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Section 1: DRS/A

DRS/A
Table of Contents

Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

As confidentially submitted with the Securities and Exchange Commission on January 16, 2020.

This draft registration statement has not been publicly filed with the Securities and Exchange Commission and all information herein remains strictly confidential.

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Albertsons Companies, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   5411   47-4376911
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

250 Parkcenter Blvd.

Boise, ID 83706

(208) 395-6200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Robert A. Gordon, Esq.

Executive Vice President and General Counsel

Albertsons Companies, Inc.

250 Parkcenter Blvd.

Boise, ID 83706

(208) 395-6200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Stuart D. Freedman, Esq.

Antonio L. Diaz-Albertini, Esq.

Schulte Roth & Zabel LLP

919 Third Avenue

New York, NY 10022

Phone: (212) 756-2000

Fax: (212) 593-5955

 

William J. Miller, Esq.

Cahill Gordon & Reindel LLP

80 Pine Street

New York, NY 10005

Phone: (212) 701-3000

Fax: (212) 378-2500

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate
Offering Price(1)(2)

 

Amount of

Registration

Fee(3)(4)

Common Stock, par value $0.01 per share

  $               $            

Series A mandatory convertible preferred stock, par value $0.01 per share (5)

  $               $            

Common Stock, par value $0.01 per share (6)

  $               $            

 

 

(1)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”).

(2)

Includes the aggregate offering price of additional shares that the underwriters have the option to purchase from the registrant.

(3)

Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

(4)

An aggregate registration fee of $11,620 in respect of shares of the registrant’s common stock was previously paid on July 8, 2015 in connection with the registration statement on Form S-1 (No. 333-205546). Additionally, an aggregate registration fee of $202,188 in respect of shares of the registrant’s common stock was previously paid on September 25, 2015 in connection with Pre-Effective Amendment No. 2 to the registration statement on Form S-1 (No. 333-205546). Additionally, an aggregate registration fee of $13,091 in respect of shares of the registrant’s common stock was previously paid on October 2, 2015 in connection with Pre-Effective Amendment No. 3 to the registration statement on Form S-1 (No. 333-205546). Thus, the aggregate filing fee associated with the registrant in connection with the registration statement on Form S-1 (No. 333-205546) was $226,899. The registrant withdrew the registration statement on Form S-1 (No. 333-205546) by filing a Form RW on April 6, 2018. The withdrawn registration statement on Form S-1 (No. 333-205546) was not declared effective, and no securities were sold thereunder. Pursuant to Rule 457(p), the registrant utilized $225,641 previously paid in connection with the withdrawn registration statement on Form S-1 to offset the filing fee in respect of shares of the registrant’s common stock in connection with the registration statement on Form S-4 (No. 333-224169) filed with the Securities and Exchange Commission on April 6, 2018. The registrant terminated the offering and, on August 9, 2018, filed a Post-Effective Amendment No. 1 to Form S-4 (No. 333-224169), which Post-Effective Amendment No. 1 to Form S-4 was declared effective on August 14, 2018, to deregister any and all securities registered but unsold or otherwise unissued under the registration statement on Form S-4. Pursuant to Rule 457(p), the registrant hereby offsets $226,899 of the filing fee previously paid in connection with the withdrawn registration statement on Form S-1, of which $225,641 was used to offset the filing fee paid in connection with the terminated offering pursuant to the registration statement on Form S-4, against the filing fee for this registration statement on Form S-1.


Table of Contents

Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

(5)

In accordance with Rule 457(i) under the Securities Act, this registration statement also registers the shares of our common stock that are initially issuable upon conversion of the Series A preferred stock registered hereby. The number of shares of our common stock issuable upon such conversion is subject to adjustment upon the occurrence of certain events described herein and will vary based on the public offering price of the common stock registered hereby. Pursuant to Rule 416 under the Securities Act, the number of shares of our common stock to be registered includes an indeterminable number of shares of common stock that may become issuable upon conversion of the Series A preferred stock as a result of such adjustments.

(6)

This registration statement also registers shares of common stock that may be issued as dividends on the Series A preferred stock in accordance with the terms thereof.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


Table of Contents

Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

EXPLANATORY NOTE

This Registration Statement contains a prospectus relating to an offering of shares of our common stock (for purposes of this Explanatory Note, the Common Stock Prospectus), together with separate prospectus pages relating to an offering of shares of our Series A preferred stock (for purposes of this Explanatory Note, the Series A Preferred Stock Prospectus). The complete Common Stock Prospectus follows immediately. Following the Common Stock Prospectus are the following alternative and additional pages for the Series A Preferred Stock Prospectus:

 

   

front and back cover pages, which will replace the front and back cover pages of the Common Stock Prospectus;

 

   

pages for the “Table of Contents” section, which will replace the “Table of Contents” section of the Common Stock Prospectus;

 

   

pages for the “Prospectus Summary—The Offering” section, which will replace the “Prospectus Summary—The Offering” section of the Common Stock Prospectus;

 

   

pages for the “Risk Factors—Risks Related to this Offering and Owning Our Series A Preferred Stock and Common Stock” section, which will replace the “Risk Factors—Risks Related to this Offering and Owning Our Common Stock” section of the Common Stock Prospectus;

 

   

pages for the “Description of Series A Preferred Stock” section, which will replace the “Concurrent Offering of Series A Preferred Stock” section of the Common Stock Prospectus;

 

   

pages for the “Material U.S. Federal Income Tax Consequences to Holders of Our Series A Mandatory Convertible Preferred Stock” section, which will replace the “Material U.S. Federal Income Tax Consequences to Non-U.S. Holders of Our Common Stock” section of the Common Stock Prospectus; and

 

   

pages for the “Underwriting” section, which will replace the “Underwriting” section of the Common Stock Prospectus.

In addition, the following disclosures contained within the Common Stock Prospectus will be replaced in the Series A Preferred Stock Prospectus as follows:

 

   

references to “this offering” contained in “Explanatory Note,” “Prospectus Summary—Our Corporate Structure,” “Prospectus Summary—Our Sponsors,” “Use of Proceeds,” “Capitalization,” “Dilution,” “Management,” “Certain Relationships and Related Party Transactions,” “Principal and Selling Stockholders,” “Description of Capital Stock” and “Shares Eligible for Future Sale,” “Description of Indebtedness,” and “Where You Can Find Additional Information” of the Common Stock Prospectus will be replaced with references to “the concurrent initial public offering of our common stock” in the Series A Preferred Stock Prospectus;

 

   

references to “common stock” or “our common stock” contained in the first paragraph under “Prospectus Summary,” “Prospectus Summary—Risks Related to Our Business and This Offering,” in the first paragraph under “Risk Factors,” “Legal Matters” and “Where You Can Find Additional Information” of the Common Stock Prospectus will be replaced with a reference to “Series A preferred stock” in the Series A Preferred Stock Prospectus;

 

   

references to “on the cover page of this prospectus” contained in “Prospectus Summary—Our Corporate Structure,” “Prospectus Summary—Our Sponsors,” “Principal and Selling Stockholders,” and “Description of Capital Stock” of the Common Stock Prospectus will be replaced with references to “on the cover page of the prospectus relating to the concurrent initial public offering of our common stock” in the Series A Preferred Stock Prospectus;


Table of Contents

Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

   

references to “the offering of Series A preferred stock” or “the Series A preferred stock offering” contained in “Prospectus Summary—Our Sponsors,” “Use of Proceeds,” “Capitalization,” “Dilution,” “Certain Relationships and Related Party Transactions,” “Description of Capital Stock,” and “Shares Eligible for Future Sale” of the Common Stock Prospectus will be replaced with references to “this offering” in the Series A Preferred Stock Prospectus;

 

   

the reference to “—Risks Related to this Offering and Owning Our Common Stock—” contained in the last line of the section titled “Prospectus Summary—Our Sponsors” of the Common Stock Prospectus will be replaced with a reference to “—Risks Related to this Offering and Owning of Our Series A Preferred Stock and Common Stock—” in the Series A Preferred Stock Prospectus;

 

   

the first paragraph under “Use of Proceeds” of the Common Stock Prospectus will be removed from the Series A Preferred Stock Prospectus;

 

   

the reference to “—Risks Related to this Offering and Owning Our Common Stock—” contained in the second paragraph of “Dividend Policy” of the Common Stock Prospectus will be replaced with a reference to “—Risks Related to this Offering and Owning of Our Series A Preferred Stock and Common Stock—” in the Series A Preferred Stock Prospectus;

 

   

the section titled “Principal and Selling Stockholders” of the Common Stock Prospectus will be renamed the “Principal Stockholders” in the Series A Preferred Stock Prospectus; and

 

   

the reference to “Concurrent Offering of Series A Preferred Stock” contained in “Description of Capital Stock—Preferred Stock” of the Common Stock Prospectus will be replaced with a reference to “Description of Series A Preferred Stock” in the Series A Preferred Stock Prospectus.

Each of the complete Common Stock Prospectus and Series A Preferred Stock Prospectus will be filed with the Securities and Exchange Commission in accordance with Rule 424 under the Securities Act of 1933, as amended. The closing of the offering of common stock is conditioned upon the closing of the offering of Series A preferred stock and the closing of the offering of Series A preferred stock is conditioned upon the closing of the offering of common stock.


Table of Contents

Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated                    , 2020.

         Shares

 

 

LOGO

Albertsons Companies, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Albertsons Companies, Inc. The selling stockholders named in this prospectus are selling                shares of our common stock. All of the shares of common stock are being sold by the selling stockholders. We will not receive any of the proceeds from the sale of common stock by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $                and $                . We will apply to list the common stock on the New York Stock Exchange, or NYSE, under the symbol “                .”

Concurrently with this offering, we are also making a public offering of                  shares of our         % Series A mandatory convertible preferred stock, $0.01 par value (“Series A preferred stock”). In that offering, we have granted the underwriters an option to purchase up to an additional                  shares of Series A preferred stock to cover over-allotments. We cannot assure you that the offering of Series A preferred stock will be completed or, if completed, on what terms it will be completed. The closing of this offering is conditioned upon the closing of the offering of Series A preferred stock and the closing of our offering of Series A preferred stock is conditioned upon the closing of this offering.

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” on page 21 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $        $    

Underwriting discounts and commissions(1)

   $        $    

Proceeds to selling stockholders(1)

   $                    $                

 

(1)

See “Underwriting” for additional information regarding underwriting compensation.

The underwriters may also purchase up to an additional                shares of common stock from the selling stockholders, at the initial public offering price, less the underwriting discount and commissions, within 30 days from the date of this prospectus. We will not receive any of the proceeds from the sale of common stock by the selling stockholders in this offering, including from any exercise by the underwriters of their option to purchase additional common stock.

The underwriters expect to deliver the shares against payment on or about                , 2020.

 

 

 

The date of this prospectus is                    , 2020.


Table of Contents

Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

LOGO


Table of Contents

Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

TABLE OF CONTENTS

 

LETTER FROM VIVEK SANKARAN, PRESIDENT & CHIEF EXECUTIVE OFFICER

     vi  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     21  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     44  

USE OF PROCEEDS

     46  

DIVIDEND POLICY

     47  

CAPITALIZATION

     48  

DILUTION

     49  

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     51  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     52  

BUSINESS

     79  

MANAGEMENT

     97  

EXECUTIVE COMPENSATION

     108  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     128  

PRINCIPAL AND SELLING STOCKHOLDERS

     133  

CONCURRENT OFFERING OF SERIES A PREFERRED STOCK

     136  

DESCRIPTION OF CAPITAL STOCK

     140  

SHARES ELIGIBLE FOR FUTURE SALE

     145  

DESCRIPTION OF INDEBTEDNESS

     150  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK

     159  

UNDERWRITING

     164  

LEGAL MATTERS

     170  

EXPERTS

     170  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     170  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

Until                , 2020 (25 days after the date of this prospectus), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Unless indicated otherwise, the information included in this prospectus assumes that (i) the shares of common stock to be sold in this offering are sold at $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus and (ii) all shares offered by the selling stockholders in this offering are sold (other than pursuant to the underwriters’ option to purchase additional shares described herein).

 

 

We and the selling stockholders have not, and the underwriters have not, authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The selling stockholders and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

 

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Table of Contents

Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

DEFINITIONS

Unless otherwise indicated or as the context otherwise requires, a reference in this prospectus to:

 

   

“ACI” refers to Albertsons Companies, Inc., a Delaware corporation;

 

   

“ACI Institutional Investors” refers to Klaff Realty, L.P., Schottenstein Stores Corp., Lubert-Adler Partners, L.P. and Kimco Realty Corporation, and each of their respective controlled affiliates and investment funds;

 

   

“Albertsons” refers to Albertson’s LLC, a Delaware limited liability company and a wholly-owned subsidiary of ACI;

 

   

“Cerberus” refers to Cerberus Capital Management, L.P., a Delaware limited partnership, and investment funds and accounts managed by it and its affiliates;

 

   

“Code” refers to the Internal Revenue Code of 1986, as amended;

 

   

“Exchange Act” refers to the U.S. Securities Exchange Act of 1934, as amended;

 

   

“GAAP” refers to accounting principles generally accepted in the United States of America;

 

   

“NALP” refers to New Albertsons L.P., a Delaware limited partnership and a wholly-owned subsidiary of ACI;

 

   

“Safeway” refers to Safeway Inc., a Delaware corporation and a wholly-owned subsidiary of ACI;

 

   

“SEC” refers to the Securities and Exchange Commission;

 

   

“Securities Act” refers to the U.S. Securities Act of 1933, as amended;

 

   

“Sponsors” refers to Cerberus, the ACI Institutional Investors and their respective controlled affiliates and investment funds; and

 

   

“we,” “our” and “us” refers to ACI and its direct or indirect subsidiaries.

EXPLANATORY NOTE

ACI is a Delaware corporation. AB Acquisition LLC (“AB Acquisition”) is a Delaware limited liability company. ACI was formed for the purpose of reorganizing the organizational structure of AB Acquisition and its direct and indirect consolidated subsidiaries. Prior to December 3, 2017, ACI had no material assets or operations. On December 3, 2017, Albertsons Companies, LLC, a Delaware limited liability company, and its parent, AB Acquisition, completed a reorganization of their legal entity structure whereby the existing equityholders of AB Acquisition each contributed their equity interests in AB Acquisition to Albertsons Investor Holdings LLC (“Albertsons Investor”) or KIM ACI, LLC (“KIM ACI”). In exchange, equityholders received a proportionate share of units in Albertsons Investor and KIM ACI, respectively. Albertsons Investor and KIM ACI then contributed all of the equity interests they received to ACI in exchange for common stock issued by ACI. As a result, Albertsons Investor and KIM ACI became the parents of ACI, owning all of the outstanding common stock of ACI, with AB Acquisition and its subsidiary, Albertsons Companies, LLC, becoming wholly-owned subsidiaries of ACI. On February 25, 2018, Albertsons Companies, LLC, merged with and into ACI, with ACI as the surviving corporation (the “ACI Reorganization Transactions”). Prior to February 25, 2018, substantially all of the assets and operations of ACI were those of its subsidiary, Albertsons Companies, LLC. In connection with, and prior to the closing of, this offering, Albertsons Investor and KIM ACI will distribute all common stock of ACI held by them to their respective equityholders (the “Distribution”) other than the              shares that we expect to repurchase from them using the proceeds of the concurrent offering of Series A preferred stock as described under “Use of Proceeds”. As a result, following the Distribution and the repurchase, Albertsons Investor and KIM ACI will no longer be the stockholders of ACI.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

BASIS OF PRESENTATION

Except as otherwise noted herein, the consolidated financial statements and consolidated financial data included in this prospectus are those of ACI and its consolidated subsidiaries.

We use a 52 or 53 week fiscal year ending on the last Saturday in February each year. Our first quarter consists of 16 weeks, and our second, third and fourth quarters generally consist of 12 weeks. For ease of reference, unless the context otherwise indicates, we identify our fiscal years in this prospectus by reference to the calendar year of the first day of such fiscal year. The fiscal years ended February 23, 2019 (“fiscal 2018”), February 24, 2018 (“fiscal 2017”), February 25, 2017 (“fiscal 2016”) and February 27, 2016 (“fiscal 2015”) included and the fiscal years ending February 27, 2021 (“fiscal 2020”), February 26, 2022 (“fiscal 2021”) and February 25, 2023 (“fiscal 2022”) will include 52 weeks. The fiscal year ended February 28, 2015 (“fiscal 2014”) consisted of and the fiscal year ending February 29, 2020 (“fiscal 2019”) will consist of 53 weeks.

IDENTICAL SALES

As used in this prospectus, the term “identical sales” includes stores operating during the same period in both the current fiscal year and the prior fiscal year, comparing sales on a daily basis. Direct to consumer internet sales are included in identical sales and fuel sales are excluded from identical sales. Fiscal 2019 is compared with fiscal 2018, fiscal 2018 is compared with fiscal 2017, fiscal 2017 is compared with fiscal 2016, fiscal 2016 is compared with fiscal 2015 and fiscal 2015 is compared with fiscal 2014. On an actual basis, acquired stores become identical on the one-year anniversary date of their acquisition. Stores that are open during remodeling are included in identical sales.

TRADEMARKS AND TRADE NAMES

This prospectus includes certain of ACI’s trademarks and trade names, which are protected under applicable intellectual property laws and are the property of ACI and its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of ACI by, these other parties.

MARKET, INDUSTRY AND OTHER DATA AND APPRAISALS

This prospectus includes market and industry data and outlook, which are based on publicly available information, reports from government agencies, reports by market research firms and/or our own estimates based on our management’s knowledge of and experience in the markets and businesses in which we operate. We believe this information to be reasonable based on the information available to us as of the date of this prospectus. However, we have not independently verified market and industry data from third-party sources. Historical information regarding supermarket and grocery industry revenues, including online grocery revenues, was obtained from Euromonitor and IBISWorld. Forecasts regarding Food-at-Home inflation were obtained from the U.S. Department of Agriculture. Information with respect to our market share was obtained from Nielsen ACView All Outlets Combined (Food, Mass and Dollar but excluding Drug). U.S. Gross Domestic Product (GDP) was obtained from the Bureau of Economic Analysis. This information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

information cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size. In addition, market conditions, customer preferences and the competitive landscape can and do change significantly. As a result, you should be aware that the market and industry data included in this prospectus and our estimates and beliefs based on such data may not be reliable. We have not verified the accuracy of such industry and market data.

In addition, the market value reported in the appraisals of the properties described herein are an estimate of value, as of the date stated in each appraisal. The appraisals were subject to the following assumption: the estimate of market value as is, is based on the assumption that the existing occupant/user remains in occupancy in the foreseeable future, commensurate with the typical tenure of a user of this type, and is paying market rent as of the effective date of appraisal. Changes since the appraisal date in external and market factors or in the property itself can significantly affect the conclusions. As an opinion, the reported values are not necessarily a measure of current market value and may not reflect the amount which would be received if the property were sold today. While we and the underwriters are not aware of any misstatements regarding any appraisals, market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the sections entitled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.

NON-GAAP FINANCIAL MEASURES

As used in this prospectus, (i) EBITDA is defined as GAAP earnings (net income (loss)) before interest, income taxes, depreciation and amortization, (ii) Adjusted EBITDA is defined as GAAP earnings (net income (loss)) before interest, income taxes, depreciation, and amortization, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance, (iii) Adjusted Net Income is defined as GAAP net income (loss) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance, (iv) Adjusted Free Cash Flow is defined as Adjusted EBITDA less capital expenditures, (v) Net Debt is defined as total debt (which includes finance lease obligations and is net of deferred financing costs and original issue discount) minus cash and cash equivalents and (vi) Net Debt Ratio is defined as the ratio of Net Debt to Adjusted EBITDA for the rolling 52 or 53 week period.

EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted Free Cash Flow, Net Debt and Net Debt Ratio (collectively, the “Non-GAAP Measures”) are performance measures that provide supplemental information management believes is useful to analysts and investors to evaluate ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe the Non-GAAP Measures, as applicable, provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. We also use Adjusted EBITDA, as further adjusted for additional items defined in our debt instruments, for board of director and bank compliance reporting. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, see “Prospectus Summary—Summary Consolidated Historical Financial and Other Data.”

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

Non-GAAP Measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our operating results or cash flows as reported under GAAP. Some of these limitations are:

 

   

Non-GAAP Measures do not reflect certain one-time or non-recurring cash costs to achieve anticipated synergies;

 

   

Non-GAAP Measures do not reflect changes in, or cash requirements for, our working capital needs;

 

   

EBITDA and Adjusted EBITDA do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

 

   

EBITDA and Adjusted EBITDA do not reflect income taxes or the cash payments related to income tax obligations;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA and, with respect to acquired intangible assets, Adjusted Net Income, do not reflect any cash requirements for such replacements;

 

   

Non-GAAP Measures are adjusted for certain non-recurring and non-cash income or expense items that are reflected in our statements of operations;

 

   

Non-GAAP Measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; and

 

   

Other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, Non-GAAP Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes. See our consolidated financial statements included elsewhere in this prospectus.

 

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LETTER FROM VIVEK SANKARAN, PRESIDENT & CHIEF EXECUTIVE OFFICER

Dear Prospective Stockholder,

In 1939, Joe Albertson opened the first Albertsons store at 16th and State streets in Boise, Idaho. The store featured welcoming associates, great products and great value. Since then, much has changed in the way we shop for and consume food; but at Albertsons, our purpose and values have not wavered. We remain committed to making every day better for our customers, our communities and our associates.

When I joined Albertsons from PepsiCo in April of 2019, I found a company that was well-positioned to benefit from changes affecting shopping and eating habits. The banners that make up Albertsons have earned customer loyalty over decades. Yet, in many ways, our Company is only a few years old. Since the Safeway merger in 2015, we have successfully completed the integration of our stores, supply chain and technology platforms. We have invested in capabilities allowing us to serve the customer wherever, whenever and however they choose to shop. We now benefit from one of the industry’s largest networks of First-and-Main, food retail locations with leading market shares in valuable and growing markets. It allows us to serve our customers locally, while delivering the advantages of national scale.

All of these elements have come together in a corporate identity that is customer focused to make the shopping experience Easy, Exciting and Friendly. We have developed a robust strategic framework to support this identity, resting on the four pillars of Growth, Productivity, Technology and Talent and Culture. These pillars equip us to win in our sector. I believe we can deliver attractive and improving financial performance, grow market share and increase customer lifetime value through more engaged relationships across our omni-channel platform and loyalty ecosystem.

Our Goal & Identity

Our goal is to drive deep and lasting relationships with our customers. To achieve our goal, we offer a unique customer shopping experience that is Easy, Exciting and Friendly – in our stores, at curbside, online and on mobile devices.

 

   

Easy: Our customers expect convenience and flexibility through a frictionless and consistent shopping experience across channels. We have well-thought-out initiatives underway that seek to make the Albertsons shopping experience easier and more convenient for our existing customers and appealing to new customers. We are leveraging our exceptional store footprint to provide a full suite of omni-channel offerings, including Drive Up & Go curbside pickup and home delivery. We are working to make the in-store shopping experience quicker and easier through initiatives such as faster checkout and improved in-store navigation. These capabilities are further enhanced through targeted technology investments and partnerships like the ones we have announced with Glympse for location sharing of store pickup and home delivery orders and Takeoff Technologies for automated micro-fulfillment to support our eCommerce efforts. We also seek to simplify the many food-related choices our customers face daily by offering efficient, comprehensive solutions such as meal planning, shopping list creation and prepared foods.

 

   

Exciting: We have earned our customers’ loyalty by creating an exciting destination shopping experience. We provide many unique and high quality products that are locally tailored to the communities we serve. We are proud to be industry leaders in fresh, natural and organic offerings. Our best-in-class fresh offerings encompass value-added organic, local and seasonal products. Examples include daily fresh-cut fruit and vegetables, customized meat cuts and seafood varieties, made-from-scratch bakery items, convenient prepared meal solutions, deli offerings and beautiful floral designs. In many locations, we also provide attractive specialty offerings, including curated wine selections and artisan cheese shops. We feature a localized

 

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assortment that is customized to individual markets, like our Santa Monica Seafood in Southern California and our Hatch Chile salsa in Arizona. We continue to innovate with our Own Brands – purchased by 9 out of 10 Albertsons shoppers – to drive customer engagement and loyalty as well as enhance profitability. We plan to launch approximately 800 new Own Brands items annually over the next few years and are proud to have built one of the largest USDA-certified organic brands, O Organics, which is one of our four Own Brands that exceed $1 billion of sales annually.

 

   

Friendly: We believe that the frontline service offered by Albertsons’ associates can make our shopping experience truly differentiated. Since joining the Company, I have been deeply impressed with our culture of service and customer appreciation that is embedded in Albertsons’ DNA. We encourage our associates to be genuine, friendly and welcoming and to provide education and value to our customers each day. Going forward, we seek to strengthen this competitive advantage by adding automation in non-customer-facing areas of our stores, freeing up our associates to do more of what they love: serving shoppers and providing a great customer experience.

Our Strategic Framework

We support our Easy, Exciting and Friendly identity through a strategy that is designed to drive sustainable growth in our business. Our strategic framework rests on four key pillars: (1) Growth; (2) Productivity; (3) Technology; and (4) Talent and Culture. Each of these pillars comprises specific, identified initiatives. We plan to grow ID sales by leveraging our core business–our stores, accelerating incremental eCommerce growth, continuing to increase the penetration of our Own Brands portfolio and increasing customer engagement and lifetime value through our extended loyalty ecosystem. We support our growth through a focus on productivity. We are working to optimize procurement and indirect spend. We are focused on delivering operational efficiencies, including shrink management, general and administrative expense discipline and labor and working capital productivity. We are also leveraging the national scale of our organization to “buy better” and create best-in-class supplier relationships. Since I joined the Company, we have developed and begun to implement specific productivity initiatives that target $1 billion of annual run-rate productivity benefits by the end of fiscal 2022 to help offset cost inflation, fund growth and drive earnings. Technology, talent and culture underpin every strategic decision we make as an organization. They accelerate our Easy, Exciting and Friendly identity and the growth and productivity we are striving for. We are modernizing our technology infrastructure to drive enhancements for our customers, store operations, merchandising and our supply chain. Ongoing technology initiatives include digitizing and automating current capabilities, leveraging data science across our merchandising, pricing and promotional strategies and training our team to be more digitally minded. Lastly, our talent and culture remain Albertsons’ greatest resource. Our friendly service and the deep community ties that we have developed, along with our nationwide loyalty ecosystem, help to drive higher customer lifetime value through increased purchase frequency, basket size, customer satisfaction and retention. We will continue to empower store-level decision makers, encourage frontline ownership and strengthen capabilities so that we remain Locally Great, Nationally Strong.

We are proud of the progress we have made over the past few years, and believe we have a long runway for growth ahead of us. At Albertsons, we are just beginning the next chapter in our rich history, and we welcome you to join us on this exciting journey.

 

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Vivek Sankaran

President & Chief Executive Officer

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus. You should also consider the matters described under the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus. Unless the context otherwise requires, the terms “ACI,” “the Company,” “we,” “us” and “our” refer to Albertsons Companies, Inc. and its consolidated subsidiaries.

 

OUR COMPANY

We are one of the largest food retailers in the United States, with 2,260 stores across 34 states and the District of Columbia. We operate 20 iconic banners with on average 85 years of operating history, including Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Jewel-Osco, Acme, Shaw’s, Star Market, United Supermarkets, Market Street and Haggen, with approximately 270,000 talented and dedicated employees who serve on average more than 33 million customers each week. Our stores operate in First-and-Main retail locations and have leading market share within attractive and growing geographies. We hold a #1 or #2 position by market share in 66% of the 121 metropolitan statistical areas (“MSAs”) in which we operate. Our portfolio of well-located, full-service stores provides the foundation of our omni-channel platform, including our rapidly growing Drive Up & Go curbside pickup, home delivery and rush delivery offerings. We seek to tailor our offerings to local demographics and preferences of the markets that we operate in. Our Locally Great, Nationally Strong operating structure empowers decision making at the local level, which we believe better serves our customers and communities, while also providing the systems, analytics and buying power afforded by an organization with national scale and more than $60 billion in annual sales.

