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Albertsons Companies Inc (ACI) Q2 2021 Earnings Call Transcript

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ABS earnings call for the period ending September 11, 2021.

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Albertsons Companies Inc (ACI 0.28%)
Q2 2021 Earnings Call
Oct 18, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Albertsons Companies Second Quarter 2021 Earnings Conference Call and thank you for standing by. All participants will be in listen-only mode until the Q&A session. This call is being recorded. I would like to hand the call over to Melissa Plaisance, GVP, treasury, and investor relations. Please go ahead.

Melissa Plaisance -- Group Vice President, Treasurer, and Investor Relations

Good morning and thank you for joining us for the Albertsons Companies second quarter 2021 earnings conference call. With me today from the company are Vivek Sankaran, our CEO and Sharon McCollam, our new President and CFO. Today, Vivek will share insights into our second quarter results as well as review our progress against our strategic priorities. Sharon will then go into the financial details of our second quarter, as well as our updated full-year 2021 outlook before handing it back over to Vivek for some closing remarks. After the prepared remarks, we will conduct a Q&A session.

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

Any forward-looking statements we make today are only as of today's date and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. Please keep in mind that included in the financial statements and management's prepared remarks are certain non-GAAP measures and the historical financial information includes a reconciliation of net income to adjusted net income and adjusted EBITDA. And with that, I'll hand the call over to Vivek.

Vivek Sankaran -- Chief Executive Officer

Thanks, Melissa. Good morning everyone and thanks for joining us today. Before we get started, I would like to introduce Sharon McCollum to any of you that do not know her in a new role as President and CFO at Albertsons Companies. She will lead all areas of finance, IT, real estate, strategy, corporate development and supply chain. As many of you know, Sharon officially joined us on September 7th and now has just over six weeks under her belt. She came out of retirement to join us on our transformation journey and a prior experience at Best Buy and with the digital transformation of Williams-Sonoma will help us as we move forward. We are very excited that she has joined our team and I look forward to working with her to accelerate our transformation. We also want to congratulate Bob Dimond on his retirement and thank him for his seven years of service with Albertsons and especially for his contributions to our successful IPO last year.

Let me now turn to our second quarter results. I'm pleased to report that our results for the quarter exceeded our internal plans across all key metrics, increasing our confidence in the business going forward. Our ID sales increased 1.5% in Q2 and 15.3% on a two-year stacked basis. We continue to gain market share in food on a one and two-year basis, and in MULO, we are up on a two-year basis and down only slightly on a one-year basis. In addition, we achieved adjusted EBITDA of $965 million and adjusted EPS of $0.64 per share, ahead of our expectations.

Again this quarter, against the backdrop of digital sales growth exceeding 200% in every quarter of 2020, the benefits of our digital and omnichannel investments continue to resonate with our customers. In the quarter, digital sales increased 5% year-over-year and increased 248% on a two-year stacked basis. Our DriveUp & Go and home delivery capabilities reaching 95% of our customers, increased omnichannel households by over four times versus Q2 2019 and retention has been strong. Omnichannel household growth is a key initiative as these customers spend 3 times more than any in-store only shopper.

We also continue to drive year-over-year growth in identified households, another key initiative that is foundational to better understanding our customers through data analytics and allowing us to improve our offerings to drive recurring and incremental spend. In our just for U your loyalty program, ongoing benefit enhancements continue to accelerate membership growth, which increased 17% year-over-year to 27.5 million members. Within the program, the number of actively engaged members increased by almost 9%. Actively engage members are those that are redeeming rewards such as fuel or grocery rewards in the current quarter.

In addition, we had a 93% retention rate, we've actively engaged members in Q2. Remember that actively engaged members spend approximately four times more with us. We also saw better-than-expected in-store results as traffic in our stores continue to increase versus Q2 2020. We believe the increased traffic is being driven by our ongoing efforts to protect the health and safety of our employees, customers and communities, and the higher vaccination rates that are helping customers become more comfortable in returning to stores. These results reflect the momentum we are seeing through the execution of our transformation strategy across all channels. The consumer backdrop remain strong throughout the quarter.

I will now take a few minutes to walk through the pillars of our transformation strategy that helped drive these results and provide you with an update on our progress. These pillars include in-store excellence, accelerating our digital and omnichannel capabilities, increasing productivity and strengthening our talent and culture. In-store excellence has been elevated by providing the right assortment in each local market using digital tools to enhance replenishment and in-stock conditions, encouraging friendly customer service and enhancing speed and ease of checkout through frictionless and contactless payments.

I will briefly touch on recent progress on two elements of our assortment fresh and Own Brands. In fresh, our efforts to differentiate our offerings have generated elevated demand with fresh growth outpacing center store by approximately 250 basis points year-over-year. Sales in each of our fresh categories remain ahead of pre-pandemic levels as customers continue to consume more meals at home. In Own Brands, the introduction of new products as well as the rollout of Own Brands into Albertsons legacy divisions has generated strong growth. Our Q2 sales penetration was 25.2%, up approximately 60 basis points from Q2 '20.

During the quarter, we launched 85 new products, including ready to eat meals, refrigerated Signature Reserve Rastas and several O Organics coffee items. Year-to-date, we have launched over 400 new Own Brands items and are on track to reach our goal of launching over 800 items this fiscal year. Finally, we continue to invest in stores. Through the first half of the year, we opened seven new stores and completed 76 upgrade and remodeled projects. Our next priority is the acceleration of our digital and omnichannel capabilities.

Digital transformation is an imperative in our growth strategy, as we aim to provide an array of convenience shopping experience for our customers. To this end, we have expanded our DriveUp and Go locations to over 1900 and expect to reach approximately 2000 locations by year-end. Underlying the rollout of our digital omnichannel capabilities is our focus for delivering a superior customer experience, as well as improving profitability over time. For example, in DriveUp & Go, our average wait time for pickup is now down to three minutes. In delivery, we continue to speed up delivery times, while reducing delivery cost per order by expanding our third party delivery store network and we added DoorDash one hour delivery to all divisions with a catalog of 40,000 plus products. And we also announced DoubleDash, allowing customers to combine delivery of a restaurant meal and a grocery delivery in one trip.

