Albertsons’ Donald Details ‘Full-Court Press’

New Albertsons President Jim Donald says he’s spent the first seven weeks of his tenure in a “full-court press” to prepare a plan for success, both in stores and online.

“While our company has a great history as a food retailer, we are embarking on a journey that is designed to ensure our success from different but contributing business units,” he said. “My travels to various business units have allowed me to stress-test the organization for infrastructure strengths and weaknesses with a fresh set of eyes, and ideas to prepare us not only for grocery battles within the four-wall environment but also in a no-wall environment.”

Donald made his remarks as the Boise, Idaho-based company reviewed financial results for the fourth quarter and fiscal year 2017 alongside forecasting sales and earnings gains and a $1.2 billion capital budget for fiscal 2018. During his travels across the country “seven days week” since his appointment in early March, Donald optimistically detailed operating initiatives he said would “delight customers and improve results,” including remodeling stores, partnering with differentiated brands, leveraging pharmacy, expanding fuel and convenience retailing, accelerating e-commerce and loyalty programs, and enhancing private brands.

Related:1-on-1 With Albertsons' New President Jim Donald

The planned $1.2 billion capex purse forecast for the new fiscal year is down from $1.5 billion in 2017 and reflects in part the approaching completion of the switch of legacy Albertsons brands to Safeway’s systems, officials said. Albertsons has completed eight of 11 divisions and is currently about halfway through changing over its Shaw’s stores. Up next for the switch is Jewel-Osco and Acme Markets banners to round off the complete chainwide integration by mid-September.

Officials said 60% to 65% of the capital budget will be devoted to new stores, maintenance and remodels, including approximately 15 new stores and 150 to 200 remodels and refreshes. The rest will go to technology projects, including e-commerce expansion and distribution center automation projects.

Albertsons’ first automated distribution center, in Tolleson, Ariz., came online during the fourth quarter. Officials said they expect Tolleson and future automated centers would generate “substantial EBITDA improvements” and 20% to 25% return on capital, despite heavy initial investments.

Donald said investments in digital and loyalty initiatives would accelerate this year, with a plan to expand a click-and-collect effort known as Drive Up & Go from 102 stores currently to more than 500 by year-end. The company will further expand Instacart same-day delivery from today's 1,300 stores to 1,700, while its proprietary home delivery program, currently in 34 markets, showed double-digit growth in 2017.

Sales in the fiscal fourth quarter ended Feb. 24 totaled $14 billion, a 1.6% improvement, with nonfuel identical-store sales of 0.6% reflecting traffic and ticket increases.

CEO Bob Miller said the chain benefited from a more targeted and effective promotional spend than in the third quarter, although gross profit margins declined by 40 basis points, as compared to last year’s fourth quarter, to 28.1% of sales. EBITDA of $712 million, or 5.1% of sales, was the company’s best fourth quarter since acquiring Safeway. Net income for the quarter totaled $388.3 million, although $370 million of that total related to new tax benefits.

For the fiscal year, Albertsons posted sales of $60 billion, a 0.4% increase. Private brands accounted for $11.5 billion of those sales, up 0.6% to 23% of sales and up 0.7% to 24% of unit volume. Albertsons introduced 550 new private brand items in 2017 and expects more than 1,400 new items this year.

Albertsons is expecting identical-store sales of 1.5% to 2% in fiscal 2018, and is betting on higher inflation during the second half of the year. Miller said an inflationary environment would help Albertsons in particular, and that climbing prices would provide a better backdrop for its promotions and reduce the likelihood that its competitors continue to promote.

“I will admit we overpromoted in the third quarter,” he said. “It was harder to get out in front of the consumer with promotional offers that set us apart, because deflation made everybody more promotional. ... But in our world, [promotions] are always there.”

The company is forecasting $2.7 billion in EBITDA for the year, counting on $100 million in synergy savings from the Safeway merger, $150 million in new corporate cost reductions and a shrink improvement of $170 million. Shrink has weighed on financial results partly as a result of the ongoing systems switch, but Donald said he was also focused on reducing shrink in traditional areas such as theft and spoilage.

Officials said they expected that Rite Aid’s shareholders would vote on their proposed merger in mid-July.

Donald said he spent the first weeks of his appointment meeting with merchants, presidents and employees in all of Albertsons' divisions, and is convinced they have the ability to capture opportunity ahead.

“Our future has never been brighter,” he said. “Our company is set up for success by having those closest to our customers making the day-to-day decisions. Our ability to execute in real time is about as good as it gets in any place I have ever worked. To encourage this, I’ve been communicating with our 275,000 employees and telling them the same thing.”