We are focused on creating deep and lasting relationships with our customers by offering them an experience that is Easy, Exciting and Friendly – wherever, whenever and however they choose to shop. We make life Easy for our customers through a convenient and consistent shopping experience across our omni-channel network. Merchandising is at our core and we offer an Exciting and differentiated product assortment. We believe we are an industry leader in fresh, emphasizing organic, locally sourced and seasonal items as well as value-added services like daily fresh-cut fruit and vegetables, customized meat cuts and seafood varieties, made-from-scratch bakery items, prepared foods, deli and floral. We also continue to grow our innovative and distinctive Own Brands portfolio, which reached 25.6% sales penetration as of the third quarter of fiscal 2019. Our Friendly service is embedded in our culture and enables us to build deep ties with our local communities.

Our Easy, Exciting and Friendly shopping experience, coupled with our nationwide just for U, grocery and fuel rewards programs and pharmacy services, offers a differentiated value proposition to our customers. The just for U program has nearly 20 million registered loyalty households which, we believe, provides us with a comprehensive understanding of our core shoppers. These loyalty programs and our omni-channel offerings combine to form an extended loyalty ecosystem that drives increased customer lifetime value through greater purchase frequency, larger basket size and higher customer retention.

Our Company has grown through a series of transformational acquisitions over the last six years, including our merger with Safeway in 2015 which gave us the benefits of national scale. While our banners have rich histories, we are in many ways a young company. Through integration, we have



 

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implemented shared best practices in areas like merchandising and loyalty to drive customer engagement across our network. We have also integrated systems and converted stores and distribution centers to create a common platform. We believe our common platform gives us greater transparency and compatibility across our network, allowing us to better serve our customers and employees while enhancing our supply chain.

We continue to sharpen our in-store execution, increase our Own Brands penetration and expand our omni-channel and digital capabilities. We have invested substantially in our business, deploying approximately $6.8 billion of capital expenditures beginning with fiscal 2015, including the $1.5 billion we expect to spend in fiscal 2019. We used that capital to remodel existing stores, opportunistically build new stores and enhance our digital capabilities. We have also developed and begun to implement specific productivity initiatives across our business that target $1 billion of annual run-rate productivity benefits by the end of fiscal 2022 to help offset cost inflation, fund growth and drive earnings.

We have enhanced our management team, adding executives with complementary backgrounds to position us well for the future, including our President and CEO, Vivek Sankaran, who joined the Company from PepsiCo in April 2019. In fiscal 2019, we also added Chris Rupp as Chief Customer & Digital Officer and Mike Theilmann as Chief Human Resources Officer. In addition, we have internally promoted and expanded the roles of certain key members of our leadership team, including Susan Morris, our Chief Operations Officer, and Geoff White, our Chief Merchandising Officer.

Our recent operational initiatives are driving positive financial momentum. We realized strong financial performance in fiscal 2018, generating net sales of $60.5 billion, Adjusted EBITDA of $2.7 billion and Adjusted Free Cash Flow of $1.4 billion. We have achieved eight consecutive quarters of positive identical sales growth. Adjusted EBITDA grew from $2.4 billion in fiscal 2017 to $2.7 billion in fiscal 2018 and we generated a cumulative $6.3 billion in Adjusted Free Cash Flow since the start of fiscal 2015. The momentum we are experiencing gives us confidence that our Easy, Exciting and Friendly identity resonates with customers. We believe our strategic framework will enable us to continue delivering profitable growth going forward.

 

Identical Sales   Net Income ($mm)   Adj. EBITDA ($mm)
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Cumulative Adjusted Free Cash Flow (in billions)

 

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DRIVERS OF CURRENT MOMENTUM

We have achieved significant near-term momentum in our business through a number of successful and ongoing initiatives, including the following:

Sharpened In-Store Execution. We are improving in-store execution and enhancing our customer experience to drive profitable growth. We have simplified our merchandising programs, automated our front-end scheduling processes and expanded self-checkout in 435 additional stores during the first three quarters of fiscal 2019. These enhancements have been instrumental in improving store-level productivity, allowing us to increase our focus on the customer. To further enhance the customer experience, we remerchandised over 700 stores since the beginning of fiscal 2017, reallocating space to better accentuate high growth fresh categories like produce, meat and seafood, bakery, prepared foods, deli and floral. This, coupled with our robust remodel program, has also allowed us to optimize store layouts and ease shopping patterns to make things simpler for customers and employees.

Increased Own Brands Penetration. Our Own Brands portfolio has continued to contribute to identical sales growth and margin expansion. Penetration of our Own Brands has expanded over the past two years, growing from 22.3% in the first quarter of fiscal 2017 to 25.6% in the third quarter of fiscal 2019. Own Brands identical sales growth has exceeded total Company identical sales growth by at least 100 basis points for 11 straight quarters.

Leading Omni-Channel Capabilities. We have continued to enhance our capabilities to meet customer demand for convenience and flexibility. In fiscal 2017, we began to offer our Drive Up & Go curbside pickup service which is currently available in approximately 550 locations, while expanding our long-established home delivery network. We also collaborate with third parties, including Instacart, for rush delivery as well as with GrubHub and Uber Eats for delivery of our prepared and ready-to-eat offerings. We now offer home delivery services across 2,000 of our stores and 12 of the country’s top 15 MSAs by population.

Investment in Stores and Technology Capabilities. From fiscal 2015 through the end of fiscal 2019, we will have spent approximately $6.8 billion on capital expenditures, including the $1.5 billion we expect to spend in fiscal 2019. Approximately $3.8 billion of that spend contributed to completing 950 store remodels and opening 57 new stores, as well as merchandising and maintenance initiatives. We have also increased investment in digital and technology projects, including an estimated $375 million we intend to spend in fiscal 2019. These investments include upgraded pricing and promotional tools and more integrated and easy-to-use customer-facing digital applications.

Continued Focus on Productivity. With the integration of Safeway behind us, we have developed and are in the early stages of implementing a new set of clearly defined productivity initiatives that are underpinned by technology and talent. We are targeting $1 billion of annual run-rate productivity benefits by the end of fiscal 2022 to help offset cost inflation, fund growth and drive earnings. These initiatives include a focus on enhancing store and distribution center operations, leveraging scale to buy better, increasing promotional effectiveness and leveraging general and administrative costs. For example, we implemented a shrink reduction program centered on the use of technology as well as employee and manager education. As a result, we successfully reduced shrink levels by approximately 45 basis points in the first three quarters of fiscal 2019 over the first three quarters of fiscal 2017. We also believe these productivity initiatives will drive tangible improvements in our customer satisfaction and customer service scores.

 



 

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OUR COMPETITIVE STRENGTHS

We are focused on driving deep and lasting relationships with our customers by delivering an Easy, Exciting and Friendly shopping experience. We believe the following competitive strengths will help us to achieve our goal:

Robust Portfolio of Stores and Iconic Banners with Leading Market Shares. Our 2,260 stores provide us with strong local presence and leading market share in some of the most attractive and growing geographies in the country.

 

   

Well-Known Banners: Our portfolio of well-known banners has strong customer loyalty and ties within the local communities we serve. Seven of our banners have operated for more than 100 years, with an average of over 85 years across all banners.

 

   

Prime Locations: Because of our long history, many of our stores are in First-and-Main locations, providing our customers with exceptional convenience. Our owned and ground leased stores and distribution centers, which represent approximately 39% of our store and distribution base, have an aggregate appraised value of $11.2 billion.

 

   

Strong Market Share and Local Market Density: We are ranked #1 or #2 by market share in 66% of the 121 MSAs in which we operate. We believe this local market presence, coupled with brand recognition, drives repeat traffic and helps create marketing, distribution and omni-channel efficiencies that enhance our profitability.

 

   

Highly Attractive Markets: Our 20 largest MSAs by store count encompass approximately one-third of the U.S. population and approximately 45% of U.S. GDP. In 65% of the 121 MSAs in which we operate, the projected population growth over the next five years, in aggregate, exceeds the national average by over 50%.

The following illustrative map represents our regional banners and combined store network as of November 30, 2019.

 

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1 Nielsen ACView based on food markets in Company operating geographies as of calendar third quarter 2019.

 



 

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Differentiated and Exciting Merchandise Offering. Our expertise in fresh merchandising is a core strength of our Company. We create a destination shopping experience by empowering our operators with the autonomy to tailor merchandise to local and seasonal tastes and preferences so they can consistently deliver an Exciting product assortment. We have particular strength in fresh categories including produce, meat and seafood, bakery, prepared foods, deli and floral. Fresh sales accounted for over 41% of our revenue in the first three quarters of fiscal 2019, which we believe is one of the highest percentages in the industry. Our relationships with a select group of suppliers enable us to provide exciting fresh produce, giving us access to premium produce grades in terms of size, flavor, color and quality. In addition, we offer an extensive range of value-added services such as daily in-store fresh-cut fruit, in-store prepared ready-to-cook vegetables and fresh-made guacamole. In meat and seafood, we feature best-in-class full service butcher blocks that highlight custom-cut USDA Choice and Prime beef, ground chicken and pork, seasonal smoked meats like sausages and bacon, Open Nature grass-fed beef, lamb and wild-caught Alaskan salmon as well as a wide range of responsibly sourced waterfront bistro shrimp. Our bakeries feature scratch-made pastries, artisan breads, and cakes designed-to-order by trained 5 Star decorators. Our prepared foods include ready-to-eat, ready-to-heat, and ready-to-cook meal solutions that encompass everything from family favorites to a wide range of world cuisine offerings. Our fresh offerings are complemented by strong specialty assortments. These include our curated wine selections and artisan cheese shops. As our customers demand healthy options and product transparency, we have grown our natural and organic sales more than twice as fast as the rest of the store during the first three quarters of fiscal 2019, with sales penetration of 13.5% for the same period, or a 40 basis point increase versus prior year.

High-Quality Own Brands That Deliver Great Value. We believe our proprietary Own Brands portfolio is a competitive advantage, providing high-quality products to our customers at a great value. In addition, customers who buy our Own Brands products shop more frequently with us and spend more per trip, driving enhanced loyalty, higher sales and improved margin. Own Brands accounted for $12.5 billion in sales in fiscal 2018, which is more than seven times larger than the next largest consumer packaged goods company selling through our stores. Our portfolio of Own Brands targets customers across price points, from the cost-conscious positioning of Value Corner to our ultra-premium Signature Reserve brand. Four of our Own Brands (Lucerne, Signature Select, Signature Café and O Organics) exceed $1 billion in annual sales and we have more than 11,000 unique items available. We self-manufacture many high-velocity Own Brands products, including dairy and bakery items, driving better pricing for our customers. We also believe that our Own Brands team is one of the most innovative in the industry, with more than 800 new product introductions planned in fiscal 2019. Our Own Brands portfolio has a significant gross margin advantage over similar national brand products and has allowed us to drive both top-line growth and margin expansion. Sustainability is also a top priority with our Own Brands, and we are targeting all Own Brands packaging to be recyclable, reusable or industrially compostable by 2025.

 

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Integrated Omni-Channel Solutions. We provide our customers with the convenience and flexibility to shop wherever, whenever and however they choose. We have instituted a variety of programs both in store and online to maximize customer choice and convenience. We have significantly expanded our digital capabilities over the last several years. Below is a summary of our various eCommerce solutions:

Drive Up & Go

 

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•  Currently available in approximately 550 locations, with plans to grow to approximately 600 by the end of fiscal 2019 and to 1,400 locations in the next two years

 

•  Easy-to-use mobile app

 

•  Convenient, well-signed, curbside pickup

Home Delivery

 

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•  First launched home delivery services in 2001

 

•  Provide home delivery using our own “white glove” delivery service in approximately 60% of our stores

 

•  Operate over 1,000 multi-temperature delivery trucks to support home delivery growth

 

•  Successful roll out of new eCommerce website and mobile applications to all divisions

Rush Delivery

 

 

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•  Launched rush delivery in 2017 with Instacart

 

•  Delivery within one to two hours in all divisions and covering over 2,000, or nearly 90%, of our stores offered in collaboration with third parties

 

•  Partnership with Grubhub and Uber Eats adds delivery offerings for our prepared and ready-to-eat options from our stores

Strong Relationships with Loyal Customers. Our just for U loyalty program, grocery and fuel rewards and pharmacy services combined with our omni-channel offerings create an extended loyalty ecosystem that drives increased customer spend and retention. We believe bringing new and existing customers into this extended loyalty ecosystem drives higher spend and longer-term relationships, and thus increases customer lifetime value. For example, our just for U program drives basket size by delivering almost 400 million personalized promotional deals each week through a variety of digital channels; our data indicates an engaged just for U household spends approximately four times more than shoppers not participating in the program. We have grown household membership to nearly 20 million registered households during the third quarter of fiscal 2019, an increase of 25% compared to the third quarter of fiscal 2018. Our data also indicates that as our customers start engaging in eCommerce, they increase their spend with us by an average of 28%.



 

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Engagement in Enhanced Loyalty Ecosystem Increases Customer Lifetime Value

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Note: Charts above based on data from a single market division and reflect indexed annual grocery spend and lifetime value versus store-only shoppers who do not participate in our loyalty ecosystem.

1 Programs are just for U, grocery and fuel rewards, pharmacy services, Drive Up & Go and home delivery.

2 Defined as annual average gross profit multiplied by average years shopping.

Disciplined Approach to Capital Investment and Strong Adjusted Free Cash Flow and Balance Sheet. Beginning with fiscal 2015 through the end of fiscal 2019, we will have spent approximately $6.8 billion in capital expenditures through a disciplined approach. We have focused on refreshing our store base with $3.8 billion of capital expenditures on remodels, upgrades, new stores and merchandising initiatives during this period. We have also invested to enhance our digital and technology assets. We believe these investments have been instrumental in maintaining our position as a leader in the food retail industry. Our strong Adjusted Free Cash Flow profile allows us the flexibility to invest in our business. Beginning with fiscal 2015, the first year after our merger with Safeway, we have generated cumulative Adjusted Free Cash Flow of $6.3 billion. We have also reduced our outstanding Net Debt by approximately $2.9 billion since the end of fiscal 2017, decreasing our Net Debt Ratio from 4.7x to 3.0x as of the end of the third quarter of fiscal 2019.

New Best-In-Class Leadership with a Fresh Perspective. We have assembled a dynamic and experienced management team. Vivek Sankaran, our President and Chief Executive Officer, brings to our organization differentiated consumer products, retail and strategic planning experience. Vivek is supported by seasoned executives, each with over 30 years of food retail and distribution experience, including Bob Dimond, our Chief Financial Officer, Susan Morris, our Chief Operations Officer, and Geoff White, our recently appointed Chief Merchandising Officer. Geoff most recently served as President of our Own Brands team, where he grew sales penetration to 25.6% in the third quarter of fiscal 2019. In addition, in fiscal 2019, we added Chris Rupp, our Chief Customer & Digital Officer, who brings a mix of retail, eCommerce, and business innovation experience from both Amazon and Microsoft, and Mike Theilmann, our Chief Human Resources Officer, who has nearly 30 years of experience at companies including Yum and Heidrick & Struggles. These enhancements to our leadership team bring us a strong blend of new perspective and industry knowledge.

Our team believes in the power of our Locally Great, Nationally Strong approach. We empower our operators to take ownership of local merchandising and in-store execution. This enables our local managers to select the best product assortments for their communities, provide a heightened level of customer service and drive improved store performance. This localized approach has been such an important part of our heritage and success.



 

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OUR STRATEGIC FRAMEWORK

We are focused on providing our customers with an Easy, Exciting and Friendly shopping experience. We support our identity through a strategic framework that rests on four key pillars: Growth, Productivity, Technology and Talent and Culture.

Growth: We are well-positioned to accelerate the profitable growth of our business through both our stores and our broader omni-channel network:

 

   

Achieve More Identical Sales Growth From Our Stores: We seek to elevate the operational excellence that drives our store performance through intensified focus and an organization-wide effort to leverage technology.

 

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Merchandising Excellence: We strive to provide customers with an Exciting shopping experience driven by excellent quality fresh, organic and local merchandise. We plan to drive identical sales growth by expanding our fresh product offerings. We will optimize the center store departments to ensure the right product is in the right stores, including natural, organic, ethnic and value. Since 2017, we have re-merchandised more than 700 stores and plan to expand this successful program.

 

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Pricing and Promotions: We intend to leverage our local market insights, proprietary data and data analytics capabilities to optimize our pricing and promotions. We track price by product, region, and store to ensure our pricing remains competitive and at a level that provides a compelling overall value proposition to shoppers. We also use our loyalty programs to enhance our value proposition through personalized pricing and rewards to drive customer retention and build basket size.

 

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Operating Excellence: We plan to continue to improve in-store efficiency by using technology to optimize labor and improve in-stock and display execution, resulting in enhanced store productivity and customer satisfaction. A number of these initiatives are already underway. In stores where we have introduced computer-assisted ordering and production systems, for example, we have seen a meaningful uplift in sales and improved levels of in-stocks, inventory and shrink.

 

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Culture of Exceptional Service: Exceptional customer service is at the heart of our Albertsons culture. We plan to leverage in-store technology to achieve labor efficiencies through the automation of non-customer-facing tasks. We expect this effort to provide our associates more time to better serve customers, enhancing the shopping experience and driving purchase frequency, larger basket size, customer satisfaction and retention.

 

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Targeted Store Remodels: Our store base is well-invested following approximately $3.8 billion of store-related capital expenditures we will have incurred since fiscal 2015 through the end of fiscal 2019. We anticipate future store remodels will be specifically targeted to enhance our Easy, Exciting and Friendly identity and to enhance the positioning of our stores as a destination shopping experience.

 

   

Drive Incremental eCommerce Growth: We believe that eCommerce is a strong growth engine that drives incremental sales. We plan to sustain our eCommerce growth through a number of initiatives. First, we will extend our Drive Up & Go pickup service to 1,400 locations in the next two years. Additionally, we are refreshing our entire digital interface to create a more personalized, easy-to-use and fully-integrated digital experience. We are improving our mobile applications to enable more personalized rewards and services like advanced basket-building tools and product, meal and recipe recommendations. We are further integrating our digital and in-store models to better drive existing customer engagement and new customer trial for our own and third-party delivery.



 

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Accelerate Own Brand Penetration: We plan to strengthen our Own Brands portfolio and increase our Own Brands penetration from 25.6% in the third quarter of fiscal 2019 to 30%. We intend to introduce innovative items and increase merchandising and promotions in underpenetrated categories and geographies. We plan to add approximately 800 products annually to our Own Brands portfolio over the next few years.

 

   

Increase Customer Engagement and Lifetime Value: We will continue to deepen relationships with our customers to grow profitable sales. Our just for U rewards program is still new in many of our banners and we plan to increase registrations in under-penetrated markets. In markets with already-strong loyalty program participation, we have an opportunity to drive incremental engagement beyond the just for U program and into our broader loyalty ecosystem. We will also enhance our loyalty ecosystem through innovation and the addition of new programs and services that will further engage existing customers, attract new customers and drive increased customer lifetime value.

Productivity: We have a successful track record of identifying and achieving productivity targets as a means of funding growth in our business. We have developed and begun to implement specific productivity initiatives across our business that target $1 billion of annual run-rate productivity benefits by the end of fiscal 2022. This will help us to offset cost inflation, fund growth and drive earnings. Our initiatives include the following:

 

   

Enhancing Store and DC Operations: Within our stores and distribution centers, we have identified opportunities to further reduce shrink and utilize technology to automate non-customer-facing tasks and drive labor productivity. For example, we are working to roll out enhanced demand forecasting and replenishment systems to improve operating efficiency, reduce product waste and optimize labor and inventory levels. We expect to scale these opportunities across the business quickly and efficiently.

 

   

Leveraging Scale to Buy Better: We have an opportunity to leverage our national scale through advantaged and more productive supplier partnerships. We will simplify the way we work with our suppliers, planning further in advance and executing coordinated, national buying across all our divisions. We have also identified indirect spend as an area of further cost savings. We plan to further harness our scale to purchase items and services such as packaging and store maintenance with additional volume discounts.

 

   

Increasing Promotional Effectiveness: Promotions both in store and online are a key component of our customer value proposition. We plan to leverage data science and advanced analytics to drive more effective promotions and increase sales. For example, we intend to introduce simulation tools enabled by machine learning and pattern recognition software that will allow our merchants to more efficiently forecast promotional performance as well as enhance collaboration with our vendors.

 

   

Leveraging G&A: Additional areas of cost savings will come from more efficiently leveraging corporate overhead. For example, continuing to modernize our IT infrastructure will make our technology stack more effective, flexible and cost effective and increase our ability to roll out technology tools across the Company.

Technology: Technology underpins everything we do and is a crucial enabler for our strategy for growth and productivity. Since 2015, we have invested $1.25 billion in technology. We are continuing to modernize the key elements of our firm-wide technology infrastructure, including the following core efforts: transition to the Cloud, modernize edge computing and network infrastructure, expand our enterprise data model in the Cloud, use robotics and process automation, leverage data science and



 

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artificial intelligence and continually enhance security. We believe that this modern infrastructure will provide a foundation to accelerate technology-based enhancements for our customers, store operations, merchandising and supply chain:

 

   

Customers: We are leveraging technology to improve the customer experience by making it more integrated, personalized and easy to use in our stores, at curbside, online and on mobile devices. We will continue to innovate on our customer-facing mobile applications, reduce friction in our check-out processes and improve our at-store pickup experience. For example, we are partnering with Adobe to provide an artificial intelligence-powered solution to personalize the website and mobile application experience. This will enable the customer to see personalized products and information as they browse homepages, categories and product detail pages.

 

   

Store Operations: We are continuing to leverage technology to improve store operations and optimize labor through task simplification and automation. Demand forecasting and replenishment tools such as computer-assisted ordering and production systems should sharpen our ability to predict store demand and track perpetual inventory, helping us to reduce out-of-stocks, inventory, and shrink.

Additionally, we have begun to introduce in-store micro-fulfilment centers (MFCs) to provide enhanced capabilities for last-mile delivery that leverage our well-located store base as the distribution point for online orders. Early learnings from our partnership with Takeoff Technologies indicate improved picking efficiency by more than four times compared to in-store services as well as better inventory management and on-time delivery. We plan to have 10 more MFCs operating within the next two years, in addition to the two operating today.

 

   

Merchandising: We plan to introduce a technology-enabled, data-driven approach to improving our product assortment and optimizing pricing and promotions. These new advanced analytics and simulation tools will incorporate machine learning and pattern recognition to drive promotional effectiveness and productivity while automating the pricing and inventory tracking processes. We will continue to improve our merchants’ access to rich information on products, customers and suppliers provided by our data analytics capabilities so they are able to make smarter decisions on pricing, promotions and assortment in each local market.

 

   

Supply Chain: Our enhanced technology infrastructure will improve our supply chain function by enabling more efficient demand forecasting, introducing robotics and process automation and data science analytics that will be integrated with our enterprise data model. These elements will work to drive labor productivity and speed efficiencies, while reducing inventory and shrink.

Talent and Culture: Our service-oriented frontline associates are at the heart of our Company. As part of our Locally Great, Nationally Strong approach, we will continue to invest in and instill an ownership mentality in our store operators.

Across all segments of our business, our associates seek to deliver for our customers, our community, and our Company through their sales and service focus. We seek to celebrate the diversity and inclusiveness of our workforce and focus on improving our communities through sustainability and charitable activities that are an essential part of our business. As we leverage our national scale for efficiencies, we will continue to empower store-level decision makers to take care of our customers and encourage frontline responsibility. We will also continue to nurture an ownership mindset in our stores and ensure that the interests of those who directly manage our customer relationships on a daily basis are aligned with those of our stockholders.



 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

RISKS RELATED TO OUR BUSINESS AND THIS OFFERING

An investment in our common stock involves a high degree of risk. You should carefully consider the risks highlighted in the section entitled “Risk Factors” following this prospectus summary before making an investment decision. These risks include, among others, the following:

 

   

the competitive nature of the industry in which we conduct our business;

 

   

general business and economic conditions, including the rate of inflation or deflation, consumer spending levels, population, employment and job growth and/or losses in our market;

 

   

our ability to increase identical sales, expand our Own Brands, maintain or improve operating margins, revenue and revenue growth rate, control or reduce costs, improve buying practices and control shrink;

 

   

our ability to expand or grow our home delivery network and Drive Up & Go curbside pickup services;

 

   

pricing pressures and competitive factors, which could include pricing strategies, store openings, remodels or acquisitions by our competitors;

 

   

labor costs, including benefit plan costs and severance payments, or labor disputes that may arise from time to time and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future;

 

   

disruptions in our manufacturing facilities’ or distribution centers’ operations, disruption of significant supplier relationships, or disruptions to our produce or product supply chains;

 

   

results of any ongoing litigation in which we are involved or any litigation in which we may become involved;

 

   

data privacy and security, the failure of our IT systems, or maintaining, expanding or upgrading existing systems or implementing new systems;

 

   

the effects of government regulation and legislation, including healthcare reform;

 

   

our ability to raise additional capital to finance the growth of our business, including to fund acquisitions;

 

   

our ability to service our debt obligations, and restrictions in our debt agreements;

 

   

the impact of private and public third-party payers’ continued reduction in prescription drug reimbursements and the ongoing efforts to limit participation in payor networks, including through mail order;

 

   

plans for future growth and other business development activities;

 

   

our ability to realize anticipated savings from our implementation of cost reduction and productivity initiatives;

 

   

changes in tax laws or interpretations that could increase our consolidated tax liabilities; and

 

   

competitive pressures in all markets in which we operate.



 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

CORPORATE INFORMATION

Our principal executive offices are located at 250 Parkcenter Blvd., Boise, ID 83706. Our telephone number is (208) 395-6200 and our internet address is www.albertsonscompanies.com. Our website and the information contained thereon are not part of this prospectus and should not be relied upon by prospective investors in connection with any decision to purchase the common stock offered hereby.

OUR SPONSORS

We believe that one of our strengths is our relationship with our Sponsors. We believe we will benefit from our Sponsors’ experience in the retail industry, their expertise in mergers and acquisitions and real estate, and their support on various near-term and long-term strategic initiatives.

Cerberus.    Established in 1992, Cerberus and its affiliated group of funds and companies comprise one of the world’s leading private investment firms with approximately $42 billion of assets across complementary credit, private equity and real estate strategies. In addition to its New York headquarters, Cerberus has offices throughout the United States, Europe and Asia.

Kimco Realty Corporation.    Kimco Realty Corporation (“Kimco”) is a real estate investment trust headquartered in New Hyde Park, New York that owns and operates North America’s largest publicly traded portfolio of neighborhood and community shopping centers. As of September 30, 2019, Kimco Realty Corporation owned interests in approximately 420 shopping centers comprising 73.6 million square feet of leasable space. Publicly traded on the New York Stock Exchange since 1991, and included in the S&P 500 Index, Kimco Realty Corporation has specialized in shopping center acquisitions, development and management for more than 60 years.

Klaff Realty, L.P.    Klaff Realty, L.P. (“Klaff Realty”) is a privately-owned real estate investment company based in Chicago, Illinois that engages in the acquisition, redevelopment and management of commercial real estate throughout the United States, with a primary focus on retail and office. Klaff Realty has established a leadership position in the acquisition of distressed retail space. To date, Klaff Realty affiliates have acquired properties and invested in operating entities that control in excess of 200 million square feet with a value in excess of $17 billion.

Lubert-Adler Partners, L.P.    Lubert-Adler Partners, L.P. (“Lubert-Adler”) was co-founded in 1997 by Ira Lubert and Dean Adler, who collectively have over 65 years of experience in underwriting, acquiring, repositioning, refinancing and disposing of real estate assets. Lubert-Adler has more than 20 investment professionals and has invested $8 billion of equity into assets valued at over $18 billion.

Schottenstein Stores Corp.    Schottenstein Stores Corp. (“Schottenstein Stores”), together with its affiliate Schottenstein Property Group, is a privately-owned operator, acquirer and redeveloper of high-quality power/big box, community and neighborhood shopping centers located throughout the United States predominantly anchored by national retailers.

