Jan. 12, 2022, 4:33 p.m. EST

10-Q: ALBERTSONS COMPANIES, INC.

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(EDGAR Online via COMTEX) -- Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS AND FACTORS THAT IMPACT OUR OPERATING RESULTS AND TRENDS

This Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws. The "forward-looking statements" include our current expectations, assumptions, estimates and projections about our business and our industry. They include statements relating to our future operating or financial performance which the Company believes to be reasonable at this time. You can identify forward-looking statements by the use of words such as "outlook," "may," "should," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future" and "intends" and similar expressions which are intended to identify forward-looking statements.

These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict, including, among others:

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements and risk factors. Forward-looking statements contained in this Form 10-Q reflect our view only as of the date of this Form 10-Q. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

While certain aspects of our financial results have been favorably impacted by increased demand during the COVID-19 pandemic, in addition to favorable consumer conditions including incremental financial assistance provided by various government agencies, our business continues to experience challenges to meet customer demand. We have recently experienced increased labor shortages due to recent COVID-19 variants resulting in transportation and retail store disruptions. Together with labor shortages and higher demand for talent, the current economic environment is driving higher wages. The current labor shortages could also impact our ability to negotiate acceptable contracts with labor unions which could result in strikes by affected workers and thereby significantly disrupt our operations. Our ability to meet labor needs, control wage and labor-related costs and minimize labor disruptions will be key to our success of operating our business and executing our business strategies. Furthermore, our business is experiencing an inflationary environment and food price inflation, which has benefited our sales and gross margin growth but has negatively impacted our gross margin rates. In addition, a deflationary market in future periods could reduce sales growth and earnings. We are unable to predict whether the current inflationary environment will continue or whether a deflationary trend will occur. We expect the economic environment to remain uncertain as we navigate the COVID-19 pandemic, labor challenges and the current inflationary environment.

Such risks and uncertainties could cause actual results to differ materially from those expressed or forecasted by us. In evaluating our financial results and forward-looking statements, you should carefully consider the risks and uncertainties more fully described in the "Risk Factors" section or other sections in our reports filed with the SEC Table of Contents

including the most recent annual report on Form 10-K and any subsequent periodic reports on Form 10-Q and current reports on Form 8-K.

As used in this Form 10-Q, unless the context otherwise requires, references to "Albertsons," the "Company," "we," "us" and "our" refer to Albertsons Companies, Inc. and, where appropriate, its subsidiaries.

NON-GAAP FINANCIAL MEASURES

We define EBITDA as generally accepted accounting principles ("GAAP") earnings (net loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as earnings (net loss) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not consider in assessing our ongoing core performance. We define Adjusted net income as GAAP Net income adjusted to eliminate the effects of items management does not consider in assessing our ongoing core performance. We define Adjusted net income per Class A common share as Adjusted net income divided by the weighted average diluted Class A common shares outstanding, as adjusted to reflect all restricted stock units ("RSUs") and restricted common stock ("RSAs") outstanding at the end of the period, as well as the conversion of Convertible Preferred Stock when it is antidilutive for GAAP. We define Net Debt as total debt (which includes finance lease obligations and is net of deferred financing costs and original issue discount) minus unrestricted cash and cash equivalents and we define Net Debt Ratio as the ratio of Net Debt to Adjusted EBITDA for the rolling 52 or 53 week period. See "Results of Operations" for further discussion and a reconciliation of Adjusted EBITDA, Adjusted net income and Adjusted net income per Class A common share.

EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted net income per Class A common share (collectively, the "Non-GAAP Measures") are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as Net income, operating income and gross margin. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing core operating performance, and thereby provide useful measures to analysts and investors of our operating performance on a period-to-period basis. Other companies may have different definitions of Non-GAAP Measures and provide for different adjustments, and comparability to our results of operations may be impacted by such differences. We also use Adjusted EBITDA and Net Debt Ratio for board of director and bank compliance reporting. Our presentation of Non-GAAP Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Non-GAAP Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes.

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THIRD QUARTER OF FISCAL 2021 OVERVIEW

In addition to comparisons of the 12 and 40 weeks ended December 4, 2021 ("third quarter of fiscal 2021" and "first 40 weeks of fiscal 2021") to the 12 and 40 weeks ended December 5, 2020 ("third quarter of fiscal 2020" and "first 40 weeks of fiscal 2020"), given the significant variations that occurred in our business during fiscal 2020 due to the COVID-19 pandemic, we also provide a supplemental comparison of the third quarter of fiscal 2021 and first 40 weeks of fiscal 2021 to the 12 and 40 weeks ended November 30, 2019 ("third quarter of fiscal 2019" and "first 40 weeks of fiscal 2019") for certain financial measures to demonstrate the two-year growth in our business.

