Albertsons Companies, Inc. — Form 10-K Summary
Period clarification: The supplied filing is for the 53 weeks ended February 29, 2020 (“fiscal 2019”), not 2018 Q4. Fiscal 2018 was the 52 weeks ended February 23, 2019. The filing includes quarterly data, but the annual results below are the principal comparison.
Business context and reporting period
Albertsons operated 2,252 grocery and drug stores in 34 states and the District of Columbia, with 1,726 pharmacies, 402 fuel centers and digital delivery and pickup services. Its 13 divisions are reported as one segment. The company is a voluntary SEC filer; its common stock had no publicly traded market and was held by two parent entities.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales and other revenue | $62.455 billion | $60.535 billion |
| Gross profit / margin | $17.594 billion / 28.2% | $16.895 billion / 27.9% |
| Operating income | $1.437 billion | $787.3 million |
| Net income | $466.4 million | $131.1 million |
| Net cash from operating activities | $1.904 billion | $1.688 billion |
| Adjusted EBITDA (non-GAAP) | $2.834 billion; 4.5% of sales | $2.741 billion; 4.5% of sales |
| Adjusted Free Cash Flow (non-GAAP) | $1.359 billion | $1.379 billion |
- Sales grew 3.2%; identical sales excluding fuel rose 2.1%, versus 1.0% in fiscal 2018. The additional 53rd week contributed approximately $1.067 billion of sales and an estimated $54 million of Adjusted EBITDA.
- Gross margin expanded 30 basis points. Management cited lower shrink, improved product mix and Own Brands penetration, partly offset by higher rent and pharmacy reimbursement pressure. Own Brands generated over $13.1 billion in sales and 25.4% penetration, excluding pharmacy, fuel and in-store coffee.
- Net income and operating income benefited materially from property sale gains: the company recorded a $484.8 million net gain on property dispositions and impairment, including $463.6 million from sale-leaseback transactions. The reported earnings increase should therefore be considered alongside these items.
- Cash and cash equivalents were $470.7 million at year-end, down from $926.1 million. Current assets were $5.731 billion and current liabilities $5.904 billion.
- Total debt, including finance leases, was $8.715 billion, down from $10.586 billion; debt excluding finance leases was approximately $8.2 billion. Net interest expense declined to $698.0 million from $830.8 million.
- At year-end, no ABL Facility borrowings were outstanding and availability was approximately $3.4 billion, net of letters of credit. On March 12, 2020, the company borrowed $2.0 billion as a precaution amid COVID-19 uncertainty.
- Capital expenditures were $1.475 billion. Operating cash flow benefited from improved operating results and lower pension contributions, among other factors; Adjusted Free Cash Flow declined modestly year over year.
Material changes, outlook and unusual items
- Fiscal 2019 debt refinancing and repayment transactions reduced reported debt, but generated a $111.4 million loss on debt extinguishment. The company repaid its term loans in full on February 5, 2020, funding repayment primarily with new notes.
- Sale-leaseback transactions on 53 stores and one distribution center generated $931.3 million of net proceeds and $463.6 million in gains, while adding long-term lease commitments. Initial annual rent on those properties was approximately $53 million.
- The company adopted ASC Topic 842 for leases, recognizing $5.3 billion of operating lease assets and $5.4 billion of lease liabilities at adoption. This materially affected the balance sheet; prior periods were not restated.
- For fiscal 2020, management projected approximately $1.5 billion of capital expenditures. It estimated next-year liquidity needs of $4.0–$4.5 billion and said operating cash flow and other liquidity sources should be adequate, while cautioning that the outlook was uncertain.
- Management reported strong sales growth, higher customer demand and increased eCommerce engagement during the first eight weeks of fiscal 2020 amid the pandemic. It also cited product supply constraints, additional sanitation and labor costs, a temporary $2-per-hour increase for frontline associates beginning March 15, 2020, and the hiring of over 55,000 associates since fiscal 2020 began. The filing did not provide a quantified full-year COVID-19 earnings forecast.
- The company estimated its share of multiemployer pension-plan underfunding at $4.9 billion. FELRA was projected by the plan to become insolvent in the first quarter of 2021. A proposed combined-plan arrangement would require annual payments of $23.2 million for 25 years, subject to PBGC approval; management preliminarily expected a material increase in pension liabilities and a corresponding non-cash expense upon approval.
- Other notable exposures include opioid litigation, pharmacy-related investigations and False Claims Act cases. The company said it was defending these matters; for several, it could not estimate the probability of outcome or reasonably possible loss. It also disclosed risks from labor negotiations, competition, supply disruptions, cyber incidents, commodity costs and substantial indebtedness.
Important facts for investors to verify
- Confirm the reporting period: this is fiscal 2019, not a 2018 Q4 filing; distinguish recurring operating performance from the sale-leaseback gain and other adjustments.
- Review post-year-end COVID-19 sales, margins, operating costs, supply availability and the use and repayment plans for the $2.0 billion ABL borrowing.
- Track debt maturities, interest costs, lease obligations and ABL availability; assess the impact of the sale-leaseback leases on future cash commitments.
- Follow PBGC approval and accounting for the FELRA/MAP restructuring, the estimated multiemployer pension exposure and the Dominick’s withdrawal-liability settlement.
- Monitor material legal and regulatory proceedings and any changes to loss estimates, reserves or disclosures.