Albertsons in 'Right Zone' for IPO as Q3 Sales, Profits Grow and Debts Dwindle

An eighth straight quarter of improving same-store sales and debt reductions enabled by sale-leaseback transactions, improved cash flow and refinancing is getting Albertsons Cos. in shape for a potential public stock offering, officials of the Boise, Idaho-based retailer said this week.

Since the beginning of fiscal 2019, Albertsons has reduced the amount of its outstanding debt by more than $1.8 billion, and by the end of its fiscal third quarter on Nov. 30, Albertsons’ total net debt to adjusted EBITDA ratio was 3.0x. That ratio puts the company in the “right zone” to consider a transaction such as a public stock offering, CEO Vivek Sankaran said in a conference call with analysts reviewing the quarterly financials.

Albertsons’ private owners, led by Cerberus Capital Management, have long sought an exit, pursuing but ultimately dropping plans not only for an IPO in 2017 but a reverse merger with Rite Aid that would have taken the company public in 2018. Cerberus has controlled Alberstons since 2006, when it agreed to acquire a handful of stores leftover its predecessor’s breakup. Over the ensuing 13 years, it built that group back through acquisitions, giving it the scale of a national company but also considerable debt as well.

A series of sale-leaseback deals, including a $660 million sale of five owned distribution centers announced a year ago, have helped to reduce total debts to $8.75 billion at the end of the quarter vs. $11 billion at the end of 2018’s third quarter. “As we speak to our investment banking groups, I think they’re feeling very comfortable that [being] in this ZIP code creates a lot of financial flexibility, whether it be an IPO or what other types of things that we may want to do,” Chief Financial Officer Bob Dimond said.

For the quarter, Albertsons posted total sales of $14.1 billion, a 1.9% increase, and same-store sales of 2.7%, the company’s eight straight quarter of increasing identical store sales. The comp figure was supported by own brand sales growth and expansion of the company’s Drive Up & Go click-and-collect offering, which Sankaran said was “meaningfully incremental to base store IDs.” Gross margin as a percent of sales also increased to 28.3% in the quarter vs. 27.8% in last year’s third quarter, due mainly to improved mix and reductions in shrink, officials said.

Albertsons offered Drive Up & Go in 548 stores as of the end of the quarter, with plans to expand that to 1,400 locations over the next two years.

The company is also seeing efficiency benefits from a pair of microfulfillment centers that recently began picking e-commerce orders at two stores in California. Sankaran said the automated facilities are handling 25,000 of the fastest-moving nonperishable items, which are supplemented with store-picked fresh and frozen items for delivery and pickup orders.

Sankaran said the units, from Takeoff Technologies, are proving about four times more efficient than store-picked orders. “Our early learnings indicate improved picking efficiency, better inventory management, as well as improved on-time delivery—areas that ultimately drive productivity and improve customer satisfaction,” he said.

E-commerce is one of four areas of growth identified by Sankaran, who also said the company was focused on improvement in stores, in own brand sales and in loyalty.

He said “easy, exciting and friendly” stores would provide Alberstsons’ “core business foundation” with a focus on enhanced customer experience, including self-checkout; expanded fresh, new product introductions; and a remodeling program targeting about 10% of the store base annually.

Own-brand sales penetration in the quarter reached a record 25.6% with 30% in its sites, Sanakaran added. The company here is focused on unique items not available elsewhere, including introductions in the recent quarter of an organic chickpea spaghetti under its O Organics line; a Signature Reserve European cookie tin; and a free-from body lotion under its Open Nature label. Albertsons intends to introduce 800 new items across nine controlled brands in the fiscal year.

A focus on loyalty “allows us to build our base of engaged shoppers and increased share of wallet,” Sankaran said, noting Just for U household registrations in the quarter were up 25% vs. a year ago. “As we continue to invest in digital marketing and customer acquisition programs, we continue to retain and grow our base of loyal customers. In the third quarter, we had almost 1.4 million more identified households vs. the prior year, allowing us to better personalize the customer experience with relevant offers and communications. The more customers engage with us, the more they spend.”

For example, he said Just for U shoppers spent $8 to $10 more per week than other customers.

Albertsons will pay for these investments through enhancements in productivity, technology and talent.

Productivity programs are underway on multiple fronts, including shrink, labor, purchasing and automation. “The way we think of these is these are all multiyear platforms, right? These are not things that you just do it once and stop,” Sankaran said. “We see productivity over multiple years, and we are laying out our plans so that we can have a steady flow of productivity that will offset inflation and give us the money to continue to generate investments back to growth.”