Business context and reporting period
Albertsons Companies, Inc. operates grocery and drug stores, pharmacies, fuel centers, distribution centers and manufacturing facilities. This filing covers the 12 and 40 weeks ended December 4, 2021, the third quarter and first 40 weeks of fiscal 2021, respectively. The request metadata says “2020 Q3,” but the filing itself is for fiscal 2021 Q3. Comparisons below are to the corresponding periods ended December 5, 2020.
At quarter-end, Albertsons operated 2,278 stores, 1,722 pharmacies and 399 fuel centers. It reports one operating segment.
Financial and operating highlights
| Metric | 12 weeks ended Dec. 4, 2021 | Change vs. prior year | 40 weeks ended Dec. 4, 2021 | Change vs. prior year |
|---|---|---|---|---|
| Net sales and other revenue | $16.73 billion | +8.6% | $54.50 billion | +1.1% |
| Identical sales, excluding fuel | +5.2% | Prior year: +12.3% | -2.3% | Prior year: +18.4% |
| Gross margin | $4.83 billion; 28.9% of sales | Rate down 0.4 percentage points | $15.74 billion; 28.9% of sales | Rate down 0.5 percentage points |
| Operating income | $599.6 million | Up from $258.5 million | $1.77 billion | Down from $1.79 billion |
| Net income | $424.5 million | Up from $123.7 million | $1.16 billion | Up from $994.4 million |
| Diluted GAAP EPS | $0.74 | Prior year: $0.20 | $1.95 | Prior year: $1.71 |
| Adjusted EBITDA (non-GAAP) | $1.05 billion; 6.3% of sales | Up from $967.7 million; margin unchanged | $3.32 billion; 6.1% of sales | Down from $3.61 billion; margin down from 6.7% |
| Operating cash flow | Not reported for the 12-week period | $2.78 billion | Down from $3.00 billion |
For the quarter, digital sales increased 9% year over year and 234% on a two-year stacked basis. Identical sales grew 17.5% on a two-year stacked basis. The filing reports adjusted net income of $457.2 million, or $0.79 per share, for the quarter, and $1.34 billion, or $2.32 per share, for the 40-week period. These are company-defined non-GAAP measures and should be considered alongside GAAP results.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $2.66 billion at December 4, 2021, versus $1.72 billion at February 27, 2021. Cash, including restricted cash, was $2.71 billion.
- Total debt and finance lease obligations were $8.00 billion, including $615.1 million of finance lease obligations. No borrowings were outstanding under the ABL facility; availability, net of letters of credit, was $3.75 billion.
- Management reported a 1.3x net debt ratio. The company estimated liquidity needs of $4.75 billion to $5.25 billion over the next 12 months and said operating cash flow and other liquidity sources should be adequate to meet them.
- Capital expenditures were $1.22 billion in the first 40 weeks. Fiscal 2021 capital expenditures were expected to be $1.8 billion to $1.9 billion. The company paid a $0.12-per-share quarterly common dividend in November, increased from $0.10, and announced another $0.12 dividend for February 2022.
Material changes versus the prior comparable period
- Quarterly sales growth reflected 5.2% identical-sales growth, retail price inflation, higher fuel sales, acquired and opened stores, and pharmacy vaccine activity. For the year-to-date period, sales growth was modest because identical sales fell 2.3%, partly reflecting unusually elevated pandemic-related demand in the prior-year first quarter.
- Quarterly GAAP net income rose substantially, while year-to-date GAAP net income also increased. Year-to-date Adjusted EBITDA and adjusted net income declined, reflecting lower adjusted operating performance versus the unusually strong prior-year period.
- Gross margin rate declined year over year, with inflation-driven product costs and higher supply-chain costs offsetting productivity gains, pharmacy margins and favorable mix. Excluding fuel, gross margin rate increased 10 basis points for the quarter and five basis points year to date.
- Operating cash flow decreased by $213.2 million year to date, with working-capital changes, including inventory, lower Adjusted EBITDA and the prior-year deferral of employer Social Security taxes contributing to the comparison. Investing outflows increased, largely due to higher capital spending.
- Interest expense declined year over year, reflecting lower average borrowings and interest rates. The company redeemed $200 million of 2025 notes and repaid $130 million of Safeway notes at maturity during the quarter.
Outlook, management commentary, risks and unusual items
- Management expected a fiscal 2021 effective tax rate of approximately 22.5% to 23.5%. It did not provide sales, earnings or Adjusted EBITDA guidance in the supplied filing text.
- Management described ongoing labor shortages, wage pressure, transportation and store disruptions, and potential union contract challenges. It also said inflation had benefited sales and gross-margin growth but hurt gross-margin rates; future deflation could constrain sales growth and earnings. COVID-19 effects and the broader economic environment remained uncertain.
- On December 20, 2021, after quarter-end, the ABL facility was amended and extended to December 20, 2026, with a lower unused-line fee and reduced interest rates based on availability.
- After quarter-end, holders converted approximately 262,601 preferred shares into approximately 15.25 million Class A shares, about 15% of preferred shares outstanding at quarter-end. The filing warns that further conversions and sales could pressure the common-stock price and dilute holders.
- Adjusted results exclude items such as equity compensation, LIFO expense, facility and transformation costs, debt-extinguishment losses, and legal or regulatory items. For the quarter, the company’s reconciliation also included a $23.8 million net benefit from certain legal and regulatory accruals and settlements, among other adjustments.
- Contingencies include False Claims Act investigations and litigation related to pharmacy pricing and insulin dispensing, opioid litigation, wage-and-hour matters, and other claims. The company said it could not determine the probability or potential loss range for certain matters, including opioid litigation and the insulin investigation; it recorded estimated liabilities for specified FCA and FACTA matters. Management stated that aggregate reasonably possible losses above amounts accrued were expected to be immaterial, while acknowledging outcomes could differ materially.
- The company estimated its share of underfunding in 27 multiemployer pension plans at $4.7 billion. It said 16 plans potentially eligible for federal special assistance represented over 90% of that estimated exposure and expected the program to help participating plans remain solvent for 25 to 30 years; this depended on final regulations and plan outcomes.
- A new cloud ERP system was implemented at the start of the quarter. Management said controls testing would continue through fiscal year-end and that disclosure controls were effective.
Most important facts an investor should verify
- Confirm the period: the filing is fiscal 2021 Q3, ended December 4, 2021, not 2020 Q3.
- Assess how much sales and earnings growth reflects inflation, fuel, vaccine-related pharmacy activity and pandemic comparisons, versus underlying volume and productivity trends.
- Review the decline in year-to-date Adjusted EBITDA and operating cash flow, the increase in inventory, and the planned capital-spending level; evaluate the company’s stated liquidity assumptions.
- Verify debt totals and definitions, including finance leases, preferred-stock obligations, and the company’s non-GAAP net debt ratio and ABL availability.
- Track labor availability and wage costs, inflation or possible deflation, multiemployer pension funding, and developments in the disclosed litigation and regulatory matters.
- Monitor preferred-stock conversions, potential share sales and dilution, and the effect of non-GAAP adjustments when comparing results across periods.