ACI - NYSE

Welcome to the Albertsons Companies, Inc. Second Quarter 2025 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 now like to hand the call over to Cody Perdue, Senior Vice President, Treasury, Investor Relations, and Risk Management. Please go ahead.

Good morning and thank you for joining us for the Albertsons Companies, Inc. second quarter 2025 earnings conference call. With me today are Susan Morris, our CEO, and Sharon McCollam, our President and CFO. Today, Susan will provide an overview of our business and the opportunities ahead before recapping the 2025 and updating you on our progress against our strategic priorities. Then Sharon will provide the details related to our second quarter 2025 financial results, and our outlook for the remainder of fiscal 2025. Before handing it back to Susan for closing remarks. After management comments, we will conduct a Q&A session. I would like to remind you that management may make forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC. 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. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these financial measures to the most directly comparable GAAP financial measures can be found in this morning's earnings release. And with that, I will hand the call over to Susan.

Thanks, Cody. Good morning, everyone, and thanks for joining us today. Before we dive into our quarterly update on our strategic priorities, I want to take a moment to zoom out. To reflect on who we are as a company, the foundation we've built, and the growth opportunities ahead. Albertsons Companies, Inc. is operating from a position of strength with compelling opportunities to drive customer and shareholder value. Opportunities that are within reach and accelerating. Internally, our rally cry is a new day at Albertsons Companies, Inc. It isn't a new day because the market or the competitive landscape has changed. It isn't a new day because our customer has changed. It is a new day because our mission is clear. A new day is not a slogan, it's a mindset. It means that it's a new day to make bold decisions. And to invest with purpose. Driving long-term sustainable growth across our banners. A new day to ignite the passion of our 280,000 associates and amplify customer centricity. A new day to leverage our strength, sharpen our competitive edge, and double down on the competitive modes that sustain our business. With this mindset as our foundation, I've spent the last five months as CEO conducting deep dives across every facet of our business. My goal? To identify how we can accelerate growth as transformational leaders leverage tech and AI to drive efficiency and speed to market, unlock areas of underperformance, and make smarter decisions about what we will build and own versus where we can partner to improve speed or optimize our capital allocation. And through this work, several major themes have emerged. First, our banners. These are not just names on storefronts. They're trusted brands. Deeply woven into the fabric of the communities that we serve. For decades, they've stood for convenience, quality, care, and connection. And they continue to earn that trust every day. We have an incredible opportunity to leverage our national scale to even further embed ourselves in these communities as we capitalize on being locally great and nationally strong. Inside our stores, the core of our experience, we lead with fresh. And deliver industry-leading service from our on-site butchers where we deliver custom cuts to our customers in over 2,200 stores. To vaccinations, where we deliver more per store than any other pharmacy. To flash delivery, where if you change your mind and decide you want tacos for dinner tonight, we can have the ingredients to you within thirty minutes or less. We are about delivering curated personalized experiences each time a customer walks through our doors or engages with us digitally. In e-commerce, we've grown at a compounded annual growth rate of 24% over the last three fiscal years. Our digital experience offers a fully integrated and increasingly personalized journey. We're not only selling food, we're simplifying meal planning. Making shopping easier and more convenient. We are serving our customers how, when, and where they want to be served. Our stores are community hubs within minutes of the vast majority of our customers' homes, offering an on-demand and fresh assortment. Trusted service, and local relevance that online-only competitors simply cannot replicate. Our in-store fulfillment model delivers fresher products faster with greater flexibility across pickup, delivery, and in-store experiences. We are a strong portfolio of brands, and we've invested in a unified national network powered by common systems. Enabling us to harness our cloud-based centralized data, drive operational efficiencies at scale, and elevate the customer experience while remaining highly relevant to the preferences of customers in our local communities. I'm extremely excited by the early success we're seeing in leveraging these systems and utilizing our data with today's most advanced algorithms and tools. This foundation is also anchored by a $14.3 billion portfolio of owned real estate. Located in the most valuable and sought-after retail corridors in our markets. These irreplaceable assets just appraised in July 2025 are not only among the most valuable in retail, but also operationally essential supporting seamless customer access, optimized logistics, and fueling long-term growth by placing us exactly where our customers live, shop, and engage. In addition to our core real estate portfolio, through the deep dive I've undertaken, we are actively evaluating our broader asset base, operating model, and market footprint to ensure that we are running as efficiently and as effectively as possible. This includes making thoughtful incremental decisions around where and how we want to grow while at the same time evaluating underperforming stores and non-core assets to better align with our long-term priorities. Year to date, we've announced the closure of 29 stores and expect to open nine new stores by year-end. All of this creates a transformational foundation for long-term value creation. And while this will not happen overnight, the opportunity in front of us gives us the confidence to take decisive action today. To exit a $750 million accelerated share repurchase representing an incremental 8% of our outstanding shares at current prices. This reflects our conviction that our share price is very much underappreciated and does not fully reflect the strength of our foundation or the opportunities within our strategy to drive long-term shareholder value. That's what a new day looks like. It's a day of confidence, a day of action, a day of growth. Now turning to our second quarter. Our teams delivered solid results with adjusted ID sales growth of 2.2%, adjusted EBITDA of $848 million, and earnings per share of $0.44. These results are in line with our expectations and reflect steady execution against our five strategic priorities. Driving growth and engagement through digital connection, growing our media collective, enhancing the customer value proposition, modernizing capabilities through technology, and driving transformational productivity. Together, these priorities are driving our current performance and positioning us to enter our long-term growth algorithm for fiscal 2026. Our four digital platforms continue to be key engines for customer acquisition, retention, and engagement, driving measurable increases in sales and frequency among our most loyal shoppers. These platforms not only deepen relationships but also generate rich, actionable data that fuels the media collective's targeting capabilities and monetization strategies. This integrated ecosystem is accelerating our ability to innovate, optimize marketing spend, customer reach, and unlock new revenue streams. E-commerce remains a key growth driver. With 23% year-over-year growth this quarter and in line with our three-year CAGR. E-commerce growth flattening at ACI. Grocery penetration is now well above 9%. Our first-party business led by Drive Up and Go continues to scale rapidly and represents