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Albertsons Cos.’ third quarter earnings jump 51%

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Albertsons Cos.’ third quarter earnings jump 51%
BOISE, Idaho — Albertsons Cos.’ third quarter adjusted EBITDA rose 51.4% to $649.7 million, driven by an identical-store sales gain, increased gross profit and cost cutting.

Sales and other revenue in the 12 weeks ended December 1 increased 1.8% from a year earlier to $13.8 billion, with identical-store sales rising 1.9%.

“We continue to gain traction in our efforts to deliver a seamless shopping experience for our customers in both the four-wall and no-wall environment,” said president and chief executive officer Jim Donald. “The third quarter marked our strongest identical sales increase since the first quarter of fiscal 2016. Identical sales grew for the fourth consecutive quarter, and adjusted EBITDA grew over 50% compared to the same quarter last year, as the business has rebounded from fiscal 2017. We achieved a record high sales penetration rate on our own brands products as we continue to delight our customers with our portfolio of award winning brands.”

“We also successfully refinanced our term loan and asset-based loan facilities during the quarter as we secure long-term financing and delever our balance sheet,” added Donald.

Sales were lifted in part by higher fuel sales of $91.7 million, partially offset by a reduction in sales related to the stores closed in the first three quarters.

Gross profit margin increased to 27.8% compared to 26.7% in the year-ago period. Excluding the impact of fuel, gross profit margin increased 140 basis points. The increase was primarily attributable to improved shrink expense as a percentage of sales, lower advertising costs, improved penetration in own brands and the cost reduction.

Selling and administrative expenses decreased to 26.6% of sales  compared to 27.4% of sales for the third quarter of fiscal 2017. Excluding the impact of fuel, selling and administrative expenses as a percentage of sales decreased 70 basis points. The decrease was primarily attributable to lower depreciation and amortization expense, a reduction in acquisition and integration costs as the store conversions were completed during the quarter , and the lower costs.

Interest expense was $213 million during the quarter, compared to $193.9 million a year earlier. The increase is attributable to the company’s refinancing transaction in the quarter and the related write-off of deferred financing costs and original issue discount. The weighted average interest rate during both the quarter and the year-ago period was 6.5%, excluding amortization and write-off of deferred financing costs and original issue discount.

The income tax benefit was $65.4 million for the quarter, compared to  $523.5 million for the year-ago period.  The tax benefit in the  quarter was primarily driven by the company’s provisional SAB 118 adjustment of $60.3 million related to the Tax Cuts and Jobs Act. The benefit in the third quarter of fiscal 2017 was primarily driven by Albertsons Cos.’ fiscal 2017 corporate reorganization and the related non-cash reversal of a valuation allowance against net deferred tax assets.

Net income for the quarter was $45.6 million, down 79% from $218.1 million a year earlier.

Adjusted EBITDA was $649.7 million, or 4.7% of sales,  compared to $429 million, or 3.2% of sales, a year earlier.

Through the first three quarters of the year, sales and other revenue increased 1.4% to $46.5 billion, compared to $45.9 billion during the first 40 weeks of fiscal 2017. The increase  was primarily driven by the company’s 0.9% increase in identical sales and an increase in fuel sales of $386.1 million, partially offset by a reduction in sales related to the stores closed in the first three quarters of fiscal 2018.

Gross profit margin increased to 27.6%, compared to 27.0% during the year-ago period. Excluding the impact of fuel, gross profit margin increased 80 basis points.

Selling and administrative expenses decreased to 26.5% of sales  compared to 27.3% of sales a year earlier. Excluding the impact of fuel, selling and administrative expenses as a percentage of sales decreased 60 basis points during the first 40 weeks of fiscal 2018 compared to the first 40 weeks of fiscal 2017.

The company recorded no goodwill impairment during the first 40 weeks of fiscal 2018 compared to goodwill impairment of $142.3 million during the first 40 weeks of fiscal 2017.

