Like the late actor, Albertsons’ Q2 results did not get any respect. Q1 EPS was $1.35 vs. consensus of $1.32. ID sales increased 26.5% with March +47%, and April and May up 21%. In comparison, Kroger’s March SSS increased 30%, and April and May increased 20%. Albertsons said ID sales continue to be up mid-teens% in Q2. Management did not provide more detailed guidance beyond expecting EBITDA to be $3.7B or better this year.
Impressive margin gains
There was a lot of attention to the conference call to management’s comments about promotions in late May and June. Albertsons’ gross margins expanded 80bps, ex. a lower shrink drives fuel. Kroger’s gross margins expanded 44bps and were also driven by a lower shrink. Kroger also said on its conference call that “we continue to invest in promotions.” It is a reminder that food retail is one of the most competitive sectors in the consumer sector. Albertsons has other headwinds and tailwinds in gross margins, so promotions should not be viewed in isolation. Albertsons’ SG&A leveraged 190bps while Kroger’s OG&A deleveraged 50bps. EBITDA margins expanded 270bps, and the flow-through on incremental sales was 20%.
Numerous adjustments
Adjusted results exclude several one-time items, including losses on hedges and asset dispositions, IPO and convertible costs, certain COVID-19 costs, and civil disruption costs. The adjustments also excluded $19M in equity compensation expense, $13M in LIFO expense, and various amortization expenses that we would include. It would probably be better for Albertsons as a new public company to make fewer adjustments to results. The shares would still be trading at a significant discount, and Q1 would still have had margin expansion. It would also have the added benefit of making the comparison next year less difficult. (Maybe one of the 19 bookrunners on the IPO can pass that advice on to management.)
The valuation gap is an outlier
The similarities in the two leading grocers’ results do not explain the valuation gap. The three arguments we have heard for the discount are 1) the problematic comparisons next year, 2) lackluster cash flow generation, 3) leverage and 4) value stocks are underperforming. Other supermarkets in the US, Canada, and Europe are not looking past current pandemic results in the 2021 comparisons. Cash flow from operations was a record $2.1B while Capex was $400M. Management announced a $.40 annual dividend. Net debt to adjusted EBITDA is 1.8x trailing and could fall by half a turn by year-end. Value may continue to underperform, but quant funds and indexes are underweight Albertsons. Albertsons is a Best Idea Long. We expect the valuation gap to narrow before it is added to the S&P 500 next year.
