BOISE, Idaho -- Surprising industry observers, Albertson's here last week said it expects its increased investment in customer service, home meal replacement, employee training and competitive promotions to squeeze second-half results.
The 801-store chain said it projects third- and fourth-quarter earnings to virtually mirror year-ago results -- in excess of $100 million, or 42 cents per share, for the third quarter ending Oct. 31 and more than $150 million, or 61 cents per share, for the fourth quarter ending Jan. 30. Those projections fall below securities analysts' consensus estimates of 48 cents per share for the third quarter and 69 cents for the fourth quarter.
Despite slack earnings growth in the second half, Albertson's said earnings for the year ending Jan. 30 should be higher than the $1.84 per share reported a year ago. Although the company did not project specific income numbers for the year, analysts told SN they expect results to fall just under $2 per share. Albertson's also said same-store sales are running flat, with third-quarter comparisons likely to rise only about 1% vs. a 2.7% gain in the second quarter.
The announcement caught most observers off-guard. Yet Albertson's bumps are company-specific and do not portend negative results for the rest of the industry, Gary Giblen, managing director of Smith Barney, New York, told SN.
"For a company that's usually extraordinarily consistent and predictable -- very much a 'Steady Eddie' -- this news is really a bolt from the blue," Giblen said.
Albertson's revised second-half projections reflect a major shift in the way it does business, as it moves from an everyday-low-price strategy to one offering more customer services, noted Jonathan Ziegler, an analyst with the San Francisco office of Salomon Bros., New York. "Rather than undergoing a Chinese water torture, the company seems to have had a sudden dousing," he said.
"As customers seek more service departments, Albertson's is increasing its expense ratios and giving up some margin as it adds more labor and trains personnel accordingly," Ziegler explained. "But it's not yet getting the sales from those changes. However, once the transition is over, it will resume its sales growth."
Chuck Cerankosky, an analyst with Hancock Institutional Equity Services, Cleveland, said he had been anticipating a downturn in Albertson's results, lowering his earnings estimates a week before Albertson's announcement -- "though not enough," he added.
"We like to see a balance of sales growth and margin expansion, and we're always wary of strong margin expansion that allows earnings growth to run well ahead of sales growth," which had been the case at Albertson's, Cerankosky said.
Programs pinching the chain's results include Quick Fixin' Ideas, which offers a variety of prepared meal items in one store, the addition of front-end managers in all stores, the implementation of various divisional and store-level training programs, plus "other investments in various markets to combat competitive store openings," said A. Craig Olson, senior vice president of finance and chief financial officer.
"Although sales continue to increase, the increases are not meeting the company's own expectations, and costs are above the originally projected amounts as a result of investments in programs to enhance long-term sales growth," Olson explained.
In a statement, Albertson's said, "The company is committed to these programs and will not sacrifice long-term benefits by suspending them for short-term results." The chain is slated to report third-quarter results in late November and fourth-quarter results in late February. Albertson's sluggish earnings performance may stem from having a broad growth strategy, according to Giblen. "Albertson's is trying to do a lot of things all at the same time, and not everything has jelled that well," he said. "It all seemed to be going well during the first half, but apparently those gains were unsustainable."
The chain, he said, is trying to "jazz up" its EDLP program to make it more exciting, offer more store-level service, train employees to deliver that service, and introduce home meal replacement in stores via Quick Fixin' Ideas. "So it's doing all the right things, and no one should question management's wisdom. It's just a matter of hitting a few intermediate bumps along the road."
Factors affecting the third- and fourth-quarter results are likely to be short-term, "although the stock will be dead money for at least a year while the company rebuilds," Giblen noted.
Ziegler said the disappointing earnings results are likely to spill over into at least the first quarter of next year, though he expects a sales uptick in next year's first quarter, with more dramatic hikes later in the year.
Of more long-term concern, Ziegler added, is the effect of competition from Safeway in the Pacific Northwest and the Southwest and from Wal-Mart supercenters in Texas and Florida. "Things are heating up in a lot of different market areas, and that pressure won't lighten up, which will make it a longer-term phenomenon for Albertson's," he said.
Cerankosky agreed, comparing Albertson's situation with that of Stop & Shop Cos., Quincy, Mass, in 1995, when slow same-store sales growth prompted the chain to slice margins to regain its sales momentum -- a move he said was working at the time Stop & Shop was acquired by Dutch-based Ahold. Supercenter competition is affecting Albertson's over a wider geographic area, he noted, "and there's also a certain amount of cannibalization as Albertson's continues to aggressively open new stores."
Albertson's EDLP policy also may be a drawback. "It's possible the company's EDLP strategy has become too bland in some markets, and it hasn't been shouting as loudly as some more promotional operators," Cerankosky said.