Albertsons Companies, Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Apr 2021

[Operator:]

Ladies and gentlemen, welcome to the Albertsons Companies Fourth Quarter 2020 Conference Call. Thank you for standing by. All participants will be in a listen-only mode until the Q&A session. This call is being recorded. If you have any objections please get disconnect at this time. I would now like to turn the call over to Melissa Plaisance, GVP of Treasury and Investor Relations. Thank you. You may begin.

[Melissa Plaisance:]

Good morning. And thank you for joining us for the Albertsons Companies fourth quarter 2020 earnings conference call. With me today from the company are Vivek Sankaran, our President and CEO; and Bob Dimond, our CFO.

[Vivek Sankaran:]

Thank you, Melissa. Good morning, everyone, and thank you so much for joining us today. I want to start today by thanking our associates for their unwavering commitment to take care of our customers, our communities, and each other during every twist and turn of the pandemic over the last year. 2020 was a difficult year for all of us, and our hearts go out to all those directly impacted by the virus. 2020 was also a transformational year for Albertsons Companies. We have deepened our relationships with customers and added many new ones through our execution in stores and through online channels. We accelerated digital transformation across our company. Almost every critical capability in our company is now enhanced with or enabled by technology.

[Bob Dimond:]

Thanks, Vivek, and hello, everyone. I am pleased to provide details on our strong fourth quarter and record fiscal 2020 results. For the quarter, total sales were $15.8 billion driven by our 11.8% increase in identical sales. Our gross profit margin increased to 28.9% during the fourth quarter of 2020, compared to 28.6% in Q4, 2019. Excluding the impact of fuel, our gross profit margin increased 10 basis points, primarily driven by improvements in shrink expense and sales leverage, partially offset by investments related to our growth in digital and strategic investments in price. We continued to see significant sales leverage on expenses in the fourth quarter. Excluding fuel and one-time pension charges, our selling and administrative expenses decreased 80 basis points compared to the fourth quarter last year. Incremental COVID cost during Q4 totaled approximately $110 million. Interest expense declined $28 million to $113 million during the fourth quarter of 2020, compared to $141 million during the same quarter last year, primarily driven by lower average interest rates as a result of our refinancing transactions and lower outstanding borrowings. Adjusted EBITDA was $917 million, compared to $756 million or $702 million excluding the extra week during the fourth quarter of fiscal 2019. The 30% growth in adjusted EBITDA represents a strong flow through of approximately 15%. Adjusted net income was $347 million or $0.60 per fully diluted share, compared to $194 million or $0.33 per deluded share during the fourth quarter last year. Turning to the full year, we delivered strong results that were above the outlook we provided last quarter. Identical sales finished the year at 16.9%, above our expectation of approximately 16.5%. Adjusted EBITDA finished the year at $4.5 billion, driven by strong sales leverage both in gross margin, and in selling and administrative expenses that translated to strong flow through. Adjusted EPS finished the year at $3.24, which was $0.09 per share above the top end of the range of our outlook we provided during the third quarter call. Our strong sales results and our strong results have generated very robust operating free cash flow of $2.3 billion in fiscal 2020. Our capital allocation priorities remain unchanged and include reinvestment to drive profitable growth, continued deleveraging, and returns to shareholders through our $0.40 per share annual dividend and opportunistic share repurchases. Capital expenditures were approximately $1.63 billion during the year and we completed 409 remodels. We also accelerated technology related investments including those in digital. As Vivek outlined, these high return projects included both in-store and productivity initiatives in manufacturing and supply chain, and in merchandising to expand our meals program, as well as in digital including incremental DUG rollouts and other technology initiatives intended to drive efficiencies and future productivity. But at the same time, we have generated asset sale proceeds of approximately $161 million as we continue to actively manage and selectively monetize our real estate portfolio. We made significant progress in de-levering the balance sheet and reduced our debt during the year by $400 million and refinanced debt at very attractive rates. These actions will save the company approximately $77 million of interest expense on an annualized basis. Given these actions and the strength of our cash flows, our net debt to adjusted EBITDA ratio is now 1.5 times on an LTM basis. Finally, we completed stock repurchases of $119 million under the company’s $300 million authorization in fiscal year 2020. Turning to the outlook we provided this morning on fiscal year 2021, I’d like to provide some details and color. As you know because of the way 2020 played out with some of the pantry loading we saw early in fiscal 2020, we think it’s appropriate to provide guidance through a two-year lens against 2019 to show the step change improvement in our business. We expect identical sales on a two-year stacked basis to be in the range of approximately 9.5% to 11%. We expect adjusted EPS in the range of a $1.95 to $2.05 per share, which represents over 37% compound annual growth compared to 2019. We expect adjusted EBITDA in the range of $3.5 billion to $3.6 billion, representing compound annual growth of 13% at the midpoint of our range compared to 2019. We also expect to spend $1.9 billion to $2 billion in capital expenditures, which includes incremental capital for high ROI projects that include in-store remodels that will have near-term paybacks, as well as our continued acceleration of digital and technology investments. The implied growth in sales and related flow-through to EBITDA on a two-year basis on this guidance continues to be industry leading even as we continue to make investments designed to drive long-term sustainable growth. As you think about the year, we want to point out a couple of items that will impact the cadence of the annual guidance within fiscal 2021. As you know, fuel margins spiked significantly during the onset of COVID-19, and as such, we expect fuel to be a headwind during the first quarter of approximately $50 million. In addition, the incremental productivity savings that Vivek mentioned will be ramping up and more heavily weighted to the second half of fiscal 2021, enhancing our confidence in achieving our EBITDA and EPS goals. Before I turn it back to Vivek, I want to spend a brief moment to discuss the impact of the American Rescue Plan Act on our multiemployer pension plans in which $86 billion were earmarked for underfunded multiemployer employer pension plans. The net effect of this legislation safeguards and protects benefits of the retirees in these plans for at least the next 30 years. In terms of the impact to Albertsons Companies, the multiemployer plans that are classified as critical or critical and declining are likely to be eligible for some level of relief under the special financial assistance through ARPA. Though the amount of financial assistance received will vary by plan, we currently estimate that these plans represent over 90% of our estimated share of the $4.7 billion total underfunding of all of the multiemployer plans to which we contribute. Pending details on how the program will work, we expect the financial assistance program will provide the necessary funding for the multiemployer plans to which we contribute to remain solvent to at least 2051. It also ensures to help that the PVGC which is the guarantor of anticipate benefits for these multiemployer plans. We did not anticipate that our cash contributions to these plans will change in the near-term as we continued to fund what we always have based upon Collective Bargaining Agreements. And as we have consistently indicated, the legislation confirms that the underfunded liability related to these plans is not an obligation of the company. And now, Vivek will provide some closing remarks.

