S-1/A 1 d74618ds1a.htm AMENDMENT NO. 12 TO FORM S-1 Amendment No. 12 to Form S-1
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As filed with the Securities and Exchange Commission on November 8, 2017

Registration No. 333–205546

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 12

TO

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

Albertsons Companies, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   5411   47-4376911

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

250 Parkcenter Blvd.

Boise, ID 83706

208-395-6200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Robert A. Gordon, Esq.

Executive Vice President and General Counsel

Albertsons Companies, Inc.

250 Parkcenter Blvd.

Boise, ID 83706

(208) 395-6200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Stuart D. Freedman, Esq.

Michael E. Gilligan, Esq.

Antonio L. Diaz-Albertini, Esq.

Schulte Roth & Zabel LLP

919 Third Avenue

New York, NY 10022

Phone: (212) 756-2000

Fax: (212) 593-5955

 

William M. Hartnett, Esq.

Jonathan A. Schaffzin, Esq.

William J. Miller, Esq.

Cahill Gordon & Reindel LLP

80 Pine Street

New York, NY 10005

Phone: (212) 701-3000

Fax: (212) 378-2500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer     (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

Subject to completion. Dated November 8, 2017

             Shares

 

LOGO

Albertsons Companies, Inc.

Common Stock

 

 

This is an initial public offering of our common stock. The selling stockholders named in this prospectus are selling             shares of our common stock. All of the shares of common stock are being sold by the selling stockholders. We will not receive any of the proceeds from the sale of common stock by the selling stockholders.

We expect the initial public offering price to be between $         and $         per share. Currently, no public market exists for our common stock. We have been approved to list our common stock on the New York Stock Exchange (“NYSE”) under the symbol “ABS.”

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 21 of this prospectus to read the factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Public offering price and proceeds to the selling stockholders

   $                   $               

Underwriting discount and commissions(1)

   $      $  

 

(1) See “Underwriting” for a description of compensation payable to the underwriters. The company has agreed to pay all underwriting discounts and commissions, transfer taxes and transaction fees, if any, applicable to the sale of the common stock offered hereby and the fees and disbursements of counsel for the selling stockholders incurred in connection with the sale.

The underwriters may also purchase up to an additional              shares of common stock from the selling stockholders, at the initial public offering price, less the underwriting discount and commissions, within 30 days from the date of this prospectus. We will not receive any of the proceeds from the sale of common stock by the selling stockholders in this offering, including from any exercise by the underwriters of their option to purchase additional common stock.

The underwriters expect to deliver the shares of our common stock to investors against payment on or about                     , 2017 through the book-entry facilities of The Depository Trust Company.

 

Goldman Sachs & Co. LLC   BofA Merrill Lynch   Citigroup     Morgan Stanley  

 

Deutsche Bank Securities   Credit Suisse   Barclays

 

Lazard   Guggenheim Securities   Jefferies   RBC Capital Markets   Wells Fargo Securities
BMO Capital Markets   SunTrust Robinson Humphrey
Telsey Advisory Group   Academy Securities   Ramirez & Co., Inc.   Blaylock Van, LLC

 

 

The date of this prospectus is                     , 2017.


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TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1  

Risk Factors

     21  

Special Note Regarding Forward-Looking Statements

     47  

Use of Proceeds

     49  

Dividend Policy

     50  

IPO-Related Transactions and Organizational Structure

     51  

Capitalization

     53  

Dilution

     55  

Selected Historical Financial Information of AB Acquisition

     56  

Supplemental Selected Historical Financial Information of Safeway

     57  

Unaudited Pro Forma Condensed Consolidated Financial Information

     58  

Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition

     63  

Business

     96  

Management

     117  

Executive Compensation

     129  

Certain Relationships and Related Party Transactions

     150  

Principal and Selling Stockholders

     157  

Description of Capital Stock

     160  

Shares Eligible for Future Sale

     166  

Description of Indebtedness

     169  

Certain U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders

     178  

Underwriting

     182  

Legal Matters

     189  

Experts

     189  

Where You Can Find More Information

     189  

Index To Financial Statements

     F-1  

 

 

Until                     , 2017 (25 days after the date of this prospectus), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Unless indicated otherwise, the information included in this prospectus assumes that (i) the shares of common stock to be sold in this offering are sold at $         per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus and (ii) all shares offered by the selling stockholders in this offering are sold (other than pursuant to the underwriters’ option to purchase additional shares described herein).

 

 

We and the selling stockholders have not, and the underwriters have not, authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The selling stockholders and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

 

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EXPLANATORY NOTE

Albertsons Companies, Inc., the registrant whose name appears on the cover of this registration statement, is a Delaware corporation. Shares of common stock of Albertsons Companies, Inc. are being offered by the prospectus that forms a part of this registration statement. AB Acquisition LLC (“AB Acquisition”) is a Delaware limited liability company. Albertsons Companies, Inc. was formed solely for the purpose of reorganizing the organizational structure of AB Acquisition and its direct and indirect consolidated subsidiaries in order for the registrant to be a corporation rather than a limited liability company. In connection with, and prior to and/or concurrently with the closing of, this offering, each member of AB Acquisition will directly or indirectly contribute all of its equity interests in AB Acquisition to Albertsons Companies, Inc. in exchange for shares of common stock of Albertsons Companies, Inc. As a result, AB Acquisition and its direct and indirect consolidated subsidiaries will become wholly-owned subsidiaries of Albertsons Companies, Inc. See “IPO-Related Transactions and Organizational Structure” for additional information.

As used in this prospectus, unless the context otherwise requires, references to (i) the terms “company,” “AB Acquisition,” “Albertsons Companies, Inc.,” “we,” “us” and “our” refer to AB Acquisition and its consolidated subsidiaries for periods prior to the consummation of the IPO-Related Transactions (as defined herein), and, for periods as of and following the consummation of the IPO-Related Transactions, to Albertsons Companies, Inc. and its consolidated subsidiaries, (ii) the term “ACL” refers to Albertsons Companies, LLC and, where appropriate, its subsidiaries, (iii) the term “Albertsons” refers to Albertson’s LLC and, where appropriate, its subsidiaries, (iv) the term “NAI” refers to New Albertson’s, Inc., and, where appropriate, its subsidiaries, (v) the term “United” refers to United Supermarkets, LLC, (vi) the term “Safeway” refers to Safeway Inc. and, where appropriate, its subsidiaries, and (vii) references to our “Sponsors” or the “Cerberus-led Consortium” refer to, collectively, Cerberus Capital Management, L.P. (“Cerberus”), Kimco Realty Corporation (“Kimco Realty”), Klaff Realty, LP (“Klaff Realty”), Lubert-Adler Partners, L.P. (“Lubert-Adler”), Schottenstein Stores Corporation (“Schottenstein Stores”) and their respective controlled affiliates and investment funds. For the convenience of the reader, except as the context otherwise requires, all information included in this prospectus is presented giving effect to the consummation of the IPO-Related Transactions.

BASIS OF PRESENTATION

Prior to or concurrently with this offering, we will effect the IPO-Related Transactions described under “IPO-Related Transactions and Organizational Structure.” The consolidated financial statements and consolidated financial data included in this prospectus are those of AB Acquisition and its consolidated subsidiaries and do not give effect to the IPO-Related Transactions. Other than the audited balance sheet, dated as of February 25, 2017, and the unaudited balance sheet, dated as of September 9, 2017, the historical financial information of Albertsons Companies, Inc. has not been included in this prospectus as it has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this prospectus.

We acquired Safeway on January 30, 2015. Accordingly, this prospectus also includes the following historical financial statements: audited balance sheets of Safeway as of January 3, 2015 and December 28, 2013 and audited consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows of Safeway for the 53 weeks ended January 3, 2015 and the 52 weeks ended December 28, 2013 and December 29, 2012.

 

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We use a 52 or 53 week fiscal year ending on the last Saturday in February each year. Prior to fiscal year 2014, we used a 52 or 53 week fiscal year ending on the closest Thursday before the last Saturday in February each year. For ease of reference, unless the context otherwise indicates, we identify our fiscal years in this prospectus by reference to the calendar year of the first day of such fiscal year. For example, “fiscal 2014” refers to our fiscal year ended February 28, 2015, “fiscal 2015” refers to our fiscal year ended February 27, 2016, “fiscal 2016” refers to our fiscal year ended February 25, 2017 and “fiscal 2017” refers to our fiscal year ending February 24, 2018. Our first quarter consists of 16 weeks, and our second, third and fourth quarters generally consist of 12 weeks. For the fiscal year ended February 28, 2015, the fourth quarter included 13 weeks, and the fiscal year included 53 weeks. The fiscal years ended February 25, 2017, February 27, 2016, February 20, 2014 and February 21, 2013 included 52 weeks. Safeway’s last three fiscal years prior to the Safeway acquisition consisted of the 53-week period ended January 3, 2015, the 52-week period ended December 28, 2013 and the 52-week period ended December 29, 2012.

Total shares outstanding as of the completion of this offering, as reflected in this prospectus, does not reflect a net decrease in 159,928 Phantom Units (as defined herein) as a result of recent issuances, cancellations, and vesting activity.

IDENTICAL STORE SALES

As used in this prospectus, the term “identical store sales” is defined as stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Fuel sales are excluded from identical store sales, and internet sales are included in identical store sales of the store from which the products are sourced. Fiscal 2016 is compared with the 52-week period ending February 27, 2016. Fiscal 2015 is compared with the 52-week period ending February 28, 2015. Fiscal 2014 is compared with the 53-week period ending February 27, 2014. On an actual basis, acquired stores become identical on the one-year anniversary date of their acquisition. Stores that are open during remodeling are included in identical store sales. The stores divested in order to secure Federal Trade Commission (“FTC”) clearance of the Safeway acquisition are excluded from the identical store sales calculation beginning on December 19, 2014, the announcement date of the divestitures. Also included in this prospectus, where noted, are supplemental identical store sales measures for AB Acquisition, which includes acquired Safeway, NAI and United stores, irrespective of their acquisition dates.

PRO FORMA INFORMATION

This prospectus contains unaudited pro forma financial information prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed consolidated statement of continuing operations for fiscal 2016 gives pro forma effect to the IPO-Related Transactions (assuming the common stock in this offering is offered at $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus), as if such transactions had been consummated on February 28, 2016, the first day of fiscal 2016. The unaudited pro forma condensed consolidated statement of continuing operations for the first two quarters of fiscal 2017 gives pro forma effect to the IPO-Related Transactions as if such transactions had occurred on February 28, 2016, the first day of fiscal 2016. The unaudited pro forma condensed consolidated balance sheet as of September 9, 2017 gives pro forma effect to the IPO-Related Transactions as if they had occurred on September 9, 2017. See “Unaudited Pro Forma Condensed Consolidated Financial Information.”

 

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TRADEMARKS AND TRADE NAMES

This prospectus includes our trademarks and service marks, including ALBERTSONS®, SAFEWAY®, ACME®, AMIGOS®, CARRS®, HAGGEN®, JEWEL-OSCO®, MARKET STREET®, PAVILIONS®, RANDALLS®, SAV-ON®, SHAW’S®, STAR MARKET®, TOM THUMB®, UNITED EXPRESS®, UNITED SUPERMARKETS®, VONS®, EATING RIGHT®, LUCERNE®, O ORGANICS®, OPEN NATURE®, MyMixx® and just for U®, which are protected under applicable intellectual property laws and are the property of our company and its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

MARKET, INDUSTRY AND OTHER DATA

This prospectus includes market and industry data and outlook, which are based on publicly available information, reports from government agencies, reports by market research firms and/or our own estimates based on our management’s knowledge of and experience in the markets and businesses in which we operate. We believe this information to be reasonable based on the information available to us as of the date of this prospectus. However, we have not independently verified market and industry data from third-party sources. Historical information regarding supermarket and grocery industry revenues, including online grocery revenues, was obtained from IBISWorld. Forecasts regarding Food-at-Home inflation were obtained from the U.S. Department of Agriculture (“USDA”). Information with respect to our market share was obtained from Nielsen ACView All Outlets Combined (Food, Mass and Dollar but excluding Drug) for the first two quarters of fiscal 2017. This information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size. In addition, market conditions, customer preferences and the competitive landscape can and do change significantly. As a result, you should be aware that the market and industry data included in this prospectus and our estimates and beliefs based on such data may not be reliable. We do not make any representations as to the accuracy of such industry and market data.

In addition, the market value reported in the appraisals of the properties described herein are an estimate of value, as of the date stated in each appraisal. The appraisals were subject to the following assumption: The estimate of market value as is, is based on the assumption that the existing occupant/user remains in occupancy in the foreseeable future, commensurate with the typical tenure of a user of this type, and is paying market rent as of the effective date of appraisal. Changes since the appraisal date in external and market factors or in the property itself can significantly affect the conclusions. As an opinion, the reported values are not necessarily a measure of current market value and may not reflect the amount which would be received if the property were sold today. While we and the underwriters are not aware of any misstatements regarding any appraisals, market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the sections entitled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.

 

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NON-GAAP FINANCIAL MEASURES

We define EBITDA as generally accepted accounting principles (“GAAP”) earnings (net income (loss)) before interest, income taxes, depreciation, and amortization. We define Adjusted EBITDA as GAAP earnings (net income (loss)) before interest, income taxes, depreciation, and amortization, further adjusted to eliminate the effects of items management does not consider in assessing our ongoing performance. We define Adjusted Net Income as GAAP net income (loss) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. We define Free Cash Flow as Adjusted EBITDA less capital expenditures. See “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data” for further discussion and a reconciliation of Adjusted EBITDA and Adjusted Net Income.

EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow (collectively, the “Non-GAAP Measures”) are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. We also use Adjusted EBITDA, as further adjusted for additional items defined in our debt instruments, for board of director and bank compliance reporting. Our presentation of Non-GAAP Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Non-GAAP Measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our operating results or cash flows as reported under GAAP. Some of these limitations are:

 

    Non-GAAP Measures do not reflect the anticipated synergies associated with the Safeway acquisition;

 

    Non-GAAP Measures do not reflect certain one-time or non-recurring cash costs to achieve the anticipated synergies associated with the Safeway acquisition;

 

    Non-GAAP Measures do not reflect changes in, or cash requirements for, our working capital needs;

 

    EBITDA and Adjusted EBITDA do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA and, with respect to acquired intangible assets, Adjusted Net Income, do not reflect any cash requirements for such replacements;

 

    Non-GAAP Measures are adjusted for certain non-recurring and non-cash income or expense items that are reflected in our statements of operations;

 

    Non-GAAP Measures, other than Free Cash Flow, do not reflect our capital expenditures or future requirements for capital expenditures or contractual commitments; and

 

    Other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

 

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Because of these limitations, Non-GAAP Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes. Please see our consolidated financial statements contained in this prospectus.

Pro Forma Adjusted EBITDA, Pro Forma Adjusted Net Income and Free Cash Flow, as presented in this prospectus, are also supplemental measures of our performance that are not required by or presented in accordance with GAAP. See “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data” for additional information.

 

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PROSPECTUS SUMMARY

This summary highlights the information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you or that you should consider before buying shares of our common stock. You should read the entire prospectus carefully. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. In particular, you should read the sections entitled “Risk Factors,” “Unaudited Pro Forma Condensed Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition” included elsewhere in this prospectus and our consolidated financial statements and the related notes.

