Business context and reporting period
Albertsons Companies, Inc. operates grocery, pharmacy, fuel and eCommerce businesses. This unaudited Form 10-Q covers the 16 weeks ended June 15, 2019, compared with the 16 weeks ended June 16, 2018; it is not a 2018 Q1 report as indicated in the request metadata. At quarter-end, the company operated 2,268 stores, versus 2,300 a year earlier.
Financial performance and liquidity
| Metric | 16 weeks ended June 15, 2019 | Prior comparable period |
|---|---|---|
| Net sales and other revenue | $18,738.4 million | $18,653.4 million |
| Gross profit / margin | $5,239.6 million / 28.0% | $5,170.7 million / 27.7% |
| Operating income / margin | $321.5 million / 1.8% | $193.1 million / 1.0% |
| Net income (loss) | $49.0 million | $(17.7) million |
| Net cash from operating activities | $802.7 million | $911.6 million |
| Capital expenditures | $362.1 million | $349.5 million |
| Adjusted EBITDA (non-GAAP) | $876.8 million; 4.7% of revenue | $815.8 million; 4.4% of revenue |
| Free Cash Flow (non-GAAP) | $514.7 million | $466.3 million |
Identical sales excluding fuel increased 1.5%, compared with 0.2% in the prior period. Gross margin improved 30 basis points; excluding fuel, it improved 10 basis points. Selling and administrative expenses declined to 26.2% of revenue from 26.7%.
Cash and cash equivalents were $662.1 million at June 15, 2019, versus $926.1 million at February 23, 2019. Cash, cash equivalents and restricted cash totaled $713.7 million at period-end. Total debt, including finance lease obligations, was $9,833.6 million, down from $10,586.4 million at fiscal year-end. There were no ABL borrowings, and reported facility availability was approximately $3.3 billion, net of letters of credit. The company reported compliance with debt covenants.
Material changes, outlook and risks
- Management attributed higher operating income and Adjusted EBITDA to improved identical sales, higher-than-expected fuel margins, cost-reduction initiatives and lower acquisition and integration costs. These benefits were partly offset by wage and benefit increases and pharmacy reimbursement-rate pressure.
- Net cash from operations fell by $108.9 million year over year, which management attributed mainly to working-capital changes, including accounts payable and inventory. Financing cash use rose to $762.7 million, primarily reflecting debt repayments.
- The company reported approximately $1.0 billion of principal debt reduction during fiscal 2019 to date. Debt tenders and repurchases contributed to a $42.7 million debt-extinguishment loss.
- Fiscal 2019 capital expenditures were projected at approximately $1.45 billion. Management estimated liquidity needs of $4.0 billion to $4.5 billion over the next 12 months and said operating cash flows and other liquidity sources should be adequate, while cautioning that cash generation and ABL access are not assured. No full-year earnings or sales guidance is provided in the supplied filing text.
- After quarter-end, the company completed sale-leaseback transactions involving 50 stores and one distribution center for approximately $886 million net of closing costs. Initial annual rent is approximately $50 million, with 1.50%–1.75% annual increases; proceeds were intended for debt reduction. The related leases have initial terms of 15–20 years.
- Adoption of the new lease standard on February 24, 2019 added $5.3 billion of operating lease right-of-use assets and approximately $5.4 billion of operating lease liabilities. The balance-sheet increase versus February 2019 therefore primarily reflects lease accounting and should not be read as an equivalent improvement in underlying resources.
- Risks include ongoing opioid litigation, approximately 49 suits, and two False Claims Act cases alleging damages exceeding $100 million each before trebling and penalties. The company says it is defending the cases and has recorded estimated liabilities; for several investigations and opioid claims, it cannot estimate the likelihood or range of loss. It also disclosed drug-pricing and vaccination-program investigations and an unresolved Alaska opioid-related investigation.
Important facts for investors to verify
- Confirm the reporting period: the filing covers the 16 weeks ended June 15, 2019, despite the request’s “2018 Q1” label.
- Review the drivers and sustainability of margin and Adjusted EBITDA improvement, particularly fuel margins, cost savings, wage costs and pharmacy reimbursement pressure.
- Reconcile debt repayment plans, the post-quarter-end sale-leaseback proceeds and the continuing lease obligations and rent escalators.
- Assess operating cash flow and working-capital trends against projected capital spending and the company’s stated 12-month liquidity needs.
- Track the litigation and investigations whose outcomes or potential losses remain uncertain, including the FCA and opioid matters.
- The cover page checks “No” to whether all required Exchange Act reports were filed during the preceding 12 months; verify the significance and context of that disclosure.