As of December 4, 2021, we operated 2,278 retail food and drug stores with 1,722 pharmacies, 399 associated fuel centers, 22 dedicated distribution centers and 20 manufacturing facilities. With a strong consumer environment, we continue to make significant progress against all of our strategic priorities, including in-store excellence, accelerating our digital and omnichannel capabilities, increasing productivity and strengthening our talent and culture. Identical sales increased 5.2%, excluding fuel, during the third quarter of fiscal 2021, resulting in two-year stacked identical sales growth of 17.5%.

We continue to gain market share in food market on a one and two-year basis, and in the third quarter of fiscal 2021 we also gained market share in Multi Outlet ("MULO") on a one and two-year basis. Food market generally includes traditional supermarkets while MULO includes most food market, drug, mass merchants, club, dollar and military stores that sell food.

Our digital initiatives continue to resonate with our customers, underscoring our strong omnichannel capabilities that allow customers to complete their shopping with us in any way they want. During the third quarter of fiscal 2021, digital sales increased 9% compared to the third quarter of fiscal 2020 and 234% on a two-year stacked basis. During the third quarter of fiscal 2021, we expanded our Drive Up & Go curbside pickup service to 1,930 locations and offered delivery services across more than 2,000 of our stores. In our delivery service, we have expanded first party locations, and continue to work with third party services to engage with customers on the platform of their choice. In addition to our continuing partnership with Instacart, we expanded our partnership with DoorDash to offer on-demand grocery delivery service where customers can receive a broad assortment in under one hour. We also recently launched a similar partnership with Uber, where customers can order a full assortment of groceries on the Uber platform.

In the just for U loyalty program, ongoing benefit enhancements continued to accelerate membership growth, which increased 17% in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020, reaching 28 million members. Within the program, our retention rate of actively engaged members, those that redeemed fuel or grocery rewards during the third quarter of fiscal 2021, was more than 93%.

During the third quarter of fiscal 2021 we continued to roll out our Own Brands across all our banners, generating strong growth as our sales penetration increased by approximately 15 basis points to 25.1% compared to the third quarter of fiscal 2020, with the strongest performance in the floral, deli and food service departments. During the first 40 weeks of fiscal 2021, we have launched 540 new products, including 143 in the third quarter of fiscal 2021, and are on track to launch over 800 items in fiscal 2021. To offset cost inflation and fund future investments, we continue to identify and drive productivity. During the third quarter of fiscal 2021, we have continued to make significant improvements in promotional effectiveness, procurement and supply chain, labor efficiency and shrink.

Our capital allocation strategy balances investing for the future, strengthening our balance sheet and returns to shareholders through a combination of dividends and opportunistic share repurchases. Capital expenditures were approximately $1,216 million during the first 40 weeks of fiscal 2021 as we opened nine new stores and completed 146 upgrades and remodels. Our balance sheet remains strong with a Net Debt Ratio of 1.3x as of the end of the third quarter of fiscal 2021. Capital returns to shareholders during the first 40 weeks of fiscal 2021 included our







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$0.10 per share quarterly dividend, which was increased to $0.12 per share of Class A common stock during the third quarter of fiscal 2021.

To enable the delivery of 37 million healthy breakfasts to those in need, we collected $9 million in the third quarter of fiscal 2021 thanks to the generosity of our customers who contributed at our check stands. Another 100,000 meals were provided to those in need with the help of one of our third-party delivery partners at Thanksgiving. In addition, we have continued to partner with the Department of Health and Human Services and local health authorities to administer COVID-19 vaccines to our local communities and have administered approximately 11 million doses.

