Albertsons Companies, Inc. (ACI) Q4 2022 Earnings Call Transcript

Welcome to the Albertsons Company's Fourth Quarter and Fiscal Year 2021 Earnings Conference Call, and thank you for joining us. This call is being recorded. I would like to turn the call over to Melissa Plaisance, Senior Vice President of Investor Relations, Treasury, and Risk Management. Please proceed.

Good morning, and thank you for joining us for the Albertsons Companies' Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. With me today are Vivek Sankaran, our CEO; and Sharon McCollam, our President and CFO. Today, Vivek will share insights into our fourth quarter results as well as review our progress against our strategic priorities. Sharon will then go into the financial details, before Vivek and Sharon provide a discussion on our priorities and outlook for fiscal 2022. 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. Forward-looking statements made 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 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. In the fourth quarter, our teams continued to drive top-tier operating and financial performance. We want to recognize and thank all of our retail, distribution and manufacturing teams for their commitment to and care of our customers and their communities. We are proud of the compassion, humility, and passion for excellence they have shown in an exceptionally challenging environment over the last two years. In Q4 '21, ID sales increased 7.5% and 19.3% on a two-year stack. We also gained unit and dollar market share in Food and MULO on both a one- and two-year basis and maintained our #1 or #2 position in 68% of the 121 MSAs in which we operate. In addition, we delivered adjusted EBITDA of approximately $1.1 billion and adjusted EPS of $0.75 per share, well ahead of our expectations. During the quarter, we continued to see a rebound in store traffic and the benefits from our digital and omnichannel investments, including the expansion of Drive Up & Go and additional micro-fulfillment centers, bringing our total MFCs to seven. Omnichannel households spent three times more than in-store-only shoppers. And during Q4, omnichannel households grew by nearly five times versus the fourth quarter of 2019. In addition, as our investments drove increased customer engagement and retention, Q4 '21 digital sales increased 5% year-over-year and 287% on a two-year stacked basis. In the Just for U Loyalty Program, benefit enhancements continued to accelerate membership growth, which increased 18% year-over-year to nearly 30 million members and is up approximately 45% or over 9 million members since the fourth quarter of 2019. Actively engaged members, defined as those redeeming coupons, fuel, or grocery rewards, also continued to increase. And the redemption rate of these members remained over 90% at the end of the year. Remember that on average, actively engaged members spend four times more than non-actively engaged customers. I will now recap our progress against the four key strategic priorities that drove our better-than-expected Q4 and 2021 results. Driving in-store excellence is the foundation that enables everything we do. Our commitment to enhancing our customers' experience contributed meaningfully to the 18% year-over-year growth in our Just for U members and market share gains. From an inventory and productivity perspective, we simplified tasks and automated production planning in our fresh departments, resulting in higher in-stock conditions and more time for customer interactions. For example, in the deli, we installed auto slicers and stackers and implemented production planning tools that increase product availability while reducing shrink and improving customer service. These changes contributed to the better-than-expected results in Fresh. During the fourth quarter, Fresh ID sales outpaced center store by 280 basis points year-over-year and over 500 basis points versus two years ago. In addition, we continue to invest and modernize our store fleet, including adding and upgrading self-checkout, which is now available in over 1,800 stores, and optimizing the layout and design to improve the customer shopping experience. We completed 236 remodels and opened 10 new stores in fiscal 2021. In Own Brands, we introduced 837 new products and increased adoption in lower-penetrated divisions, driving strong growth and improved margins. Q4 sales penetration reached 25.6% with the strongest performance in floral, deli, and meat. During the year, Own Brands was awarded four Private Label Manufacturing Association awards, and one recognition from Store Brands Magazine for Innovation Private Brand Marketing. Our next priority is the acceleration of our digital and omnichannel capabilities to fuel our growth and increase customer engagement, satisfaction, and retention. In loyalty, we launched and upscale our new unified mobile app, or UMA. 87% of our digital orders were being placed in the UMA by the end of the fiscal year. We also introduced a meal planning tool that offers recipes, including those that address dietary preferences such as vegetarian or gluten-free. Customers can seamlessly add all recipe ingredients to their shopping list or immediately purchase them in the UMA. In Drive Up & Go, we reached our goal of over 2,000 stores, serving 99% of our households. In online delivery, we expanded third-party partnerships to offer more choices and accelerate the speed of delivery. And in both Drive Up & Go and online delivery, we reduced the cost per order by adding five additional MFCs and three fulfillment rooms. We're configuring our picking software and staffing models and improving our forecasting algorithms. In digital, we are beginning to capitalize on our rich and proprietary data, recently launching the Albertsons Media Collective, or AMC. AMC offers existing business partners a robust digital marketing platform that reaches our extensive customer network and leverages our strong market share, especially in the 68% of markets where we hold the #1 or #2 share position. We expect AMC to be a leading growth and profit driver over the next several years. Increasing productivity, our next priority, allowed us to continue to fund future growth and offset inflation. In the second year of our three-year $1.5 billion savings program, we enhanced our pricing and promotion capabilities, further rationalized indirect spend, and expanded our national buying initiatives. We expect to achieve our targeted $1.5 billion in savings by the end of fiscal year 2022. And we will not stop there. Later on this call, we will discuss the next phase of our perpetual productivity engine beyond fiscal year '22. Our fourth priority is strengthening our talent and culture and supporting the communities we serve. In 2021, we continued to acquire and develop talent to transform the culture, to harness local ownership, leverage scale, and support our new omnichannel imperatives. We also recognized the frontline teams for embracing this cultural transformation while delivering exceptional sales to our customers by awarding a discretionary thank you payment in the fourth quarter. Our senior leadership team also focused on amplifying our diversity, equity, and inclusion strategy. We are continuing to make progress at the senior levels of the company and are benefiting from the experience and diversity of thought that each of these leaders is bringing to the table. In pharmacy, our teams worked tirelessly to provide COVID vaccinations for the communities we serve. To date, we have administered over 12 million vaccinations. In ESG, we increased investment and further developed our goals in the areas of climate action; waste reduction and circularity; community stewardship; and diversity, equity, and inclusion. Later this month, in conjunction with Earth Day, we will announce this comprehensive set of goals publicly. We are very pleased with the progress we have made against all our strategic priorities, and there remains significant headroom and a strong foundation to build on in 2022. I will now turn the call over to Sharon to cover the details of our fourth quarter and fiscal year results.

