Albertsons Companies, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Albertsons Companies, Inc. is a large food and drug retailer in the United States, operating 2,271 stores with a focus on providing a wide range of products and services to their customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Albertsons operates a vast network of retail stores, primarily grocery and drug stores, spread across 34 states and the District of Columbia, making it a large presence in the U.S. retail sector.

The company’s retail operations are segmented into geographical divisions, each with its own set of stores and digital fulfillment methods.

Albertsons’ strategy is focused on modernizing the stores, enhancing digital capabilities, building brand loyalty, and leveraging its scale to improve margins.

Here is a breakdown of the revenue distribution by product type, based on data from the 10-Q reports

  • Non-Perishables (Groceries): Typically a significant portion of their revenue, accounting for 49-50% of the total revenues.
  • Pharmacy: A substantial portion, ranging from 30 to 34%. This is driven by the growing healthcare sector.
  • Fuel: around 12% on average.
  • Other: (including general merchandise, health, and beauty care products) is usually around 4-7%

The food and drug retail industry is highly competitive, with multiple regional and national players.

The rise of digital channels also poses both challenges and opportunities for the business. Current trends in the industry include a move toward greater emphasis on e-commerce, delivery, and personalized customer experiences. Albertsons is focusing on digital platform development, and has invested a lot in improving its logistics network, but still not enough to compete properly with pure online companies. There is a continued trend of increased interest in value brands and private labels due to economic uncertainty, which is good for business.

Margins

Gross profit margin has been between 27 and 30 % across 2021-2023. Operating margin and net margin are usually in 1.5-2.0% and 1.5-0.8% range, however, in fiscal 2022 the increased inflation and costs decreased the net margin down to just 0.4%

Competitive Landscape

Albertsons faces strong competition from multiple sources:

  • Large national players like Kroger, Walmart, and Costco
  • Regional supermarkets and grocery chains
  • Online retailers like Amazon and pure online grocery delivery businesses.
  • Drugstore chains, such as CVS and Walgreens
  • Local and specialty retailers. This is a tough and highly fragmented industry. Competition primarily focuses on pricing, which hurts margins. This intense competition, combined with high labor costs (especially in some states like California) and the increasing trend of customers buying through digital channels, makes it more difficult to create long-lasting sustainable competitive advantages.

Albertsons does have strong loyalty and rewards program, as well as private labels, all of which create a little bit of stickiness with the customer base. But, none of these are strong enough to create a moat.

What Makes the Company Different?

Here are a few factors:

  • Strong presence in digital, with its own digital platform and delivery services, which is still being developed.
  • A broad and diverse product selection, which includes fresh food and a wide range of pharmacy items.
  • A huge store footprint with several locations, a significant amount of them located in strong markets.

Financial Analysis

Here are some key points about Albertson’s financials: Revenues:

  • Revenue is driven by the combination of core retail and fuel sales.
  • Fiscal 2023 net sales and revenue totaled to 78.7 Billion, that’s 3.3% growth compared to the year earlier, partially due to growth in pharmacy sales and same-store sales.
  • Sales have a history of trending slowly upwards over the years, which means that the underlying business is stable, albeit, without significant growth. Profitability
  • The company has managed to maintain its gross margins (around 28-30%) despite facing inflationary pressures.
  • As said before, net profit margins for the company are low, and volatile, this needs to be fixed, by cutting costs, improving productivity, and implementing better financial control.
  • A significant factor affecting profitability are operating expenses that consist of Selling and Administrative expenses, which are very important to monitor. Balance Sheet:
  • Cash and cash equivalents and restricted cash was around 2 Billion at the end of F2023, that is a large drop from 4.7 Billion in 2022. This points to cash flow problems with the underlying business.
  • Inventory is usually around 7 Billion across the year.
  • Goodwill is around 10 Billion, which is very high and should be monitored in detail. * As of end of fiscal 2023, total debt of the company was 7.7 Billion and finance lease obligations was 3 Billion. Long-term debt was 4.0 Billion. The company has a relatively leveraged balance sheet.

Cash Flows

  • The company generated strong cash from operations, around $2 Billion, however, cash from financing was negative, partially from debt repayments, and that cash was used for acquisitions in other areas, mainly investments in e-commerce infrastructure.

Controversies

  • The company recently terminated a merger deal with Kroger as that deal got struck down in regulatory court.
  • There are several legal proceedings on going, the biggest of which involve price gouging by the company.
  • Increased debt over the past years are also a factor of concern.

Moat Rating

2 / 5 Albertsons, while a large player with some advantages in terms of scale and brand loyalty, has a narrow, weak moat.

  • Limited Pricing Power: Due to fierce competition in the retail industry, Albertsons doesn’t have a lot of pricing power.
  • Weak Barriers to Entry: There aren’t many barriers to entry in the grocery and drug retail space and competitors often open up stores close to Albertsons stores.
  • Switching Costs: Most customers have very little switching costs, hence there isn’t much lock-in with the customers.
  • Competition: The grocery retail market has fierce competition both locally and nationally.

Legitimate Risks that Could Harm the Moat and Business Resilience

  • Intensified Competition: Increase in competition could reduce profitability and further erode the already thin margins.
  • Technological Disruption: Change in e-commerce preferences and technological landscape and inability to adapt will prove to be extremely challenging for the company.
  • Economic Downturn: A downturn in the US economy could reduce consumer spending, thereby affecting company’s revenues.
  • Rising Input Costs: Rising supply prices and inflation can squeeze the company’s margins.
  • Regulatory Changes: Changes in regulation of drug sales may harm the pharmacy sector of the business.
  • Merger Failures and Legal issues: Ongoing legal proceedings for price fixing, can damage the brand and cause huge fines. Also, if any future mergers are struck down the company may have difficulty trying to grow inorganically.

Understandability

2 / 5 Albertsons, on the surface, is very easy to understand. It is a simple grocery store business. However, once you start looking into the nuances and details of the company, it becomes much more difficult.

  • A huge component of the revenue is from pharmacy, that is more complicated than normal grocery sales.
  • It’s hard to value this company in a traditional sense because of the many special items present in the balance sheets and income statements, so you need a specialized knowledge to understand the financial statements of the company. * It has a complex structure involving many subsidiaries, and several business segments.
  • A big component of the revenue comes from fuel sales, which fluctuates massively with oil prices.

Balance Sheet Health

3 / 5 Albertson’s balance sheet health is average, but with some concerning issues.

  • Leveraged Balance Sheet: The company operates with a substantial amount of debt. The total debt is 7.7 Billion and finance lease obligations are 3 Billion.
  • High Goodwill: Goodwill and acquired intangibles amounts to roughly 10 Billion on the balance sheet, which poses a future risk of impairment.
  • Decreasing Cash: Cash has been dramatically decreasing year-over-year.
  • Reasonable Equity: Equity is around 12 Billion, which is enough to absorb minor losses.

The high amount of goodwill and debt present risk to the business, the management needs to actively address these issues.