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Section 1: DRS

DRS
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 October 24, 2019.

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

  $               $            

 

 

(1)

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

(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.

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

 

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                    , 20    .

         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 “                .”

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” on page 20 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                , 20    .

 

 

 

The date of this prospectus is                    , 20    .


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

 

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     20  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     41  

USE OF PROCEEDS

     43  

DIVIDEND POLICY

     44  

CAPITALIZATION

     45  

DILUTION

     46  

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     47  

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

     49  

BUSINESS

     75  

MANAGEMENT

     92  

EXECUTIVE COMPENSATION

     103  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     123  

PRINCIPAL AND SELLING STOCKHOLDERS

     128  

DESCRIPTION OF CAPITAL STOCK

     131  

SHARES ELIGIBLE FOR FUTURE SALE

     138  

DESCRIPTION OF INDEBTEDNESS

     143  

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

     152  

UNDERWRITING

     157  

LEGAL MATTERS

     163  

EXPERTS

     163  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     163  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

Until                , 20     (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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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”). As a result, 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 year ending February 27, 2021 (“fiscal 2020”) 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 and fiscal 2016 is compared with fiscal 2015. 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 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 information cannot always be

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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) 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, 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, other than Free Cash Flow, 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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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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 2,262 stores across 34 states and the District of Columbia. We operate a portfolio of stores, under 20 iconic banners, with prime retail locations and leading market share in attractive and growing geographies. We hold a #1 or #2 position by market share in 68% of the 120 metropolitan statistical areas (“MSAs”) in which we operate. Within each of the geographies in which we operate, we have a variety of store sizes and aim to provide a destination shopping experience, as we tailor our offerings to the local demographics, including value-oriented, premium and ethnic preferences. Our portfolio of well-located, full service stores provides the backbone of our rapidly growing eCommerce business, through which we offer Drive Up & Go curbside pickup, home delivery and rush delivery. Our go-to-market strategy is focused on a differentiated customer experience across our stores, our just for U loyalty program and comprehensive online capabilities to drive purchase frequency, basket size and customer satisfaction and retention. Our differentiated customer experience emphasizes fresh, organic and locally sourced items among our product offerings as well as our $12.5 billion Own Brands portfolio that drives loyalty, sales growth and margin. We believe that our operating structure empowers decision making at the local level to better serve customers in their communities while offering significant corporate support by leveraging an organization with more than $60 billion in sales and national scale.

Our Company has grown through a series of transformational acquisitions over the last six years, resulting in our ownership of 20 store banners with rich local heritage. In 2015, we merged with Safeway, from which we realized approximately $823 million of run-rate synergies, on-time and ahead of target. We have implemented best practices across the enterprise to allow the realization of significant efficiencies. Our ongoing financial momentum in both identical sales and Adjusted EBITDA also reflects the benefits from our investments and initiatives to differentiate our customer experience and further enhance the productivity of our store base. We continue to sharpen our in-store execution and have expanded our omni-channel capabilities, enabling us to connect with our customers where, when and how they want to shop with us. We increased capital investment in our business, deploying over $6.7 billion of capital expenditures beginning with fiscal 2015, including the $1.45 billion we expect to spend in fiscal 2019, to build new stores, upgrade existing locations with an emphasis on fresh, value-added features and enhance our digital capabilities.

We are currently in the process of implementing cost reduction and productivity initiatives that we expect to reinvest into the business and drive growth. These initiatives include procurement, indirect spend and operational efficiencies such as shrink management, general and administrative discipline and labor and working capital productivity. We have also enhanced our management team, adding executives with complementary backgrounds to position us well for the future.



 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

Locally Great, Nationally Strong

 

 

LOGO

Our 20 iconic banners include Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Jewel-Osco, Acme, Shaw’s, Star Market, United Supermarkets, Market Street and Haggen. We have approximately 270,000 talented and dedicated employees serving on average 34 million customers each week. With more than 18 million registered loyalty members, we believe we have a comprehensive understanding of our core shoppers. Harnessing the data from our just for U loyalty program, we engage directly with our customers through a variety of digital media channels and digital offers, through which we generate over 400 million personalized promotions per week to drive customer retention and increase spend.

Together, 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 Free Cash Flow of $1.4 billion. We have achieved seven consecutive quarters of positive identical sales, and annual Adjusted EBITDA grew from $2.4 billion in fiscal 2017 to $2.7 billion in fiscal 2018. For the 28 weeks ended September 7, 2019, we generated net sales of $32.9 billion, Adjusted EBITDA of $1.44 billion and Free Cash Flow of $728.1 million compared to net sales of $32.7 billion, Adjusted EBITDA of $1.36 billion and Free Cash Flow of $733.2 million for the 28 weeks ended September 8, 2018.

We have reduced our outstanding Net Debt by approximately $2.9 billion since the end of fiscal 2017 and our Net Debt Ratio decreased from 4.7x as of the end of fiscal 2017 to 2.9x as of the end of the second quarter of fiscal 2019.

 

 

LOGO



 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

DRIVERS OF CURRENT MOMENTUM

We are focused on running the best stores, driving engagement with our customers through our well-established loyalty program, providing excellent customer service and growing our easy-to-use eCommerce business. Our current momentum has been driven in part by the following:

Successfully Completed Safeway Integration.    Since closing the merger with Safeway on January 30, 2015, the integration of the Safeway platform was a priority. We have completed the significant task of integrating systems and converting stores and distribution centers to one common technology platform, giving us greater transparency and compatibility across our network. The combination has also led to shared best practices integrated across the entire enterprise. For example, we now offer fresh-cut fruits and vegetables and expanded offerings in butcher block meat and seafood, which are Albertsons practices, across our stores. We also rolled out Safeway’s expansive wine assortments, differentiated floral programs and leading just for U loyalty program throughout the enterprise. Having one chain-wide loyalty program is integral to the business as it provides a deeper understanding of our customer base. We achieved approximately $823 million in annual run-rate synergies as of the end of fiscal 2018 which exceeded our initial synergy target of approximately $800 million. We have invested a portion of these synergies into the business through selective investments in price and service, in-store upgrades and accelerating the growth of our digital and online offerings and technology platforms.

Sharpened In-Store Execution.    We have taken steps to improve in-store execution in order to achieve dual objectives of enhancing the customer experience and driving profitable growth. Since the beginning of fiscal 2017, we have remerchandised over 700 stores to increase the variety of items and Own Brands penetration in categories such as natural, organic, specialty, healthy and ethnic foods, as we reallocate space to growth categories. This activity coupled with our robust remodel program has also allowed us to update aisle adjacencies and store flows to ease shopping patterns throughout the store. We deployed incremental self-checkout units in over 245 stores during the first two quarters of fiscal 2019. These units were installed at the request of many customers and help reduce wait time during the checkout process. In addition, everyday store operations have continued to improve as our associates have become more familiar with our fully converted and integrated systems, leading to greater operational clarity.

Built Out Leading Omni-Channel Capabilities.    We have continued to enhance our capabilities to meet the growing customer demand for convenience and flexibility in order to serve customers where, when and how they shop. We developed capabilities to offer Drive Up & Go curbside pickup service beginning in fiscal 2017 and expanded Safeway’s home delivery network across the Company. We also collaborated with third-parties, including Instacart, for rush delivery as well as with Grubhub and UberEats for delivery of our prepared and “ready-to-eat” offerings from our stores. We now offer home delivery services in over 2,000 of our stores and 11 of the top 15 MSAs in the country.

Increased In-Store and Digital Investments.    From the beginning of fiscal 2015 through the end of fiscal 2019, we will have spent more than $6.7 billion in capital expenditures, including the $1.45 billion we expect to spend in fiscal 2019. Approximately half of that spend was geared towards new stores, remodels, merchandising and maintenance initiatives, aimed at making our stores a destination shopping experience. Over this same time period, we will have opened approximately 57 new stores and completed approximately 950 store remodels. We have also increased our investment in digital and technology projects, including an estimated $350 million we intend to spend on these projects in fiscal 2019. These investments in digital and technology initiatives include an upgraded pricing and promotional tool and more robust customer-facing applications. We believe our enhanced



 

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capital expenditure efforts have continued to provide the on-trend destination shopping experience that excites our customers and drives repeat visits.

 

 

LOGO

Reduced Costs and Improved Productivity to Fund Future Growth.    With the integration of Safeway behind us, we are in the early stages of implementing initiatives to reduce costs and increase productivity to fund our future growth. Our initiatives include two primary objectives: (i) leveraging our more than $60 billion of sales and national scale to enhance our supplier partnerships and (ii) focusing on shrink, labor productivity, cost of goods-not-for-resale, general and administrative discipline and working capital productivity. We are leveraging technology and automation to improve productivity across our business, including inventory management, stocking time and labor scheduling. Along with these initiatives, we have also implemented a shrink reduction program that features employee training and manager education as well as utilization of enhanced shrink management tools. As a result of these initiatives, we have seen operating improvements, including shrink reductions of approximately 50 basis points from the second quarter of fiscal 2017 to the second quarter of fiscal 2019. We believe these in-store initiatives, among others, have helped drive tangible improvements in our customer satisfaction and customer service scores.

OUR COMPETITIVE STRENGTHS

We believe the following competitive strengths are key drivers of our current success and position us for continued growth:

Portfolio of Iconic Store Banners with Leading Market Share in Growing Markets.    Our 2,262 stores provide us with strong local presence and market share in some of the most attractive geographies in the U.S.

 

   

Well-Known Brands:    Our portfolio of banners have long-standing roots within their local communities, with seven of our banners operating for more than 100 years and 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 which provides our customers with exceptional convenience. We own or ground-lease approximately 39% of our stores and distribution centers that currently have an aggregate value of $                        .

 

   

Strong Market Share and Local Market Density:    We are ranked #1 or #2 by market share in 68% of the 120 MSAs in which we operate. This local market presence and brand recognition drives repeat traffic and helps create marketing, distribution and omni-channel efficiencies that enhances our profitability.



 

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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 120 MSAs in which we operate, the projected population growth over the next five years, in aggregate, exceeds the national average by over 50%.

Our portfolio of store banners with strong brand recognition, as well as the convenience provided by their local market density and strong market share, helps drives both traffic and customer loyalty. The following illustrative map represents our regional banners and combined store network as of September 7, 2019.

 

 

LOGO

 

(1)

Nielsen ACView based on food markets in company operating geographies as of calendar second quarter 2019.

Differentiated Offering Driven by Fresh, Organic and Locally Sourced Merchandise.    We are a fresh, perishables-driven company. Fresh sales accounted for over 41% of our revenue in the second quarter of fiscal 2019, which we believe is one of the highest percentages in the industry. We offer butcher block meat and seafood, curated wine assortments, floral assortments, artisan cheese shops, fresh-cut fruit and vegetables, prepared meals and in-store bakeries to create a destination shopping experience. We understand that today’s customer expects a variety of healthier options and demands transparency. The growth of our natural and organic sales reflects this demand, as the category grew more than twice as fast as non-natural and organic categories during fiscal 2018. Our Natural & Organic sales penetration was 12% for fiscal 2018, which represented a 60 basis point increase in sales penetration versus fiscal 2017. Our locally empowered operators have the autonomy to tailor merchandise, particularly fresh offerings, to local market demand. This allows each store to be unique and locally great, driven by the tastes and preferences of the particular micro-market demographic. Fresh and perishable is our highest growth segment, drives consumer loyalty and is higher margin, and we are well-positioned to benefit from this continued category growth.

High-Quality Own Brands That Deliver Great Value.    We are very proud of our substantial Own Brands portfolio. We believe our proprietary Own Brands portfolio is a competitive advantage,



 

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driving purchase frequency, higher sales and improved margin. We believe that our Own Brands team is one of the more innovative in the industry. 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. In addition, we self-manufacture many high velocity Own Brands products, including dairy and bakery items, in our 20 manufacturing plants that allows for better pricing for our customers. With four Own Brands exceeding $1 billion in the portfolio (Lucerne, Signature Select, Signature Café and O Organics) and more than 11,000 unique items available, we have successfully driven both top-line growth and margin expansion, as our Own Brands portfolio has a significant gross margin advantage over similar national brand products. Our portfolio of brands targets customers across price points, from the cost-conscious positioning of the Value Corner brand to the recently released, ultra-premium Signature Reserve brand. Notably, penetration of our Own Brands has expanded over the past two years, growing from 22.3% in the first quarter of fiscal 2017 to 25.3% in the second quarter of fiscal 2019. Finally, sustainability is top of mind with our Own Brands and we are targeting 100% of 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 where, when and how they choose. As consumer preferences evolve, we have sought to provide a more enjoyable and fluid shopping experience, instituting a variety of programs both in-store and online to maximize customer choice and convenience. In-store, we are improving the shopping experience – broadening selection, ensuring in-stock conditions, providing friendly, helpful service, and speedier checkout. Online, we have significantly expanded our capabilities over the last several years. Below is a summary of our various online solutions:

Home Delivery

 

LOGO   

•  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



 

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Drive Up & Go

 

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•  Currently available in approximately 500 locations, with plans to grow to 600 by the end of fiscal 2019 and further expansion in fiscal 2020

 

•  Easy-to-use mobile app

 

•  Convenient, well-signed, curbside pickup

Rush Delivery

 

LOGO

 

LOGO

 

LOGO

  

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

 

•  Asset-light offering to meet customers’ needs for speedy delivery

 

•  Partnership with Grubhub and Uber Eats to add delivery options for our prepared and “ready-to-eat” options from our stores

National Loyalty Program with Data-Driven Personalization.    Our just for U loyalty program, with over 18 million registered members, is a pillar of our competitive strategy. This program drives customer retention, increases spend and is the source of significant data, while also delivering great value to our customers. We have seen strong growth in our just for U loyalty program (which includes personalized deals and digital coupons as well as gas and grocery rewards), with a 24% increase in members during the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018. Just for U members spend approximately four times more than non-members. Data gathered from our loyalty program enables over 400 million unique, targeted promotional deals per week that drive user trials and basket size and also captures lapsed users. Membership in our loyalty program is associated with increased shopping trips and increased basket size, and it encourages purchases in adjacent categories.

Strong Relationships with Loyal Customers.    Our go-to-market strategy is integrated across our stores, just for U loyalty program and online offerings that takes our business from transactional to relational with our customers and drives incremental growth through better retention and larger basket size.

