Business context and reporting period
Albertsons Companies, Inc. operates grocery and drug retail stores. This summary reflects the 10-Q’s actual reporting period: the 16 weeks ended June 16, 2018, compared with the 16 weeks ended June 17, 2017. The request metadata says “2017 Q1,” which does not match the filing. At quarter-end, the company operated 2,300 stores, 1,762 pharmacies and 397 fuel centers.
Financial results and liquidity
| Metric | 16 weeks ended June 16, 2018 | Prior comparable period |
|---|---|---|
| Net sales and other revenue | $18,653.4 million | $18,460.0 million |
| Gross profit / margin | $5,170.7 million / 27.7% | $5,058.5 million / 27.4% |
| Operating income / margin | $193.1 million / 1.0% | $82.4 million / 0.4% |
| Interest expense, net | $254.6 million | $270.5 million |
| Net loss | $17.7 million | $204.9 million |
| Net cash from operating activities | $911.6 million | $654.3 million |
| Capital expenditures | $349.5 million | $422.6 million |
| Adjusted EBITDA (non-GAAP) | $815.8 million; 4.4% of revenue | $771.7 million; 4.2% of revenue |
| Free cash flow (non-GAAP) | $466.3 million | $349.1 million |
Cash and cash equivalents were $1,237.0 million at June 16, 2018, versus $670.3 million at February 24, 2018; cash, cash equivalents and restricted cash totaled $1,247.6 million. Current assets were $6,488.9 million and current liabilities were $5,129.5 million. Disclosed total debt was $11,000.4 million, net of debt discounts and deferred financing costs; capitalized lease obligations were $841.3 million. No borrowings were outstanding under the $4.0 billion ABL facility, with approximately $3.1 billion available after letters of credit.
Material changes versus the prior period
- Revenue increased 1.0%; identical sales excluding fuel were 0.2%, compared with a 2.1% decline in the prior period. Fuel revenue rose $154.1 million.
- Gross margin improved 30 basis points overall and 60 basis points excluding fuel. Management cited lower advertising costs, improved product mix and lower shrink.
- Operating income rose to $193.1 million from $82.4 million. Net loss narrowed substantially, but results also included $40.8 million of other income, primarily gains from investment sales and pension-related items.
- Operating cash flow increased by $257.3 million, which management attributed mainly to stronger operating performance and working-capital changes, including accounts payable and inventory.
- The store count fell to 2,300 from 2,329 a year earlier. The company closed 20 stores and opened two during the period.
Outlook, commentary and risks
- Management expected fiscal 2018 capital expenditures of approximately $1.2 billion, including $65.0 million for Safeway integration. It estimated liquidity needs over the next 12 months at $3.75 billion to $4.25 billion and said available liquidity and expected operating cash flows should be adequate, while cautioning that cash generation and borrowing access are not assured.
- Management expected a fiscal 2018 effective tax rate of approximately 25% to 27%, excluding discrete items. Accounting for the Tax Act remained incomplete; the company had recorded a provisional $430.4 million tax benefit in fiscal 2017 and made no adjustment in this quarter.
- The proposed Rite Aid merger remained pending, subject to stockholder approval and other conditions, with closing expected early in the second half of calendar 2018 if approved. The company said required merger financing had been syndicated and the merger had no debt-financing condition. After quarter-end, it issued $750 million of floating-rate secured notes; if the merger is not completed by November 18, 2018, the notes must be redeemed under the stated terms.
- Merger-related litigation, investigations involving pharmacy pricing and vaccination incentives, opioid-related inquiry, data-breach claims and ERISA and False Claims Act cases remain disclosed contingencies. The company said it could not estimate potential losses for several matters. Management’s view that excess reasonably possible litigation losses are expected to be immaterial is subject to uncertainty.
- The company reported compliance with debt covenants. It plans to adopt the new lease accounting standard in fiscal 2019 and expects significant lease right-of-use assets and liabilities to be recognized.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is for the 16 weeks ended June 16, 2018, not 2017 Q1.
- Track the Rite Aid merger’s approval, closing conditions, final financing structure and the notes’ redemption provisions if the transaction does not close.
- Assess the quality and sustainability of cash flow, including the role of working-capital movements, and compare non-GAAP Adjusted EBITDA and free cash flow with their reconciliations.
- Review the company’s high debt and lease obligations, interest-rate exposure, ABL availability and planned $1.2 billion of fiscal 2018 capital expenditures.
- Monitor unresolved legal and regulatory matters and the company’s incomplete Tax Act accounting.
- The 10-Q cover page appears to check “No” for having filed all required Exchange Act reports during the preceding 12 months; verify the filing-status indication and its context.