Albertsons Companies, Inc. (ACI) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Albertsons Companies Second Quarter 2019 Conference Call, and thank you for standing by. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the conference over to Melissa Plaisance, GVP of Treasury and Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us for the Albertsons Companies' Second Quarter 2019 Earnings Conference Call. With me today from the company are Vivek Sankaran, our President and CEO; and Bob Dimond, our CFO. Today, Vivek will touch on our recent results, share some observations, discuss some of our plans to grow and improve our business and provide an update in a number of key operating areas. Bob Dimond will then provide an overview of our second quarter results, and Vivek will then make some closing comments. I'd like to remind you that management may make statements during this call that include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not limited to historical facts but contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements will be contained from time to time in our SEC filings, including on Form 10-Q, 10-K and 8-K. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. Please keep in mind that included in the financial statements and management's prepared remarks are certain non-GAAP measures, and the historical financial information includes a reconciliation of net income to adjusted EBITDA. And with that, I will hand the call over to Vivek.

Thank you, Melissa. Good morning, everyone, and thank you for joining us today. As many of you read this morning, we continue to make very good progress, and we are delivering solid results. During our second quarter, we had identical sales of 2.4%, and our adjusted EBITDA was approximately $568 million, representing 3.5% growth over the second quarter of last year, demonstrating the strength of our core business. The Q2 identical sales result was our seventh consecutive quarter of identical sales growth. This sales momentum is also driving steady EBITDA growth. I'm also pleased to report that as of the end of the second quarter of fiscal 2019, we have reduced our total leverage to 2.9x. Through the use of a combination of opportunistic asset sale proceeds and free cash flow from the business, we have reduced our debt balance by $1.8 billion year-to-date in fiscal 2019. We also refinanced and repriced our term loan complex during the quarter and issued new bonds as we capitalized on a favorable market and lowered our overall interest rate expense and extended our maturity profile. As Bob will cover further in a moment, we are very pleased with the outcome of our refinancing transactions and feel great about the financial flexibility it will afford us as we move forward. As I reported from our initial call, I continue to be encouraged about the prospects of our business and our ability to grow it as we enhance the customer experience in store and online and improve our operating performance. Over the last few years, we have brought together iconic retail bandwidths with rich heritage and a strong local following. We now have the ability to be locally great and nationally strong. With almost 2,300 stores and a robust online offering, we are important to customers in many attractive markets. We operate in 120 MSAs and ranked #1 or #2 in 68% of those MSAs. In 65% of those 120 MSAs we operate in, the projected population growth over the next 5 years in aggregate exceeds the national average by over 50%. In summary, we have great locations in attractive and growing markets and have strong market share in those markets. As I mentioned last quarter, since integration related to the Safeway merger is behind us, we are now able to focus on profitably growing our business. I'll talk about growth first. Our internal strategy sessions have been focused around 4 main themes that should enhance our ability to grow the business. I would like to touch on each of these with you today. The first growth driver is our stores, the core of our business. We continue to enhance our everyday store operations with a strong focus on the customer experience as well as improvements in productivity. Ease of shopping is central to our approach. Our goal is to provide customers with a variety of items they want in stock and easy to find with a seamless checkout experience. This may be high-touch, warm and friendly or completely frictionless through self-checkout based on their needs. We strive to provide customers with an exciting sensory experience driven by excellent quality, fresh, especially-needed produce and great solutions for meals in our delis. We are very proud of our associates and the personalized touch they deliver in our stores. As we focus on employee engagement, we enhance employee retention and allow our associates to be even better prepared to take great care of our customers. This is exemplified by our employee promise, to make every day a better day for our customers, our people, our company and our communities. In addition, we're increasing our use of technology to assist with in-stock conditions to simplify our automated processes, to guide us on competitive pricing and promotions and enhance labor scheduling. For example, we plan to roll out an upgraded pricing and promotional tools during the fourth quarter that will drive better pricing and margin optimization and allow us to invest in areas that have the highest impact for our customers. We expect this to add to our sales momentum. In addition, we're working on enhanced demand forecasting and replenishment systems to improve our operating efficiency with regard to labor and inventory management and expect to scale these across the business quickly and efficiently. The second growth driver is our loyalty program. We continue to invest in digital marketing and customer acquisition programs to build our base of engaged shoppers. Our goal is to grow the base and get a larger share of wallet by providing offers that are meaningful and personalized to our customers. Our just for U shopper registrations were up 24% in Q2 versus a year ago. In September, we relaunched our fuel program in Shaw's, Acme and Star in partnership with Exxon, enabling customers to earn gas rewards over 1,300 participating ExxonMobil stations in those markets. This expanding loyalty program continues to enrich our data for enhanced