the majority of e-commerce transactions and sales. By leveraging our store-based fulfillment model, we operate from a network that places us closest to the customers we serve. Giving us a structural advantage in last-mile fulfillment. This proximity combines our rich asset base allows us to deliver a differentiated customer experience built on speed, service, convenience, quality, and assortment. At the same time, our digital investments, including AI-powered features, are driving engagement, customer acquisition, and retention. Loyalty continues to be a powerful driver of digital engagement value creation, with membership growing 13% to more than 48 million in the second quarter. Program enhancements and simplification are fueling deeper engagement. Members are transacting more frequently. Redeeming rewards more easily spending more. Notably, nearly 40% of engaged households now choose the cash-off option, underscoring the appeal of immediate value. Loyalty also serves as a rich data source for our merchants and media collective, enabling targeted marketing and monetization. Most recently, we extended the value of our loyalty platform beyond grocery. With the launch of 4U Travel. A new partnership powered by Expedia that allows members to earn up to 10% cash back on travel bookings redeemable towards grocery purchases further strengthening engagement, and broadening the appeal of our platform. Pharmacy grew 19% year over year. Fueled by continued strength in GLP-one strong core prescription volume increases, and share gains from competitor store closures. All supported by our top-tier customer satisfaction. As we've consistently said, customers who engage across both grocery and pharmacy channels demonstrate materially higher value with increased visit frequency and broader spending across the store. To capture this opportunity, we're investing in personalized omnichannel pharmacy and health solutions that are driving new customer acquisition, and converting single-channel shoppers into high-value cross shoppers. As a key pillar of our Customers for Life strategy, scaling these pharmacy and health solutions profitably through higher-margin services, central field expansion, and innovative procurement and operational efficiencies is a top priority. In the integrated mobile app experience, we introduced the app as a Swiss army knife of tools that simplify planning, shopping, saving, and more. Whether customers shop in-store or online. Since then, we've enhanced it with advanced personalization and AI. Our newest feature, Ask AI, delivers a conversational search experience that helps customers build smarter baskets faster. It enables natural cross-category discovery and personalized recommendations. Customers no longer need to know exactly what they're looking for in our aisles or online. They can simply ask, what are healthy snacks for kids? Or say, my holiday party is tomorrow, and I'm not prepared. Ask AI will offer tailored ideas and guide them to relevant products. Our media collective delivered strong momentum in the second quarter, significantly improving the year-over-year return on ad spend for our partners. This was driven by enhanced data quality, more precise targeting, and faster campaign measurement. On-site digital ad inventory has grown meaningfully year to date. While improved speed to market has enabled advertisers to launch and optimize campaigns with much greater agility. Off-site, our media offerings are gaining traction. By leveraging real-time transaction data and integrating item-level sales reporting, with platforms like Google, Meta, and Pinterest. We're delivering greater transparency and measurable performance across the customer journey. We've also advanced our full-funnel strategy through shoppable recipes, app integration, connected TV, and new in-store digital signage, creating seamless experiences for customers and measurable value for our partners. Looking ahead, we remain focused on building innovative customer-centric media solutions that drive growth for our partners and value for our business. In our customer value proposition, we continue to invest through a balanced approach of enhanced loyalty, incremental and personalized promotions, competitive pricing actions, and vendor funding. This includes surgical price investments in select categories and markets along with dynamic management of cost inflation to help stretch customers' wallets. During the quarter, we made incremental shelf price in specific divisions, and while early in the journey, we're already seeing an inflection in unit sales growth. We continue to strengthen our own brands portfolio this quarter. Introducing new offerings across multiple categories that deliver exceptional value to our customers. These enhancements are driving customer engagement and loyalty, while also contributing to margin accretion through improved mix and merchandising. As we elevate the visibility and appeal of our own brands, we believe we can drive outsized growth in this critical area of our business. Reinforcing our competitive advantage and long-term profitability as we drive penetration from 25% to 30% over time. Technology remains central to our long-term growth strategy. As we shared last quarter, our technology-first approach is enabling us to innovate faster. Operate more efficiently and deliver greater value at a lower cost. We're energized by the progress we're making as we embed technology across every part of our business. Our modern cloud-native platform continues to power key operations across e-commerce. Stores, pharmacies, supply chain, merchandising, and retail media. It also positions us to rapidly scale emerging technologies like AI. We are actively deploying AI agents to enhance core business functions. Including cogeneration, price and promotion, personalization, and customer care and experience, like Ask AI. Unlocking new levels of speed, precision, and productivity. Looking ahead, we see technology innovation as a key enabler of both margin expansion and customer experience differentiation. And we remain very focused on building capabilities that drive long-term sustainable value creation. Driving transformational productivity is not a priority. It's an imperative. As we navigate a dynamic operating environment, it's critical that we unlock the sustainable efficiencies to reinvest our strategic growth initiatives offset inflationary headwinds, including annual union labor cost increases. As previously shared, from fiscal 2025 through fiscal year '27, we expect our product engine to deliver $1.5 billion in savings and are on track to achieve the 2025 savings. Our productivity savings are tightly integrated with our technology modernization strategy, which includes AI and data analytics to enhance decision-making and operational agility, automation across the supply chain, to optimize costs, improve speed, and support business continuity. Shrink in labor management tools, including Vision AI and electronic shelf labels to drive store-level efficiency and accountability. We're also making meaningful progress in reducing existing overhead and expanding our global capabilities. With continued investment in our India Technology and Innovation Center, and scaled back office operations in Manila. These hubs are accelerating our ability to deliver productivity at scale while also enhancing operational support capabilities. One of our most significant opportunities continues to be leveraging our consolidated scale to improve purchasing efficiency. Through national buying strategies and more streamlined supplier relationships, we are driving better cost outcomes and consistency across our network. At the same time, we are completely transforming our merchandising organization end to end. Structurally building a house of merchants empowered by AI. We're also reimagining our assortment strategy. And upgrading our tools and processes to drive more effective execution and stronger results. Including a partnership with OpenAI, to use Agencik AI to power merchandising intelligence. This transformation is designed to unlock the full potential of our talent and scale enhance customer relevance, deliver improved financial performance. Sharon, over to you.

