© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Albertsons Third Quarter 2018 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. And now I'd like to turn the call over to Melissa Plaisance, GVP of Treasury and Investor Relations. Thank you. You may begin.
Hello, and thank you for joining us for the Albertsons Companies' Third Quarter 2018 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. Today, Jim Donald will touch on our recent results, discuss some of our plans to grow and improve our business, share some observations and provide an update in a number of key operating areas. Bob Dimond will then provide an overview of our third quarter results and Jim will then make some closing comments. I would like to remind you that management may make statements during this call that include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not limited to historical facts, but contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements will be contained from time to time in our SEC filings, including on Form 10-Q, 10-K and 8-K. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. Please keep in mind that included in the financial statements and management's prepared remarks are certain non-GAAP measures, and 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 thanks to all for joining us today. As many of you have read this morning, we continue to make good progress and are delivering solid results. During our third quarter, we had identical sales of 1.9% and our adjusted EBITDA was approximately $650 million, a 50% improvement over our third quarter of last year. With some headwinds coming from our recently converted divisions, we have updated our 2018 EBITDA target to be in the range of $2.65 billion to $2.7 billion. We don't anticipate these conversion headwinds will continue into fiscal 2019. 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.
Now that we have completed our store system's conversions, we are beginning to move away from a company that has grown by acquisition and synergy realization to a company that is growing by coordinated retail execution between our well-located store locations and our eCommerce business with the potential to grow in an omnichannel retail environment as our consumer preference continues to change. Our new capabilities, derived in large part through our integration efforts, has set us up to orchestrate and to facilitate our customer ability to shop with us however, whenever and wherever they want. Improving our retail store format is key here, as the strength of a good eCommerce business to sit atop a strong 4-wall business and their interdependency cannot be underestimated. In addition, disruption in all forms continues to accelerate in our retail environment, and it's happening at a quicker pace than ever before. As I mentioned, having a solid brick-and-mortar foundation is key to a solid eCommerce business. And creating disruption within your company through a poor customer experience in-store or online is potentially a permanent disruption. We are cognizant of that and continue to improve daily, to create an experience that separates us from our competition. We are a fresh, perishable-driven company as shown by our 8 out of our top 10 items, that's units sold, are in our perishable departments throughout the company. And we're a local company, with over 20 banners throughout our 35 states, with an average of close to 100 years in our local communities. Integrating into our convenient locations, broad assortments, own brands and progress store experience is a growing eCommerce business, as evidenced by our 73% growth in eCommerce this quarter. As we rack and stack our eCommerce initiatives with our competition, we keep in mind the importance of investing in the in-store, what I call, 4-wall experience as well as our online experience, and I call that no wall. As we continue to innovate in our 4-wall environment coupled with our mission of continuing improvement in eCommerce, we balance and blend our use of capital that keeps the emphasis on growth in both. I'm very pleased that this combination of capital investments continued in the third quarter combined with our entire divisional execution and our focus on efficiency and changed management. In the 4-wall environment, as we move forward towards fiscal 2019, we continue to accelerate remerchandising and refreshing our store base, refining and expanding our fresh offering and our convenience grab-and-go solutions. We stepped up the expansion of our natural organic, specialty, healthy and ethnic offering. We will speed up and strengthen our rapidly growing Own Brands portfolio, and we're going to further enhance our pharmacy and specialty pharmacy business as well as our wellness halo, as evidenced by our 2018 inventor of the year award in pharmacy. We will also accelerate and grow our Hispanic market through our Rancho and other stores in Hispanic markets, and we'll move quickly to leverage data analytics in all of these areas. In the no-wall environment, we plan to accelerate and grow eCommerce in an economically