ALBERTSONS COMPANIES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes found in "Part II-Item 8. Financial Statements and Supplementary Data" in this Form 10-K, as well as "Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year endedFebruary 27, 2021 filed with theSEC onApril 28, 2021 , which provides comparisons of fiscal 2020 and fiscal 2019. This discussion contains forward-looking statements based upon current expectations that involve numerous risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section entitled "Special Note Regarding Forward-Looking Statements" set forth in Part I and in Item 1A. "Risk Factors." Our last three fiscal years consisted of the 52 weeks endedFebruary 26, 2022 ("fiscal 2021"), the 52 weeks endedFebruary 27, 2021 ("fiscal 2020") and the 53 weeks endedFebruary 29, 2020 ("fiscal 2019"). In this Management's Discussion and Analysis of Financial Condition and Results of Operations ofAlbertsons Companies, Inc. , the words "Albertsons," the "Company," "we," "us," "our" and "ours" refer toAlbertsons Companies, Inc. , together with its subsidiaries.
EXECUTIVE SUMMARY - FISCAL 2021 OVERVIEW
We are one of the largest food retailers inthe United States , with 2,276 stores across 34 states and theDistrict of Columbia . We operate 24 banners including Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs,Jewel-Osco , Acme, Shaw's, Star Market, United Supermarkets,Market Street , Haggen,Kings Food Markets and Balducci's Food Lovers Market, with approximately 290,000 talented and dedicated employees, as ofFebruary 26, 2022 , who serve on average 34 million customers each week. Additionally, as ofFebruary 26, 2022 , we operated 1,722 pharmacies, 1,317 in-store branded coffee shops, 402 adjacent fuel centers, 22 dedicated distribution centers, 20 manufacturing facilities and various digital platforms. During fiscal 2021, we made significant progress against all of our strategic priorities, including in-store excellence, accelerating our digital and omnichannel capabilities, driving productivity and strengthening our talent and culture. Identical sales, excluding fuel, decreased 0.1% during fiscal 2021, which was impacted by the significantly elevated demand at the onset of the COVID-19 pandemic in the first quarter of fiscal 2020. On a two-year stacked basis, identical sales, excluding fuel, increased 16.8%. In the fourth quarter of fiscal 2021, we gained market share in food market andMulti Outlet ("MULO") on both a one and two-year basis. Food market generally includes traditional supermarkets while MULO includes most food market, drug, mass merchants, club, dollar and military stores that sell food. Our digital initiatives continue to resonate with our customers, underscoring our strong omnichannel capabilities that allow customers to complete their shopping with us in any way they want. During fiscal 2021, digital sales, which include home delivery and Drive Up & Go curbside pickup, increased 5% compared to fiscal 2020 and 263% on a two-year stacked basis. During fiscal 2021, we expanded our Drive Up & Go curbside pickup service to over 2,000 locations and added five micro fulfillment centers ("MFCs") for a total of seven MFCs in operation. In our online delivery service, we expanded third-party partnerships to offer more choices and accelerate the speed of delivery. In digital, we are beginning to capitalize on our rich and proprietary data, recently launching the Albertsons Media Collective ("AMC") in the first quarter of fiscal 2022. AMC offers new and existing business partners a robust digital marketing platform that reaches our extensive customer network and leverages our strong market share, especially in the 68% of markets where we hold a #1 or #2 share position. We believe AMC will be a leading growth and profit driver over the next several years. 43
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In the just for U loyalty program, ongoing benefit enhancements continued to accelerate membership growth, which increased 18% in the fourth quarter of fiscal 2021 compared to the fourth quarter of fiscal 2020, reaching 29.9 million members, and is up approximately 45% or more than 9 million members since the fourth quarter of fiscal 2019. Within the program, our retention rate of actively engaged members, those that redeemed coupons, fuel or grocery rewards, was over 90% at the end of fiscal 2021. In loyalty, we launched a new unified mobile app (the "UMA") and we introduced a meal planning tool that offers recipes, including those that address dietary preferences, such as vegetarian or gluten-free. Customers can seamlessly add all recipe ingredients to their shopping list or immediately purchase them in the UMA. We offer nearly 14,000 high-quality products under our Own Brands portfolio. Our Own Brands products resonate well with our shoppers, as evidenced by Own Brands sales of over$15.3 billion in fiscal 2021. Own Brands continues to deliver on innovation with 837 new items launched in fiscal 2021. During fiscal 2021, Own Brands was awarded fourPrivate Label Manufacturing Association awards and won recognition fromStore Brands Magazine for innovation in private brand marketing. Driving productivity allowed us to continue to fund future growth and offset inflation. During fiscal 2021, we continued to drive incremental productivity savings as we enhanced our pricing and promotion capabilities, further rationalized indirect spend and expanded our national buying initiatives. We expect to achieve our targeted three-year$1.5 billion savings by the end of fiscal 2022 and are working on the next phase to identify incremental productivity savings beyond fiscal 2022. Our capital allocation strategy balances investing for the future, strengthening our balance sheet and returns to shareholders through a combination of dividends and opportunistic share repurchases. Capital expenditures were approximately$1,607 million during fiscal 2021, primarily including investments in the modernization of our store fleet, including 236 remodels and the opening of 10 new stores, and the building of our digital and technology platforms. We continue to make progress in strengthening the balance sheet, reducing our Net debt ratio to 1.2x as of the end of fiscal 2021 compared to 1.5x at the end of fiscal 2020. Capital returns to shareholders in fiscal 2021 included$207.4 million in common stock dividends ($0.44 per common share). In addition, during fiscal 2021, along with theAlbertsons Companies Foundation , we contributed nearly$200 million in food and financial support, including approximately$40 million through our Nourishing Neighbors program to ensure those living in our communities have enough to eat. We have continued to partner with theDepartment of Health and Human Services and local health authorities to administer COVID-19 vaccines to our local communities and have administered more than 12 million doses. We have continued to settle labor contracts that provide an overall wage and benefit package that rewards our existing team members for their significant contributions and strengthens our competitive positioning in the markets we serve. During the fourth quarter of fiscal 2021, we settled contracts inDenver ,Portland ,Montana ,Idaho ,Oregon and the Mid-Atlantic. Subsequent to the end of fiscal 2021, throughApril 22, 2022 , we have also reached tentative settlements in ourNorthern California ,Southern California andSeattle divisions.
