Albertsons Companies Inc (ACI) 2018 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Albertsons Company's Fourth Quarter Earnings 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 like to hand the call over to Melissa Plaisance, GVP, Treasury and Investor Relations. Thank you. You may begin.

Hello, and thank you for joining us for the Albertsons Companies' Fourth Quarter 2018 and Fiscal Year-End Earnings Conference Call. With me today from the company are Jim Donald, our CEO; and Bob Dimond, our CFO. In addition, Shane Sampson, our Chief Marketing and Merchandising Officer; and Susan Morris, our Chief Operations Officer, are also on hand. Also joining us today is Vivek Sankaran, who will succeed Jim as our President and CEO effective tomorrow.

Today, Jim will provide some opening remarks, touch on our recent results, 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 fourth quarter and full year 2018 results, and Jim 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. The 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 Jim Donald.

Thank you, Melissa. Good morning, and thank you for joining us today. When I joined Albertsons Companies in March of 2018, there were 2 paths in front of me waiting to play out: helping to shepherd the integration of the Rite Aid-Albertsons Companies combination into 2019 and beyond; or helping further lead our already solid company towards the future in both the 4-wall and no-wall environment and tell our story more broadly. Just over a year later, we know which path that the company took. And as I took on the role of President and CEO, I made finding my successor a high priority. When you look for a successor, you find someone who embraces your vision and then has the capacity to take it to a whole new level. As Melissa indicated, we announced that Vivek Sankaran has been appointed President and Chief Executive Officer of Albertsons Companies effective tomorrow. With this change, I'm going to take on the role of Co-Chairman of the Board. I'll be serving alongside Co-Chairman Len Laufer, who was named to our Board of Directors last fall and is a Managing -- a Senior Managing Director and Head of Transformation and Technology for Servers Capital Management. Bob Miller, after 58 years in the industry, has been named Chairman Emeritus and will continue to serve as a member of the Board of Directors.

Vivek was named CEO of Frito-Lay North America in December 2018. Prior to that, he served as the company's President and Chief Operating Officer, a position he was named to in 2016. Over the last 3 years, he led Frito-Lay industry-leading growth by remaining focused on innovation, technology and execution. Over his 10-year career at PepsiCo, in addition to leading Frito-Lay, Vivek also served as the Chief Commercial Officer for Pepsico's North America; Chief Customer Officer of Frito-Lay; and as the SVP of Strategy for PepsiCo. Before joining PepsiCo in 2009, Vivek was a partner at McKinsey and Company, where he served various Fortune 100 companies, bringing a strong focus on strategy and operations. He co-led the firm's North America purchasing and supply management practice and was on the leadership team of the North American retail practice. Vivek has an MBA from the University of Michigan, a Master’s Degree in manufacturing from the Georgia Institute of Technology and a Bachelor's Degree in Mechanical Engineering from the Indian Institute of Technology in Chennai.

My Co-Chairman, Len Laufer, also leads Cerberus Technology Solution, a subsidiary of Cerberus that is focused exclusively on leveraging and merging technology, data and advanced analytics to drive business transformations. Len and his team of senior technologists worked closely with Cerberus' investment and operating professionals on targeted initiatives aimed at improving systems and generating value from data. I think we can all agree that he will be invaluable as Co-Chair.

I'm going to pause for a moment here and ask Vivek to make a few comments. Vivek?

Thank you, Jim. As I said in the announcement in late March, it is a great privilege to join a company that has such deep roots in retail grocery, with stores that are integral to the lives of millions of customers each week. I'm excited to build on the legacies of past CEOs, Bob Miller and Jim Donald, who both laid a solid foundation for success. I will bring my background in consulting and in a number of leadership roles at PepsiCo and look forward to working with our team to realize the opportunities and navigate the challenges in our evolving industry. And since I don't officially become a member of the team until tomorrow, I will ask Jim to continue with his remarks. Jim?

Thanks, Vivek. Well, I'm truly excited to see what our company does next. I've said it to our division presidents, our leadership team and everyone who will listen that, simply put, the small moves we are making, they're enough. The industry may think that we're playing catch-up with e-commerce, Drive-Up and Go and third-party agreements. But when you look at the whole picture, we're changing the game for customers in small, simple ways that I'm confident will add up to our being the company that everyone wants to catch up to in the next few years. I'm excited about our progress, and I look forward to what we'll accomplish. Our commitment to making every day a better day for our employees, for our customers, for our community and our company remains our priority. With 270,000 talented associates serving 34 million customers each week across our nearly 2,300 stores and 5.5 million customers in our 1,700 plus pharmacies, we are well positioned to serve the evolving food, health and wellness needs of today's customer in our 4-wall, no-wall company.

