Albertsons Companies, Inc. (ACI) Q1 2026 Earnings Report, Transcript and Summary

Welcome to Albertsons Company's First Quarter Fiscal 2026 Earnings Conference Call. [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 first quarter results and perspective on the current operating environment, including the actions we are taking to improve execution, strengthen our customer value proposition and position the business for stronger long-term performance. Sharon will then cover our financial results and updated outlook before we open the call for Q&A. 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. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in this morning's earnings release. And with that, I will turn the call over to Susan.

Good morning, everyone, and thank you for joining us. Let me begin by discussing this morning's announcement on Sharon's retirement. Of course, I first want to thank Sharon for the lasting impact she's had on Albertsons and her exceptional partnership. Since joining the company in 2021, she played a critical role in shaping our financial, operational and strategic priorities, bringing a unique combination of financial discipline, operational expertise and transformation leadership. Most importantly, Sharon has helped position Albertsons for its next chapter of growth, leaving the company with a strong foundation, a clear strategic direction and the capabilities needed to drive long-term value creation. We are conducting a comprehensive search process, evaluating both internal and external candidates to identify a transformational leader who combines exceptional financial acumen with a strategic vision to drive sustainable growth and long-term value. I'll turn now to our results for the quarter. Identical sales declined 0.8%. Adjusted EBITDA was $1.013 billion, and adjusted earnings per share was $0.42 per share. While pharmacy and digital delivered strong growth, their performance was not enough to offset broader pressures in our core business. These results were below our expectations, and we're taking decisive action to improve future performance. Our response is to accelerate execution and surgically invest in our customer value proposition even as we manage through a more pressured unit environment. While it's weighing on near-term earnings, it is targeted to improve traffic, units, loyalty and the overall trajectory of the business over time. As we invest now to strengthen our customer value proposition, we're also accelerating actions to fund those investments over time. Today, we're introducing the ACI Edge, a simpler, faster, more connected operating model that helps Albertsons turn scale into greater customer impact. The ACI Edge starts with 2 decisive actions, moving from 11 divisions to 4 regions: California, West, South and East and centralizing center store merchandising. These actions are not simply about changing how we're organized, they are about creating a stronger operating platform that allows us to move faster, make better decisions, scale successful ideas more consistently and deploy resources against the markets, banners and capabilities with the greatest opportunity. At this center, we'll leverage enterprise scale more effectively across center store merchandising, servicing supply chain, technology and talent. In the regions, we'll share up an accountability and strengthen execution in the areas that matter most to our customers: fresh, service, store standards, local merchandising and community connection. That balance is the core of the ACI Edge. The economics and capabilities of a national retailer, combined with the relevance and customer connection of a local grocer. The ACI Edge also extends beyond the operating model. With more than 2,200 stores and tens of millions of loyalty households, our data and AI capabilities increasingly allow us to personalize the individual customer experience. By combining that insight with a simpler organization, we can deliver a more relevant customer experience while improving the return on every investment that we make. This new operating model also creates clear accountability. Each region will be led by a proven Albertsons executive with end-to-end responsibility for performance while 1 enterprise merchandising organization will manage category strategy and supplier partnerships across the company. That gives us clearer ownership in the field, greater purchasing scale at the center and a faster path from decision to execution. These changes are already underway. Leadership appointments are complete, center store centralization has begun and work streams across merchandising, sourcing, supply chain and overhead are progressing. As the ACI Edge matures, we expect it to generate approximately $200 million of incremental annual run rate benefits with savings building through fiscal 2026 and the majority realized in fiscal 2027. We also expect approximately $50 million of transition costs over fiscal 2026 and '27. Importantly, these savings are not the end goal. There are additional fuel for reinvestment today into sharper value, stronger fresh execution, greater personalization, digital convenience and ultimately, unit growth. The ACI Edge directly supports our 3 strategic priorities: leveraging our winning footprint, delivering a customer-centric experience and creating balanced value. It gives us the speed, consistency and accountability to execute those priorities more effectively across the enterprise. Ultimately, we will judge success by what our customers experience every day, better value, stronger fresh execution, higher in-stock levels, more personalized experiences and stronger store standards across every market that we serve. Technology and AI are foundational to the ACI Edge. Our objective is to create a simpler, more connected enterprise where information flows seamlessly, decisions are made faster, and our teams spend less time navigating complexity and more time serving our customers. We're creating a future-fit organization that provides easier access to insights, automate through teamwork and enables better decisions at every level of our business. Our 4 enterprise AI priorities are focused on the areas where we see the greatest opportunity to drive growth, improve execution and expand margins. Digital customer experience, merchandising intelligence, labor optimization and supply chain optimization. These are not stand-alone technology initiatives. They are capabilities designed to strengthen and simplify how we operate every day and fully support our regional structure. Ultimately, this creates [indiscernible] on for our customers. Technology and AI are not separate initiatives. They are the foundation of a simpler organization, a more customer-centric operating model and a stronger, more competitive Albertsons for the long term. Again, this quarter, we continued to make progress across each area. In digital customer experience, we're building AI-powered experiences that improve engagement, increased basket size and create a more seamless shopping journey. Customers using conversational search and planning tools continue to spend more and engage more deeply with our platform while retention trends are improving as adoption grows. We're also continuing to expand partnerships with leading AI providers, including Google, OpenAI and Microsoft, allowing us to reach more customers wherever they choose to engage. In merchandising intelligence, we're implying AI to improve category planning, promotions, vendor collaboration and margin management. Our early pilots continue to produce encouraging results, and we're expanding those capabilities into broader planning processes with selected vendor partners. These tools will help merchants make faster, more informed decisions and negotiate lower costs while reducing friction across the organization. All of this is a key foundation for our center store centralization. In labor optimization, our AI-powered workforce management platform remains on track for enterprise-wide rollout in early 2027. The solution expands automated scheduling, improves labor adherence, enhances associate self-service and supports a better frontline experience, helping us more effectively align labor with customer demand, improved productivity and