Albertsons Earnings: Strength Suggests Turnaround Is Progressing Independent of Kroger Deal

Our $29 per share valuation of no-moat Albertsons ACI should not change significantly after it reported fiscal 2022 earnings slightly ahead of our expectations (propelled by 5.6% fourth-quarter identical sales growth). We are encouraged that the company continues to progress in improving efficiency and bolstering its omnichannel capabilities, particularly important as we remain skeptical that its proposed acquisition by narrow-moat Kroger will pass regulatory muster. Our long-term standalone forecast for Albertsons still calls for low-single-digit top-line growth and mid-single-digit adjusted EBITDA margins over the next decade. We believe prevailing sentiment does not adequately credit Albertsons’ ability to improve its private label and omnichannel capabilities independent of Kroger (our valuation is on a standalone basis).

Albertsons’ full-year adjusted EPS of $3.37 outpaced our $3.21 target, with 6.9% identical sales growth ahead of our 6.3% estimate (the period ended Feb. 26). Management attributed the solid results to its continued work on differentiating its omnichannel and traditional store experience, as well as bolstering its assortment and modernizing its operational abilities. While we remain convinced that Albertsons is a step behind Kroger in key areas like digital fulfillment (despite 28% full-year growth in digital sales), private-label, and data analytics, management has made progress in narrowing the gap. 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 Albertsons remains in a better position than smaller rivals that do not possess its ability to leverage costs. Still, the intensely competitive landscape in grocery leads us to believe that the company’s adjusted EBITDA margin will slide from fiscal 2022′s 6.0% toward a little more than 4% over the decade ahead.