OUR COMPANY

We are one of the largest food and drug retailers in the United States, with both strong local presence and national scale. As of September 9, 2017, we operated 2,328 stores across 35 states and the District of Columbia under 20 well-known banners, including Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market, Carrs and Haggen. We operate in 122 Metropolitan Statistical Areas in the United States (“MSAs”) and are ranked #1 or #2 by market share in 66% of them. We provide our customers with convenient and value-added services, including through our 1,779 pharmacies, 1,254 in-store branded coffee shops and 393 adjacent fuel centers. Complementary to our large network of stores, we aim to provide our customers a seamless omni-channel shopping experience by offering a growing set of digital offerings, including home deliveries, “click-and-collect” store pickup, and online prescription refills. We have approximately 280,000 talented and dedicated employees serving on average more than 34 million customers each week. With over 12 million loyalty rewards members and one of the largest data sets in the food and drug retail industry, we strive to offer each of our customers a personalized shopping experience with targeted promotions and relevant product offerings.

Our core operating philosophy is simple: we run great stores with a relentless focus on driving sales. We believe that our management team, with decades of collective experience in the food and drug retail industry, has developed a proven and successful operating playbook that differentiates us from our competitors. Our strategy is to drive customer loyalty and sales by offering our customers an excellent in-store experience, superior customer service, an attractive value proposition and compelling and original product offerings, including our O Organics and Open Nature brands. We also engage directly with our customers through a variety of digital media channels and personalized digital offers in our just for U and MyMixx rewards programs. We are focused on providing our customers with a choice of how, when and where they shop through the continued expansion of our online offerings, including the roll-out of new delivery models and our “click-and-collect” pick-up program.

We implement our playbook through a decentralized management structure. We believe this approach allows our division and district-level leadership teams to consistently create a superior customer experience and deliver outstanding operating performance. These leadership teams are empowered and incentivized to make decisions on product assortment, placement, pricing, promotional plans and capital spending in the local communities and neighborhoods they serve. Our store directors are responsible for implementing our operating playbook on a daily basis and ensuring that our employees remain focused on delivering outstanding service to our customers. This strategy extends beyond our stores to our e-commerce and loyalty platforms, where our local leadership teams are instrumental in determining which promotions and offerings to target to our customers in their local communities.

 



 

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We believe that the execution of our operating playbook, among other factors, including improved economic conditions and consumer confidence, has enabled us to grow sales, profitability and Free Cash Flow across our business. While recent deflationary trends in certain commodities, such as meat, eggs and dairy, have contributed to a decrease in identical store sales in our stores since the third quarter of fiscal 2016, we believe our operating playbook has enabled us to improve our competitive positioning in the food retail channel during the period. As a result, we believe we are well-positioned to take advantage of projected food price inflation in the latter half of fiscal 2017 and during fiscal 2018.

We believe that our ability to drive innovation will become increasingly important to the success of our company as our customers’ preferences trend towards greater convenience and personalization. We have introduced new delivery and pick-up options at many of our stores across the country, and intend to grow our home delivery network to include eight of the ten most populous MSAs by the end of fiscal 2017. We have expanded our just for U, MyMixx and fuel rewards programs to over 12 million members. We are focused on and continue to improve the convenience of our offerings such as grab-and-go meals, prepared foods, in store dining and online pharmacy refills. We continue to offer a wide range of complementary amenities in our store base, including pharmacies, branded coffee shops and fuel centers. We believe our recent acquisition of DineInFresh, Inc. (“Plated”), a premier meal kit service company with leading technology and data capabilities, demonstrates our continuing focus on delivering convenience and personalization. By offering Plated meal kits at many of our store locations and across our digital channels, we plan to make it easy for customers to create delicious meals at home with high-quality, fresh ingredients.

OUR INTEGRATION HISTORY

Over the past ten years, we have completed a series of acquisitions, beginning with our purchase of Albertson’s LLC in 2006 (the “Legacy Albertsons Stores”). This was followed in March 2013 by our acquisition of NAI from SUPERVALU INC. (“SuperValu”), which included the Albertsons stores that we did not already own and stores operating under the Acme, Jewel-Osco, Shaw’s and Star Market banners. In December 2013, we acquired United, a regional grocery chain in North and West Texas.

In January 2015, we acquired Safeway in a transaction that significantly increased our scale and geographic reach. We are currently executing on an annual synergy plan of approximately $800 million related to the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018. We expect to deliver annual run-rate synergies related to the acquisition of Safeway of approximately $750 million by the end of fiscal 2017.

We also completed the acquisition of 73 stores from The Great Atlantic & Pacific Tea Company, Inc. (“A&P”) for our Acme banner and 35 stores from Haggen during fiscal 2015, and we acquired an additional 29 stores from Haggen during fiscal 2016, 15 of which operate under the Haggen banner. We continually review acquisition opportunities that we believe are synergistic with our existing store network and we intend to continue to participate in the ongoing consolidation of the food retail industry. Any future acquisitions may be material.

OUR OPERATING PLAYBOOK

Our management team has developed and implemented a proven and successful operating playbook to drive sales growth, profitability and Free Cash Flow. Our playbook covers every major

 



 

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facet of store-level operations and is executed by local leadership under the supervision of our executive management team. Our playbook is based on the following key concepts:

 

    Operate Our Stores to the Highest Standards.    We ensure that our stores are always “full, fresh, friendly and clean.” Our efforts are driven through our rigorous G.O.L.D. (Grand Opening Look Daily) program that is focused on delivering fresh offerings, well-stocked shelves, and clean and brightly lit departments. Our high-quality local stores serve as the “last mile” of our distribution platform for our home delivery and “click-and-collect” pick-up services and are instrumental in ensuring consistent quality and freshness of products delivered to customers.

 

    Drive Convenience Through a Broad Array of Products and Services.    We provide a broad array of products and services to enhance our customers’ shopping experience, generate customer loyalty, drive traffic and generate sales growth. We are focused on deploying innovative, value-added services including in-store dining, meal kits, customized bakery orders and catering services. We have also introduced a greater assortment of grab-and-go, individually packaged, and snack-sized meals. To further enhance our pharmacy offerings, we recently acquired MedCart Specialty Pharmacy, a URAC (Utilization Review Accreditation Commission) accredited specialty pharmacy with accreditation and license to operate in over 40 states, which will extend our ability to service our customers’ health needs. We are focused on providing our customers with a choice of how, when and where they shop. We have prioritized the roll-out of new delivery models, including same-day delivery, instant delivery and unattended delivery, and are expanding our “click-and-collect” pick-up program.

 

    Leverage Data to Offer an Attractive Value Proposition to our Customers.    We maintain price competitiveness through systematic, selective and thoughtful price investment to drive customer traffic and basket size. We also use our loyalty programs, including just for U, MyMixx and our fuel rewards programs, to target promotional activity and improve our customers’ experience. Over 12 million members (or 23% of our customer base) are currently enrolled in our loyalty rewards programs, and we expect that over 13 million households (or 25% of our customer base) will be enrolled by the end of fiscal 2017. We have recently deployed and are continuing to refine cloud-based enterprise solutions to quickly process proprietary customer, product and transaction data and efficiently provide our local managers with targeted marketing strategies for customers in their communities. By leveraging customer and transaction information with data driven analytics, our “personalized deal engine” is able to select, out of the thousands of different promotions offered by our suppliers, the offers that we expect will be most compelling to each of our more than 34 million weekly customers. In addition, we use data analytics to optimize shelf assortment and space in our stores by continually and systematically reviewing the performance of each product. We believe that as we optimize our data-driven analytic programs, we will be able to drive incremental sales and customer satisfaction through increasingly effective promotions and enhanced store product assortment and layout.

 

    Deliver Superior Customer Service.    We focus on providing superior customer service. We consistently invest in store labor and training, and our simple and well-understood sales- and EBITDA-based bonus structure ensures that our employees are properly incentivized. We measure customer satisfaction scores weekly and hold management accountable for continuous improvement. Our focus on customer service is reflected in our strong customer satisfaction scores. Our commitment to superior customer service extends from our stores to our more than 1,000 home-delivery “brand ambassadors.” Similar to our in-store team members, we provide each of our brand ambassadors with best-in-class customer training and empower them to build relationships with our delivery customers to promote our products and process refunds and returns at the point of delivery.

 



 

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    Provide a Compelling Product Offering.    We focus on providing the highest quality fresh, natural and organic assortments to meet the demands of our customers, including through our private label brands, which we refer to as our own brands, such as O Organics and Open Nature. Our own brands products achieved over $10.9 billion in sales in fiscal 2016, and our company’s portfolio of USDA-certified organic products is one of the largest and fastest growing in the industry. In addition, we offer high-volume, high-quality and differentiated signature products, including in-store fresh-cut fruit and vegetables, cookies and fried chicken prepared using our proprietary recipes, in-store roasted turkey and freshly-baked bread. Our decentralized operating structure, together with our data analytics capabilities, enables our divisions to offer products and store layouts that are responsive to local tastes and preferences. In addition, we believe our store-based model provides us with a proven “last-mile” delivery solution that offers our home-delivery customers a wide variety of superior, fresh products and a variety of delivery options.

 

    Make Disciplined Capital Investments.    We believe that our store base is modern and in excellent condition. We apply a disciplined approach to our capital investments, undertaking a rigorous cost-benefit analysis and targeting an attractive return on investment. We are investing in our supply channel, including the automation of several of our distribution centers, in order to create efficiencies and reduce costs. Our capital budgets are subject to approval at the corporate level, but we empower our division leadership to prudently allocate capital to projects that will generate the highest return.

The following illustrative map represents our regional banners and combined store network as of September 9, 2017. We also operate 27 strategically located distribution centers and 18 manufacturing facilities. Approximately 42% of our operating stores are owned or ground-leased. Together, our owned and ground-leased properties have a value of approximately $11.5 billion.

 

LOGO

 



 

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OUR COMPETITIVE STRENGTHS

We believe the following strengths differentiate us from our competitors and contribute to our ongoing success:

Powerful Combination of Strong Local Presence and National Scale.    We operate a portfolio of well-known banners with both strong local presence and national scale. We have leading positions in many of the largest and fastest-growing MSAs in the United States. Given the long operating history of our banners, many of our stores form an important part of the local communities and neighborhoods in which they operate and occupy “First-and-Main” locations. We believe that our combination of local presence and national scale provides us with competitive advantages in brand recognition, customer loyalty and purchasing, marketing and advertising and distribution efficiencies, particularly as customers seek additional convenience options such as home delivery and “click-and-collect” pickup services. We believe our network of stores provides us with an effective solution to the “last mile” delivery challenge of online ordering by allowing us to provide convenient delivery to our customers while preserving the value, quality and freshness they receive from our stores.

Commitment to an Innovative Customer Experience.    We believe our commitment to innovative service solutions, store offerings and data-driven analytics positions us to drive sales and capture market share. With over 12 million loyalty accounts, tens of thousands of products and a large database of historical transactions, we are able to leverage our data analytics capabilities to offer our customers more personalized offerings and increase customer loyalty. We now use the power of cloud-based enterprise solutions to quickly process proprietary customer, product and transaction data in order to efficiently provide our divisional and local managers with targeted marketing strategies. In addition to driving targeted customer promotions, we are beginning to utilize our data analytics capabilities to optimize shelf assortment and space by continually and systematically reviewing product performance. We are also continuously upgrading our online web portal and mobile application, which is currently the fourth-largest home delivery portal nationwide among food retailers, to improve ease-of-use and visual design for our desktop and mobile customers and to better integrate our customers’ loyalty rewards accounts.

Best-in-Class Management Team with a Proven Track Record.    We have assembled a best-in-class management team with decades of operating experience in the food and drug retail industry. Our Chairman and Chief Executive Officer, Bob Miller, has over 50 years of food and drug retail experience, including serving as Chairman and CEO of Fred Meyer and Rite Aid and Vice Chairman of Kroger. We recently appointed Kevin Turner, former Chief Operating Officer of Microsoft and former CEO and President of Sam’s Club, as our Vice Chairman and Senior Advisor to our CEO, and believe Mr. Turner will complement our experienced operations team and recently expanded digital team to enhance our ability to connect with and serve our customers in innovative ways. Wayne Denningham, President & Chief Operating Officer, and Shane Sampson, Executive Vice President & Chief Marketing and Merchandising Officer, both bring significant leadership and operational experience to our management team with long tenures at our company and within the industry. Our Executive and Senior Vice Presidents and our division, district and store-level leadership teams are also critical to the success of our business. Our eight Executive Vice Presidents, 19 Senior Vice Presidents and 12 division Presidents have an average of over 21, 22, and 35 years of service, respectively, with our company. We are actively building out our digital marketing and information technology teams to ensure we are best positioned to capitalize on dynamic changes occurring in our industry.

Proven Operating Playbook Driving Strong Free Cash Flow Generation.     We believe that the execution of our operating playbook has been an important factor in enabling us to achieve sales growth

 



 

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and increase our profitability and market share. Our strong operating results, in combination with our disciplined approach to capital allocation, have resulted in the generation of strong Free Cash Flow. We generated Free Cash Flow of approximately $1.4 billion and $504.3 million in fiscal 2016 and the first two quarters of fiscal 2017, respectively. Our Free Cash Flow will be enhanced by the synergies we expect to achieve from our acquisition of Safeway. We expect to deliver approximately $800 million of annual synergies by the end of fiscal 2018, and expect to achieve approximately $750 million of synergies on an annual run-rate basis by the end of fiscal 2017.

Significant Acquisition and Integration Expertise.    Growth through acquisition is an important component of our strategy, both to enhance our competitiveness in existing markets and to expand our footprint into new markets. We acquired 73 stores from A&P for our Acme banner and 35 stores from Haggen for our Albertsons banner during fiscal 2015, and we acquired an additional 29 stores from Haggen during fiscal 2016, including 15 stores that operate under the Haggen banner. We continually review acquisition opportunities that we believe are synergistic with our existing store network. We have developed a proprietary and repeatable blueprint for integration, including a clearly defined plan for the first 100 days. We believe that our ability to integrate acquisitions is significantly enhanced by our decentralized approach, which allows us to leverage the expertise of incumbent local management teams. We have also developed significant expertise in synergy planning and delivery. We believe that the acquisition and integration experience of our management team, together with the considerable transactional expertise of our equity sponsors, positions us well for future acquisitions as the food and drug retail industry continues to consolidate.

OUR STRATEGY

Our operating philosophy is simple: we run great stores with a relentless focus on sales growth. We believe there are significant opportunities to grow sales and enhance profitability and Free Cash Flow through execution of the following strategies:

Consistent with our operating playbook, we plan to deliver sales growth by implementing the following initiatives:

 

    Enhancing and Upgrading Our Fresh, Natural and Organic Offerings and Signature Products.    We continue to enhance and upgrade our fresh, natural and organic offerings across our meat, produce, service deli and bakery departments to meet the changing tastes and preferences of our customers. We are rapidly growing our portfolio of USDA-certified organic products to include over 1,300 own brands products. We also believe that continued innovation and expansion of our high-volume, high-quality and differentiated signature products will contribute to stronger sales growth.

 

    Expanding Our Own Brands Offerings.    We continue to drive sales growth and profitability by extending our own brands offerings across our banners, including high-quality and recognizable brands such as O Organics, Open Nature, Signature and Lucerne. Our own brands products achieved over $10.9 billion in sales in fiscal 2016.

