Albertsons Companies - Earnings Call - Q4 2025

Executive Summary

• Q4 fiscal 2024 delivered steady top-line growth and digital/pharmacy momentum: Net sales rose to $18.80B, identical sales +2.3%, digital +24% and pharmacy revenue +18%.
• Gross margin rate compressed to 27.4% (vs. 28.0% prior year) on pharmacy mix and digital delivery/handling costs; SG&A rate held flat at 25.7% year-over-year.
• EPS context: Diluted EPS was $0.29 and adjusted EPS $0.46; the quarter beat Wall Street consensus on both EPS and revenue by modest amounts, while entering FY25 as an “investment year” with guidance implying lower margins near term (see Estimates Context and Guidance).
• Capital allocation and catalysts: Board reaffirmed quarterly dividend of $0.15 per share, initiated $2.0B buyback authorization (Q4 repurchases $82.5M) and refinanced $600M notes; leadership transition to incoming CEO Susan Morris highlights continuity of “Customers for Life” strategy.

What Went Well and What Went Wrong

• What Went Well

  • Digital and loyalty flywheel: e-commerce grew 24% in Q4 (penetration >8%), loyalty members up 15% to 45.6M; management sees outsized growth opportunities vs peers.
  • Pharmacy strength and customer lifetime value: pharmacy revenue +18% in Q4; cross-shoppers carry 4x baskets and are strategic to long-term engagement.
  • Productivity offsets: Ongoing initiatives in shrink reduction, store labor tools, automation and WMS rollout helped fund customer value investments and mitigate margin mix headwinds.

• What Went Wrong

  • Margin pressure from mix and investments: Gross margin rate fell to 27.4% (vs 28.0% y/y) on pharmacy mix and digital delivery/picking costs; FY25 set as an investment year with expected near-term margin headwinds.
  • Wage inflation and competitive intensity: SG&A pressure persists given higher multi-year wage contracts and promotional environment amid mass/club strength.
  • Asset impairments: Net loss on property dispositions and impairments of $36.4M in Q4 (vs $0.8M y/y) weighed on operating income.

Transcript

Operator (participant)

Welcome to the Albertsons Companies Q4 and fiscal year 2024 Earnings Conference Call. 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 (SVP of Investor Relations, Treasury and Risk managegent)

Good morning, and thank you for joining us for the Albertsons Companies fourth quarter and fiscal year-end 2024 Earnings Conference Call. With me today from the company are Vivek Sankaran, our CEO; Susan Morris, our COO and CEO-elect; and Sharon McCollam, our President and CFO. Today, Vivek will make a few parting comments on his retirement, and Susan will update you on our strategic priorities and our progress and path forward against them. Sharon will provide the details related to our Q4 2024 financial results and our 2025 financial outlook before handing it back over to Susan for some closing remarks. After management comments, we will conduct a Q&A session. I'd 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. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events, or otherwise.

Please keep in mind that included in the financial statements and management's prepared marks are certain non-GAAP measures, and the historical financial information includes a reconciliation of net income to adjusted net income and adjusted EBITDA. With that, I'll hand the call over to Vivek.

Vivek Sankaran (CEO)

Thanks, Melissa. Good morning, everyone, and thank you for joining us today. First, let me say a few words about my upcoming retirement and Susan's succession to the role of CEO. It has been an honor to serve as the Albertsons CEO and work alongside the best people in the industry. My tenure has spanned the COVID-19 pandemic, our initial public offering, and our reemergence as a standalone company following our 2022 review of strategic alternatives. What I'm most proud of is that throughout this journey, we have stayed true to our customers, invested in strengthening our business, and advancing our Customers for Life strategy. This strategy has firmly positioned the company for its next chapter of growth and value creation for our shareholders. Within the few months since the termination of the merger, our mojo is back.

We are executing once again like we used to, and we have proof points and therefore more conviction to say that our strategy is right and working. Thank you for your support through all of it. For those of you who do not already know Susan, let me introduce you. Susan is a homegrown talent, starting her career at Albertsons nearly 40 years ago at a store in the Denver market. During her tenure, she has taken on roles of increasing responsibility, including store operations, supply chain, and merchandising. She has been the steward of our retail operations for my six years here. She has become one of the most influential leaders across the industry. She has extensive knowledge of all facets of the industry and our company, a strong track record of driving operational excellence, and most importantly, a passion for serving our customers, our associates, and our communities.

She has been a top partner with me since the day I arrived and an integral part of developing and leading our Customers for life strategy. I'm delighted she is taking the reins and cannot wait to see the next great chapters of our company under her leadership. Susan, it's all yours.

Susan Morris (COO and CEO-elect)

Thanks, Vivek, for the introduction and for your partnership. Over the last six years, you've helped us reach a new level from which to grow. Turning to the Q4, we're pleased with our results, including ID sales growth of 2.3%, adjusted EBITDA of $855 million, and adjusted earnings per share of $0.46. These results illustrate the proof points of our strategy that Vivek mentioned and were guided by the following priorities: driving customer growth and engagement through digital connection, growing our Albertsons Media Collective, enhancing the customer value proposition, modernizing capabilities through technology, and driving transformational productivity. As we outlined last quarter, to engage customers, we've continued to invest in growth through four digital platforms. These platforms are designed to drive increased sales, more deeply engage our most loyal customers, increase customer lifetime value, and generate digital space and robust data for the Albertsons Media Collective.