[Vivek Sankaran:]

Hey. Thank you, Bob. Before we turn to Q&A, I want to share a few closing remarks. Fiscal 2020 was a transformational year for Albertsons Companies and we believe the changes we have made to our businesses have enhanced our ability to retain our customers, continue to drive share growth and grow from a higher baseline relative to our pre-pandemic trajectory. We have learned a lot from the pandemic, both in terms of customer behavior and how to operate the business more efficiently. We are emerging from this crisis more digitally focused, both in-store and online, and elevating the service our customers expect, while at the same time being more productive and doing so delivering more profitable growth. We have further strengthened our financial position. We have generated strong free cash flow, allowing us to accelerate investments and initiatives that will support future growth, reduce debt, pay our dividend and repurchase shares. And through debt reduction and refinancings, we have truly transformed the balance sheet and we are approaching the future from a much stronger position. And we are continuing to develop and execute our ESG agenda, enhancing the sustainability of our operations, supporting the communities in which we operate and investing in people with an unwavering commitment to diversity and inclusion across the organization. As I reflect on some recent topics of interest in our industry, I would like to share some insights on the first seven weeks of fiscal year 2021. I realize this is unusual, but we live in unusual times and you will ask us these questions anyway. So here goes. Our sales momentum continues with growth in market share in food and -- on a two-year basis in new low. When looking at our average weekly sales dollars, sales are trending at approximately the same levels that we exited the fourth quarter on a seasonally adjusted basis taking account -- taking into account holidays, in spite of significant business re-openings across the country. We are seeing continued strength in sales of items that have been elevated throughout the pandemic such as meat, seafood, produce, eggs, breakfast cereal and high-end wines that provide evidence that some important food and beverage categories that shifted from food away from home are still being consumed at home. But we have also seen as we expected some categories falling below pandemic levels such as soup, pasta and pasta sauce. While food at home inflation is still at recent high levels and could be sustained at these levels for some time, we have planned our business assuming inflation of 1% to 2% this fiscal year. And we expect a rational competitive environment to prevail, driven by relatively tight supply, sophistication and promotion management and more digital promotions. With all this as a backdrop, we are confident in our ability to continue to produce strong results. I want to reiterate my thanks to our entire team of approximately 300,000 associates. I am so proud of what they have done to serve our customers and communities over the last 13 months. And we will now take your questions.

[Operator:]

Thank you. Our first question today is coming from Edward Kelly from Wells Fargo. Your line is now live.

[Edward Kelly:]

Yeah. Hi. Good morning, guys. Vivek, I just wanted to first just clarify one thing you said about quarter-to-date trends. I think you said in line with the exit of Q4, so, I guess, at the end of the day, are you talking about quarter-to-date trends that are above the high end at a 11% number that you talked about for the two-year stack expectation for 2021?

