ALBERTSONS PUTS MARGINS AHEAD OF SALES GROWTH

Elliot Zwiebach

BOISE, Idaho -- Albertsons is standing by its decision to retain margins at the expense of sales growth, but analysts see challenges ahead.

The company reported a comparable-store sales increase of 1.8% for the first quarter ending May 5, excluding results at Shaw's Supermarkets, Quincy, Mass., or Bristol Farms, Carson, Calif., which it acquired last year. The company did not break out the food portion of the comp, but analysts contacted by SN last week estimated that, excluding fuel and the ongoing sales recovery in Southern California, food comps were negative -- between negative 1.5% to negative 4.2%.

"It would be nice to have higher comps," said Larry Johnston, chairman, president and chief executive officer, during a conference call with analysts, "but I think in an environment of declining consumer confidence, where you have people investing as much as 100 to 150 basis points of gross margins and not being able to sustain those sales gains over the succeeding quarters, we thought it would be a bad decision for shareowners, so we stayed with our plan."

Gross margin at Albertsons declined slightly for the quarter, to 28.11% of sales compared with 28.19% a year ago.

"We invested strategically in price and promotion this quarter, [though] we clearly could have invested more heavily to drive sales," Johnston said. "However, we remain disciplined in our approach to investing for sustained top-line growth vs. renting short-term sales gains that are not sustained."

He said Albertsons is investing in more long-term efforts, including "Check the Price" -- a program that lowers everyday prices on products consumers purchase most frequently -- and national promotions, while successfully increasing net earnings and lowering selling, general and administrative costs. "That's what you do in a tough period of time, and we think when the economy gets stronger, you're going to see a much stronger company."

Steve Chick, an analyst with J.P. Morgan Securities, New York, said the recovery in Southern California from last year's 141-day labor dispute boosted comps for that division by nearly 37%. However, excluding fuel and "the tailwind provided by the cycling of [the] labor dispute," Chick estimated overall food comps were down 4.2%. "It is clear the company is willing to accept sales deterioration in order to preserve margins," he said. "Implied core business sales trends are noticeably weaker than peers, and sales were weak."

Chick also noted the Check the Price program, which involves less than 10% of total revenues, yielded an increase in unit sales but a decline in overall gross profit dollars.

John Heinbockel, an analyst with Goldman Sachs, New York, said Albertsons' sales momentum "is still weak, and its ongoing top-line struggles should result in [operating] margin pressure later in the year." He said he had anticipated weak food comps outside Southern California and estimated identical-store sales, which were up 1.6% overall, would have shown a decline of 3% without Southern California.

Investors had expected "a slightly better comparable-store sales increase, but the company did strike a reasonable balance between gross margin and comps, [indicating] that it could have 'bought' more sales," said Robert Campagnino, an analyst with Prudential Equity Group, New York.

"What wasn't there [in first-quarter results] was a lot of investment to get sales going," according to Gary Giblen, principal at GMG Capital, Darien, Conn. "The company said it didn't invest gross margin because it preferred to develop loyal customers rather than renting temporary business, so sales were softer than expected, though gross margin was better."

Giblen said comp sales should have been up 3.5% to 4%, "but when you exclude inflation in gas prices and prescriptions at its drug stores, the food business is lagging, with declines of at least 1.5%."

The company said its acquisition of Shaw's last spring and ongoing recovery in Southern California helped boost sales for the 13-week quarter 16% to $10 billion and net earnings from continuing operations by 93% to $107 million, or 29 cents per share (27 cents per share on continuing operations following a charge of 2 cents resulting from its pending exit from the Jacksonville, Fla., market).

Johnston said earnings are "coming back" in Southern California.

When an analyst pointed out Albertsons is still "throwing a lot of gross margin" at the Southern California division, Johnston said, "We believe that, over the next couple of years, that division is not only going to be the largest in our company, but it's also going to be contributing a tremendous amount of profit to the enterprise. So it was a strategic investment."

1ST-QUARTER RESULTS

Qtr Ended: 5/5/05; 4/29/04

Sales: $10 billion; $8.6 billion

Change: 16%

Comp-store: 1.8%

Net Income: $100 million; $36 million

Change: 170%

Inc/Share: 29 cents; 10 cents