Thank you, Susan, and good morning, everyone. It's great to be here with you today. As Susan shared, it is a new day at Albertsons Companies, Inc. Under her leadership, a right to win energy is mounting across the company, and the pace of change at both the division and national levels is accelerating. We are also seeing our investments in digital loyalty, e-commerce, pharmacy, and retail media taking hold and adding to our competitive war chest. With this said, these opportunities in front of us have remained underappreciated in our equity story. And there is clear dislocation between our stock price and the underlying value of our business. So before I dive into our Q2 financials, I want to talk about capital allocation. With the strength of our balance sheet, and our belief that our stock is undervalued, we announced two capital allocation actions this morning. To quickly return value to our shareholders. First, we increased our existing share repurchase authorization from $2 billion to $2.75 billion. Under this new authorization, today we announced and executed a $750 million accelerated share repurchase on top of an already repurchased $600 million in shares since the beginning of the fiscal year. Combined, assuming today's share price for the ASR, these repurchases represent over 12% of our beginning of the year outstanding shares. With a remaining authorization for future repurchases of $1.3 billion. This $750 million accelerated share repurchase is immediately accretive and including it our net debt to adjusted EBITDA ratio will be 2.2x versus 2x at the end of the second quarter. Still well within a range that gives us significant operational flexibility. Turning now to our second quarter results. I'll start with identical sales. Adjusted identical sales grew 2.2% this quarter. Adjusted for a 12 basis point negative impact related to the three-week Colorado labor dispute in 47 stores. This 2.2% increase was driven by strong growth in pharmacy and a 23% increase in digital sales. Pharmacy in particular outperformed even our own expectations. Driven by ongoing growth in GLP-one and share gains from the standalone pharmacy channel. We also saw encouraging growth in areas where we made surgical investments like Fresh. As Susan mentioned earlier, where we invested we saw improving unit trends. Gross margin in the second quarter was 27%. Excluding fuel and LIFO, gross margin decreased 63 basis points versus last year. But importantly, it improved sequentially from Q1 on a year-over-year basis. The ongoing mix shift toward digital and pharmacy drove the significant majority of this decline. Incremental investments in our customer value proposition, however, were substantially offset by gains from our productivity initiatives. Also driven by productivity, we saw a 50 basis point improvement in our selling and administrative expense rate compared to last year, excluding fuel. That's on the same trend as last quarter and reflects the benefits of leveraging employee costs and lower merger-related expenses. We expect continued discipline in the selling and administrative expense rate in the back half of 2025 and beyond. Interest expense picked up slightly in Q2, $105 million this quarter versus $103 million last year. The increase was mainly due to costs associated with the refinancing and maturity extension to two and thirty. Of our $4 billion asset-based credit facility which was completed during the second quarter. Finally, adjusted EBITDA in Q3 was $848 million and adjusted EPS was $0.44 per diluted share, in line with our expectations and reflective of the strategic investments we're making for long-term growth. I'd now like to give you a quick update on our year-to-date labor. In fiscal 'twenty-five, we had 120,000 associates up for renewal. To date, we've successfully reached agreements covering more than 107,000 of those associates. Now let's walk through our updated 2025 financial outlook. As Susan said, we remain focused on our five strategic priorities, Through the balance of fiscal 'twenty-five, we will continue to invest in our customer value proposition, customer experience, digital growth, the media collective, and health and pharmacy. These investments are expected to enhance our customer value proposition and drive outside growth in digital and pharmacy. Both of which drive higher future customer lifetime value. We will also continue to focus on our productivity agenda to fuel this growth and offset inflationary headwinds. With that as our backdrop, we are updating our fiscal 2025 outlook as follows. We are increasing the lower end of our identical sales range and now expect it to be in the range of 2.2 to 2.75%. This assumes ongoing outsized growth in pharmacy and digital as well as continued surgical price investments in grocery, to accelerate unit inflection. We continue to expect adjusted EBITDA to be in the range of $3.8 billion to $3.9 billion unchanged from last quarter including the approximate $65 million in adjusted adjusted EBITDA in the fourth quarter related to our fifty-third week. We are increasing, however, our adjusted EPS to a range of 2.06 to $2.19 reflecting the 2025 accretion of the $750 million accelerated share repurchase announced today. The effective income tax rate is expected to be in the range of 23.5% to 24.5%. Unchanged from last quarter. We do, however, expect a cash flow benefit in the range of $125 million to $150 million in 2025 from recent tax legislation. Capital expenditures are expected to be in the increased range of $1.8 billion to $1.9 billion as we accelerate our investment in digital and automation. And finally, as it relates to tariffs, tariffs have not had a material impact on our financial performance yet this year. As 90% of the products we sell are sourced domestically. Insulating us from global trade volatility. Beyond that, we have and are taking proactive steps to mitigate cost exposure leveraging sourcing and supplier partnerships, to minimize the downstream impact to both our margins and our customers. And with that, I'll hand it back to Susan for closing remarks.

