Good afternoon again. This is Kate McShane, Goldman's grocery hard lines and broad lines analyst, and we're very happy to be hosting Albertsons this afternoon. It's my pleasure to introduce Vivek Sankaran, the CEO of Albertsons, and the very brand new President and CFO, Sharon McCollam. Albertsons is one of the largest food and drug retailers in the U.S. and became a public company in mid 2020. It operates over 2,200 stores across 34 states under 20 banners. Vivek and Sharon, thank you for joining us today. Vivek, I'll turn it over to you for some opening comments. Kate, great to see you. Thank you so much for having us in this meeting. I just want to take a moment to introduce Sharon. We are so delighted that Sharon has joined our team. Sharon is going to be a co-pilot with me to help us accelerate the transformation that we've been on for the last several years. We're excited about the experience she brings in many of the different areas that we have. Thanks for having us. We look forward to having a great discussion. Great. Thank you. My first question is going to be for Sharon McCollam about this decision, and then we can launch into the macro and the company. Sharon McCollam, this is the first C-suite position you've taken since you left Best Buy. Over the last several years, you've been on many boards and have been a consultant. We're just wondering why this is the right time to make a move to be back in management and why is Albertsons the right opportunity? Thank you. The discussion with Albertsons actually started very much, Kate, in the spirit of what I was doing. It started as a conversation about a board seat. Through those discussions, I learned a lot about the company, about the strategy. First and foremost, that clearly they were a market leader, with the iconic brands that they offer. Then I realized that they were very early in this transformation, and with COVID particularly. The aspects of the transformation that I am so passionate about were really the digital transformation, the supply chain transformation, and then the customer obsession. One of the things that I got out of the discussions was that this idea of a customer-obsessed culture came through with virtually every person I spoke to. Oftentimes, through my consulting, the board would bring me in, and then I'd talk to the CEO and the CFO, and I'd get three different answers to the same question, right? Here it was so crystal clear about where they were going. The imperatives that they were focused on, the initiatives they were focused on, in-store experience, digital transformation, driving productivity. Then, of course, culture and talent were another area that, quite frankly, I think companies are late to this party. They've been focusing on this ever since Vivek really joined the company, and they have hired some just absolutely incredible talent. Absent hiring that talent when they did, the work that they did during COVID, I think, would not have been achievable without this incredible team that they hired. Then they were operating on all cylinders. That was the really exciting part on the baseline, what I was listening to. Of course, Vivek and I were talking this whole time. One of the things that came up in every conversation were the similarities between this transformation and what has to happen and what has to be true in Best Buy. When you take a look at the initiatives, if you take out what we sell, as far as grocery versus the consumer electronics, the stories are so similar. We couldn't help but draw those correlations. Then I visited about 75 stores, you know me and my weekly store visits that I continue to do, right? I visited about 75 stores, and it was actually across banners. That is so important when you look at the story to look at it in its different aspects, right? When I did that, first of all, it was clear, and through my research, it's clear. When I went to Best Buy, I said we inherited one of the best real estate portfolios out there. Albertsons, in their space, is in a very similar place. This is an exceptionally good real estate portfolio. With all the activity of ownership through these brands over the years, they have really crystallized it down to an incredible real estate group. The other thing that I noticed is actually in the stores, you could see these initiatives that everybody was talking about coming to life. Now, Vivek has said he's in the second inning. I don't know if we're in the second inning on 1 and third inning on another, not sure. I'll know more. It's day four. As I learned more and more about it and we kept drawing these correlations and then building my relationship, of course, with Vivek and the team, and the board, really, it was really more like the board. When we did all that, Vivek said to me, he said, "Well, wouldn't you just love to do this? And instead of doing this other thing, why don't you just come and do this with me?" I was really excited about it. Kate, somebody asked me on one of the other calls, "Why did you pick grocery?" I didn't. I picked Albertsons. I think the story is exciting, and I love the size. Kate, that was another thing. Albertsons is. You always know I have my 3 questions to decide