Albertsons Companies, Inc. — Form 10-K Summary
Reporting period: The filing covers fiscal 2017, the 52 weeks ended February 24, 2018, with comparisons to fiscal 2016 (ended February 25, 2017). Although the request identifies “2016 Q4,” the supplied filing is for fiscal 2017; its fourth quarter was the final 12 weeks of that fiscal year.
Business context
Albertsons operated 2,318 grocery and drug stores in 35 states and the District of Columbia under 20 banners, with 1,777 pharmacies and 397 fuel centers. Its divisions are reported as one operating segment. A legal-entity reorganization occurred during the year; the filing presents the predecessor operating business on a basis reflecting common control.
Financial performance and liquidity
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Net sales and other revenue | $59.925 billion | $59.678 billion |
| Gross profit / margin | $16.361 billion / 27.3% | $16.641 billion / 27.9% |
| Operating income (loss) | $(4.9) million | $640.5 million |
| Net income (loss) | $46.3 million | $(373.3) million |
| Net cash from operating activities | $1.019 billion | $1.814 billion |
| Capital expenditures | $1.547 billion | $1.415 billion |
| Adjusted EBITDA (non-GAAP) | $2.398 billion; 4.0% of sales | $2.817 billion; 4.7% of sales |
| Free Cash Flow (non-GAAP) | $850.9 million | $1.402 billion |
Sales increased 0.4%, but identical-store sales excluding fuel fell 1.3%, driven by a 2.9% decline in traffic, partly offset by a 1.6% increase in average ticket. Fourth-quarter identical-store sales were positive 0.6%. The gross margin contracted 60 basis points, principally reflecting price and promotional investment and higher shrink. Adjusted EBITDA declined on lower gross profit, higher employee costs, and fixed-cost deleverage.
Fiscal 2017 net income included a $963.8 million income-tax benefit, including a $430.4 million provisional noncash benefit from the Tax Cuts and Jobs Act and a $218.0 million noncash benefit from valuation-allowance releases. Before taxes, the company reported a $917.5 million loss. The net-income improvement therefore does not represent a comparable improvement in operating earnings.
Cash and equivalents were $670.3 million at year-end, down from $1.219 billion. Total debt including capital leases was $11.876 billion, versus $12.338 billion a year earlier; debt excluding capital leases was reported at approximately $11.3 billion. The company had no ABL borrowings and approximately $3.1 billion of ABL availability, net of letters of credit. It said operating cash flow and other liquidity sources should cover expected needs over the next 12 months, while noting this depends on continued cash generation and borrowing availability.
Material changes and significant items
- Fiscal 2017 sales were supported by acquisitions and higher fuel sales, which together offset the identical-store sales decline. Fuel revenue rose $411.2 million; new stores and acquisitions, net of closures, added $589.4 million.
- Operating results included a $142.3 million goodwill impairment, substantially related to the Acme reporting unit, and $100.9 million of long-lived asset impairment losses.
- Operating cash flow fell by about $795 million year over year. Investing cash outflow was $469.6 million, aided by asset-sale proceeds, including sale-leasebacks; financing cash outflow was $1.098 billion.
- The company sold and leased back 94 store properties for approximately $962 million net of closing costs, with initial annual rent of approximately $65 million and initial lease terms of 20 years.
- In fiscal 2017 it acquired Plated and MedCart and purchased a 45% equity interest in El Rancho; it also sold its Casa Ley investment and distributed approximately $222 million related to the associated contingent value rights.
Outlook, risks and contingencies
Management expected fiscal 2018 identical-store sales growth of 1.5%–2.0%, weighted toward the second half, and capital expenditures of approximately $1.2 billion. It targeted $823 million of annual run-rate Safeway synergies by the end of fiscal 2018; it reported approximately $675 million of synergies achieved in fiscal 2017 and estimated about $200 million of remaining one-time costs, including $65 million of integration capital expenditures. These are targets, not assured results. Management expected a mid-twenties effective tax rate in fiscal 2018 before discrete items.
The proposed Rite Aid merger, announced February 18, 2018, remained subject to stockholder approval and other closing conditions. The filing anticipated closing early in the second half of calendar 2018. The transaction contemplated substantial committed financing, including a new $1.5 billion asset-based term loan and a bridge facility, among other facilities. Key risks include financing and closing conditions, integration and synergy execution, incremental costs, litigation, management distraction, and increased leverage. The Hart-Scott-Rodino waiting period and a required asset-sale proceeds condition had been satisfied by the filing date; other conditions remained.
Other material exposures include an estimated $4.1 billion share of underfunding in multiemployer pension plans (an estimate, not a recorded direct liability), a recorded $160.1 million withdrawal liability related to the Dominick’s closure under dispute in arbitration, and labor agreements covering about 54,000 employees scheduled to expire in fiscal 2018. The filing also describes unresolved pharmacy-pricing and vaccination investigations, ERISA litigation, and potential claims related to 2014 payment-card intrusions; loss ranges for several matters were not estimable. A customer class action concerning online pricing resulted in a $42.3 million payment into escrow.
Other operating risks include food-price deflation, intense competition and price investment, labor and pension costs, supply disruptions and perishables, cybersecurity, and the transition from SuperValu information-technology services. Management stated that the SuperValu transition was expected to be completed before the service wind-down deadline, but delays could lead to additional fees or disruption.
Most important facts for investors to verify
- Whether fiscal 2018 sales, margins, and cash generation improved as projected, and whether synergy targets were achieved without excessive costs.
- The cash-tax and earnings effects of the Tax Act and valuation-allowance releases, and the finalization of the provisional tax accounting.
- Debt, lease obligations, refinancing needs, borrowing-base availability, and the financing and closing status of the Rite Aid transaction.
- Developments in multiemployer pension funding, collective bargaining renewals, and the disputed withdrawal liability.
- Updates on pharmacy investigations, data-breach exposures, and other litigation for which losses were not estimable.