal delivery for the fourth quarter. What factors are contributing to this slowdown? It appears you anticipate inflation could be as high, if not higher, in the fourth quarter compared to the third quarter. Are you expecting fewer vaccine sales, or is this a conservative estimate given your strong start? Secondly, could either Vivek or Sharon provide more insight on what you expect with the supply chain? Do you think it will improve as we progress through 2022, and might in-stock levels return to normal for the industry?

I will address those questions. First, regarding the guidance for the fourth quarter and the expected ID sales range of 3% to 4.5%, the reason it's lower than the 5.2% in Q3 is partly due to concerns about government support and consumer behavior as these programs wind down. Even though we haven't experienced negative effects so far, we are being cautious about the rest of the quarter. We anticipate our vaccination efforts to continue in our stores, and we are committed to promoting it actively. As Vivek mentioned, we've administered 11 million vaccines, which is significant compared to other retailers with more locations. This initiative is essential for us from both a business and social standpoint, and it strengthens customer engagement with our brand. Additionally, as we serve pharmacy customers through these programs, we've seen measurable improvements in engagement and customer lifetime value. Participating in this program is not only the right thing to do socially but has also proven beneficial for our overall business.

Yes. Robby, regarding the supply chain issue, here's what we anticipated after discussing with our suppliers. Many of them were increasing their capacity over 2020 and 2021, and we expected much of that capacity to become available around now, since it typically takes 12 to 18 months to ramp up. However, with the emergence of Omicron, while the physical resources are in place, there are now issues with labor availability, which is creating challenges. I believe that once we move past Omicron, we should see more of that capacity entering the market.

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

So the first one is around the equity action. And I know management sometimes hesitates on this. But clearly, the performance last year was strong. But also you look at the valuation gap through your largest competitor, it's fairly substantial. So I think as you look at it as a management team and enhancing shareholder value, how should we think about it, especially because you are sitting on a pretty big chunk of cash on the balance sheet that's growing? So what do you think you guys could do to enhance shareholder value further?

Scott, thank you. I believe that we need to continue to execute, gain market share, drive the business, and deliver on our productivity initiatives. And that's the foundation for creating value. Long-term sustainable performance creates value. The second, now we'll talk about the balance sheet. We are carrying more cash than we carried in the past. As you know, we have a lot of exciting initiatives that we are investing in right now. We can start with accelerating digital and omnichannel. We can talk about the digital marketing platform that we're investing in. We can talk about the technology, the supply chain. So I mentioned that we will continue to invest in the growth drivers of the business. As you know, during the quarter, we retired some debt. We'll continue to also retire debt where it makes sense or refinance debt where it makes sense. And then we are continuing, of course, to pay our dividend. We've put out over $50 million this quarter. We're up to $149 million. And we'll continue to look at it, Scott. We completely hear the question, and we are constantly looking at returning cash and returning other things to our shareholders' value. So more to come on that, and we'll give you more of an outlook on that in 2022.

That's perfect. And so, Vivek, I kind of asked something similar last quarter. But obviously, you're just having a blowout year this year. But as you guys think about your planning, which I'm sure you're doing for next year and the years to come, is your expectation as a CEO that EBITDA should grow just naturally, even if the year was good? Or kind of philosophically, how do you approach the planning process? And what your expectations are for your management team?

Yes, I’m not providing guidance, but our approach is always to identify opportunities that can positively impact the gross margin, which we have discussed along with our initiatives. We are also looking for ways to increase productivity below the gross margin line. Additionally, we are working on our next phase of productivity. If you can grow the top line and implement those two areas I mentioned, you will naturally gain leverage in the business. This is the principle that guides our operations. We will provide you with more insights on our expectations for 2022 later in the year.

Our next question comes from the line of Karen Short with Barclays.

I wanted to follow up on that by discussing the factors affecting gross margin and SG&A in 2022, particularly focusing on gross margin. This year and next, we will face inflation and supply chain pressures, and we may experience the impact of lapping some vaccine benefits depending on booster developments. These will be headwinds, but our productivity initiatives and increased private label penetration should serve as a tailwind. So, I'd like to know more about your expectations for expanding gross margins excluding fuel in 2022.

Yes, Karen, we won’t provide an outlook for 2022 today. However, we believe there will be both challenges and opportunities in 2022, as you mentioned. We think inflation is not finished and based on what we hear from suppliers, continued inflation is likely to flow into at least the first half of 2022. At some point, we will also be comparing against vaccination benefits, assuming this trend does not persist. The positive aspect for us, as Vivek noted earlier, is that our models and the consolidation of procurement are performing very well. We are collaborating effectively with our vendors, which we see as a supportive factor moving into 2022. Additionally, our productivity initiatives are progressing well, and we are making good strides in our Own Brands. While supply will always present some challenges, we are optimistic about our growth in Own Brands, which will also support us in 2022. The main question remains regarding the factors influencing the top line, and we'll discuss this further at the end of Q4. I completely agree with the points you highlighted regarding the challenges and opportunities we’re evaluating.

Okay. That's helpful. Sharon, you provided the actual comp for the quarter-to-date and mentioned that you are performing better than the 3% to 4% range. Regarding SNAP, I assume you've already observed reductions in SNAP penetration. Could you share what your current penetration is in SNAP as a percentage of sales, and how you view that situation now and into 2022?

Yes, Karen, we haven't provided that information, but there is an important point to consider regarding SNAP. Our analytics show that when a customer utilizes more SNAP benefits, they tend to spend less of their own money. However, this doesn't necessarily mean that their overall spending increases. It indicates a shift in how they are paying. Right now, we are focused on understanding these analytics and our customers better. Retaining customers has been a top priority for us this year. We are implementing special promotions for new customers, learning what drives their engagement, and communicating with them digitally. We are using personal advertising, video, and social media influencers to connect with them. We are working diligently to retain the customers we have gained. As Vivek mentioned, we are experiencing some of the highest retention numbers we've seen. While many people discuss the decline of SNAP, it's also important to consider the shift in payment methods.

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

Two quick questions. One is I was hoping to get a little more clarity on what you were saying about gross margin in the fourth quarter, Vivek. It sounded like you're expecting inflation to accelerate. Your gross margins have been very steady throughout the year. So are you saying that gross margins can remain steady in the fourth quarter? Or do you think there's a little more pressure? And then secondarily, on Own Brands, our Nielsen data shows that private label trailed overall grocery throughout 2021. Do you need to take extra steps in 2022 for your Own Brands to merchandise them more aggressively? Or do you expect the consumer just to behave differently in 2022 with respect to Own Brands? How do you think about it?

Sharon, do you want to address the gross margin? Yes. Thanks. When you guys think about Q4, within the ranges of guidance, I think you should think about it very much in context of Q3. We're expecting the quarters to look very similar. And Vivek, I'll just turn to you to take the Own Brands. Our Own Brands penetration has returned to pre-pandemic levels, which we find encouraging. We believe that achieving stability in supply is important, and we continue to roll out a variety of new products. We see significant potential in our Own Brands program, and this potential will primarily be limited by supply, rather than by consumer interest, innovation, merchandising, or our online efforts, all of which we can control. Therefore, when I mention earlier about supply stabilizing, I believe it will stabilize not only for our branded products but also for our Own Brands as we move forward.

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

Thank you all for participating in the call today. We will be talking with each of you over the course of the day to follow up. Thank you. Take care.

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