marketing and merchandising. The data is the core of our customer-centric merchandising efforts to optimize our assortments, enhance our flow and product placement and maximize the effectiveness of our pricing and promotion strategies. Ultimately, more customers are motivated to spend more with us, and this is an important driver of sales growth and market share. The third growth driver is our online home delivery and Drive-Up and Go business. A recent analysis shows that those who engage with us online spend substantially more with us than those who do not. So engaging with our loyal customers online should lead to increases in share of wallet. In the second quarter, sales grew 40%. And in many cases, we grew overall spend with existing in-store customers. We're making it easier for our customers to engage with us when, where and how they choose. And we continue to enhance our websites and mobile applications for eCommerce to ensure they're convenient and user-friendly. In addition, we are expanding our Drive-Up and Go pickup service, currently available in 500 stores, and expect to expand to approximately 600 stores by the end of the year with additional rollout in 2020. Our growth in this area will be assisted by technology with improved customer-facing websites, use of micro fulfillment centers and integration with third-party delivery services as we see where customer demand is strongest and meet their needs in a variety of ways. We plan to continue to make disciplined investments to further enhance productivity. The fourth driver of growth is our Own Brands business. We are very proud of our Own Brands portfolio and the Own Brands team continues to innovate -- be innovative, and our products provide great value to customers. The portfolio is distinctive, and it drives loyalty to our stores and online offerings as many of our products are unique and cannot be found elsewhere. Today, Own Brands consists of 10 primary brands, 4 of which exceed $1 billion in annual sales, including Lucerne, O Organics, Signature and Signature Café. We continue to innovate and introduce new items to the portfolio, launching 439 new products during Q1 and Q2 this year, with over 800 planned for the full year. For example, this year, we introduced Open Nature Cauliflower Crust Uncured Pepperoni Frozen Pizza, O Organics' Plant-Based Frozen Burgers and Signature Reserve imported cookies, which have proven to be very popular with our customers. All brands continue to contribute to identical sales, and sales penetration was at 25.3% for the second consecutive quarter in Q2. We believe our customers look for quality products at a value, and our portfolio absolutely meets that customer need. We pride ourselves on great quality products and a wide area of choices to meet all lifestyle needs. Open Nature, our free-from brand, is a great example where customers are seeking cleaner and more eco-friendly ingredients. Sales continued to grow in our Open Nature brand, up 17.6% in Q2 compared to the prior year. Sustainability is always top of mind in our brand's -- Own Brands portfolio, and we are focused on reducing plastics use. As we indicated last call, we aim to have 100% of Own Brands' packaging recyclable, reusable or industrially compostable by 2025. And in addition, the U.S. EPA recently awarded us the esteemed Safer Choice Partner of the Year award for leadership in furthering safer chemistry and increasing awareness of safer chemicals for consumer products, largely due to our efforts with our Open Nature and Own Brands. This marks the third time since the EPA began awarding this in 2015 that our company was selected as 1 of 14 international award winners. In summary, 4 instance of growth: stores, loyalty, eCommerce and our Own Brands. We continue to drive productivity and leverage our scale to increase efficiency and in turn, lower our costs. We are working closely with our suppliers to take advantage of our national scale and make it easier for them to work with us. We're taking a close look at indirect spend, and we'll use our size and scale to buy better. We also continue to focus on better ordering, product preparation and PET deterrents that reduce shrink. And that focus is yielding positive results in shrink. We continue to expand our self-checkout systems in many markets in response to customer demand. As of the end of our second quarter, we have recently installed over 1130 new self-checkout lanes and upgraded 91 existing lanes in 245 of our stores, which increases the number of total stores the company with self-checkout lanes to 1,075. We plan to install an additional 460 new self-checkout lanes and upgrade 112 lanes in 131 stores by the end of fiscal 2019, which will give us 1,162 stores where our customers can benefit from the efficiency of self-checkout. As we move forward -- as we move towards our goal of creating an exceptional front-end experience, self-checkout plays an essential role in our success. We continue to automate distribution centers where it makes sense, which should greatly improve labor productivity in the supply chain, increase storage density, enhance inventory management and shorten stocking timelines. The acceleration of these investments in fiscal 2019 is part of a concerted effort to better utilize technology, automation and AI across all elements of our business. We believe these investments will generate significant savings going forward that will allow us to fund future growth. We also believe that adding to our talent pool and developing leaders will be key to our future. We recently hired Mike Theilmann as EVP and Chief Human Resources Officer. He joined us from Heidrick & Struggles, where he served as the Global Practicing -- Practice Managing Partner of their Human Resources Officers Practice. He previously held senior positions in human resources at Diageo, PepsiCo, Yum! and JCPenney. Mike brings prudent HR leadership and a winning track record in developing strong cultures of employee engagement and developments to our company. We also recently promoted Geoff White, formerly SVP and Head of Own Brands to EVP and Chief Merchandising Officer. Geoff is a customer-centric leader who brings a unique combination of creativity and analytics to achieve growth. He has been with the company for over 30 years in a variety of positions. Now I will ask Bob to cover our second quarter results.

