ALBERTSONS COMPANIES, INC. FORWARD-LOOKING STATEMENTS AND FACTORS THAT IMPACT OUR OPERATING RESULTS AND TRENDS
This Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws. The "forward-looking statements" include our current expectations, assumptions, estimates and projections about our business and our industry. They include statements relating to our future operating or financial performance which the Company believes to be reasonable at this time. You can identify forward-looking statements by the use of words such as "outlook," "may," "should," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future" and "intends" and similar expressions which are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict, including, among others:
•changes in macroeconomic conditions and uncertainty regarding the geopolitical environment;
•retail consumer behavior and environment and the Company's industry;
•ability to attract and retain qualified associates and negotiate acceptable contracts with labor unions;
•failure to achieve productivity initiatives;
•increased rates of food price inflation, as well as fuel and commodity prices;
•availability of agricultural commodities and raw materials used in our food products;
•ability to enter into strategic transactions, investments or partnerships in the future on terms acceptable to us, or at all; and
•factors related to the continued impact of the COVID-19 pandemic, about which
there are still many unknowns, including its duration, recurrence, new variants,
status and effectiveness of vaccinations, duration and scope of related
government orders, financial assistance programs, mandates and regulations and
the extent of the overall impact to our business and the communities we serve.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary statements
and risk factors. Forward-looking statements contained in this Form 10-Q reflect
our view only as of the date of this Form 10-Q. We undertake no obligation,
other than as required by law, to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
While certain aspects of our financial results have been favorably impacted by
increased demand during the COVID-19 pandemic, in addition to favorable consumer
conditions including incremental financial assistance provided by various
government agencies, our business continues to experience challenges to meet
customer demand. We have experienced increased labor shortages due to COVID-19
variants resulting in operational disruptions. Together with labor shortages and
higher demand for talent, the current economic environment is driving higher
wages. Labor shortages could also impact our ability to negotiate acceptable
contracts with labor unions which could result in strikes by affected workers
and thereby significantly disrupt our operations. Our ability to meet labor
needs, control wage and labor-related costs and minimize labor disruptions will
be key to our success of operating our business and executing our business
strategies. Furthermore, our business is experiencing an inflationary
environment and food price inflation, which has benefited our sales and gross
margin growth but has negatively impacted our gross margin rates. We are unable
to predict how long the current inflationary environment, including increased
energy costs, will continue. We expect the economic environment to remain
uncertain as we
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navigate the current geopolitical environment, the COVID-19 pandemic, labor challenges, supply chain constraints and the current inflationary environment, including increasing energy and commodity prices.
Such risks and uncertainties could cause actual results to differ materially from those expressed or forecasted by us. In evaluating our financial results and forward-looking statements, you should carefully consider the risks and uncertainties more fully described in the "Risk Factors" section or other sections in our reports filed with theSEC including the most recent annual report on Form 10-K and any subsequent periodic reports on Form 10-Q and current reports on Form 8-K. As used in this Form 10-Q, unless the context otherwise requires, references to "Albertsons," the "Company," "we," "us" and "our" refer toAlbertsons Companies, Inc. and, where appropriate, its subsidiaries.
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 ("RSUs") and restricted common
stock ("RSAs") 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. See "Results of
Operations" for further discussion and a reconciliation of Adjusted EBITDA,
Adjusted net income and Adjusted net income per Class A common share.
