Executive Summary / Key Takeaways

• Albertsons Companies, Inc. (ACI) is executing a clear "Customers for Life" strategy, leveraging its extensive physical footprint and digital platforms to drive growth and enhance shareholder value.
• The company reported solid Q2 Fiscal 2025 results, with identical sales up 2.2% (adjusted), digital sales surging 23%, and pharmacy revenue increasing 19% year-over-year, demonstrating momentum in key strategic areas.
• ACI is aggressively investing in technology, including a cloud-native platform and AI agents, to modernize operations, enhance customer experience, and unlock significant productivity savings, targeting $1.5 billion from Fiscal 2025 through 2027.
• Management's confidence in the company's undervalued equity is underscored by an increased share repurchase authorization to $2.75 billion and a $750 million accelerated share repurchase.
• Despite a challenging competitive landscape and ongoing litigation, ACI projects continued growth, with Fiscal 2025 identical sales guidance raised to 2.2% to 2.75% and a long-term algorithm of 2% plus identical sales and higher Adjusted EBITDA growth from Fiscal 2026.

A New Era for Albertsons: Leveraging Foundational Strengths for Digital Growth

Albertsons Companies, Inc. (ACI) stands as a prominent force in the U.S. food and drug retail industry, operating 2,257 stores across 35 states and the District of Columbia under 22 well-known banners such as Albertsons, Safeway, and Vons. Rooted in a history of growth through strategic acquisitions since its founding in 1860, ACI has cultivated a "banner company" identity deeply integrated into local communities. This extensive physical presence, underpinned by a $14.3 billion portfolio of owned real estate appraised in July 2025, provides a foundational competitive advantage, ensuring seamless customer access and optimized logistics.

In the wake of the terminated merger agreement with The Kroger Co. (KR) in December 2024, Albertsons has embraced a "new day" mindset, focusing on accelerating its standalone "Customers for Life" strategy. This strategy is built on five core priorities: driving customer growth and engagement through digital connection, expanding the Albertsons Media Collective, enhancing the customer value proposition, modernizing capabilities through technology, and achieving transformational productivity. The company's approach emphasizes being "locally great and nationally strong," leveraging its scale while maintaining local relevance.

Technological Foundation: The Digital & AI Edge

ACI's strategic transformation is deeply rooted in its technology-first approach, which is enabling faster innovation, greater efficiency, and enhanced customer value at a lower cost. The company operates a modern, cloud-native platform that powers critical operations across e-commerce, stores, pharmacy, supply chain, merchandising, and retail media. This platform positions ACI to rapidly scale emerging technologies like Artificial Intelligence (AI).

AI agents are actively being deployed to enhance core business functions, including cogeneration, price and promotion optimization, personalization, and customer care. A notable innovation is the "AskAI" feature within the integrated mobile app, which delivers a conversational search experience, enabling cross-category discovery and personalized recommendations to help customers build smarter baskets. Furthermore, ACI is partnering with OpenAI to use Agencik AI to power merchandising intelligence, aiming to transform its merchandising organization and drive more effective execution. These technological advancements provide tangible benefits, improving operational agility, decision-making speed, and customer engagement, thereby strengthening ACI's competitive moat and supporting long-term financial performance.

Competitive Arena: Differentiating in a Fierce Market

Albertsons operates in a highly competitive grocery and drug retail landscape, facing formidable direct rivals such as Walmart (WMT), Kroger, Target (TGT), and Amazon (AMZN). ACI differentiates itself through its strong local brands, integrated in-store services, and a focus on fresh, high-quality products. Its extensive store network, often serving as community hubs, offers an on-demand and fresh assortment with trusted service and local relevance that online-only competitors struggle to replicate.

Compared to mass retailers like Walmart, ACI's localized approach and integrated pharmacy services can foster deeper customer loyalty, though Walmart's sheer scale often translates to superior pricing power. Against traditional grocery chains like Kroger, ACI's diverse regional banners and owned manufacturing facilities provide a degree of customization and supply control. However, ACI acknowledges that it must "accelerate our growth rates to compete with the very, very best in the industry", particularly against mass and club stores that are growing faster. ACI's technological investments, such as its cloud-native platform and AI-powered tools, are critical in enhancing its operational execution and customer experience, allowing it to better compete with digitally advanced rivals like Amazon, especially in last-mile fulfillment where its store proximity offers a structural advantage.

Financial Performance: Momentum and Strategic Investments

Albertsons delivered solid financial results for the second quarter of fiscal 2025, reflecting steady execution of its strategic priorities. Net sales and other revenue increased 2% to $18,915.80 million, primarily driven by a 2.2% increase in identical sales (adjusted for labor strikes). This growth was significantly fueled by a 19% surge in pharmacy sales and a 23% increase in digital sales. For the first 28 weeks of fiscal 2025, net sales and other revenue rose 2.3% to $43,796.60 million, with identical sales up 2.6% (adjusted).