The first digital platform is e-commerce. E-commerce grew 24% in the Q4 and the full year, with first-party far outpacing third-party growth. We operate our e-commerce business out of our stores, which allows us to leverage our rich asset base and proximity to our customers. It also enables full access to our merchandise assortment, a fast and convenient Drive Up & Go experience, and robust delivery options. E-commerce penetration is now over 8% of grocery revenue, with our top-performing markets now over 10%. This growth is driven by award-winning experiences in our fully integrated mobile app and the success of our five-star certification program, which we discussed last quarter. At over 8% of grocery revenue today, e-commerce penetration is still below our industry peers and is one of our biggest growth customer acquisition and customer retention opportunities for 2025 and beyond. The second digital platform is loyalty.

Loyalty membership grew by over 15% year-over-year in the Q4 to more than 45 million members, and at the same time, actively engaged customers increased 12%. Our new simplified loyalty program is a key enabler of digital customer engagement and a rich source of data for the Albertsons Media Collective. Through the unified mobile app, it allows customers to get personalized deals, to earn points, and to have an extended period of time to redeem them for fuel and grocery rewards or automatic cash off their grocery bill. Since launching the simplified program, 20% of engaged households are now electing the new cash off option, reinforcing the customer desire for immediate value. In fiscal 2025, we will continue to simplify and expand the program to include integrated strategic partnerships that will offer even more value. The third digital platform is pharmacy and health.

In the Q4, pharmacy revenue increased 18% year-over-year, driven by industry-leading script and immunization growth, best-in-class customer satisfaction scores, and the ongoing integration of experiential health offerings in our Sincerely Health mobile app. Although the pharmacy business is financially dilutive, cross shoppers between grocery and pharmacy are exceptionally valuable, contributing outsized customer lifetime value to the total store. For this reason, in fiscal 2025, we will continue to invest in our pharmacy and health platform to drive increased customer engagement and loyalty. We also expect growth in scripts and immunizations as pharmacy competitors continue to close stores. The fourth digital platform is the integration of the mobile app for use in our stores. Launched in 2024, over 9 million customers have engaged with this in-store feature.

When customers are in our stores, we want them to digitally engage with us, which requires us to raise the bar on store-level execution. Our in-store geolocation mobile feature delivers real-time coupons, helps shoppers locate products, and assists customers with meal planning and generating shopping lists. In 2025, we expect to drive increased customer engagement through this platform by adding additional conveniences and value. All these digital platforms are working together to generate deeper customer engagement, increase digital inventory, and enrich our data to accelerate growth in the Albertsons Media Collective, or AMC. In fiscal 2025, we will continue to significantly invest in improving endemic and non-endemic brand reach by building industry-leading technologies to deliver an easy-to-use, dynamic, and transparent measurement model.

These investments will also improve our ability to define shopper audiences, run targeted media campaigns, compress campaign measurement timelines, and deliver consistent omni-execution across our digital and physical assets. In addition, we expect to build new partnerships that add even more digital inventory and capabilities to our media offerings. We continue to expect AMC to grow faster than the retail media market and to be one of the largest sources of fuel for reinvestment into our core business. Turning now to our customer value proposition, inflationary pressures have elevated our customers' needs for value. To address these needs, we're working with our vendor partners to strategically invest in price in certain categories and certain markets. We've also enhanced the breadth of our loyalty offerings to provide immediate savings and greater value. Finally, we're amplifying our own brand's presence to drive profitable unit growth and increase share of wallet.

We will increase innovation, more prominently feature existing owned brands, and offer products at attractive entry price points. We ended Q4 with sales penetration of 25.4% and believe with increased exposure and new product launches, we can increase our penetration to at least 30%. In Q4, we launched new items in our industry-leading Open Nature Cauliflower Pizza line and in our Signature Select ice cream assortment. We also launched our first seasonally relevant burst of flavor campaign to a strong customer response. Each of these value-creating initiatives are driving increased loyalty, greater digital and omni-household engagement, and higher transaction counts. Our next priority is a modernization of our capabilities through technology. Our North Star is to use technology in everything that we do. We've invested strategically to build best-in-class technology platforms with our core infrastructure in the cloud and a modernized, scalable network.

Most recently, we've built a real-time comprehensive data platform designed to enable data science and Artificial Intelligence. This advanced technology platform, on which we will continue to innovate, powers our e-commerce, store, pharmacy, supply chain, merchandising, and Media Collective operations, and will allow us to leverage emerging AI technologies to accelerate our operational transformation going forward. This transformation includes empowering merchants to optimize pricing decisions, using our recommendation and look-alike capabilities to provide customers personalized offers to complete their basket, and capitalizing on in-store vision AI to reduce inventory shrink and enhance product quality. The final priority is driving transformational productivity. Our productivity engine is systematically improving the efficiency of our business and lowering our costs.

From fiscal year 2025 through fiscal year 2027, we expect to radically deliver $1.5 billion in productivity savings, which we plan to reinvest in our growth initiatives and our customer value proposition, as well as to help offset inflationary headwinds. The largest of these initiatives is leveraging our consolidated scale to buy goods for resale. In fiscal 2025, we are accelerating national buying on a category-by-category basis, resulting in lower costs and easier, more efficient supplier relationships. The next of these initiatives is transforming our ways of working, including strategically consolidating divisions, rationalizing non-customer-facing headcount, and optimizing our onshore and offshore activities to not only reduce costs, but to accelerate innovation in technology and data analytics. In our supply chain, we are continuing to invest in automation and the rollout of our new warehouse management system.

