Albertsons Companies(ACI) - 2024 Q4 - Annual Report

Part I Business Overview Albertsons is a leading U.S. food and drug retailer operating 2,269 stores under more than 20 banners, focusing on a "Locally Great, Nationally Strong" strategy - The company's loyalty program has grown to 39.8 million members, and its digital sales increased by 22% in fiscal 2023, highlighting the success of its omnichannel strategy[36][191] - Own Brands, such as Signature SELECT® and O Organics®, are a key part of the business, generating $16.5 billion in sales in fiscal 2023 with over 14,000 unique items[30] - The company faces intense competition from a wide range of retailers, including supercenters, club stores, online retailers, and specialty supermarkets, with key competitive factors being location, price, quality, and convenience[49][51] Company Scale and Operations (as of Feb 24, 2024) | Metric | Value | | :--- | :--- | | Stores | 2,269 across 34 states and DC | | Banners | Over 20 (e.g., Albertsons, Safeway, Vons) | | Market Position | 1 or 2 in 70% of 121 MSAs | | Pharmacies | 1,725 | | Fuel Centers | 402 | | Distribution Centers | 22 | | Manufacturing Facilities | 19 | | Employees | Approx. 285,000 | Risk Factors The company identifies several material risks, with significant focus on the pending merger with Kroger, including uncertainties about its completion, potential negative impacts on business relationships, and litigation - Significant risks are associated with the pending merger with The Kroger Co., including the ability to close the transaction, potential distraction of management, difficulties in retaining employees, and litigation, with the FTC having filed a lawsuit to enjoin the merger[73][76][79] - The food and drug retail industry is intensely competitive, and failure to compete on price, quality, and convenience, or to respond to consumer trends and the growth of online channels, could adversely affect profitability[82][83][88] - A significant majority of the workforce (approx. 200,000 employees) is unionized, posing financial risks from potential labor disputes, work stoppages, and increased pension expenses, with an estimated allocable share of multiemployer plan underfunding of $4.5 billion[105][106][110] - The company is dependent on IT systems and faces cybersecurity risks, including data breaches and incidents involving customer or employee data, which could lead to financial loss and reputational damage, with the use of AI also presenting emerging risks[130][132][138] - As of February 24, 2024, the company had approximately $7.7 billion of debt outstanding, and this high level of indebtedness could increase vulnerability to adverse economic conditions and limit operational flexibility[141][149] Cybersecurity The company has established a comprehensive cybersecurity risk management program, overseen by the Board's Audit and Risk Committee and Technology Committee, focusing on proactive threat identification, continuous monitoring, and incident response - Cybersecurity oversight is handled at the board level by the Audit and Risk Committee and the Technology Committee, with the CISO reporting to the Chief Technology and Transformation Officer[166][168][169] - The risk management strategy includes continuous monitoring, regular risk assessments of internal systems and third-party suppliers, and annual tabletop exercises to test the incident response plan[163][164][165] - As of the report date, no cybersecurity threats have been identified that have materially affected or are reasonably anticipated to materially affect the company[170] Properties As of February 24, 2024, the company operated 2,269 stores across 34 states and the District of Columbia, with California having the highest number of stores and over half of the stores being larger than 50,000 square feet - The company owns or ground-leases 39% of its operating stores and 53% of its industrial properties (distribution centers and manufacturing plants)[174] Store Count by Top 5 States (as of Feb 24, 2024) | State | Number of Stores | | :--- | :--- | | California | 586 | | Washington | 215 | | Texas | 208 | | Illinois | 183 | | Arizona | 135 | Store Size Distribution (as of Feb 24, 2024) | Square Footage | Number of Stores | Percent of Total | | :--- | :--- | :--- | | Less than 30,000 | 217 | 9.6% | | 30,000 to 50,000 | 778 | 34.3% | | More than 50,000 | 1,274 | 56.1% | Legal Proceedings The company is involved in various legal proceedings arising in the ordinary course of business, including matters related to trade practices, employment, product claims, and significant ongoing litigation such as False Claims Act cases and opioid epidemic lawsuits - The company is defending two significant False Claims Act (FCA) lawsuits (Proctor and Schutte) concerning pharmacy pricing, which allege damages over $100 million each before trebling, with the Supreme Court ruling adversely on a key legal issue and cases remanded for further proceedings[474][477][478] - The company is a defendant in approximately 85 lawsuits filed by various government entities and hospitals related to the national opioid epidemic, and while some cases have been settled, the outcome and