In an earnings call Wednesday, Albertsons shared the company’s plans for growth after its $24.6 billion failed merger with Kroger. The company reported solid Q3 results with 2% identical sales growth and 23% digital sales increase, while outlining plans to deliver $1.5 billion in cost savings over the next three years.
Highlights include the rise in GLP-1s like Ozempic, which have contributed to an 11% revenue gain in the company’s pharma unit, and an investment in tech and AI to help streamline workflows and cut costs. Read the full transcript below.
Vivek Sankaran, CEO: Good morning everyone, and thanks for joining us today. First, let me say how wonderful it is to be back hosting all of you on today’s call. While we are disappointed that the merger was terminated, we never stopped investing in our business or driving our “customers for life” strategy.
I’d like to use my time with you today to provide an update on what we have been working on since the merger was announced, and give you an early view of our strategic priorities moving forward. Over the last two years, we have continued to drive and evolve all priorities:
- Driving customer growth and engagement through digital connection
- Enhancing the customer value proposition
- Modernizing capabilities through technology
- Driving transformational productivity
Digital growth strategy
To engage customers, we have continued to invest in growth through four digital platforms. These platforms are designed to drive increased sales, more deeply engage our most loyal customers, increase customer lifetime value and generate digital space and robust data for the Albertsons Media Collective.
The first of these platforms is e-commerce. We run our e-commerce business out of our stores so our inventory is close to our customers and we can offer full access to our merchandise assortment. Our investments in e-commerce have driven sales penetration to over 7% of grocery revenue, with our top performing market over 9%.
This growth, which is higher in our first-party versus our third-party business, has been driven by the development of new capabilities in our fully integrated mobile app and improvements in quality, speed and convenience of drive up and go and in-home delivery.
While we have grown this business significantly and faster than the market, it is still under-penetrated compared to industry benchmarks, and is one of our biggest growth, customer acquisition, and customer retention opportunities. To capture these opportunities, we are rolling out a store-based five-star certification program to ensure we are delivering a consistent and elevated level of customer service, as well as a series of targeted marketing initiatives to grow sales and penetration.
Customer loyalty program
The second of these digital growth platforms is loyalty. Our loyalty program is integrated into our mobile app and is a key engagement tool for our business. It is the entry point for digital and personalized marketing and a primary contributor of data to our retail media collective. In April of 2024 we launched a simplified and enriched program to make it easier for our customers to earn points and redeem coupons, fuel and grocery rewards. For the first time, it also allows customers to simply redeem points for dollars off their grocery bill.
Since the launch, we’ve seen more frequent engagement, higher retention and increased customer spend. Going forward, we expect to continue to see increased adoption, and we will leverage strategic partnerships to provide our members with even more ways to get rewarded.
GLP-1s driving pharmacy growth
The third of these digital platforms is pharmacy and health. Our investments in pharmacy have driven sales penetration to over 11% of total annual revenue. This penetration has been driven by industry-leading core script growth, including GLP-1s, excellence in immunization, and best-in-class service. It has also been driven by the integration of pharmacy offerings into our mobile app through the launch of Sincerely Health. Sincerely Health is a high engagement, value-added wellness and rewards platform with over 1 million lives.
Although the pharmacy business is financially dilutive, cross-shoppers between grocery and pharmacy are exceptionally valuable customers, spending three times more and engaging across all service offerings. Going forward, we see Sincerely Health growing as a top loyalty driver and a catalyst for introducing immunization and pharmacist-administered treatments. We also expect to capitalize on continued script and immunization growth from traditional pharmacy store closures.
Mobile app integration
The fourth of these digital platforms is integration of the mobile app for use in our stores, which is supported by excellence in store-level execution. When our customers are in our stores, we want them to engage with us digitally. To enable this, we launched an in-store geo-located mobile feature that delivers real-time coupons, helps shoppers locate products and plan meals, and assists customers with their shopping lists. By the end of 2024 we expect over 8 million of our customers to have used this in-store feature.
Albertsons Media Collective
Going forward, we expect to see continued increases in customer utilization of this feature, and are planning to launch additional capabilities to drive even deeper engagement over time. All these platforms, working together, are generating eyeballs, digital inventory and data for the Albertsons Media Collective, or AMC, which we brought in-house in fiscal 22.
Since then, we have invested significantly in building industry-leading technologies to deliver an easy-to-use, dynamic and transparent management platform, which is improving endemic and non-endemic brand reach. We’ve also improved our ability to define shopper audiences, run targeted media campaigns, enhance product offerings and achieve parity in campaign measurement. With these capabilities, while on a small base, AMC is currently growing faster than the market.
