With Americans eating more meals at home, supermarkets are among the few traditional retailers to thrive, and
Cos., the nation’s fourth-largest grocer, is no exception.
Since the pandemic began in March, the owner of the Safeway and Acme supermarket chains has had sales growth of more than 20% and ample profits. Its stock is a different matter. The company went public in late June at $16 a share, and the stock has since fallen to around $13.
Now is the time to bag these marked-down shares. Albertsons (ticker: ACI) trades at a discount to virtually every company in the grocery business, including dollar stores like
(DG) and the largest food vendor,
Albertsons also has an improving outlook and a dynamic CEO in Vivek Sankaran, who joined in 2019 from
(PEP), where he headed the North American food business.
“We’re undervalued relative to our cash flow,” Sankaran tells Barron’s. “My charter is to transform Albertsons into a modern retailer fit for the future. The company has a fabulous foundation with great brands and great locations.”
Albertsons operates more than 2,200 stores and is strong in California, where it has nearly 600. Its chains include Safeway, mainly on the West Coast, and Acme in the mid-Atlantic states. It also owns regional grocers like Jewel-Osco in the Chicago area and Shaw’s in New England.
The stock trades for just seven times projected earnings of $1.86 a share in the company’s fiscal year ending in February 2021 and for nine times estimated earnings of $1.53 in the February 2022 fiscal year. Rival
(KR) fetches 12 times next year’s expected earnings.
Sales at Albertsons are expected to hit $66 billion this fiscal year, up nearly 7% from 2019, putting it behind Walmart, Kroger, and
(COST) in grocery sales.
Albertsons’ float is just 10% of its nearly 600 million shares outstanding, reflecting ownership by an investor consortium led by Cerberus Capital Management, which owns about 25%. Lockup restrictions begin to expire late this year, creating a potential overhang.
Apollo Global Management
(APO), the big private-equity firm, is a believer, having bought $1.75 billion of convertible preferred stock in May with a conversion price of around $17—well above the current price.
*Estimates for fiscal ’21 and ’22 ending in Feb. 2022. **Estimates for calendar 2020 and 2021. ***Estimates for fiscal ’21 and ’22 ending in Jan. 2022. ****Since June 25 IPO. E=Estimate.
Sources: Bloomberg; FactSet
Whether the eat-at-home trend will persist and how the company deals with its roughly $5 billion pension deficit nag at investors. There is also the question of whether Albertsons can stave off larger rivals like Walmart,
(AMZN), and Costco in the fiercely competitive $1 trillion U.S. grocery market. The threat was highlighted recently when Walmart rolled out its Walmart+ service that allows unlimited delivery for $98 a year.
Many investors figure that old-line food retailers with unionized workforces are at a structural disadvantage relative to Walmart,
(TGT), Amazon, and Costco, which have few or no unionized employees. About 69% of Albertsons 270,000 workers are unionized.
Bulls argue that Albertsons has been taking market share from smaller grocery chains and that the negatives are already in the stock.
While it has been slower to develop e-commerce initiatives than some rivals, Albertsons is ramping up its successful “drive-up and go”—known as DUG—program that allows consumers to order online and pick up at stores. The company now has the service in more than 700 stores and aims to roll it out in nearly 1,400 by the end of the current fiscal year.
Albertsons “is catching up on e-commerce and with loyalty cards,” says Ken Goldman, an analyst at J.P. Morgan. “There is a lot of low-hanging fruit. If Albertsons can grow comparable sales and maintain gross margins, the stock should do fine in the long run.” He has an Overweight rating and $19 price target on the stock.
He argues that Albertsons, now valued at just over five times projected 2021 earnings before interest, taxes, depreciation, and amortization (Ebitda) adjusted for its pension shortfall, is too cheap relative to Kroger, which is at nearly seven times.
Albertsons’ long-term goal is for annual identical sales growth of 2.25%, Ebitda of 3% to 5%, earnings per share in the high single digits, and a double-digit total return. The company is expected to set a 40-cent annual dividend starting in the current quarter, which ends in early December, resulting in a 3% dividend yield.
The company is aiming to cut $1 billion of annual operating costs within three years. “The program is not new to the industry, but it’s new to Albertsons,” CEO Sankaran says. One step: Consolidating the purchase of grocery bags rather than having each chain do it.
Albertsons, like other top grocers, emphasizes its private-label brands. They account for about 25% of sales and carry 10 percentage points of additional gross profit margin relative to national brands. That is important, given its 2% operating margins.
Sankaran is betting eating habits don’t revert to prepandemic patterns. Before the pandemic, there was a roughly 50/50 split of food spending in-home and out. In-home spiked to 70% in April during lockdown and is now down below 60%.
“We’re six months into the pandemic and patterns of behavior are getting established,” Sankaran says. Americans will be doing more work-from-home after the pandemic, and that means more breakfasts and lunches at home, he says.
An energized Albertsons looks like it can hold its own in the tough grocery business. And its stock is on sale.
Write to Andrew Bary at [email protected]