There is a renaissance going on in the retail pharmacy industry and Albertsons (NYSE:ACI) is taking part. The company’s ongoing efforts to improve operations coupled with strength driven by pandemic tailwinds are driving not only revenue growth but improving profitability as well. Albertsons' fiscal Q2 report was so good, in fact, the company unexpectedly raised its dividend and by a stunning 20%. The new payout of $0.12 quarterly or $0.48 annually is good for a yield of 1.70% and we think this is just the first of many distribution increases to come.
“The ongoing strength of our performance and free cash flow generation gives us the confidence to increase our quarterly dividend, even as we ramp up investments in our business and support our digital transformation,” said Vivek Sankaran, CEO.
Albertson's Transformation Is Paying Off
Albertsons'. transformation is a multi-faceted affair that centers on its customers. This means enhancing its in-store appeal as well as the digital offerings and they are both driving results. The company reported $16.50 billion in consolidated revenue which is good for a gain of 4.7% over last year. More importantly, revenue beat the consensus by more than 400 basis points, and results in the 2 years stack are even stronger. On a comp sale basis, what the company refers to as identical sales, sales are up 1.5% and 15.3% versus two years ago. Digital sales, notably, are up 5% versus last year and up 248% versus 2 years ago.
Movie down to the earnings, the results are a little mixed. The company reports a slight contraction in its gross profit margin due in large part to fuel costs but core margins remained steady. At the core level, the company's efforts to improve operations were offset by rising product, supply chain, and advertising costs. The good news is that the revenue strength carries through to the bottom line delivering GAAP and adjusted EPS above consensus. The company's GAAP earnings of $0.52 beat the consensus by $0.07 while the adjusted earnings of $0.64 beat the consensus estimate by $0.19.
Turning to the guidance, the company has raised its guidance for revenue to a range of -2.5% to -3.5% compared to last year versus the previous range of -5% to -6%. This will drive 2-year growth in the range of 13.4% to 14.4% compared to the previous guidance of 10.9% to 11.9%. Adjusted EPS should run in the range of $2.50 to $2.60 compared to the Marketbeat.com consensus of $2.38.
Albertson's Dividend Is Safe Enough
Albertsons has only been paying a dividend for a year which is about how long it's been trading as a public company. That said, the metrics suggest the payout is safe enough, even with the increase, to keep us interested. To start, the payout ratio is running below 20% of the company's earnings consensus and that consensus estimate is obviously too low. The only negative is that the balance sheet is a little more levered than we'd like to see but even that situation is improving. Assuming that Albertson's turnaround plan continues to gain momentum we would expect to see the balance sheet improve and the dividend grows. But maybe not at 20% CAGR.
The Technical Outlook: Albertsons Confirms Support
Shares of Albertsons opened lower in the wake of the Q2 earnings report but price action surged from the low opening and gained roughly 3% in the first hour of trading. Price action is confirming support at the $28 level and we see it driving price action higher. Albertsons is trading at less than 15X its consensus estimate for both this year and next year which is not only a value but a miss-valuation of the stock. In our view, shares of Albertsons will be retesting resistance at the $32 and $34 levels fairly soon and could easily move up to set a new all-time high in the coming weeks. A move up to a new high would bring Targets in the range of $40 to $41 into play.