Omni-Channel Growth Strategy

 

 

LOGO



 

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We continue to grow our just for U loyalty program with increased customer participation. The omni-channel customer also has meaningfully higher retention rates compared to those who only shop in store, representing potential for incremental share of wallet from those customers. This gives us confidence in the long-term potential of our integrated approach. We invest in these loyalty initiatives with an integrated view of the customer in order to maximize value across our portfolio. In markets where we have high loyalty penetration, Drive Up & Go curbside pickup locations and home delivery capabilities, the loyalty member that shops both in-store and online spends approximately 30% more on average.

Disciplined Approach to Capital Investment and Strong Free Cash Flow.    We have taken a disciplined approach in deploying our capital expenditures with a focus on refreshing our store base and, more recently, enhancing our digital and technology assets. Beginning with fiscal 2015 through the end of fiscal 2019, we will have spent more than $6.7 billion on new stores and remodels, distribution centers, technology and integration, including the $1.45 billion in capital we expect to spend in fiscal 2019. These investments have been instrumental in maintaining our position as a leader in the food retail industry in a time of rapid transformation. Beginning with fiscal 2015, the first year after our merger with Safeway, we have cumulatively generated $6.1 billion in free cash flow. Our strong free cash flow profile allows us the flexibility to invest in our business in order to drive sales and profitable growth over time.

Cumulative Free Cash Flow

(in billions)

 

 

LOGO

Best-In-Class Leadership Team.    We have made meaningful executive changes over the last several years and believe we have a world-class, cross-disciplinary team led by our President and CEO, Vivek Sankaran who brings valuable consumer packaged goods experience from Pepsi/Frito Lay as well as strategic perspectives from his time at McKinsey and Co. Our leadership team, including our board of directors, brings a strong blend of veteran institutional knowledge and new perspectives from a wide variety of consumer packaged goods, retail, and technology backgrounds.

Our team believes in the power of our “locally great, nationally strong” mentality, empowering our operators to take ownership in a local approach. We enable our local managers to select the best product for their communities, provide a heightened level of customer service and drive improved store performance. While we are beginning to take advantage of our national scale to drive additional growth, we intend to retain the localized approach that has been such an important part of our success.



 

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OUR STRATEGY

Since the beginning of 2013, through acquisitions, we have brought together iconic store banners each with a rich heritage and strong local following. With the successful Safeway integration now behind us, we are well-positioned to accelerate performance through execution of the following strategies:

Ensure Profitable Identical Sales Growth from Our Stores, the Foundation of Our Business.    We are now in a position to accelerate our performance and will continue to leverage our store base in two primary ways:

 

   

Continuing to Enhance our Everyday Store Operations:    Ease of shopping is central to taking care of our customers. Our goal is to provide customers with the variety of items they want, in stock and easy to find, with a seamless shopping and checkout experience. We strive to provide customers with an exciting, sensory experience driven by excellent quality fresh and local merchandising and we expect to strengthen our sales of perishables as a result. We have a robust program to re-merchandise our store portfolio in categories that drive sales and will continue to enhance our product offerings. In addition, we aim to provide great customer service through our associates and the personalized touch they deliver in our stores every day.

 

   

Elevating Core Capabilities Through Modern Technologies and Data Science:    We are increasing our use of technology to assist with in-stock conditions, to simplify or automate processes, to guide us on competitive pricing and promotions, and to enhance labor scheduling. For example, we plan to roll out an upgraded pricing and promotional tool during the fourth quarter of fiscal 2019 which we believe will drive better pricing and margin optimization and allow us to invest in the areas that have the highest impact for our customers. We expect this to add to our sales momentum as we work to provide the right value proposition to our customers.

Drive Penetration of our Robust, Innovative Own Brands Portfolio.    As of the second quarter of fiscal 2019, our Own Brands penetration was 25.3%. We have a goal to strengthen our Own Brands portfolio and increase our Own Brands penetration to approximately 30% through increased merchandising and promotions in underpenetrated geographies and through innovative, new high-quality products that meet our customers’ needs and desires. Through continued, rapid innovation, we will maximize category growth through emerging customer trends and aim to provide solutions for all customer lifestyles. For example, our current Own Brands portfolio consists of over 11,000 high-quality products and we plan to add over 800 new Own Brands products by the end of fiscal 2019, and an additional 800 products annually thereafter to ensure we are constantly expanding and innovating. We plan to increase the distribution of top-selling Own Brands items across our network of stores and through both Drive Up & Go curbside pickup and delivery services. Our commitment to quality and sustainability will continue, with the goal to lead the industry in product quality, transparency and continuous improvement throughout the entire portfolio. We aim to have 100% of Own Brands packaging be recyclable, reusable, or industrially compostable by 2025.

Enhance Growth Through Just For U Loyalty Program.    We believe there is significant opportunity for incremental growth and increased basket size by both increasing the number of households in our loyalty program and by encouraging our existing loyalty members to become a more valuable, omni-channel customer, utilizing all of the shopping experiences we offer. We are making enrollment into just for U quick and easy to do at checkout, reducing friction to join this valuable program. We are deepening the value proposition to the customer through enhanced fuel partnerships and the roll-out of grocery rewards in all markets. For instance, our recent extension of our ExxonMobil partnership allows loyalty members to redeem their points at an additional 1,500 fuel stations on the East Coast. In addition, we have expanded our algorithms to provide even more personalized pricing to drive customer retention and build basket size. Incremental data gathered from our just for U loyalty program will continue to enhance the personalized promotions we offer our customers.



 

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Pursue Incremental Growth Through eCommerce.    We also continue to enhance our eCommerce business to offer more delivery options and windows across our well-located store base, including delivery within hours, and are working towards offering unattended deliveries and subscription-based delivery. In addition, we are expanding our Drive Up & Go curbside pickup program in order to enable customers to conveniently pickup their goods without leaving their vehicles, with a target to expand the program to 600 locations by the end of fiscal 2019. We believe our strategy of providing customers with a variety of in-store and online options that suit their individual needs, anchored to our effective just for U loyalty program, will continue to drive additional sales growth and differentiate us from many of our competitors. Therefore, building loyalty in-store and online is expected to drive growth. In addition, we are piloting automated micro-fulfillment centers to improve speed and efficiencies in eCommerce.

Reduce Costs and Increase Productivity to Fund Our Growth.     We are currently in the process of implementing cost reduction and productivity increases from the following initiatives, which we will reinvest in pricing, service, and the overall omni-channel customer experience:

 

   

Procurement:    We believe there is an opportunity to leverage our national scale and over $60 billion in sales to develop advantaged and productive supplier partnerships by simplifying how they work with us, planning further in advance, and executing coordinated and national events with all our divisions.

 

   

Indirect Spend:    We have identified “Cost of Goods Not For Resale” as an area of further potential cost savings through our ability to harness our scale to buy these items with volume discounts. We have formed an internal task force, partnering with third-party experts, to rapidly drive efficiency with no impact to the customer.

 

   

Operational Efficiencies:    Additional areas of cost savings include continued shrink management efforts, general and administrative discipline, and labor and working capital productivity based on training, analysis and technological advancements. We are working to roll out enhanced demand forecasting and replenishment systems to improve our operating efficiency with regard to labor and inventory management and expect to scale these across the business quickly and efficiently.

Continue Our Disciplined Approach to Capital Deployment.    As responsible stewards of capital, we will look to opportunistically build or acquire new stores and continue to invest in the remodels necessary to maintain and enhance our store base. In fiscal 2019, we plan to open 14 new stores and complete approximately 220 to 240 remodels. We plan to modernize our infrastructure for speed and scale, including through asset-light, strategic partnerships with companies that could expand our technological and omni-channel capabilities.

Celebrate Our Culture of Frontline Ownership and Sense of Purpose.    As we leverage our national scale for efficiencies, we will continue to celebrate the localized structure that empowers store-level decision makers and encourages frontline ownership. Through our carefully developed manager incentive structure, we will continue to ensure that the interests of those on the front lines are aligned with those of the stockholders. Throughout the organization, we will remain true to our Employee Promise – to “Make Every Day a Better Day” for our customers, our people, our company and our community. We remain focused on our environmental, social and governance initiatives and view them as an essential part of our business as a leading member of the corporate community.



 

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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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OUR CORPORATE STRUCTURE

The chart below summarizes our corporate structure after giving effect to the Distribution and this offering (assuming the common stock in this offering is offered at $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus), but before giving effect to dilution from outstanding restricted stock units or the exercise of the underwriters’ option to purchase additional shares:

 

 

LOGO

 

 

(1)

The following sets forth the ownership of the Pre-IPO Stockholders (as defined herein) (assuming the common stock in this offering is offered at $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus):

 

   

Cerberus –    %

 

   

Kimco Realty Corp. –    %

 

   

Klaff Realty, L.P. –    %

 

   

Schottenstein Stores Corp. –    %

 

   

Lubert-Adler Partners, L.P. –    %

 

   

Current management –    %

 

   

Other Pre-IPO Stockholders –    %

For more information, see “Principal and Selling Stockholders.”



 

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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 7, 2019, Kimco Realty Corporation owned interests in approximately 430 shopping centers comprising 75.5 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, our Sponsors will own in the aggregate



 

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approximately     % of our common stock (assuming the common stock in this offering is offered at $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus), or     % if the underwriters exercise their option to purchase additional shares in full. Our Sponsors will enter into a Stockholders’ Agreement (as defined below), 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 have been approved 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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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 shares 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. 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. See “Dividend Policy.”

 

Risk Factors

You should carefully read and consider the information set forth in the section entitled “Risk Factors” beginning on page 20, 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.



 

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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, February 24, 2018 and February 25, 2017 and notes thereto included elsewhere in this prospectus. Additionally, we have derived the summary balance sheet data as of September 7, 2019 and the consolidated statement of operations data for the 28 weeks ended September 7, 2019 and the 28 weeks ended September 8, 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)   28 Weeks Ended
September 7, 2019
    28 Weeks Ended
September 8, 2018
    Fiscal 2018     Fiscal 2017     Fiscal 2016  

Results of Operations:

         

Net sales and other revenue

  $ 32,915     $ 32,678     $ 60,535     $ 59,925     $ 59,678  

Gross profit

  $ 9,181     $ 8,984     $ 16,895     $ 16,361     $ 16,641  

Selling and administrative expenses

    8,741       8,835       16,272       16,209       16,072  

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

    (464     (176     (165     67       (39

Goodwill impairment

                      142        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    904       325       788       (57     608  

Interest expense, net

    403       450       831       875       1,004  

Loss (gain) on debt extinguishment

    66             9       (5     112  

Other income

    (6     (60     (104     (9     (44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    441       (65     52       (918     (464

Income tax expense (benefit)

    97       (15     (79     (964     (90
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 344     $ (50   $ 131     $ 46     $ (374
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

         

Adjusted EBITDA(1)

  $ 1,444     $ 1,364     $ 2,741     $ 2,398     $ 2,817  

Adjusted Net Income(1)

    276       121       435       74       378  

Rent expense(2)(3)

    521       463       864       844       806  

Capital expenditures

    716       631       1,363       1,547       1,415  

Net cash provided by operating activities

    1,085       1,191       1,688       1,019       1,814  

Free Cash Flow(1)

    728       733       1,379       851       1,402  

Other Operating Data:

         

Identical sales

    1.9     0.5     1.0     (1.3 )%      (0.4 )% 

Store count (at end of fiscal period)

    2,262       2,291       2,269       2,318       2,324  

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

    113       114       113       115       115  

Fuel sales

  $ 1,870     $ 1,954     $ 3,456     $ 3,105     $ 2,693  

Balance Sheet Data (at end of period):

         

Cash and equivalents

  $ 435     $ 1,662     $ 926     $ 670     $ 1,219  

Total assets(3)

    24,699       21,817       20,777       21,812       23,755  

Total stockholders’ / member equity(3)

    2,346       1,363       1,451       1,398       1,371  

Total debt, including finance leases

    8,746       11,765       10,586       11,876       12,338  

Per Share Data:

         

Basic net income (loss) per common share

  $ 1.23     $ (0.18   $ 0.47     $ 0.17     $ (1.33

Diluted net income (loss) per common share

  $ 1.23     $ (0.18   $ 0.47     $ 0.17     $ (1.33

Weighted-average common shares outstanding (in millions):

         

Basic

    280       281       280       280       280  

Diluted

    280       281       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  
    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  

Identical Sales

    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

 

(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 Free Cash Flow as Adjusted EBITDA less capital expenditures.

 

    

Adjusted EBITDA, Adjusted Net Income and Free Cash Flow 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 and Free Cash Flow 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 Adjusted Net Income and Adjusted EBITDA to net income (see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus for a reconciliation of cash flow from operating activities to Free Cash Flow):

 

(dollars in millions)   28 Weeks
Ended
September 7,
2019
    28 Weeks
Ended
September 8,
2018
    Fiscal
2018
    Fiscal 
2017
    Fiscal 
2016
 

Net income (loss)

  $ 344     $ (50   $ 131     $ 46     $ (374

Adjustments:

         

Gain on interest rate and commodity hedges, net

                (1     (6     (7

Facility closures and related transition costs(a)

          12       13       12       23  

Integration costs(b)

    23       135       186       156       144  

Acquisition-related costs(c)

    11       57       74       62       70  

Equity-based compensation expense

    18       26       48       46       53  

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

    (464     (176     (165     67       (39

Goodwill impairment

                      142        

LIFO expense (benefit)

    16       13       8       3       (8

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

    110       25       72       67       253  

Collington acquisition(d)

                            79  

Amortization of intangible assets resulting from acquisitions

    162       173       326       422       404  

Other(e)

    32       (27     (53     66       45  

Effect of ACI Reorganization Transactions, tax reform and reversal of valuation allowance

                (57     (750      

Tax impact of adjustments to Adjusted Net Income

    24       (67     (147     (259     (265
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

  $ 276     $ 121     $ 435     $ 74     $ 378  

Adjustments:

         

Tax impact of adjustments to Adjusted Net Income

    (24     67       147       259       265  

Effect of ACI Reorganization Transactions, tax reform, and reversal of valuation allowance

                57       750        

Income tax expense (benefit)

    97       (15     (79     (964     (90

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

    (110     (25     (72     (67     (253

Interest expense, net

    403       450       831       875       1,004  

Loss (gain) on debt extinguishment

    66             9       (5     112  

Amortization of intangible assets resulting from acquisitions

    (162     (173     (326     (422     (404

Depreciation and amortization

    898       939       1,739       1,898       1,805  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 1,444     $ 1,364     $ 2,741     $ 2,398     $ 2,817  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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Pursuant to 17 C.F.R. Section 200.83

 

  (a)

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

  (b)

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

  (c)

Includes expenses related to acquisition and financing activities, including management fees of $13.8 million in each year through fiscal 2018. Fiscal 2016 includes adjustments to tax indemnification assets of $12.3 million.

