Albertsons Companies, Inc. (NYSE:ACI) Q1 2022 Earnings Conference Call July 26, 2022 8:30 AM ET

Company Participants

Melissa Plaisance - SVP, IR

Vivek Sankaran - CEO

Sharon McCollam - President and CFO

Conference Call Participants

John Heinbockel - Guggenheim

Michael Kessler - Morgan Stanley

Paul Lejuez - Citi

Edward Kelly - Wells Fargo

Rupesh Parikh - Oppenheimer

Ken Goldman - JPMorgan

Michael Montani - Evercore ISI

Scott Mushkin - R5 Capital

Robert Moskow - Credit Suisse

Spencer Hanus - Wolfe Research

Melissa Plaisance

Good morning, and thank you for joining us for the Albertsons Companies' First Quarter 2022 Earnings Conference Call.

With me today from the company are Vivek Sankaran, our CEO; and Sharon McCollam, our President and CFO. Today, Vivek will share insight into our first quarter results as well as review our progress against our strategic priorities. Sharon will then provide the financial details of our first quarter before handing it back over to Vivek for some closing remarks. After management comments, we will conduct a Q&A session.

I would like to remind you that management may make statements during this call that are or could include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not limited to historical facts but contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. These risks and uncertainties include those related to the COVID-19 pandemic.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are and will be contained from time to time in our SEC filings, including on Forms 10-Q, 10-K and 8-K. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise.

Please keep in mind that included in the financial statements and management's prepared remarks are certain non-GAAP measures, and the historical financial information includes a reconciliation of net income to adjusted net income and adjusted EBITDA.

And with that, I will hand the call over to Vivek.

Vivek Sankaran

Thank you, Melissa. Good morning, everyone, and thanks for joining us today.

In the first quarter, our teams continued to deliver strong operating and financial performance across all key metrics. We want to thank all of our associates for their ongoing service to our customers and communities. We are so proud of their resilience, agility and passion for excellence in this challenging operating environment.

In Q1, ID sales increased 6.8% and we continue to gain market share in Food and MULO. We also maintained our number one or number two position in 68% of the 121 MSAs in which we operate. In addition, we delivered year-over-year adjusted EBITDA growth of 9% to $1.42 billion and adjusted EPS of $1 per share.

Q1 digital sales increased 28% year-over-year as our digital offerings continue to resonate with customers, and we further optimized our cost to serve. Also in Q1, we continue to leverage our digital investments. Omnichannel households increased 34% year-over-year, with retention rates over 90% and they spend 3x more than an in-store-only shopper.

At the same time, in-store transactions also increased as we continue to invest in new merchandising initiatives and our Just for U Loyalty offerings. Just for U Loyalty members increased 16% to 31 million, with actively engaged members reaching an all-time high and spending 4x more than a non-actively engaged member. Like omnichannel households, retention remained at over 90%.

These growth trends affirm our belief that engaged and connected digital and in-store experiences will result in long-lasting customer relationships and industry-leading growth, the underpinnings of the next phase of our transformation strategy.

Customers for Life, which we introduced last quarter is based on placing the customer at the center of everything we do. We want our customers to interact with us daily, not only to shop, but to consume relevant content about food, plan meals or find information to inspire their well-being. When we laid out our fiscal 2022 priorities in our last earnings call, we shared that we are investing in four strategic priorities that I will update you on now.

First, we are deepening our digital connection and engagement with our customers, which supported our 28% digital growth in the quarter. This growth was driven by an expansion of our services and innovation.

For example, we were operating 2,075 DUG stores, Drive Up & Go stores at the end of Q1. Our focus on speed is paying off. For example, our express delivery two-hours or less is now available to 74% of our households and penetration of this option has increased fivefold versus prior year.

During Q1, we launched new merchandising features in our unified mobile app, providing an increasingly personalized and curated digital experience. Since the launch, we've seen significant growth in the number of new users and improvements in our iOS and Android App Store ratings.

We also saw increased digital engagement driven by our meal planning tool launched last quarter. The meal planning capability inspires our customers to engage in our app more frequently as they plan, shop and prepare the recipes we offer, which can be filtered by dietary preferences such as carb-conscious, vegetarian and pescatarian.

In Q1, we had over 1.2 million unique visitors explore our meal planning tool, and over 40% of them used to add to shopping list functionality in the app to create their shopping list. We also continue to invest in the Albertsons Media Collective using industry-leading technologies to build a platform that is easy-to-use, transparent, modern and measurable. We transitioned in-house. And while we are in the very early stages of onboarding clients and agency partners we are pleased with the growth in the business.

Second, we are differentiating our store experience but a deepening engagement through the use of technology to automate task management thus creating more time for our team members to assist our customers despite a difficult staffing environment. We're also simplifying the end-to-end shopping journey by improving localized assortments and adjacencies of complementary products, installing more checkouts and adding grab-and-go sections to ensure a convenient and easy experience. In support of our omnichannel growth, we are evolving store operations, building out staging areas for Drive Up & Go, adding way rooms for easier picking and installing additional MFCs.

Third, we are enhancing what we offer by expanding our own brand products and elevating our distinctiveness in Fresh. We are actively leveraging the strength of our Own Brands assortment and our ability to manage Fresh hyper locally to give customers great choices in the inflationary environment we are in.