In micro-fulfillment centers, we are improving our productivity in our three existing MFCs and we have plans for an additional four MFCs before the end of our fiscal year, bringing the total to seven. This is 2 less than previously estimated as the launch of two locations has moved into fiscal year '22, primarily as a result of delays in construction. In loyalty, our integrated loyalty e-commerce app is now fully rolled out and offers a connected customer experience with redesigned rewards and other new features. To partially offset all of these investments and cost inflation, our third priority is driving productivity. During the quarter, we continue to eliminate waste and improve efficiencies through enhanced promotional effectiveness, reductions in indirect spend, labor efficiencies and ongoing efforts to reduce shrink. We continue to expect to achieve the targeted $1.5 billion in annual gross savings by the end of fiscal year 2022.

Our fourth priority is strengthening our talent and culture and supporting the communities we serve. We continue to add talent throughout the Company at both the corporate and divisional level, including the recent appointment of Sharon, our outreach through job fairs for retail and distribution employees and the training we've put in place to assist in the success of our new employees and enhanced retention. Our pharmacy team continues to serve our communities with an area of services including the COVID and flu vaccines. To date, the pharmacy team has administered over 7.5 million COVID vaccine doses.

In support of our associates that were impacted in the communities we serve, the Albertsons Companies donated $500,000 to help provide food to those impacted by hurricane Ida and the California wildfires. We also continue to take actions related to ESG and sustainability. We recently published our fiscal 2020 ESG Report, which is available on our company website. As the next step from our recently refreshed materiality assessment, we will soon release a comprehensive set of goals in areas including climate action, diversity equity and inclusion, waste reduction and circularity, and community stewardship.

Now I will turn to Sharon to provide remarks and cover the details of our second quarter financial results and outlook.

Sharon McCollam -- President and Chief Financial Officer

Thank you, Vivek and hello everyone. I'm thrilled to be here today and couldn't be more excited to have joined this team at such a transformative time in the company's history. What I have found to be with most impressive since joining is the disciplined approach that the company is taking to leveraging the favorable backdrop that the industry is seeing today, while at the same time remaining deeply focused on the strategic priorities that Vivek just covered and are foundational to advancing the transformation longer term.

Consistent with these priorities, where I am currently spending the majority of my time, is in the acceleration of our digital and technology initiatives, the strengthening of our omnichannel capabilities and the advancement of our productivity agenda, including identifying opportunities to further rationalize our cost structure, particularly in the technological enablement of our supply chain and our stores. I look forward to discussing all of these topics further, both today and in our meetings to come.

But now, we'll turn to the details of our second quarter results and provide an update on our fiscal '21 outlook. As Vivek said earlier, we were extremely pleased with our sales trends as we delivered Q2 2021 identical sales growth of 1.5% on top of 13.8% growth in Q2 2020 for a two-year stack of 15.3%. Total sales in Q2 2021 were $16.5 billion compared to $15.8 billion last year and $14.2 billion in Q2 2019.

Gross profit margin with 28.6% in Q2 2021 compared to 29% in Q2 2020 and 27.8% in Q2 2019. Excluding the impact of fuel, however, our gross profit margin was flat compared to Q2 2020, as higher product, supply chain and advertising costs were offset by productivity initiatives, favorable product mix and pharmacy margins related to COVID-19 vaccine. Compared to Q2 2019. gross margin increased 85 basis point, primarily driven by improvements in our productivity, shrink expense, sales leverage and improved pharmacy margins related to COVID-19 vaccines, partially offset by investments related to our growth in digital sales.

Selling and administrative expenses as a percentage of sales were 25.6% during the second quarter of fiscal '21 compared to 25.6% in Q2 2020 and 26.8% in Q2 2019. Excluding the impact of fuel, selling and administrative expenses increased 55 basis point year-over-year. This increase was primarily driven by higher employee costs, depreciation and expenses related to the acceleration of our digital and omnichannel capabilities and other strategic priorities. These increases were partially offset by lower COVID-9 related expenses.

As it relates to the year-over-year increase in employee costs, labor related to the reopening of certain fresh departments such as deli, bakery and prepared foods, market-driven wage rate increases and higher equity-based compensation expense contributed to this increase. On a two-year basis, our selling and administrative expenses were down 120 basis points versus Q2 2019. This decrease was driven by strong sales leverage, partially offset by higher employee costs and expenses related to investments in our omnichannel and digital capabilities and other strategic priorities.

As a result of opportunistic refinancing transactions as well as continued debt reduction due to 2021 interest expense decreased by $20 million to a $109 million versus Q2 2020. Adjusted EBITDA with #965 million in the second quarter 2021 compared to $948 million in Q2 2020. This increase in adjusted EBITDA was primarily due to increased sales, partially offset by higher selling and administrative costs. Adjusted net income in Q2 '21 was $370 million or $0.64 per fully diluted share compared to $356 million or $0.60 per fully diluted share in the second quarter of fiscal 2020.

I would now like to discuss free cash flow and capital allocation. During the second quarter and year-to-date, we have generated significant free cash flow, driven by better-than-expected operating results, as well as lower working capital. From an investment perspective, capital expenditures year-to-date were approximately $823 million as we continue to invest in our digital and technology platform, completed 76 remodels and opened seven stores. For the year, we continue to expect capital spending in the range of approximately $1.9 billion to $2 billion.

Regarding debt reduction, subsequent to the end of the quarter, we provided notice of redemption of the remaining $200 million of Albertsons 5.75% unsecured notes due in 2025, which will save us $11.5 million per annum in interest expense going forward. And finally, in regards to returning cash to shareholders, we announced today a 20% increase in our quarterly dividend from $0.10 to $0.12 per share based on our confidence in future cash flow generation and our strong operating performance.