Thank you, Vivek, and good morning, everyone. It's great to be here with you today. Our fourth quarter '21 results were strong across all key metrics. Identical sales were up 7.5% and up 19.3% on a two-year stacked basis, with momentum continuing into Q1 '22. Retail price inflation as well as market share gains contributed to these results. Gross margin rate was 28.7% in Q4 2021. Excluding fuel, the gross margin rate was flat compared to last year. Productivity, improved COVID-related pharmacy margins, and a favorable product mix were offset by the rate impact of increased product costs driven by the current inflationary environment and higher supply chain and LIFO expenses. Selling and administrative expenses as a percentage of sales were 24.9% in Q4 2021. Excluding fuel and a favorable pension adjustment, SG&A decreased 30 basis points compared to last year. This decrease was primarily driven by lower COVID-19-related expenses and the benefit of productivity initiatives. These decreases were partially offset by market-driven wage rate increases, a discretionary appreciation payment to our frontline associates, expenses related to the acceleration of our digital and omnichannel capabilities, and higher depreciation. Q4 '21 adjusted EBITDA was $1.074 billion compared to $917 million last year. This increase was primarily driven by the flow-through from our 7.5% ID sales increase and the margin benefit related to administering COVID-19 vaccines. Q4 '21 adjusted EPS was $0.75 per fully diluted share compared to $0.60 per fully diluted share in Q4 2020. Turning to full year fiscal '21. ID sales were near flat and up 16.8% on a two-year stack basis. We also delivered adjusted EBITDA of $4.398 billion, as our productivity initiatives and margin benefit from COVID-19 vaccines fueled strategic investments and substantially offset product, wage, and other inflationary headwinds. Full-year adjusted EPS came in at $3.07, nearly three times our 2019 adjusted EPS of $1.04. I'll now discuss fiscal '21 cash flow and capital allocation. Strong earnings and temporary reductions in working capital drove better-than-expected cash flow. Capital expenditures in fiscal '21 were $1.6 billion, with the majority of investments being made in the modernization of our store fleet and the building of our digital and technology platforms, both of which we expect will continue to fuel our transformation as we enter 2022. We also returned $207 million to our shareholders through common dividends and repaid $330 million in outstanding notes. Net debt leverage at the end of fiscal '21 was 1.2x compared to 1.5x in fiscal 2020 and 2.9x in fiscal 2019. I'd now like to provide an update on our recent labor relations activities. We have continued to settle labor contracts that provide an overall wage and benefit package that rewards our existing team members for their significant contributions and strengthened our competitive positioning in the markets we serve. During the fourth quarter of 2021, we settled retail contracts in Denver, Portland, Montana, Idaho, Oregon, and the Mid-Atlantic. Thus far, in the first quarter of 2022, we have also reached tentative settlements in both Northern and Southern California with retail contracts in Seattle, Las Vegas, Shaw's, and Jewel left to be negotiated this year. I will now turn the call back over to Vivek to discuss our fiscal '22 priorities.

