Albertsons earnings improve in Q2, but long-term growth looks murky

Dive Brief:

Albertsons reported a net sales increase of 1.4% to $14 billion for the second financial quarter, according to a news release. An increase in fuel sales of $140 million was partially offset by a drop in sales following the closure of 30 stores, the company noted.
Same-store sales increased 1% for the quarter, and Albertsons lowered its comparable guidance for the year to 1% to 1.3% from 1.5% to 2%. Profit for the company dipped 32% while gross margins grew 20 basis point, to 27.2%. E-commerce sales surged 113%.
"We are energized and enthusiastic about our company and our ability to generate free cash flow and delever our balance sheet.," Jim Donald, Albertsons chief executive officer, noted in the release. "The team continues to innovate through our digital engagement with customers in both the four-wall and no-wall environment, through our continued expansion of natural and organic Own Brands offerings and through the automation of our distribution centers which we believe will deliver strong returns going forward."

Dive Insight:

After a failed tie-up with Rite Aid back in August, Albertsons is figuring out its way forward in an industry that is getting increasingly more competitive and dealing with a rapid consumer push toward online ordering. The company and its owner, Cerberus Capital Management, desperately want the grocer to go public, but that may be difficult absent a transformative acquisition.

Right now, it’s tough to see what that acquisition would be given Albertsons’ debt load and the thin bench of prospects. Promising and well-differentiated players like Sprouts Farmers Market seem too expensive for Albertsons and acquiring a regional grocer would be in the company’s wheelhouse but wouldn’t grow the bottom line. The Idaho-based company could expand its reach into ethnic foods by picking up a Hispanic retailer similar to El Rancho Supermercado, which it announced an investment in late last year. However, this likely wouldn’t elevate Albertsons to the scale it hopes to be at.

Instead, Albertsons will likely focus on steps it can take within its current store footprint and operations. This includes paying down its debt load and boosting performance by closing and selling back real estate. The company closed 30 stores during the most recent quarter, and in mid-August completed the sale and leaseback of two distribution centers for $290 million. Albertsons operates 2,291 stores and is slowly remodeling some of its most promising locations. However, those remodels may fail to generate as much capital as an asset sale while doing little to ease the pressure on its highly leveraged business.

Outside of sales and acquisitions, Albertsons has zeroed in on promising segments of the business, including private label and e-commerce. The company has cast a wide net so far with home delivery service, which includes the company’s own platforms through retailers such as Safeway and Jewel-Osco, as well its nationwide deal with Instacart. Meanwhile, its store pickup service, Drive Up & Go, is gaining ground quickly, with 500 stores set to come online by the end of this year. Albertsons also is swiftly rolling out its Plated meal kits acquired in 2017, which will be in more than 650 stores by the end of this year.

The company has launched hundreds of new store brand products and plans to release more than 700 more throughout the year with a particular emphasis on its natural and organic lines, O Organics and Open Nature. O Organics is now a $1 billion brand. In all, private label items comprise 25% of Albertsons total sales.

Albertsons has some products and services experiencing strong growth, but these will struggle to get ahead of the investments and competitive pressures the company is facing. Its stores aren’t as compelling as Aldi’s or Whole Foods’, and its e-commerce platform — while growing — will primarily be a me-too offering as Walmart, Amazon and Kroger scale quickly and invest in innovation. A recent report from Deutsche Bank, in fact, names Albertsons as a share donor in the e-commerce in the years ahead.