Albertsons Companies, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 12 weeks and first 28 weeks of fiscal 2023 ended September 9, 2023, with comparisons to periods ended September 10, 2022. Although the request metadata says “2022 Q2,” the filing itself reports fiscal 2023 second-quarter results.
Business context and results
Albertsons operated 2,272 stores across 34 states and the District of Columbia, with approximately 290,000 employees. Its 12 operating divisions are reported as one segment.
- Second-quarter sales: $18.29 billion, up 2.1%; identical sales excluding fuel rose 2.9%. Digital sales increased 19%, and loyalty members grew 17% to 37.4 million.
- Second-quarter earnings: Gross margin was $5.04 billion, or 27.6% of sales, versus 27.9% a year earlier. Operating income was $454.4 million versus $531.0 million; net income was $266.9 million versus $342.7 million. Diluted GAAP earnings per share were $0.46 versus $0.59.
- Adjusted measures: Adjusted net income was $367.7 million, or $0.63 per share, versus $418.3 million, or $0.72. Adjusted EBITDA was $976.9 million, 5.3% of sales, versus $1.05 billion, 5.9%. These are non-GAAP measures.
- First 28 weeks: Sales rose 2.7% to $42.34 billion; identical sales excluding fuel increased 4.0%. Net income declined to $684.1 million from $826.9 million, while diluted GAAP earnings per share fell to $1.18 from $1.43. Adjusted EBITDA was $2.30 billion versus $2.47 billion.
Cash flow, debt and liquidity
- For the first 28 weeks, operating cash flow was $1.35 billion, down from $1.65 billion. Investing used $890.1 million, including $1.08 billion in property, equipment and intangible expenditures; financing used $651.1 million.
- Cash and cash equivalents were $266.1 million at September 9, 2023; cash plus restricted cash was $270.5 million. The company repaid $500 million of its ABL Facility and had $550 million outstanding at period end.
- Total debt and finance lease obligations were $8.45 billion, down from $8.91 billion at February 25, 2023. ABL availability was $3.40 billion, net of letters of credit. Management said it expected sufficient liquidity for the next 12 months and estimated liquidity needs of $5.0–$5.6 billion.
- Common dividends paid during the first 28 weeks totaled $138 million, or $0.12 per share per quarter. The company announced a further $0.12-per-share quarterly dividend for payment in November 2023.
Material changes and management commentary
- Sales growth reflected pharmacy, digital and retail price inflation, partly offset by lower fuel sales. Pharmacy growth and fewer COVID-19 vaccinations, higher shrink and promotional activity pressured gross-margin rates; productivity initiatives partly offset the pressure.
- Second-quarter selling and administrative expenses increased to 25.1% of sales from 25.0%, with merger costs, digital expansion, occupancy and security costs partly offset by lower employee costs and productivity initiatives.
- Interest expense increased to $111.9 million from $89.8 million, reflecting higher average borrowing and interest rates and lower interest income. The second-quarter weighted-average interest rate was 5.6% versus 5.3%.
- First-28-week net income included a $49.7 million tax benefit from releasing a reserve for an uncertain tax position. The period also included $19.2 million of net property-disposition and impairment losses, compared with $93.4 million of net gains in the prior-year period.
Merger, outlook and risks
- The proposed Kroger merger would provide $34.10 per share in cash, subject to reduction for the $6.85-per-share special dividend already paid. On September 8, 2023, Albertsons and Kroger announced a divestiture agreement with C&S Wholesale Grocers covering selected stores, banners, facilities and brands. The previously contemplated SpinCo plan will not be pursued. The divestitures and merger remain subject to conditions, including regulatory clearance.
- The merger agreement’s stated outside date was January 13, 2024, extendable by either party for up to 270 days in aggregate. A $600 million Kroger termination fee applies in specified circumstances if the agreement ends at the outside date after all conditions other than regulatory approval have been satisfied.
- No specific operating earnings or sales guidance is provided in the filing. Management cited risks including food and fuel price changes, wages and labor availability, consumer spending, supply-chain challenges, cyber incidents, and uncertainty, costs and operating restrictions related to the merger.
- Legal matters include False Claims Act pharmacy-pricing cases remanded for further proceedings after a U.S. Supreme Court decision; relators alleged damages exceeding $100 million in each case before trebling and penalties. The company has recorded estimated liabilities. It also recorded a liability for a $107 million Oregon class-action settlement, paid September 11, 2023, and described other pharmacy, opioid and commercial litigation.
Investor verification priorities
- Confirm the merger’s regulatory status, divestiture scope and timing, and any changes to the consideration or closing conditions.
- Track comparable sales, pharmacy and digital contribution, fuel trends, shrink and gross-margin performance.
- Assess the sustainability of earnings excluding the $49.7 million tax benefit and other adjustments, and review the company’s non-GAAP reconciliations.
- Monitor operating cash generation, capital spending, ABL borrowings and availability, interest costs, and debt maturities.
- Review developments and potential exposure in the False Claims Act, PBM, opioid and other litigation matters.