viable way using the combination of our own operations and other partners. We're going to expedite and expand home delivery, Drive-Up and Go and Instacart deliveries. We're going to expand Grubhub and Uber Eats in our dense markets. And we will continue to leverage our loyalty program and the data and the insights it provides. Our overall eCommerce strategy is to lead in areas that play to our fresh and local strengths and to invest in areas where it makes sense using current models already in the market. We want to go deep in our big markets first, fine-tune a winning strategy and then roll that out to additional markets. All that being said, continuing to refine and improve our bricks-and-mortar business in all of our operating areas is critical here, as the key initiative I just outlined will bolt-on to a solid foundation. While industry experts have generally accepted the fact that eCommerce investments are necessary in this current war-of-attrition environment, 2019 will see our partnerships in technology season. Our innovation will continue to expand to better serve our customers. Briefly, our plans for eCommerce are as follows: pilot and partner in 2019 to build and grow an economically viable and scalable eCommerce model using micro fulfillment centers; maximize our store infrastructure through the integration of our point-of-sale systems with various third parties, such as Instacart, Uber Eats and Grubhub; grow Drive-Up and Go in a viable way using a combination of our own operations and third parties with an accelerated rollout; and then we want to grow the marketplace, our infinite aisle business and use this platform for other categories. We are beginning our second warehouse automation project in Chicago, Phase 1 of which should be completed at the end of 2019. In addition, we currently plan to automate 3 more large distribution centers over the next several years. We are accelerating both our customer service experience as well as our employee productivity through our front-ends with an accelerated rollout of self-checkouts and expansion of our scan-and-go technology. Also, with over 395 fuel stations, we're looking to expand our One Touch Fuel, which allows our customers to seamlessly pay for fuel through our online app. And we will also see our data science platform deepen and create efficiencies both in store and in eCommerce that we anticipate will contribute to our EBITDA margin over time. These include improvements in demand forecasting, the way we price our products, our loyalty program and our merchandising. We're accelerating investments in and expansion of our capabilities in eCommerce, digital marketing and loyalty programs to provide value for our customers and drive sales. Our total eCommerce sales, including Instacart and Plated meal-kits grew 72.5% year-over-year in quarter 3 2018. We have expanded our Drive-Up and Go pickup stores to 215 stores by the end of quarter 3, '18, and we plan to expand to over 250 stores by fiscal year-end 2018. As mentioned earlier, we have also 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 13 of our divisions in 1,961 stores at the end of our third quarter. We also continue to see growth in our pharmacy delivery business, which includes mail-order MedCart and specialty drug delivery. We continue to make data-driven, personalized offers to our customers through Just for U, which we have expanded into all markets. In fact, at the end of the third quarter, our registrations for Just for U in United loyalty program increased 24% year-over-year on a combined basis. We're also continuing to expand fuel rewards and have begun to offer grocery rewards. The weekly average sales to participate in these 2 programs continues to be significantly higher than to nonusers, which is very encouraging. The Own Brands portfolio is well established and consists of more than 11,000 high-quality products, which resonate well with our shoppers. In fact, we have 4 $1 billion brands: O Organics, Lucerne, Signature and Signature Café in the portfolio. Our Own Brands sales penetration continues to grow reaching 25.2% in quarter 3, which is our highest sales penetration rate since the merger with Safeway. Own Brands continues to deliver on innovation, with over 1,000 new-item introductions in the last 3 quarters and over 100 items in the pipeline for the fourth quarter of this year. We recently introduced a new brand, Signature Reserve, to highlight super premium seasonal and everyday products to surprise and delight our shoppers. The Reserve portfolio currently boasts 31 SKUs and our excitement is building as we explore the brand possibilities. Open Nature, our brand that encompasses natural brand products free from ingredients like antibiotics, MSG, and O Organics, our organic brand, continued to deliver strong sales growth posting a 15.7% sales increase for the 2 combined brands in the third quarter compared to last year. Open Nature and O Organics now represent 24.9% of total natural and organic sales at Albertsons, and that's a 191 basis point growth from quarter 3 last year.
