Albertsons Companies, Inc. — Form 10-Q Summary
Period: The filing covers the 12 weeks ended September 10, 2022 (second quarter of fiscal 2022) and year-to-date results for the 28 weeks ended September 10, 2022. The request metadata says “2021 Q2,” but the filing itself is for fiscal 2022 Q2.
Business context and reporting period
Albertsons operated 2,272 food and drug stores, 1,722 pharmacies and 402 fuel centers. It reports as one segment. Management said it continued investing in digital engagement, store experience and modernization. Identical sales excluding fuel rose 7.4% in the quarter, with retail price inflation cited as a driver.
Key financial metrics
| Metric | 12 weeks ended Sep. 10, 2022 | Prior-year 12 weeks | 28 weeks ended Sep. 10, 2022 | Prior-year 28 weeks |
|---|---|---|---|---|
| Net sales and other revenue | $17.919 billion | $16.506 billion | $41.230 billion | $37.775 billion |
| Gross margin | $5.005 billion; 27.9% | $4.717 billion; 28.6% | $11.550 billion; 28.0% | $10.908 billion; 28.9% |
| Operating income | $531.0 million | $485.9 million | $1.291 billion | $1.173 billion |
| Net income | $342.7 million | $295.2 million | $826.9 million | $740.0 million |
| Diluted GAAP EPS | $0.59 | $0.52 | $1.43 | $1.26 |
| Adjusted EBITDA (non-GAAP) | $1.049 billion; 5.9% of sales | $965.4 million; 5.8% | $2.469 billion; 6.0% | $2.274 billion; 6.0% |
Quarterly revenue increased 8.6%; year-to-date revenue increased 9.1%. Adjusted net income was $418.3 million, or $0.72 per diluted share, for the quarter, and $1.000 billion, or $1.72 per diluted share, year to date. These are non-GAAP measures and should be considered alongside GAAP results.
- Cash flow, 28 weeks: Operating cash flow was $1.652 billion, versus $2.138 billion a year earlier; investing cash outflow was $977.7 million and financing cash outflow was $226.6 million. Cash and restricted cash ended at $3.400 billion.
- Cash and liquidity: Balance-sheet cash and cash equivalents were $3.392 billion. No borrowings were outstanding under the ABL facility; availability was $3.760 billion after letters of credit.
- Debt: Debt and finance lease obligations totaled $7.933 billion, including $826.0 million of current maturities. Fair value of total debt was $7.031 billion. The company also had $5.868 billion of operating lease obligations on the balance sheet.
- Margins: Quarterly gross margin rate fell 70 basis points year over year. Excluding fuel and LIFO effects, management reported a 43-basis-point decline, primarily from product and supply-chain costs, digital picking and delivery costs, and fewer COVID-19 vaccines. Selling and administrative expenses declined to 25.0% of sales from 25.6%.
Material changes versus the prior comparable period
- Higher identical sales and fuel revenue drove sales growth; identical sales excluding fuel were up 7.4% in the quarter versus 1.5% in the prior-year quarter.
- Net income and diluted EPS increased, while gross margin rate declined. LIFO expense rose to $54.8 million for the quarter from $14.6 million; year-to-date LIFO expense was $116.9 million versus $29.1 million.
- Operating cash flow declined year over year, primarily due to working-capital changes, including inventory and accounts payable. Capital spending increased to $1.061 billion from $822.5 million, including digital and technology investment, 81 remodels and one store opening.
- Quarterly interest expense declined to $89.8 million from $109.3 million, which management attributed mainly to lower average borrowings and interest rates.
- Convertible preferred stock conversions continued; approximately 63% of originally issued convertible preferred stock had converted to common stock by October 14, 2022.
Outlook, commentary, risks and unusual items
- No detailed operating or earnings guidance is provided. Management estimated liquidity needs of approximately $10.0 billion over the next 12 months, including the announced special dividend, and said operating cash flow and other liquidity sources should be adequate. It cautioned that future cash generation and ABL borrowing capacity are not assured.
- After quarter-end, Albertsons and Kroger entered into a merger agreement. The stated cash consideration is $34.10 per share, subject to reductions tied to the special dividend and potential store divestitures/SpinCo arrangements. On October 14, Albertsons declared a $6.85-per-share special dividend, capped at $4 billion, funded with about $2.5 billion of cash and the remainder from ABL borrowings. Completion depends on regulatory clearance and other conditions.
- Unusual items include $93.4 million of year-to-date net gains on property dispositions and impairments, primarily real estate sale gains, and a $19.0 million non-cash gain from removing an Excess Plan pension liability after the multiemployer plan’s financial-assistance development.
- Reported risk factors include food and fuel inflation or deflation, wages and labor negotiations, consumer behavior, supply-chain challenges, cybersecurity, and uncertainty around strategic transactions. The company cited ongoing litigation, including pharmacy-related claims and opioid cases; it recorded estimated liabilities for certain matters but said outcomes for remaining opioid claims could not be estimated. It also reported an agreement in principle to pay $6.9 million to settle a California underground-storage-tank investigation.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting. Management said there were no material changes in market-risk exposure or risk factors from its most recent annual report.
Important facts for investors to verify
- Merger conditions, regulatory divestitures or SpinCo terms, and how these affect the final per-share consideration.
- Special-dividend payment and funding, including the resulting ABL borrowings and liquidity position.
- Whether elevated LIFO costs, inflation and supply-chain pressures continue to weigh on gross margins.
- Cash conversion and inventory trends, given lower operating cash flow and increased inventory-related cash use.
- Developments in material litigation and the adequacy of recorded legal liabilities.
- The company’s reported non-GAAP adjustments and reconciliations when comparing adjusted results with GAAP performance.