Third quarter of fiscal 2021 highlights

In summary, our financial and operating highlights for the third quarter of fiscal 2021 include:







        Stores
        The following table shows stores operating, acquired, opened and closed during
        the periods presented:
                                                             12 weeks ended                                     40 weeks ended
                                                 December 4,                December 5,             December 4,                 December 5,
                                                     2021                       2020                    2021                       2020
        Stores, beginning of period                  2,278                      2,252                   2,277                       2,252
        Acquired (1)                                     2                          -                       3                           -
        Opened                                           -                          5                       6                           7
        Closed                                          (2)                        (4)                     (8)                         (6)
        Stores, end of period                        2,278                      2,253                   2,278                       2,253
        


(1) The 40 weeks ended December 4, 2021 includes one store acquired from Kings and Balducci's that transferred to us subsequent to the end of the fourth quarter of fiscal 2020. The following table summarizes our stores by size:







                                                   Number of stores                                    Percent of Total                                 Retail Square Feet (1)
                                        December 4,                December 5,              December 4,              December 5,              December 4,                   December 5,
        Square Footage                     2021                        2020                    2021                      2020                     2021                          2020
        Less than 30,000                     223                          202                       9.8  %                     9.0  %               5.1                            4.7
        30,000 to 50,000                     782                          784                      34.3  %                    34.8  %              32.7                           32.9
        More than 50,000                   1,273                        1,267                      55.9  %                    56.2  %              75.2                           74.8
        Total Stores                       2,278                        2,253                     100.0  %                   100.0  %             113.0                          112.4
        


(1) In millions, reflects total square footage of retail stores operating at the end of the period.

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        RESULTS OF OPERATIONS
        Comparison of Third Quarter of Fiscal 2021 and First 40 Weeks of Fiscal 2021 to
        Third Quarter of Fiscal 2020 and First 40 Weeks of Fiscal 2020:
        The following tables and related discussion set forth certain information and
        comparisons regarding the components of our Condensed Consolidated Statements of
        Operations for the third quarter of fiscal 2021 and first 40 weeks of fiscal
        2021 to the third quarter of fiscal 2020 and first 40 weeks of fiscal 2020 (in
        millions, except per share data).
                                                                                         12 weeks ended
                                                        December 4,                                  December 5,
                                                            2021               % of Sales                2020               % of Sales
        Net sales and other revenue                    $  16,728.4                   100.0  %       $  15,408.9                   100.0  %
        Cost of sales                                     11,898.3                    71.1             10,900.3                    70.7
        Gross margin                                       4,830.1                    28.9              4,508.6                    29.3
        Selling and administrative expenses                4,243.9                    25.4              4,309.1                    28.0
        Gain on property dispositions and impairment
        losses, net                                          (13.4)                   (0.1)               (59.0)                   (0.4)
        Operating income                                     599.6                     3.6                258.5                     1.7
        Interest expense, net                                111.3                     0.7                115.9                     0.8
        Loss on debt extinguishment                            3.7                       -                  8.6                     0.1
        Other income, net                                    (38.3)                   (0.2)               (19.2)                   (0.1)
        Income before income taxes                           522.9                     3.1                153.2                     0.9
        Income tax expense                                    98.4                     0.6                 29.5                     0.2
        Net income                                     $     424.5                     2.5  %       $     123.7                     0.7  %
        Basic net income per Class A common share      $      0.78                                  $      0.21
        Diluted net income per Class A common share           0.74                                         0.20
                                                                                         40 weeks ended
                                                        December 4,                                  December 5,
                                                            2021               % of Sales                2020               % of Sales
        Net sales and other revenue                    $  54,503.5                   100.0  %       $  53,918.1                   100.0  %
        Cost of sales                                     38,765.4                    71.1             38,063.1                    70.6
        Gross margin                                      15,738.1                    28.9             15,855.0                    29.4
        Selling and administrative expenses               13,978.8                    25.6             14,109.7                    26.2
        Gain on property dispositions and impairment
        losses, net                                          (13.3)                      -                (47.0)                   (0.1)
        Operating income                                   1,772.6                     3.3              1,792.3                     3.3
        Interest expense, net                                373.9                     0.7                425.1                     0.8
        Loss on debt extinguishment                            3.7                       -                 57.7                     0.1
        Other income, net                                   (100.7)                   (0.2)               (27.5)                   (0.1)
        Income before income taxes                         1,495.7                     2.8              1,337.0                     2.5
        Income tax expense                                   331.2                     0.6                342.6                     0.6
        Net income                                     $   1,164.5                     2.2  %       $     994.4                     1.9  %
        Basic net income per Class A common share      $      1.97                                  $      1.78
        Diluted net income per Class A common share           1.95                                         1.71
        


Net Sales and Other Revenue







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quarter of fiscal 2020. Retail price inflation and incremental sales related to administering COVID-19 vaccines contributed to the 5.2% identical sales increase.







