Albertsons Companies Inc Aktie

Welcome to the Albertsons Companies' Fourth Quarter and Full Year 2025 Earnings Conference Call, and thank you for standing by. [Operator Instructions] This call is being recorded.

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

Good morning, and thank you for joining us. With me today are Susan Morris, our CEO; and Sharon McCollam, our President and CFO. Today, Susan will provide an overview of our fourth quarter and full year 2025 results and update you on our strategic progress, highlighting areas of particular focus as we enter fiscal 2026. Then Sharon will provide the details related to our fourth quarter and full year financial results and our outlook for 2026 before handing it back to Susan for closing remarks. After management comments, we will conduct a Q&A session.

I would like to remind you that management may make forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise.

Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these financial measures to the most directly comparable GAAP financial measures can be found in this morning's earnings release.

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

Thanks, Cody. Good morning, everyone, and thanks for joining us today. In the fourth quarter, our teams led with operational agility and strong execution. Despite greater-than-expected pharmacy headwinds, identical sales increased 0.7%, while our resilient operating model and ongoing productivity drove better-than-expected adjusted EBITDA of $903 million.

For the full year, we delivered results in line with our expectations, while investing in capabilities that strengthened our business, further positioning us for long-term growth. Also during fiscal '25, we returned more than $1.8 billion to shareholders through share repurchase and dividends, underscoring our commitment to shareholder returns and disciplined capital allocation. Throughout 2025, our teams leaned into a new day, executing with focus amidst a volatile and uncertain macro environment. The results we delivered validate the effectiveness of our investments, the progress we're making across the business and the strength of the foundation that we have built.

As we enter 2026, we do so with confidence as reflected in today's outlook. This confidence is further reinforced by our announcement this morning to increase our quarterly dividend by 13% and refresh our existing share repurchase authorization to $2 billion. But before we talk more about the fourth quarter and 2026, I want to step back and talk about how we see the future of Albertsons and how we're positioning the company to win in a competitive value-focused grocery environment that requires differentiation.

At the core of our strategy is a clear conviction. The future of grocery is personal, and true personalization is a durable competitive advantage. Our mission is to become the most-loved grocer in the neighborhoods we serve by transforming routine transactions into differentiated customer connections and experiences that deepen engagement. It's not a reinvention of who we are, it's a deliberate build on strengths that already differentiate us and give us the right to win.

We have one of the strongest store networks in the country. In our markets, our stores are within 15 minutes of approximately 120 million people, giving us a structural advantage in trip frequency, pharmacy access and fast same-day fulfillment. Put simply, our store network cannot be replicated and is further strengthened by our team, our data, AI and next-generation technology capabilities, which allow us to personalize a customer's entire experience.

We also have the scale and capabilities to deliver sustainable value. In our stores, we provide market tailored fresh offerings and value-enhancing services. In e-commerce, we offer speed, convenience and variety from our store-based fulfillment model. In pharmacy, we don't just fill prescriptions, we immunize and treat our patients along their wellness journey. And we have a strong loyalty engagement where deep relationships with our banners and brands provide us the data and insights to personalized experiences at scale.

These foundational strengths working together bring our strategy to life under 3 tightly connected pillars: a winning footprint, a customer-centric experience and balanced value. Our winning footprint is not only a critical differentiator but a deep and structural competitive advantage that enables both convenience and local relevance. We're taking a disciplined market-by-market approach to banner optimization, store modernization, market densification where we have the right to win and store rationalization where the economics are structurally challenged. This is not about growth for growth's sake, it's about optimizing return on investment, elevating the customer-centric experience and ensuring that every store plays a clear role in winning in its local market.

To elevate the customer experience, we're creating scalable yet personal experiences, experiences that are differentiated, combine caring service, quality and fresh, convenience, value and own brands, all while remaining simple and easy for our customers to navigate. To deliver this, we're building on capabilities and offerings where our brands already have credibility and our customers' trust. Fresh is a great example. Our customers know they can trust us with their custom birthday cake order, to have perfectly trimmed steaks for their barbecue or to be there for them with our fresh-cut options. We're leaning into our strength as a scaled Fresh destination combining service, solutions, innovation and expertise to drive both loyalty and share.

We're also expanding into what we call food now, broadening our role in customers' daily lives by providing meal solutions that allow us to compete for a larger share of food occasions, not just the weekly stock up. Today, our deli and prepared foods drive more than 1/3 of total trips, and we have outsized share of wallet that continues to grow in this area.

At the heart of our mission, we are deepening the personal digital and loyalty relationship, connecting online and in-store experiences so customers feel recognized, seen and valued wherever they engage with us. The outcome we're driving here is simple. Customers don't just shop with us, they choose us. We're very clear-eyed about today's consumer. They remain focused on value, making a balanced value proposition more critical than ever. Our approach to this is deliberate and sustainable. Scale is a real advantage that we will leverage every day, including capitalizing on buying better together at the national level, expanding our own brand penetration, and growing our retail media platform, all to provide fuel to reinvest in value.

At the same time, we're accelerating automation and AI-enabled tools across merchandising stores and supply chain to improve efficiency to add further fuel for investment.

We are surgically investing where it matters most to our customer. That includes getting sharper on key value items and driving own brand penetration, both funded through structural margin improvement in productivity, not short-term trade-offs. But it also includes the convenience, speed and value we can offer with our assortment. The result is building a balanced value equation that works for customers, and in turn for all stakeholders while protecting long-term returns and making us our customers' retailer of choice.

Underpinning all of this is our team powered data-driven and AI-enabled company, using technology not to replace the human element, but to amplify it. As we look ahead, our focus is on building a company that can grow sustainably through all cycles. We have a clear path to accelerating revenue growth, strengthening margins and improving returns while staying true to what makes Albertsons distinctive.

Becoming the most loved grocer in our neighborhood is how we bring this to life, while building on the initiatives and capabilities we've been focused on, making grocery personal at scale, earning customers for life and delivering long-term value for shareholders.

I'll now turn back to the quarter to highlight the progress we are making across our priorities that continue to strengthen our foundation and position us for sustainable, profitable growth in fiscal 2026. Technology and AI fit at the center of our transformation. Our 4 big bets: digital customer experience, merchandising intelligence, labor optimization and supply chain optimization are not pilot programs. They're all long-term structural initiatives designed to drive growth and expand margins.

This quarter, we continue to see tangible progress. In digital customer experience, AI-driven capabilities are modernizing the way customers shop, delivering personalization that drives higher conversion, larger baskets and greater loyalty.

Merchandising intelligence. Automated insights and intelligent pricing tools are improving category decision-making and supporting structurally stronger margins. We are in flight with tools that are reimagining price and promotional strategy as well as category management and assortment decisions.

Labor optimization. Our generative AI scheduling tools will improve forecast accuracy, reducing complexity for associates and driving labor efficiency.

In supply chain, our AI power demand forecasting and computer vision are improving availability, quality and freshness, while lowering inventory and fulfillment costs. As part of our investments in supply chain, we've launched Gateway, a proprietary AI-powered tool that boosts inventory efficiency and replenishment for promotional center store SKUs. All of these initiatives are building the modern technology-enabled Albertsons that will define our competitiveness in fiscal 2026 and beyond.

Our digital and e-commerce business continues to be a strong growth engine, building on the momentum that we delivered throughout fiscal '25, digital penetration surpassed 10% in Q4, a new milestone for our omnichannel ecosystem. Our first-party business continues to scale rapidly and contributed nearly 90% of our 16% digital growth this quarter as we continue to elevate our customer experience. Our AI-enabled shopping assistance, already showing meaningful lift in basket size, continues to enhance personalization, and we see significant runway ahead as customer adoption increases.

The strength of our store-based fulfillment model also continues to differentiate. Our proximity advantage enables speed and efficiency at scale as we continue to fulfill more than half of digital orders in under 3 hours. Additionally, the vast majority of delivery households are eligible for a 30-minute flash delivery, which is our fastest growing digital segment.

We maintained strong conviction in digital as a driver of sustainable growth and margin expansion as we scale retail media, enhance marketing efficiency and strengthen loyalty engagement. Our third-party business also remains a convenient choice for some customers and is a gateway for introducing new customers to our first-party offering.

Our loyalty ecosystem continues to be one of our strongest competitive advantages, creating deeper stickiness and fueling our strategy. Membership grew 12% to more than 51 million members, with more frequent transactions, easier reward redemption and higher spending among engaged households. The program's momentum reflects both simplicity and relevancy. Customers are gravitating toward immediate value, including increasing redemption through the cash off option, which is clear evidence that we're meeting their needs in a value-focused environment.

Loyalty is also a flywheel for growth. It enriches our data, strengthens our media collective and helps us personalize promotions with increasing precision. Across the board, loyalty is driving higher lifetime value, deeper omnichannel engagement and a more predictable, resilient revenue base, all essential components of our long-term growth algorithm.

Our media business gained further momentum in Q4, driven by deeper integration across our platform. By embedding media into the customer journey and merchant partnerships, we're delivering targeted, measurable value at scale. In the quarter, our personalized ad pilots delivered a 90% lift in conversion and click-through rates, validating a clear path to scale personalization, driving higher relevance and improved return on ad spend. This approach is translating into a structurally attractive profit stream that amplifies and fuels our core retail business.

Our customer value proposition continues to strengthen, making shopping more affordable, intuitive and personalized across our market. By combining our rich store, customer and category level data with disciplined price investments, we are delivering clear, more consistent value. Through targeted pricing actions, improved loyalty-driven promotions and continued own brands innovation, we're reinforcing trust with customers who increasingly expect transparency and consistency in their weekly shop.

Our approach remains deliberate, protect affordability, sharpen value perception and use data-driven personalization to meet customers where they are across income levels, trip types and missions. The results, a value engine that supports growth and protects margins through all cycles.

In pharmacy, we delivered improved profitability despite top line pressure from the government-mandated Inflation Reduction Act that took effect this quarter. This performance reinforces our confidence in our strategy to improve pharmacy stand-alone profitability, while also driving materially higher customer lifetime value among customers who shop both pharmacy and grocery. Looking ahead to 2026, we remain focused on increasing operational productivity through expanded central fill, enhanced procurement and the scaling of higher-margin services while maintaining disciplined management of reimbursement and regulatory headwinds.

Finally, productivity remains a foundational pillar of our strategy and a meaningful source of both fuel and flexibility. Across fiscal '25, our teams executed with discipline, unlocking efficiencies across labor, store operations, supply chain, merchandising and global capability centers. This included a deliberate focus on reducing shrinking expense and improving units per labor hour, driving better in-store execution and structurally lower cost.

Importantly, this work does not reset in 2026, it builds. As we enter fiscal '26, we are scaling the same productivity engine further through a $2 billion 3-year productivity program, supported by our technology agenda and our 4 big bets in AI. Our progress continues to strengthen our operating model and reinforce our ability to grow through all cycles. Our teams delivered a strong close to fiscal '25, and we are entering fiscal '26 from a position of confidence, clarity and momentum.

With that, I'll turn it over to Sharon to walk through our financial results and 2026 outlook.

Thank you, Susan, and good morning, everyone. It's great to be here with you today. Before turning to results, I want to briefly update you on this morning's announcement of our proposed nationwide opioid legal settlement framework. This framework provides for a $774 million settlement payable over 9 years that was recorded during the fourth quarter. This proposed settlement is a meaningful step toward resolving our opioid-related litigation without any admission of wrongdoing or liability. We remain committed to patient safety, strong pharmacy practices and being a constructive partner in addressing the opioid crisis as communities' needs evolve.

Now let me turn back to our fourth quarter results. In Q4, we delivered better-than-expected adjusted EBITDA and adjusted EPS despite industry-wide pharmacy dynamics that pressured reported identical sales. ID sales in Q4 increased 0.7%, net of approximately 145 basis points of pharmacy-related headwinds versus the expectation we provided in our Q3 outlook of approximately 65 to 70 basis points. These headwinds were primarily driven by a greater impact from the Inflation Reduction Act, which I will call IRA, and broader industry affordability dynamics. Specifically, IRA pricing and mix pressure accelerated more quickly than expected, while the industry shifted toward a higher generic to brand mix. Together, these factors represented an approximate 105 basis point headwind to ID sales in the quarter.

Importantly, while the top line impact was meaningful, the margin impact was favorable as generics are structurally more accretive. In addition, we saw a greater moderation in GLP-1 growth, driven by tighter payer criteria and increased direct-to-consumer penetration. This represented an incremental 40 basis point headwind to identical sales compared to our Q3 outlook. So in total, pharmacy created an approximate 145 basis point headwind to our Q4 ID sales expectations, with better-than-expected adjusted EBITDA flow-through.

In grocery, units in ID sales in Q4 remained pressured in our lowest income cohorts. And deflation also created a meaningful sales headwind as we cycled the significant egg shortages from a year ago, a dynamic that we expect to persist into the first quarter of 2026. Gross margin in Q4 was 27.2%, a decline of 25 basis points year-over-year, excluding fuel and LIFO. The decrease in gross margin rate continued to be driven by the mix shift impact of outsized growth in digital sales, while productivity benefits offset our surgical price investments. The gross margin rate also reflected the favorable rate impact associated with lower sales due to the pharmacy IRA.

Selling and administrative expense, excluding the impact of fuel and the opioid settlement framework, improved by 2 basis points year-over-year as we continue to accelerate productivity and cost-containment discipline. The SG&A rate also reflected the unfavorable rate impact associated with lower sales due to the pharmacy IRA.

Q4 interest expense increased $40 million to $141 million, compared to $101 million last year due to higher borrowings in the extra week in the fourth quarter of 2025 compared to 2024. Adjusted EBITDA in Q4 was $903 million, including approximately $68 million related to the 53rd week, and adjusted EPS was $0.48 per diluted share as productivity continued to drive fuel for investment and the bottom line.

For the full year, identical sales increased 2%, and we generated $3.9 billion of adjusted EBITDA. This performance reflects the resilience of our operating model and our ability to continue to drive productivity across the business. These results reflect our financial agility to both reinvest in the business and return capital to shareholders, which brings us to capital allocation.

I want to reiterate our capital allocation priorities. First, invest in the business to drive growth and value for our customers. Next, maintain and grow our dividend, which we increased 13% this morning to $0.68 per share. And finally, opportunistically repurchase shares while maintaining a strong balance sheet. In order of these priorities, we invested $1.84 billion in capital expenditures in fiscal '25 to modernize our store fleet, advance our AI, digital and technology capabilities and elevate our supply chain. In the store fleet, we remodeled 94 stores and opened 9 stores as we refresh the asset base for long-term growth. In AI, digital and technology, we accelerate our investment in our 4 big bets as we create greater structural cost advantages, deepen customer loyalty and unlock new profit pools.

Also in fiscal '25 from a cash return to shareholders perspective, we returned $1.8 billion of capital to shareholders, including $322 million in dividends and nearly $1.5 billion in share repurchases, including the completion of our $750 million accelerated share repurchase program.

As we look forward to 2026 and beyond, we remain confident in the strength of our balance sheet and our cash flow generation. As such, now that the ASR is complete, the Board has again increased our remaining share repurchase authorization to $2 billion in total, which we expect to opportunistically complete over approximately the next 3 years.

We ended the year with our net debt to adjusted EBITDA ratio at 2.24x, demonstrating the strength of our balance sheet and capacity to fund growth and return capital to our shareholders. Finally, in the fourth quarter, we opportunistically refinanced $2.1 billion of existing bonds in 2 tranches, $1.2 billion of 5.625% notes due 2032 and $900 million of 5.75% tack-on notes due 2034. These proceeds were used to refinance our $1.35 billion 2027 and $750 million 2028 note maturity.

I'll now walk through our 2026 outlook. As we look ahead to 2026, we view the year as an important step in returning the business to earnings growth, while continuing to invest in the capabilities that support sustainable long-term value creation. Our strategy remains focused on the areas where we see the greatest opportunity to drive profitable growth. Digital continues to be a powerful engine as we expand our base of loyal, engaged customers and scale the business in a disciplined and increasingly profitable way. At the same time, our focus on cost control and productivity remains central to our approach, enabling us to reinvest in high-impact initiatives, expand margins and maintain financial strength.

In pharmacy, we expect continued improvement in the underlying trajectory of the business. Excluding the top line headwinds associated with the IRA, we believe pharmacy scripts will continue to grow, supported by immunizations in value-added clinical services that enhance customer engagement and profitability. With that backdrop, our fiscal '26 outlook represents a year in line with our long-term algorithm and a double-digit TSR, including our expected dividend yield and share repurchases.

Identical sales are expected to be in the range of 0% to 1% or 1.5% to 2.5%, excluding the 150 basis point headwind from the IRA and assuming near flat reported pharmacy sales. Looking at quarterly cadence, we expect identical sales in the first quarter to track below our full year range, including the IRA and significant ongoing egg deflation. As we move beyond this dynamic, we anticipate a sequential improvement in sales trends throughout the year.

Adjusted EBITDA is expected to be in the range of $3.85 billion to $3.925 billion, representing growth of approximately 2.5% at the top end of the range, excluding the 53rd week impact in 2025. Adjusted EPS is expected to be in the range of $2.22 to $2.32, including approximately $600 million of share repurchases during fiscal '26, underscoring our confidence in the business and our commitment to returning capital to shareholders. The effective income tax rate is expected to be in the range of 24% to 25% and capital expenditures are expected to be in the range of $2 billion to $2.2 billion as we accelerate our investment in new stores, remodels, AI-powered technologies and digital capabilities.

Taken together, we believe fiscal '26 marks an important step forward, delivering adjusted EBITDA growth, strengthening earnings resilience and positioning the company to create sustained value.

And with that, I'll turn it back to Susan for closing remarks.

Thanks, Sharon. As we look ahead, 3 things should be clear. First, Albertsons has a differentiated growth model built to win in a highly competitive industry, and is rooted in proximity, customer centricity and balanced value. Second, fiscal 2026 is the year where the investments that we've made begin to translate into accelerating earnings power and improving returns. And third, our confidence is grounded in the strength of our productivity engine, efficiencies we are driving across the business that expand margins, fund reinvestment and give us the flexibility to grow through cycles.

The environment remains dynamic and competitive intensity across food retail is not easing, but our strategy is built for this reality. We have a defensible footprint that creates everyday convenience, distinct fresh experiences, a differentiated digital and loyalty ecosystem that deepens engagement and lifetime value of pharmacy business with long-term earnings power and an AI-enabled operating model that strengthens margins, improves execution and compounds returns over time.

Above all, our confidence in the year ahead comes from our people. To our 280,000 associates, thank you. Your resilience, your commitment to customers and pride in our banners bring our strategy to life every day, whether it's delivering fresh, high-quality food, supporting customers on their wellness journeys or serving communities with care. You are the foundation of our success. And as we advance our transformation, we will continue to invest in the tools, technology and support systems to help you do your best work.

