Albertsons Companies(ACI) - 2025 Q2 - Quarterly Results

Executive Summary & Business Update This section provides an overview of Albertsons Companies' Q2 FY24 financial performance, strategic achievements, and future operational outlook Second Quarter Fiscal 2024 Highlights Albertsons Companies reported a 2.5% increase in identical sales, a 24% rise in digital sales, and a 15% growth in loyalty members for Q2 FY24, achieving $146 million in net income, $301 million in adjusted net income, and $901 million in adjusted EBITDA Key Financial Highlights | Metric | Value | | :-------------------- | :------------------- | | Identical sales | Increased 2.5% | | Digital sales | Increased 24% | | Loyalty members | Increased 15% to 43.0 million | | Net income | $146 million | | Net income per share | $0.25 | | Adjusted net income | $301 million | | Adjusted net income per share | $0.51 | | Adjusted EBITDA | $901 million | CEO Commentary and Outlook CEO Vivek Sankaran highlighted the success of the "Customers for Life strategy" in driving digital sales, pharmacy growth, and loyalty, while anticipating future headwinds from wage/benefit investments, lower-margin business mix, and competition, partially offset by productivity initiatives - Investments in the "Customers for Life strategy" continued to drive strong growth in digital sales and pharmacy operations[2] - Strong year-over-year growth in loyalty members and omnichannel shoppers, and accelerated growth in Albertsons Media Collective[2] - Expected headwinds for the balance of fiscal 2024 include investments in associate wages and benefits, an increasing mix of lower-margin pharmacy and digital businesses, and an increasingly competitive backdrop, though these are expected to be partially offset by ongoing and new productivity initiatives[2] Second Quarter Fiscal 2024 Financial Performance This section details Albertsons Companies' Q2 FY24 financial results, including net sales, gross margin, operating expenses, and key profitability metrics Net Sales and Other Revenue Net sales and other revenue increased to $18.6 billion in Q2 FY24 from $18.3 billion in Q2 FY23, primarily driven by a 2.5% increase in identical sales, particularly strong pharmacy sales, and a 24% rise in digital sales, partially offset by lower fuel sales Net Sales and Other Revenue Overview | Metric | Q2 FY24 (12 weeks ended Sep 7, 2024) | Q2 FY23 (12 weeks ended Sep 9, 2023) | Change | | :----- | :----------------------------------- | :----------------------------------- | :----- | | Amount | $18.6 billion | $18.3 billion | +$0.3 billion | - The increase was driven by a 2.5% increase in identical sales, with strong growth in pharmacy sales[3] - Digital sales increased 24% during the second quarter of fiscal 2024, partially offset by lower fuel sales[3] Gross Margin Analysis The reported gross margin rate remained flat at 27.6% for both Q2 FY24 and Q2 FY23, though it decreased by 44 basis points excluding fuel and LIFO expense, mainly due to lower-margin pharmacy sales and increased digital picking/delivery costs Gross Margin Rate | Metric | Q2 FY24 | Q2 FY23 | | :----------- | :------ | :------ | | Gross margin rate | 27.6% | 27.6% | - Excluding the impact of fuel and LIFO expense, gross margin rate decreased 44 basis points compared to the second quarter of fiscal 2023[4] - Primary drivers of the decrease were strong growth in pharmacy sales (lower gross margin rate) and increases in picking and delivery costs related to digital sales growth, partially offset by procurement and sourcing productivity initiatives[4] Selling and Administrative Expenses Selling and administrative expenses increased to 25.8% of Net sales and other revenue in Q2 FY24, rising 41 basis points excluding fuel, primarily due to digital/omnichannel investments, merger costs, higher employee costs, and security services Selling and Administrative Expenses as Percentage of Revenue | Metric | Q2 FY24 | Q2 FY23 | | :------------------------------------ | :------ | :------ | | Selling and administrative expenses (% of Net sales and other revenue) | 25.8% | 25.1% | - Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue increased 41 basis points[4] - The increase was primarily attributable to operating expenses for digital and omnichannel capabilities, Merger-related costs, higher