whether or not you invest. Well, it's the same about whether you decide to change your entire life for them. The first was. Do they have a strategy that's been articulated and it's clear where they are going? That was easy. The second one that I always ask is, if you went away, theoretically, do customers care? As you look into their loyalty and all the things that you've been talking about, I won't take up too much time on that, but these brands are beloved in their communities, and they have a role in those communities. People do care. They have choices, and they have great choices. There is an absolute connection, similar to Best Buy had in its communities with its customers. Lastly, do the vendors care? Albertsons is at this size that transformation is absolutely possible. They aren't so behemoth that you cannot move it, but they are big enough that the vendors care? Vendors absolutely care what happens and want it to be successful. Those were all the things that I learned through this process, and when it came down to it, and I had the invitation from Vivek, honestly, I could not have been more excited. Now I've been here four days. Seriously, we've had a lot of conversations since the announcement, and I just couldn't be more excited about it, and I think I made the exact right decision. Thanks for asking, and hopefully, you get how I ended up here. Absolutely. Thank you for all that insight. It's very helpful, and we're excited to see you there. My first question I wanted to start out with is, I think one of the things that we've been so surprised about as retail analysts is not so much that food at home has held up. It's that food at home has held up in the context of people going out again and people eating out again. I wanted to ask, is that something that has surprised you, too? In terms of stickiness, what does this tell you about what the customer is going to want over the next six months to a year? Kate, first, I think we're operating in a backdrop where the customer's balance sheet is very strong. Right? I think over the last several months, customers have spent money on food, stayed home, spent money on food, and while spending money on food, I think have realized that you can get a lot more quality for food when you buy it in a store, one of our stores, for the same dollar than if you went to a restaurant. You come to our store, and you can get a fabulous steak for $25 a pound. You can't get a good steak for 25 bucks at a restaurant. I think there is some of that that has happened, and that has driven more eating at home. A part of that is conditioned more cooking at home and eating at home. The other trend that I always believed will be the more lasting effect of COVID and the pandemic is working at home. Right. It can be two days, it can be one day, but that's still a substantial shift from five days of working somewhere else. That has continued, especially with this notion of, with Delta over here. In some ways, I think those are going to be sustained. To me, I think working at home, the technology's going to get better. I believe we're all going to experiment with it, with different forms of working at home and coming to work, and then we're all going to settle into a new normal. Technology's going to enable more and more remote work. I suspect that is going to stick. When that sticks, more people are going to eat at home. Thank you for that. I think, too, one of the things that has been benefiting your top line more so than some other retailers is just market share gains. I think on your last quarterly call, you indicated you were still seeing market share gains even quarter to date. What do you think are the bigger drivers of this? How much do you think is merchandise versus value versus price? When you say merchandise, Kate, let me expand on that because I go back to what I just said earlier. When you eat at home and you cook at home, the fresh assortment that you have matters a lot more. The quality of the fresh, the completeness and the variety of fresh that you offer in a store matters a lot. I think during the pandemic, especially in the early days of the pandemic, a lot of customers discovered our network of stores that were not shopping with us or not shopping with us predominantly. They came in, they anchored on the fresh portfolio, you realize that you can complete a basket in our store. Absolutely, get everything you want. In fact, go pretty deep on several varieties of things in our stores. To me, I think that stuck. What we have seen throughout this pandemic is that coming back for the fresh has anchored the customer and the relationship with that customer. What we have done is because we have data on our customers, a lot of them have engaged in our loyalty program, enrolled in it and engaged in it. Because we have the data, we're able to find ways to retain them on the rest of the store that they may not have bought as deeply with us in the past. That's how I see this work. That's what I think is driving it. If you think about market share, there's the assortment and everything I talked about. There's the loyalty program that creates a stickiness on top of that. We've offered e-commerce to create tremendous