Thank you, Sharon. As we look forward to fiscal '22, we are entering the next phase of our transformation strategy, Customers for Life. Our belief, supported by evidence, is that when we are at our best in both the brick-and-mortar and digital worlds, our customers never leave us and continue to spend more of their wallet with us. Customers for Life is built around this belief that satisfied customers create outsized lifetime value and that everything we do should enable greater customer loyalty. Customers for Life is anchored on placing the customer at the center of everything we do, with the ultimate goal of supporting our customers every day, every week, and for a lifetime. We want our customers to interact with us daily, not only to shop but sometimes to simply consume relevant content about food, plan meals, or find information to inspire their well-being. Our business model is pivoting to one that is loyalty-based, doubling down on our omnichannel engagement with customers beyond just transactions. We will elevate the in-store experience when they shop with us, expand our services and content-rich offerings, and build a set of competitive and timeless capabilities that create a compelling reason for our customers to seek a lifelong relationship with our team members and our brands. To support this pivot, we will be investing in the following strategic priorities: digitally connecting and engaging all customers through our mobile app and website, so they can enjoy integrated and curated experiences in e-commerce, the community, loyalty, health, and media; differentiating our store experience by deepening engagement through the use of technology, removing team member pain points to allow them to focus on customer service versus just tasks; simplifying the end-to-end shopping journey and evolving store operations to support omnichannel growth; enhancing what we offer by elevating our distinctiveness in fresh, expanding our Own Brands products and services, including our Ready Meals program, and enhancing product offerings in-store to address customers' changing needs and preferences; modernizing our capabilities in part through an improved supply chain, enhanced data and data analytics, and ongoing productivity, all built on the foundation of being locally great and nationally strong; and finally, further embedding ESG throughout our operations. Success against these priorities will be measured based on increased digital engagement, expanded merchandise and service offerings, a competitively differentiated omnichannel experience, and an accelerated set of digital and supply chain capabilities. I will now turn the call over to Sharon to discuss the financial outlook for 2022.

As Vivek said, we're entering fiscal '22 and the next phase of our transformation with continued momentum and strength in our core business, evidenced by our Q1-to-date mid-single-digit ID sales increase. We are gaining market share, and the investments we have made in growth and productivity are delivering better-than-expected returns. Throughout the pandemic, we capitalized on the opportunity to attract new customers and have entered 2022 with 30 million Just for U Loyalty members, a 45% increase versus year-end 2019. With that as the backdrop, our fiscal '22 outlook assumes the following: we expect fiscal '22 ID sales to increase 2% to 3%, driven by continued inflation and market share gains. In the first half of the year, we expect ID sales to be above the full-year range. In the back half, we expect ID sales to be below the full year rate due to cycling heightened inflation in the back half of fiscal '21. We expect adjusted EBITDA in the range of $4.15 billion to $4.25 billion, reflecting continued growth in the business and stable gross margins. In fiscal '22, in our core business, excluding fuel, we are expecting gross margin rate expansion, driven by productivity tailwinds. We are also expecting, however, a 65% decline in COVID vaccinations and related margins, the impact of which will be greater than the core business margin rate expansion. Therefore, factoring in both drivers, we are expecting the gross margin rate, excluding fuel, to be down slightly in fiscal '22. In selling and administrative expense, we are incrementally investing in our strategic priorities, including our digital transformation, the Albertsons Media Collective, and the modernization of our supply chain, which will increase our SG&A rate in fiscal '22 that drives long-term benefits. Productivity tailwinds are also substantially offsetting a significant increase in hourly wages and benefits for our frontline associates. That brings us to adjusted EPS, which we expect will be in the range of $2.70 to $2.85 per share based on our current fully diluted share count. To support this outlook, we expect capital expenditures to be in the range of $2 billion to $2.1 billion, with more than half of the spending invested in modernization and digitization in our stores and the remaining in the expansion of our digital offerings and optimization of our supply chain. I'd also like to share with you our latest view on additional productivity. By the end of fiscal '22, we will have delivered on our three-year commitment of $1.5 billion in productivity. As that is coming to a close, we have started framing the next wave of productivity and have already identified $750 million in future savings that we are committing to between fiscal '23 and fiscal '25 in the areas of automation and digital tools, scalable workforce management, modernization of our supply chain, and SG&A optimization.