Our Sponsors control us and will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Following the completion of the Distribution and the Repurchase, Cerberus will own



 

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approximately         % of our common stock, Kimco will own approximately         % of our common stock, Klaff Realty will own approximately         % of our common stock, Lubert-Adler will own approximately         % of our common stock and Schottenstein will own approximately         % of our common stock and our Sponsors will own in the aggregate approximately     % of our common stock, or     % if the underwriters exercise their option to purchase additional shares in full. Assuming              shares of outstanding common stock are repurchased by us using the net proceeds from the offering of         % Series A mandatory convertible preferred stock, $0.01 par value (“Series A preferred stock”) (or              shares of common stock if the underwriters in the Series A preferred stock offering exercise their over-allotment option in full), our Sponsors will control in the aggregate approximately         % of our common stock (or     % if the underwriters in the Series A preferred stock offering exercise their over-allotment option in full). Our Sponsors will enter into a Stockholders’ Agreement (as defined herein), pursuant to which they will agree to act in concert and vote together on certain matters. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the NYSE on which we will apply to list our shares and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. As a result, our stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Following the completion of the Distribution and this offering, we will be required to appoint to our board of directors individuals designated by and voted for by our Sponsors. In connection with this offering, we will enter into a stockholders agreement with our Sponsors (the “Stockholders’ Agreement”). If Cerberus (or a permitted transferee or assignee) has beneficial ownership of at least 20% of our then-outstanding common stock, it shall have the right to designate four directors to our board of directors. If Cerberus (or a permitted transferee or assignee) owns less than 20% but at least 10% of our then-outstanding common stock, it shall have the right to designate two directors to our board of directors. If Cerberus (or a permitted transferee or assignee) owns less than 10% but at least 5% of our then-outstanding common stock, it shall have the right to designate one director to our board of directors. If Klaff Realty (or a permitted transferee or assignee) owns at least 5% of our then-outstanding common stock, it shall have the right to designate one director to our board of directors. If Schottenstein Stores (or a permitted transferee or assignee) owns at least 5% of our then-outstanding common stock, it shall have the right to designate one director to our board of directors.

The interests of our Sponsors may not coincide with the interests of other holders of our common stock. Additionally, our Sponsors are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsors may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as our Sponsors continue to own a significant amount of the outstanding shares of our common stock, they will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant transactions.

See “Risk Factors—Risks Related to This Offering and Owning Our Common Stock.”



 

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Pursuant to 17 C.F.R. Section 200.83

 

THE OFFERING

 

Common stock outstanding

             shares

 

Common stock offered by the selling stockholders

             shares

 

Option to purchase additional shares of common stock

The selling stockholders have granted to the underwriters a 30-day option to purchase up to                  additional shares of our common stock at the initial public offering price less the underwriting discount and commissions.

 

Use of proceeds

We will not receive any net proceeds from the sale of common stock by the selling stockholders, including from any exercise by the underwriters of their option to purchase additional shares of our common stock from the selling stockholders.

We estimate that the net proceeds to us from the offering of our Series A preferred stock, based upon an assumed public offering price per share of our Series A preferred stock of $                , will be approximately $                 (or approximately $                 if the underwriters in the Series A preferred stock offering exercise their over-allotment option in full), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the anticipated net proceeds from the offering of Series A preferred stock, together with cash on hand, to repurchase approximately                  shares of outstanding common stock from certain Pre-IPO Stockholders (or approximately                  shares of outstanding common stock if the underwriters in the Series A preferred stock offering exercise their over-allotment option in full) (the “Repurchase”). The Repurchase is conditioned upon the consummation of the offering of Series A preferred stock and the receipt of funds therefrom. See “Use of Proceeds.”

 

Dividend Policy

The declaration and payment of any future dividends will be made at the sole discretion of our board of directors and will depend on a number of factors, including general and economic conditions, industry standards, our financial condition and operating results, our available cash and current and anticipated cash needs, restrictions under the documentation governing certain of our indebtedness, including our Term Loan Facilities, ABL Facility and ACI Notes (each as defined herein), capital requirements, regulations, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. To the extent a dividend policy is put in place it will require that, so



 

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long as any share of our Series A preferred stock remains outstanding, no dividend or distribution may be declared or paid on our common stock unless all accrued and unpaid dividends have been paid on our Series A preferred stock, subject to exceptions such as dividends on our common stock payable solely in shares of our common stock. See “Dividend Policy.”

 

Lock-Up Agreements

Prior to the closing of this offering, each Pre-IPO Stockholder will deliver a lock-up agreement to us. Pursuant to the lock-up agreements, for a period of six months after the closing of this offering each Pre-IPO Stockholder will agree, subject to certain exceptions, that it will not offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of common stock or any options or warrants to purchase common stock, or any securities convertible into, exchangeable for or that represent the right to receive common stock, owned by them (whether directly or by means of beneficial ownership) immediately prior to the closing of this offering. Thereafter, each Pre-IPO Stockholder will be permitted to sell shares of common stock subject to certain restrictions. See “Certain Relationships and Related Party Transactions—Lock-Up Agreements.”

 

Concurrent Series A preferred stock offering

Concurrently with this offering of common stock, we are making a public offering of                 shares of our Series A preferred stock, and we have granted the underwriters of that offering a 30-day option to purchase up to                 additional shares of Series A preferred stock to cover over-allotments. Such shares of Series A preferred stock will be convertible into an aggregate of up to                 shares of our common stock (up to                 shares of our common stock if the underwriters in the Series A preferred stock offering exercise their over-allotment option in full), in each case subject to anti-dilution, make-whole and other adjustments.

 

  We cannot assure you that the offering of Series A preferred stock will be completed or, if completed, on what terms it will be completed. The closing of this offering is conditioned upon the closing of the Series A preferred stock offering and the closing of our offering of Series A preferred stock is conditioned upon the closing of this offering. See “Concurrent Offering of Series A Preferred Stock” for a summary of the terms of our Series A preferred stock and a further description of the concurrent offering.


 

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Risk Factors

You should carefully read and consider the information set forth in the section entitled “Risk Factors” beginning on page 21, together with all of the other information set forth in this prospectus, before deciding whether to invest in our common stock.

 

Proposed NYSE trading symbol

“                .”

Unless otherwise indicated, all information in this prospectus excludes up to                shares of our common stock that may be sold by the selling stockholders if the underwriters exercise in full their option to purchase additional shares of our common stock from the selling stockholders. The number of shares of common stock that will be outstanding after this offering also excludes up to                 shares of our common stock (up to                 shares if the underwriters in the Series A preferred stock offering exercise their over-allotment option in full), in each case subject to anti-dilution, make-whole and other adjustments, that would be issuable upon conversion of shares of Series A preferred stock issued in our concurrent offering of Series A preferred stock.



 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

SUMMARY CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA

Albertsons Companies, Inc. was formed for the purpose of reorganizing the organizational structure of AB Acquisition and its direct and indirect consolidated subsidiaries. Prior to December 3, 2017, Albertsons Companies, Inc. had no material assets or operations. On December 3, 2017, Albertsons Companies, LLC and its parent, AB Acquisition, completed a reorganization of their legal entity structure whereby the existing equityholders of AB Acquisition each contributed their equity interests in AB Acquisition to Albertsons Investor or KIM ACI. In exchange, equityholders received a proportionate share of units in Albertsons Investor and KIM ACI, respectively. Albertsons Investor and KIM ACI then contributed all of the equity interests they received to Albertsons Companies, Inc. in exchange for common stock issued by Albertsons Companies, Inc. As a result, Albertsons Investor and KIM ACI became the parents of Albertsons Companies, Inc., owning all of its outstanding common stock with AB Acquisition and its subsidiary, Albertsons Companies, LLC, becoming wholly-owned subsidiaries of Albertsons Companies, Inc. On February 25, 2018, Albertsons Companies, LLC merged with and into Albertsons Companies, Inc., with Albertsons Companies, Inc. as the surviving corporation. Prior to February 25, 2018, substantially all of the assets and operations of Albertsons Companies, Inc. were those of its subsidiary, Albertsons Companies, LLC. The ACI Reorganization Transactions were accounted for as a transaction between entities under common control, and accordingly, there was no change in the basis of the underlying assets and liabilities. The Consolidated Financial Statements are reflective of the changes that occurred as a result of the ACI Reorganization Transactions. Prior to February 25, 2018, our Consolidated Financial Statements reflect the net assets and operations of Albertsons Companies, LLC.

The summary consolidated financial information set forth below is derived from Albertsons Companies, Inc.’s annual consolidated financial statements for the periods indicated below, including the consolidated balance sheets at February 23, 2019 and February 24, 2018 and the related consolidated statements of operations and comprehensive income (loss) and consolidated statements of cash flows for each of the 52-week periods ended February 23, 2019 (fiscal 2018), February 24, 2018 (fiscal 2017) and February 25, 2017 (fiscal 2016) and notes thereto included elsewhere in this prospectus. Additionally, we have derived the summary balance sheet data as of November 30, 2019 and the consolidated statement of operations data for the 40 weeks ended November 30, 2019 and the 40 weeks ended December 1, 2018 from our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this prospectus.



 

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(dollars in millions, except per share data)   40 Weeks
Ended
November 30,
2019
    40 Weeks
Ended
December 1,
2018
    Fiscal 2018     Fiscal 2017     Fiscal 2016     Fiscal 2015  

Results of Operations:

           

Net sales and other revenue

  $ 47,018     $ 46,518     $ 60,535     $ 59,925     $ 59,678     $ 58,734  

Gross profit

  $ 13,176     $ 12,836     $ 16,895     $ 16,361     $ 16,641     $ 16,062  

Selling and administrative expenses

    12,548       12,501       16,272       16,209       16,072       15,600  

(Gain) loss on property dispositions and impairment losses, net

    (483     (164     (165     67       (39     103  

Goodwill impairment

                      142              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    1,111       499       788       (57     608       359  

Interest expense, net

    558       663       831       875       1,004       951  

Loss (gain) on debt extinguishment

    66       9       9       (5     112        

Other income, net

    (22     (88     (104     (9     (44     (50
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    509       (85     52       (918     (464     (542

Income tax expense (benefit)

    110       (80     (79     (964     (90     (40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 399     $ (5   $ 131     $ 46     $ (374   $ (502
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

           

Adjusted EBITDA(1)

  $ 2,079     $ 2,014     $ 2,741     $ 2,398     $ 2,817     $ 2,681  

Adjusted Net Income(1)

    418       218       435       74       378       365  

Rent expense(2)(3)

    757       663       864       844       806       781  

Capital expenditures

    1,084       917       1,362       1,547       1,415       960  

Net cash provided by operating activities

    1,387       1,069       1,688       1,019       1,814       902  

Adjusted Free Cash Flow(1)

    995       1,097       1,379       851       1,402       1,721  

Net Debt(1)

    8,343       10,515       9,660       11,206       11,119       11,646  

Other Operating Data:

           

Identical sales

    2.1     0.9     1.0     (1.3 )%      (0.4 )%      4.4

Store count (at end of fiscal period)

    2,260       2,277       2,269       2,318       2,324       2,271  

Gross square footage (at end of fiscal period) (in millions).

    113       113       113       115       115       113  

Fuel sales

  $ 2,664     $ 2,785     $ 3,456     $ 3,105     $ 2,693     $ 2,955  

Balance Sheet Data (at end of period):

           

Cash and equivalents

  $ 406     $ 463     $ 926     $ 670     $ 1,219     $ 580  

Total assets(3)

    24,992       20,982       20,777       21,812       23,755       23,770  

Total stockholders’ / member equity(3)

    2,411       1,390       1,451       1,398       1,371       1,613  

Total debt, including finance leases

    8,749       10,978       10,586       11,876       12,338       12,226  

Per Share Data:

           

Basic net income (loss) per common share

  $ 1.43     $ (0.02   $ 0.47     $ 0.17     $ (1.33   $ (1.80

Diluted net income (loss) per common share

  $ 1.42     $ (0.02   $ 0.47     $ 0.17     $ (1.33   $ (1.80

Weighted-average common shares outstanding (in millions):

           

Basic

    280       281       280       280       280       280  

Diluted

    280       281       280       280       280       280  


 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

    Fiscal 2019     Fiscal 2018     Fiscal 2017     Fiscal 2016     Fiscal 2015  
    Q3’19     Q2’19     Q1’19     Q4’18     Q3’18     Q2’18     Q1’18     Q4’17     Q3’17     Q2’17     Q1’17     Q4’16     Q3’16     Q2’16     Q1’16     Q4’15     Q3’15     Q2’15     Q1’15  

Identical Sales

    2.7     2.4     1.5     1.1     1.9     1.0     0.2     0.6     (1.8 )%      (1.8 )%      (2.1 )%      (3.3 )%      (2.1 )%      0.1     2.9     4.7     5.1     4.5     4.3

 

(1)

Adjusted EBITDA is a Non-GAAP Measure defined as earnings (net income (loss)) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. Adjusted Net Income is a Non-GAAP Measure defined as net income (loss) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. We define Adjusted Free Cash Flow as Adjusted EBITDA less capital expenditures. Net Debt is defined as total debt (which includes finance lease obligations and is net of deferred financing costs and original issue discount) minus cash and cash equivalents.

 

    

Adjusted EBITDA, Adjusted Net Income, Adjusted Free Cash Flow and Net Debt are Non-GAAP Measures that provide supplemental information we believe is useful to analysts and investors to evaluate ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA, Adjusted Net Income, Adjusted Free Cash Flow and Net Debt provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. Set forth below is a reconciliation of net income to Adjusted Net Income and Adjusted EBITDA and a reconciliation of cash flow from operating activities to Adjusted Free Cash Flow:

 

(dollars in millions)    40 Weeks
Ended
November 30,
2019
    40 Weeks
Ended
December 1,
2018
    Fiscal
2018
    Fiscal
2017
    Fiscal
2016
    Fiscal
2015
 

Net income (loss)

   $ 399     $ (5   $ 131     $ 46     $ (374   $ (502

Adjustments:

            

(Gain) loss on interest rate and commodity hedges, net

           (1     (1     (6     (7     16  

Facility closures and related transition costs(a)

     11       13       13       12       23       25  

Integration costs(b)

     36       164       186       156       144       125  

Acquisition-related costs(c)

     15       66       74       62       70       217  

Equity-based compensation expense

     25       36       48       46       53       98  

Net (gain) loss on property dispositions, asset impairments and lease exit costs

     (483     (164     (165     67       (39     103  

Goodwill impairment

                       142              

LIFO expense (benefit)

     19       16       8       3       (8     30  

Amortization and write-off of original issue discount, deferred financing costs and loss on extinguishment of debt

     135       66       72       67       253       82  

Collington acquisition(d)

                             79        

Amortization of intangible assets resulting from acquisitions

     227       251       326       422       404       377  

Other(e)

     41       (44     (53     66       45       45  

Effect of ACI Reorganization Transactions, Tax Act and reversal of valuation allowance

           (60     (57     (750            

Tax impact of adjustments to Adjusted Net Income

     (7     (120     (147     (259     (265     (251
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

   $ 418     $ 218     $ 435     $ 74     $ 378     $ 365  

Adjustments:

            

Tax impact of adjustments to Adjusted Net Income

     7       120       147       259       265       251  

Effect of tax restructuring, tax reform, and reversal of valuation allowance

           60       57       750              

Income tax expense (benefit)

     110       (80     (79     (964     (90     (40

Amortization and write-off of original issue discount, deferred financing costs and loss on extinguishment of debt

     (135     (66     (72     (67     (253     (82

Interest expense, net

     558       663       831       875       1,004       951  

Loss (gain) on debt extinguishment

     66       9       9       (5     112        

Amortization of intangible assets resulting from acquisitions

     (227     (251     (326     (422     (404     (377

Depreciation and amortization

     1,282       1,341       1,739       1,898       1,805       1,613  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $  2,079     $  2,014     $  2,741     $  2,398     $  2,817     $  2,681  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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(dollars in millions)   40 Weeks
Ended
November 30,
2019
    40 Weeks
Ended
December 1,
2018
    Fiscal
2018
    Fiscal
2017
    Fiscal
2016
    Fiscal
2015
 

Net cash provided by operating activities

  $  1,387     $ 1,069     $  1,688     $  1,019     $ 1,814     $ 902  

Income tax expense (benefit)

    110       (80     (79     (964     (90     (40

Deferred income taxes

    41       135       82       1,094       220       90  

Interest expense, net

    558       663       831       875       1,004       951  

Operating lease right-of-use assets amortization

    (418                              

Changes in operating assets and liabilities

    326       (147     (176     222       (252     467  

Amortization and write-off of deferred financing costs

    (35     (38     (43     (56     (84     (69

Contributions to pension and post-retirement benfit plans, net of expense

    16       178       175       23       (84     (7

Integration costs

    36       164       186       156       144       125  

Acquisition-related costs

    15       66       74       62       70       217  

Collington acquisition

                            79        

Other adjustments

    43       4       3       (33     (4     45  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    2,079       2,014       2,741       2,398       2,817       2,681  

Less: capital expenditures

    1,084       917       1,362       1,547       1,415       960  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Free Cash Flow

  $ 995     $  1,097     $ 1,379     $ 851     $ 1,402     $  1,721  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a)

Includes costs related to facility closures and the transition to our decentralized operating model. The 40 weeks ended November 30, 2019 includes closure costs related to the discontinuation of our meal kit subscription delivery operations in the third quarter of fiscal 2019.

  (b)

Related to conversion activities and related costs associated with integrating acquired businesses, primarily the Safeway acquisition.

  (c)

Includes expenses related to acquisition and financing activities, including management fees of $13.8 million in each year through fiscal 2018. Fiscal 2018 includes acquisition costs related to the mutually terminated merger with Rite Aid Corporation. Fiscal 2016 and fiscal 2015 include adjustments to tax indemnification assets of $12.3 million and $30.8 million, respectively. Fiscal 2015 also includes losses of $44.2 million related to acquired contingencies in connection with the Safeway acquisition.

  (d)

Fiscal 2016 includes a charge to pension expense, net related to the settlement of a pre-existing contractual relationship and assumption of the pension plan related to the acquisition of Collington Services, LLC (“Collington”) from C&S Wholesale Grocers, Inc. during the first quarter of fiscal 2016.

  (e)

Primarily includes non-cash lease-related adjustments and lease-related costs for surplus and closed stores. Also includes net realized and unrealized (gains) losses on non-operating investments, certain legal and regulatory accruals and settlements, net, changes in the fair value of the contingent value rights, changes in our equity investment in Casa Ley, S.A. de C.V. (“Casa Ley”) (disposed of in the fourth quarter of fiscal 2017), foreign currency translation gains, adjustments to contingent consideration, costs related to our planned initial public offering and pension expense (exclusive of the charge related to the Collington acquisition) in excess of cash contributions.

 

(2)

Represents rent expense on operating leases, including contingent rent expense.

 

(3)

We adopted ASU 2016-02, Leases (Topic 842), and related amendments as of February 24, 2019 under the modified retrospective approach and, therefore, have not revised comparative periods. Under Topic 842, leases historically classified as capital leases are now referred to as finance leases.



 

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RISK FACTORS

You should carefully consider the risks described below and the other information contained in this prospectus, including our consolidated financial statements and the related notes, before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

Various operating factors and general economic conditions affecting the food retail industry may affect our business and may adversely affect our business and operating results.

Our operations and financial performance are affected by economic conditions such as macroeconomic conditions, credit market conditions and the level of consumer confidence. While the combination of improved economic conditions, lower unemployment, higher wages and lower gasoline prices have contributed to improved consumer confidence, there is uncertainty about the continued strength of the economy. If the economy weakens, or if gasoline prices rebound, consumers may reduce spending, trade down to a less expensive mix of products or increasingly rely on food discounters, all of which could impact our sales. In addition, consumers’ perception or uncertainty related to the economy and future fuel prices could also dampen overall consumer confidence and reduce demand for our product offerings. Both inflation and deflation affect our business. Food deflation could reduce sales growth and earnings, while food inflation could reduce gross profit margins. Several food items and categories, including meat and dairy, experienced price deflation in fiscal 2018; however, prices for all other major food categories increased. We are unable to predict the direction of the economy or gasoline prices or if deflationary trends will occur. If the economy weakens, fuel prices increase or deflationary trends occur, our business and operating results could be adversely affected.

Competition in our industry is intense, and our failure to compete successfully may adversely affect our profitability and operating results.

The food and drug retail industry is large and dynamic, characterized by intense competition among a collection of local, regional and national participants. We face strong competition from other brick and mortar food and/or drug retailers, supercenters, club stores, discount stores, online retailers, specialty and niche supermarkets, drug stores, general merchandisers, wholesale stores, convenience stores, natural food stores, farmers’ markets, local chains and stand-alone stores that cater to the individual cultural preferences of specific neighborhoods, restaurants and home delivery and meal solution companies. Shifts in the competitive landscape, consumer preference or market share may have an adverse effect on our profitability and results of operations.

As a result of consumers’ growing desire to shop online, we also face increasing competition from both our existing competitors that have incorporated the internet as a direct-to-consumer channel and online providers that sell grocery products. In addition, we face increasing competition from online distributors of pharmaceutical products. Although we have a growing eCommerce business and offer our customers the ability to shop online for both home delivery and curbside pickup, there is no assurance that these online initiatives will be successful. In addition, these initiatives may have an adverse impact on our profitability as a result of lower gross profits or greater operating costs to compete.

Our ability to attract customers is dependent, in large part, upon a combination of channel preference, location, store conditions, quality, price, service, convenience and selection. In each of these areas, traditional and non-traditional competitors compete with us and may successfully attract

 

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our customers by matching or exceeding what we offer or by providing greater shopping convenience. In recent years, many of our competitors have aggressively added locations and adopted a multi-channel approach to marketing and advertising. Our responses to competitive pressures, such as additional promotions, increased advertising, additional capital investment and the development of our eCommerce offerings could adversely affect our profitability and cash flow. We cannot guarantee that our competitive response will succeed in increasing or maintaining our share of retail food sales.

An increasingly competitive industry and, from time to time, deflation in the prices of certain foods have made it difficult for food retailers to achieve positive identical sales growth on a consistent basis. We and our competitors have attempted to maintain or grow our and their respective share of retail food sales through capital and price investment, increased promotional activity and new and remodeled stores, creating a more difficult environment to consistently increase year-over-year sales. Some of our primary competitors are larger than we are or have greater financial resources available to them and, therefore, may be able to devote greater resources to invest in price, promotional activity and new or remodeled stores in order to grow their share of retail food sales. Price investment by our competitors has also, from time to time, adversely affected our operating margins. In recent years, we have invested in price in order to remain competitive and generate sales growth; however, there can be no assurance this strategy will be successful.

Because we face intense competition, we need to anticipate and respond to changing consumer preferences and demands more effectively than our competitors. We devote significant resources to differentiating our banners in the local markets where we operate and invest in loyalty programs to drive traffic. Our local merchandising teams spend considerable time working with store directors to make sure we are satisfying consumer preferences. In addition, we strive to achieve and maintain favorable recognition of our Own Brands offerings, and market these offerings to consumers and maintain and enhance a perception of value for consumers. While we seek to continuously respond to changing consumer preferences, there are no assurances that our responses will be successful. Our continued success is dependent upon our ability to control operating expenses, including managing health care and pension costs stipulated by our collective bargaining agreements, to effectively compete in the food retail industry. Several of our primary competitors are larger than we are, or are not subject to collective bargaining agreements, allowing them to more effectively leverage their fixed costs or more easily reduce operating expenses. Finally, we need to source, market and merchandise efficiently. Changes in our product mix also may negatively affect our profitability. Failure to accomplish our objectives could impair our ability to compete successfully and adversely affect our profitability.

Profit margins in the food retail industry are low. In order to increase or maintain our profit margins, we develop operating strategies to increase revenues, increase gross margins and reduce costs, such as new marketing programs, new advertising campaigns, productivity improvements, shrink-reduction initiatives, distribution center efficiencies, manufacturing efficiencies, energy efficiency programs and other similar strategies. Our failure to achieve forecasted revenue growth, gross margin improvement or cost reductions could have a material adverse effect on our profitability and operating results.

We may not identify timely or respond effectively to consumer trends, which could negatively affect our relationship with our customers, the demand for our products and services and our market share.

It is difficult to predict consistently and successfully the products and services our customers will demand over time. Our success depends, in part, on our ability to identify and respond to evolving trends in demographics and preferences. Failure to timely identify or respond effectively to changing consumer tastes, preferences (including those relating to sustainability of product sources) and spending patterns could lead us to offer our customers a mix of products or a level of pricing that they

 

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do not find attractive. This could negatively affect our relationship with our customers, leading them to reduce their visits to our stores and the amount they spend. Further, while we have significantly expanded our digital capabilities and grown our loyalty programs over the last several years, as technology advances, and as the way our customers interact with technology changes, we will need to continue to develop and offer compelling eCommerce and loyalty solutions that are both cost effective and compelling. Our failure to anticipate or respond to customer expectations for products, services, eCommerce and loyalty programs would adversely affect the demand for our products and services and our market share and could have an adverse effect on our performance, margins and operating income.

Increased commodity prices may adversely impact our profitability.

Many of our own and sourced products include ingredients such as wheat, corn, oils, milk, sugar, proteins, cocoa and other commodities. Commodity prices worldwide have been volatile. Any increase in commodity prices may cause an increase in our input costs or the prices our vendors seek from us. Although we typically are able to pass on modest commodity price increases or mitigate vendor efforts to increase our costs, we may be unable to continue to do so, either in whole or in part, if commodity prices increase materially. If we are forced to increase prices, our customers may reduce their purchases at our stores or trade down to less profitable products. Both may adversely impact our profitability as a result of reduced revenue or reduced margins.

Fuel prices and availability may adversely affect our results of operations.

We currently operate 402 fuel centers that are adjacent to many of our store locations. As a result, we sell a significant amount of gasoline. Increased regulation or significant increases in wholesale fuel costs could result in lower gross profit on fuel sales, and demand could be affected by retail price increases as well as by concerns about the effect of emissions on the environment. We are unable to predict future regulations, environmental effects, political unrest, acts of terrorism and other matters that may affect the cost and availability of fuel, and how our customers will react, which could adversely affect our results of operations.

Our stores rely heavily on sales of perishable products, and product supply disruptions may have an adverse effect on our profitability and operating results.

Reflecting consumer preferences, we have a significant focus on perishable products. Sales of perishable products accounted for over 41% of our revenue in the first three quarters of fiscal 2019. We rely on various suppliers and vendors to provide and deliver our perishable product inventory on a continuous basis. We could suffer significant perishable product inventory losses and significant lost revenue in the event of the loss of a major supplier or vendor, disruption of our distribution network, extended power outages, natural disasters or other catastrophic occurrences.

Severe weather and natural disasters may adversely affect our business.

Severe weather conditions such as hurricanes, earthquakes, floods, extended winter storms, heat waves or tornadoes, as well as other natural disasters in areas in which we have stores or distribution centers or from which we source or obtain products have caused and may cause physical damage to our properties, closure of one or more of our stores, manufacturing facilities or distribution centers, lack of an adequate work force in a market, temporary disruption in the manufacture of products, temporary disruption in the supply of products, disruption in the transport of goods, delays in the delivery of goods to our distribution centers or stores, a reduction in customer traffic and a reduction in the availability of products in our stores. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops yielded by food producers may adversely affect the availability or cost of certain products within the grocery supply chain. Any of these factors may disrupt our business and adversely affect our business.

 

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Threats or potential threats to security of food and drug safety, the occurrence of a widespread health epidemic or regulatory concerns in our supply chain may adversely affect our business.

Acts or threats, whether perceived or real, of war or terror or other criminal activity directed at the food and drug industry or the transportation industry, whether or not directly involving our stores, could increase our operating costs and operations, or impact general consumer behavior and consumer spending. Other events that give rise to actual or potential food contamination, drug contamination or food-borne illnesses, or a widespread regional, national or global health epidemic, such as pandemic flu, could have an adverse effect on our operating results or disrupt production and delivery of our products, our ability to appropriately staff our stores and potentially cause customers to avoid public gathering places or otherwise change their shopping behaviors.