convenience. Our locations are in great places, and they always matter, especially in this environment. You spoke about fresh, that always has been, since you've been a public company, an area that you've highlighted as a point of differentiation. I wondered if you could talk a little bit more about the mix of fresh in your stores, how it's changed over time, and what in particular do you think is differentiated about your fresh selection? Kate, we invest in fresh, right? By that I mean, first of all, you make sure you're getting the right product through a DC, from a DC, distribution center, into your store. You're buying the right products, it's better than USDA standards, so on and so forth. That's one part of it. The real magic with fresh is what happens in a store. Are you investing enough labor to manage the quality and freshness of all of the product that you have? Are you turning the product adequately, and so on, and is there enough care for the product? That's one level of investment. The second level of investment that we do is making sure that we are adding value to that fresh, right? Sometimes that value gives customers more convenience. As an example, you can sell watermelon, you can cut watermelon. We cut our watermelon in the store. We choose to do that very purposefully, because that gives the customer the freshest watermelon, cut watermelon, you can get. By the way, if you learn to operate it well, it also reduces shrink. Okay? When you learn to operate things in a store. Our guacamole is made in the store, Kate. We don't make it elsewhere. It's made that day in the store. When you learn to make these things better, you just keep expanding this, what I think of as a value-added portfolio. Which is not only fresher, but offers great convenience. We keep looking for ideas like that. In parts of the country now, we've rolled out a meals program. I happen to be in Dallas this week, and we have it in our stores here. We're rolling out a meals program where you can walk in there and take care of your week's meals in 15 minutes, right, that were made in the store that day. That's helpful. Thank you. Sharon McCollam had mentioned one of the reasons that she was so intrigued in the opportunity of helping you lead this company was about digital. ACI reported triple-digit growth in digital sales throughout 2020 and seems to have held onto those gains so far this year. Can you detail maybe some of the investments you've made in this channel and how different the last mile solutions are resonating with customers, including, the unlimited FreshPass? Yeah. Kate, let me, if you don't mind, I'm going to step back a little bit and describe for you how we think about our e-commerce strategy. It begins with a very fundamental principle that we have, that we need to put the customer in control. Okay? We do that in two ways. One is, the DriveUp & Go. The reason I say the customer is in control is because in that particular case, we are waiting for her to show up, not the other way around. When she shows up, we want to be in that car in three to five minutes. Three minutes. Five minutes is longer than we want. We try to make sure we get there quickly and serve her. That's one form of making sure you give her control. Interestingly, it's the fastest growing piece of our e-commerce business. I think you'll agree, it's not just with us, it happens in much of retail. I just want you to play that movie forward and imagine a world where we're back to commuting and, even if it's three days a week and you're coming back from work, I think this business grows even faster because it's on the way home and you pick up your groceries and go home. That's one piece. The second way you give customers more control is by reducing the time they have to wait. Okay. It used to be next day, then it became same day, then it was four hours, and now we're pushing two hours. I think we will always keep trying to reduce that window. Because again, she's in control. She's not buying a refrigerator every 10 years. She's buying groceries three times a week. If you accept that philosophy, the e-commerce strategy has to rely on inventory that's close to the home. It's called a store. We make the store the base of our e-commerce strategy. By the way, you also get a lot of curated assortment in that store, which you've been shopping, you've been shopping it all along, and you expect to find it. We want to make sure all of that's available for you. What we do is we put technology behind it to make sure that we make that operation in a store more and more efficient. It can be a different picking algorithm, it can be a back room in a store that's assorted differently for speed, or it can be an MFC. We're exploring all of these. That's the foundation of our e-commerce strategy. We've found, obviously we've reported strong growth in that. We see a lot of upside in that business. The beauty of that business is it continues to drive more digital engagement. When people engage with you digitally, they tend to stick with you. We see that. We see that our customers who are engaging with us in e-commerce, by the way, it's not like they stop shopping the store. They just end up spending