In Own Brands, our sales penetration reached an all-time high at 25.8% and Own Brands sales outpaced national brands in several categories. In the quarter, we launched 59 new items, including new keto options, and we expect to launch a total of approximately 425 new products this year. While much of the growth in Own Brands is related to increases in underpenetrated markets and product innovation, the breadth of our Own Brand's portfolio from opening to premium price points also provides great value to customers who are trying to stretch their budgets.

In Fresh, our in-store processing capabilities allow us to tailor the selection, the cuts and package sizes to fit local demographics and economic circumstances. We are giving customers choices with opening price points and large value packs. Our innovation to is gaining traction. For example, we now have rolled out our ready meals, our ready-to-eat, ready-to-heat and ready-to-cook meals to approximately 600 stores and expect to be in more than 1,100 stores by our fiscal year-end.

Both we are modernizing our capabilities in part through an improved supply chain, enhanced data and data analytics and ongoing productivity, all built on the foundation of being locally great and nationally strong.

In supply chain, we are currently increasing automation in two of our largest distribution centers and expect to continue to roll out similar automation across our network over the next several years. We've also begun the progressive rollout of a new enterprise-wide warehouse management system that is expected to be fully implemented network-wide by fiscal 2025.

Both these initiatives are expected to materially improve our ability to differentiate our fresh quality to improve in-stock conditions, lower our cost to serve and improve our end-to-end supply chain data analytics capabilities.

In our stores, we are rolling out AI-based and machine learning technologies to improve the customer experience in self-checkout, enhanced freshness and product availability in produce and reduce shrink. In addition, we have continued to modernize our technology through cloud migration and the upgrade of our edge computing platform.

And finally, we are further embedding ESG throughout our operations. We launched our new ESG framework in April. Recipe for change is focused on maximizing the company's positive impact across four pillars; planet, people, product and community. We have a long history of driving sustainability within our operations and are committed to leveraging our resources and expertise to support the communities we serve and the planet we share.

Also in April, we began utilizing electric terminal tractors in our distribution centers. In place of diesel-powered options, and we have plans to expand our fleet later this year. We continued to support hunger relief in the communities we serve through food bank donations, and a $7.7 billion fundraiser supporting our Nourishing Neighbors Initiative. These funds will provide over 30 million meals to people in need.

I will now turn the call over to Sharon to cover the details of our first quarter and our updated 2022 outlook.

Sharon McCollam

Thank you, Vivek, and good morning, everyone. It is great to be here with you today.

Our first quarter results were strong across all key metrics. Identical sales were up 6.8% with momentum continuing into Q2. Market share gains in both dollars and units together with inflation drove the better-than-expected results.

Our Q1 '22 gross margin rate was 28.1%, excluding fuel and LIFO expense, the gross margin rate was lower than Q1 '21 by 27 basis points. This decrease was driven by fewer COVID-19 vaccine versus Q1 last year. And consistent with our expectations for the quarter, excluding fuel, LIFO and fewer COVID vaccines, our gross margin rate was slightly ahead of the first quarter last year due to ongoing productivity improvements, offsetting higher product and supply chain costs.

Our selling and administrative expense rate was 25.2% this quarter. Excluding fuel, the SG&A rate decreased 15 basis points compared to last year. This decrease was primarily driven by lower COVID related expenses and the benefit of productivity initiatives. These decreases were partially offset by investments related to the acceleration of our digital and omnichannel capabilities, market-driven wage rate increases and higher depreciation.

Interest expense in Q1 '22 decreased $14 million to $139 million. This reduction was primarily driven by a lower outstanding debt balance. Q1 '22 adjusted EBITDA was $1.42 billion compared to $1.31 billion last year. This $110 million increase was primarily driven by the flow-through from our 6.8% ID sales increase and benefits from our productivity initiatives.

Q1 adjusted EPS was at $1 per fully diluted share compared to $0.89 in Q1 '21. I'll now discuss Q1 '22 cash flow and capital allocation. We ended Q1 '22 with $3.2 billion in cash, which provides us with significant liquidity to invest in growth and return cash to our shareholders. Capital expenditures in Q1 were approximately $614 million with the majority of our investments being made in the modernization of our store fleet and ongoing investments in our digital and omnichannel transformation. We also returned $63 million to our shareholders through common stock dividends. Net debt leverage at the end of the first quarter was 1.0x compared to 1.5x in Q1 '21.

Turning to labor relations. We have continued to reach settlements that are providing an overall wage and benefit package that rewards our team members for their significant contribution and strengthen our competitive positioning in the markets we serve.

During Q1, as previously shared, we settled retail contracts in both Northern and Southern California, Seattle, Las Vegas and Shaw's. And earlier this month, we reached a tentative settlement on the retail contract with Jewel.

I'd now like to discuss our financial outlook. As we look forward to Q2 and the rollout of our Customer for Life strategy, we do so with continued momentum as evidenced by our Q2 to date mid-single-digit ID sales increases. We are gaining market share and continue to see signs of a healthy grocery consumer who is engaging broadly while we and the industry are seeing a bit of trade down, with in and out of some Fresh categories as consumers stretch their budgets. Our share gains in Fresh continue.

With that as our backdrop, we have raised our fiscal '22 outlook, assuming the following; we now expect fiscal '22 ID sales to increase 3% to 4%, up 100 basis points versus previous guidance of 2% to 3%, driven by continued inflation and market share gains.

In the second quarter, we expect ID sales to be above the full year range and in the back half, below due to cycling heightened inflation in the back half of fiscal '21. We are also increasing adjusted EBITDA by $100 million to the range of $4.25 billion to $4.35 billion, versus previous guidance of $4.15 billion to $4.25 billion. Our gross margin rate, excluding fuel and LIFO we are expecting core business gross margin rate expansion driven by productivity tailwind.