We continue our disciplined approach towards managing capital expenditures. Year-to-date, we have spent approximately $917 million, including approximately $45 million for Safeway integration-related capital expenditures. We have completed 91 remodel projects, 88 4-wall for pre-expansions and we opened 3 new stores and continued to invest in our digital marketing capabilities. In fiscal 2018, we now expect to spend approximately $1.4 billion in CapEx, including approximately $75 million for Safeway integration-related capital expenditures. We have opened 7 new stores, completed 130 remodels, including 4 expansions and increased our investment in technology and automation. As we mentioned previously, we are working to automate several distribution centers over the next few years, which will greatly improve labor productivity, increase storage density, enhance inventory management and shorten stocking time lines. Our first automated distribution center in Tolleson, Arizona, became operational in the fourth quarter of 2017 and is performing well. The automation of our distribution center requires a capital investment. We expect this automation would generate significant EBITDA and the improvements going forward. From a technology side of the business, we have completed our 3.5-year journey of converting all the Albertsons stores onto our Safeway IT systems. We recently completed 1 additional distribution center during quarter 3. Our attention is now focused on new projects that will position us even better for growth going forward. I'm also pleased to report that the realization of synergies continues to be on track. We continue to expect to deliver $823 million of synergies on an annual run-rate basis by the end of fiscal 2018. And finally, as I mentioned on our last call, I continue to connect personally with our associates in our stores, distribution centers and manufacturing facilities. And over the last 6 weeks, I visited with our associates impacted by the fires in California, the earthquakes in Alaska. Quite frankly, I was blown away by their commitment to the community and their sense of urgency towards getting their stores back open to serve their customers. We are committed to supporting their efforts with financial aid, both personally and professionally; their everyday efforts and the efforts of all 280,000 associates, both 4-wall and no-wall, continue to set us apart from our competition. With that, I'll turn the call over to Bob Dimond, our Chief Financial Officer, for review and an overview of our third quarter results.
Thanks, Jim, and hello, everyone. Sales and other revenue increased $241 million or 1.8% to $13.8 billion during the third quarter of fiscal 2018 compared to $13.6 billion during the third quarter of fiscal 2017. The increase in sales was primarily driven by our 1.9% increase in identical sales and an increase in fuel sales, partially offset by a reduction in sales related to store closures. The identical sales were our highest since the first quarter of fiscal 2016. Gross profit margin increased to 27.8% for the third quarter of fiscal 2018 compared to 26.7% for the third quarter of fiscal 2017. Excluding the impact of fuel, gross profit margin increased 140 basis points. The increase was primarily attributable to lower shrink expense, as a percentage of sales; lower advertising costs; improvements in margin related to an increase in our Own Brands sales penetration rates; and the realization of our cost-reduction initiatives. Although our gross profit margin improved compared to the third quarter of fiscal 2017, it was negatively impacted by elevated shrink expense within the 3 divisions that converted during fiscal 2018. Selling and administrative expenses decreased to 26.6% of sales during the third quarter of fiscal 2018 compared to 27.4% of sales for the third quarter of fiscal 2017. Excluding the impact of fuel, selling and administrative expenses as a percentage of sales, decreased 70 basis points during the third quarter of fiscal 2018 compared to the prior year. The decrease in selling and administrative expenses was primarily attributable to lower depreciation and amortization expense, a reduction in acquisition and integration costs, as the last of the store conversions were completed during the third quarter of fiscal 2018, and the realization of our cost-reduction initiatives. Interest expense was $213 million during the third quarter of fiscal 2018 compared to $193.9 million during the same quarter last year. The increase in interest expense is attributable to the company's refinancing transaction in the third quarter of fiscal 2018 and the related writeoff of deferred financing costs and original issue discount. Adjusted EBITDA was $649.7 million or 4.7% of sales in the third quarter of fiscal 2018 compared to $429 million or 3.2% of sales in Q3 of last year. The 51.4% increase in adjusted EBITDA primarily reflects the company's identical sales increase, improved gross profit and realization of the company's cost-reduction initiatives. Net cash provided by operating activities was $1.069 billion for the fiscal 2018 year-to-date period compared to $710.6 million in the prior year period. The increase in cash flow from operations was primarily driven by the improvements in operating results compared to the prior year period and changes in working capital, primarily related to accounts payable and inventory. As we indicated, during the quarter, we successfully amended our term loan facilities, paying off the term loan B4 tranche in full and replacing it with a new term loan B7 tranche, resulting in an extended maturity profile and an overall $1 billion reduction in our aggregate term loan facilities. In addition, we also refinanced our ABL facility, extending its maturity profile as well. We are pleased with the results of the refinancings and will