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In its first quarterly report since terminating its merger agreement with Kroger (KR), grocery chain operator Albertsons (ACI) rang up decent bottom-line upside and raised its FY25 (Feb) adjusted EPS outlook moderately, reflecting the benefits of ongoing productivity enhancements. Meanwhile, identical sales growth of +2.0% met estimates in Q3 (Nov). However, ACI tempered its FY25 comp expectations, lowering the high end of its previous +1.8-2.2% outlook to +1.8-2.0%. Management noted that the reduced guidance underpinned a slowing food and beverage sector during the holiday season, a critical time of the year that can be challenging to recover in later months.

• With the merger between ACI and KR off the table, ACI outlined its strategy to compete in an intensely competitive industry, where mass merchants like Walmart (WMT) and Costco (COST) are gobbling up market share within the grocery category as consumers' budgets remain stretched due to the cumulative effects of inflation. In December, ACI mentioned accelerating its Customer for Life strategy, aiming toward at least +2% identical sales growth over time with adjusted EBITDA growth outpacing identical sales.
  • At the time, ACI also authorized a $2.0 bln repurchase program and hiked its dividend by 25%.
• Central to its Customer for Life strategy is ACI's digital platforms, such as e-commerce, where the company's investments have driven sales penetration to over 7% of grocery revenue, helped by new capabilities within its mobile app and improvements in drive-up-and-go and home delivery. Another platform is ACI's loyalty program, where membership ticked 15% higher yr/yr in Q3 to 44.3 mln. Lastly, pharmacy and health platforms have driven sales penetration to over 11% of total annual revs, assisted by core script growth, such as GLP-1s and immunization.
• ACI's focus on these pillars paid off in Q3, posting a 23% and 13% improvement in digital and pharmacy sales, respectively, yr/yr, helping push total revenue 1.2% higher to $18.77 bln. However, there was a downside to these encouraging growth rates. Gross margins slipped by 27 bps yr/yr to 27.9% as pharmacy and grocery pick-up and delivery services carry lower margins.
• Still, productivity improvements largely offset the higher costs of mounting digital sales growth. ACI has been modernizing its operations, from migration to the cloud to launching pricing and promotional tools. Increasing self-checkout kiosks and updating supply chain systems have also underpinned productivity gains. As a result, ACI was confident in lifting its profitability outlook for the year despite trimming its identical sales growth forecast.

ACI is traversing the national grocery landscape alone after cutting ties with KR during a challenging economic period. Consumer spending could keep identical sales growth trends from improving quickly and produce volatility from quarter to quarter. While we like ACI's Customer for Life strategy, eyeing similar digital offerings as its rivals WMT and KR, it may be better to employ a wait-and-see approach.