BOISE, Idaho -- Albertson's here said last week it plans to accelerate its remodeling program as a result of discovering unanticipated efficiencies from its merger in June with Salt Lake City-based American Stores Co.
Those comments came in the wake of the release of the chain's financial results for the second quarter and 26 weeks ended July 29, which showed increases in sales and earnings before merger-related costs.
As a result of finding greater efficiencies than anticipated, securities analysts said, Albertson's plans to increase remodeling efforts in 2000 by 30% -- with Acme Markets in the Northeast a likely beneficiary.
According to A. Craig Olson, executive vice president and chief financial officer, Albertson's store-development teams "have found efficiencies in capital spending and opportunities to accelerate our remodel program for 2000 and 2001."
Chain officials told SN last week the chain plans 240 remodels over the next five years but declined to specify the number of remodeling projects per year. However, industry analysts indicated the company had originally pinpointed approximately 100 supermarket remodels for 2000, "but now it's talking about 130 remodels," said Gary Giblen, New York-based managing director of Banc of America Montgomery Securities, San Francisco. "So apparently what Albertson's is finding is that it can do things more efficiently and therefore cheaper than American Stores could in terms of building and remodeling stores.
"The question all along has been whether or not Albertson's would slash capital spending and use the free cash flow to pay off debt more quickly, but it's clear now that, rather than cutting back on spending, it will use the money to do more projects, which shows its dedication to building the business for the long term."
According to Giblen, one beneficiary of Albertson's accelerated remodeling efforts may be Acme Markets, the Malvern, Pa.-based American Stores subsidiary.
"For a while American had opted not to invest in the smaller Acmes, on the assumption it would ultimately replace them with larger stores," Giblen said. "But over the last nine months American reversed itself and decided it was worth spending money to get a rapid payoff, and Albertson's is continuing that program," he explained.
Since completion of the merger June 23, Olson said, Albertson's has been "taking advantage of leveraged purchasing power and experiencing reductions in operating costs as a result of eliminating duplicate functions," resulting in Albertson's belief that "the cost savings and synergistic advantages are greater than originally estimated."
That discovery was made after Albertson's was able to look more closely at American Stores' operations following the merger, a company spokesman told SN.
Jonathan Ziegler, San Francisco-based analyst with Salomon Smith Barney, New York, said Albertson's could do "only so much from the outside looking in, and once it got inside American Stores, it's not surprising that it found more savings than originally anticipated. I felt all along that it was low-balling its projected synergies."
The Albertson's spokesman said he could not quantify the revised savings beyond what the company had originally said it expected -- synergies of $100 million in the first 12 months after the merger, $200 million in the second year and $300 million in the third year.
Giblen said the only specifics on synergies the company gave involved the savings from "general office consolidation," which the company had initially estimated at $40 million. "But Albertson's is now saying it can achieve savings of 50% to 75% beyond that level, which would be $20 million to $30 million more," he said.
Albertson's said its second-quarter and first-half results were reported on a pro forma basis, with all prior-year comparisons made as if the two companies had always been one.
Sales rose 4.9% to $9.4 billion for the 13-week quarter and 5.3% to $18.6 billion for the 26-week half, while comparable-store sales, including replacement units, increased 1.5% for the quarter and 1.7% for the half. The company said net earnings before merger-related costs of $464 million after taxes rose 8.9% to $236 million for the quarter and 11.8% to $460 million for the half before merger-related costs of $449 million after taxes and a prior-year impairment charge of $29.4 million for store closures.
Including all merger-related costs, Albertson's said it had a net loss of $228 million for the quarter, while net earnings fell 97.4% to $10 million for the half.