I want to thank all of you on the call today for your time and support. We know who we are, how we win and where we're going. And we're building a company that can grow sustainably, generate strong cash flow and deliver long-term value for shareholders. We look forward to sharing our progress with you in the quarters ahead. I'll now turn the call over to the operator for questions and answers.

[Operator Instructions] And our first question is from the line of Leah Jordan with Goldman Sachs.

I wanted to start out on productivity, you talked about your efforts building as we go through '26. Just -- can you provide more detail on what you've been vetted regarding productivity within the guide as we move through the year? And how we should think about the split between COGS and SG&A at this point?

Yes, we just reset our productivity to $2 billion over the next 3 years. You can think of that ratably over that period of time. And when you look at the big areas that, that comes out of, it's going to be our store operations, including shrinkage and Rx, you're going to see us buying better together. Sourcing, both GNFR and in the admin areas, we expect to see benefit supply chain. So we have amplified our activities in this area materially, and we feel very confident in the delivery of this new productivity target over the next 3 years.

Leah, what I would add to that is that the strength of the productivity really shown through for us in FY '25. We showed that we can fund strong investments, still deliver EBITDA. And as Sharon mentioned, as we think about the shape of productivity moving forward, the fact that we raised our expectations there from $1.5 billion to $2 billion over the next 3 years, that shows that we believe there's more to be had.

We mentioned our AI big bets, and we're starting to see returns there on those investments. Our buying better together is yielding strong results, and we can talk more about that. The bulk of the savings though will be coming through the SG&A side of the business.

Okay. That's very helpful. And then I just wanted to follow up on the ID sales guide. Thanks for the color, Sharon, on the improving sequential outlook for the year. But just if you can provide more detail on the grocery side of the house, your view of volumes and inflation as we move through the year?

So Leah, what I would say there -- and I'll hand it over to Sharon, is first, remember -- and we shared this in the script. The reported IDs of 0% to 1% include about a 150 basis point headwind from the IRA. So if you think about that, the underlying business will be running closer to 1.5% to 2% range.

Also, remember that we're thinking about this not just about how we grow top line, but the quality of top line growth. And there are several things that we mentioned in the call. We've got the advantage of proximity and trip frequency. We're now looking at how we can optimize our stores to drive better returns. From a customer-centric perspective, we're really engaging deeply in loyalty, digital personalization and increasing our fresh penetration to drive frequency and lifetime value. And from a pricing perspective, we're closing pricing gaps where it matters, but we're doing it with productivity funding, not through margin erosion.

Sharon, anything to add?

Yes. And Leah, your question is how do we see the cadence ex Rx as we move through the year. We're expecting the industry units to remain pressured, particularly in the first half of the year and expect Q1, we said it will actually be below our guidance range in total, including IRA. And then we will have sequential improvement as we move through the year and expect likely to be positive in the back half.

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

So to start, just on the pricing front, some of your larger competitors continue to talk about investing in their value propositions. Have you seen much of a step change on this front? And then you talked about being able to fund your anticipated changes with your productivity initiatives. Just curious if you see much risk or need to make any deeper investments in the year ahead in any of your specific markets like you did this past year?

Mark, thanks for the question. So a couple of things. First of all, we closed the gap on pricing versus MULO in the fourth quarter. So we are seeing improvements there. And I think we shared a year ago, we have a very different price position across the many markets that we operate in. So our approach is very surgical, not broad-based. We're investing where it matters most to customer value perception, especially in key value items on our private label, our own brands, and also through loyalty and personalization. We're funding that through structural productivity and margin improvement, not looking for short-term trade-offs, and that's how we're improving the price competitive perspective of our business, but also protecting long-term gross margin growth.

Great. That's helpful. And then with everything that's going on in the Middle East, can you walk through the main implications you expect to see from higher fuel prices? Do you see demand destruction or trade down tend to accelerate when the price of gasoline is at a certain level? Does it change your inflation outlook? And just broadly speaking, how impactful do you expect it to be on your fuel margins?

Yes. So we're still expecting industry inflation -- food inflation to run around that 2% range. That said, you should know that we have not been passing through that inflation at the 2% rate. We've been working on that to help bolster our price position surgically across the company.

And as we look forward, from a fuel perspective, what I would say is maybe this and just thinking about the consumer for a second. We do see units remaining pressured across the industry, and that pressure certainly is unevenly distributed. What we're seeing is increasing pressure on the lower income cohorts. It's reflected in ongoing affordability changes, we're seeing further pressure from staff regulation and so forth. So -- and by the way, the middle and income customers remain more stable in terms of the pressures that we're seeing there.

But that said, we recognize our customers are focused on value. Our lower income households are most elastic, and that's why we continue to describe our value actions as very surgical. We're trying to improve the value perception where it changes behavior, again, while protecting long-term returns through productivity funding.

Our next question is from the line of Edward Kelly with Wells Fargo.

Yes. Could we just start with the gross margin, and I'm curious if you could provide a bit more color on how you're thinking about the gross margin in the upcoming year. There's a number of, I think, puts and takes here. And just curious as to whether you think that's a line item that we'll continue to improve.

Yes. So in 2026, we will continue to see benefit from the IRA. So you can anticipate that there will be a positive coming from that piece of it.

On the mix shift side where we are seeing the digital business continue to grow, while less than previous years because of the improvement we're seeing in profitability in the digital business, it's still not running -- obviously, margins of the grocery business. So we see the digital mix still playing out. And the investments that we're making price and others, we've got the productivity to offset it. So we should see the margin flat to slightly better as we progress through the year in 2026.

And when we think about that, the previous question about how is the Iran situation affecting us. One of the things to keep in mind is what we know at this point, we've included the pressures that the higher fuel costs will provide related to our transportation and the distribution expenses, et cetera. Obviously, we're expecting that -- hoping that this comes to an end in some shorter period of time. If that continued throughout the year, there could be some incremental pressure, but we are very comfortable right now with what we've included in our outlook.

Okay. And then I just wanted to follow up on the guidance that you talked about with the share repo. I think you mentioned $600 million this year and $2 billion in 3 years. With cash -- with CapEx going up and the opioid sentiment, there's roughly, I think, a $300 million incremental headwind there. Can you just talk about what the offsets are to that? How you're thinking about leverage within the context of all of that? Just kind of curious as to the drivers of the cash flow to deliver the share repo.

Yes. So one area -- when you look at the big bets and you listen to the initiatives that are underlying our productivity, we are expecting in 2026, an improvement in working capital. And our guess would be that half of that probably will be funded by working capital improvements.

In addition to that, we continue to believe that we are going to be able to take this CapEx and invest it, improve the store fleet, see the benefits in the back half of the year coming from the 4 big bets and be able to then at the back half of the year further accelerate working capital. So from a leverage point of view, we're very comfortable with where we are and we will see how this progresses through the year, but feel very confident in the returns that we will see from those capital investments.

Our next question is from the line of Simeon Gutman with Morgan Stanley.

First, more of a philosophical question. It looks like the implied guidance is flattish margins, you can correct me if I'm wrong. If the comps end up being a little bit better at the high end, are you in reinvest mode at almost -- at any cost? Or do you let that flow through to earnings? How should we think about that both this year and the next couple of years?

Simeon, thanks for the question. So I'll start and I'll ask Sharon to chime in a little bit as well. So first and foremost, we want to -- I want to underscore the impact of our productivity agenda. And again, as I mentioned before, when you look at the results from FY '25, we've shown that we can actually deliver strong productivity and strong EBITDA flow-through.

And we're scaling that further in FY '26. And that agenda is now accelerated and amplified by our 4 AI big bets, which are already yielding real results. We're starting to see increased customer take on AI-enabled shopping assistance. We're seeing a basket lift size there. In merchandising, we're already in flight with tools that help us reimagine price and promo and manage our margin spend very, very effectively. We've talked about supply chain helping us with our in-stock perspective and optimizing inventory levels through our proprietary gateway forecasting capability. So we see strong improvements there. We think it will be a very balanced year from that perspective.

Sharon?

And Simeon, as I think about if units inflected faster than we expected and we saw real momentum with our customer, we will evaluate when that moment comes. But to get that flywheel going and to get that momentum going, we will definitely invest behind the customer and the growth because long term, that will be a catalyst for staying in the algorithm and maybe even improving the algorithm over time, and that would be our goal for 2026.

Okay. And then a follow-up. It sounds like you have a digital advantage and you have the assets and capabilities in place to drive it. Can you tell us the KPIs? When you report the e-commerce growth, how -- like what level of growth are you targeting? What level of growth are you satisfied by -- like -- and are you turning -- are you bending the curve in -- across all markets? Are you seeing some progress scattered across your regions?

Thanks, Simeon. So we're very pleased with the results of our digital penetration. We shared on the call that it's now surpassed 10%. If sales grew 16% in the fourth quarter, but what's important to note there, it's over 40% to your stack. And by the way, we're not done. We think there's still a lot of upside there. We're excited about the growth. 90% of that roughly coming from our first party, which is very attractive for us because of the relationship with the customer and the data side.

On the other side of it, execution has been strong. More than half of our orders are delivered in less than 3 hours. Our Flash delivery, under 35 minutes, I believe, is one of our fastest-growing verticals in that space. And then we're really excited about the improvements that we made from a 5-star service program. We've gained return customers because we're delivering better in-stock, on-time deliveries and high-quality fresh products that we're committing to our customers.

Our next question is from the line of Paul Lejuez with Citibank.

Curious if we can we go back to the fuel for a second. I'd love to hear what your assumption is for fuel profits in F'26? And also, if you have witnessed any change in consumer behavior since gas prices have increased over the past month or so? And then I also wanted to ask about your own brand's performance in 4Q relative to the rest of the store and what your assumptions are for F'26 on own brands?

So we are seeing, again, a shift in the consumer, primarily localized with the lower income consumers that shift towards the value. We've spoken about the increase in auto cash back on our loyalty program. So we are starting to see some changes there. At the same time, we're also still seeing consumers making trips to multiple retailers. So we'll watch that closely over time. And then we anticipate to see it -- an uplift in our fuel rewards program moving forward.

Sharon?

And from a fuel perspective, at this point in time, again, within our forecast, we are assuming that this conflict is going to end in a reasonable period of time. And assuming that's the case, we're expecting -- let's think of it, in the near flat trajectory for 2026.

And then the own brand penetration as you look out to F'26?

So on brand, as we mentioned before, we're seeing fairly flat penetration at this moment in time, but it's one of our top priorities as we move forward into 2026. We've made some pretty significant investments in restructuring the team, in cost negotiation improvements, while also amplifying -- we're certainly protecting the quality that we have. So one of our primary initiatives in terms of driving value now and through the rest of 2026 is absolutely increasing own brand penetration.

Our next question is from the line of John Heinbockel with Guggenheim Partners.

Susan, I want to start with -- can you talk about the lag between value perception and reality, right? And how long that takes to shift? And I know it will probably differ market by market. With that in mind, is it reasonable to think about exiting '26 with the positive food volumes? Or is that ambitious given the industry backdrop?

John, thanks for the question. So it's a very philosophical view, by the way. From a value perception to a reality perspective or -- what we're seeing there is really doubling down on how we're communicating to customers about value and what it means to them specifically. You'll hear us talking a lot about personalization. And of course, that means personalized offers through our app and so forth. But the value perception can come in a variety of ways, simplified pricing at the shelf level. Yes, of course, personalized offers coming through our app, but it also comes through relevance in terms of assortment at store level, variety and quality of fresh, which, by the way, as a reminder, we're already in the neighborhoods where our customers live. So our ability to deliver that fresh fast, whether it's in-store or online, that proximity is an advantage that we have there.

Your second part of the question was, remind me?

Well, just what's -- is it ambitious to think about food volumes inflecting as an exit rate at the end of the year?

Yes. So we absolutely see an inflection as we go throughout the year. Clearly, the customer -- consumer remains pressured in the first quarter, and we're seeing that as much as the industry is, but we expect that to increase sequentially over time.

Sharon, would you add to that?

And John, I just -- when I answered the question about the cadence through the year of the ID sales, I said that in our outlook, we are assuming that we do get to positive at that point in time. Industry unit is going to be a catalyst that underlies that, and we will see what happens with industry units as they progress through the year as well.

Great. And then my follow-up just on, right, sourcing better together, and that's always been a really large opportunity, right, given the base. Where are we on that? Because it sounds like most of the incremental productivity agenda is SG&A. Is there still an equally large opportunity in COGS? And is that still over that 3-year time period?

John, great question. So yes, absolutely, there is more to be had from buying better together. And we were talking about this earlier. I'd say we're somewhere around the fifth inning, if you want to think about it that way, the fourth or fifth inning.

What's materially changed is we've not only put new leadership in place since late last summer, we've also reconstructed the team here, and we're already working differently with our vendor partners. Some examples, we used to have 3 national sales events. It will be 5 this year. We've already worked with our vendor partners on securing -- I'd mentioned this a moment ago, lower owned brands costs. We're now in discussions with our top vendor partners on how we can amplify the value equation for our customers, but do so in a way that protects our margins by asking them to lean in differently and helping us fund that growth as we move forward in the future.

Our next question is from the line of Rupesh Parikh with Oppenheimer.

I just want to go back to the new higher CapEx range. Is this a new baseline level we should think about going forward? And then in terms of the plans to open up new stores, is there any more color in terms of the number of new stores? And if there's a geography tent and the expectation for store closures?

In the new store fleet modernization program, there will be incremental new stores next year. We haven't given a number yet. But think about maybe -- not maybe, up 50% from this year. And then on remodels, we are amplifying our remodels materially in that number. So do I expect it to be a new baseline? These are easily measurable. You open, you've remodeled, you see the result that you get. Assuming that we see those kinds of returns that we're expecting based on the work we did in 2025, we would likely remain in this range, but we'll let you know how it's going throughout the year, and we'll give you an outlook for '27 later in the year, obviously.

Great. And then my follow-up question, just on retail media. Just curious, the key priorities for the year? And then as you look at the efforts this past year, any major surprises of note?

Rupesh, what I would just say there is that we continue to accelerate growth in our media collective. And over the past year, the team has done a phenomenal job of improving return on advertising spend for our vendors, speeding up the rate at which we're able to feed back that data to our vendor partners so they can make better decisions on how they move forward. We've opened up inventory substantially and are leveraging that inventory well.

I think we shared in the script also that we have been highlighting some experiments on personalized ads, which is -- which has had incredible take rate from a customer perspective, but also delivers a really strong return from our vendors for our vendors. So we're looking at acceleration there. So as a key driver of not only productivity and funding our digital business, we also see the media collective as a strong source of building relationships with customers and driving unit growth in the future.

Our next question is from the line of Tom Palmer with JPMorgan.

You gave some helpful detail on ID sales expectations as 2026 progresses. I just wanted to maybe tie that in with the expected cadence of earnings growth and to what extent we should think about earnings, excluding the extra week, of course, aligning with that cadence of ID sales?

Yes. So in the first quarter, that will be our most pressured quarter because of the fact that the comp sales will be below the ID sales range due to the dynamic of the IRA and on top of that, the egg deflation. But when we start getting into Q2, Q3 and Q4, we are expecting adjusted EBITDA growth in every quarter improving sequentially as we get through the year as our productivity kicks in.

Great. And then I wanted to follow up just on the CapEx. You mentioned both store investments and technology and some expected benefits materializing in the second half, is that mainly related to the technology benefits? And then when we think about some of the store level investments, when do we start to see those becoming more of a contributor?

Yes. On the early remodels we do in the year, you should start seeing benefit as you get into the back half of the year. And that -- but they're going to be coming throughout the year. So it's a small benefit in this year, and you'll see it obviously in 2027.

And then on the investments that we are making, we've been making them all year on the 4 big bets. And many of those, like, as an example, one of the ones Susan spoke to, Gateway, in her prepared remarks, actually launched nationwide in February. So the benefit from that initiative, we would start to see growing as we go throughout the year.

Our next question comes from the line of Scott Mushkin with R5 Capital.

So my first one just goes to loyalty. You guys are seeing some really nice growth there. But on a unit basis -- and you guys correct me if I'm wrong, but on a market share unit basis, it seems it's in the grocery business, maybe flattish to down. And so I was wondering like kind of square that for me? Because your loyalty is growing really fast. I think you said trips are up, but yet, it looks like there's a little market share erosion. So I was wondering if you can kind of walk me through that?

Sure. So thanks for the question, Scott. Yes, as you stated, we definitely see industry units under pressure. And I think we saw a further decline in the industry from Q3 to Q4. That's true for us as well. That pressure is concentrated, as we mentioned before in our lower income cohorts. And this is where we look at our role is to turn our footprint, our proximity into preference for our customers through sharper value, stronger loyalty engagement, differentiation in fresh, better omnichannel experience and all of those types of things.

So we are -- we mentioned before, units will be -- are pulling tougher in the first quarter, but we expect and plan for a gradual improvement as we go on throughout the year. Our initiatives are built to drive that improvement. And again, leveraging the value of our proximity, fresh and personalization are some of the key drivers that we're using to achieve that growth over time.

Perfect. And then my second question, just again, like John is maybe a little more philosophical. When you think about your kind of natural shelf price versus your promoted price, how do you guys think about that vis-a-vis the maybe high, pretty high price point at the shelf without it being promoted and the impact on the value perception?

Sure. So what I would go back to is what I mentioned a few minutes ago and just speak to the fact that we definitely look at price market by market. Our price position is very different across the country, depending where we're at. And so that's a very surgical approach that we take because of that, where we can massage promotional in one area. We're working on frontline pricing in another. In previous quarters, we mentioned the investments that we've made, largely in frontline pricing, also in promotional pricing, but in our 3 divisions.

We've seen strong customer feedback, strong improvements. We're very pleased with those results. But again, even across those 3 deployments, if you will, the execution has been slightly different. One market might need heavier promotional increases, another market might need more relief from a frontline perspective. So a very surgical approach for us moving ahead.

Our final question is from the line of Robby Ohmes with Bank of America.

I'll wrap it into one question. There's actually -- it's really just 2 follow-ups. The first, I think -- I can't remember, Sharon, I think you mentioned the moderation in GLP-1 growth was more than expected. I was hoping you could give a little more color on is that expected to continue? And does that have a -- should we think that it's going to be a negative headwind, obviously, to store traffic?

And then the second one was on, I think, Susan, you mentioned you have seen more increased cross shopping. Is that, again, another headwind to store traffic? And overall, how is store traffic looking as digital keeps increasing as well?

Let me take the GLP-1 comment. So in our ID sales forecast for 2026, we have assumed that this GLP-1 pressure will continue and -- to some extent, and only because of the clampdown from the payers. Many health plans have made a decision not to pay for GLP-1s for consumers in 2026. So for weight loss only, where it's being taken for weight loss only. So we do think it is possible that, that will continue during the year.

As far as the question related to GLP-1s and traffic, this is -- many of our GLP-1 customers are already customers of the store. If they were not taking GLP-1s, I believe they will continue to come to our store. So I see this is a very unique drug and has a lot of implications as it relates to food. So I don't know that I would immediately make that correlation.