  (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, amortization of unfavorable leases on acquired Safeway surplus properties, estimated losses related to the security breach, 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, has 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

 

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 internet presence 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 internet 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 store growth, 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 and 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.

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.

 

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

We currently operate 401 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 approximately 41% of our total sales in the second quarter 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.

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.

 

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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 greater 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 1,733 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 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

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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 have been cooperating with the Alaska Attorney General in this investigation. 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 approximately 66 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 one of those MDL cases, MDL No. 2804 filed by The Blackfeet Tribe of the Blackfeet Indian Reservation, we filed a motion to dismiss. That motion has yet to be ruled on, but motions by other defendants have been denied and all defendants in the Blackfeet action, including us, have now answered the Complaint. We have also filed a motion to dismiss a state court case pending in New Mexico. While that motion has yet to be ruled on, motions filed by other defendants have been denied and a September 2021 trial date has been set. To date, no discovery has been conducted against us in any of the actions; however it is anticipated that we will need to begin discovery in the New Mexico action in early 2020. 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 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.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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 future negotiations with labor unions, we expect that health care, pension costs and/or contributions and wage costs, among other issues, will be 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 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 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.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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.

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 2015 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,

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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 $12.00 per hour effective January 1, 2019, will increase 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 will increase to $12.75 per hour, effective January 1, 2020, and 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 will increase to $11.00 per hour, effective January 1, 2020, and reach $15.00 per hour by 2024. In Maryland, where we employed approximately 7,200 associates as of February 23, 2019, the minimum wage will increase to $11.00 per hour, effective January 1, 2020, and 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 $16.00 per hour effective January 1, 2019 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,

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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.

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 401 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. By 2020, production of new R-22 refrigerant gas will be completely phased out; however, recovered and recycled/reclaimed R-22 will be available for servicing systems after 2020. 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 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 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

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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.

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 our recent 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. 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 and ANSI data encryption standards and the California Consumer Privacy Act which will take effect in January 2020, could be significant.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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. Despite our considerable efforts to secure our respective 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

 

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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 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.

Failure to realize anticipated savings from our implementation of cost reduction and productivity initiatives could adversely affect our financial performance.

Estimating savings from cost reduction and productivity initiatives is inherently uncertain and there can be no assurance that we will be able to realize such savings in the currently anticipated amounts and time-frame, if at all. The estimates of savings from cost reduction and productivity initiatives represents managements estimates and remain subject to risks and uncertainties. Actual cost savings, if achieved, may be lower than what we expect, may take longer to achieve than anticipated and may require greater charges than currently anticipated.

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.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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 September 7, 2019, we had $8.2 billion of debt outstanding (other than finance lease obligations). As of September 7, 2019, we would have been able to borrow an additional $3.3 billion under the ABL Facility after giving effect to the borrowings under our ABL Facility and letters of credit. As of September 7, 2019, we and our subsidiaries had approximately $727 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;

 

   

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.

 

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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, 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;

 

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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 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 September 7, 2019, we had $8.2 billion of indebtedness outstanding (other than finance lease obligations), of which $3.1 billion is secured under the Term Loan Facilities and no amounts are secured under the ABL Facility (excluding $504.6 million of outstanding letters of credit). As of September 7, 2019, we and our subsidiaries had approximately $727 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

 

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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 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 Our Common Stock and This Offering

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.”

 

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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.

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 at an initial public offering price of $         per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, 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). 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

 

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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 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 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

 

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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 30,000,000 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 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.

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 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. This exclusive forum provision does not preclude or contract the scope of exclusive federal or concurrent jurisdiction for actions brought under the Exchange Act or the Securities Act or the respective rules and regulations promulgated thereunder.

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 existing 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 existing 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 existing stockholders (assuming that the underwriters do not exercise their option to purchase additional shares from the selling stockholders). Prior to this offering, we, our independent directors and our existing

 

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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. Pursuant to this agreement, 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 existing 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.

In addition, our Sponsors will have substantial demand and incidental registration rights, as described in “Certain Relationships and Related Party Transactions—Registration Rights Agreement.” The market price for shares of our common stock may drop when the restrictions on resale by our existing stockholders and independent directors lapse. We 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. We expect that the initial registration statement on Form S-8 will cover                 % of the shares of our common stock that will be available as of the consummation of this offering. 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.

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

The trading market for our common shares 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 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. Any decision to declare and pay dividends 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. 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

 

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Pursuant to 17 C.F.R. Section 200.83

 

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—Incentive Plans.” 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.

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.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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 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.

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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Pursuant to 17 C.F.R. Section 200.83

 

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.

 

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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.

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 debt agreements, including our Term Loan Facilities, ABL Facility and ACI Notes.”

We are also subject to restrictions under agreements governing our debt instruments and we and our subsidiaries will be subject to general restrictions imposed on dividend payments under the laws of their jurisdictions of incorporation or organization. See “Risk Factors—Risks Related to Our Indebtedness—Our debt instruments limit our flexibility in operating our business.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 7, 2019. 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.

 

(dollars in millions)    As of
September 7,
2019
 

Cash and cash equivalents

   $ 435  
  

 

 

 

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

  

ABL Facility(2)

   $  

Term Loan Facilities

     3,033  

ACI Notes

     3,814  

Safeway Notes(3)

     642  

NALP Notes(4)

     465  

Finance leases

     727  

Other financing liabilities(5)

     47  

Mortgage notes payable, secured

     18  
  

 

 

 

Total Debt

   $ 8,746  
  

 

 

 

Total stockholders’ equity

   $ 2,346  
  

 

 

 

Total capitalization

   $ 11,092  
  

 

 

 

 

(1)

Debt discounts and deferred financing costs totaled $94.7 million and $59.2 million, respectively, as of September 7, 2019, on an actual basis.

(2)

The ABL Facility provides for a $4,000.0 million revolving credit facility. As of September 7, 2019, the aggregate borrowing base on the ABL Facility would be approximately $3.8 billion, which was reduced by $504.6 million of outstanding standby letters of credit, resulting in a net borrowing base availability of approximately $3.3 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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DILUTION

All shares of our common stock being sold in the offering were issued and outstanding prior to this offering. As a result, this offering will not have a dilutive effect on our stockholders. Dilution results from the fact that the per share offering price of our common stock is substantially in excess of the tangible book value attributable to the existing equity holders. Our tangible book value represents the amount of total tangible assets less total liabilities, and our tangible book value per share represents tangible book value divided by the number of shares of common stock outstanding. As of                             , our tangible book value per share of our common stock was $            .

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 initial public offering price of $         per share.

 

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

Existing stockholders

                                $                         $            

Purchasers of common stock in this offering

                   $                 $    
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100.0   $          100.0   $    
  

 

 

    

 

 

   

 

 

    

 

 

   

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, 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, February 24, 2018, February 25, 2017 and notes thereto appearing elsewhere in this prospectus. As well, we have derived the Consolidated Balance Sheet data as of September 7, 2019 and the Consolidated Statement of Operations data for the 28 weeks ended September 7, 2019 and the 28 weeks ended September 8, 2018 from our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this prospectus.

 

    28 Weeks Ended        
(dollars in millions, except per share data)   September 7,
2019
    September 8,
2018
    Fiscal
2018
    Fiscal
2017
    Fiscal
2016
    Fiscal
2015
    Fiscal
2014(1)
 

Results of Operations

             

Net sales and other revenue

  $  32,915     $  32,678     $ 60,535     $ 59,925     $ 59,678     $ 58,734     $ 27,199  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    9,181       8,984       16,895       16,361       16,641       16,062       7,503  

Selling and administrative expenses

    8,741       8,835       16,272       16,209       16,072       15,600       7,929  

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

    (464     (176     (165     67       (39     103       228  

Goodwill impairment

                      142                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    904       325       788       (57     608       359       (654

Interest expense, net

    403       450       831       875       1,004       951       633  

Loss (gain) on debt extinguishment

    66             9       (5     112              

Other (income) expense

    (6     (60     (104     (9     (44     (50     91  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    441       (65     52       (918     (464     (542     (1,378

Income tax expense (benefit)

    97       (15     (79     (964     (90     (40     (153
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 344     $ (50   $ 131     $ 46     $ (374   $ (502   $ (1,225
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet (at end of period)

             

Cash and cash equivalents

  $ 435     $ 1,662     $ 926     $ 670     $ 1,219     $ 580     $ 1,126  

Total assets(2)

    24,699       21,817       20,777       21,812       23,755       23,770       25,678  

Total stockholders’ / member equity(2)

    2,346       1,363       1,451       1,398       1,371       1,613       2,169  

Total debt, including finance leases

    8,746       11,765       10,586       11,876       12,338       12,226       12,569  

Net cash provided by (used in) operating activities

    1,085       1,191       1,688       1,019       1,814       902       (165

Per Share Data

             

Basic net income (loss) per common share

  $ 1.23     $ (0.18   $ 0.47     $ 0.17     $ (1.33   $ (1.80   $ (4.38

Diluted net income (loss) per common share

  $ 1.23     $ (0.18   $ 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  

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

 

(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 2,262 stores across 34 states and the District of Columbia. We operate a portfolio of stores, under 20 iconic banners, with prime retail locations and leading market share in attractive and growing geographies. We hold a #1 or #2 position by market share in 68% of the 120 MSAs in which we operate. Within each of the geographies in which we operate, we have a variety of store sizes and aim to provide a destination shopping experience, as we tailor our offerings to the local demographics, including value-oriented, premium and ethnic preferences. Our portfolio of well-located, full service stores provides the backbone of our rapidly growing eCommerce business, through which we offer Drive Up & Go curbside pickup, home delivery and rush delivery. Our go-to-market strategy is focused on a differentiated customer experience across our stores, our just for U loyalty program and comprehensive online capabilities to drive purchase frequency, basket size and customer satisfaction and retention. Our differentiated customer experience emphasizes fresh, organic and locally sourced items among our product offerings as well as our $12.5 billion Own Brands portfolio that drives loyalty, sales growth and margin. We believe that our operating structure empowers decision making at the local level to better serve customers in their communities while offering significant corporate support by leveraging an organization with more than $60 billion in sales and national scale.

Our Company has grown through a series of transformational acquisitions over the last six years, resulting in our ownership of 20 store banners with rich local heritage. In 2015, we merged with Safeway, from which we realized approximately $823 million of run-rate synergies, on-time and ahead of target. We have implemented best practices across the enterprise to allow the realization of significant efficiencies. We continue to sharpen our in-store execution and have expanded our omni-channel capabilities, enabling us to connect with our customers where, when and how they want to shop with us. We increased capital investment in our business, deploying over $6.7 billion of capital expenditures beginning with fiscal 2015, including the $1.45 billion we expect to spend in fiscal 2019, to build new stores, upgrade existing locations with an emphasis on fresh, value-added features and enhance our digital capabilities.

We are currently in the process of implementing cost reduction and productivity initiatives that we expect to reinvest into the business and drive growth. These initiatives include procurement, indirect spend and operational efficiencies such as shrink management, general and administrative discipline and labor and working capital productivity. We have also enhanced our management team, adding executives with complementary backgrounds to position us well for the future.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

We operate in the $655 billion 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. While brick and mortar stores account for approximately 95% of industry sales, eCommerce offerings have been expanding as result of new pure-play internet-based companies as well as established players expanding omni-channel options.

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 is expected to increase between 0.5% and 1.5% in both 2019 and 2020, and U.S. GDP is expected to increase by 2.4% in 2019 and 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 $12.00 per hour effective January 1, 2019, will increase 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 will increase to $12.75 per hour, effective January 1, 2020, and 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 will increase to $11.00 per hour, effective January 1, 2020, and reach $15.00 per hour by 2024. In Maryland, where we employed approximately 7,200 associates as of February 23, 2019, the minimum wage will increase to $11.00 per hour, effective January 1, 2020, and 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 $16.00 per hour effective January 1, 2019 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 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 “Risks Related to Our Business and Industry—Increased pension expenses, contributions and surcharges may have an adverse impact on our financial results.”

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

Stores

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

 

     28 weeks ended     52 weeks ended  
     September 7,
2019
    September 8,
2018
    February 23,
2019
    February 24,
2018
    February 24,
2017
 

Stores, beginning of period

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

Acquired

                       5       78  

Opened

     7       3       6       15       15  

Closed

     (14     (30     (55     (26     (40
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stores, end of period

     2,262       2,291       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

   September 7,
2019
     September 8,
2018
     September 7,
2019
    September 8,
2018
    September 7,
2019
     September 8,
2018
 

Less than 30,000

     205        209        9.1     9.1     4.8        4.9  

30,000 to 50,000

     790        799        34.9     34.9     33.1        33.5  

More than 50,000

     1,267        1,283        56.0     56.0     74.9        75.8  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Stores

     2,262        2,291        100.0     100.0     112.8        114.2  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(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 28 weeks ended September 7, 2019 to 28 weeks ended September 8, 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 28 weeks ended September 7, 2019 (“first 28 weeks of fiscal 2019”) and 28 weeks ended September 8, 2018 (“first 28 weeks of fiscal 2018”).

 

     28 weeks ended  
     September 7,
2019
    % of
Sales
     September 8,
2018
    % of
Sales
 

Net sales and other revenue

   $ 32,915.1       100.0    $ 32,677.5       100.0

Cost of sales

     23,734.0       72.1        23,694.0       72.5  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     9,181.1       27.9        8,983.5       27.5  

Selling and administrative expenses

     8,741.2       26.6        8,834.8       27.0  

Gain on property dispositions and impairment losses, net

     (464.0     (1.4      (175.8     (0.5
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     903.9       2.7        324.5       1.0  

Interest expense, net

     402.7       1.2        449.5       1.4  

Loss on debt extinguishment

     65.8       0.2               

Other income

     (6.0            (60.0     (0.2
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     441.4       1.3        (65.0     (0.2

Income tax expense (benefit)

     97.6       0.3        (14.9      
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 343.8       1.0    $ (50.1     (0.2 )% 
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Sales and Other Revenue

Net sales and other revenue increased 0.7% to $32,915.1 million for the first 28 weeks of fiscal 2019 from $32,677.5 million for the first 28 weeks of fiscal 2018. The increase in Net sales and other revenue was primarily driven by our 1.9% increase in identical sales, partially offset by a reduction in sales related to the stores closed since the second 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 28 weeks ended September 7, 2019 and the 28 weeks ended September 8, 2018, respectively, were:

 

     28 weeks ended
     September 7,
2019
   September 8,
2018

Identical sales, excluding fuel

   1.9%    0.5%

Our identical sales 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 27.9% during the first 28 weeks of fiscal 2019 compared to 27.5% during the first 28 weeks of fiscal 2018. Our total gross profit margin benefited from higher than normal fuel margin during the first 28 weeks of fiscal 2019. Excluding the impact of fuel, gross profit margin increased 20 basis points compared to the first 28 weeks of fiscal 2018. The increase in gross profit margin was driven by improved shrink expense, increased Own Brands penetration, lower depreciation expense and better leveraging of advertising spend, partially offset by continued reimbursement rate pressures in pharmacy and higher distribution center rent expense.