Thanks, Vivek, and hello, everyone. Total sales increased $153 million or 1.1% to $14.2 billion during the second quarter of fiscal 2019 compared to $14 billion during the second quarter of fiscal 2018. The increase in sales was primarily driven by our 2.4% increase in identical sales, partially offset by a reduction in sales related to store closures in fiscal 2018 and the first half of fiscal 2019 and lower fuel sales, mostly driven by lower average retail fuel prices. Our identical sales benefited from growth in Own Brands' sales and our 40% increase in online home delivery and Drive-Up and Go sales. Our gross profit margin increased to 27.8% for the second quarter of fiscal 2019 compared to 27.2% in the prior year. Our gross profit margin again benefited from industry-wide, better-than-expected fuel gross profit margins during Q2 of '19. Excluding the impact of fuel, the gross profit margin increased 30 basis points. Shrink expense was over 30 basis points better than a year ago, as we executed upon our initiatives around reducing shrink. Gross margin is also benefiting from increases in our Own Brands' penetration. These improvements continued to be partially offset by reimbursement rate pressure in our pharmacy business and higher distribution center rent expense. Selling and administrative expenses decreased to 26.8% of sales during the second quarter of fiscal 2019 compared to 27.2% of sales for the second quarter of fiscal 2018. Excluding the impact of fuel, selling and administrative expenses as a percentage of sales decreased 60 basis points during the second quarter of fiscal 2019 compared to the prior year. The decrease in selling and administrative expenses was primarily attributable to lower acquisition and integration costs as the store system conversions related to the Safeway integration were completed during fiscal 2018; and lower depreciation and amortization expense, partially offset by strategic investments in digital and technology investment initiatives, higher employee wage and benefit costs and rent expense. The net gain on property distributions and asset impairments was $435.5 million during the second quarter of fiscal 2019 compared to $135.8 million during the second quarter of fiscal 2018. The increase during the second quarter of fiscal 2019 was primarily due to the sale-leaseback transactions that we closed during the quarter that I'll cover further in a moment. Interest expense was $177.5 million during the second quarter of fiscal 2019 compared to $194.9 million during the same quarter last year. The decrease in interest expense is primarily attributable to lower average outstanding borrowings and lower average interest rates during the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018. The weighted average interest rate during the second quarter of fiscal 2019 was 6.4% during the quarter compared to 6.6% a year ago. Adjusted EBITDA was $567.6 million or 4% of sales for the second quarter of fiscal 2019 compared to $548.6 million or 3.9% of sales in Q2 of last year. The 3.5% growth in adjusted EBITDA primarily reflects the company's 2.4% increase in identical sales and higher gross profit margin, due in part to higher fuel margins and continued improvements in shrink expense, partially offset by our strategic investments in digital and technology initiatives, higher employee wage and benefit costs and incremental rent expense from sale-leaseback transactions. We also remain committed to our disciplined approach to investing capital into our business. During the first 2 quarters, we spent approximately $716 million and expect to spend approximately $1.45 billion during fiscal 2019. As we've said previously, we have greatly increased our investments in technology during fiscal 2019, as we seek to optimize our systems and build for the future. At the same time, we still believe deeply in our brick-and-mortar business and continue to invest significantly in our stores. We expect to complete between 220 and 240 remodels during the year in fiscal 2019 and open 14 new stores. During the first 2 quarters, we opened 7 new stores and remodeled 99 stores. Net cash provided by operating activities was $1.084 billion for the fiscal 2019 year-to-date period compared to $1.191 billion in the prior year period. The decrease in cash flow from operations was primarily driven by changes in working capital related to accounts payable and inventory, offset by our improvements in operating income, including the reduction in acquisition and integration costs. The difference in year-over-year working capital in the first 2 quarters of fiscal 2019 was largely due to the store system conversions last year. As we announced on our last call, we closed on the sale-leaseback transactions during the quarter relating to 53 store properties and 1 distribution center for an aggregate purchase price of $931.3 million. The aggregate initial annual rent payments relating to the leases we signed on these properties will be approximately $53 million. We successfully used the proceeds relating to this opportunistic transaction to fund in part the term loan repayment and related repricing that I will now cover. During the quarter, we repaid approximately $1.571 billion of aggregate principal amount outstanding under our term loan facilities and refinanced the remaining term loan tranches with longer-dated maturities and improved pricing. The new tranches consist of $1.5 billion of new Term B7 loans and $1.6 billion of new Term B8 loans. The term loan repayment was funded using a combination of cash on hand and the issuance of a new $750 million bond. We also repurchased approximately $253 million of New Albertsons L.P. notes at par during the quarter. In total, we reduced the amount of outstanding debt by over $1.8 billion to date during fiscal 2019. And as of the end of the second quarter of fiscal 2019, we've achieved our previously stated leverage target as we are now at 2.9x net debt to adjusted EBITDA as of the end of the second quarter and at approximately 3x after adjusting for the incremental sale-leaseback rent not reflected in our LTM adjusted EBITDA. In addition, we extended our debt maturity profile, such that we have no material mandatory debt repayments for the next 4 years. In total, the debt reductions we've made to date during fiscal 2019 will reduce our interest expense by an estimated $110 million annually. We will continue to use free cash flow over time to invest in the business and further delever the balance sheet. We have reduced our leverage to a level that significantly enhances our financial flexibility. And now Vivek will provide some closing remarks.