Interest expense was $662.5 million during the first 40 weeks of fiscal 2018 compared to $679.2 million a year earlier.

Income tax benefit was $80.3 million and $590.8 million during the first 40 weeks of fiscal 2018 and fiscal 2017, respectively.

Albertsons Cos. had a net loss was $4.5 million during the first three quarters of fiscal 2018 compared to net loss of $342 million during the first 40 weeks of fiscal 2017.

Adjusted EBITDA was $2 billion, or 4.3% of sales, during the first 40 weeks of fiscal 2018 compared to $1.7 billion, or 3.7% of sales, during the first 40 weeks of fiscal 2017.

Net cash provided by operating activities was $1.069 billion during the first 40 weeks of fiscal 2018 compared to $710.6 million during the first 40 weeks of fiscal 2017. The increase in cash flow from operations was primarily driven by improvements in operating results  and changes in working capital, primarily related to accounts payable and inventory.

During the first 40 weeks of fiscal 2018, Albertsons Cos. invested approximately $917 million in capital expenditures, which included approximately $45 million related to the Safeway Inc. integration, the completion of 91 remodeling projects, the opening of three new stores and continued investment in  digital marketing capabilities.

Albertsons Cos. continues to delever its balance sheet and over the last twelve months has reduced its principal debt balance by approximately $1 billion. In connection with this reduction in debt, on November 16, the company successfully refinanced both its term loan and asset-based loan facilities. Contemporaneously with the refinancing, the grocer paid down approximately $976 million in aggregate principal amount of term loans for which it used cash on hand and approximately $410 million of borrowings under the its asset-based loan facility.  In addition, on November 29, Safeway purchased for cash, at par plus accrued and unpaid interest, approximately $23 million aggregate principal amount of its 7.45% senior debentures due 2027 and approximately $311 million aggregate principal amount of its 7.25% debentures due 2031. The purchase was funded using cash on hand and $200 million of borrowings under the Albertsons Cos.’ asset-based loan facility.

Subsequent to the end of the third quarter, the company repaid the $610 million in borrowings under its asset-based loan facility and as of Monday had no borrowings outstanding under its $4 billion asset-based loan facility, and total availability of approximately $3.4 billion (net of letters of credit usage).

Also subsequent to the end of the quarter, Albertsons Cos. completed the sale and leaseback of five of its distribution centers for an aggregate purchase price, net of closing costs, of approximately $660 million. The sale and leasebacks were completed in two separate transactions which closed on December 17, and January 2. In connection with the sale and leasebacks, the supermarketer entered into lease agreements for each of the properties for initial terms of 15 to 20 years. The aggregate initial annual rent payment for the properties will be approximately $38 million and includes 1.5% to 1.75% annual rent increases over the initial lease terms.

Albertsons Cos. continues to be pleased with its financial performance to date in fiscal 2018 given the elevated level of integration activities and continued investment in the expansion of its digital and e-commerce customer offerings. The company’s significant improvements in shrink rates during the first three quarters compared to fiscal 2017 were lessened by higher shrink rates in the stores and distribution centers converted during the current year, which the grocer believes will persist into the fourth quarter. The third quarter results were impacted by the industrywide recall on romaine lettuce, the fires in California and the recent earthquake in Alaska.

Also, given the company’s recent sale and leaseback of five distribution centers, and two earlier this year, fiscal 2018 results are now expected to be impacted by approximately $17 million in incremental rent expense. Collectively, the company believes these items will negatively impact its fiscal 2018 adjusted EBITDA margin by approximately 10 basis points. Consequently, Albertsons has updated its full fiscal 2018 identical sales guidance to be in the range of 0.8% to 1% and its adjusted EBITDA guidance to be in the range of $2.65 billion to $2.7 billion (reconciled to operating income in the table below).

In addition, the company expects interest expense to be slightly down to relatively flat, and  its effective tax rate to be in the range of 29% to 30%, excluding one-time asset sales and discrete items. Capital expenditures are expected to spend be approximately $1.4 billion.


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