I'll now turn the call back over to Vivek for closing remarks. Thank you, Sharon. As Sharon just mentioned, we are pleased with our 2021 results and the continuing momentum we are seeing as we enter 2022. Our relative performance, evidenced by our profitable ID sales growth and market share gains, continues to be strong. Our strategy is working, and we're executing well against industry-wide pressures. The transformation we began before the pandemic has significantly strengthened our company. And on our stores, we have accelerated remodels, implemented technology-enabled core processes, and advanced our capabilities in Fresh. Leveraging our store base, we have built a scaled omnichannel capability, including Drive Up & Go and online delivery that is proving to be sticky with customers to engage across channels. We have developed a robust loyalty platform and a unified mobile app that engages customers and personalizes offers for our 30 million Just for U members. We have learned to leverage our scale in vital capabilities such as pricing and promotions, merchandising, and supply chain without compromising agility and local ownership. We have proven that we can deliver productivity at scale and are adding an incremental wave. All of these foundational capabilities have created a springboard for Customers for Life and our next phase of growth. While we recognize there are a number of uncertainties in the macroeconomic environment, as we enter 2022, we have demonstrated a proven track record in the execution of our strategy and remain confident in our ability to deliver against the 2022 priorities that we laid out for you today. But none of this will be possible without the unwavering commitment of our associates and the ongoing support of our vendor partners and shareholders. We will now open the call for questions.

Our first question will be from Robby Ohmes with Bank of America.

Great quarter. I'll just do my two questions upfront. The first one is just on the ID sales guidance, maybe a little more color. We just had the March food at home inflation come out around 10%. I think, Sharon, you said you're seeing sort of mid-single-digit trends to date. That seems like you'd be falling behind the overall food-at-home inflation numbers. Maybe more color on why that may be and some thoughts on that. And then, Vivek, you talked about enhancing center store for needs and preferences. I was hoping to get some more color from you on what that means and what you're seeing in center store changing.

Robby, thank you. I'll take your first question on the mid-single-digit comp sales that we're currently seeing. We feel very good about the strength of our business. We have a substantial Easter shift. That's not an Albertsons dynamic, that's an industry dynamic because last year, at this time, Easter would have already happened, and it won't be happening now for a couple of weeks. So we'll see how the rest of the quarter plays out, but we wanted to make sure that we gave you guys color on where we are at this point in time, and we are running in the mid-single-digit range. So I'll let Vivek take the other part of your question.

Yes. Robby, regarding the center store, we have adopted a new approach to purchasing. With a more consolidated strategy for the market, we can now make decisions on categories where we haven’t been performing well. There are significant categories that are growing, but we haven't been competitive in those areas. We will continue to focus on these aspects at a national level to maximize our efficiency. Additionally, while it doesn’t relate directly to individual stores, the whole meal solution concept is relevant. It aligns with our efforts to optimize layout and provide quick meal solutions. You'll notice this in some of our stores, where we aim to help customers efficiently find options for evening meals, combining a few center-store items with primary meal solutions. These are the initiatives we are pursuing, Robby.

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

First, a quick follow-up on inflation. There is a growing sort of consensus concern, I guess, that we could see elevated food price inflation for some time now with the war in Ukraine. I guess what is your expectation for when inflation may peak based upon kind of what you're hearing from vendors in your work? I mean your guidance seems to suggest that maybe you think it's peaking now. And then in terms of elasticity, it's hard to imagine that elasticity stays so low. Like Robby said, we see 10% food CPI today. What are you seeing from a consumer behavior standpoint? And then what are you expecting from an elasticity standpoint from here?

First, on inflation, let me just provide a little bit of context there. I hope you guys are able to see that we are managing inflation very, very well, right? And so when you think about what we're trying to optimize here is we want to make sure that we're competitive. And the way we measure that is market gains, dollar share, and unit share both in food and meal. And we've got a nice track record all through the quarter of sustaining a track record of market share gains and at the same time, not compromising gross margins. So that's the equation that we're trying to work through, and we are doing very well with it because we're giving people choices and allowing customers to get a competitive basket. What we have done is estimate that at the current level of inflation; I think Q4 CPI was 7.4%, okay? And I just saw news this morning that the inflation overall was 8% or so. We suspect that this rate of inflation will continue until it cycles itself around September, which will be the beginning of our second half. Our assumption is that this inflation will moderate in the second half. And if you think that what's happening in Ukraine will create more inflation, then our assumption there is conservative. But our approach is to assume that the inflation will be lighter and moderate in the second half of the year and drive more productivity and other things over there. If inflation goes up, then it gets to your second question. Now if the consumer behaves like she's behaving now, honestly, we are not seeing a change in behavior. We are still seeing the consumers very strong. We're not seeing any meaningful trade down. I'll give you an example: Organic sales penetration is up, not down, in our business. So we think the consumer is still strong. Whether the consumer will stay that way, even if we go to the second half or past the fall and inflation continues to be at 8% or 9%, I don't know. I would imagine you'd see some elasticities. But that's the approach we've taken. We expect it to moderate in the second half. I hope that gives you enough color on how we've thought about it.