I will let Susan talk about traffic in the stores and our customers and where we see that happening.

Thanks, Sharon. And also just a side note, too, on the pharmacy, we are still growing script count. I want to make sure that comes through clearly. And that's important for us for a variety of reasons, including the traffic side, but as well as building larger baskets and customer lifetime value.

From a traffic perspective, what I would say is -- we would say traffic has been fairly steady. And what our focus has been is we've got great proximity. We're already in the neighborhood that serve our customers today. So how do we stop that second trip? And that's where we're focused on increasing in-stock, which we've done. That's where we're focused on fair pricing -- fair frontline pricing, again, surgically across the country, great promotions funded by our productivity, and then excellence in fresh. So if we're giving our customers what they need at prices they're willing to pay in their neighborhood, that's how we think about stopping that second trip. That's why the investment in our store fleet is so important to us. That's why we're thinking about this customer-centric experience, again, loyalty, digital, pharmacy, fresh penetration, all of those things so that we can give them the balanced value equation that resonates uniquely with them.

At this time, we've reached the end of our question-and-answer session. I'll turn the floor back over to Susan for closing remarks.

So before we wrap up, I just want to thank our investors and analysts for your questions and your continued engagement. And to any employees that might be listening in, thank you for the work that you do every day to serve our customers and strengthen our business. We appreciate your ongoing support and look forward to continuing dialogue. Have a great day.

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

Welcome to the Albertsons Companies' Third Quarter 2025 Earnings Conference Call, and thank you for standing by. [Operator Instructions] This call is being recorded. I would now like to hand the call over to Cody Perdue, Senior Vice President of Treasury, Investor Relations and Risk Management. Please go ahead.

Good morning, and thank you for joining us for the Albertsons Companies' Third Quarter 2025 Earnings Conference Call. With me today are Susan Morris, our CEO; and Sharon McCollam, our President and CFO. Today, Susan will provide an overview of our third quarter of 2025 and update you on our progress against our strategic priorities. Then Sharon will provide the details related to our third quarter financial results and our outlook for the remainder of fiscal 2025, before handing it back to Susan for closing remarks. After management comments, we will conduct a Q&A session. I would like to remind you that management may make forward-looking statements within the meaning of the federal securities laws.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these financial measures to the most directly comparable GAAP financial measures can be found in this morning's earnings release. And with that, I will hand the call over to Susan.

Thanks, Cody. Good morning, everyone, and happy New Year. This quarter marked the first since we declared a new day at Albertsons, and we delivered. We drove bold decisions in our tech and AI transformation, purposeful investments to strengthen our customer value proposition and accelerated execution in digital and pharmacy. In the face of a government shutdown, SNAP delays and a challenging consumer backdrop, our team executed with discipline and urgency. Identical sales grew 2.4%, digital sales rose 21% and adjusted EBITDA was $1.039 billion. These results underscore the resilience of our model anchored by more than 2,240 neighborhood stores. Our proximity, deep fresh expertise and trusted portfolio of brands gives us a clear advantage in serving more than 49 million loyal customers and advancing our Customers for Life strategy. We're building a structurally advantaged Albertsons, one that wins in any environment, and yet our current valuation does not reflect the progress that we've made or the long-term earnings power we're creating.

This disconnect only sharpens our resolve to execute faster, scale our transformation and deliver the performance that ultimately commands the value this company deserves. Our mission is clear: growing customers for life by leveraging our strengths, sharpening our competitive edge and delivering consistent value for customers, all while driving sustainable long-term value for our shareholders. During the quarter, execution was strong, and we delivered meaningful efficiencies through intentional and methodical cost control. Importantly, year-over-year unit trends improved sequentially versus the second quarter, reflecting the impact of our surgical price investments and reinforcing the effectiveness of our broader strategy. I'm extremely proud of how our team is executing. Also during the quarter, we continued to advance our strategic priorities with intent and conviction to position us for profitable growth as we enter 2026.

These priorities include modernizing capabilities through technology, scaling digital engagement and monetizing our media collective, enhancing our customer value proposition and unlocking structural productivity gains. As we look forward, one of the most exciting drivers of our transformation and a key source of long-term competitive advantage is technology. Our advanced cloud data infrastructure provides the foundation for scaling AI solutions and business processes across the enterprise. Additionally, we're enhancing our agility and speed to market with our global capability center in Bengaluru. We're not just adopting AI, we're working to scale it across the enterprise to fundamentally change how we operate and how customers experience Albertsons. This is not incremental. It's designed to be step change in speed, intelligence and personalization. Our teams are energized and our foundation is strong, and our strategic priorities are clear.

With bold decisions and partnering with world-class leaders like Google, OpenAI and Databricks, we're building a future where every decision is smarter, every process is more efficient and every interaction is more seamless. So where are we focused first? Our transformational big bets are in 4 critical areas. First in digital customer experience. Digital customer experience is a critical pillar of our growth strategy. By leveraging AI, we're creating differentiated experiences that go beyond convenience. They increase basket size, drive repeat trips and deepen loyalty. Early results are compelling. Our Ask AI search capability is already delivering a 10% increase in basket size for those customers using it, signaling a meaningful revenue upside as adoption scales. In addition, our autonomous shopping assistants are meeting customers where they are and delivering frictionless personalized journeys, keeping our omnichannel customer experience modernized and on trend.

Next, in merchandising intelligence. We'll be equipping our merchants with AI-driven insights and automated execution to optimize pricing, promotions and assortment decisions, transforming category management and driving margin improvement. Our vision is the future where intelligent automation guides these decisions, freeing our people to focus on strategy and innovation. Our ambition is for customers to truly feel seen, to reliably find the essentials they need at prices they trust while also discovering unique inspiring items that make our stores a destination and eliminate the need for a trip elsewhere. Next, in empowering and managing labor. We're deploying generative AI to optimize labor forecasting and scheduling across our retail labor model, reducing costs while improving associate experience through intuitive conversational tools. By leveraging AI, we ensure the right associates are in the right place at the right time, which not only drives productivity, but also elevates customer service.

This transformation simplifies complex scheduling tasks, frees up associates to focus on the customer and positions us to deliver consistent execution across thousands of stores. Finally, optimizing our end-to-end supply chain. AI demand forecasting is central to our supply chain transformation, enabling precise product tracking from vendor to customer. By applying advanced analytics and computer vision, we're improving forecasting accuracy, fulfillment, quality and on-shelf availability, optimizing labor and inventory while ensuring that customers can find the products they need when and where they need them. In sum, our tech and AI initiatives are designed to be scalable enterprise-wide programs that can deliver measurable impact and build the foundation for tomorrow. By embedding this across our business, we will unlock structural cost advantages, accelerate speed to market and create new profit pools. We're turning technology into a growth engine, improving margins, deepening customer loyalty and positioning us to win.

With momentum accelerating and a clear road map, we're confident that this transformation will help drive sustainable value for customers and long-term returns for shareholders. Turning to our digital and e-commerce business. We continue to gain market share with sales up 21% this quarter and penetration now at 9.5%. As we've consistently said about our e-commerce business, the resilience, scalability and customer proximity of our store-based fulfillment model remains a structural advantage in last-mile fulfillment and positions us well for profitable growth. In fact, during Q3, more than half of our orders were delivered in 3 hours or less, underscoring the speed and convenience that differentiate our offering. In addition, more than 95% of our delivery households are eligible to receive our Flash delivery in as soon as 30 minutes. We're also adding features to our platform like the AI shopping assistant I just mentioned, a groundbreaking tool that redefines the shopping experience.

This AI-powered assistant enables customers to interact in natural language, receive personalized recommendations and build smarter baskets faster, whether they're planning meals, discovering new products or shopping for specific occasions. This innovation enhances convenience for our customers while strengthening our competitive advantage by leveraging rich data to optimize marketing, improve loyalty and unlock new monetization opportunities through our media collective. Our pharmacy and health business delivered another outstanding quarter. Growth was driven by strong execution in our immunization offering, GLP-1 therapies and core prescriptions. We captured leading share in immunizations and strengthened long-term customer relationships. These efforts reinforce our position as a trusted health partner and deepen engagement across channels. Customers who engage across both grocery and pharmacy continue to demonstrate significantly higher lifetime value, underscoring the strength of our Customers for Life strategy.

Based on the strength of this performance, we remain on track to deliver profitable growth in our pharmacy business in 2025, supported by disciplined execution and efficiency initiatives. Scaling higher-margin services, expanding central fill capabilities, driving innovative procurement and leveraging operational efficiencies continue to be key priorities as we position this business for sustained growth into 2026 and beyond. In loyalty, we continue to drive digital engagement and value creation with membership growing 12% to over 49 million members in the third quarter. Program enhancements and simplification continue to fuel deeper engagement. Members are transacting more frequently, redeeming rewards more easily and spending more. 40% of engaged households continue to choose the cash off option, underscoring the appeal of immediate value for our most engaged and loyal customers.

Loyalty also serves as a rich data source for our merchants and for our media collective, enabling targeted marketing and monetization. Most recently, we again extended the value of our loyalty platform beyond grocery with the launch of a new offering with Uber One, offering members exclusive benefits and savings, further strengthening engagement and broadening the appeal of our platform. Our media collective continues to gain traction as a high-margin growth engine. In Q3, on-site media delivered double-digit growth year-over-year. We also strengthened performance by adding transaction capability to off-site ad units. These improvements drove higher ROI for our partners, faster campaign activation, positioning us to capture incremental spend. While the retail media space remains highly competitive, our advantage lies in the depth of our loyalty data and omnichannel reach, which enable targeted, measurable campaigns that improve both partner outcomes and the customer experience.

Looking ahead, we're focused on scaling these capabilities and unlocking new monetization opportunities, creating a structural profit pool that complements our core retail business. Few companies possess the depth of store level, customer level and category level data that we do, and we're increasingly using that data to deliver a more relevant, localized and differentiated customer experience. From a customer value perspective, we continue to invest in value through loyalty enhancements, personalized promotions and selective price investments in key categories. And these actions, combined with vendor funding and own brands innovation are strengthening engagement and driving unit growth. In our own brands portfolio, we have a clear path to growing penetration from 25% to 30%. In the divisions where we've launched our new lower-price campaign, we continue to see fundamentally better unit trends and growth in unit share, reflecting the impact of our targeted strategies.

We also very carefully manage the pass-through of inflation to deliver value for customers across the entire company, ensuring affordability while protecting margin. Importantly, unit trends for the quarter improved sequentially even with the government shutdown, again, underscoring the resilience of our approach. Productivity remains a cornerstone of our transformation and a critical enabler of our investments. Our teams are executing with discipline across multiple fronts, optimizing our labor model, redesigning ways of working, including a targeted global diversification of talent to drive efficiency at scale. We're also unlocking structural savings through automation, advanced analytics and process simplification across merchandising, supply chain and store operations. In pharmacy, where growth continues to accelerate, we're streamlining fulfillment and procurement to improve cost to serve while also enhancing the customer experience.

These efforts are not isolated, they're part of our comprehensive plan to deliver $1.5 billion in productivity gains over the next 3 fiscal years, creating capacity to fund innovation, strengthen our value proposition and improve profitability. Already in 2025, we're seeing the benefits of our productivity reduce SG&A spend as we accelerate our efforts around labor optimization. By attacking waste, modernizing labor planning and embedding technology into core processes, we're building a leaner, more agile organization that's positioned to win. Finally, before I hand it over to Sharon to cover the financial details of the quarter and our outlook for the remainder of the year, I want to spend a minute on the consumer backdrop and what we continue to see from our customers.

Consistent with what you've heard from others, the environment remains mixed and continues to reflect pressure across income segments. At the low end, shoppers are clearly stretched, putting fewer items in the basket each trip and prioritizing essentials while visiting more frequently as they manage their cash flow. Middle-income households, which have been relatively resilient, are showing some signs of softening with increased price sensitivity and trade down behavior emerging in certain categories. At the high end, spending patterns remain largely stable, but even these customers are becoming more conscious of price and value, reflecting a broader shift towards cautious discretionary spending.

Looking ahead, our outlook and actions are fully aligned with these dynamics. We're leaning into personalized promotions, loyalty enhancements and the surgical management of cost inflation to deliver immediate value while continuing selective price investments in key categories to support unit growth. At the same time, we're leveraging technology and AI, just as we discussed, to deepen engagement and optimize the shopping experience, ensuring that our strategy not only addresses current consumer behavior, but also positions us to capture share and drive profitable growth as behaviors evolve. Sharon, over to you.

Thank you, Susan, and good morning, everyone. It's great to be here with you today. Building on Susan's comments, Q3 did mark a new day for our Albertsons teams. Disciplined execution and purposeful investments drove a 2.4% identical sales increase and a 21% increase in digital sales. While temporary headwinds from the government shutdown and delayed SNAP funding negatively impacted ID sales by approximately 10 to 20 basis points, we sequentially strengthened our year-over-year unit trends, clear evidence that our targeted price investments are working and reinforcing the resilience of our model. In pharmacy and health, sales increased 18% as we delivered another strong quarter and deepened engagement through immunization and value-added services. Loyalty membership grew to 49.8 million, reinforcing the strength of our Customers for Life strategy.

At the same time, as Susan shared, we continued scaling the media collective and advancing our technology transformation, including embedding AI across the enterprise and modernizing capabilities to drive productivity and growth. Each of these initiatives contributed to the results we just delivered for the third quarter, which I will discuss now. From a top line perspective, ID sales grew 2.4%, which is net of the 10 to 20 basis point government shutdown headwind, and we saw encouraging growth in areas where we made price investments. Gross margin came in at 27.4%, a decline of 55 basis points year-over-year, excluding fuel and LIFO, reflecting the expected mix shift impact of digital and pharmacy and our targeted price investments. Importantly, year-over-year gross margin improved sequentially versus Q2 as productivity benefits partially offset targeted investments, demonstrating that our actions are delivering results even as we prioritize value for customers.

Our selling and administrative expense rate was 24.9%, down 33 basis points year-over-year, excluding fuel, another clear proof point of disciplined cost management. This improvement reflects ongoing productivity initiatives and operating leverage, which we are using to fuel our investments to drive growth. Interest expense increased $7 million to $116 million this quarter, primarily due to borrowings related to our $750 million accelerated share repurchase program announced last quarter. Adjusted EBITDA in Q3 was $1.039 billion and adjusted EPS was $0.72 per diluted share, in line with our expectations and reflective of the strategic investments we're making in long-term growth. Turning to capital allocation. Our priorities remain clear: invest in the business to drive growth and value for our customers, maintain and grow our dividend over time, opportunistically repurchase shares and preserve a strong balance sheet that gives us flexibility to accelerate investment when opportunities arise.

In Q3, we invested $462 million in capital expenditures to upgrade our store fleet and advance digital technology and supply chain capabilities. In our store fleet, we opened 2 new stores, completed 23 remodels and closed 16 underperforming locations, all actions that strengthen our asset base for long-term competitiveness. From a digital and technology perspective, we further invested in AI and digital transformation to create structural cost advantages, deepen customer loyalty and unlock new profit pools, further modernizing the company for sustainable, profitable growth in an evolving retail landscape. We also returned $77 million to shareholders through our quarterly dividend of $0.15 per share and continued our $750 million accelerated share repurchase program, which began last quarter and is expected to be complete in early 2026.

The benefit of this ASR will accrue to EPS as we move through fiscal 2026. There is also $1.3 billion remaining under our existing $2.75 billion authorization that can be executed at the completion of the ASR. Our net debt to adjusted EBITDA ratio ended the quarter at 2.29x, underscoring the strength of our balance sheet and capacity to fund growth while returning capital to shareholders. Finally, in the third quarter, we also refinanced $1.5 billion of existing indebtedness in 2 tranches: $700 million of 5.5% notes due 2031 and $800 million of 5.75% notes due 2034. These proceeds were used to refinance our $750 million 2026 bond maturity and repay $750 million in borrowings under our revolving credit facility, demonstrating the strength and flexibility of our balance sheet. Before we turn to the outlook, I'd like to give you a quick update on our year-to-date labor negotiations. As a reminder, in fiscal '25, we had collective bargaining agreements covering 120,000 associates up for renewal.

As of today, we've successfully reached agreements covering more than 112,000 of these associates, leaving only 8,000 left to bargain this year. Now let's walk through our 2025 outlook. Our focus remains squarely on investing in and driving long-term profitable growth through our strategic priorities. Digital remains a powerful growth engine as we continue to add loyal shoppers to our ecosystem and scale the business profitably. Disciplined cost control and productivity also remains a key focus of our strategy, fueling reinvestment into these high-impact initiatives while maintaining financial strength. At the same time, we expect our pharmacy business to continue to accelerate, driven by immunizations and value-added services that enhance customer engagement through profitability. In pharmacy, however, on January 1, 2026, the Inflation Reduction Act's Medicare Drug price Negotiation Program took effect, reducing consumer prices and supplier costs on certain branded drugs.

While this will result in lower reported pharmacy sales, the impact to profit is near neutral. In the fourth quarter, we estimate and have included in our outlook an approximate 65 to 70 basis point headwind to identical sales, which will equate to a 16 to 18 basis point impact for the full year with no impact to adjusted EBITDA. With that as the backdrop, we're updating our fiscal '25 outlook as follows: for identical sales, we are narrowing our range to reflect the impact of the Inflation Reduction Act to 2.2% to 2.5%. Adjusted EBITDA is now expected to be in the range of $3.825 billion to $3.875 billion, including the approximate $65 million in adjusted EBITDA in the fourth quarter related to our 53rd week. We are narrowing our adjusted EPS to a range of $2.08 to $2.16. The effective income tax rate is expected to be in the range of 23% to 24% and capital expenditures are unchanged in the range of $1.8 billion to $1.9 billion. And with that, I will hand it back to Susan for closing remarks.

In closing, our Customers for Life strategy is building a future-fit distinct Albertsons company, one that combines scale with local relevance, advanced analytics with deep experience of our teams and operational excellence with bold growth ambitions. The path forward is clear, the opportunities are significant and we're just getting started. Q3 demonstrates the strength of this foundation and the acceleration of our transformation. We're not just navigating a competitive and dynamic environment, we're reshaping it. Our investments in digital, loyalty, pharmacy and retail media are delivering measurable results today, while our AI strategy positions us to lead tomorrow. When we get together again for our fourth quarter earnings release, we'll share the next evolution of our Customers for Life strategy, building on the progress we've made and the strength of our model.

As we've said, at the core of this evolution is a deeper integration of data and AI across the enterprise. We're not using AI as a short-term lever. We're embedding it into merchandising, labor and supply chain to create a durable structural advantage. From personalized shopping and merchandising intelligence to supply chain optimization, these capabilities are already scaling, driving lower costs, faster execution and compounding returns that will support growth and profitability for years to come. We're also focused on delivering a more differentiated customer experience. We'll provide an overview of micro market merchandising and how we're leveraging our robust customer data to create more curated experiences across assortment, pricing and promotion, while further strengthening our leadership in fresh and expanding affordable meal solutions. In parallel, we're actively transforming our portfolio for the future. We'll outline how we plan to densify, differentiate and scale our network, including through strategic partnerships.

