Grocery headwinds FQ4 (ACI)
Albertsons reported FQ4 EPS of $.54, $.02 ahead of consensus expectations. ID sales increased by 1%, in line with expectations. Albertsons’ sales growth was in the lower half of food retailer results, but the months do not line up well with the others for comparison purposes. Pharmacy sales growth drove the increase. Digital sales grew by 24%. Gross margins ex. fuel and LIFO contracted by 58bps due to the higher pharmacy mix, increased shrink, and digital fulfillment costs. SG&A was deleveraged by 13bps after excluding fuel and a legal settlement last year.
Management said, “We expect to face ongoing headwinds posed by investments in associate wages and benefits, cycling significant prior year food inflation, lower government assistance for our customers, declining COVID-related income, and the increasing mix of our pharmacy and digital businesses, which carry lower margins.” Albertsons’ results show the margin offset from digital and pharmacy sales growth.
Updated divestiture plan (KR, ACI)
Kroger and Albertsons also announced an updated divestiture package with C&S Wholesale Grocers. Management had alluded to meaningful additions to the divestiture plans in response to the merger suits. The grocers increased by 166 stores the number of stores that will be divested to C&S. In addition to the 579 stores; the grocers will include the Haggen banner as well as the license of Albertsons and Safeway banners in two states each. Kroger and Albertsons are also including additional distribution facilities. The increased divestitures are to further ensure the viability of C&S. The regulators believe that the details of the original merger proposal were not sufficient in ensuring the stand-alone viability because it lacked self-sufficiency. The enhanced divestiture by not including banners like Ralph’s does not give up too much for Kroger, but it improves the proposition for C&S. Regulators may just want a fight.
Water fees (STKL)
The California board that regulates water in a first voted to take control of the groundwater in the Tulare Lake subbasin. It is one of California’s largest farming areas. The board is imposing a mandatory fee on water pumping. The large farmers in the area may have to pay millions of dollars in fees or stop cultivating sections of the farmland. California will start measuring water usage and collecting fees of $20 for every acre-foot of water the farmer uses. The farms in the area grow tomatoes and almonds and raise dairy cows. California is out of a drought now, but with La Nina more likely this year, water fees may result in a change in what the farmland is used for. Almonds are a notoriously thirsty crop.