Albertsons Companies Inc. (NYSE:ACI) Q4 2021 Earnings Conference Call April 12, 2022 9:00 AM ET

Company Participants

Vivek Sankaran - Chief Executive Officer

Sharon McCollam - President, Chief Financial Officer

Melissa Plaisance - Senior Vice President, Investor Relations

Conference Call Participants

Robbie Ohmes - Bank of America

Edward Kelly - Wells Fargo

John Heinbockel - Guggenheim Partners

Ken Goldman - JP Morgan

Scott Mushkin - R5 Capital

Simeon Gutman - Morgan Stanley

Erica Eiler - Oppenheimer

Karen Short - Barclays

Chuck Cerankosky - Northcoast Research

Brandon Cheatham - Citi

Michael Montani - Evercore ISI

Operator

Welcome to the Albertsons Companies fourth quarter and fiscal year 2021 earnings conference call, and thank you for standing by. All participants will be in listen-only mode until the Q&A session. This call is being recorded.

I would like to hand the call over to Melissa Plaisance, Senior Vice President, Investor Relations, Treasury, and Risk Management. Please go ahead.

Melissa Plaisance

Good morning and thank you for joining us for the Albertsons Companies’ fourth quarter and fiscal year 2021 earnings conference call. With me today are Vivek Sankaran, our CEO, and Sharon McCollam, our President and CFO.

Today Vivek will share insights into our fourth quarter results as well as review our progress against our strategic priorities. Sharon will then go into the financial details before Vivek and Sharon provide a discussion on our priorities and outlook for fiscal 2022.

I would like to remind you that management may make statements during this call that are or could include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not limited to historical facts but contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are and will be contained from time to time in our SEC filings, including on Forms 10-Q, 10-K, and 8-K.

Forward-looking statements 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 historical financial information includes a reconciliation of net income to adjusted net income and adjusted EBITDA.

With that, I will hand the call over to Vivek.

Vivek Sankaran

Thanks Melissa. Good morning everyone and thanks for joining us today.

In the fourth quarter, our teams continued to drive top tier operating and financial performance. We want to recognize and thank all of our retail distribution and manufacturing teams for their commitment to and care of our customers and their communities. We are proud of the compassion, humility and passion for excellence they have shown in an exceptionally challenging environment over the last two years.

In Q4 2021, ID sales increased 7.5% and 19.3% on a two-year stack. We also gained unit and dollar market share in food and MULO on both a one and two-year basis and maintained our number one or number two position in 68% of the 121 MSAs in which we operate. In addition, we delivered adjusted EBITDA of approximately $1.1 billion and adjusted EPS of $0.75 per share, well ahead of our expectations.

During the quarter, we continued to see a rebound in store traffic and the benefits from our digital and omnichannel investments, including the expansion of drive up and go and additional micro fulfillment centers bringing our total MSCs to seven. Omnichannel households spent three times more than in-store only shoppers, and during Q4 omnichannel households grew by nearly five times versus the fourth quarter of 2019. In addition, as our investments drove increased customer engagement and retention, Q4 2021 digital sales increased 5% year-over-year and 287% on a two-year stack basis.

In the Just For You loyalty program, benefit enhancements continued to accelerate membership growth which increased 18% year-over-year to nearly 30 million members and is up approximately 45% or over 9 million members since the fourth quarter of 2019. Actively engaged members, defined as those redeeming coupons and fuel up grocery rewards also continued to increase, and the retention rate of these members remained over 90% at the end of the year. Remember that on average, actively engaged members spend four times more than non-actively engaged customers.

I will now recap our progress against the four key strategic priorities that drove our better than expected Q4 and 2021 results. Driving in-store excellence is the foundation that enables everything we do, and our commitment to enhancing our customers’ experience contributed meaningfully to the 18% year-over-year growth in our Just For You members and market share gains. From an inventory and productivity perspective, we simplified tasks and automated production planning in our fresh departments, resulting in higher in-stock conditions and more time for customer interactions. For example, in the deli we installed auto slicers and stackers and implemented production planning tools that increased product availability while reducing shrink and improved customer service. These changes contributed to the better than expected results in fresh. During the fourth quarter, fresh ID sales outpaced center store by 280 basis points year-over-year and over 500 basis points versus two years ago.

In addition, we continued to invest and modernize our store fleet, including adding and upgrading self checkout which is now available in over 1,800 stores, and optimizing the layout and design to improve the customer shopping experience. We completed 236 remodels and opened 10 new stores in fiscal 2021.

In own brands, we introduced 837 new products and increased adoption in lower penetrated divisions, driving strong growth and improved margins. Q4 sales penetration reached 25.6% with the strongest performance in floral, deli and meat. During the year, own brands was awarded four Private Label Manufacturing Association awards and one recognition from Store Brands Magazine for innovation in private brand marketing.