Offsetting this, however, is a continued expectation of a 65% decline in COVID vaccinations and related margins, the impact of which will be greater than the core business margin rate expansion. Therefore, factoring in both drivers we are expecting the gross margin rate, excluding fuel and LIFO to be down slightly in fiscal '22.

In selling and administrative expense, we will continue to incrementally invest in our digital transformation, the Albertsons Media Collective and the modernization of our supply chain, which will increase our SG&A rate in fiscal '22, but drive growth and productivity longer term. As an example, productivity tailwinds are currently substantially offsetting a significant increase in hourly wages and benefits for our frontline associates in this year's outlook.

That brings us to adjusted EPS which we now expect will be in the range of $2.80 to $2.95 per fully diluted share, up $0.10 versus previous guidance of $2.70 to $2.85 per fully diluted share. To support this outlook, we expect capital expenditures to remain in the range of $2 billion to $2.1 billion. Additionally, as it relates to productivity, we are on track to deliver against our three-year commitment of $1.5 billion by the end of fiscal '22 and are already beginning to roll-out action plans to deliver the incremental $750 million between fiscal '23 and fiscal '25 that we shared with you last quarter.

And finally, I'd like to provide a brief update on our ongoing review of strategic alternatives. While we have not yet reached the conclusion, we are pleased to share that as part of the review, our third-party appraiser has completed our five-year compliant real estate appraisal and the overall value of our real estate portfolio has increased $2.5 billion to $13.7 billion, representing a $4 per fully diluted share increase in asset value on a pretax basis versus the 2019 appraisal at $11.2 billion.

I will now turn the call back over to Vivek for closing remarks.

Vivek Sankaran

Thank you, Sharon.

We are pleased with our first quarter results and the momentum we are seeing today. As we look ahead to the balance of the year, we are thoughtful about the macro environment and the possible implications it could have on consumer behavior. Our top-tier performance over the last several quarters, even with periods of high inflation, has demonstrated, we are a stronger company today than we were pre-pandemic and the initiatives that have driven our strong results give us confidence in our future.

First, our Customers for Life strategy is working. We are adapting quickly and we are executing well. We are adding customers and engaging customers more frequently through our loyalty program and our e-commerce offering. Customers spend more with us and stay longer with us because we're able to tailor assortment and promotional offers for them.

We are giving customers great value choices by adapting our Fresh offerings literally every week in every market and through our strong own brands portfolio. Our stores are operating more effectively and efficiently as our supply improves and our new technologies take hold, and we are proactively managing our costs.

Given recently settled collective bargaining agreements, we have visibility into our labor costs into the future. And our productivity programs, both old and new continue to allow for investments and provide the installation for our earnings commitments in the event the macro situation becomes more challenging.

We believe this puts us in a strong position to continue to gain market share and sustain our track record of sales and earnings growth. I would like to again thank our 290,000 associates for their loyalty and dedication to our customers and communities. They are the ones who make all of this possible.

We will now take your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, thank you for joining us for the Albertsons Company's first quarter 2022 earnings conference call. [Operator Instructions] The first question comes from John Heinbockel of Guggenheim. Please go ahead.

John Heinbockel

Hi, guys. I want to start with how you think about the market share opportunity from food away from home right in an environment where menu prices continue to go up? I don't if you can size that opportunity in your mind, how much of that will be driven by ready meals, right, versus ingredients and how do you kind of go out and maybe market differently in this environment to educate consumers about your offering?

Vivek Sankaran

Hi John, good morning. John, here's how I'd characterize what we're seeing in the market. I think I would argue that consumers are still eating a lot at home, right? And possibly because they're working at home, possibly because of some of the things you pointed out about inflation outside. In restaurants, sometimes it's hard to get into restaurants. And the way I see that is because of the portfolio. Our ready meals is doing so well, we just launched a sandwich program. And the sandwich program that so made sandwiches, they're doing so well. And our convenient salads in our stores are doing so well.

So we think there's one of two phenomenons happening. One is people working at home and picking up things to have lunch at all to convenient things so that they can have a quick lunch at all. And we also see the types of things that you would buy if you were cooking at home. All the meat programs that we have, oils, the things that you would use to cook at home.

So we still see that trend going. And I think everything we're doing on the app to enable meals, to provide more meals is also working for us. You just - if you go to our app, we just launched a meal capability where you can pick your meal and it populates the items that you want, and we're seeing a lot of traction and things like that, John.

John Heinbockel

Okay, great. And then maybe second, totally different topic. Maybe share your philosophy or what you can share the Board's philosophy with regard to real estate ownership, right? You mentioned the $13.7 billion. A lot of big-box retailers, right, view real estate as a strategic value, right, for control reasons and a lot of other factors. What's the philosophy on your end as to ownership?

Sharon McCollam

Thank you, John. Our philosophy on real estate is exactly the way you described it, which is that we believe that the real estate we have is a strategic asset for the company. There has been a history in the company of occasionally having a transaction where they might do a sale leaseback of a percentage of the real estate that we have. That was about three years ago. I believe the last time they did that, and it was relatively small.