We source our products from vendors and suppliers and related networks across the globe who may be subject to regulatory actions or face criticism due to actual or perceived social injustices, including human trafficking, child labor or environmental, health and safety violations. A disruption in our supply chain due to any regulatory action or social injustice could have an adverse impact on our supply chain and ultimately our business, including potential harm to our reputation.

We could be affected if consumers lose confidence in the food supply chain or the quality and safety of our products.

We could be adversely affected if consumers lose confidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, such as the concerns during fiscal 2018 relating to romaine lettuce, whether valid or not, may discourage consumers from buying our products or cause production and delivery disruptions. The real or perceived sale of contaminated food products by us could result in product liability claims, a loss of consumer confidence and product recalls, which could have a material adverse effect on our business.

Consolidation in the healthcare industry could adversely affect our business and financial condition.

Many organizations in the healthcare industry have consolidated to create larger healthcare enterprises with greater market power, which has resulted in increased pricing pressures. If this consolidation trend continues, it could give the resulting enterprises even greater bargaining power, which may lead to further pressure on the prices for our pharmacy products and services. If these pressures result in reductions in our prices, we will become less profitable unless we are able to achieve corresponding reductions in costs or develop profitable new revenue streams. We expect that market demand, government regulation, third-party reimbursement policies, government contracting requirements and societal pressures will continue to cause the healthcare industry to evolve, potentially resulting in further business consolidations and alliances among the industry participants we engage with, which may adversely impact our business, financial condition and results of operations.

Certain risks are inherent in providing pharmacy services, and our insurance may not be adequate to cover any claims against us.

We currently operate 1,732 pharmacies and, as a result, we are exposed to risks inherent in the packaging, dispensing, distribution and disposal of pharmaceuticals and other healthcare products, such as risks of liability for products which cause harm to consumers, as well as increased regulatory risks and related costs. Although we maintain insurance, we cannot guarantee that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will be able to maintain this insurance on acceptable terms in the future, or at all. Our results of operations, financial condition or cash flows may be materially adversely affected if in the future our insurance

 

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coverage proves to be inadequate or unavailable, or there is an increase in the liability for which we self-insure, or we suffer harm to our reputation as a result of an error or omission.

We are subject to numerous federal and state regulations. Each of our in-store pharmacies must be licensed by the state government. The licensing requirements vary from state to state. An additional registration certificate must be granted by the U.S. Drug Enforcement Administration, and, in some states, a separate controlled substance license must be obtained to dispense controlled substances. In addition, pharmacies selling controlled substances are required to maintain extensive records and often report information to state and federal agencies. If we fail to comply with existing or future laws and regulations, we could suffer substantial civil or criminal penalties, including the loss of our licenses to operate pharmacies and our ability to participate in federal and state healthcare programs. As a consequence of the severe penalties we could face, we must devote significant operational and managerial resources to complying with these laws and regulations.

Recently, pharmaceutical manufacturers, wholesale distributors and retailers have faced intense scrutiny and, in some cases, investigations and litigation relating to the distribution of prescription opioid pain medications. On May 22, 2018, we received a subpoena from the Office of the Attorney General for the State of Alaska (the “Alaska Attorney General”) stating that the Alaska Attorney General has reason to believe we have engaged in unfair or deceptive trade practices under Alaska’s Unfair Trade Practices and Consumer Act and seeking documents regarding our policies, procedures, controls, training, dispensing practices and other matters in connection with the sale and marketing of opioid pain medications. We responded to the subpoena on July 30, 2018 and have not received any further communication from the Alaska Attorney General. We do not currently have a basis to believe we have violated Alaska’s Unfair Trade Practices and Consumer Act; however, at this time, we are unable to determine the probability of the outcome of this matter or estimate a range of reasonably possible loss, if any.

We are one of dozens of companies that have been named in various lawsuits alleging that defendants contributed to the national opioid epidemic. At present, we are named in over 70 suits pending in various state courts as well as in the United States District Court for the Northern District of Ohio, where over 2,000 cases have been consolidated as Multi-District Litigation (“MDL”) pursuant to 28 U.S.C. §1407. In two matters-MDL No. 2804 filed by The Blackfeet Tribe of the Blackfeet Indian Reservation and State of New Mexico v. Purdue Pharma L.P., et al.- we filed motions to dismiss, which were denied, and we have now answered the Complaints. The MDL cases are stayed pending bellwether trials, and the only active matter is the New Mexico action where a September 2021 trial date has been set. We are vigorously defending these matters and believe that these cases are without merit. At this early stage in the proceedings, we are unable to determine the probability of the outcome of these matters or the range of reasonably possible loss, if any.

Application of federal and state laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our pharmacy business or assure that we will be able to obtain or maintain the regulatory approvals required to operate our business.

Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows.

Part of our strategy may include pursuing acquisitions that we believe will be accretive to our business. With respect to any possible future acquisitions, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an

 

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interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to:

 

   

transaction litigation;

 

   

a failure of our due diligence process to identify significant risks or issues;

 

   

the loss of customers of the acquired company or our Company;

 

   

negative impact on the brands or banners of the acquired company or our Company;

 

   

a failure to maintain or improve the quality of customer service;

 

   

difficulties assimilating the operations and personnel of the acquired company;

 

   

our inability to retain key personnel of the acquired company;

 

   

the incurrence of unexpected expenses and working capital requirements;

 

   

our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; and

 

   

difficulty in maintaining internal controls, procedures and policies.

Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows.

We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations and financial condition.

A significant majority of our employees are unionized, and our relationship with unions, including labor disputes or work stoppages, could have an adverse impact on our operations and financial results.

As of February 23, 2019, approximately 170,000 of our employees were covered by collective bargaining agreements. During fiscal 2018, collective bargaining agreements covering approximately 8,500 employees were renegotiated. Collective bargaining agreements covering approximately 106,000 employees have expired or are scheduled to expire in fiscal 2019. In negotiations with labor unions, health care, pension costs and/or contributions and wage costs, among other issues, are important topics for negotiation. If, upon the expiration of such collective bargaining agreements, we are unable to negotiate acceptable contracts with labor unions, it could result in strikes by the affected workers and thereby significantly disrupt our operations. As part of our collective bargaining agreements, we may need to fund additional pension contributions, which would negatively impact our Adjusted Free Cash Flow. Further, if we are unable to control health care and pension costs provided for in the collective bargaining agreements, we may experience increased operating costs and an adverse impact on our financial results.

Increased pension expenses, contributions and surcharges may have an adverse impact on our financial results.

We are sponsors of defined benefit retirement plans for certain employees at our Safeway, United and Shaw’s stores and distribution centers. The funded status of these plans (the difference between

 

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the fair value of the plan assets and the projected benefit obligation) is a significant factor in determining annual pension expense and cash contributions to fund the plans.

Unfavorable investment performance, increased pension expense and cash contributions may have an adverse impact on our financial results. Under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Pension Benefit Guaranty Corporation (“PBGC”) has the authority to petition a court to terminate an underfunded pension plan under limited circumstances. In the event that our defined benefit pension plans are terminated for any reason, we could be liable to the PBGC for the entire amount of the underfunding, as calculated by the PBGC based on its own assumptions (which would result in a larger obligation than that based on the actuarial assumptions used to fund such plans). Under ERISA and the Code, the liability under these defined benefit plans is joint and several with all members of the control group, such that each member of the control group would be liable for the defined benefit plans of each other member of the control group.

In addition, we participate in various multiemployer pension plans for substantially all employees represented by unions pursuant to collective bargaining agreements that require us to contribute to these plans. Under the Pension Protection Act of 2006 (the “PPA”), contributions in addition to those made pursuant to a collective bargaining agreement may be required in limited circumstances.

Pension expenses for multiemployer pension plans are recognized by us as contributions are made. Generally, benefits are based on a fixed amount for each year of service. Our contributions to multiemployer plans were $451.1 million, $431.2 million and $399.1 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

Based on an assessment of the most recent information available, we believe that most of the multiemployer plans to which we contribute are underfunded. We are only one of a number of employers contributing to these plans. As of February 23, 2019, we attempted to estimate our share of the underfunding of multiemployer plans to which we contribute, based on the ratio of our contributions to the total of all contributions to these plans in a year. Our estimate of the Company’s share of the underfunding of multiemployer plans to which we contribute was $4.7 billion. Our share of underfunding described above is an estimate and could change based on the amount contributed to the plans, investment returns on the assets held in the plans, actions taken by trustees who manage the plans’ benefit payments, interest rates, the amount of withdrawal liability payments made to the plans, if the employers currently contributing to these plans cease participation, and requirements under the PPA, the Multiemployer Pension Reform Act of 2014 and applicable provisions of the Code.

Currently, Safeway is the second largest contributing employer to the Food Employers Labor Relations Association and United Food and Commercial Workers Joint Pension Plan (“FELRA”). We understand FELRA projects that it will become insolvent in approximately the first quarter 2021. We continue to fund all of our required contributions to FELRA. In October 2019, our collective bargaining agreements with the two local unions, pursuant to which we contribute to FELRA, expired. We and the two local unions with whom we are negotiating agreed to extend the terms and conditions of the expired collective bargaining agreements on a temporary basis as negotiations continue. All pension provisions, including the funding, are subject to on-going collective bargaining negotiations with the local unions. We, along with the largest contributing employer and local unions, have had discussions with the Pension Benefit Guaranty Corporation (“PBGC”) regarding various issues concerning FELRA that may affect FELRA’s solvency. Depending on the outcome of the on-going collective bargaining and discussions with the PBGC, we may agree, or be required, to make certain payments arising from our participation in FELRA. Several different potential outcomes could result, all of which are uncertain and dependent on unknown future events which cannot be reasonably predicted but the potential final outcome of the matter could have a material impact on our financial position and results of operations.

 

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The United States Congress established a joint committee in February 2018 with the objective of formulating recommendations to improve the solvency of multiemployer pension plans and the PBGC. Although the joint committee’s term expired without it making any formal recommendations, Congress is expected to continue to consider these issues, which may result in legislative changes. If the funding required for these plans declines, our future expense could be favorably affected. Favorable legislation could also decrease our financial obligations to the plans. On the other hand, our share of the underfunding and our future expense and liability could increase if the financial condition of the plans deteriorated or if adverse changes in the law occurred. We continue to evaluate our potential exposure to underfunded multiemployer pension plans.

In the event we were to exit certain markets or otherwise cease contributing to these plans, we could trigger a substantial withdrawal liability. Any accrual for withdrawal liability will be recorded when a withdrawal is probable and can be reasonably estimated, in accordance with GAAP. All trades or businesses in the employer’s control group are jointly and severally liable for the employer’s withdrawal liability.

We are subject to withdrawal liabilities related to Safeway’s previous closure in 2013 of its Dominick’s division. One of the plans, the UFCW & Employers Midwest Pension Fund (the “Midwest Plan”), has asserted we may be liable for mass withdrawal liability, if the plan has a mass withdrawal, in addition to the liability the Midwest Plan already has assessed. We believe it is unlikely that a mass withdrawal will occur in the foreseeable future and dispute that the Midwest Plan would have the right to assess mass withdrawal liability against us if the Midwest Plan had a mass withdrawal. We are disputing in arbitration the amount of the withdrawal liability the Midwest Plan has assessed. The amount of the withdrawal liability recorded as of February 23, 2019 with respect to the Dominick’s division was $142.1 million.

Unfavorable changes in government regulation may have a material adverse effect on our business.

Our stores are subject to various federal, state, local and foreign laws, regulations and administrative practices. We must comply with numerous provisions regulating health and sanitation standards, food labeling, energy, environmental, equal employment opportunity, minimum wages, pension, health insurance and other welfare plans, and licensing for the sale of food, drugs and alcoholic beverages. We cannot predict either the nature of future laws, regulations, interpretations or applications, or the effect either additional government laws, regulations or administrative procedures, when and if promulgated, or disparate federal, state, local and foreign regulatory schemes would have on our future business. In addition, regulatory changes could require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. Any or all of such requirements could have an adverse effect on our business.

The minimum wage continues to increase and is subject to factors outside of our control. Changes to wage regulations could have an impact on our future results of operations.

A considerable number of our employees are paid at rates related to the federal minimum wage. Additionally, many of our stores are located in states, including California, where the minimum wage is greater than the federal minimum wage and where a considerable number of employees receive compensation equal to the state’s minimum wage. For example, as of February 23, 2019, we employed approximately 68,000 associates in California, where the current minimum wage increased to $13.00 per hour, effective January 1, 2020, and will gradually increase each year thereafter to $15.00 per hour by January 1, 2023. In Massachusetts, where we employed approximately 10,800

 

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associates as of February 23, 2019, the minimum wage increased to $12.75 per hour, effective January 1, 2020, and will reach $15.00 per hour by 2023. In New Jersey, where we employed approximately 7,100 associates as of February 23, 2019, the minimum wage increased to $11.00 per hour, effective January 1, 2020, and will reach $15.00 per hour by 2024. In Maryland, where we employed approximately 7,200 associates as of February 23, 2019, the minimum wage increased to $11.00 per hour, effective January 1, 2020, and will reach $15.00 per hour by 2025. Moreover, municipalities may set minimum wages above the applicable state standards. For example, the minimum wage in Seattle, Washington, where we employed approximately 1,800 associates as of February 23, 2019, increased to $16.39 per hour effective January 1, 2020 for employers with more than 500 employees nationwide. In Chicago, Illinois, where we employed approximately 6,200 associates as of February 23, 2019, the minimum wage increased to $13.00 per hour effective July 1, 2019. Any further increases in the federal minimum wage or the enactment of additional state or local minimum wage increases could increase our labor costs, which may adversely affect our results of operations and financial condition.

The food retail industry is labor intensive. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of qualified persons in the workforce in the local markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment and labor laws. Such laws related to employee hours, wages, job classification and benefits could significantly increase operating costs. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service to suffer, while increasing wages for our employees could cause our profit margins to decrease. If we are unable to hire and retain employees capable of meeting our business needs and expectations, our business and brand image may be impaired. Any failure to meet our staffing needs or any material increase in turnover rates of our employees may adversely affect our business, results of operations and financial condition.

Failure to attract and retain qualified associates could materially adversely affect our financial performance.

Our ability to continue to conduct and expand our operations depends on our ability to attract and retain a large and growing number of qualified associates. Our ability to meet our labor needs, including our ability to find qualified personnel to fill positions that become vacant at our existing stores and distribution centers, while controlling our associate wage and related labor costs, is generally subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force of the markets in which we operate, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and adoption of new or revised employment and labor laws and regulations. If we are unable to locate, to attract or to retain qualified personnel, the quality of service we provide to our customers may decrease and our financial performance may be adversely affected.

Failure to realize anticipated benefits from our productivity initiatives could adversely affect our financial performance and competitive position.

Although we have identified and are in the early stages of implementing a broad range of new, specific productivity initiatives that target $1 billion in annual run-rate productivity benefits by the end of fiscal 2022 to help offset cost inflation, fund growth and drive earnings, there can be no assurance that all of our initiatives will be successful or that we will realize the estimated benefits in the currently anticipated amounts or time-frame, if at all. Certain of these initiatives involve significant changes in our operating processes and systems that could result in disruptions in our operations. The estimates of savings from our planned productivity initiatives represent management’s estimates of benefits from

 

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our planned productivity initiatives and remain subject to risks and uncertainties. The actual benefits of our productivity initiatives, if achieved, may be lower than what we expect and may take longer than anticipated.

Unfavorable changes in, failure to comply with or increased costs to comply with environmental laws and regulations could adversely affect us. The storage and sale of petroleum products could cause disruptions and expose us to potentially significant liabilities.

Our operations, including our 402 fuel centers, are subject to various laws and regulations relating to the protection of the environment, including those governing the storage, management, disposal and cleanup of hazardous materials. Some environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes, impose strict, and under certain circumstances joint and several, liability for costs to remediate a contaminated site, and also impose liability for damages to natural resources.

Federal regulations under the Clean Air Act require phase-out of the production of ozone-depleting refrigerants that include hydrochlorofluorocarbons, the most common of which is R-22. As of January 1, 2020, industry production of new R-22 refrigerant gas has been completely phased out; however, recovered and recycled/reclaimed R-22 will be available for servicing systems. We are reducing our R-22 footprint while continuing to repair leaks, thus extending the useful lifespan of existing equipment. In fiscal 2018, we incurred approximately $15 million for system retrofits, and we have budgeted approximately $12 million per year for subsequent years. Leak repairs are part of the ongoing refrigeration maintenance budget. We may be required to spend additional capital above and beyond what is currently budgeted for system retrofits and leak repairs which could have a significant impact on our business, results of operations and financial condition.

Third-party claims in connection with releases of or exposure to hazardous materials relating to our current or former properties or third-party waste disposal sites can also arise. In addition, the presence of contamination at any of our properties could impair our ability to sell or lease the contaminated properties or to borrow money using any of these properties as collateral. The costs and liabilities associated with any such contamination could be substantial and could have a material adverse effect on our business. Under current environmental laws, we may be held responsible for the remediation of environmental conditions regardless of whether we lease, sublease or own the stores or other facilities and regardless of whether such environmental conditions were created by us or a prior owner or tenant. In addition, the increased focus on climate change, waste management and other environmental contamination relating to prior, existing or future sites or other environmental changes will not adversely affect us through, for example, business interruption, cost of remediation or adverse publicity.

We are subject to, and may in the future be subject to, legal or other proceedings that could have a material adverse effect on us.

From time to time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims, intellectual property claims and other proceedings arising in or outside of the ordinary course of business. In addition, there are an increasing number of environmental issues may result in new environmental laws or regulations that negatively affect us directly or indirectly through increased costs on our suppliers. There can be no assurance that cases being filed against companies generally, which contain class-action allegations under federal and state wage and hour laws. We estimate our exposure to these legal proceedings and establish reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings or changes in management’s forecast assumptions or predictions could have a material adverse impact on our results of operations.

 

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We may be adversely affected by risks related to our dependence on IT systems. Any future changes to or intrusion into these IT systems, even if we are compliant with industry security standards, could materially adversely affect our reputation, financial condition and operating results.

We have complex IT systems that are important to the success of our business operations and marketing initiatives. If we were to experience failures, breakdowns, substandard performance or other adverse events affecting these systems, or difficulties accessing the proprietary business data stored in these systems, or in maintaining, expanding or upgrading existing systems or implementing new systems, we could incur significant losses due to disruptions in our systems and business. These risks may be further exacerbated by the deployment and continued refinement of cloud-based enterprise solutions. In a cloud computing environment, we could be subject to outages by third-party service providers and security breaches to their systems. Unauthorized parties have obtained in the past, and may in the future obtain, access to cloud-based platforms used by companies.

Improper activities by third parties, exploitation of encryption technology, new data-hacking tools and discoveries and other events or developments may result in future intrusions into or compromise of our networks, payment card terminals or other payment systems.

In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often cannot be recognized until launched against a target; accordingly, we may not be able to anticipate these frequently changing techniques or implement adequate preventive measures for all of them. Any unauthorized access into our customers’ sensitive information, or data belonging to us or our suppliers, even if we are compliant with industry security standards, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in us and subject us to potential litigation, liability, fines and penalties and consent decrees, resulting in a possible material adverse impact on our financial condition and results of operations.

As a merchant that accepts debit and credit cards for payment, we are subject to the Payment Card Industry (“PCI”) Data Security Standard (“PCI DSS”), issued by the PCI Council. PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical administrative and technical storage, processing and transmission of individual cardholder data. By accepting debit cards for payment, we are also subject to compliance with American National Standards Institute (“ANSI”) data encryption standards and payment network security operating guidelines. Failure to be PCI compliant or to meet other payment card standards may result in the imposition of financial penalties or the allocation by the card brands of the costs of fraudulent charges to us. As well, the Fair and Accurate Credit Transactions Act (“FACTA”) requires systems that print payment card receipts to employ personal account number truncation so that the consumer’s full account number is not viewable on the slip. Despite our efforts to comply with these or other payment card standards and other information security measures, we cannot be certain that all of our IT systems will be able to prevent, contain or detect all cyber-attacks or intrusions from known malware or malware that may be developed in the future. To the extent that any disruption results in the loss, damage or misappropriation of information, we may be adversely affected by claims from customers, financial institutions, regulatory authorities, payment card associations and others. In addition, privacy and information security laws and standards continue to evolve and could expose us to further regulatory burdens. The cost of complying with stricter laws and standards, including PCI DSS, ANSI and FACTA data encryption standards and the California Consumer Privacy Act which took effect in January 2020, could be significant.

The loss of confidence from a data security breach involving our customers or employees could hurt our reputation and cause customer retention and employee recruiting challenges.

We receive and store personal information in connection with our marketing and human resources organizations. The protection of our customer and employee data is critically important to us.

 

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Despite our considerable efforts to secure our computer networks, security could be compromised, confidential information could be misappropriated or system disruptions could occur, as has occurred with a number of other retailers. If we experience a data security breach, we could be exposed to government enforcement actions, possible assessments from the card brands if credit card data was involved and potential litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to stop shopping at our stores altogether.

Unauthorized computer intrusions could adversely affect our brands and could discourage customers from shopping with us.

In 2014, we were the subject of an unauthorized intrusion affecting 800 of our stores in an attempt to obtain credit card data. While the claims arising out of this intrusion have been substantially resolved, there can be no assurance that we will not suffer a similar criminal attack in the future or that unauthorized parties will not gain access to personal information of our customers. While we have implemented additional security software and hardware designed to provide additional protections against unauthorized intrusions, there can be no assurance that unauthorized individuals will not discover a means to circumvent our security. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex attacks. Experienced computer programmers and hackers may be able to penetrate our security controls and misappropriate or compromise sensitive personal, proprietary or confidential information, create system disruptions or cause shutdowns. They also may be able to develop and deploy malicious software programs that attack our systems or otherwise exploit any security vulnerabilities. Computer intrusions could adversely affect our brands, have caused us to incur legal and other fees, may cause us to incur additional expenses for additional security measures and could discourage customers from shopping in our stores.

We use a combination of insurance and self-insurance to address potential liabilities for workers’ compensation, automobile and general liability, property risk (including earthquake and flood coverage), director and officers’ liability, employment practices liability, pharmacy liability and employee health care benefits.

We use a combination of insurance and self-insurance to address potential liabilities for workers’ compensation, automobile and general liability, property risk (including earthquake and flood coverage), director and officers’ liability, employment practices liability, pharmacy liability and employee health care benefits and cyber and terrorism risks. We estimate the liabilities associated with the risks retained by us, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.

The majority of our workers’ compensation liability is from claims occurring in California, where workers’ compensation has received intense scrutiny from the state’s politicians, insurers, employers and providers, as well as the public in general.

Our long-lived assets, primarily goodwill and store-level assets, are subject to periodic testing for impairment, and we may incur significant impairment charges as a result.

Our long-lived assets, primarily goodwill and store-level assets, are subject to periodic testing for impairment. We have incurred significant impairment charges to earnings in the past. Long-lived asset impairment charges were $36.3 million, $100.9 million and $46.6 million in fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Failure to achieve sufficient levels of cash flow at reporting units and at store-level could result in impairment charges on long-lived assets. We also review goodwill for impairment

 

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annually on the first day of the fiscal fourth quarter or if events or changes in circumstances indicate the occurrence of a triggering event. During fiscal 2017, we recorded a goodwill impairment loss of $142.3 million. The annual evaluation of goodwill performed for our reporting units during the fourth quarters of fiscal 2018 and fiscal 2016 did not result in impairment.

Our operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store, transport and sell products.

Our operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store, transport and sell products. Energy and fuel costs are influenced by international, political and economic circumstances and have experienced volatility over time. To reduce the impact of volatile energy costs, we have entered into contracts to purchase electricity and natural gas at fixed prices to satisfy a portion of our energy needs. We also manage our exposure to changes in energy prices utilized in the shipping process through the use of short-term diesel fuel derivative contracts. Volatility in fuel and energy costs that exceeds offsetting contractual arrangements could adversely affect our results of operations.

We may have liability under certain operating leases that were assigned to third parties.

We may have liability under certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, we could be responsible for the lease obligation. Due to the wide dispersion among third parties and the variety of remedies available, we believe that if an assignee became insolvent it would not have a material effect on our financial condition, results of operations or cash flows. No liability has been recorded for assigned leases in our consolidated balance sheet related to these contingent obligations.

We may be unable to attract and retain key personnel, which could adversely impact our ability to successfully execute our business strategy.

The continued successful implementation of our business strategy depends in large part upon the ability and experience of members of our senior management. In addition, our performance is dependent on our ability to identify, hire, train, motivate and retain qualified management, technical, sales and marketing and retail personnel. If we lose the services of members of our senior management or are unable to continue to attract and retain the necessary personnel, we may not be able to successfully execute our business strategy, which could have an adverse effect on our business.

Risks Related to our Indebtedness

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.

We have a significant amount of indebtedness. As of November 30, 2019, we had $8.2 billion of debt outstanding (other than finance lease obligations). As of November 30, 2019, we would have been able to borrow an additional $3.5 billion under the ABL Facility after giving effect to the borrowings under our ABL Facility and letters of credit. As of November 30, 2019, we and our subsidiaries had approximately $702 million of finance lease obligations.

Our substantial indebtedness could have important consequences. For example, it could:

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

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require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

place us at a competitive disadvantage compared to our competitors that have less debt; and

 

   

limit our ability to borrow additional funds.

In addition, there can be no assurance that we will be able to refinance any of our debt or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as:

 

   

sales of assets;

 

   

sales of equity; or

 

   

negotiations with our lenders to restructure the applicable debt.

Our debt instruments may restrict, or market or business conditions may limit, our ability to obtain additional indebtedness, refinance our indebtedness or use some of our options.

Despite our significant indebtedness levels, we may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the credit agreements that govern the Term Loan Facilities and the ABL Facility and the indentures that govern the NALP Notes (as defined herein), the Safeway Notes (as defined herein) and the ACI Notes, permit us to incur significant additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See “Description of Indebtedness.”

To service our indebtedness, we require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control.

Our ability to make cash payments on and to refinance the indebtedness and to fund planned capital expenditures will depend on our ability to generate significant operating cash flow in the future, as described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results” included elsewhere in this prospectus. This ability is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that will be beyond our control.

Our business may not generate sufficient cash flow from operations to enable us to pay our indebtedness or to fund our other liquidity needs. In any such circumstance, we may need to refinance all or a portion of our indebtedness, on or before maturity. We may not be able to refinance any indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions and investments. Any such action, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness may restrict our ability to sell assets and our use of the proceeds from such sales.

If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness,

 

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or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our credit agreement, or any replacement revolving credit facility in respect thereof, could elect to terminate their revolving commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation.

In addition, in July 2017, the U.K. Financial Conduct Authority, which regulates the London Inter-bank Offered Rate (“LIBOR”), announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve and what, if any, effect these changes, other reforms or the establishment of alternative reference rates may have on instruments that calculate interest rates based on LIBOR including our Term Loan Facilities and ABL Facility. Additionally, changes in the method pursuant to which the LIBOR rates are determined may result in a sudden or prolonged increase or decrease in the reported LIBOR rates. While we do not expect that the transition from LIBOR and risks related thereto will have a material adverse effect on our financing costs, it is still uncertain at this time. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk.”

Our debt instruments limit our flexibility in operating our business.

Our debt instruments contain various covenants that limit our and our restricted subsidiaries’ ability to engage in specified types of transactions. A breach of any of these covenants could result in a default under our debt instruments. Any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions. In addition, certain of the covenants governing the ABL Facility, the Term Loan Facilities and the ACI Notes restrict, among other things, our and our restricted subsidiaries’ ability to:

 

   

incur additional indebtedness or provide guarantees in respect of obligations of other persons;

 

   

pay dividends on, repurchase or make distributions to our owners or make other restricted payments or make certain investments;

 

   

prepay, redeem or repurchase debt;

 

   

make loans, investments and capital expenditures;

 

   

sell or otherwise dispose of certain assets;

 

   

incur liens;

 

   

engage in sale and leaseback transactions;

 

   

restrict dividends, loans or asset transfers from our subsidiaries;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

enter into a new or different line of business; and

 

   

enter into certain transactions with our affiliates.