employee costs, business transformation costs, and additional third-party store security services, partially offset by productivity benefits[5] Property Dispositions and Impairment Losses The company reported a net loss on property dispositions and impairment losses of $43.9 million in Q2 FY24, a significant shift from a net gain in Q2 FY23, driven by micro-fulfillment center and retail store impairments Net Loss (Gain) on Property Dispositions and Impairment Losses | Metric | Q2 FY24 | Q2 FY23 | | :------------------------------------------ | :-------------- | :-------------- | | Net loss (gain) on property dispositions and impairment losses | $43.9 million (loss) | $8.4 million (gain) | - The net loss was primarily due to impairment losses of $39.8 million related to equipment from micro-fulfillment center closings and $13.5 million of retail store impairment losses[5] - Partially offset by $9.4 million of gains from the sale of real estate assets[5] Interest and Other Expenses Interest expense, net, decreased to $103.6 million in Q2 FY24 from $111.9 million in Q2 FY23 due to lower average outstanding borrowings, with other expense, net, also significantly decreasing Interest and Other Expenses | Metric | Q2 FY24 | Q2 FY23 | Change | | :------------------ | :-------------- | :-------------- | :------------- | | Interest expense, net | $103.6 million | $111.9 million | -$8.3 million | | Other expense, net | $1.9 million | $8.1 million | -$6.2 million | - The decrease in interest expense, net, was primarily attributable to lower average outstanding borrowings[6] Income Tax Expense Income tax expense for Q2 FY24 was $41.0 million, with an effective tax rate of 22.0%, down from $67.5 million and a 20.2% effective tax rate in Q2 FY23 Income Tax Expense and Effective Tax Rate | Metric | Q2 FY24 | Q2 FY23 | | :----------------- | :-------------- | :-------------- | | Income tax expense | $41.0 million | $67.5 million | | Effective tax rate | 22.0% | 20.2% | Net Income and Earnings Per Share (GAAP) Net income for Q2 FY24 significantly decreased to $145.5 million, or $0.25 per share, compared to $266.9 million, or $0.46 per share, in Q2 FY23 GAAP Net Income and Earnings Per Share | Metric | Q2 FY24 | Q2 FY23 | Change | | :-------------------- | :-------------- | :-------------- | :-------------- | | Net income | $145.5 million | $266.9 million | -$121.4 million | | Net income per share | $0.25 | $0.46 | -$0.21 | Adjusted Net Income and Earnings Per Share (Non-GAAP) Adjusted net income for Q2 FY24 was $301.0 million, or $0.51 per share, a decrease from $367.7 million, or $0.63 per share, in Q2 FY23 Adjusted Net Income and Earnings Per Share (Non-GAAP) | Metric | Q2 FY24 | Q2 FY23 | Change | | :-------------------- | :-------------- | :-------------- | :-------------- | | Adjusted net income | $301.0 million | $367.7 million | -$66.7 million | | Adjusted net income per share | $0.51 | $0.63 | -$0.12 | Adjusted EBITDA (Non-GAAP) Adjusted EBITDA for Q2 FY24 was $900.6 million, representing 4.9% of Net sales and other revenue, down from $976.9 million, or 5.3% of Net sales and other revenue, in Q2 FY23 Adjusted EBITDA (Non-GAAP) | Metric | Q2 FY24 | Q2 FY23 | Change | | :-------------------- | :-------------- | :-------------- | :-------------- | | Adjusted EBITDA | $900.6 million | $976.9 million | -$76.3 million | | % of Net sales and other revenue | 4.9% | 5.3% | -0.4% | Operational and Corporate Developments This section outlines Albertsons Companies' capital investments, the ongoing merger agreement with Kroger, and its operational profile and community contributions Capital Expenditures For the first 28 weeks of fiscal 2024, capital expenditures totaled $952.3 million, primarily allocated to completing 44 remodels, opening two new stores, and ongoing investments in digital and technology platforms - Capital expenditures were $952.3 million during the first 28 weeks of fiscal 2024[8] - Investments primarily included the completion of 44 remodels, the opening of two new stores, and continued investment in digital and technology platforms[8] Merger Agreement with The Kroger Company Albertsons Companies announced on October 13, 2022, an Agreement and Plan of Merger with The Kroger Company, under which Kroger will acquire all outstanding shares of Albertsons' common stock, subject