Albertsons Companies, Inc. — Form 10-Q Summary
Period clarification: The request identifies “2019 Q1,” but this filing covers the 16 weeks ended June 20, 2020, compared with the 16 weeks ended June 15, 2019. The filing describes these as the first quarters of fiscal 2020 and fiscal 2019, respectively. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Albertsons operated 2,252 stores, 1,726 pharmacies, 402 fuel centers, 22 distribution centers and 20 manufacturing facilities at June 20, 2020. It reports one segment. The quarter occurred during the COVID-19 pandemic, which management said drove substantial increases in store demand and eCommerce use. Albertsons’ IPO occurred after the quarter: its shares began trading June 26, and selling stockholders sold shares on June 30. The company received no proceeds from that secondary offering.
Financial performance and liquidity
| Metric | 16 weeks ended June 20, 2020 | Comparable 2019 period |
|---|---|---|
| Net sales and other revenue | $22,751.6 | $18,738.4 |
| Gross profit / margin | $6,771.5 / 29.8% | $5,239.6 / 28.0% |
| Operating income / margin | $971.8 / 4.3% | $321.5 / 1.8% |
| Net income | $586.2 | $49.0 |
| Diluted GAAP earnings per share | $1.00 | $0.08 |
| Adjusted EBITDA (non-GAAP) | $1,691.0 / 7.4% of sales | $876.8 / 4.7% of sales |
| Operating cash flow | $2,091.9 | $802.7 |
| Capital expenditures | $402.3 | $362.1 |
| Adjusted free cash flow (non-GAAP) | $1,288.7 | $514.7 |
Identical sales excluding fuel increased 26.5%, versus 1.5% in the prior-year period; digital sales grew 276%. Fuel sales declined $487.3 million. Gross margin improved 180 basis points, while selling and administrative expenses fell to 25.4% of sales from 26.4%. Management attributed the improvement primarily to higher sales leverage and lower shrink, advertising and promotional activity, depreciation, and occupancy costs. Reported GAAP results also reflect different property-disposition and impairment results versus 2019.
Cash and cash equivalents were $2,022.2 million at June 20, 2020, up from $470.7 million at February 29, 2020; cash and restricted cash totaled $2,064.5 million at period-end. Operating cash flow benefited from stronger operations and working-capital movements, as well as approximately $140 million of employer Social Security tax deferrals under the CARES Act. The company had total debt and finance lease obligations of $8,703.6 million, including $652.7 million of finance leases; long-term debt and finance lease obligations were $8,484.5 million. There were no ABL borrowings outstanding at quarter-end, and management reported approximately $3.5 billion of availability after letters of credit.
Material changes, unusual items and capital structure
- COVID-19-related expenses included employee appreciation pay, added labor and cleaning, protective supplies, warehousing and inventory costs, and $53 million of hunger-relief contributions. Management identified $89.9 million of discretionary pandemic-related costs and $14.9 million of civil-disruption-related costs among its Adjusted EBITDA adjustments. Adjusted measures are non-GAAP and exclude items management does not consider representative of core performance.
- Albertsons borrowed $2.0 billion under its ABL facility in March as a precautionary liquidity measure and repaid it in full on June 19, 2020.
- On June 9, the company issued convertible preferred stock for $1.68 billion and used an equal amount to repurchase 101.6 million common shares from existing owners at $16.53 per share. The preferred stock carries a 6.75% annual dividend and has conversion and other investor rights. The transactions reduced reported stockholders’ equity.
- The board established an intended common dividend of $0.40 per share annually, or approximately $191.6 million in aggregate, with the first payment expected in fiscal Q3 2020. Payment remains subject to board discretion, legal and debt restrictions, and preferred-stock dividend priorities.
- On July 21, after quarter-end, Albertsons announced a tentative agreement to withdraw from the UFCW National Fund for approximately $286 million, subject to union ratification. The company expected an approximately $286 million pre-tax charge upon ratification. Separately, proposed changes involving the FELRA and MAP multiemployer pension plans remained subject to PBGC approval and could result in a material increase in pension liabilities and a non-cash pension expense charge.
Outlook, commentary and risks
Management gave no specific full-year earnings or sales guidance in this filing. It projected approximately $1.6 billion of fiscal 2020 capital expenditures and estimated liquidity needs of $4.75 billion to $5.25 billion over the next 12 months. Management believed operating cash flow and available liquidity, including the ABL facility, would be sufficient to meet those needs, while cautioning that future cash generation and borrowing access were not assured.
Management said the pandemic’s financial impact would depend on its duration, customer and supplier effects, and governmental responses; the uncertainty made near-term forecasting more difficult. Risks include a reversal of pandemic-driven demand, continued safety and labor costs, product and meat supply disruptions, intense competition and low grocery margins, substantial leverage, pension obligations, and regulatory and litigation exposure. The filing describes opioid litigation, pharmacy-related government investigations, alleged pandemic price-gouging claims, and other legal matters; outcomes or potential losses in several matters could not be estimated clearly. Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether exceptional pandemic-driven identical-sales growth and margins persisted after the 16-week period, and how much incremental pandemic cost continued.
- The sustainability of operating cash flow, including the effects of working-capital changes and deferred payroll taxes, and the company’s ability to fund capex, debt service and dividends.
- The terms, dividend burden, conversion dilution and real-estate exchange rights associated with the $1.75 billion liquidation preference of the convertible preferred stock.
- The status and final financial effects of the National Fund withdrawal agreement and the FELRA/MAP restructuring, including required approvals and charges.
- Developments in material legal matters, pension liabilities, and the company’s approximately $8.2 billion of debt excluding finance leases.
- The filing’s stated $0.40 annual dividend intention versus actual declarations and any applicable preferred-stock or debt restrictions.