Fiscal 2021 highlights
In summary, our financial and operating highlights for fiscal 2021 include:
•Identical sales decreased 0.1%; on a two-year stacked basis identical sales growth was 16.8%
•Digital sales increased 5%; on a two-year stacked basis digital sales growth was 263%
•Net income of
•Adjusted net income of
•Adjusted EBITDA of
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•Operating cash flows of
•Reduced Net debt ratio to 1.2x at the end of fiscal 2021 compared to 1.5x at the end of fiscal 2020
•Continued modernization of our store fleet, including completing 236 remodels and opening 10 new stores
•Expanded Drive Up & Go to over 2,000 locations
•Added five MFCs for a total of seven in operation
Stores
The following table shows stores operating, acquired, opened and closed during
the periods presented:
Fiscal Fiscal Fiscal
2021 2020 2019
Stores, beginning of period 2,277 2,252 2,269
Acquired (1) 3 26 -
Opened 7 9 14
Closed (11) (10) (31)
Stores, end of period 2,276 2,277 2,252
(1) Fiscal 2021 includes one store acquired from Kings and Balducci's in fiscal 2020 that transferred to us in fiscal 2021.
The following table summarizes our stores by size:
Number of Stores Percent of Total Retail Square Feet (1)
February 26, February 27, February 26, February 27, February 26, February 27,
Square Footage 2022 2021 2022 2021 2022 2021
Less than 30,000 221 221 9.7 % 9.7 % 5.0 5.1
30,000 to 50,000 781 789 34.3 % 34.7 % 32.7 33.0
More than 50,000 1,274 1,267 56.0 % 55.6 % 75.3 74.9
Total Stores 2,276 2,277 100.0 % 100.0 % 113.0 113.0
(1) In millions, reflects total square footage of retail stores operating at the end of the period.
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NON-GAAP FINANCIAL MEASURES
We define EBITDA as generally accepted accounting principles ("GAAP") earnings
(net loss) before interest, income taxes, depreciation and amortization. We
define Adjusted EBITDA as earnings (net loss) before interest, income taxes,
depreciation and amortization, further adjusted to eliminate the effects of
items management does not consider in assessing our ongoing core performance. We
define Adjusted net income as GAAP net income adjusted to eliminate the effects
of items management does not consider in assessing our ongoing core performance.
We define Adjusted net income per Class A common share as Adjusted net income
divided by the weighted average diluted Class A common shares outstanding, as
adjusted to reflect all restricted stock units and awards outstanding at the end
of the period, as well as the conversion of Convertible Preferred Stock when it
is antidilutive for GAAP. We define Net debt as total debt (which includes
finance lease obligations and is net of deferred financing costs and original
issue discount) minus unrestricted cash and cash equivalents and we define Net
debt ratio as the ratio of Net debt to Adjusted EBITDA for the rolling 52 or 53
week period.
EBITDA, Adjusted EBITDA, Adjusted net income, Adjusted net income per Class A
common share and Net debt ratio (collectively, the "Non-GAAP Measures") are
performance measures that provide supplemental information we believe is useful
to analysts and investors to evaluate our ongoing results of operations, when
considered alongside other GAAP measures such as net income, operating income,
gross margin and net income per Class A common share. These Non-GAAP Measures
exclude the financial impact of items management does not consider in assessing
our ongoing core operating performance, and thereby provide useful measures to
analysts and investors of our operating performance on a period-to-period basis.
Other companies may have different definitions of Non-GAAP Measures and provide
for different adjustments, and comparability to our results of operations may be
impacted by such differences. We also use Adjusted EBITDA and Net debt ratio for
board of director and bank compliance reporting. Our presentation of Non-GAAP
Measures should not be construed as an inference that our future results will be
unaffected by unusual or non-recurring items.
Non-GAAP Measures should not be considered as measures of discretionary cash
available to us to invest in the growth of our business. We compensate for these
limitations by relying primarily on our GAAP results and using Non-GAAP Measures
only for supplemental purposes.
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RESULTS OF OPERATIONS
The following information summarizes the components of our Consolidated Statements of Operations for fiscal 2021 compared to fiscal 2020.