to regulatory approval - On October 13, 2022, the Company entered into a Merger Agreement with The Kroger Company[9] - Under the terms, Kroger will acquire all outstanding shares of the Company's common stock, subject to regulatory approval[9] Company Profile and Operations Albertsons Companies is a leading US food and drug retailer, operating 2,267 retail food and drug stores, 1,726 pharmacies, 405 fuel centers, 22 distribution centers, and 19 manufacturing facilities across 34 states and D.C. under over 20 banners Business Overview Albertsons Companies is a leading US food and drug retailer, operating 2,267 retail food and drug stores, 1,726 pharmacies, 405 fuel centers, 22 distribution centers, and 19 manufacturing facilities across 34 states and D.C. under over 20 banners - Albertsons Companies is a leading food and drug retailer in the United States[10] Operational Footprint | Metric (as of Sep 7, 2024) | Count | | :------------------------- | :---- | | Retail food and drug stores | 2,267 | | Pharmacies | 1,726 | | Associated fuel centers | 405 | | Dedicated distribution centers | 22 | | Manufacturing facilities | 19 | - The Company operates stores across 34 states and the District of Columbia under more than 20 well-known banners[10] Community Engagement In 2023, Albertsons Companies, along with its Foundation, contributed over $350 million in food and financial support, including more than $35 million through its Nourishing Neighbors Program, to support communities and disaster relief efforts - In 2023, along with the Albertsons Companies Foundation, the Company contributed more than $350 million in food and financial support[11] - More than $35 million was contributed through the Nourishing Neighbors Program to ensure those living in communities and those impacted by disasters have enough to eat[11] Legal and Disclosure Information This section addresses forward-looking statements, key risk factors, and important disclosure information regarding the company and its merger Forward-Looking Statements The press release contains forward-looking statements regarding the company's business, industry, and the outcome of the Merger, identifiable by terms like "outlook," "expects," and "intends," which are not guarantees of future performance and are subject to numerous risks and uncertainties - This press release includes "forward-looking statements" about the business, industry, and the outcome of the Merger[12] - Forward-looking statements are identifiable by words such as "outlook," "may," "should," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future" and "intends"[12] - These statements are not guarantees of future performance and are subject to numerous risks and uncertainties beyond control that could cause actual results to differ materially[13] Risk Factors Key risks include uncertainties related to closing the Merger (regulatory approval, legal actions, consumer confidence erosion, operational restrictions, employee retention challenges), macroeconomic conditions (inflation/deflation, fuel prices, student loan deferments), failure to achieve productivity, supply chain issues, cyber incidents, and changes in tax laws - Risks include uncertainties related to the ability to close the Merger, including resolution of pending legal actions and regulatory approval[13] - Challenges in retaining and motivating associates until the closing of the Merger and difficulties in attracting new employees[13] - Changes in macroeconomic conditions such as rates of food price inflation or deflation, fuel and commodity prices, and expiration of student loan payment deferments[13] - Operational and financial effects resulting from cyber incidents at the Company or at a third party[13] Additional Information The company has filed a definitive information statement on Schedule 14C with the SEC regarding the Merger approval, which is available free of charge on the SEC's website (www.sec.gov) or the company's investor relations website - The Company has filed with the SEC a definitive information statement on Schedule 14C with respect to the approval of the Merger[16] - Copies of all documents filed by the Company with the SEC regarding this transaction are available free of charge at www.sec.gov or from the Company's website at