As many of you read this morning, we're pleased with the trends in our business and our strong results in the fourth quarter and 2018 fiscal year. During our fourth quarter, we had identical sales of 1.1%, and our adjusted EBITDA was approximately $727 million. For the full year, our adjusted EBITDA increased 14% to $2.74 billion, exceeding the top end of our range. Our fourth quarter benefited from better-than-expected fuel margins that we experienced across the industry, which Bob Dimond will discuss further in a few minutes. We also reduced our leverage in 2018 in a meaningful way and delivered on our commitment to delever the balance sheet. Our goal remains to be the favorite local supermarket with the freshest high-quality products at a fair price with an outstanding customer experience. At the same time, we aspire to become the favorite digital supermarket anchored on our in-store experience and enhanced through our omnichannel approach. To succeed in today's omnichannel retail environment, we continue to improve our retail store formats, which provide a solid foundation for our e-commerce business. Our ability to meet our customers' needs with an appealing 4-wall customer experience as well as meet their expectations in the digital environment will be the key to future success.

We continue to focus on being a fresh, perishable-driven company, and we operate as a local company with over 20 banners throughout our 34 states with an average of close to 100 years in our local communities. We keep in mind the importance of investing in the in-store, that's the 4-wall experience, as well as our online, that's the no-wall experience. As we continue to innovate in our 4-wall environment, coupled with our mission of continuing improvement in e-commerce, we balance and blend our use of capital that keeps the emphasis on growth in both. I'm very pleased this combination of capital investments continued in the fourth quarter, combined with our empowered divisional execution and our focus on efficiency and changed management.

As we move into fiscal 2019, we continue to accelerate remerchandising and refreshing our store base to strengthen our rapidly growing own brands portfolio, continue to accelerate and grow e-commerce in an economically viable way using the combination of our own operations and other partners and then leverage our loyalty program and data analytics to drive growth. While industry experts have generally accepted the fact that e-commerce investments are necessary in this current environment, we expect to see our partnerships in technology deepen and our innovation will continue to progress to better serve our customers in 2019. We will also expand our data science platform and create efficiencies in both in-store 4-wall and in e-commerce no-wall environments, and we anticipate this will continue to contribute to our EBITDA margin over time. Our data science platform will lead to improvements in demand forecasting, the way we price our products, our loyalty programs and our merchandising.

We continue to make investments in and expand our capabilities in e-commerce, digital marketing and loyalty programs to provide value to our customers and to drive sales. Our total e-commerce sales, including the Instacart and Plated meal kits, grew 52% year-over-year in quarter 4 '18, and 83% in fiscal 2018. We also expanded our Drive-Up and Go pickup service to over 250 stores by the end of the fiscal year. We also have expanded our fast delivery through Instacart, which allows our customers to have access to same-day delivery in as little as an hour. Instacart was operating in all of our 13 divisions and 1,994 stores at the end of the fiscal year. We continue to see growth in our pharmacy delivery business, which includes mail order, MedCart and specialty drug delivery. And we continue to make data-driven personalized offers to our customers through Just for U, which we have expanded to all markets. In fact, at the end of the fiscal year, our registrations for Just for U and United's loyalty program increased over 24% year-over-year on a combined basis. We also continue to expand fuel rewards and have begun to offer grocery rewards. The weekly sales -- the weekly average sales to participants in these 2 programs continues to be significantly higher than to nonusers, which is very encouraging.

In addition, Albertsons Performance Media, in partnership with Quotient Technology, is providing CPG companies with a powerful way to connect with their loyal customers on major advertising campaigns that drive significant sales. Just over a year, Albertsons Performance Media has delivered 21 influencer campaigns for 13 brands and 4 national campaigns producing over 200 million targeted and verified impressions and activated targeted social media campaigns across Facebook, Instagram, Snapchat and Pinterest. These campaigns produce as much as 2x more return on their advertising spend compared to Nielsen benchmarks.