 

    Leveraging Our Effective and Scalable Loyalty Programs.    We believe we can grow basket size and improve the shopping experience for our customers by expanding our just for U, MyMixx and fuel rewards programs. Over 12 million members (or 23% of our customer base) are currently enrolled in our loyalty programs, and we expect that over 13 million households (or 25% of our customer base) will be enrolled by the end of fiscal 2017. We believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications, to improve customer retention and provide targeted promotions to our customers. For example, our just for U and fuel rewards customers have demonstrated greater basket size, improved customer retention rates and an increased likelihood to redeem promotions offered in our stores.

 



 

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    Providing Our Customers with Convenient Digital Solutions.    We seek to provide our customers with the means to shop how, when and where they choose. As consumer preferences evolve towards greater convenience, we are improving our online offerings, including home delivery and “click-and-collect” services. We continue to enhance our delivery platform to offer more delivery options and windows across our store base, including early morning deliveries, same-day deliveries, instant deliveries and unattended deliveries. In addition, we seek to expand our curbside “click-and-collect” program in order to enable customers to conveniently pick up their goods on the way home or to the office. We believe our strategy of providing customers with a variety of in-store and online options that suit their varying individual needs will drive additional sales growth and differentiate us from many of our competitors.

 

    Capitalizing on Demand for Health and Wellness Services.    We intend to leverage our portfolio of 1,779 pharmacies and our growing network of wellness clinics to capitalize on increasing customer demand for health and wellness services. Pharmacy customers are among our most loyal, and their average weekly spend is over 2.5x that of our non-pharmacy customers. We plan to continue to grow our pharmacy script counts through new patient prescription transfer programs and initiatives such as clinic, hospital and preferred network partnerships, which we believe will expand our access to more customers. To further enhance our pharmacy offerings, we recently acquired MedCart Specialty Pharmacy, a URAC-accredited specialty pharmacy with accreditation and license to operate in over 40 states, which will extend our ability to service our customers’ health needs. We believe that these efforts will drive sales and generate customer loyalty.

 

    Continuously Evaluating and Upgrading Our Store Portfolio.    We plan to pursue a disciplined but committed capital allocation strategy to upgrade, remodel and relocate stores to attract customers to our stores and to increase store volumes. We opened 15 and 12 new stores in fiscal 2016 and the first two quarters of fiscal 2017, respectively, and expect to have opened a total of 16 new stores and completed approximately 170 upgrade and remodel projects by the end of fiscal 2017. We believe that our store base is in excellent condition, and we have developed a remodel strategy that is both cost-efficient and effective. In addition to store remodels, we continuously evaluate and optimize store formats to better serve the different customer demographics of each local community. We have identified approximately 300 stores across our divisions that we have started to re-merchandise to our “Premium” format, where we offer a greater assortment of unique items in our fresh and service departments, as well as more natural, organic and healthy products throughout the store. Additionally, we have started to reposition approximately 100 stores across our divisions from our “Premium” format to an “Ultra-Premium” format that also offers gourmet and artisanal products, upscale décor and experiential elements including walk-in wine cellars and wine and cheese tasting counters.

 

    Driving Innovation.    We intend to drive traffic and sales growth through constant innovation. We will remain focused on identifying emerging trends in food and sourcing new and innovative products. We are adjusting our store layouts to accommodate a greater assortment of grab-and-go, individually packaged, and snack-sized meals. We are also rolling out new merchandising initiatives across our store base, including the introduction of meal kits, product sampling events, quality prepared foods and in-store dining.

 

    Sharing Best Practices Across Divisions.    Our division leaders collaborate to ensure the rapid sharing of best practices. Recent examples include the expansion of our O Organics offering across banners, the accelerated roll-out of signature products such as Albertsons’ in-store fresh-cut fruit and vegetables and implementing Safeway’s successful wine and floral shop strategies, with broader product assortments and new fixtures across many of our banners.

 



 

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We believe the combination of these actions and initiatives, together with the attractive industry trends described in more detail under “Business—Our Industry,” will position us to achieve sales growth.

Enhance Our Operating Margin.    Our focus on sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefits through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. We are investing in our supply channel, including the automation of several of our distribution centers, in order to create efficiencies and reduce costs. In addition, we maintain a disciplined approach to expense management and budgeting.

Implement Our Synergy Realization Plan.    We are currently executing on an annual synergy plan of approximately $800 million from the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018, with associated one-time costs of approximately $840 million (net of estimated synergy-related asset sale proceeds). Our detailed synergy plan was developed on a bottom-up, function-by-function basis by combined Albertsons and Safeway teams. The plan includes capturing opportunities from corporate and division cost savings, simplifying business processes and rationalizing headcount. Over time, Safeway’s information technology systems will support all of our stores, distribution centers and systems, including financial reporting and payroll processing, as we wind down our transition services agreement for our Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market banners with SuperValu on a store-by-store basis. We are extending the expansive and high-quality own brands program developed at Safeway across all of our banners. We believe our increased scale will help us to optimize and improve our vendor relationships. We also plan to achieve marketing and advertising savings from lower print, production and broadcast rates in overlapping regions and reduced agency spend. Finally, we intend to consolidate managed care provider reimbursement programs, increase vaccine penetration and leverage our combined scale. During fiscal 2016 and the first two quarters of fiscal 2017, we achieved synergies from the Safeway acquisition of approximately $575 million and $330 million, respectively, and we expect to achieve synergies of approximately $675 million in fiscal 2017, or approximately $750 million on an annual run-rate basis by the end of fiscal 2017, principally from savings related to corporate and division overhead, our own brands, vendor funds and marketing and advertising cost reductions. Approximately 80% of our $800 million annual synergy target is independent of sales growth, which we believe significantly reduces the risk of not achieving our target.

Selectively Grow Our Store Base Organically and Through Acquisition.    We intend to continue to grow our store base organically through disciplined but committed investment in new stores. We opened 15 and 12 new stores in fiscal 2016 and the first two quarters of fiscal 2017, respectively, and expect to have opened a total of 16 new stores and completed approximately 170 upgrade and remodel projects by the end of fiscal 2017. We acquired 73 stores from A&P for our Acme banner and 35 stores from Haggen for our Albertsons banner during fiscal 2015, and we acquired an additional 29 stores from Haggen during fiscal 2016, of which 15 operate under the Haggen banner. We evaluate acquisition opportunities on an ongoing basis as we seek to strengthen our competitive position in existing markets or expand our footprint into new markets. We believe our healthy balance sheet and decentralized structure provide us with strategic flexibility and a strong platform to make acquisitions. We believe our successful track record of integration and synergy delivery provides us with an opportunity to further enhance sales growth, leverage our cost structure and increase profitability and Free Cash Flow through selected acquisitions. Consistent with this strategy, we regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and we are currently participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us.

 



 

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OUR INDUSTRY

We operate in the $611 billion U.S. food and drug retail industry, a highly fragmented sector with a large number of companies competing locally and a growing array of companies with a national footprint, including traditional supermarkets, pharmacies and drug stores, convenience stores, warehouse clubs, supercenters and a growing number of internet-based delivery services. The industry has also seen the widespread introduction of “limited assortment” retail stores, as well as local chains and stand-alone stores that cater to the individual cultural preferences of specific neighborhoods.

From 2012 through 2016, food and drug retail industry revenues increased at an average annual rate of 1.0%, driven in part by improving macroeconomic factors, including gross domestic product, household disposable income, consumer confidence and employment. Several food items and categories, including meat, eggs and dairy, experienced price deflation in fiscal 2016 and price deflation is expected to continue in several food categories in fiscal 2017. On an annual basis, Food-at-Home inflation is forecasted to be between (0.25)% and 0.75% in 2017 and between 1.0% and 2.0% in 2018. In addition to macroeconomic factors, the following trends, in particular, are expected to drive sales across the industry:

 

    Customer Focus on Fresh, Natural and Organic Offerings.    Evolving customer tastes and preferences have caused food retailers to improve the breadth and quality of their fresh, natural, and organic offerings. This, in turn, has resulted in the increasing convergence of product selections between conventional and alternative format food retailers.

 

    Converging Approach to Health and Wellness.    Customers increasingly view their food shopping experience as part of a broader approach to health and wellness. As a result, food retailers are seeking to drive sales growth and customer loyalty by incorporating pharmacy and wellness clinic offerings in their stores.

 

    Increased Customer Acceptance of Own Brand Offerings.    Increased customer acceptance has driven growth in demand for own brand offerings, including the introduction of premium store brands. In general, own brand offerings have a higher gross margin than similarly positioned products of national brands.

 

    Loyalty Programs and Personalization.    To remain competitive and generate customer loyalty, food retailers are increasing their focus on loyalty programs and data-driven analytics to target the delivery of personalized offers to their customers. Food retailers are also expected to seek to strengthen customer loyalty by introducing mobile applications that allow customers to make purchases, access loyalty card data and check prices while in-store.

 

    Convenience as a Differentiator.    Industry participants are addressing customers’ desire for convenience through in-store amenities and services, including store-within-store sites such as coffee bars, fuel centers, banks and ATMs, meal kits and prepared meals. Customer convenience is important for traditional grocers that must differentiate themselves from other mass retailers, club stores and other food retailers. The increasing penetration of e-commerce competition has prompted food retailers to develop or outsource online and mobile applications for home delivery, pickup and digital shopping solutions with customer convenience in mind. The growth of e-commerce has also resulted in the emergence of a number of online-only food and drug retail offerings, including specialized meal kit services and online pharmacies.

 



 

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RISKS RELATED TO OUR BUSINESS AND THIS OFFERING

An investment in our common stock involves a high degree of risk. You should carefully consider the risks highlighted in the section entitled “Risk Factors” following this prospectus summary before making an investment decision. These risks include, among others, the following:

 

    Various operating factors and general economic conditions affecting the food retail industry may adversely affect our business and operating results.

 

    Competition in our industry is intense, and our failure to compete successfully may adversely affect our profitability and results of operations.

 

    Increased commodity prices may adversely impact our profitability.

 

    Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows.

 

    We may be adversely affected by risks related to our dependence on information technology (“IT”) systems. Any future intrusion into these IT systems, even if we are compliant with industry security standards, could materially adversely affect our reputation, financial condition and operating results.

 

    We may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the Safeway acquisition.

 

    Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.

 

    Our debt instruments limit our flexibility in operating our business.

 

    There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity. If our stock price fluctuates after this offering, you could lose a significant part of your investment.

 



 

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OUR CORPORATE STRUCTURE

Our business is currently conducted through our operating subsidiaries, which are wholly-owned by AB Acquisition. The equity interests of AB Acquisition immediately prior to the IPO-Related Transactions were owned (directly and indirectly) by entities affiliated with our Sponsors and certain current and former members of our management, whom we refer to as our “Existing Owners,” as well as our independent directors. Albertsons Companies, Inc. is a Delaware corporation.

In order to effectuate this offering, we expect to effect the following series of transactions prior to and/or concurrently with the closing of this offering that will result in the reorganization of our business so that it is owned by Albertsons Companies, Inc. Specifically, (i) our Existing Owners, other than KRS AB Acquisition and KRS ABS, LLC (collectively, “Kimco”) and Albertsons Management Holdco, LLC (“Management Holdco”), will contribute all of their direct and indirect equity interests in AB Acquisition to Albertsons Investor Holdings LLC (“Albertsons Investor”), including their interests in NAI Group Holdings Inc. (“NAI Group Holdings”) and Safeway Group Holdings Inc. (“Safeway Group Holdings”), (ii) Albertsons Investor, Kimco and Management Holdco will contribute all of their equity interests in AB Acquisition to Albertsons Companies, Inc. in exchange for common stock of Albertsons Companies, Inc., and our independent directors will receive grants of restricted and unrestricted common stock of Albertsons Companies, Inc. in substitution for their interests in AB Acquisition, (iii) NAI Group Holdings, Safeway Group Holdings and other special purpose corporations owned by certain of the Sponsors through which they invested in AB Acquisition will be merged with and into Albertsons Companies, Inc., with Albertsons Companies, Inc. remaining as the surviving corporation in the mergers and (iv) certain stores owned by Albertson’s LLC will be contributed to a newly formed subsidiary, Albertson’s Stores Sub LLC, which subsidiary will be distributed to its ultimate owner AB Acquisition, AB Acquisition will transfer all of its equity interests in ACL to Albertsons Companies, Inc. and ACL will be merged with and into Albertsons Companies, Inc. with Albertsons Companies, Inc. remaining as the surviving corporation in the merger. As a result of the foregoing transactions, an aggregate of             ,              ,             and              shares of our common stock will be owned by Albertsons Investor, Kimco, Management Holdco and our independent directors, respectively (assuming the common stock in this offering is offered at $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus).

 



 

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The chart below summarizes our corporate structure after giving effect to the IPO-Related Transactions (assuming the common stock in this offering is offered at $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus), but before giving effect to dilution from outstanding restricted stock units or the exercise of the underwriters’ option to purchase additional shares and excluding the shares of restricted and unrestricted stock held by our independent directors:

 

LOGO

For a further discussion of the IPO-Related Transactions, see “IPO-Related Transactions and Organizational Structure.”

 



 

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RECENT DEVELOPMENTS

Sale-Leaseback Transaction

On October 31, 2017, certain of our subsidiaries completed the sale of 71 of our store properties (the “Properties” and, such sale, the “Sale-Leaseback Transaction”) to CF Albert Propco LLC, an unaffiliated entity (the “Purchaser”) for an aggregate purchase price, exclusive of closing costs, of approximately $720 million. We intend to use the net proceeds to repay outstanding debt or invest in our operations. In connection with the Sale-Leaseback Transaction, we entered into lease agreements for each of the Properties for initial terms of 20 years with varying multiple five-year renewal options, that we expect will qualify for sale-leaseback accounting. Any gain on the sale of the Properties will be deferred and amortized over the term of the leases. The aggregate initial annual rent payment for the Properties will be approximately $48 million, with scheduled rent increases occurring generally every one or five years over the initial 20-year term.

CORPORATE INFORMATION

Albertsons Companies, Inc. is a Delaware corporation that was incorporated on June 23, 2015 to undertake this offering. Our principal executive offices are located at 250 Parkcenter Blvd., Boise, ID 83706. Our telephone number is (208) 395-6200 and our internet address is www.albertsons.com. Our website and the information contained thereon are not part of this prospectus and should not be relied upon by prospective investors in connection with any decision to purchase our common shares.

OUR EQUITY SPONSORS

We believe that one of our strengths is our relationship with our Sponsors. We believe we will benefit from our Sponsors’ experience in the retail industry, their expertise in mergers and acquisitions and real estate, and their support on various near-term and long-term strategic initiatives.

Cerberus.    Established in 1992, Cerberus and its affiliated group of funds and companies comprise one of the world’s leading private investment firms with over $30 billion of capital under management in four primary strategies: control and non-control private equity investments, distressed securities and assets, commercial mid-market lending, and real estate-related investments. In addition to its New York headquarters, Cerberus has offices throughout the United States, Europe and Asia.