create a more consistent experience for both associates and our customers. In supply chain optimization, we continue to expand our machine learning capabilities to improve forecasting, inventory productivity and replenishment decisions. Improved forecast accuracy is lowering manual intervention and strengthening in-stock performance. At the same time, we're building a unified AI-powered ordering platform that brings demand planning, supply planning and replenishment together into a single decision engine. We're also scaling computers [indiscernible]. Beyond these investments, we're embedding AI across the company to improve decision-making to automate workflows and enhance productivity at scale. Our technology teams are focused on AI first development, accelerating how quickly we can build and deploy new capabilities across the business. Combined with our simplified operating model, these efforts position us to drive better execution, expand margins and deliver more consistent long-term financial performance. Digital and loyalty remain key drivers of both growth and customer engagement. Digital sales grew 13% this quarter with penetration increasing nearly to 10.5%. Our loyalty ecosystem continues to scale personalization, and we're seeing clear behavioral benefits. Engaged members shop more frequently and with higher average basket than nonmembers, contributing meaningfully to both sales growth and customer lifetime value. Execution remains strong across our fulfillment network. Again, this quarter, Flash Delivery continues to be the fastest-growing segment of our digital offering, highlighting once again the strength of our proximity advantage complemented by our expansive fresh offering. Including both our first-party and third-party businesses, e-commerce was profitable in the first quarter. This milestone demonstrates that we are successfully growing digital sales while improving the underlying economics of the platform and creating a business that can generate profitable growth over time. We're continuing to deepen engagement through more personalized experiences, ongoing improvements in the online journey and expanded fulfillment capabilities. We expect digital and loyalty to remain key drivers of frequency, retention and lifetime value supporting more consistent top line growth. Pharmacy remains one of our most important growth platforms. While reported sales results continue to be pressured by the Inflation Reduction Act and branded generic mix, we continue to see outsized script, immunization and clinical service growth. Beyond sales growth, pharmacy drives deeper customer engagement across our ecosystem by connecting health care, digital and grocery in ways that are difficult to replicate and create a competitive advantage in the markets we serve. Our pharmacy business is profitable on a stand-alone basis and continues to improve. Our media business delivered strong growth in Q1 and with on-site revenue up significantly year-over-year, driven by increased monetization of both new and existing display placements. Building on that foundation, we introduced an industry-first branded entertainment offering, shopper inform content that was created in our stores, which opens a new higher value inventory category for our brand partners. In parallel, we expanded our commerce media capabilities by integrating sponsored product discovery into AI-powered conversational search. This positions us to monetize customer engagement at the point of highest intent, creating a more effective and valuable platform for our partners. Together, these innovations are increasing the quality of our media inventory and enhancing our ability to drive higher returns on ad spend supporting continued growth of this high-margin business. Productivity remains foundational to our strategy because it gives us the fuel and flexibility to improve the customer experience while strengthening the economics of the business. The move to 4 regions and the centralization of center store merchandising further support that effort by allowing us to leverage scale more effectively across sourcing, merchandising supply chain and technology. In turn, these changes improve sourcing effectiveness, inventory productivity and decision-making across the enterprise. We are delivering against our productivity commitments and are on track to realize more than 1/3 of our 3-year $2 billion productivity target in fiscal 2026. Our confidence in that goal is growing as the simplification of our operating model is uncovering additional opportunities across the business. At the same time, the operating environment continues to evolve. Inflationary pressures and the investments required to strengthen our competitive position, all increase the need for productivity. As a result, our focus is not simply on achieving the original $2 billion target. It's on continuously expanding the opportunity set creating additional fuel to reinvest over time. Turning to our customer value proposition. We approach value across 3 connected dimensions. First, price and quality anchored by our own brand portfolio, where customers can access a compelling range of opening price point, core and premium products that deliver both affordability and trust. Second, personalization and convenience, enabled by our digital and loyalty ecosystem, allowing us to tailor offers, promotions and experiences at the individual level while providing customers flexible ways to shop across stores and digital channels. And third, the customer experience, anchored in our fresh and food forward offerings for quality, service and differentiation matter most. In the current environment, we believe the appropriate response is to make life simpler for our customers. We're accelerating our investments because improving the customer value proposition is the most direct path to strengthening customer engagement, loyalty and long-term growth. While those investments create some near-term pressure on earnings, we believe they will improve the overall growth trajectory of the business. Today, customers expect all of these elements together with our ability to deliver across each dimension while funding targeted investments through productivity allows us to remain competitive on value while protecting longer-term returns. Own Brands is a key example of how this model comes to life. Our portfolio expands a broad and growing set of categories across the store, can deliver structurally higher margins while creating value for the customer and drive stronger loyalty and repeat engagement. Our largest brands, including Signature Select, Lucerne and O Organics continue to scale with high repeat rates and strong customer sentiment. We're elevating product quality, expanding penetration in value-focused categories, accelerating innovation in premium and better-for-you segments and strengthening both in-store visibility and digital integration to drive trial and repeat as we pursue ultimate sales penetration of 30%. Over time, this balanced approach to value positions us to deepen customer engagement, strengthen loyalty and drive share gains. Stepping back, the purpose of the ACI Edge is straightforward, to improve the trajectory of the business. We're building a simpler, faster and more customer-centric Albertsons. That means leveraging the scale where scale creates value, empowering our regions where local execution matters most and using technology and data to connect the 2 more effectively. Productivity is an important part of this work, but it's not the end goal. The end goal is stronger execution, better customer outcomes and more consistent financial performance. As we accelerate productivity, we'll continue to reinvest in the areas that matter most to our customers, value personalization, convenience, fresh execution and store experience. Combined with our investments in digital, loyalty, media and AI, we believe these actions strengthen our competitive position and support sustainable growth and stronger earnings over time. The actions are underway, the leadership structure is in place, and we are moving with urgency to turn these changes into better results. And with that, I'll turn the call over to Sharon to walk through our financial results and fiscal 2026 outlook in more detail.