In addition, the restrictive covenants in our ABL Facility require us, in certain circumstances, to maintain a specific fixed charge coverage ratio. Our ability to meet that financial ratio can be affected by events beyond our control, and there can be no assurance that we will meet it. A breach of this covenant could result in a default under such facilities. Moreover, the occurrence of a default under our ABL Facility could result in an event of default under our other indebtedness. Upon the occurrence of

 

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an event of default under our ABL Facility, the lenders could elect to declare all amounts outstanding under the ABL Facility to be immediately due and payable and terminate all commitments to extend further credit. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us.

We may not have the ability to raise the funds necessary to finance the change of control offer required by the indentures governing the 2020 Safeway Notes (as defined herein), the 2021 Safeway Notes (as defined herein) and the ACI Notes (the 2020 Safeway Notes, the 2021 Safeway Notes and the ACI Notes, collectively the “CoC Notes”).

Upon the occurrence of certain kinds of change of control events, we will be required to offer to repurchase outstanding CoC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of the CoC Notes or that restrictions in our debt instruments will not allow such repurchases. Our failure to purchase the tendered notes would constitute an event of default under the indentures governing the CoC Notes which, in turn, would constitute a default under our ABL Facility and Term Loan Facilities. In addition, the occurrence of a change of control would also constitute a default under our ABL Facility and Term Loan Facilities. A default under our ABL Facility and Term Loan Facilities would result in a default under our indentures if the lenders accelerate the debt under our ABL Facility and Term Loan Facilities.

Moreover, our debt instruments restrict, and any future indebtedness we incur may restrict, our ability to repurchase the notes, including following a change of control event. As a result, following a change of control event, we may not be able to repurchase the CoC Notes unless we first repay all indebtedness outstanding under our Term Loan Facilities and any of our other indebtedness that contains similar provisions, or obtain a waiver from the holders of such indebtedness to permit us to repurchase the CoC Notes. We may be unable to repay all of that indebtedness or obtain a waiver of that type. Any requirement to offer to repurchase the outstanding CoC Notes may therefore require us to refinance our other outstanding debt, which we may not be able to do on commercially reasonable terms, if at all. These repurchase requirements may also delay or make it more difficult for others to obtain control of us.

Currently, substantially all of our assets are pledged as collateral under our ABL Facility and Term Loan Facilities.

As of November 30, 2019, we had $8.2 billion of indebtedness outstanding (other than finance lease obligations), of which $2.4 billion is secured under the Term Loan Facilities and $18.0 million is secured under the ABL Facility (excluding $459.8 million of outstanding letters of credit). As of November 30, 2019, we and our subsidiaries had approximately $702 million of finance lease obligations. If we are unable to repay all secured borrowings under our Term Loan Facilities when due, whether at maturity or if declared due and payable following a default, the administrative agents or the lenders, as applicable, would have the right to proceed against the collateral pledged to secure the indebtedness and may sell the assets pledged as collateral in order to repay those borrowings, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Increases in interest rates and/or a downgrade of our credit ratings could negatively affect our financing costs and our ability to access capital.

We have exposure to future interest rates based on the variable rate debt under our credit facilities and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future

 

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acquisitions. Daily working capital requirements are typically financed with operational cash flow and through the use of our ABL Facility. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results.

We rely on access to bank and capital markets as sources of liquidity for cash requirements not satisfied by cash flows from operations. A downgrade in our credit ratings from the internationally recognized credit rating agencies could negatively affect our ability to access the bank and capital markets, especially in a time of uncertainty in either of those markets. A rating downgrade could also impact our ability to grow our business by substantially increasing the cost of, or limiting access to, capital.

Risks Related to This Offering and Owning Our Common Stock

There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity. If the stock price fluctuates after this offering, you could lose a significant part of your investment.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling shares of our common stock that you buy. The initial public offering price for the shares will be determined by negotiations between us, the selling stockholders and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. The market price of our common stock may be influenced by many factors, some of which are beyond our control, including:

 

   

the failure of securities analysts to cover our common stock after this offering, or changes in financial estimates by analysts;

 

   

changes in, or investors’ perception of, the food and drug retail industry;

 

   

the activities of competitors;

 

   

future issuances and sales of our common stock, including in connection with acquisitions;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

   

regulatory or legal developments in the United States;

 

   

litigation involving us, our industry, or both;

 

   

general economic conditions; and

 

   

other factors described elsewhere in these “Risk Factors.”

As a result of these factors, you may not be able to resell your shares of our common stock at or above the initial offering price. In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.

 

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If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline.

If our Pre-IPO Stockholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decrease. The perception in the public market that our Pre-IPO Stockholders might sell shares of common stock could also create a perceived overhang and depress our market price. Upon completion of this offering, we will have                  shares of common stock outstanding of which                  shares will be held by our Pre-IPO Stockholders (assuming that the underwriters do not exercise their option to purchase additional shares from the selling stockholders). Prior to this offering, we, our executive officers and directors and our other Pre-IPO Stockholders will have agreed with the underwriters to a “lock-up” period, meaning that such parties may not, subject to certain exceptions, sell any of their existing shares of our common stock without the prior written consent of representatives of the underwriters for at least                  days after the date of this prospectus. Thereafter, each Pre-IPO Stockholder will be permitted to sell shares of common stock subject to certain restrictions, including the restrictions described in “Certain Relationships and Related Party Transactions—Lock-Up Agreements.” Pursuant to these agreements, among other exceptions, we may enter into an agreement providing for the issuance of our common stock in connection with the acquisition, merger or joint venture with another publicly traded entity during the 180-day restricted period after the date of this prospectus. In addition, all of our Pre-IPO Stockholders and independent directors will be subject to the holding period requirement of Rule 144 (“Rule 144”) under the Securities Act, as described in “Shares Eligible for Future Sale.” When the lock-up agreements expire, these shares will become eligible for sale, in some cases subject to the requirements of Rule 144. The market price for shares of our common stock may drop when the restrictions on resale by our Pre-IPO Stockholders and independent directors lapse.

Further, if the concurrent offering of Series A preferred stock is completed, up to              shares of common stock (up to              shares if the underwriters in the Series A preferred stock offering exercise their over-allotment option in full), in each case subject to anti-dilution, make-whole and other adjustments, will be issuable upon conversion of the shares of Series A preferred stock. We may also choose to pay dividends on the Series A preferred stock in the form of shares of our common stock, which would be based on the volume weighted average price per share of our common stock over a certain period, subject to certain limitations set forth in the certificate of designations relating to the Series A preferred stock. See “Concurrent Offering of Series A Preferred Stock.”

In addition, our Sponsors will have substantial demand and incidental registration rights, as described in “Certain Relationships and Related Party Transactions—Registration Rights Agreement.” We also intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our equity plans. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. A decline in the market price of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

We are controlled by our Sponsors and they may have conflicts of interest with other stockholders in the future.

After the completion of this offering, and assuming an offering of              shares by the selling stockholders before giving effect to the Repurchase, our Sponsors will control in the aggregate approximately     % of our common stock (or     % if the underwriters exercise in full their option to purchase additional shares). Assuming              shares of outstanding common stock are repurchased by us using the net proceeds from the offering of Series A preferred stock (or              shares of common stock if the underwriters in the Series A preferred stock offering exercise their over-allotment option in full), our Sponsors will control in the aggregate approximately     % of our common stock (or

 

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    % if the underwriters in the Series A preferred stock offering exercise their over-allotment option in full). As a result, our Sponsors will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Four of our 12 directors are either employees of, or advisors to, members of our Sponsors, as described under “Management.” Our Sponsors will also have sufficient voting power to amend our organizational documents. The interests of our Sponsors may not coincide with the interests of other holders of our common stock. Additionally, our Sponsors are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsors may also pursue, for their own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as our Sponsors continue to own a significant amount of the outstanding shares of our common stock, our Sponsors will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions.

We are a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Upon completion of this offering, our Sponsors, as a group, will control a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NYSE rules. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of the board of directors consist of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation committees consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.

Provisions in our charter documents, certain agreements governing our indebtedness, the Stockholders’ Agreement and Delaware law could make an acquisition of the Company more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

Provisions in our certificate of incorporation and our amended and restated bylaws (“bylaws”) may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which you might otherwise receive a

 

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premium for your shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock.

In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows:

 

   

from and after such date that our Sponsors and their respective Affiliates (as defined in Rule 12b-2 of the Exchange Act), or any person who is an express assignee or designee of their respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the “50% Trigger Date”), the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors;

 

   

prior to the 50% Trigger Date, only our board of directors and the Sponsors are expressly authorized to make, alter or repeal our bylaws and, from and after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote;

 

   

from and after the 50% Trigger Date, the manner in which stockholders can remove directors from the board will be limited;

 

   

from and after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent will be prohibited;

 

   

from and after such date that our Sponsors and their respective Affiliates (or any person who is an express assignee or designee of our Sponsors’ respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established;

 

   

limits on who may call stockholder meetings;

 

   

requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Sponsors, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder;

 

   

requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and

 

   

our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquiror, effectively preventing acquisitions that have not been approved by our board of directors.

Our certificate of incorporation authorizes our board of directors to issue up to              shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action

 

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by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights, and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent, or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control.

Certain rights of the holders of the Series A preferred stock, if issued, could delay or prevent an otherwise beneficial takeover or takeover attempt of the Company.

Certain rights of the holders of the Series A preferred stock could make it more difficult or more expensive for a third party to acquire us. For example, if a fundamental change were to occur on or prior to                 , 20    , holders of the Series A preferred stock, if issued, may have the right to convert their Series A preferred stock, in whole or in part, at an increased conversion rate and will also be entitled to receive a make-whole amount equal to the present value of all remaining dividend payments on their Series A preferred stock as described in the certificate of designations governing the Series A preferred stock. These features of the Series A preferred stock could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. Because the applicability of the exclusive forum provision is limited to the extent permitted by law, we do not intend that the exclusive forum provision would apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction, and acknowledge that federal courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act. We note that there is uncertainty as to whether a court would enforce the provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.

 

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If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the market price of our common stock could decline.

The trading market for our common stock likely will be influenced by the research and reports that equity and debt research analysts publish about the industry, us and our business. The market price of our common stock could decline if one or more securities analysts downgrade our shares or if those analysts issue a sell recommendation or other unfavorable commentary or cease publishing reports about us or our business. If one or more of the analysts who elect to cover us downgrade our shares, the market price of our common stock would likely decline.

Our ability to pay dividends to our stockholders is restricted by applicable laws and regulations and requirements under certain of our securities and debt agreements, including the Term Loan Facilities, ABL Facility and ACI Notes.

Holders of our common stock are only entitled to receive such cash dividends as our board, in its sole discretion, may declare out of funds legally available for such payments. The declaration and payment of any future dividends will be made at the sole discretion of our board of directors and will be dependent on a variety of factors, including our financial condition, earnings, legal requirements, our general liquidity needs, and other factors that our board deems relevant. Our ability to declare and pay dividends to our stockholders is subject to certain laws, regulations, and policies, including minimum capital requirements and, as a Delaware corporation, we are subject to certain restrictions on dividends under the DGCL. Under the DGCL, our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, to the extent a dividend policy is put in place it will require that, so long as any share of our Series A preferred stock remains outstanding, no dividend or distribution may be declared or paid on our common stock unless all accrued and unpaid dividends have been paid on our Series A preferred stock, subject to exceptions, such as dividends on our common stock payable solely in shares of our common stock. Finally, our ability to pay dividends to our stockholders may be limited by covenants in any financing arrangements that we are currently a party, including the Term Loan Facilities, ABL Facility and ACI Notes, to or may enter into in the future. As a consequence of these various limitations and restrictions, we may not be able to make, or may have to reduce or eliminate at any time, the payment of dividends on our common stock. See “Description of Indebtedness.” Any change in the level of our dividends or the suspension of the payment thereof could have a material adverse effect on the market price of our common stock. See “Dividend Policy.”

You may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise.

After this offering, we will have              shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved up to     % of the shares of our common stock that will be available as of the consummation of this offering for issuance under existing restricted stock unit awards and for future awards that may be issued under our Phantom Unit Plan (as defined herein). See “Executive Compensation—Incentive Plans” and “Shares Eligible for Future Sale—S-8 Registration Statement.” Any common stock that we issue, including under our Phantom Unit Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

 

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In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

The Series A preferred stock may adversely affect the market price of our common stock.

The market price of our common stock is likely to be influenced by the Series A preferred stock. For example, the market price of our common stock could become more volatile and could be depressed by:

 

   

investors’ anticipation of the potential resale in the market of a substantial number of additional shares of our common stock received upon conversion of the Series A preferred stock;

 

   

possible sales of our common stock by investors who view the Series A preferred stock as a more attractive means of equity participation in us than owning shares of our common stock; and

 

   

hedging or arbitrage trading activity that may develop involving the Series A preferred stock and our common stock.

Our common stock will rank junior to the Series A preferred stock, if issued, with respect to the payment of dividends and amounts payable in the event of our liquidation, dissolution or winding-up of our affairs.

Our common stock will rank junior to the Series A preferred stock, if issued, with respect to the payment of dividends and amounts payable in the event of our liquidation, dissolution or winding-up of our affairs. This means that, unless accumulated and unpaid dividends have been declared and paid, or set aside for payment, on all outstanding shares of the Series A preferred stock, if issued, for all preceding dividend periods, no dividends may be declared or paid on our common stock and we will not be permitted to purchase, redeem or otherwise acquire any of our common stock, subject to limited exceptions. Likewise, in the event of our voluntary or involuntary liquidation, dissolution or winding-up of our affairs, no distribution of our assets may be made to holders of our common stock until we have paid to holders of the Series A preferred stock, if issued, a liquidation preference equal to $             per share plus accumulated and unpaid dividends.

Holders of the Series A preferred stock, if issued, will have the right to elect two directors in the case of certain dividend arrearages.

Whenever dividends on any shares of the Series A preferred stock have not been declared and paid for the equivalent of six or more dividend periods, whether or not for consecutive dividend periods, the authorized number of directors on our board of directors will, at the next annual meeting of stockholders or at a special meeting of stockholders, if any, automatically be increased by two and the holders of such shares of the Series A preferred stock will be entitled, at our next annual meeting of stockholders or at a special meeting of stockholders, if any, to vote for the election of a total of two additional members of our board of directors, subject to certain terms and limitations. This right to elect directors will dilute the representation of the holders of our common stock on our board of directors and may adversely affect the market price of our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future operating results and financial position, business strategy, and plans and objectives of management for future operations, are forward-looking statements. Words such as “believes,” “plans,” “anticipates,” “estimates,” “expects,” “intends,” “aims,” “potential,” “will,” “would,” “could,” “considered,” “likely,” “estimate” and the negatives or variations of these words and similar future or conditional expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Statements regarding cost synergies and revenue opportunities (and in each case, the components, amounts and/or percentages thereof) are forward-looking statements. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon future circumstances that may or may not occur. These factors include, but are not limited to, risks and uncertainties discussed in the section of this prospectus entitled “Risk Factors” and the following factors:

 

   

the competitive nature of the industry in which we conduct our business;

 

   

general business and economic conditions, including the rate of inflation or deflation, consumer spending levels, population, employment and job growth and/or losses in our market;

 

   

our ability to increase identical sales, expand our Own Brands, maintain or improve operating margins, revenue and revenue growth rate, control or reduce costs, improve buying practices and control shrink;

 

   

our ability to expand or grow our home delivery network and Drive Up & Go curbside pickup services;

 

   

pricing pressures and competitive factors, which could include pricing strategies, store openings, remodels or acquisitions by our competitors;

 

   

labor costs, including benefit plan costs and severance payments, or labor disputes that may arise from time to time and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future;

 

   

disruptions in our manufacturing facilities’ or distribution centers’ operations, disruption of significant supplier relationships, or disruptions to our produce or product supply chains;

 

   

results of any ongoing litigation in which we are involved or any litigation in which we may become involved;

 

   

data privacy and security, the failure of our IT systems, or maintaining, expanding or upgrading existing systems or implementing new systems;

 

   

the effects of government regulation and legislation, including healthcare reform;

 

   

our ability to raise additional capital to finance the growth of our business, including to fund acquisitions;

 

   

our ability to service our debt obligations, and restrictions in our debt agreements;

 

   

the impact of private and public third-party payers’ continued reduction in prescription drug reimbursements and the ongoing efforts to limit participation in payor networks, including through mail order;

 

   

plans for future growth and other business development activities;

 

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our ability to realize anticipated savings from our implementation of new productivity initiatives, the failure of which could adversely affect our financial performance and competitive position;

 

   

changes in tax laws or interpretations that could increase our consolidated tax liabilities; and

 

   

competitive pressures in all markets in which we operate.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

Consequently, all of the forward-looking statements we make in this prospectus are qualified by the information contained in this prospectus, including, but not limited to, the information contained in this section and the information discussed in the section entitled “Risk Factors.” See the section “Where You Can Find More Information” in this prospectus.

Persons reading this prospectus are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and only to events as of the date on which the statements are made. We are not under any obligation, and we expressly disclaim any obligation, to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

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USE OF PROCEEDS

The selling stockholders are selling all of the shares of common stock in this offering, and we will not receive any proceeds from the sale of the shares.

We estimate that the net proceeds to us from the offering of Series A preferred stock, based upon an assumed public offering price per share of our Series A preferred stock of $                , will be approximately $                 (or approximately $                 if the underwriters in the Series A preferred stock offering exercise their over-allotment option in full), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the anticipated net proceeds from the offering of Series A preferred stock, together with cash on hand, for the Repurchase. The Repurchase is conditioned upon the consummation of the offering of Series A preferred stock and the receipt of funds therefrom. The initial estimated net proceeds of $                 , together with cash on hand, will be used to repurchase an aggregate of              shares of outstanding common stock from two of our Pre-IPO Stockholders, Albertsons Investor and KIM ACI, at a price equal to the initial public offering price of the shares of common stock sold in this offering, after deducting underwriting discounts and commissions. If the underwriters in the Series A preferred offering exercise their over-allotment option in full, an additional $                 in net proceeds will be available and such additional net proceeds, together with cash on hand, will be used to repurchase an additional aggregate of              shares of outstanding common stock from our Sponsors, on a pro-rata basis relative to their respective holdings in the Company, at the same price.

 

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DIVIDEND POLICY

The declaration and payment of any future dividends will be made at the sole discretion of our board of directors and will depend on a number of factors, including general and economic conditions, industry standards, our financial condition and operating results, our available cash and current and anticipated cash needs, restrictions under the documentation governing certain of our indebtedness, including our Term Loan Facilities, ABL Facility and ACI Notes, capital requirements, regulations, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant.

To the extent a dividend policy is put in place it will require that, so long as any share of our Series A preferred stock remains outstanding, no dividend or distribution may be declared or paid on our common stock unless all accrued and unpaid dividends have been paid on our Series A preferred stock, subject to exceptions such as dividends on our common stock payable solely in shares of our common stock.

The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. See “Risk Factors—Risks Related to This Offering and Owning Our Common Stock—Our ability to pay dividends to our stockholders is restricted by applicable laws and regulations and requirements under certain of our securities and debt agreements, including our Term Loan Facilities, ABL Facility and ACI Notes.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of November 30, 2019, on an actual basis and as adjusted to reflect the issuance and sale by us of shares of our Series A preferred stock, which is contingent upon the closing of the offering of common stock, at a public offering price of $         per share of Series A preferred stock (assuming no exercise by the underwriters of their over-allotment option in the Series A preferred stock offering) and the application of the net proceeds of the Series A preferred stock offering as described in “Use of Proceeds.” The as adjusted information below is illustrative only, and our capitalization following the closing of this offering will be adjusted based upon the public offering price for the offering of Series A preferred stock and other terms of the offering of Series A preferred stock determined at pricing and the use of proceeds therefrom. You should read this table together with “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of November 30, 2019  
(dollars in millions)    Actual      As
Adjusted
 

Cash and cash equivalents

   $ 406      $    
  

 

 

    

 

 

 

Debt, including current maturities, net of debt discounts and deferred financing costs(1)

     

ABL Facility(2)

   $ 18      $    

Term Loan Facilities

     2,312     

ACI Notes

     4,554     

Safeway Notes(3)

     642     

NALP Notes(4)

     466     

Finance leases

     702     

Other financing liabilities(5)

     37     

Mortgage notes payable, secured

     18     
  

 

 

    

 

 

 

Total Debt

   $ 8,749      $    
  

 

 

    

 

 

 

Stockholders’ equity

     

Series A mandatory convertible preferred stock, $0.01 par value; no shares authorized, issued and outstanding, actual;         shares authorized,         shares issued and outstanding, as adjusted

   $      $    

Undesignated preferred stock, $0.01 par value;                      shares authorized, no shares issued and outstanding, actual;          shares authorized, no shares issued and outstanding, as adjusted

         

Common stock, $0.01 par value; 1,000,000,000 shares authorized, 279,597,312 shares issued and outstanding, actual; 1,000,000,000 shares authorized,          shares issued and outstanding, as adjusted

     2.8     

Total stockholders’ equity

   $ 2,411      $    
  

 

 

    

 

 

 

Total capitalization

   $ 11,160      $                
  

 

 

    

 

 

 

 

(1)

Debt discounts and deferred financing costs totaled $78.3 million and $62.8 million, respectively, as of November 30, 2019, on an actual basis.

(2)

The ABL Facility provides for a $4,000.0 million revolving credit facility. As of November 30, 2019, the aggregate borrowing base on the ABL Facility would be approximately $4.0 billion, which was reduced by $459.8 million of outstanding standby letters of credit, resulting in a net borrowing base availability of approximately $3.5 billion. See “Description of Indebtedness—ABL Facility.”

(3)

Consists of the 2020 Safeway Notes, 2021 Safeway Notes, 2027 Safeway Notes (as defined herein) and 2031 Safeway Notes (as defined herein).

(4)

Consists of the NALP Medium-Term Notes, 2026 NALP Notes, 2029 NALP Notes, 2030 NALP Notes and 2031 NALP Notes (each as defined herein).

(5)

Consists of other financing obligations and the ASC Notes (as defined herein).

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

DILUTION

All shares of our common stock being sold in this offering were issued and outstanding prior to this offering. If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the adjusted net tangible book value (deficit) per share of our common stock after this offering. Dilution results from the fact that the per share offering price of our common stock is substantially in excess of the tangible book value (deficit) per share attributable to the existing equity holders.

Our tangible book value (deficit) represents the amount of total tangible assets less total liabilities, and our tangible book value (deficit) per share represents tangible book value (deficit) divided by the number of shares of common stock outstanding. As of             , 2020 our tangible book value (deficit) was approximately $            , or $             per share of our common stock.

After giving effect to (i) the sale by us of the shares of Series A preferred stock in the offering of Series A preferred stock, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the application of the net proceeds from the offering of Series A preferred stock for the Repurchase as set forth under “Use of Proceeds,” our as adjusted net tangible book value (deficit) as of             , 2020 would have been $            , or $             per share of our common stock. This amount represents an immediate increase in net tangible book value (or a decrease in net tangible book deficit) of $             per share to existing stockholders and an immediate and substantial dilution in net tangible book value (deficit) of $ per share to investors purchasing shares in this offering at the initial public offering price.

The following table illustrates this dilution on a per share basis:

 

Initial public offering price per share of common stock (the midpoint of the estimated offering price range shown on the cover page of this prospectus)

   $                

Net tangible book value (deficit) per share as of             , 2020

   $                

Increase in tangible book (deficit) value per share attributable to investors in the this offering

   $                

As adjusted net tangible book value (deficit) per share after this offering

   $                

Dilution per share to investors in this offering

   $                

Dilution is determined by subtracting as adjusted net tangible book value (deficit) per share of common stock after this offering from the initial public offering price per share of common stock.

If the underwriters exercise in full their over-allotment option to purchase additional shares in the Series A preferred stock offering, the as adjusted net tangible book value (deficit) per share after giving effect to the Series A preferred stock offering and the use of proceeds therefrom would be $ per share. This represents an increase in as adjusted net tangible book value (or a decrease in as adjusted net tangible book deficit) of $             per share to existing stockholders and results in dilution in as adjusted net tangible book value (deficit) of $             per share to investors purchasing shares in this offering at the initial public offering price.

The following table summarizes the number of shares of common stock purchased, the total consideration paid and the average price per share paid by the selling stockholders and by investors participating in this offering, based upon the assumed initial public offering price of $             per share.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent  

Pre-IPO Stockholders

                   $                             $                

Purchasers of common stock in this offering

                   $                     $    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0   $          100.0   $    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

The table above does not give effect to     % of the shares of our common stock that we have reserved and will be available as of the consummation of this offering for issuance under existing restricted stock unit awards.

Any common stock that we issue, including under our equity incentive plans that we may adopt in the future or upon conversion of the Series A preferred stock, would further dilute the percentage ownership held by the investors who purchase common stock in this offering.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The information below should be read along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and the historical financial statements and accompanying notes included elsewhere in this prospectus. Our historical results set forth below are not necessarily indicative of results to be expected for any future period.

The selected consolidated financial information set forth below is derived from our annual Consolidated Financial Statements for the periods indicated below, including the Consolidated Balance Sheets at February 23, 2019 and February 24, 2018 and the related Consolidated Statements of Operations and Comprehensive Income (Loss) and Consolidated Statements of Cash Flows for the 52 weeks ended February 23, 2019 (fiscal 2018), February 24, 2018 (fiscal 2017), February 25, 2017 (fiscal 2016) and notes thereto appearing elsewhere in this prospectus. As well, we have derived the Consolidated Balance Sheet data as of November 30, 2019 and the Consolidated Statement of Operations data for the 40 weeks ended November 30, 2019 and the 40 weeks ended December 1, 2018 from our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this prospectus.

 

    40 Weeks Ended        
(dollars in millions, except per share data)   November 30,
2019
    December 1,
2018
    Fiscal
2018
    Fiscal
2017
    Fiscal
2016
    Fiscal
2015
    Fiscal
2014(1)
 

Results of Operations

             

Net sales and other revenue

  $ 47,018     $ 46,518     $ 60,535     $ 59,925     $ 59,678     $ 58,734     $ 27,199  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    13,176       12,836       16,895       16,361       16,641       16,062       7,503  

Selling and administrative expenses

    12,548       12,501       16,272       16,209       16,072       15,600       7,929  

(Gain) loss on property dispositions and impairment losses, net

    (483     (164     (165     67       (39     103       228  

Goodwill impairment

                      142                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    1,111       499       788       (57     608       359       (654

Interest expense, net

    558       663       831       875       1,004       951       633  

Loss (gain) on debt extinguishment

    66       9       9       (5     112              

Other (income) expense, net

    (22     (88     (104     (9     (44     (50     91  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    509       (85     52       (918     (464     (542     (1,378

Income tax expense (benefit)

    111       (80     (79     (964     (90     (40     (153
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 399     $ (5 )     $ 131     $ 46     $ (374   $ (502   $ (1,225
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet (at end of period)

             

Cash and cash equivalents

  $ 406     $ 463     $ 926     $ 670     $ 1,219     $ 580     $ 1,126  

Total assets(2)

    24,992       20,982       20,777       21,812       23,755       23,770       25,678  

Total stockholders’ / member equity(2)

    2,411       1,390       1,451       1,398       1,371       1,613       2,169  

Total debt, including finance leases

    8,749       10,978       10,586       11,876       12,338       12,226       12,569  

Net cash provided by (used in) operating activities

    1,387       1,069       1,688       1,019       1,814       902       (165

Per Share Data

             

Basic net income (loss) per common share

  $ 1.43     $ (0.02)     $ 0.47     $ 0.17     $ (1.33   $ (1.80   $ (4.38

Diluted net income (loss) per common share

  $ 1.42     $ (0.02)     $ 0.47     $ 0.17     $ (1.33   $ (1.80   $ (4.38

Weighted-average common shares outstanding (in millions):

             

Basic

    280       281       280       280       280       280       280  

Diluted

    280       281       280       280       280       280       280  

 

(1)

Includes results from four weeks for the stores purchased in the Safeway merger on January 30, 2015.