Turning now to own brands. Our Own Brands portfolio consists of more than 11,000 high-quality products, which resonate well with our shoppers. Our own brand sales penetration continues to grow, with quarter 3 and quarter 4 coming in at 25.2%, achieving our highest sales penetration rate since the merger with Safeway. Own Brand continues to deliver on innovation with over 1,100 new item introductions in fiscal 2018. Open Nature, our brand that encompasses natural and products free from ingredients like antibiotics and MSG, and O Organics, our organic brand, continued to deliver strong sales growth posting a 13.9% sales increase for the 2 combined brands in the fourth quarter compared to last year and 13.6% for the full year. Open Nature and O Organics now represent 25% of total natural and organic sales at Albertsons, a 208 basis point growth from quarter 4 last year. Also just as a reminder, Albertsons has $4 billion brands: O Organics, Lucerne, Signature and Signature Café in our Own Brands portfolio.

We continue our disciplined approach towards managing capital expenditures. In fiscal 2018, we spent approximately $1.4 billion, including approximately $70 million for Safeway integration-related capital expenditures. We completed 128 projects, that would be 124 4-wall and 4 expansions, and we opened up 6 new stores and invested in our digital capabilities. As we continue to rack and stack our 4-wall and no-wall business with our competition, we also continue to blend in our capital investments that keep us competitive in both brick-and-mortar and e-commerce. We are incrementally increasing our capital investments for brick-and-mortar with the intent to increase the number of renovated stores as a percent of the total fleet at a higher pace than in the past.

Our e-commerce investments, too, have grown substantially as we have finalized a large part of our maintenance spend. For example, conversions are putting those investments to work to enable our customers to shop us whenever, wherever and however they want. As we mentioned previously, we're working to automate several distribution centers over the next few years, which will greatly improve labor productivity, increase storage density, enhance inventory and management and shorten stocking times. Our first automated distribution center in Tolleson, Arizona, became operational in the fourth quarter of 2017, and is performing well. We began our second warehouse automation project in Chicago, Phase 1 of which should be completed at the end of fiscal 2019. While the automation of our distribution center requires a capital investment, we expect this automation will generate significant cost savings going forward.

In addition, in store, we are improving our customer service experience as well as our employee productivity through our front end with an accelerated rollout of self-checkouts and expansion of our scan-and-go technology. Also, with the 397 fuel stations, we're looking to expand our One Touch Fuel, which allows our customers to seamlessly pay for fuel through our online app. I'm also pleased to report that we delivered approximately $823 million of synergies from the Safeway merger on an annual run rate basis by the end of fiscal 2018.

In the area of sustainability, we've achieved several milestones in fiscal year 2018. We completed more than 800 energy-efficient projects in over 500 stores and warehouses. We recycled more than 705 million pounds of cardboard and 22 million pounds of plastic film. 100% of the eggs sold under our O Organics and Open Nature labels are cage-free. We made more than $226 million of product donations to food bank and hunger relief agencies. We enabled 70 million breakfasts to be provided to children in need through Hunger Is. We raised $43 million to support causes that impact our customers' lives and supported 2,000 organizations through foundation grants. Overall, we have maintained a good balance of corporate responsibility and product innovation, and these efforts contribute to us being named in Forbes' list of top 50 of America's most reputable companies in 2019.

And finally, as I've mentioned on every call, and it holds true from when I began in this business and going forward in both a 4-wall and no-wall environment: our employees are still the everyday key to our success from our manufacturing facilities to our distribution centers, support centers, and of course, our stores. There is no question that our front line is directly connected to our bottom line, and I'd like to thank all 270,000 associates for what they do every day. They are making a difference for Albertsons Companies.

And with that, I will turn the call over to Bob Dimond, our Chief Financial Officer, for an overview of our fourth quarter and fiscal year-end 2018 results.

Thanks, Jim, and hello, everyone. Sales and other revenue was $14 billion during both the fourth quarter of fiscal 2018 and the fourth quarter of fiscal 2017. As Jim mentioned, our identical sales remained strong at 1.1%, and we are pleased with our fifth consecutive quarter of identical sales growth. The increase in identical sales during the quarter was offset by a reduction in sales related to the store closures during the year.

Gross profit margin increased to 29% for fourth quarter of fiscal 2018 compared to 28.1% last year. Our gross profit margin benefited from better-than-expected fuel gross profit margin during the fourth quarter of fiscal 2018. Excluding the impact of fuel, gross profit margin increased 50 basis points. The increase was primarily attributable to lower shrink expense as a percentage of sales, which improved 40 basis points in the quarter compared to last year and improvements in margin related to an increase in our own brand sales penetration rate.