But despite having the real estate appraisal, we are very excited to see how well we've invested in the real estate. You saw that we were up about $2.5 billion, which if you put that on an asset value to the stock price on a pretax basis is about $4 a share. So it was an impressive increase in the valuation. But we do recognize the strategic value of the real estate, and we'll be very thoughtful about that as we continue to consider all of the strategic alternatives that we have in front of us.

John Heinbockel

Okay. Thank you.

Operator

Thank you. [Operator Instructions] The next question comes from Simeon Gutman of Morgan Stanley.

Michael Kessler

Hi guys. This is Michael Kessler on for Simeon. Thanks for taking my questions. I wanted to ask first about inflation and units or consumption, how did both of those trend in the quarter, I guess, even sequentially incrementally versus what you were seeing a few months ago? And then thinking about the pass-through of higher costs into retail pricing, how that's going, if there's any change in how you're viewing that pass-through dynamic and what you're seeing from the competition? And then any sense of inflation outlook for the rest of this year and potentially even in the next year as we're starting to hear a little more speculation about maybe some commodity deflation coming in?

Vivek Sankaran

Simeon, first, let me - if you don't mind, let me just give you a little bit about the consumer backdrop that we're seeing because that's important for me to characterize what we're then seeing with inflation. I don't want to generalize, but I'd say there's two things that we're seeing.

One is the consumer is clearly trading down. And so you can think of in rice, beans, oils, buying bouquets instead of arrangements and so on. And so we're seeing that on one hand. But the good news is they're trading down into a lot of our Own Brands on that front.

The second thing I'd point out is that we have consumers uncharacterized the consumers again, not every segment, but there are consumers who have cash but are very value conscious, okay? And so the behavior we see from them is they're buying more - they're trading down on daily needs, but they're also buying a lot of store-made sandwiches and meals, right? They are buying more hamburger, but they're also buying organic needs. Are they buying premium beer and they're buying - and people are buying lower-priced beer, right? And so they're buying one avocado they're buying backs of avocado.

So we're seeing this behavior where people are value-conscious but are willing to spend on the things that they care about. So when we think about - going back to your question, we're seeing the kind of inflation that you would expect in the marketplace - that you're seeing in the marketplace. I think retail CPI was like 10.9% or so for the quarter. But - and if you see our numbers, yes, we are seeing some unit decline. But I'll also tell you that our tonnage is better than our units because it's sort of the other bag of avocado is one unit, right? Instead of three avocados that they have bought in the past. So we're seeing some of that.

Our expectation on inflation when we started the year was that the inflation would moderate quite significantly in the back half of our calendar year, right? And we don't think it's going to moderate as quickly, which is why we've raised our forecast a little bit, as you see on the top line. But what we're seeing though is that the overall behavior of the consumer is that they're engaging on the book ends with us and in the middle. And we are working that. I mean our assortment allows for that. If somebody wants the higher end of the product, they've got it, somebody wants an opening price point, they've got it around stores and that combination is working well for us in driving units and margins. As you know, the margins are pretty strong where they start engaging in our own brand portfolio. Does that help, Simeon?

Michael Kessler

It does. Yes. Thanks. This is Michael, by the way, Simeon, he was - he didn't make the call, but all good. No problem. But that's helpful. Thank you. And maybe a follow-up to actually, to John's question, was asking about food away from home. And maybe just a broader one on market share. There's the component of food away-from-home demand shifting into food at home, and then there's a component of people trading down within food at home, maybe to lower price or discount channels. How do you view your positioning I guess, in the context of those two dynamics, which maybe to a degree, are playing out? And if you can maybe speak to where you think the market share gains are coming from, and we heard from one of the largest sellers of food in the country yesterday that they also think they're gaining share. So curious where you think it's coming from too. Thank you.

Vivek Sankaran

Yes, Michael, I'd say the first thing I'll note is that our market share is positive in Food and MULO in dollars and units. And that - the last thing I said is very important to us that we are gaining market share in units. If - when people are eating more at home, if they're, in fact, trading out of food away from home or trading into food at home, and they're eating more at home, the Fresh portfolio really, really matters.

And so we think we are gaining market share first because people are coming in for a broad Fresh portfolio. People are coming in for the bookings of the assortment, if that's what they choose. We've got it. And so we - our observation is that we're gaining market share clearly within the world of retail. And it's going to be very locally from all the competitors that we track locally, Michael. And I think you know the names.

Michael Kessler

Yes, got it. Okay. Thank you for that. Appreciate it. Good luck.

Operator

The next question comes from Paul Lejuez of Citi.

Paul Lejuez

I just want to be clear that on that 6.8% ID sales number, how much of that was passing through higher prices to the consumer? And then just ask my follow-up now. Performance of Own Brands, while the increase overall compared to that ID sales number. And you said that they performed Own Brands outperformed national brands in several categories. Curious where Own Brands are outperforming versus underperforming and what you think makes up that difference? Thanks.

Sharon McCollam

Do you want to speak to the Own Brands?

Vivek Sankaran

Yes, I'll speak to the Own Brands. Paul, yes, on the Own Brands, what happens in these markets is if a national brand is not a strong national brand, people migrate very quickly to the Own Brands. So you'll see like categories like oils and shortening and rice and beans and even in some meats and deli meats and so on, we're starting to see people move very quickly to the Own Brands.

I'll remind you that our Own Brand portfolio is 1,000 basis points better margin than national brands. So even a small movement into Own Brands makes a meaningful difference in our gross margins. I think Own Brand's penetration went up 30 bps, right, this quarter, right? So that's a substantial change and the contribution to the gross margin.

