BOISE, Idaho -- Albertson's here said last week the ongoing integration of American Stores Co. resulted in "a lot of indigestion" for the third quarter and 39 weeks ended Oct. 28 -- the first reporting period since the completion of the American Stores merger last June.
After posting earnings declines for both periods, the company said it has "a lot of work to do over the next six to 12 months" but believes it is positioned for long-term success. Securities analysts contacted by SN said they agreed that the chain's integration problems should be behind it by sometime next year.
Albertson's said net income dropped 40.5% to $129.9 million for the 13-week quarter and 77.1% to $140.3 million for the year to date, including extraordinary after-tax charges of $55 million for merger-related costs and potential payouts and attorney fees in settlement of a union-backed lawsuit that alleged Albertson's allowed off-the-clock work.
(For details on the lawsuit settlement agreement, see separate story, this page.)
Gary Michael, chairman and chief executive officer, said the integration process "evolved in a manner that prevented us from anticipating the magnitude of the impact sooner. While we are disappointed with our earnings and with the short-term cost of the merger and integration, we are confident the long-term picture is very positive."
He said the factors that contributed to the earnings declines included the following:
The government-ordered divestiture of 145 stores, whose sales totalled $2.3 billion.
The conversion of more than 400 acquired stores and distribution centers to common systems.
The need to operate two banners -- Albertson's and Lucky Stores -- in California, Nevada and New Mexico, "[which] was more complicated and costly than we expected."
According to Michael, "We are merging two large organizations into a single chain and also taking significant steps to bring the Albertson's brand into new regions, new markets and new channels of distribution.
"Although the conversion was more complicated and costly than we expected, and while our tracking systems in these areas were disrupted, we learned a lot and believe future endeavors will be smoother. In fact, we are on track to achieve our goal of one common system companywide, which will enable us to realize significant synergies and operating efficiencies."
Jonathan Ziegler, San Francisco-based managing director for Deutsche Bank/Alex Brown, New York, told SN Albertson's management seemed surprised by the disappointing earnings results.
"But the merger contained a lot of moving parts that affected the financial results," Ziegler said.
"For example, as Albertson's converted the American Stores' systems to its own, one problem it ran into was that a lot of data it would otherwise have had about costing and pricing goods was not available. And it had to keep both the Albertson's and Lucky banners going in California and elsewhere because, as part of its agreement with the Federal Trade Commission, it had to keep sales up in stores it ultimately divested.
"There was also the cost of training new Albertson's employees and perhaps some morale problem at stores that were being divested."
Ziegler said many of those issues are behind Albertson's now, "though some, particularly on the West Coast, could last for another couple of quarters. But I believe the third quarter was the trough quarter, and Albertson's should have smooth sailing by the third quarter of 2000."
Debra Levin, an analyst with Morgan Stanley Dean Witter, New York, said the integration of American Stores proved tough, "as expected," with difficulties likely to persist in the fourth quarter. She said Albertson's is likely to experience additional near-term pressures caused by the transition, although it is likely to benefit in the longer term "from substantial synergies."
Sales rose 1.6% to $9 billion for the quarter and 4.1% to $27.6 billion for the 39 weeks, despite the store divestitures, the company noted, while comparable-store sales rose 2.2% for the quarter and 2.0% for the year to date. Albertson's said sales gains were particularly strong at three former American Stores divisions -- Acme Markets in Philadelphia, Jewel Food Stores in Chicago and the former Lucky Stores in California.
Albertson's said prior-year comparisons include results from both Albertson's and American Stores as if they had always been one company.
Craig Olson, executive vice president and chief financial officer, said Albertson's is making progress "on all fronts, in spite of the earnings results," noting that the company has increased service levels, spruced up stores and enhanced product promotions, advertising and price markdowns to drive sales in California, Nevada and New Mexico, where Lucky units are being rebannered with the Albertson's name.
As a result, Olson said, comparable-store sales rose 3.3% in the last four weeks of October and 3.6% in the first four weeks of the current quarter.
In a conference call with securities analysts last week, Albertson's said it will cut back on capital expenditures for new stores in the next two years to invest more in remodelings, with new square footage increasing 5% in 2000 and 6% in 2001 instead of 7.9% and 8.6%, respectively, as had been estimated a year ago.
Mike Rueling, vice chairman, said Albertson's plans to invest $1.9 billion in capital expenditures in 2000 to build 90 new combination stores, 50 stand-alone drug stores and 120 fuel centers, and to remodel 130 units; in 2001, the company said, it will invest $2 billion to open 200 new combo stores, 65 drug stores and 130 fuel centers, and to remodel 140 stores.
Michael said the expense projections represent a cutback on plans to enter new markets. "Before the merger, we intended to move into new markets, but we don't need to do that right now," he told the analysts. "We need to get our efficiencies going first, and we have enough to work on in our existing markets for the next year or two."
He said most of the original Albertson's stores had been remodeled before the merger, "and now we have opportunities to get sales increases through remodelings at Acme and the northern California Lucky stores in particular."