By the end of 2025, we expect 30% of our distribution volume to be automated, and we're piloting innovative new technologies to expand our menu of options for future warehouse automation. We also expect our new warehouse management system to be fully implemented company-wide by year-end. All of these initiatives lower our cost to serve and improve our end-to-end data analytic capabilities, resulting in better in-stock conditions and a differentiated level of quality and fresh. Finally, in store operations in fiscal 2025, we're leveraging new store replenishment, shrink management, and labor productivity tools to drive enhanced efficiency and improved customer experience and deeper associate engagement. We're also continuing to expand the utilization of AI technology in our produce departments to drive increased freshness, higher sales, and better net promoter scores. I would now like to talk about the support we provide to the communities that we serve.

In 2024, along with the Albertsons Companies Foundation, we contributed more than $435 million in food and financial support. This includes $40 million through our Nourishing Neighbors program to ensure those living in our communities and those impacted by disasters have enough to eat. In addition, 10 March, we announced a new goal to enable 1.5 billion meals through 2030, supporting our efforts to help end the cycle of hunger. I will now hand it over to Sharon for an overview of our Q4 and to provide guidance on our expectations for fiscal year 2025.

Sharon McCollam (President and CEO)

Thank you, Susan, and good morning, everyone. It's great to be here with you today. As Susan shared, we are pleased with our Q4 results. The investments we are making are delivering transformational capabilities and affirm our confidence in our customers-for-life strategy.

What I'll do now is provide additional color on our financials for the Q4, and then I will discuss our 2025 outlook and provide an update on our capital allocation priorities. We grew ID sales 2.3% in the Q4, fueled by an 18% increase in pharmacy and a 24% increase in digital sales. The digital increase continues to be driven by strong growth in first-party sales. Our Q4 gross margin was 27.4%. Excluding fuel and LIFO expense, the gross margin decreased 45 basis points compared to Q4 last year. Strong growth in pharmacy sales, which carries an overall lower gross margin rate, and incremental digital volume-related delivery and handling costs related to the 24% increase in digital sales drove this decrease, but was partially offset by productivity initiatives.

In the Q4, we also made incremental investments in our customer value proposition, which were funded by the benefits from our productivity initiatives, which included reductions in shrink expense. Our selling and administrative expense rate was 25.7% this quarter. Excluding fuel, the SG&A rate decreased 5 basis points compared to last year. This decrease was primarily driven by lower merger-related costs and leveraging of employee costs in depreciation, partially offset by increased business transformation costs. Our selling and administrative expenses also benefited from our productivity initiatives. Interest expense net decreased $7.5 million to $101.5 million during Q4 2024. This reduction was primarily driven by lower outstanding debt. Income tax expense in the fourth quarter was $46.4 million, a 21.3% effective tax rate compared to a 20.4% effective tax rate in Q4 of last year.

As mentioned in the highlights, Q4 2024 adjusted EBITDA was $855 million compared to $916 million last year. Adjusted EPS was $0.46 per diluted share compared to $0.54 in the Q4 of 2023. Turning now to the balance sheet and cash flow, capital expenditures of $485 million in the Q4 were driven primarily by investments in the modernization of our store fleet and our digital technology platforms. In fiscal year 2024, we opened 11 new stores and remodeled 127 stores. We also returned approximately $87 million to our shareholders through common stock dividends. Additionally, we repurchased $83 million of common stock during Q4 2024 under our $2 billion share repurchase authorization. Net debt leverage at the end of the Q4 was 1.9 times, and the balance sheet remained strong. I'll now discuss our 2025 outlook.

As a reminder, fiscal 2025 is a 53-week year. Looking forward to fiscal 2025, we do so with continued confidence in our customers-for-life strategy and our ability to execute against it. To drive incremental growth, we are deepening customer engagement through our digital platforms, enhancing our value proposition, and modernizing our capabilities through technology. We are also continuing to drive our productivity agenda to fuel this growth and offset inflationary headwinds. Throughout fiscal 2025, we will continue to invest in our customers-for-life strategy, including accelerated investments in digital growth, the Albertsons Media Collective, and in health and pharmacy. We will also continue to surgically invest in our customer value proposition and elevate the customer experience. We expect these investments will continue to drive outside growth in our digital and pharmacy businesses, which will result in increased future customer lifetime value but create short-term margin headwinds.

With that as our backdrop and excluding the impact of tariffs and other potential market dislocations, we are assuming the following in our outlook: ID sales growth in the range of 1.5% to 2.5%, assuming inflation in the range of 1.5% to 2%. Adjusted EBITDA in the range of $3.8 to 3.9 billion, including the investments I just shared, partially offset by our productivity improvements and including approximately $65 million in adjusted EBITDA related to our 53rd week. Adjusted EPS in the range of $2.03 to $2.16, including $0.03 related to the company's 53rd week. The effective income tax rate is expected to be in the range of 23.5% to 24.5%, and capital expenditures in the range of $1.7 to 1.9 billion.

Looking beyond fiscal 2025, we expect to leverage the investments we make this year to drive growth consistent with our long-term algorithm of 2% plus identical sales and EBITDA growth higher than that in fiscal 2026 and beyond. Before I hand it back to Susan for some closing comments, I'd like to spend a moment on capital allocation. First and foremost, we will continue investing in our business to drive long-term sustainable growth. We also plan to maintain our quarterly dividend and seek to grow it over time. Finally, we plan to return excess cash to our shareholders through opportunistic share repurchases. As a reminder, in December of 2024, our board authorized a $2 billion share repurchase program.

Since that time and as of today, we have completed over $100 million in share repurchases and have approximately $1.9 billion available for repurchase under that program, which we expect to complete during the next three years. Our balance sheet is strong, and it provides flexibility as we drive our business forward and seek to generate long-term sustainable shareholder value. I will now hand the call back to Susan for closing comments.