Summary of Consolidated Statements of Operations (dollars in millions, except
per share data):
Fiscal Fiscal Fiscal
2021 2020 2019
Net sales and other revenue $ 71,887.0 100.0 % $ 69,690.4 100.0 % $ 62,455.1 100.0 %
Cost of sales 51,164.6 71.2 49,275.9 70.7 44,860.9 71.8
Gross margin 20,722.4 28.8 20,414.5 29.3 17,594.2 28.2
Selling and administrative expenses 18,300.5 25.5 18,835.8 27.0 16,641.9 26.6
Gain on property dispositions and
impairment losses, net (15.0) - (38.8) (0.1) (484.8) (0.7)
Operating income 2,436.9 3.3 1,617.5 2.4 1,437.1 2.3
Interest expense, net 481.9 0.7 538.2 0.8 698.0 1.1
Loss on debt extinguishment 3.7 - 85.3 0.1 111.4 0.2
Other (income) expense, net (148.2) (0.2) (134.7) (0.2) 28.5 -
Income before income taxes 2,099.5 2.8 1,128.7 1.7 599.2 1.0
Income tax expense 479.9 0.7 278.5 0.4 132.8 0.2
Net income $ 1,619.6 2.1 % $ 850.2 1.3 % $ 466.4 0.8 %
Basic net income per Class A common
share $ 2.73 $ 1.53 $ 0.80
Diluted net income per Class A common
share 2.70 1.47 0.80
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Net sales and other revenue increased$2,196.6 million , or 3.2%, from$69,690.4 million in fiscal 2020 to$71,887.0 million in fiscal 2021. The primary increase in Net sales and other revenue in fiscal 2021 as compared to fiscal 2020 was driven by higher fuel sales and sales related to the stores acquired and opened since fiscal 2020, offset by our 0.1% decrease in identical sales, which was impacted by the significantly elevated demand at the onset of the COVID-19 pandemic in the first quarter of fiscal 2020. Our identical sales for fiscal 2021 was favorably impacted by retail price inflation and incremental pharmacy sales related to administering COVID-19 vaccines. The components of the change in Net sales and other revenue for fiscal 2021 were as follows (in millions): Fiscal 2021 Net sales and other revenue for fiscal 2020 $
69,690.4
Increase in fuel sales
1,511.0
Increase in sales due to new store openings, net of store closures 602.9
Identical sales decrease of 0.1%
(67.8)
Other, net
150.5
Net sales and other revenue for fiscal 2021 $
71,887.0
Identical Sales, Excluding Fuel
Identical sales include stores operating during the same period in both the
current year and the prior year, comparing sales on a daily basis. Direct to
consumer digital sales are included in identical sales, and fuel sales are
excluded from identical sales. Acquired stores become identical on the one-year
anniversary date of the acquisition. Identical sales results, on an actual
basis, for the past three fiscal years were as follows:
Fiscal Fiscal Fiscal
2021 2020 2019
Identical sales, excluding fuel (0.1)% 16.9% 2.1%
The following table represents Net sales and other revenue by product type (in
millions):
Fiscal Fiscal
2021 2020
Amount Amount
(1) % of Total (1)(2) % of Total
Non-perishables (3) $ 36,486.7 50.8 % $ 37,520.0 53.8 %
Fresh (4) 24,636.8 34.3 % 23,674.5 34.0 %
Pharmacy 5,823.3 8.1 % 5,195.8 7.4 %
Fuel 3,747.5 5.2 % 2,236.5 3.2 %
Other (5) 1,192.7 1.6 % 1,063.6 1.6 %
Total (6) $ 71,887.0 100.0 % $ 69,690.4 100.0 %
(1) Digital related sales are included in the categories to which the revenue pertains.
(2) In the fourth quarter of fiscal 2021, to better align with internal management reporting, the Company revised its presentation of sales revenue by product type, primarily to reclassify dairy sales from "Perishables" to "Non-perishables" and then titled its former "Perishables" product category "Fresh." Fiscal 2020 has been adjusted to reflect this presentation.
(3) Consists primarily of general merchandise, grocery, dairy and frozen foods.
(4) Consists primarily of produce, meat, deli, floral and seafood.
(5) Consists primarily of wholesale revenue to third parties, commissions and other miscellaneous revenue.
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Gross Margin
Gross margin represents the portion of Net sales and other revenue remaining after deducting the Cost of sales during the period, including purchase and distribution costs. These costs include, among other things, purchasing and sourcing costs, inbound freight costs, product quality testing costs, warehousing and distribution costs, Own Brands program costs and digital-related third-party delivery and handling costs. Advertising, promotional expenses and vendor allowances are also components of Cost of sales. Gross margin rate decreased 50 basis points to 28.8% in fiscal 2021 compared to 29.3% in fiscal 2020. Excluding the impact of fuel, gross margin rate increased five basis points. The increase in fiscal 2021 as compared to fiscal 2020 was primarily due to productivity initiatives, improved pharmacy margins related to administering COVID-19 vaccines and favorable product mix, offset by lower gross margin rates across certain product categories due to the rate impact of increased product costs and higher supply chain costs driven by the current inflationary environment predominantly experienced in the third and fourth quarters of fiscal 2021.
Selling and Administrative Expenses
Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.
Selling and administrative expenses decreased 150 basis points to 25.5% of Net sales and other revenue in fiscal 2021 from 27.0% in fiscal 2020. Excluding the impacts of fuel and theCombined Plan and UFCW National Fund withdrawals, Selling and administrative expenses as a percentage of Net sales and other revenue increased 35 basis points during fiscal 2021 compared to fiscal 2020. The increase in Selling and administrative expenses as a percentage of Net sales and other revenue during fiscal 2021 compared to fiscal 2020 was primarily attributable to higher employee costs, depreciation and other expenses related to our investments in our digital and omnichannel capabilities and other strategic priorities. The increase in employee costs was the result of additional labor to support the increase in fresh sales, market-driven wage rate increases and higher equity-based compensation expense. These increases were partially offset by lower COVID-19 related costs and execution of productivity initiatives.
Gain on Property Dispositions and Impairment Losses, Net
For fiscal 2021, net gain on property dispositions and impairment losses was$15.0 million , primarily driven by$44.6 million of gains from the sale of assets, partially offset by$31.1 million of asset impairments, primarily related to right-of-use assets and intangible assets. For fiscal 2020, net gain on property dispositions and impairment losses was$38.8 million , primarily driven by$69.0 million of gains from the sale of assets, including the sale of a distribution center, partially offset by$30.2 million of asset impairments, primarily related to underperforming or closed stores and certain surplus properties.
Interest Expense, Net
Interest expense, net was$481.9 million in fiscal 2021 and$538.2 million in fiscal 2020. The decrease in Interest expense, net for fiscal 2021 compared to fiscal 2020 was primarily due to lower average outstanding borrowings and lower average interest rates. The weighted average interest rate was 5.5% and 5.8% during fiscal 2021 and fiscal 2020, respectively, excluding amortization of debt discounts and deferred financing costs.