Kimco Realty.    Kimco Realty is a real estate investment trust headquartered in New Hyde Park, New York that owns and operates North America’s largest publicly traded portfolio of neighborhood and community shopping centers. As of June 30, 2017, Kimco Realty owned interests in 510 shopping centers comprising 84 million square feet of leasable space across 34 states and Puerto Rico. Publicly traded on the NYSE since 1991, and included in the S&P 500 Index, Kimco Realty has specialized in shopping center acquisitions, development and management for more than 50 years.

Klaff Realty.    Klaff Realty is a privately-owned real estate investment company based in Chicago, Illinois that engages in the acquisition, redevelopment and management of commercial real estate throughout the United States and Latin America, with a primary focus on retail and office. Klaff Realty has established a leadership position in the acquisition of distressed retail space. To date, Klaff Realty affiliates have acquired properties and invested in operating entities that control in excess of 200 million square feet with a value in excess of $17 billion.

 



 

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Lubert-Adler.    Lubert-Adler was co-founded in 1997 by Ira Lubert and Dean Adler, who collectively have over 60 years of experience in underwriting, acquiring, repositioning, refinancing and disposing of real estate assets. Lubert-Adler has more than 20 investment professionals and has invested $8 billion of equity into assets valued at over $18 billion.

Schottenstein Stores.    Schottenstein Stores, together with its affiliate Schottenstein Property Group, is a privately-owned operator, acquirer and redeveloper of high quality power/big box, community and neighborhood shopping centers located throughout the United States predominantly anchored by national retailers.

Our Sponsors will indirectly control us through their respective ownership of Albertsons Investor and Kimco and will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Following the completion of the IPO-Related Transactions, our Sponsors will indirectly own approximately      % of our common stock (assuming the common stock in this offering is offered at $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus), or     % if the underwriters exercise their option to purchase additional shares in full. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the NYSE on which we have been approved to list our shares and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. As a result, our stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements. Following the completion of the IPO-Related Transactions and this offering, we will be required to appoint to our board of directors individuals designated by Albertsons Investor. Furthermore, if we cease to be a controlled company under the applicable rules of the NYSE, but Albertsons Investor, Kimco and Management Holdco collectively own at least 35% of our then-outstanding common stock, Albertsons Investor shall have the right to designate a number of members of our board of directors equal to one director fewer than 50% of our board of directors and Albertsons Investor shall cause its directors appointed to our board of directors to vote in favor of maintaining a 13-person board. In connection with this offering, Albertsons Companies, Inc. will enter into a stockholders agreement with Albertsons Investor, Kimco and Management Holdco (the “Stockholders’ Agreement”), and if a permitted transferee or assignee of such party that succeeds to such party’s rights under the Stockholders’ Agreement (each transferee or assignee, a “Holder” and, collectively, the “Holders”) has beneficial ownership of less than 35% but at least 20% of our then-outstanding common stock, such Holder shall have the right to designate a number of members of our board of directors equal to the greater of (a) three or (b) 25% of the size of our board of directors (rounded up to the next whole number). If a Holder has beneficial ownership of less than 20% but at least 15% of our then-outstanding common stock, such Holder shall have the right to designate a number of directors equal to the greater of (a) two or (b) 15% of the size of our board of directors (rounded up to the next whole number). If a Holder has beneficial ownership of less than 15% but at least 10% of our then-outstanding common stock, such Holder shall have the right to designate one director to our board of directors.

The limited liability company agreement of AB Acquisition provides for the Cerberus-led Consortium to receive annual management fees of $13.75 million from our company over a 48-month period beginning on January 30, 2015, the date of the consummation of the Safeway acquisition. We paid the Cerberus-led Consortium management fees totaling $15 million for fiscal 2014, $6 million of which was paid under the previous limited liability company agreement of AB Acquisition and $9 million of which was paid upon the closing of the Safeway acquisition. We have paid management fees to the Cerberus-led Consortium in an annual amount of $13.75 million for fiscal 2015, fiscal 2016 and fiscal

 



 

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2017. In exchange for the management fees, the Cerberus-led Consortium has provided strategic advice to management, including with respect to acquisitions and financings. As of September 9, 2017, management fees over the remainder of the 48-month period total $13.75 million. Consistent with the terms of the limited liability company agreement of AB Acquisition, the remaining management fees will be paid in full upon the closing of this offering. We do not expect to pay any further management fees to the Cerberus-led Consortium following the completion of this offering.

The interests of our Sponsors may not coincide with the interests of other holders of our common stock. Additionally, our Sponsors are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsors may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as the Cerberus-led Consortium continues to own a significant amount of the outstanding shares of our common stock through Albertsons Investor and Kimco, the Cerberus-led Consortium will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant transactions.

See “Risk Factors—Risks Related to This Offering and Owning Our Common Stock.”

 



 

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THE OFFERING

 

Common stock outstanding

409,832,959 shares.

 

Common stock offered by the selling stockholders

             shares.

 

Option to purchase additional shares

The selling stockholders have granted to the underwriters a 30-day option to purchase up to              additional shares of our common stock at the initial public offering price less the underwriting discount and commissions.

 

Use of proceeds

We will not receive any net proceeds from the sale of common shares by the selling stockholders, including from any exercise by the underwriters of their option to purchase additional shares of our common stock from the selling stockholders.

 

  See “Use of Proceeds.”

 

Dividend policy

We do not intend to pay dividends for the foreseeable future. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, and other considerations that our board of directors deems relevant.

 

  See “Dividend Policy.”

 

NYSE trading symbol

“ABS.”

 

Risk factors

For a discussion of risks relating to our company, our business and an investment in our common stock, see “Risk Factors” and all other information set forth in this prospectus before investing in our common stock.

 

Directed Share Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale within the United States to some of our directors, officers, employees, business associates and related persons. If these persons purchase reserved shares, it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

Unless otherwise indicated, all information in this prospectus excludes up to              shares of our common stock that may be sold by the selling stockholders if the underwriters exercise in full their option to purchase additional shares of our common stock from the selling stockholders.

 



 

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SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

The following tables summarize our consolidated historical and pro forma financial and other data and should be read together with “Selected Historical Financial Information of AB Acquisition,” “Supplemental Selected Historical Financial Information of Safeway,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition,” and our consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the summary balance sheet data as of September 9, 2017 and the consolidated statement of operations data for the 28 weeks ended September 9, 2017 and the 28 weeks ended September 10, 2016 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have derived the summary balance sheet data as of February 25, 2017 and the consolidated statement of operations data for fiscal 2016, fiscal 2015 and fiscal 2014 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results set forth below are not necessarily indicative of results to be expected for any future period.

On January 30, 2015, we acquired Safeway. Commencing on January 31, 2015, our consolidated financial statements also include the financial position, results of operations and cash flows of Safeway.

 



 

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We have included in this prospectus pro forma financial information which gives effect to the IPO-Related Transactions for fiscal 2016 and the 28 weeks ended September 9, 2017 as more fully described in the notes below. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for additional information.

 

    28 Weeks Ended
September 9, 2017
    28 Weeks Ended
September 10, 2016
    Fiscal 2016     Fiscal
2015
    Fiscal
2014(1)
 
   

Pro
Forma(2)

   

Actual

   

Actual

   

Pro
Forma(2)

   

Actual

    Actual     Actual(3)  

Results of Operations:

             

Net sales and other revenue

  $ 32,292     $ 32,292     $ 32,248     $ 59,678     $ 59,678     $ 58,734     $ 27,199  

Gross profit

  $ 8,788     $ 8,788     $ 8,887     $ 16,641     $ 16,641     $ 16,062     $ 7,503  

Selling and administrative expenses

    8,769       8,769       8,586       15,986       16,000       15,660       8,152  

Goodwill impairment

    142       142                                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (123     (123     301       655       641       402       (649

Interest expense, net

    485       485       571       1,004       1,004       951       633  

Loss on debt extinguishment

                112       112       112              

Other expense (income)

    19       19       4       (11     (11     (7     96  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (627     (627     (386     (450     (464     (542     (1,378

Income tax benefit

    (243     (67     (14     (174     (90     (40     (153
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (384   $ (560   $ (372   $ (276   $ (374   $ (502   $ (1,225
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Net loss per share—basic and diluted(4)

  $ (0.94       $ (0.67      

Weighted average shares outstanding—basic and diluted(4)

    410           410        

Other Financial Data:

             

Adjusted EBITDA(5)

  $ 1,257     $ 1,257     $ 1,455     $ 2,817     $ 2,817     $ 2,681     $ 1,099  

Adjusted Net Income (Loss)(5)

    18       (32     94       339       378       365       58  

Adjusted Net Income per share—basic and diluted(5)

    0.04           0.83        

Capital expenditures

    753       753       740       1,415       1,415       960       337  

Free Cash Flow(5)

    504       504       715       1,402       1,402       1,721       762  

Other Operating Data:

             

Identical store sales

    (2.0 )%      (2.0 )%      1.7     (0.4 )%      (0.4 )%      4.4     7.2

Store count (at end of fiscal period)

    2,328       2,328       2,320       2,324       2,324       2,271       2,382  

Gross square footage (at end of fiscal period) (in millions)

    116       116       115       115       115       113       118  

Fuel sales

  $ 1,660     $ 1,660     $ 1,455     $ 2,693     $ 2,693     $ 2,955     $ 387  

Balance Sheet Data (at end of period):

             

Cash and equivalents

  $ 572     $ 572     $ 931       $ 1,219     $ 580     $ 1,126  

Total assets

    22,335       22,335       23,774         23,755       23,770       25,678  

Total members’ equity

    596       596       1,215         1,371       1,613       2,169  

Total debt

    11,926       11,926       12,509         12,338       12,226       12,569  

 

Supplemental Identical Store Sales

  Fiscal 2017     Fiscal 2016     Fiscal 2015     Fiscal 2014  
 

Q2’17

   

Q1’17

   

Q4’16

   

Q3’16

   

Q2’16

   

Q1’16

   

Q4’15

   

Q3’15

    Q2’15     Q1’15     Q4’14     Q3’14     Q2’14     Q1’14  

AB Acquisition(a)(b)

    (1.8)%       (2.1)%       (3.3)%       (2.1)%       0.1%       2.9%       4.7%       5.1%       4.5%       4.3%       4.1%       4.8%       5.4%       4.8%  

Safeway(c)

    (2.2)%       (2.9)%       (3.7)%       (2.2)%       0.1%       3.9%       5.8%       5.6%       4.9%       3.8%       3.5%       3.2%       3.1%       2.2%  

 

(a) Includes acquired Safeway, NAI and United stores, irrespective of date of acquisition.
(b) After adjusting for the positive sales impact in one of our divisions during the second quarter of fiscal 2014 resulting from a labor dispute at a competitor that caused a temporary closure of its stores, identical store sales growth for AB Acquisition during the second quarter of fiscal 2014 and the second quarter of fiscal 2015 would have been 4.6% and 5.2%, respectively.
(c) Includes Safeway’s Eastern Division, now owned by NAI.

 

 

(1) The fiscal year ended February 28, 2015 included 53 weeks.

 



 

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(2) The pro forma results of operations information for fiscal 2016 and the 28 weeks ended September 9, 2017 reflects the IPO-Related Transactions as if these events had occurred on February 28, 2016. The pro forma balance sheet information as of September 9, 2017 reflects the IPO-Related Transactions as if they occurred on September 9, 2017. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data for fiscal 2016 and the 28 weeks ended September 9, 2017.

 

(3) For the period from February 21, 2014 to January 30, 2015, our consolidated financial statements include the financial position, results of operations and cash flows of Albertsons, NAI and United. Commencing on January 31, 2015, our consolidated financial statements also include the financial position, results of operations and cash flows of Safeway.

 

(4) Gives effect to the items described in note 2 above as if they had occurred on the first day of fiscal 2016. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data.

 

(5) Adjusted EBITDA is a Non-GAAP Measure defined as earnings (net income (loss)) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. Adjusted Net Income is a Non-GAAP Measure defined as net income (loss) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. We define Free Cash Flow as Adjusted EBITDA less capital expenditures. Pro forma amounts give effect to the items described in note 2 above, as applicable, as if they had occurred on the first day of fiscal 2016, as applicable.

Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are Non-GAAP Measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA, Adjusted Net Income and Free Cash Flow provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. Set forth below is a reconciliation of Adjusted Net Income and Adjusted EBITDA to net income (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition,” included elsewhere in this prospectus, for a reconciliation of cash flow from operating activities to Free Cash Flow):

 



 

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    28 Weeks Ended
September 9, 2017
    28 Weeks Ended
September 10, 2016
    Fiscal 2016     Fiscal
2015
    Fiscal
2014(1)
 
   

Pro
Forma

   

Actual

   

Actual

   

Pro
Forma

   

Actual

   

Actual

   

Actual

 

Net loss

  $ (384   $ (560   $ (372   $ (276   $ (374   $ (502   $ (1,225

Adjustments:

             

(Gain) loss on interest rate and commodity hedges, net

    (3     (3     (7     (7     (7     16       98  

Facility closures and related transition costs(a)

    9       9       17       23       23       25        

Acquisition and integration costs(b)

    100       100       117       214       214       342       352  

Termination of long-term incentive plans

                                        78  

Equity-based compensation expense

    18       18       15       53       53       98       344  

Net loss (gain) on property dispositions, asset impairments and lease exit costs

    52       52       (51     (39     (39     103       228  

Goodwill impairment

    142       142                                

LIFO expense (benefit)

    24       24       20       (8     (8     30       43  

Amortization and write-off of original issue discount, deferred financing costs and loss on extinguishment of debt

    51       51       209       253       253       82       72  

Collington acquisition(c)

         

 
    79       79       79              

Amortization of intangible assets resulting from acquisitions

    223      
223
 
    213       404       404       377       149  

Other(d)

    39       39       19       31       45       45       (17

Tax impact of adjustments to Adjusted Net Income(e)

    (253     (127     (165     (388     (265     (251     (64
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income (Loss)

  $ 18     $ (32   $ 94     $ 339     $ 378     $ 365     $ 58  

Adjustments:

             

Tax impact of adjustments to Adjusted Net Income(e)

    253       127       165       388       265       251       64  

Income tax benefit

    (243     (67     (14     (174     (90     (40     (153

Amortization and write-off of original issue discount, deferred financing costs and loss on extinguishment of debt

    (51     (51     (209     (253     (253     (82     (72

Interest expense, net

    485       485       571       1,004       1,004       951       633  

Loss on debt extinguishment

                112       112       112              

Amortization of intangible assets resulting from acquisitions

    (223     (223     (213     (404     (404     (377     (149

Depreciation and amortization

    1,018       1,018       949       1,805       1,805       1,613       718  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 1,257     $ 1,257     $ 1,455     $ 2,817     $ 2,817     $ 2,681     $ 1,099  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Includes costs related to facility closures and the transition to our decentralized operating model.
  (b) Includes costs related to the Safeway acquisition (including the charge associated with the settlement of appraisal rights litigation), the A&P Transaction (as defined herein), the Haggen Transaction (as defined herein), the NAI acquisition and the United acquisition.
  (c) Fiscal 2016 includes a charge to pension expense, net related to the settlement of a pre-existing contractual relationship and assumption of the pension plan related to the acquisition of Collington (as defined herein) from C&S Wholesale Grocers, Inc. during the first quarter of fiscal 2016.
  (d) Primarily includes lease adjustments related to deferred rents and deferred gains on leases. Also includes amortization of unfavorable leases on acquired Safeway surplus properties, estimated losses related to the security breach, charges related to changes in the fair value of the CVRs (as defined herein), earnings from Casa Ley (as defined herein), foreign currency translation gains, costs related to this offering and pension expense (exclusive of the charge related to the Collington acquisition) in excess of cash contributions.
  (e) The tax impact was determined based on the taxable status of the subsidiary to which each of the above adjustments relates.