Our next priority is the acceleration of our digital and omnichannel capabilities to fuel our growth and increase customer engagement, satisfaction and retention. In loyalty, we launched in upscale our new unified mobile app, or UMA. Eighty-seven percent of our digital orders were being placed in the UMA by the end of the fiscal year. We also introduced meal planning that offers recipes, including those that address dietary preferences such as vegetarian or gluten-free. Customers can seamlessly add all recipe ingredients to their shopping list or immediately purchase them in the UMA.

In drive up and go, we reached our goal of over 2,000 stores serving 99% of our households. In online delivery, we expanded third party partnerships to offer more choices and accelerate the speed of delivery, and in both drive up and go and online delivery, we reduced costs per order by adding five additional MFCs and three-way rooms, reconfiguring our picking software and staffing models and improving our forecasting algorithms.

In digital, we are beginning to capitalize on our rich and proprietary data, recently launching the Albertson’s Media Collective, or AMC. AMC offers new and existing business partners a robust in-store marketing platform that reaches our extensive customer network and leverages our strong market share especially in the 68% of markets where we hold the number one or number two share position. We expect AMC to be a leading growth and profit driver over the next several years.

Increasing productivity, our next priority, allowed us to continue to fund future growth and offset inflation. In the second year of our three-year $1.5 billion savings program, we enhanced our pricing and promotion capabilities, further rationalized indirect spend, and expanded our national buying initiatives. We expect to achieve our targeted $1.5 billion in savings by the end of fiscal year 2022 and we will not stop there. Later on this call, we will discuss the next phase of our perpetual productivity engine beyond fiscal year ’22.

Our fourth priority is strengthening our talent and culture and supporting the communities we serve. In 2021, we continued to acquire and develop talent to transform the culture to harness local ownership, leverage scale, and support our new omnichannel imperatives. We also recognized the front line teams for embracing this cultural transformation while delivering exceptional service to our customers by awarding a discretionary thank you payment in the fourth quarter.

Our senior leadership team also focused on amplifying our diversity, equity and inclusion strategy. We are continuing to make progress at the senior levels of the company and are benefiting from the experience and diversity of thought that each of these leaders is bringing to the table. In pharmacy, our teams worked tirelessly to provide COVID vaccinations to the communities we serve. To date, we have administered over 12 million vaccinations.

In ESG, we increased investment and further developed our goals in the areas of climate action, waste reduction and circularity, community stewardship, and diversity, equity and inclusion. Later this month in conjunction with Earth Day, we will announce this comprehensive set of goals publicly.

We are very pleased with the progress we have made against all our strategic priorities and there remains significant headroom and a strong foundation to build on in 2022.

I will now turn the call over to Sharon to cover the details of our fourth quarter and fiscal year results.

Sharon McCollam

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

Our fourth quarter ’21 results were strong across all key metrics. Identical sales were up 7.5% and up 19.3% on a two-year stacked basis, with momentum continuing into Q1 2022. Retail price inflation as well as market share gains contributed to these results.

Gross margin rate was 28.7% in Q4 2021. Excluding fuel, the gross margin rate was flat compared to last year. Productivity, improved COVID-related pharmacy margins, and a favorable product mix were offset by the rate impact of increased product costs driven by the current inflationary environment and higher supply chain and LIFO expenses.

Selling and administrative expenses as a percentage of sales were 24.9% in Q4 2021. Excluding fuel and a favorable pension adjustment, SG&A decreased 30 basis points compared to last year. This decrease was primarily driven by lower COVID-19 related expenses and the benefit of productivity initiatives. These decreases were partially offset by market driven wage rate increases, a discretionary appreciation payment to our frontline associates, expenses related to the acceleration of our digital and omnichannel capabilities, and higher depreciation.

Q4 2021 adjusted EBITDA was $1.074 billion compared to $917 million last year. This increase was primarily driven by the flow through from our 7.5% ID sales increase and the margin benefits related to administering COVID-19 vaccines. Q4 2021 adjusted EPS was $0.75 per fully diluted share compared to $0.60 per fully diluted share in Q4 2020.

Turning to full year fiscal ’21, ID sales were near flat and up 16.8% on a two-year stacked basis. We also delivered adjusted EBITDA of $4.398 billion as our productivity initiatives and margin benefit from COVID-19 vaccines fueled strategic investments and substantially offset product, wage and other inflationary headwinds. Full year adjusted EPS came in at $3.07, nearly three times our 2019 adjusted EPS of $1.04.

I’ll now discuss fiscal ’21 cash flow and capital allocation. Strong earnings and temporary reductions in working capital drove better than expected cash flow. Capital expenditures in fiscal ’21 were $1.6 billion with the majority of investments being made in the modernization of our store fleet and the building of our digital and technology platforms, both of which we expect will continue to fuel our transformation as we enter 2022. We also returned $207 million to our shareholders through common dividends and repaid $330 million in outstanding notes. Net debt leverage at the end of fiscal ’21 was 1.2 times compared to 1.5 times in fiscal 2020 and 2.9 times in fiscal 2019.