Thank you, Bob. We are pleased to see the momentum during the first 2 quarters of fiscal 2019 as our efforts, both in-store and online, are resonating with our customers. We are working to enhance the customer experience, building on our strength in fresh and local, extracting more value from our core stores, loyalty programs, eCommerce and Own Brands to win in the marketplace, to do so efficiently and effectively by enhancing productivity, strengthening supplier relationships, using technology to find a better way to do everything, adding to our talent pool and modernizing assets and infrastructure. And finally, we made great progress on our leverage profile and plan to continue to invest in the business and pay down incremental debt as we generate significant free cash flow, further reducing interest expense and increasing our financial flexibility. I will now turn the call back to the operator for questions.

[Operator Instructions] Our first question comes from the line of Jenna Giannelli with Goldman Sachs.

I wanted to start off just asking around the top line and the comp performance. I know you called out direct-to-consumer and Own Brands growth as driving some of the acceleration. But I just -- given the strength that you saw, the improvement versus last quarter, is there anything else that we should think about? Do you feel like you're gaining market share? Maybe inflationary environment getting a little bit better? Anything else that we can think about that's really helping to drive that comp acceleration?

Vivek here. Here is how I think about it. I think it's hard to isolate any one thing that drives our growth. And I go back to the 4 drivers of growth that I mentioned. Number one, we continue to focus on improving the condition and operations of our stores. It's something we do very well, and we're putting more technology into it. We're getting better at being in stock, assorting merchandising even more sharply locally. And so that's the foundation of our growth. On top of that, the Own Brands' program provides some innovation and variety that you can't get elsewhere. And we find that when you -- people who are engaged in our Own Brands' program spend more with us. Add to that, the loyalty program, and we find people coming back to our stores. That gives us an additional increment. And finally, we find even more when we add eCommerce to that same customer. And so that's why I come back to those 4 pillars of growth that are reinforcing and create a much greater share of wallet and create more stickiness with our customer.