continue to look for opportunistic ways to enhance our capital structure and further delever as we move forward. Subsequent to the end of the third quarter of fiscal 2018, we also successfully completed the sale and leaseback of 5 distribution centers for an aggregate purchase price, net of closing cost of approximately $660 million. During and subsequent to Q3 of 2018, we have been using proceeds from our sale and leasebacks and seasonal cash inflows to pay down debt. In summary, we reduced our term loans outstanding by approximately $1 billion. We paid off over $300 million in Safeway bonds and currently have no outstandings under our ABL. In addition, we will be looking at opportunities for further debt reduction with excess cash. We continue to be pleased with our financial performance to date in fiscal 2018 given that elevated level of integration activities and continued investment in the expansion of our digital and eCommerce customer offerings during the first 3 quarters of fiscal 2018. Please note that in year-to-date 2018, we converted 506 stores, which were more store conversions than all 3 previous fiscal years combined as we converted 219 stores in fiscal 2017, 151 stores in fiscal 2016 and 91 stores in fiscal 2015. Though we continue to experience significant improvements in shrink rates during the first 3 quarters compared to fiscal 2017, these improvements were lessened by higher-than-expected shrink rates in the stores and distribution centers that were converted during the current year, which we believe will persist into the fourth quarter. Our third quarter results were impacted by the industry-wide recall on romaine lettuce, the fires in California and the recent earthquake in Alaska. Also given the recent sale and leaseback of 5 distribution centers and the 2 earlier this year, our fiscal 2018 results are expected to be impacted by approximately $17 million in incremental rent expense. Although these transactions have been opportunistic and have aided in our deleveraging during the year, we are incurring incremental rent expense that was not in our original guidance. Collectively, we believe that these items will negatively impact our expected fiscal 2018 adjusted EBITDA margin by approximately 10 basis points. With respect to our 2018 outlook, we're providing the following update: we now expect identical sales growth to be in the range of 0.8% to 1% for the full year and fiscal 2018; we now expect adjusted EBITDA to be in the range of $2.65 billion to $2.7 billion; we continue to expect interest expense to be flat to slightly down compared to fiscal 2017; and our effective tax rate to be in the range of 29% to 30%, excluding onetime asset sales and discrete items; and as previously mentioned, to spend approximately $1.4 billion in capital expenditures, including the acceleration of our DC automation and digital marketing capabilities. And now Jim will provide some closing remarks.
Thanks, Bob. We're pleased to see improved identical sales in quarter 3 as our efforts to improve the 4-wall and no-wall environments through remerchandising and refreshing our store base, leveraging of data analytics and expanding Own Brand offerings resonated with our customers. These efforts coupled with successful cost reductions, including continued improvements in shrink, the achievement of the remaining fiscal 2018 incremental synergies from the Safeway acquisition and the incremental cost-reduction efforts offset in part by integration-related headwinds and selective price investments should allow us to generate improvements in sales and achieve adjusted EBITDA of $2.65 billion to $2.7 billion in fiscal 2018. As we move forward, we intend to pay down debt and enhance our financial flexibility. Let me wrap up with this thought. The technology of today is not to be overestimated, both the technology used in leading our associates and of course, leading technology, which prepares us for the future both in our 4-wall and no-wall environment, finding new ways to create engagement in both tactics and tools will continue to make a difference for us in this ever-growing omnichannel environment. And just as we can't have B-level technology in the systems we use to run and track our business and allow us to compete effectively in the eCommerce market, we need to make sure we have A-level associates ready to take on all of our challenges and we are investing in both. With that, I will now turn the call back to the operator for questions. Thank you.
[Operator Instructions] And our first question is from William Reuter from Bank of America Merrill Lynch.
My first question is on the guidance revision. You laid out maybe 3 or 4 different items which are contributing to the revision, none of which were anything around the competitive environment changing. Has anything changed in terms of the competitive environment? Or was it really just these one-off items, like romaine and fires and some challenges with shrink?
William, it's Jim Donald. Look, I'd be silly if I said the competitive environment wasn't just as tough as it always is. What we're finding is that we're competing as we compete division-by-division with these different retail competitors and eCommerce competitors I think very favorably and not that we're just -- we're killing our results and we want to show that, but we were able to make some gains in terms of where we're at versus the year and also towards our budget. The big headwinds, though, are as Bob had mentioned, and the good news on that is the conversions primarily are done, and we're working through some of those just finished conversions as I speak. So a long story short, it's a little bit of each. We're seeing, though, that the competitive environment today, I call it, rational. And I think this positions us, as we go forward, to continue to see positive results in all of our areas.