Susan Morris (COO and CEO-elect)

Thank you, Sharon. Our customers-for-life strategy is working. We're growing digitally engaged customers, omnichannel households, loyalty members, and increasing customer traffic. Our stores are operating more effectively and efficiently as new technologies take hold, and we're proactively reducing our costs. Our productivity programs are creating fuel for investments and are an offset to inflationary headwinds. We believe all of this puts us in a strong position to continue to transform the business and serve our customers even better.

As we look forward to the balance of fiscal 2025 and beyond, we are excited about the investments that we've made in our core business, in new sources of revenue, and in our tech-enabled capabilities. We expect to continue our investments going forward, including enhancements to our value proposition for our customers. As a result of these investments, we expect gradual and incremental improvement in top-line trends in our grocery business in the second half of 2025, ultimately driving growth in line with our long-term algorithm of 2% plus identical sales and adjusted EBITDA growing higher than that in fiscal year 2026. In closing, I am thrilled to be taking the helm of our company during this transformational time in our customers-for-life strategy. None of our success would be possible without the support of our 285,000 associates who worked tirelessly to make it all happen.

Over the next weeks and months, Sharon and I look forward to engaging further with all of you in the investment community, and thank you for your support. I would also like to thank Melissa Plaisance, who will be retiring next month after 35 years with the company. On behalf of all of us, we want to acknowledge her contributions to our success, including the relationships that she has developed with all of you. Melissa, you will be greatly missed. Cody Perdue, who you all know, will be assuming her responsibilities. We will now open up the call for questions.

Operator (participant)

Thank you. We'll now be conducting the question-and-answer session. If you'd like to ask a question, please press Star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue.

You may press Star 2 if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up the handset before pressing the Star keys. In order to allow as many as possible to ask questions today, we ask that you please limit yourself to one question and one follow-up. One moment, please, while we pull for questions. Thank you. Our first question comes from the line of Leah Jordan with Goldman Sachs. Please proceed with your questions.

Leah Jordan (Equity Research Analyst)

Thank you. Good morning. Thanks for taking my question.

Just given the price investments you've made in the quarter and plan to make for this year, just seeing if you could provide an update on how you view your price gaps today, maybe what you're seeing in the competitive environment, and just given the dynamic consumer environment overall, just has anything changed in your view on the breadth and depth of investments that you need to make throughout the year?

Susan Morris (COO and CEO-elect)

Hi, Leah. Thanks for the question. I would say a couple of different things. First of all, let me address the second part of your question first. We have not seen a dramatic shift in the recent months from consumer behavior. As we've mentioned before, we're seeing a shift towards value. They're clearly more responsive to promotion.

When we listen to the voice of our internal customers, we recognize that our SNAP customers are feeling more pressure and that customers in general are thinking about their budgets and how to optimize them, maybe eating out less and making different choices, shopping more owned brands, those kinds of things. With regards to the pricing question, first and foremost, we have a very different price position across the multiple markets that we operate in. As we think about our investments, we are taking a very surgical approach to how we are making those adjustments, surgical by category and by market.

To be honest, we've been actually investing in price over the last several quarters very thoughtfully, using the new tools and technology that we've developed over the last few years that help us understand elasticities, help us make the best decisions that will optimize value for the customer, but also support the sales and margin goals that we're trying to achieve.

Leah Jordan (Equity Research Analyst)

Great. Thank you. That's very helpful. I just had one quick follow-up around the comments around the buybacks. I noticed you made buybacks in the quarter. It sounds like some activity has continued, maybe even a little bit quarter to date. I guess curious, have you assumed anything with buybacks within the guide? How are you thinking about it as a lever for this year? Thank you.

Sharon McCollam (President and CEO)

Leah, in the guidance, what we've assumed is in our prepared remarks, we said we will be repurchasing that $1.9 billion over the next three years. If you spread that ratably over that time frame, that would equate to approximately $0.06 of accretion in EPS each year if you bought it that way. That gives you the math.

Leah Jordan (Equity Research Analyst)

Great. Thank you. Very helpful.

Operator (participant)

Our next questions are from the line of Mark Carden with UBS. Please proceed with your questions.

Mark Carden (CIO)

Good morning. Thanks so much for taking the questions. To start, I want to ask one on tariffs. Just as it stands, what proportion of your cost of goods do you import at this stage? How do you think about the impact of tariffs once you back out USMCA-exempt goods, understanding again that it's very fluid?

Susan Morris (COO and CEO-elect)

Good morning, Mark. Thanks for the question.

For us, for Albertsons Companies, we procure more than 90% of our products domestically. That is a very different position than some of the competitive set out there. We also recognize, though, that even in those domestic purchases, there are impacts from ingredients that are sourced from tariff-impacted areas. The situation, as you know, is very fluid. We are staying very close to it. We have deployed a task force to help us understand the complexities of the situation as it evolves. We have some very good plans in place to help mitigate the impacts accordingly.

Mark Carden (CIO)

Great. That is helpful. How are you thinking about demand growth with your Albertsons Media Collective initiative in the year ahead? Are you seeing any hesitancy in advertiser spend, just given the macro?

Susan Morris (COO and CEO-elect)

To date, as you may know, we are rather nascent in our media collective opportunity. Actually, to date, we're still delivering upsized growth compared to the market and media. We're very optimistic about our abilities to achieve the goals that we've set forth for 2025.

Mark Carden (CIO)

Great. Thanks so much. Good luck.

