Albertsons Companies, Inc. annual report, FY2023

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Albertsons Companies, Inc. — Form 10-K Summary

Reporting period: Fiscal 2023, the 52 weeks ended February 24, 2024, compared with fiscal 2022, the 52 weeks ended February 25, 2023. Although the request labels the period “2022 Q4,” this filing is an annual report for fiscal 2023, not a quarterly filing.

Business context

Albertsons operates a U.S. food and drug retail business, reported as one segment. At year-end it operated 2,269 stores across 34 states and the District of Columbia, alongside pharmacies, fuel centers, distribution centers, manufacturing facilities and digital channels. The company served an average of 35.3 million customers weekly.

Financial and operating performance

  • Revenue: $79.24 billion, up 2.0% from $77.65 billion. Identical sales rose 3.0%, while digital sales increased 22%. Lower fuel sales partly offset growth; pharmacy sales were a key contributor.
  • Profit and margins: GAAP net income was $1.296 billion, down 14.4% from $1.514 billion; diluted EPS was $2.23 versus $2.27. Gross margin was $22.05 billion, or 27.8% of revenue, down from 28.0%. Operating income was $2.07 billion, or 2.6% of revenue, versus $2.31 billion, or 3.0%.
  • Adjusted results: Adjusted net income was $1.694 billion and adjusted diluted EPS was $2.88, compared with $1.965 billion and $3.37. Adjusted EBITDA was $4.318 billion, or 5.4% of revenue, versus $4.677 billion, or 6.0%. These are non-GAAP measures; the company cautions they are supplemental and not measures of discretionary cash.
  • Cash flow and investment: Operating cash flow was $2.660 billion, down from $2.854 billion. Investing cash outflow was $1.747 billion, including $2.037 billion of capital investment. The company completed 150 store remodels and opened six stores.
  • Cash and debt: Cash and cash equivalents were $188.7 million at year-end; cash, cash equivalents and restricted cash totaled $193.2 million. Total debt including finance leases was $8.069 billion, down from $8.910 billion. The ABL facility had $200 million outstanding and approximately $3.752 billion available, net of letters of credit.
  • Other obligations: Contractual operating lease payments totaled $8.727 billion. The company contributed $545.5 million to multiemployer pension plans in fiscal 2023 and estimated its allocable share of those plans’ underfunding at $4.5 billion; the filing says this estimate is not a direct company liability. Fiscal 2024 contributions were expected to be about $560 million.

Material changes and unusual items

  • Gross margin rate fell 20 basis points; excluding fuel and LIFO effects, it fell 64 basis points. Management cited pharmacy mix and lower COVID-19 vaccine margins, higher shrink, and digital picking and delivery costs; procurement and sourcing initiatives partly offset pressure.
  • Interest expense rose to $492.1 million from $404.6 million, reflecting lower interest income, higher average borrowings and higher rates. The weighted average interest rate, excluding debt-cost amortization, increased to 5.6% from 5.3%.
  • Fiscal 2023 included $180.6 million of merger-related costs and a $43.9 million net loss on property dispositions and impairments. Fiscal 2022 included a $147.5 million net gain on property dispositions, primarily real estate sales, and $268.0 million of LIFO expense compared with $52.0 million in fiscal 2023.
  • Net income declined despite a lower effective tax rate—18.4% versus 21.8%—which benefited from reduced uncertain-tax-position reserves and additional federal tax credits.
  • Fiscal 2022 included a $3.917 billion special dividend of $6.85 per share. No shares were repurchased in fiscal 2023 or fiscal 2022; regular fiscal 2023 common dividends totaled $276.2 million, or $0.48 per share.

Outlook, risks and contingencies

  • Outlook: Management expected fiscal 2024 capital expenditures of $2.0–$2.1 billion and estimated next-12-month liquidity needs of $5.1–$5.3 billion. It stated it believed available cash, operating cash flow and other liquidity sources would meet near-term needs. The filing does not provide a numerical fiscal 2024 revenue or earnings forecast.
  • Kroger merger: The proposed all-cash merger consideration is $34.10 per share, subject to specified reductions. The FTC and states were pursuing legal actions to block the transaction as of the filing; completion, timing and required regulatory approvals were uncertain. A divestiture agreement with C&S Wholesale Grocers is also contingent on merger completion and regulatory clearance.
  • Labor and pensions: Approximately 200,000 associates were covered by collective bargaining agreements; contracts covering about 28,500 employees were due to expire in fiscal 2024. The company warns that labor negotiations, pension contributions and possible withdrawal liabilities could affect costs and operations.
  • Legal matters: Disclosed proceedings include False Claims Act pharmacy-pricing litigation, pharmacy benefit manager litigation and opioid-related claims. The company recorded estimated liabilities for certain matters but stated it could not determine the outcome or reasonably estimate potential losses for some claims. It also paid a $107 million settlement in an Oregon consumer class action during fiscal 2023.
  • Other risks: Key exposures include intense price competition and thin industry margins, inflation and commodity or fuel volatility, supply and severe-weather disruptions, shrink, cybersecurity and technology incidents, pharmacy regulation, and interest-rate and refinancing risk.
  • Controls and audit: Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Self-insurance liabilities were identified as a critical audit matter because their estimation depends on actuarial assumptions.

Important facts for investors to verify

  • Confirm the correct period: fiscal 2023 ended February 24, 2024; this is not a “2022 Q4” filing.
  • Check subsequent developments in the Kroger merger litigation, regulatory process, divestiture plan and any effect on the transaction’s consideration or timing.
  • Review the GAAP-to-non-GAAP reconciliations and the drivers of lower adjusted EBITDA, earnings and margins.
  • Assess debt maturities, interest costs, ABL availability, capital spending and lease commitments against operating cash generation.
  • Track multiemployer pension plan funding, contribution requirements and collective bargaining expirations, as well as developments in material litigation and contingencies.