more with us. Kate, I would just add to that the other thing about this is that over time, when a person is walking through a store, the traditional grocery experience, I get my cart, I walk through the store, we don't have the opportunity to upsell. We don't have salespeople per se on the floor. We use various types and at the end of an aisle and things like that to demonstrate a promotion. When you really get these customers digitally engaged and they forget something, you're going to have data, and it's going to say, "You always buy cookies, Oreo." You can remind them and be helpful to them as they're doing their digital orders on things that people forget all the time, "Oh, my gosh, I just walked out." That's going to help build basket. That was always the issue. If you go back to the early days, of all the retailers who went online, they all said it was less profitable, and in many of them, it was attach rate, right? I can't attach enough to the order in order to help leverage the cost of the activity, right? Over time, all the work was around data analytics, the customer, and they were able to build attach rates that are as good as what they could possibly do in a store, in some cases even better. Just as we look at this longer term, the expectation would be that you would be able to use the data and really be able to help the customer, starting with the obsession around helping the customer, and in return, we will benefit by higher basket sizes over time. Thank you. That makes a lot of sense. I think one aspect of your digital, we were wondering if we could understand a little bit more. Obviously, the DriveUp & Go has been a big investment. When it comes to delivery, it seems like you might be pivoting more to third-party fulfillment, away from first-party fulfillment. If that's the case, why is that the right model, and is there any concern that you are giving up some data because of that relationship? Yeah, Kate, it's a great question. Let me separate out two things. There is the data side of it, which is about the customer order and knowing who the customer is and what the customer ordered. That's simply a matter of aligning, getting clarity around a customer loyalty number and such, we continue to capture that data and know that that customer has expanded the basket with us. That only applies in a case where the customer has chosen to go to a third party to initiate the order, right? That's one type of business. We call it our third-party business. We have a first-party business that's large and growing, and we'll continue to do that. Let me get to the delivery side of it, which is something else third parties do for us. This is a case where the customer has come to our site and generated the order, and then we, at the last moment, have decided that we are going to use company X to deliver it and drop it off. If I go back to the fundamental principle that we want speed, the only way to get speed is by having point-to-point deliveries. We cannot do a milk run in a van. We think the third-party solution provides that. What it does for them is it increases the number of trips they make in any particular one square mile for a driver, right? They are doing less miles and making more dollars. It's mutually beneficial for us, which is why we think that the last mile is going to be solved more and more by engaging with the third parties. What's amazing is that they're all getting better. They're all coming up with new ideas and technologies better than we ever would, because they're specialized in it. It works for us and them. Thank you. In the same vein, technology is going to be helping you on the supply chain side as well. It seems like you've seen a good amount of success with your micro-fulfillment strategy. Yeah the couple of stores you've had it in, and I think your plan is to have it in nine stores by year-end. Could you maybe walk us through what some of your tests have yielded so far in the first few of operation, and how are you thinking about the pace of additional MFCs longer term? Sure, Kate. The MFCs, we are very excited about it. What's fascinating is that, in the two years or so that we have been learning about the MFCs, the technology keeps advancing. Every MFC is a next version of the MFC, both from a software standpoint and a hardware standpoint, which makes it very interesting because as we expand it in modular increments, we just keep getting better solutions. What have we learned from the MFC? First, that it clearly has the potential to make a massive step change in the cost per pick. If you think about a store itself and you imagine a cost curve, you'll see the cost coming down in a particular store as the volume per store goes up, and cost per pick coming down. Then it kind of hits the limits of the physics of a store and the physics of a pick. The MFC takes that another notch down. We are learning a lot about how to assort the MFC, how to manage the pick of things you carry in the MFC and what you don't carry in the MFC. For example, the MFCs today don't carry frozen, and they will at some point soon. You learn about that. There's a lot of learning about what is the rate at which orders come in so that you