[Vivek Sankaran:]

No. Ed, the way to think of it is, what we’ve tried to do, because it’s so difficult to think about the lapse and such. We have tried to model the business on dollar sales on a weekly basis, okay? And the assumption we had made going into the year is that the dollar sales on a weekly basis will kind of remain like the way we closed out the year, the last few months of how we closed out last year, and of course adjusting it seasonally, and that’s what we are seeing. So, Bob, would you add anything to that from a…

[Bob Dimond:]

Yeah.

[Vivek Sankaran:]

…stack standpoint.

[Bob Dimond:]

Yeah. I -- from a stack perspective, there will be some differences by quarter. But we think the right way to try to make sure that we forecast in the quarter is, as Vivek suggested, which is taking a look at the absolute sales dollars and trend those forward, and that’s what we are trying to begin the year, and we are tracking along that very closely.

[Edward Kelly:]

Okay. And just thoughts around how you think about the cadence of the IDs throughout the year, if you are back to this like 9.5% to 11% stack, I would assume that we have some deceleration in the back half. How are you thinking about the cadence of that? And then I did have a follow-up on this, the differences geographically, because you have said, that they have been kind of consistent, maybe just more color there. Because I don’t think dining out trends are consistent, right? There does seem to be differences with states that have less restrictions for instance?

[Vivek Sankaran:]

Yeah. Ed, so the way we’ve thought about the business, the further out you go the harder it becomes to predict what the topline is going to be, which is why we have said we want to have strong productivity programs yielding in the second half of the year. So, if the sales turn out to be better than we have imagined, it would be a strong second half on multiple dimensions, but we have made sure that we have that cushion of productivity in the second half of the year. Now the second -- on your second point in terms of jump – geographic in Q4, we certainly didn’t see it. But what happens when you get into Q1, you are seeing some very difference -- big differences in lapse across regions, right? So part of it -- so we are going through a very noisy period right now between what happened last year and what’s happening now. So, I am not going to conclude that we are not going to see differences in re-openings this quarter, but what the statement we made in the discussion was about last quarter.

[Edward Kelly:]

Okay. And then just last one for you, the incremental $500 million in cost saves, can you just provide a bit more color around where they came from? And then I assume some of this maybe gets reinvested in the business. How do we think about sort of like what’s reinvested, what’s not and the priorities there?

[Vivek Sankaran:]

Yeah. So let’s start with that philosophy, Ed. We really generate productivity, there’s always productivity that’s going into reinvesting in the business to make us stronger to be ahead on capabilities, and there’s some productivity that’s always there for a rainy day, right, to take to the bottomline. That’s how we think about it, and we will always have that mindset in this business. And so, now let’s talk about the $500 million. I would frame it this way. The -- we -- one of the great things about our company is that we are incredibly locally nimble, and we have learned a lot through this pandemic and how that is an advantage to us and how we are able to react with speed, but we have also learned through this pandemic what else is extremely important to preserve, okay, and we are going to preserve that. But we also have 13 divisions that -- we have 13 supply chains in the company and we have 13 buying organizations in the company. They are going to change some aspects of that. And by changing some aspects of that, we get a lot of leverage both in the supply chain and the design of the supply chain, and what -- and making things easier for our supplier partners and in the discussions of how we buy, so those are completely two new topics that are substantial programs that we have launched and will continue over the next two years.

[Edward Kelly:]

All right. Thank you.

[Operator:]

Thank you. Our next question is coming from Ken Goldman from JP Morgan. Your line is now live.

[Vivek Sankaran:]

Good morning, Ken.

[Ken Goldman:]

Hi. Thank you. Hey. Good morning, everybody. I wanted to follow up on Ed’s question, but not from this quarter from last quarter when Ed asked I think, about the gross margin. And Bob, I think at the time you said, it should be relatively flat and you are quantifying it necessarily. But I just wanted to see if there was any update there, anything you could tell us about your gross margin ex-fuel for 2021 with the benefit of a little more time?

[Bob Dimond:]

Yeah. We are still -- well, first of all, I will start-off a little bit with the comment that Vivek just made because of some of the productivity initiatives that we have. We actually generate tailwinds as we call them to our gross margin. And so, because we have that benefit, we do feel confident that kind of, overall, we are going to end up with gross margin for fiscal 2021 to be directional to what we saw here for the full year in 2020. Now it won’t necessarily be exactly the same cadence by quarter, because there were some big swings in the first couple of quarters. So you need to kind of seasonalize that to a typical year. But, overall, we feel very good about our ability to kind of keep gross margins at the full year level and which is a nice step up from where we were running in 2019 of course. But Ken, I mean if you think about, I will give you four initiatives. All of these are substantial, right? So I have always talked to you about this notion of we are going to have gross margin tailwinds that we judiciously invest back so that we can strengthen the business. So four big ones, first is, owned brand’s penetration coming back 1,000 basis points on every one of those items. The second is we are excited about our shrink initiatives. It’s redoubling our confidence that our shrink initiatives are working. And then we just add it to big ones, supply chain and the entirely -- the entire cost of goods that buying the cost of -- buying those things differently, right, that -- those things that are mostly national. Those are substantial pools of gross margin tailwinds. And then there’s the mix issues, but even those, I’d stopped with those four and we see we see a lot of upside there.