Loss on Debt Extinguishment
During fiscal 2021, we redeemed the remaining$200.0 million aggregate principal amount outstanding (the "2025 Redemption") of our 5.750% senior unsecured notes dueSeptember 2025 (the "2025 Notes"), using cash on hand, at a redemption price of 101.438% of the principal amount thereof plus accrued and unpaid interest. The Company 49
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recorded a
During fiscal 2020, we completed the issuance of$750.0 million in aggregate principal amount of 3.250% senior unsecured notes dueMarch 15, 2026 ,$750.0 million in aggregate principal amount of 3.500% senior unsecured notes dueMarch 15, 2029 (the "2029 Notes) and$600.0 million in aggregate principal amount of additional 2029 Notes. The proceeds from these issuances along with cash on hand were used to fund various redemptions of senior unsecured notes. In connection with these redemptions, we incurred a loss on debt extinguishment of$85.3 million , comprised of$71.6 million of redemption premiums and$13.7 million of write-offs of debt discounts.
Other (Income) Expense, Net
For fiscal 2021, other income, net was$148.2 million primarily driven by non-service cost components of net pension and post-retirement expense, realized and unrealized gains from non-operating investments and income related to our equity investment, partially offset by unrealized losses from non-operating investments. For fiscal 2020, other income, net was$134.7 million primarily driven by unrealized gains from non-operating investments, non-service cost components of net pension and post-retirement expense and income related to our equity investment, partially offset by recognized losses on interest rate swaps.
Income Taxes
Income tax expense was$479.9 million , representing a 22.9% effective tax rate, in fiscal 2021, and$278.5 million , representing a 24.7% effective tax rate, in fiscal 2020. The decrease in the effective tax rate was primarily driven by incremental discrete state income tax benefits related to statute expirations and audit settlements, as well as non-deductible transaction costs in fiscal 2020.
Net Income and Adjusted Net Income
Net income was$1,619.6 million or$2.70 per share during fiscal 2021 compared to$850.2 million or$1.47 per share during fiscal 2020. Adjusted net income was$1,781.0 million , or$3.07 per share, during fiscal 2021 compared to$1,891.4 million , or$3.24 per share, during fiscal 2020.
Adjusted EBITDA
Adjusted EBITDA was$4,398.4 million , or 6.1% of Net sales and other revenue, during fiscal 2021 compared to$4,524.0 million , or 6.5% of Net sales and other revenue, during fiscal 2020. 50
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Supplemental Two-Year Results - Fiscal 2021 Compared to Fiscal 2019
The following table provides a comparison of fiscal 2021 to fiscal 2019 for certain financial measures, including a compounded annual growth rate ("CAGR"), to demonstrate the two-year growth in the Company's business. The Company believes these supplemental comparisons provide meaningful and useful information to investors about the trends in its business relative to pre-COVID-19 pandemic periods.
Fiscal 2021
Supplemental Two-Year Results
Identical sales two-year stacked (1) 16.8 %
Net income per Class A common share two-year CAGR 83.7 %
Adjusted net income per Class A common share two-year CAGR 71.8 %
Net income two-year CAGR 86.3 %
Adjusted net income two-year CAGR 70.6 %
Adjusted EBITDA two-year CAGR 24.6 %
% of net sales and other revenue:
Gross margin (2) Increased 60 basis points
Selling and administrative expenses (3) Decreased 115 basis points
(1) Calculated as the sum of fiscal 2021 and fiscal 2020 identical sales, excluding fuel, of (0.1)% and 16.9%, respectively.
(2) Excluding fuel.
(3) Excluding fuel and the Combined Plan withdrawal.
Net sales and other revenue was$71.9 billion during fiscal 2021 compared to$62.5 billion during fiscal 2019. The increase in sales compared to fiscal 2019 was primarily due to the 16.8% increase in two-year stacked identical sales, partially offset by the impact of the 53rd week in fiscal 2019.
Gross Margin
Gross margin rate increased to 28.8% during fiscal 2021 compared to 28.2% during fiscal 2019. Excluding the impact of fuel, gross margin rate increased by approximately 60 basis points compared to fiscal 2019, primarily driven by productivity initiatives, sales leverage and improved pharmacy margins related to administering COVID-19 vaccines, partially offset by an increase in product and supply chain costs and growth in digital sales.
Selling and Administrative Expenses
Selling and administrative expenses decreased to 25.5% of net sales and other
revenue during fiscal 2021 compared to 26.6% of net sales and other revenue for
fiscal 2019. Excluding the impacts of fuel and the Combined Plan withdrawal,
selling and administrative expenses as a percentage of net sales and other
revenue decreased approximately 115 basis points primarily due to sales leverage
and the execution of productivity initiatives, partially offset by increases in
employee costs and other expenses related to the Company's investments in its
digital and omnichannel capabilities and strategic priorities, as well as
incremental COVID-19 expenses.