I will now turn for our updated outlook for fiscal year 2021. Given the outperformance in Q2 and recent trends, we have updated and raised our guidance for fiscal year 2021. We now expect identical sales in fiscal 2021 in the range of negative 2.5% to 3.5% compared to prior guidance of negative 5% to 6%, representing an updated two-year stacked ID range of 13.4% to 14.4% compared to prior guidance of 10.9% to 11.9%. We expect adjusted EPS in the range of $2.60 per share, up $0.30 from our previous guidance range. We expect adjusted EBITDA in the range of $3.95 billion to $4.05 billion, up $250 million from our previous guidance range. We also expect our tax rate to be in the range of 23% to 24% compared to 25% previously.

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

Vivek Sankaran -- Chief Executive Officer

Thank you, Sharon. In summary, I would like to reinforce a few messages. Our omnichannel strategy is working with our customers. By adding customers to our franchise, they're spending more with us and engaging in more ways with us. We continue to gain market share in dollars and units, and our trends improved with each successive period in the quarter and especially around holidays.

Our digital initiatives continue to drive engagement and growth. We remain focused on elevating service quality and speed. Our productivity initiatives are delivering, strengthening the middle of our P&L. We're also navigating the uncertainties of the times, inflation, product supply, labor challenges to name a few, with agility and creativity. Our strong performance year-to-date and continuing positive trends give us the confidence to raise our full-year 2021 outlook for the ID sales, adjusted EBITDA and EPS.

While we celebrate progress, we remind ourselves that we are still in the early innings of our transformation, with significantly more potential to capture. Finally, none of this would be possible without the efforts of our 285,000 associates, who would take care of our customers and the communities we serve day in and day out. I want to thank each and every one of them for their contributions to our ongoing success. We will now take your questions.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is coming from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions.

Simeon Gutman -- Morgan Stanley -- Analyst

Hey, everyone.

Sharon McCollam -- President and Chief Financial Officer

Good morning, Simeon.

Simeon Gutman -- Morgan Stanley -- Analyst

Hi, Sharon. How you're doing. Hey, Vivek.

Sharon McCollam -- President and Chief Financial Officer

Good.

Vivek Sankaran -- Chief Executive Officer

Hi.

Simeon Gutman -- Morgan Stanley -- Analyst

My first question is on inflation, I guess just straight housekeeping. So can you talk about product cost inflation or retail price inflation to the customer, where is it and how is it trending sequentially? And trying to figure out what the benefit could have been during the quarter?

Sharon McCollam -- President and Chief Financial Officer

Thank you, Simeon. I'm going to turn that over to Vivek.

Vivek Sankaran -- Chief Executive Officer

Yes, Simeon. So the CPI inflation was around 2% in the quarter, ours was about 3% on cost, OK, for the quarter. And as I said earlier, we expect inflation to be higher as we go through the year, but we expect it still to be in the 3% to 5% range, which in our opinion is extremely manageable and you're seeing that come through in, at least the quarter we just delivered. So we feel good that we can manage it through both what the customer is able to -- we have a strong customer. So with that backdrop and what we have going in productivity, we are able to manage that in our B&L.

Simeon Gutman -- Morgan Stanley -- Analyst

Got it. Okay, that's helpful. My next question, I want to ask Sharon about the free table stakes, I think you remember, it was mentioned a lot of Best Buy and I think it was related to pricing and making sure prices were at parity to large competitors, and I know we've talked about this with Albertsons in the past, but I'm curious Sharon, your own perception as a customer of Albertsons and the industry so far. What do you think or where should pricing be, where should you operate? I'm curious if you have a view yet, like where would it make sense, where wouldn't it make sense to level the playing field against other competitors?

Sharon McCollam -- President and Chief Financial Officer

Yes, Simeon, thank you for that. I think I'll like to talk first about where we have been with pricing and then I will follow up with my view as it relates to Albertsons in that comparison you spoke to. So, Vivek, why don't you take the first part. I'll take the second.

Vivek Sankaran -- Chief Executive Officer

Yes, Simeon, I just want to be sure that I reinforced our approach to pricing, right? The first thing we look at is, are we gaining market share in dollars and units because to me gaining market share in units gives us a good indication that the value we are providing our customer across the mix of our portfolio, the fresh portfolio, we have our Own Brands portfolio and the branded portfolio resonates. And so that's the first thing. The second principle on pricing. I want to reinforce again is that we take an incredibly surgical approach to it. So every single quarter, you should know that we are investing in pricing and we invested in by price area and specific markets. And again it's with the outcomes that we care about, which is growth and market share gains in dollars and units. So please keep that philosophy and then Sharon, you might want to add to that.

Sharon McCollam -- President and Chief Financial Officer

Yes, so, Simeon, I would say that, interestingly enough, there are great similarities to what we were doing in my previous life and I would say overall, the company has a very surgical approach to pricing. And that is actually not new. We are definitely building capabilities in this area. I would say that they have moved their capabilities in this area materially over the last 12 months. And when I look at that, lightning rod products, we might cover something different in the grocery space, but there are products that we offer in our store that mentally customers are consistently benchmarking and to the extent that we see that, of course, we are going to be reacting because that is what is good for our customers. So it is different in every category, we have a much more expansive number of products that we offer and I would say that you will continue to see us invest in surgical ways into pricing over time where it makes sense to do it.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay, great, thanks. Nice quarter, everyone. Take care.

Vivek Sankaran -- Chief Executive Officer

Thank you, Simeon.

Operator

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

Vivek Sankaran -- Chief Executive Officer

Hello, Ed.