Great. And then just a follow-up on the gross margin line. As we think about the gross margin going forward, it sounds like we still might have quite a bit of tailwinds in the back half of the year. You called out a new pricing promotional tool in the fourth quarter, and then obviously, shrink improvement has been a tailwind. Can you talk to us a little bit about how much opportunity or incremental opportunity we could see on both of those fronts, both from shrink reduction and also the new tool you mentioned in the fourth quarter?

Sure. As far as continued opportunities in gross margin, you're right. We have had quite a trend here of improving shrink. We don't see that slowing down at all. So we should continue to see some improvements there. We've also been deploying a number of cost-of-goods reduction initiatives that will benefit the gross margin line. A few examples might be of things coming would be some opportunities that we see in reduced packaging costs, for example. And there's a whole other list of things that we're working on as well that improve that and possibly reduce SG&A and cost reduction.

But there's always puts and takes. We always -- we're always watching also where we should keep investing back into the business so that we remain competitive. And so we are working on this by getting the balance right so that we can sustain growth and get it all the way down to the EBITDA line.

And then just finally, given the solid numbers that we've seen the past few quarters, stability, clear improvement, I guess, it's 2 parts. But do you have any plans to reintroduce full year guidance? And how are you thinking about potential monetization on the back of the earnings strength that you're seeing?

Yes. First of all, we are not providing any guidance at this point. We continue to be finishing or in the final stages of our comprehensive review of the business, and we plan on sharing our strategic plan in more detail as soon as that's finalized. So I'm not planning on providing anything further than that today.

Our next question comes from the line of William Reuter with Bank of America Merrill Lynch.

The first is I think you took down your expectation for the number of remodeled stores this year. I guess does this speak to anything about what you're seeing in the performance of those stores? Or is it just timing of when they're going to be completed?

Yes. It's strictly just timing, Bill, based upon where we're at. At this point, we're not taking down any of that run rate. Even still, at 220 to 240, that will keep us right on our target of remodeling about 10% of the store base each year.

All right. Good to hear. And then when we take out some of the onetime items out of SG&A, it looks to us like it was up about 2% year-over-year. Is this the context of inflation that you're seeing in light of some new union contracts and other wage pressures that are out there?

There are some increases each year that we have, and certainly increases in labor is one. But each year, we also try to offset that with other cost-reduction activities.

Okay. And then lastly for me, there was an article in the journal today about ALDI and Lidl and how they're continuing to expand their number of stores. I guess when you see their stores opening in your markets, do you see any impact? Or is there pricing and product strategy different enough that they don't really impact you?

We haven't seen any material impact when those stores open around us. We are -- we have fresh offering. We are a house of brands. We have full basket and a company's basket in our stores. I think that continues to remain an advantage for us with the customer base we serve.

Our next question comes from the line of Karru Martinson with Jefferies.

As you guys move to greater self-checkout, how should we think about that affecting your labor expenses in SG&A?

So Karru, so the way to think about that, it does -- there is a labor productivity component to it, but we first focus on the experience for the customers. And at the front end, the way I think about it is we want customers to have 1 or 2 experiences. One is a smooth self-checkout, where they don't remember what happened. Or a warm and friendly customer service rep, where they've had a great engagement as they finish their shopping journey. And we're trying to balance both those on a consistent basis. And then we always think about investing this labor in different parts of the store, enhancing our fresh assortment, enhancing that service at different parts of the store where we continue to differentiate.

Okay. And while you guys are not providing guidance, I thought on the last call, you had said that you'd be year-end leverage around 3x, and we're kind of at that point today. I mean do we still feel that 3x is the right level for a year-end target?

Karru, I appreciate the question. Yes, we are at 3 -- at roughly 3x right now. Remember that in our third quarter, our -- we have our normal seasonal build of inventory. So you should expect third quarter will rise just a little bit as we're carrying that extra inventory for the holidays. And then as we sell through that by year-end, we should be back down to roughly the 3x.