We're targeting markets where we have strong share and growth as well as opportunities where we see a clear right to win through new store development and strategic acquisitions that enhance our footprint, drive supply chain efficiencies and create meaningful synergies. Supporting all of this is our continuous productivity engine. We'll reiterate our commitment to disciplined cost management while outlining the next tranche of initiatives designed to deliver benefits in 2026 and beyond, fueling reinvestment in growth, innovation and customer value. As we approach fiscal 2026, we do so with confidence and a clear path to sustainable, profitable growth. To our 280,000 associates, thank you for your passion and commitment. You're the driving force behind this transformation. And together, we're creating an Albertsons that wins for our customers, our communities and our shareholders today and for the long term. We look forward to continuing this journey and delivering against our priorities. Thank you, and we'll now take your questions.

[Operator Instructions] Our first question comes from the line of Mark Carden with UBS.

So to start, you continue to make surgical investments in value, and they seem to be gaining traction with the grocery unit growth. At the same time, you've got some of your larger competitors continue to make price investments as well. Just how is the overall pricing environment lined up relative to your initial expectations? And do you see much risk ahead for the need for incremental price investments?

Mark, thanks for the question. So first, I'd start out with, we are taking a very surgical and targeted data-driven approach to our price investments. And I think we've shared that we've seen green shoots in the categories where we're investing. I also want to make sure that I call out that price investment comes in 3 ways for us, well, many ways, but 3 of them are our investments in loyalty, our investments in pulling forward on promotion, base price investments and then how we're managing through inflation. We're working very hard to soften the pass-through of inflation to our customers. So that said, we are pleased with the progress that we see in our price investments to date.

I also want to make sure that you understand that our price gaps are very market-driven, category-driven, and we're very thoughtful about how we're approaching each of these investments. Our price indices versus competitors often miss our personalized loyalty discounts, and that really materially makes a difference in our effective price. So we do intend to continue to invest very surgically, very thoughtfully. We're pleased with the initial results that we've seen and recognize there are some more surgical opportunities out there. But also, I want to remind you that we look at price as one key piece of the value equation, along with that, our fresh capabilities, our proximity to our customers, our e-commerce and pharmacy expertise that add value for the customer.

And Susan, I might also add -- oh, go ahead, Mark.

No, please, Sharon, go on.

I also want to add that another area of key focus for us, which we can talk about later, is our own brand focus. That has been a primary offering that we have put front and center for our customers because to provide value, our own brands is one of the tools in our toolbox in order to do that. And it is an area that we are doubling down and amplifying.

That's great. And then just as a follow-up, you guys have talked in the past about your ability to capitalize on some of the drug store closures that are taking place across the country. How are you progressing with getting your new pharmacy shoppers to cross over and purchase more grocery items? And are you seeing any changes to the timing or lifts just given some of the macro pressures that you highlighted in the call?

Sure. So again, we're very pleased with our pharmacy growth overall. We've -- much of it has come from organic growth inside our store. We're seeing core scripts, excluding GLPs grow. Obviously, GLPs play a factor as well. What we typically see is the bulk of our customers are already shopping with us in some way, shape or form in grocery. And as they convert into the pharmacy, that's when we start to see the deeper relationship. They become more highly engaged. They adopt our digital platforms. They engage in our loyalty programs. And I think we've shared with you in the past, it's somewhere around a 1- to 2-year journey depending on the customer to get to a fully robust loyalty platform with us. But that said, again, I want to remind you that the bulk of our customers are already shopping in the store. It's really about deepening that engagement. We're pleased with the acquisitions that we've had, both some that we've paid for and many of our customers are just choosing to come to us, which we see as a structural advantage from the services that we provide.

Our next question comes from the line of Leah Jordan with Goldman Sachs.

I know it's a little too early to guide for FY '26 at this point, but there are a number of potential headwinds investors have been concerned about, such as disinflation and just ongoing volume pressure within food across the industry, along with the lower Medicare drug prices, as you noted in the prepared comments. But then you have your own efforts in driving unit improvements, which we saw this quarter, along with the ongoing productivity efforts. So just see if you could comment on a high level, the puts and takes we should think about next year and your confidence in being on algo.

You bet. Leah, thanks. So first and foremost, I want to reiterate our confidence in our algo. And the reasons we believe in that is our Customers for Life strategy is working. We see that we have outsized upside in pharmacy, in our digital and customer growth. Our media collective, which we've shared is very early in its journey. We've talked about our focus on value enhancement, which includes pricing. It includes loyalty, as Sharon just mentioned, own brands. We're pleased with our technology modernization. But again, that's early stages, and we believe there are more unlocks to come in the future there. And then our productivity agenda continues to deliver quarter-over-quarter, and we only expect that to grow. And I think all of these feed one another. Pharmacy, digital and loyalty grow engagement in baskets. Media creates high-margin fuel. Our productivity and tech agenda frees up resources to reinvest in value. So we are very confident in our ability to deliver the algorithm. Sharon, what would you add to that?

I would only add that each of these initiatives, Leah, build on one another. And as you think about it for '26 and you think about the year, it's gradually and incrementally going to build. So as you're calendarizing the year, think of it in that way. And I think that this concept of gradual and incremental, I don't care who you're talking to about AI and some of the digital transformation that's occurring, that learning is so powerful and the value that it is bringing to the bottom line just continues to grow. So as we look forward to next year, the other thing about the algo that Susan didn't say is remember when we gave that, we talked about this last quarter. We ran multiple scenarios. We know that this environment is constantly changing and evolving, and we acknowledge everything that you just said around the different aspects of the macro that could be affecting us. But our plan at this point in time has levers to pull. And again, I will reiterate Susan's confidence in our ability to get into the algo next year.

That's all really helpful color. Just wanted to go back to the lower ID sales guide for this year. And I understand the impact from the Medicare drug prices that you detailed. But within the lower guide, it's still implying a fairly wide range for the fourth quarter. So just maybe more detail on how you're thinking about the key drivers there? What gets you to the high versus low end? And how much is just tied to the uncertainty in the consumer, as you highlighted, just a broadening pressure across income cohorts? And then if you could, any color on kind of where quarter-to-date trends are tracking for ID sales?

I think there's key areas, Leah, where the guidance range is wide. First and foremost, we've got this 65 to 70 basis point impact that we are anticipating from the Inflation Reduction Act's drug pricing issue. So you pointed that out. We've tried to incorporate that. That's 10 to 20 -- 16 to 18 basis points on the full year. It's very significant. But within pharmacy, there's also a lot of other opportunities happening. There are scenarios where GLP-1s going, what's going to be the adoption with New Year's resolutions around weight loss, the pill that's coming out for GLP-1s. So there is upside in our mind depending on how each of those play out. We're also keeping a -- I would say, a cautious view around industry units. You pointed it out on the units in the industry, and that can be ranged. So within those ranges, we're keeping everything that we currently see in mind. And again, I would say this, when you take out the impact of the Inflation Reduction Act on the drug pricing, we are very much where we expect it to be at this point in time.

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

So I just wanted to follow up on that -- the algo next year maybe to start. And I just want to make sure, are you saying that if the backdrop stays where it is currently from a unit volume standpoint and we have slightly less pricing, which obviously is going to put some pressure on IDs that you still think that you can get to your algo next year? If that's the case, maybe can you just talk about what the levers are that you might be pulling in order to do that? And then big picture here, can you maybe talk about the temptation to move a bit faster from an investment standpoint to generate longer-term growth versus the desire to deliver EBITDA growth in line with the plan?

Ed, I'll start, and I'll ask Sharon to chime in as well. So as she stated just a couple of seconds ago, one of the pivotal points of our strategy is our ability to be agile. And recognizing that the market is dynamic, there are different levers that we can pull to meet the algo. We've continued to talk about our acceleration in digital platforms, merchandising intelligence, our pharmacy and customer experience, our price investments and so forth. We believe they'll deliver outsized growth. And a lot of that growth is building as we exit 2025 and continues to grow as we go throughout 2026. We recognize there are some pressures from the pharmacy Inflation Reduction Act that we just spoke of. I want to make sure everybody understands, too, though that, that is a top line pressure, it is not a bottom line pressure. It's actually net neutral to the bottom line. Sharon, what would you say?

Ed, I want to be -- make sure that I understand your question because with the Inflation Reduction Act, the 16 to 18 basis points that we have quantified on the full year comp for 2025, that is only 2 periods for us this year. So you can see the magnitude of that for 2026. It is possible. We said that we would have a 2-plus percent comp store sales increase because of this Reduction Act, to that point, it is possible the comp will be -- on a comparable basis, it won't be comparable. There will be a significant headwind, could be as much as 125 basis points to the comp. And if that was the case, you may not deliver the comp number with ex the Inflation Act, it would be in the 2%-plus. But it may be different depending on how many more drugs get added to that. So we've got to think through that. When we're talking about the algorithm, we are talking about on a comparable basis to 2025, we expect comp store sales growth to be 2-plus percent before the adjustment for the Inflation Reduction Act and that adjusted EBITDA will grow slightly faster than that.

Got it. And then just a follow-up. I was hoping maybe you could talk about the progress of the cost savings and how you're tracking so far against the plan and the cadence in terms of savings as you think about 2026?

Yes. So I would -- I'll start off and just say we're executing very well against our $1.5 billion plan, as we've stated, driven by technology, automation, analytics. We've also undergone process redesign across the company in merchandising, supply chain, store operations. You can see the results that we've shared in our SG&A. We're very pleased with what's flowing through to the bottom line there from a productivity perspective. That said, though, part of our productivity is meant to fuel our growth in terms of the reinvestment in price, how we're structurally managing our store labor and developing stronger customer experiences, both in-store and online. Sharon, anything you want to offer about our outlook on productivity?

Yes. When we get into 2026, in our Q4 discussion, as Susan shared in our call, we'll also be giving you an update on productivity. We do see new opportunities with all of the things that we've talked about, and we'll be giving you an update on our productivity agenda. To Susan's point, we are achieving our productivity and to some extent, exceeding our productivity. You can see that in the numbers that we're delivering. And we expect to continue to be pushing that heavily as we go into 2026. And these opportunities, of course, are like everything I keep saying, they're gradual incremental because they're building on each other.

Our next question comes from the line of John Heinbockel with Guggenheim Securities.

Susan, you guys have -- you've acquired a lot of customers, this 12% growth, right, year-over-year over the past couple of years. Can you talk to wallet share, right? When I think -- and you also talked about that 1- to 2-year journey with pharmacy. When I think about maybe your upper decile loyalty members, average loyalty brand new, can you maybe at least give us some guidance on how those wallet share numbers differ, right? So like is the highest decile 2x the average? Or what does that look like? And then is there much difference, I guess, with the pharmacy customer, some of those new ones are still lagging, right, the wallet share of mature pharmacy customers.

Thanks, John. So our digitally engaged customers spend approximately 2 to 3x more than those not engaged in digital. And engagement rises further as they broaden through our ecosystem. So as they engage in online ordering, in loyalty, and different features on our app, our health as an example, our pharmacy. And when we get -- when pharmacy enters that ecosystem, we start to see that number grow, 4x, 5x. So our most loyal customers definitely have outsized growth in lifetime value. And our focus there is to continue to build upon that strength as customers engage with us, delivering more personalized journeys. We talked about our AI assistant, offering meal planning. We can help you curate a party or different occasions. And all of those things help deepen baskets and repeat trips for us.

Okay. And maybe a follow-up. You talked about the divisions where you've invested in price. I'm curious, have they crossed over into positive food volume territory? And then maybe related to that, I think you've talked about core, noncore assets and wanting to double down on some of the strongest markets. Do you see potential to exit markets and redeploy those assets and resources to the strongest ones or not really?

Okay. So with regards to the price investment, I'll speak to it more at the category level. We have seen strong unit improvement in the categories that we've invested. In many cases, they've moved to positive year-over-year. In other cases, the decline has lessened substantially. And as we think about our price investments, I want to remind you, too, that we've got some areas where we've executed a new low price campaign, but there are other areas where we're leveraging price in terms of deepening promotion, and as I mentioned before, the mitigation of inflation pass-through. So we're very pleased to see the positive customer response there in share as well. With regards to our fleet, yes, we're evaluating our entire portfolio end-to-end as we always do.

And I think we mentioned a couple of calls ago that because of the merger, we were unable to conduct some of the normal hygiene that we would do in terms of store closures, and you'll see an upsized list of closures as we exit 2025 based upon that. But as we look forward, yes, we're looking very much at where we're strong and want to grow, again, organically or through acquisition. And then we'll also evaluate markets where we perhaps aren't performing like we should and make a determination on if we can grow, if we can invest differently and make a change there.

And John, I would add to that, that we are also looking to materially sophisticate our real estate operations in 2026. In addition to that, we are looking at all noncore -- when I say noncore assets, surplus real estate, things -- other things like that, everything is being evaluated at this point in time. I want to make sure, however, that we are not having a similar conversation to other competitors in the grocery landscape. We did not have material type investments like others. And in no way do I -- are we indicating or signaling any type of massive write-off in front of us.

Our next question comes from the line of Rupesh Parikh with Oppenheimer & Co.

So just going back to, I guess, the gross margin line. We've seen now improvement for really the last 2 or 3 quarters. It's the lowest decline that we've seen all year. Sharon, just curious how you're thinking about Q4, some of the puts and takes there and whether you'd expect further improvement versus what we saw in Q3?

Yes. I think as you think about Q4, you should think about it more like Q2, and here's the reason. In the third quarter, we saw an exceptionally strong pharmacy business and it was in the value-added side of the business, which brought some incremental profit. It really moved from Q4 into Q3 because of what happened nationally with flu and fear of COVID. We saw an acceleration into the third quarter that will then turn itself around in the fourth quarter. And fourth quarter pharmacy margin is never as strong as Q3. So I think if you model out more like Q2, you'll be in the neighborhood.

Great. And then maybe my follow-up question, just going back to the GLP-1 conversation. Given some of the enthusiasm out there on the pill format, does your team at this point think it's -- it sounds like -- does your team at this point think it could be more of a tail or maybe even a bigger tailwind as we go into next year? Is that the current thought process? Or just any thoughts on how your team is thinking about it?

Yes, we absolutely think it can be more of a tailwind as we move forward with the accessibility and delivery mechanism change in pills versus shots and so forth.

Yes. And Rupesh, I think the inflection on the pill version of the GLP-1, it is not -- so it's not broadly used, obviously. And it will depend likely on the side effects. But at this point, we do not see it having a material impact one way or the other on the EBITDA in pharmacy. This is really about top line, and it's really about our patients. If they could come out with a pill and provide our patients with a pill form versus the injection form, that would be great for the patients. But from a material P&L point of view, I don't see it in the short term as something that you need to worry about from a modeling point of view as it relates to adjusted EBITDA.

Our next question comes from the line of Tom Palmer with JPMorgan.

I wanted to ask again on just the price investment side. It sounds like there was perhaps a more intense promotional environment in November, especially when SNAP benefits were deferred. One of your competitors discussed the likelihood of higher promotions persisting into subsequent quarters. I think you earlier addressed your tactical actions on this call, but I wondered if you might talk maybe more broadly about what you're seeing across the industry and whether we should think about maybe more promotions funded by food producers or if more of that funding is coming from kind of the grocer side?

Tom, so with regards to pricing, yes, we also saw a more aggressive promotional environment this year. And certainly, it was accelerated throughout the holiday season. As we've mentioned before, our customers are absolutely more price sensitive. Our value-focused competition is clearly showing growth. But that said, our market density and strong locations, combined with our loyalty and AI-driven personalization help us create a more durable edge to serve our customers faster and at a closer proximity while protecting value. So we absolutely see promotional investments continuing. By the way, our -- by nature, we are a promotional merchant. That's who we are. That's who we've always been. And with our buying better together work, where we've spoken before about how we're leveraging our size and scale as a national company to procure a lower cost of goods to secure more promotional funding where it makes sense. All of those things will help us support where we need to be to meet the customers where they are in terms of price impression.

And the timing for us, when you think about our productivity related to buying together, where we're bringing our buying the divisions and buying together at the national level, the timing of that and the fact that, that is an opportunity in front of us, it completely is in line with the timing of the nature of your question. So obviously, that is opportunistic at the moment.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

This is Zach on for Simeon. You mentioned a sequential improvement in unit trends. Can you speak to the composition of that trend? Is it loyal families spending more? Is it new customers? And how much is coming from digital versus in-store?

So what I would say, just a reminder too, for everyone that the industry -- what we've seen in the industry is units were slightly positive in the first quarter, turned negative in the second quarter and remained flat to negative in the third quarter. And obviously, within that backdrop, our unit trends improved sequentially, and we credit that to our surgical price investment and to our loyalty-led value. I would say that we continue to see customers very price sensitive, thinking about how they prioritize essentials. We're seeing some smaller baskets in those price-sensitive customers and obviously, some trade down that's happening as well there. We know that customers are more value aware. Their spending remains relatively stable for us. And again, our personalized promotions, our targeted price investments, our own brand innovation, all of these are designed to support unit recovery over time.

And as a quick follow-up regarding digital sales, what does the economic model look like today? And where are you on the profit curve there?

Sure. So I'll start and I'll ask Sharon to chime in on some of this. But as a reminder, it continues to be a very powerful engine for us. We shared that sales were up 21%. We're very pleased with our penetration growth quarter-over-quarter. And also, we have a structural advantage in that for last mile, over half of our orders are delivered in less than 3 hours. And I think we shared 95% of our households are eligible for flash delivery, which means as fast as 30 minutes. So that reinforces speed and convenience for us. From a profitability perspective, we continue to see margin improvement as we scale adoption and embed AI into everything that we're doing end-to-end. And Sharon, do you want to add any color on profit?

Only that we had said that we expect that as we continue to grow, we will get to profitability possibly at the end of this year or going into next year. The volume levers, obviously, the fixed cost. And when we're talking about profitability, we are not including retail media, and we are fully allocating that P&L with fixed cost.

Our next question comes from the line of Kelly Bania with BMO Capital Markets.

Sharon, I wanted to go back to the efforts to shift the buying to a national buying campaign rather than more localized. Just wondering if you can talk about how that is progressing? Did the savings, are they starting to come through as you expected? And what does that imply for maybe the gross margin outlook into the fourth quarter and next year?

When we laid out our productivity, Kelly, we said that we expected the big benefits from that to come in year 2 and year 3 of our productivity program. That's the response to the earlier question that as we are seeing this more competitive environment, this is still in front of us. I'm going to turn it over to Susan in a second because the other thing that we're doing simultaneously is in our 4 big bets on AI, merchandising intelligence is one of those. And that provides a very data-driven way to approach this change -- material change in the way we're working. And I'll let Susan talk about the merchandising organization and how that's transformed since she took this role. So Susan, do you want to add a little bit to that?