Thank you, Sharon. In closing, this is a new day at Albertsons Companies, Inc. And we're operating from a position of strength. We are executing with clarity, discipline, and momentum. Our strategy is working and it's delivering measurable results. Our owned real estate portfolio, our trusted local banners, and our locally great and nationally strong operating model give us a strong foundational competitive advantage. One that we are leveraging to drive long-term sustainable growth. We are also deepening engagement through our customer-focused associate connections digital platforms, expanding our reach through loyalty and e-commerce. And unlocking new revenue streams through our growing media business. At the same time, we're modernizing our capabilities with scalable technology driving transformational productivity and making strategic investments that will enhance our customer value proposition. We are confident in our ability to deliver on our fiscal 2025 commitments and even more excited about the opportunities ahead as we enter our long-term growth algorithm in fiscal 'twenty-six and beyond. To our 280,000 associates, thank you. Your passion, resilience, and commitment to our customers is what will fuel our next chapter. You are the heartbeat of our company. The architects of our customer experience, and the driving force behind our transformation. We look forward to continuing to create value for our customers, our communities, and our shareholders. We'll now open the call for questions.

Thank you. Our first question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question.

Yes. Hi. Good morning, everyone, and thank you for the update. Clearly, you're expressing your confidence in the business and the return of the algo in '26 with the ASR. I was curious if you could maybe you know, take a step back for us and, you know, maybe revisit the building blocks of returning to algo next year and, you know, what is driving that incremental confidence that we're hearing today. I mean, '25 is certainly an investment year and, you know, it's a choppy investment year. So, you know, just curious around, you know, around that around that confidence in the building blocks for next year.

Good morning, Ed. So sure. First and foremost, what I would say is it's it's really sticking to the five priorities that we've laid forth. Driving our customer growth through our digital connections, growth in our media collective, enhancing the customer value proposition, modernizing our capabilities through technology, and driving transformational productivity. And within each of those, we're seeing strong proof points of success. As an example, I think about the customer value proposition. With great intention, we've invested surgically in key markets and we're seeing a positive inflection in units there. We're starting to see the returns. In addition to that, we made deeper investments in promotions, in loyalty, and personal personalization. And again, we're seeing those customers engage with us at a deeper level and more frequent. Frequently. From a productivity perspective, we've we've spoken of the 1 and a half billion dollars in productivity. We are on track for those savings. In 2025, most of that is coming from SG&A. As we look forward into the future, we'll start to see that coming from gross margin expansion.