[Ken Goldman:]

Okay. No. That is helpful. Thank you. And then, Vivek, I wanted to follow-up. You gave some examples of some categories that continued to do well after some areas of reopened meat, seafood, cereal, wine, I think…

[Vivek Sankaran:]

Yeah.

[Ken Goldman:]

…you also gave some examples, I think, you said, soup and pasta, maybe pasta sauce that are sort of below recent levels. I want to know if you and I don’t mean to put you on the spot here, but I can understand the meat and the seafood sign -- the side -- the wine side surely. But what is the distinction between certain sort of center store categories, whether it’s cereal or pasta or soup. What do you think is driving one to continue to do better versus another that isn’t necessarily doing quite as well? Is it real -- or is it really just a question of a people stock up on things like soup and pasta bottle…

[Vivek Sankaran:]

Yeah.

[Ken Goldman:]

… and you are just lapping it, is that the issue?

[Vivek Sankaran:]

Yeah. That’s it, Ken. You have got. So what you are seeing it’s a…

[Ken Goldman:]

Okay.

[Vivek Sankaran:]

Hey. No. Nobody shot on paper now, right? So, yeah, I think, we are seeing things that have been loaded in the store and so that’s, sorry, in the pantry. So you have got that. That’s always there. And but you are working more from home and you are eating is more breakfast at home and you are eating more lunches at home which is continuing to drive that fresh consumption. So it’s remarkable. We are continuing to see steady fresh consumption and the same kind of frequency of purchases on fresh. And people are feeling comfortable that they have got enough in the pantry on some other products.

[Ken Goldman:]

Understood. Thank you.

[Vivek Sankaran:]

Thanks, Ken.

[Operator:]

Thank you. Your next question today is coming from Robbie Ohmes from Bank of America Merrill Lynch. Your line is now live.

[Robbie Ohmes:]

Oh! Hey. Good morning, everybody. Vivek, I was hoping you could talk a little bit more about the 1% to 2% food at home inflation assumption that you guys are thinking about for this year? And maybe weave into that a lot of the CPG companies have obviously been talking about pushing through a fair amount of price increases this year. How does that play out in your thinking and maybe about, you guys mentioned in the press release, strategic price investments that you made this quarter, how are you thinking about price investments this year? And we are seeing the competitive promotions are coming back within the industry, you can see it in the Nielsen data. Maybe you could just tell us about the scenarios you have been thinking about for how food inflation could play out this year?

[Vivek Sankaran:]

Yeah. So, Robbie, let me give you some context then I will have Bob add color to it too. So the 1% to 2% is a planning assumption and we like that, because we know we can add a 3% to 4% inflation. It’s a better thing for our business, right? It’s a better outcome in our P&L. So we plan to 1% to 2% and then see how -- and then go from there. We are seeing a 3% to 4% inflation like you have all seen it. Now, I have no idea where the inflation is going to land. We don’t, right? But here’s a few things to consider. One is that, the demand is still ahead of supply in so many categories. It’s still the case, okay? Two, we have got a consumer -- I have been never -- should never generalize this, but by and large the consumer is healthy. They have got cash. There -- and so -- and to me it’s -- if it’s a demand-driven inflation, I think, you are going to see consumers still shopping these categories. Now, when it come -- if it goes beyond that 3% to 4%, then here’s what’s going to happen. We are going to be -- we are going to have difficult conversations on how much we can accept, because we are not going to pass through all of it and we are going to have difficult conversations up and down the supply chain, if it gets to a place where it’s going to exceed that 3% to 4%. The last thing I will leave you with is, yes, these -- a lot of this inflation that you are hearing about from CPGs and others, it -- the nice thing about when it is planned and when it is available -- when you have some sense for how it might shape up, it’s more manageable. The ones we worry about are the spikes and we are not seeing any of those emerging at this time, Robbie. But that’s the planning, of course, we have taken to inflation. Bob, anything else you would add?

[Bob Dimond:]

I think you have covered it well. The 1% to 2% really is just our baseline planning process and any upside from that, typically will flow through either to the bottomline or we may choose to utilize that to drive the topline. But I think you have covered it well.