Sharon McCollam

And then your question, Paul, on the 6.8% ID sales. Clearly, Vivek mentioned that retail CPI was in the high 10s for the quarter. And we anticipated coming into Q1 that we would start seeing some breakage in units as well as government stimulus has been rolling off. So all of that contributed - market share gains contributed to the ID sales as did the opportunity for us to continue to grow the Own Brand business. We did go up 30 basis points of penetration on Own Brands went up from 25.5% last year up to 25.8% this year, and we expect that to continue going forward. So that is the answer on your 6.8%. Of course, inflation helped drive that number. Some of the offsets were some breakage units, and we also saw government stimulus go down.

Paul Lejuez

Thanks Sharon. Thank you for that. Good luck.

Operator

The next question comes from Edward Kelly of Wells Fargo.

Edward Kelly

Hi, good morning, everyone. I wanted to go back to the volume question and the question around sort of elasticity. It does look like this quarter with double-digit inflation elasticity picked up a bit. Curious as to whether that's what you seeing as well? I know you mentioned sort of tonnage. But then as we look forward now and we think about decelerating inflation?

We - looks like we could be entering a period where there's very low comp growth. And I'm curious as to how you think the industry acts in that environment from a promotional standpoint and how, if at all, it would change how you act from a promotional standpoint?

Vivek Sankaran

Yes first Ed, I think the inflation is decelerating, but there's still inflation, right? I think we should remember that and it may not be 10.9%. But remember, we've operated business historically that has been of 1.5%, 2% inflation. And we think as a business, we're so much stronger than pre-pandemic that even at 1.5%, 2% inflation, we're going to have much better comps then we went into the pandemic with, right.

So fundamentally, I think there's more strength in the business to do that. But the inflation is going to be slightly higher than - the old numbers, I think. The second thing, in terms of elasticities, the elasticity, if I go back to my history in this industry in CPG and so on, the elasticities are so much better than we typically used to see in the past then - but in that sense, there are elasticities, right.

I think - and it's shown up in two ways. One is maybe people buying a little less of something or clearly people trading down. I would expect that if that's the behavior, then people will trade back up or buyback more if the inflation starts dropping, right. So if it goes one way - in one direction it will go the other way in the other direction. And so my sense is the volume should also start coming up as the inflation moderates.

And then I think the other thing I'd point out is that everything we are doing is driving stickiness, right. We are very deliberate about saying when we get a customer, we want to engage them and keep them, get them to spend more with us. And what's helping us do that is the digital engagement that they have and the e-commerce business that continues to grow. Once we get them, we're able to personalize and keep them. And that's a market share gain that's working for us, share wallet.

Edward Kelly

Okay. And then I just wanted to pivot and this question maybe is for you, Sharon but if we look at sort of SG&A or OpEx dollar growth this quarter was about 5% or so. And I know you're making investments into the business. There's obviously been some stuff that's happening from a labor standpoint on contract renewals. How do we think about SG&A growth both for sort of like -- this year? And then even sort of like going forward with things like labor rate inflation that gets invested and embedded into contracts that type of stuff. So just kind of curious as to how we should be viewing the growth of that line item going forward.

Sharon McCollam

Yes, so Ed, we do anticipate continuing to invest in several key areas our digital and omnichannel of course. We're also investing in the Albertsons Media Collective, which of course, is a longer-term revenue driver for us. But today, we are just beginning the investments in the Albertsons Media Collective. And then the modernization of our supply chain, which is going to bring us substantial cost savings in the future.

So those are the big areas where we are investing in SG&A and in the outlook that I gave on adjusted EBITDA for the year, I gave a little color on SG&A. And those were the areas that we said we would invest and we did expect that in the back half by the end of the year that we would have a rate deleverage on SG&A due to those investments.

Q1, we leveraged the rate, but that was heavily driven as it laid out in the press release by significantly lower COVID-related costs, and those are nothing to do with the vaccine. We're talking about the cost that we incurred in Q1 of 2021 in our stores. So that would be rate leverage in Q1, and that was Q1 last year with our largest quarter of COVID store-related investment. So I anticipate in the balance of the year to continue to see us make these investments.

And I expect these investments, by the way, to bring us returns. Now offsetting that, which I also said in the prepared remarks earlier, is productivity. We saw the highest increases we have seen in frontline labor in our history, quite frankly in 2022. And yet our productivity savings that we are continuing to identify and capture have virtually offset that increase this year, and we expect to continue our productivity programs, which I also mentioned.

We just announced last quarter another $750 million productivity program from 2023 to 2025. So while we are making these investments, we are also funding the investments through productivity and expect to continue to identify increasing productivity and many of the investments by their very nature will create productivity.

Edward Kelly

Great, thank you.

Operator

The next question comes from Rupesh Parikh of Oppenheimer.

Rupesh Parikh

Good morning, thanks for taking my question. So, I wanted to touch on the promotional and competitive backdrop. Are you guys seeing any changes of note right now on the competitive side? And then as the year progresses, just given increased consumer sensitivity, do you expect it to become a more promotional environment later this year?

Vivek Sankaran

Hi, good morning Rupesh, No, we're not seeing a material change in the marketplace on that, Rupesh, but I've said this before. And I think we're not going to come out of this going back to the old form of promotional intensity. And the reason behind that is, I think all of us are one, better at the use of technology and we're all much more digitally engaged in our promotions. And so yes, we are promoting, but we're promoting very deliberately in an extremely targeted fashion to - giving people the promotions that matter for them.

