Albertsons Companies, Inc. — Form 10-Q Summary
Reporting-period note: The request metadata says “2019 Q3,” but the filing is for the 12 and 40 weeks ended December 5, 2020, compared with periods ended November 30, 2019. The filing describes these as fiscal 2020 and fiscal 2019, respectively.
Business context and reporting period
Albertsons operated 2,253 food and drug stores, 1,727 pharmacies, 400 fuel centers, 22 distribution centers and 20 manufacturing facilities at period-end. The company reports one segment. Its interim statements are unaudited; the 40-week results are not a full fiscal year.
Financial results
| Metric | 12 weeks ended Dec. 5, 2020 | 12 weeks ended Nov. 30, 2019 | 40 weeks ended Dec. 5, 2020 | 40 weeks ended Nov. 30, 2019 |
|---|---|---|---|---|
| Net sales and other revenue | $15,408.9 million | $14,103.2 million | $53,918.1 million | $47,018.3 million |
| Gross profit / margin | $4,508.6 million / 29.3% | $3,995.1 million / 28.3% | $15,855.0 million / 29.4% | $13,176.2 million / 28.0% |
| Operating income / margin | $258.5 million / 1.7% | $206.6 million / 1.4% | $1,792.3 million / 3.3% | $1,110.5 million / 2.3% |
| Net income | $123.7 million | $54.8 million | $994.4 million | $398.6 million |
| Diluted GAAP earnings per Class A share | $0.20 | $0.09 | $1.71 | $0.69 |
| Adjusted EBITDA (non-GAAP) | $967.7 million | $634.4 million | $3,607.1 million | $2,078.8 million |
Quarterly identical sales, excluding fuel, rose 12.3% (versus 2.7%); for the 40-week period they rose 18.4% (versus 2.1%). Management attributed growth primarily to pandemic-related demand, including 225% growth in digital sales in the quarter. Lower fuel sales partly offset reported revenue growth.
For the 40 weeks, operating cash flow was $2,996.0 million (prior year $1,387.0 million), investing cash outflow was $944.3 million (prior year $25.4 million), and financing cash outflow was $643.9 million (prior year $1,912.7 million). Capital expenditures were $1,083.0 million. Management’s non-GAAP Adjusted Free Cash Flow was $2,524.1 million, versus $995.1 million; it is a company-defined measure, not GAAP cash flow.
At December 5, 2020, cash and cash equivalents were $1,836.1 million; cash, cash equivalents and restricted cash totaled $1,886.7 million. Current assets were $7,444.2 million and current liabilities $6,597.3 million. Total debt and finance lease obligations were $8,540.4 million, including $212.4 million current maturities. The $4.0 billion asset-based credit facility had no borrowings outstanding and approximately $3.6 billion availability, net of letters of credit.
Material changes versus prior comparable periods
- Revenue increased 9.3% in the quarter and 14.7% over 40 weeks, led by same-store sales growth. Fuel revenue was lower by $265.4 million in the quarter and $975.1 million for the 40-week comparison.
- Gross margin improved year over year: by 1.0 percentage point for the quarter and 1.4 points over 40 weeks. Management cited lower shrink and cost leverage, partly offset by digital-sales costs, promotional investment and pandemic-related expenses.
- Quarterly selling and administrative expense was 28.0% of revenue versus 27.0%, including a $285.7 million charge for withdrawal from the UFCW National Fund. For the 40 weeks, the ratio declined to 26.2% from 26.7%, despite that charge, as higher sales leveraged costs.
- Net interest expense declined to $115.9 million for the quarter and $425.1 million for 40 weeks, from $154.8 million and $557.5 million, respectively, reflecting lower average borrowings and interest rates.
- Cash increased substantially from February 29, 2020, while stockholders’ equity fell to $1,374.7 million from $2,278.1 million. The period included $1.68 billion of convertible preferred stock proceeds used for a major common-stock repurchase, further repurchases, and newly issued preferred dividends.
Outlook, management commentary, risks and unusual items
- Management said it expected fiscal 2020 capital expenditures of $1.65 billion to $1.75 billion. Estimated liquidity needs for the next 12 months were $4.75 billion to $5.25 billion; management believed operating cash flow and available liquidity would meet those needs, while noting there is no assurance cash generation or borrowing availability will be maintained.
- COVID-19 increased customer demand and digital engagement, but also costs. For the 40 weeks, the company reported $97.0 million of pandemic-related costs in cost of sales and substantial additional labor, benefits, supplies and services costs in selling and administrative expenses. It also cited price-gouging restrictions and uncertainty over the pandemic’s duration and effects.
- In December 2020, after quarter-end, Albertsons issued $600 million of additional 2029 notes. In January 2021, proceeds plus approximately $230 million cash were used for an $800 million partial redemption of 2025 notes. The filing also disclosed a December-quarter dividend payment after period-end.
- The National Fund withdrawal resulted in a $285.7 million pre-tax charge in the quarter and approximately $286 million of agreed withdrawal-liability payments. Separately, following a year-end agreement to combine and terminate the FELRA and MAP pension plans, the company preliminarily expected a roughly $595 million pre-tax charge in fiscal 2020’s fourth quarter; the estimate was preliminary and subject to change. Future payments include $23.2 million annually for 25 years and estimated additional contributions of $10–12 million annually for 10 years starting in 2022.
- Convertible preferred stock carries a 6.75% annual dividend rate on its liquidation preference and has conversion, redemption and real-estate exchange provisions. The exchange right may be triggered by specified events, including a sufficiently low credit rating, missed dividend or bankruptcy filing.
- Legal and regulatory matters include opioid litigation, pharmacy-related government investigations and False Claims Act appeals, among other claims. The company said potential losses in several matters could not be estimated; it has recorded liabilities where it considered loss probable and estimable. Management said aggregate reasonably possible exposure above accruals was expected to be immaterial, while acknowledging outcomes remain uncertain.
Most important facts for investors to verify
- Confirm the intended period: the supplied filing is fiscal 2020 Q3, not 2019 Q3.
- Assess the sustainability of pandemic-driven comparable sales and digital growth, and the associated costs and margin effects.
- Review cash-flow quality, working-capital movements, deferred payroll taxes and the gap between GAAP operating cash flow and company-defined Adjusted Free Cash Flow.
- Track debt refinancing, the January 2021 redemption, preferred-stock dividends and conversion or exchange rights, and remaining ABL availability.
- Monitor the preliminary fourth-quarter pension charge and ongoing pension contribution obligations, as well as material legal contingencies.
- Evaluate non-GAAP adjustments—especially the National Fund withdrawal charge and other exclusions—alongside GAAP earnings and margins.