Thank you, Susan. Before I turn to the financials, I want to take this opportunity to say that it has been a privilege to serve Albertsons and work alongside its talented teams across the organization. Together, we have strengthened the company, navigated significant change and built an even stronger foundation for the future. I will be retiring with tremendous confidence in Albertsons' future and deep appreciation for our associates, leadership team and everyone who made this journey so meaningful. I want to sincerely thank Susan, who has been an extraordinary leader and an inspiring business partner, my peers, our corporate and frontline associates and in particular, my direct reports for their exceptional contributions to the Albertsons story. I would also like to thank our Board and shareholders for their support. It has been an honor to be part of the Albertsons' family. Now turning to the quarter, I first want to acknowledge that our performance fell short of our expectations. We have moved quickly to address those issues and are accelerating the execution, productivity and the ACI Edge actions Susan outlined to improve performance as we move forward. In the first quarter, identical sales decreased 0.8%, reflecting both ongoing declines in industry units and the macro pressures we have discussed. As Susan shared, the decline was most pronounced in our lower income customer segment, where we continued to see softness in both units and basket. In addition, reported results were pressured by approximately 100 basis points from the impact of the Inflation Reduction Act and 50 basis points from deflation. Excluding these headwinds, identical sales increased approximately 0.7%, driven by continued strength in pharmacy scripts and digital growth. We also saw an ID sales headwind from the ongoing brand to generic mix shift in the pharmacy. Gross margin in Q1 was 26.6%, a decline of 23 basis points year-over-year, excluding fuel and LIFO. The decrease in gross margin rate continues to be driven by the mix impact of outsized growth in digital sales, while productivity benefits mostly offset surgical investments in customer value. The gross margin rate also reflected the favorable rate impact associated with the lower sales due to the pharmacy IRA. The selling and administrative expense rate, excluding the impact of fuel, increased 42 basis points year-over-year. The increase in the SG&A rate was primarily attributable to increases in rent and occupancy costs, merger-related litigation, business transformation costs and depreciation, partially offset by a decrease in employee costs. The SG&A rate also reflected the unfavorable rate impact associated with lower sales due to the pharmacy IRA. In [ dollars ], our adjusted SG&A was approximately flat, reflecting the benefits of our productivity initiatives. Q1 interest expense increased $25 million to $167 million. compared to $142 million last year due to higher borrowings and slightly higher average interest rates. Adjusted EBITDA in Q1 was $1.013 billion and adjusted EPS was $0.42 per diluted share. Turning to capital allocation. Our overall priorities remain unchanged. We are continuing to invest in the business to support long-term growth while maintaining a strong balance sheet and returning excess capital to shareholders in a disciplined manner. Consistent with these priorities, in Q1, we invested $522 million in capital expenditures related to the modernization of our store fleet, including 4 new stores as well as continued investment in our technology and AI capabilities. We then returned more than $300 million to shareholders, including approximately $225 million of share repurchases under our existing $2 billion authorization and $84 million in dividends. Ended the quarter with a net debt to adjusted EBITDA ratio of 2.3x, a level that continues to provide ample financial flexibility. I'll now walk through our updated 2026 outlook. As we look to the balance of the year, we are planning prudently around a softer unit environment while continuing to invest in actions that strengthen our competitiveness and customer value proposition. Our more cautious view reflects ongoing pressure on lower-income consumers, softness in grocery industry unit trends and the potential for additional affordability pressure from supplier cost increases. Accordingly, our updated outlook reflects both a more challenging near-term demand environment and increased investments in customer value. While these actions will pressure near-term earnings, we believe they are strategically necessary to strengthen customer engagement, accelerate unit growth and improve the long-term trajectory of the business. With these actions, our confidence in the long-term earnings power of the business remain unchanged. Pharmacy trends remain healthy. Digital continues to deliver outsized growth, and we are moving with urgency to improve execution across our grocery operations. As such, we are updating our fiscal '26 outlook as follows: identical sales are now expected to be in the range of negative 0.5% to negative 1.5% and 0 to 1%, excluding the 150 basis point expected full year headwind from the pharmacy IRA. This assumes a gradual improvement in grocery IDs as our investments in the customer value proposition accelerate, offset by lower pharmacy IDs as we face IRA headwinds. Adjusted EBITDA is now expected to be in the range of $3.55 billion to $3.625 billion as we accelerate investments in our customer value proposition. Adjusted EPS is now expected to be in the range of $1.75 to $1.85 per share, including approximately $600 million of share repurchases during fiscal '26, consistent with our capital allocation priorities. The effective income tax rate is expected to be in the range of 24% to 25%. And capital expenditures are now expected to be in the range of $1.9 billion to $2 billion. I'll now turn the call back to Susan for closing remarks.