Profitability metrics reflect strategic investments and operational efficiencies. The gross margin rate for Q2 Fiscal 2025 decreased to 27% from 27.60% in the prior year. Excluding fuel and LIFO expense, the gross margin rate decreased by 63 basis points, primarily due to the strong growth in lower-margin pharmacy sales and increased delivery and handling costs for digital sales. However, these pressures were partially offset by benefits from productivity initiatives. Selling and administrative expenses as a percentage of net sales and other revenue decreased by 50 basis points (excluding fuel) to 25.40% in Q2 Fiscal 2025, driven by leveraging employee costs and lower merger-related costs, with productivity gains helping to offset wage and inflationary pressures. Adjusted EBITDA for the second quarter was $848.40 million, representing 4.50% of net sales and other revenue.

The company's liquidity remains robust. Net cash provided by operating activities for the first 28 weeks of fiscal 2025 was $1,282 million. Capital expenditures totaled $950.50 million, primarily directed towards 51 remodels, 3 new store openings, and continued investments in digital and technology platforms. ACI's balance sheet is strong, with net debt to Adjusted EBITDA at 2.2x after accounting for the recently announced accelerated share repurchase, providing significant operational flexibility.

Strategic Pillars in Action: Driving Growth and Efficiency

ACI's "Customers for Life" strategy is yielding measurable results across its key pillars. Digital sales, encompassing Drive Up & Go and home delivery, continue to scale rapidly, with e-commerce penetration now above 9% of grocery revenue. The e-commerce business is nearing breakeven and improving, with every additional order helping to leverage Adjusted EBITDA. Loyalty membership grew 13% to 48.70 million in Q2 Fiscal 2025, with program enhancements like "for U Travel" (a partnership with Expedia (EXPE) offering cash back on travel redeemable for groceries) deepening engagement and broadening appeal.

Pharmacy remains a significant growth driver, with a 19% year-over-year revenue increase in Q2 Fiscal 2025, fueled by GLP-1 strength, core prescription volume, and competitor store closures. While pharmacy is currently dilutive to Adjusted EBITDA, ACI is focused on improving its profitability through higher-margin services, central fill expansion, and innovative procurement. The Albertsons Media Collective (AMC) is gaining strong momentum, growing faster than the retail media market by leveraging enhanced data quality, precise targeting, and faster campaign measurement, positioning it as a major source of future reinvestment.

The company is also committed to enhancing its customer value proposition through "surgical price investments" in specific categories and markets, which have already shown an "inflection in unit sales growth." ACI aims to increase its Own Brands penetration from 25% to over 30% over time, recognizing their contribution to margin accretion and customer loyalty. Driving transformational productivity is an imperative, with a target of $1.5 billion in savings from Fiscal 2025 through 2027. These savings are being realized through national buying strategies, a transformed merchandising organization empowered by AI, and operational efficiencies across supply chain and store operations.

Outlook and Capital Allocation: A Confident Path Forward

Albertsons Companies has updated its Fiscal 2025 outlook, reflecting confidence in its strategic trajectory. The company now expects identical sales growth in the range of 2.2% to 2.75%, an increase at the lower end of the previous guidance. Adjusted EBITDA is projected to be between $3.8 billion and $3.9 billion, including approximately $65 million for the 53rd week. Adjusted EPS guidance has been raised to $2.06 to $2.19, incorporating the accretion from the recently announced $750 million accelerated share repurchase. Capital expenditures are also increasing to $1.8 billion to $1.9 billion, reflecting accelerated investments in digital and automation.

Looking beyond Fiscal 2025, ACI anticipates entering its long-term growth algorithm in Fiscal 2026, targeting 2% plus identical sales growth and Adjusted EBITDA growth higher than that. This outlook is underpinned by ongoing outsized growth in pharmacy and digital, continued surgical price investments in grocery, and the realization of productivity benefits. The Board's decision to increase the share repurchase program to $2.75 billion, inclusive of the $750 million ASR, signals strong conviction in the company's undervalued equity and its ability to generate long-term shareholder value.

Risks and Challenges: Sustaining Momentum Amidst Headwinds

Despite a clear strategic roadmap and positive momentum, Albertsons faces several risks. The highly competitive grocery market, with aggressive pricing from mass and club stores, necessitates continuous strategic price investments, which can pressure margins. Ongoing litigation, including False Claims Act, Pharmacy Benefit Manager, and Opioid lawsuits, presents potential financial liabilities and reputational risks, with some trials scheduled into 2026 and 2027. Wage rate increases and broader inflationary pressures also pose a challenge to operating expenses, though productivity initiatives are designed to mitigate these. The company's ability to fully realize its ambitious productivity targets and effectively integrate new technologies across its vast network will be crucial for sustained performance.

Conclusion

Albertsons Companies, Inc. is embarking on a transformative journey, leveraging its deep community roots, extensive physical assets, and a renewed focus on digital and technological innovation to unlock significant shareholder value. The "Customers for Life" strategy, with its emphasis on digital engagement, enhanced value, and transformational productivity, is demonstrating tangible results, as evidenced by strong Q2 Fiscal 2025 performance and an optimistic outlook. The company's aggressive capital allocation, particularly the accelerated share repurchase, signals management's firm belief in the intrinsic value of its business, which they contend is currently underappreciated by the market. As ACI continues to execute its strategic initiatives, driven by technological leadership and a commitment to operational excellence, it is well-positioned to achieve its long-term growth algorithm and solidify its competitive standing in a dynamic retail landscape.