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 26.6% of Net sales and other revenue during the first 28 weeks of fiscal 2019 compared to 27.0% of Net sales and other revenue for the first 28 weeks of fiscal 2018. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue decreased 60 basis points during the first 28 weeks of fiscal 2019 compared to the first 28 weeks of fiscal 2018. The decrease in Selling and administrative expenses was primarily attributable to lower acquisition and integration costs, the realization of our cost reduction initiatives and lower depreciation and amortization expense, partially offset by strategic investments in digital and technology initiatives, higher employee wage and benefit costs and an increase in rent expense related to store properties. Lower acquisition and integration costs were driven by the completion of the Safeway integration during fiscal 2018, resulting in no store conversions in the first 28 weeks of fiscal 2019 compared to 462 store conversions in the first 28 weeks of fiscal 2018. The integration costs in the first 28 weeks of fiscal 2019 were largely driven by the conversion of back-office related areas and a distribution center.

Gain on Property Dispositions and Impairment Losses, Net

Gain on property dispositions and impairment losses, net was $464.0 million during the first 28 weeks of fiscal 2019 compared to $175.8 million during the first 28 weeks of fiscal 2018. The increase is primarily attributable to $463.6 million of gains related to sale-leaseback transactions during the second quarter of fiscal 2019, partially offset by asset impairments including an impairment loss of $38.6 million related to certain assets of our meal kit operations.

Interest Expense, Net

Interest expense, net was $402.7 million during the first 28 weeks of fiscal 2019 compared to $449.5 million during the first 28 weeks of fiscal 2018. The decrease in interest expense is primarily attributable to lower average outstanding borrowings and lower average interest rates, partially offset by $33.0 million of deferred financing costs and original issue discount that was expensed in connection with the repayment of $1,570.6 million of aggregate principal amount outstanding under our term loan facilities, along with accrued and unpaid interest and fees and expenses, for which we used approximately $864 million of cash on hand and proceeds from the issuance of new senior unsecured notes, and the refinancing of the remaining amounts outstanding with new term loan tranches during the second quarter of fiscal 2019. The weighted average interest rate during the first 28 weeks of fiscal 2019 was 6.4%, excluding amortization and write-off of deferred financing costs and original issue discount, compared to 6.5% during the first 28 weeks of fiscal 2018.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

Loss on Debt Extinguishment

Loss on debt extinguishment was $65.8 million during the first 28 weeks of fiscal 2019, compared to no loss on debt extinguishment during the first 28 weeks of fiscal 2019. The loss on debt extinguishment primarily consists of the write-off of debt discounts associated with the tender offer and repurchase of notes, as described in “Debt Management” included elsewhere in this prospectus.

Other Income

For the first 28 weeks of fiscal 2019, Other income was $6.0 million compared to Other income of $60.0 million for the first 28 weeks of fiscal 2018. Other income during the first 28 weeks of fiscal 2019 is primarily driven by non-service cost components of net pension and post-retirement expense and unrealized gains from non-operating investments. Other income during the first 28 weeks of fiscal 2018 is primarily driven by realized gains from the sale of non-operating investments and non-service cost components of net pension and post-retirement expense.

Income Taxes

For the first 28 weeks of fiscal 2019, Income tax expense was $97.6 million, representing a 22.1% effective tax rate. Income tax benefit was $14.9 million, representing a 22.9% effective tax rate, for the first 28 weeks of fiscal 2018. Our effective tax rate for the first 28 weeks of fiscal 2019 differs from the federal income tax statutory rate of 21% primarily due to state income taxes, partially offset by income tax credits and charitable donation benefit.

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

 

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Pursuant to 17 C.F.R. Section 200.83

 

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.

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

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

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 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 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
  

 

 

 

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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  
  

 

 

 

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

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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.

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.

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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.

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 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 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

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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 28 weeks of fiscal 2019, Adjusted EBITDA was $1,444.4 million, or 4.4% of Net sales and other revenue, compared to $1,364.4 million, or 4.2% of Net sales and other revenue for the first 28 weeks of fiscal 2018. The increase in Adjusted EBITDA primarily reflects our identical sales increase, higher gross profit margin, due in part to higher fuel margin and continued improvements in shrink expense, partially offset by strategic investments in digital and technology initiatives, higher employee wage and benefit costs and incremental rent expense from sale-leaseback transactions.

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

 

     28 weeks ended  
     September 7,
2019
    September 8,
2018
 

Net income (loss)

   $ 343.8     $ (50.1

Depreciation and amortization

     897.6       939.2  

Interest expense, net

     402.7       449.5  

Income tax expense (benefit)

     97.6       (14.9
  

 

 

   

 

 

 

EBITDA

     1,741.7       1,323.7  

Integration costs(1)

     22.4       134.9  

Acquisition-related costs(2)

     11.2       57.5  

Equity-based compensation expense

     17.6       25.6  

Loss on debt extinguishment

     65.8        

Gain on property dispositions and impairment losses, net

     (464.0     (175.8

LIFO expense

     16.3       12.9  

Miscellaneous adjustments(3)

     33.4       (14.4
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 1,444.4     $ 1,364.4  
  

 

 

   

 

 

 

 

(1)

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

(2)

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

(3)

Miscellaneous adjustments include the following (see table below):

 

     28 weeks ended  
     September 7,
2019
    September 8,
2018
 

Non-cash lease-related adjustments

   $ 6.3     $ (5.5

Lease and lease-related costs for surplus and closed stores

     12.0       14.6  

Net realized and unrealized loss (gain) on non-operating investments

     7.5       (33.3

Adjustments to contingent consideration

           (10.0

Certain legal and regulatory accruals and settlements, net

     (1.9      

Other(a)

     9.5       19.8  
  

 

 

   

 

 

 

Total other adjustments

   $ 33.4     $ (14.4
  

 

 

   

 

 

 

 

(a)

Primarily includes adjustments for unconsolidated equity investments and costs related to the transition services agreements.

 

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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 Free Cash Flow (in millions):

 

     28 weeks ended  
     September 7,
2019
    September 8,
2018
 

Net cash provided by operating activities

   $ 1,084.8     $ 1,191.3  

Income tax expense (benefit)

     97.6       (14.9

Deferred income taxes

     14.4       66.2  

Interest expense, net

     402.7       449.5  

Operating lease right-of-use assets amortization

     (288.4      

Changes in operating assets and liabilities

     100.3       (517.6

Amortization and write-off of deferred financing costs

     (26.1     (17.7

Integration costs

     22.4       134.9  

Acquisition-related costs

     11.2       57.5  

Other adjustments

     25.5       15.2  
  

 

 

   

 

 

 

Adjusted EBITDA

     1,444.4       1,364.4  

Less: capital expenditures

     (716.3     (631.2
  

 

 

   

 

 

 

Free Cash Flow

   $ 728.1     $ 733.2  
  

 

 

   

 

 

 

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

 

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(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 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
  

 

 

   

 

 

   

 

 

 

Free Cash Flow

   $ 1,378.7     $ 850.9     $ 1,401.6  
  

 

 

   

 

 

   

 

 

 

 

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Confidential Treatment Requested by Albertsons Companies, Inc.

Pursuant to 17 C.F.R. Section 200.83

 

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):

 

     28 weeks ended                    
     September 7,
2019
    September 8,
2018
    Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

Cash and cash equivalents and restricted cash at end of period

   $ 464.7     $ 1,669.8     $ 967.7     $ 680.8     $ 1,229.1  

Cash flows provided by operating activities

     1,084.8       1,191.3       1,687.9       1,018.8       1,813.5  

Cash flows provided by (used in) investing activities

     307.7       (88.2     (86.8     (469.0     (1,079.6

Cash flows used in financing activities

     (1,895.5     (114.1     (1,314.2     (1,098.1     (97.8

Net Cash Provided By Operating Activities

Net cash provided by operating activities was $1,084.8 million for the first 28 weeks of fiscal 2019 compared to $1,191.3 million for the first 28 weeks of fiscal 2018. The reduction in cash flow from operations compared to the first 28 weeks of fiscal 2018 is due to changes in working capital, primarily related to accounts payable and inventory, partially offset by improvements in operating income, which includes the reduction in acquisition and integration costs. The year over year change in working capital was largely impacted by activities related to the store conversions that were ongoing during the first 28 weeks of fiscal 2018.

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 Provided By (Used In) Investing Activities

Net cash provided by investing activities was $307.7 million for the first 28 weeks of fiscal 2019 compared to net cash used in investing activities of $88.2 million for the first 28 weeks of fiscal 2018.

 

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For the first 28 weeks of fiscal 2019, cash provided by investing activities consisted primarily of proceeds from the sale of assets of $1,029.5 million, partially offset by payments for property and equipment, including lease buyouts, of $716.3 million. 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. Payments for property and equipment included the opening of seven new stores, completion of 99 remodels and continued investment in our digital and eCommerce technology. For the first 28 weeks of fiscal 2018, cash used in investing activities consisted primarily of payments for property and equipment, including lease buyouts, of $631.2 million, partially offset by proceeds from the sale of assets of $509.4 million. Payments for property and equipment included the opening of three new stores, completion of 59 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.

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 $1,450 million in capital expenditures, or approximately 2.4% of our sales in fiscal 2018, as follows (in millions):

 

Projected Fiscal 2019 Capital Expenditures

      

New stores and remodels

   $ 600.0  

IT

     350.0  

Real estate and expansion capital

     200.0  

Maintenance

     200.0  

Supply chain

     100.0  
  

 

 

 

Total

   $ 1,450.0  
  

 

 

 

 

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Net Cash Used In Financing Activities

Net cash used in financing activities was $1,895.5 million during the first 28 weeks of fiscal 2019 compared to $114.1 million during the first 28 weeks of fiscal 2018.

Net cash used in financing activities during the first 28 weeks of fiscal 2019 consisted primarily of payments on long-term debt of $2,558.4 million, partially offset by proceeds from the issuance of long-term debt of $750.0 million. Payments on long-term debt principally consisted of the term loan repayment, tender offer and repurchase of notes, as further discussed below.

Net cash used in financing activities during the first 28 weeks of fiscal 2018 consisted primarily of payments on long-term debt of $780.1 million, partially offset by proceeds from the issuance of long-term debt of $750.0 million. Proceeds from the issuance of long-term debt and payments of long-term debt principally consisted of the issuance and subsequent redemption of floating rate senior secured notes as a result of the mutual termination of the merger agreement with Rite Aid Corporation.

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 asset-based loan facility, the repayment of term loans in connection with the refinancing and repurchase of Safeway’s notes described herein. 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 September 7, 2019, we had no borrowings outstanding under our $4.0 billion asset-based revolving credit facility, and total availability of approximately $3.3 billion (net of letter of credit usage).

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. 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 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 sale of $750.0 million of principal amount of 2028 Notes. Proceeds from the 2028 Notes were used to partially fund the term loan repayment discussed above.

 

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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 28 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):

 

     September 7,
2019
 

Term loans

   $ 3,032.5  

Notes and debentures

     4,920.5  

Finance leases

     726.5  

Other notes payable and mortgages

     66.2  
  

 

 

 

Total debt, including finance leases

   $ 8,745.7  
  

 

 

 

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 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 the 2018 Term B-7 Loan (each as defined below), 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.

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.

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 28 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.

 

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(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 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 out outstanding debt balance during the 28 weeks ended September 7, 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 are approximately $52 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. We also recorded operating lease ROU assets and corresponding operating lease liabilities of $602.5 million. These sale-leaseback transactions, in addition to other operating leases entered into during the 28 weeks ended September 7, 2019, resulted in an increase to our future operating lease contractual obligations of approximately $1 billion.

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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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.

 

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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 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

 

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valuation assumptions used to determine the fair value of these two reporting units and lead to future impairment charges.

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

 

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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.

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.

 

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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.

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 2,262 stores across 34 states and the District of Columbia. We operate a portfolio of stores, under 20 iconic banners, with prime retail locations and leading market share in attractive and growing geographies. We hold a #1 or #2 position by market share in 68% of the 120 MSAs in which we operate. Within each of the geographies in which we operate, we have a variety of store sizes and aim to provide a destination shopping experience, as we tailor our offerings to the local demographics, including value-oriented, premium and ethnic preferences. Our portfolio of well-located, full service stores provides the backbone of our rapidly growing eCommerce business, through which we offer Drive Up & Go curbside pickup, home delivery and rush delivery. Our go-to-market strategy is focused on a differentiated customer experience across our stores, our just for U loyalty program and comprehensive online capabilities to drive purchase frequency, basket size and customer satisfaction and retention. Our differentiated customer experience emphasizes fresh, organic and locally sourced items among our product offerings as well as our $12.5 billion Own Brands portfolio that drives loyalty, sales growth and margin. We believe that our operating structure empowers decision making at the local level to better serve customers in their communities while offering significant corporate support by leveraging an organization with more than $60 billion in sales and national scale.

Our Company has grown through a series of transformational acquisitions over the last six years, resulting in our ownership of 20 store banners with rich local heritage. In 2015, we merged with Safeway, from which we realized approximately $823 million of run-rate synergies, on-time and ahead of target. We have implemented best practices across the enterprise to allow the realization of significant efficiencies. Our ongoing financial momentum in both identical sales and Adjusted EBITDA also reflects the benefits from our investments and initiatives to differentiate our customer experience and further enhance the productivity of our store base. We continue to sharpen our in-store execution and have expanded our omni-channel capabilities, enabling us to connect with our customers where, when and how they want to shop with us. We increased capital investment in our business, deploying over $6.7 billion of capital expenditures beginning with fiscal 2015, including the $1.45 billion we expect to spend in fiscal 2019, to build new stores, upgrade existing locations with an emphasis on fresh, value-added features and enhance our digital capabilities.