(2)

We adopted ASU 2016-02, Leases (Topic 842), and related amendments as of February 24, 2019 under the modified retrospective approach and, therefore, have not revised comparative periods. Under Topic 842, leases historically classified as capital leases are now referred to as finance leases.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve numerous risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements.

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations of Albertsons Companies, Inc., the words “Albertsons,” “the Company,” “we,” “us,” “our” and “ours” refer to Albertsons Companies, Inc., together with its subsidiaries.

Overview

We are one of the largest food retailers in the United States, with 2,260 stores across 34 states and the District of Columbia. We operate 20 iconic banners with on average 85 years of operating history, including Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Jewel-Osco, Acme, Shaw’s, Star Market, United Supermarkets, Market Street and Haggen, with approximately 270,000 talented and dedicated employees who serve on average more than 33 million customers each week. Our stores operate in First-and-Main retail locations and have leading market share within attractive and growing geographies. We hold a #1 or #2 position by market share in 66% of the 121 metropolitan statistical areas (“MSAs”) in which we operate. Our portfolio of well-located, full-service stores provides the foundation of our omni-channel platform, including our rapidly growing Drive Up & Go curbside pickup, home delivery and rush delivery offerings. We seek to tailor our offerings to local demographics and preferences of the markets that we operate in. Our Locally Great, Nationally Strong operating structure empowers decision making at the local level, which we believe better serves our customers and communities, while also providing the systems, analytics and buying power afforded by an organization with national scale and more than $60 billion in annual sales.

Our Company has grown through a series of transformational acquisitions over the last six years, including our merger with Safeway in 2015 which gave us the benefits of national scale. While our banners have rich histories, we are in many ways a young company. We have also integrated systems and converted stores and distribution centers to create a common platform. We believe our common platform gives us greater transparency and compatibility across our network, allowing us to better serve our customers and employees while enhancing our supply chain.

We continue to sharpen our in-store execution, increase our Own Brands penetration and expand our omni-channel and digital capabilities. We have invested substantially in our business, deploying approximately $6.8 billion of capital expenditures beginning with fiscal 2015, including the $1.5 billion we expect to spend in fiscal 2019. We used that capital to remodel existing stores, opportunistically build new stores and enhance our digital capabilities.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

We operate in the $1.1 trillion U.S. food retail industry, a highly fragmented sector with a large number of companies competing locally and a growing array of companies with a national footprint, including traditional supermarkets, pharmacies and drug stores, convenience stores, warehouse clubs and supercenters. The industry has also seen the widespread introduction of “limited assortment” retail stores, as well as local chains and stand-alone stores that cater to the individual cultural preferences of specific neighborhoods. Despite this, large, national grocers have increased market share over time as scale remains an important advantage in offering customers a modern and attractive shopping experience. Between 2013 and 2018, the share of the top 10 food retail companies increased from 44% to 55% on the basis of industry retail sales. While brick and mortar stores account for approximately 95% of industry sales, eCommerce offerings have been expanding as a result of new pure-play internet-based companies as well as established players expanding omni-channel options. Other trends in the industry include changing consumer tastes, preferences (including those relating to sustainability of product sources) and spending patterns. See “Risk Factors—Risks Related to Our Business and Industry—We may not identify timely or respond effectively to consumer trends, which could negatively affect our relationship with our customers, the demand for our products and services and our market share.”

From 2014 through 2019, food retail industry revenues increased by $29 billion, driven in part by economic growth, favorable consumer dynamics and a consumer shift to premium and organic brands. Both inflation and deflation affect our business. After a period of food deflation in 2016 and 2017, the Food-at-Home Consumer Price Index increased by 0.4% in 2018 and             % in 2019 and is expected to increase between 0.5% and 1.5% in 2020, and U.S. GDP is expected to increase by 2.1% in 2020.

A considerable number of our employees are paid at rates related to the federal minimum wage. Additionally, many of our stores are located in states, including California, where the minimum wage is greater than the federal minimum wage and where a considerable number of employees receive compensation equal to the state’s minimum wage. For example, as of February 23, 2019, we employed approximately 68,000 associates in California, where the current minimum wage increased to $13.00 per hour, effective January 1, 2020, and will gradually increase each year thereafter to $15.00 per hour by January 1, 2023. In Massachusetts, where we employed approximately 10,800 associates as of February 23, 2019, the minimum wage increased to $12.75 per hour, effective January 1, 2020, and will reach $15.00 per hour by 2023. In New Jersey, where we employed approximately 7,100 associates as of February 23, 2019, the minimum wage increased to $11.00 per hour, effective January 1, 2020, and will reach $15.00 per hour by 2024. In Maryland, where we employed approximately 7,200 associates as of February 23, 2019, the minimum wage increased to $11.00 per hour, effective January 1, 2020, and will reach $15.00 per hour by 2025. Moreover, municipalities may set minimum wages above the applicable state standards. For example, the minimum wage in Seattle, Washington, where we employed approximately 1,800 associates as of February 23, 2019, increased to $16.39 per hour effective January 1, 2020 for employers with more than 500 employees nationwide. In Chicago, Illinois, where we employed approximately 6,200 associates as of February 23, 2019, the minimum wage increased to $13.00 per hour effective July 1, 2019. Any further increases in the federal minimum wage or the enactment of state or local minimum wage increases could also increase our labor costs, which may adversely affect our results of operations and financial condition.

In addition, we participate in various multiemployer pension plans for substantially all employees represented by unions pursuant to collective bargaining agreements that require us to contribute to these plans. Pension expenses for multiemployer pension plans are recognized by us as contributions are made. Generally, benefits are based on a fixed amount for each year of service. Our contributions to these pension plans could change as a result of collective bargaining efforts, which could have a negative effect to our results of operations and financial condition. Our contributions to multiemployer

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

plans are expected to be $475.0 million in fiscal 2019 and were $451.1 million, $431.2 million and $399.1 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. See “Risk Factors—Risks Related to Our Business and Industry—Increased pension expenses, contributions and surcharges may have an adverse impact on our financial results.”

We have identified and are in the early stages of implementing a broad range of new, specific productivity initiatives that target $1 billion in annual run-rate efficiencies and savings by the end of fiscal 2022 to help offset cost inflation, fund growth and drive earnings. The initiatives include operational efficiencies such as shrink management and labor efficiencies, purchasing and procurement, improved promotional effectiveness and leveraging corporate overhead, including continued modernization of our IT infrastructure. The savings from these planned productivity initiatives represent management’s estimates and remain subject to risks and uncertainties. See “Risk Factors—Risks Related to Our Business and Industry—Failure to realize anticipated benefits from our productivity initiatives could adversely affect our financial performance and competitive position.”

Stores

The following table shows stores operating, acquired, opened and closed during the periods presented:

 

     40 weeks ended     52 weeks ended  
     November 30,
2019
    December 1,
2018
    February 23,
2019
    February 24,
2018
    February 25,
2017
 

Stores, beginning of period

     2,269       2,318       2,318       2,324       2,271  

Acquired

                       5       78  

Opened

     12       3       6       15       15  

Closed

     (21     (44     (55     (26     (40
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stores, end of period

     2,260       2,277       2,269       2,318       2,324  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables summarize our stores by size:

 

     Number of stores      Percent of Total     Retail Square Feet(1)  

Square Footage

   November 30,
2019
     December 1,
2018
     November 30,
2019
    December 1,
2018
    November 30,
2019
     December 1,
2018
 

Less than 30,000

     204        208        9.0     9.1     4.7        4.8  

30,000 to 50,000

     787        795        34.8     34.9     33.0        33.4  

More than 50,000

     1,269        1,274        56.2     56.0     75.0        75.2  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Stores

     2,260        2,277        100.0     100.0     112.7        113.4  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(1)

In millions, reflects total square footage of retail stores operating at the end of the quarter.

 

     Number of Stores      Percent of Total     Retail Square Feet(1)  

Square Footage

   February 23,
2019
     February 24,
2018
     February 23,
2019
    February 24,
2018
    February 23,
2019
     February 24,
2018
 

Less than 30,000

     208        211        9.2     9.1     4.9        4.9  

30,000 to 50,000

     792        810        34.9     34.9     33.2        34.0  

More than 50,000

     1,269        1,297        55.9     56.0     74.9        76.5  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Stores

     2,269        2,318        100.0     100.0     113.0        115.4  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(1)

In millions, reflects total square footage of retail stores operating at the end of the period.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

Results of Operations

Comparison of 40 weeks ended November 30, 2019 to 40 weeks ended December 1, 2018:

The following table and related discussion set forth certain information and comparisons regarding the components of our Condensed Consolidated Statements of Operations for the 40 weeks ended November 30, 2019 (“first 40 weeks of fiscal 2019”) and 40 weeks ended December 1, 2018 (“first 40 weeks of fiscal 2018”).

 

     40 weeks ended  
     November 30,
2019
    % of
Sales
     December 1,
2018
    % of
Sales
 

Net sales and other revenue

   $ 47,018.3       100.0    $ 46,517.9       100.0

Cost of sales

     33,842.1       72.0        33,682.0       72.4  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     13,176.2       28.0        12,835.9       27.6  

Selling and administrative expenses

     12,548.4       26.7        12,500.7       26.9  

Gain on property dispositions and impairment losses, net

     (482.7     (1.0      (163.7     (0.4
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     1,110.5       2.3        498.9       1.1  

Interest expense, net

     557.5       1.2        662.5       1.5  

Loss on debt extinguishment

     65.8       0.1        9.5        

Other income, net

     (21.9            (88.3     (0.2
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     509.1       1.0        (84.8     (0.2

Income tax expense (benefit)

     110.5       0.2        (80.3     (0.2
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 398.6       0.8    $ (4.5    
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Sales and Other Revenue

Net sales and other revenue increased 1.1% to $47,018.3 million for the first 40 weeks of fiscal 2019 from $46,517.9 million for the first 40 weeks of fiscal 2018. The increase in Net sales and other revenue was primarily driven by our 2.1% increase in identical sales, partially offset by a reduction in sales related to the stores closed since the third quarter of fiscal 2018 and lower fuel sales.

Identical Sales, Excluding Fuel

Identical sales include stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Direct to consumer internet sales are included in identical sales, and fuel sales are excluded from identical sales. Acquired stores become identical on the one-year anniversary date of the acquisition. Identical sales for the first 40 weeks of fiscal 2019 and the first 40 weeks of fiscal 2018, respectively, were:

 

     40 weeks ended
     November 30,
2019
   December 1,
2018

Identical sales, excluding fuel

   2.1%    0.9%

Our identical sales for the 40 weeks ended November 30, 2019 benefited from growth in our online home delivery and Drive Up & Go curbside pickup sales and Own Brands sales.

Gross Profit

Gross profit represents the portion of Net sales and other revenue remaining after deducting Cost of sales during the period, including purchase and distribution costs. These costs include inbound

 

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Pursuant to 17 C.F.R. Section 200.83

 

freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with our distribution network. Advertising, promotional expenses and vendor allowances are also components of Cost of sales.

Gross profit margin increased to 28.0% during the first 40 weeks of fiscal 2019 compared to 27.6% during the first 40 weeks of fiscal 2018. Excluding the impact of fuel, gross profit margin increased 30 basis points compared to the first 40 weeks of fiscal 2018. The increase in gross profit margin was driven by improved shrink expense, improved product mix, including increased penetration in Own Brands and natural and organic products and lower depreciation expense, partially offset by continued reimbursement rate pressures in pharmacy and higher distribution center rent expense related to sale-leaseback transactions.

 

First 40 weeks of fiscal 2019 vs. First 40 weeks of fiscal 2018

   Basis point
increase

(decrease)
 

Lower shrink expense

     22  

Product mix, including increased penetration in Own Brands and natural and organic products

     13  

Lower depreciation expense

     9  

Pharmacy reimbursement rate pressure

     (14

Higher rent expense

     (10

Other

     10  
  

 

 

 

Total

       30  
  

 

 

 

Selling and Administrative Expenses

Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.

Selling and administrative expenses decreased to 26.7% of Net sales and other revenue during the first 40 weeks of fiscal 2019 compared to 26.9% of Net sales and other revenue for the first 40 weeks of fiscal 2018. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue decreased 30 basis points during the first 40 weeks of fiscal 2019 compared to the first 40 weeks of fiscal 2018. The decrease in Selling and administrative expenses was primarily attributable to lower integration and acquisition-related costs and lower depreciation and amortization expense, partially offset by an increase in rent expense and occupancy costs related to store properties, investments in strategic initiatives and higher employee wage and benefit costs. Lower acquisition and integration costs were driven by the completion of the Safeway integration during the third quarter of fiscal 2018, resulting in no store conversions in the first 40 weeks of fiscal 2019 compared to 506 store conversions in the first 40 weeks of fiscal 2018. The integration costs in the first 40 weeks of fiscal 2019 were largely driven by the conversion of back-office related areas and a distribution center.

 

First 40 weeks of fiscal 2019 vs. First 40 weeks of fiscal 2018

   Basis point
increase

(decrease)
 

Lower integration and acquisition-related costs

     (37

Depreciation and amortization

     (9

Rent expense and occupancy costs

       13  

Investments in strategic initiatives

     9  

Employee wage and benefit cost

     7  

Other

     (13
  

 

 

 

Total

     (30
  

 

 

 

 

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

Gain on Property Dispositions and Impairment Losses, Net

For the first 40 weeks of fiscal 2019, net gain on property dispositions and impairment losses was $482.7 million, primarily driven by $539.0 million of gains from the sale of assets including $463.6 million of gains related to sale-leaseback transactions during the second quarter of fiscal 2019 which consisted of store properties and a distribution center, partially offset by $56.3 million of asset impairments including an impairment loss of $38.6 million related to certain assets of our meal kit operations. For the first 40 weeks of fiscal 2018, net gain on property dispositions and impairment losses was $163.7 million, primarily driven by $216.0 million of gains related to the sale of various store properties and supply chain related assets, partially offset by $52.3 million of asset impairments primarily related to store properties and non-operating surplus assets.

Interest Expense, Net

Interest expense, net was $557.5 million during the first 40 weeks of fiscal 2019 compared to $662.5 million during the first 40 weeks of fiscal 2018. The decrease in interest expense was primarily attributable to lower average outstanding borrowings and lower average interest rates, partially offset by an increase in previously deferred financing costs and original issue discounts that were expensed in connection with the term loan repayments and refinancing of our term loan. The weighted average interest rate during the first 40 weeks of fiscal 2019 was 6.4%, excluding amortization and write-off of deferred financing costs and original issue discount, compared to 6.6% during the first 40 weeks of fiscal 2018.

Loss on Debt Extinguishment

Loss on debt extinguishment was $65.8 million during the first 40 weeks of fiscal 2019, compared to $9.5 million during the first 40 weeks of fiscal 2018. The losses on debt extinguishment primarily consist of the write-off of debt discounts associated with the tender offer and various repurchases of notes, as described in “Debt Management” included elsewhere in this prospectus.

Other Income, Net

For the first 40 weeks of fiscal 2019, Other income, net was $21.9 million compared to $88.3 million for the first 40 weeks of fiscal 2018. Other income, net during the first 40 weeks of fiscal 2019 was primarily driven by non-service cost components of net pension and post-retirement expense and unrealized gains from non-operating investments. Other income, net during the first 40 weeks of fiscal 2018 is primarily driven by adjustments related to contingent consideration, gains related to non-operating investments, and non-service cost components of net pension and post-retirement expense.

Income Taxes

For the first 40 weeks of fiscal 2019, Income tax expense was $110.5 million, representing a 21.7% effective tax rate. Our effective tax rate for the first 40 weeks of fiscal 2019 differs from the federal income tax statutory rate of 21% primarily due to state income taxes, reduced by income tax credits and charitable donation benefit. Income tax benefit was $80.3 million for the first 40 weeks of fiscal 2018. The tax benefit in fiscal 2018 was primarily driven by our provisional Staff Accounting Bulletin 118 adjustment of $60.3 million, primarily to account for refinement of the transition tax, and the remeasurement of deferred taxes related to the Tax Cut and Jobs Act.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

Comparison of Fiscal 2018 to Fiscal 2017 to Fiscal 2016:

The following table and related discussion sets forth certain information and comparisons regarding the components of our Consolidated Statements of Operations for fiscal 2018, fiscal 2017 and fiscal 2016, respectively (in millions):

 

     Fiscal
2018
     Fiscal
2017
     Fiscal
2016
 

Net sales and other revenue

   $ 60,534.5       100.0    $ 59,924.6       100.0    $ 59,678.2       100.0

Cost of sales

     43,639.9       72.1        43,563.5       72.7        43,037.7       72.1  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     16,894.6       27.9        16,361.1       27.3        16,640.5       27.9  

Selling and administrative expenses

     16,272.3       26.9        16,208.7       27.0        16,072.1       26.9  

(Gain) loss on property dispositions and impairment losses, net

     (165.0     (0.3      66.7       0.1        (39.2      

Goodwill impairment

                  142.3       0.2               
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     787.3       1.3        (56.6            607.6       1.0  

Interest expense, net

     830.8       1.4        874.8       1.5        1,003.8       1.7  

Loss (gain) on debt extinguishment

     8.7              (4.7            111.7       0.2  

Other income

     (104.4     (0.2      (9.2            (44.3     (0.1
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     52.2       0.1        (917.5     (1.5      (463.6     (0.8

Income tax benefit

     (78.9     (0.1      (963.8     (1.6      (90.3     (0.2
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 131.1       0.2    $ 46.3       0.1    $ (373.3     (0.6 )% 
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Identical Sales, Excluding Fuel

Identical sales include stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Direct to consumer internet sales are included in identical sales, and fuel sales are excluded from identical sales. Acquired stores become identical on the one-year anniversary date of the acquisition. Identical sales results, on an actual basis, for the past three fiscal years were as follows:

 

     Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

Identical sales, excluding fuel

     1.0     (1.3 )%      (0.4 )% 

Net Sales and Other Revenue

Net sales and other revenue increased $609.9 million, or 1.0%, from $59,924.6 million in fiscal 2017 to $60,534.5 million in fiscal 2018. The components of the change in Net sales and other revenue for fiscal 2018 were as follows (in millions):

 

     Fiscal
2018
 

Net sales and other revenue for fiscal 2017

   $ 59,924.6  

Identical sales increase of 1.0%

     539.6  

Increase in fuel sales

     351.3  

Decrease in sales due to store closures, net of new store openings

     (413.6

Other(1)

     132.6  
  

 

 

 

Net sales and other revenue for fiscal 2018

   $ 60,534.5  
  

 

 

 

 

(1)

Includes changes in non-identical sales and other miscellaneous revenue.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

The primary increase in Net sales and other revenue in fiscal 2018 as compared to fiscal 2017 was driven by our 1.0% increase in identical sales and an increase in fuel sales of $351.3 million, partially offset by a reduction in sales related to the closure of 55 stores in fiscal 2018.

Net sales and other revenue increased $246.4 million, or 0.4%, from $59,678.2 million in fiscal 2016 to $59,924.6 million in fiscal 2017. The components of the change in Net sales and other revenue for fiscal 2017 were as follows (in millions):

 

     Fiscal
2017
 

Net sales and other revenue for fiscal 2016

   $ 59,678.2  

Additional sales due to new stores and acquisitions, net of store closings

     589.4  

Increase in fuel sales

     411.2  

Identical sales decline of 1.3%

     (740.4

Other(1)

     (13.8
  

 

 

 

Net sales and other revenue for fiscal 2017

   $ 59,924.6  
  

 

 

 

 

(1)

Includes changes in non-identical sales and other miscellaneous revenue.

The primary increase in Net sales and other revenue in fiscal 2017 as compared to fiscal 2016 was driven by an increase of $589.4 million from new stores and acquisitions, net of store closings, and an increase of $411.2 million in fuel sales primarily driven by higher average retail pump prices, partially offset by a decline of $740.4 million from our 1.3% decline in identical sales.

Gross Profit

Gross profit represents the portion of Net sales and other revenue remaining after deducting the Cost of sales during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with our distribution network. Advertising, promotional expenses and vendor allowances are also components of Cost of sales.

Gross profit margin increased 60 basis points to 27.9% in fiscal 2018 compared to 27.3% in fiscal 2017. Excluding the impact of fuel, gross profit margin increased 70 basis points. The increase in fiscal 2018 as compared to fiscal 2017 was primarily attributable to lower shrink expense as a percentage of sales partially due to the completion of our store conversions related to the Safeway merger and the implementation of inventory management initiatives, lower advertising costs and improved product mix, including improved sales penetration in Own Brands.

 

Fiscal 2018 vs. Fiscal 2017

   Basis point increase
(decrease)
 

Lower shrink expense

     31  

Product mix, including increased Own Brands penetration

     16  

Advertising

     14  

Acquisition synergies

     6  

Other

     3  
  

 

 

 

Total

     70  
  

 

 

 

Gross profit margin decreased 60 basis points to 27.3% in fiscal 2017 compared to 27.9% in fiscal 2016. Excluding the impact of fuel, gross profit margin decreased 50 basis points. The decrease in fiscal 2017 as compared to fiscal 2016 was primarily attributable to our investment in promotions and

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

price and higher shrink expense as a percentage of sales, which was partially due to system conversions related to our integration.

 

Fiscal 2017 vs. Fiscal 2016

   Basis point increase
(decrease)
 

Investment in price and changes in product mix

     (36

Increase in shrink expense

     (23

LIFO expense

     (1

Acquisition synergies

     10  
  

 

 

 

Total

     (50
  

 

 

 

Selling and Administrative Expenses

Selling and administrative expenses consist primarily of store-level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.

Selling and administrative expenses decreased 10 basis points to 26.9% of Net sales and other revenue in fiscal 2018 from 27.0% in fiscal 2017. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue decreased 10 basis points during fiscal 2018 compared to fiscal 2017.

 

Fiscal 2018 vs. Fiscal 2017

   Basis point increase
(decrease)
 

Depreciation and amortization

     (27

Cost reduction initiatives

     (18

Employee wage and benefit costs (primarily incentive pay)

     28  

Other (includes an increase in acquisition and integration costs)

     7  
  

 

 

 

Total

     (10
  

 

 

 

The decrease during fiscal 2018 compared to fiscal 2017 was primarily attributable to lower depreciation and amortization expense and our cost reduction initiatives, partially offset by increased employee wage and benefit costs and higher acquisition and integration costs. Increased employee wage and benefit costs were primarily attributable to incentive pay as a result of improved operating performance. Higher acquisition and integration costs were primarily driven by the 506 store conversions in fiscal 2018 related to the Safeway integration compared to 219 store conversions in fiscal 2017.

Selling and administrative expenses increased 10 basis points to 27.0% of Net sales and other revenue in fiscal 2017 from 26.9% in fiscal 2016. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue increased 20 basis points during fiscal 2017 compared to fiscal 2016.

 

Fiscal 2017 vs. Fiscal 2016

   Basis point increase
(decrease)
 

Employee wage and benefit costs

     20  

Depreciation and amortization

     14  

Store-related costs

     12  

Pension expense, net

     (17

Safeway merger synergies

     (7

Other

     (2
  

 

 

 

Total

     20  
  

 

 

 

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

Increased employee wage and benefit costs, higher depreciation and amortization expense and higher store-related costs during fiscal 2017 compared to fiscal 2016 were offset by lower pension costs and increased Safeway merger synergies. Increased employee wage and benefit costs and higher store-related costs were primarily attributable to deleveraging of sales on fixed costs. These increases were partially offset by lower pension expense, net driven by a $25.4 million settlement gain during fiscal 2017 primarily due to an annuity settlement on a portion of our defined benefit pension obligation.

(Gain) Loss on Property Dispositions and Impairment Losses, Net

For fiscal 2018, net gain on property dispositions and impairment losses was $165.0 million, primarily driven by gains from the sale of assets of $240.1 million, partially offset by long-lived asset impairment losses of $36.3 million. For fiscal 2017, net loss on property dispositions and impairment losses was $66.7, primarily driven by long-lived asset impairment losses of $100.9 million, partially offset by gains from the sale of assets of $63.8 million. For fiscal 2016, net gain on property dispositions and impairment losses was $39.2 million, primarily driven by gains from the sale of assets of $91.7 million, partially offset by long-lived asset impairment losses of $46.6 million.

Goodwill Impairment

No goodwill impairment was recorded in fiscal 2018 compared to $142.3 million in fiscal 2017.

Interest Expense, Net

Interest expense, net was $830.8 in fiscal 2018, $874.8 million in fiscal 2017 and $1,003.8 million in fiscal 2016. The decrease in Interest expense, net for fiscal 2018 compared to fiscal 2017 is primarily due to lower average outstanding borrowings as a result of our term loan paydown and other debt reduction during fiscal 2018 and lower amortization and write-off of deferred financing costs and original issue discount, partially offset by $10.9 million of interest that was due and payable on the floating rate senior secured notes that were issued in connection with the Merger Agreement and later redeemed as further described herein.

The following details our components of Interest expense, net for the respective fiscal years (in millions):

 

     Fiscal
2018
    Fiscal
2017
     Fiscal
2016
 

ABL Facility, senior secured and unsecured notes, term loans and debentures

   $ 698.3     $ 701.5      $ 764.3  

Capital lease obligations

     81.8       96.3        106.8  

Amortization and write-off of deferred financing costs

     42.7       56.1        84.4  

Amortization and write-off of debt discounts

     20.3       16.0        22.3  

Other interest (income) expense

     (12.3     4.9        26.0  
  

 

 

   

 

 

    

 

 

 

Interest expense, net

   $ 830.8     $ 874.8      $ 1,003.8  
  

 

 

   

 

 

    

 

 

 

The weighted average interest rate during the year was 6.6%, excluding amortization of debt discounts and deferred financing costs. The weighted average interest rate during fiscal 2017 and fiscal 2016 was 6.5% and 6.8%, respectively.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

Loss (Gain) on Debt Extinguishment

During fiscal 2018, we repurchased Safeway’s 7.45% Senior Debentures due 2027 and 7.25% Debentures due 2031 with a par value of $333.7 million and a book value of $322.4 million, and NALP Notes with a par value of $108.4 million and a book value of $96.4 million for an aggregate of $424.4 million (the “2018 Repurchases”). We also redeemed Safeway’s 5.00% Senior Notes due 2019 (the “2018 Redemption”) for $271.7 million, which included an associated make-whole premium of $3.1 million. In connection with the 2018 Repurchases and the 2018 Redemption, we recorded a loss on debt extinguishment of $8.7 million.

During fiscal 2017, we repurchased NALP Notes with a par value of $160.0 million and a book value of $140.2 million for $135.5 million plus accrued interest of $3.7 million. In connection with this repurchase, we recorded a gain on debt extinguishment of $4.7 million.

On June 24, 2016, a portion of the net proceeds from the issuance of the 2024 Notes was used to fully redeem $609.6 million of 7.75% Senior Secured Notes due 2022 (the “2016 Redemption”). In connection with the 2016 Redemption, we recorded a $111.7 million loss on debt extinguishment comprised of an $87.7 million make-whole premium and a $24.0 million write-off of deferred financing costs and original issue discount.

Other Income

For fiscal 2018, Other income was $104.4 million primarily driven by adjustments related to acquisition-related contingent consideration, gains related to non-operating minority investments and non-service cost components of net pension and post-retirement expense. For fiscal 2017, Other income was $9.2 million primarily driven by changes in our equity method investment in Casa Ley, changes in the fair value of the contingent value rights, which we refer to as CVRs, non-service cost components of net pension and post-retirement expense and gains and losses on the sale of non-operating minority investments. For fiscal 2016, Other income was $44.3 million primarily driven by gains on the sale of certain investments, changes in our equity method investments and non-service cost components of net pension and post-retirement expense.