[Vivek Sankaran:]

And then pricing, Robbie, our pricing investments continue. We do it surgically. We are doing it in all the time, every quarter in different markets. And when it comes to promotions, we are not seeing a significant step-up anywhere in the market. We think it’s quite rational and we are all going more digital. So it’s not going to be -- it’s not going to see a big step-up in the Wednesday flyer from four pages to 10 pages.

[Robbie Ohmes:]

That’s really helpful. And just a quick follow-up on that DUG profitability, it sounds like you are feeling better about it going forward. Is that more about efficiencies you figure it out on executing that, that’s made it a lot more profitable at store level or you are seeing something on the MFCs working, that’s makes you feel like you maybe figured something out there?

[Vivek Sankaran:]

Both, so what happens with the DUG is, as you see the orders are still going up, you can literally see the labor cost curve, right? It comes down pretty rapidly. It’s an exponential curve and so you see that and you -- and you are -- so when you get to a certain level of orders for store, your labor costs becomes better and we are starting to get to that, right, in many of our stores. The second thing we have done, we have launched new picking algorithms and the other thing when you get a lot more scared, you are picking becomes more efficient, right? That’s why your cost comes. We have got new picking software in place. And the third thing we are seeing is that as things get better in stock, right, and we are having -- not having to go out of the MFC to go pick in the store, you are seeing better efficiencies in the MFC itself. So where we are adding all these up in the lobby and starting to feel really good that DUG can be a profitable engine within the e-commerce offerings that we have.

[Robbie Ohmes:]

That sounds great. Thanks so much.

[Vivek Sankaran:]

Thanks, Robbie.

[Operator:]

Thanks. Our next question today is coming from Simeon Gutman from Morgan Stanley. Your line is now live.

[Vivek Sankaran:]

Hi, Simeon.

[Unidentified Analyst:]

Hi, guys. This is -- oh, hey, this is actually Michael Cyprys on for Simeon Gutman. But thanks for that.

[Vivek Sankaran:]

Okay.

[Unidentified Analyst:]

All right. First question actually on your guy’s kind of promotional strategies and you talked a lot about the more targeted and surgical with high level. I’d love to get an update on the progress you guys have made. Are there any examples you can point too and maybe I don’t know if you have kind of an inning or kind of a roadmap for how that plays out? And also how does that kind of interplay with the price investments that you guys just spoke to and how that’s trending?

[Vivek Sankaran:]

Yeah. So think of two different things that we are doing. One is, we have -- now all our promotions are made on one platform across the company, okay? And it’s a platform that our merchants access and because it’s all technology and we can see the data, our pricing team can look at the totality of the promotions and get a sense for where people are heading. So we -- what that does is, it allows us to maintain that local nature of being reactive and appropriate in a market yet being able to see the full picture from here, because we are now on one technology platform. So that’s tremendously helpful. The second thing I mentioned to you is that, we now have 25.4 million people on Just for You. So it’s -- we have just added in another 1.1 million just last quarter. And those 25.4 million people get promotions target to do them, right? It’s a -- we can access them. They can access us digitally. We access them digitally. So at the underlying all of this promotions is a technology capability, right? So on that -- on the second one we have had it for a long time we just get smarter and smarter about using it. The first one I mentioned we rolled it out across last -- during the pandemic we have rolled it out and we are continuing to improve it. On that one I’d say, if that was a baseball game, we are probably in our third inning, right? We have a lot more to go in terms of optimizing it.

[Unidentified Analyst:]

Great. That’s very helpful. Thank you. And a follow-up actually on Robbie’s question on drive-up and profitability there and your comment, I think, Bob you made or one of you guys made on the mid-to-high single digits flow-through on that. I guess number one is that on an EBIT basis and I’d love to hear maybe some of the assumptions that you just guys just kind of used whether as far as incrementality how that’s factored into that number? And I guess also does that kind of imply that given the incremental cost of delivery versus drive-up that delivery is more like maybe flattish or even loss making, and I guess, how you guys are thinking about it, looking to improve that or is that something where it’s kind of that the reality of the business as it stands right now and …

[Vivek Sankaran:]

Right.

[Unidentified Analyst:]

… since you are going to accept it for the sales?

[Vivek Sankaran:]

Yeah. Let me provide a little bit of context and I will have Bob talk to you specifically about the flow-through and the EBIT piece. You are, right. The delivery business is not profitable. The DUG business is. Because it’s harder to recover the delivery cost. And we have -- as you know though we just have shifted a lot more of that where we are using third parties and so we are on a path to improve that side of the business. But that would be the harder one to get right on profitability over time. Now here’s the other thing. Yes, we are excited about the incrementality and we can see incrementality because we know the customer. We know that she bought -- spent $100 with us typically and now she’s spending $125 bucks with us and so -- and that $25 bucks is coming from e-commerce and so we are able to track that incrementality. But we are fully cognizant that you don’t build a big business all purely around incrementality, because at some point that business too has to become on a unit basis profitable. But we have got some time, right? We have got other things in our P&L that are driving productivity that can allow us to make these investments. And that’s how we are working it and I talked you about some of those improvement initiatives in e-commerce. But, Bob, can you clarify the flow-through comment.