Thank you, Sharon. As we look ahead, our priorities are clear, our actions are underway and our accountability is increasing. We've moved decisively to address the areas that need improvement. Through the ACI Edge, we're simplifying our operating model moving from 11 divisions to 4 regions and centralizing center store merchandising actions designed to make us faster, more focused and more effective in serving customers and creating shareholder value. We're aligning our scale, technology, talent and resources behind a clear objective, improving the trajectory of the business. That requires us to make surgical investments in the customer value proposition now while improving execution across our stores and banners accelerating innovation and creating a more consistent growth and earnings profile over time. At the same time, we continue to invest in the capabilities that will shape our future, digital, loyalty, media, AI and data-driven personalization. Combined with our simplified structure, these investments give us confidence in our ability to compete, adapt and win in a rapidly evolving marketplace. We're focused on delivering better results in the near term, but we're equally focused on building a stronger algorithms for the years ahead. We believe the ACI Edge will allow us to better leverage our scale improve execution, reinvest more effectively in our customer value proposition and create a more competitive and resilient business over time. But we have work to do. We're confident these actions position us to improve the trajectory of the business and create long-term value for both customers and shareholders. I'll now turn the call back to the operator for Q&A.

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

Sharon, I wish you the best in retirement. I wanted to start on the investments, specifically the price investments. And I was hoping that you could provide a bit more color on the [indiscernible]

[indiscernible] broad-based discounting. It's very targeted market-specific investments in the areas where we believe customers are making purchase decisions. So it's around price perception, around fresh personalization and convenience. We are funding the investment through productivity. As we've shared previously, we've been in ways in 3 key markets over the last year, and we've learned from those investments where the elasticities are, what works, what doesn't work, and we're taking that knowledge as we apply it to, again, very select and strategic markets and categories across the company. As far as an index versus our competitive set, I don't think we're willing to disclose that. What I will say is when we think about our value proposition, of course, it's about price, but it's also about quality. It's about service. It's about convenience and leveraging all of those and finding the right balance to make sure that we are bringing customers to us versus making other choices. Own Brands is a key part of that. We've shared that before and is also a key part of our price investment. Sharon, anything to add?

No, Susan. I think that's absolutely right.

Can I just maybe ask a follow-up, and I want to kind of step back sort of bigger picture. The backdrop is tough in grocery. Price investment stories in this business are always difficult to execute. But you trade at 4x EBITDA, you have assets. Has the Board considered strategic alternatives as an option? Or does today's news basically kind of mean that the current strategy is the path forward, and that's how we should be evaluating the company.

And first and foremost, our primary goal is, of course, delivering shareholder value over time. So full stop there. We do believe in ACI Edge, both the reorganization of the company, the centralization of center store and service of rightsizing the value proposition that is in need of adjustment. From a strategic alternative perspective, of course, we're always making sure that we're considering every angle when we think about delivering shareholder value, but that's not the primary discussion that we're having today.