We are currently in the process of implementing cost reduction and productivity initiatives that we expect to reinvest into the business and drive growth. These initiatives include procurement, indirect spend and operational efficiencies such as shrink management, general and administrative discipline and labor and working capital productivity. We have also enhanced our management team, adding executives with complementary backgrounds to position us well for the future.

Our 20 iconic banners include Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Jewel-Osco, Acme, Shaw’s, Star Market, United Supermarkets, Market Street and Haggen. We have approximately 270,000 talented and dedicated employees serving on average 34 million customers each week. With more than 18 million registered loyalty members, we believe we have a comprehensive understanding of our core shoppers. Harnessing the data from our just for U loyalty program, we engage directly with our customers through a variety of digital media channels and digital offers, through which we generate over 400 million personalized promotions per week to drive customer retention and increase spend.

Together, 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

 

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$2.7 billion and Free Cash Flow of $1.4 billion. We have achieved seven consecutive quarters of positive identical sales, and annual Adjusted EBITDA grew from $2.4 billion in fiscal 2017 to $2.7 billion in fiscal 2018. For the 28 weeks ended September 7, 2019, we generated net sales of $32.9 billion, Adjusted EBITDA of $1.44 billion and Free Cash Flow of $728.1 million compared to net sales of $32.7 billion, Adjusted EBITDA of $1.36 billion and Free Cash Flow of $733.2 million for the 28 weeks ended September 8, 2018.

We have reduced our outstanding Net Debt by approximately $2.9 billion since the end of fiscal 2017 and our Net Debt Ratio decreased from 4.7x as of the end of fiscal 2017 to 2.9x as of the end of the second quarter of fiscal 2019.

 

 

LOGO

Drivers of Current Momentum

We are focused on running the best stores, driving engagement with our customers through our well-established loyalty program, providing excellent customer service and growing our easy-to-use eCommerce business. Our current momentum has been driven in part by the following:

Successfully Completed Safeway Integration.     Since closing the merger with Safeway on January 30, 2015, the integration of the Safeway platform was a priority. We have completed the significant task of integrating systems and converting stores and distribution centers to one common technology platform, giving us greater transparency and compatibility across our network. The combination has also led to shared best practices integrated across the entire enterprise. For example, we now offer fresh-cut fruits and vegetables and expanded offerings in butcher block meat and seafood, which are Albertsons practices, across our stores. We also rolled out Safeway’s expansive wine assortments, differentiated floral programs and leading just for U loyalty program throughout the enterprise. Having one chain-wide loyalty program is integral to the business as it provides a deeper understanding of our customer base. We achieved approximately $823 million in annual run-rate synergies as of the end of fiscal 2018 which exceeded our initial synergy target of approximately $800 million. We have invested a portion of these synergies into the business through selective investments in price and service, in-store upgrades and accelerating the growth of our digital and online offerings and technology platforms.

 

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Sharpened In-Store Execution.     We have taken steps to improve in-store execution in order to achieve dual objectives of enhancing the customer experience and driving profitable growth. Since the beginning of fiscal 2017, we have remerchandised over 700 stores to increase the variety of items and Own Brands penetration in categories such as natural, organic, specialty, healthy and ethnic foods, as we reallocate space to growth categories. This activity coupled with our robust remodel program has also allowed us to update aisle adjacencies and store flows to ease shopping patterns throughout the store. We deployed incremental self-checkout units in over 245 stores during the first two quarters of fiscal 2019. These units were installed at the request of many customers and help reduce wait time during the checkout process. In addition, everyday store operations have continued to improve as our associates have become more familiar with our fully converted and integrated systems, leading to greater operational clarity.

Built Out Leading Omni-Channel Capabilities.     We have continued to enhance our capabilities to meet the growing customer demand for convenience and flexibility in order to serve customers where, when and how they shop. We developed capabilities to offer Drive Up & Go curbside pickup service beginning in fiscal 2017 and expanded Safeway’s home delivery network across the Company. We also collaborated with third-parties, including Instacart, for rush delivery as well as with Grubhub and UberEats for delivery of our prepared and “ready-to-eat” offerings from our stores. We now offer home delivery services in over 2,000 of our stores and 11 of the top 15 MSAs in the country.

Increased In-Store and Digital Investments.     From the beginning of fiscal 2015 through the end of fiscal 2019, we will have spent more than $6.7 billion in capital expenditures, including the $1.45 billion we expect to spend in fiscal 2019. Approximately half of that spend was geared towards new stores, remodels, merchandising and maintenance initiatives, aimed at making our stores a destination shopping experience. Over this same time period, we will have opened approximately 57 new stores and completed approximately 950 store remodels. We have also increased our investment in digital and technology projects, including an estimated $350 million we intend to spend on these projects in fiscal 2019. These investments in digital and technology initiatives include an upgraded pricing and promotional tool and more robust customer-facing applications. We believe our enhanced capital expenditure efforts have continued to provide the on-trend destination shopping experience that excites our customers and drives repeat visits.

 

LOGO

Reduced Costs and Improved Productivity to Fund Future Growth.     With the integration of Safeway behind us, we are in the early stages of implementing initiatives to reduce costs and increase productivity to fund our future growth. Our initiatives include two primary objectives: (i) leveraging our more than $60 billion of sales and national scale to enhance our supplier partnerships and (ii) focusing on shrink, labor productivity, cost of goods-not-for-resale, general and administrative discipline and working capital productivity. We are leveraging technology and automation to improve productivity

 

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across our business, including inventory management, stocking time and labor scheduling. Along with these initiatives, we have also implemented a shrink reduction program that features employee training and manager education as well as utilization of enhanced shrink management tools. As a result of these initiatives, we have seen operating improvements, including shrink reductions of approximately 50 basis points from the second quarter of fiscal 2017 to the second quarter of fiscal 2019. We believe these in-store initiatives, among others, have helped drive tangible improvements in our customer satisfaction and customer service scores.

Our Competitive Strengths

We believe the following competitive strengths are key drivers of our current success and position us for continued growth:

Portfolio of Iconic Store Banners in with Leading Market Share in Growing Markets.     Our 2,262 stores provide us with strong local presence and market share in some of the most attractive geographies in the U.S.

 

   

Well-Known Brands:     Our portfolio of banners have long-standing roots within their local communities, with seven of our banners operating for more than 100 years and 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 which provides our customers with exceptional convenience. We own or ground-lease approximately 39% of our stores and distribution centers that currently have an aggregate value of $            .

 

   

Strong Market Share and Local Market Density:     We are ranked #1 or #2 by market share in 68% of the 120 MSAs in which we operate. This local market presence and brand recognition drives repeat traffic and helps create marketing, distribution and omni-channel efficiencies that enhances 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 120 MSAs in which we operate, the projected population growth over the next five years, in aggregate, exceeds the national average by over 50%.

Our portfolio of store banners with strong brand recognition, as well as the convenience provided by their local market density and strong market share, helps drives both traffic and customer loyalty. The following illustrative map represents our regional banners and combined store network as of September 7, 2019.

 

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LOGO

 

(1)

Nielsen ACView based on food markets in company operating geographies as of calendar second quarter 2019.

Differentiated Offering Driven by Fresh, Organic and Locally Sourced Merchandise.     We are a fresh, perishables-driven company. Fresh sales accounted for over 41% of our revenue in the second quarter of fiscal 2019, which we believe is one of the highest percentages in the industry. We offer butcher block meats and seafood, curated wine assortments, floral assortments, artisan cheese shops, fresh-cut fruit and vegetables, prepared meals and in-store bakeries to create a destination shopping experience. We understand that today’s customer expects a variety of healthier options and demands transparency. The growth of our natural and organic sales reflects this demand, as the category grew more than twice as fast as non-natural and organic categories during fiscal 2018. Our Natural & Organic sales penetration was 12% for fiscal 2018, which represented a 60 basis point increase in sales penetration versus fiscal 2017. Our locally empowered operators have the autonomy to tailor merchandise, particularly fresh offerings, to local market demand. This allows each store to be unique and locally great, driven by the tastes and preferences of the particular micro-market demographic. Fresh and perishable is our highest growth segment, drives consumer loyalty and is higher margin, and we are well-positioned to benefit from this continued category growth.

High-Quality Own Brands That Deliver Great Value.     We are very proud of our substantial Own Brands portfolio. We believe our proprietary Own Brands portfolio is a competitive advantage, driving purchase frequency, higher sales and improved margin. We believe that our Own Brands team is one of the more innovative in the industry. 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. In addition, we self-manufacture many high velocity Own Brands products, including dairy and bakery items, in our 20 manufacturing plants that allows for better pricing for our customers. With four Own Brands exceeding $1 billion in the portfolio (Lucerne, Signature Select, Signature Café and O Organics) and more than 11,000 unique items available, we have successfully driven both top-line

 

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growth and margin expansion, as our Own Brands portfolio has a significant gross margin advantage over similar national brand products. Our portfolio of brands targets customers across price points, from the cost-conscious positioning of the Value Corner brand to the recently released, ultra-premium Signature Reserve brand. Notably, penetration of our Own Brands has expanded over the past two years, growing from 22.3% in the first quarter of fiscal 2017 to 25.3% in the second quarter of fiscal 2019. Finally, sustainability is top of mind with our Own Brands and we are targeting 100% of 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 where, when and how they choose. As consumer preferences evolve, we have sought to provide a more enjoyable and fluid shopping experience, instituting a variety of programs both in-store and online to maximize customer choice and convenience. In-store, we are improving the shopping experience – broadening selection, ensuring in-stock conditions, providing friendly, helpful service, and speedier checkout. Online, we have significantly expanded our capabilities over the last several years. Below is a summary of our various online solutions:

Home Delivery

 

LOGO   

•  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

Drive Up & Go

 

LOGO   

•  Currently available in approximately 500 locations, with plans to grow to 600 by the end of fiscal 2019 and further expansion in fiscal 2020

 

•  Easy-to-use mobile app

 

•  Convenient, well-signed, curbside pickup

 

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Rush Delivery

 

LOGO

 

LOGO

 

LOGO

  

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

 

•  Asset-light offering to meet customers’ needs for speedy delivery

 

•  Partnership with Grubhub and Uber Eats to add delivery options for our prepared and “ready-to-eat” options from our stores

National Loyalty Program with Data-Driven Personalization.     Our just for U loyalty program, with over 18 million registered members, is a pillar of our competitive strategy. This program drives customer retention, increases spend and is the source of significant data, while also delivering great value to our customers. We have seen strong growth in our just for U loyalty program (which includes personalized deals and digital coupons as well as gas and grocery rewards), with a 24% increase in members during the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018. Just for U members spend approximately four times more than non-members. Data gathered from our loyalty program enables over 400 million unique, targeted promotional deals per week that drive user trials and basket size and also captures lapsed users. Membership in our loyalty program is associated with increased shopping trips and increased basket size, and it encourages purchases in adjacent categories.

Strong Relationships with Loyal Customers.     Our go-to-market strategy is integrated across our stores, just for U loyalty program and online offerings that takes our business from transactional to relational with our customers and drives incremental growth through better retention and larger basket size.

Omni-Channel Growth Strategy

 

 

LOGO

We continue to grow our just for U loyalty program with increased customer participation. The omni-channel customer also has meaningfully higher retention rates compared to those who only shop in store, representing potential for incremental share of wallet from those customers. This gives us confidence in the long-term potential of our integrated approach. We invest in these loyalty initiatives with an integrated view of the customer in order to maximize value across our portfolio. In markets where we have high loyalty penetration, Drive Up & Go curbside pickup locations and home delivery capabilities, the loyalty member that shops both in-store and online spends approximately 30% more on average.

Disciplined Approach to Capital Investment and Strong Free Cash Flow.     We have taken a disciplined approach in deploying our capital expenditures with a focus on refreshing our store base and, more recently, enhancing our digital and technology assets. Beginning with fiscal 2015 through the end of fiscal 2019, we will have spent more than $6.7 billion on new stores and remodels, distribution centers,

 

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technology and integration, including the $1.45 billion in capital we expect to spend in fiscal 2019. These investments have been instrumental in maintaining our position as a leader in the food retail industry in a time of rapid transformation. Beginning with fiscal 2015, the first year after our merger with Safeway, we have cumulatively generated $6.1 billion in free cash flow. Our strong free cash flow profile allows us the flexibility to invest in our business in order to drive sales and profitable growth over time.

Cumulative Free Cash Flow

(in billions)

 

 

LOGO

Best-In-Class Leadership Team.     We have made meaningful executive changes over the last several years and believe we have a world-class, cross-disciplinary team led by our President and CEO, Vivek Sankaran who brings valuable consumer packaged goods experience from Pepsi/Frito Lay as well as strategic perspectives from his time at McKinsey and Co. Our leadership team, including our board of directors, brings a strong blend of veteran institutional knowledge and new perspectives from a wide variety of consumer packaged goods, retail, and technology backgrounds.

Our team believes in the power of our “locally great, nationally strong” mentality, empowering our operators to take ownership in a local approach. We enable our local managers to select the best product for their communities, provide a heightened level of customer service and drive improved store performance. While we are beginning to take advantage of our national scale to drive additional growth, we intend to retain the localized approach that has been such an important part of our success.

Our Strategy

Since the beginning of 2013, through acquisitions, we have brought together iconic store banners each with a rich heritage and strong local following. With the successful Safeway integration now behind us, we are well-positioned to accelerate performance through execution of the following strategies:

Ensure Profitable Identical Sales Growth from Our Stores, the Foundation of Our Business.     We are now in a position to accelerate our performance and will continue to leverage our store base in two primary ways:

 

   

Continuing to Enhance our Everyday Store Operations:     Ease of shopping is central to taking care of our customers. Our goal is to provide customers with the variety of items they want, in stock and easy to find, with a seamless shopping and checkout experience. We strive to provide customers with an exciting, sensory experience driven by excellent quality fresh and local merchandising and we expect to strengthen our sales of perishables as a result. We have a robust program to re-merchandise our store portfolio in categories that drive sales and will continue to enhance our product offerings. In addition, we aim to provide great customer service through our associates and the personalized touch they deliver in our stores every day.

 

   

Elevating Core Capabilities Through Modern Technologies and Data Science:     We are increasing our use of technology to assist with in-stock conditions, to simplify or automate processes, to guide us on competitive pricing and promotions, and to enhance labor scheduling.

 

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For example, we plan to roll out an upgraded pricing and promotional tool during the fourth quarter of fiscal 2019 which we believe will drive better pricing and margin optimization and allow us to invest in the areas that have the highest impact for our customers. We expect this to add to our sales momentum as we work to provide the right value proposition to our customers.