 



 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following information, together with other information in this prospectus, before buying shares of our common stock. If any of the following risks or uncertainties actually occur, our business, financial condition, prospects, results of operations and cash flow could be materially adversely affected. Additional risks or uncertainties not currently known to us, or that we deem immaterial, may also impair our business operations. We cannot assure you that any of the events discussed in the risk factors below will not occur. In that case, the market price of our common stock could decline and you may lose all or a part of your investment.

Risks Related to Our Business and Industry

Various operating factors and general economic conditions affecting the food retail industry may affect our business and may adversely affect our business and operating results.

Our operations and financial performance are affected by economic conditions such as macroeconomic conditions, credit market conditions and the level of consumer confidence. While the combination of improved economic conditions, the trend towards lower unemployment, higher wages and lower gasoline prices have contributed to improved consumer confidence, there is continued uncertainty about the strength of the economic recovery. If the economy does not continue to improve or if it weakens, or if gasoline prices rebound, consumers may reduce spending, trade down to a less expensive mix of products or increasingly rely on food discounters, all of which could impact our sales. In addition, consumers’ perception or uncertainty related to the economic recovery and future fuel prices could also dampen overall consumer confidence and reduce demand for our product offerings. Both inflation and deflation affect our business. Food deflation could reduce sales growth and earnings, while food inflation could reduce gross profit margins. Several food items and categories, such as meat, eggs and dairy, experienced price deflation in fiscal 2016 and price deflation is expected to continue in several food categories in fiscal 2017. We are unable to predict if the economy will continue to improve, the rate at which the economy may improve, the direction of gasoline prices or when the deflationary trends we are currently experiencing will abate. If the economy does not continue to improve or if it weakens, fuel prices increase or deflationary trends increase materially, our business and operating results could be adversely affected.

Competition in our industry is intense, and our failure to compete successfully may adversely affect our profitability and operating results.

The food and drug retail industry is large and dynamic, characterized by intense competition among a collection of local, regional and national participants. We face strong competition from other brick and mortar food and/or drug retailers, supercenters, club stores, discount stores, online retailers, specialty and niche supermarkets, drug stores, general merchandisers, wholesale stores, convenience stores, natural food stores, farmers’ markets, local chains and standalone stores that cater to the individual cultural preferences of specific neighborhoods, restaurants and home delivery and meal solution companies. Shifts in the competitive landscape, consumer preference or market share may have an adverse effect on our profitability and results of operations.

As a result of consumers’ growing desire to shop online, we also face increasing competition from both our existing competitors who have incorporated the internet as a direct-to-consumer channel and online providers that sell grocery products. Although we have a growing internet presence and offer our customers the ability to shop online for both home delivery and in-store pick-up, there is no assurance that these online initiatives will be successful. In addition, these initiatives may have an adverse impact on our profitability as a result of lower gross profits or greater operating costs to compete.

 

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Our ability to attract customers is dependent, in large part, upon a combination of channel preference, location, store conditions, quality, price, service, convenience and selection. In each of these areas, traditional and non-traditional competitors compete with us and may successfully attract our customers by matching or exceeding what we offer or by providing greater shopping convenience. In recent years, many of our competitors have aggressively added locations and adopted a multi-channel approach to marketing and advertising. Our responses to competitive pressures, such as additional promotions, increased advertising, additional capital investment and the development of our internet offerings, could adversely affect our profitability and cash flow. We cannot guarantee that our competitive response will succeed in increasing or maintaining our share of retail food sales.

An increasingly competitive industry and deflation in the prices of certain foods have made it difficult for food retailers to achieve positive identical store sales growth on a consistent basis. We and our competitors have attempted to maintain or grow our and their respective share of retail food sales through capital and price investment, increased promotional activity and new store growth, creating a more difficult environment to consistently increase year-over-year sales. Several of our primary competitors are larger than we are or have greater financial resources available to them and, therefore, may be able to devote greater resources to invest in price, promotional activity and new or remodeled stores in order to grow their share of retail food sales. Price investment by our competitors has also, from time to time, adversely affected our operating margins. In recent years, we have invested in price in order to remain competitive and generate sales growth; however, there can be no assurance this strategy will be successful.

Because we face intense competition, we need to anticipate and respond to changing consumer preferences and demands more effectively than our competitors. We devote significant resources to differentiating our banners in the local markets where we operate and invest in loyalty programs to drive traffic. Our local merchandising teams spend considerable time working with store directors to make sure we are satisfying consumer preferences. In addition, we strive to achieve and maintain favorable recognition of our own brands and offerings, and market these offerings to consumers and maintain and enhance a perception of value for consumers. While we seek to continuously respond to changing consumer preferences, there are no assurances that our responses will be successful.

Our continued success is dependent upon our ability to control operating expenses, including managing health care and pension costs stipulated by our collective bargaining agreements to effectively compete in the food retail industry. Several of our primary competitors are larger than we are, or are not subject to collective bargaining agreements, allowing them to more effectively leverage their fixed costs or more easily reduce operating expenses. Finally, we need to source, market and merchandise efficiently. Changes in our product mix also may negatively affect our profitability. Failure to accomplish our objectives could impair our ability to compete successfully and adversely affect our profitability.

Profit margins in the food retail industry are low. In order to increase or maintain our profit margins, we develop operating strategies to increase revenues, increase gross margins and reduce costs, such as new marketing programs, new advertising campaigns, productivity improvements, shrink reduction initiatives, distribution center efficiencies, manufacturing efficiencies, energy efficiency programs and other similar strategies. Our failure to achieve forecasted revenue growth, gross margin improvement or cost reductions could have a material adverse effect on our profitability and operating results.

Increased commodity prices may adversely impact our profitability.

Many of our own and sourced products include ingredients such as wheat, corn, oils, milk, sugar, proteins, cocoa and other commodities. Commodity prices worldwide have been volatile. Any increase in commodity prices may cause an increase in our input costs or the prices our vendors seek from us.

 

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Although we typically are able to pass on modest commodity price increases or mitigate vendor efforts to increase our costs, we may be unable to continue to do so, either in whole or in part, if commodity prices increase materially. If we are forced to increase prices, our customers may reduce their purchases at our stores or trade down to less profitable products. Both may adversely impact our profitability as a result of reduced revenue or reduced margins.

Fuel prices and availability may adversely affect our results of operations.

We currently operate 393 fuel centers that are adjacent to many of our store locations. As a result, we sell a significant amount of gasoline. Increased regulation or significant increases in wholesale fuel costs could result in lower gross profit on fuel sales, and demand could be affected by retail price increases as well as by concerns about the effect of emissions on the environment. We are unable to predict future regulations, environmental effects, political unrest, acts of terrorism and other matters that may affect the cost and availability of fuel, and how our customers will react, which could adversely affect our results of operations.

Our stores rely heavily on sales of perishable products, and product supply disruptions may have an adverse effect on our profitability and operating results.

Reflecting consumer preferences, we have a significant focus on perishable products. Sales of perishable products accounted for approximately 40.9% of our total sales in fiscal 2016. We rely on various suppliers and vendors to provide and deliver our perishable product inventory on a continuous basis. We could suffer significant perishable product inventory losses and significant lost revenue in the event of the loss of a major supplier or vendor, disruption of our distribution network, extended power outages, natural disasters or other catastrophic occurrences.

Severe weather and natural disasters may adversely affect our business.

Severe weather conditions such as hurricanes, earthquakes, floods, extended winter storms, heat waves or tornadoes, as well as other natural disasters, in areas in which we have stores or distribution centers or from which we source or obtain products may cause physical damage to our properties, closure of one or more of our stores, manufacturing facilities or distribution centers, lack of an adequate work force in a market, temporary disruption in the manufacture of products, temporary disruption in the supply of products, disruption in the transport of goods, delays in the delivery of goods to our distribution centers or stores, a reduction in customer traffic and a reduction in the availability of products in our stores. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops yielded by food producers may adversely affect the availability or cost of certain products within the grocery supply chain. Any of these factors may disrupt our business and adversely affect our business.

Threats or potential threats to security of food and drug safety, the occurrence of a widespread health epidemic or regulatory concerns in our supply chain may adversely affect our business.

Acts or threats, whether perceived or real, of war or terror or other criminal activity directed at the food or drug store industry or the transportation industry, whether or not directly involving our stores, could increase our operating costs and operations, or impact general consumer behavior and consumer spending. Other events that give rise to actual or potential food contamination, drug contamination or food-borne illnesses, or a widespread regional, national or global health epidemic, such as pandemic flu, could have an adverse effect on our operating results or disrupt production and delivery of our products, our ability to appropriately staff our stores and potentially cause customers to avoid public gathering places or otherwise change their shopping behaviors.

 

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We source our products from vendors and suppliers and related networks across the globe who may be subject to regulatory actions or face criticism due to actual or perceived social injustices, including human trafficking, child labor or environmental, health and safety violations. A disruption in our supply chain due to any regulatory action or social injustice could have an adverse impact on our supply chain and ultimately our business, including potential harm to our reputation.

We could be affected if consumers lose confidence in the food supply chain or the quality and safety of our products.

We could be adversely affected if consumers lose confidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, whether valid or not, may discourage consumers from buying our products or cause production and delivery disruptions. The real or perceived sale of contaminated food products by us could result in product liability claims, a loss of consumer confidence and product recalls, which could have a material adverse effect on our business.

Certain risks are inherent in providing pharmacy services, and our insurance may not be adequate to cover any claims against us.

We currently operate 1,779 pharmacies, and, as a result, we are exposed to risks inherent in the packaging, dispensing, distribution, and disposal of pharmaceuticals and other healthcare products, such as risks of liability for products which cause harm to consumers, as well as increased regulatory risks and related costs. Although we maintain insurance, we cannot guarantee that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will be able to maintain this insurance on acceptable terms in the future, or at all. Our results of operations, financial condition or cash flows may be materially adversely affected if in the future our insurance coverage proves to be inadequate or unavailable, or there is an increase in the liability for which we self-insure, or we suffer harm to our reputation as a result of an error or omission.

We are subject to numerous federal and state regulations. Each of our in-store pharmacies must be licensed by the state government. The licensing requirements vary from state to state. An additional registration certificate must be granted by the U.S. Drug Enforcement Administration (“DEA”), and, in some states, a separate controlled substance license must be obtained to dispense controlled substances. In addition, pharmacies selling controlled substances are required to maintain extensive records and often report information to state and federal agencies. If we fail to comply with existing or future laws and regulations, we could suffer substantial civil or criminal penalties, including the loss of our licenses to operate pharmacies and our ability to participate in federal and state healthcare programs. As a consequence of the severe penalties we could face, we must devote significant operational and managerial resources to complying with these laws and regulations.

During fiscal 2014, Safeway received two subpoenas from the DEA requesting information concerning its record keeping, reporting and related practices concerning the theft or significant loss of controlled substances. On June 7, 2016, we received a third subpoena requesting information concerning potential diversion by one former employee in the Seattle/Tacoma area (Washington State). On July 18, 2017, the DEA and Department of Justice announced that they had reached an agreement with Safeway with respect to the matters under investigation. Under the agreement, Safeway (1) has paid a penalty of $3.0 million; (2) has surrendered its controlled substances license at one of its pharmacies in California and has had its controlled substances license at one of its pharmacies in Washington State suspended for four months; and (3) is subject to a three year corrective action plan.

Application of federal and state laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our pharmacy

 

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business or assure that we will be able to obtain or maintain the regulatory approvals required to operate our business.

Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows.

Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to:

 

    a failure of our due diligence process to identify significant risks or issues;

 

    the loss of customers of the acquired company or our company;

 

    negative impact on the brands or banners of the acquired company or our company;

 

    a failure to maintain or improve the quality of customer service;

 

    difficulties assimilating the operations and personnel of the acquired company;

 

    our inability to retain key personnel of the acquired company;

 

    the incurrence of unexpected expenses and working capital requirements;

 

    our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; and

 

    difficulty in maintaining internal controls, procedures and policies.

Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows.

We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations and financial condition.

A significant majority of our employees are unionized, and our relationship with unions, including labor disputes or work stoppages, could have an adverse impact on our operations and financial results.

As of February 25, 2017, approximately 170,000 of our employees were covered by collective bargaining agreements. During fiscal 2016, collective bargaining agreements covering approximately 82,000 employees were renegotiated. During fiscal 2017, collective bargaining agreements covering approximately 10,000 employees are scheduled to expire. In future negotiations with labor unions, we expect that health care, pension costs and/or contributions and wage costs, among other issues, will be important topics for negotiation. If, upon the expiration of such collective bargaining agreements, we are unable to negotiate acceptable contracts with labor unions, it could result in strikes by the affected workers and thereby significantly disrupt our operations. As part of our collective bargaining agreements, we may need to fund additional pension contributions, which would negatively impact our Free Cash Flow. Further, if we are unable to control health care and pension costs provided for in the collective bargaining agreements, we may experience increased operating costs and an adverse impact on our financial results.

 

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Increased pension expenses, contributions and surcharges may have an adverse impact on our financial results.

In connection with the Safeway acquisition, we assumed Safeway’s defined benefit retirement plans for substantially all Safeway employees not participating in multiemployer pension plans. We also assumed defined benefit retirement plans in connection with our acquisitions of United, NAI and Collington. The funded status of these plans (the difference between the fair value of the plan assets and the projected benefit obligation) is a significant factor in determining annual pension expense and cash contributions to fund the plans. In recent years, cash contributions have declined due to improved market conditions and the impact of the pension funding stabilization legislation, which increased the discount rate used to determine pension funding. However, in the fourth quarter of fiscal 2014, under a settlement agreement with the PBGC in connection with the closing of the Safeway acquisition, Safeway contributed $260 million to its largest pension plan. As a result, we do not expect to make additional contributions to this plan until 2018.

If financial markets do not improve or if financial markets decline, increased pension expense and cash contributions may have an adverse impact on our financial results. Under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the PBGC has the authority to petition a court to terminate an underfunded pension plan under limited circumstances. In the event that our defined benefit pension plans are terminated for any reason, we could be liable to the PBGC for the entire amount of the underfunding, as calculated by the PBGC based on its own assumptions (which likely would result in a larger obligation than that based on the actuarial assumptions used to fund such plans). Under ERISA and the Internal Revenue Code of 1986, as amended (the “Code”), the liability under these defined benefit plans is joint and several with all members of the control group, such that each member of the control group would be liable for the defined benefit plans of each other member of the control group.

In addition, we participate in various multiemployer pension plans for substantially all employees represented by unions that require us to make contributions to these plans in amounts established under collective bargaining agreements. Under the Pension Protection Act of 2006 (the “PPA”), contributions in addition to those made pursuant to a collective bargaining agreement may be required in limited circumstances in the form of a surcharge that is equal to 5% of the contributions due in the first year and 10% each year thereafter until the applicable bargaining agreement expires.