The next question comes from Mark Carden with UBS.

And Sharon, you'll be missed. Congrats on your upcoming retirement. Maybe to start, just on the centralized merchandising. You've talked about fully centralizing this for center store. Can you maybe provide a bit more color on how this builds in your prior centralized buying initiative? What are the biggest enhancements you expect to get here? And how should we think about timing?

Yes, Mark. So we -- you're right, we've been talking about buying better together for quite some time. And over the last, let's call it, 2 years, we've been building AI-driven tools, stronger processes in support of this evolution. And we're at the point right now where we feel we can not only buy better together, but also deliver stronger merchandising plans using the tools that we've built. So this is not only about securing a lower cost of goods, of course, it is. But it's also about making stronger category decisions, assortment decisions, price and promotion decisions from a center store perspective, yes, across the entire company, but using the data and tools and the information that we have to also be able to be very surgical at the local market level, but being able to do so from the center. From a time line perspective, the process is underway. And as we look at bringing all 4 Ps into the center, if you will, and we're expecting to be complete somewhere in spring, early summer of next year.

That's great. And as a follow-up, you called out some expected pressure on registry units. Are you seeing any outsized headwinds on any particular categories as customers take items out of their baskets? And then how should we think about the potential timing of some of the supplier price increases that you mentioned?

Sure. So there are certainly categories that are feeling more pressure than others. And what we are seeing is, again, the most pressure coming from our lowest income customers. We're seeing a shift to private label. We're seeing a shift to value packaging trade downs. I think we've talked about this before in certain commodities. And again, it's a very bifurcated situation lower income customers are shifting more to cheaper proteins as an example, our higher-end customers seem to be a little bit more resilient. The second part of your question?

Just in terms of the timing for the supplier increases?

Yes. So we're seeing supplier cost increases that's just a part of our business. As we look towards the second half of the year, we're expecting to see incremental pressure there. And as a reminder, our first response is always pushing back. We are also manufacturers. We understand where cost increases are coming from, whether it's fuel, packaging and so forth. We push back. And then a negotiation begins. And in worst case scenarios, we have to make a tough choice on whether or not we're going to accept care those products. But ideally, it's about a negotiation. We're going to be pushing our vendor partners very hard to absorb those costs on their own. We're being very clear today with our goals on rightsizing our value proposition. We're being clearer than we've ever been before. With our manufacturing and vendor partners on the centralization of center store, we expect them to lean in.

The next question comes from John Heinbockel with Guggenheim Partners.

Sharon, congratulations on your retirement. Susan, a question I want to start with value perception, sort of variability across your markets, how we spread from best to worst? How do you think about that? Is that now changing, say, in the last 6 months because of pressure on the consumer? And then I know you care about absolute performance, but do you think you're gaining share in the supermarket channel?

John, so from a value perception perspective across the company, you're right, we have different competitive sets, different customer bases that we're serving. And even if I step back for a second and look at the total industry units, we are definitely seeing different unit pressure or as an example, the West seems to be more under pressure from an industry perspective on units than the middle part of the country and the East. So as we think about our opportunities, and this goes back to why we're being very surgical and selective about our price investments, it's not a one-size-fits-all answer. So -- and again, we have the tools and AI modeling on elasticities to be able to manage that effectively. And of course, ACI Edge is about giving us not only the tools and information to do that, but fuel for that growth as we see productivity. From a share perspective, it's -- we don't share specifically, but we are -- and again, it varies across the company. I would say we're doing our share with traditional food is in a better spot than multi-outlet as a whole.

Maybe as a follow-up. The -- so with the new org structure, so what do you think you get -- the biggest changes to come out of that? Do you think execution-wise? And then I know at some point, you were looking at a strategic review of markets. Do you think there -- are there now markets that you think you'd like to exit or you need to get through ACI Edge first before you know?

So going back to ACI Edge. It's -- thanks for the question because it's -- yes, it's a restructuring, but it's really about running the company in a better way. It's about getting greater scale where customers don't always see it where it's less relevant to them or they don't -- when we do it well. And then gaining greater local relevance, or they do see it. And then finding the productivity to reinvest in value. And for us, again, yes, of course, that's price, but it's also fresh, personalization and digital. And that's the combination of where we believe that we can improve unit earnings and shareholder returns over time. With regards to the markets, we're constantly evaluating our business and making decisions where strategically we want to lean in and grow and where perhaps some areas are less strategic and we want to exit. The ACI Edge is more about optimizing our operating model to improve execution and to end through the organization and accountability. It's not necessarily about exiting markets. And I think we've shared this before, over time, there are probably a handful of smaller areas that we would look at. But our primary focus right now is on our core business and driving an inflection in unit growth.

The next question comes from Tom Palmer with JPMorgan.