Drive Penetration of our Robust, Innovative Own Brands Portfolio.     As of the second quarter of fiscal 2019, our Own Brands penetration was 25.3%. We have a goal to strengthen our Own Brands portfolio and increase our Own Brands penetration to approximately 30% through increased merchandising and promotions in underpenetrated geographies and through innovative, new high-quality products that meet our customers’ needs and desires. Through continued, rapid innovation, we will maximize category growth through emerging customer trends and aim to provide solutions for all customer lifestyles. For example, our current Own Brands portfolio consists of over 11,000 high-quality products and we plan to add over 800 new Own Brands products by the end of fiscal 2019, and an additional 800 products annually thereafter to ensure we are constantly expanding and innovating. We plan to increase the distribution of top-selling Own Brands items across our network of stores and through both Drive Up & Go and delivery services. Our commitment to quality and sustainability will continue, with the goal to lead the industry in product quality, transparency and continuous improvement throughout the entire portfolio. We aim to have 100% of Own Brands packaging be recyclable, reusable, or industrially compostable by 2025.

Enhance Growth Through Just For U Loyalty Program.     We believe there is significant opportunity for incremental growth and increased basket size by both increasing the number of households in our loyalty program and by encouraging our existing loyalty members to become a more valuable, omni-channel customer, utilizing all of the shopping experiences we offer. We are making enrollment into just for U quick and easy to do at checkout, reducing friction to join this valuable program. We are deepening the value proposition to the customer through enhanced fuel partnerships and the roll-out of grocery rewards in all markets. For instance, our recent extension of our ExxonMobil partnership allows loyalty members to redeem their points at an additional 1,500 fuel stations on the East Coast. In addition, we have expanded our algorithms to provide even more personalized pricing to drive customer retention and build basket size. Incremental data gathered from our just for U loyalty program will continue to enhance the personalized promotions we offer our customers.

Pursue Incremental Growth Through eCommerce.     We also continue to enhance our eCommerce business to offer more delivery options and windows across our well-located store base, including delivery within hours, and are working towards offering unattended deliveries and subscription-based delivery. In addition, we are expanding our Drive Up & Go curbside pickup program in order to enable customers to conveniently pick up their goods without leaving their vehicles, with a target to expand the program to 600 locations by the end of fiscal 2019. We believe our strategy of providing customers with a variety of in-store and online options that suit their individual needs, anchored to our effective just for U loyalty program, will continue to drive additional sales growth and differentiate us from many of our competitors. Therefore, building loyalty in-store and online is expected to drive growth. In addition, we are piloting automated micro-fulfillment centers to improve speed and efficiencies in eCommerce.

Reduce Costs and Increase Productivity to Fund Our Growth.     We are currently in the process of implementing cost reduction and productivity increases from the following initiatives, which we will reinvest in pricing, service, and the overall omni-channel customer experience:

 

   

Procurement:     We believe there is an opportunity to leverage our national scale and over $60 billion in sales to develop advantaged and productive supplier partnerships by simplifying how they work with us, planning further in advance, and executing coordinated and national events with all our divisions.

 

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Indirect Spend:     We have identified “Cost of Goods Not For Resale” as an area of further potential cost savings through our ability to harness our scale to buy these items with volume discounts. We have formed an internal task force, partnering with third-party experts, to rapidly drive efficiency with no impact to the customer.

 

   

Operational Efficiencies:     Additional areas of cost savings include continued shrink management efforts, general and administrative discipline, and labor and working capital productivity based on training, analysis and technological advancements. We are working to roll out enhanced demand forecasting and replenishment systems to improve our operating efficiency with regard to labor and inventory management and expect to scale these across the business quickly and efficiently.

Continue Our Disciplined Approach to Capital Deployment.     As responsible stewards of capital, we will look to opportunistically build or acquire new stores and continue to invest in the remodels necessary to maintain and enhance our store base. In fiscal 2019, we plan to open 14 new stores and complete approximately 220 to 240 remodels. We plan to modernize our infrastructure for speed and scale, including through asset-light, strategic partnerships with companies that could expand our technological and omni-channel capabilities.

Celebrate Our Culture of Frontline Ownership and Sense of Purpose.     As we leverage our national scale for efficiencies, we will continue to celebrate the localized structure that empowers store-level decision makers and encourages frontline ownership. Through our carefully developed manager incentive structure, we will continue to ensure that the interests of those on the front lines are aligned with those of the stockholders. Throughout the organization, we will remain true to our Employee Promise – to “Make Every Day a Better Day” for our customers, our people, our company and our community. During fiscal 2019, we surpassed a milestone of $1 billion in sales for our O Organics label which has helped meet the growing demand for organic and responsibly sourced products. Additionally, we have and will continue to remain focused on reducing the environmental impact of our operations. We are committed to zero waste in our manufacturing facilities by 2022 and have made significant progress in reaching this milestone. As of February 23, 2019, nine of our 20 manufacturing plants are zero waste, diverting over 90% of waste from the landfill. We also recycled more than 705 million pounds of cardboard and 22 million pounds of plastic film from our facilities and have more than 900 energy efficiency projects completed in over 600 stores and warehouses in fiscal 2018. Coupled with our physical efforts, we, along with the Albertsons Companies Foundation, donated approximately $262 million in food and financial support, enabled 70 million breakfasts to kids in need through Hunger Is and supported more than 2,000 organizations through Foundation grants in fiscal 2018. We remain focused on our environmental, social and governance initiatives and view them as an essential part of our business as a leading member of the corporate community.

Our Industry

We operate in the $655 billion 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. While brick and mortar stores account for approximately 95% of industry sales, eCommerce offerings have been expanding as result of new pure-play internet-based companies as well as established players expanding omni-channel options.

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

 

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Food-at-Home Consumer Price Index increased by 0.4% in 2018 and is expected to increase between 0.5% and 1.5% in both 2019 and 2020, and U.S. GDP is expected to increase by 2.4% in 2019 and 2.1% in 2020. In addition to macroeconomic factors, the following trends, in particular, are expected to drive sales across the industry:

 

   

Customer Focus on Fresh, Natural and Organic Offerings.     Evolving customer tastes and preferences and a more holistic pursuit of health and wellness has caused food retailers to improve the breadth and quality of their fresh, natural, meal replacement and organic offerings. This, in turn, has resulted in the increasing convergence of product selections between conventional and alternative format food retailers.

 

   

Omni-Channel Convenience as a Differentiator.     Industry participants are addressing customers’ desire for convenience by providing an excellent in-store experience as well as online, home delivery, pickup and digital shopping solutions in order to differentiate themselves from competitors. In-store amenities and services, including store-within-store sites such as restaurants, coffee bars, fuel centers, banks and ATMs, meal kits and prepared meals have become increasingly commonplace.

 

   

Expansion of Private Label Offerings.     Consumers are increasingly viewing private label as a high-quality, national brand alternative, which has driven growth in demand for private label offerings, including the introduction of premium store brands. Industry participants are elevating private label programs through expanded assortments and improved packaging and marketing. In general, private label offerings have a higher gross margin than similarly positioned products of national brands.

 

   

Loyalty Programs and Personalization.     To remain competitive and generate customer loyalty, food retailers are increasing their focus on loyalty programs and data-driven analytics to target the delivery of personalized offers to their customers. Food retailers are also strengthening customer loyalty by offering mobile applications that allow customers to make purchases, access loyalty card data and check prices while in-store.

Competition

The food and drug retail industry is highly competitive. The principal competitive factors that affect our business are location, quality, price, service, selection, convenience and condition of assets such as our stores. The operating environment for the food and drug retailing industry continues to be characterized by intense competition, aggressive expansion, increasing specialization of retail and online formats, entry of non-traditional competitors and consolidation.

We face intense competition from other food and/or drug retailers, supercenters, club stores, online retailers, specialty and niche supermarkets, “limited assortment” stores, drug stores, general merchandisers, wholesale stores, discount 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 a growing number of internet-based home delivery and meal solution companies. We and our competitors engage in price and non-price competition which, from time to time, has adversely affected our operating margins.

For more information on the competitive pressures that we face, see “Risk Factors—Risks Related to Our Business and Industry—Competition in our industry is intense, and our failure to compete successfully may adversely affect our profitability and results of operations.”

Seasonality

Our business is generally not seasonal in nature, but a larger share of annual revenues may be generated in our fourth quarter due to the major holidays in November and December.

 

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Employees

As of February 23, 2019, we employed approximately 270,000 full- and part-time employees, of which approximately 170,000 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 by the end of fiscal 2019. We believe that our relations with our employees are good.

Properties

As of September 7, 2019, we operated 2,262 stores located in 34 states and the District of Columbia as shown in the following table:

 

Location

  

Number of

stores

  

Location

  

Number of

stores

  

Location

  

Number of

stores

Alaska

   25   

Iowa

   1   

North Dakota

   1

Arizona

   134   

Louisiana

   16   

Oregon

   122

Arkansas

   1   

Maine

   21   

Pennsylvania

   50

California

   596   

Maryland

   65   

Rhode Island

   8

Colorado

   106   

Massachusetts

   75   

South Dakota

   3

Connecticut

   4   

Montana

   38   

Texas

   212

Delaware

   18   

Nebraska

   5   

Utah

   6

District of Columbia

   11   

Nevada

   50   

Vermont

   19

Hawaii

   22   

New Hampshire

   26   

Virginia

   38

Idaho

   42   

New Jersey

   76   

Washington

   219

Illinois

   183   

New Mexico

   34   

Wyoming

   14

Indiana

   4   

New York

   17      

The following table summarizes our stores by size as of September 7, 2019:

 

Square Footage

   Number of
stores
     Percent
of total
 

Less than 30,000

     205        9.1

30,000 to 50,000

     790        34.9

More than 50,000

     1,267        56.0
  

 

 

    

 

 

 

Total stores

     2,262        100.0
  

 

 

    

 

 

 

As of September 7, 2019, approximately 39% of our operating stores are owned or ground-leased properties that currently have an aggregate value of $                    . Appraisals of our real estate were conducted by                          between                      and                     .

Our corporate headquarters are located in Boise, Idaho. We own our headquarters. The premises is approximately 250,000 square feet in size. In addition to our corporate headquarters, we have corporate offices in Pleasanton, California and Phoenix, Arizona. We believe our properties are well maintained, in good operating condition and suitable for operating our business.

Segments

We offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel and other items and services through our stores or through eCommerce channels. Our retail operating divisions are geographically based, have similar economic characteristics and similar expected long-term financial performance and are reported in one reportable segment. Our operating segments

 

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and reporting units are made up of 13 divisions, which have been aggregated into one reportable segment. Each reporting unit constitutes a business for which discrete financial information is available and for which management regularly reviews the operating results. We operate similar store formats across all operating segments. Each store offers the same general mix of products with similar pricing to similar categories of customers, has similar distribution methods, operates in similar regulatory environments and purchases merchandise from similar or the same vendors.

Products

Our stores offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel and other items and services. We are not dependent on any individual supplier; only one third-party supplier represented more than 5% of our sales for fiscal 2018. The following table represents sales by revenue by similar type of product (in millions). Year over year increases in volume reflect acquisitions as well as identical sales growth.

 

     Fiscal
2018
     Fiscal
2017
     Fiscal
2016
 
     Amount
(1)
     % of Total      Amount
(1)
     % of Total      Amount
(1)
     % of Total  

Non-perishables(2)

   $ 26,371.8        43.6    $ 26,522.0        44.3    $ 26,699.2        44.7

Perishables(3)

     24,920.9        41.2      24,583.7        41.0      24,398.5        40.9

Pharmacy

     4,986.6        8.2      5,002.6        8.3      5,119.2        8.6

Fuel

     3,455.9        5.7      3,104.6        5.2      2,693.4        4.5

Other(4)

     799.3        1.3      711.7        1.2      767.9        1.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

eCommerce-related sales are included in the categories to which the revenue pertains.

(2)

Consists primarily of general merchandise, grocery and frozen foods.

(3)

Consists primarily of produce, dairy, meat, deli, floral and seafood.

(4)

Consists primarily of lottery and various other commissions, rental income and other miscellaneous income.

Distribution

As of September 7, 2019, we operated 23 strategically located distribution centers, approximately 39% of which are owned or ground-leased. Our distribution centers collectively provide approximately 64% of all products to our retail operating areas.

Merchandising and Manufacturing

We offer more than 11,000 high-quality products under our Own Brands portfolio. Our Own Brands products resonate well with our shoppers as evidenced by Own Brands sales of over $12.5 billion in fiscal 2018. Year over year, we have demonstrated significant progress and increased sales penetration of Own Brands by 50 basis points to 25.1%, excluding pharmacy, fuel and in-store branded coffee sales. Our more than 11,000 Own Brands products achieved approximately $6.9 billion in sales in the 28 weeks ended September 7, 2019, with 25.4% Own Brands sales penetration.

Own Brands continues to deliver on innovation with more than 1,100 new items launched in fiscal 2018 and more than 1,000 in the pipeline for fiscal 2019. Our O Organics and Open Nature brands posted a combined 13.6% growth in sales year-over-year, with over 1,900 items, and we plan to introduce approximately 350 new items in fiscal 2019. In addition to new item innovation and brand development, Own Brands continues to focus on package redesign to refresh shelf presence and comply with new regulatory nutrition guideline changes.

 

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As measured by units for fiscal 2018, 10.2% of our Own Brands merchandise was manufactured in Company-owned facilities, and the remainder of our Own Brands merchandise was purchased from third parties. We closely monitor make-versus-buy decisions on internally sourced products to optimize their quality and profitability. In addition, we believe that our scale will provide opportunities to leverage our fixed manufacturing costs in order to drive innovation across our Own Brands portfolio. As of September 7, 2019, we operated 20 food production plants. These plants consisted of seven milk plants, four soft drink bottling plants, three bakery plants, two ice cream product plants, two grocery/prepared food plants, one ice plant and one soup plant.

