In its first quarterly report since ending its merger with Kroger (KR, Financial), Albertsons (ACI, Financial) reported strong bottom-line results and slightly increased its FY25 (Feb) adjusted EPS outlook. This reflects ongoing productivity improvements. The company achieved identical sales growth of +2.0% in Q3 (Nov), meeting expectations. However, ACI lowered the high end of its FY25 comp forecast from +1.8-2.2% to +1.8-2.0%, citing a slowdown in the food and beverage sector during the holiday season, a critical time that is hard to recover from later.
With the merger off the table, ACI is focusing on competing in a tough market dominated by mass merchants like Walmart (WMT, Financial) and Costco (COST, Financial). In December, ACI emphasized its Customer for Life strategy, targeting at least +2% identical sales growth and adjusted EBITDA growth that surpasses identical sales. The company also announced a $2.0 billion share repurchase program and increased its dividend by 25%.
Key to the Customer for Life strategy is ACI's digital platforms, including e-commerce, which now accounts for over 7% of grocery revenue. This growth is driven by enhancements in its mobile app and improvements in drive-up-and-go and home delivery services. ACI's loyalty program saw a 15% year-over-year increase in Q3, reaching 44.3 million members. Pharmacy and health platforms have also contributed, with sales penetration exceeding 11% of total annual revenues, supported by core script growth like GLP-1s and immunizations.
In Q3, ACI's focus on these areas resulted in a 23% increase in digital sales and a 13% rise in pharmacy sales year-over-year, boosting total revenue by 1.2% to $18.77 billion. However, gross margins decreased by 27 basis points year-over-year to 27.9%, as pharmacy and grocery pickup and delivery services typically have lower margins.
Despite these challenges, productivity improvements helped offset the increased costs associated with digital sales growth. ACI has been modernizing operations, including cloud migration, new pricing and promotional tools, expanding self-checkout kiosks, and updating supply chain systems. These efforts allowed ACI to raise its profitability outlook for the year, even as it trimmed its identical sales growth forecast.
ACI is navigating the national grocery market independently after parting ways with KR during a challenging economic climate. Consumer spending may prevent rapid improvements in identical sales growth trends and could lead to quarterly volatility. While ACI's Customer for Life strategy, which mirrors digital initiatives of competitors like WMT and KR, is promising, a cautious, wait-and-see approach might be advisable.