Susan Morris (COO and CEO-elect)

Thank you.

Operator (participant)

Our next questions come from the line of Edward Kelly with Wells Fargo. Please proceed with your questions.

Edward Kelly (Managing Director of Equity Research)

Yeah. Hi. Good morning, everyone. I wanted to ask about the 2025 guidance and the investment. I was hoping that you could provide maybe just some additional color around the key buckets of investment that you are planning to attack in 2025, the magnitude of the investment around those areas. How do we think about the Cadence of EBITDA growth or EBITDA throughout the year? Susan, I think you maybe mentioned something at the end about progressing towards the algo as the year rolls on.

Susan Morris (COO and CEO-elect)

I'm just kind of curious around that as well. Sure. Thanks, Ed, for the question. As we think about the investment, it's multifaceted, right? Clearly, there's the conversation that we just had around price, which we think is a very surgical opportunity. It's already begun, by the way, in many respects across the organization in select markets. The other elements are around investing, continuing to invest in growing our digital and loyalty business, important parts of our growth algorithm. When you think about the ecosystem that we talk about, the more we can engage customers in loyalty in our digital platforms and pharmacy and, of course, in our stores, there's 2x, 3x, 4x value for those customers as they go through, work through that cycle.

The investments will be, as I think about how they occur throughout the year, the timing of the investments will not necessarily—let me think. As I think about the investments, the cadence will be thoughtful throughout the year, recognizing the fact that some of the benefits that we have through the Media Collective, through productivity and so forth, may not directly align with the timing of the investments. That is part of the reason, as we shared our expectations for the year, we expect to leave 2025 with stronger growth and building towards our long-term algorithm of IDs at 2% plus and EBITDA growth higher than that in 2026. Sharon, would you add anything to that?

Sharon McCollam (President and CEO)

No, I think that's absolutely right. When you think about it, it's going to be these accelerated investments we're making in digital growth. Obviously, the Media Collective is a main focus for us this year. In health and pharmacy, the customer value proposition that pulls all that together through the digital platforms is going to be what will bring us to the back half of 2025 and allow us to enter that algorithm in 2026.

Edward Kelly (Managing Director of Equity Research)

Okay. Maybe just a follow-up, and maybe this is for you, Sharon. I do not know. As you think about Q1, obviously, the backdrop has been rather uncertain, especially from a consumer standpoint. I am just kind of curious as to how we should think about Q1. I do not know if you can share anything around what you are seeing from the standpoint of ID sales so far relative to the guide. Do you expect Q1 to be a softer quarter than the rest of the year for any of these reasons?

Sharon McCollam (President and CEO)

Yeah. What you need to expect is not because of what is happening with the consumer. It is going to be the investments. We will be making investments in the first half of the year. As Susan said, we will be expecting those investments to start paying off towards the back half of the year. From a customer point of view, I will just reiterate what Susan said. We are not seeing a major change in customer behavior at this point.

Everything you are hearing about, our own research validates. The consumer sentiment is low, etc. The consumer is also saying that they will do what they have been doing, which is seek value and find ways to tighten their pocketbooks. Food away from home versus food at home is always a decision for those customers who need value. At this point, we have not seen a major change.

Edward Kelly (Managing Director of Equity Research)

Great. Thank you.

Operator (participant)

Our next questions are from the line of John Heinbockel with Guggenheim Securities. Please proceed with your questions.

John Heinbockel (Managing Director and Senior Research Analyst)

Hey, Susan. I wanted to start with you've acquired a lot of pharmacy customers the last two years, three years. Maybe the journey as they go through the engagement process, right? When you think about their wallet share, kind of where does it start out?

How does it progress? What's the opportunity there, right? How do you attack that? Is that simply CRM through things they might be interested in? How do you look at that?

Susan Morris (COO and CEO-elect)

Good morning, John. Thanks for the question. Thinking about the pharmacy customer, it's definitely an evolution over time. They engage with us. They start to engage with us, typically in-store first, then join our pharmacy business in that first year.

Over the course of one and a half to two years, they engage across multiple platforms. Going back to our ecosystem, right? As they think about, of course, brick-and-mortar customers evolve to e-commerce, evolve to pharmacy, evolve to loyalty. As they engage with us through those multiple platforms, that's when we start to see the bigger unlock in their lifetime value. That said, customers that shop pharmacies and brick-and-mortar alone typically have 4 times the basket of customers that do not.

John Heinbockel (Managing Director and Senior Research Analyst)

Okay. Maybe as a follow-up, right? When you think about enhancing profitability in the digital channel, right? Obviously, you are not running larger automated facilities. Is the opportunity, when you think about density, right, of delivery versus in-store labor productivity, where are the big unlocks in the e-commerce profitability?

Susan Morris (COO and CEO-elect)

Sure. Thanks for the question. As I think about that, the largest opportunity for us in e-commerce profitability is all around growing sales, right? Scale breeds productivity. You touched on the fact that our stores are actually in the neighborhoods that our customers live. Our proximity to customers creates some productivity for us that perhaps others may not have.

We have advantages in our growth because we do carry full assortment. We have fast delivery, convenient delivery. Our drug part of our business is actually quite robust, which helps on the profitability side. The other part around scalability is we look at our growth, and we mentioned before, 24% growth in the Q4, which is fantastic. Strong penetration, which, by the way, at 8% store penetration, we believe there's upside there versus our competitive set. We fully expect to be able to capture that.