Yes. No, that's great. And just a quick follow-up, Sharon, on the guidance for the gross margin. The compare to 2019 is kind of different throughout the year. It's much harder in the first half than it is in the back half. How do we think about sort of like first half gross margins?

Yes. So we're not guiding by quarter. I tried to give you a little more color on the gross margins as we walk through the year. One thing to think about is that, just as you think about 2022, as it relates to COVID, you're going to see the most significant impacts from COVID vaccinations in Q1. And then in Q2, our numbers were down last year in COVID, then Q3 picked up and Q4 picked up. So when you think about modeling that, those flow-through on COVID is substantial on these vaccinations. So I hope that will provide a little more help. I've already talked about the pressure of the COVID vaccinations, but that's a pressure that you need to model. But think about Q1, 3, and 4 as being the biggest COVID quarters. Honestly, Q3 and 4 were the bigger of the four quarters.

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

Guys, first question, can you somehow size the dollar opportunity? When I think about your best customers versus maybe the average, I would think there is a several hundred dollar annual spend opportunity there. And then with that in mind, if you think about a 2% to 3% comp longer term, can you think you drive the vast majority of that just from the best 15% or 20% of your customer base?

John, in response to your first question, it's not several hundred; it's actually several thousand for the customers who are most engaged with us. To provide some context, if you look back at our IPO document, we mentioned that customers who interact with various parts of our business tend to stay longer and spend more. While we recognized this before, it wasn't at the scale we see now. Today, we have 30 million customers in our loyalty program, all accessed through a single app, which acts as a portal to our entire company. While it doesn't encompass everything yet, it offers access to our pharmacy, e-commerce, and content like meal recipes. By bringing all these elements together, we are reaching a national scale and creating what we refer to as stickiness with our customers. So, to answer the first part of your question: yes, it's thousands of dollars, not hundreds. And for the second part: absolutely yes. We anticipate that a larger share of our sales will come from this group of customers, primarily by enhancing retention through the various touchpoints we've established that are now more robust and scalable.

Okay. Yes. And then maybe secondly, you talked about the $750 million productivity for the next three years that you've just started. I assume you will not finish there. Is it possible or likely that that ends up being similar to the last three, right, the $1.5 billion? And then your thought process on the new – if there is a new secular algorithm versus the old one, right? Is this the same on a higher base? Or is it possible that this algorithm is a little higher than the old one?

Let me start with the productivity question. As we said in the prepared remarks, we have just started framing this next phase of productivity over the last six months since I joined. It's a perpetual productivity engine. So there is absolutely the expectation that over time, that number will continue to grow. So that's the first question. And then on the second question, Vivek, do you want to take that?

Yes, John, when we went public, our long-term algorithm was at 2.25%. We've actually maintained a significantly higher number, both in absolute and relative terms, which has been very positive. I would be disappointed if we ended up at that original figure in the long run. However, we need to navigate through the current year before we can establish a consistent trend.

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

Vivek, I think I already know the answer to this based on your tone earlier. But is it fair to say that as you are not seeing any meaningful changes in how the consumer is behaving. And this is true whether the consumer, as you define it, is considered higher end or lower end. I just wanted to get a little bit of a sense there, given how much sensitivity there is in the market right now to lower-end consumers and their spending?

Yes. Ken, I've not seen a big difference yet. We have not seen a big difference yet across income segments, right? The one thing that we have put in our plan is that as SNAP funds reduce, which we suspect will go down over time as we go through the year, that lower-end consumers will reduce some spend. That said, to date, what we've seen is currency shifting. We haven't seen that behavior yet, but we don't want to conclude that and assume it for the full year. So as we go into the second half, we have assumed that consumers depending on SNAP will spend less. It may just be spend less by trading down. And we've assumed that behavior going forward, Ken. But we haven't seen that in any of our segments to date.

Are you anticipating some incremental promotions and discounts to help counteract the pressures that consumers may experience?

Yes, it does.

It does, Ken.