Selling and administrative expenses increased to 26.9% of sales during Q4 2018 compared to 26.8% of sales for Q4 2017. Excluding the impact of fuel, selling and administrative expenses as a percentage of sales were flat during the fourth quarter of fiscal 2018 compared to the prior year. While we experienced lower depreciation and amortization expense and benefited from cost reduction initiatives, this improvement was offset by higher employee-related costs year-over-year in Q4. The increase in employee-related cost was largely attributable to an increase in incentive-related pay due to our significant improvement in fiscal 2018 operating performance over fiscal 2017.

Interest expense was $168.3 million during the fourth quarter of fiscal 2018 compared to $195.6 million during the same quarter last year. The decrease in interest expense is primarily attributable to lower average outstanding borrowings compared to the fourth quarter of fiscal 2017 as a result of the company's term loan pay down and other debt reduction during fiscal 2018. The weighted average interest rate during the third -- fourth quarter of fiscal 2018 and the fourth quarter of fiscal 2017 was 6.5% and 6.6%, respectively, excluding amortization and write-off of deferred financing costs and original issue discount.

Adjusted EBITDA was $727.2 million or 5.2% of sales for the fourth quarter of fiscal 2018 compared to $712 million or 5.1% of sales in Q4 last year. The increase in adjusted EBITDA primarily reflects the company's identical sales increase and higher-than-normal fuel margins during the fourth quarter of fiscal 2018, which was driven by the sharp decline in average fuel prices during the fourth quarter of fiscal 2018. As we look back at fiscal 2018, we are proud of the growth we delivered year-over-year, driven by a combination of top line sales growth and execution of the cost reduction initiatives we outlined at the beginning of the year. Sales and other revenue increased 1% to $60.5 billion. Identical sales increased 1%. Adjusted EBITDA improved 14% from $2.4 billion to $2.74 billion, and net cash provided by operating activities increased from $1 billion to $1.7 billion. The increase in cash flow from operations was primarily driven by the improvements in adjusted EBITDA compared to fiscal 2017 and improvements in working capital.

As we indicated earlier, during fiscal 2018, we executed against our long-term objective of delevering the balance sheet. During the year, we reduced our outstanding debt by nearly $1.4 billion, which included a $1 billion reduction in the company's term loan facilities and opportunistic debt repurchases in the Safeway and New Albertsons notes. During the fourth quarter, we completed the sale of $600 million in senior unsecured notes, which allowed us to repay near-term maturities. We also refinanced our term loan and asset-based loan facilities, achieving extended maturities. As a result of these activities, we reduced our total net debt to adjusted EBITDA ratio to a record low of 3.5x. We've set ourselves up with excellent liquidity going forward, and we intend to continue reducing our debt leverage further.

Overall, we are pleased with the trajectory and the trends in our business as we move into fiscal 2019. As we continue to position ourselves for long-term growth in both the 4-wall and no-wall environment, we will continue to make strategic investments in our online and digital technologies during fiscal 2019 to better serve our customers in the omnichannel environment.

And now, I'll turn the call back over to Jim for some closing remarks. Jim?

Thanks, Bob. As Bob indicated, we are pleased with the positive momentum in our business as we close the door on fiscal 2018 and look towards fiscal 2019. Our efforts to improve the 4-wall and no-wall environments through remerchandising and refreshing our store base, leveraging data analytics and expanding Own Brand help drive our sales growth and enhance the loyalty of our shoppers. Those efforts, coupled with successful cost reduction, including continued improvement in shrink, the achievement of the expected synergies from the Safeway acquisition, incremental cost reduction efforts and higher-than-expected fuel margins, offset in part by integration-related headwinds and investments in our business resulted in our ability to achieve better-than-expected adjusted EBITDA in fiscal year 2018. We also executed against our long-term objective of delevering the balance sheet in fiscal 2018, and we had a clear path for further reduction. We all look forward to continuing to [lead] our customers and improving our business results in fiscal 2019.

And with that, I will now turn the call back to the operator for questions.

(Operator Instructions)

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

Last year, you laid out some explicit adjusted EBITDA guidance. I was wondering if you were planning on doing that this year? Or if not, if you could lay out some of the larger puts and takes that you kind of would help describe how 2019 might look in terms of sales expectations or potential gross margin expansion from further shrink reduction.

Yes, Bill, this is Bob. You're right. We have not yet in this release provided any guidance. And our intention with Vivek coming on board effective tomorrow is to provide the fulsome guidance that we normally would but on our next conference call, after the first quarter, which will be in roughly July.