I’d now like to provide an update on our recent labor relations activities. We have continued to settle labor contracts that provide an overall wage and benefit package that rewards our existing team members for their significant contributions and strengthens our competitive positioning in the markets we serve. During the fourth quarter of 2021, we settled retail contracts in Denver, Portland, Montana, Idaho, Oregon and the mid-Atlantic. Thus far in the first quarter of 2022, we have also reached tentative settlements in both northern and southern California with retail contracts in Seattle, Las Vegas, Shaw’s and Jewel left to be negotiated this year.

I will now turn the call back over to Vivek to discuss our fiscal 2022 priorities.

Vivek Sankaran

Thank you Sharon.

As we look forward to fiscal ’22, we are entering the next phase of our transformation strategy: Customers for Life. Our belief and the evidence is that when we are at our best in the brick and mortar and digital worlds, our customers never leave us and spend more of their wallet with us. Customers for Life is built around this belief that satisfied customers create outsized lifetime value and that everything we do should enable more stickiness.

Customers for Life is anchored on placing the customer at the center of everything we do with the ultimate goal of supporting our customers every day, every week, and for a lifetime. We want our customers to interact with us daily, not only to shop but sometimes to simply consume relevant content about food or plan meals, or find information to inspire their wellbeing. Our business model is pivoting to one that is loyalty-based, doubling down on our omnichannel engagement with customers beyond just transactions. We will elevate the in-store experience when they shop with us, expand our services and content-rich offerings, and build a set of competitive and timeless capabilities that create a compelling reason for our customers to seek a lifetime relationship with our team members and our banners.

To support this pivot, we will be investing in the following strategic priorities: digitally connecting and engaging all customers through our mobile app and website so they can enjoy and curated experiences in ecommerce, the community, loyalty, health, and media; differentiating our store experience by deepening engagement through the use of technology, removing team member pain points to allow them to focus on customer service versus just tasks, and simplifying the end-to-end shopping journey and evolving store operations to support omnichannel growth; and enhancing what we offer by elevating our distinctiveness in fresh, expanding our own brands products and services, including our ready to use program, and enhancing product offerings in center store to address customers’ changing needs and preferences; modernizing our capabilities in part through an improved supply chain, enhanced data and data analytics, and ongoing productivity all built on the foundation of being locally great and nationally strong; and finally, further embedding ESG throughout our operations.

Success against these priorities will be measured based on increased digital engagement, expanded merchandise and service offerings, a competitively differentiated omnichannel experience, and an accelerated set of digital and supply chain capabilities.

I will now turn the call over to Sharon to discuss the financial outlook for 2022.

Sharon McCollam

As Vivek said, we’re entering fiscal ’22 and the next phase of our transformation with continued momentum and strength in our core business, evidenced by our Q1 to date mid single digit ID sales increase. We are gaining market share and the investments we have made in growth and productivity are delivering better than expected returns. Throughout the pandemic, we capitalized on the opportunity to attract new customers and have entered 2022 with 30 million Just for You loyalty members, a 45% increase versus year-end 2019.

With that as the backdrop, our fiscal ’22 outlook assumes the following. We expect fiscal ’22 ID sales to increase 2% to 3% driven by continued inflation and market share gains. In the first half of the year, we expect ID sales to be above the full year range; in the back half, we expect ID sales to be below the full year range due to cycling heightened inflation in the back half of fiscal ’21. We expect adjusted EBITDA in the range of $4.15 billion to $4.25 billion, reflecting continued growth in the business and stable gross margins. In fiscal ’22 in our core business excluding fuel, we are expecting gross margin rate expansion driven by productivity tailwinds. We are also expecting, however, a 65% decline in COVID vaccination and related margins, the impact of which will be greater than the core business margin rate expansion, therefore factoring in both drivers, we are expecting the gross margin rate excluding fuel to be down slightly in fiscal ’22.

In selling and administrative expense, we are incrementally investing in our strategic priorities, including our digital transformation, the Albertsons Media Collective, and the modernization of our supply chain which will increase our SG&A rate in fiscal ’22 but drive long term benefits. Productivity tailwinds are also substantially offsetting a significant increase in hourly wages and benefits for our frontline associates. That brings us to adjusted EPS which we expect will be in the range of $2.70 to $2.85 per share based on our current fully diluted share count.

To support this outlook, we expect capital expenditures to be in the range of $2 billion to $2.1 billion with more than half of the spending invested in modernization and digitization in our stores and the remaining in the expansion of our digital offerings and optimization of our supply chain.

I’d also like to share with our latest view on the digital productivity. By the end of fiscal ’22, we will have delivered on our three-year commitment of $1.5 billion in productivity. As that is coming to a close, we have started framing the next wave of productivity and have already identified $750 million in future savings that we are committing to between fiscal ’23 and fiscal ’25 in the areas of automation and digital tools, scalable workforce management, modernization of our supply chain, and SG&A optimization.

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

Vivek Sankaran

Thank you Sharon.

As Sharon just mentioned, we are pleased with our 2021 results and the continuing momentum we are seeing as we enter 2022. Our relative performance evidenced by our profitable ID sales growth and market share gains continues to be strong. Our strategy is working and we are executing well against industry-wide pressures, and the transformation we began before the pandemic has significantly strengthened our company.