Looking forward, we will continue to invest in delivering consistent omni-execution for brand campaigns across our digital and physical assets. In addition, we expect to build new partnerships that add even more eyeballs, digital inventory and capabilities to our platform. AMC continues to be one of the largest opportunities we have to fuel reinvestment into our business.
Building on ‘customers for life’ strategy
I’ll now discuss our initiatives to enhance our customer value proposition, which includes not just price, but also the ease of the value-added services we provide to customers, both in-store and online. To date, loyalty memberships, digitally engaged customers, omnichannel households, and transaction counts are all growing because our “customers for life” strategy places the customer at the center of everything we do.
As our customers’ needs for value evolve due to inflationary pressures, so are our strategies to address these needs. These strategies to drive better value for customers, in addition to increasing total category growth, include working with our vendor partners to strategically invest in price in certain categories and markets, and increasing owned brands penetration.
To deliver this, we will source products that customers trust and need at a better value to drive profitable unit growth and increase share of wallet from existing customers. In owned brands, we will also offer products at an attractive entry price point so that customers always have an accessible alternative, and more prominently feature existing owned brands offerings.
Tech investments and cost-cutting plan
Our third priority is the modernization of our capabilities through technology. Our north star has been to use technology in everything we do. Over the last few years, we have invested strategically to make technology the key enabler of all major future growth and productivity initiatives. These investments include migration to the cloud, the launch of our end-to-end e-commerce capabilities, the digitization of pharmacy and health, state-of-the-art tools for pricing and promotion, the enablement of self-checkout, productivity tools to manage replenishment, shrink, and labor, new supply chain systems, and an industry-leading retail media platform.
These investments have created long-term capabilities that will continue to allow us to accelerate the transformation of our operating model going forward. They also position us well to take advantage of the evolution of AI and machine learning to elevate our core business processes.
The final priority is driving transformational productivity. We have continued to develop our productivity engine designed to systematically improve the efficiency of our business and improve costs. Over the next three years, we plan to deliver $1.5 billion in savings to invest in our customer value proposition and growth initiatives, as well as to offset inflationary headwinds.
To achieve this, we’re leveraging our recent investments in technology and the latest innovations in business best practices to build industry-leading capabilities and reduce costs. The first of these initiatives is leveraging our consolidated scale to buy goods for resale. The next is transforming our ways of working, including rebalancing our onshore and offshore activities.
In our supply chain, we are continuing to make significant progress on automation and the rollout of our new warehouse management system, or WMS. By the end of 2025, we expect 30% of our distribution volume to be automated and our WMS to be fully implemented company-wide. These supply chain initiatives improve in-stock conditions, differentiate our fresh quality, lower our cost to serve, and improve our end-to-end data analytics capabilities.
And finally, in store operations, we are leveraging a more robust technology platform to drive enhanced efficiency, improved customer experience, and deeper associate engagement. For example, we’ve implemented AI technologies that provide a prompt for missed scans, which is reducing inventory shrinkage and improving the customer and associate experience. We’re also expanding the utilization of technology in our produce departments, which is driving increased sales, reduced inventory shrinkage, improved quality, and enhanced labor productivity.
2024 financial outlook
I will now hand it over to Sharon for an overview of our third quarter and an update on our 2024 financial outlook.
Sharon McCollam, president and CFO: Thank you, Vivek, and good morning everyone. It’s great to be here with you today. We are pleased with our third quarter results and the operational benefits we are seeing from the investments we have made in our business. We are a stronger company today than pre-merger, and the initiatives that have driven these results affirm our confidence in our future.
We delivered solid operating and financial performance during the quarter across all key metrics in an environment where the consumer remains cautious. The financial highlights of the quarter included:
- Identical sales increase of 2%
- Digital sales increase of 23%
- Adjusted EBITDA of $1.065 billion
- Adjusted EPS of $0.71 per share
- Loyalty members increased 15% to 44.3 million
- Increased our quarterly dividend by 25% to $0.15 per share
I’ll now provide additional color on the financial details that drove these results. The ID sales increase of 2% was primarily driven by a 13% increase in pharmacy and a 23% increase in digital sales. The digital sales increase was primarily driven by strong growth in first-party sales fueled by continued innovation in our digital offerings and improved service levels.