Okay. And then over the last year or 2, you benefited a lot from generating proceeds from sale leasebacks. I was wondering if you could update us on what the market value of real estate that's still on the balance sheet? And then any expectations around additional sale leaseback opportunities?

Yes. Great point. As far as the appraised value of our real estate that's remaining -- first of all, I'll just give you a little reconciliation there. You might recall, when we did the appraisals a couple of years back, we had a total of $12 billion of owned real estate. Since then, we've taken in proceeds on the sale of real estate of about $2 billion. However, the appraised value of that property that was sold was only $1.6 billion. Subtract the $1.6 billion out, we've got $10.4 billion left. So we still own a substantial portion of our real estate. And if you do that ratio there, you can see that that's one of the things that made the sale leaseback so attractive is that we were able to garner proceeds that were about 30% on average greater than what the appraised value was.

Okay. And then just lastly for me, I think a lot of retailers and supermarket operators have talked about February being a challenging month. I was wondering if you could comment at all about how February was relative to the rest of the quarter? And then a lot of people have talked about March being better, whether you've experienced that as well?

Yes. Bill, it's Jim Donald. We're not going to really give you individual numbers with regards to February and March, but the way that our fiscal year breaks out is that we had in the fourth quarter the results of February. And there was some -- there was, obviously, when you look at January, February, March, some SNAP pick up and some SNAP withdrawal. We also had, in this quarter where we are currently in now, Easter is in both quarters. So we'll be able to compare with like-for-like when we look at the first quarter.

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

It's Dave Kuck on for Bryan. Wanted to first touch on Q4. I think your implied guidance for the full year -- the full year guidance implied an EBITDA of $663 million. You obviously came in well above that. I know you cited better-than-expected fuel profitability. I was wondering if there were just any other factors aside from fuel that led to the better-than-expected Q4 results?

Yes. Good question. Yes. We, like others in the industry who have fuel stations, certainly, this kind of

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higher margins in the fourth quarter. Hence, we saw average reduction in the cost for fuel that occur over that time period. But in addition to that, we did have some very solid performance on just our core business. One of that -- one callout would be -- and I think we disclosed that as well in our earnings release is that our shrink improved by 40 basis points year-over-year in the fourth quarter. Now as we talked about what our goals were for the year of 2018, one of the big things that needed to improve to kind of achieve our plan was to get about a 30 basis point improvement year-over-year. And I would say for the full year, we even exceeded that by a few basis points, this quarter was about 40 basis points better. There were some other items, Jim. I don't know if there's anything that...

No, I mean, there was -- it was an excellent quarter for cost containment, cost reduction. The shrink is a little bit of art and a little bit of science. We've got systems in place now to continue to manage the shrink at very good levels. But Bob, you said it best, I mean, the fourth quarter, with the holidays in there, was a great retail quarter. And the team, division-by-division, executed with precision with regard to the customer experience in both 4-wall and no-wall. So it was just a good quarter.

Great. And then I wanted to talk about -- you had about, I think, 50, approximately net store closures in 2018. Curious how you're thinking about that in 2019? I know you mentioned some, I think, 6 or so new stores?

Yes. I would say that 2018 was one of our largest years that we've had as far as store closures. We did not anticipate being at that level for 2019. We have not disclosed what that number might be. We do look at bubble stores each and every quarter and take action where it needs to occur, but typically, I would say, that would be somewhere in the 10 to 20 range on average as opposed to the 50 that you saw this last year.

Okay. And then just curious to hear your latest on what you're seeing with regard to inflation, deflation?

Okay. In the fourth quarter, we did see a slight uptick in the quarter relative to what we had seen earlier in the year. So that was kind of nice. As you might recall earlier in the year, it was averaging about at 0.4%. For the fourth quarter, things upticked to about 0.8% on an average for the entire quarter with the last month of our quarter, which was February, being just over 1%. So we're optimistic that as we move into 2019 that there might be modest improvement in inflation as we move through the year. March, as you probably saw, as reported by the BLS, came out at about 1.4%. So we'll just -- that's good for the industry if we could have some modest inflation and costs there, so that we can pass that through and cover other cost increases.

Our next question comes from the line of Geoffrey McKinney from Citi.

I think you've commented on SNAP having an impact in January, February, March. Some of your competitors referenced an acceleration in disbursements, recognizing they're on a slightly different fiscal calendars. Did you see anything that was benefiting 4Q at the expense of the start of 2019?