Pension expenses for multiemployer pension plans are recognized by us as contributions are made. Benefits generally are based on a fixed amount for each year of service. Our contributions to multiemployer plans were $113.4 million, $379.8 million and $399.1 million during fiscal 2014, fiscal 2015 and fiscal 2016, respectively. In fiscal 2017, we expect to contribute approximately $420 million to multiemployer pension plans, subject to collective bargaining conditions.

Based on an assessment of the most recent information available, the company believes that most of the multiemployer plans to which it contributes are underfunded. The company is only one of a number of employers contributing to these plans, and the underfunding is not a direct obligation or liability of the company. However, the company has attempted, as of February 25, 2017, to estimate its share of the underfunding of multiemployer plans to which the company contributes, based on the ratio of its contributions to the total of all contributions to these plans in a year. As of February 25, 2017, our estimate of the company’s share of the underfunding of multiemployer plans to which it contributes was $3.5 billion. The company’s share of underfunding described above is an estimate and could change based on the results of collective bargaining efforts, investment returns on the assets held in the plans, actions taken by trustees who manage the plans’ benefit payments, interest rates, if the employers currently contributing to these plans cease participation, and requirements under the PPA, the Multiemployer Pension Reform Act of 2014 and applicable provisions of the Code.

 

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Additionally, underfunding of the multiemployer plans means that, in the event we were to exit certain markets or otherwise cease making contributions to these plans, we could trigger a substantial withdrawal liability. Any accrual for withdrawal liability will be recorded when a withdrawal is probable and can be reasonably estimated, in accordance with GAAP. All trades or businesses in the employer’s control group are jointly and severally liable for the employer’s withdrawal liability.

As a part of the Safeway acquisition, we assumed withdrawal liabilities related to Safeway’s previous closure of its Dominick’s division. The respective pension plans have asserted that we may become obligated to pay an estimated maximum withdrawal liability of approximately $510 million if one of the pension plans, the UFCW & Employers Midwest Pension Fund (the “UFCW Midwest Plan”), were to experience a mass withdrawal. A mass withdrawal would require monthly installment payments to be made by us in perpetuity. Our installment payments would be limited to 20 years if we are not part of, or the UFCW Midwest Plan does not experience, a mass withdrawal. Upon the Safeway acquisition, we recorded a $221.8 million multiemployer pension withdrawal liability related to Safeway’s withdrawal from these plans, a difference of $288.2 million from the maximum withdrawal liability. Our current estimate of the withdrawal liability is based on the fact that a mass withdrawal from the UFCW Midwest Plan has not occurred and our management’s belief that a mass withdrawal liability is remote. We are also disputing in arbitration certain factors used to determine the allocation of the unfunded vested benefits and therefore the annual pension payment installments due to the UFCW Midwest Plan. Our estimated liability reflects our best estimate of the probable outcome of this arbitration. Based on the current facts and circumstances, we believe it is reasonably possible that the estimated liability could change from the amount currently recorded as a result of the arbitration, but because our management believes that a mass withdrawal from the UFCW Midwest Plan is remote, it believes the payment of the maximum liability of approximately $510 million is also remote. The amount of the withdrawal liability recorded as of February 25, 2017 with respect to the Dominick’s division was $180.1 million, primarily reflecting minimum required payments made subsequent to the date of consummation of the Safeway acquisition.

On July 19, 2015, A&P filed a Chapter 11 petition in the United States Bankruptcy Court. Our company and A&P participated in four of the same multiemployer pension plans. The bankruptcy of A&P adversely affected the funding of these pension plans. Our subsidiary, Acme Markets, Inc. (“Acme Markets”), purchased 73 A&P stores. We purchased some but not all of the A&P stores that have contribution obligations to the four plans. A&P and Acme Markets represented the substantial majority of all contributions to one of these plans (although there are approximately eight other contributing employers) and that plan’s unfunded actuarial accrued liability is included in our estimate of $3.5 billion for the company’s share of underfunding of multiemployer plans as of February 25, 2017. The $3.5 billion estimate does not include liabilities associated with former A&P employees in the other three plans to which we and A&P contributed or the other five plans to which some of the A&P stores that we purchased contributed because data on such liabilities is not yet available. Based on prior estimates of such liabilities, which were estimated to be $53 million, the inclusion of such liabilities would not change the $3.5 billion estimate. It is likely the A&P stores we did not purchase have withdrawn from these other plans because no entity purchased them or the stores were sold to a buyer who is not obligated to contribute to the plans; therefore, our contingent liability for the underfunding of these plans likely increased further because liability for the plans’ underfunding shifted to the remaining employers in each of the plans.

See Note 14—Employee Benefit Plans and Collective Bargaining Agreements in our consolidated financial statements, included elsewhere in this prospectus, for more information relating to our participation in these multiemployer pension plans.

 

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Unfavorable changes in government regulation may have a material adverse effect on our business.

Our stores are subject to various federal, state, local and foreign laws, regulations and administrative practices. We must comply with numerous provisions regulating health and sanitation standards, food labeling, energy, environmental, equal employment opportunity, minimum wages and licensing for the sale of food, drugs and alcoholic beverages. We cannot predict either the nature of future laws, regulations, interpretations or applications, or the effect either additional government laws, regulations or administrative procedures, when and if promulgated, or disparate federal, state, local and foreign regulatory schemes would have on our future business. In addition, regulatory changes could require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. Any or all of such requirements could have an adverse effect on our business.

The minimum wage continues to increase and is subject to factors outside of our control. Changes to wage regulations could have an impact on our future results of operations.

A considerable number of our employees are paid at rates related to the federal minimum wage. Additionally, many of our stores are located in states, including California, where the minimum wage is greater than the federal minimum wage and where a considerable number of employees receive compensation equal to the state’s minimum wage. For example, as of September 9, 2017, we employed approximately 71,000 associates in California, where the current minimum wage was recently increased to $10.50 per hour effective January 1, 2017, and will gradually increase to $15.00 per hour by January 1, 2022. In Maryland, where we employed approximately 8,100 associates as of September 9, 2017, the minimum wage was recently increased to $9.25 per hour, and will increase to $10.10 per hour on July 1, 2018. Moreover, municipalities may set minimum wages above the applicable state standards. For example, the minimum wage in Seattle, Washington, where we employed approximately 1,700 associates as of September 9, 2017, was recently increased to $15.00 per hour effective January 1, 2017 for employers with more than 500 employees nationwide. In Chicago, Illinois, where we employed approximately 6,000 associates as of September 9, 2017, the minimum wage was recently increased to $11.00 per hour, and will gradually increase to $13.00 per hour by July 1, 2019. Any further increases in the federal minimum wage or the enactment of additional state or local minimum wage increases could increase our labor costs, which may adversely affect our results of operations and financial condition.

The food retail industry is labor intensive. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of qualified persons in the workforce in the local markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment and labor laws. Such laws related to employee hours, wages, job classification and benefits could significantly increase operating costs. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service to suffer, while increasing wages for our employees could cause our profit margins to decrease. If we are unable to hire and retain employees capable of meeting our business needs and expectations, our business and brand image may be impaired. Any failure to meet our staffing needs or any material increase in turnover rates of our employees may adversely affect our business, results of operations and financial condition.

Our historical financial statements may not be indicative of future performance.

In light of our acquisitions of NAI in March 2013, United in December 2013, and Safeway in January 2015, our operating results for periods prior to fiscal 2015 only reflect the impact of those

 

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acquisitions from those respective dates, and therefore comparisons with prior periods are difficult. As a result, our limited historical financial performance as owners of NAI, United and Safeway may make it difficult for stockholders to evaluate our business and results of operations to date and to assess our future prospects and viability. Furthermore, given the nature of the assets acquired, our recent operating history has resulted in revenue and profitability growth rates that may not be indicative of our future results of operations.

In addition, Safeway completed the distribution of its remaining shares of Blackhawk Network Holdings, Inc. (“Blackhawk”) in April 2014, the sale of the net assets of Canada Safeway Limited in November 2013 and closed or sold its Dominick’s stores in the fourth quarter of 2013. In addition, Property Development Centers, LLC (“PDC”) was sold in December 2014, and Safeway’s 49% interest (the “Casa Ley Interest”) in Casa Ley, S.A. de C.V. (“Casa Ley”), a Mexico-based food and general merchandise retailer that we are in the process of attempting to divest, with the net proceeds of such divestiture expected to be paid to Safeway’s former stockholders.

As a result of the foregoing transactions and the implementation of new business initiatives and strategies, our historical results of operations are not necessarily indicative of our ongoing operations and the operating results to be expected in the future.

Our unaudited pro forma financial information may not be representative of our future results.

The pro forma financial information included in this prospectus does not purport to be indicative of the financial information that will result from our future operations. In addition, the pro forma financial information presented in this prospectus is based in part on certain assumptions that we believe are reasonable. We cannot assure you that our assumptions will prove to be accurate over time. Accordingly, the pro forma financial information included in this prospectus does not purport to be indicative of what our results of operations and financial condition will be in the future.

Unfavorable changes in, failure to comply with or increased costs to comply with environmental laws and regulations could adversely affect us. The storage and sale of petroleum products could cause disruptions and expose us to potentially significant liabilities.

Our operations, including our 393 fuel centers, are subject to various laws and regulations relating to the protection of the environment, including those governing the storage, management, disposal and cleanup of hazardous materials. Some environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes, impose strict, and under certain circumstances joint and several, liability for costs to remediate a contaminated site, and also impose liability for damages to natural resources.

Federal regulations under the Clean Air Act require phase out of the production of ozone-depleting refrigerants that include hydrochlorofluorocarbons, the most common of which is R-22. By 2020, production of new R-22 refrigerant gas will be completely phased out; however, recovered and recycled/reclaimed R-22 will be available for servicing systems after 2020. The company is reducing its R-22 footprint while continuing to repair leaks, thus extending the useful lifespan of existing equipment. For fiscal 2017, $15 million has been budgeted for system retrofits, and we have budgeted approximately $15 million in subsequent years. Leak repairs are part of the ongoing refrigeration maintenance budget. We may be required to spend additional capital above and beyond what is currently budgeted for system retrofits and leak repairs which could have a significant impact on our business, results of operations and financial condition.

Third-party claims in connection with releases of or exposure to hazardous materials relating to our current or former properties or third-party waste disposal sites can also arise. In addition, the presence of

 

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contamination at any of our properties could impair our ability to sell or lease the contaminated properties or to borrow money using any of these properties as collateral. The costs and liabilities associated with any such contamination could be substantial, and could have a material adverse effect on our business. Under current environmental laws, we may be held responsible for the remediation of environmental conditions regardless of whether we lease, sublease or own the stores or other facilities and regardless of whether such environmental conditions were created by us or a prior owner or tenant. In addition, the increased focus on climate change, waste management and other environmental issues may result in new environmental laws or regulations that negatively affect us directly or indirectly through increased costs on our suppliers. There can be no assurance that environmental contamination relating to prior, existing or future sites or other environmental changes will not adversely affect us through, for example, business interruption, cost of remediation or adverse publicity.

We are subject to, and may in the future be subject to, legal or other proceedings that could have a material adverse effect on us.

From time to time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims, intellectual property claims and other proceedings arising in or outside of the ordinary course of business. In addition, there are an increasing number of cases being filed against companies generally, which contain class-action allegations under federal and state wage and hour laws. We estimate our exposure to these legal proceedings and establish reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings or changes in management’s forecast assumptions or predictions, could have a material adverse impact on our results of operations.

We may be adversely affected by risks related to our dependence on IT systems. Any future changes to or intrusion into these IT systems, even if we are compliant with industry security standards, could materially adversely affect our reputation, financial condition and operating results.

We have complex IT systems that are important to the success of our business operations and marketing initiatives. If we were to experience failures, breakdowns, substandard performance or other adverse events affecting these systems, or difficulties accessing the proprietary business data stored in these systems, or in maintaining, expanding or upgrading existing systems or implementing new systems, we could incur significant losses due to disruptions in our systems and business.

Our ability to effectively manage the day-to-day business of approximately 500 Albertsons and NAI stores depends significantly on IT services and systems provided by SuperValu pursuant to two transition services agreements (the “SVU TSAs”). Prior to Albertsons’ and NAI’s transition onto Safeway’s IT systems, the failure of SuperValu’s systems to operate effectively or to integrate with other systems, or unauthorized access into SuperValu’s systems, could cause us to incur significant losses due to disruptions in our systems and business.

We receive and store personal information in connection with our marketing and human resources organizations. The protection of our customer and employee data is critically important to us. Despite our considerable efforts to secure our respective computer networks, security could be compromised, confidential information could be misappropriated or system disruptions could occur, as has occurred with a number of other retailers. If we (or through SuperValu) experience a data security breach, we could be exposed to government enforcement actions, possible assessments from the card brands if credit card data was involved and potential litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to stop shopping at our stores altogether. The loss of confidence from a data security breach involving our employees could hurt our reputation and cause employee recruiting and retention challenges.

 

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Improper activities by third parties, exploitation of encryption technology, new data-hacking tools and discoveries and other events or developments may result in future intrusions into or compromise of our networks, payment card terminals or other payment systems. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often cannot be recognized until launched against a target; accordingly, we may not be able to anticipate these frequently changing techniques or implement adequate preventive measures for all of them. Any unauthorized access into our customers’ sensitive information, or data belonging to us or our suppliers, even if we are compliant with industry security standards, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in us, and subject us to potential litigation, liability, fines and penalties and consent decrees, resulting in a possible material adverse impact on our financial condition and results of operations.

As merchants who accept debit and credit cards for payment, we are subject to the Payment Card Industry (“PCI”) Data Security Standard (“PCI DSS”) issued by the PCI Council. PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical administrative and technical storage, processing and transmission of individual cardholder data. By accepting debit cards for payment, we are also subject to compliance with American National Standards Institute (“ANSI”) data encryption standards and payment network security operating guidelines. In addition, we are required to comply with PCI DSS version 3.1 for our 2016 assessment, and are replacing or enhancing our in-store systems to comply with these standards. Failure to be PCI compliant or to meet other payment card standards may result in the imposition of financial penalties or the allocation by the card brands of the costs of fraudulent charges to us. Despite our efforts to comply with these or other payment card standards and other information security measures, we cannot be certain that all of our (or through SuperValu) IT systems will be able to prevent, contain or detect all cyber-attacks or intrusions from known malware or malware that may be developed in the future. To the extent that any disruption results in the loss, damage or misappropriation of information, we may be adversely affected by claims from customers, financial institutions, regulatory authorities, payment card associations and others. In addition, the cost of complying with stricter privacy and information security laws and standards, including PCI DSS version 3.1 and ANSI data encryption standards, could be significant.

Furthermore, on October 1, 2015, the payment card industry began to shift liability for certain transactions to retailers who are not able to accept Europay, Mastercard, and Visa (“EMV”) chip card transactions (the “EMV Liability Shift”). We are currently in the process of implementing EMV chip card technology in our stores. Before the implementation of EMV chip card technology is completed by our company, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, which could have an adverse effect on our business, financial condition or cash flows.

Termination of the SuperValu transition services agreement or the failure of SuperValu to perform its obligations thereunder could adversely affect our business, financial results and financial condition.

