Albertsons Companies, Inc. — Form 10-Q Summary
Period clarification: The request identifies “2019 Q2,” but the supplied filing is for the 12 weeks ended September 12, 2020, and compares results with the 12 weeks ended September 7, 2019. It also reports year-to-date results for the first 28 weeks of fiscal 2020 and 2019.
Business context and reporting period
Albertsons operated 2,252 retail food and drug stores as of September 12, 2020, alongside pharmacies, fuel centers, distribution centers and manufacturing facilities. The company reports one segment. Management attributed unusually strong sales to increased demand during the COVID-19 pandemic and growth in eCommerce.
Key financial metrics
| Metric | 12 weeks ended September 12, 2020 | Prior-year 12 weeks | First 28 weeks of fiscal 2020 | Prior-year 28 weeks |
|---|---|---|---|---|
| Net sales and other revenue | $15.76 billion | $14.18 billion | $38.51 billion | $32.92 billion |
| Gross profit / margin | $4.57 billion / 29.0% | $3.94 billion / 27.8% | $11.35 billion / 29.5% | $9.18 billion / 27.9% |
| Operating income | $562.0 million | $582.4 million | $1.53 billion | $903.9 million |
| Net income | $284.5 million | $294.8 million | $870.7 million | $343.8 million |
| Diluted EPS | $0.49 | $0.51 | $1.49 | $0.59 |
| Adjusted EBITDA, non-GAAP | $948.4 million | $567.6 million | $2.64 billion | $1.44 billion |
Quarterly identical sales excluding fuel increased 13.8% (versus 2.4% a year earlier); digital sales grew 243%. For the first 28 weeks, identical sales excluding fuel rose 21.0% (versus 1.9%). The quarter’s gross margin expanded 1.2 percentage points, while operating income and GAAP net income declined. The prior-year periods included substantial sale-leaseback gains, making property-related comparisons unusually significant.
Operating cash flow for the first 28 weeks was $2.72 billion, up from $1.08 billion. Investing cash outflow was $687.1 million; capital expenditures were $702.9 million. Financing cash outflow was $80.7 million, compared with $1.90 billion in the prior-year period. Management-reported Adjusted Free Cash Flow, a non-GAAP measure, was $1.94 billion versus $728.1 million.
At September 12, cash and cash equivalents were $2.39 billion, compared with $470.7 million at February 29, 2020. Total current assets were $7.58 billion and current liabilities $6.73 billion. Total debt and finance lease obligations were $8.79 billion, including $331.6 million of current maturities; the ABL facility had no borrowings outstanding, with $367.3 million of letters of credit issued. The filing reports $8.46 billion of long-term debt and finance lease obligations. It also reports $5.96 billion of operating lease obligations, separately from debt.
Material changes and unusual items
- Revenue rose 11.2% in the quarter and 17.0% year to date, principally on pandemic-related demand and higher identical sales; lower fuel sales partly offset growth.
- Quarterly gross margin benefited from lower shrink and better leverage of distribution and advertising costs. Pandemic-related costs partly offset the improvement. The company cited approximately $22 million of such costs in the quarter and approximately $78 million year to date in its gross-profit discussion; separate selling and administrative pandemic costs included labor, appreciation pay, supplies and services.
- Interest expense declined to $128.6 million for the quarter from $177.5 million, reflecting lower average borrowings and rates. The weighted average interest rate was 6.0%, versus 6.4%.
- The company issued $1.5 billion of notes at 3.250% due 2026 and 3.500% due 2029, and redeemed $1.25 billion of 6.625% notes due 2024. The redemption generated a $49.1 million extinguishment loss. After quarter-end, it used remaining proceeds to redeem $250 million of 5.75% notes due 2025.
- The company issued $1.68 billion of convertible preferred stock and used an equal amount to repurchase 101.6 million shares from its parents. Preferred stock has a 6.75% annual dividend rate and seniority over common stock. Its associated real-estate exchange rights may be triggered by specified events, including certain credit-rating downgrades or missed preferred dividends.
- The June 2020 IPO involved sales by existing stockholders; the company received no proceeds from those share sales. After quarter-end, the company repurchased 6.84 million shares from a stockholder for $12 per share.
Outlook, risks and contingencies
- Management estimated liquidity needs of $4.75 billion to $5.25 billion over the next 12 months and said cash flows and other liquidity sources, including the ABL facility, should be adequate. It cautioned that future cash generation and borrowing availability are not assured.
- Fiscal 2020 capital expenditures were expected to be approximately $1.9 billion. Management also stated an intended common dividend of $0.40 per share annually; the first $0.10 quarterly dividend was announced after quarter-end. A new $300 million share repurchase program was also authorized after quarter-end.
- COVID-19 effects remain uncertain. Management cited changing customer demand, increased safety and labor costs, eCommerce expansion, and anti-price-gouging requirements. The company had been named in three price-gouging complaints and received one pre-complaint claim letter, which it said it believes are without merit.
- Multiemployer pension obligations are a notable exposure. A proposed FELRA/MAP arrangement, subject to PBGC approval, could require annual payments of $23.2 million for 25 years and may materially increase pension liabilities. Separately, a tentative National Fund withdrawal agreement contemplated approximately $286 million in payments and an expected pre-tax charge of approximately $286 million, subject to union ratification; the filing expected the charge in the third fiscal quarter.
- Other disclosed matters include opioid litigation, pharmacy-related government investigations, a California regulatory matter, wage-and-hour and other litigation, and lease guarantees. Management said it had accrued certain matters, but outcomes and potential losses in several investigations and lawsuits could not be determined.
Important facts for investors to verify
- Confirm that the intended filing period is fiscal 2020 Q2, not 2019 Q2, and distinguish the 12-week quarter from the 28-week year-to-date comparison.
- Review the sustainability of pandemic-driven sales and eCommerce growth, and how demand changes affect margins and incremental costs.
- Assess the reconciliation and exclusions in Adjusted EBITDA and Adjusted Free Cash Flow; these are non-GAAP measures, not substitutes for GAAP results or discretionary cash.
- Track pension-plan approvals, required contributions, withdrawal payments and the timing and amount of any pension charge.
- Review preferred-stock dividends, conversion and real-estate exchange provisions, debt maturities, refinancing costs and the company’s liquidity assumptions.
- Monitor litigation and investigations with unquantified exposure, as well as the post-quarter share repurchase and dividend actions.