Albertsons also reported third quarter sales and earnings for the 12-week period ended December 2 and posted both an operating loss and an identical store sales decrease.
The big retailer’s net income was $218.1 million after a tax benefit of $523.5 million. However, Albertsons’ operating loss for the quarter was $95 million, compared with operating profit of $153.9 million in the corresponding period last year.
The company said the decline in earnings was primarily due to aggressive promotions and shrink. Overall sales were flat at about $13.6 billion in the quarter. The 1.8 percent dip in ID store sales included a 2.7 percent decrease in traffic, which was partially offset by a 0.9 percent increase in average basket transaction.
In his follow up conference call with financial analysts, chairman and chief executive Bob Miller said he sees sales improving in Albertsons’ fourth quarter.
“During the third quarter we expected to see significant sales improvement as a result of price and promotional investments, but we experienced disappointing results from these investments as our identical-store sales for the third quarter matched the second-quarter decline of 1.8 percent,” said the veteran industry leader.
Miller added that Albertsons has already adjusted its promotional strategy to focus on certain key markets, rather than investing aggressively across the entire organization. That has resulted in improved sales and traffic, and Miller noted that identical store sales have been positive in the last several weeks, and are expected to remain positive in the final six weeks of the fiscal fourth quarter.
Also contributing to the earnings decline were expenses related to integration costs of consolidating warehouses and converting stores to new systems, which also helped drive up shrink in the quarter, the company stated.
Miller also addressed some of Albertsons’ new initiatives including the continuing growth of its e-commerce delivery and store pickup, its expanded partnership with Instacart and the opportunities it has with its Plated meal kit service both as a home delivery business and as an offering in stores. The company acquired the meal kit company late last year.
Additionally, Albertsons’ “Drive Up and Go,” a service that allows customers to order online and pick up at the store, is expected to be rolled out to 500 stores in 2018. The Boise, ID-based merchant also acquired a 45 percent stake in the 16-store El Rancho Supermercado chain in Texas. The investment included $70 million in cash and $30 million in equity.
And just before presstime, Albertsons acknowledged it has agreed to sell its 49 percent stake in its Casa Ley operations in Mexico to Tenedora CL del Noroeste for approximately $345 million.
The Casa Ley division had been owned by Safeway when Albertsons and Safeway merged in 2015, and the companies said at that time they would seek a buyer for the stores. The sale, which is subject to Mexican antitrust approval, is expected to close by February 28. The proceeds from the sale will be distributed to previous holders of Safeway stock, as per an agreement announced at the time of the Albertsons-Safeway merger.
The company also marked a significant milestone as 12-month revenue for its “O Organics” private label brand (originally a Safeway brand) exceeded $1 billion for the first time. Overall, private label penetration increased by 62 basis points in the recent quarter.
Speaking to the analysts, Miller also provided a broader view of some of the company’s other upcoming plans. In the next few months, Albertsons’ first automated warehouse, in Tolleson, AZ, will be completed. Several more automated distribution centers are expected to be added including new distribution centers in Chicago (Jewel) and Denver, PA (Acme Markets).
Miller said that he expected that competitive new store openings that impact Albertsons’ existing supermarkets are to decrease by about 30 percent in the next year.
Albertsons will also be decelerating its new store development in 2018. The large retailer said it would reduce capital expenditures by about $300 million, to $1.2 billion. Much of that decrease will be in new store development but investments in technology will increase.
Another $150 million in cost reductions is projected for 2018 which will encompass corporate and division overhead, advertising circular costs and packaging costs and other cost reductions.
Albertsons also said it expects to see an additional $150-$300 million in savings per year as a result of the new tax reform legislation. The company said that it would provide more details next quarter.
Albertsons is also expecting approximately $100 million in savings from post-merger synergies in the coming year, in addition to the $675 million in synergies savings achieved thus far.