[Bob Dimond:]

Yeah. Definitely. So when we look at DUG, as you know, we had -- that was our fastest growing segment of our e-commerce this past year. And because of that, we are getting tremendous scale benefits, which are now coming through in our latter quarters where we are seeing an incremental basis to the mid-to-high single-digit EBITDA is what we are looking at there, which is effectively the same as EBIT and think of a business, because there’s not much amortization. But anyway, so we just look forward to as we continue to see the -- that business scale even higher, as well as factor in the savings from MFCs in the future that that mid-to-single -- mid-to-high single-digit rate will continue to improve.

[Vivek Sankaran:]

Yeah. And the only thing I will add on delivery is, we have prioritized speed. We believe time is money that people are going to expect shorter and shorter delivery windows, and we have absolutely prioritized that and that fits with what we are doing with stores and MFCs. And we will keep stay on that path for a long time.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Thanks. Your next question today is coming from Karen Short from Barclays. Your line is now live.

[Karen Short:]

Hi. Thank you so much.

[Vivek Sankaran:]

Hi, Karen.

[Karen Short:]

Hey, there. I just wanted to go back to this weekly sales commentary as it relates to 1Q. So if I take what the weekly sales look like they were doing in 4Q, I am not doing average weekly sales per store, but just weekly sales and I bring that forward to 1Q, I am backing into kind of a negative 9.5% comp in 1Q. Can you maybe just let me know if that’s directionally accurate, but I think, the way you describe it was just a little nuanced?

[Bob Dimond:]

Yeah.

[Vivek Sankaran:]

Go ahead, Bob.

[Bob Dimond:]

Yeah. I will start-off and Vivek you can fill in any blanks that you think I missed. First of all, what you need to do is take a -- we took the fourth quarter average weekly sales run rate, but then we had to adjust it seasonally for the first quarter, because as you as you know, we have stronger holidays in the fourth quarter…

[Karen Short:]

Right.

[Bob Dimond:]

We need to kind of normalize there if you will. So that would be maybe the one adjustment that I would say relative one I think I heard you say?

[Vivek Sankaran:]

Yeah. And I -- we -- I’d rather not comment on comps at this time, Karen. But we wanted to give you some sense for the momentum in the business by giving you that those -- at least that additional information for Q -- for this Q1.

[Bob Dimond:]

Yeah. And the other thing that we feel really positive about is, it’s not only the continued momentum there, but we are also seeing the continued momentum of market share gains.

[Vivek Sankaran:]

Yes.

[Karen Short:]

Right. No. No. That’s helpful. I just wanted to make sure it was a very nuance comment. And then…

[Vivek Sankaran:]

Yeah.

[Karen Short:]

…I wanted to just clarify. So when we look at EBITDA, by my math, I think, the right number of total COVID costs embedded in the 2020 EBITDA number was $875 million, so can you just confirm that? Because I guess what I am trying to look at is when I look at the midpoint of your guidance, call it, $3.5 billion for 2021, I am kind of trying to think intellectually about how that should compare to the $4.524 that you reported, because presumably that $875 million goes away in 2021 at or -- and/or doesn’t increase. So like net -- it’s a net flat number, right?

[Vivek Sankaran:]

Yeah. I think you are directionally correct there. Remember that the first quarter had the biggest chunk of it, right? And we had announced that we had roughly $600 million in the first quarter. I think we added back a small portion of that. But that was direct directionally the number there and then we had an additional just over $100 million per quarter after that.

[Karen Short:]

Okay. And then, sorry, two housekeeping questions, I don’t know if -- you did gave us fuel in terms of the impact in 1Q. Is there any way you could give us fuel for the year in terms of what you thought was outsized in dollars? And then the second question I had is just on the hero pay initiative in California broadly, how do you factor that into your guidance?

[Bob Dimond:]

Yeah. I will first take the fuel piece. Our intention was not to provide quarterly guidance for fuel or any other lines. Other than we wanted to call out that fuel was going to be a headwind in the first quarter. I would say for the year, it’s directionally that amount of headwind for the full year. So the impact is really a first quarter primary event. There’s certainly a smaller impacts by quarter, but I prefer not to try to list what those are the kind of net out.

[Vivek Sankaran:]

Yeah. And the hazard pay that we are seeing in certain pockets of the country, Karen, look, those are those are -- we are -- we think that those will abate as vaccination -- people get vaccinated. And I wouldn’t -- I do want to say it’s not material, but we will -- it is part of our planning and we are going to absorb it.