Okay. And then you guys just repaid a bunch of debt. You issued new longer debt. You brought down leverage, and yet Moody's still has you as a BBB versus the BB- from S&P. I mean what needs to change here to be reflected in the rating agencies?

We had -- earlier this year, as we were having our year -- annual review with them, we did actually receive some modest upgrades in their outlook. We went from negative to stable, and I think they'll be looking carefully at our results this year. And given our debt pay down, well, we're hopeful that we'll see continued improvement here in the near future.

Our next question comes from the line of Bryan Hunt with Wells Fargo.

Three questions for me. So when you look on your progress for your remodeling program in F Q2, can you discuss the sales lift you're seeing from the recent iteration of remodels? And maybe how the remodels have evolved over the last couple of quarters?

Yes, Bryan, the way we think of remodels is we go through a process, and there are very different levels of remodels. Sometimes, it's just -- think of it more as a good maintenance stop shop, where we're changing refrigeration units and such. In another case, we are going through a whole rethinking of the store, and so we go through this whole range. In every case, we see a sales lift, there's no question about it. We see a healthy sales lift in the remodels that we do. And we just go through this process of finding each type and applying it based on what we think the potential of the store is and the condition of the store. Anything else you got there, Bob?

No, I think that's right. They do range, as Vivek indicated. Sometimes, we'll be looking at a potential remodel where maybe we're doing it to get ahead of a new store or another remodel that's coming in place. So the results do vary, but we are seeing increases generally.

Can you discuss what the remodels year-to-date maybe have contributed to same-store sales growth? Or is that, at this point, not meaningful?

I don't have that number for you, Bryan.

Okay. My second question, with eCommerce for you all, whether it's Drive-Up and Go or home delivery, varying reports around the industry relative to margin contribution compared to an in-store shop. I was wondering if you could discuss whether these transactions are dilutive or marginally accretive to EBITDA margins at this point in time?

Yes, Bryan, at this point, they are dilutive. But the nice thing about what we are seeing is they're also incremental, right? So what we find is where the shopper who's shopping with us in-store engages online, their basket -- their spend with us goes up quite significantly. And so we're encouraged by that. And the reason it's dilutive is because for most of us in this industry today, it's not optimized from an operating standpoint. So for example, a big part of cost is in how you pick your product and fill the basket. And one of the things we're trying is something called a micro fulfillment center, right? So we're going to put that on the West Coast in 2 stores. One of them is operational already, and we keep finding ways to reduce the cost of the pick so that we can start getting to EBITDA margins that are -- where we're indifferent. And I think that will happen with time as we try different technologies and improve efficiencies.

Very good, Vivek. And my last question is, you all have closed some stores, and you'll continue to do that. Again, when you look at same-store sales, was there a -- as well as EBITDA, is there a way you could discuss the accretion to same-store sales from closed stores as well as maybe the EBITDA accretion of some of those stores that were EBITDA negative?

Yes. Actually, Bryan, year-to-date, I think the closures have been fairly minimal. It's 14 stores of our total [ 800 ] store base. Roughly the same what we've opened. So I don't think it's material.

Yes.

And I think in the last conference call, you said you're going to close maybe 50 stores this year. Is that still a good number?

No. I think what we said is that we had closed 55 last year. And this year, it's 14, we -- is what we've done in the first half. We continue to meet on a quarterly basis and go through a disciplined process where we evaluate the opportunities, we -- to improve any of the stores that might be underperforming at this point. Once we determined that something or a given store may not have an opportunity to improve, then we'll close it, but we're not anticipating huge incremental numbers.

Our next question comes from the line of Carla Casella with JPMorgan.

I'm wondering if the hurricane -- hurricanes affected any of your results this quarter?

Not really, not in the markets where we are because we are -- Carla, we are -- the hurricanes, without -- no, it didn't really. We didn't see much impact of that. [indiscernible] was largely affected.

Okay. I thought so but I wanted to just double check. And then any comments on the promotional environment? Do you see any differences in the promotional environment by -- market by market? Or any increase in competition?

We haven't seen any substantial change in the way we are competing in different markets relative to the last time we connected on the quarter. I think people are continuing to be vigilant on pricing. There's a big push -- everybody's pushing into omni-channel. It's the same things. And so no major difference.