Marketing, Advertising and Online Sales

Our marketing efforts involve collaboration between our national marketing and merchandising team and local divisions and stores. We augment the local division teams with corporate resources and are focused on providing expertise, sharing best practices and leveraging scale in partnership with leading consumer packaged goods vendors. Our corporate teams support divisions by providing strategic guidance in order to drive key areas of our business, including pharmacy, general merchandise and our Own Brands. Our local marketing teams set brand strategy and communicate brand messages through our integrated digital and physical marketing and advertising channels. We operate in 120 MSAs and are ranked #1 or #2 by market share in 68% of these markets. We maintain price competitiveness through systematic, selective and thoughtful price investment to drive customer traffic and basket size. We also use our just for U loyalty program, including both personalized deals and digital coupons as well as gas and grocery rewards, to target promotional activity and improve our customers’ experience. More than 18 million members are currently enrolled in our loyalty program, through which we generate more than 400 million personalized promotions per week. We have achieved significant success with active participants in our gas rewards program, which have sales over 4x larger than non-participants. We have recently deployed and are continuing to refine cloud-based enterprise solutions to quickly process proprietary customer, product and transaction data and efficiently provide our local managers with targeted marketing strategies for customers in their communities. By leveraging customer and transaction information with data driven analytics, our “personalized deal engine” is able to select, out of the thousands of different promotions offered by our suppliers, the offers that we expect will be most compelling to each of our approximately 34 million weekly customers. In addition, we use data analytics to optimize shelf assortment and space in our stores by continually and systematically reviewing the performance of each product.

Raw Materials

Various agricultural commodities constitute the principal raw materials used by us in the manufacture of our food products. We believe that raw materials for our products are not in short supply, and all are readily available from a wide variety of independent suppliers.

Environmental Laws

Our operations are subject to regulation under environmental laws, including those relating to waste management, air emissions and underground storage tanks. In addition, as an owner and operator of commercial real estate, we may be subject to liability under applicable environmental laws for clean-up of contamination at our facilities. Compliance with, and clean-up liability under, these laws has not had and is not expected to have a material adverse effect upon our business, financial condition, liquidity or operating results. See “—Legal Proceedings” and “Risk Factors—Risks Related to Our Business and Industry—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.”

 

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Legal Proceedings

We are subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits involving trade practices, lawsuits alleging violations of state and/or federal wage and hour laws (including alleged violations of meal and rest period laws and alleged misclassification issues), real estate disputes as well as other matters. Some of these suits purport or may be determined to be class actions and/or seek substantial damages.

It is the opinion of our management that although the amount of liability with respect to certain of the matters described herein cannot be ascertained at this time, any resulting liability of these and other matters, including any punitive damages, will not have a material adverse effect on our business or financial condition.

We continually evaluate our exposure to loss contingencies arising from pending or threatened litigation and believes we have made provisions where the loss contingency can be reasonably estimated and an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of reasonably possible loss for our exposure in excess of the amount accrued is expected to be immaterial to us. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material effect on our financial condition, results of operations or cash flows.

Office of Inspector General:     In January 2016, we received a subpoena from the Office of the Inspector General of the Department of Health and Human Services (the “OIG”) pertaining to the pricing of drugs offered under our MyRxCare discount program and the impact on reimbursements to Medicare, Medicaid and TRICARE (the “Government Health Programs”). In particular, the OIG requested information on the relationship between the prices charged for drugs under the MyRxCare program and the “usual and customary” prices reported by us in claims for reimbursements to the Government Health Programs or other third-party payors. We cooperated with the OIG in the investigation. We are currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.

Civil Investigative Demand:     On December 16, 2016, we received a civil investigative demand from the United States Attorney for the District of Rhode Island in connection with a False Claims Act investigation relating to our influenza vaccination programs. The investigation concerns whether our provision of store coupons to our customers who received influenza vaccinations in our store pharmacies constituted an improper benefit to those customers under the federal Medicare and Medicaid programs. We believe that our provision of the store coupons to our customers is an allowable incentive to encourage vaccinations. We cooperated with the U.S. Attorney in the investigation. We are currently unable to determine the probability of the outcome of this matter or the range of possible loss, if any.

Security Breach:     In 2014, we were the subject of criminal intrusions by the installation of malware on a portion of our computer network that processes payment card transactions for approximately 800 of our stores through our then service provider SuperValu. We believe these were attempts to collect payment card data. The forensic investigation into the intrusions indicated that although we were then compliant with the Payment Card Industry (PCI) Data Security Standards issued by the PCI Council, we were not compliant with all of these standards at the time of the intrusions. As a result, we were assessed by certain card companies for incremental counterfeit fraud losses, non-ordinary course expenses (such as card reissuance costs) and case management costs. We have paid for all of such assessments. We sought recovery from MasterCard of our assessment and have entered into a confidential settlement with MasterCard. As a result of the intrusion, two class action complaints were filed against us by consumers. These complaints have been dismissed and the

 

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dismissal was upheld on appeal on May 31, 2019. In 2015, we also received a letter from the Office of the Attorney General of the Commonwealth of Pennsylvania stating that the Illinois and Pennsylvania Attorneys General Offices were leading a multi-state group requesting specified information concerning the two data breach incidents. We have cooperated with the investigation. The multi-state group did not make a monetary demand, and we are unable to estimate the possibility or range of loss, if any.

Terraza/Lorenz:     Two lawsuits were brought against Safeway and the Safeway Benefits Plan Committee (the “Benefit Plans Committee,” and together with Safeway, the “Safeway Benefits Plans Defendants”) and other third parties alleging breaches of fiduciary duty under ERISA with respect to Safeway’s 401(k) Plan (the “Safeway 401(k) Plan”). On July 14, 2016, a complaint (“Terraza”) was filed in the United States District Court for the Northern District of California by a participant in the Safeway 401(k) Plan individually and on behalf of the Safeway 401(k) Plan. An amended complaint was filed on November 18, 2016. On August 25, 2016, a second complaint (“Lorenz”) was filed in the United States District Court for the Northern District of California by another participant in the Safeway 401(k) Plan individually and on behalf of all others similarly situated against the Safeway Benefits Plans Defendants and against the Safeway 401(k) Plan’s former record-keepers. An amended complaint was filed on September 16, 2016, and a second amended complaint was filed on November 21, 2016. In general, both lawsuits alleged that the Safeway Benefits Plans Defendants breached their fiduciary duties under ERISA regarding the selection of investments offered under the Safeway 401(k) Plan and the fees and expenses related to those investments. On March 13, 2017, the United States District Court for the Northern District of California denied the Safeway Benefits Plan Defendants’ motion to dismiss with respect to Terraza, and granted in part and denied in part the Safeway Benefits Plan Defendants’ motion to dismiss with respect to Lorenz. Both parties filed summary judgment motions, which were heard and taken under submission on August 16, 2018. Plaintiffs’ motions were denied and defendants’ motions were granted in part and denied, in part. Bench trials for both matters were set for May 6, 2019, but a settlement in principle was reached before trial. On September 13, 2019, settlement papers were filed with the Court along with a motion for preliminary approval of the settlement, which is set for hearing on November 20, 2019. We have recorded an estimated liability for these matters.

False Claims Act:     We are currently subject to two qui tam actions alleging violations of the False Claims Act (“FCA”). Violations of the FCA are subject to treble damages and penalties of up to a specified dollar amount per false claim. In United States ex rel. Schutte and Yarberry v. SuperValu, New Albertson’s, Inc., et al., which is pending in the U.S. District Court for the Central District of Illinois, the relators allege that defendants (including various subsidiaries of ours) overcharged government healthcare programs by not providing the government, as a part of usual and customary prices, the benefit of discounts given to customers who requested that defendants match competitor prices. The complaint was originally filed under seal and amended on November 30, 2015. On August 5, 2019, the Court granted relator’s motion for partial summary judgment, holding that price matched prices are the usual and customary prices for those drugs. Defendants filed a motion for interlocutory appeal on August 30, 2019, which is pending. Additional summary judgment motions by both parties are also still pending and trial will be set after the Court rules on the pending summary judgment motions. In United States ex rel. Proctor v. Safeway, also pending in the Central District of Illinois, the relator alleges that Safeway submitted fraudulent, inflated pricing information to government healthcare programs in connection with prescription drug claims, by failing to include pharmacy discount program pricing as a part of its usual and customary prices. On August 26, 2015, the underlying complaint was unsealed. Discovery is complete and trial is currently set for February 18, 2020; however, the parties have not yet filed, and the Court has not yet considered, any summary judgment motions. In both of the above cases, the government previously investigated the relators’ allegations and declined to intervene. Relators elected to pursue their respective cases on their own and in each case have alleged FCA damages in excess of $100 million, before trebling and excluding penalties. We are vigorously defending each of these matters and believe each of these cases is without merit. We have recorded an estimated liability for these matters.

 

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We were also subject to another FCA qui tam action entitled United States ex rel. Zelickowski v. Albertson’s LLC. In that case, the relators alleged that Albertsons overcharged federal healthcare programs by not providing the government, as a part of its usual and customary prices to the government, the benefit of discounts given to customers who enrolled in the Albertsons discount-club program. The complaint was originally filed under seal and amended on June 20, 2017. On December 17, 2018, the case was dismissed, without prejudice.

Alaska Attorney General’s Investigation:     On May 22, 2018, we received a subpoena from 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 have been cooperating with the Alaska Attorney General in this investigation. 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.

Opioid Litigation:     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 approximately 66 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 one of those MDL cases, MDL No. 2804 filed by The Blackfeet Tribe of the Blackfeet Indian Reservation, we filed a motion to dismiss. That motion has yet to be ruled on, but motions by other defendants have been denied and all defendants in the Blackfeet action, including us, have now answered the Complaint. We have also filed a motion to dismiss a state court case pending in New Mexico. While that motion has yet to be ruled on, motions filed by other defendants have been denied and a September 2021 trial date has been set. To date, no discovery has been conducted against us in any of the actions; however it is anticipated that we will need to begin discovery in the New Mexico action in early 2020. 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.

California Air Resources Board:     Upon the inspection, by the California Air Resources Board (“CARB”), of several of our stores in California, it was determined that we failed certain paperwork and other administrative requirements. As a result of the inspections, we proactively undertook a broad evaluation of the record keeping and administrative practices at all of our stores in California. In connection with this evaluation, we retained a third party to conduct an audit and correct deficiencies identified across our entire California store base. We are working with CARB to resolve these compliance issues and fully comply with governing regulations, which is still ongoing. Consequently, though no monetary assessment has been assessed by CARB, we could be subject to certain fines and penalties. Given the preliminary nature of this matter, we are unable to estimate the possibility or range of loss at this time.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding our executive officers and directors upon completion of this offering:

 

Name

   Age      Position

Vivek Sankaran

     56      President, Chief Executive Officer and Director

James L. Donald

     65      Co-Chairman

Leonard Laufer

     53      Co-Chairman

Susan Morris

     51      Executive Vice President and Chief Operations Officer

Anuj Dhanda

     57      Executive Vice President and Chief Information Officer

Robert B. Dimond

     58      Executive Vice President and Chief Financial Officer

Michael Theilmann

     53      Executive Vice President and Chief Human Resources
Officer

Geoff White

     53      Executive Vice President and Chief Merchandising Officer

Justin Ewing

     50      Executive Vice President, Corporate Development and Real
Estate

Robert A. Gordon

     67      Executive Vice President, General Counsel and Secretary

Sharon L. Allen*(a)(b)

     67      Director

Steven A. Davis*(d)(e)

     61      Director

Kim Fennebresque*(b)(d)

     69      Director

Allen M. Gibson*

     54      Director

Hersch Klaff(e)

     65      Director

Jay L. Schottenstein

     65      Director

Alan H. Schumacher*(d)

     73      Director

Lenard B. Tessler(a)(b)

     67      Director

B. Kevin Turner(c)

     54      Vice Chairman and Senior Advisor to the CEO

 

 

As of September 7, 2019

*

Independent Director

(a)

Member, Nominating and Corporate Governance Committee

(b)

Member, Compensation Committee

(c)

Member, Technology Committee

(d)

Member, Audit and Risk Committee

(e)

Member, Compliance Committee

Biographies

Vivek Sankaran, President, Chief Executive Officer and Director.    Mr. Sankaran has served as our President, Chief Executive Officer and Director since April 2019. Mr. Sankaran previously served from January 2019 to March 2019 as Chief Executive Officer of PepsiCo Foods North America, which includes Frito-Lay North America (“Frito-Lay”). There he led PepsiCo, Inc.’s (“PepsiCo”) snack and convenient foods business. Prior to that, Mr. Sankaran served as President and Chief Operating Officer of Frito-Lay from April 2016 to December 2018; Chief Operating Officer of Frito-Lay from February 2016 to April 2016; Chief Commercial Officer, North America of PepsiCo from 2014 to February 2016, where he led PepsiCo’s cross-divisional performance across its North American customers; Chief Customer Officer of Frito-Lay from 2012 to 2014; Senior Vice President and General Manager of Frito-Lay’s South business unit from 2011 to 2012; and Senior Vice President, Corporate Strategy and Development of PepsiCo from 2009 to 2010. Before joining PepsiCo in 2009,

 

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Mr. Sankaran was a partner at McKinsey and Company, where he served various Fortune 100 companies, bringing a strong focus on strategy and operations. Mr. Sankaran co-led the firm’s North American purchasing and supply management practice and was on the leadership team of the North American retail practice. Mr. Sankaran has an MBA from the University of Michigan, a master’s degree in manufacturing from the Georgia Institute of Technology and a bachelor’s degree in mechanical engineering from the Indian Institute of Technology in Chennai.

James L. Donald, Co-Chairman.    Mr. Donald has served as our Co-Chairman since April 2019. Prior to that, Mr. Donald served as our President and Chief Executive Officer since September 2018 and, prior to that, served as President and Chief Operating Officer since joining ACI in March 2018. Previously, Mr. Donald served as Chief Executive Officer and Director of Extended Stay America, Inc., a large North American owner and operator of hotels, and its subsidiary, ESH Hospitality, Inc. (together with Extended Stay America, Inc., “ESH”), from February 2012 to July 2015, and as Senior Advisor of ESH from August 2015 to December 2015. Prior to joining ESH, Mr. Donald served as President, Chief Executive Officer and Director of Starbucks Corporation, President and Chief Executive Officer of regional food and drug retailer Haggen Food & Pharmacy, Chairman, President and Chief Executive Officer of regional food and drug retailer Pathmark Stores, Inc., and in a variety of other senior and executive roles at Wal-Mart Stores, Inc., Safeway Inc. and Albertson’s, Inc. Mr. Donald began his grocery and retail career in 1971 with Publix Super Markets, Inc. Mr. Donald has served on the Advisory Board of Jacobs Holding AG, a Switzerland-based global investment firm, since 2015, and as a member of the board of directors at Barry Callebaut AG, a Switzerland-based manufacturer of chocolate and cocoa, since 2008.