Of course. And I'll just tag on to your AI comment as well. The merchandising intelligence that we listed under AI does exactly what Sharon described, but -- and it's also meant to help us not only create better customer experiences, create curated assortment, but also optimize the profitability of our price and promotion end-to-end. So we're very excited about our proprietary work there. From an internal construct perspective, we've -- as we've shared before, we've got a new merchant, Michelle Larson, took the seat a few months ago. And under her leadership and with the collaboration across all of our divisions, we're actually very -- we're bullish about what we're going to be able to capture from a benefits perspective as we leverage our size and scale to buy better together. We've got alignment across every single one of our divisions. We've got a common calendar. We're building the right processes and tools, as I just mentioned, from an AI perspective to support all of this. So we're very bullish about the future potential benefits that we will deliver in 2026 and beyond.

That's helpful. Can I just follow up a little bit on the discussion of the units. I believe the plan was to try to approach flattish units by year-end. I was wondering if you can talk about if that's possible still on the horizon in terms of the core grocery categories? And can you also talk about the performance of fresh versus branded? I think you talked a little bit about private label, but just some of the growth in some of those categories versus your expectations?

I'll start, and then I'll let Susan take the second half of your question. In the outlook that we have for the fourth quarter and as we think about where we will start to go into the algorithm in 2026, in light of industry units being negative and the trends in that having no clear sign of material improvement or catalyst for improvement, we will -- we did not assume that we would be at flat units coming into 2026 and don't expect to be in 2025 Q4.

And what I would add to that is, again, we've seen strong unit inflection in our price investment categories and other categories as well. We are bolstered by what we're seeing there, and that only helps us gain confidence in our pricing approach. and supports what we want to do as we move into 2026 and beyond.

Our final question this morning comes from the line of Paul Lejuez with Citi.

You gave us an update on 3 income demographics earlier in your comments. I'm curious what you actually saw in each of those 3 during this quarter? And how does that differ in-store versus online? Curious where you're seeing yourselves gain share by income demographic or maybe even losing a little share.

Sure. So thanks, Paul. So we are by nature, by the -- our go-to-market strategy, we are -- appeal more to the middle and upper income customer base. Now that said, we serve everyone in many markets across the country. And as we've said before, our low-income customers are certainly stretched, and that is where we're seeing a smaller baskets. They're focusing on essentials. Our middle-income households also, though, do show some softening. And what we're seeing there is maybe a trade down. So instead of buying steak, they're buying ground beef and so forth. Our higher-income customers, their spend is largely stable, but also we are starting to see them be increasingly value conscious. And that's, again, where we're really leaning into our personalized promotions, our surgical cost inflation management making sure that we're delivering value across all cohorts, and we're able to leverage our loyalty programs to help us do that in a more meaningful way.

Just one follow-up on units. If we ex out pharmacy in terms of this quarter's ID sales, how does that look in terms of pricing versus units if we look at the ID sales ex pharmacy?

I think it's going to -- we expect Q4 to look pretty similar. We're expecting to see similar trends to Q3.

And what was that inflation piece, the pricing piece in Q3?

We didn't give that specifically. CPI was up 2% in Q3. We did not pass through 2%, and we passed through less than our cost inflation. That's what you see in the margins.

Thank you. Okay. Thank you all for your time today. That concludes our Q&A section. Have a great day. Thank you.

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

Welcome to the Albertsons Companies' Second Quarter 2025 Earnings Conference Call, and thank you for standing by. [Operator Instructions] This call is being recorded.

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

Good morning, and thank you for joining us for the Albertsons Companies' Second Quarter 2025 Earnings Conference Call.

With me today are Susan Morris, our CEO; and Sharon McCollam, our President and CFO. Today, Susan will provide an overview of our business and the opportunities ahead before recapping the second quarter of 2025 and updating you on our progress against our strategic priorities. Then Sharon will provide the details related to our second quarter 2025 financial results and our outlook for the remainder of fiscal 2025 before handing it back to Susan for closing remarks. After management comments, we will conduct a Q&A session.

I would like to remind you that management may make forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise.

Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these financial measures to the most directly comparable GAAP financial measures can be found in this morning's earnings release.

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

Thanks, Cody. Good morning, everyone, and thanks for joining us today. Before we dive into our quarterly update on our strategic priorities, I want to take a moment to zoom out to reflect on who we are as a company, the foundation we've built and the growth opportunities ahead. Albertsons is operating from a position of strength with compelling opportunities to drive customer and shareholder value, opportunities that are within reach and accelerating.

Internally, our rally cry is a new day at Albertsons. It isn't a new day because the market or the competitive landscape has changed, it isn't a new day because our customer has changed, it is a new day because our mission is clear. A new day is not a slogan, it's a mindset. It means that it's a new day to make bold decisions and to invest with purpose, driving long-term sustainable growth across our banners; a new day to ignite the passion of our 280,000 associates and amplify customer centricity; a new day to leverage our strength, sharpen our competitive edge and double down on the competitive moats that sustain our business.

With this mindset as our foundation, I've spent the last 5 months as CEO conducting deep dives across every facet of our business. My goal, to identify how we can accelerate growth, add transformational leaders, leverage tech and AI to drive efficiency and speed to market, unlock areas of underperformance and make smarter decisions about what we will build and own versus where we can partner to improve speed or optimize our capital allocation strategy. And through this work, several major themes have emerged.

First, our banners. These are not just names on storefronts. They're trusted brands, deeply woven into the fabric of the communities that we serve. For decades, they stood for convenience, quality, care and connection, and they continue to earn that trust every day. We have an incredible opportunity to leverage our national scale to even further embed ourselves in these communities as we capitalize on being locally great and nationally strong.

Inside our stores, the core of our experience. We lead with fresh and deliver industry-leading service from our on-site butchers, where we deliver custom cuts to our customers in over 2,200 stores; to vaccinations, where we deliver more per store than any other pharmacy; to Flash delivery, where if you change your mind and decide you want tacos for dinner tonight, we can have the ingredients to you within 30 minutes or less. We are about delivering curated personalized experiences each time a customer walks through our doors or engages with us digitally.

In e-commerce, we've grown at a compounded annual growth rate of 24% over the last 3 fiscal years. Our digital experience offers a fully integrated and increasingly personalized journey. We're not only selling food, we're simplifying meal planning, making shopping easier and more convenient. We are serving our customers how, when and where they want to be served.

Our stores are community hubs, within minutes of the vast majority of our customers' homes, offering an on-demand and fresh assortment, trusted service and local relevance that online-only competitors simply cannot replicate. Our in-store fulfillment model delivers fresher products faster with greater flexibility across pickup, delivery and in-store experiences.

We are a strong portfolio of brands, and we've invested in a unified national network powered by common systems, enabling us to harness our cloud-based centralized data, drive operational efficiencies at scale and elevate the customer experience while remaining highly relevant to the preferences of customers in our local communities.

I'm extremely excited by the early success we're seeing in leveraging these systems and utilizing our data with today's most advanced algorithms and tools. This foundation is also anchored by a $14.3 billion portfolio of owned real estate, located in the most valuable and sought-after retail corridors in our markets. These irreplaceable assets, just appraised in July of 2025, are not only among the most valuable retail, but also operationally essential, supporting seamless customer access, optimized logistics, and fueling long-term growth by placing us exactly where our customers live, shop and engage.

In addition to our core real estate portfolio, through the deep dives I've undertaken, we are actively evaluating our broader asset base, operating model, and market footprint to ensure that we are running as efficiently and as effectively as possible. This includes making thoughtful incremental decisions around where and how we want to grow while at the same time, evaluating underperforming stores and noncore assets to better align with our long-term priorities. Year-to-date, we've announced the closure of 29 stores and expect to open 9 new stores by year-end.

All of this creates a transformational foundation for long-term value creation. And while this will not happen overnight, the opportunity in front of us gives us the confidence to take decisive action today to execute a $750 million accelerated share repurchase, representing an incremental 8% of our outstanding shares at current prices. This reflects our conviction that our share price is very much underappreciated and does not fully reflect the strength of our foundation or the opportunities within our strategy to drive long-term shareholder value. That is what a new day looks like, it is a day of confidence, a day of action, a day of growth.

Now turning to our second quarter. Our team delivered solid results with adjusted ID sales growth of 2.2%, adjusted EBITDA of $848 million, and earnings per share of $0.44. These results are in line with our expectations and reflect steady execution against our five strategic priorities, driving growth and engagement through digital connection, growing our media collectives, enhancing the customer value proposition, modernizing capabilities through technology and driving transformational productivity. Together, these priorities are driving our current performance and positioning us to enter our long-term growth algorithm for fiscal '26.

Our four digital platforms continue to be key engines for customer acquisition, retention and engagement, driving measurable increases in sales and frequency amongst our most loyal shoppers. These platforms not only deepen relationships but also generate rich actionable data that fuels the Media Collective's targeting capabilities and monetization strategies.

This integrated ecosystem is accelerating our ability to innovate, optimize marketing spend, customer reach and unlock new revenue streams. E-commerce remains a key growth driver with 23% year-over-year growth this quarter and in line with our 3-year CAGR. E-commerce growth isn't flattening at ACI. Grocery penetration is now well above 9%.

Our first-party business led by Drive Up & Go, continues to scale rapidly and represent the majority of e-commerce transactions and sales. By leveraging our store-based fulfillment model, we operate from a network that places us closest to the customers we serve, giving us a structural advantage in the last-mile fulfillment. This proximity, combined with our rich asset base, allows us to deliver a differentiated customer experience built on speed, service, convenience, quality and assortment. At the same time, our digital investments, including AI-powered features are driving engagement, customer acquisition and retention.

Loyalty continues to be a powerful driver of digital engagement and value creation with membership growing 13% to more than 48 million in the second quarter. Program enhancements and simplification are fueling deeper engagement. Members are transacting more frequently, redeeming rewards more easily, spending more. Notably, nearly 40% of engaged households now choose the cash-off option, underscoring the appeal of immediate value. Loyalty also serves as a rich data source for our merchants and Media Collective, enabling targeted marketing and monetization.

Most recently, we extended the value of our loyalty platform beyond grocery. With the launch of for U Travel, a new partnership powered by Expedia that allows members to earn up to 10% cash back on travel bookings redeemable towards grocery purchases, further strengthening engagement and broadening the appeal of our platform.

Pharmacy grew 19% year-over-year, fueled by continued strength in GLP-1s, strong core prescription volume increases and share gains from competitor store closures, all supported by our top-tier customer satisfaction. As we've consistently said, customers who engage across both grocery and pharmacy channels demonstrate materially higher value with increased visit frequency and broader spending across the store.

To capture this opportunity, we're investing in personalized omnichannel pharmacy and health solutions that are driving new customer acquisition and converting single-channel shoppers into high-value cross-shoppers. As a key pillar of our Customers for Life strategy, scaling these pharmacy and health solutions profitably through higher-margin services, central fill expansion, and innovative procurement and operational efficiencies is a top priority.

In the integrated mobile app experience, we introduced the app as a Swiss Army knife of tools that simplify planning, shopping, saving and more, whether customers shop in-store or online. Since then, we've enhanced it with advanced personalization and AI. Our newest feature, Ask AI, delivers a conversational search experience that helps customers build smarter baskets faster. It enables natural cross-category discovery and personalized recommendation.

Customers no longer need to know exactly what they're looking for in our aisles or online. They can simply ask, what are healthy snacks for kids; or say, my holiday party is tomorrow, and I'm not prepared, Ask AI will offer tailored ideas and guide them to relevant products.

Our Media Collective delivered strong momentum in the second quarter, significantly improving the year-over-year return on ad spend for our partners. This was driven by enhanced data quality, more precise targeting and faster campaign measurement. On-site digital ad inventory has grown meaningfully year-to-date, while improved speed to market has enabled advertisers to launch and optimize campaigns with much greater agility. Off-site, our media offerings are gaining traction. By leveraging real-time transaction data and integrating item-level sales reporting with platforms like Google, Meta and Pinterest, we're delivering greater transparency and measurable performance across the customer journey.

We've also advanced our full funnel strategy through shoppable recipes, app integration, connected TV and new in-store digital signage, creating seamless experience for customers and measurable value for our partners. Looking ahead, we remain focused on building innovative customer-centric media solutions that drive growth for our partners and value for our business.

In our customer value proposition, we continue to invest through a balanced approach of enhanced loyalty, incremental and personalized promotions, competitive pricing actions and vendor funding. This includes surgical price investments in select categories and markets, along with dynamic management of cost inflation to help stretch customers' wallets. During the quarter, we made incremental shelf price investments in specific divisions. And while early in the journey, we're already seeing an inflection in unit sales growth.

We continue to strengthen our Own Brands portfolio this quarter, introducing new offerings across multiple categories that deliver exceptional value to our customers. These enhancements are driving customer engagement and loyalty, while also contributing to margin accretion through improved mix and merchandising. As we elevate the visibility and appeal of our Own Brands, we believe we can drive outsized growth in this critical area of our business, reinforcing our competitive advantage and long-term profitability as we drive penetration from 25% to 30% over time.

Technology remains central to our long-term growth strategy. As we shared last quarter, our technology-first approach is enabling us to innovate faster, operate more efficiently and deliver greater value at a lower cost. We're energized by the progress we're making as we embed technology across every part of our business.

Our modern cloud-native platform continues to power key operations across e-commerce, stores, pharmacy, supply chain, merchandising and retail media. It also positions us to rapidly scale emerging technologies like AI. We are actively deploying AI agents to enhance core business functions, including cogeneration, price and promotion, personalization, and customer care and experience like Ask AI, unlocking new levels of speed, precision and productivity.

Looking ahead, we see technology innovation as a key enabler of both margin expansion and customer experience differentiation, and we remain very focused on building capabilities that drive long-term sustainable value creation.

Driving transformational productivity is not just a priority, it's an imperative. As we navigate a dynamic operating environment, it's critical that we unlock sustainable efficiencies to reinvest in our strategic growth initiatives, offset inflationary headwinds, including annual union labor cost increases. As previously shared, from fiscal 2025 through fiscal year '27, we expect our productivity engine to deliver $1.5 billion in savings and are on track to achieve the 2025 savings.

Our productivity savings are tightly integrated with our technology modernization strategy, which includes AI and data analytics to enhance decision-making and operational agility, automation across the supply chain to optimize costs, improve speed and support business continuity, shrink and labor management tools, including Vision AI and electronic shelf labels to drive store-level efficiency and accountability.

We're also making meaningful progress in reducing existing overhead and expanding our global capabilities with continued investment in our India technology and innovation center and scaled back-office operations in Manila. These hubs are accelerating our ability to deliver productivity at scale, while also enhancing operational support capabilities.

One of our most significant opportunities continues to be leveraging our consolidated scale to improve purchasing efficiency. Through national buying strategies and more streamlined supplier relationships, we are driving better cost outcomes and consistency across our network. At the same time, we are completely transforming our merchandising organization end-to-end, structurally building a house of merchants empowered by AI.

We're also reimagining our assortment strategy and upgrading our tools and processes to drive more effective execution and stronger results, including a partnership with OpenAI to use agentic AI to power merchandising intelligence. This transformation is designed to unlock the full potential of our talent and scale, enhance customer relevance and deliver improved financial performance. Sharon, over to you.

Thank you, Susan, and good morning, everyone. It's great to be here with you today. As Susan shared, it is a new day at Albertsons. Under her leadership, our right-to-win energy is mounting across the company, and the pace of change at both the division and national levels is accelerating. We are also seeing our investments in digital, loyalty, e-commerce, pharmacy, and retail media taking hold and adding to our competitive war chest.

With this said, these opportunities in front of us have remained underappreciated in our equity story, and there is clear dislocation between our stock price and the underlying value of our business. So before we dive into our Q2 financials, I want to talk about capital allocation. With the strength of our balance sheet and our belief that our stock is undervalued, we announced two capital allocation actions this morning to quickly return value to our shareholders.

First, we increased our existing share repurchase authorization from $2 billion to $2.75 billion. Under this new authorization, today we announced and executed a $750 million accelerated share repurchase on top of an already repurchased $600 million in shares since the beginning of the fiscal year.

Combined, assuming today's share price for the ASR, these repurchases represent over 12% of our beginning-of-the-year outstanding shares, with the remaining authorization for future repurchases of $1.3 billion. This $750 million accelerated share repurchase is immediately accretive and including it, our net debt-to-adjusted EBITDA ratio will be 2.2x versus 2x at the end of the second quarter, still well within a range that gives us significant operational flexibility.

Turning now to our second quarter results. I'll start with identical sales. Adjusted identical sales grew 2.2% this quarter, adjusted for a 12-basis point negative impact related to the 3-week Colorado labor dispute in 47 stores. This 2.2% increase was driven by strong growth in pharmacy and a 23% increase in digital sales.

Pharmacy, in particular, outperformed even our own expectations, driven by ongoing growth in GLP-1s and share gains from the stand-alone pharmacy channel. We also saw encouraging growth in areas where we made surgical investments like fresh. As Susan mentioned earlier, where we invested, we saw improving unit trends.

Gross margin in the second quarter was 27%, excluding fuel and LIFO, gross margin decreased 63 basis points versus last year, but importantly, it improved sequentially from Q1 on a year-over-year basis. The ongoing mix shift toward digital and pharmacy drove the significant majority of this decline.

Incremental investments in our customer value proposition, however, were substantially offset by gains from our productivity initiatives. Also driven by productivity, we saw a 50-basis point improvement in our selling and administrative expense rate compared to last year, excluding fuel, that's on the same trend as last quarter and reflects the benefits of leveraging employee costs and lower merger-related expenses. We expect continued discipline in the selling and administrative expense rate in the back half of 2025 and beyond.

Interest expense ticked up slightly in Q2, $105 million this quarter versus $103 million last year. The increase was mainly due to costs associated with the refinancing and maturity extension to 2030 of our $4 billion asset-based credit facility, which was completed during the second quarter.

Finally, adjusted EBITDA in Q2 was $848 million, and adjusted EPS was $0.44 per diluted share, in line with our expectations and reflective of the strategic investments we're making for long-term growth.

I'd now like to give you a quick update on our year-to-date labor negotiations. In fiscal '25, we had 120,000 associates up for renewal. To date, we've successfully reached agreements covering more than 107,000 of those associates.

Now let's walk through our updated 2025 financial outlook. As Susan said, we remain focused on our five strategic priorities. Through the balance of fiscal '25, we will continue to invest in our customer value proposition, customer experience, digital growth, the Media Collective and health and pharmacy.

These investments are expected to enhance our customer value proposition and drive outsized growth in digital and pharmacy, both of which drive higher future customer lifetime value. We will also continue to focus on our productivity agenda to fuel this growth and offset inflationary headwinds.

