Albertsons Companies: Reports Q2 Fiscal 2023 Results

Boise / ID. (abc) Albertsons Companies reported results for the second quarter of fiscal 2023, which ended September 9, 2023. Second quarter of fiscal 2023 financial highlights:

  • Identical sales increased 2.9 percent
  • Digital sales increased 19 percent
  • Loyalty members increased 17 percent to 37.4 million
  • Net income of USD 267 million, or USD 0.46 per share
  • Adjusted net income of USD 368 million, or USD 0.63 per share
  • Adjusted Ebitda of USD 977 million

Vivek Sankaran, CEO commented, «During the second quarter, we continued to execute against our Customers for Life transformation strategy and drive solid operating results, despite increasing macro-economic headwinds. We want to thank all our teams for their commitment to our customers and communities.»

Sankaran continued, «As we look ahead to the balance of the year, our focus remains the same – advancing operational excellence in our stores, driving growth in our digital and pharmacy operations, and deepening our relationships with our customers.»

Sankaran concluded, «We are also mindful of a more challenging economic backdrop, including declining federal and state government assistance and higher interest rates, and their effects on consumer spending and our business. We also expect slowing food inflation, ongoing labor investment, broad inflationary cost increases and significant declines in COVID-19 vaccination and test kit revenue. We continue to partially offset these headwinds with the benefits of our productivity initiatives.»

Second Quarter of Fiscal 2023 Results

Net sales and other revenue was USD 18.3 billion during the 12 weeks ended September 09, 2023 (Q2-2023) compared to USD 17.9 billion during the 12 weeks ended September 10, 2022 (Q2-2022). The increase was driven by the Company’s 2.9 percent increase in identical sales, with strong growth in pharmacy sales, a 19 percent increase in digital sales, and retail price inflation across most categories being the primary contributors to the identical sales increase. The increase in Net sales and other revenue was partially offset by lower fuel sales.

Gross margin rate decreased to 27.6 percent during the second quarter of fiscal 2023 compared to 27.9 percent during the second quarter of fiscal 2022. Excluding the impact of fuel and LIFO expense, gross margin rate decreased 37 basis points compared to the second quarter of fiscal 2022. The strong growth in pharmacy operations, which carries an overall lower gross margin rate, and increases in shrink were the primary drivers of the decrease, partially offset by our procurement and sourcing productivity initiatives. The rate decrease related to pharmacy operations was primarily due to growth in pharmacy sales and fewer COVID-19 vaccines in the second quarter of fiscal 2023. In addition, the benefits from our productivity initiatives allowed us to continue to provide incremental price investments to our customers during the second quarter of fiscal 2023.

Selling and administrative expenses increased to 25.1 percent of Net sales and other revenue during the second quarter of fiscal 2023 compared to 25.0 percent during the second quarter of fiscal 2022. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue decreased eight basis points. The decrease in Selling and administrative expenses as a percentage of Net sales and other revenue was primarily attributable to lower employee costs, which includes the benefit of ongoing productivity initiatives, partially offset by Merger-related costs, an increase in operating expenses related to the expansion of our digital and omnichannel capabilities, increased store occupancy costs and additional third-party store security services.

Net gain on property dispositions and impairment losses was USD 8.4 million during the second quarter of fiscal 2023 compared to USD 14.0 million during the second quarter of fiscal 2022.

Interest expense, net was USD 111.9 million during the second quarter of fiscal 2023 compared to USD 89.8 million during the second quarter of fiscal 2022. The increase in interest expense, net was primarily attributable to higher average outstanding borrowings and higher average interest rates, as well as lower interest income.

Other expense, net was USD 8.1 million during the second quarter of fiscal 2023 compared to other income, net of USD 18.9 million during the second quarter of fiscal 2022.

Income tax expense was USD 67.5 million, representing a 20.2 percent effective tax rate, during the second quarter of fiscal 2023 compared to USD 117.4 million, representing a 25.5 percent effective tax rate, during the second quarter of fiscal 2022. The favorability in the effective income tax rate in the second quarter of fiscal 2023 was driven by the recognition of discrete state income tax benefits related to audit settlements and favorable legislation during the second quarter of fiscal 2023.

Net income was USD 266.9 million, or USD 0.46 per share, during the second quarter of fiscal 2023. Net income was USD 342.7 million, or USD 0.59 per share, during the second quarter of fiscal 2022.

Adjusted net income was USD 367.7 million, or USD 0.63 per share, during the second quarter of fiscal 2023 compared to USD 418.3 million, or USD 0.72 per share, during the second quarter of fiscal 2022.

Adjusted Ebitda was USD 976.9 million, or 5.3 percent of Net sales and other revenue, during the second quarter of fiscal 2023 compared to USD 1,048.5 million, or 5.9 percent of Net sales and other revenue, during the second quarter of fiscal 2022. The decrease in Adjusted Ebitda in the second quarter of fiscal 2023 was primarily due to a decrease in gross margin contribution from our fuel business and fewer COVID-19 vaccinations. We expect a continued decline in demand for COVID-19 vaccinations and at-home test kits, resulting in an approximate USD 75 million headwind to Adjusted Ebitda for the remaining two quarters of fiscal 2023.

Capital Expenditures

During the first 28 weeks of fiscal 2023, capital expenditures were USD 1,084.3 million, which primarily included the completion of 80 remodels, the opening of three new stores and continued investment in our digital and technology platforms.

Merger Agreement

On October 13, 2022, the Company entered into an Agreement and Plan of Merger with The Kroger Company and Kettle Merger Sub Inc. Under the terms of the Merger Agreement, Kroger (through Kettle Merger Sub Inc.) will acquire all of the outstanding shares of the Company’s common stock for total consideration of USD 34.10 per share, reduced by the special cash dividend of USD 6.85 per share paid on January 20, 2023.

In connection with the Merger, on September 08, 2023, the Company and Kroger announced that the parties had entered into a definitive agreement, dated September 08, 2023, with C+S Wholesale Grocers, LLC for the sale of select stores, banners, distribution centers, offices and private label brands. Also on September 8, 2023, Kroger notified the Company that, in accordance with the Merger Agreement, Kroger intends to sell the SpinCo Business (as defined in the Merger Agreement) to C+S. As a result, the spin-off previously contemplated by the Company and Kroger is no longer a requirement under the Merger Agreement and will no longer be pursued by the Company and Kroger. Details regarding the definitive agreement with C+S can be found in the Form 8-K filed on September 8, 2023 and the joint press release issued by the Company and Kroger on September 08, 2023.