Our ability to effectively monitor and control the operations of Albertsons and NAI depends to a large extent on the proper functioning of our IT and business support systems. In connection with our acquisition of NAI, Albertsons and NAI each entered into a comprehensive transition services agreement with SuperValu. Pursuant to the SVU TSAs, Albertsons and NAI each pay fees to SuperValu for certain services, including back office, administrative, IT, procurement, insurance and accounting services. The SVU TSAs limit the liability of SuperValu to instances in which SuperValu has committed gross negligence in regard to the provision of services or has breached its obligations under the SVU TSAs. The SVU TSAs terminated and replaced a transition services agreement providing for substantially similar services, which we had previously entered into with SuperValu in connection with our June 2006 acquisition of the Legacy Albertsons Stores. We are dependent upon SuperValu to continue to provide these services to Albertsons and NAI until we transition Albertsons and NAI onto

 

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Safeway’s IT system and otherwise replace SuperValu as a service provider to Albertsons and NAI. In addition, we may depend on SuperValu to manage IT services and systems for additional stores we acquire, including the A&P stores we have acquired, until we are able to transition such stores onto Safeway’s IT system. The failure by SuperValu to perform its obligations under the SVU TSAs prior to Albertsons’ and NAI’s transition onto Safeway’s IT systems and to other service providers (external or internal) could adversely affect our business, financial results, prospects and results of operations.

On October 17, 2017, Albertsons and NAI entered into wind-down agreements with SuperValu providing for, among other things, the termination of the SVU TSAs on September 21, 2018 (the “TSA Termination Date”). Although we expect to complete the transition of the properties covered by the SVU TSAs onto Safeway’s IT systems prior to the TSA Termination Date, we may suffer disruptions as part of that process. As a result, if we are unable to complete the transition of certain properties by the TSA Termination Date, we will be required to pay SuperValu additional fees under the wind-down agreements and remain dependent upon SuperValu to provide these services until our transition is complete.

Furthermore, SuperValu manages and operates NAI’s distribution center located in the Lancaster, Pennsylvania area. Under the Lancaster Agreement (as defined herein), SuperValu supplies NAI’s Acme and Shaw’s stores from the distribution center under a shared costs arrangement. The failure by SuperValu to perform its obligations under the Lancaster Agreement could adversely affect our business, financial results and financial condition.

Our third-party IT services provider discovered unauthorized computer intrusions in 2014. These intrusions could adversely affect our brands and could discourage customers from shopping in our Albertsons and NAI stores.

Our third-party IT services provider for Albertsons and NAI, SuperValu, informed us in the summer of 2014 that it discovered unlawful intrusions to approximately 800 Shaw’s, Star Market, Acme, Jewel-Osco and Albertsons banner stores in an attempt to obtain payment card data. We have contacted the appropriate law enforcement authorities regarding these incidents and have coordinated with our merchant bank and payment processors to address the situation. We maintain insurance to address potential liabilities for cyber risks and, in the case of Albertsons and NAI, are self-insured for cyber risks for periods prior to August 11, 2014. We have also notified our various insurance carriers of these incidents and are providing further updates to the carriers as the investigation continues.

We believe the intrusions may have been an attempt to collect payment card data. The unlawful intrusions have given rise to putative class action litigation complaints against SuperValu and our company on behalf of customers. The class action complaints were dismissed without prejudice on January 7, 2016. The plaintiffs filed a motion to alter or amend the court’s judgment, which was denied on April 20, 2016. The court also denied leave to amend the complaint. On May 18, 2016, the plaintiffs filed a notice of appeal to the Eighth Circuit and defendants filed a cross-appeal. In a decision dated August 30, 2017, the Eighth Circuit Court of Appeals reversed the District Court’s dismissal of the case as to one of the 16 named plaintiffs, affirmed the dismissal as to the remaining 15 plaintiffs and remanded the case to the District Court for further proceedings. On November 3, 2017, we filed a motion to dismiss with respect to the remaining plaintiff’s claim on the basis that the plaintiff was not a customer at any of our stores.

On October 6, 2015, we received a letter from the Office of Attorney General of the Commonwealth of Pennsylvania stating that the Illinois and Pennsylvania Attorneys General Offices are leading a multi-state group that includes the Attorneys General for 14 other states requesting specified information concerning the two data breach incidents. The multistate group has not made a monetary demand, and we are unable to estimate the possibility of or reasonable range of loss, if any. We have cooperated with the investigation. In addition, the payment card networks required that forensic investigations be conducted of the intrusions. The forensic firm retained by us to conduct an investigation has issued separate reports for each intrusion (copies of which have been provided to the payment card networks).

 

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In both reports, the forensic firm found that not all of the PCI DSS standards had been met at the time of the intrusions and that some of this non-compliance may have contributed to or caused at least some portion of the compromise that occurred during the intrusions. On August 5, 2016, we were notified that MasterCard had asserted its initial assessment for incremental counterfeit fraud losses and non-ordinary course expenses (such as card reissuance costs) as well as its case management assessment. We believe it is probable that the other payment card networks will make claims against us. If other payment card networks assert claims against us, we currently intend to dispute those claims and assert available defenses. At the present time, we believe that it is probable that we will incur a loss in connection with the claims or potential claims from the payment card networks. On December 5, 2016, we were further notified that MasterCard has asserted its final assessment of approximately $6.0 million, which we paid on December 9, 2016; however we dispute the MasterCard assessment and, on March 10, 2017, filed a lawsuit against MasterCard seeking recovery of the assessment. On May 5, 2017, MasterCard filed a motion to dismiss the litigation. In a decision dated August 25, 2017, the court denied MasterCard’s motion. We have recorded an estimated liability for probable losses that we expect to incur in connection with the claims or potential claims to be made by the payment card networks. The estimated liability is based on information currently available to us and may change as new information becomes available or if other payment card networks assert their claims against us. We will continue to evaluate information as it becomes available and will record an estimate of additional loss, if any, when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. Currently, the potential range of any loss above our currently recorded amount cannot be reasonably estimated given no claims have been asserted to date by the payment card networks other than MasterCard and because significant factual and legal issues remain unresolved. On October 20, 2015, we agreed with one of our third-party payment administrators to provide a $15 million letter of credit to cover any claims from the payment card networks and to maintain a minimum level of card processing until the potential claims from the payment card networks are resolved.

There can be no assurance that we will not suffer a similar criminal attack in the future or that unauthorized parties will not gain access to personal information of our customers. While we have recently implemented additional security software and hardware designed to provide additional protections against unauthorized intrusions, there can be no assurance that unauthorized individuals will not discover a means to circumvent our security. Computer intrusions could adversely affect our brands, have caused us to incur legal and other fees, may cause us to incur additional expenses for additional security measures and could discourage customers from shopping in our stores.

Two of our insurance carriers have denied our claim for cyber insurance coverage for losses resulting from the intrusions based on, among other things, the insurers’ conclusions that the intrusions began prior to the start date for coverage under the cyber insurance policy. We responded to the insurers’ denials disagreeing with the conclusions and reserving our rights. Our claims with other of our insurance carriers remain outstanding.

We use a combination of insurance and self-insurance to address potential liabilities for workers’ compensation, automobile and general liability, property risk (including earthquake and flood coverage), director and officers’ liability, employment practices liability, pharmacy liability and employee health care benefits.

We use a combination of insurance and self-insurance to address potential liabilities for workers’ compensation, automobile and general liability, property risk (including earthquake and flood coverage), director and officers’ liability, employment practices liability, pharmacy liability and employee health care benefits and cyber and terrorism risks. We estimate the liabilities associated with the risks retained by us, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.

 

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The majority of our workers’ compensation liability is from claims occurring in California. California workers’ compensation has received intense scrutiny from the state’s politicians, insurers, employers and providers, as well as the public in general.

Our long-lived assets, primarily goodwill and store-level assets, are subject to periodic testing for impairment.

Our long-lived assets, primarily goodwill and store-level assets, are subject to periodic testing for impairment. We have incurred significant impairment charges to earnings in the past. Long-lived asset impairment charges were $62.0 million, $46.6 million, $40.2 million and $266.9 million in the first 28 weeks of fiscal 2017, fiscal 2016, fiscal 2015 and fiscal 2014, respectively. Failure to achieve sufficient levels of cash flow at reporting units and at store-level could result in impairment charges on long-lived assets. During the second quarter of fiscal 2017, we recorded a goodwill impairment loss of $142.3 million. The annual evaluation of goodwill performed for our reporting units during the fourth quarters of fiscal 2016, fiscal 2015 and fiscal 2014 did not result in impairment.

Our operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store, transport and sell products.

Our operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store, transport and sell products. Energy and fuel costs are influenced by international, political and economic circumstances and have experienced volatility over time. To reduce the impact of volatile energy costs, we have entered into contracts to purchase electricity and natural gas at fixed prices to satisfy a portion of our energy needs. We also manage our exposure to changes in energy prices utilized in the shipping process through the use of short-term diesel fuel derivative contracts. Volatility in fuel and energy costs that exceeds offsetting contractual arrangements could adversely affect our results of operations.

We may have liability under certain operating leases that were assigned to third parties.

We may have liability under certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, we could be responsible for the lease obligation.

For example, in connection with FTC-mandated divestitures, we assigned leases with respect to 93 store properties to Haggen. On September 8, 2015, Haggen commenced a case under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. In November 2015, we participated in Haggen’s bankruptcy auction for its non-core stores, and after additional negotiations with Haggen and having received FTC and state attorneys general clearance and Bankruptcy Court approval, we acquired 35 stores for approximately $33 million, including 19 assigned store leases. We previously assigned 42 leases to Haggen that were acquired by other retailers or by landlords in the auction, and three others were modified during the bankruptcy process, eliminating our contingent lease liability. Haggen conducted a subsequent sale process with respect to its 33 core stores, which resulted in the sale to us of 29 stores (including eight leases previously assigned by us to Haggen) for an aggregate purchase price of approximately $114 million, including the cost of acquired inventory. Haggen rejected, in its bankruptcy case, 11 leases for which we have contingent lease liability, one of which has now expired. As a result of the rejections, we recorded a loss of $32.2 million for this contingent liability, of which $30.6 million was recorded during fiscal 2015 and $1.6 million was recorded in the first quarter of fiscal 2016.

With respect to other leases we have assigned to third parties (including the leases Haggen had acquired from us but assigned to other retailers in its bankruptcy), because of the wide dispersion among third parties and the variety of remedies available, we believe that if an assignee became

 

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insolvent it would not have a material effect on our financial condition, results of operations or cash flows. No liability has been recorded for assigned leases in our consolidated balance sheet related to these contingent obligations.

We may be unable to attract and retain key personnel, which could adversely impact our ability to successfully execute our business strategy.

The continued successful implementation of our business strategy depends in large part upon the ability and experience of members of our senior management. In addition, our performance is dependent on our ability to identify, hire, train, motivate and retain qualified management, technical, sales and marketing and retail personnel. We cannot assure you that we will be able to retain such personnel on acceptable terms or at all. If we lose the services of members of our senior management or are unable to continue to attract and retain the necessary personnel, we may not be able to successfully execute our business strategy, which could have an adverse effect on our business.

Risks Related to the Safeway, A&P and Haggen Acquisitions and Integration

We may not be able to successfully integrate and combine Safeway with Albertsons and NAI, which could cause our business to suffer.

We may not be able to successfully integrate and combine the operations, management, personnel and technology of Safeway with the operations of Albertsons and NAI. If the integration is not managed successfully by our management, we may experience interruptions in our business activities, a deterioration in our employee and customer relationships, increased costs of integration and harm to our reputation with consumers, all of which could have a material adverse effect on our business. We may also experience difficulties in combining corporate cultures, maintaining employee morale and retaining key employees. In addition, the integration of our businesses will impose substantial demands on our management. There is no assurance that the benefits of consolidation will be achieved as a result of the Safeway acquisition or that our businesses will be successfully integrated in a timely manner.

We may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the Safeway acquisition.

Although we currently expect to achieve annual synergies from the Safeway acquisition of approximately $800 million by the end of fiscal 2018, with associated one-time costs of approximately $1.3 billion, or approximately $840 million, net of estimated synergy-related asset sale proceeds, inclusion of the projected synergies in this prospectus should not be viewed as a representation that we in fact will achieve this annual synergy target by the end of fiscal 2018, or at all. Although we currently expect to achieve synergies from the Safeway acquisition of approximately $675 million during fiscal 2017, or approximately $750 million on an annual run-rate basis by the end of fiscal 2017, the inclusion of these expected synergy targets in this prospectus should not be viewed as a representation that we will in fact achieve these synergies by the end of fiscal 2017, or at all. To the extent we fail to achieve these synergies, our results of operations may be impacted, and any such impact may be material.

We have identified various synergies including corporate and division overhead savings, our own brands, vendor funds, the conversion of Albertsons and NAI onto Safeway’s IT systems, marketing and advertising cost reduction and operational efficiencies within our back office, distribution and manufacturing organizations. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from these estimates, and we cannot assure you that we will achieve the full amount of synergies on the schedule anticipated, or at all, or that these synergy programs will not have other adverse effects on our business. In light of these significant uncertainties, you should not place undue reliance on our estimated synergies.

 

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We have incurred, and will continue to incur, significant integration costs in connection with Safeway.

We expect that we will continue to incur a number of costs associated with integrating the operations of Safeway, including associated one-time costs of approximately $1.3 billion, or approximately $840 million, net of estimated synergy-related asset sale proceeds, to achieve expected synergies. The substantial majority of these costs will be non-recurring expenses resulting from the Safeway acquisition and will consist of our transition of Albertsons and NAI to Safeway’s IT systems, consolidation costs and employment-related costs. Achieved synergies required approximately $250 million and $105 million of one-time integration-related capital expenditures in fiscal 2016 and the first two quarters of fiscal 2017, respectively, and anticipated synergies are expected to require approximately $95 million of one-time integration-related capital expenditures during the remainder of fiscal 2017. Additional unanticipated costs may be incurred in the integration of Safeway’s business and proceeds from the sale of surplus assets may be lower than anticipated. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

New business initiatives and strategies may be less successful than anticipated and could adversely affect our business.

The introduction, implementation, success and timing of new business initiatives and strategies, including, but not limited to, initiatives to increase revenue or reduce costs, may be less successful or may be different than anticipated, which could adversely affect our business.

We will be required to make payments under the contingent value rights within agreed periods even if the sale of the Casa Ley Interest is not completed within those periods.

If the Casa Ley Interest is not sold prior to January 30, 2018, we are obligated to make a cash payment to the holders of contingent value rights (the “CVRs”) in an amount equal to the fair market value of the unsold Casa Ley Interest, minus certain fees, expenses and assumed taxes that would have been deducted from the proceeds of a sale of the Casa Ley Interest. The sale process for the Casa Ley Interest will be conducted by a committee, or person controlled by a committee, as representative of the former Safeway stockholders, and we cannot control such sales process. If we are required to make a payment under the contingent value rights agreement with respect to the CVRs, our liquidity may be adversely affected.

We have not provided any detailed financial information with respect to A&P or Haggen or any pro forma information reflecting the A&P Transaction or the Haggen Transaction in this prospectus.