In our stores, we have accelerated remodels, implemented technology-enabled core processes, and advanced our capabilities in fresh. Leveraging our store base, we have built a scale omnichannel capability including drive up and go and online delivery that is proving to be sticky with customers who engage across channels. We have developed a robust loyalty platform and a unified mobile app that engages customers and personalizes offers for our 30 million Just for You members. We have learned to leverage our scale in vital capabilities such as pricing and promotions, merchandising and supply chain without compromising agility and local ownership. We have proven that we can deliver productivity at scale and are adding an incremental wave.

All of these foundational capabilities have created a [indiscernible] for customers for life and our next phase of growth. While we recognize there are a number of uncertainties in the macroeconomic environment as we enter 2022, we have demonstrated a proven track record in the execution of our strategy and remain confident in our ability to deliver against the 2022 priorities that we laid out for you today, but none of this will be possible without the unwavering commitment of our associates and ongoing support of our vendor partners and shareholders.

We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator instructions]

Our first question will be coming from the line of Robbie Ohmes with Bank of America. Please proceed with your questions.

Robbie Ohmes

Hey, good morning. Great quarter. I’ll just do my two questions upfront.

The first one is just on the ID sales guidance. Maybe a little more color - we just had the March food at home inflation came out around 10%, I think Sharon, you said you’re seeing mid single digit trends to date. That seems like you’d be falling behind the overall food at home inflation numbers. Maybe more color on why that may be and some thoughts on that.

Then Vivek, you talked about enhancing center of store for needs and preferences. I was hoping to get some more color from you on what that means and what you’re seeing in center of store changing.

Sharon McCollam

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

I’ll let Vivek take the other part of your question.

Vivek Sankaran

Robbie, on the center store, recall we started this wave of buying differently, right, and so now that we have a more consolidated approach to going to the market, especially in the center store, we now also have an opportunity to start taking decisions on categories where we under-index, and there are some very meaningful categories that are growing that we under-index in our space, so those are examples of the types of things that we’re going to continue to do, and we can do that on a national scale so that we can get the best bang for the buck. That’s primarily around the center store.

The other area--I mean, it’s not so much center store but I don’t know where it fits, is the whole meal solution, right? It kind of fits with what--when I talked about the layout and optimizing things, those are the types of things we’re also working on so that we can allow people to have quick and fast trips. You’ll see it in some of our stores that are oriented towards those solving for a meal solution for the evening, to get in and out with a few center store categories but primarily the meals. Those are the types of things we’re working on, Robbie.

Robbie Ohmes

That sounds great. Thank you so much.

Vivek Sankaran

Thank you.

Operator

Your next question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your questions.

Edward Kelly

Hi, good morning everyone. First, a quick follow-up on inflation. There is a growing consensus concern, I guess, that we could see elevated food price inflation for some time now with the war in Ukraine. What is your expectation for when inflation may peak, based upon what you’re hearing from vendors in your work? Your guidance seems to suggest that maybe you think it’s peaking now.

Then in terms of elasticity, it’s hard to imagine that elasticity stays so low. Like Robbie said, we see 10% food CPI today. What are you seeing from a consumer behavior standpoint, and then what are you expecting from an elasticity standpoint from here?

Vivek Sankaran

Hey Ed, good morning. First on inflation, let me just provide a little bit of context, Ed.

I hope you guys are able to see that we are managing the inflation very, very well, right, and so if you think about what we’re trying to optimize here is we want to make sure that we are competitive, and the way we measure that is market share gains, dollar share and unit share both in food and MULO, and we’ve got a nice track record all through the quarter with sustaining the track record of market share gains and at the same time not compromising gross margins, so that’s the equation that we’re trying to work through, and we are doing very well with it because we’re giving people choices, customers choices, they’re managing mix, and we’re allowing customers to get a competitive basket by doing that.

What we have done is that we have estimated that the current level of inflation, I think Q4 CPI 7.4%, okay, and I just saw news this morning that inflation overall was 8% or so. We suspect that this rate of inflation will continue until it cycles itself around September, which will be the beginning of our second half, and the assumption we have made is that this inflation will moderate in the second half, and that’s the assumption we’ve made. You could argue that if you think what’s happening in Ukraine will create more inflation, then our assumption there is conservative, but the way we have approached it is assume that the inflation will be lighter and moderate in the second half of the year, deliver the business that way because we’re going to drive more productivity in other things over there, and if inflation came up, then it gets to your second question.

Now, if the consumer behaves like she is behaving now, where honestly we are not seeing a change in behavior, Ed, we are still seeing the consumer very strong, we’re not seeing any meaningful trade downs. I’ll give you an example - organic sales penetration is up, not down in our business, okay, so we think the consumer is still strong. Whether the consumer will stay that way even if we go to the second half or past the fall and inflation continues to be at 8%, 9%, I don’t know, I would imagine you’d see some elasticity. But that’s the approach we have taken - we expect it to moderate in the second half.

I hope that gives you enough color on how we’ve thought about it, Ed.