And Sharon, congratulations on your retirement. I wanted to maybe just start off on the gross margin side. You noted the pressure in the quarter and that it did come, I think, from fulfillment costs for digital. But at the same time, there was the call out that e-commerce was profitable in the quarter, and I think the digital growth was actually a bit lower than we've seen in recent years. So maybe expand a bit on, one, how you were able to kind of drive that profitability in that business despite the gross margin callout and really where the gross margin pressure is coming from?

Thanks, Tom. So what I would say about the profitability of digital is we continue to see the economics improve through higher order density, better fulfillment productivity and stronger customer engagement. And I think we've talked to you before about some of our proprietary tools that we use, but Sharon, let me turn it over to you and to give some color on the P&L side.

Absolutely. So e-com has tipped over into profitability. And the reason that you see it called out is that from a mix perspective within the gross margin, the rate of the gross margin for e-commerce is much lower than traditional grocery. Therefore, even as a small profit contributor, it still creates a negative mix shift into the gross margin.

Okay. And then on the ID sales side, I think originally, the expectation was ID sales would be down year-over-year in the first quarter and then kind of progressively improve the midpoint of the outlook would imply that the 1Q rate is essentially sustained, but it sounds like there was commentary in the prepared remarks about this expected improvement in the back half. So I guess I want to think through 2 things. One, should we be thinking about something progressively softer in the second quarter and then improvement thereafter? And when you think about the improvement in the back half, how much is your view of how the industry evolves versus some of the Albertsons specific initiatives starting to take hold?

Sharon, why don't you take that, and I'll follow up.

Okay. Great. As we think about the unit trajectory for the balance of the year, we believe that the industry will only slightly gradually improve and that we, from our actions will have very modest improvement going through the balance of the year. So where we are at a negative 0.8% ID sales, and that's the total company. And I'm going to talk about grocery and pharmacy in a minute. I think you need to be thinking about very modest improvement but improvement each quarter. What's important in that is that, that improvement is expected to be in the grocery side of the business. As we move through the year on pharmacy, pharmacy is performing extremely well. but we will be comping script buys from last year going into Q2 and beyond. And so actually the mix within the ID sales going into the back half changes a little bit. But from a modeling perspective, just extremely minimal improvement really coming Q3, Q4 as we invest in the customer value proposition. That's how I would think about it.

The next question comes from Leah Jordan with Goldman Sachs.

Congrats, Sharon as well. It's been a pleasure over the years. I just wanted to go back to the gross margin discussion from the last question. I mean that was helpful color on the quarter. But just as with the updated guide, maybe you could just walk through the key puts and takes we should keep in mind as we move through the year? I'm just trying to get a sense of how we should think about the pace of these incremental investments that you've announced today.

Absolutely. So just from a guide point of view, I want you to think about Q2 very similarly to Q1, including on a year-over-year basis as far as adjusted EBITDA goes. We're in the transformation. We're moving forward. Now when you get into Q3 and Q4, you're going to see in the back half, I'm going to give you like a look for the back half, it's going to improve. The year-over-year decline will improve a little bit in the back half for products -- for all the reasons we're talking about, some unit inflection, modest at improvement. And then, of course, the productivity that we'll bring in behind that. So you'll see a modest -- a little bit of an improvement in the back half.

Okay. That's super helpful. And then I just wanted to go back to the new edge model. I mean there's been a lot on the sharper value kind of proposition, and we've talked about price investments a lot. But the other things you've called out, elevating the store experience, greater differentiation in fresh. I mean just what are really the opportunities there? Where do you feel like you're in a gap versus peers? And then I guess, ultimately, as I think about investing, is it more remodels, more labor hours? Just trying to get a sense there and how you prioritize those as well?

Sure. Thanks, Leah. So I guess to your point, we firmly believe that customers don't choose their gross turn price alone. They choose based on the overall value equation. And that's our advantage. It's our opportunity, not advantage. It's combining the neighborhood convenience that we have. We're already in your backyard. Our strong fresh execution that we have across the organization, our ability to continue to deliver and enhance personalized value. So not just blanket cost reductions or price reductions or promotions, but personalize value. And of course, the digital convenience that we have, we said in the script, our flash delivery continues to be one of our fastest-growing mechanisms. And as I think about that, it's not only about the speed of being able to deliver usually in well less than an hour, but the fact that we have a full complement assortment. So ACI Edge helps us deliver upon this more consistently. And as I think about this, one of the things that's important to note -- the first thing that we did as an organization when we made the regional change was to complete our leadership appointments first. Again, I mentioned this in the script, our top leaders in the organization are now overseeing the top region -- or over the top of the region. And then we're sequencing the rest of the implementation very carefully, making sure that what we cannot do is disrupt the front line. Changes like this create risk. We believe that we've mitigated that risk with our emphasis first and foremost, on better, simpler store execution, clarity and accountability and ownership and then again, driving fuel with the centralization process so that we can reinvest over time. Some of it's in price. Some of it's going to be in the personalization, in enhancing our fresh experience across the store and again, continuing to grow our digital business and our media income business.