Edward Kelly -- Wells Fargo Securities -- Analyst

Hi, good morning, everyone. I just -- I had a -- I want to start with just a follow-up and then I had a bigger picture question. But just on the inflation front, you mentioned last quarter, sort of 3% to 4% being like a good number for the business. Today, you said sort of 3% to 5%, PPI is running much higher than that, I mean CPI is kind of closer to the high end. I'm just kind of curious sort of taking a step back, can you just provide a bit more color on sort of how you're thinking about this in terms of how you manage it strategically, what your competitors are doing? And how we should be thinking about the gross margin in the back half of the year against that backdrop?

Sharon McCollam -- President and Chief Financial Officer

Ed, I'll let Vivek take that.

Vivek Sankaran -- Chief Executive Officer

Yes, so, let me start with the gross margin question, Ed, because that's ultimately what we're trying to manage too at the top. Right? So we want the top line growth and we want to make sure that it comes with a healthy gross margin. I've always maintained the fact that in our company we obsess about this notion of gross margin tailwinds and gross margin tailwinds come from better mix management, better shrink management, smarter promotions, supply chain benefits and cost of goods benefits. And those first three have been programs that we've been doing for a while now and the last two, as we talked about earlier, we are going to see more and more benefits from that toward the back half of the year.

So from the management of the gross margin in the P&L, while we can't predict what's going to happen with inflation, we certainly are prepared with what we can do within -- with what's in our control. So, think of it that way. Now, secondly with my 3% to 5%. I mean, I -- to me with the CPI projections came up, I think they've have gone up to 3.5% for the full year. So, I expect it. I expect that it'll continue to increase a little bit over what we've seen through the rest, balance of this year and maybe the first part of next year, but it's still in my opinion, Ed, very much in the manageable run for a country like ours, especially with the consumer, with the backdrop we're seeing with the consumer.

The last thing I'll leave you with is, you'll see that a big part of the Inflation is proteins and protein inflation doesn't -- it tends to be more cyclical. So, I suspect that some of that will come back. Protein inflation -- then you'll see it in different parts of protein. So -- and it's a very manageable part of the business, especially when we have butchers in our store who can manage and give different choices for consumers. That's how we manage the protein inflation. So, consumers can always have something that they pick up to meet their budget.

Edward Kelly -- Wells Fargo Securities -- Analyst

Great, that's helpful. And then I just wanted to follow-up related to the broader category of investments. So, you're ramping invested in the business and in digital transformation and I'm curious is this changing at all with Sharon joining. What I mean by that is either in urgency or the size of the spend, kind of curious, Sharon, is that how you think about like the position of the company's stores or technology or supply chain and how that could impact areas like capex going forward? We have seen companies sort of ramp capex into transformation [Technical Issues].

Sharon McCollam -- President and Chief Financial Officer

We would and from my perspective, these investments create gradual and incremental returns over time and the early stages of these type of transformations start with having to build the foundations. Where the company is now is very much on getting out of systems that are old enough to [Indecipherable] in most states and actually putting in platforms that they can build on quickly. Right? And so this is a story that you hear from every large retailer, who has legacy systems. So they have been working on that for the last 18 months, 24 months since [Indecipherable] company.

We are in the process -- the analytics behind these investments and the work to determine directions is very well on its way on many of these projects and now it's the execution that needs to happen, rest assured that our goal is going to be to accelerate the pace at which we are rolling this out. One of the key things we had to do was to get ourselves into the cloud and as you know that is a significant undertaking and the company is making great progress on that. We still have a ways to go, but we are making very good progress in that space, thus being able to move much faster in the future.

So the -- your question was how do I feel about it. I feel the discipline around this and the strategic discipline around has been excellent. I think there is always the opportunity to accelerate, which is something that I mentioned in my prepared remarks that I'm very interested in doing, both on the technology side and on the supply chain side of it. And as we look forward and we get into our guidance for 2022, this has been a question that I've received numerous times from many of you in the private meetings before our call today and I will be providing some additional color when we go into 2022 as we get clear picture of the 2022 capital spending expectations and budget. But as you know, they have taken them up. So I feel very confident that we will be able to execute against the initiatives that they've originally laid out.

Edward Kelly -- Wells Fargo Securities -- Analyst

Great, thank you.

Operator

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

John Heinbockel -- Guggenheim Securities -- Analyst

Hey, guys. I wanted to start with omnichannel households, right? So up ForEx, I would imagine that's still less than 5% of your total households. Is that fair? Then when you think about maybe the next two years, can you double again the number of omnichannel households over that time period to 2 times? And what do you think drives that? Obviously organically just having capabilities on some of that, but more, is it really your outreach marketing wise, right, that drives that growth from here?

Sharon McCollam -- President and Chief Financial Officer

I'll let Vivek take that.

Vivek Sankaran -- Chief Executive Officer

Hey, John. Good morning, John. We are below our competitors in terms of overall omnichannel mix in the business and we've said that before and we continue to grow that. We are excited about the growth rate, but we're also excited about the quality and the speed at which we are providing it. Right? So your question, I do think we can continue to increase it, at the same pace, if not more. And there's a couple of things. What is -- just making sure we are covering the entire market. I'll give you an example, John. When they open up two-hour delivery in our markets, we see even more incremental growth. Right? People love to speak and our coverage is in the close to say 60% of the market and we're going to continue to grow that.

So, our philosophy here is to keep giving customers more choices on DriveUp & Go, 3-minute service when you pull up to the parking lot. We want to make sure we give you more speed in delivery and more choices in delivery. And I think that's -- those fundamentals, and as we open it up continues to increase the number of omnichannel customers we get. To your point, we haven't turned on a big marketing blitz or anything because we see a lot of customers coming to our stores and we just convert them at that point. They see the availability and they start engaging in it.