And you will continue to see that, in my opinion, right, as we go forward. The other thing is, I think you should also know that while supply is better, supply is vastly improved, supply is not where it used to be, right? And in many categories, we've all got to a steady state of managing it, and that's also going to throttle promotions to quite a bit or quite an extent over at least the next six to eight months.

Rupesh Parikh

Great, and then maybe one follow-up question. Just on the e-commerce front one of your competitors called out changing consumer behavior, I think towards more pickup. Are you guys seeing the same thing on the e-commerce side, shifts in consumer purchasing behavior online versus in-store?

Vivek Sankaran

Rupesh, did you say pickup?

Rupesh Parikh

Pickup more pickup versus delivery?

Vivek Sankaran

Yes, I'll tell you two things that we've always believed in that pickup matters and speed matters in delivery. And so the two things that are working for us is, one, we've got more pickup in our stores [2075] stores at the end of Q1. But we've also expanded two-hour delivery and same-day delivery. And we're getting tremendous traction with two-hour delivery with our customers.

And so - and the nice thing about that is we're leveraging our stores to do that. Sometimes it's just putting a wareroom in a store to do that, which is a very low CapEx. I mean it's more shelving in the back of the store for the fast-moving items. And that - those two things are working for us.

Rupesh Parikh

Great, thank you I'll pass it on.

Operator

The next question comes from Ken Goldman of JPMorgan.

Ken Goldman

Hi, thank you. Sharon, do you have an update on how to think about which of your multi-employer pension plans might be backstopped by the government. I think the U.S. recently put out some papers on the subject, but I might need some kind of advanced degree to fully understand them. I'm just curious if you have any additional thoughts at this time?

Sharon McCollam

Yes, so we do have an update. First of all, what you're speaking to Ken, and thank you for bringing it to everybody's attention is the American Rescue Plan Act, it's called ARPA and it was during COVID, it was put out there to provide special assistance to keep these multi-employer pension plan solvent. So we participate in about 90% of those plans. Now keep in mind that we do not have liability for these plans.

And that is the most important thing to take away from this. But for those plans that we participate in the 10-K, we disclosed that we had about $4.9 billion, there was $4.9 billion of liability in those plans. And after tax, it was about $3.7 billion. And as we look at this, we have already started to receive we've applied and received funding for that.

And we anticipate that of that liability, about half of it would be covered by ARPA up to about half of it would be covered by ARPA. So yes, it is out there. It got settled. It's acting and moving forward. And again, we have 16 plants, which is 90% of our underfunding that is in that category.

Ken Goldman

That's very helpful. And then Vivek, more of a broader question. You said in your opening comments, and I think you said this consistently, but you said that Albertsons faces a challenging operating environment. And I do appreciate that by nature right, the industry you are in, is perpetually challenging. But I guess I'm not quite sure why today should be considered particularly tough, right? You have rational competition?

You have actions that are taking share, you're offsetting high labor inflation with productivity, you've low elasticity I guess one of the questions I get sometimes is? Why aren't these considered the good old days, all things considered. It wasn't that long ago that supermarkets were losing a lot more share to mass. We had a historically high level of deflation so sorry to be overly worried. But I'm just curious what's challenging today relative to prior years in your mind?

Vivek Sankaran

Ken good morning. I think the - here's how I'd characterize it. You're right. I think our sector and we, in particular, we are doing really well relative to where we were pre-pandemic. The pandemic and the initiatives that we have in place have accelerated so many different things we're doing. We're gaining customers, we're keeping them. Our portfolio is working with better and execution. We're driving stickiness.

I have yes, scores I mean, we just - our pharmacy, NPS scores last year, 54 now 81.5. And guess what, we're adding scripts every day in our pharmacy. So there's, a lot of things going well. What's challenging? The challenging part is the uncertainty. And the way we have to deal with that uncertainty is by being incredibly local and incredibly nimble. And I'm so proud of our teams for doing that, right and that's one challenging piece.

The second challenging piece is Ken we all thought COVID is going away. It's not yet. So we still have the timing around. It causes disruptions. It's causing disruptions and - it's not like it was before, but we still have those uncertainties to manage. That's the part that I characterize as challenging. And we don't know where - I mean this inflation - so far, I think because of our portfolio. And the way we're executing, we are managing through this inflation very well.

And I think we all have in the back of our minds what the - how the consumer might behave if this thing keeps going, right. So those are the types of things we're navigating. It's more the uncertainty than anything else.

Ken Goldman

Great, thanks so much Vivek.

Vivek Sankaran

Thank you, Ken

Operator

The next question comes from Michael Montani of Evercore ISI.

Michael Montani

Hi, good morning, thanks for taking the question. I wanted to ask, if I could first off, in terms of the ID sales. Could you just clarify was the actual number of transactions up or down in the quarter?

Sharon McCollam

Yes, in order to drive that ID trends, we don't quantify, but transactions were absolutely up.

Michael Montani

Okay got it.

Sharon McCollam

And when, we talked about the fact that we are seeing a return Michael of in-store traffic.

Vivek Sankaran

Yes, adding households and adding transactions.

Michael Montani

Understood. And then if I could just follow-up on the guidance for a moment. So for the next three quarters, it looks like it's implied about a $200 million decrease in EBITDA year-over-year versus the $100 million increase year-over-year in 1Q. And understand there's, cross currents going on, obviously, lower ID sales as well?