That growth, that expansion of growth, the scalability of that creates efficiencies from our picking platform as well. We have in-house built tools that are fantastic. What we're learning, though, is as you get more and more e-commerce orders in a given store, we actually shift the way that the pickers are selecting orders to batch picking. They're doing more than one order at a time. Lower times of the day, they're going back to one. We're really studying and understanding the science of how we're investing labor to most effectively, first of all, deliver the terrific customer experiences we're looking for, but also to seek more productivity in the e-commerce business.

John Heinbockel (Managing Director and Senior Research Analyst)

Thank you.

Operator (participant)

The next questions are from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions.

Erica Eiler (Equity Research Analyst)

Good morning. This is actually Erica Eiler on for Rupesh. Thanks for taking our question. I was just hoping maybe to unpack gross margin a little bit more this year. It would be helpful, I think, if you could just maybe talk about the puts and takes.

Obviously, a lot of moving pieces there. I mean, you've touched on productivity a little bit. Maybe you could talk about how you're thinking about level of reinvestment of the $1.5 billion of savings you guys have outlined. You touched on price investments. Also, as we think about mixed headwinds, are you assuming similar type headwinds from the strong growth in pharmacy and digital that you're seeing currently?

Sharon McCollam (President and CEO)

Yes. Thank you. As we look at 2025 and you think about, first, let's talk about productivity. From a productivity perspective, you're going to see it both in SG&A and in the margin. Over the years, it will shift.

In 2025, you're going to see more of it in SG&A than you do in the gross margin. We are expecting strong growth from the digital platform. We are expecting strong growth in e-commerce and pharmacy and health, which will create a mixed-shift impact. I will say that that's getting better because as e-commerce scales, it levers. On the pharmacy and health side, we have productivity initiatives that are coming into place, like central fill and other things that we are able to do that will take that diluted nature of pharmacy and make that better.

Additionally, obviously, we talked about investing in loyalty and the customer value proposition. That will flow into the margin and then be partially offset by the cost of goods sold and the buying-together initiative that we have. That is how you should think about it. When you look at the guidance for next year and you think about where to weight it, which is probably where your question came from, you need to weight it into the margin.

Erica Eiler (Equity Research Analyst)

Okay. That's super helpful. Lastly for me, just wanted to touch on the competitive backdrop and the promotional environment. I mean, are you seeing any changes on the competitive side? Just given the increased macro uncertainty out there, and you've talked about that your consumer increasingly seeking out value, what are you expecting on the promotional front this year?

Susan Morris (COO and CEO-elect)

Erica, and I think I might have mentioned this earlier, we are absolutely still seeing the customers navigate towards value and towards promotion. Our promotional volume is up. This is where our work around buying better together and seeking to improve our cost of goods is going to be critical for us as we go throughout 2025. From a competitive perspective, I think like the rest of the industry, we're all seeing the pressures from mass and club stores, value players. That said, our customer traffic is up. We have shared growth in several of our markets, and we understand exactly where those are and are very thoughtful about how we're investing in the areas where we have opportunity very surgically using the tools and technology that we have to help us make the best decision.

Erica Eiler (Equity Research Analyst)

Great. Thank you.

Operator (participant)

The next question has come from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions.

This is John for Simeon. I would like to ask you about the guidance. Could you talk a little bit about what food inflation assumptions are embedded in your ID sales guidance and what would be the effect of pharmacy within the ID sales figure for the full year?

Sharon McCollam (President and CEO)

Thank you. The inflation assumption within the guidance, we've got a 1.5% to 2.5% ID sales guidance. And within that, it's 1.5% to 2% on inflation. And on the mix of pharmacy and e-commerce, we expect to see very strong growth in e-com and continued growth in pharmacy. We're not guiding that, but you can think about in terms of continuing we are making continued investments there. That would be how I would model it if I was you.

Okay. Great. Thank you. As a follow-up, if I could ask you about e-commerce, congratulations. You had impressive sales growth there, 24% in the fourth quarter. Could you help us think through how you're looking at the e-commerce contribution to profitability and how you're thinking it more broadly alongside retail media and the loyalty program into 2025?

Yes. On e-commerce, e-commerce is dilutive to our margin, and it is getting better all the time. If you look at the explanation in the press release about our gross margin in Q4, we talk about the fact that the picking costs and delivery costs are putting weight on the margin. We explain it's only because of the volume. We actually are making progress in productivity in our e-commerce operations within our stores so that business is getting more profitable as it goes. Our guess would be that when you combine our first-party and our third-party businesses, we are getting close to being contributing to the EBITDA margin. We expect that to continue to grow over time.

Great. Thank you.

Operator (participant)

The next question is from the line of Robbie Ohmes with Bank of America. Please proceed with your questions.

Robbie Ohmes (Analyst)

Oh, hey, good morning. I had just two quick follow-up questions. Just maybe on the pharmacy growth outlook, how much is GLP-1 still a driver to the comps there? Do you see that fading at all in 2025? What are the other, how much is a GLP-1, say, versus how much benefit are you getting from drugstore closings?

Susan Morris (COO and CEO-elect)

Thanks for the question. First and foremost, of course, GLP-1s are contributing to our growth, but that's not the sole increase that we have. Our core script volume is growing year over year and actually has been for several years now. We're excited about the health of the business from that regard.

Clearly, the GLP-1 profitability is less. That said, as we engage those customers into our entire ecosystem, recognizing clearly their eating habits change, but their eating habits change with regard to wanting more protein, looking for supplements, buying more fruits and vegetables. We have all of those things. It is actually an opportunity for us to even more deeply engage those customers. Sharon, what might you add?