That's helpful. You mentioned you expect to be at an $823 million run rate of synergies by the end of fiscal year '18. What will actually be achieved in your P&L because the difference between those 2 should be a tailwind for '19?
That's correct, Bill. So we will have all but about $47 million realized into our P&L. So about $776 million will be in the P&L by the end of the year. And to your point, since our run rate will have the full amount of synergies of $821 million accomplished this year, we'll have an incremental, the final piece of it, of $47 million coming next year, which is really just representing the positive tailwind of the ID TSA going forward.
Okay. And then just lastly for me, I can't remember -- I think over the last couple of calls, I don't remember you laying out what -- or reaffirming what your leverage targets are over what periods of time. What have you been saying to investors recently about your leverage target?
Yes. Well, that's a great question because as you've seen in the quarter, we have paid down a significant amount of debt, $1 billion on our term loan and over $300 million on our bond complex. So at the end of the year, I think, we end up, after the sale leasebacks that we announced being taken into consideration, a net leverage of about 3.8x. So we think that our near-term target is that we ought to be able to be around in the 3x range within 2 years.
Our next question is from Geoff McKinney from Citigroup.
Just a quick follow-up on the -- on both question on leverage. To confirm the $660 million in net proceeds, expect that was largely used up to this point to repay just the ABL, and then you would potentially look at subsequent debt reduction with operating cash flow in the quarter?
Yes, that is true. I mean, when we -- we kind of had a couple of those transactions expanding right around the end of the quarter there. So we would expect to -- we have paid off our ABL that shows on the third quarter financial the $610 million with the new proceeds that we talked about, and then any incremental free cash flow we'll determine how to pay down additional debt as we move forward.
And then how do you prioritize high coupon versus near-dated debt when you think about that?
Yes. I mean as we take a look at balancing, looking at near-term maturities as well as looking at potentially being able to take out some higher yielding or high-coupon debt. So we're evaluating those opportunities, and you'll probably see us talk about that more in future quarters.
Okay. And then last question on the CapEx spend. That's moderated as a percentage of total sales from over the last 2 years. Should we think about kind of that plus/minus 2% being the right run rate from here? And then you called out eCommerce growth at a healthy plus 70% year-over-year. Can you remind us where penetration is? And do you think -- and do you think that you need to potentially accelerate spending there in light of the competitive environment?
Geoff, it's Jim. When I comment on the penetration on our eCommerce business, with regard to the capital, yes, I think that, that is correct. That is the range and the total that we're looking at going forward. I think if I mentioned in my remarks that we're lending this capital to give us what we consider to be a more bang for the capital buck with regard to blending in both the -- reaching more of the assets, the company stores and our eCommerce business, but that's all is good to look at on a go-forward basis.
Our next question is from Bryan Hunt from Wells Fargo Securities.
My first question is the Safeway store have had delivery in them for quite some time. The ones where they have had delivery for in excess of 24 months, can you give us an idea of what the same-store sales growth is on delivery?
Bryan, it's Jim. We're not commenting, again, on the individual pieces of our eCommerce. It is true that Safeway has been pioneered for us on home delivery, but as we look at the start-ups with regard to the home delivery, it's not an immediate run rate that goes pari passu with Safeway, but we're finding encouraging at where these stores are growing and the acceptance by our customers.
Very good. My second question is that you did call out the wildfires, the earthquakes and then the lettuce as the impacts to -- or personal impacts to guidance. Is there any way you could just carve those specific items out for us in terms of the magnitude of the impact to the change in guidance?
Yes. Here is kind of the way I would look at it from a macro perspective, Bryan, is -- are you take the midpoint of that range of $2,675,000,000 that is down $25 million from our previous range. So about just over half of that is due to the increase in a sale leaseback grant that we'll be incurring, about $17 million, during the year. And then the remaining portions is broken out between those remaining items, I would say, maybe half of that is the disruption or the conversion-related issues have been running just a little bit higher than originally expected, and the other half of that is from some of these natural disasters that we had to -- impacted a little bit by. So not individually hugely material but when they collectively are taken together, it's going to put just a little bit of pressure. The good news is some of that is just onetime and will not recur in the coming year.
