Albertsons Earnings: Productivity and Digital Efforts Shine, but Competition Clouds Industry Outlook

Albertsons’ ACI first quarter (ended June 17) highlighted its ability to navigate well amid an intensifying competitive landscape, which we expect to endure. Having largely accounted for this challenging environment, as reflected in just 2% sales and gross profit growth on average during the next five years, we don’t plan to materially adjust our $28 stand-alone fair value estimate, leaving shares undervalued. Our fair value estimate assumes that the proposed acquisition of Albertsons by Kroger will be blocked by regulators on antitrust grounds given concerns over higher food prices for consumers.

First-quarter revenue lifted 3% year over year, driven by same-store sales growth of 4.9%, which was aided by a 22% increase in digital revenue. We plan to maintain our 2% sales growth estimate for the full fiscal year, as comparisons get slightly harder and the economic environment remains ominous. To this point, management commented that the landscape has become more challenging, which was evidenced by gross margin degradation to 27.7% in the quarter from 28.1% last year, weighed down in part by the company’s investment in pricing, as well as a continued mix shift to lower margin digital sales, and tough COVID-19 vaccine comparisons. But the company’s productivity initiatives helped selling, general, and administrative expense leverage 20 basis points to 25%. Still, we believe that no-moat Albertsons is a step behind narrow-moat Kroger in key areas like digital fulfillment, private-label, and data analytics (loyalty membership was up 16% to 35.9 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.