Edward Kelly

Yes, that’s great. Just a quick follow-up, Sharon, on the guidance for the gross margin. The compare to 2019 is kind of different throughout the year - you know, it’s much harder in the first half than it is in the back half. How do we think about first half gross margins?

Sharon McCollam

Yes, so we’re not guiding by quarter. I tried to give you a little more color on the gross margins as we walk through the year. One thing to think about is that just as you think about 2022 as it relates to COVID, you’re going to see the most significant impact from COVID vaccinations in Q1 and then in Q2, our numbers were down last year in COVID, then Q3 picked up and Q4 picked up, so when you think about modeling those, the flow through on COVID is substantial on these vaccinations, so I hope that will give a little more help.

I’ve already talked about the pressure of the COVID vaccinations, but that’s a pressure that you need to model, but think about Q1, Q3 and Q4 as being the biggest COVID quarters. Honestly, Q3 and Q4 were the bigger of the four quarters.

Edward Kelly

Thank you.

Operator

The next question is coming from the line of John Heinbockel with Guggenheim. Please proceed with your questions.

John Heinbockel

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

Vivek Sankaran

Hey John, good morning. On your first question, it’s not several hundreds, it’s several thousands for the customers who are most deeply engaged with us, and the way we think about it, if I can give you a little context here, if you go back even to our IPO documents, you’ll see that we talked about this notion of customers who engage in multiple parts of our business stay longer with us and spend more with us. That was evident but it was not at the kind of scale we have today.

What do I mean by that? Today we have 30 million customers engaged in our loyalty program. We have one app that they can go through, and that one app is a portal to the whole company, whether it’s--it’s not the whole yet, but it will be there, where you go to the pharmacy business, you can engage in ecommerce, you can get content on meals and recipes and so on and so forth, so we’ve got that. We’ve got an ecommerce business now that’s national with drive up and go and delivery and many, many choices of delivery. We have a revitalized pharmacy business, so you put all of these together, it gives us at scale, national scale an ability to create what we can stickiness with our customers.

The first of your question - yes, it’s thousands of dollars, not hundreds of dollars, and the second part of your question, absolutely yes. You know, we imagine driving more and more of our sales from this group of customers, and the big way to do it is by driving more retention with these customers. The reason we have retention is all of the touch points we have, have just become stronger and at scale.

Does that help, John?

John Heinbockel

Okay, yes. Maybe secondly, you talked about the 750 productivity for the next three years, that you just started. I assume you will not finish there. It is possible or likely that that ends up being similar to the last three, the $1.5 billion, and then your thought process on the new--if there was a new secular algo versus the old one, right, is this the same on a higher base or is it possible that this algo is a little higher than the old one?

Sharon McCollam

Let me start with the productivity question. As we said in the prepared remarks, we have just started bringing this next phase of productivity over the last six months since I joined, and it’s a perpetual productivity engine so there is absolutely the expectation that over time, that number will continue to grow. That’s the first question.

Then on the second question, Vivek, do you want to take that?

Vivek Sankaran

Yes, I think John, the way I think about it is when we went out--when we went through the IPO, we were at 2.25, if I’m right, long term algorithm. Obviously we’ve sustained a much higher number than that, not even--not just on an absolute basis but on a relative basis, it’s been incredibly good. We put a lot of different things in place. Let me put it this way - I’d be disappointed if that’s where we ended up in the long term, but we need to lap what we’re going through this year before we can establish a pattern on that.

John Heinbockel

Great, thank you.

Operator

The next question is coming from the line of Ken Goldman with JP Morgan.

Ken Goldman

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

Vivek Sankaran

Yes Ken, I have not seen a big difference yet. We have not seen a big difference yet across income segments. The one thing that we have put in our plan is that as SNAP funds reduce, which we suspect will go down over as we go through the year, that that lower end consumer--or the consumers that were more dependent on SNAP, let me put it that way, will reduce some spend.

That said, to date what we’ve seen is currency shifting. We haven’t seen that behavior yet, but we don’t want to conclude that and just assume that for the full year, so as we go into the second half, we had assumed that the consumer that was depending on SNAP will spend less, and it may be just spend less by trading down. We have assumed that behavior going forward, Ken, but we haven’t seen that in any of our segments to date.

Ken Goldman

Are you seeing a little bit of--or sorry, does your outlook, rather, assume a little bit of incremental promotions, incremental discounting to sort of offset some of those pressures that those consumers might feel?

Sharon McCollam

Yes, it does.

Vivek Sankaran

It does, Ken.

Ken Goldman

All right. Then my follow-up is--and this is possibly a wasted bullet but I’ll go down this road anyway, can you talk about what the impetus was for the strategic review? It’s just so odd to see a company that IPOed so recently, performing well fundamentally, adding great C-suite talent, to announce something like this especially given how broad some of the wording is. I’m just curious if you could talk about what sparked all of this which has created such noise in the market.