And also, for those on the call, you might have read that we had a 5.1 earthquake. And lastly, yesterday, they are calling it an aftershock, but we don't have any damage to the stores or distribution centers though, just an FYI.
And then my last question is, asset value has been a strong point of the credit story for quite some time. You all continue to do sale leasebacks. Can you give us an idea of, one, what the amount of appraised real estate is still available in the system and unencumbered? And then second this last, batch of sale leasebacks you did for $660 million, what was the realized value of those assets relative to the appraised value? And that's it for me.
That's a great point. And as we looked at these sale leasebacks, they really have been opportunistic in nature. As you know, the real estate market has been on fire and has had some very good opportunities for us to realize in excess of what our appraised values were. So as you might remember, pre any of the sale leasebacks, either those that we've done this year or the couple we did last year, we had $12 billion of appraised real estate on the books. Now post the sale-leaseback activity, including those that we announced after the end of the third quarter release here, it is now at $10.4 billion. So we have still a significant portion of our original real estate appraised value that we still own. What's interesting is that difference, that $1.6 billion of appraised value that related to the sale leasebacks, that compares to roughly $2 billion of proceeds that we have received. So I'm not going to go in and break it out by tranche, but we have been able to exceed, I guess, these valuations that we've received that have exceeded the value of our upraised real estate on a range between 25% and 30%. So it's been very positive from that perspective.
Our next question is from Carla Casella from JPMorgan.
On that same note, what is your view towards seeing future sale leasebacks? Is there a push to do more at this time? Or is that something you see as "keep that real estate value in your back pocket for longer term down the road?"
It's a great question, Carla. I mean, we continue to evaluate additional transactions. I can't say that we won't do any. I mean, there will probably be additional opportunities, and there's not a big rush to go out and do a ton, but if we get presented with other opportunities that make sense, we will take advantage of.
But it's also safe to say, Bob, that -- all of the other cash proceeds whether it's free cash flow generation or sale leaseback, we have the member from the board, our investors to add to these cash proceeds, we're investing in the business, meaning near-term debt maturities and other areas that we see will make us just a better company.
And then also -- can you update the -- I think the last we saw, you owned about 42% of your stores and 59% of the DCs. And by our count, the stores still you don't know the highest percentage of the number of stores that are in the DCs. Has that come down significantly? Because I know there is a -- how many DCs, I'm wondering, do you have now? And how many of those are owned?
I don't have the percentage real handy there, but we have this year, including the 5 that we just announced, that closed in fourth quarter, we've now leased 7, a total of 7, and -- yes, so that's 7 out of 24 total.
Okay. And have you updated the pension contribution you will have to make in 2019? I know you made the big payment this year. Will that come down for '19?
It will. We had taken a look at, real carefully, the analysis of if we made this voluntary prepayment of the $150 million that was due for us. And it really just accelerates what we would have had to have paid in 2019. So next year's 2019 cash contribution requirement is only $13 million, so pretty small. Some real benefits though outside that by paying that early. We are able to reduce our PBGC premium that needs to be paid, and those are real dollars savings as well as there's some tax benefits as well as -- that pertain to accelerating it.
Okay, great. And then just one last one, just to clarify. So if we look at your full year EBITDA guidance, that implies the fourth quarter will be down just in low single to mid-single digit. Is that correct?
Yes.
Our next question is from Karru Martinson from Jefferies.
You guys talked about moving away from acquisitions and synergies. Are we to understand that, that's kind of just off the table and nothing out there that's there or valuations that's driving that decision?
It's Jim. No, we're -- it's not valuation and it's not the opportunities, we're looking at all of these, whether they are sizable opportunities or tuck-in opportunities. We want to make sure, though, that when we do look at these and we do come forward with it that it's immediately accretive to what it is that we're doing with regard to the division that a retail opportunity would exist in. And so we're getting calls daily about opportunities out there, and Justin and his team are constantly looking to see what's out there and what it will do for us.
And when you talk about the headwinds from the recent conversions, I mean, what are some of the steps that you've done to date to reduce that shrink in those stores?