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Reconciliation of Non-GAAP Measures
The following tables reconcile Net income to Adjusted net income, and Net income per Class A common share to Adjusted net income per Class A common share (dollars in millions, except per share data):
Fiscal Fiscal Fiscal
2021 2020 2019
Numerator:
Net income $ 1,619.6 $ 850.2 $ 466.4
Adjustments:
(Gain) loss on interest rate and commodity hedges, net
(d) (22.8) 16.9 50.6
Facility closures and transformation (1)(b) 56.6 58.0 18.3
Acquisition and integration costs (2)(b) 8.6 12.6 60.5
Equity-based compensation expense (b) 101.2 59.0 32.8
Gain on property dispositions and impairment losses, net (3)
(15.0) (38.8) (484.8)
LIFO expense (a) 115.2 58.7 18.4
Discretionary COVID-19 pandemic related costs (4)(b) - 134.6 -
Government-mandated incremental COVID-19 pandemic
related pay (5)(b) 57.9 1.8 -
Civil disruption related costs (6)(b) - 13.0 -
Transaction and reorganization costs related to
Convertible Preferred Stock issuance and initial
public offering (b) - 23.8 3.7
Amortization of debt discount and deferred financing costs (c)
23.2 20.3 73.9
Loss on debt extinguishment 3.7 85.3 111.4
Amortization of intangible assets resulting from
acquisitions (b) 48.5 55.8 273.6
892.9 -
Miscellaneous adjustments (8)(f) (63.4) 2.4 35.0
Tax impact of adjustments to Adjusted net income (46.0) (355.1) (47.7)
Adjusted net income $ 1,781.0 $ 1,891.4 $ 612.1
Denominator:
Weighted average Class A common shares outstanding - diluted
475.3 578.1 580.3
Adjustments:
Convertible Preferred Stock (9) 97.7 - - Restricted stock units and awards (10) 7.4 6.3 6.6 Adjusted weighted average Class A common shares outstanding - diluted 580.4 584.4 586.9
Adjusted net income per Class A common share - diluted
Supplemental Two-Year CAGR:
Net income two-year CAGR 86.3 %
Adjusted net income two-year CAGR 70.6 %
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Fiscal Fiscal Fiscal
2021 2020 2019
Net income per Class A common share - diluted $ 2.70 $ 1.47 $ 0.80
Convertible Preferred Stock (9) 0.13 - -
Non-GAAP adjustments (11) 0.28 1.80 0.25
Restricted stock units and awards (10) (0.04)
(0.03) (0.01)
Adjusted net income per Class A common share - diluted
Supplemental Two-Year CAGR: Net income per Class A common share two-year CAGR 83.7 %
Adjusted net income per Class A common share two-year CAGR 71.8 %
The following table is a reconciliation of Adjusted net income to Adjusted
EBITDA:
Fiscal Fiscal Fiscal
2021 2020 2019
Adjusted net income (12) $ 1,781.0 $ 1,891.4 $ 612.1
Tax impact of adjustments to Adjusted net
income 46.0 355.1 47.7
Income tax expense 479.9 278.5 132.8
Amortization of debt discount and deferred
financing costs (c) (23.2) (20.3) (73.9)
Interest expense, net 481.9 538.2 698.0
Amortization of intangible assets resulting
from acquisitions (b) (48.5) (55.8) (273.6)
Depreciation and amortization (e) 1,681.3 1,536.9 1,691.3
Adjusted EBITDA (13) $ 4,398.4 $
4,524.0
Supplemental Two-Year CAGR: Adjusted EBITDA two-year CAGR 24.6 %
(1) Includes costs related to closures of operating facilities and third-party consulting fees related to our strategic priorities and associated business transformation.
(2) Related to conversion activities and related costs associated with integrating acquired businesses. Also includes expenses related to management fees paid in prior fiscal years connection with acquisition and financing activities.
(3) Primarily due to gains related to sale leaseback transactions in the second quarter of fiscal 2019.
(4) Includes$44.7 million in bonus payments to front-line associates during the third quarter of fiscal 2020. Also includes$53 million of charitable contributions to our communities for hunger relief and$36.9 million in final reward payments to front-line associates at the end of the first quarter of fiscal 2020.
(5) Represents incremental pay that is legislatively required in certain municipalities in which we operate.
(6) Primarily includes costs related to store damage, inventory losses and
community support as a result of the civil disruption during late
(7) Related to the Combined Plan during the fourth quarter of fiscal 2021 and the fourth quarter of fiscal 2020, and the withdrawal from theUFCW National Fund during the third quarter of fiscal 2020. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 12" for more information. 53
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(8) Miscellaneous adjustments include the following (see table below):
Fiscal Fiscal Fiscal
2021 2020 2019
Non-cash lease-related adjustments $ 9.7 $ 5.3 $ 21.2
Lease and lease-related costs for surplus and
closed stores 27.5 46.0 21.5
Net realized and unrealized gain on
non-operating investments (57.8) (85.1) (1.1)
Certain legal and regulatory accruals and
settlements, net (31.0) 12.0 (22.2)
Other (i) (11.8) 24.2 15.6
Total miscellaneous adjustments $ (63.4) $
2.4
(i) Primarily includes adjustments for pension settlement gain, unconsolidated equity investments and certain contract terminations.
(9) Represents the conversion of Convertible Preferred Stock to the fully outstanding as-converted Class A common shares as of the end of each respective period, for periods in which the Convertible Preferred Stock is antidilutive under GAAP.
(10) Represents incremental unvested RSUs and unvested RSAs to adjust the diluted weighted average Class A common shares outstanding during each respective period to the fully outstanding RSUs and RSAs as of the end of each respective period.
(11) Reflects the per share impact of Non-GAAP adjustments for each period. See the reconciliation of Net income to Adjusted net income above for further details.
(12) See the reconciliation of Net income to Adjusted net income above for further details.