https://www.albertsonscompanies.com/investors/overview/[16](index=16&type=chunk) Non-GAAP Measures and Key Definitions This section defines the company's key Non-GAAP financial measures and the methodology for calculating identical sales Non-GAAP Measures Definition The company uses Non-GAAP Measures (EBITDA, Adjusted EBITDA, Adjusted net income, Adjusted net income per Class A common share, and Net debt ratio) to provide supplemental information for evaluating ongoing operations, excluding items management does not consider core, though these measures may not be comparable to those of other companies - Non-GAAP Measures include EBITDA, Adjusted EBITDA, Adjusted net income, Adjusted net income per Class A common share and Net debt ratio[17] - These measures provide supplemental information useful to analysts and investors to evaluate ongoing results of operations, excluding financial impact of items management does not consider in assessing core operating performance[17] - Other companies may have different definitions of Non-GAAP Measures, impacting comparability[17] Identical Sales Definition "Identical sales" refers to sales from stores operating during the same period in both the current and prior fiscal years, compared on a daily basis, including direct-to-consumer digital sales but excluding fuel sales - The term "identical sales" includes stores operating during the same period in both the current fiscal year and the prior fiscal year, comparing sales on a daily basis[18] - Direct to consumer digital sales are included in identical sales, and fuel sales are excluded[18] Condensed Consolidated Financial Statements This section presents the condensed consolidated statements of operations, balance sheets, and cash flows for the reported periods Condensed Consolidated Statements of Operations The condensed consolidated statements of operations show a decrease in net income for both the 12-week and 28-week periods ending September 7, 2024, compared to the prior year, despite a slight increase in net sales and other revenue, with operating income also declining significantly Condensed Consolidated Statements of Operations (Selected Data) | Metric (in millions, except per share) | 12 weeks ended Sep 7, 2024 | 12 weeks ended Sep 9, 2023 | 28 weeks ended Sep 7, 2024 | 28 weeks ended Sep 9, 2023 | | :------------------------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Net sales and other revenue | $18,551.5 | $18,290.7 | $42,816.9 | $42,340.9 | | Gross margin | $5,121.3 | $5,041.5 | $11,860.2 | $11,704.2 | | Operating income | $292.0 | $454.4 | $751.6 | $1,076.6 | | Net income | $145.5 | $266.9 | $386.2 | $684.1 | | Basic net income per Class A common share | $0.25 | $0.46 | $0.67 | $1.19 | Condensed Consolidated Balance Sheets As of September 7, 2024, total assets increased to $26,528.4 million from $26,221.1 million at February 24, 2024, driven by increases in cash and cash equivalents, receivables, and inventories, while total liabilities remained relatively stable and total stockholders' equity increased Condensed Consolidated Balance Sheets (Selected Data) | Metric (in millions) | September 7, 2024 | February 24, 2024 | | :------------------- | :---------------- | :---------------- | | Total current assets | $6,646.6 | $6,287.5 | | Total assets | $26,528.4 | $26,221.1 | | Total current liabilities | $7,422.4 | $7,457.7 | | Total liabilities and stockholders' equity | $26,528.4 | $26,221.1 | - Cash and cash equivalents increased from $188.7 million to $280.0 million[23] - Total stockholders' equity increased from $2,747.5 million to $3,020.3 million[23] Condensed Consolidated Statements of Cash Flows For the first 28 weeks of fiscal 2024, net cash provided by operating activities slightly increased to $1,374.1 million from $1,347.9 million in the prior year, while net cash used in investing activities increased to $925.3 million, and net cash used in financing activities decreased significantly to $357.8 million Condensed Consolidated Statements of Cash Flows (Selected Data) | Metric (in millions) | 28 weeks ended Sep 7, 2024 | 28 weeks ended Sep 9, 2023 | | :---------------------------------------------------------------- | :------------------------- | :------------------------- | | Net cash provided by operating activities | $1,374.1 | $1,347.9 | | Net cash used in investing activities | $(925.3) | $(890.1) | | Net cash used in financing activities | $(357.8) | $(651.1) | | Net increase (decrease) in cash and cash equivalents and restricted cash | $91.0 | $(193.3) | - Payments for property, equipment and intangibles, including lease buyouts, decreased from $1,084.3 million to $952.3 million[25] - Payments on long-term borrowings, including ABL facility, decreased from $500.5 million to $200.4 million[25] Reconciliation of Non-GAAP Financial Measures This section provides detailed reconciliations of GAAP net income to Adjusted net income, Adjusted EBITDA, and the Net Debt Ratio Reconciliation of Net Income to Adjusted Net Income and EPS The reconciliation shows that Adjusted net income for Q2 FY24 was $301.0 million ($0.51 per share), compared to GAAP net income of $145.5 million ($0.25 per share), with key adjustments including merger-related costs, loss on property dispositions, business transformation costs, and equity-based compensation Reconciliation of Net Income to Adjusted Net Income (Selected Adjustments, in millions) | Adjustment Category | 12 weeks ended Sep 7, 2024 | 12 weeks ended Sep 9, 2023 | | :------------------ | :------------------------- | :------------------------- | | Net income | $145.5 | $266.9 | | Merger-related costs | $67.4 | $41.2 | | Loss (gain) on property dispositions and impairment losses, net | $43.9 | $(8.4) | | Business transformation | $20.5 | $13.5 | | Equity-based compensation expense | $29.5 | $25.3 | | Adjusted net income | $301.0 | $367.7 | Adjusted Net Income Per Class A Common Share - Diluted | Metric | 12 weeks ended Sep 7, 2024 | 12 weeks ended Sep 9, 2023 | | :----- | :------------------------- | :------------------------- | | Adjusted net income per Class A common share - diluted | $0.51 | $0.63 | Reconciliation of Adjusted Net Income to Adjusted EBITDA Adjusted EBITDA for Q2 FY24 was $900.6 million, reconciled from Adjusted net income of $301.0 million by adding back tax impact of adjustments, income tax expense, interest expense, and depreciation and amortization, while subtracting certain non-cash items Reconciliation of Adjusted Net Income to Adjusted EBITDA (in millions) | Metric | 12 weeks ended Sep 7, 2024 | 12 weeks ended Sep 9, 2023 | 28 weeks ended Sep 7, 2024 | 28 weeks ended Sep 9, 2023 | | :------------------------------------------------ | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Adjusted net income | $301.0 | $367.7 | $692.6 | $913.4 | | Tax impact of adjustments to Adjusted net income | $47.8 | $29.9 | $92.8 | $71.2 | | Income tax expense | $41.0 | $67.5 | $110.2 | $133.6 | | Interest expense, net | $103.6 | $111.9 | $249.3 | $266.8 | | Depreciation and amortization | $421.9 | $414.6 | $973.9 | $945.2 | | Adjusted EBITDA | $900.6 | $976.9 | $2,084.5 | $2,295.4 | Reconciliation of Net Debt Ratio The Net Debt Ratio as of September 7, 2024, was 1.86, calculated from total debt net of cash and cash equivalents of $7,628.4 million and rolling four quarters Adjusted EBITDA of $4,106.8 million, representing a slight increase from 1.82 in the prior year Net Debt Ratio Reconciliation (in millions) | Metric | September 7, 2024 | September 9, 2023 | | :------------------------------------ | :---------------- | :---------------- | | Total debt (including finance leases) | $7,908.4 | $8,449.6 | | Cash and cash equivalents | $280.0 | $266.1 | | Total debt net of cash and cash equivalents | $7,628.4 | $8,183.5 | | Rolling four quarters Adjusted EBITDA | $4,106.8 | $4,503.6 | | Total Net Debt Ratio | 1.86 | 1.82 | Reconciliation of Net Income to Adjusted EBITDA (Rolling Four Quarters) The rolling four quarters Adjusted EBITDA was $4,106.8 million as of September 7, 2024, a decrease from $4,503.6 million as of September 9, 2023, providing a comprehensive view of EBITDA adjustments over a longer period Reconciliation of Net Income to Adjusted EBITDA (Rolling Four Quarters, in millions) | Metric | Rolling four quarters ended Sep 7, 2024 | Rolling four quarters ended Sep 9, 2023 | | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Adjusted EBITDA | $4,106.8 | $4,503.6 | - Key adjustments include business transformation, equity-based compensation, loss (gain) on property dispositions and impairment losses, LIFO expense, merger-related costs, and certain legal and regulatory accruals and settlements[41]