Well, I can take a look at shrink as a company and not just the converted divisions, and we've basically created a full-time strength reduction program starting with individuals in divisions that basically are leading our teams through, what we call, various fundamentals that were built on the best-of-the-best business cases with regard to shrink reduction. That's from the bricks-and-mortar, people-to-people point of view, whether it's converted store or whether it's not. In addition to that though, the tools that we're using, whether it's informed on labor scheduling, whether it's vision pro or production planning and other areas that we're working on with third parties, we're getting our arms around the science behind it as well as the art, but we see opportunities on a go-forward basis that communication is the key fact here. And when we look at the work that we're doing in, what we call, S works, similar focused areas that we share results on and are fresh. We're a large, large retail of fresh products. And some of the quick hits that we've gotten are all around production planning or ineffectiveness and the daily disciplines that include things like just dish-plate levels or inventory on the floor. The foundational piece of it, what we call this X work -- S works, is this all about shrink awareness, the physical security of the building, manager scheduling as well as knowing a large part of shrink comes from both internal and external theft. So at a store, it's all about backrooms, and it's all about being able to have the right amount of inventory at the right time. One of our use cases that we're working on in 2019 is demand forecasting. We think that's going to enable us to reduce our shrink even more. Now we have vendor relations that we're working with each individual vendor to let them understand what we're doing from a shrink perspective and how they can be a part of it. And then we put in the front-end controls, the shrink analytics that we're using as well as the support here from Boise. So it's a fully flushed, people-to-people, large communication and now technology-based organization that, I think, gives it the art and science. So we think there is some major room for improvement. So again, it's not just our converted stores that are giving us but all of the stores as well.
Okay. And just lastly, in terms of the cash proceeds and the cash from operations, it sounds like investing in the business is the first priority, second is to pay down debt. And if you guys want to get to a low 3 year's range in 2 years or so, it kind of sounds like dividends are off the table for now. Is that the correct way to read your guidance there?
Yes, that's exactly right. We have no plans of paying dividends.
Our next question is from Seth Levine from Guardian Life Insurance.
I just have one more quick one here. Did you guys disclose like a pro forma rent expense moving forward?
We have not done that. As we put together our guidance for 2019, which would probably be on our next conference call, we may list that out for you.
Okay, that would be helpful as you move into transition the portfolio from loan to lease.
Our next question is from Hilary Langworthy from Blank -- Black Diamond Capital Management.
I wanted to know if you could tell us the number of total square feet sold in those 5 DCs.
I don't happen to have that level of data with me right at this moment. So I mean, our average distribution centers are somewhere around 1 million square feet each. So it's going to be directionally 5 million square feet.
Okay. Great. And any cap rate that you can share?
I think we've shared publicly in our documentation by each of the tranches what the purchase price was and what the rent is, so you can calculate it from there.
Our next question is from Bryan Krug from Artisan Partners.
Would you mind giving a little color as to like where you are pricing is relative to Walmart as -- if you will get a in-baskets daily, like Walmart has been dropping prices to give some sense like how the gap has evolved to from where it was a year ago to where it is today?
Well, I'm not going to talk about the pricing as it relates to Walmart. I will tell you how we price this by division and by market. So for me to say that the pricing for Walmart wouldn't necessarily be even directionally correct. In addition, we also have offers through our Just for U program that don't show up on the pricing as well. And so when you look at not just Walmart but for all of our competition, again, by pricing it by division, we calculate in internally what our Just for U margins are as well. The in-store pricing decisions -- decentralization really works when it comes to pricing because the competitive landscape changes. And when we look at our entire portfolio of products, we're a perishable-driven company, as I mentioned earlier, and when you are perishable-driven, you tend to have higher margins, but you also have different pricing components that might tend to lead to accelerated margins when a competitor like a Walmart doesn't have the quality or the specs that we have in our produce department. So again, when we look at our online pricing and our in-store pricing, our goals -- we're not going to necessarily be the all-time low price, believe me, but through our promotions, we're able to -- and through our Just for U, compete competitively in all these particular markets.