Income Taxes

Income tax was a benefit of $78.9 million in fiscal 2018, $963.8 million in fiscal 2017 and $90.3 million in fiscal 2016. Prior to the Reorganization Transactions, a substantial portion of our businesses and assets were held and operated by limited liability companies, which are generally not subject to entity-level federal or state income taxation. See Note 1 – Description of business, basis of presentation and summary of significant accounting policies in our consolidated financial statements, included elsewhere in this prospectus, for a discussion and definition of the “Reorganization Transactions.” On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law, which resulted in a significant ongoing benefit to us, primarily due to the reduction in the corporate tax rate from 35% to 21% and the ability to accelerate depreciation deductions for qualified property purchases.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

The components of the change in income taxes for the last three fiscal years were as follows:

 

     Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

Income tax expense (benefit) at federal statutory rate

   $ 11.0     $ (301.5   $ (162.3

State income taxes, net of federal benefit

     0.7       (39.8     (20.2

Change in valuation allowance

     (3.3     (218.0     107.1  

Unrecognized tax benefits

     (16.2     (36.5     (18.7

Member loss

           83.1       16.6  

Charitable donations

     (4.4           (11.1

Tax credits

     (10.8     (9.1     (17.3

Indemnification asset

                 5.1  

Effect of Tax Cuts and Jobs Act

     (56.9     (430.4      

CVR liability adjustment

           (20.3     7.5  

Reorganization of limited liability companies

           46.7        

Nondeductible equity-based compensation expense

     3.8       1.6       4.2  

Other

     (2.8     (39.6     (1.2
  

 

 

   

 

 

   

 

 

 

Income tax benefit

   $ (78.9   $ (963.8   $ (90.3
  

 

 

   

 

 

   

 

 

 

As a result of the Tax Act, we recorded a net non-cash tax benefit of $56.9 million and $430.4 million in fiscal 2018 and fiscal 2017, respectively, primarily due to the lower corporate tax rate. The income tax benefit in fiscal 2017 includes a net $218.0 million non-cash benefit from the reversal of a valuation allowance, partially offset by an increase of $46.7 million in net deferred tax liabilities from our limited liability companies related to the Reorganization Transactions.

Adjusted EBITDA and Adjusted Free Cash Flow

The Non-GAAP Measures are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income, gross profit and Net cash provided by operating activities. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe EBITDA, Adjusted EBITDA and Adjusted Free Cash Flow provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. We also use Adjusted EBITDA, as further adjusted for additional items defined in our debt instruments, for board of director and bank compliance reporting. The presentation of Non-GAAP Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

For the first 40 weeks of fiscal 2019, Adjusted EBITDA was $2,078.8 million, or 4.4% of Net sales and other revenue, compared to $2,014.1 million, or 4.3% of Net sales and other revenue, for the first 40 weeks of fiscal 2018. The increase in Adjusted EBITDA for the first 40 weeks of fiscal 2019 primarily relates to our identical sales increase and higher gross profit margin, due in part to higher fuel margin, and continued improvements in shrink expense, partially offset by incremental rent expense and occupancy costs, higher employee wage and benefit costs and investments in strategic initiatives, including digital and technology.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

The following is a reconciliation of Net income (loss) to Adjusted EBITDA (in millions):

 

     40 weeks ended  
     November 30,
2019
    December 1,
2018
 

Net income (loss)

   $ 398.6     $ (4.5

Depreciation and amortization

     1,281.9       1,340.8  

Interest expense, net

     557.5       662.5  

Income tax expense (benefit)

     110.5       (80.3
  

 

 

   

 

 

 

EBITDA

     2,348.5       1,918.5  

Integration costs(1)

     36.4       164.4  

Acquisition-related costs(2)

     14.6       65.8  

Equity-based compensation expense

     24.8       35.5  

Loss on debt extinguishment

     65.8       9.5  

Gain on property dispositions and impairment losses, net

     (482.7     (163.7

LIFO expense

     18.9       15.7  

Miscellaneous adjustments(3)

     52.5       (31.6
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 2,078.8     $ 2,014.1  
  

 

 

   

 

 

 

 

(1)

Related to conversion activities and related costs associated with integrating acquired businesses, primarily the Safeway acquisition.

(2)

Includes expenses related to acquisitions (including the mutually terminated merger with Rite Aid Corporation in fiscal 2018) and expenses related to management fees paid in connection with acquisition and financing activities.

(3)

Miscellaneous adjustments include the following (see table below):

 

     40 weeks ended  
     November 30,
2019
    December 1,
2018
 

Non-cash lease-related adjustments

   $         13.3     $ (6.9

Lease and lease-related costs for surplus and closed stores

     16.5               16.9  

Facility closure costs(a)

     11.0       13.4  

Net realized and unrealized gain on non-operating investments

     (2.5     (26.0

Adjustments to contingent consideration

           (39.4

Certain legal and regulatory accruals and settlements, net

     (1.8      

Other(b)

     16.0       10.4  
  

 

 

   

 

 

 

Total other adjustments

   $  52.5     $ (31.6
  

 

 

   

 

 

 

 

(a)

Includes costs related to facility closures. Includes closure costs related to the discontinuation of our meal kit subscription delivery operations in the third quarter of fiscal 2019.

(b)

Primarily includes adjustments for unconsolidated equity investments.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

The following is a reconciliation of Net cash provided by operating activities to Adjusted Free Cash Flow (in millions):

 

     40 weeks ended  
     November 30,
2019
    December 1,
2018
 

Net cash provided by operating activities

   $ 1,387.0     $ 1,069.1  

Income tax expense (benefit)

     110.5       (80.3

Deferred income taxes

     40.6       135.2  

Interest expense, net

     557.5       662.5  

Operating lease right-of-use assets amortization

     (418.3      

Changes in operating assets and liabilities

     326.1       (146.8

Amortization and write-off of deferred financing costs

     (35.4     (38.3

Contributions to pension and post-retirement benefit plans, net of expense

     16.2       178.2  

Integration costs

     36.4       164.4  

Acquisition-related costs

     14.6       65.8  

Other adjustments

     43.6       4.3  
  

 

 

   

 

 

 

Adjusted EBITDA

     2,078.8       2,014.1  

Less: capital expenditures

     (1,083.7     (916.9
  

 

 

   

 

 

 

Adjusted Free Cash Flow

   $ 995.1     $ 1,097.2  
  

 

 

   

 

 

 

For fiscal 2018, Adjusted EBITDA was $2.7 billion, or 4.5% of Net sales and other revenue, compared to $2.4 billion, or 4.0% of Net sales and other revenue, for fiscal 2017. The increase in Adjusted EBITDA primarily reflects our identical sales increase, improved gross profit and realization of our cost reduction initiatives.

The following is a reconciliation of Net income (loss) to Adjusted EBITDA (in millions):

 

     Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

Net income (loss)

   $ 131.1     $ 46.3     $ (373.3

Depreciation and amortization

     1,738.8       1,898.1       1,804.8  

Interest expense, net

     830.8       874.8       1,003.8  

Income tax benefit

     (78.9     (963.8     (90.3
  

 

 

   

 

 

   

 

 

 

EBITDA

     2,621.8       1,855.4       2,345.0  

Integration costs(1)

     186.3       156.2       144.1  

Acquisition-related costs(2)

     73.4       61.5       69.5  

Loss (gain) on debt extinguishment

     8.7       (4.7     111.7  

Equity-based compensation expense

     47.7       45.9       53.3  

Net (gain) loss on property dispositions, asset impairment and lease exit costs(3)

     (165.0     66.7       (39.2

Goodwill impairment

           142.3        

LIFO expense (benefit)

     8.0       3.0       (7.9

Collington acquisition(4)

                 78.9  

Miscellaneous adjustments(5)

     (39.6     71.6       61.1  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 2,741.3     $ 2,397.9     $ 2,816.5  
  

 

 

   

 

 

   

 

 

 

 

(1)

Related to activities to integrate acquired businesses, primarily the Safeway merger.

(2)

Includes expenses related to acquisition and financing activities, including management fees of $13.8 million in each year. Fiscal 2018 includes expenses related to the mutually terminated

 

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  merger with Rite Aid. Fiscal 2016 includes adjustments to tax indemnification assets of $12.3 million.
(3)

Fiscal 2018 includes gains related to various property dispositions and increased amortization of deferred gains related to sale-leaseback transactions. Fiscal 2017 includes asset impairment losses of $100.9 million primarily related to underperforming stores. Fiscal 2016 includes a net gain of $42.9 million related to the disposition of a portfolio of surplus properties.

(4)

Fiscal 2016 charge to pension expense, net related to the settlement of a pre-existing contractual relationship and assumption of the pension plan related to the acquisition of Collington.

(5)

Miscellaneous adjustments include the following:

 

     Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

Lease-related adjustments(a)

   $ 5.8     $ 17.4     $ 27.0  

Net realized and unrealized gain on non-operating investments

     (17.2     (5.1     (9.7

Adjustments to contingent consideration

     (59.3            

Facility closures and related transition costs(b)

     13.4       12.4       23.0  

Costs related to initial public offering and reorganization transactions

     1.6       8.7       23.9  

Changes in our equity method investment in Casa Ley and related CVR adjustments

           53.8       1.5  

Certain legal and regulatory accruals and settlements, net

     4.0       (13.7     (0.1

Other(c)

     12.1       (1.9     (4.5
  

 

 

   

 

 

   

 

 

 

Total miscellaneous adjustments

   $ (39.6   $ 71.6     $ 61.1  
  

 

 

   

 

 

   

 

 

 

 

(a)

Primarily includes lease adjustments related to deferred rents, deferred gains on leases and costs incurred on leased surplus properties.

(b)

Includes costs related to facility closures and the transition to our decentralized operating model.

(c)

Primarily includes gains and losses from interest rate and commodity hedges and adjustments for unconsolidated equity investments

The following is a reconciliation of Net cash provided by operating activities to Adjusted Free Cash Flow, which we define as Adjusted EBITDA less capital expenditures (in millions):

 

     Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

Net cash provided by operating activities

   $ 1,687.9     $ 1,018.8     $ 1,813.5  

Income tax benefit

     (78.9     (963.8     (90.3

Deferred income tax

     81.5       1,094.1       219.5  

Interest expense, net

     830.8       874.8       1,003.8  

Changes in operating assets and liabilities

     (176.2     222.1       (251.9

Amortization and write-off of deferred financing costs

     (42.7     (56.1     (84.4

Acquisition and integration costs

     259.7       217.7       213.6  

Pension and post-retirement expense, net of contributions

     174.8       22.8       (84.0

Collington acquisition

                 78.9  

Other adjustments

     4.4       (32.5     (2.2
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     2,741.3       2,397.9       2,816.5  

Less: capital expenditures

     (1,362.6     (1,547.0     (1,414.9
  

 

 

   

 

 

   

 

 

 

Adjusted Free Cash Flow

   $ 1,378.7     $ 850.9     $ 1,401.6  
  

 

 

   

 

 

   

 

 

 

 

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Liquidity and Financial Resources

The following table sets forth the major sources and uses of cash and cash equivalents and restricted cash for each period (in millions):

 

     40 weeks ended                    
     November 30,
2019
    December 1,
2018
    Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

Cash and cash equivalents and restricted cash at end of period

   $ 416.6     $ 486.1     $ 967.7     $ 680.8     $ 1,229.1  

Cash flows provided by operating activities

     1,387.0       1,069.1       1,687.9       1,018.8       1,813.5  

Cash flows used in investing activities

     (25.4     (360.6     (86.8     (469.0     (1,079.6

Cash flows used in financing activities

     (1,912.7     (903.2     (1,314.2     (1,098.1     (97.8

Net Cash Provided By Operating Activities

Net cash provided by operating activities was $1,387.0 million for the first 40 weeks of fiscal 2019 compared to $1,069.1 million for the first 40 weeks of fiscal 2018. The increase in cash flow from operations compared to the first 40 weeks of fiscal 2018 is primarily due to improvements in Adjusted EBITDA, lower acquisition and integration costs, lower contributions to defined benefit pension plans and post-retirement benefit plans and a decrease in cash paid for interest, partially offset by changes in working capital and an increase in cash paid for income taxes primarily related to sale-leaseback transactions.

Net cash provided by operating activities was $1,687.9 million during fiscal 2018 compared to net cash provided by operating activities of $1,018.8 million during fiscal 2017. The increase in net cash flow from operating activities during fiscal 2018 compared to fiscal 2017 was primarily due to the increase in Adjusted EBITDA, principally reflecting the results in fiscal 2018 compared to fiscal 2017, and changes in working capital primarily related to accounts payable and accrued liabilities, which includes $42.3 million in payments related to litigation settlements in fiscal 2017, partially offset by $199.3 million in pension contributions in fiscal 2018.

Net cash provided by operating activities was $1,018.8 million during fiscal 2017 compared to net cash provided by operating activities of $1,813.5 million during fiscal 2016. The decrease in net cash flow from operating activities during fiscal 2017 compared to fiscal 2016 was primarily due to the decrease in Adjusted EBITDA, principally reflecting the results in fiscal 2017 compared to fiscal 2016, and changes in working capital primarily related to accounts payable and accrued liabilities and the $42.3 million payment on litigation settlements, partially offset by a decrease in interest and income taxes paid of $110.7 million and $113.4 million, respectively. Fiscal 2016 cash provided by operating activities also includes a correction in the classification of certain book overdrafts resulting in an increase of $139.2 million.

Net Cash Used In Investing Activities

Net cash used in investing activities was $25.4 million for the first 40 weeks of fiscal 2019 compared to $360.6 million for the first 40 weeks of fiscal 2018.

 

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For the first 40 weeks of fiscal 2019, cash used in investing activities consisted primarily of payments for property and equipment, including lease buyouts, of $1,083.7 million, partially offset by proceeds from the sale of assets of $1,061.0 million. Payments for property and equipment included the opening of 12 new stores, completion of 153 remodels and continued investment in our digital and eCommerce technology. Proceeds from the sale of assets primarily includes the sale and leaseback of 53 store properties and one distribution center for $931.3 million, net of closing costs, during the second quarter of fiscal 2019 and certain other property dispositions during the first 40 weeks of fiscal 2019. For the first 40 weeks of fiscal 2018, cash used in investing activities consisted primarily of payments for property and equipment, including lease buyouts, of $916.9 million, partially offset by proceeds from the sale of assets of $529.3 million. Payments for property and equipment included the opening of three new stores, completion of 91 remodels and continued investment in our digital and eCommerce technology. Proceeds from the sale of assets included the sale and leaseback of two distribution centers for approximately $290 million, net of closing costs, during the second quarter of fiscal 2018 and certain other property dispositions during the first 40 weeks of fiscal 2018.

Net cash used in investing activities during fiscal 2018 was $86.8 million primarily due to payments for property and equipment, including lease buyouts, of $1,362.6 million, which includes approximately $70 million of Safeway integration-related capital expenditures, partially offset by proceeds from the sale of assets of $1,252.0 million. Payments for property and equipment included the opening of six new stores, completion of 128 upgrades and remodels and continued investment in our digital and eCommerce technology. Asset sale proceeds primarily relate to the sale and subsequent leaseback of seven of our distribution center properties during fiscal 2018 and other property dispositions.

Net cash used in investing activities during fiscal 2017 was $469.0 million primarily due to payments for property and equipment, including lease buyouts, of $1,547.0 million, which includes approximately $200 million of Safeway integration-related capital expenditures, and payments for business acquisitions of $148.8 million partially offset by proceeds from the sale of assets of $939.2 million and proceeds from the sale of our equity method investment in Casa Ley of $344.2 million. Asset sale proceeds primarily relate to the sale and subsequent leaseback of 94 store properties during the third and fourth quarters of fiscal 2017.

Net cash used in investing activities during fiscal 2016 was $1,079.6 million primarily due to payments for property and equipment, including lease buyouts, of $1,414.9 million, which includes approximately $250 million of Safeway integration-related capital expenditures, and payments for business acquisitions of $220.6 million partially offset by proceeds from the sale of assets of $477.0 million. Asset sale proceeds include the sale and 36-month leaseback of two distribution centers in Southern California and the sale of a portfolio of surplus properties.

In fiscal 2019, we expect to spend approximately $1.5 billion in capital expenditures, as follows (in millions):

 

Projected Fiscal 2019 Capital Expenditures

      

New stores and remodels

   $ 625.0  

Maintenance

     200.0  

Supply chain

     100.0  

IT

     375.0  

Real estate and expansion capital

     200.0  
  

 

 

 

Total

   $ 1,500.0  
  

 

 

 

 

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Net Cash Used In Financing Activities

Net cash used in financing activities was $1,912.7 million during the first 40 weeks of fiscal 2019 compared to $903.2 million during the first 40 weeks of fiscal 2018.

Net cash used in financing activities during the first 40 weeks of fiscal 2019 consisted primarily of payments on long-term debt of $3,300.8 million, partially offset by proceeds from the issuance of long-term debt of $1,518.0 million. Payments on long-term debt principally consisted of the term loan repayments, tender offer and various repurchases of notes.

Net cash used in financing activities during the first 40 weeks of fiscal 2018 consisted primarily of payments on long-term debt of $2,113.8 million, partially offset by proceeds from the issuance of long-term debt of $1,365.8 million. Proceeds from the issuance of long-term debt and payments of long-term debt principally consisted of the issuance and subsequent redemption of the $750 million floating rate senior secured notes as a result of the mutual termination of the Rite Aid Corporation merger agreement, borrowings under our ABL Facility and the repayment of term loans in connection with the refinancing and the repurchase of Safeway Notes.

Net cash used in financing activities was $1,314.2 million in fiscal 2018 consisting of payments on long-term debt and capital leases of $3,179.8 million, partially offset by proceeds from the issuance of long-term debt of $1,969.8 million. Proceeds from the issuance of long-term debt and payments of long-term debt consisted of the issuance of the 2026 Notes, the issuance and subsequent redemption of the $750.0 million floating rate senior secured notes as a result of the mutual termination of the merger agreement with Rite Aid Corporation, borrowings and repayments under our ABL Facility, the repayment of our Term Loan Facilities in connection with the refinancing and repurchase of Safeway Notes. Net cash used in financing activities was $1,098.1 million in fiscal 2017 due primarily to payments on long-term debt and capital lease obligations of $977.8 million, payment of the Casa Ley CVR and a member distribution of $250.0 million, partially offset by proceeds from the issuance of long-term debt. Net cash used in financing activities was $97.8 million in fiscal 2016 due primarily to payments on long-term debt and capital lease obligations, partially offset by proceeds from the issuance of long-term debt.

Debt Management

In our continued commitment to delever our balance sheet and improve financial flexibility, we have reduced our outstanding debt balance by more than $1.8 billion during fiscal 2019 to date. As of November 30, 2019, we had $18.0 million of borrowings outstanding under our $4.0 billion ABL Facility, and total availability of approximately $3.5 billion (net of letter of credit usage).

On November 22, 2019, we completed the issuance of $750.0 million of principal amount of the 2027 Notes (as defined herein). Also on November 22, 2019, we repaid approximately $743 million in aggregate principal amount outstanding under our Term Loan Facilities which was to mature on November 17, 2025, along with accrued and unpaid interest and fees and expenses, with the proceeds from the issuance of the 2027 Notes.

On August 15, 2019, we repaid approximately $1,571 million in aggregate principal amount outstanding under our term loan facilities, along with accrued and unpaid interest and fees and expenses, using cash on hand and proceeds from the issuance of the 2028 Notes (as defined herein). Contemporaneously with the term loan repayment, we refinanced the remaining amounts outstanding with new term loan tranches. The new tranches consist of $3.1 billion in aggregate principal, of which $1,500.0 million matures on November 17, 2025 and $1,600.0 million matures on August 17, 2026. The new loans amortize, on a quarterly basis, at a rate of 1.0% per annum of the original principal

 

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amount. The new loans bear interest, at the borrower’s option, at a rate per annum equal to either (a) the base rate plus 1.75% or (b) LIBOR plus 2.75%, subject to a 0.75% floor.

Also on August 15, 2019, we completed the issuance of $750.0 million of principal amount of 2028 Notes. Proceeds from the 2028 Notes were used to partially fund the August 15, 2019 term loan repayment discussed above.

On May 24, 2019, we completed a cash tender offer and early redemption of $34.1 million of Safeway Notes and $402.9 million of NALP Notes for an aggregate of $415.3 million in cash plus accrued and unpaid interest. During the first 40 weeks of fiscal 2019, we also repurchased NALP Notes on the open market with an aggregate par value of $553.9 million for $547.5 million in cash plus accrued and unpaid interest.

Outstanding debt, including current maturities and net of debt discounts and deferred financing costs, principally consisted of (in millions):

 

     November 30,
2019
 

ABL Facility

   $ 18.0  

Term loans

     2,311.5  

Notes and debentures

     5,661.7  

Finance leases

     702.3  

Other notes payable and mortgages

     55.7  
  

 

 

 

Total debt, including finance leases

   $ 8,749.2  
  

 

 

 

Total debt, including both the current and long-term portions of capital lease obligations and net of debt discounts and deferred financing costs, decreased $1.3 billion to $10.6 billion as of the end of fiscal 2018 compared to $11.9 billion as of the end of fiscal 2017. The decrease in fiscal 2018 was primarily due to the repurchase of NALP Notes and Safeway Notes, and the repayment made in connection with the term loan repricing described below, offset by the issuance of $600.0 million of principal amount of 7.5% Senior Unsecured Notes.

On November 16, 2018, the Company repaid approximately $976 million in aggregate principal amount of the $2,976.0 million term loan tranche B-4 (the “2017 Term B-4 Loan”) along with accrued and unpaid interest on such amount and fees and expenses related to the term loan repayment and new Term Loan B-7 (as defined herein), for which the Company used approximately $610 million of cash on hand and approximately $410 million of borrowings under the ABL Facility. Substantially concurrently, the Company amended the Company’s Term Loan Agreement, to establish a new term loan tranche and amend certain provisions of the Term Loan Agreement. The new tranche consists of $2,000.0 million of new term B-7 loans. The Term Loan B-7, together with cash on hand, was used to repay in full the remaining principal amount outstanding under the 2017 Term B-4 Loan. During fiscal 2018, Safeway repurchased certain amounts of its 7.45% Senior Debentures due 2027 and 7.25% Debentures due 2031 with a par value of $333.7 million and a book value of $322.4 million.

As of February 23, 2019, we had no borrowings outstanding under our ABL Facility and total availability of approximately $3.4 billion (net of letter of credit usage). As of February 24, 2018, we had no borrowings outstanding under our ABL Facility and total availability of approximately $3.1 billion (net of letter of credit usage).

Liquidity and Factors Affecting Liquidity

We estimate our liquidity needs over the next 12 months to be in the range of $4.0 billion to $4.5 billion, which includes anticipated requirements for working capital, capital expenditures, interest

 

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payments and scheduled principal payments of debt, operating leases and finance leases. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our ABL Facility, will be adequate to meet our liquidity needs for the next 12 months and for the foreseeable future. We believe we have adequate cash flow to continue to respond effectively to competitive conditions. In addition, we may enter into refinancing and sale-leaseback transactions from time to time. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our ABL Facility.

The ABL Facility contains no financial maintenance covenants unless and until (a) excess availability is less than (i) 10% of the lesser of the aggregate commitments and the then-current borrowing base at any time or (ii) $250.0 million at any time or (b) an event of default is continuing. If any such event occurs, we must maintain a fixed charge coverage ratio of 1.0:1.0 from the date such triggering event occurs until such event of default is cured or waived and/or the 30th day that all such triggers under clause (a) no longer exist.

During fiscal 2017, fiscal 2018 and the first 40 weeks of fiscal 2019, there were no financial maintenance covenants in effect under the ABL Facility because the conditions listed above (and similar conditions in our refinanced asset-based revolving credit facilities) had not been met.

Contractual Obligations

The table below presents our significant contractual obligations as of February 23, 2019 (in millions)(1):

 

     Payments Due Per Year  
     Total      2019      2020-2021      2022-2023      Thereafter  

Long-term debt(2)

   $ 10,086.3      $ 51.5      $ 370.4      $ 2,661.9      $ 7,002.5  

Estimated interest on long-term debt(3)

     4,248.5        633.1        1,231.3        1,075.8        1,308.3  

Operating leases(4)

     8,216.6        879.7        1,623.7        1,374.6        4,338.6  

Capital leases(4)

     1,203.0        170.5        286.2        237.2        509.1  

Other long-term liabilities(5)

     1,183.8        319.3        394.2        156.9        313.4  

Purchase obligations(6)

     402.3        179.4        83.7        55.4        83.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 25,340.5      $ 2,233.5      $ 3,989.5      $ 5,561.8      $ 13,555.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The contractual obligations table excludes funding of pension and other postretirement benefit obligations, which totaled $199.3 million in fiscal 2018 and is expected to total $12.4 million in fiscal 2019. This table excludes contributions under various multiemployer pension plans, which totaled $451.1 million in fiscal 2018 and is expected to total approximately $475 million in fiscal 2019.

(2)

Long-term debt amounts exclude any debt discounts and deferred financing costs. See Note 8 – Long-term debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information.

(3)

Amounts include contractual interest payments using the interest rate as of February 23, 2019 applicable to our variable interest term debt instruments and stated fixed rates for all other debt instruments, excluding interest rate swaps. See Note 8 – Long-term debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information.

(4)

Represents the minimum rents payable under operating and capital leases, excluding common area maintenance, insurance or tax payments, for which we are obligated.

(5)

Consists of self-insurance liabilities, which have not been reduced by insurance-related receivables, and deferred cash consideration related to Plated. Excludes the $142.1 million of

 

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  assumed withdrawal liabilities related to Safeway’s previous closure of its Dominick’s division, and excludes the unfunded pension and postretirement benefit obligation of $502.6 million. The amount of unrecognized tax benefits of $376.2 million as of February 23, 2019 has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined. Excludes contingent consideration because the timing and settlement is uncertain. Also excludes deferred tax liabilities and certain other deferred liabilities that will not be settled in cash and other lease-related liabilities already reflected as operating lease commitments.
(6)

Purchase obligations include various obligations that have specified purchase commitments. As of February 23, 2019, future purchase obligations primarily relate to fixed asset, marketing and information technology commitments, including fixed price contracts. In addition, not included in the contractual obligations table are supply contracts to purchase product for resale to consumers which are typically of a short-term nature with limited or no purchase commitments. We also enter into supply contracts which typically include either volume commitments or fixed expiration dates, termination provisions and other customary contractual considerations. The supply contracts that are cancelable have not been included above.

See “Debt Management” included elsewhere in this prospectus for information regarding the more than $1.8 billion reduction of our outstanding debt balance during the 40 weeks ended November 30, 2019.

During the second quarter of fiscal 2019, we completed the sale and leaseback of 53 store properties and one distribution center, through three separate transactions, for an aggregate purchase price, net of closing costs, of $931.3 million. In connection with the sale and leaseback transactions, we entered into lease agreements for each of the properties for initial terms ranging from 15 to 20 years. The aggregate initial annual rent payment for the properties is approximately $53 million and includes 1.50% to 1.75% annual rent increases over the initial lease terms. All of the properties qualified for sale-leaseback and operating lease accounting, and we recorded total gains of $463.6 million, which is included as a component of Gain on property dispositions and impairment losses, net. We also recorded operating lease ROU assets and corresponding operating lease liabilities of $602.5 million.

During fiscal 2018, the Company, through three separate transactions, completed the sale and leaseback of seven of the Company’s distribution centers for an aggregate purchase price, net of closing costs, of approximately $950 million. In connection with the sale and leasebacks, the Company entered into lease agreements for each of the properties for initial terms of 15 to 20 years. The aggregate initial annual rent payment for the properties will be approximately $55 million and includes 1.50% to 1.75% annual rent increases over the initial lease terms.

Off-Balance Sheet Arrangements

Guarantees

We are party to a variety of contractual agreements pursuant to which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, trademarks, intellectual property, financial agreements and various other agreements. Under these agreements, we may provide certain routine indemnifications relating to representations and warranties (for example, ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial statements.

We are liable for certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, we could be responsible for the lease obligation. See Note 14 – Commitments and contingencies and off-balance sheet arrangements in our consolidated financial statements, included elsewhere in this prospectus, for additional information.

 

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Because of the wide dispersion among third parties and the variety of remedies available, we believe that if an assignee became insolvent it would not have a material effect on our financial condition, results of operations or cash flows.

In the ordinary course of business, we enter into various supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. These contracts typically include volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations.

Letters of Credit

We had letters of credit of $520.8 million outstanding as of February 23, 2019. The letters of credit are maintained primarily to support our performance, payment, deposit or surety obligations. We typically pay bank fees of 1.25% plus a fronting fee of 0.125% on the face amount of the letters of credit.