[Karen Short:]

Great. Thanks very much.

[Operator:]

Thanks. Our next question is coming from Beth Reed from RBC Capital Markets. Your line is now live.

[Beth Reed:]

Hi. Good morning, guys.

[Vivek Sankaran:]

Hey, Beth.

[Beth Reed:]

Just a couple of quick ones on your ID sales guide, what are the embedded expectations for share gains in that. And then just wondering if you could comment on any potential impacts on stimulus on quarter-to-date trends?

[Bob Dimond:]

Yeah. As far as your first question on market share gains, I mean, we would hope that we will continue to see the threat that we are seeing now. That’s kind of a hard one to predict…

[Vivek Sankaran:]

Yeah.

[Bob Dimond:]

…as we move forward though.

[Vivek Sankaran:]

Yeah. I think the thing is it share gains is we had such a tremendous year in 2020. And so, if you look at it on a one year stack it just becomes difficult to share. It would be likely that we would -- share will look negative. But what we have looked at is on a two-year basis and on a two-year basis there’s substantial share gains and we are seeing that happening even through the first part of this quarter. So and then on the stimulus, what’s interesting is that, when we look at different segments of our shoppers, let me stay with income for now. We are -- we continue to see -- we haven’t seen a dramatic shift in consumption patterns for lower income households. If the stimulus mattered to them, we were doing better with them pre-stimulus and we continue to do well with them.

[Beth Reed:]

Okay. Got it.

[Vivek Sankaran:]

And so we haven’t seen a substantial change from the stimulus itself, at least for us.

[Beth Reed:]

Okay. Thank you. That’s helpful. And then just going back to the gross margin for a second, can you talk a bit about some of the mix improvements that you have been seeing there and how you see those playing out over the course of the year?

[Vivek Sankaran:]

Yeah. Mix improvement is a very deliberate approach we take, right? And that’s been historical that the Albertsons Companies is as simple as something that, sell a cut watermelon or cut asparagus instead of whole watermelon. And so those initiatives continue -- we continue to find new ways of doing those types of things. The meals initiatives that we are rolling out are again gross margin enhancers. And so the -- and the price -- the owned brands are gross margin enhancers. When you do well in fresh and we continue to do well in fresh, that’s a gross margin enhancer. Notwithstanding all of the other things that I talked about that are productivity-oriented, right? So do we -- again, I will come back to both your questions and others on gross margin. We believe that we have plenty of tailwind.

[Beth Reed:]

Got it. Thank you.

[Operator:]

Thank you. Your next question is coming from Scott Mushkin from R5 Capital. Your line is now live.

[Vivek Sankaran:]

Hello, Scott.

[Scott Mushkin:]

Thanks for taking -- good morning. Thanks for taking my questions. I wanted to talk a little bit about the store environment as you grow pickup and delivery. How do you keep the store environment good for people that actually want to come into the store? And then you are probably rotating labor from customer-facing activities to picking activities in order to see how you guys are attacking that issue as well?

[Vivek Sankaran:]

Scott, we are not doing the latter, right? We are not saying, hey, we are going to sacrifice service in one part of the store to support another part of the store. So when it comes to the frontend, we have -- it’s a completely different system that allocates what labor needs to go to a frontend of a store. It’s based on historical and predicted demand and we do that. And we hold people to that standard on that front. We are adding labor to the store for e-commerce, which is where -- which is why and you have to add that labor in kind of like block increments. You don’t say it’s half person and you have to add a block to get it going, which is why as orders go up in the store, you see this thing -- you see the -- the improvement in profitability. Now, the other thing I will tell you, Scott, is, we are a higher index on fresh. The way you win in fresh is you don’t just stock it up in the morning and then revisit it at the end of the day or the next morning. You are in the store working fresh all the time and so part of that is a mod -- is a labor model that allows us to be great at fresh, right? And by the way, that same philosophy exists in much of the store. So, in our stores, you will see people working the store through the day, so that the store remain fresh and staunch, even while people are picking the store and so that’s the philosophy we have taken. We have not had run into that issue yet where a store is depleted or overcrowded for e-commerce.

[Scott Mushkin:]

Okay. Thanks. And then as a follow-up to the -- this question, The Wall Street Journal had an article talking about the competition for labor and given that you guys are growing these businesses where you are going to be adding labor, how should we look at kind of labor costs as the year progresses? Is this something you guys worry about and how -- what are you doing to control that line item?

[Vivek Sankaran:]

Yeah. Scott, a lot of our labor is unionized and we have contracts with our unions. They come up every so often for renewal and they typically negotiate it for three years or five years. And so a lot of our wages are in that sense predictable and so we really focus a lot more on hours. So you add hours in some places, you drive productivity in other places to take the hours back out. And then we have all of these initiatives, right, like, you have -- we have talked about in the past far, which is an ordering program, production scheduling programs, et cetera, that drive -- and automation that we are doing that continue to drive productivity in labor hours and that’s how we manage that equation.