Our Q3 2024 gross margin was 27.9%. Excluding fuel and LIFO expense, the gross margin decreased by 27 basis points compared to Q3 last year. Strong growth in pharmacy sales, which carries an overall lower gross margin rate, and increases in picking and delivery costs related to the continued growth in our digital sales drove this decrease, but was partially offset by the benefits from our productivity initiatives.
Our selling and administrative expense rate was 25.1% this quarter. Excluding fuel, the SG&A rate increased 6 basis points compared to last year. This increase was primarily driven by merger-related costs and an increase in occupancy-related expenses, including third-party store security services, partially offset by the leveraging of employee costs and benefits from our productivity initiatives.
Interest expense decreased $7 million to $109 million during Q3 2024. This reduction was primarily driven by lower outstanding debt. Income tax expense in the third quarter was $14.5 million, a 3.5% effective tax rate compared to 20.8% effective tax rate in Q3 last year. This decrease was primarily driven by the recognition of an $81 million discrete state income tax benefit related to audit settlements. Excluding this discrete benefit, the effective income tax rate would have been approximately 23%.
As mentioned in the highlights, Q3 2024 adjusted EBITDA was $1.065 billion, compared to $1.107 billion last year. Adjusted EPS was $0.71 per diluted share, compared to $0.79 in Q3 2023.
Turning now to the third quarter balance sheet and cash flow: Capital expenditures of $494 million were driven primarily by investments in the modernization of our store fleet and our digital and technology platform. We also returned approximately $70 million to our shareholders through common stock dividends. Net debt leverage at the end of the third quarter was 1.9 times, and the balance sheet remains strong.
I’d now like to discuss our 2024 outlook. As we look forward to the balance of fiscal 2024, we do so with continued confidence in our “customers for life” strategy and our operational execution. We are engaging customers in our digital platforms, driving traffic to our stores, and leveraging the investments we have made to drive efficiency in our operations.
So with that as our backdrop and our Q3 results behind us:
- ID sales are now expected in the range of 1.8% to 2% versus 1.8% to 2.2%
- Adjusted EBITDA in the increased range of $3.95 billion to $3.99 billion, versus $3.90 billion to $3.98 billion
- This increase in adjusted EBITDA is driven by the ongoing benefits of increased productivity
- We are also increasing our adjusted EPS range to $2.25-$2.31 per diluted share, to reflect the corresponding increase in adjusted EBITDA
- Additionally, due to the $81 million discrete state income tax benefit recognized this year in the third quarter, we expect our full year tax rate to be in the range of 15% to 16%
- Our capital expenditures remain in the range of $1.8 billion to $1.9 billion
Before I hand it back to Vivek for some closing comments, I would like to spend a minute on how we are thinking about capital allocation over the longer term. First and foremost, we will continue investing in our business to drive long-term sustainable growth. We also plan to maintain our quarterly dividend and seek to grow it over time, as demonstrated by the 25% increase that we declared this morning. And finally, we plan to opportunistically return excess cash to shareholders by repurchasing shares under our recently announced $2 billion share repurchase authorization.
Our balance sheet is strong, and it provides flexibility as we drive our business forward and seek to generate long-term sustainable shareholder value. Consistent with our previous cadence, we will provide our outlook for fiscal 2025 in our fourth quarter conference call in April.
I will now turn the call back over to Vivek for closing remarks.
Looking ahead
Vivek Sankaran, CEO: Thank you, Sharon. As we look forward, we start this next chapter in strong financial condition with a track record of positive business performance. Over the last two years, we have invested heavily in our core business, developed new sources of revenue and strengthened our capabilities through the rollout of new technologies. We have retained our best talent and even added and strengthened talent in critical positions.
Our customers for life strategy is working. We’ve added loyalty members, digitally engaged customers, omnichannel households and increased transaction counts. Our stores are operating more effectively and efficiently as new technology takes hold, and we are proactively managing our costs. Our productivity programs, both old and new, are creating fuel for investments and are an offset to inflationary headwinds.
We believe all of this puts us in a strong position to continue to transform the business and adapt to an ever-changing consumer landscape. We also know that we must elevate our performance to compete with the very best in our industry. We are energized by that challenge and see a path to doing so. We’re confident in our ability to execute against these opportunities. We will share more of our long-term plans at the end of the fiscal year.
I would like to thank our 285,000 associates for their loyalty and dedication to our customers and communities. We are so proud of the difference they make. In December, we published our latest Recipe for Change report and highlighted the role that our associates play in fighting food insecurity and helping reduce the impact of our operations on the environment. They are the ones who make all of this possible, and I want to applaud them for their hard work and dedication.