No. Within our structure where our year ends in February, it was all contained in our fourth quarter, but there's just a little caveat. If I calculate our ID sales based upon a calendar -- or not a calendar but a quarter that ends in January, like some of our competitors, our sales ID was increased or would have been reported at like 1.7%. And the reason for that, of course, is that in the month of January, there were really 2 installments of SNAP benefits provided by the government. And most of those recipients went out and spent a goodly portion of that in January, so February would have been a lower month. In our particular quarter, we had the big push in January and the softer February, all within our fiscal fourth quarter.

Okay. If I look back at the envelope, fuel was a tailwind in 4Q. Am I correct in understanding for the full year, it was a headwind of about 10 basis points to gross margin when we look at the adjusted numbers that you call out in addition to kind of a 5 to 10 basis point tailwind in 4Q from improved shrink? Is it fair to say that we might be a 20 -- kind of a, like, magnitude 20 basis point tailwind on gross margin in 2019, all else being equal? If you can continue to execute on shrink like you did in the fourth quarter and fuel margins remain where they are today?

Yes. Well, first of all, I can see how you're looking at it there, but it's not going to play out exactly like that. Fuel for the full year actually was a benefit for the entire year. And when we provide you the roll forward at the end of next month with our guidance, we'll detail that out a little bit for you, but that will be a little bit of a headwind. We've got a jump. Now as far as shrink goes, we still -- as Jim indicated, we have put into place some additional tools and training and so forth with our stores. And so we anticipate continuing to see some incremental improvement year-over-year. That isn't -- and that's probably an iterative process over the next couple of years. We can see that there's still more improvement to be had there, and we look forward to that. Jim, anything...?

No. No.

And then have you seen anything in terms of the competitive landscape? Have you seen any change in the last quarter? I think one of your larger competitors is constructive on accelerating ID sales. Have you seen any pick up in the competitive landscape at this point?

It's Jim, Geoff. And it's not anything that's an incremental plus or minus. And so what we're seeing is when you look at the press that's out there, there are just so many things going on from Amazon announcing purpose book stores, which to me verifies that bricks and mortars is not dead, number one. And number two is that the actions that Whole Foods took, we see that pricing as incremental. But we compete with about 250 Whole Foods, and we haven't really seen the impact of that yield. Our business is a price and promotion business. And so when we look at how we're priced versus our competition, we do it with just different lens on, that look at all kinds of activity from ads to everyday prices. And so we see the change out there. We're constantly negotiating with suppliers to continue to drive our business. We just had a conference with over 1,000 suppliers that participated, and we're pretty up to speed on what the competition is doing. But having said that, I'll mention in my closing comments, we're very positive on 2019 and where we're trending there. So we feel good about our business now.

Okay. And last one and I'll turn it over. On the e-commerce side, you still see healthy growth, but sequentially, a not insignificant deceleration was -- were you guys doing anything different in the fourth quarter that might cause that move from 73% to 52%? Or how should we be thinking about that?

Well, the primary adjustment -- not really adjustment, the primary thing that occurred there is we cycle Plated, the acquisition of that. So that was just kind of the natural thing that occurred there, although we have other things that we're working on that will continue to drive sales. And we think that's going to continue to be a very strong percentage as we move forward.

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

When do you guys look at the 250 stores where you got pick up and go, how are those comping against the rest of the store fleet?

I mean, Drive-Up and Go, you mean?

Yes, Drive-Up and Go.

Yes. We don't necessarily break out those numbers to discuss those, but what I can tell you is that we're continuing to roll out our Drive-Up and Go. We're excited about the opportunities as everyone reads that our competition, too, is expanding this as well. But I will say this, that as part of our e-commerce initiative, we're going to be testing in September our take off, which is our fulfillment centers, our micro fulfillment centers, inside of our stores in the Bay Area of San Francisco, and we continue to see that as an opportunity for us as we go forward with this. We'll be testing 2 fulfillment centers with the potential of more to come. So the business is robust. It's good, and it's kind of sort of where the customer is settling down into getting what he or she wants, wherever, whenever and however she wants it. So we look to continue to expand that.

Okay. And I think on the last call when we talked about the guidance, that certainly came in better than expected, there is some disruption from conversions expected on the shrink line. Now when we go forward with an incremental increase in CapEx and speeding those conversions, what lessons did we gain that kind of helped us outperform there?

