Albertsons Companies, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 16 weeks ended June 18, 2022 (fiscal 2022 first quarter), compared with the 16 weeks ended June 19, 2021. Although the request metadata says “2021 Q1,” the filing itself reports fiscal 2022 Q1. Financial statements are unaudited.
Business context and operating performance
Albertsons operates grocery and drug stores, pharmacies, fuel centers and digital shopping services. At June 18, 2022, it operated 2,273 stores. Management highlighted investments in digital engagement, store modernization, own brands, fresh offerings and supply chain capabilities.
- Identical sales, excluding fuel, increased 6.8%, versus a 10.0% decrease in the prior-year comparable period. Digital sales rose 28%; Just for U loyalty members increased 16% to 31 million.
- Net sales and other revenue increased 9.6% to $23.31 billion. Management attributed the increase to identical-sales growth, retail price inflation and higher fuel sales.
- Revenue by category included non-perishables of $11.45 billion, fresh of $7.88 billion, pharmacy of $1.92 billion and fuel of $1.65 billion.
Financial results and liquidity
| Metric | 16 weeks ended June 18, 2022 | Comparable 2021 period |
|---|---|---|
| Gross margin | $6.545 billion; 28.1% of sales | $6.191 billion; 29.1% |
| Operating income | $760.1 million; 3.2% of sales | $687.1 million; 3.2% |
| Net income | $484.2 million | $444.8 million |
| Diluted GAAP EPS | $0.84 | $0.78 |
| Adjusted EBITDA | $1.420 billion; 6.1% of sales | $1.308 billion; 6.2% |
| Adjusted net income / diluted adjusted EPS | $582.0 million / $1.00 | $517.5 million / $0.89 |
| Cash provided by operating activities | $991.9 million | $1.059 billion |
- Gross margin rate fell 100 basis points year over year; excluding fuel and LIFO expense, it decreased 27 basis points. Management cited fewer COVID-19 vaccines and inflation in product and supply-chain costs, partly offset by productivity initiatives.
- Selling and administrative expenses declined to 25.2% of sales from 25.9%, reflecting lower COVID-related costs and productivity gains, partly offset by wage increases, higher equity compensation and strategic investments.
- Operating income included a net $79.4 million gain on property dispositions and impairments, primarily an $80.0 million real estate sale gain. The prior-year period recorded a $0.3 million net loss on these items.
- Interest expense declined to $138.9 million from $153.3 million; the reported weighted-average interest rate was 5.4%, versus 5.6%. Other income fell to $6.3 million from $43.5 million, partly because the prior period included realized gains on non-operating investments.
- Operating cash flow was $991.9 million, down from $1.059 billion, primarily due to working-capital changes related to inventory, accounts payable and accrued wages. Investing cash use was $551.4 million, including $613.8 million of property, equipment and intangible payments. Financing cash use was $129.5 million.
- Cash and cash equivalents were $3.213 billion at June 18, 2022; restricted cash was $50.5 million. Total debt and finance lease obligations were $7.947 billion, including $825.4 million of current maturities. The ABL Facility had no borrowings and $3.750 billion of availability, net of letters of credit. Management reported a 1.0x net debt ratio, compared with 1.5x at the end of the prior-year first quarter.
- Current assets were $8.678 billion and current liabilities were $7.912 billion. Stockholders’ equity was $4.071 billion. The fair value of total debt was reported as $6.774 billion versus a $7.484 billion carrying value, excluding debt discounts and deferred financing costs.
Material changes and capital allocation
- Sales and net income increased year over year, while reported gross margin rate and operating cash flow declined. Adjusted EBITDA increased in dollars but decreased as a percentage of sales.
- Convertible preferred stock conversions during the period resulted in 40.9 million Class A shares issued from treasury. Additional conversions after quarter-end brought total shares issued on conversion to approximately 61.5 million by the filing date.
- Common dividends paid were $63.0 million, or $0.12 per share, compared with $46.5 million, or $0.10 per share. Capital expenditures were approximately $614 million; the company completed 27 remodels.
Outlook, risks and contingencies
- Management expected fiscal 2022 capital expenditures of $2.0 billion to $2.1 billion and an annual effective tax rate of approximately 23% to 24%. It estimated next-12-month liquidity needs of approximately $6.0 billion and believed operating cash flows and available liquidity would be adequate, while noting there is no assurance cash flows or ABL borrowing capacity will be maintained.
- Management cited uncertainty from inflation, energy and commodity costs, labor shortages and wage pressure, supply-chain constraints, consumer conditions, geopolitical developments and the continuing effects of COVID-19. Food inflation supported sales and gross-margin growth but pressured gross-margin rates. Labor shortages could disrupt operations or complicate labor negotiations.
- Legal matters include pharmacy-related False Claims Act cases, PBM litigation, more than 90 opioid-related suits, and a Plated acquisition-related dispute. The company said it recorded estimated liabilities for certain matters; it could not determine the likelihood or reasonably possible loss range for some cases. Management stated that aggregate matters were not expected to materially adversely affect overall financial condition, while acknowledging outcomes could affect results or cash flows.
- The company agreed in principle to pay $6.9 million to resolve a California investigation concerning underground fuel-storage tank compliance. The filing also reports approval of a settlement in the FACTA receipt-printing case.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors or market-risk exposure were reported.
Important facts for investors to verify
- Confirm the period being analyzed: this filing is for fiscal 2022 Q1, not 2021 Q1.
- Assess how much sales growth reflects inflation and fuel versus underlying volumes, and monitor the effect of inflation and costs on gross-margin rates.
- Review the real estate sale gain and the substantial adjustments used in Adjusted EBITDA and adjusted net income when comparing reported and adjusted performance.
- Track cash conversion, inventory and working-capital trends, planned capital expenditures, debt maturities and the reported net debt ratio.
- Monitor preferred-stock conversions and resulting share dilution, as well as the status and potential exposure of significant legal matters.