Just a follow-up on on all this. I mean, from a pricing standpoint, obviously, you've been investing in price. You know, you're starting to get some you know, result associated with that. But it's been pretty surgical. How are you thinking about, you know, the outlook for price investment as you continue forward? I'm curious from a price competition standpoint, have you seen price competition know, increase in all? And I think overall, I guess what I'm trying to ask here is that I think you know, investors are worried that that we may see a more accelerated investment from a pricing standpoint. So I'm just curious as to how you see that playing out as things move forward here.

We're very pleased with the price investment so far as I mentioned. And I I can't underscore enough that they are incredibly surgical by category, by market. We've we've got an aggressive agenda laid forth on pricing, but it's also we recognize the fact that we are striving to offset it with increased vendor funds and with other sources of productivity. So this is a very measured exercise, very surgical, We don't anticipate making any brash moves. It's all built into our plan. And again, it seems to be working. We're we're very pleased with the initial results.

And Ed, I would just add to that. That so many of these pricing surveys do not capture the personalized discounts that the customers receive through our loyalty programs, gas rewards, and the now they're even converting those rewards into cash, which when they're checking out, they are getting cash off as they walk out of the store. And we think that that is a very powerful way to leave the store when you've just had your bill reduced. When you take that into consideration, customers are receiving great value through those programs. And when we think about that, we also have to think about the acceleration that we are moving forward with with owned brands. One of the biggest things we will do to bring value to our customers is to continue to invest and grow our penetration of owned brands.

Great. Thank you.

Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer and Company. Please proceed with your question.

Good morning and thanks for taking my question. So just going back to I guess just gross margin dynamics for the balance of the year. Just curious the puts and takes for the back half. Anything changed versus what you saw in the first half first half of the year?

We don't see any significant real change in the margin. The mix shift we expect that to continue. As a reminder, those are our highest customer lifetime value customers. In RX and e-commerce. So that we expect to continue. And what you saw in the second quarter is how our productivity funded a significant amount of the surgical price investment. So we expect that also to continue. So when I look at Q2 and I look at the full year, I would expect that margin to be very similar with the main explanation of the variance year over year to be mix shift.

Great. And then maybe my follow-up question, just given a lot of concerns out there on the consumer backdrop, just curious what you guys saw with your consumer during the past quarter and then your expectations for the balance of the year?

Sure. So what we've seen from the consumer is a continued focus on value. A shift to trading down, maybe it's smaller package sizes, a focus on own brands, hence why we believe we have an incredible upside opportunity. Increasing our penetration well above 25%. We see an increased usage in coupons. We see them sticking closer to their shopping list maybe not buying that extra item, that extra bottle of whatever they're they're kind of shortening their list and sticking to it. On the other side of it too, we're still seeing a lot of impacts from healthier eating. Whether it's just I think it's an overall awareness of making better choices categories like functional beverage, protein shakes, protein-enhanced milks, and those kinds of things, supplements. All of those continue to grow. We're seeing a nice and what what we enjoy about that is those are the categories that also include things like fresh meat, fresh produce, and they're margin accretive for us so we see some positives there. The pressure continues. And we're working very hard to give the customers what they want by market in a way that fits their budget. We also offer tools through our app to help them create lists that fit within their budget that meet their health and wellness needs, and and and ease and simplify sort of the mental load of of shopping in today's environment.

Great. Thank you for all the color.

Thank you. Our next question comes from the line of Mark Carden with UBS. Please proceed with your question.

Good morning. Thanks so much for taking the questions. So to start just on the full year guidance, you're boosting your top line but maintaining your EBITDA expectations. Just wanted to get some color on the primary driver of the gap there and how much of that is related to any incremental price investments versus conservatism or anything else? Thank you.

The increase in the sales range in the guidance is primarily which was driven by pharmacy. And we expect due to the performance in Q2, volatility in the ID sales to be driven by ongoing growth in the pharmacy. It's an area that we are taking share and we are continuing to capitalize on the benefits we can get from those new customers. As it relates to the adjusted EBITDA, because we expect that to come from pharmacy, it doesn't have a significant impact on adjusted EBITDA.

That's great. And then as a follow-up, just on the pharmacy cross-selling front, are you seeing any deviations just in the spending lifts from customers using GLP-one? Just in other words, is it having any impact on your ability to see as much of the sales left for those specific customers? As you guys have seen in the past over time?

Sure, Mark. So what we typically see with the GLP customers is that there might be an an additional excuse me, an additional dip in their purchase size, but we see that recover fairly quickly. And then if they do continue to expand their basket once again, as I mentioned, they are leaning into some of the categories and protein supplements chicken, beef, fresh vegetables, and we love about that is, again, they're very margin accretive for us. And how the customer shopping the entire store, expanding the breadth of categories that they're shopping with us. So there may be an initial impact, but we quickly see recovery from that.

Great, thanks so much. Good luck.