Well, the big lesson is disruption is bad, but disruption is critical. And so while we had disruption, we have to give the team credit that -- and disruption is part of growing scale, but we have to give the team credit for maintaining the numbers that we made in the face of our largest conversion ever of over 500 stores. And so what we learned is that it was necessary. What we learned going forward is that it had to be done, and makes us just a bigger company and able to use the synergies that are in place now going forward. But we have one warehouse left, and that's it, we are completely finished and we're converting that warehouse right now.

Okay. And just lastly, years back, we had the IPO in the market. You looked at Rite Aid earlier, and as you said, 2 different paths led you this way. Should we see that IPO exit come back here? What are the future plans for the company?

We continue to look at everything and anything that is out there. We're still active in looking at M&A opportunities, but we're very selective in what we look at. We've got a very deliberate plan. And we believe there are opportunities out there that can add not only scale but also significant synergies, and we look for those as far as an IPO goes. We know that our owners have been very patient in their investment. And that is the next logical thing for us to look forward, and you can probably anticipate when the markets are right and all of the -- everything lines up properly, but we'll probably look for an opportunity to take the company public.

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

It looks like you bought them back -- bought back some of the Safeway and New Albertsons bonds in the quarter. Can you give us a sense for how much or which bonds?

Carla, I don't know that I have the exact specifics there. I can say, directionally, it was about $100 million of the NAI bonds and the rest were Safeway.

Okay. And that was on fourth quarter?

Yes. We did some of the Safeway in the third quarter and then we did some in the fourth quarter. The portion that we did in the fourth quarter was really in concert with the issuance of the new $600 million unsecured bonds that we put out. We took the opportunity at that point to retire the 2019 maturities.

Okay. And if you can -- and now that you've reached the 3.5x leverage target, where do you go from here? And what's your target leverage? And where do you think you need to be if you do want to come public?

Yes. Well, as I think we've been indicating in the last couple of years, our target has been to get to 3x leverage. And as you can see by the significant improvement, getting down to 3.5x is a fact, where we've made a big inroads towards that, but we still are laser-focused on the path to 3x. And through a combination of free cash flow generation and looking at other potential opportunities, we think that we can get there within the next 12 to 18 months.

Okay. And just following on Bill's question about the sale leasebacks. Did you say how much the rent increase was in the quarter? Or how much it will go up on an annual basis because of the transactions you've completed last year?

From 2018 to 2019, it will go up about $43 million.

Okay. And that was probably some of the SG&A increase this quarter?

Yes.

Okay. And the other question is working capital has been -- has swung around quite a bit in the last 2 years. It was a big source in '18 and a big use in '17. How should we think about working capital going forward? Should it be more normalized? Or are there unusual factors we should keep in mind?

A great question, Carla. It should be more normalized going forward. We received some kind of onetime benefits, if you will, through all of the consolidation activity of our distribution centers that we're referring in late 2017 and early 2018 that -- as that kind of works its way through, you saw we had some pretty big pickups in the first and second quarter in particular. And so I would anticipate that most of that is worked through there. We're going to do some additional incremental things across time by automating DCs and so forth, which could also help that number, but I think that's going to be more incremental than real big chunky increases like us.

Okay. Great. And you had a question about store closures. Did you say how many plant stores you plan to open this year? And if you're still thinking $1.2 billion of CapEx is the right range for '19?

Yes. Carla, it's Jim. It's about $1.4 billion in the new store openings, not remodels. It'd probably be in the 12 to 14 range, and these will be in areas that are going to add density to some already very good market shares. But we're remodeling probably and renovating probably more stores as a percent to total than we had in the past, so we're excited about that as well.

Okay. You didn't give a number on the remodels for next year, did you?

No. I can't remember. It's over 250. I know that so...

Okay. Great. And then just one other numbers question on the pension, any change? I think you were expecting to contribute only about $13 million this year. Has that changed?

No. That's the number for 2019. So that's a good number.

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

I just had a couple of very quick ones. Circling back to your inflation comments, were those costs or retail? And I was wondering how you feel about your ability to kind of pass forward kind of the full inflation that's out there in the market? Or are you seeing some compression on retail?

Yes. Well, those percentages that I gave you are the CPI, which is retail. There's usually a pretty good correlation, maybe not in the exact quarter, but a pretty good correlation with the PPI. And we are expecting to see vendors and we're seeing vendors pass-through increases as we speak. So -- and some of this is commodity-specific, of course, and -- but we think that it's going to be a little bit more of an increase relative to last year by what you see out there by the USDA and other analysts that are coming up with estimates.