Sharon McCollam -- President and Chief Financial Officer

And John, I would add to that that over time this past year, we have been adding capability. The act that customers were buying online with has been upgraded materially. Again, all of these initiatives that we're working on in the e-commerce side of the business are gradual and incremental. You implement them, customers learn to use them, they see how much more efficient they are, they have a better experience and then they use it more. So, we've really saw launch the majority of these. We're also making similar progress in the loyalty area. We talked in the deck prepared comments about the fact that we are increasing our number of loyalty members and as we enhance the benefits and enhance the efficiency and the experience the customer has in redeeming loyalty, etc., that will also be greatly helpful to advancing this.

John Heinbockel -- Guggenheim Securities -- Analyst

And then maybe as a follow-up. Right. So we're going to -- I don't think you double in omnichannel customers. Right. But certainly, the demand is going to increase exponentially. So maybe talk to and I know the MFCs tie into this, but it's broader than this bringing the cost to pick. I guess, I don't know if you guys look at cost to pick a piece as opposed to an entire order, but cost to pick down and how much can you bring the cost to pick down by? Right. Can you bring that down 25%, 30% or possibly even more yeah?

Sharon McCollam -- President and Chief Financial Officer

Vivek?

Vivek Sankaran -- Chief Executive Officer

Yes, John. The cost a bit down, there's two steps. One is, how do you become more and more efficient in the store and that's through technology. And then in some of our stores, we have created what we call a ware rule. So that your fastest moving items can be made even faster in a very small space. So that's -- but you are going to reach the physical limits. And so our long-term strategy will not be about picking everything from the store. Now, in certain locations we have to do that, but that's where the MFC comes in.

What I can tell you is this that we see the MFCs getting to a point where the cost to pick becomes about the same as the labor cost that we had for an order in store. Right. So -- because of the productivity it gives you. And at some point you start becoming indifferent to whether the order was picked, whether -- where somebody shop the store or whether they shop it through the MFC. That's efficient. When that converges, this thing opens up in a big way for us because you're quite of indifferent. The MFCs are going to take a little while. John, as we said. Couple of MFCs, we couldn't get done, right, because of delays, permitting takes a little longer, construction takes a little longer in today's environment.

John Heinbockel -- Guggenheim Securities -- Analyst

Thank you.

Operator

Our next question comes from the line of Karen Short with Barclays. Please proceed with your question.

Karen Short -- Barclays Capital -- Analyst

Hi, thanks very much. So just a question regarding guidance. So your comps guide has obviously improved, but when we look at the second half EBITDA dollars, they're kind of more or less in line with consensus. So kind of wondering if you could give a little color there, meaning you obviously raised top line, but you didn't really change the second half EBITDA dollars? And then tying into that you did say sales accelerated throughout the quarter, but the full year ID guidance wise a deceleration in the one and two-year ID. So some color on that. And then I had a bigger picture question.

Sharon McCollam -- President and Chief Financial Officer

Karen on the bigger view for the back half. I'll let Vivek take that and then I'll take more of the detailed financial side of the question.

Vivek Sankaran -- Chief Executive Officer

Karen, the way we think of it as if -- let's say, we've got about 2.5 points additional ID growth, right, that's about let's say about $1.65 billion or so, at a 50% flow through is an additional $250 million for the year, right. So that's how I would think of it and remember that the back half of the year is going to depend a lot more -- we're getting a lot more of our productivity. So that's how we have framed at least the model for how we think about the full year.

Sharon McCollam -- President and Chief Financial Officer

Okay. And then Karen when you look at the back half, if you do the math, basically you're in the back half at in the midpoint of it somewhere around flat. So obviously that will flow through as Vivek just described. And I would say this, as we look at the back half, like all of you, like every report that I've read that many of you have written, we are very thoughtful about whatever dynamics will result in the back half as it relates to the stimulus changes that will be upon us, with some have already happened.

However, I will point out, there's been some new ones. We went from the snap increases throughout the first part of the year and now they are paying out the child care credits on a monthly basis and as we understand that we are -- the industry looks like it's seeing a lot of that going into grocery and into everyday necessities. So, we are thoughtful and about the back half. And we will continue to push the business, but as we see it right now, I think we've played in a very balanced view of what the back half could look like on the comp side.

Karen Short -- Barclays Capital -- Analyst

Okay, that's helpful and then Sharon in your comments, you obviously said, you had -- there are great similarities at Albertsons to kind of some of your former experiences. But one comment you made was that you're taking, I think, a very surgical approach to pricing and have moved significantly in the last 12 months on that front. Can you just update us on where you're at in terms of that and what is to be expected going forward?

Sharon McCollam -- President and Chief Financial Officer

As it relates to my comments on the pricing, the company is building a very strong pricing team. Considerable resources have been added to that. This is one of those investments that we continue to talk about on our strategic priorities. So, again, this is all about data, Karen, and as you think about the time, the benefits of that are gradual and incremental. I hate to keep saying that, but it is true for just about every one of the underlying projects and the strategic priorities that Albertsons have. So, as we think about pricing, again, what I said is the company has always been known for its deals, while the price that you see -- customers are getting special pricing through loyalty, they are getting special pricing deals and actually we have data that will tell you that people come to us for our deals. So it is interesting to see how well the company is managing that at this point.

Now, do I think we need to go further, I do. And there is no one here that doesn't think that you have to keep pace with what others are doing in the industry. So I feel like we will continue to see benefit in pricing and I think we will be looking at the gap, like we always have been looking at them and where we believe it is important and it will create more stickiness with our customers, we will be adjusting that pricing. But I just don't think that like -- as Simeon said earlier that this is a lot like Best Buy. I think it isn't in the pricing arena. And at Best Buy, we did match price, but there were many products that you can't match and that is always the case. So, happy to have some further conversation as we talk about this over time, but I feel very confident that we are building a much stronger pricing capability in the company and we will see benefit from that. Yes, Karen, if I can add to that, there's, we talked some time ago about promotion tools that we are launching. Now that is national. All our promotions are going through that too. And while we are doing less promotions, we're also doing a lot -- we are a lot smarter with our promotions. We know which ones to do to drive traffic, which ones to do to drive margins, etc. And then a lot of that is also going digital. So, from a promotion standpoint, we are so far ahead of where we were a couple of years ago from what data and technology capabilities do it and that's the principle we're going to continue to go down. The other thing we are doing when we talk of these, when Sharon said surgical is that in these different price areas, we also adjust price -- everyday pricing and we do that very, very -- in every quarter. There are some parts of our -- some markets in our franchise where we are adjusting it on an everyday basis. That's the combination that we continue to play and we're getting better and better at it because we have the data and the tools to do it.