Thank you. Our next question comes from the line of Leah Jordan with Goldman Sachs. Please proceed with your question.

Good morning. Thank you for taking my question. Just wanted to ask about the updated comp guide and see if you could talk about what's embedded regarding the cadence in the back half? Has anything changed in your view on how you're thinking about inflation versus tonnage? Maybe on the pharmacy piece, I mean, there anything to think through on the timing shift with vaccines and how that could drive the comp in the third quarter versus the fourth quarter? Thank you.

Yes. So as we think about the comp pharmacy will drive higher comp in Q3. Than we think it will drive in Q4 for the very reasons that you've just mentioned regarding vaccination and the ongoing market share gains we're getting from the closure of other pharmacies. We're picking up those customers and are thrilled to do so. So from that perspective, Leah, I expect there to continue to be momentum coming from pharmacy. We also expect to see continued growth in e-commerce. And from a difference between the two quarters, I don't think it's materially different. Between the two quarters. Sharon, I would just add to that from a pharmacy perspective as well. The delay in vaccines maybe had a slight impact at the end of Q2. But that actually accelerated at the beginning of Q3 and a credit to our pharmacy teams. Who once the vaccines were released, we were out there in full force and are pretty excited about what we're seeing in vaccine growth this year.

Okay. That's helpful. And then just on productivity, I mean, you guys are driving nice improvement on SG&A leverage, better than we were expecting. I think, Susan, you highlighted a number of items in the prepared remarks that can drive that. I think AI, automation, reducing overhead, among others. But just as you think about that long list of opportunities, I guess which are the ones that are circled near term versus longer term within the three-year plan? And then as we think about this year, what about cost savings? Right? Like, how much of a relative magnitude shift is that in the back half? Versus the front half?

Sure. So with regards to the productivity side, what we're seeing, first and foremost, and I I think I said it earlier, is the bulk of the savings in 2025 are SG&A related. And this is us looking end to end across the organization, understanding where we made the tough decision to lay off close to 1,000 individuals this year. We're also looking behind the scenes on processes where we can automate, eliminate, simplify them. And and and looking at what we can take to our offshore businesses again, to cost savings, but also to enhance our capabilities. As we look forward, we'll start to see greater improvement in margin expansion as I mentioned, and this is where we'll start to see the impact of our buying better together. Leveraging our national size and scale, to secure better cost of goods. And, oh, by the way, partnered with that is technology. So there's tools that were that were launched or that are in process, I should say, with OpenAI as one example to help us improve our category strategies, to help us make better decisions faster, and to leverage the amount the vast amount of data that we have to secure stronger negotiations with our vendor partners.

Sharon, would you like to add? And, Leah, I would just add to that. During the second quarter, we did open our Technology Innovation Center in India. And we successfully moved a large piece of our back office accounting finance functions to Manila. That Manila operation, just to remind you guys, has been there about twenty years. So it's an established entity for us. And we are very pleased with how these moves have gone. They've been really seamless, honestly. And we will continue to balance onshore and offshore going forward.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Paul Lejuez with Citi. Citigroup.

Hey, thanks guys. I'm curious within your productivity initiatives, how much you are focused on shrink, I guess, both fast and and spoilage or or waste? And what are the levels of sit today versus history? And how do you look at the opportunity to improve those items reducing theft, reducing waste as a potential driver of stronger profitability in the future? And then just a quick follow-up on the pharmacy business. I'm curious if you can talk about how much of that sales growth is being driven by existing versus new customers. I think you cited gaining some market share from from closing competitors. And I'm just curious how that would break down existing versus new? Thanks.

Sure. Thanks, Paul. So with regard to shrink, we are seeing improvements year over year. And much of that is driven by improvements in operational effectiveness, just being frank. And but a lot of it is being driven by tools and technology. As an example, we've now got AI cameras systems over our registers to understand perhaps items are being scanned properly at the self-checkouts or even by our own clerks. We've got improved tools and processes in order management and also in production planning, leveraging history leveraging current trends to give us best-in-class order sizes and production planning lists so we can optimize for sales but also manage our shrink levels. From the pharmacy perspective, on the GLP-one side, we are seeing, of course, the lion's share of growth comes from GLP-1s also our core pharmacy business, our core script growth is doing quite well. We are One example of where we're doing well outside of GLP-one are speaking of vaccines earlier today, We are three times our market share in vaccines versus our normal share in pharmacy. So we're working very hard to find outsized growth and profitability to help our bottom line and our top line.

And during the quarter, we did see a significant number of new customers come into the brand. But remember that they don't have to be completely new to us. It is possible that when a Walgreens or a CVS closes, that a customer that is currently grocery shopping at Albertsons Companies, Inc. may be filling their prescriptions there because of the health plan they may be associated or another reason that it may be unbeknownst to us. So we are bringing in customers that are in grocery today that are coming into pharmacy. We are bringing customers in the store that have not shopped in grocery in our stores, which is our biggest opportunity. But we are seeing all of the above. But always keep in mind the majority of our pharmacy sales will always come from grocery customers in our stores today that then convert to becoming pharmacy customers.