(13) Fiscal 2019 includes an estimated
Non-GAAP adjustment classifications within the Consolidated Statements of Operations:
(a) Cost of sales
(b) Selling and administrative expenses
(c) Interest expense, net
(d) (Gain) loss on interest rate and commodity hedges, net:
Fiscal Fiscal Fiscal
2021 2020 2019
Cost of sales $ (19.5) $ (2.6) $ 2.7
Other (income) expense, net (3.3)
19.5 47.9
Total (Gain) loss on interest rate and commodity hedges, net
(e) Depreciation and amortization:
Fiscal Fiscal Fiscal
2021 2020 2019
Cost of sales $ 164.7 $ 172.6 $ 171.5
Selling and administrative expenses 1,516.6 1,364.3 1,519.8
Total Depreciation and amortization
(f) Miscellaneous adjustments:
Fiscal Fiscal Fiscal
2021 2020 2019
Selling and administrative expenses
(56.5) (71.4) 14.0
Total Miscellaneous adjustments
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LIQUIDITY AND FINANCIAL RESOURCES
The following table sets forth the major sources and uses of cash and cash equivalents and restricted cash at the end of each period (in millions):
February 26, February 27, February 29,
2022 2021 2020
Cash and cash equivalents and restricted cash
at end of period $ 2,952.6 $ 1,767.6 $ 478.9
Cash flows provided by operating activities 3,513.4 3,902.5 1,903.9
Cash flows used in investing activities (1,538.9) (1,572.0) (378.5)
Cash flows used in financing activities (789.5) (1,041.8) (2,014.2)
Net Cash Provided By Operating Activities
Net cash provided by operating activities was$3,513.4 million during fiscal 2021 compared to net cash provided by operating activities of$3,902.5 million during fiscal 2020. The decrease in cash flow from operating activities during fiscal 2021 compared to fiscal 2020 was due to the deferral of the employer-paid portion of social security taxes in fiscal 2020 and related partial payment of such deferral in fiscal 2021, increases in inventory purchases and lower Adjusted EBITDA. These decreases were partially offset by an increase in accounts payable from fiscal 2020, less cash paid for income taxes and interest, both theUFCW National Fund withdrawal payment and theUFCW & Employers Midwest Pension Fund settlement in fiscal 2020 and a decrease in contributions to our defined benefit pension plans and post-retirement benefit plans.
Net cash used in investing activities during fiscal 2021 was$1,538.9 million primarily due to payments for property, equipment and intangibles of$1,594.8 million , partially offset by proceeds from the sale of assets of$51.9 million . Payments for property, equipment and intangibles included the completion of 236 remodels, the opening of 10 new stores and continued investment in our digital and technology platforms. Net cash used in investing activities during fiscal 2020 was$1,572.0 million primarily due to payments for property, equipment and intangibles of$1,643.2 million and the Kings and Balducci's acquisition of$97.9 million , partially offset by proceeds from the sale of assets of$161.6 million . Payments for property, equipment and intangibles included the completion of 409 remodels, the opening of nine new stores and continued investment in our digital and technology platforms.
In fiscal 2022, we expect capital expenditures to be in the range of
Net cash used in financing activities was$789.5 million in fiscal 2021 primarily consisting of payments on long-term debt and finance leases of$408.9 million and dividends paid on our Class A common stock and Convertible Preferred Stock. Payments on long-term debt principally consisted of the 2025 Redemption and the full payment on our Safeway 4.75% notes at maturity. Net cash used in financing activities was$1,041.8 million in fiscal 2020 consisting of payments on long-term debt and finance leases of$4,526.6 million , partially offset by proceeds from the issuance of long-term debt of$4,094.0 million . Payments on long-term debt and proceeds from the issuance of long-term debt principally consisted of the$2,100 million issuance and subsequent$2,300 million redemption of Senior Unsecured Notes, the$2,000 million borrowing and subsequent repayment under the ABL Facility, the repurchase of outstanding Class A 55
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common stock, the issuance of the Convertible Preferred Stock and dividends paid on our Class A common stock and Convertible Preferred Stock.
See "Part II-Item 8. Financial Statements and Supplementary Data-Note 7 and Note 9" for additional information.
Debt Management
Total debt, including both the current and long-term portions of finance lease
obligations, net of debt discounts and deferred financing costs, decreased
Outstanding debt, including current maturities, net of debt discounts and deferred financing costs, principally consisted of (in millions):
2022
Senior Unsecured Notes,
7,339.5
Finance lease obligations
579.4
Other financing obligations and mortgage notes payable
46.2
Total debt, including finance leases $
7,965.1
OnNovember 1, 2021 , we redeemed the remaining$200.0 million aggregate principal amount outstanding of our 2025 Notes, using cash on hand. The Company recorded a$3.7 million loss on debt extinguishment. We also repaid, using cash on hand, the remaining$130.0 million in aggregate principal amount of Safeway's 4.75% Notes due 2021 on their maturity date,December 1, 2021 . As ofFebruary 26, 2022 , we had no borrowings outstanding under our ABL Facility and total availability of approximately$3,750.6 million (net of letter of credit usage). OnDecember 20, 2021 , the existing ABL Facility was amended and restated to, among other things, extend the maturity date of the facility toDecember 20, 2026 , reduce the unused line fee to 0.25% per annum and reduce the interest rate based on availability. The ABL Facility contains no financial maintenance covenants unless and until (a) excess availability is less than (i) 10% of the lesser of the aggregate commitments and the then-current borrowing base at any time or (ii)$250.0 million at any time or (b) an event of default is continuing. If any such event occurs, we must maintain a fixed charge coverage ratio of 1.0:1.0 from the date such triggering event occurs until such event of default is cured or waived and/or the 30th day that all such triggers under clause (a) no longer exist.
During fiscal 2021 and fiscal 2020, there were no financial maintenance covenants in effect under the ABL Facility because the conditions listed above had not been met.
See "Part II-Item 8. Financial Statements and Supplementary Data-Note 7" for additional information.