[Scott Mushkin:]

Thanks, guys.

[Vivek Sankaran:]

Thanks, Scott.

[Melissa Plaisance:]

We have time for two more questions.

[Vivek Sankaran:]

Great.

[Operator:]

Certainly. Our next question is coming from John Heinbockel from Guggenheim. Your line is now live.

[Vivek Sankaran:]

Hey, John.

[John Heinbockel:]

Hey, Vivek. I know you guys had 4.5 million roughly loyalty customers this year and I know omnichannel was up 3x. How many actual omnichannel households could you add relative to that? I am curious how many are coming from this omnichannel? And then, how big is the omnichannel customer base today as part of that $25.4 million?

[Vivek Sankaran:]

Yeah. John, let me put it this way. We are -- our mix of e-commerce has improved dramatically, but we are still behind some others, right? And that’s why we are going to continue to invest in this business, because we know that it’s resonating. We haven’t passed out those numbers that you are -- that you just asked me about. But we are excited about the growth rate. We know who they are and we are going to continue to do to invest in it, so the e-commerce business becomes a bigger mix. We have got -- we are -- we have got a few points of catch up to do on that.

[John Heinbockel:]

And I think you said the 11 million that was total customers…

[Vivek Sankaran:]

Identifiable.

[John Heinbockel:]

You have…

[Vivek Sankaran:]

John. Yeah. Identifiable. So that’s pretty good, right, because we know some -- because they are identifiable, we know what they are buying. We know what they are buying, whether they are going to engage in e-commerce. We -- so that’s the part that we are excited about, it’s 11 million identifiable customers.

[John Heinbockel:]

That you added and the 4.5 million were loyalty, right? So you still…

[Vivek Sankaran:]

That’s right.

[John Heinbockel:]

…in theory, I guess, of that 5 million -- 6.5 million that are not -- that are identifiable but not loyalty, what’s your…

[Vivek Sankaran:]

That’s right.

[John Heinbockel:]

How do you go about them to be loyal customers and how optimistic are you that you can do that?

[Vivek Sankaran:]

And yeah, that’s the -- so our loyalty team is now expanding the way they are thinking about it, John. It used to be that our loyalty program was primarily had a financial incentive. It was rewards on fuel oil pricing. And now we are starting to open up other things that you will see us launching in the market, so that we can get more of those other 6 million customers engaged in the loyalty program. Not -- prices isn’t the answer for everybody, some people care about convenience, some people care about experiences and that’s what we are going toward.

[John Heinbockel:]

Okay. Thank you.

[Vivek Sankaran:]

Thanks, John.

[Operator:]

Thank you. Our next question is coming from Rupesh Parikh from Oppenheimer. Your line is now live.

[Rupesh Parikh:]

Good morning. Thanks for taking my question. So going back to your CapEx guidance, for this year you guys deferred increase in CapEx at $1.9 billion or $2 billion. As we look forward, should we think about this as a right -- the new base level to think about in future years as well?

[Vivek Sankaran:]

No. No. Don’t think of it as the new base level. We would -- remember, recall we were at about $1.5 billion in the past and we would keep it to that ratio of percentage of sales about say 2.5% of sales what you should expect in the long run algorithm for us. We are just being opportunistic here and we have the cash. We are pulling forward initiatives that are we know are clear ROI winners, right? So we have done that. And then we are -- in that $1.9 billion, you will see a substantial investment in our digital agenda. Building digital capabilities around the company, so we can monetize all those things I just told John about, those 11 million additional customers.

[Rupesh Parikh:]

Great. And then maybe just one follow-up question on free cash flow, I know -- I think this year there’s going to be some specific items that may weigh in your cash flow such as that payroll tax deferral. So, Bob, just curious if you can just share any other discrete items we should be thinking about on the free cash flow side for this year?

[Bob Dimond:]

You are correct on the free cash flow side or I am sorry, on the CARES Act. That was about $200 million -- just over $200 million that we will have to pay back in the fourth quarter of this year. Outside of that, there’s really nothing out of the ordinary.

[Rupesh Parikh:]

Okay. Great. Thank you.

[Operator:]

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over for any further or closing comments.

[Melissa Plaisance:]

Very good. Thank you everyone for participating today. I wanted to point out that there is an infographic that has been made available on our website, summarizing many of the statistics from this call today. And if there are any follow-up calls, Cody and I will be available over the course of the day and the rest of the week. Thank you so much.

[Vivek Sankaran:]

Thank you, all.

[Bob Dimond:]

Thanks.

[Melissa Plaisance:]

Bye-bye.

[Operator:]

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.