Albertsons Companies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 12 and 28 weeks ended September 7, 2019 (second quarter and first 28 weeks of fiscal 2019), not 2018 Q2 as indicated in the request metadata. The financial statements are unaudited.
Business context
Albertsons operated 2,262 food and drug stores, 1,733 pharmacies, 401 fuel centers, 23 distribution centers and 20 manufacturing facilities at period-end. It reported one segment and sells through stores and eCommerce channels.
Financial performance
| Metric | 12 weeks ended Sep. 7, 2019 | 12 weeks ended Sep. 8, 2018 | 28 weeks ended Sep. 7, 2019 | 28 weeks ended Sep. 8, 2018 |
|---|---|---|---|---|
| Net sales and other revenue | $14,176.7 million | $14,024.1 million | $32,915.1 million | $32,677.5 million |
| Gross profit / margin | $3,941.5 million / 27.8% | $3,812.8 million / 27.2% | $9,181.1 million / 27.9% | $8,983.5 million / 27.5% |
| Operating income | $582.4 million | $131.4 million | $903.9 million | $324.5 million |
| Net income (loss) | $294.8 million | $(32.4) million | $343.8 million | $(50.1) million |
| Adjusted EBITDA | $567.6 million (4.0% of sales) | $548.6 million (3.9%) | $1,444.4 million (4.4%) | $1,364.4 million (4.2%) |
Identical sales excluding fuel rose 2.4% in the quarter and 1.9% over 28 weeks, versus 1.0% and 0.5% in the comparable prior-year periods. Quarterly gross margin was helped by unusually high fuel margins; excluding fuel, it increased 30 basis points. Management cited improved shrink, Own Brands penetration and advertising leverage, partly offset by pharmacy reimbursement pressure and higher distribution-center rent.
For the 28 weeks, net cash provided by operations was $1,084.8 million, down from $1,191.3 million. Investing activities provided $307.7 million, including sale-leaseback proceeds, versus $88.2 million used in the prior period. Financing activities used $1,895.5 million, principally for debt repayments. Capital expenditures were $716.3 million; reported Free Cash Flow was $728.1 million, compared with $733.2 million. These non-GAAP measures are company-defined and should be read alongside GAAP cash flow.
Balance sheet, debt and liquidity
- At September 7, 2019, cash and cash equivalents were $435.3 million, compared with $926.1 million at February 23, 2019; cash and restricted cash totaled $464.7 million.
- Total assets were $24.7 billion. Total debt, including finance lease obligations, was $8.75 billion; long-term debt and finance lease obligations were $8.63 billion. The company reported no borrowings on its $4.0 billion ABL facility and approximately $3.3 billion of availability after letters of credit.
- Current assets were $5.63 billion and current liabilities were $5.73 billion. Adoption of lease accounting added operating lease right-of-use assets of $5.83 billion and operating lease obligations of $5.97 billion, including current and long-term portions.
- Management estimated next-12-month liquidity needs of $4.0–$4.5 billion and said operating cash flows and other available liquidity should be adequate, while noting there is no assurance that cash generation or borrowing capacity will be maintained.
Material changes, outlook and unusual items
- Net sales rose 1.1% in the quarter and 0.7% over 28 weeks. Management attributed growth primarily to identical-sales gains, partly offset by closed-store impacts and lower fuel sales.
- Operating results included $463.6 million of gains from selling and leasing back 53 stores and one distribution center. The transactions generated $931.3 million net proceeds and approximately $53 million of initial annual rent, with 15–20-year lease terms and annual rent increases. A $38.6 million impairment related mainly to Plated meal-kit assets partly offset property gains.
- The company adopted the new lease standard in fiscal 2019. The transition included a $574.6 million after-tax cumulative adjustment to retained earnings, primarily associated with elimination of deferred sale-leaseback gains.
- Albertsons issued $750 million of 5.875% senior unsecured notes due 2028 and refinanced term loans in August. It reported reducing outstanding debt by more than $1.8 billion during fiscal 2019 to date. Debt-extinguishment losses were $23.1 million for the quarter and $65.8 million for the 28 weeks; interest expense declined year over year.
- Fiscal 2019 capital expenditure guidance was approximately $1.45 billion. No sales, earnings or other full-year financial guidance is provided in the supplied filing text.
- Management cited continued investment in digital and technology, higher wages and benefits, and incremental sale-leaseback rent as offsets to operating improvements. It stated that market-risk exposures and previously reported risk factors had no material changes.
Contingencies and filing matters
Material matters described include two False Claims Act pharmacy-pricing cases, with relators alleging damages exceeding $100 million before trebling and penalties; one court ruling on usual-and-customary pricing was subject to a pending interlocutory appeal. The company also disclosed approximately 66 opioid-related suits, an ongoing Alaska opioid investigation, and California Air Resources Board compliance issues for which potential penalties could not be estimated. Management said it had accrued estimated liabilities for specified cases and believed reasonably possible losses beyond accruals were expected to be immaterial, while acknowledging outcomes remain uncertain. A settlement in principle was reached in the Terraza/Lorenz ERISA matters, with preliminary approval pending.
Filing-status item: The cover page appears to mark “No” for having filed all required reports during the preceding 12 months. Investors may wish to verify this selection against the official filing.
Key facts for investors to verify
- How much of reported operating income and net income reflects the property sale-leaseback gain, and what are ongoing earnings excluding that item?
- Whether elevated fuel margins and identical-sales growth are sustainable, and how pharmacy reimbursement pressures affect margins.
- The full economic burden and duration of operating lease commitments, including rent escalation and sale-leaseback obligations.
- Debt reduction progress, refinancing terms, interest-rate exposure and continued access to ABL liquidity.
- Potential outcomes and reserves for False Claims Act, opioid, regulatory and other legal matters.
- The apparent “No” cover-page response concerning timely filing of required reports.