can optimize the labor necessary to do all that. There's a lot of learning. Now, we have also models where we're attached the MFC to a store. In some cases, the MFC's adjacent to a store, not attached to a store, and we can play with that configuration differently. In a third case, the MFC is a standalone entity that might serve a radius. We're trying to think about how to expand the reach of an MFC. Can you think about intermediate hubs that expand the reach of an MFC? All of these ideas that are percolating, being tried, and we think this year is a year of experimentation and learning. We are at a place where we can start expanding this more robustly in different market areas. That's the journey we're going through at this time, Kate. Thank you for that. My next set of questions can kind of all be linked together. Maybe I'll start with inflation. We've seen modest inflation year to date. Typically, it's a good thing for grocery in order to drive sales. I wondered if you could talk a little bit about the inflationary environment as it is today and how you expect it to evolve over the rest of the year. Yeah. In our quarter one discussion, we had imagined that, we reflected on the USDA saying it's 2%-3%. I think it's going to be at the higher end. We'd said it's going to be at the higher end of that range, and I think that's the zone we're in. That number, the 3%, 4%, is incredibly manageable for somebody like us. In fact, in the past, when you've seen those types of numbers, grocers like us have done very well. We feel that it's in that manageable range, Kate. I maintain that perspective. Could you maybe talk about price investments in the context of inflation? Yeah. Price investments are always a big topic when it comes to grocery, but it has been pretty limited over the last 18 months just because demand has been so strong. Can you talk about price investment? At the same time, I know you have a lot of productivity initiatives as well. Is that something that can help you as maybe we get to a more normalized pricing environment that can help you with your gross margins over time? Yes. I think you're right. The conversation should begin with a point of view on gross margins. We have a belief at Albertsons that we should always have initiatives that are gross margin tailwinds. Examples of those are improvements in shrink and the technologies that we're investing in to improve shrink. Examples of that are the supply chain program that we have. It's a robust program cutting across the company. Another example is we're buying the products differently. Making sure that we can get the best cost of goods and such. There are all of these initiatives. Own Brands expansion is another initiative that drives gross margin up. We have these tailwinds for gross margins. On the other side, we look at multiple price areas. There's several hundred price areas in the company, and we're always looking at it on a week-by-week basis to gauge where we are from a value standpoint relative to competition. The way we gauge whether the value is working or not is to test whether we're gaining share in both units and dollars. The unit share gain is very important. Then we make adjustments as we need to every week, and we do that all the time. We try to manage both those ends of the spectrum, Kate. It doesn't work unless you have this continuous pipeline of margin tailwinds that help you manage this side of it. We feel good about both the initiatives we have, but also the methodologies that we have to take care of this as we go forward. I'm sorry, Sharon, go ahead. Can I add one thing to that? I realized in a previous meeting that the understanding of what Vivek said regarding how we can buy better. Historically, we are several banners, right? Many banners under one umbrella. Historically, the banners were buying on their own. In other words, when they were dealing with the major manufacturers, they were buying as a $6 billion company or a $12 billion company or whatever they might be. Earlier this year, this was a massive project that Vivek undertook with the teams, and it is only this year that they have even started to use their national scale in that arena. Just as to put some teeth into something like that, in order to get order of magnitude, this is a very significant change for the company, and it could be a beginning of many things that may work better that way. The magnitude of that is important to understand, and many people may or may not have a clear view of that. No, that's very helpful. Thank you. Actually, one housekeeping thing. For those listening in, we are taking questions. You can just type them into your screen, and it comes to my email. There's a little bit of a delay, so I'm asking for questions now as we get towards the back end of our chat. In the meantime, we've been asking four questions to all of the companies that have presented at our conference the last two days. We've touched upon a lot of it, but just to maybe summarize things. When you think about consumer demand going forward into the back half of the year, would you describe it as accelerating, decelerating, or the same as what you saw in the first half of the calendar year? Kate, for