Sharon McCollam (President and CEO)

Yeah. I would add that we continue to actually be excited about the GLP-1 customer. And as you know, the industry is evolving. It is going to be in pill form. I do not know the exact timing of that, but as that goes. It gives us such a substantial opportunity to help these customers achieve this life goal. When we embrace those customers, we can fulfill their new basket.

Remember, their basket materially changes, and it shifts, as Susan said, to a more profitable basket. We believe through Sincerely Health and the other investments that we're making in the digital side of our business that we can be an asset to these customers and that they will choose us for the role that we play in their healthcare. From that standpoint, that's how we're thinking about it right now.

Susan Morris (COO and CEO-elect)

You mentioned, oh, sorry. I was just going to answer your acquisition question. We are continually looking at opportunities to acquire scripts. Pharmacy businesses certainly hire the pharmacists and the techs from other units around us. We have a very solid, thoughtful approach on how we do that, but we are absolutely looking to continue to grow our pharmacy business thoughtfully.

Robbie Ohmes (Analyst)

That's really helpful. Maybe, Sharon, a quick follow-up for you. Just on the so this year, we should expect a little more pressure on gross margin and maybe some offset in SG&A. What's the wage rate pressure you guys are expecting in 2025 in that SG&A?

Sharon McCollam (President and CEO)

Yeah. We said last quarter that we used to see 2-3%. We're seeing significantly higher than that. Remember, these contracts are multi-year. Our assumption on wage growth in 2025 looks a lot like the wage growth we saw in 2024, and we don't anticipate that changing materially.

Susan Morris (COO and CEO-elect)

Part of the challenges we recognize, or actually the opportunity we have, is we've recognized that. As Sharon mentioned, these are multi-year contracts. As we talk about our $1.5 billion goal in productivity, which, by the way, as I say goal, we've got evidence that we can accomplish that and will continue to do so. Those targets were set with the wage growth in mind.

Robbie Ohmes (Analyst)

Got it. Thank you.

Operator (participant)

The next question is from the line of Scott Mushkin with R.F. Lafferty. Please proceed with your question. Hey, guys.

Scott Mushkin (Analyst)

Thanks for taking my question. My first one is kind of looking at the business by category. If you think about the Center Store, do you need the Center store to be positive next year or this year, I guess now, to make your comp numbers? I guess my first question.

Susan Morris (COO and CEO-elect)

Let's see. We are seeing growth in center of store. By the way, when I'm saying center of store, I mean grocery and grocery non-food, but we're actually also seeing growth in our fresh departments. Yes, we're seeing strong pharmacy growth. We're seeing strong e-commerce growth, but we are actually experiencing growth in the core part of the store as well.

Scott Mushkin (Analyst)

Okay. If you were to exceed your thoughts on EBITDA internally, would that flow to shareholders this year, or would that just be further invested in the business?

Sharon McCollam (President and CEO)

Scott, we put our guidance out there. At this point, as the year progresses, we can talk more about that. Our guidance at the $3.8 to 3.9 billion is where we expect to land the year at this time.

Scott Mushkin (Analyst)

Okay. No thoughts on if you were to exceed where that money would go?

Sharon McCollam (President and CEO)

Lots of thoughts, but not for you.

Scott Mushkin (Analyst)

Okay. All right. Thanks. Those are my two questions. Appreciate it.

Operator (participant)

The next question is from the line of Michael Montani with Evercore ISI. Please proceed with your questions.

Michael Montani (Analyst)

Yes. Hi. Good morning. Thanks for taking the questions. The first one was just if you could give an update within the CapEx, how you're planning to allocate that out, how many remodels should we expect, and also new stores for this year and then for next. I had a separate follow-up.

Sharon McCollam (President and CEO)

On the CapEx for next year, you can think about it very similarly to the way it played out this year. We expect to open new stores. We're not giving committed numbers at this point. You can think about the capital as half of it is in our stores. There's a maintenance capital piece, and the rest of it will be invested in the digital platforms and AMC.

Michael Montani (Analyst)

Okay. If I could just follow up around tariffs. You mentioned that it's not in the guide. To the extent that it does flow through over the course of the year, is the goal to preserve margin dollars or margin rate? How should we think about that evolution?

Sharon McCollam (President and CEO)

On the tariffs, what we would tell you is our goals, our priorities for this year are going to be what the five that Susan laid out. Our goal is to drive customer growth and engagement through the digital connection. It is growing AMC. It is enhancing the customer value proposition. With those three priorities, it is fluid. How we handle the tariffs, how we handle negotiations with vendors, etc., will depend on continuing to deal with the tariffs, but doing so in a way that continues to amplify our work toward those priorities.

Susan Morris (COO and CEO-elect)

Sharon, what I would add to that is clearly it is dollars that drive our business, and that is always our focus.

Michael Montani (Analyst)

Understood. Thank you.

Operator (participant)

Our next questions are from the line of Karen Short with Melius Research. Please proceed with your questions.

Karen Short (Managing Director and Head of Consumer and Retail Research)

Hey, thanks very much, Melissa. It's been a long 25-plus years, so congratulations, and I have loved working with you.

Susan Morris (COO and CEO-elect)

Thank you.

Karen Short (Managing Director and Head of Consumer and Retail Research)

My two questions are price gaps. When you think about price gaps relative to your peers, can you give me a sense of what you think your price gaps are and where you think they need to go? My second question is, do you think you could be at the algo by 4Q as it relates to sales growth and EBITDA growth?

Susan Morris (COO and CEO-elect)

Sharon, first of all, you made Melissa very happy with your comments. Thank you for that. With regards to price gaps, it's not a simple answer. We operate in over 120 MSAs, and our price position is very different in each of those.