Okay. And I may have missed it, but did you give what the outstanding balance remaining is on the -- is there any LP or the Safeway notes? I know you've done a bunch of repurchases in the quarter.

Yes. I mean year-to-date, we've done roughly $1 billion of repurchases in bonds. I don't have that exact number, Carla. We can -- you can look on Bloomberg. It's got the updated numbers, but we'll be glad to follow up with you with a separate call.

No, that's okay. And it'll be -- if it's on Bloomberg update, that's great. They had been lagging on their updates, and I'm sure they'll be in the Q2.

Right.

And then just one last one. Any outlook on fuel margins?

You have that?

Yes. Let me take that one. We did, as we indicated, benefit by more favorable than normal, as I'm sure everyone else in the industry is reporting here in the first half of the year. We don't expect that to continue in the back half, in fact, it'll be a little bit of a headwind because you'll remember, in the third and fourth quarter last year, we had inordinately high margins as well. So it'd be hard to have -- to see that replicate, in fact, it will probably be back or upside down just a little bit.

Our next question comes from the line of Hale Holden with Barclays.

Just as a clarification to Jenna's question. You guys mentioned that you were in the process of a strategic review. I was wondering if that was related to like your tenure here? Or if it was normal course? Or if there was something we should expect changes that would be an outcome from this?

It's both. Hale, it's both my tenure and the novel course. And you've got some broad outlines of how we're thinking about the business in the commentary I gave you today, and we're going to continue to refine all aspects of that and be ready pretty soon.

Great. As a follow-up to that, I mean, you guys mentioned a lot of sort of data capture. I was wondering if you've given any thoughts to kind of alternative revenue streams, the way that Kroger has sort of phrased it, either from promotions or advertising that would be margin accretive?

So Hale, I don't like to use that language, but here's how we think about it, right? The first thing you have to remember is the 4 growth engines I talked about, stores, Own Brands, loyalty and eCommerce. And it's that combination that gets customers to stick with us, spend more with us, be loyal to us and churn less. And we understand more and more about their shopping patterns as we do that. That builds the data. That builds the data that's rich and actionable. And eventually -- first of all, we use it and then we make it available to all our CPG partners who are capable of using it and want to use it. And so that's how we tend to do that. They benefit from it, and therefore, we benefit from that. And that's how we see it. So I go back to -- we got to get the score right, and then we can build on that and monetize things in various ways. But that's secondary, not a primary objective of ours.

Makes sense. And then I just had one last question. There have been some press reports that Amazon is considering opening grocery stores in Chicago and L.A., which would seem to be -- put them kind of in your bigger DMAs. I was wondering if you guys had done a game theory thinking on what that would mean for you if that actually occurred. I know it's hard to guess.

It's hard. Here's how I think about it, Hale, it's hard to guess because we don't know what the stores are going to be and such. But we take our comfort in a couple of things. First that they do believe that a footprint, a physical footprint is required, and we have great physical footprint in the markets that we operate in. The second thing is there competitor was extremely customer-centric and makes everybody in the market better. So I just -- I can't comment on anything specific because we don't have those specifics.

Our next question comes from the line of Ryan Bloom with Hartford. Ryan Bloom;Hartford Investment Management;Senior Vice President: So I wanted to start out and maybe ask Jenna's question a little bit differently. So in terms of sustainability or maybe length of time frame in which you could see these type of improvements from more targeted advertising promos, how far out do you think you can continue to refine this? Or is it just a 1-year type of event?

Ryan, I -- we are -- there are no magic bullets in what we are doing is how I'd phrase the [ crime ]. We are doing all the things that are the fundamental drivers of growth better. And in that vein, we see our ability to keep improving that. I mean there's no limits to how much we can improve that. As an example, if I talk about pricing promotions. We've got pricing promotion capability today. And one of the things we do well is we have multiple markets where we operate locally, and so there's innovation of pricing promotions coming out of every market. They might think about a different way to put that flyer out every week. A different way to bring traffic in and drive a basket. And we take these practices and keep driving it around. Then we're going to introduce more advanced tools and capabilities. To put these more advanced tools and capabilities, you have an AI engine on top of that, and that keeps improving. So there's no magic bullet. It's just a sense of priorities with a few things we're going to do and continuous improvement on it. Ryan Bloom;Hartford Investment Management;Senior Vice President: Okay. That's helpful. And then if I could also ask you, like I'd love to understand your thought process in terms of using micro fulfillment centers, preferring those over larger scale warehouses. Or do you think ultimately you wind up investing in both? What would be your -- the advantage or the thought process behind the bend towards micro fulfillment right now?