When we last talked on the last call, you guys had highlighted some pressures from the fourth quarter. Recall the latest fires in California and an earthquake in Alaska. Your numbers were very good and above the guide range, so I assumed that none of those really materialized into what you thought they would be?

Well, they definitely were headwinds, and we did incur some costs. I won't say that individually any of those were super-material, but if you aggregate them together, it was a number. It's just that between the -- primarily the 2 things that we talked about, really doing -- performing real well on shrink, and particularly, in some of our conversion stores coming around better as well as having higher fuel margins. Those 2 or 3 things aggregated together allowed us to offset those headwinds that we talked about.

And I will say that mitigation by the team at those particular areas was strong, it was swift, and we were backing business as quick as we could and possibly be.

And then my last question is on the fuel margins, which were higher in the fiscal fourth quarter because of some dip in gas prices, now that gas prices are increasing and we're seeing them at -- over $4 in California, I think, I assume that, that reverse is a bit against you?

That's right. We'll just have to see where it goes. It certainly has moderated back to kind of the normalized rate. If things start -- it's interesting. If prices increase, just across a long number of months, it may not impact us very much because you're able to pass things along in the same time frame that the prices go up, it's really more if it happens quickly when you can end up being on the short end of the stick. It's similarly the other way in the fourth quarter as prices really took a dive.

Our next question comes from the line of James [Wing] from Black Diamond Capital Management.

Just a few quick points. Can you talk a little bit about any disruption from Walmart, neighborhood market stores? How that disruption has changed over the past year? And whether that's still a concerning headwind?

Well, competition, in general, has always been a headwind and we fight those daily. I don't have any concrete information on the Walmart neighborhood markets that compete with them. And we're a completely different brand of retailer than the Walmart neighborhood market. And so it's -- they're no different than the ALDIs or the [Eagle] out there that we compete favorably as well. So we look at these. We throw them into the mix of all the other competitors that are around there and compete with them but service the customers in our own market.

Okay. That's helpful. What percent of your distribution is in-sourced versus outsourced? Because you mentioned on the call that you guys are going through an automation of distribution center. And we also saw that you have a new contract with KeHE Distributors. So I was just trying to understand that better.

No, no. KeHE is a specialty. Yes, they are specially slow movers. We are primarily -- we primarily do our own internal sourcing. We do have some third-party agreements, but by and large, over 90% of our business is through our own DCs.

Got it. What do you -- how should I think about specialty distribution, then?

Well, I'm not sure what you mean by that. We use some third-party specialty distributors, but we also use our own for specialty foods. It's a big part of our growth in terms of our premium stores, but I'm not quite sure I understand the question.

Well, I guess, I'm trying to understand the difference between a specialty distributor and the other category?

Well, yes, it's just a type of products. So we're not going to carry in our warehouse all of the specialty items that we usually do. They are slower moving items. And so this is why we usually use these third-party carriers to supply us with these products.

And they are case pick than each pick.

Yes. I mean, a good point, Shane. They are each pick versus case pick.

Sorry, what was that?

They are each pick versus case pick. Their warehouses are set up primarily in grocery for a case pick.

Got it. Okay. And lastly, you mentioned you compete with about 250 Whole Foods storefronts, right?

Yes.

How do you think about the trend in natural and organic foods? Because we know that's kind of a big thing across all groceries, but the growth in that sector might be decelerating a bit. So how should we think about that?

Well, I mentioned earlier in my remarks that our O Organics and Open Nature are growing at a strong double-digit clip. As a percent to pull, in our fresh departments as well, O Organic is on the rise. And it's part of what everybody's offerings are now, and we look at continuing to grow this with our next-gen Own Brand items led primarily by O Organics and Open Nature. So we're very bullish on this business. And we feel like we're capturing, and we'll continue to capture through innovation, through the right offerings in all the departments across the entire store more and more of these items.

Have you -- do you feel any sort of compelling pressure to undergo any price cuts in response to Whole Foods?

Well, again, we look at pricing by division. We look at pricing by division. We look at pricing by competitor. We all go to market different, and so everything that we do is basically mirrored in what our prices are out there. And again, we're promotionally driven company.

Okay. I think we need to conclude the call now. We're a little over time. So thank you so much for participating today. And if you have any follow-up calls, [Cody Purdue] and I will be available for the balance of the day. Thank you.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.