Karen Short -- Barclays Capital -- Analyst

Great, thank you very much. That was very helpful.

Operator

Our next question is coming from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Ken Goldman -- JP Morgan -- Analyst

Hi, good morning. Thanks. Sharon, you mentioned that one of your priorities right now is working on the productivity agenda. We've seen overall for the grocery sector margins declined for decades now. So I'm curious when you think about productivity, are you thinking about the net effect potentially being that margins over the very long-term could reverse course and start to rise over time? Or is the idea -- you really just need more tools, so that the headwinds just aren't -- are offset partially a little bit better. Just trying to get a better sense of how you view this because I think there's a belief out there overall that margins will continue to decline forever in this industry and I'm just not sure how you see that?

Sharon McCollam -- President and Chief Financial Officer

Since Vivek had made some comments about this in the last conference call, I'll let Vivek take this first and then I'll give you my view.

Vivek Sankaran -- Chief Executive Officer

Yes, Ken. Hey, good morning, Ken. The approach here is we want to make sure we don't grow this business simply by expanding gross margins. We [Indecipherable] in gross margins, but we've always want to have room for reinvestment of that for growth. So that's number one. Number two, you could speak about the industry, but I won't speak about this. We've got plenty of room in the middle of the P&L to drive more and more productivity. Why is that, Ken. It's because we are -- just, we went through the integration in the past, but we haven't yet learned how to fully operate with scale benefits and a lot of the initiatives that we're driving are driven by improving leveraging initiatives that get us better cost because of scale benefits. We haven't implemented all the technologies that many others have that drives productivity benefits.

So the middle of the P&L, you're seeing our productivity being driven by initiatives, frankly, that are not new to this sector, but new to us, right, which gives us more flow through in the middle of the P&L. So but think of that philosophy, Ken, it's managing the gross margin through tailwinds and investments, so that we are driving customers back to us and engaging more with customers and driving the top line and a set of technology and scale-based initiatives that improve the middle of the P&L that end up with margins, right? So, but our -- and if we can keep that engine going, which we think we can, we'll continue to not only deliver growth, but healthy margins.

Sharon McCollam -- President and Chief Financial Officer

And Ken. I would just add to that, to what Vivek said, that there are other ways as well that we think are going to help offset some of those cost pressures. I, first and foremost, want to say that there is no doubt in my mind that there will continue to be cost pressures on all of retail: grocery, consumer electronic, pick one home furnishings, it doesn't matter, there will be cost pressure. There is also the incremental cost of adding these online businesses, which we're all aware of. In order to combat that first of all growth has to be the foundation of the strategy and we are making great strides in continuing to gain market share and it is a steep focus of the organization to gain market share and as Vivek said, on a two-year basis, we've gained it on both metrics. We are gaining on dollars and

Are gaining on units.

The second thing that we have that other retailers in this space have already taken advantage of is the penetration of Own Brands. We still in the IPO view, you can go back to the IPO, we talked about the fact that we have an increased opportunities for penetration in Own Brands. We have not yet -- Vivek mentioned a 25.2% penetration today. We still have significant opportunity there and we will continue to capitalize on that. Another area that we have opportunity to create a tailwind were offset to some of these pressures. It's going to be in the mix of fresh. We continue to talk about the fact that we are growing faster in fresh than we are in the center store that is giving us a margin benefit. And we will continue to grow in that area because we believe that this is one of the greatest things that we can do for our customers is to create an incredible fresh experience, but it also has margin benefit from a mix point of view. So those are just a few things I would add to what Vivek said that will give us some tailwinds to help offset the cost pressures that we would all agree is certainly coming.

Ken Goldman -- JP Morgan -- Analyst

Great, thanks very much.

Vivek Sankaran -- Chief Executive Officer

Thanks, Ken.

Operator

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

Paul Lejuez -- Citigroup -- Analyst

Hey guys, thanks. Curious about the categories where you're seeing the highest levels of inflation. And Vivek, I think maybe you mentioned protein earlier and how you've chosen to pass through or not pass through those higher prices to the customer? What has been the customer reaction in terms of elasticity of demand? And how does that compare to what you had expected?

Sharon McCollam -- President and Chief Financial Officer

Vivek?

Vivek Sankaran -- Chief Executive Officer

Yes, Paul. Good morning, Paul. Let me start with this. We have not seen a material change in customer behavior and I think it speaks to the strength of the customer, it speaks to the fact that they are, in my opinion, still consuming a lot at home. They're enjoying cooking and so on. So we're seeing those trends stick and in fact in the research we are doing with our shoppers, we don't see that changing dramatically. We don't see their intent changing dramatically over the next several weeks and months. So that's number one.

Number two, remember we are always optimizing for a basket and that's important to keep in mind because you can see the protein inflation going up and so on, but we're always managing for two things, one is, what's the right way to pass the inflation, so we get -- we make the basket affordable and yet keep the gross margins that we want. The second thing we do is manage it locally and that's something we can do with our model because we've got the divisions that know what's necessary in their market versus the competition they have. So in those two dimensions, we are able to manage the pass through, if I can call it, very, very locally and that's a combination that's giving us the ability to deliver the gross margin without compromising the sales. Is that helpful?