Ryan, who knows how all this plays out? But here's our belief. We have -- we are in great locations. And why are we in great locations? Our stores happen to be very close to where people live. I mean just -- we've been around for a long time. We've picked off the best real estate, and we happen to be very close to where people live. And so our philosophy is that why not give the ability to pick up product or deliver product from those places, which are the best DCs close to population. And these micro fulfillment centers provide a great option to provide -- to get real productivity, a real productivity in how we take these orders, whether it's a Drive-Up and Go order or delivery order. And so we're going down that path, and we're going to learn from it. We're going to have our first 2 operational in about a month, and we'll learn from that. Ryan Bloom;Hartford Investment Management;Senior Vice President: And then just 2 last ones. One, have you identified the total amount of your investment in DCs over the next year, 2 years? Or maybe if you want to frame it over a larger time frame, total investment there and any savings associated with it? And then the last question, I'll just say is, are there any product categories that you've curtailed and replaced with Own Brands as a result of the Safeway integration process?

Let me take the Own Brands question first. Look, we don't believe in -- our Own Brands portfolio is in multiple categories, and the way we think about it is we offer an opening price point. And in many, many cases, we're offering something innovative and different that the CPGs have not sought, okay? I gave you a great example of our Own Brands Cauliflower Pizza, fantastic product and differentiated from what we have from the CPGs. And so we play that. And we're not pointing to any one category or another, we just go and fill the gaps that are not -- and enhance the categories, frankly, right? With the DCs, it's part of our strategic plan. We will have that as we go through. We think we have had a lot -- the first automation we have done has showed a lot of promise so we've started the second one, it's showing a lot of promise. And we've continued to drive that through, and we'll understand that more as we go forward.

Our next question comes from the line of Kenneth Williamson with JPMorgan.

A lot of my questions have been answered, but a couple of housekeeping, if I could. Can you refresh us on what run rate rent expense should be on an annual basis and where it was in the quarter, kind of pro forma for the sale -- the property sales you've done?

I don't have the full run rate of rent expense. Maybe this will help you. In the quarter, second quarter, we had $22 million of incremental rent expense that pertains to sale leaseback. And you should expect that, that kind of rough increase will continue in quarters going forward.

Okay. That's helpful. And then just as you kind of look at the landscape and your scale and the overall store footprint, are there any M&A opportunities out there for you that you think are attractive? Or is that not a part of the strategy at this point?

Kenneth, we are always looking for opportunities. It's opportunistic tuck-ins. You know we're good at it, and we'll keep -- but it's not a fundamental pillar of our strategy.

Our last question this morning comes from the line of Geoff McKinney with Citi.

Just one final one. In Northern California, was there any impact from the power outages that occurred in the last couple of weeks?

Geoff, we had a number -- looks like probably an echo. Hopefully, you can hear me. We had a number of stores that we had to close, 27 stores that were affected by it. But here's the thing, we are still doing the math on all of it. Because people hear fire engines coming, there was a bunch of -- the people shopped heavily, early before the stores closed. And so we're going to do all the math, and we'll have a better sense of what the total impact is in the next few weeks.

And would you expect that any kind of lost sales would ultimately end up on the other side of the restoration of power?

Yes. I think the way this typically works here, enough people -- people pick up product before the closure and then they come back after the closure. I tell you one of the things I'm most proud about is how the team handled what was right for the community. With some of the communities, we were the only store open that could -- that people could come and pick up water and food and whatever they needed. And so I'm really proud of what the team did there, but there's puts and takes. This is not something we go through often, so we're going to have to learn from what happened here right now and we'll do the math. But overall, it's hard for me to tell which way this all shakes out for those stores.

That concludes our question-and-answer session. I'll turn the floor back to Ms. Plaisance for any final questions -- comments.

Thanks for participating today. If you have any follow-up questions, Cody Perdue and I will be available in balance of the day to follow up with you. Thanks.

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