Sharon McCollam

Yes, so Ken, it was really sparked by the fact that valuation compared to peers was not reflecting the strength of our performance, and there were reasons in our minds for some of that. Our performance has been--as you know, if you put us on the same basis as Kroger, we have different quarter ends, but if you measure us out, we outperformed Kroger in Q4, we outperformed them for the year, etc., so that was originally the catalyst for it.

Of course, there was the overhang of the preferred shares that had hit the market, and then of course the IPO lockup was coming, so as opposed to playing whack-a-mole, that’s an alternative, right - you could just react to each event, we felt that a much more comprehensive assessment was much more inclusive of all of the alternatives, and that in included--as you know, I don’t have to read the press release to you, but the assessment of our balance sheet optimization, any kind of strategic or financial transaction, etc.

That’s what we’re looking at, and that was the catalyst for it. I said that after we put out that release, and the catalyst hasn’t changed. That’s exactly why we’re doing it, and we’ll keep you guys updated as we move forward.

Ken Goldman

Thanks so much, Sharon.

Operator

The next question comes from the line of Scott Mushkin with R5 Capital. Please proceed with your questions.

Scott Mushkin

Hey guys, thanks for taking my questions. I just wanted to go back to what Robbie was talking about and the inflation rate and market share. I just want to make sure, you guys are assuming or you’re thinking you’re going to continue to gain share, volume share and dollar share this year, because looking at the guide, you may think that you think there’s some kind of change there.

Vivek Sankaran

No Scott, we have gained--you know, let me give you the share story. When we started this year, we were lapping some significant numbers in 2020, so through the first half of 2021, fiscal ’21, we were clearly gaining share in food but we were not gaining share versus MULO, and--because I think MULO, grocery--supermarkets had outperformed the rest of the market in 2020. Now, the second half of the year, everything turned positive, right, so we’ve gained share in MULO and in food on dollars and units, and the rate of share gain continues, it just continues.

We are expecting to continue to gain share. All of the different things that we’re doing are--I mean, we watch that and that is our primary metric.

Scott Mushkin

Okay, perfect, and then--I have to figure out which question I want to ask, because I have a bunch of them. Maybe talk about competition and product availability that you’re seeing right now. Is competition changing much? Clearly we may still have some product availability, it actually may get worse - I mean, I think chicken is a hard commodity, chicken breasts, so how are you guys thinking about that as the year goes on, both competition and product availability?

Vivek Sankaran

Yes Scott, product availability continues to be a challenge, continues to be a little bit of whack-a-mole. We had imagined back then that by now, we’d see some relief, but it’s not the case. We are imagining that product availability will continue to be a challenge through most of this calendar year, maybe middle of this year at least and maybe start to get some relief in the fall, which is why we also think there might be more supply and that supply might pull down some inflation. That’s how we’ve thought about it.

An example is eggs, right - we’re seeing going into Easter, there’s the flu and we’ve got prices going up on--costs going up on just white eggs, and so we continue to have all those kinds of issues. We are planning that we need to manage around that.

Competitively not a whole lot has changed. I’d say it’s still quite stable, the competition. It’s hard for somebody to get into a [indiscernible] promotional mindset given the challenges in product availability.

Scott Mushkin

Perfect, thanks guys.

Operator

Our next question is coming from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions.

Simeon Gutman

Good morning everyone. I’d like to paraphrase something on inflation and units, maybe for the rest of the year, Vivek. If we look the composition of comp, it looks like it’s tracking inflation, which means maybe units are flattish, something like that, and that’s different than where it was a year or so ago. That’s fine, I think that makes sense. It sounds like you’re not expecting that dynamic to change even as inflation continues, if I heard that right, but there may be some sensitivity at the low end with SNAP. Does that mean there’s an offset? And then it sounds like--again, you’re not expecting inflation to step up later in the year, we’re going to lap it and then inflation sort of normalizes?

Vivek Sankaran

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

Simeon Gutman

Okay, and this is to clarify, not my follow-up, and this is based on to date, even as inflation has picked up, you’re not seeing a further degradation in units or as it picks up, it is staying flat and that gives you the confidence that we won’t see that elasticity pick--

Vivek Sankaran

Correct.

Simeon Gutman

Okay.

Vivek Sankaran

Correct. We have not seen a further degradation in units. We are seeing consistent behavior from the customer.

Simeon Gutman

Okay, and then my follow-up, it might be more for Sharon, and this goes back to what John asked earlier. Your EBIT, if you look at it relative to 2019 is up about a billion dollars, so it’s pretty impressive. This year, the outlook is comps are going to grow, yet at the midpoint EBIT doesn’t look like it’s going to--it looks like it’s going to decline. Some of it could just be conservatism - we’ll see how the year plays out. Some of it, there’s expenses. Should we think about it as an investment year, and then as an investment year, does it normalize one year later, two years later? I understand there’s a little gross margin compare issue regarding vaccines, but how should we think, because on a two to three comp, your EBIT base probably ought to grow in the future - I think that’s probably a fair assumption, but when does that begin?