With that as our backdrop, we are updating our fiscal 2025 outlook as follows: we are increasing the lower end of our identical sales range and now expect it to be in the range of 2.2% to 2.75%. This assumes ongoing outsized growth in pharmacy and digital as well as continued surgical price investments in grocery to accelerate unit inflection.

We continue to expect adjusted EBITDA to be in the range of $3.8 billion to $3.9 billion, unchanged from last quarter, including the approximate $65 million in adjusted EBITDA in the fourth quarter related to our 53rd week. We are increasing, however, our adjusted EPS to a range of $2.06 to $2.19, reflecting the 2025 accretion of the $750 million accelerated share repurchase announced today.

The effective income tax rate is expected to be in the range of 23.5% to 24.5%, unchanged from last quarter. We do, however, expect cash flow benefit in the range of $125 million to $150 million in 2025 from recent tax legislation. Capital expenditures are expected to be in the increased range of $1.8 billion to $1.9 billion as we accelerate our investment in digital and automation.

And finally, as it relates to tariffs, tariffs have not had a material impact on our financial performance yet this year as 90% of the products we sell are sourced domestically, insulating us from global trade volatility. Beyond that, we have and are taking proactive steps to mitigate cost exposure, leveraging sourcing and supplier partnerships to minimize the downstream impact to both our margins and our customers.

And with that, I'll hand it back to Susan for closing remarks.

Thank you, Sharon. In closing, this is a new day at Albertsons and we're operating from a position of strength. We are executing with clarity, discipline and momentum. Our strategy is working and it's delivering measurable results.

Our owned real estate portfolio, our trusted local banners and our locally great and nationally strong operating model give us a strong foundational competitive advantage, one that we are leveraging to drive long-term sustainable growth. We are also deepening engagement through our customer-focused associate connections, digital platforms, expanding our reach through loyalty and e-commerce and unlocking new revenue streams through our growing media business. At the same time, we're modernizing our capabilities with scalable technology, driving transformational productivity and making strategic investments that will enhance our customer value proposition.

We are confident in our ability to deliver on our fiscal 2025 commitments and even more excited about the opportunities ahead as we enter our long-term growth algorithm in fiscal '26 and beyond. To our 280,000 associates, thank you. Your passion, resilience and commitment to our customers is what will fuel our next chapter. You are the heartbeat of our company, the architects of our customer experience and the driving force behind our transformation. We look forward to continuing to create value for our customers, our communities and our shareholders.

We'll now open the call for questions.

[Operator Instructions] Our first question comes from the line of Edward Kelly with Wells Fargo.

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

So sure. First and foremost, what I would say is it's really sticking to the five priorities that we've laid forth, driving our customer growth through our digital connections, growth in our Media Collective, enhancing the customer value proposition, modernizing our capabilities through technology and driving transformational productivity. And within each of those, we're seeing strong proof points of success.

As an example, I think about the customer value proposition. With great intention, we've invested surgically in key markets, and we're seeing a positive inflection in units there. We're starting to see the returns. In addition to that, we've made deeper investments in promotions and loyalty and personalization. And again, we're seeing those customers engage with us at a deeper level and more frequently.

From a productivity perspective, we've spoken of the $1.5 billion in productivity. We are on track for those savings in 2025, most of that is coming from SG&A. And as we look forward into the future, we'll start to see that coming from gross margin expansion.

Just a follow-up on all this. I mean from a pricing standpoint, obviously, you've been investing in price. You're starting to get some results associated with that, but it's been pretty surgical. How are you thinking about the outlook for price investment as you continue forward?

I'm curious from a price competition standpoint, have you seen price competition increase in all? And I think overall, I guess what I'm trying to ask here is that I think investors are worried that we may see a more accelerated investment from a pricing standpoint. So I'm just curious as to how you see that playing out as things move forward here?

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

And then Ed, I would just add to that. That so many of these pricing surveys do not capture the personalized discounts that the customers received through our loyalty programs, gas rewards and the -- now they're even converting those rewards into cash, which when they're checking out, they are getting cash off as they walk out of the store. And we think that, that is a very powerful way to leave the store when you just had your bill reduced.

When you take that into consideration, the customers are receiving great value through those programs. And when we think about that, we also have to think about the acceleration that we are moving forward with Own Brands. One of the biggest things we will do to bring value to our customers is to continue to invest and grow our penetration of Own Brands.

Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company.

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

We don't see any significant real change in the margin. The mix shift, we expect that to continue. As a reminder, those are our highest customer -- lifetime value customers in Rx and e-com. So that we expect to continue.

And what you saw in the second quarter is how our productivity funded a significant amount of the surgical price investment. So we expect that also to continue. So when I look at Q2 and I look at the full year, I would expect that margin to be very similar with the main explanation of the variance year-over-year to be mix shift.

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

Sure. So what we've seen from the consumer is a continued focus on value, a shift to trading down, maybe it's smaller package sizes, a focus on Own Brands, hence, why we believe we have an incredible upside opportunity, increasing our penetration well above 25%. We see an increased usage in coupons. We see them sticking closer to their shopping list, maybe not buying that extra item, that extra bottle of whatever. They're kind of shortening their list and sticking to it.

On the other side of it, too, we're still seeing a lot of impacts from healthier eating, whether it's just -- I think it's an overall awareness of making better choices, categories like functional beverage, protein shakes, protein-enhanced milks and those kinds of things, supplements, all of those continue to grow. We're seeing a nice -- and what we enjoy about that is those are the categories that also include things like fresh meat, fresh produce and they're margin accretive for us. So we see some positives there.

The pressure continues and we're working very hard to give the customers what they want by market in a way that fits their budget. We also offer tools to our app to help them create lists that fit within their budget, but that meets their health and wellness needs and ease and simplify sort of the mental load of shopping in today's environment.

Our next question comes from the line of Mark Carden with UBS.

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

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

That's great. And then as a follow-up, just on the pharmacy cross-selling front, are you seeing any deviations just in the spending lifts from customers using GLP-1s? Just in other words, is it having any impact on your ability to see as much of the sales lift for those specific customers that -- as you guys have seen in the past over time?

Sure, Mark. So what we typically see with the GLP customers is that there might be an additional -- excuse me, an additional dip in their purchase size, but we see that recover fairly quickly. And then as they do continue to expand their basket once again, as I mentioned, they are leaning into some of the categories and protein supplements, chicken, beef, fresh vegetables.

And what we love about that is, again, they're very margin accretive for us and how -- get the customer shopping the entire store, expanding the breadth of categories that they're shopping with us. So there may be an initial impact, but we quickly see recovery from that.

Our next question comes from the line of Leah Jordan with Goldman Sachs.

I just wanted to ask about the updated comp guide and see if you could talk about what's embedded regarding the cadence in the back half? Has anything changed in your view on how you're thinking about inflation versus tonnage?

And then maybe on the pharmacy piece, I mean, is there anything to think through on the timing shift with vaccines and how that could drive the comp in the third quarter versus the fourth quarter?

Yes. So as we think about the comp, pharmacy will drive higher comp in Q3 than we think it will drive in Q4 for the very reasons that you just mentioned regarding vaccination and the ongoing market share gains we're getting from the closure of other pharmacies. We're picking up those customers and are thrilled to do so.

So from that perspective, Leah, I expect there to continue to be momentum coming from pharmacy. We also expect to see continued growth in e-commerce. And from a difference between the 2 quarters, I don't think it's materially different between the 2 quarters.

Sharon, I would just add to that on the -- from a pharmacy perspective as well. The delay in vaccines maybe had a slight impact at the end of Q2, but that actually accelerated at the beginning of Q3. And a credit to our pharmacy teams who -- once the vaccines were released, we were out there in full force and are pretty excited about what we're seeing in vaccine growth this year.

Okay. That's helpful. And then just on productivity. I mean, you guys are driving nice improvement on SG&A leverage, better than we were expecting. I think, Susan, you highlighted a number of items in the prepared remarks that can drive that, I think, AI, automation, reducing overhead, among others. But just as you think about that long list of opportunities, I guess, which are the ones that are circled near term versus longer term within the 3-year plan?

And then as we think about this year, what about cost savings, right? Like how much of a relative magnitude shift is that in the back half versus the front half?

Sure. So with regards to the productivity side, what we're seeing, first and foremost, and I think I said it earlier, is the bulk of the savings in 2025 are SG&A-related. And this is us looking end-to-end across the organization, understanding where we made the tough decision to lay off close to 1,000 individuals this year. We're also looking behind the scenes on processes where we can automate, eliminate or simplify them. And looking at what we can take to our offshore businesses, again to -- for cost savings, but also to enhance our capabilities.

As we look forward, we'll start to see greater improvement in margin expansion, as I mentioned, and this is where we'll start to see the impacts of our buying better together, leveraging our national size and scale to secure better cost of goods.

And oh, by the way, partnered with that is technology. So there's tools that were launched -- or that are in process, I should say, with OpenAI as one example to help us improve our category strategies, to help us make better decisions faster, and to leverage the amount of -- the vast amount of data that we have to secure stronger negotiations with our vendor partners. Sharon, would you...

And Leah, I would just add to that. During the second quarter, we did open our technology innovation center in India, and we successfully moved our -- a large piece of our back-office accounting and finance functions to Manila. That Manila operation, just to remind you guys, has been there about 20 years. So it's an established entity for us, and we are very pleased with how these moves have gone, and they've been really seamless, honestly. And we will continue to balance onshore and offshore going forward.

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

Curious within your productivity initiatives, how much you are focused on shrink, I guess, both theft and spoilage or waste? And where those levels sit today versus history? And how do you look at the opportunity to improve those items, reducing waste as a potential driver of stronger profitability in the future?

And then just a quick follow-up on the pharmacy business. I'm curious if you can talk about how much of that sales growth is being driven by existing versus new customers? I think you cited gaining some market share from closing competitors. I'm just curious how that would break down existing versus new?

Sure. Thanks, Paul. So with regard to shrink, we are seeing improvements year-over-year. And much of that is driven by improvements in operational effectiveness, just being frank. And -- but a lot of it is being driven by tools and technology. As an example, we've now got AI cameras, systems over our registers to understand when perhaps items are being scanned properly at the self-checkouts or even by our own clerks. We've got improved tools and processes in order management and also in production planning, leveraging history, leveraging current trends to give us best-in-class order sizes and production planning lists so we can optimize for sales, but also manage our shrink levels.

From the pharmacy perspective, on the GLP-1 side, we are seeing, of course, the lion's share of growth comes from GLP-1s. Also, our core pharmacy business, our core script growth is doing quite well. We are -- one example of where we're doing well outside of GLP-1s are -- speaking of vaccines earlier today, we are 3x our market share in vaccines versus our normal share in pharmacy. So we're working very hard to find outsized growth and profitability to help our bottom line and our top line.

And during the quarter, we did see a significant number of new customers coming into the brand. But remember that they don't have to be completely new to us. It is possible that when a Walgreens or a CVS closes, that a customer that is currently grocery shopping at Albertsons, may be filling their prescriptions there because of the health plan they may be associated or another reason that is maybe unbeknownst to us.

So we are bringing in customers that are in grocery today that are coming into pharmacy. We are bringing customers in the store that have not shopped in grocery in our stores, which is our biggest opportunity, but we are seeing all of the above. But always keep in mind, the majority of our pharmacy sales will always come from grocery customers in our stores today that then convert to becoming pharmacy customers.

Our next question comes from the line of Jacob Aiken-Phillips with Melius Research.

So I wanted to talk about e-commerce. I'm just curious like -- so I think last quarter, you said, it was nearing breakeven, and there's some mix shift towards e-commerce is pressuring gross margins. But over the long term, how do you balance the structural labor and capital requirements of direct delivery and immediacy versus like cost efficiencies?

Jacob, thanks for the question. So with regards to e-commerce, yes, we're getting closer to breakeven to profitability there. And there's a few items that play. First and foremost, our business continues to grow exponentially. We're very excited about that. We're proud of that.

And at the same time, we've been leveraging technology, data, information to optimize the picking path for our shoppers within our stores, whether it's picking one order a time, picking multiple orders at a time, giving them a pathway to shop up and down the aisle to create productivity.

We're continuing -- you mentioned the capital allocation side of things. And as we look at this exponential growth, when we go through our remodel process, as we're building new stores, we're continually evaluating this space that we're allocating to our e-commerce operations and making the right decisions to expand. We're also able to go back and retrofit certain stores, perhaps adding refrigeration, adding hot food holding, so that we can give the customers what they want when they want it.

That part of the process is essential to us because, again, we don't know what high looks like. We expect it to continue to grow in the future. The beauty of our model is our 2,270-ish stores are located in the neighborhoods where our customers are shopping. We've solved for the last mile, surely by our proximity to the customers that we serve. So that helps us with the profitability side. And maybe more importantly, it helps us on the customer experience side.

You're getting product that was picked for you, fresh, right? You can custom-order a cut of meat, we can write happy birthday on a cake for you. But you're getting those products from the store that other shoppers are shopping, and up -- as quickly as in 30 minutes if you'd like or next day, if that's what's most convenient for you, but proximity is really a huge advantage for us as a company.

And, Jacob, I'll just add to that, that when you think about the fact that we actually believed that the winner in e-commerce would be in the last mile, who successfully delivered the best and highest-quality fresh product in the last mile, and we built our e-commerce model with that in mind. So we have been -- from the date that we actually started e-commerce, we have been using our stores as fulfillment centers in order to achieve that.

As part of that, we have evolved proprietary systems to support the entire picking, distribution process in our stores and continue to engineer those capabilities and those systems to drive the highest levels of efficiency, which is why we can sit here today and say we are getting very close to near breakeven in the e-commerce business.

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

Sure. So honestly, one of the most effective methods that we have for deploying new technologies across 285,000 associates is they help us build the solution. So you mentioned OpenAI. We actually have division merchants. So yes, our corporate team is engaged, of course, and our national tech team, but we're actually using some of our merchants that work in the divisions today that are closest to the stores to help us build these tools. So they're incredibly intuitive. They're meant to take work away.

As an example, we have an incredible amount of data available to us. It can actually become very complicated to be able to get answers. By leveraging AI tools, we're able to simply ask business questions, "Hey, why were my ice cream sales up yesterday? What were the key items that I sold the most, or why was I down?" And with the agentic AI, we're able to actually get information back at a really rapid pace, accurate information back. And we're able to then action upon that information as opposed to spending all the time digging into it.

When I think about what we've done with AI at store level, of fresh, it's a tool that we use for order writing in our fresh departments. That tool was literally created in partnership with one or two store managers, department managers in produce helped us write that tool so that it was very intuitive to the actions that they were taking today, but of course, sped up the process and added to that multidimensional data that we're looking for. It's really getting the team involved and building the tools that they will use in the future that is part of our success in this space.

We're also using it extensively in the real estate side of our business. We are -- it can help us assess the performance across our banners, markets, formats. It provides clear visibility into where we're the strongest and where the opportunities exist.

And we're also training the AI agents to perform advanced geospatial-type analytics, that's mapping competitive proximity, trade areas and market dynamics. And we can do that in real time. And these are extremely valuable insights for us as we continue to focus on future growth, new locations and in Susan's deep dive that she talked about, it's been one of the foundational tools that she's been looking at to look at all of our assets, noncore assets, et cetera.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

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

Simeon, what we -- one does not preclude the other. So the ASR does not prevent us from continuing our capital expenditures as planned, we've -- and we've got a very aggressive agenda there in terms of remodels, new stores, driving technology improvements. We've also left ourselves, and Sharon can speak to this, dry powder. We are interested in growing in many ways, organically, but also through acquisitions. So we've left ourselves some room to be able to accomplish whatever we need from a capital perspective, an acquisition perspective or whatever else might come our way. Sharon?

Yes, and Simeon, in our prepared remarks, we said it. With our adjusted EBITDA ratio at 2.2, it leaves us ample opportunity and tremendous flexibility. So we don't see the ASR as having any impact on any of the strategic initiatives that we've been talking about.

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

Yes. So thank you for the question. Pharmacy growth is separate. So this is truly just the rest of the store growth. And some of the key factors there are, first and foremost, our 5-star certification program. And this is really just ensuring that our associates are delivering customer experience that we expect, that they're meeting productivity time lines, that they're delivering the quality our customers are looking for. And I have to say, our team is doing a phenomenal job in that space.

The other side of it is as we look at the improvements that our team has been making on the app, your ability to create lists, your ability to add items from recipes to your ability to seek recipes and be able to look at your app as sort of a one-stop shop solution for all your needs in your shopping experience with us. By the way, that's for e-commerce, but that's also true for online.

Our next question comes from the line of John Heinbockel with Guggenheim Partners.

Susan, can you -- you mentioned sort of looking at assets and noncore assets. How do you think about those? What are sort of noncore? And then when I think about store assets, you've got markets with dual banners, right, multiple banners. How do you think about that in terms of possible banner consolidation?

And when you look at markets where you might lack share, is there a real thought of exiting some markets? Or do you try to gain requisite share through selective M&A? How do you look at the portfolio?

Yes, sure. So thanks, John. So as we look at our assets, first and foremost, one of the things that Sharon just mentioned, our real estate team is doing a phenomenal job of aggregating data for us to be able to look at our fleet across the entire country, overlay that on top of customer growth and influx of population growth, looking at where we perform strongest with our customers, where the brands resonate best and so forth. So we're looking across the entire organization, and it's helping us identify, first and foremost, where are we doing well? Where do we want to double down? How can we either, again, grow organically or we're looking for fill-ins?

One of our top priorities is saying, as we see growth across the entire organization, where are those markets where we've got a strong fleet, we need to double down and buy or build more or adjacent opportunities where there might be a fill-in. We're a banner -- a company built of acquisitions, it's what we do. We're very good at it. And looking for those strategic fill-ins is really important to us.

From a banner perspective, we've -- gosh, we've been, what we call, flipping banners for years, that's where we look at a market and say, gosh, we've got two or three banners, which ones are performing the best? Which ones resonate most with the customers that we serve? The Northwest is one example where -- I can think of, where we've flipped many of our stores from Albertsons to Safeway, as an example. In Southern California, we flipped stores from Vons to Pavilions. So we're using this data and information that we have to make very surgical decisions, strategic decisions on how we can improve the fleet moving forward.

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

John, what we previously said is that as we enter 2026 into the algo, it is our expectation that we are getting to near flat units. Now if the industry continues to decline, of course, we will still continue to move forward. And I think within that 2%-plus, we believe that, that could be an inflection point for us. If not, it will move into '26 depending on what happens with the industry, but we still believe regardless that we will be in the algo in 2026 at 2-plus percent comp. It may come a little bit differently.