But just help us to walk through that in terms of the productivity agenda sounds good, but then also you've got basically less incremental volume forecast. So is it consistent promotionality that you're assuming through the year and just kind of why is that the right outlook?

Sharon McCollam

Yes, keep in mind, Michael that COVID vaccination, 65% reduction in COVID vaccinations in 2022 versus 2021, and recall that there was a big increase that occurred Q2 will be our smallest quarter where - in 2021, but then Q3 and Q4 started to re-escalate, and that is hitting us very hard in Q3 and Q4.

Michael Montani

Okay, thank you for that.

Operator

The next question comes from Scott Mushkin of R5 Capital.

Scott Mushkin

Hi guys, thanks for taking for taking my question. So I guess I wanted to look at - when I think about what the pushback in owning Albertsons right really from the IPO pensions, which we covered already. And I think that's obviously a big plus. The ownership overhang which I think you guys addressed a little bit. And then the third and was a major one was pricing. Everyone - and this hasn't come up really that much on the call. But it does seem that you guys continue to invest part of your savings and narrowing the pricing gap?

At the same time, and I don't know how long it's going to last, certain competitors clearly have enormous pressures on their business, whether it be an omnichannel build-out or general merchandise problem. So how should we look at this pricing gap as you go forward? Do you think it's something you can continue to narrow and kind of take that off the table as a concern or is that something you think is going to widen out again when the competitive environment changes?

Vivek Sankaran

Good morning Scott.

Scott Mushkin

Good morning.

Vivek Sankaran

To talk about pricing, first, you've got to believe that you're going to have gross margin stability in the business. And we've always talked in the past about having tailwinds on gross margin and for example, assortment. So more of Own Brands more store-made products that we sell, the better the gross margin promotions. We're putting a lot more technology into our promotions. It's a lot more personalized. That's a gross margin tailwind.

Operations, reducing our shrink right, through technology and production, technology and produce ordering technology as the self-checkout. We thought we'd optimize it. Now there's technology to reduce or shrink in the checkout. Cost of goods. We are rolling out a lot more merchandising fine. We're even finding reduced costs in our Own Brands portfolio and the supply chain. So the first thing is we need to have a lot of confidence in our gross margin.

By the way, we're also automating our supply chain, DCs so that we need to have. Now that we - but we have it these - everything I told you are initiatives that are in flight. Some are late, some are early, but we look at the ability to deliver tailwinds as we look into the future. We combine that with being extremely surgical about where we invest in price. And the metric we're always looking at is, are we gaining market share in dollars and units, food and MULO.

And where we feel that, that is out of kilter, we invest in price. And so that mechanism will continue only because we have all of this I just talked about to continue to do that, Scott. So there's no - we don't believe in going and making large-scale changes. We just don't think that pays off. And we, by the way, we offer a set of things in our store that we think comprehensively provides value to our customer. And it's that combination that matters.

Scott Mushkin

And – thanks with that and so as a follow-up, and then I'll - you guys have been gaining share now, gosh, I guess, a couple of years consistently. If you had to kind of say, answer the question, I guess, most investors clearly don't believe it's going to happen because the stock doesn't really want to move up and this valuation is real low. Why do you think it's sustainable and why do you think it's happening?

Vivek Sankaran

Scott, let me understand the question. Why is the share gain sustainable? Oh Scott, I think there's, a few things working right for us. One is - it always starts with having a great portfolio. And our portfolio works in many, many different environments, right? So now we're in an inflationary environment. I think that was concerned whether our portfolio will work - actually it works because we can give people those bookends, right.

Those who choose to stay with organic beef and buy hamburger. You got it. You got it in our store. The second thing we do, I have to emphasize that while I'm giving you general statements, the magic is local. You cannot win in this market if you're not working it on a store-by-store basis, locality-by-locality basis and optimizing to it. And that's our heritage, and the teams are doing that.

The third thing is driving stickiness. We did that extremely seriously, which is why we want people to engage more digitally because we can drive more stickiness, whether it's a loyalty program or an e-commerce program. And the fourth thing is this is underrated, but it's just great everyday execution, right? The NBS call in Rx, I gave you is just good old everyday execution, just getting better, so the customer says, hey, I'd rather come here from my scripts than somewhere else. And all of those, we still think we have plenty of headroom in everything I just said.

Sharon McCollam

And I would just add to that, the other thing to keep in mind is at the end of Q4, we gave you a metric on our Just for U Loyalty members that we had gone up 45% to 30 million Just For U Loyalty members. And then coming into Q1, we just increased another 1 million to 31 million Just for U Loyalty members. And if you go back and reflect on the that prepared remarks, what you'll see is that as these Just for U Loyalty members mature. As an example, when they become omnichannel, over time, they come to be spending 3x more than the in-store-only shoppers, are actively engaged when they become actively engaged with us, they become 4x more than an average shopper spenders in our stores. And nobody doing Just for U and becomes either one of those immediately. It takes time and it grows over an extended period of time.

So as we continue to gain these members, and then we have the pandemic significant increase in those members. And what we have been most pleased with is the retention of those members. And as we do that, that helps fuel ongoing share gains because these customers become more and more valuable, we continue to gain share of wallet from those customers in addition to attracting new customers to the brand, and that provides a very significant tailwind to the issues that you've mentioned about continuing to gain market share over time. And these are some of the most that we feel like we have been able to build over the last couple of years in order to create the environment that can make that share gain environment sustainable.

