Albertsons Earnings: Industry Pressures Mount; We Still See Uncertainty Over Kroger Merger

We plan to hold our stand-alone fair value estimate of $28 for Albertsons ACI after its third quarter (ending Sept. 9) results continue to highlight intense industry headwinds, which we expect to endure. On Sept. 8, Albertsons and Kroger announced the latter would divest 413-650 Albertsons stores to competitor C&S to meet regulatory concerns about its proposed acquisition of Albertsons, allowing for a potential completion early next year. We still see regulatory uncertainty though as C&S stands to have 600-750 units, while the combined Kroger/Albertsons would have a meaningfully larger 4,600-unit footprint.

Third-quarter sales rose 2.2%, near our 1.9% full-year estimate as the company noted increasing macroeconomic headwinds such as declining federal aid, elevated interest rates, and decreasing COVID-19 vaccinations. Gross margin once again decreased to 27.6% from 27.9%, hit by increasing shrink and a higher mix of lower-margin pharmaceutical sales, mitigated by ongoing procurement and productivity efforts. We expect to reduce our full-year gross margin to 28.1% from 28.3% (down 30 basis points year over year). Meanwhile, selling and administrative costs rose 10 basis points to 25.1%, in line with our prognosis, as necessary digital and omnichannel investments continue. In that vein, digital sales were up a solid 19%.

We see Albertsons as a step behind narrow-moat Kroger in key areas like digital fulfillment, private-label, and data analytics (loyalty membership was up 17% to 37.4 million), yet management has made progress in narrowing the gap. Ultimately though, the company is hamstrung by its smaller size relative to its potential acquirer (Kroger’s full-year revenue of $148 billion is nearly double Albertsons’ $78 billion), but we believe it remains in a better position than smaller rivals that do not possess its ability to leverage costs.