And one of the things to keep in mind with that is that, as we move forward with pharmacy, the scale that we have been able to take or grow is allowing us to do things that we were not able to do before to improve profitability in pharmacy. I don't want us getting overly excited about the pharmacy business profitability, but as we all know, today, it is actually dilutive to adjusted EBITDA and everything we can do like central fill, like vendor negotiations on drugs, direct negotiations will help improve incrementally that pharmacy contribution. So we do expect that to happen over time.

Additionally, when you think about it in e-commerce, as we get closer to breakeven in e-commerce, every additional order helps lever into adjusted EBITDA. So we're expecting the identical sales growth of 2%-plus or 2%-plus and then adjusted EBITDA slightly better than that. So based on everything we've talked about here today, and the priorities and everything Susan shared, we are very confident in our ability to get there for 2026.

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

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the Albertsons Companies' First Quarter 2025 Earnings Conference Call, and thank you for standing by.

[Operator Instructions] This call is being recorded.

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

Good morning, and thank you for joining us for the Albertsons Company's First Quarter 2025 Earnings Conference Call. With me today are Susan Morris, our CEO and Sharon McCollam, our President and CFO.

Today, Susan will recap the first quarter of 2025 and update you on our progress against our strategic priorities. Then Sharon will provide the details related to our first quarter 2025 financial results and our outlook for the remainder of fiscal 2025 before handing it back to Susan for closing remarks. After management comments, we will conduct a Q&A session.

I would like to remind you that management may make forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to, the factors identified in our filings with the SEC. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise.

Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these financial measures to the most directly comparable GAAP financial measures can be found in this morning's earnings release.

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

Thanks, Cody. Good morning, everyone, and thanks for joining us today. In the first quarter, our teams delivered solid results with ID sales growth of 2.8%, adjusted EBITDA of $1.11 billion and adjusted earnings per share of $0.55. These results again demonstrate gradual and incremental progress against our 5 strategic priorities, which include driving customer growth and engagement through digital connection, growing our media collective, enhancing the customer value proposition, modernizing capabilities through technology and driving transformational productivity.

Within these priorities, our 4 digital platforms continue to be the catalyst for customer growth and engagement. We continue to drive increased sales and to more deeply engage our most loyal customers, all while generating data and insights for the media collective. Our first digital platform is e-commerce, which grew 25% and reached 9% of total grocery revenue in the first quarter.

This growth was again led by a strong performance in our first-party business, driven by award-winning capabilities and our fully integrated mobile app and supported by our 5 Star certification program. Our focus on delivering exceptional customer service experience is fueling new customer acquisition and strengthening existing customer retention.

To do this, we're continuing to enhance our digital shopping experience, including the introduction of AI and interactive features that deliver both ease and convenience. For example, we launched our new shop assist feature, which enables the connected shopping experience that allows customers to communicate back and forth with our in-store associates throughout their orders fulfillment process. We've also created more flexibility in our basket building. Customers can now add items to their orders up until picking has started, recognizing that shoppers often think of 1 more item they need just after an order is placed.

While our e-commerce penetration is still below industry peers, it is one of our biggest growth customer acquisition and customer retention opportunities for 2025 and beyond. From a profitability perspective, our e-commerce business is near breakeven and improving.

Our second digital platform is loyalty, which grew 14% to 47 million members in the first quarter as we capitalized on simplification of our program and further enhance the value the program offers. Members in the program today are engaging more frequently using more of our easy-to-understand and redeem features and spending more with us. A case in point, 30% of our engaged households are now electing the cash off option, reinforcing the customers' desire for immediate value. As we did last quarter, loyalty is a key enabler of digital customer engagement and a rich source of data for our media collectives.

Throughout 2025, we will continue to introduce compelling benefits that will attract new members, improve share of wallet and further enable marketing and monetization opportunities for the media collective. We will also continue to simplify and expand the program to include strategic partnerships to offer even more value.

Our third digital platform in pharmacy and health, which grew 20% year-over-year, driven by industry-leading script and immunization growth. Best-in-class customer satisfaction scores and the ongoing integration of pharmacy and Sincerely Health into our overall digital experience. Cross shoppers between grocery and pharmacy are exceptionally valuable. Over time, these customers visit the store 4x more often and by significantly more groceries with us, resulting in outsized customer lifetime value across the entire store.

For this reason, in addition to the market share opportunity, competitor closings are creating for us. We're also continuing to invest in our pharmacy and health digital platform. Through this platform, we're also launching customized omnichannel benefits that are not only attracting new customers but also converting an existing pharmacy and grocery only customers to become cross-shoppers. It is also helping customers to find new and personalized ways to improve their health and well-being, consistent with evolving national trends.

Our pharmacy and health platform is an integral part of our Customers for Life strategy and a significant growth and customer engagement opportunity. For this reason, leveraging our growing scale to improve pharmacy profitability over time is a key operational priority. To deliver this, we are continuing to pursue higher-margin service offerings and drive productivity through improved sourcing, increased automation and labor optimization. This quarter, we opened our third central fill processing facility, which is reducing our cost to serve while at the same time improving overall customer experience.

The fourth digital platform is the integration of the mobile app for use in our stores. We're not just selling food. We're simplifying meal planning and making shopping easier and more convenient, both in-store and online. Our app has become the epicenter of the omnichannel experience with digital customers engaging nearly 3x a week on average. What began as a tool for enabling e-commerce and delivering great deals is now a Swiss Army knife of tools that makes customers lives easier regardless of whether they're shopping in our stores or online.

These tools include best-in-class list building and personalized meal planning capabilities, powerful search and product locating capabilities and an in-store mode that connects meal planning and other store-specific capabilities. In our media collective in the first quarter, we significantly increased the high-impact digital inventory as our digital platforms work together to enrich our data and generate deeper customer engagement to accelerate growth and deliver superior return on ad spend. We'll continue to invest in building industry-leading integrated solutions that will support both endemic and non-endemic partners.

These solutions include refining shopper audiences, running targeted media campaigns with compressed measurement timelines and delivering consistent omni execution to develop personalized relationships for our collective partners with our customers. These same solutions are also providing benefits for our internal loyalty and marketing initiatives. As we look forward, we expect the collective to grow faster than the retail media market and ultimately be one of the largest sources of fuel for reinvestment into our core business over time.

To improve our customer value proposition, we intentionally invested in value in both loyalty and promotional offerings as well as by partnering with strategic vendors to invest in price in certain categories in certain markets. We also surgically managed through the pass-through of cost inflation to further invest in the customers' needs for immediate value. While it is early, these investments did deliver a sequential quarterly unit sales improvement and over time are expected to drive greater existing and new customer engagement across our banners.

We additionally amplified our own brands presence to drive further value for our customers. Own brand sales penetration finished the quarter at 25.7% as we launched new offerings across multiple categories. We also expanded the assortment in our recently introduced Overjoyed brand and launched our newest brand, Chef's Counter, a chef-inspired meal solution targeting foodies seeking fast and easy restaurant quality choices at affordable prices. These launches, coupled with greater prominence and better value in own brand merchandising is expected to drive greater loyalty, increased digital and omnichannel household engagement and higher transaction counts over time.

Our next priority is the modernization of our capabilities through technology. As we said last quarter, our North Star is to use technology in everything we do, and we are energized by the progress we are making towards this aspiration. Our technology first focus is positioning us to make a greater impact faster allowing us to drive greater innovation at a lower cost.

Our advanced technology platform on which we are continuing to innovate, powers our e-commerce store, pharmacy, supply chain, merchandising and media collective operations and is allowing us to leverage emerging AI technologies to accelerate our operational transformation going forward. We are also using our advanced capabilities to use AI agents to enhance many business functions, including pricing and promotions, personalization, customer care and cogeneration, among others.

Driving transformational productivity is our next priority, which is an imperative to fuel our growth. Our productivity engine continues to reduce costs, offset headwinds and fund our growth priorities. They work hand-in-hand with our technology modernization, including our initiatives to leverage AI and data analytics, optimize supply chain costs through automation and build out shrink and labor management tools, to name a few.

In addition, the largest of our opportunities continues to be the leveraging of our consolidated scale to buy goods for resale through national buying and more efficient supplier relationships. As we previously shared from fiscal year 2025 through 2027, we expect our productivity engine to deliver $1.5 billion in savings, which we plan to reinvest in growth and our customer value proposition as well as to offset other inflationary headwinds.

Before I hand the call over to Sharon for an overview of our first quarter and to provide an update to our 2025 outlook, I'd like to give you an update on recent labor negotiations. In fiscal '25, we have negotiations covering approximately 120,000 associates. As of today, we've reached agreements covering nearly half of these associates with 2 pending ratifications in Colorado and Southern California. We appreciate and value our associates. And in these contracts, we are meaningfully improving wages and benefits.

At the same time, we're working to negotiate contracts that are not only financially viable but also provide the operational flexibility the company needs to streamline operations, manage costs and offer affordable prices in a rapidly changing grocery landscape.

Sharon, over to you.

Thank you, Susan, and good morning, everyone. It's great to be here with you today. As Susan shared, the investments we are making are delivering value to our customers and adding breadth to the capabilities we need to drive future growth. During the quarter, we saw early wins from these investments, affirming our confidence in our strategic priorities and our Customers for Life strategy. Included in these wins was identical sales growth this quarter of 2.8% driven by 20% growth in pharmacy and a 25% increase in digital sales. We also saw a sequential improvement in core grocery units.

To drive this growth, our gross margin rate of 27.1% was lower than last year by 85 basis points, excluding fuel and LIFO expense. Incremental investments in our customer value proposition and the mix shift impact related to the strong growth in our pharmacy and digital businesses drove this decrease but was partially offset by benefits driven by our productivity initiatives, including improved shrink expense. Offsetting this gross margin investment was a 63 basis point improvement, excluding fuel in our selling and administrative expense rate. This decrease was primarily driven by the leveraging of employee costs reflecting the positive benefits from our ongoing productivity initiatives and lower merger-related costs.

Interest expense in Q1 '25 decreased $4 million to $142 million compared to $146 million last year due to lower average borrowings. Income tax expense in the first quarter totaled $75 million or 24.1% compared to $69 million or 22.3% in Q1 last year. This tax rate increase was primarily driven by a reduction of an uncertain tax position last year that did not recur in 2025. Adjusted EBITDA was $1.111 billion in the first quarter compared to $1.184 billion last year. Adjusted EPS was $0.55 per diluted share compared to $0.66 per diluted share last year.

Now I'd like to discuss capital allocation, the balance sheet and cash flow. Consistent with our capital allocation priorities during the first quarter, we invested $585 million in capital expenditures, including the opening of 3 new stores and the completion of 36 remodels as well as the ongoing modernization of our digital and technology capabilities. We also returned $401 million to our shareholders, including $86 million in quarterly dividends and $315 million in share repurchases, leaving approximately $1.5 billion in our existing multiyear $2 billion share repurchase authorization. At the end of the first quarter, our net debt to adjusted EBITDA ratio was 1.96.

Now let me walk you through our updated 2025 outlook. As Susan said, we remained focused on our 5 strategic priorities. Through the balance of fiscal '25, we will continue to invest in our customer value proposition, customer experience, digital growth and media collective and health and pharmacy. These investments are expected to drive outsized growth in digital and pharmacy, both of which drive our higher future customer lifetime value but create near-term margin headwinds. We will also continue to drive our productivity agenda to fuel this growth and offset inflationary headwinds.

With that backdrop, we are updating our outlook as follows: We expect identical sales growth in the increased range of 2% to 2.75%, up from 1.5% to 2.5% last quarter. This assumes continuing growth in pharmacy and digital sales as well as gradually increasing units in grocery. From a cadence perspective, we expect the second quarter ID sales to be towards the lower end of our guidance range with gradual acceleration in the back half of the year.

We expect adjusted EBITDA to be in the range of $3.8 billion to $3.9 billion, unchanged from last quarter. As a reminder, this includes approximately $65 million in adjusted EBITDA in the fourth quarter related to our 53rd week. We expect adjusted EPS to be in the range of $2.03 to $2.16, unchanged from last quarter and including $0.03 related to the 53rd week.

The effective income tax rate is expected to be in the range of 23.5% to 24.5%, unchanged from last quarter. And capital expenditures are expected to be unchanged in the range of $1.7 billion to $1.9 billion. Looking beyond 2025, as we capitalize on the investments we are making behind our strategic priorities, we continue to expect fiscal 2026 to coincide with our long-term growth algorithm of 2-plus percent identical sales and adjusted EBITDA growth higher than that.

I will now hand the call back to Susan for closing comments.

In closing, our Customers for Life strategy is working. We're investing in our core operations and improving our customer value proposition. These investments are driving increased traffic and growing digitally engaged customers, omnichannel households and loyalty members. To fuel these initiatives, we are driving productivity and leveraging new technologies to drive efficiencies across our operations. As Sharon said, we continue to expect 2025 to be a year of investment, including enhancing our customer value proposition. As a result, we expect gradual and incremental improvement in top line trends at our grocery business in the second half of 2025 and 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.

With just over 2 months as CEO of Albertsons Companies, let me say that I am more confident in our strategy with each day. I'm energized by the work our teams are progressing and excited to continue building on our strong foundation. To our 285,000 great associates, I am more inspired than ever by you and all that you make possible for our customers and our communities each day. No matter where you are across our business, you make a difference. You keep our systems running, ensure our products are in stock and delight our customers.

We will now open the call for questions.

[Operator Instructions] Our first question comes from the line of Paul Lejuez with Citi.

Curious if you could talk about the drivers of the gross margin decline this quarter, maybe size them for us and how we should think about each of them remaining for the rest of the year, which might go away, which become less of a headwind, maybe that you could start with that. And then also curious how you would characterize the pricing environment around you in the competitive landscape?

Thanks, Paul. As I think about gross margins, so we've been very clear that our top priority is driving sales and specifically driving an increase in units. And we're investing in that and remain true to that. We expect to continue that, by the way, throughout the rest of the year.

As we think about Q1, it was actually one of our largest overlaps year-over-year, and thus the compare that you're seeing from the gross margin investment. That said, as I mentioned before, we're going to continue to invest in margin but we also expect our productivity to begin to provide a tailwind as our national buying gradually kicks in as the year progresses. Also keep in mind, our focus is on gross margin dollars, on EBITDA dollars and not on rate.

You had a second question about the pricing environment. And I might have missed a question in the middle. And what we're seeing is continued promotional investment from the competitive set, of course, in our own operations. We're also leaning in more heavily on loyalty, on personalized deals. I would say that the pricing environment is rational. So we've not seen any broad swings across the industry at this point in time.

And I would just add to that you're continuing to see pressure from mass club stores and the value players.

Our next question comes from the line of Leah Jordan with Goldman Sachs.

You made an interesting comment that e-com profitability is near breakeven and improving. Just seeing if you could provide more detail on the key drivers supporting that improvement. How much is Albertsons media collective factor at this point? And what's your line of sight into reaching breakeven in that business?

So Leah, I think it's really important to recognize that different companies are calling e-commerce, different things in their P&Ls. When we are talking about e-commerce that is specifically our e-commerce business. There is nothing in our e-commerce P&L related to the media collective from a financial point of view. Of course, it creates data for the media collective, and it is a major provider of information for the media collective but from a P&L point of view, it's pure. What is driving that is volume, first and foremost, leveraging the fixed cost of the operations of that business, also labor efficiency in the business.

We've invested in tools and systems in order to drive efficiency in labor and then we are also very much focused on continuing to leverage transportation costs in that process. So it's across the P&L, where we're seeing improvement. But in that type of a business where you've got fixed costs that put the space in the stores, the real estate because all that's allocated to that business. We are continuing to lever that. So we are getting very close to breakeven in our e-com business.

And Sharon, if I could just add to that as well. And you touched on this, a reminder that our fulfillment model is through our stores, and our stores are already in the neighborhoods that are serving our customers, so that creates efficiencies for us perhaps versus some others out there. I think that...

That's very helpful. And then I just had a quick follow-up on the ID sales guidance. I mean, just if you could comment on the cadence of ID sales throughout the quarter. And then with the deceleration that you're guiding in 2Q, just what are the key drivers of that? Are you seeing something change with the consumer? Is this related to the pharmacy business? Anything there would be helpful.

Leah, there's a couple of things. First and foremost, the compares on pharmacy. You have to look at pharmacy growth last quarter, which we disclosed. So if you take a look at that, that has a major swing impact on the comp each quarter. So look at that. Secondly, from a cadence point of view, we feel pretty confident that as we progress through the year, we expect to see our -- on the grocery side of the business, we talked about the fact that we're expecting to see progressive units as we go through the back half of the year as the price investment that we have spoken about.

So in Q2, we do need to keep in mind that there will be an impact from the strike that we had during the quarter. So that will have an impact but we quantified that for you in order for you to help model. We said in our prepared remarks that we expected in the second quarter to be at the low end of our guidance range. So hopefully that will be helpful and we continue to expect to see strong pharmacy in the numbers going into Q2.

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

I was hoping that you could maybe take a step back and update us on your price investment goals. Just kind of given what you have seen so far, customer response does that give you any confidence maybe to lean in a little bit more? And then as you think about productivity initiatives rolling in and then you think about returning to your algo next year, is it your expectation that eventually gets to the point where you will continue to invest in price, productivity offsets, gross margin is a bit more stable. Just curious as to how we should be thinking about all that.

Sure. Thanks, Ed, for the question. So as we think about price, just a reminder, as we went into the year, we have an incredible amount of data, and our price investments are very surgical. We know the categories and the markets where we need to make those investments and we've begun that process. And also keeping in mind, too, that as we talk about investing in price, it's really investing in the total value proposition. So yes, some of it's based pricing, it's promotional. It's investing in our loyalty programs as well and of course, focusing on own brands.

To date, it's still early in the investment process. So we'll be able to understand a little bit more. This is certainly a journey, not something that is a one and done. It will be an iterative process with multiple phases launching throughout the year. Right now, we've seen sequential improvements in our unit trajectory, which is what we expected to see. We have been tracking our CPI versus the competitive set and are generally pleased with what we see. But once again, it's quite early in the process.

You asked about productivity. And what I would say here is, as I mentioned a moment ago, there will be a tailwind from a gross margin perspective as we implement our national buying processes. But keeping in mind, too, that, that is a process. We're working closely with our vendor partners, category by category, vendor by vendor. So we expect to see that start to show through towards the second half of the year and expect to leave 2025 going into 2026, delivering on the long-term algorithm.

And then just maybe a follow-up on the pharmacy and grocery cross-shopping momentum. I mean, pharmacy growth has obviously been very impressive. But the grocery business has lagged. And I'm just curious as to what's happening with the momentum of that cross-shopping activity? What you're doing to get those customers to engage more in a store. And over time, I mean, it seems like we should expect the grocery ID to respond to all this. I'm just kind of curious as to how you are thinking about the momentum there and when that really begins to improve.

So as we've shared before, it does take time for the cross-shopping to begin between pharmacy and grocery customers. That said we know what they do -- they also visit the store 4x more frequently. They drive outsized customer lifetime value. And they -- one of our goals with all of this is, of course, getting engaged in both center store and pharmacy, recognizing that if they're engaging in the pharmacy side of the business, we are working to increase their engagement with higher service offerings, test and treat as one example, immunization is another.