New Accounting Policies Not Yet Adopted

See Note 1 – Description of business, basis of presentation and summary of significant accounting policies in our consolidated financial statements, included elsewhere in this prospectus, for new accounting pronouncements which have not yet been adopted.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a fair and consistent manner. See Note 1 – Description of business, basis of presentation and summary of significant accounting policies in our consolidated financial statements, included elsewhere in this prospectus, for a discussion of our significant accounting policies.

Management believes the following critical accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of our consolidated financial statements.

Vendor Allowances

Consistent with standard practices in the retail industry, we receive allowances from many of the vendors whose products we buy for resale in our stores. These vendor allowances are provided to increase the sell-through of the related products. We receive vendor allowances for a variety of merchandising activities: placement of the vendors’ products in our advertising; display of the vendors’ products in prominent locations in our stores; supporting the introduction of new products into our retail stores and distribution systems; exclusivity rights in certain categories; and compensation for temporary price reductions offered to customers on products held for sale at retail stores. We also receive vendor allowances for buying activities such as volume commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of the vendor allowance contracts have terms of less than one year.

 

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Pursuant to 17 C.F.R. Section 200.83

 

We recognize vendor allowances for merchandising activities as a reduction of cost of sales when the related products are sold. Vendor allowances that have been earned because of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. The amount and timing of recognition of vendor allowances as well as the amount of vendor allowances to be recognized as a reduction of ending inventory require management judgment and estimates. We determine these amounts based on estimates of current year purchase volume using forecast and historical data and a review of average inventory turnover data. These judgments and estimates affect our reported gross profit, operating earnings (loss) and inventory amounts. Our historical estimates have been reliable in the past, and we believe the methodology will continue to be reliable in the future. Based on previous experience, we do not expect significant changes in the level of vendor support.

Self-Insurance Liabilities

We are primarily self-insured for workers’ compensation, property, automobile and general liability. The self-insurance liability is undiscounted and determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We have established stop-loss amounts that limit our further exposure after a claim reaches the designated stop-loss threshold. In determining our self-insurance liabilities, we perform a continuing review of our overall position and reserving techniques. Since recorded amounts are based on estimates, the ultimate cost of all incurred claims and related expenses may be more or less than the recorded liabilities.

Any actuarial projection of self-insured losses is subject to a high degree of variability. Litigation trends, legal interpretations, benefit level changes, claim settlement patterns and similar factors influenced historical development trends that were used to determine the current year expense and, therefore, contributed to the variability in the annual expense. However, these factors are not direct inputs into the actuarial projection, and thus their individual impact cannot be quantified.

Long-Lived Asset Impairment

We regularly review our individual stores’ operating performance, together with current market conditions, for indications of impairment. When events or changes in circumstances indicate that the carrying value of an individual store’s assets may not be recoverable, our future undiscounted cash flows are compared to the carrying value. If the carrying value of store assets to be held and used is greater than the future undiscounted cash flows, an impairment loss is recognized to record the assets at fair value. For property and equipment held for sale, we recognize impairment charges for the excess of the carrying value plus estimated costs of disposal over the fair value. Fair values are based on discounted cash flows or current market rates. These estimates of fair value can be significantly impacted by factors such as changes in the current economic environment and real estate market conditions. Long-lived asset impairment losses were $36.3 million, $100.9 million and $46.6 million in fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

Business Combination Measurements

In accordance with applicable accounting standards, we estimate the fair value of acquired assets and assumed liabilities as of the acquisition date of business combinations. These fair value adjustments are input into the calculation of goodwill related to the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition.

The fair value of assets acquired and liabilities assumed are determined using market, income and cost approaches from the perspective of a market participant. The fair value measurements can be

 

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based on significant inputs that are not readily observable in the market. The market approach indicates value for a subject asset based on available market pricing for comparable assets. The market approach used includes prices and other relevant information generated by market transactions involving comparable assets, as well as pricing guides and other sources. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required market rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for certain assets for which the market and income approaches could not be applied due to the nature of the asset. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, adjusted for obsolescence, whether physical, functional or economic.

Goodwill

As of February 23, 2019, our goodwill totaled $1.2 billion, of which $917.3 million related to our acquisition of Safeway. We review goodwill for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our reporting units that have goodwill balances. We review goodwill for impairment by initially considering qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it is necessary to perform a quantitative analysis. If it is determined that it is more likely than not that the fair value of reporting unit is less than its carrying amount, a quantitative analysis is performed to identify goodwill impairment. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, it is unnecessary to perform a quantitative analysis. We may elect to bypass the qualitative assessment and proceed directly to performing a quantitative analysis.

In the second quarter of fiscal 2017, there was a sustained decline in the market multiples of publicly traded peer companies. In addition, during the second quarter of fiscal 2017, we revised our short-term operating plan. As a result, we determined that an interim review of the recoverability of our goodwill was necessary. Consequently, we recorded a goodwill impairment loss of $142.3 million, substantially all within the Acme reporting unit relating to the November 2015 acquisition of stores from the Great Atlantic & Pacific Tea Company, Inc., due to changes in the estimate of our long-term future financial performance to reflect lower expectations for growth in revenue and earnings than previously estimated. The goodwill impairment loss was based on a quantitative analysis using a combination of a discounted cash flow model (income approach) and a guideline public company comparative analysis (market approach).

Goodwill has been allocated to all of our operating segments which are our reporting units, and none of our reporting units have a zero or negative carrying amount of net assets. As of February 23, 2019, there are two reporting units with no goodwill due to the impairment loss recorded during the second quarter of fiscal 2017. There are nine reporting units with an aggregate goodwill balance of $1,034.6 million, of which the fair value of each reporting unit was substantially in excess of its carrying value, which indicates a remote likelihood of a future impairment loss. There are two reporting units with an aggregate goodwill balance of $148.7 million where it is reasonably possible that future changes in judgments, assumptions and estimates we made in assessing the fair value of the reporting unit could cause us to recognize impairment charges on a portion of the goodwill balance within each reporting unit. For example, a future decline in market conditions, continued underperformance of these two reporting units or other factors could negatively impact the estimated future cash flows and valuation assumptions used to determine the fair value of these two reporting units and lead to future impairment charges.

 

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The annual evaluation of goodwill performed for our reporting units during the fourth quarters of fiscal 2018, fiscal 2017 and fiscal 2016 did not result in impairment.

Employee Benefit Plans

Substantially all of our employees are covered by various contributory and non-contributory pension, profit-sharing or 401(k) plans, in addition to defined benefit plans for Safeway, Shaw’s and United employees. Certain employees participate in a long-term retention incentive bonus plan. We also provide certain health and welfare benefits, including short-term and long-term disability benefits to inactive disabled employees prior to retirement. Most union employees participate in multiemployer retirement plans pursuant to collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by us.

We recognize a liability for the underfunded status of the defined benefit plans as a component of pension and post-retirement benefit obligations. Actuarial gains or losses and prior service costs or credits are recorded within Other comprehensive (loss) income. The determination of our obligation and related expense for our sponsored pensions and other post-retirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate and expected long-term rate of return on plan assets.

The objective of our discount rate assumptions was intended to reflect the rates at which the pension benefits could be effectively settled. In making this determination, we take into account the timing and amount of benefits that would be available under the plans. As of February 27, 2016, we changed the method used to estimate the service and interest rate components of net periodic benefit cost for our defined benefit pension plans and other post-retirement benefit plans. Historically, the service and interest rate components were estimated using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We have elected to use a full yield curve approach in the estimation of service and interest cost components of net pension and other post-retirement benefit plan expense by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. We utilized weighted discount rates of 4.12% and 4.21% for our pension plan expenses for fiscal 2018 and fiscal 2017, respectively. To determine the expected rate of return on pension plan assets held by us for fiscal 2018, we considered current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories. Our weighted assumed pension plan investment rate of return was 6.38% and 6.40% for fiscal 2018 and fiscal 2017, respectively. See Note 12 – Employee benefit plans and collective bargaining agreements in our consolidated financial statements, included elsewhere in this prospectus, for more information on the asset allocations of pension plan assets.

Sensitivity to changes in the major assumptions used in the calculation of our pension and other post-retirement plan liabilities is illustrated below (dollars in millions).

 

     Percentage
Point Change
    Projected Benefit Obligation
Decrease / (Increase)
     Expense
Decrease / (Increase)
 

Discount rate

     +/-1.00     $194.8 / $(234.0)        $26.8 / $(5.2
  

 

 

   

 

 

    

 

 

 

Expected return on assets

     +/-1.00     - / -        $17.6 / $(17.6

In fiscal 2018 and fiscal 2017, we contributed $199.3 million and $21.9 million, respectively, to our pension and post-retirement plans. We expect to contribute $12.4 million to our pension and post-retirement plans in fiscal 2019.

 

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Income Taxes and Uncertain Tax Positions

We review the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in our consolidated financial statements. See Note 11 – Income taxes in our consolidated financial statements, included elsewhere in this prospectus, for the amount of unrecognized tax benefits and other disclosures related to uncertain tax positions. Various taxing authorities periodically examine our income tax returns. These examinations include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating these various tax filing positions, including state and local taxes, we assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our financial statements. A number of years may elapse before an uncertain tax position is examined and fully resolved. As of February 23, 2019, we are no longer subject to federal income tax examinations for fiscal years prior to 2012, and in most states we are no longer subject to state income tax examinations for fiscal years before 2007. Tax years 2007 through 2017 remain under examination. The assessment of our tax position relies on the judgment of management to estimate the exposures associated with our various filing positions.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from a variety of sources, including changes in interest rates, foreign currency exchange rates and commodity prices. We have from time to time selectively used derivative financial instruments to reduce these market risks. We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments. Our market risk exposures related to interest rates, foreign currency and commodity prices are discussed below and have not materially changed from the prior fiscal year. We use derivative financial instruments to reduce these market risks related to interest rates.

Interest Rate Risk and Long-Term Debt

We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. Our risk management objective and strategy is to utilize these interest rate swaps to protect us against adverse fluctuations in interest rates by reducing our exposure to variability in cash flows relating to interest payments on a portion of our outstanding debt. We believe that we are meeting our objectives of hedging our risks in changes in cash flows that are attributable to changes in LIBOR, which is the designated benchmark interest rate being hedged, on an amount of our debt principal equal to the then-outstanding swap notional amount. In accordance with the swap agreement, we receive a floating rate of interest and pay a fixed rate of interest over the life of the contract.

Interest rate volatility could also materially affect the interest rate we pay on future borrowings under the ABL Facility and the Term Loan Facilities. The interest rate we pay on future borrowings under the ABL Facility and the Term Loan Facilities are dependent on LIBOR. We believe a 100 basis point increase on our variable interest rates would impact our interest expense by approximately $4 million.

 

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The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including debt instruments and interest rate swaps. For debt obligations, the table presents principal amounts due and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents average notional amounts and weighted average interest rates by expected (contractual) maturity dates as of February 23, 2019 (dollars in millions):

 

     Fiscal
2019
    Fiscal
2020
    Fiscal
2021
    Fiscal
2022
    Fiscal
2023
    Thereafter     Total     Fair
Value
 

Long-Term Debt

                

Fixed Rate - Principal payments

   $ 4.2     $ 141.1     $ 134.5     $ 4.7     $ 5.0     $ 5,102.5     $ 5,392.0     $ 5,139.2  

Weighted average interest rate

     7.15     4.04     4.83     6.97     6.98     6.86     6.74  

Variable Rate - Principal payments

   $ 47.3     $ 47.4     $ 47.4     $ 1,124.0     $ 1,528.2     $ 1,900.0     $ 4,694.3     $ 4,662.0  

Weighted average interest rate(1)

     5.54     5.54     5.54     5.39     5.69     5.52     5.54  

 

(1)

Excludes effect of interest rate swaps. Also excludes debt discounts and deferred financing costs.

 

     Pay Fixed / Receive Variable  
     Fiscal
2019
    Fiscal
2020
    Fiscal
2021
    Fiscal
2022
    Fiscal
2023
    Thereafter  

Cash Flow Hedges

            

Average Notional amount outstanding

   $ 2,514.0     $ 1,957.0     $ 1,653.0     $ 593.0     $     $  

Average pay rate

     5.8     5.8     5.8     5.9     0.0     0.0

Average receive rate

     5.5     5.3     5.3     5.3     0.0     0.0

Commodity Price Risk

We have entered into fixed price contracts to purchase electricity and natural gas for a portion of our energy needs. We expect to take delivery of these commitments in the normal course of business, and, as a result, these commitments qualify as normal purchases. We also manage our exposure to changes in diesel prices utilized in our distribution process through the use of short-term heating oil derivative contracts. These contracts are economic hedges of price risk and are not designated or accounted for as hedging instruments for accounting purposes. Changes in the fair value of these instruments are recognized in earnings. We do not believe that these energy and commodity swaps would cause a material change to our financial position.

 

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BUSINESS

Our Company

We are one of the largest food retailers in the United States, with 2,260 stores across 34 states and the District of Columbia. We operate 20 iconic banners with on average 85 years of operating history, including Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Jewel-Osco, Acme, Shaw’s, Star Market, United Supermarkets, Market Street and Haggen, with approximately 270,000 talented and dedicated employees who serve on average more than 33 million customers each week. Our stores operate in First-and-Main retail locations and have leading market share within attractive and growing geographies. We hold a #1 or #2 position by market share in 66% of the 121 metropolitan statistical areas (“MSAs”) in which we operate. Our portfolio of well-located, full-service stores provides the foundation of our omni-channel platform, including our rapidly growing Drive Up & Go curbside pickup, home delivery and rush delivery offerings. We seek to tailor our offerings to local demographics and preferences of the markets that we operate in. Our Locally Great, Nationally Strong operating structure empowers decision making at the local level, which we believe better serves our customers and communities, while also providing the systems, analytics and buying power afforded by an organization with national scale and more than $60 billion in annual sales.

We are focused on creating deep and lasting relationships with our customers by offering them an experience that is Easy, Exciting and Friendly – wherever, whenever and however they choose to shop. We make life Easy for our customers through a convenient and consistent shopping experience across our omni-channel network. Merchandising is at our core and we offer an Exciting and differentiated product assortment. We believe we are an industry leader in fresh, emphasizing organic, locally sourced and seasonal items as well as value-added services like daily fresh-cut fruit and vegetables, customized meat cuts and seafood varieties, made-from-scratch bakery items, prepared foods, deli and floral. We also continue to grow our innovative and distinctive Own Brands portfolio, which reached 25.6% sales penetration as of the third quarter of fiscal 2019. Our Friendly service is embedded in our culture and enables us to build deep ties with our local communities.

Our Easy, Exciting and Friendly shopping experience, coupled with our nationwide just for U, grocery and fuel rewards programs and pharmacy services, offers a differentiated value proposition to our customers. The just for U program has nearly 20 million registered loyalty households which, we believe, provides us with a comprehensive understanding of our core shoppers. These loyalty programs and our omni-channel offerings combine to form an extended loyalty ecosystem that drives increased customer lifetime value through greater purchase frequency, larger basket size and higher customer retention.

Our Company has grown through a series of transformational acquisitions over the last six years, including our merger with Safeway in 2015 which gave us the benefits of national scale. While our banners have rich histories, we are in many ways a young company. Through integration, we have implemented shared best practices in areas like merchandising and loyalty to drive customer engagement across our network. We have also integrated systems and converted stores and distribution centers to create a common platform. We believe our common platform gives us greater transparency and compatibility across our network, allowing us to better serve our customers and employees while enhancing our supply chain.

We continue to sharpen our in-store execution, increase our Own Brands penetration and expand our omni-channel and digital capabilities. We have invested substantially in our business, deploying approximately $6.8 billion of capital expenditures beginning with fiscal 2015, including the $1.5 billion we expect to spend in fiscal 2019. We used that capital to remodel existing stores, opportunistically build new stores and enhance our digital capabilities. We have also developed and begun to implement specific productivity initiatives across our business that target $1 billion of annual run-rate productivity benefits by the end of fiscal 2022 to help offset cost inflation, fund growth and drive earnings.

 

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We have enhanced our management team, adding executives with complementary backgrounds to position us well for the future, including our President and CEO, Vivek Sankaran, who joined the Company from PepsiCo in April 2019. In fiscal 2019, we also added Chris Rupp as Chief Customer & Digital Officer and Mike Theilmann as Chief Human Resources Officer. In addition, we have internally promoted and expanded the roles of certain key members of our leadership team, including Susan Morris, our Chief Operations Officer, and Geoff White, our Chief Merchandising Officer.

Our recent operational initiatives are driving positive financial momentum. We realized strong financial performance in fiscal 2018, generating net sales of $60.5 billion, Adjusted EBITDA of $2.7 billion and Adjusted Free Cash Flow of $1.4 billion. We have achieved eight consecutive quarters of positive identical sales growth. Adjusted EBITDA grew from $2.4 billion in fiscal 2017 to $2.7 billion in fiscal 2018 and we generated a cumulative $6.3 billion in Adjusted Free Cash Flow since the start of fiscal 2015. The momentum we are experiencing gives us confidence that our Easy, Exciting and Friendly identity resonates with customers. We believe our strategic framework will enable us to continue delivering profitable growth going forward.

 

Identical Sales   Net Income ($mm)   Adj. EBITDA ($mm)
LOGO   LOGO   LOGO

Cumulative Adjusted Free Cash Flow (in billions)

 

LOGO

Drivers of Current Momentum

We have achieved significant near-term momentum in our business through a number of successful and ongoing initiatives, including the following:

Sharpened In-Store Execution. We are improving in-store execution and enhancing our customer experience to drive profitable growth. We have simplified our merchandising programs, automated our front-end scheduling processes and expanded self-checkout in 435 additional stores during the first three quarters of fiscal 2019. These enhancements have been instrumental in improving store-level productivity, allowing us to increase our focus on the customer. To further enhance the customer experience, we remerchandised over 700 stores since the beginning of fiscal 2017, reallocating space to better accentuate high growth fresh categories like produce, meat and seafood, bakery, prepared foods, deli and floral. This, coupled with our robust remodel program, has also allowed us to optimize store layouts and ease shopping patterns to make things simpler for customers and employees.

 

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Increased Own Brands Penetration. Our Own Brands portfolio has continued to contribute to identical sales growth and margin expansion. Penetration of our Own Brands has expanded over the past two years, growing from 22.3% in the first quarter of fiscal 2017 to 25.6% in the third quarter of fiscal 2019. Own Brands identical sales growth has exceeded total Company identical sales growth by at least 100 basis points for 11 straight quarters.

Leading Omni-Channel Capabilities. We have continued to enhance our capabilities to meet customer demand for convenience and flexibility. In fiscal 2017, we began to offer our Drive Up & Go curbside pickup service which is currently available in approximately 550 locations, while expanding our long-established home delivery network. We also collaborate with third parties, including Instacart, for rush delivery as well as with GrubHub and Uber Eats for delivery of our prepared and ready-to-eat offerings. We now offer home delivery services across 2,000 of our stores and 12 of the country’s top 15 MSAs by population.

Investment in Stores and Technology Capabilities. From fiscal 2015 through the end of fiscal 2019, we will have spent approximately $6.8 billion on capital expenditures, including the $1.5 billion we expect to spend in fiscal 2019. Approximately $3.8 billion of that spend contributed to completing 950 store remodels and opening 57 new stores, as well as merchandising and maintenance initiatives. We have also increased investment in digital and technology projects, including an estimated $375 million we intend to spend in fiscal 2019. These investments include upgraded pricing and promotional tools and more integrated and easy-to-use customer-facing digital applications.

Continued Focus on Productivity. With the integration of Safeway behind us, we have developed and are in the early stages of implementing a new set of clearly defined productivity initiatives that are underpinned by technology and talent. We are targeting $1 billion of annual run-rate productivity benefits by the end of fiscal 2022 to help offset cost inflation, fund growth and drive earnings. These initiatives include a focus on enhancing store and distribution center operations, leveraging scale to buy better, increasing promotional effectiveness and leveraging general and administrative costs. For example, we implemented a shrink reduction program centered on the use of technology as well as employee and manager education. As a result, we successfully reduced shrink levels by approximately 45 basis points in the first three quarters of fiscal 2019 over the first three quarters of fiscal 2017. We also believe these productivity initiatives will drive tangible improvements in our customer satisfaction and customer service scores.

Our Competitive Strengths

We are focused on driving deep and lasting relationships with our customers by delivering an Easy, Exciting and Friendly shopping experience. We believe the following competitive strengths will help us to achieve our goal:

Robust Portfolio of Stores and Iconic Banners with Leading Market Shares. Our 2,260 stores provide us with strong local presence and leading market share in some of the most attractive and growing geographies in the country.

 

   

Well-Known Banners: Our portfolio of well-known banners has strong customer loyalty and ties within the local communities we serve. Seven of our banners have operated for more than 100 years, with an average of over 85 years across all banners.

 

   

Prime Locations: Because of our long history, many of our stores are in First-and-Main locations, providing our customers with exceptional convenience. Our owned and ground leased stores and distribution centers, which represent approximately 39% of our store and distribution base, have an aggregate appraised value of $11.2 billion.

 

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Strong Market Share and Local Market Density: We are ranked #1 or #2 by market share in 66% of the 121 MSAs in which we operate. We believe this local market presence, coupled with brand recognition, drives repeat traffic and helps create marketing, distribution and omni-channel efficiencies that enhance our profitability.

 

   

Highly Attractive Markets: Our 20 largest MSAs by store count encompass approximately one-third of the U.S. population and approximately 45% of U.S. GDP. In 65% of the 121 MSAs in which we operate, the projected population growth over the next five years, in aggregate, exceeds the national average by over 50%.

The following illustrative map represents our regional banners and combined store network as of November 30, 2019.

LOGO

1 Nielsen ACView based on food markets in Company operating geographies as of calendar third quarter 2019.

Differentiated and Exciting Merchandise Offering. Our expertise in fresh merchandising is a core strength of our Company. We create a destination shopping experience by empowering our operators with the autonomy to tailor merchandise to local and seasonal tastes and preferences so they can consistently deliver an Exciting product assortment. We have particular strength in fresh categories including produce, meat and seafood, bakery, prepared foods, deli and floral. Fresh sales accounted for over 41% of our revenue in the first three quarters of fiscal 2019, which we believe is one of the highest percentages in the industry. Our relationships with a select group of suppliers enable us to provide exciting fresh produce, giving us access to premium produce grades in terms of size, flavor, color and quality. In addition, we offer an extensive range of value-added services such as daily in-store fresh-cut fruit, in-store prepared ready-to-cook vegetables and fresh-made guacamole. In meat and seafood, we feature best-in-class full service butcher blocks that highlight custom-cut USDA Choice and Prime beef, ground chicken and pork, seasonal smoked meats like sausages and bacon, Open Nature grass-fed beef, lamb and wild-caught Alaskan salmon as well as a wide range of responsibly sourced waterfront bistro shrimp. Our bakeries feature scratch-made pastries, artisan breads, and cakes designed-to-order by trained 5 Star decorators. Our prepared foods include ready-to-eat, ready-to-heat, and ready-to-cook meal solutions that encompass everything from family favorites to a wide range of world cuisine offerings. Our fresh offerings are complemented by strong

 

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specialty assortments. These include our curated wine selections and artisan cheese shops. As our customers demand healthy options and product transparency, we have grown our natural and organic sales more than twice as fast as the rest of the store during the first three quarters of fiscal 2019, with sales penetration of 13.5% for the same period, or a 40 basis point increase versus prior year.

High-Quality Own Brands That Deliver Great Value. We believe our proprietary Own Brands portfolio is a competitive advantage, providing high-quality products to our customers at a great value. In addition, customers who buy our Own Brands products shop more frequently with us and spend more per trip, driving enhanced loyalty, higher sales and improved margin. Own Brands accounted for $12.5 billion in sales in fiscal 2018, which is more than seven times larger than the next largest consumer packaged goods company selling through our stores. Our portfolio of Own Brands targets customers across price points, from the cost-conscious positioning of Value Corner to our ultra-premium Signature Reserve brand. Four of our Own Brands (Lucerne, Signature Select, Signature Café and O Organics) exceed $1 billion in annual sales and we have more than 11,000 unique items available. We self-manufacture many high-velocity Own Brands products, including dairy and bakery items, driving better pricing for our customers. We also believe that our Own Brands team is one of the most innovative in the industry, with more than 800 new product introductions planned in fiscal 2019. Our Own Brands portfolio has a significant gross margin advantage over similar national brand products and has allowed us to drive both top-line growth and margin expansion. Sustainability is also a top priority with our Own Brands, and we are targeting all Own Brands packaging to be recyclable, reusable or industrially compostable by 2025.

LOGO

Integrated Omni-Channel Solutions. We provide our customers with the convenience and flexibility to shop wherever, whenever and however they choose. We have instituted a variety of programs both in store and online to maximize customer choice and convenience. We have significantly expanded our digital capabilities over the last several years. Below is a summary of our various eCommerce solutions:

Drive Up & Go

 

LOGO

  

•  Currently available in approximately 550 locations, with plans to grow to approximately 600 by the end of fiscal 2019 and to 1,400 locations in the next two years

 

•  Easy-to-use mobile app

 

•  Convenient, well-signed, curbside pickup

 

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Home Delivery

 

LOGO

  

•  First launched home delivery services in 2001

 

•  Provide home delivery using our own “white glove” delivery service in approximately 60% of our stores

 

•  Operate over 1,000 multi-temperature delivery trucks to support home delivery growth

 

•  Successful roll out of new eCommerce website and mobile applications to all divisions

Rush Delivery

 

LOGO

 

LOGO

 

LOGO

  

•  Launched rush delivery in 2017 with Instacart

 

•  Delivery within one to two hours in all divisions and covering over 2,000, or nearly 90%, of our stores offered in collaboration with third parties

 

•  Partnership with Grubhub and Uber Eats adds delivery offerings for our prepared and ready-to-eat options from our stores

Strong Relationships with Loyal Customers. Our just for U loyalty program, grocery and fuel rewards and pharmacy services combined with our omni-channel offerings create an extended loyalty ecosystem that drives increased customer spend and retention. We believe bringing new and existing customers into this extended loyalty ecosystem drives higher spend and longer-term relationships, and thus increases customer lifetime value. For example, our just for U program drives basket size by delivering almost 400 million personalized promotional deals each week through a variety of digital channels; our data indicates an engaged just for U household spends approximately four times more than shoppers not participating in the program. We have grown household membership to nearly 20 million registered households during the third quarter of fiscal 2019, an increase of 25% compared to the third quarter of fiscal 2018. Our data also indicates that as our customers start engaging in eCommerce, they increase their spend with us by an average of 28%.

Engagement in Enhanced Loyalty Ecosystem Increases Customer Lifetime Value

LOGO

Note: Charts above based on data from a single market division and reflect indexed annual grocery spend and lifetime value versus store-only shoppers who do not participate in our loyalty ecosystem.

1 Programs are just for U, grocery and fuel rewards, pharmacy services, Drive Up & Go and home delivery.

2 Defined as annual average gross profit multiplied by average years shopping.

Disciplined Approach to Capital Investment and Strong Adjusted Free Cash Flow and Balance Sheet. Beginning with fiscal 2015 through the end of fiscal 2019, we will have spent approximately $6.8 billion in capital expenditures through a disciplined approach. We have focused on

 

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refreshing our store base with $3.8 billion of capital expenditures on remodels, upgrades, new stores and merchandising initiatives during this period. We have also invested to enhance our digital and technology assets. We believe these investments have been instrumental in maintaining our position as a leader in the food retail industry. Our strong Adjusted Free Cash Flow profile allows us the flexibility to invest in our business. Beginning with fiscal 2015, the first year after our merger with Safeway, we have generated cumulative Adjusted Free Cash Flow of $6.3 billion. We have also reduced our outstanding Net Debt by approximately $2.9 billion since the end of fiscal 2017, decreasing our Net Debt Ratio from 4.7x to 3.0x as of the end of the third quarter of fiscal 2019.

New Best-In-Class Leadership with a Fresh Perspective. We have assembled