Albertson’s Weaknesses Outweigh Its Strengths

Albertson's has high debt and unfavorable geographic markets

Albertson’s (NYSE:ACI) has meaningful strengths and important weaknesses. It should benefit from people around the country continuing to stay at home and the current bans on indoor dining in California, New York and New Jersey, where many of its stores are located. However, relatively high debt levels and its unfavorable geographic mix make ACI stock less appealing than one of its peers.

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Supermarkets’ Pandemic Surge and Albertsons’ Other Strengths

With tens of millions of Americans avoiding eating at restaurants, grocery chains have done exceptionally well in recent months. Albertson’s is no exception; the company reported that its identical store sales jumped 34% year-over-year in the first six weeks of fiscal 2020. (Albertson’s fiscal year starts in March.)

However, with fear of the virus decreasing and outdoor dining allowed in most areas, the company’s sales are not going to continue climbing as quickly as they did at the beginning of the pandemic. Moreover, some of the areas in which Albertson’s has a significant presence, including Texas and Washington state, are allowing indoor dining.

In the early days of the pandemic, I believe that many Americans were probably too scared to go to the drive-in windows of fast food restaurants; that’s probably not the case anymore. As a result, many cash-strapped Americans who would only get their food delivered to them from grocery stores previously will now return to the delivery windows of fast food chains like McDonald’s (NYSE:MCD) and Yum! Brands’ (NYSE:YUM) Taco Bell.

The extent to which grocery chains’ sales growth are decelerating could surprise some investors who expect the trends from March. April, and May to largely continue.

But returning to Albertsons’ strengths, the company “has invested heavily in its online and delivery capabilities,” according to a Seeking Alpha columnist. Additionally, partnering with Instacart, Grubhub (NYSE:GRUB), and Uber’s (NYSE:UBER) Uber Eats, Albertson’s allows consumers to have their groceries delivered in one or two hours.

That option, available in nearly 90% of the grocery chain’s locations, is certainly convenient and makes buying groceries almost as fast as ordering food from a restaurant. I think it’s a great idea.

Finally, Albertson’s should benefit from the fact that it owns more than 1,700 pharmacies. As I pointed out in a previous column on Rite Aid (NYSE:RAD), in the early days of the pandemic, drug stores benefited from strong demand for cleaning items, over-the-counter medicine and toilet paper, as well as reduced competition from stores that closed down. Rite Aid reported much stronger-than-expected first-quarter results last month.

Although the drug stores’ positive catalysts have likely moderated in recent weeks, I think that they will continue to be factors to some degree for the next few months.

Factors That Reduce the Appeal of ACI Stock

On the negative side, Albertson’s has relatively high net debt of $14.28 billion. Further, its current ratio is 0.97, indicating that it may not have much financial flexibility in the near term. And private equity firms, which are known for being stingy when it comes to spending, still own about 48.5% of the company.

As a result, Albertson’s may not make important investments in e-commerce and technology going forward.

Indeed, I was surprised to read that curbside pick-up is now only available in about 650 of the company’s 2,252 stores. Further, Albertson’s ability to benefit from mergers and acquisitions could be limited due to its spending constraints.

Finally, the geographic locations of Albertsons’ stores seem to be unfavorable. The majority of its stores appear to be located in New York, New Jersey, Oregon, Washington state, and Illinois. All of those states are likely to be hurt by a number of related trends in the coming years, including increasing crime in urban areas, accelerated fleeing from states and cities with high tax rates, and the work-from-home phenomenon.

These trends could lead to meaningful population decreases and declining average incomes in many of the markets in which Albertson’s has the most stores. Of course, those developments would hurt Albertson’s top and bottom lines.

Kroger Seems Like a Better Option

Kroger’s (NYSE:KR) net debt is slightly below $18 billion. But its current ratio, at 0.83, is meaningfully better than Albertsons’ 0.97, indicating that it has more money to spend in the near term. Further, Kroger is not run by private equity firms that tend to be stingy, and it has launched many technological initiatives in recent years.

Moreover, although Kroger also has many stores in California, it also has a large number of stores in Ohio, Texas, Georgia, and many other southern and midwestern states. In general, those states should be less affected by the trends I described above than the states in which the majority of Albertsons’ stores are located.

The Bottom Line on ACI Stock

Albertson’s does have its strengths. But because Kroger’s geographic markets are superior to those of Albertson, while Kroger is much more likely to spend money on improving its technology, I recommend that investors looking for a supermarket play buy Kroger’s shares instead of those of Albertson’s.

As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has written articles about U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful, contrarian picks have been Roku, solar stocks, and Plug Power. You can reach him on StockTwits at @larryramer.

 


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