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Dividends
The holders of Convertible Preferred Stock are entitled to a quarterly dividend at a rate per annum of 6.75% of the liquidation preference per share of the Convertible Preferred Stock. In addition, the holders of Convertible Preferred Stock will participate in cash dividends that we pay on our common stock to the extent that such cash dividends exceed$206.25 million per fiscal year. Cash dividends paid to holders of the Convertible Preferred Stock were$114.6 million and$66.0 million during fiscal 2021 and fiscal 2020, respectively. OnMarch 15, 2022 , we declared a quarterly cash dividend of$22.8 million to holders of Convertible Preferred Stock, which was paid onMarch 31, 2022 . In connection with the Initial Public Offering, we established a dividend policy pursuant to which we intend to pay a quarterly dividend on our Class A common stock. Cash dividends paid on our Class A common stock were$207.4 million ($0.44 per common share) and$93.7 million ($0.20 per common share) during fiscal 2021 and fiscal 2020, respectively. OnApril 12, 2022 , we announced the next quarterly dividend payment of$0.12 per share of Class A common stock to be paid onMay 10, 2022 to stockholders of record as of the close of business onApril 26, 2022 .
Liquidity and Factors Affecting Liquidity
We estimate our liquidity needs over the next fiscal year to be approximately$6,000 million , which includes anticipated requirements for incremental working capital, capital expenditures, pension obligations, interest payments and scheduled principal payments of debt, dividends on Class A common stock and Convertible Preferred Stock, operating leases and finance leases. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our ABL Facility, will be adequate to meet our liquidity needs for the next 12 months and for the foreseeable future. We believe we have adequate cash flow to continue to maintain our current debt ratings and to respond effectively to competitive conditions. In addition, we may enter into refinancing transactions from time to time. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our ABL Facility. The table below presents our material cash requirements as ofFebruary 26, 2022 (in millions) (1): Payments Due Per Year Total 2022
2023-2024 2025-2026 Thereafter Long-term debt (2)
$ 7,484.6 $ 750.8
2,202.2 367.7 682.4 644.0 508.1
Operating leases (4) 8,742.7 935.6 1,841.1 1,504.5 4,461.5
Finance leases (4) 844.6 114.3 221.2 162.0 347.1
Other obligations (5) 1,886.6 422.2 520.7 207.4 736.3
Purchase obligations (6) 601.6 168.0 247.8 102.2 83.6
Total contractual obligations
(1) The cash requirements table excludes funding of pension and other postretirement benefit obligations, which totaled$29.8 million in fiscal 2021 and is expected to total approximately$21 million in fiscal 2022. This table also excludes recurring contributions under various multiemployer pension plans, which totaled$523.7 million in fiscal 2021 and is expected to total approximately$550 million in fiscal 2022. This table also excludes the 6.75% annual dividend to holders of Convertible Preferred Stock, which currently totals approximately$73 million per year. (2) Long-term debt amounts exclude any debt discounts and deferred financing costs. See "Part II-Item 8. Financial Statements and Supplementary Data-Note 7" for additional information.
(3) Amounts include contractual interest payments using the stated fixed
interest rate as of
(4) Represents the minimum rents payable under operating and finance leases,
excluding common area maintenance, insurance or tax payments, for which we are
obligated.
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(5) Consists of self-insurance liabilities, which have not been reduced by insurance-related receivables, as well as payment obligations related to the Combined Plan, the Excess Plan and theUFCW National Fund . The table excludes the unfunded pension and postretirement benefit obligation of$357.9 million . The potential settlement payments related to unrecognized tax benefits have been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined. Also excludes deferred tax liabilities and certain other deferred liabilities that will not be settled in cash. (6) Purchase obligations include various obligations that have specified purchase commitments. As ofFebruary 26, 2022 , future purchase obligations primarily relate to fixed asset, marketing and information technology commitments, including fixed price contracts. In addition, not included in the contractual obligations table are supply contracts to purchase product for resale to consumers which are typically of a short-term nature with limited or no purchase commitments. We also enter into supply contracts which typically include either volume commitments or fixed expiration dates, termination provisions and other customary contractual considerations. The supply contracts that are cancelable have not been included above.
Multiemployer Pension Plans
We currently contribute to 27 multiemployer plans which provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose and the respective plan trustees are responsible for determining the level of benefits to be provided to participants, the management of the plan assets and plan administration. We continue to monitor any potential exposure to underfunded multiemployer plans for our associates who are beneficiaries of these plans. The underfunding of any of these plans to which we contribute are not our liability and though we are not obligated nor the guarantor for any of the underfunding, we have estimated, based on the ratio of our contributions to the total of all contributions to these plans, our allocable share of the underfunding (the amount by which the actuarial determined plan liabilities exceed the value of the plan assets) of these multiemployer plans to which we contribute to be approximately$4.9 billion . The American Rescue Plan Act ("ARP Act") establishes a special financial assistance program for financially troubled multiemployer pension plans. Under the ARP Act, eligible multiemployer plans can apply to receive a one-time cash payment in the amount projected by thePension Benefit Guaranty Corporation ("PBGC") to pay pension benefits through the plan year ending 2051. The payment received by the multiemployer plan under this special financial assistance program would not be considered a loan and would not need to be paid back. Any financial assistance received by the multiemployer plan would need to be segregated from the other assets of the multiemployer plans and invested in investment grade bonds or other investments permitted by the PBGC. Of the 27 multiemployer plans to which we contribute, 16 plans are classified as "Critical" or "Critical and Declining" and potentially eligible for some level of relief under the special financial assistance program through the ARP Act. OnJuly 9, 2021 , the PBGC issued its interim final rule with respect to the special financial assistance program. The PBGC interim final rule provides direction on the application requirements, identifies which plans will have priority, eligibility requirements, the determination of the amount of financial assistance to be provided and establishes conditions and restrictions that apply to plans that receive assistance. Though the amount of financial assistance that each of these 16 plans could receive will vary by plan, we currently estimate that these 16 plans represent over 90% of the$4.9 billion estimated underfunding. We expect the special financial assistance program under these regulations to provide the funding for these plans to remain solvent for at least the next 25 to 30 years and continue to provide benefits to our associates who are beneficiaries of these multiemployer plans. We will continue to make our contributions based on collective bargaining agreements for each of the multiemployer plans to which we contribute. Our contributions to multiemployer plans were$523.7 million ,$524.0 million and$469.3 million during fiscal 2021, fiscal 2020 and fiscal 2019, respectively, and we expect to contribute approximately$550 million in fiscal 2022. Refer to "Part I-Item 1A. Risk Factors" and "Part II-Item 8. Financial Statements and Supplementary Data-Note 12" for additional information.