potential loss for the remaining matters are currently indeterminable[484][485] - A class action lawsuit in Oregon regarding meat promotions was settled for $107 million, which was paid in September 2023[488] Part II Stockholder Matters The company's Class A common stock trades on the NYSE under the symbol "ACI", and the report includes a performance graph comparing ACI's stock return to relevant indices since its IPO in June 2020 - The company's Class A common stock (ACI) has been trading on the NYSE since June 26, 2020[180] - No shares of common stock were repurchased during fiscal 2023 or 2022, and as of February 24, 2024, $180.9 million remained available under the authorized share repurchase program[183] - All remaining Convertible Preferred Stock was converted into Class A common stock during fiscal 2023, completing the conversion of all originally issued shares[184] Management's Discussion and Analysis (MD&A) In fiscal 2023, Net Sales and Other Revenue increased 2.0% to $79.2 billion, driven by a 3.0% increase in identical sales, primarily from pharmacy and digital sales growth, though Net Income and Adjusted EBITDA declined due to lower gross margin, higher interest expense, and merger-related costs - The 3.0% increase in identical sales was primarily driven by growth in pharmacy sales and a 22% increase in digital sales[191][202] - Gross margin rate decreased by 20 basis points, or 64 basis points excluding fuel and LIFO, mainly due to pharmacy operations mix, higher shrink, and increased digital picking/delivery costs[208] - Net cash from operating activities decreased to $2.7 billion in fiscal 2023 from $2.9 billion in fiscal 2022, due to lower Adjusted EBITDA and higher cash payments for taxes, merger costs, and interest[226] - Capital expenditures for fiscal 2024 are expected to be between $2.0 billion and $2.1 billion[228] Fiscal 2023 Key Financial Results (vs. Fiscal 2022) | Metric | Fiscal 2023 | Fiscal 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales & Other Revenue | $79.2B | $77.6B | +2.0% | | Identical Sales Increase | 3.0% | 6.9% | (3.9) p.p. | | Gross Margin Rate | 27.8% | 28.0% | (0.2) p.p. | | Operating Income | $2.1B | $2.3B | (10.3)% | | Net Income | $1.3B | $1.5B | (14.4)% | | Adjusted EBITDA | $4.3B | $4.7B | (7.7)% | | Diluted EPS | $2.23 | $2.27 | (1.8)% | | Adjusted Diluted EPS | $2.88 | $3.37 | (14.5)% | Market Risk Disclosures The company is exposed to market risks from changes in interest rates and energy prices, with interest rate risk primarily relating to its variable-rate ABL Facility, and energy price risk managed through fixed-price contracts and short-term derivatives - The primary interest rate exposure is from the ABL Facility, and a hypothetical 100 basis point increase in variable interest rates would increase annual interest expense by about $2 million[259] - The company uses fixed-price contracts and short-term derivatives to manage exposure to price fluctuations in electricity, natural gas, and diesel fuel[261] Debt Maturity Profile (as of Feb 24, 2024) | Debt Type | Total Principal | Fair Value | | :--- | :--- | :--- | | Fixed Rate Debt | $7,484.2M | $7,257.2M | | Variable Rate Debt | $200.0M | $200.0M | Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended February 24, 2024, and the unqualified report from the independent registered public accounting firm, Deloitte & Touche LLP, on both the financial statements and the effectiveness of internal control over financial reporting - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[264][274] - The auditor identified self-insurance liabilities for general liability and workers' compensation as a Critical Audit Matter due to the significant estimation and judgment involved[270][271] - The pending merger with Kroger is subject to regulatory clearance, with the FTC and several states having filed lawsuits to block the transaction, and the merger agreement's outside date can be extended to October 9, 2024[343][349][350] - As of Feb 24, 2024, total debt, including finance leases, was $8.1 billion, and the company has a $4.0 billion ABL facility, of which $3.75 billion was available[231][364][367] Consolidated Balance Sheet Summary (as of Feb 24, 2024) | Account | Value (in millions) | | :--- | :--- | | Total Assets | $26,221.1 | | Total Liabilities | $23,473.6 | | Total Stockholders' Equity | $2,747.5 | Part III Directors, Executive Compensation, and Corporate Governance Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, and principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of Stockholders, to be filed with the SEC within 120 days after the fiscal year-end - Information for Items 10 through 14 is incorporated by reference from the company's forthcoming 2024 Proxy Statement[5] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, including the Merger Agreement with Kroger, corporate governance documents, debt indentures, material contracts, and certifications by the CEO and CFO - This section provides a comprehensive list of all exhibits filed with the 10-K, including the Agreement and Plan of Merger with The Kroger Co[514] - Certifications by the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[519]