Okay. Is there any way to quantify that, in terms of what the gap used to be versus what it is today? I realize like you do have higher quality produce. But just like there was a 20% gap and now it's 30% or like -- to get some sort of sense of magnitude because across the board you've just seemed like Walmart and all, they get more price-competitive and I wasn't sure how that translates into the gap?
I don't have access to that, but you bring up a good point with all the -- and with [ label ]. So our pricing, the way we look at it, it runs the gamut from our small box discounters up through Walmart and all places in between. And what we try to do is find the sweet spot for our customer, based upon the data that we have, based upon the Just for U offers and based upon what we do on a promotional basis. It's not say that we don't look at pricing every day because we do in each division. And what we also have available to us, too, is our own brand, which that doesn't necessarily come into these price comparisons as well. So what we're looking at is personalized pricing, market-by-market, category-by-category. And we're finding that the consumers are first and foremost telling us how we're priced versus everybody else.
Our next question is from Azeem Haider from BlueMountain Capital.
First of all, thank you so much for presenting a really good color and transparency on devaluation, the real-estate portfolio and the use of proceeds thereof. One additional question, just to tack a little bit differently, can you sort of give us a sense how should we be thinking about the dark value of your real estate portfolio? I know this is the metric that was previously presented but hasn't been presented lately. So any sort of direction how should we be thinking about this? It will be helpful.
Yes. The question is due to surplus property that we make out what the dark value is of that, it has become a pretty small amount. We've done -- our real estate team has done a fantastic job of getting rid of a lot of that. So we don't have any specifics that we're providing on -- or updates on that at this point.
Our next question is from Scott Dempsey from DoubleLine Capital.
Just a quick one for me. In the past, I think you've previously broken out same-store sales by kind of price and foot traffic. I was wondering, if you aren't providing that going forward, can you maybe just broadly comment on foot traffic for the quarter and expectations going forward? Any color you might be able to provide on that would be helpful.
Yes, Scott, you are right. We ceased providing breakout of traffic and ticket quite some time ago, much like a lot of others. So I'm just not prepared to provide any color on that today. We're happy with our ID sales trends that we've seen here over the last several quarters, and that's what we will be talking to going forward.
Our next question is from Mary Gilbert from Imperial Capital.
I wanted to find out what the opportunity is in terms of basis point from shrink in 2019? And if you could talk about potential top line traction? Are we expected to see top line ID? And I know you're not giving us specifics on per quarter, in terms of traffic and price and mix, but just how you're looking at that? What you're seeing in terms of inflation? And what that means for 2019? And also from a competitive perspective, any significant openings or pricing moves in your various markets?
Mary, thanks. This is Jim. On the competitive opening front, we are seeing a somewhat diminished amount of bricks-and-mortar being built. Now there are the small box discounters like Lidl and all the -- who are putting up stores, and we compete with a lot of them now and so we feel comfortable about competing with them, but whether it's Kroger or whether it's Walmart, we're seeing that -- we're not seeing that the store -- the amount of stores being built -- as well as us, too, I mean, we are putting up less stores, too. We are encouraged by some recent reports on food inflation, and some of the reports are saying that when you look at sort of where it's going, it's about we're today staying at 1% to 1.5% range. As we go forward in the 2019, it breaks down by all departments. So that's a bit of a tailwind for us as well. The opportunity on ID sales for us is to continue to take advantage of all the opportunities we have, like, we do see shrink, which we think there is more, I won't get into the exact details on that. There are other cost opportunities to help generate some of our own tailwinds. So that was in our 4 walls. In our eCommerce business, we're able to generate that positive ID. I'm looking at 2019 as a year that basically continues to follow the trends that we're seeing in 2018 because of all the things that I have just mentioned. And so we look at the tailwinds that we can create on our own as well as help from inflation in all those areas to give us a -- what I'm considering to be an exciting year ahead of us.
Yes. So you see EBITDA improving further in 2019? And then with less CapEx that means more free cash flow, is that fair to say?
Well, Bob is looking at me like we're not talking about '19, we're talking about it next quarter, but directionally that's kind of sort of where we're heading.
This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.
Thank you, everyone, for participating today. I'm available for any follow-ups over the course of the rest of the day. Thanks so much -- and the next week. Bye-bye.
Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you, again, for your participation.