Albertsons Companies, Inc. — Form 10-K Summary
Reporting period: The supplied filing is for the 52 weeks ended February 23, 2019 (fiscal 2018), not 2017 Q4 as indicated in the request metadata. It was filed April 24, 2019. The company is a voluntary filer; its common stock had no publicly traded market, and all shares were held by two entities.
Business context
Albertsons operated 2,269 stores in 34 states and the District of Columbia under 20 banners, with one reportable retail segment. Its operations also included pharmacies, fuel centers, digital shopping, meal kits and food manufacturing. Approximately 267,000 employees worked for the company; about 170,000 were covered by collective bargaining agreements.
Financial results and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Net sales and other revenue | $60.535 billion | $59.925 billion |
| Identical sales, excluding fuel | +1.0% | -1.3% |
| Gross profit / gross margin | $16.895 billion / 27.9% | $16.361 billion / 27.3% |
| Operating income (loss) | $787.3 million | $(56.6) million |
| Net income | $131.1 million | $46.3 million |
| Operating cash flow | $1.688 billion | $1.019 billion |
| Adjusted EBITDA (non-GAAP) | $2.741 billion | $2.398 billion |
| Free cash flow (non-GAAP) | $1.379 billion | $851 million |
- Adjusted EBITDA margin was 4.5%, versus 4.0%. Management attributed improvement to higher identical sales, gross profit gains and cost-reduction initiatives. Free cash flow is defined by the company as Adjusted EBITDA less capital expenditures and is not a GAAP measure.
- Cash and cash equivalents were $926.1 million at year-end. Total debt, including capital leases, was $10.586 billion, down from $11.876 billion; debt excluding capital leases was approximately $10.1 billion. Interest expense was $830.8 million.
- The $4.0 billion asset-based revolving facility had no borrowings outstanding and approximately $3.4 billion of availability, net of letters of credit. Outstanding letters of credit were $520.8 million.
- Current assets were $6.250 billion and current liabilities were $5.153 billion. Total assets were $20.777 billion; stockholders’ equity was $1.451 billion.
Material changes and unusual items
- Sales rose 1.0%, supported by identical-sales growth and a $351.3 million increase in fuel sales, partly offset by the net effect of store closures. The company closed 55 stores and opened six in fiscal 2018.
- Gross margin increased 60 basis points. Lower shrink, improved product mix and Own Brands penetration, lower advertising costs and acquisition synergies contributed. SG&A fell to 26.6% of sales from 27.1%.
- Fiscal 2017 operating results included a $142.3 million goodwill impairment; none was recorded in fiscal 2018. Fiscal 2018 included $165.0 million of net gains on property dispositions, asset impairment and lease exit costs, reflected as an adjustment in the company’s Adjusted EBITDA reconciliation.
- The Tax Act contributed a $56.9 million non-cash tax benefit in fiscal 2018; fiscal 2017’s $963.8 million tax benefit included substantial non-cash effects, including Tax Act and valuation-allowance adjustments.
- The company sold and leased back seven distribution centers for approximately $950 million, agreeing to initial lease terms of 15–20 years and approximately $55 million of initial annual rent. It also issued $600 million of 7.5% notes due 2026 and repaid or repurchased other debt.
- The proposed Rite Aid merger was mutually terminated in August 2018; neither party owed the other a termination payment under the agreement. Fiscal 2018 included related financing and acquisition costs.
Outlook, risks and contingencies
- Management expected fiscal 2019 to comprise 53 weeks and forecast approximately $1.45 billion in capital expenditures, including investment in stores, IT, real estate, maintenance and supply chain. It expected about 15 new stores and approximately 300 upgrade or remodel projects.
- Management estimated liquidity needs of $4.0–$4.5 billion over the next fiscal year and believed operating cash flow and available borrowing capacity would be adequate, while cautioning that cash generation and borrowing availability were not assured. No specific sales or earnings guidance is provided in the filing.
- Key risks include intense competition and low retail margins; food-price deflation or inflation; labor costs and negotiations; supply-chain, weather and food-safety disruptions; pharmacy regulation; cybersecurity; and substantial leverage, interest-rate exposure and refinancing needs. Substantially all assets secure the senior secured facilities.
- Collective bargaining agreements covering about 106,000 employees had expired or were scheduled to expire in fiscal 2019. The company estimated its share of multiemployer pension-plan underfunding at $4.7 billion; this is an estimate, not a recorded balance-sheet liability. Contributions to multiemployer plans were $451.1 million in fiscal 2018.
- Recorded withdrawal liability related to the former Dominick’s division was $142.1 million and was being disputed in arbitration. The company also disclosed opioid-related investigations and litigation, False Claims Act matters, and other legal proceedings; outcomes and potential losses in several matters could not be estimated clearly.
- The board announced Vivek Sankaran would become CEO effective April 25, 2019, with James Donald and Leonard Laufer becoming co-chairmen. The company stated it did not intend to pay dividends for the foreseeable future.
Most important facts for investors to verify
- Confirm the period: this is fiscal 2018, ended February 23, 2019, rather than 2017 Q4.
- Assess whether improved identical sales, gross margin and Adjusted EBITDA are sustainable, and distinguish GAAP results from management’s non-GAAP measures and adjustments.
- Review debt maturities, interest costs, collateral and lease commitments, including the long-term rent obligations created by sale-leasebacks.
- Evaluate the uncertainty and potential cash demands from multiemployer pensions, labor negotiations, opioid matters and other litigation.
- Check execution of the fiscal 2019 capital-investment and store-remodel plans, and the effect of the 53-week fiscal year on comparisons.
- Note the auditor opined that the financial statements were fairly presented under GAAP; the auditor did not attest to internal control effectiveness.