us, if we thought about it from a fiscal year standpoint, which goes to March of next year, end of February next year. When we planned the year, we imagined that there will be some deceleration in sales as you go into the second half of our fiscal year, which is most of the second half of the calendar year. That's how we had prepared ourselves. That's the ingoing assumption. As a result, we also wanted to make sure that a lot of our productivity initiatives, and they are, they're going to be yielding more towards the back half of this year. That's the ingoing assumption as we prepare this year. Great. The second question goes back to digital. How do you think about digital penetration in 2022 relative to what we saw in 2021? The rate of digital growth, there was hyper-growth in 2020, and I think many people imagined that that growth rate might continue. As you saw in Q1, while we added more customers to e-commerce, the baskets dropped. There's continued customer growth. My belief is that it's going to get back to the growth rates that we'd seen in the past, but maybe a little more than that, only because all of us are investing in it. At the end of the day, it's a good thing. It's a good thing for the customer, it's a good thing for us, because we just love the digital engagement we get with the customer. As Sharon said, there's many things you can do that you cannot necessarily do in a physical environment. Thank you. The third question, again, we touched upon it a little bit. Just with regards to promotions in 2022, will it be higher, lower, or the same versus what we've seen in 2021? I think it's going to be better. Not higher or lower. The reason is this, that we certainly have put a lot of energy into doing the right promotions enabled by technology and data. To me, I think we are in an industry which has believed in the quantity of promotions rather than the quality of promotions. We are changing that, and I'm sure others are changing that too. The second thing that's changed is that the promotions are more digital. It's on your phone, and it's, as a result, personalized. I think we're going to be entering an era where it's sharper, better promotions than what we've seen in the past, and not necessarily the metric, is less, I think, about whether it's more or less in the total promotions. Our last question, which may or may not be that relevant for you, but what do you expect for inventory growth? Will it be faster or slower than sales in the back half? Yeah. I have a hard time imagining that the supply. The bottom line is, I think the supply of many different categories has not caught up to demand. If the supply came in, the sales would go up. I think that'll get normalized as we go forward. I'm actually surprised that the supply hasn't come on. If you think through it, I think the challenges that many industries are seeing in getting products, same thing with the suppliers and the equipment suppliers to the suppliers. I don't imagine it fundamentally changing as we go into the rest of the year. Great. Thank you. I did receive a couple of questions from the audience. I've received four of them, and they're all the same question. To the extent that you can answer, there was another grocer that reported results this morning with a good amount of gross margin pressure. I think last quarter, to be fair, there was some gross margin pressure as well, maybe not to the same degree. It seems very different from what you reported last quarter. Maybe could you walk through maybe what some of the difference is on your approach to why your gross margin held up better last quarter? I can't speak to the differences versus anybody else, but Kate, I can only re-emphasize that we believe in this notion of gross margin tailwinds. We act on this notion of gross margin tailwinds, and we have initiatives, substantial initiatives, that drive gross margin tailwinds, right? These are not initiatives that are an initiative that begins and ends in a quarter. These are multi-month, they can span more than a year in many cases. Frankly, some of these, I don't even know where the finish line is. We continue to make those improvements. I guess just a quick question to follow up on my end is, we talked about price investments before. What are you seeing with price gaps? I think that's really the name of the game at the end of the day, is it's relative. Do you feel like there's been a meaningful change in price gaps over the last six months? The metric, again, I go back to, Kate, is the market share gains on dollars and units, and then we track the price gaps. As I said, in Q1, there hasn't been a material change in pricing behavior in the marketplace, right? I think we're all challenged by the supply constraints, and we're all, frankly, better at it, in my opinion. Great. Thank you. With that, we have a couple of minutes left, no more questions in the queue. I want to thank you, Sharon and Vivek, for joining us today. It's always a pleasure to see you. Thank you to the audience for dialing in and sticking with us late into a Friday. Thank you. Have a good weekend. Thank you, Kate. Great. Thank you. It was great to see everyone. Great to see everyone. Take care.