Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Is Albertsons a Value Investment in Groceries?

The Albertsons Companies (NYSE: ACI) could be the best value investment in groceries.

To explain, Albertsons (ACI) claims to operate over 2,200 supermarkets in 34 US States and the District of Columbia. Albertsons also claims to operate 23 food distribution centers, 20 food and beverage plants, over 400 fuel centers, and 1,700 pharmacies. In addition, Albertsons offers home grocery delivery 11 of the top 15 US grocery markets.

Albertsons operates 20 supermarket brands including Safeway, Vons, Albertsons, Star, Lucky, Carrs, Shaws, Tom Thumb, Pavilions, Jewel Osco, Haggen, and Amigos. Thus, you could be a regular Albertsons shopper and not realize it.

Yet, Mr. Market paid $19.74 for Albertsons on 26 January 2021. Moreover, Albertsons’s share price rose from $15.45 on 26 June 2020, the day the company went public.

Does Albertsons Make Money?

Albertsons (NYSE: ACI) makes money from its supermarkets. For instance, Albertsons reported a quarterly gross profit of $4.509 billion, a quarterly operating income of $258.50 million, and quarterly revenues of $15.409 billion on 30 November 2020.

However, Albertsons’ quarterly revenues fell from $15.758 billion on 31 August 2020 and $22.752 billion on 31 May 2020. Similarly, the quarterly gross profit fell from $6.771 billion on 31 May 2020 and $4.575 billion on 31 August 2020. Plus, the quarterly operating income fell from $971.8 million on 31 May 2020 and $562 million on 31 August 2020.

Thus, Albertsons makes money, but it made less money in 2020. Conversely, Albertsons had impressive revenue growth in 2020. For instance, Stockrow estimates Albertsons revenues grew by 21.42% in the quarter ending on 31 May 2020. The revenue growth fell to 11.15% on 31 August 2020 and 9.26% on 30 November 2020.

How Much Cash Does Albertsons Generate?

Albertsons (ACI) generates some cash. It reported a quarterly operating cash flow of $275.20 million on 30 November 2020.

However, the quarterly operating cash flow fell from $2.092 billion on 31 May 2020 and $628.90 million on 31 August 2020. Similarly, the quarterly ending cash flow fell from $2.065 billion on 31 May 2020 to $367.40 million on 31 August 2020.

Finally, Albertsons had $1.836 billion in cash and short-term investments on 30 November 2020. The cash and short-term investments fell from $2.022 billion on 31 May 2020 and $2.39 billion on 31 August 2020.

Is Albertsons a Value Trap?

I think Albertsons (ACI) could be a value trap because it has a tiny amount of cash. To explain, a value trap can be a cheap company that generates almost no cash.

The small amounts of cash create a value trap because they lead to a low margin of safety. To elaborate, the margin of safety is low because the company can run out of cash and issue enormous amounts of debs to finance its operations.

I think many retailers; including Macy’s (M), are value traps because they generate small amounts of cash. Albertons is a value trap because it generates limited amounts of cash.

However, Albertsons had $26.319 billion in total assets and $8.328 billion in long-term debt on 30 November 2020. Thus, Albertsons has some value in assets but almost no cash. I do not think Albertsons generates enough cash to offer a margin of safety.

How Kroger can Kill Albertsons

Albertsons (ACI) could experience future growth because it offers delivery through Instacart. However, Albertsons will have to compete with Amazon (AMZN), Walmart (WMT), and Kroger (KR) in the delivery market.

Walmart, Amazon, and Kroger are investing heavily in grocery delivery infrastructure. Kroger (NYSE: KR) plans 10 automated customer fulfillment centers (CFCS) in the United States.

The CFCs are automated warehouses where Ocado Group PLC (LON: OCDO)robots pull and pack grocery orders. Kroger management hopes to open the company’s first Ocado CFC in Monroe, Ohio, in early 2021.

Other Ocado CFC locations announced by Kroger include Frederick, Maryland. (350,000 square feet); Pleasant Prairie, Wisconsin. (350,000 square feet); Groveland, Florida. (375,000 square feet); Forest Park, Georgia. (375,000 square feet); and Dallas (350,000 square feet), Supermarket News reports. Kroger plans a smaller 135,000 square foot CFC in Romulus, Michigan.

Can Albertsons Compete with Kroger?

Kroger plans additional Ocado CFCs in the Pacific Northwest and the West. Supermarket News speculates. Each CFC will support grocery delivery by Kroger; and contractors such as Instacart or Uber’s (UBER) Postmates, in a region. For instance, the Kroger CFC in Frederick will support grocery delivery in Washington, DC.

Moreover, Kroger and Ocado will develop micro-fulfillment capabilities in an accelerated growth plan, Supermarket News reports. Micro-fulfillment means expanding grocery pickup capacities at stores which can service both Instacart deliveries and individual shoppers.

I cannot see how Albertsons can compete with automated delivery operations such as Kroger’s and Amazon’s. Consequently, I consider the Kroger/Ocado alliance the greatest threat to Albertsons. I cannot see how Albertsons could compete with Kroger/Ocado.

The worst nightmare for Albertsons will be Kroger/Ocado buying Instacart or merging with Instacart. I think a Kroger/Ocado/Instacart combination or alliance could create a grocery delivery monopoly even Amazon cannot compete with. Thus, I predict Albertsons could sell out to Amazon (AMZN) at some point.

Is Albertsons a Good Stock?

I consider Albertsons a terrible stock and a value trap because it pays no dividend. I advise investors to avoid Albertsons Companies (ACI) and investigate Kroger (KR) instead.

I like Kroger (NYSE: KR)because the Ocado alliance gives that company enormous growth potential. In particular, Kroger is cheap, Mr. Market paid $37.98 for it on 26 January 2021. In addition, Kroger paid an 18¢ quarterly dividend on 12 November 2020.

In the final analysis, I consider Kroger not Albertsons the value investment in grocery stocks.