From a grocery perspective, we did see positive growth in grocery in the first quarter, exclusive of our pharmacy business. So we were pleased to see that happening there. As I mentioned before, 2 words, focused on creating incredible amount of productivity in our pharmacy business, including improving our sourcing, buying better, increasing automation, creating solutions for our pharmacy techs and teams to make their jobs more efficient.

We've invested in 3 central fill facilities in our Southwest division, in Dallas and in Southern Washington state, which are also helping our productivity. So again, we like the total value equation when our customers engage with us in-store, in pharmacy, online. That's a virtuous flywheel for us that drives ongoing growth and productivity, by the way. So we're very excited about the future and believe in the priorities that we've laid forth.

Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company.

Just going back to Retail Media, I was just curious how that ramp is going versus expectations so far? And just anything surprising at this point?

Rupesh, we are very pleased with the progress that we're seeing on Media Collective. Our growth is outpacing the industry. Our team has done a phenomenal job of condensing the amount of time that it takes for us to be able to give feedback to our vendor partners on the performance of their investments. They're enhancing our digital properties so that we have more inventory to be able to sell. And we are also working on really creating more streamlined personalization opportunities so that our vendor partners can have direct connection with the customers that they're serving.

So we feel good about our progress there. But we also see that as some blue sky ahead, we recognize that we're catching up in some ways, and our goal is to lead forward but there's great progress there from the team.

Great. And then maybe just 1 follow-up question. Just on the consumer. Just curious what you guys are seeing right now? And with the recently passed legislation, just any thoughts on SNAP impacts.

I'll start with the SNAP impact. So for us, we have a lower penetration of SNAP than the majority of the competitive set that we have. That said, that customer is very important to us. They typically have a larger basket. They're very loyal. And we'll work hard to make sure that they have the communication and information they need to get access to those resources when available.

I would also add to that, that the -- when you look at the new legislation, there is a very long ramp to implementation of many of the things within that legislation. So in the short term, we don't anticipate that being a headwind of any material amount in the short term.

Thanks, Sharon. And on the consumer side, we continue to see the customers seeking value. We're selling more on promotion. That's been happening for quite some time now. We're leaning heavily into own brands, understanding that. And as we mentioned before, we're proud of our own brands program that we have but we're not satisfied with the penetration that we have. So we're really leaning in for the Q2 and the rest of the year, that's upside potential for us moving ahead.

As I think about the customer, we were looking at some category information. And it's been interesting, some of our top-performing categories in the first quarter, it was kind of a tale of 2 cities. We absolutely saw increases in the shift into pork and ground beef as 1 example, again, indicating that the customer is looking for value. We also saw strong growth in our deli chicken business as an example, knowing that I think customers are always looking for quick and easy meal solutions. And with the increase of food away from home, I think inflation was almost 4% and we're absolutely providing value there.

Our next question comes from the line of John Heinbockel with Guggenheim Partners.

I want to start with -- I think you said -- maybe I heard wrong, food volumes were positive in the quarter, grew. Was that right? If so, is that predominantly traffic or items per basket? And then I think your goal -- a couple of quarters ago, you talked about 50 basis points, is that still a fair goal you think you can do better than that?

Yes. So John, traffic and the AIV were positive on the units -- it is a sequential improvement in units from Q4 to Q1, and that is not yet to positive.

Okay. And then my follow-up is if you think about -- you referenced technology, where do you think the most fruitful labor productivity opportunities are, right? I think about -- because you guys are promotional, electronic shelf labels, thinking about that, thinking about automation back into the warehouses, where are the biggest opportunities to move the needle on cost per unit?

John, thanks for the question. So you actually touched on a few that are very important to us today, one of which is DC automation. We've had some great success with recent launches and look forward to accelerating that agenda for a variety of reasons, efficiency being 1 of them. With regards to store labor, we are -- so we have an incredible amount of data, and I think about e-commerce as 1 example where we've actually been able to enhance productivity because we're able to get the data that we need to create more predictive scheduling. That's really helping us create efficiencies there. That's already underway in the rest of the store. And where the process is actually fairly robust in center store. We're working through the fresh departments. So all the walls forecasting is what we call it, and that's going to be a big amount for us.

We are currently in pilot on ESL and I think it's 40 stores at this moment in time, seeing great results there. But to your point, we're absolutely leaning in heavily on technology and automation test where we can, eliminating pain points across the organization in the existing tasks. And looking forward to what we're going to learn from our experiments on AI across the company because we see further opportunity there for efficiency.

I would also add that over the last several years, we've invested heavily in our stores in several technologies that are used by a very large number of people in our stores. We implemented [indiscernible]. We've implemented ordering and other types of technologies. And one of the big opportunities that every retailer has is the utilization of that technology. And there is a full court press within the company on execution in the stores elevating that in our stores. So we are expecting to see changes and continued improvement in the stores in the utilization of the tools we currently have.

Another area that we continue to invest in, and you have to invest in it from 2 perspectives. One is the customer experience, and one of them is from a shrink perspective but is in the self-checkout and the various things we can do with self-checkout from a customer experience point of view. Using Vision AI as part of that process, we saw, as you saw in our prepared remarks, that we did have some favorability in shrink. Part of that, we believe, is coming from the technology that we have invested in self-checkout.

So that is another area that it benefits you in labor in many different ways. But the key to self-checkout is making sure that, that customer experience is as great as it can be, and we're spending time on that and ensuring that, and I believe that will help us continue to take self-checkout to the next level.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

I wanted to follow up on pricing. Susan, I ask you about where your head is on pricing. I think you've lived in the high-low environment for most of your career. So curious what this iteration looks like? Are you moving to part EDLP with high low. And you mentioned this -- is this a onetime catch-up? Or this is iterative and of course, open to changes down the road. And then I don't know what in the conversations with vendors, how you're communicating some of the changes as you try to work with them on the central buying.

Simeon, thanks for the question. So first and foremost, I want to highlight the fact that and I've mentioned this a couple of times and we talked about this last time, we have an incredible opportunity with our own brands. Our penetration well, it's growing, it was 25.7% for the quarter, we should be at 30% plus. So we are leaning into that from both ends, both from a price perspective but also from a cost of goods perspective so we can fuel our own growth there.

Going back to your price question in general, I would just -- yes, you're right. We've typically been a high low retailer. And if I had to describe our go-forward approach, I'd say we're more of a modified high low. That's where we're looking to achieve. And yes, it's iterative. This is absolutely not a one and done. And what the team has created, which is actually pretty fantastic. Internally, we've created a suite of tools that helps us utilize the data that we have to anticipate the changes that we're making based off of past performance of various price points, understand the customer elasticities and then feed us what those pricing changes should be to optimize unit growth, optimize profitability. And those tools are only becoming more and more robust. We continue to add to the suite.

So I guess to answer your question shortly, no, this is not a one and done. This is a new go-to-market strategy. We are deeply engaging our vendor partners that takes time, by the way. So as we talk about our productivity as a tailwind that will come gradually over time as we're leaning into partnerships with our vendors to say, hey, how do we do this together. We want to move more units, we want to move them with you, how can we lean in and create the right opportunity to grow sales and share -- unit sales and share collectively.

Okay. And then switching topics for a follow-up. SG&A run rate. Can you talk about -- I think it was up 3.5% or so percent. Union contracts, I'm sure was part of your plan at some point because you know when they come up and you have some expectation. Can you talk about how the union contract could or couldn't change that run rate? And any investments that come in? And then managing it relative to where you think comps can come in? Is it in the right range so that you could eventually leverage when you get some of the unit pick up in the back half?

Simeon, yes. In our SG&A guidance that in our outlook for this year, we have anticipated what these increases could look like and that is incorporated in the adjusted EBITDA balance that we provided for the year. As it relates to other areas in this that you didn't ask about, Keep in mind this quarter, we were -- we had a year-over-year benefit of about 63 basis points. Take a look at how much of that is onetime cost. You can see the onetime costs in our reconciliations in the press release. So about half of that comes from the elimination of merger cost but the rest of that has been driven by productivity.

One of the big areas of productivity that we expect to see this year, early in the year, particularly, is going to be in SG&A. Remember, we are materially changing our ways of working. We've had several announcements on the opening of our new headquarters in India for technology, which we're very excited about. We are also transitioning many of our back-end accounting functions to an existing location that we have in the Philippines. And that transition is also happening.

So we are making several, I call -- we call them internally ways of working moves that are helping to offset some of the pressure that we're seeing in the wages. And when does it -- I don't want to specifically say union wages but wages in general.

Our next question comes from the line of Mark Carden with UBS.

So on the pharmacy front, how does that contribution shake out from GLP-1s? And then for the growth outside of GLP-1s, is it being more driven by newer customers or more by your engaged existing customers?

On the GLP-1 question, it's about past the pharmacy comps. So think about GLP-1 as half the comp. However, remember, it comes at an incredibly outsized average unit retail and script growth actual script growth outside of GLP-1 was also very strong.

Susan, do you have something you'd like to add to that?

Yes. So as Sharon touched on it. Clearly, the profitability is quite different on the GLP-1 script itself but the customer is quite valuable. What we found is there might be an initial dip when they start shopping with us in their grocery basket but that quickly turns around and actually leads into items like supplements, lean proteins in our meat department categories that are actually quite profitable for us as a company.

Sharon mentioned, our core script count ex GLP-1 is very strong. And we're -- that's again, exciting to us as customers continue to engage in our total ecosystem that adds profitability, that adds long-term lifetime value. So we feel very good about where we're at the pharmacy space. That said, and I mentioned this earlier, we are very focused on productivity there, improving sourcing, increasing automation and of course, the central fill that I spoke of.

Great. And then on tariffs, I know that indirect impacts were a big unknown from ingredient and a packaging standpoint in grocery and pharmacy. Now that we're a few months in, are you expecting this to be any more or less a contributor to inflation over the course of the next few quarters relative to what you're expecting last quarter?

Thank you. And yes, as we mentioned before, well over 90% of the goods we source are domestically based but to your point, ingredients are certainly playing a factor in our CPG partners and their cost of goods. We're starting to see increases in cost of goods moving ahead. And we've got a very rigorous process of, first and foremost, quite frankly, just pushing back. We worked hard and it shows in our price position as well that we've not passed through all of the inflation that we're seeing from a cost of goods perspective.

Our first line of defense, though, is to push back with our vendor partners, deconstruct the cost increase and make sure that we're all in alignment of the back rationale behind it, looking for alternate sources of supply or other products that we can push if the tariffs become unwieldy and then finally in certain cases, if we have to, we'll pass them on to customers but we're going to remain very close to the competitive set, especially on key items when I start to think about commodity items that come through, which is something we do every day. This is part of our DNA. We sell a lot of commodity driven items, and we are very agile in the pricing process there.

And Susan, I would just add to that, it is also having us take a look at what we are offering in own brands. So as we look forward and we look at the tariffs, it may be that there comes a point where we decide that an expansion in our assortment in own brands is a great solution for our customer, and we're looking at that as well.

Our next question comes from the line of Kelly Bania with BMO Capital Markets.

I wanted to go back to the sequential improvement in grocery units. It sounds like you were pleased with that. Just want to clarify, would you expect that to continue into Q2 and it's just a pharmacy dynamic there in Q2. Just wanted to understand really what underpins that confidence regarding the stronger second half IDs? And what's the measure of that? Is that more of a grocery unit dynamic?

Yes. Kelly, first and foremost, in Susan's prepared remarks, her statements about the sequential improvement in units, that is -- and we were clear, it is grocery. So when we are referring to the sequential improvement and what we expect for the balance of the year, what is important and one of our top priorities is growing units in grocery. When you -- now as we look for the rest of the year, we said last quarter and we continue to believe that each quarter this year, we will continue to sequentially improve our 3 units. We're making the investment in the margin.

We are focused on driving those units. And as we get towards the back half of the year, when you think about the margin, remember what Susan said, the productivity will start to provide a tailwind to the investment in order to drive the units but we are committed to driving units through the balance of the year.

Susan, do you want to add to that?

No, Sharon, I think you said it well. The primary purpose of the investments that we're making, yes in price, yes in loyalty, yes in own brands is literally all about driving that unit growth and driving those improvements. So we do expect it to continue. We will be funding it again over time. As we mentioned, the investment in the tailwinds don't exactly line up, which, again, though fits the algorithm that we've shared.

But that's what gives us the confidence. Your question was what gives us confidence? That is why we are confident.

That's helpful. And is there anything that you've learned as you've had these discussions with vendors in terms of more of a national buying process that makes you think about the opportunity over time in any different way and sizing that up in terms of the impact that could have on productivity?

Yes. So just what we're learning as we go through the process is there's an incredible opportunity for us, right? And as you think we own our own manufacturing plants. So we understand that the more information that we can get and the further out that we're out on forecasting for our own plants creates incredible efficiencies for production. It's no different for our vendor partners who shared with us that their ability to forecast demand, which, by the way, we're also developing -- have developed and then there's more in development, various AI tools to help us create stronger and further out demand planning signals.

But it's just a complete unlock in terms of efficiencies for everybody. It also enables us to plan further ahead and align our media collective dollars along with our digital dollars. And of course, the cost of goods reductions that we'll see so that we can create a comprehensive program in-store, online to drive more traffic and drive more units by creating this -- again, the total package for the customers that we serve.

Our vendors, I think, we are a large company, and there are times when it's very efficient and effective for us to act locally and be very agile. But our vendors clearly recognize that there is a significant change in our thought processes that we're committed to doing this. And I'm excited about what that brings for the future.

And in the conversations, the goals that we have about driving units are completely aligned with our vendors. So we are aligned -- when you're aligned on the same business objective, it's very helpful and very constructive in those conversations.

Yes. And to your point, Sharon, we have joint business plan goals that we put in place with most of the major CPGs. So again, we're aligned on the same targets. We're leaning in together, and I really am excited about what will come in the second half of the year.

Our next question comes from the line of Michael Montani with Evercore ISI.

Just wanted to ask 1 on guidance and then 1 on the trends for the consumer. So on the guidance front, there was about a 40 or 50 bps increase in ID sales but then obviously, EPS did not change. So I just wanted to confirm, is that due to the nature of the ID sales being stronger in pharma? Or was there incremental investments either in price or labor as you do the union contract negotiations that caused that?

Yes. So I think it's a blend of some of the things that you just described. Yes, some of the growth -- our pharmacy growth continues to be outsized, right? And that's great because we love that customer. We love that relationship but there is an impact on profitability there.

Sharon, is there anything that you would add from...

I think that throughout the year, we expect this in the total comp guidance for 2025, pharmacy is going to be the biggest driver of comp for sales growth for the year. They're continuing -- you know what that business is doing, Mike, and we continue to believe that we are going to continue to take share from pharmacy.

On the grocery side, you will see that each quarter, we expect to see gradual and incremental improvement in units, and that will, through the year, bring the grocery comp as a slightly bigger percentage of the total. But on the top line, you're going to see a bit the increase that we put in the guidance for 2025, that is pharmacy.

Got it. Okay. And then just in terms of the consumer trends, as it relates to kind of better-for-you product, natural, organic and otherwise, what percent of the mix is that for you today? How is that trending? And I guess, is there any surprises that you're seeing with respect to GLP-1 absorption? And then how that's impacting consumer buying behavior.

Sure. So Mike, what we're seeing -- and we have -- we call it NOSHE, natural organic specialty health and ethnic products. And those categories are growing for us. And what we -- and it's interesting as you start to break it down, I think there's a few things in play. Certainly, trends for you -- sorry, certainly trends in better-for-you products are strong.

Also interesting, though, the influence that we see from specialty items like premium sparkling water is one of our top growth categories. It's fascinating to watch. This one -- I had to double check the numbers but cottage cheese is actually a strong growth category. Yes, some of that's from the focus on protein, lower carbs, perhaps GLP-1 users, and then just being totally frank, TikTok is driving some of that.

So we're leaning into those categories. They do lend themselves, those categories pair well with some of what we see for GLP-1 customers. But it goes well beyond just the GLP user. We're definitely seeing overall trends focusing on health and well-being. And that works perfectly for us. as 1 of our 5 priorities is driving the customer value proposition, and creating an environment, an ecosystem that brings customers into brick-and-mortar, into digital, into pharmacy and health.

Our final question this morning comes from the line of Robbie Ohmes with Bank of America.

This is Kendall Toscano on for Robbie. I just have a follow-up in terms of the percent of your customers that are cross shopping grocery and pharmacy today versus how much higher you think that number could go over time? And basically, just trying to get a sense of after 4 years of pharmacy growth in the double-digit range, which has obviously been a huge sales driver but a headwind to profitability. Are we nearing a point where pharmacy could eventually start to normalize or the growth rate could start to normalize?

Kendall, so what we're seeing is, yes, of course, the cross shopping between pharmacy and grocery is pivotal for us. We do have very strong pharmacy growth, and I mentioned a lot of that is core pharmacy business. Just a side note there as well. In that core pharmacy business, we continue to strive for profitability, stronger profitability, increasing our generics mix, improving offerings such as test and treat immunization, those kinds of things. And again, creating that linkage between store and pharmacy is critical.

From a -- the pharmacy business, here's what I see. There's been a serious -- I mean, you guys see the information out there. There's been a serious decline in the availability of doors for customers to go to take care of their pharmacy needs. We think that's critical. And I believe that we're well positioned with the steps that we've made both from an acquisition perspective, meaning acquiring scripts from outside, hiring the amazing pharmacists and techs that are out there that are looking for work. We need more and more of that support.

So we're leveraging that and becoming -- I think we're becoming -- that helps to become an essential choice for customers. I can get my groceries there. I can meet my pharmacy needs in an environment where the doors are shrinking, right? We have less and less opportunity in certain markets, less choices for customers, we're happy to be there for them. So I actually see it as a moat and a competitive advantage for us moving ahead with the investments that we've made in pharmacy and said it again, just I can't repeat also the -- enough the fact that we are striving to improve the profitability there. Again, recognizing that, that customer's total value when we engage them in both center store as well as pharmacy is tremendous for us. We love those customers, we want to serve them.

And Susan, I would only add also, we have invested significantly in the customer experience and pharmacy, integrating it into the total company at and being able to serve that customer, including we talked last quarter now being able to pick up your prescription at the same time that you're picking up your drive-up and go order. And as we continue to create the linkage and the ease of shopping between the pharmacy customer and the grocery customer, we believe that, that does provide incremental opportunity for us as we move forward through the year and into next year.

So these investments we're making on the digital side and linking them together with everything we're doing in pharmacy and health. And then mobile app for use in the stores, we think that, that is also going to make a significant difference with these cross-shopping customers.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Morris for any final comments.

Just thank you everybody for the time today. We're excited about the year to come, and thank you to our associates that make all of this happen.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.