Paul Lejuez -- Citigroup -- Analyst

Yes. Thank you. And then, just another follow-up. On the SG&A front, can you quantify some of the year-over-year changes in terms of which were moving the dial? And I'm also kind of curious about the productivity initiatives where you stand in that $1.5 billion by '22? How is that progressing relative to your plans? Thanks.

Sharon McCollam -- President and Chief Financial Officer

Yes. So why don't I take that one, Paul. On the SG&A and the increases, there's a couple of dynamics during the quarter that we discussed in the press release. The first one was that we had the reopening of many of our fresh departments, deli, bakeries, prepared food that creates a mix difference within our stores and the labor hours that of course go along with that. So that was one of the big drivers and one of the largest drivers. The second area that we saw increases is in the market wage rates. While we do have union contracts across majority of our employee base, we still have annual increases that come along into those contracts.

And then of course, I don't have to describe for you, the wage pressures that you would see in any work and we can start with stores and we can work our way all the way through the corporate headquarters. We have wage pressure in virtually every area in the company like every other retailer. We also have a higher stock-based compensation this quarter based on a credit that flows through the P&L last year, but in the order of magnitude, they are in the press release in the order of magnitude.

Paul Lejuez -- Citigroup -- Analyst

Got it, thanks. And then just that $1.5 billion?

Sharon McCollam -- President and Chief Financial Officer

Yes. We have not disclosed our progress against that. However, we are progressing as you would expect them to progress and we continue to be committed to delivering on that promise.

Paul Lejuez -- Citigroup -- Analyst

Thank you, guys. Good luck.

Operator

Thank you. Our next question is coming from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions.

Rupesh Parikh -- Oppenheimer -- Analyst

Good morning, thanks for taking my question. I'm going to follow-up on that gross margin line. I was wondering if you could provide more color on puts and takes you see on the balance of the year? And I think last quarter you guys indicated you could be close to flat with the prior year. So, I just want to get a sense of what are your updated expectation is for the full year?

Sharon McCollam -- President and Chief Financial Officer

Vivek you want to talk about the back half gross margins.

Vivek Sankaran -- Chief Executive Officer

Yes, Rupesh. I think -- we'd think of it as we -- some of the initiatives that are going to help us in the back half of the year in gross margin, in addition to the things we talked about before: mix, shrink, promotions, Own Brand penetration and so on, is the new flow through coming from supply chain benefits and the new flow-through coming from cost of goods reduction, right, which both of them are leveraging our scale and I talked about those initiatives earlier. So, we feel good about the overall gross margin tailwinds that we have coming with us and we'll continue to use that appropriately to drive growth where we need to make investments.

So, no -- there should be no fundamental change to the thinking on gross margins, Rupesh. that helps.

Rupesh Parikh -- Oppenheimer -- Analyst

Okay, great...

Sharon McCollam -- President and Chief Financial Officer

And we don't guide by gross margins, we only guide adjusted EBITDA, just as a reminder.

Rupesh Parikh -- Oppenheimer -- Analyst

Okay, great. And then maybe just one follow-up. Just on the supply chain, just curious where you guys are on the out-of-stock front right now?

Sharon McCollam -- President and Chief Financial Officer

Yes. So, I'll let Vivek speak to that. He was just in a meeting on it.

Vivek Sankaran -- Chief Executive Officer

Yes, I think it's surprise that we're still talking about out of stocks and we have out of stocks, but the fact is, it's like whack a mole, Rupesh. On any given day, something is out of stock in the store, but -- so let's talk about how we manage it. Now, we give customers alternatives. Right? If you come in, you may not get exactly what you want when you want it, but you might get an alternative. And if you come in another day, you'll probably find it. And so this comes down to execution, this comes down to local execution, finding ways to make sure that the store is supplying -- finding ways to make sure that the stuff is not in the backroom, but in the front, and that's where I am proud of what the teams are doing, just to be that much, a little bit better than others in what's on the shelf.

Sharon McCollam -- President and Chief Financial Officer

And I'll just add to that, hope that for the next three months. fourth quarter holiday actions that you've seen that are being taken by many of the largest retailers, we have been all over those and have a list of probably 25 things that we are approaching differently this year than we have in the past in order to ensure that we offer our customers the best in the stocks we can.

Rupesh Parikh -- Oppenheimer -- Analyst

Great, thank you.

Operator

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

Scott Mushkin -- R5 Capital -- Analyst

Hey guys, thanks for taking my questions. So, I wanted to talk about something little bit more short-term, which Sharon. I think you always had the reputation of being pretty conservative on the guidance. Is that the philosophy you're going to bring to Albertsons? Should we assume kind of a continuation of that?

Sharon McCollam -- President and Chief Financial Officer

Yes, there would be no question that I believe that, especially in the environment that we're operating in today that that would be appropriate. So, I couldn't affirm more strongly that I believe that is a good strategy.

Scott Mushkin -- R5 Capital -- Analyst

Okay, great. And then I know it's a little early to think about '22, but we get a lot of questions on this. And I guess as you think about it, is it going to be possible to grow earnings next year into a degree or is that something that's going to be just really hard given the cost pressures on the business with the union contracts and labor and other things going on?

Sharon McCollam -- President and Chief Financial Officer

Yes, Scott. We will not be talking about 2022 and so we get closer to the end of this year. There is so much learnings that needs to happen with the changes in the consumer and what post COVID. There is never going to be a post COVID, but the next chapter of where this goes. So when we get into the fourth quarter and we look at next year, we'll try to give you a lot more color on that. But I think this needs to unfold before we start talking about 2022.

Vivek Sankaran -- Chief Executive Officer

Yes, the only thing I'd add Scott is that remember costs and things are a controllable. We can work that with productivity initiatives. I think the biggest unknown as Sharon points always, where is to consumer, how is consumer behavior going to change. And as we've all seen. I don't know if we've predicted what's happening now.

