Digital And Media Collective Plans Will Offset Rising Margin Pressure

Key Takeaways

• Muted sales growth and margin pressures could curtail short-term profitability amid a competitive environment and rising costs.
  
• Planned capital investments and gradual share buybacks might strain near-term finances, delaying earnings improvements.
  
• Strategic investments in e-commerce, media, loyalty, automation, and Own Brands aim to boost revenue, improve margins, and enhance long-term growth.

Catalysts

Through its subsidiaries, operates in the food and drug retail industry in the United States.

• Albertsons forecasts same-store sales growth of only 1.5% to 2.5%, reflecting muted revenue expectations potentially due to the competitive environment and cautious consumer spending trends, which may result in revenue growth below expectations.
  
• The company anticipates ongoing pressure on gross margins due to a blend of digital sales growth and pharmacy expansion, both of which have lower margins, potentially leading to lower profitability.
  
• Wage inflation is expected to remain elevated, running significantly higher than historical levels, leading to increased labor costs and potentially compressing net margins.
  
• The significant planned investment of $1.7 billion to $1.9 billion in capital expenditures focuses on digital platforms and store modernization, which may not immediately translate into earnings growth but could strain free cash flow in the short term.
  
• Albertsons has a $2 billion share buyback authorization, but plans to execute it over three years, suggesting investors might not see substantial share count reductions or resulting EPS accretion until much later, affecting short-term earnings per share improvement.

Albertsons Companies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Albertsons Companies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Albertsons Companies's revenue will grow by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.2% today to 1.3% in 3 years time.
• The bearish analysts expect earnings to reach $1.1 billion (and earnings per share of $2.03) by about May 2028, up from $958.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, down from 13.5x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.17%, as per the Simply Wall St company report.

Albertsons Companies Future Earnings Per Share Growth

Risks

• Albertsons Companies is continuing to invest in its e-commerce infrastructure, which grew 24% in the fourth quarter. This strategic focus on digital platforms could enhance revenue and improve net margins due to increased sales and reduced costs from efficiencies.
  
• The expansion of Albertsons Media Collective, which aims to deliver more targeted media campaigns and increased advertiser reach, is expected to outpace the retail media market, potentially boosting earnings through new revenue streams.
  
• Albertsons has a strong loyalty program that grew by over 15% year-over-year. This increase in loyalty membership and customer engagement could lead to higher long-term revenue and improved profit margins due to greater customer lifetime value.
  
• Investments in automation and warehouse management systems are expected to improve operational efficiency, resulting in $1.5 billion in productivity savings by fiscal year 2027. These savings are likely to offset inflationary pressures, positively impacting net margins.
  
• The company’s focus on enhancing its customer value proposition through Own Brands, which ended Q4 with 25.4% sales penetration, is projected to increase to 30%, potentially driving profitable unit growth and increased market share, positively affecting overall earnings.

Valuation

• The assumed bearish price target for Albertsons Companies is $20.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Albertsons Companies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $31.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $84.7 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 8.2%.
• Given the current share price of $22.4, the bearish analyst price target of $20.0 is 12.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.