Sure. Can you explain what led to the strategic review? It's unusual to see a company that recently went public, performing well, and attracting talented executives announce something like this, particularly given the vague nature of some of the language used. I'm curious about what triggered this decision, which has caused such a stir in the market.

Yes. So Ken, it was really sparked by the fact that valuation compared to peers was not reflecting the strength of our performance. There were reasons in our minds for some of that. Our performance has been, as you know, if you put us on the same basis as Kroger, we have different quarter ends. But if you measure us out, we outperformed Kroger in Q4. We outperformed them for the year, et cetera. So that was the catalyst for it. And of course, there was the overhang of the preferred shares that have hit the market, and then, of course, the IPO lockup was coming. So instead of playing whack-a-mole, that's an alternative right? You could just react to each event, but we felt that a much more comprehensive assessment was much more inclusive of all of the alternatives. That is included; as you know, I don't have to read the press release to you, but the assessment of our balance sheet optimization, and any kind of strategic or financial transactions, et cetera. So that's what we're looking at. And that was the catalyst for it. I said that after we put out that release, the catalyst hasn't changed. That's exactly why we're doing it. And we'll keep you guys updated as we move forward.

The next question comes from the line of Scott Miskin with R5 Capital.

And so I just wanted to go back to what Robby was talking about in the inflation rate market share. I just want to make sure, you guys are assuming or you're thinking you're going to continue to gain share, volume share, and dollar share this year? Because looking at the guide, you may think that you think there's some kind of change there.

No, Scott. Let me explain the share story. At the beginning of this year, we were comparing ourselves to some significant numbers from 2020. In the first half of fiscal 2021, we were clearly gaining market share in Food, but not in MULO. Grocery supermarkets performed better than the rest of the market in 2020. By the second half of the year, things changed positively. We've gained market share in both MULO and Food, in terms of dollars and units, and the rate of share gain is ongoing. We expect to keep gaining share. We monitor that closely, as it is our primary metric.

Okay. I need to decide which question to ask because I have several. Can you discuss the competition and product availability you are experiencing right now? Is the competition changing significantly? It seems we may still face some product availability issues that could worsen. Chicken, especially chicken breast, is a challenging commodity. How are you approaching this as the year progresses, in terms of both competition and product availability?

Yes, Scott, product availability continues to be a challenge and continues to be a little bit of whack-a-mole. We had imagined by now, we would see some relief, but that's not the case; we are imagining that product availability will continue to be a challenge through most of this calendar year, maybe mid-year, at least, and maybe start to get some relief in the fall, which is why we think there might be more supply, and that supply might pull down some inflation. That's how we've thought about it. An example is eggs, right? We're seeing it going into Easter. There are flu prices and costs going up on just white eggs. We continue to have all those kinds of issues. We plan to manage around that. Competitively, not a whole lot has changed. I'd say it's still quite stable. It's hard for anybody to get into a massively promotional mindset, given the challenges in product availability.

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

I would like to summarize some points regarding inflation and unit sales for the remainder of the year, Vivek. When we analyze the composition of comparable sales, it appears to align with inflation trends, suggesting that unit sales may be relatively flat. This is a shift from the situation a year ago, but it seems reasonable. It appears you're not anticipating this dynamic will change, even as inflation persists, if I've understood correctly. However, there could be some sensitivity at the lower end with SNAP, which raises the question of whether there's a compensating factor. Additionally, it seems you do not expect inflation to rise later in the year, as we prepare to compare against previous levels, leading to a normalization of inflation.

That's right. We planned that when we cycle current inflation, it will moderate significantly. That’s going to depend on supplies coming in, too, and we think there might be supply in the latter part of the year. That’s how we've thought about it when we put the guidance forward to you, that the second half will have much more moderated inflation. We've also assumed that the lower-end customer, the SNAP customer, will spend less as we go into the second half of our year.

Okay. To clarify, based on what we have observed so far, even with rising inflation, you are not experiencing a further decline in units? Or as inflation increases, it has remained stable, which gives you confidence that we won't see that elasticity change?

Correct. We've not seen a further degradation in units. We're seeing consistent behavior from the customer.

Okay. For my follow-up, it might be more directed towards Sharon. This relates back to what John asked earlier. Your EBIT, when compared to 2019, has increased by about $1 billion, which is quite impressive. This year, the outlook indicates that comparable figures will grow; however, at the midpoint, EBIT appears to be declining. Some of this might be due to a conservative approach. We'll have to wait and see how the year unfolds. Some of the decline could be attributed to expenses. Should we consider this as an investment year? If so, does it return to normal after one year or two years? I realize there's a minor gross margin comparison issue concerning vaccines, but how should we approach this? With a 2% to 3% comparable growth, your EBIT base should logically increase in the future. That seems like a reasonable assumption, but when should we expect this to start?