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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FIRST QUARTER OF FISCAL 2022 OVERVIEW
As ofJune 18, 2022 , we operated 2,273 retail food and drug stores with 1,720 pharmacies, 402 associated fuel centers, 22 dedicated distribution centers and 19 manufacturing facilities. During the first quarter of fiscal 2022, we executed on our Customer for Life strategy as we continued to invest in our strategic priorities, including deepening our digital connection and engagement with our customers, differentiating our store experience, enhancing what we offer and modernizing our capabilities. Identical sales increased 6.8%, excluding fuel, during the first quarter of fiscal 2022 and we continued to gain market share in food market andMulti Outlet ("MULO"). 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 omnichannel capabilities that allow customers to complete their shopping with us in any way they want. During the first quarter of fiscal 2022, digital sales, which include home delivery and Drive Up & Go curbside pickup, increased 28% compared to the first quarter of fiscal 2021. Just for U loyalty members increased 16% to 31 million in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. Within the program, our retention rate of actively engaged members, those that redeemed fuel or grocery rewards during the first quarter of fiscal 2022, remained at over 90%. In deepening our digital connection and engagement with our customers, during the first quarter of fiscal 2022, we launched new merchandising features in our Unified Mobile App, providing a personalized and curated digital experience. We also saw increased digital engagement driven by our Meal Planning tool, launched in the fourth quarter of fiscal 2021. The Meal Planning capability inspires our customers to engage in our app more frequently as they plan, shop and prepare the recipes we offer, which can by filtered by dietary preferences, such as carb conscious, vegetarian and pescatarian. We also continued to invest in the Albertsons Media Collective using industry-leading technologies to build a platform that is easy to use, transparent, modern and measurable. We are differentiating our store experience by deepening engagement through the use of technology to automate task management, thus creating more time for our team members to assist our customers. We are also simplifying the end-to-end shopping journey by improving localized assortments and adjacencies of complimentary products, installing more self-checkouts, and adding grab and go sections to ensure a convenient and easy experience. In support of our omnichannel growth, we are evolving store operations, including building out staging areas for Drive Up & Go, adding warerooms for easier picking and installing additional micro fulfillment centers. We are enhancing what we offer by expanding our Own Brands products and elevating our distinctiveness in Fresh. In Own Brands, our sales penetration was at its highest at 25.8% during the first quarter of fiscal 2022. We launched 59 new items during the first quarter of fiscal 2022 and we expect to launch a total of approximately 425 new products in fiscal 2022. In Fresh, our in-store processing capabilities allow us to tailor the selection, the cuts and package sizes to fit local demographics and economic circumstances. In addition, we now have rolled out our ReadyMeals, our ready to eat, ready to heat and ready to cook meals to approximately 600 stores and expect to be in more than 1,100 stores by the end of fiscal 2022. Lastly, we continue to modernize our capabilities in part through an improved supply chain, enhanced data and data analytics, ongoing productivity and automation, all built on the foundation of being Locally Great and Nationally Strong. Capital Allocation Capital expenditures were approximately$614 million during the first quarter of fiscal 2022, primarily including the building of our digital and technology platforms and investments in the modernization of our store fleet, including 27 remodels. We continue to make progress in strengthening the balance sheet, reducing our Net debt ratio to 1.0x as of the end of the first quarter of fiscal 2022 compared to 1.5x as of the end of the end of first quarter of fiscal 20
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2021. Capital returns to shareholders during the first quarter of fiscal 2022
included
First quarter of fiscal 2022 highlights
In summary, our financial and operating highlights for the first quarter of fiscal 2022 include:
•Identical sales increased 6.8%
•Digital sales increased 28%
•Net income of
•Adjusted net income of
•Adjusted EBITDA of
•Continued modernization of our store fleet, including completing 27 remodels
Stores
The following table shows stores operating, acquired, opened and closed during
the periods presented:
16 weeks ended
June 18, June 19,
2022 2021
Stores, beginning of period 2,276 2,277
Acquired - 1
Opened - 5
Closed (3) (5)
Stores, end of period 2,273 2,278
The following table summarizes our stores by size:
Number of stores Percent of Total Retail Square Feet (1)
June 18, June 19, June 18, June 19, June 18, June 19,
Square Footage 2022 2021 2022 2021 2022 2021
Less than 30,000 220 223 9.7 % 9.8 % 5.0 5.1
30,000 to 50,000 781 786 34.4 % 34.5 % 32.7 32.9
More than 50,000 1,272 1,269 55.9 % 55.7 % 75.2 75.0
Total Stores 2,273 2,278 100.0 % 100.0 % 112.9 113.0
(1) In millions, reflects total square footage of retail stores operating at the end of the period.
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Table of Contents RESULTS OF OPERATIONS
Comparison of the 16 weeks ended
The following tables and related discussion set forth certain information and comparisons regarding the components of our Condensed Consolidated Statements of Operations for the 16 weeks endedJune 18, 2022 ("first quarter of fiscal 2022") and 16 weeks endedJune 19, 2021 ("first quarter of fiscal 2021") (in millions, except per share data). 16 weeks ended June 18, June 19, 2022 % of Sales 2021 % of Sales Net sales and other revenue$ 23,310.3 100.0 %$ 21,269.4 100.0 % Cost of sales 16,765.3 71.9 15,078.4 70.9 Gross margin 6,545.0 28.1 6,191.0 29.1 Selling and administrative expenses 5,864.3 25.2 5,503.6 25.9 (Gain) loss on property dispositions and impairment losses, net (79.4) (0.3) 0.3 - Operating income 760.1 3.2 687.1 3.2 Interest expense, net 138.9 0.6 153.3 0.7 Other income, net (6.3) - (43.5) (0.2) Income before income taxes 627.5 2.6 577.3 2.7 Income tax expense 143.3 0.6 132.5 0.6 Net income$ 484.2 2.0 %$ 444.8 2.1 % Basic net income per Class A common share$ 0.86 $ 0.80 Diluted net income per Class A common share 0.84 0.78
Net sales and other revenue increased 9.6% to$23,310.3 million for the first quarter of fiscal 2022 from$21,269.4 million for the first quarter of fiscal 2021. The increase in Net sales and other revenue was driven by our 6.8% increase in identical sales and higher fuel sales, with retail price inflation contributing to the identical sales increase. 22
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Identical Sales, Excluding Fuel
Identical sales include stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Direct to consumer digital sales are included in identical sales, and fuel sales are excluded from identical sales. Acquired stores become identical on the one-year anniversary date of the acquisition. Identical sales for the 16 weeks endedJune 18, 2022 and the 16 weeks endedJune 19, 2021 , respectively, were: 16 weeks ended June 18, June 19, 2022 2021 Identical sales, excluding fuel 6.8% (10.0)% The following table represents Net sales and other revenue by product type (dollars in millions): 16 weeks ended June 18, June 19, 2022 2021 Amount (1) % of Total Amount (1) % of Total Non-perishables (2)$ 11,446.0 49.1 %$ 10,742.7 50.5 % Fresh (3) 7,881.5 33.8 7,412.5 34.9 Pharmacy 1,923.5 8.3 1,728.6 8.1 Fuel 1,654.7 7.1 1,049.3 4.9 Other (4) 404.6 1.7 336.3 1.6
Net sales and other revenue
(1) Digital related sales are included in the categories to which the revenue pertains.