There is really not one simple answer. There are markets where we are very comfortable with our price position and see very little need to change, and there are others where we have more opportunity. We are really excited about using the new tools, technology, and processes that we have in place to be very surgical and thoughtful about how and where we make those investments. We feel we have a deep understanding of the elasticity of our customers based off of experiments that we have been running over the last several months. It is a very surgical and thoughtful approach. Sharon, maybe I will give the algo question over to you.

Sharon McCollam (President and CEO)

Yeah. We will be building toward that. Obviously, as we make these investments, they start to return. When we start getting toward Q4, as we're expecting that to materialize by the end of 2026, we expect it to be gradual and incremental. You should be expecting us to be moving in that direction.

Karen Short (Managing Director and Head of Consumer and Retail Research)

Okay. Great. Thank you.

Operator (participant)

The next question is from the line of Kelly Bania with BMO Capital Markets. Please proceed with your questions.

Kelly Bania (Senior Equity Research Analyst)

Good morning. Thanks for taking our questions, and congrats to both of you, Vivek and Melissa, on your retirements. I was wondering if we could just talk about IDs a little bit more granularly. I think you mentioned an improvement in kind of grocery sales trends in the back half in your expectations. Wondering if you could just unpack kind of the traffic versus the ticket component of that and the expectation for that to improve in the back half. If there's any conservatism with regard to SNAP and if there are any developments on reductions in SNAP there into the back half.

Susan Morris (COO and CEO-elect)

Kelly, thanks for the question. For ID sales, as mentioned before, we're looking at that 1.5% to 2.5% range. Clearly, we expect to see growth increase as we exit 2025 and going into 2026. Sharon, any color you would add?

Sharon McCollam (President and CEO)

Yeah. Kelly, as it relates to when we go into 2025, as we're entering the year, we have said consistently we are continuing to see customers. The traffic in our store is positive. We're very excited about that. Obviously, the AIV with CPI in the fourth quarter up 1.9%. AIV is going to be up. What the opportunity for us at this point is, it is going to be in units as we go into 2025?

A lot of the initiatives—I am not going to go back to them—but all the initiatives we talked about are doing exactly what Susan keeps saying and continues to drive in the company, which is bringing units back into the store. That is the opportunity that we see within the guidance. Yes, we believe that we are doing it, and we can do it.

Kelly Bania (Senior Equity Research Analyst)

Okay. If I can just follow up on pharmacy, obviously that is and remains a key component of your strategy. Just wondering if it is possible to integrate prescriptions and pharmacy deeper into your digital offering for pickup and delivery, just given that competitors are moving forward with that. Is that something that Albertsons can do and is considering doing?

Susan Morris (COO and CEO-elect)

Yes, we absolutely are. It varies by market, and there are some technological solutions that we're working on that will help us get there, but that is absolutely on our roadmap for pharmacy this year. We agree with you. The more that we can take pressure off of the customer experience, especially patients in pharmacy, make their life easier, we're seeking every possible way to do that.

Sharon McCollam (President and CEO)

Kelly, I was in our Tom Thumb store here in Dallas last night, and they were announcing over the speaker to welcome you to do both your drug and your pharmacy order through DUG. Your question was perfect. I was just there last night when we were telling our customers all about it.

Kelly Bania (Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. Our final question today comes from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your questions.

Joe Feldman (Senior Managing Director and Assistant Director of Research)

Yeah. Hi. Good morning, guys. Thanks for taking some time. I wanted to ask about you made a comment about the division consolidation, which I know you've done some, but I was curious if there's more to go there.

It sounded like there are opportunities still, and I don't know if you could share a little more color on that. Also, the second kind of question I had was around the Albertsons Media Collective. If you could just share a little more color on sort of the adoption by your partners and what the feedback you're getting on it initially and where there are some of those opportunities you described earlier.Thanks.

Susan Morris (COO and CEO-elect)

Hi, Joe. With regard to the division consolidation, the most recent one we just announced was the blending of our Denver and Intermountain divisions. We're calling it Mountain West. As part of that, it's multifaceted, really.

We're looking at, first and foremost, how can we create productivity by bringing two divisions together. We are also seeking to better develop our team to improve tools and processes and learn from that consolidation how we might leverage opportunities across the rest of the organization. We are continually evaluating how we're going to market, where there might be opportunities to look for synergies such as this and in other ways as well. With regard to AMC, we have had strong performance, strong engagement with our vendor partners. We also recognize that we have an opportunity to, as we look about our efforts around buying better together, leverage AMC as part of those conversations.

Today, we operate 11 divisions across the organization, and there are important times to act as 11, but there are also times to act as 1.When we think about unlocking dollars for whether it's cost of goods reduction or AMC dollars, this opportunity of buying better together creates simplicity for our vendor partners, ease of execution consistently across the organization. We see a lot of opportunity as we evolve our model moving forward.

Joe Feldman (Senior Managing Director and Assistant Director of Research)

Great. Thanks. Good luck, guys.

Susan Morris (COO and CEO-elect)

Thank you. Thank you.

Sharon McCollam (President and CEO)

Thank you.

Operator (participant)

I'll now turn the floor back to management for closing remarks.

Susan Morris (COO and CEO-elect)

Just wanted to say thank you for your time and for the questions today. We remain very excited, very energized about the growth agenda that we've put forth in 2025. Clearly, it's a year of investment for us, and we feel very confident in our ability to deliver both internally and externally the commitments that we have made. We appreciate your support, and we look forward to talking to you all soon.

Operator (participant)

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