Sharon McCollam

Yes, so when you think about the guidance, there are two major pressures that if you go back and look at the transcript, I tried to lay it out for you in the gross margin and the SG&A. On the gross margin side, we are expecting the gross margin, and then that would flow to the bottom line of COVID basically, to decline by 65%. Let’s put this in comparison to Kroger as an example. They have done 11 million-plus COVID vaccinations and they are basically twice our revenue, and we have 12 million, so actually more COVID vaccinations than they’ve done, and it’s on half the revenue, so the impact of COVID on Albertsons is significantly higher, Simeon. That flow through and that pressure falls through to the bottom line, and we are talking about a significant number. You can do the math - we helped you with that last quarter to do the math on that.

Then the second thing is, to your point, we are making investments. Those investments are exactly where you are seeing the benefit that we’re seeing today - you are seeing those investments in our digital transformation, in the Albertsons Media Collective, and another major area is the modernization of our supply chain. That is a big project I talked to you about last quarter, that’s coming into 2022 and 2023, so those are the three areas that we’re making those investments.

And of course, all the labor, we of course have substantial increases in labor like everyone else in the industry, and--but the productivity has been such a strong tailwind, and that continues to offset that, but it’s really COVID and these investments.

Vivek Sankaran

And just a note on productivity, over the last two, three years, we’ve learned how to deliver productivity at scale, so it gives us more confidence and so the productivity becomes an engine, right? As we have said before, there is so much more to explore in our company given where we were and where--given where we began, let me say.

Simeon Gutman

Thanks, good luck.

Operator

Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions.

Erica Eiler

Good morning, this is actually Erica Eiler on for Rupesh. Thanks for taking our questions.

First, it sounds like you’re not seeing any signs of trade-down to date, but maybe you could talk about your expectations on the private label side this year. Are you expecting maybe we start to see a shift more towards private label? Maybe just any thoughts you could share on private label penetration this year would be helpful.

Vivek Sankaran

Yes, private label penetration is back up to 25.6%. I recall that was what it was before the pandemic, so we’re right back there. I would expect private label to become a bigger and bigger part of the consumer’s basket, our customer’s basket only because with that, we are offering better price points, better opening price points.

Now, just like everybody else, we too have supply challenges in private label brands that the national brands have, but as that comes back and if t his inflation holds, it will become a bigger and bigger initiative in our growth and gross margin agenda.

Erica Eiler

Okay, that’s helpful. Then just switching gears to SG&A, you highlighted the puts and takes. Maybe you could just add a little bit more into the latest you’re seeing on the wage pressure front with your contracts and labor availability, and then also just in terms of the investments you’re making this year, is there anything to call out in terms of cadence? Should we think about any of the quarters being more pressured by those investments this year?

Sharon McCollam

Yes, so on the SG&A side, obviously we listed out for you in the prepared remarks where we have finalized our contracts. Northern and southern California are to be ratified but we have settled there, and then we have--the other big one in that is going to be Jewel, which is in the midwest, so that’s--as we see each of those throughout the year, what you’re going to see is gradual and incremental increases coming through the year. They’re starting now on all of the big ones that I laid out in the release that have been under negotiation are happening with us today, and then the rest will come in towards midyear and toward the end of the year, so that’s how you should think about it.

But again, to that point, I want to go back to productivity, this is not a surprise. I know it’s no surprise to any of you on the call and it wasn’t a surprise to us. We expected to see substantial increases and as such have planned productivity accordingly, and we’re proactive on productivity in order to address that. The thing that we’re here to day today is while first of all, we are--it puts us in a very strong competitive position in the markets that we serve. While of course nobody likes cost increases, we are investing in our associates, they are important to our mission, and we are moving forward with the highest increases that we’ve seen, but putting the productivity engine that Vivek talked about behind it and that will be happening throughout the year, so those are the big drivers.

Then of course we all want us to continue to deliver against these investments in these strategic priorities, including, and I really want to call out, the Albertsons Media Collective. This is our alternative--in the industry, they’re calling it alternative revenue stream. We are several years behind others in that space. We’re building it, we announced it earlier this year. It’s something we’re really excited about. We have to build the foundation - those investments are going in today, but the returns are going to start happening over the next couple of years, and it’s substantial. Those are areas where investors want to see investment, and that’s exactly where the money is going.

Erica Eiler

Great, thanks for all the additional color.

Operator

Thank you. Our next question is from the line of Karen Short with Barclays. Please proceed with your questions.

Karen Short

Hi, thanks very much. I wanted to--and apologies for the short term orientation of the questions, but could you actually--two questions, could you actually quantify the Easter shift impact on comps in the quarter to date, and then my second question is obviously you’ve gotten a lot of questions on your EBITDA guide, I’m wondering if you could actually quantify the vaccine dollar benefit to 2021 as well as actual lapping of COVID costs in 2021, because that would just help frame the down guide on EBITDA for ’22.

Sharon McCollam

Yes, so Karen, until we see what happens at Easter, to quantify the Easter shift is harder to do, but we’re not going to be guiding weekly sales. We gave you where we are to date.