Vivek Sankaran

I'll just close up with this, Scott, that for - to do all of this, you need capacity to invest, and that's where our productivity program comes in. Our first [1.05] if I can call it, the 1.5 billion going great - we talked to you about the next tranche of productivity. It's off to a great start. And so we feel we'll continue to have the ability to drive productivity and invest in the things that drive growth.

Scott Mushkin

Fantastic color guys. Really appreciate that.

Operator

The next question comes from Robert Moskow of Credit Suisse.

Robert Moskow

Hi, thanks for the question. Maybe trying to get Vivek into inflation from a different perspective. Do you expect sequential inflation in your next quarter? Like do you expect prices to be sequentially higher? And what's driving it? Are you still seeing vendors come to you asking for more pricing? And if so, are you more - are you less amenable for that given what's happening in the commodity markets or not?

Vivek Sankaran

Yes. So Rob, here is how I'd characterize it. The broad answer to you is yes. We'd expect sequential inflation but at more moderated levels than we're seeing. So early in the year, we had expected that we lap it and we lap it and inflation will moderate very significantly. We are less sure about that now. So that was to characterize what we're seeing.

One, on the one hand, you're seeing commodity prices decreasing. But on the other hand, we also expect that things like produce and others will come in a little higher because fertilizer costs are up. And those are the - that's the crop that people have already put in the ground. And so when we harvest that we're going to see some prices.

So net-net, we're seeing signals on both sides today, but - and then some CPGs are coming forward with price increases later in the year. Of course, we will continue to challenge all of that because we do our own clean sheets on our - on what something should cost, and we'll continue to challenge that. But net-net answer is we do expect some sequential inflation even if moderated through the rest of the year.

Robert Moskow

Okay. Great. A last question. I didn't hear anything about supply chain disruption being an issue in the quarter. Are you still experiencing that? Or does that tamp down a lot? And as a result, are your shelves full? Or are you still not getting everything you need from your vendors?

Sharon McCollam

We are definitely still seeing supply chain disruption, and we still have categories where we are on allocation. So those issues have moderated. They are in no way passed. And from a supply chain operations standpoint, we have been hiring better and we've been more able to find labor. I'm not saying it's solved. It seems to have mitigated.

And on the transportation side, that continues to be a challenge. But again, moderated but not fixed. So I think all of us as an industry would say we've seen some relief but it is not at this point where we would call it being significantly better. It is moderating.

Vivek Sankaran

It doesn't make us proud.

Sharon McCollam

Yes.

Vivek Sankaran

Good.

Melissa Plaisance

We have time for one last question.

Operator

Thank you. The final question comes from Greg Badishkanian of Wolfe Research.

Spencer Hanus

Good morning. This is Spencer Hanus on of Greg. One of your biggest competitors is increasingly passing through price increases on food and consumables to manage the markdowns that they're taking in general merchandise categories. Just curious how you think that's going to impact the competitive environment in grocery? And do you think your peers are going to take the opportunity to also bring up prices?

Vivek Sankaran

What's that question again?

Sharon McCollam

Channel merchandise. One of our biggest competitors.

Vivek Sankaran

Yes. I don't know - I can't speak about what might be happening in somebody else's business. But I can tell you that I think everybody is feeling that the Food business is doing well, right? You're seeing that across the markets, even if you saw some of the earnings calls today, you'll see that the Food businesses are doing well. And my sense is that for some of the things I talked about earlier, It'll be really hard to, in this environment, to drive down prices and expect massive uptick in supply - in volumes, only because supply is challenged and people are looking for different things. It's not just about going in and buying a packaged good. People are looking for a full portfolio to solve their challenges and meet their needs today.

Spencer Hanus

Got it. That's helpful. And then I totally understand that the sort of the full rates remain challenged and can constrain promotions for now. But if we start to see fill rates in pick up and then we see [indiscernible] decelerate further in the second half, and into 2023. Do you think the promotions are going to remain as rational as they've been over the last, past 12 to 18 months there?

Vivek Sankaran

Yes, it's still as rational. I - again, I go back to - if you go back to the past, the old behavior in our sector was that we would all run a 10-page ad and blast promotions that didn't give us a return, okay? And that was what diluted gross margins in the past. I think there's plenty of technology and data and digital access and so on today to become much more targeted and get a better return on promotion.

So - and so far, I still find it rational. I suspect that - I talked to you about the fill rates. Just to put it in perspective, in some of these categories, - we're at 65% service level and feeling good because it's better than 35%, but 65% still stops, okay? So we are - so I think we've got a long way to go before we get completely comfortable as a sector on supply.

Sharon McCollam

And we've said consistently that with the pricing, promotion, data analytics investments that the entire industry has been making over the last several years. We believe that it is the tide that raises all boats. This isn't a specific Albertsons discussion. We believe that this discussion applied to most of our sophisticated competitors that through personalized promotion, it is why the Media Collectives are doing better. Vivek talked about the fact that the suppliers and the retailers together have realized that the effectiveness of promotion can be so much greater when you can personalize and you use data analytics to drive it.

And so I think that over the last couple of years, if you take a look at the investments that we've all made in those capabilities they have changed the game. And to just give away margins, I just don't see that behavior coming back into the industry in the way that we saw it pre-pandemic.

Melissa Plaisance

Okay. Thank you very much for participating in today's call. We look forward to speaking with you over the balance of the day and the rest of the week. Thank you.

Vivek Sankaran

Thank you all.

Sharon McCollam

Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude today's teleconference. Thank you for your participation. You may now disconnect your lines.