This week, Durig takes another look at the number two grocer in the United States. Albertsons has made a significant turnaround in the past few years after its purchase of Safeway stores in early 2015. With its most recent quarterly results, the company has now logged seven consecutive quarters of identical store sales growth. In addition, the company’s online grocery sales grew by 40% year-over-year, a massive win for this traditional brick and mortar retailer. Other results from its Q2 results include:
- Net earnings totaled $294.8 million as compared to a loss of $32.4 million a year ago.
- Adjusted EBITDA increased by 3.5%.
- For FY 2019, the company has reduced debt by $1.8 billion.
- For Q2, total net debt to adjusted EBITDA ratio decreased to 2.9x
- Albertsons has fantastic interest coverage of 3.2x.
Of course the pressing question from the investor world is likely to be when might Albertsons go public, especially given its recent string of successes, including debt reduction. Cerberus Capital Management, the private equity backer of Albertsons, has not made any recent comments regarding their plans for the grocery retailer. But given the fact that Albertsons has tried to go public as recently as 2018, another attempt is likely. Considering Albertsons competitive position and aggressive pursuit of the e-commerce space, these 2028 bonds, discounted for a competitive yield-to-maturity of about 8% make an excellent addition to Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, the aggregated performance of which is shown below.
Albertsons Companies Second Quarter Results
Albertsons reported on its seventh consecutive quarter of identical stores sales growth. Its results for its second quarter for FY 2019 (three months ended September 7, 2019), saw a 2.4% increase year-over-year of identical store sales growth. Other highlights from the quarter included the following:
- Q2 net earnings were $294.8 million compared to a net loss of $32.4 million in Q2 2018.
- Adjusted EBITDA grew 3.5% to $567.6 million.
- Gross profit margin increased to 27.8%, compared to 27.2% during Q2 2018.
- For the first 28 weeks of FY 2019, net cash provided by operating activities was $1.1 billion.
- To date for FY 2019, Albertsons Companies has reduced its debt by over $1.8 billion. As a result, the company’s total net debt to adjusted EBITDA ratio decreased to 2.9x.
“The strong momentum in the business continued in the second quarter,” said Vivek Sankaran, President and Chief Executive Officer. “Our identical sales were positive for the seventh consecutive quarter and represented our strongest identical sales performance in over three years as we continue to elevate the shopping experience for our customers. We are focused on driving sales growth by running the best stores, growing our loyal customer base, winning in eCommerce, and enhancing our Own Brands portfolio.”
About the Issuer
Albertsons Companies is one of the largest food and drug retailers in the United States, with both a strong local presence and national scale. The company has 2,262 stores spread across 35 states as well as Washington D.C. The company operates under 20 well-known banners including Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market, Haggen and Carrs. Albertsons Companies employs approximately 273,000 people and serves 34 million customers each week. Albertsons is backed by New York based Cerberus Capital Management, a private equity firm. The company maintains corporate locations in Boise Idaho, Phoenix Arizona and Pleasanton California.
Trends in Online Grocery
The online grocery space is heating up. While big online retailers continue to try to dominate the space, retailers like WalMart, Target as well as traditional grocery retailers are fighting back.
In 2019, U.S food and beverage e-commerce sales are slated to grow 18.2% to $19.89 billion, according to estimates. By 2021, that figure is projected to reach $38.16 billion.
Albertsons has continued to grow its online grocery sales. In fact, in its most recent quarter, online grocery sales were up 40% year-over-year. Growing its online grocery service is one of the company’s four engines of growth as identified on the company’s most recent earnings call.
Albertsons Four Engines of Growth
Albertsons CEO, Vivek Sankaran, outlined the four avenues of growth the company is targeting moving forward – online sales, loyalty programs, stores, and private label. With regards to online grocery, a recent study performed by the company indicated that customers buying online spend substantially more than those who did not purchase online. In order to capitalize on this, the company continues to enhance its website and mobile application to ensure that both are convenient and user friendly.
Stores and loyalty programs are also expected to contribute to growth. Focusing on the customer experience in the store is a key growth driver. The goal is to provide ease of shopping for the customer. This includes providing a variety of grocery items to choose from as well as expanded self-checkout. Albertsons loyalty program, “Just for U” saw shopper enrollments increase by 24% in the second quarter. This loyalty program provides the company valuable data on its customers, which in turn helps enhance marketing and merchandising efforts. Loyal customers are motivated to spend more money in-store.
Interest Coverage and Liquidity
Interest coverage tells the bondholder / investor the ability of the issuer to service its existing debt level. A higher interest coverage is favorable. For the twelve weeks ending September 7, 2019, Albertsons Companies had operating income of $582.4 million and interest expense of $177.5 million, for a healthy interest coverage ratio of 3.2x.
In terms of liquidity, as of September 7, 2019, the company had cash and cash equivalents of $435 million. Also, the company had $3.3 billion available on its asset based revolving credit facility as of September 7, 2019.
The risk for bondholders is Albertsons ability to stay competitive in the grocery and online grocery space. Despite fears that Amazon would take over the grocery space after its acquisition of Whole Foods a few years ago, that fear has not really materialized. And Albertsons is making good progress on its online grocery sales, up 40% year-over-year in its most recent quarter. Albertsons also maintains a dominant presence in the grocery space, being the nation’s second largest grocery retailer.
Generally, there is reduced risk for investors who invest in Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio due to its diversification across many bonds and industries, as compared to the purchase of individual bonds. Historically, the FX2 Portfolio has significantly outperformed when compared to portfolios where investors have chosen bonds individually. Durig Capital currently holds this bond in its FX2 Portfolio.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
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Summary and Conclusion
Albertsons continues to perform, logging its seventh consecutive quarter of identical stores sales gains. Online grocery sales were up 40% year-over-year in Q2, following a 33% year-over-year increase in Q1. And although Amazon may have grown in the grocery space, there are still many consumers who like the convenience of online shopping paired with getting product from their local store. Albertsons appears to have the best of both for its loyal customers. In addition, the company continues reducing debt while growing adjusted EBITDA. Albertsons 2028 bonds are trading at a discount, giving them a very competitive yield-to-maturity of about 8%. These bonds provide ideal diversification for investors looking to include the essential grocery industry in their portfolios. In light of Albertsons continued solid performance, these bonds make an excellent addition to Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio.
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We have now started offering our highly successful Fixed Income 2 (FX2) Portfolio, our Dividend Aristocrats 40 Portfolio, and our Income Aristocrats Portfolio to clients of other Registered Investment Advisors through segregated accounts at TD Ameritrade Institutional. Please ask us to learn how this might work for you and your current advisor.
Issuer: Albertsons Inc.
Price: ~ 91.0
Yield to Maturity: ~8.11%
Durig Capital provides investors with a specialized, transparent fiduciary service at a very low cost. Our FX2 (Discretionary Management) Portfolio over time has greatly outperformed our FX1 (Non-discretionary) Portfolio, giving significantly higher (at times double) the returns of FX1. Our professional service enables access to a broad spectrum of bond, high yields, and lower price points that are often found in less efficient markets, but not evidenced in many bond services. Most of our client accounts are custodied in their own name at TD Ameritrade Institutional, a large discount service provider that is SPIC insured, or at Interactive Brokers. We have now started offering our highly successful FX2 service to clients of other Registered Investment Advisors through segregated accounts at TD Ameritrade. Please ask us to learn how this might work for you and your current advisor.
Disclosure: Durig Capital and certain clients may hold positions in Albertsons February 2028 bonds.
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