Yes. When considering the guidance, there are two main pressures. Referring back to the transcript, I previously outlined this regarding gross margin and SG&A. On the gross margin front, we anticipate a decline of 65%, which will impact the bottom line due to COVID. To put this in perspective, Kroger has administered over 11 million COVID vaccinations and generates approximately twice our revenue. We have actually administered 12 million COVID vaccinations, which is more than Kroger, but we generate half the revenue. This indicates that the impact of COVID on Albertsons results in significantly higher demand, and this pressure affects our bottom line. The numbers are substantial, and you can calculate that as we did last quarter. Additionally, we are making investments that directly contribute to the current benefits you are observing. These investments focus on our digital transformation, the Albertsons Media Collective, and the modernization of our supply chain—an important project I mentioned last quarter that will carry into 2022 and 2023. So, we are investing in these key areas. Moreover, like the rest of the industry, we are experiencing significant labor cost increases. However, strong productivity serves as a beneficial counterbalance to these costs. Ultimately, the challenges stem from COVID and these investments.

To note on productivity: Over the last two to three years, we've learned how to deliver productivity at scale, so it gives us more confidence. And productivity becomes an engine, right? As we've said before, there's so much more to explore in our company, given where we were and where we began.

Next question comes from the line of Rupesh Parikh with Oppenheimer.

This is actually Erica Eiler on for Rupesh. So first, I mean, it sounds like you're not seeing any signs of trade down to date. But maybe you could talk about your expectations on the private label side this year. Are you expecting maybe we start to see a shift more towards private label? Maybe just any thoughts you can share on private-label penetration this year would be helpful.

Yes. Private-label penetration is back up to 25.6%. If I recall, that was what it was during the pandemic. So we're right back there. I expect private label to become a bigger and bigger part of the consumers' basket, only because with that, we are offering better price points, better opening price points. Now, just like everybody else, we do have supply challenges in private-label brands that the national brands have. But as that comes back, and if this inflation holds, it will become a bigger initiative in our gross margin agenda.

Okay. No, that's helpful. And then just switching gears to SG&A. So I mean you highlighted the puts and takes. Maybe you could just dive a little bit more into the latest you're seeing on the wage pressure front with your contracts and labor availability. And then also just in terms of the investments you're making this year. Is there anything to call out in terms of cadence? Should we think about any of the quarters being more pressured by those investments this year?

On the SG&A front, we have finalized our contracts in Northern and Southern California, which are awaiting ratification, and settled on others. A major contract in the Midwest is with Jewel. As we progress through the year, you will notice gradual and incremental increases starting now for the major contracts that have been under negotiation. The rest will come in around midyear and toward the end of the year. We anticipated substantial increases and have planned for productivity to address that. We hold a strong competitive position in our markets. While cost increases are never favorable, we are investing in our associates, which is crucial to our mission. We are implementing the highest increases we've seen, supported by a productivity strategy that will unfold throughout the year. Additionally, we aim to meet our strategic investment priorities, particularly regarding the Albertsons Media Collective—a new revenue stream we are developing, as we are several years behind others in this space. We've announced it earlier this year, and while now is the time to build the foundation, we expect significant returns in the coming years. These investments are aligned with what investors want to see.

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

I apologize for the short-term focus of my questions, but could you address two things? Could you quantify the impact of the Easter shift on comparable sales for the current quarter? Additionally, I know you’ve received numerous inquiries about your EBITDA guidance. Could you clarify the financial benefits from vaccines for 2021, as well as how we're accounting for the costs associated with COVID in 2021? This information would help explain the reduced EBITDA forecast for 2022.

Yes. So, until we see the results from Easter, it's difficult to quantify the impact of the Easter shift, but we won't be providing weekly sales guidance. We have shared our current performance. Regarding your second question about vaccinations, we haven't quantified that figure or indicated what the headwind may look like. We expect a roughly 65% reduction in the number of vaccinations we administer. In the previous quarter, after our follow-up call, you may have found some relevant numbers online that helped you understand this better. We do have contracts with confidentiality agreements, so I can't provide the exact figures today. However, it's important to note that it represents a significant earnings headwind heading into next year, and we have factored that into our EBITDA guidance.

Okay, and the COVID...

65% of 12 million, Karen, right?

Pardon me?