The next question comes from Rupesh Parikh with Oppenheimer.

This is Erica Eiler on for Rupesh. And Sharon, also I just want to offer my congratulations on your retirement. So just tacking on to that last question. It seems like a lot of the efforts, whether we think about improving the value proposition and leaning into convenience and differing and fresh are things that, that grocery customer has become accustomed to in demand at this point. So I'm just curious, what are things that you're doing beyond those fundamental grocery expectations that the consumer has to drive even more differentiation into the box.

Great. Thanks, Erica, for the question. The first 2 things that come to mind as I'm answering the question is our work around, again, the importance of using our national scale for center of store decision-making is, yes, about taking those decisions, the paper category as an example, the laundry category, very important categories. But the way the customer shops those are not dynamically different across the entire country. However, there are categories and items, fresh, in particular, where it is very regionalized. So as we think about how we're going to show up differently for our customers, it's using data and information to fuel how we think about 2 things, in particular, our micro market merchandising and then our macro resets. And with regards to micromarket merchandising, this is an understanding that the simplest thing for a company to do is pretty much run the same footprint across the entire organization, but that's not what our customers need and expect. What we need is to give them consistency and execution, great store standards, great service and then delight them and prevent them from going anywhere else by giving them the offering that they're looking for in their local community, whether that's a different assortment of fresh, whether it's the right complement of barbecue sauces and seasonings, whether it's really paying attention to how we show up differently in produce, knowing that I'm in Boise, Idaho today, Huckleberry's are going to be a big deal next month. Also next month in New Mexico, I'm going to be roasting Hatch Green chili on for my stores, being able to unleash the magic of that local marketing and merchandising that appeals to the customers that we're serving by neighborhood, that's a key point of difference. And then zooming back out just for 1 second, I mentioned the word macro. And as we think about macro, I've been in this business for 41 years. And as I look across the store, in many retailers, we have certain set sizes or space allocations or adjacencies that have been the same for decades. The customer has changed, and we've been implementing what we call macro resets in key markets across the company with great success. And this is about rightsizing space allocation for the way customers shop today. Think about the beverage aisle. Think about functional beverage. Where does protein belong in the store when you think about all the supplements and the enhanced beverages and those kinds of things. Our macro resets are leveraging the way that our customers are shopping today and how they're shopping tomorrow, rightsizing space creating more logical adjacencies and amplifying holding power on the categories where we see the most growth.

That's super helpful. And then just as a follow-up, I mean as we think about all your actions collectively from investments in the consumer value proposition to ACI Edge, I mean, how long do you think it could take for the benefits to materialize to help you get back to algo?

So we -- first and foremost, we are moving with speed. I know that and not dangerous speed, but very calculated planful speed. That said, some of the changes that we're making will be gradual and incremental and happen over time. Sharon, I don't know if you have a comment on the long-term algo and any insights that you want offer there.

Yes. The goal is to use ACI Edge to accelerate the business such that we can get back into the algorithm. Obviously, we're going to be coming from a lower base. And as we look into '27, it's going -- like Susan said, this is -- we're going from 11 regions to divisions to 4 regions, et cetera. So I would say that we need to be looking for gradual and incremental improvement, getting to 2% ID sales, which is part of that algorithm, this industry unit question, we are not seeing forecasts that show major improvement yet at this point. But we got to keep in mind that the backdrop with what is happening with the more geopolitical issues, et cetera, are making this a very difficult time to read. So we're not ready to call that at this point. What we know is that this is going to drive incremental unit value, customer engagement, et cetera, and that we expect it to start playing into 2027.

The next question comes from Paul Lejuez with Citibank.

I'm curious if you can quantify for us what you are seeing on the cost inflation side? And how much of that cost inflation do you think you'll be able to pass through to consumers versus have to absorb? And how might that change as we move throughout the year? And then second, just bigger picture, higher level, I'm curious how many stores you have that are unprofitable. And if there are any real estate actions that you're contemplating to help the overall profitability of the company, perhaps closures, selling the real estate? Anything like that, that you're thinking of?

Thanks, Paul. So starting with the cost increases. So to date, the cost increases that we've seen have been very moderate. And from a customer perspective, I would tell you that we are not passing through the inflation that we're seeing. That's part of how we think about investment, right, is holding the pricing at a more rational level and not passing all of that through. That said, -- as I'm sure you are hearing from our CPG partners, we fully expect to see cost increase. And the fuel situation continues. They're already signaling that with us throughout the end of the year that we'll expect to see costs continue to ramp up. Again, we -- as best we can, and again, very surgically with great intention, we will work to not pass that through to the customer where it matters the most. And that's both by us perhaps taking some compression in margin. But again, as I said earlier, also pushing back on our vendor partners and helping them realize the fact that this is Albertsons leaning in, in a very clear and decisive way on centralizing center store, which should unlock a great deal of efficiencies, certainly for them, which we expect to pass through to us. You had a second question around the profitability of stores. And here's what I would say. Our stores -- unprofitable stores is a very, very small number. And outside of the period during the merger process, our hygiene is very rigorous. We're continually looking at our store base and making decisions on whether to keep the stores or can we turn them around, can we change the profitability or making the difficult decisions from time to time to exit those stores. And we've not seen a dramatic shift or increase in store profitability at this time. Again, it's a pretty small number of our fleet.