Scott Mushkin -- R5 Capital -- Analyst

Perfect. And then if I could slip one last one in. Is the philosophy that's -- is it going to be a change in what's the philosophy on capital efficiency and ROIC given that we are going into an investment period a little bit with the company it sounds like, further investment?

Sharon McCollam -- President and Chief Financial Officer

Yes, Scott, I would say this, I think it is a philosophy of discipline. But it is a philosophy of do it as fast as you can. Time if not your friend and philosophically that is very much how we will be moving forward. We have a lot of opportunity. Vivek mentioned earlier, we have brought together, a lot of companies and they've done a good job of getting them solidified onto a similar platform, common platform. But as we move forward, we still have opportunities in better buying. We just consolidated some of that. So, we have significant opportunities that by the way other retailers don't have in their tailwinds. So I think, yes, the diligence around those investments will be high and we will continue to accelerate to the extent we can over the next 12 to 24 months.

Melissa Plaisance -- Group Vice President, Treasurer, and Investor Relations

Okay, great. We're going to run over time by just a little bit. We'll take three more questions, operator. But if you could keep it to one question a piece, we'd really appreciate it.

Operator

Thank you. Your next question will come in from line of Robbie Ohmes with Bank of America.

Robbie Ohmes -- Bank of America -- Analyst

Hey, thanks. Hi Vivek and Sharon. I will -- OK, so my one question with the -- I think the guidance implies kind of similar to lower ID sales in the back half and what I was hoping, can you give a little more color on sort of the traffic versus transaction size assumptions in that? And maybe speak to what you're seeing, are you seeing consolidation of trips remain similar or is that dropping off? I'm just in that customer behavior assumption, what do you think is staying the same versus changing, especially on that size of the transaction versus visits to the stores?

Vivek Sankaran -- Chief Executive Officer

Yes. Robbie, back in, when we talk about Q1, we have seen that there was -- in-store traffic was going up a lot. We saw digital traffic, when it was higher, the rate was coming down. What's interesting is that over the last several periods here, the traffic seems to have stabilized in the stores. So, we're seeing healthy, stable traffic in store and we've seen a pickup again in the digital traffic. So -- and about three weeks into this quarter, we started seeing a pickup in digital traffic. We had just launched our new app and we've started this faster service and so on, so we've seen the digital traffic go up. So I'm predicting that to me that we're going to see some stability on store traffic, people started to get to a new pattern, what we hear, I don't know how Thanksgiving changes that probably, but I hope that gives you some color that's how we've thought about the rest of the year.

Robbie Ohmes -- Bank of America -- Analyst

That's great, thanks so much.

Operator

Our next question is from the line of Michael Montoni with Evercore ISI. Please proceed with your question.

Michael Montoni -- Evercore ISI -- Analyst

Hey, thanks for taking the question. Just wanted to follow-up if I could quickly Vivek and Sharon on the competitive environment and what you're seeing in terms of promotions throughout the quarter and then obviously to start this quarter and into year-end?

Sharon McCollam -- President and Chief Financial Officer

Yes, Vivek.

Vivek Sankaran -- Chief Executive Officer

Yes, pretty stable, Mike. We are not seeing a fundamental change. I think everybody -- my sense is all the last players are doing more digital promotions, are doing things we are doing like being smarter about promotions and then we also have supply challenges. Right? So we are not seeing any material change on the promotional environment.

Michael Montoni -- Evercore ISI -- Analyst

Thank you.

Operator

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

Chuck Cerankosky -- Northcoast Research -- Analyst

Good morning, everyone. Great quarter.

Vivek Sankaran -- Chief Executive Officer

Hi Chuck.

Chuck Cerankosky -- Northcoast Research -- Analyst

If you could comment a little bit on how you're prepared foods business evolved during the quarter as some of these new -- excuse me the old sections of fresh reopen and also your progress in the meal solutions, please?

Vivek Sankaran -- Chief Executive Officer

Yes, Chuck, we were very cautious as we brought those back in and we saw different take rates in different markets on salad bars, hot bars and such. And the general sense I guess now is that customers are back on the fresh side of the store, on the self-service side of the store. And certainly, you could see in that most markets. And then on the meals program, we are excited about what we're doing. It's a very difficult thing to pull off to deliver -- develop the meals in store, manage and keep the shrink down, yet keep the offer really fresh, it's a difficult thing to do and I'm delighted that the team seems to have cracked the code on that. And we've launched it in about four markets already, applied and continue to drive that through. Chuck, the thing is that the biggest challenge there is the equipment. Like everything else that too is constrained in how quickly you can get it.

Chuck Cerankosky -- Northcoast Research -- Analyst

All right, thank you.

Melissa Plaisance -- Group Vice President, Treasurer, and Investor Relations

Hey, thank you, everyone. I'm sorry, we weren't able to get to everyone today, but we ran a little bit over. We appreciate your interest. Cody and I will be available for the balance of the day for more questions and Sharon is going to join us on the follow-up call. So thank you very much and we'll talk with you soon. Bye-bye.

Sharon McCollam -- President and Chief Financial Officer

Thank you.

Vivek Sankaran -- Chief Executive Officer

Thank you all.

Operator

[Operator Instructions]

Duration: 66 minutes

Call participants:

Melissa Plaisance -- Group Vice President, Treasurer, and Investor Relations

Vivek Sankaran -- Chief Executive Officer

Sharon McCollam -- President and Chief Financial Officer

Simeon Gutman -- Morgan Stanley -- Analyst

Edward Kelly -- Wells Fargo Securities -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

Karen Short -- Barclays Capital -- Analyst

Ken Goldman -- JP Morgan -- Analyst

Paul Lejuez -- Citigroup -- Analyst

Rupesh Parikh -- Oppenheimer -- Analyst

Scott Mushkin -- R5 Capital -- Analyst

Robbie Ohmes -- Bank of America -- Analyst

Michael Montoni -- Evercore ISI -- Analyst

Chuck Cerankosky -- Northcoast Research -- Analyst

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