Digital Growth And AI Investments Will Drive Future Productivity And Customer Engagement

Key Takeaways

• Strategic digital growth and healthcare integration are expected to enhance customer engagement and improve net margins through cross-shopping and increased revenue streams.
  
• Investments in retail media and technology aim to boost earnings and productivity, potentially alleviating inflationary pressures with significant cost savings.
  
• Rising competition, inflation, and margin pressures threaten Albertsons' revenue growth and profitability amid challenges in maintaining market share.

Catalysts

Through its subsidiaries, engages in the operation of food and drug stores in the United States.

• Albertsons Companies' increased focus on digital growth platforms, such as e-commerce and loyalty programs, is expected to drive future revenue growth, with plans for enhanced customer engagement and sales penetration opportunities.
  
• The integration of pharmacy and health services, despite being financially dilutive currently, is expected to grow as a top loyalty driver, potentially improving net margins due to the higher spending of cross shoppers.
  
• Investments in retail media through the Albertsons Media Collective are growing faster than the market and are seen as a significant opportunity for additional revenue streams, potentially enhancing earnings.
  
• The ongoing modernization of capabilities with technology investment, including AI and machine learning, aims to elevate core processes, potentially improving net margins through enhanced productivity and efficiencies.
  
• Productivity initiatives, including supply chain automation and scale in buying goods, are expected to deliver $1.5 billion in savings over the next three years, supporting improved earnings and offsetting inflationary pressures.

Albertsons Companies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Albertsons Companies's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 1.4% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $2.27) by about January 2028, up from $1.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $1.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, up from 11.1x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 27.1x.
• Analysts expect the number of shares outstanding to decline by 4.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Albertsons Companies Future Earnings Per Share Growth

Risks

• Slow growth in identical store sales and net gains mainly driven by pharmacy and digital, which may not be sustainable long-term, puts pressure on overall revenues.
  
• Rising competition from mass retailers and clubs gaining market share suggests potential difficulty in maintaining and increasing revenue streams.
  
• Ongoing margin pressure from increasing e-commerce picking and delivery costs and lower pharmacy margins could challenge net margins if not offset by productivity initiatives.
  
• Market share losses to large discount and club retailers indicate competitive risks that could negatively impact growth and overall earnings.
  
• The impact of inflationary pressures on consumer spending patterns and potentially greater need for price investments might constrain revenue growth and margin expansion.

Valuation

• The analysts have a consensus price target of $23.44 for Albertsons Companies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $84.5 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 7.5%.
• Given the current share price of $19.84, the analyst's price target of $23.44 is 15.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.