Guarantees
We are party to a variety of contractual agreements pursuant to which we may be
obligated to indemnify the other party for certain matters. These contracts
primarily relate to our commercial contracts, operating leases and other real
estate contracts, trademarks, intellectual property, financial agreements and
various other agreements. Under
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these agreements, we may provide certain routine indemnifications relating to representations and warranties (for example, ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial statements. We are liable for certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, we could be responsible for the lease obligation. Because of the wide dispersion among third parties and the variety of remedies available, we believe that if an assignee became insolvent it would not have a material effect on our financial condition, results of operations or cash flows. In the ordinary course of business, we enter into various supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. We have also entered into fixed price contracts to purchase electricity and natural gas for a portion of our energy needs. These contracts typically include volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations.
Letters of Credit
We had letters of credit of$249.4 million outstanding as ofFebruary 26, 2022 . The letters of credit are maintained primarily to support our performance, payment, deposit or surety obligations. We typically pay bank fees of 1.25% plus a fronting fee of 0.125% on the face amount of the letters of credit.
NEW ACCOUNTING POLICIES
See "Part II-Item 8. Financial Statements and Supplementary Data-Note 1" for new accounting pronouncements.
CRITICAL ACCOUNTING POLICIES The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a fair and consistent manner. See "Part II-Item 8. Financial Statements and Supplementary Data-Note 1" for a discussion of our significant accounting policies. Management believes the following critical accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of our consolidated financial statements.
Self-Insurance Liabilities
We are primarily self-insured for workers' compensation, property, automobile
and general liability. The self-insurance liability is undiscounted and
determined actuarially, based on claims filed and an estimate of claims incurred
but not yet reported. We have established stop-loss amounts that limit our
further exposure after a claim reaches the designated stop-loss threshold. In
determining our self-insurance liabilities, we perform a continuing review of
our overall position and reserving techniques. Since recorded amounts are based
on estimates, the ultimate cost of all incurred claims and related expenses may
be more or less than the recorded liabilities.
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Any actuarial projection of self-insured losses is subject to a high degree of variability. Litigation trends, legal interpretations, benefit level changes, claim settlement patterns and similar factors influenced historical development trends that were used to determine the current year expense and, therefore, contributed to the variability in the annual expense. However, these factors are not direct inputs into the actuarial projection, and thus their individual impact cannot be quantified.
Long-Lived Asset Impairment
We regularly review our individual stores' operating performance, together with current market conditions, for indications of impairment. When events or changes in circumstances indicate that the carrying value of an individual store's assets may not be recoverable, its future undiscounted cash flows are compared to the carrying value. If the carrying value of store assets to be held and used is greater than the future undiscounted cash flows, an impairment loss is recognized to record the assets at fair value. For property and equipment held for sale, we recognize impairment charges for the excess of the carrying value plus estimated costs of disposal over the fair value. Fair values are based on discounted cash flows or current market rates. These estimates of fair value can be significantly impacted by factors such as changes in the current economic environment and real estate market conditions. Long-lived asset impairment losses were$31.1 million ,$30.2 million and$77.4 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
As ofFebruary 26, 2022 , our goodwill totaled$1,201.0 million , of which$917.3 million related to our acquisition of Safeway. We review goodwill for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our reporting units that have goodwill balances. We review goodwill for impairment by initially considering qualitative factors to determine whether it is necessary to perform a quantitative analysis. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative analysis is performed to identify goodwill impairment. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, it is unnecessary to perform a quantitative analysis. We may elect to bypass the qualitative assessment and proceed directly to performing a quantitative analysis.Goodwill has been allocated to all of our reporting units, and none of our reporting units have a zero or negative carrying amount of net assets. As ofFebruary 26, 2022 , there is one reporting unit with no goodwill. There are eleven reporting units with an aggregate goodwill balance of$1,201.0 million , of which we believe the fair value of each reporting unit was substantially in excess of its carrying value, which indicates a remote likelihood of a future impairment loss. However, the estimates of fair value can be significantly impacted by factors such as changes in current market conditions within each of the geographies that our reporting units operate, therefore future potential declines in market conditions or other factors could negatively impact the estimated future cash flows and valuation assumptions used to determine the fair value of our reporting units and lead to future impairment charges. The annual evaluation of goodwill performed for our reporting units during the fourth quarters of fiscal 2021, fiscal 2020 and fiscal 2019 did not result in impairment.
Income Taxes and Uncertain Tax Positions
We review the tax positions taken or expected to be taken on tax returns to
determine whether and to what extent a benefit can be recognized in our
consolidated financial statements. Various taxing authorities periodically
examine our income tax returns. These examinations include questions regarding
our tax filing positions, including the timing and amount of deductions and the
allocation of income to various tax jurisdictions. In evaluating these various
tax filing positions, including state and local taxes, we assess our income tax
positions and record tax benefits for all years subject to examination based
upon management's evaluation of the facts, circumstances and
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information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our financial statements. A number of years may elapse before an uncertain tax position is examined and fully resolved. As ofFebruary 26, 2022 , we are no longer subject to federal income tax examinations for fiscal years prior to 2012 and in most states, we are no longer subject to state income tax examinations for fiscal years before 2012. Tax years 2012 through 2020 remain under examination. The assessment of our tax position relies on the judgment of management to estimate the exposures associated with our various filing positions.
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