Leonard Laufer, Co-Chairman.    Mr. Laufer has served as our Co-Chairman since April 2019 and has been a member of our board of directors since October 2018. Mr. Laufer has served as Senior Managing Director at Cerberus and Chief Executive Officer of Cerberus Technology Solutions since May 2018. From March 2013 to May 2018, Mr. Laufer served as Managing Director and Head of Intelligent Solutions at JPMorgan Chase & Co. Prior to JPMorgan and from March 1997 to February 2013, Mr. Laufer co-founded and served as Chief Executive Officer and Managing Member of Argus Information and Advisory Services, LLC a provider of informational and analytical solutions to the payment industry that was purchased by Verisk Analytics in August 2012. Mr. Laufer’s leadership roles at our largest beneficial owner and his knowledge of technology and information solutions provides critical skills for our board of directors to oversee our strategic planning and operations.

Susan Morris, Executive Vice President and Chief Operations Officer.    Ms. Morris has been our Executive Vice President and Chief Operations Officer since January 2018. Previously, Ms. Morris served as our Executive Vice President, Retail Operations, West Region from April 2017 to January 2018. Ms. Morris also served as our Executive Vice President, Retail Operations, East Region from April 2016 to April 2017, as President of our Denver Division from March 2015 to March 2016 and as President of our Intermountain Division from March 2013 to March 2015. From June 2012 to February 2013, Ms. Morris served as our Vice President of Marketing and Merchandising, Southwest Division. From February 2010 to June 2012, Ms. Morris served as a Sales Manager in our Southwest Division. Prior to joining our company, Ms. Morris served as Senior Vice President of Sales and Merchandising and Vice President of Customer Satisfaction at SuperValu. Ms. Morris also previously served as Vice President of Operations at Albertson’s, Inc.

Anuj Dhanda, Executive Vice President and Chief Information Officer.    Mr. Dhanda has been our Executive Vice President and Chief Information Officer since December 2015. Prior to joining our company, Mr. Dhanda served as Senior Vice President of Digital Commerce of the Giant Eagle supermarket chain since March 2015, and as its Chief Information Officer since September 2013. Previously, Mr. Dhanda served at PNC Financial Services as Chief Information Officer from March 2008 to August 2013, after having served in other senior information technology positions at PNC Bank from 1995 to 2013.

 

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Robert B. Dimond, Executive Vice President and Chief Financial Officer.    Mr. Dimond has been our Chief Financial Officer since February 2014. Prior to joining our company, Mr. Dimond previously served as Executive Vice President, Chief Financial Officer and Treasurer at Nash Finch Co., a food distributor, from 2007 to 2013. Mr. Dimond has over 30 years of financial and senior executive management experience in the retail food and distribution industry. Mr. Dimond has served as Chief Financial Officer and Senior Vice President of Wild Oats, Group Vice President and Chief Financial Officer for the western region of Kroger, Group Vice President and Chief Financial Officer of Fred Meyer, Inc. and as Vice President, Administration and Controller for Smith’s Food and Drug Centers Inc., a regional supermarket chain. Mr. Dimond is a Certified Public Accountant.

Michael Theilmann, Executive Vice President & Chief Human Resources Officer.     Mr. Theilmann has been our Executive Vice President & Chief Human Resources Officer since August 2019. Mr. Theilmann previously served as Global Practice Managing Partner, Human Resources Officers Practice, from February 2018 to August 2019, and as Partner, Consumer Markets Practice, from June 2017 to January 2018, of Heidrick & Struggles International Incorporated, a worldwide executive search firm. Prior to that, Mr. Theilmann served as Managing Director of Slome Capital LLC, a family office, from April 2013 to June 2017. Mr. Theilmann also served as Group Executive Vice President, from 2010 to 2012, and as Executive Vice President, Chief Human Resources & Administrative Officer, from 2005 to 2009, of J.C. Penney Company, Inc., a national department store chain.

Geoff White, Executive Vice President and Chief Merchandising Officer.    Mr. White has been our Executive Vice President and Chief Merchandising Officer since September 2019. Mr. White previously served as president of our Own Brands division since April 2017. Prior to that Mr. White served as senior vice president of marketing and merchandising for the Northern California Division from 2015 to April 2017. From 2004 to 2015, Mr. White held various leadership roles, including director of Canadian produce operations, at Safeway. Mr. White started his career as a general clerk at Safeway in Burnaby, British Columbia, in 1981.

Justin Ewing, Executive Vice President, Corporate Development and Real Estate.    Mr. Ewing has been our Executive Vice President of Corporate Development and Real Estate since January 2015. Previously, Mr. Ewing had served as our Senior Vice President of Corporate Development and Real Estate since 2013, as Vice President of Real Estate and Development since 2011 and as Vice President of Corporate Development since 2006, when Mr. Ewing originally joined ACI from the operations group at Cerberus. Prior to his work with Cerberus, Mr. Ewing was with Trowbridge Group, a strategic sourcing firm. Mr. Ewing also spent over 13 years with PricewaterhouseCoopers LLP. Mr. Ewing is a Chartered Accountant with the Institute of Chartered Accountants of England and Wales.

Robert A. Gordon, Executive Vice President, General Counsel and Secretary.    Mr. Gordon has been our Executive Vice President, General Counsel and Secretary since January 2015. Previously, he served as Safeway’s General Counsel from June 2000 to January 2015 and as Chief Governance Officer since 2004, Safeway’s Secretary since 2005 and as Safeway’s Deputy General Counsel from 1999 to 2000. Prior to joining Safeway, Mr. Gordon was a partner at the law firm Pillsbury Winthrop Shaw Pittman LLP from 1984 to 1999.

Sharon L. Allen, Director.    Ms. Allen has been a member of our board since June 2015. Ms. Allen served as U.S. Chairman of Deloitte LLP from 2003 to 2011, retiring from that position in May 2011. Ms. Allen was also a member of the Global Board of Directors, Chair of the Global Risk Committee and U.S. Representative of the Global Governance Committee of Deloitte Touche Tohmatsu Limited from 2003 to May 2011. Ms. Allen worked at Deloitte for nearly 40 years in various leadership roles, including partner and regional managing partner, and was previously responsible for

 

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audit and consulting services for a number of Fortune 500 and large private companies. Ms. Allen is currently an independent director of Bank of America Corporation. Ms. Allen has also served as a director of First Solar, Inc. since 2013. Ms. Allen is a Certified Public Accountant (Retired). Ms. Allen’s extensive leadership, accounting and audit experience broadens the scope of our board of directors’ oversight of our financial performance and reporting and provides our board of directors with valuable insight relevant to our business.

Steven A. Davis, Director.    Mr. Davis has been a member of our board since June 2015. Mr. Davis is the former Chairman and Chief Executive Officer of Bob Evans Farms, Inc., a food service and consumer products company, where he served from May 2006 to December 2014. Mr. Davis has also served as a director of PPG Industries, Inc., a manufacturer and distributor of paints, coatings and specialty materials, since April 2019, Legacy Acquisition Corporation, an acquirer of companies in the public and restaurant sectors, since November 2017, Sonic Corp., the nation’s largest chain of drive-in restaurants, since January 2017, Marathon Petroleum Corporation, a petroleum refiner, marketer, retailer and transporter, since 2013, Walgreens Boots Alliance, Inc. (formerly Walgreens Co.), a pharmacy-led wellbeing enterprise, from 2009 to 2015, and CenturyLink, Inc. (formerly Embarq Corporation), a provider of communication services, from 2006 to 2009. Prior to joining Bob Evans Farms, Inc. in 2006, Mr. Davis served in a variety of restaurant and consumer packaged goods leadership positions, including president of Long John Silver’s LLC and A&W Restaurants, Inc. In addition, he held executive and operational positions at Yum! Brands, Inc.’s Pizza Hut division and at Kraft General Foods Inc. Mr. Davis has served as a member of the international board of directors for the Juvenile Diabetes Research Foundation since June 2016. Mr. Davis brings to our board of directors extensive leadership experience. In particular, Mr. Davis’ leadership of retail and food service companies and pharmacies provides our board of directors with valuable insight relevant to our business.

Kim Fennebresque, Director.    Mr. Fennebresque has been a member of our board of directors since March 2015. Mr. Fennebresque has served as a senior advisor to Cowen Group Inc., a diversified financial services firm, since 2008, where he also served as its chairman, president and chief executive officer from 1999 to 2008. He has served on the boards of directors of Ally Financial Inc., a financial services company, since May 2009, BlueLinx Holdings Inc., a distributor of building products, since May 2013 and as Chairperson of BlueLinx Holdings Inc. since May 2016 and Ribbon Communications Inc., a provider of network communications solutions, since October 2017. Mr. Fennebresque has served as a member of the Supervisory Board of BAWAG P.S.K., one of Austria’s largest banks, since 2017. Mr. Fennebresque served as a director of Delta Tucker Holdings, Inc. (the parent of DynCorp International, a provider of defense and technical services and government outsourced solutions) from May 2015 to July 2017. From 2010 to 2012, Mr. Fennebresque served as chairman of Dahlman Rose & Co., LLC, an investment bank. He has also served as head of the corporate finance and mergers and acquisitions departments at UBS and was a general partner and co-head of investment banking at Lazard Frères & Co. He has also held various positions at First Boston Corporation, an investment bank acquired by Credit Suisse. Mr. Fennebresque’s extensive experience as a director of several public companies and history of leadership in the financial services industry brings corporate governance expertise and a diverse viewpoint to the deliberations of our board of directors.

Allen M. Gibson, Director.    Mr. Gibson has been a member of our board of directors since October 2018. Mr. Gibson is currently the Chief Investment Officer of Centaurus Capital LP and Investment Manager for the Laura and John Arnold Foundation. Mr. Gibson has held both positions since April 2011. Centaurus Capital LP is a private investment partnership with interests in oil and gas, private equity, structured finance, and the debt capital markets. Prior to Centaurus Capital LP, Mr. Gibson was a Senior Vice President in institutional asset management at Royal Bank of Canada from February 2008 until April 2011. Mr. Gibson has served as a member of the board of directors of

 

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ARG Realty, a commercial real estate company based in Argentina, since April 2018, Global Atlantic Financial Group, Inc., a brokerage firm, since May 2013, Cell Site Solutions, LLC, a provider of telecom equipment, products and services since May 2014, and the Tony Hawk Foundation, a youth-oriented charitable foundation, since July 2016. Mr. Gibson also serves on the advisory committee of several investment funds, including Cerberus Investment Partners V and Cerberus Investment Partners VI. Centaurus Capital LP is an investor in certain Cerberus funds. Mr. Gibson’s knowledge of capital markets enhances the ability of our board of directors to make prudent financial judgments.

Hersch Klaff, Director.    Mr. Klaff has served as a member of our board of directors since 2010. Mr. Klaff is the Chief Executive Officer of Klaff Realty, which he formed in 1984. Mr. Klaff began his career as a Certified Public Accountant with the public accounting firm of Altschuler, Melvoin and Glasser in Chicago. Mr. Klaff’s real estate expertise and accounting and investment experience, as well as his extensive knowledge of our company, broadens the scope of our board of directors’ oversight of our financial performance.

Jay L. Schottenstein, Director.    Mr. Schottenstein has served as a member of our board of directors since 2006. Mr. Schottenstein has served as Chairman of the board of directors of American Eagle Outfitters, Inc., a global apparel and accessories retailer, since January 2014 and as Chief Executive Officer since January 2014, a position in which he previously served from March 1992 until December 2012. He has also served as Chairman of the Board and Chief Executive Officer of Schottenstein Stores since March 1992 and as president since 2001. Mr. Schottenstein also served as Chief Executive Officer of DSW, Inc., a footwear and accessories retailer, from March 2005 to April 2009, and as Chairman of the board of directors of DSW, Inc. since March 2005. Mr. Schottenstein’s experience as a chief executive officer and a director of other major publicly-owned retailers, and his prior experience as a member of our board of directors, gives him and our board of directors valuable knowledge and insight to oversee our operations.

Alan H. Schumacher, Director.    Alan H. Schumacher has served as a member of our board of directors since March 2015. He has also served on the board of Warrior Met Coal, Inc., a leading producer and exporter of metallurgical coal for the global steel industry, since its initial public offering in April 2017. He has currently or previously served as a director of BlueLinx Holdings Inc., a distributor of building products, Evertec Inc., a full-service transaction processing business in Latin America, School Bus Holdings Inc., an indirect parent of school-bus manufacturer Blue Bird Corporation, Quality Distribution Inc., a chemical bulk tank truck operator, and Noranda Aluminum Holding Corporation, a producer of aluminum. Mr. Schumacher was a member of the Federal Accounting Standards Advisory Board from 2002 through June 2012. The board of directors has determined that the simultaneous service on more than three audit committees of public companies by Mr. Schumacher does not impair his ability to serve on our audit and risk committee nor does it represent or in any way create a conflict of interest for our company. Mr. Schumacher’s experience as a board director of several public companies, and his deep understanding of accounting principles, provides our board of directors with experience to oversee our accounting and financial reporting.

Lenard B. Tessler, Director.    Mr. Tessler has served as a member of our board of directors since 2006. Mr. Tessler is currently Vice Chairman and Senior Managing Director at Cerberus, which he joined in 2001. Prior to joining Cerberus, Mr. Tessler served as Managing Partner of TGV Partners, a private equity firm that he founded, from 1990 to 2001. From 1987 to 1990, he was a founding partner of Levine, Tessler, Leichtman & Co. From 1982 to 1987, he was a founder, Director and Executive Vice President of Walker Energy Partners. Mr. Tessler is a member of the Cerberus Capital Management Investment Committee. Mr. Tessler has also served as a member of the board of directors of Keane Group, Inc., a provider of hydraulic fracturing, wireline technologies and drilling services, since October 2012, and as a Trustee of New York Presbyterian Hospital, where he also serves as member of the Investment Committee and the Budget and Finance Committee. Mr. Tessler’s

 

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leadership roles at our largest beneficial owner, his board service and his extensive experience in financing and private equity investments and his in-depth knowledge of our company and its acquisition strategy, provides critical skills for our board of directors to oversee our strategic planning and operations.

B. Kevin Turner, Vice Chairman and Senior Advisor to the CEO.    Mr. Turner has served as Vice Chairman and Senior Advisor to the Chief Executive Officer and as a member of our board of directors since August 2017. Mr. Turner is currently a member of the board of directors of Nordstrom, Inc. Mr. Turner has served as President and Chief Executive Officer of Core Scientific, an emerging leader in blockchain and artificial intelligence infrastructure, hosting, transaction processing and application development, since July 2018. Mr. Turner was previously Chief Executive Officer of Citadel Securities and Vice Chairman of Citadel LLC, global financial institutions, from August 2016 to January 2017