Albertsons Companies, Inc. — Form 10-Q summary
Period discrepancy: The request identifies “2017 Q2,” but the supplied filing is for the quarter ended September 8, 2018, covering 12 and 28 weeks of fiscal 2018, with comparisons to periods ended September 9, 2017. The filing is unaudited.
Business context and reporting period
Albertsons operated 2,291 stores across 35 states and the District of Columbia at period-end. It reported one aggregated segment, spanning grocery, pharmacy, fuel and related offerings, including eCommerce. Management highlighted completed Safeway store conversions, expanding eCommerce, and growth in Own Brands.
Key financial metrics
| Metric | 12 weeks ended Sep. 8, 2018 | 12 weeks ended Sep. 9, 2017 | 28 weeks ended Sep. 8, 2018 | 28 weeks ended Sep. 9, 2017 |
|---|---|---|---|---|
| Net sales and other revenue | $14,024.1 million | $13,831.7 million | $32,677.5 million | $32,291.7 million |
| Gross profit | $3,812.8 million | $3,729.7 million | $8,983.5 million | $8,788.2 million |
| Gross margin | 27.2% | 27.0% | 27.5% | 27.2% |
| Operating income (loss) | $131.4 million | $(219.8) million | $324.5 million | $(137.4) million |
| Net loss | $(32.4) million | $(355.2) million | $(50.1) million | $(560.1) million |
| Adjusted EBITDA | $548.6 million | $485.2 million | $1,364.4 million | $1,256.9 million |
Second-quarter identical sales, excluding fuel, rose 1.0%, versus a 1.8% decline in the prior-year quarter. eCommerce sales grew 113%; Own Brands penetration increased 44 basis points to 25.0%. Adjusted EBITDA margin was 3.9% in the quarter and 4.2% for the 28-week period.
For the 28 weeks, operating cash flow was $1,191.3 million, capital expenditures were $631.2 million, and management-defined free cash flow was $733.2 million. Investing cash flow was $(88.2) million, including $509.4 million of asset-sale proceeds; financing cash flow was $(114.1) million. Cash and cash equivalents were $1,661.9 million at September 8, 2018, compared with $670.3 million at February 24, 2018.
At September 8, 2018, total debt was $10,946.9 million and capitalized lease obligations were $818.5 million. The ABL facility had no borrowings and approximately $3.2 billion of availability, net of letters of credit. Current assets were $6,845.7 million and current liabilities were $5,474.0 million.
Material changes versus the prior comparable period
- Quarterly revenue increased 1.4%; 28-week revenue increased 1.2%. Fuel sales were a significant contributor, partly offset by sales lost from store closures.
- Gross margin improved 0.2 percentage points for the quarter and 0.3 points for 28 weeks. Management attributed improvement mainly to lower advertising and shrink costs, and, for the 28-week period, improved product mix.
- Operating results improved substantially, including because the prior-year period included a $142.3 million goodwill impairment. Current-period selling and administrative expenses included gains on property dispositions.
- Interest expense declined to $194.9 million for the quarter and $449.5 million for 28 weeks, primarily reflecting prior-year deferred-financing-cost write-offs.
- Operating cash flow increased from $872.7 million to $1,191.3 million for 28 weeks, which management attributed to improved operating results and working-capital movements.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2018 capital expenditures of approximately $1.4 billion. It estimated liquidity needs of $4.0–$4.5 billion over the next 12 months and believed operating cash flow and available liquidity would be sufficient, while noting cash generation and borrowing availability are not assured.
- Management expected a fiscal 2018 effective tax rate of approximately 25%–27%, excluding one-time asset sales and discrete items. The company had not completed its accounting for the Tax Act.
- The proposed Rite Aid merger was mutually terminated on August 8, 2018, with no termination payment due between the parties. The company had issued $750 million of floating-rate secured notes and redeemed them after the merger termination.
- Subsequent to quarter-end, the company contributed $184.3 million to defined-benefit pension plans, including $150 million discretionary, to improve funded status and reduce future premiums and required contributions.
- Other notable items include the sale-leaseback of two distribution centers for approximately $290 million, net of closing costs, and a new CEO, James L. Donald, effective September 11, 2018.
- Risks and contingencies include healthcare-program pricing investigations and False Claims Act cases, an opioid-related investigation, data-breach litigation and investigations, and ERISA fiduciary-duty litigation. The company said it could not estimate potential losses for several matters; it also noted litigation outcomes remain uncertain.
- The company stated it was in compliance with debt covenants. Its $4.0 billion ABL facility terminates in December 2020 unless extended. Adoption of the new lease standard was expected to add significant right-of-use assets and lease liabilities to the balance sheet.
Most important facts for investors to verify
- Confirm the reporting year: the supplied filing is fiscal 2018 Q2, not 2017 Q2.
- Assess the sustainability and quality of earnings and cash flow, including the effects of property-disposition gains, asset-sale proceeds, store closures, integration costs, and management’s non-GAAP adjustments.
- Review debt maturities, interest-rate exposure, lease obligations, ABL availability, and the effect of the subsequent pension contribution on liquidity.
- Monitor the unresolved investigations and litigation for developments that could change the company’s loss estimates or disclosures.
- The cover page marks “No” to whether required Exchange Act reports had been filed during the preceding 12 months; verify this unusual filing-status response against the official filing record.