(2) Consists primarily of general merchandise, grocery, dairy and frozen foods.
(3) Consists primarily of produce, meat, deli and prepared foods, bakery, floral and seafood.
(4) Consists primarily of wholesale revenue to third parties, commissions and other miscellaneous revenue.
Gross Margin Gross margin represents the portion of Net sales and other revenue remaining after deducting 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, warehouse and distribution costs, Own Brands program costs and digital-related delivery and handling costs. Advertising, promotional expenses and vendor allowances are also components of Cost of sales. Gross margin rate decreased to 28.1% during the first quarter of fiscal 2022 compared to 29.1% during the first quarter of fiscal 2021. Excluding the impact of fuel and LIFO expense, gross margin rate decreased 27 basis points compared to the first quarter of fiscal 2021. The decrease was driven by fewer COVID-19 vaccines in the first quarter of fiscal 2022 compared to 2021 as the gross margin rate benefits from our productivity initiatives offset inflationary increases in product and supply chain costs.
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 to 25.2% of Net sales and other
revenue during the first quarter of fiscal 2022 compared to 25.9% during the
first quarter of fiscal 2021. Excluding the impact of fuel, Selling and
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administrative expenses as a percentage of Net sales and other revenue decreased 15 basis points. The decrease in Selling and administrative expenses was primarily attributable to lower COVID-19 related expenses and the execution of productivity initiatives, partially offset by expenses related to the Company's investments in its digital and omnichannel capabilities and other strategic priorities, increased employee costs and higher depreciation and amortization. The increase in employee costs was the result of market-driven wage rate increases and higher equity-based compensation expense.
(Gain) Loss on Property Dispositions and Impairment Losses, Net
For the first quarter of fiscal 2022, net gain on property dispositions and impairment losses was$79.4 million , primarily driven by$80.0 million of gains from the sale of real estate assets, partially offset by$0.6 million of asset impairments. For the first quarter of fiscal 2021, net loss on property dispositions and impairment losses was$0.3 million , primarily driven by$9.9 million of asset impairments, primarily related to right-of-use assets, partially offset by$9.6 million of gains from the sale of real estate assets.
Interest Expense, Net
Interest expense, net was$138.9 million during the first quarter of fiscal 2022 compared to$153.3 million during the first quarter of fiscal 2021. The decrease in interest expense was primarily attributable to lower average outstanding borrowings and lower average interest rates. The weighted average interest rate during the first quarter of fiscal 2022 was 5.4%, excluding deferred financing costs and original issue discount, compared to 5.6% during the first quarter of fiscal 2021. Other Income, Net For the first quarter of fiscal 2022, Other income, net was$6.3 million compared to$43.5 million for the first quarter of fiscal 2021. Other income, net during the first quarter of fiscal 2022 was primarily driven by non-service cost components of net pension and post-retirement expense and income related to our equity investment, partially offset by unrealized losses from non-operating investments. Other income, net during the first quarter of fiscal 2021 was primarily driven by realized 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 unrealized losses from non-operating investments. Income Taxes Income tax expense was$143.3 million , representing a 22.8% effective tax rate, for the first quarter of fiscal 2022. Income tax expense was$132.5 million , representing a 23.0% effective tax rate, for the first quarter of fiscal 2021.
We currently expect our annual effective tax rate for fiscal 2022 to be in the range of approximately 23% to 24%.