Thank you. Good luck.

Thank you. Our next question comes from the line of Jacob Aiken Phillips. Melius Research. Please proceed with your question.

Hi, morning. So I I wanted to talk about e-commerce. I'm just curious, like so I think last quarter you said it it was nearing breakeven and there's some mixture towards e-commerce just pressuring gross margins. Over the long term, how are you balancing the structural labor and capital requirements of you know, direct delivery and immediacy versus, like, cost efficiencies?

Jacob, thanks for the question. So with regards to e-commerce, yes, we're getting closer to breakeven to profitability there. And there's a few items that play. First and foremost, our business continues to grow exponentially. We're very excited about that. We're proud of that. And at the same time, we've been leveraging technology, data, information to optimize the picking path. For our shoppers within our stores, whether it's picking one order at a time, picking multiple orders at a time, giving them a pathway to shop up and down the aisle, to create productivity. We're continuing you mentioned the capital allocation side of things. And as we look at this exponential growth, when we go through our remodel process, as we're building new stores, we're continually evaluating the space that we're allocating to our e-commerce operations and making the right decisions to expand. We're also able to go back and retrofit certain stores, perhaps adding refrigeration. Adding hot food holding so that we can give the customers what they want. When they want it. That part of the process is is essential to us because, again, we don't know what high looks like. We expect it to continue to grow in the future. The beauty of our model is our twenty-two seventy-ish stores are located in the neighborhood where our customers are shopping. We've solved for the last mile purely by our proximity to the customers that we serve. So that that helps us with the profitability side, and maybe more importantly, it helps us on the customer experience side. You're getting product that was picked for you fresh, Right? You can you can custom order a cut of meat. We can write happy birthday on a cake for you. But you're getting those products from the store that other shoppers are shopping and up in as quickly as in thirty minutes if you'd like, or next day if that's what's most convenient for you. But our proximity is really a huge advantage for us as a company.

And, Jacob, I'll just add to that that when you think about the fact that we actually believe that the winner in e-commerce would be in the last mile. Who successfully delivered best and highest quality fresh product in the last mile. And we built our e-commerce model with that in mind. So we have been, from the date that we actually started e-commerce, we have been using our stores as fulfillment centers in order to achieve that. As part of that, we have evolved proprietary systems to support the entire picking distribution process in our stores and continue to engineer those capabilities and those systems to drive the highest level of efficiency, which is why we can sit here and say we are getting very close to near breakeven in the e-commerce business.

Thanks. That's helpful. And then so I appreciate all the comments on using AI. I partnership with OpenAI. It's a big team right now, obviously. If you can take take a step back and talk about how you're managing, like, integration across the organization of these some of these cutting-edge tools, like, what use cases? You've mentioned some. What are the And how you it evolving over the next few years?

Sure. So honestly, of the most effective methods that we have for deploying new technologies across 285,000 associates. Is they help us build the solution. So you mentioned OpenAI. We actually have division merchants. So, yes, our corporate team's engaged, of course, and our national tech team, but we're actually using some of our merchants that work in the divisions today that are closest to the stores to help us build these tools, So they're incredibly intuitive. They're they're meant to take work away. As an example, you know, we we have an incredible amount of data available to us. It can actually become very complicated to be able to get answers. By leveraging AI tools, we're able to simply ask business questions. Why were my ice cream sales up yesterday? What were the key items that I sold the most of, or or why was I down? And with the AgenSci AI, we're able to actually get information back at a at a really rapid pace after getting our information back. And we're able to then action upon that information as opposed to spending all the time digging into it. When I think about what we've done with AI at store level, Afresh. It's a tool that we use for order writing in our fresh departments. That tool was literally created in partnership with one one or two store managers department managers in produce helped us write that tool. So that it was very intuitive to the actions that they were taking today, but of course sped up the process and added that multidimensional data that we're looking for. It's really getting the team involved and building the tools that they will use in the future that's part of our success in this space.

We're also using it, extensively in the real estate side of our business. We are it can help us assess the performance across our banners, markets, formats, It provides clear visibility into where we're the strongest and where the opportunities exist. And we're also training the AI agents to perform advanced geospatial type analytics. That's mapping competitive proximity trade areas. And market dynamics. And we can do that in real time. And these are extremely valuable insights for us as we continue to focus on future growth new locations. And in Susan's deep dive that she talked about, it's been one of the foundational tools that she's been looking at to look at all of our assets noncore assets, etcetera.

Thank you.

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hi, Susan. Hi, Sharon. Thanks for the question. My first question, it's on the ASR So Susan, since you've joined, you've kind of opened the of reinvesting a little bit more. And the business is still under comping the industry. So thinking about spending on stores or something related to digital, how did you weigh that versus repurchasing the stock or, frankly, even paying down some debt?