        Identical Sales, Excluding Fuel
        Identical sales include stores operating during the same period in both the
        current year and the prior year, comparing sales on a daily basis. Direct to
        consumer digital sales are included in identical sales, and fuel sales are
        excluded from identical sales. Acquired stores become identical on the one-year
        anniversary date of the acquisition. Identical sales for the 12 and 40 weeks
        ended December 4, 2021 and the 12 and 40 weeks ended December 5, 2020,
        respectively, were:
                                                            12 weeks ended                                       40 weeks ended
                                                December 4,                 December 5,              December 4,                 December 5,
                                                   2021                        2020                     2021                        2020
        Identical sales, excluding fuel            5.2%                        12.3%                   (2.3)%                       18.4%
        


Gross Margin

Gross margin represents the portion of Net sales and other revenue remaining after deducting Cost of sales during the period, including purchase and distribution costs. These costs include, among other things, purchasing and sourcing costs, inbound freight costs, product quality testing costs, warehouse and distribution costs, Own Brands program costs and digital-related delivery and handling costs. Advertising, promotional expenses and vendor allowances are also components of Cost of sales.

Gross margin rate decreased to 28.9% during the third quarter of fiscal 2021 compared to 29.3% during the third quarter of fiscal 2020. Excluding the impact of fuel, gross margin rate increased 10 basis points compared to the third quarter of fiscal 2020. The increase in gross margin rate was primarily due to productivity initiatives, improved pharmacy margins related to administering COVID-19 vaccines and favorable product mix, largely offset by lower gross margin rates across certain product categories due to the rate impact of increased product costs driven by the current inflationary environment, as well as higher supply chain costs.

Gross margin rate decreased to 28.9% during the first 40 weeks of fiscal 2021 compared to 29.4% during the first 40 weeks of fiscal 2020. Excluding the impact of fuel, gross margin rate increased five basis points compared to the first 40 weeks of fiscal 2020. The increase in gross margin rate was primarily due to productivity initiatives, improved pharmacy margins related to administering COVID-19 vaccines and favorable product mix, offset by higher supply chain costs, as well as lower gross margin rates driven by the current inflationary environment predominantly experienced in the third quarter of fiscal 2021.

Selling and Administrative Expenses

Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.

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Selling and administrative expenses decreased to 25.4% of Net sales and other revenue during the third quarter of fiscal 2021 compared to 28.0% of Net sales and other revenue during the third quarter of fiscal 2020. Excluding the impact of fuel and the $285.7 million charge related to the withdrawal from the United Food and Commercial Workers International Union ("UFCW") Union-Industry Pension Fund ("National Fund") during the third quarter of fiscal 2020, Selling and administrative expenses as a percentage of Net sales and other revenue decreased 20 basis points. The decrease in Selling and administrative expenses was primarily attributable to lower COVID-19 related expenses and the execution of productivity initiatives, which were offset by higher employee costs, depreciation and other expenses related to our investments in our digital and omnichannel capabilities and other strategic priorities. The increase in employee costs was the result of additional labor to support the increase in fresh sales, market-driven wage rate increases, and higher equity-based compensation expense.

Selling and administrative expenses decreased to 25.6% of Net sales and other revenue during the first 40 weeks of fiscal 2021 compared to 26.2% of Net sales and other revenue for the first 40 weeks of fiscal 2020. Excluding the impact of fuel and the $285.7 million charge related to the withdrawal from the UFCW National Fund during the third quarter of fiscal 2020, Selling and administrative expenses as a percentage of Net sales and other revenue increased 60 basis points during the first 40 weeks of fiscal 2021 compared to the first 40 weeks of fiscal 2020. The increase in Selling and administrative expenses as a percentage of Net sales and other revenue was primarily attributable to higher employee costs, depreciation and other expenses related to our investments in our digital and omnichannel capabilities and other strategic priorities. The increase in employee costs was the result of additional labor to support the increase in fresh sales, market-driven wage rate increases and higher equity-based compensation expense. These increases were partially offset by lower COVID-19 related costs and execution of productivity initiatives.

Gain on Property Dispositions and Impairment Losses, Net

For the third quarter of fiscal 2021, net gain on property dispositions and . . .

Jan 12, 2022

COMTEX_400430757/2041/2022-01-12T16:33:21

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