Your second question on vaccination, we have not specifically quantified that number and what that headwind looks like. We did point out that we expect to be down about 65% on the number of vaccinations that we give, and last quarter you might recall that in our comps and in our follow-up call, you had found some numbers out there on the internet that helped you sort of put a frame around that. We have arrangements and contracts that we have confidentiality agreements on, so I can’t sit here today and give you the exact numbers, but needless to say that it is a substantial earnings headwind going into next year and we have accounted for that in the EBITDA guidance.

Karen Short

Okay, and the COVID--

Vivek Sankaran

Sixty-five percent of 12 million, Karen, right?

Karen Short

Pardon me?

Vivek Sankaran

Sixty-five percent of 12 million vaccines is what we--

Karen Short

No, no, I understand that.

Sharon McCollam

And Karen, baseline COVID costs, I think you had one other piece, which was baseline COVID costs?

Karen Short

Yes.

Sharon McCollam

We don’t anticipate that changing. COVID is not gone. Just look at Philadelphia, that just went back to mask mandates in April - COVID is not gone, and we would not anticipate on the COVID costs side to see a material change year-over-year, so cleanliness in our stores and keeping customers and employees safe, it’s a top priority and that will not change.

Q - Karen Short

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

Sharon McCollam

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

Karen Short

Okay, thank you.

Operator

The next question comes from the line of Chuck Cerankosky with Northcoast Research. Please proceed with your questions.

Chuck Cerankosky

Good morning everyone, nice quarter. I’d like to have you comment on how business is looking, how the customers are behaving as gasoline prices have tracked up during your fourth quarter and thus far in to the first quarter, please.

Vivek Sankaran

Hey Chuck, good morning. You know, one of the things we’ve observed with customers is that the traffic is up over last year and it’s holding very steady, but what’s fascinating is the baskets, if I compare to 2019, are substantially larger even if you account for inflation. One of the things that we are observing is I think we’ve got customers consolidating shops, that’s behavior that started during the pandemic, I think it’s still sticking where people have consolidated trips.

When fuel prices go up, it leads to--it tends to lead to even more consolidation of trips, okay, and a shift from what might be other channels that are more connected to commuting to people like us, where you--you know, because the price points are better, so we haven’t--I mean, I’m not saying we’ve seen that, I’m not seeing any material change that because of fuel prices, but there’s a new behavior that seems to have become more entrenched, it also could be because people are eating more at home, but it’s leading towards more consolidation of trips.

Chuck Cerankosky

How about in response to the fuel component to the loyalty program? Any effect there that you’re observing?

Vivek Sankaran

Oh, great volume, Chuck, great volume. You know, the fuel rewards are incredibly powerful, and it has always been one of our best returns and one of the biggest drivers of stickiness. Over the last several weeks, we’ve increased the number of rewards that we provide for fuel. That will drive--it will drive more stickiness to us, and it will drive more of that consolidation of the basket to us, you’re right.

Chuck Cerankosky

Thank you, good luck.

Operator

The next question is from the line of Paul Lejuez with Citi. Please proceed with your questions.

Brandon Cheatham

Hey everyone, this is Brandon Cheatham on for Paul. Thanks for squeezing us in.

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

Vivek Sankaran

Right, so the promotions are going to depend completely on supply, right, and we are an operator that does more FILO and less EDLP, and so we do--there is a set of customers, an important segment of customers who care about that, and we want to make sure that we’re able to serve them.

One important difference, though, from the past is that recall, go back to the 30 million people who are engaged in our loyalty program, they get very specific personalized promotions, so even as promotions come back in our sector, my belief is that the promotions will come back at an extremely granular--in an extremely surgical way, rather than what was the old approach of promoting--putting a lot of ads on the front page and driving it out for everybody. That’s how I imagine it coming back, which will be good because I think it takes care of the customers that we need to take care of and protects our P&L.

Brandon Cheatham

Great, thanks. Then on the Media Collective, where are you in launching that, do you have a full team already hired, and then anything you can share on the long term potential of this initiative and what might be considered in ’22 guidance? Thanks.

Vivek Sankaran

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

Sharon McCollam

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

Brandon Cheatham

Got it, thanks, and good luck.

Operator

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

Michael Montani

Hey there, good morning. Thanks for taking the questions.

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

Sharon McCollam

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

Vivek Sankaran

Yes.

Michael Montani

And sorry, is that for EBITDA or EBIT?

Sharon McCollam

EBITDA.

Michael Montani

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

Sharon McCollam

As it relates to fuel?

Michael Montani

Yes, just trying to think of that.

Sharon McCollam

Yes Vivek, you want to take that?

Vivek Sankaran

Yes, the fuel business, Michael, for us is not terribly large. We would expect--I think the way we thought about it is the volumes will be higher this year, but the margins will be lower this year. That’s how we’ve thought about it. It’s not a material headwind-tailwind - let me put it that way. It’s going to reflect in total kind of what we had this year, maybe a little less in terms of profit.

Michael Montani

Okay, great. Thank you for taking the questions.

Melissa Plaisance

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

Operator

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

Vivek Sankaran

Thank you all.