Hi, Simeon. Once we does not preclude the other. So the ASR does not prevent us from continuing our capital expenditures as planned. We've got a very aggressive agenda there in terms of remodels, new stores, driving technology improvements, We've also left ourselves, and Sharon can speak to this, dry powder. We are interested in growing in many ways organically, but also, you know, through acquisition. So we've left ourselves some room to be able to accomplish whatever we need from a capital perspective, an acquisition perspective, or whatever else might come our way. Sharon? Yeah. And, Simeon, not prepared remarks, we said it. With our adjusted EBITDA ratio at 2.2 it leaves us able opportunity and tremendous flexibility. So we don't see the ASR as having any impact on any of the strategic initiatives that we've been talking about.

Thanks for that. And then, one follow-up. The e-commerce growth digital was excellent. Can you talk about the drivers of it? And can you remind us this this pharmacy growth factor into that, or is that just, I guess, grocery orders?

Yeah. So thank you for the question. Pharmacy growth is separate, so this is truly just the rest of the store growth. And some of the key factors there are, first, and foremost, our five-star certification program. And this is really just ensuring that our associates are delivering the customer experience that we expect. They're meeting productivity timelines, that they're delivering the quality our customers are looking for, And I have to say, our team is doing a phenomenal job in that space. The other side of it is as we look at the improvements that our team has been making on the app. Your ability to create lists, your ability to add items, from recipes, your ability to seek recipes, and and be able to look at your app as sort of a one-stop-shop solution for all your needs in your shopping experience with us. By the way, that's for e-commerce, but that's also true for online.

Thank you. Good luck.

Thank you. Our next question comes from the line of John Heinbockel with Guggenheim Partners. Please proceed with your question.

Hey, Susan, can you you mentioned sort of looking at assets noncore assets. How do you think about those You know, what are sort of non-core And then when I when I think about store assets, you've got markets with dual banners right, multiple banners. How do you think about that in terms of possible banner consolidation And when you look at markets where you might lack share, is there a real thought of you know, exiting some markets, Or do you try to gain requisite share through selective M&A. How do you look at the portfolio?

Yeah. Sure. So thanks, John. So as we look at our our assets, first and foremost, one of the things that Sharon just mentioned Our real estate team is doing a phenomenal job of aggregating data for us to be able to look at our fleet across the entire country, overlay that on top of customer growth, you know, in an influx of population growth. Looking at where we performed strongest with our customers, where the brands resonate best and so forth. So we're looking across the entire organization it's helping us identify first and foremost where are we doing well? Where do we wanna double down? How can we either, again, grow organically or we're looking for fill-ins? One of our top priorities is saying as we see growth across the entire organization, where are those markets where we've got a strong suite, we need to to double down and and buy or build more, or adjacent opportunities where there might be a fill-in, a We're a banner company built of acquisitions. It's what we do. We're very good at it. And looking for those strategic fill-ins is really important to us. From a Banner perspective, we've gosh, we've been what we call flipping banners for years. That's where we look at a market and say, gosh. We've got two or three banners. Which ones are performing the best? Which ones resonate most with the that we serve. The Northwest is one example where I can think of where we've flipped many of our stores from Albertsons Companies, Inc. to Safeway as an example. In Southern California, we flipped stores from Vaughan to Pavilions. So we're using this data and information that we have to make very surgical decisions, strategic decisions on how we can improve the fleet moving forward.

And then maybe a quick follow-up. Just remind us as part of the secular algo on top line, Food volume, I I think, the plan is to be modestly positive. Correct me if I'm wrong with that. When do you think you inflect to that point? You know, is it next year or or that too early? And I guess, is pharmacy, you would think pharmacy alone could play a big role in getting to positive.

John, what we previously said is that as we enter 2026 into the algo, it is our expectation that we are getting to near flat units. Now if the industry continues to decline, of course, we will still continue to move forward. And I think within that two plus we believe that that could be an inflection point for us. If not, it will move into '26, depending on what with the industry. But we still believe regardless that we will be in the algo in 2026 at two plus percent comp. It may come a little bit differently. And one of the things to keep in mind with that is that as we move forward with pharmacy, the scale that we have been able to take or or grow is allowing us to do things that we were not able to do before to improve profitability in pharmacy. I don't want us getting overly excited about the pharmacy business profitability. But as we all know, today, it is actually dilutive to adjusted EBITDA. And everything we can do, like Central Fill. Like vendor negotiations on drugs, direct negotiations, will help improve incrementally that pharmacy contribution. So we do expect that to happen over time. Additionally, you think about it, an e-commerce. As we get closer to break even in e-commerce, every additional order helps lever into adjusted EBITDA. So we're expecting the identical sales growth of two plus and then adjusted EBITDA slightly better than that. So based on everything we've talked about here today, and the priorities and everything Susan shared, we are very confident in our ability to get there for 2026.

Thank you.

Great. Thank you all so much for your questions. We appreciate your time, and we look forward to talking to you over the next couple of days.