Albertsons: Sustainable Leader In Groceries (NYSE:ACI) (2024)

Thesis

Albertsons (NYSE:ACI) stands as undervalued right now due to a COVID-19 boost, as well as the firm’s heavy focus on innovating and amplifying the customer shopping experience.

Overview and Price Action

Albertsons Companies, Inc. is an American retailer headquartered in Boise, Idaho specializing in groceries, in addition to selling general, health, beauty, and pharmacy products. It operates over 2,500 stores under names such as Albertsons, Safeway, Jewel-Osco, and Tom Thumb. The company had its IPO last June at $16 per share, with its most recent closing price at $17.38.

COVID Boost

The pandemic has been perhaps the most direct catalyst for growth for Albertsons over the past year. Per the earnings report earlier this week, the company’s year-over-year revenues were up 9.3%, as well as adjusted EBITDA growth of 53%. The reason is clear - at first, many consumers panicked when the lockdown began, starting to stockpile essentials that Albertsons carried (e.g. food, basic drugs, health products), but even after that fad has passed, consumers still look to spend on essentials at shops like Albertsons, giving them a large moat during the pandemic.

Moreover, this increased revenue has allowed the firm to now hold just over $1.8 billion in cash, up from less than $500 million in February of 2020. And the company isn’t just sitting idle on these funds: CEO Vivek Sankaran explains that the firm aims to take advantage of increased traffic in stores during the pandemic by trying to create a “one-stop shop” experience for customers, which would, of course, generate a lot more revenue for the firm.

For example, the company is already in a position to offer vaccinations, and as demand for immunizations in the US skyrockets in 2021, Albertsons should be able to take advantage. Overall, the firm has been able to capitalize on the pandemic due to its status as an essential retailer, and its expansion into a “one-stop” shopping experience presents attractive prospects for the near future.

Emphasis on Shopping Experience Innovations

While the pandemic has and will likely continue to bolster Albertsons' prospects, its true value in the long term stems from its continual innovations in the customer shopping experience. To begin with, the company has been expanding its e-commerce business, with 1181 stores currently offering “Drive Up & Go” services as: a number that is projected to grow to 1,800 soon after 2020. Drive Up & Go saw a staggering 800% expansion in Q3, which drove overall digital sales growth up 225% year-over-year (Q3 Earnings Transcript).

Moreover, this digital expansion doesn’t seem to be showing any signs of stopping. Just last week, per Perishable News, the company debuted an automated grocery service, PickUp, which, similar to Drive Up & Go, allows customers to drive to the store and pick up their groceries without having to go in the store. However, PickUp is uniquely innovative in that it is fully contactless, as groceries are robotically delivered once a customer scans a code on their phone, opening the door for huge cost savings for the firm - especially in the long term - once this service is implemented on a wider scale.

On top of this technology, however, the firm is also focusing on creating a better experience for those who shop in the store. Specifically, CEO Vivek Sankaran noted that stores have been adding health and wellness experts to amplify the consumer experience, and the company’s expansion of its “Own Brands” portfolio, which has “offerings at different price points, and to address varying lifestyle needs” (Q2 Earnings Transcript) is a way it can reach more consumers than competitors. Overall, the firm is focusing on the right things - innovation and amplifying the customer experience in order to differentiate itself from competition, which will ensure long-term success.

Competitor Analysis

Source: GuruFocus

While Albertsons is trading significantly cheaper than competitors such as Walmart and Grocery Outlet, its metrics reveal a smaller discount in comparison to Kroger, which is a truer competitor than the others, but the firm's unique advantages spelled out earlier likely make up for this. Overall, comparing the key valuation ratios reveals that relative to its competitors, Albertsons seems to be trading at a significant discount.

DCF Valuation

Overall, using conservative measurements to maintain a large margin of safety, these are the assumptions for major valuation drivers for the company.

Cost of Capital: Making sure to add operating leases into total debt, we calculate a cost of debt of 9.40%. Next, we use the company’s beta and a market risk premium for the cost of equity, which comes out to 6.77%. Combining the two, we get a weighted average cost of capital of 5.49%.

Revenue Growth (next 5 years): The company has seen revenues somewhat stagnate over the last few years, but we expect revenues to pick up from the short-term COVID boost as well as innovations in the shopping experience; nonetheless, we’ll use a careful estimate of 1% revenue growth for the next 5 years.

Revenue Growth (Terminal): While the economy tends to grow at 2-3% historically, we want to remain conservative, so we use 2%.

Operating Margins: Margins have grown for the past few years to about 3% in the last twelve months, and with the company’s innovations and cost-cutting, we expect it to remain around that going forward, converging to a maximum 3% in the next 5 years.

DCF Results

Concerns

While the company may have attractive prospects, there are still some concerns: many are concerned about Albertsons’ ability to differentiate itself from strong competition, like Kroger. This is a legitimate concern, but the firm has shown to differentiate itself with its superior shopping experience and unique innovations, particularly with its automated grocery service and alternative pricing points for its “Own Brands” products.

Next, many are concerned with the return to normalcy as the COVID vaccine is distributed in the US, which could potentially take away a lot of business from Albertsons. While this is a valid point, management have shown their commitment to innovating the shopping experience to keep attracting customers even after the pandemic, and customers may now be used to shopping at Albertsons a lot more, so many may continue to do so even after the pandemic subsides.

Conclusion

Overall, Albertsons Companies' strong boost from the pandemic, as well as its innovations in the customer shopping experience, combined with its discounted price right now, make the firm an attractive value investment.

Himansh Bishnoi