And Karen, on baseline COVID cost, I think you had one other piece, which was baseline COVID costs.

Yes.

And we don't anticipate that changing. COVID is not gone. Just look at Philadelphia that just went back to mask mandate in April. COVID's not gone, and we would not anticipate on the COVID cost side to see a material change year-over-year. The cleanliness in our stores and keeping people, customers, and employees safe is a top priority, and that will not change.

Okay. And if I just may ask, with respect to the valuation gap versus peers, can you just clarify exactly who you're including in your peer set? I mean I'm assuming it's not just Kroger.

Yes. You can look at a lot of different peer sets, but I think that you can take a look at the places where you're pointing to in your own reports and those would be the same places we'd be looking as well.

Your next question comes from the line of Chuck Cerankosky with North Coast Research.

I'd like to have you comment on how business is looking, how the customers are behaving as gasoline prices have tracked up during your fourth quarter and thus far into the first quarter, please?

One observation we've made with customers is that traffic has increased compared to last year and remains steady. What's interesting is that when comparing basket sizes to 2019, they are significantly larger even after adjusting for inflation. We're seeing customers continue to consolidate their shopping trips, a behavior that began during the pandemic and seems to have persisted, especially as fuel prices rise, which tends to encourage more trip consolidation. There appears to be a shift from other channels linked to commuting to our offerings where prices are more favorable. While I haven't noticed any significant changes related to fuel prices yet, this new behavior seems to be solidifying. It might also be attributed to people dining more at home, which is contributing to the consolidation of trips.

How about in response to the fuel component of the loyalty program? Any effect there?

Great point, Chuck. The fuel rewards are incredibly powerful. They have always been one of our best returns and one of the biggest drivers of stickiness. Over the last several weeks, we've increased the number of rewards that we provide for fuel. That will drive more stickiness to us and drive more of that consolidation of the basket to us. You're right.

The next question is from the line of Paul Lejuez with Citi.

This is Brandon Cheatham on for Paul. I just wanted to kind of circle back to your price gaps compared to competitors. It sounds like the marketplace is being quite rational right now in passing along price to consumers. On your guidance, I think you mentioned that you expect promotions to kind of increase as the year progresses. I guess specifically, what do you expect the changes to make the marketplace a little more promotional? If there is an improvement in supply chain, how could that maybe benefit your margins to help offset some of those promotions?

The promotions will rely entirely on supply. We operate with a focus on a high-low strategy, as opposed to everyday low pricing. There is a significant group of customers who value this, and we want to make sure we cater to them. However, a key distinction from the past is our loyalty program, which involves 30 million engaged members receiving highly personalized promotions. As promotions begin to re-enter our market, I believe they will return in a more targeted and specific manner, rather than the previous method of mass advertising. This approach will benefit our customers while also safeguarding our financial performance.

Great. And then on the Media Collective, I guess, where are you in launching that? Or do you have a full team already hired? And then anything you can share on the long-term potential of this initiative and what might be considered in '22 guidance?

Yes. You should expect that to follow the pattern that you've seen with many others who started this journey on a media business. We've got a team that has done this before and had a lot of success. We've been patient about building it because we wanted to build it the right way and in a modern way. We've launched it on February 27. This year is about building it. In the following years, it will become more material in our P&L. We're very comfortable with that because at the end of the day, this is being built to serve our customers who are most engaged with us in the markets where we are the strongest. For those customers, we are one of the best vehicles to reach them if you want to market to them.

Recall in our guidance we gave you this morning that it was called out as one of the areas we have significant investment in 2022.

Our final question this morning will come from the line of Michael Montani with Evercore ISI.

Just wanted to ask, if I could, first off, on the flow-through rate. If the comp store sales do end up exceeding your guidance, what's the right flow-through rate to think of, Sharon, for every 100 basis points of comp beyond the midpoint?

Yes, I would put that in the range of 15-ish.

Percent of sales.

Of percent of sales.

Sorry, is that for EBITDA or EBIT?

EBITDA.

Okay. And then another follow-up I had was on the gasoline side. Obviously, you had mentioned the COVID vaccines. But is there any incremental color you can share in terms of either how much tailwind that could have been last year or how much headwind to think of for this year?

As it relates to fuel?

Yes.

Yes. Just trying to think of that.

Yes, Vivek, you want to take that? Yes.

The fuel business is not very large for us. We expect that the volumes will be higher this year, but the margins will be lower. That's how we've considered it. Therefore, we are facing both material headwinds and tailwinds.

Thank you, everyone, for participating today. Cody and I will be available for follow-up questions, and have a great day.

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

Thank you all.