Net Income and Adjusted Net Income
Net income was$484.2 million , or$0.84 per Class A common share, during the first quarter of fiscal 2022 compared to$444.8 million , or$0.78 per Class A common share, during the first quarter of fiscal 2021. Adjusted net income was$582.0 million , or$1.00 per Class A common share, during the first quarter of fiscal 2022 compared to$517.5 million , or$0.89 per Class A common share, during the first quarter of fiscal 2021.
Adjusted EBITDA
For the first quarter of fiscal 2022, Adjusted EBITDA was$1,420.3 million , or 6.1% of Net sales and other revenue, compared to$1,308.1 million , or 6.2% of Net sales and other revenue, for the first quarter of fiscal 2021. 24
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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 (in
millions, except per share data):
16 weeks ended
June 18, June 19,
2022 2021
Numerator:
Net income $ 484.2 $ 444.8
Adjustments:
Gain on interest rate swaps and energy hedges, net (d) (18.5) (6.3)
Business transformation (1)(b) 33.8 20.8
Equity-based compensation expense (b) 35.3 22.2
(Gain) loss on property dispositions and impairment losses, net (79.4) 0.3
LIFO expense (a) 62.1 14.5
Government-mandated incremental COVID-19 pandemic related pay (2)(b)
5.9 29.1 Amortization of debt discount and deferred financing costs (c) 5.1 6.4
Amortization of intangible assets resulting from acquisitions (b) 15.4
16.1
Miscellaneous adjustments (3)(f) 67.0 (7.3)
Tax impact of adjustments to Adjusted net income (28.9) (23.1)
Adjusted net income $ 582.0 $ 517.5
Denominator:
Weighted average Class A common shares outstanding - diluted 576.3 571.4
Adjustments:
Restricted stock units and awards (4) 6.9 9.4
Adjusted weighted average Class A common shares outstanding - diluted
583.2 580.8
Adjusted net income per Class A common share - diluted $ 1.00 $ 0.89
16 weeks ended
June 18, June 19,
2022 2021
Net income per Class A common share - diluted $ 0.84 $ 0.78
Non-GAAP adjustments (5) 0.17
0.13
Restricted stock units and awards (4) (0.01)
(0.02)
Adjusted net income per Class A common share - diluted
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The following table is a reconciliation of Adjusted net income to Adjusted
EBITDA:
16 weeks ended
June 18, June 19,
2022 2021
Adjusted net income (6) $ 582.0 $ 517.5
Tax impact of adjustments to Adjusted net income 28.9 23.1
Income tax expense 143.3 132.5
Amortization of debt discount and deferred financing costs (c) (5.1)
(6.4)
Interest expense, net 138.9 153.3
Amortization of intangible assets resulting from acquisitions (b)
(15.4) (16.1)
Depreciation and amortization (e) 547.7 504.2
Adjusted EBITDA $ 1,420.3 $ 1,308.1
(1) Includes costs associated with third-party consulting fees related to our
strategic priorities and associated business transformation, as well as closures
of operating facilities.
(2) Represents incremental pay that is legislatively required in certain municipalities in which we operate.
(3) Miscellaneous adjustments include the following (see table below):
16 weeks ended
June 18, June 19,
2022 2021
Non-cash lease-related adjustments $ 1.2 $ 2.1
Lease and lease-related costs for surplus and closed stores 7.3 10.2
Net realized and unrealized loss (gain) on non-operating investments
14.0 (22.5)
Certain legal and regulatory accruals and settlements, net 32.8 -
Acquisition and integration costs 0.5 3.5
Other (i) 11.2 (0.6)
Total miscellaneous adjustments $
67.0
(i) Primarily includes adjustments for unconsolidated equity investments and other costs not considered in our core performance.
(4) 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.
(5) 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.
(6) See the reconciliation of Net income to Adjusted net income above for further details.
Non-GAAP adjustment classifications within the Consolidated Statement of Operations:
(a) Cost of sales
(b) Selling and administrative expenses
(c) Interest expense, net
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(d) Gain on interest rate swaps and energy hedges, net:
16 weeks ended
June 18, June 19,
2022 2021
Cost of sales $ (8.9) $ (5.2)
Selling and administrative expenses (2.9) (1.4)
Other income, net (6.7)
0.3
Total Gain on interest rate swaps and energy hedges, net
(6.3)
(e) Depreciation and amortization:
16 weeks ended
June 18, June 19,
2022 2021
Cost of sales $ 51.5 $ 50.8 Selling and administrative expenses 496.2 453.4
Total Depreciation and amortization
(f) Miscellaneous adjustments:
16 weeks ended
June 18 , June 19,
2022 2021
Selling and administrative expenses
19.2 (17.6)
Total Miscellaneous adjustments
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