The next question comes from Simeon Gutman with Morgan Stanley.

Sharon, thank you your insights and your influence you've left the lasting and some question on many of us. So wishing you all the best and what's next. Susan, I want to ask that you've narrowed it down to 4 divisions. Can you give us a sense of the performance variability. So you mentioned California units were tougher. Are IDs negative at 4? Or is it a matter of improving more so in 1 or 2 divisions to help turn the ship?

What I would say, Simeon, is -- and we don't disclose results by division, which we're now calling regions, by the way. That said, we did share that in the West industry units are more pressured, and we see something similar. That said, in many of the markets in the West were outperforming our traditional food competitors. Their market by market, depending on the customers that we serve and the competitors around us, our results can vary quite widely. But again, one of the goals of ACI Edge and the 4 region structure is to create more consistency in our operational execution to leverage our size and scale so that we can create those efficiencies and invest very surgically across those many markets that we operate in to rightsize opportunities where we see them and to amplify growth where we're already strong.

Okay. And to clarify, the $200 million, that's all going to price? Or is that on top of productivity initiatives to help further bend the SG&A curve?

So the $2 billion that we've stated before exists. The $200 million is incremental. And yes, we do intend to reinvest that into price. That's part of price and other elements of our value equation, personalization, digital and other.

Okay. And you were asked this, but just to clarify, it's being surgical, you're not changing your high low, maybe it's going to be more modified high low, but you're certainly not moving to like EDLP. It will still be promotional-based pricing strategy?

That's correct. We are not making a huge change in our go-to-market strategy from a pricing promotional perspective. It's really just about sharpening, specifically at the customer level and at the market level, both again through frontline pricing, but also through personalization. The other thing that we haven't talked about much throughout the call today is just our own brands. We've shared our aspiration of hitting 30% penetration, and we're more convicted than ever in that goal, especially at a time where our team has been doing a phenomenal job of leveraging down the costs on our private label products and our own brand products, therefore, allowing us to be able to sharpen price points, especially on commodity-driven items and being able to drive that back into price investment, give the customers great quality products at prices they're willing to pay.

The next question comes from Robbie Ohmes with Bank of America.

Sharon, wishing you the very best in retirement as well. Really, I just have one question. I was wondering if you could -- maybe, Susan, tell us what you're seeing right now in the promotional competitive environment? And kind of following up on Simeon's question, appreciating that you're not going to change her high low or however you're phrasing it. But what -- how would you characterize sort of the June, July time frame? Is large competitors? Are they getting more promotional, more competitive than Albertsons typically seen historically? Or are we kind of seeing the normal seasonal activities from your largest competitor?

So I would say that we are seeing a fairly consistent promotional environment to what we've seen in the previous months. That said -- that's a promotional perspective. That said, we're also seeing some of our competitors as we are investing a little bit more in frontline pricing. Again, it seems to be pockets. It does appear to be widespread at least not yet at this moment in time. We stay very close to our price indices versus all competitors and are managing that effectively. But again, this is part of the reason that we're looking to invest is we do see opportunities very surgically, market by market, category by category to invest.

And then just a quick follow-up. The low-income consumer from your perspective, are they -- where are they going?

There's a variety of answers there. Our biggest leakage is to the big players to Walmart, Amazon and to some degree, [indiscernible] from a price competitive player. And that's where surgically, whether it's in frontline pricing, but also we're able to use our personalized deals and our loyalty program to market specifically to those lower income customers and be able to give them some price locks, so hold on pricing, some offers that help stretch their basket and maybe keep them from leaking as aggressively to some of the price -- pure price players.

This concludes the question-and-answer session at this time. I would like to turn the floor back over to Susan Morris, the CEO for closing comments.

Thank you. So before we conclude our call today, I just want to take a moment to thank our associates for their commitment to our customers, our communities and to each other. You are what makes this company special. Every day, you bring our strategy to life. You're committed to giving -- and we are committed to giving you the tools, the support and the clarity that you need to succeed. And to all of you on the call today, we look forward to updating you on our progress next quarter, and we'll talk to many of you soon. Thanks for joining us today.

Ladies and gentlemen, thank you. Thank you for your participation in today's conference call. This concludes today's teleconference. Please disconnect your lines, and have a wonderful day.