Pursuant to applicable Securities and Exchange Commission (“SEC”) rules, this prospectus does not include or incorporate by reference any detailed financial information with respect to the assets acquired pursuant to the A&P Transaction or the Haggen Transaction for periods prior to the transactions. In addition, in accordance with applicable SEC rules, we are not required to provide and have not provided any pro forma information giving effect to these transactions. A&P’s and Haggen’s financial condition and results of operations for periods prior to their entry into bankruptcy are of limited utility in assessing the potential impact of the A&P Transaction and the Haggen Transaction on our financial condition because we have purchased only certain assets and assumed only certain liabilities of A&P and Haggen.

 

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We have incurred and expect to incur significant acquisition-related costs in connection with the A&P Transaction and the Haggen Transaction.

We have incurred and expect to incur a number of costs associated with integrating the operations of the acquired A&P and Haggen stores. The amount of one-time opening and transition costs required to improve store conditions and reposition the 137 stores we acquired from A&P and Haggen is greater on a per store basis than our previous acquisitions. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the acquired A&P and Haggen stores, may offset these costs over time, this net benefit may not be achieved in the near term, or at all.

Risks Relating to Our Indebtedness

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.

We have a significant amount of indebtedness. As of September 9, 2017, we had $11.4 billion of debt outstanding, and we would have been able to borrow an additional $3.0 billion under our ABL Facility (as defined herein).

Our substantial indebtedness could have important consequences to you. For example, it could:

 

    adversely affect the market price of our common stock;

 

    increase our vulnerability to general adverse economic and industry conditions;

 

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions;

 

    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

    place us at a competitive disadvantage compared to our competitors that have less debt; and

 

    limit our ability to borrow additional funds.

In addition, we cannot assure you that we will be able to refinance any of our debt or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as:

 

    sales of assets;

 

    sales of equity; or

 

    negotiations with our lenders to restructure the applicable debt.

Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options.

Despite our significant indebtedness levels, we may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the credit agreements that govern the ABL Facility and the Term Loan Facilities (as defined herein and, together with the ABL Facility, the “Senior Secured Credit Facilities”) and the

 

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indentures that govern the NAI Notes (as defined herein), the Safeway Notes and the ACL Notes (as defined herein) permit us to incur significant additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See “Description of Indebtedness.”

Our debt instruments limit our flexibility in operating our business.

Our debt instruments contain various covenants that limit our and our restricted subsidiaries’ ability to engage in specified types of transactions, including, among other things:

 

    incur additional indebtedness or provide guarantees in respect of obligations of other persons, or issue disqualified or preferred stock;

 

    pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

    prepay, redeem or repurchase debt;

 

    make loans, investments and capital expenditures;

 

    sell or otherwise dispose of certain assets;

 

    incur liens;

 

    engage in sale and leaseback transactions;

 

    restrict dividends, loans or asset transfers from our subsidiaries;

 

    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

    enter into a new or different line of business; and

 

    enter into certain transactions with our affiliates.

A breach of any of these covenants could result in a default under our debt instruments. In addition, any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions. In addition, the restrictive covenants in the revolving portion of our Senior Secured Credit Facilities require us, in certain circumstances, to maintain a specific fixed charge coverage ratio. Our ability to meet that financial ratio can be affected by events beyond our control, and we cannot assure you that we will meet it. A breach of this covenant could result in a default under our Senior Secured Credit Facilities. Moreover, the occurrence of a default under our Senior Secured Credit Facilities could result in an event of default under our other indebtedness. Upon the occurrence of an event of default under our Senior Secured Credit Facilities, the lenders could elect to declare all amounts outstanding under our Senior Secured Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us. See “Description of Indebtedness.”

We may not have the ability to raise the funds necessary to finance the change of control offer required by the indentures governing the 2019 Safeway Notes, the 2020 Safeway Notes, the 2021 Safeway Notes (each as defined herein) and the ACL Notes (collectively, the “CoC Notes”).

Upon the occurrence of certain kinds of change of control events, we will be required to offer to repurchase outstanding CoC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of the CoC Notes or that restrictions in our debt instruments will not allow such repurchases. Our failure to purchase the tendered notes would constitute an event of default under the indentures governing the CoC Notes which, in turn, would

 

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constitute a default under our Senior Secured Credit Facilities. In addition, the occurrence of a change of control would also constitute a default under our Senior Secured Credit Facilities. A default under our Senior Secured Credit Facilities would result in a default under our indentures if the lenders accelerate the debt under our Senior Secured Credit Facilities.

Moreover, our debt instruments restrict, and any future indebtedness we incur may restrict, our ability to repurchase the notes, including following a change of control event. As a result, following a change of control event, we may not be able to repurchase the CoC Notes unless we first repay all indebtedness outstanding under our Senior Secured Credit Facilities and any of our other indebtedness that contains similar provisions, or obtain a waiver from the holders of such indebtedness to permit us to repurchase the CoC Notes. We may be unable to repay all of that indebtedness or obtain a waiver of that type. Any requirement to offer to repurchase the outstanding CoC Notes may therefore require us to refinance our other outstanding debt, which we may not be able to do on commercially reasonable terms, if at all. These repurchase requirements may also delay or make it more difficult for others to obtain control of us.

Substantially all of our assets are pledged as collateral under the Senior Secured Credit Facilities.

As of September 9, 2017, our total indebtedness was approximately $11.4 billion, including $5.7 billion outstanding under our Senior Secured Credit Facilities. In addition, as of September 9, 2017, we had $636.2 million of outstanding standby letters of credit under our Senior Secured Credit Facilities. Substantially all of our and our subsidiaries’ assets are pledged as collateral for this indebtedness. As of September 9, 2017, our ABL Facility would have permitted additional borrowings of up to a maximum of $3.0 billion under the borrowing bases as of that date. If we are unable to repay all secured borrowings under our Senior Secured Credit Facilities when due, whether at maturity or if declared due and payable following a default, the administrative agents or the lenders, as applicable, would have the right to proceed against the collateral pledged to secure the indebtedness and may sell the assets pledged as collateral in order to repay those borrowings, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Increases in interest rates and/or a downgrade of our credit ratings could negatively affect our financing costs and our ability to access capital.

We have exposure to future interest rates based on the variable rate debt under our credit facilities and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through the use of various committed lines of credit. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results.

We rely on access to bank and capital markets as sources of liquidity for cash requirements not satisfied by cash flows from operations. A downgrade in our credit ratings from the internationally recognized credit rating agencies could negatively affect our ability to access the bank and capital markets, especially in a time of uncertainty in either of those markets. A rating downgrade could also impact our ability to grow our business by substantially increasing the cost of, or limiting access to, capital.

 

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Risks Related to This Offering and Owning Our Common Stock

There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity. If the stock price fluctuates after this offering, you could lose a significant part of your investment.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling shares of our common stock that you buy. The initial public offering price for the shares will be determined by negotiations between us, the selling stockholders and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. The market price of our common stock may be influenced by many factors, some of which are beyond our control, including:

 

    the failure of securities analysts to cover our common stock after this offering, or changes in financial estimates by analysts;

 

    changes in, or investors’ perception of, the food and drug retail industry;

 

    the activities of competitors;

 

    future issuances and sales of our common stock, including in connection with acquisitions;

 

    our quarterly or annual earnings or those of other companies in our industry;

 

    the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

    regulatory or legal developments in the United States;

 

    litigation involving us, our industry, or both;

 

    general economic conditions; and

 

    other factors described elsewhere in these “Risk Factors.”

As a result of these factors, you may not be able to resell your shares of our common stock at or above the initial offering price. In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.

The Cerberus-led Consortium controls us and may have conflicts of interest with other stockholders in the future.

After the completion of this offering, and assuming an offering of              shares by the selling stockholders at an initial public offering price of $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, the Cerberus-led Consortium will indirectly control approximately     % of our common stock (or     % if the underwriters exercise in full their option to purchase additional shares). As a result, the Cerberus-led Consortium will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Eight of our 13 directors are either employees of, or advisors to, members of the Cerberus-led Consortium, as described under “Management.” The Cerberus-led Consortium, through Albertsons Investor and Kimco, will also have sufficient voting power to amend our organizational documents. The interests of the Cerberus-led Consortium may not

 

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coincide with the interests of other holders of our common stock. Additionally, Cerberus and the members of the Cerberus-led Consortium are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus and the members of the Cerberus-led Consortium may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as the Cerberus-led Consortium continues to own a significant amount of the outstanding shares of our common stock through Albertsons Investor and Kimco, the Cerberus-led Consortium will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions.

We will incur increased costs as a result of being a publicly traded company.

After the completion of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations of the stock market on which our common stock is traded. Being subject to these rules and regulations will result in additional legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place significant strain on management, systems and resources.

These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

We are a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Upon completion of this offering, Albertsons Investor, Kimco and Management Holdco, as a group, will control a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NYSE rules. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

    the requirement that a majority of the board of directors consist of independent directors;

 

    the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

    the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation

 

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committees consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.

We are currently not required to meet the standards required by Section 404 of the Sarbanes-Oxley Act (“Section 404”), and failure to meet and maintain effective internal control over financial reporting in accordance with Section 404 could have a material adverse effect on our business, financial condition and results of operations.

As a privately held company, we are not currently required to document or test our compliance with internal controls over financial reporting on a periodic basis in accordance with Section 404. We are in the process of addressing our internal control procedures to satisfy the requirements of Section 404, which requires an annual management assessment of the effectiveness of our internal control over financial reporting. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to attest to the effectiveness of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we may be unable to report our financial information on a timely basis, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules and may breach the covenants under our credit facilities. We will be unable to issue securities in the public markets through the use of a shelf registration statement if we are not in compliance with the applicable provisions of Section 404. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.

In addition, we may incur additional costs in order to improve our internal control over financial reporting and comply with Section 404, including increased auditing and legal fees and costs associated with hiring additional accounting and administrative staff.

Provisions in our charter documents, certain agreements governing our indebtedness, the Stockholders’ Agreement and Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

Provisions in our certificate of incorporation and, upon the completion of the IPO-Related Transactions, our bylaws, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock.

In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows:

 

   

from and after such date that Albertsons Investor, Kimco, Management Holdco and their respective Affiliates (as defined in Rule 12b-2 of the Exchange Act), or any person who is an express assignee or designee of Albertsons Investor, Kimco or Management Holdco’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the “Designated Controlling Stockholder”) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the “50% Trigger Date”), the authorized number of our directors may be increased or decreased only by the

 

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affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors;

 

    prior to the 50% Trigger Date, only our board of directors and the Designated Controlling Stockholder are expressly authorized to make, alter or repeal our bylaws and, from and after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote;

 

    from and after the 50% Trigger Date, the manner in which stockholders can remove directors from the board will be limited;

 

    from and after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent will be prohibited;

 

    from and after such date that Albertsons Investor, Kimco, Management Holdco and their respective Affiliates (or any person who is an express assignee or designee of Albertsons Investor, Kimco or Management Holdco’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established;

 

    limits on who may call stockholder meetings;

 

    requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder;

 

    requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and

 

    our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquiror, effectively preventing acquisitions that have not been approved by our board of directors.

Our certificate of incorporation authorizes our board of directors to issue up to 30,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights, and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent, or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control.

In addition, under the credit agreements governing our Senior Secured Credit Facilities, a change in control may lead the lenders to exercise remedies such as acceleration of the loan, termination of their obligations to fund additional advances and collection against the collateral securing such loans. Also, under the indentures governing the CoC Notes, a change of control may require us to offer to repurchase all of the CoC Notes for cash at a premium to the principal amount of the CoC Notes.

 

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Furthermore, in connection with this offering, Albertsons Companies, Inc. will enter into the Stockholders’ Agreement with Albertsons Investor, Kimco and Management Holdco. Pursuant to the Stockholders’ Agreement, we will be required to appoint to our Board of Directors individuals designated by Albertsons Investor upon the closing of the IPO-Related Transactions. Pursuant to a limited liability company agreement entered into by the Cerberus-led Consortium, other than Kimco, and certain other individuals who agreed to co-invest with them through Albertsons Investor (the “Albertsons Investor LLC Agreement”), such appointees shall be selected by Albertsons Investor’s board of managers so long as Albertsons Companies, Inc. is a controlled company under the applicable rules of the NYSE. See “Certain Relationships and Related Party Transactions—Albertsons Investor Limited Liability Company Agreement.”

The Stockholders’ Agreement will provide that, except as otherwise required by applicable law, from the date on which (a) Albertsons Companies, Inc. is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Albertsons Investor will have the right to designate a number of individuals who satisfy the Director Requirements (as defined herein) equal to one director fewer than 50% of our board of directors at any time and shall cause its directors appointed to our board of directors to vote in favor of maintaining a 13-person board of directors unless the management board of Albertsons Investor otherwise agrees by the affirmative vote of 80% of the management board of Albertsons Investor; (b) a Holder has beneficial ownership of at least 20% but less than 35% of our outstanding common stock, the Holder will have the right to designate a number of individuals who satisfy the Director Requirements equal to the greater of three or 25% of the size of our board of directors at any time (rounded up to the next whole number); (c) a Holder has beneficial ownership of at least 15% but less than 20% of our outstanding common stock, the Holder will have the right to designate the greater of two or 15% of the size of our board of directors at any time (rounded up to the next whole number); and (d) a Holder has beneficial ownership of at least 10% but less than 15% of our outstanding common stock, it will have the right to designate one individual who satisfies the Director Requirements. The ability of Albertsons Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

 

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If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline.

If our Existing Owners sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decrease. The perception in the public market that our Existing Owners might sell shares of common stock could also create a perceived overhang and depress our market price. Upon completion of this offering, we will have 409,832,959 shares of common stock outstanding of which              shares will be held by our Existing Owners (assuming an initial public offering price of $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, and that the underwriters do not exercise their option to purchase additional shares from the selling stockholders). Prior to this offering, we, our independent directors and our Existing Owners will have agreed with the underwriters to a “lock-up” period, meaning that such parties may not, subject to certain exceptions, sell any of their existing shares of our common stock without the prior written consent of representatives of the underwriters for at least 180 days after the date of this prospectus. Pursuant to this agreement, among other exceptions, we may enter into an agreement providing for the issuance of our common stock in connection with the acquisition, merger or joint venture with another publicly traded entity during the 180-day restricted period after the date of this prospectus. In addition, all of our Existing Owners and independent directors will be subject to the holding period requirement of Rule 144 (“Rule 144”) under the Securities Act, as described in “Shares Eligible for Future Sale.” When the lock-up agreements expire, these shares will become eligible for sale, in some cases subject to the requirements of Rule 144.

In addition, the Cerberus-led Consortium, through Albertsons Investor, will have substantial demand and incidental registration rights, as described in “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.” The market price for shares of our common stock may drop when the restrictions on resale by our Existing Owners and independent directors lapse. We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our 2015 Equity and Incentive Award Plan (the “2015 Incentive Plan”) and our Restricted Stock Unit Plan (the “Restricted Stock Unit Plan”). Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover     % of the shares of our common stock that will be available as of the consummation of this offering. A decline in the market price of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common shares, the market price of our common stock could decline.

The trading market for our common shares likely will be influenced by the research and reports that equity and debt research analysts publish about the industry, us and our business. The market price of our common stock could decline if one or more securities analysts downgrade our shares or if those analysts issue a sell recommendation or other unfavorable commentary or cease publishing reports about us or our business. If one or more of the analysts who elect to cover us downgrade our shares, the market price of our common stock would likely decline.

Because we do not intend to pay dividends for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We do not intend to pay dividends for the foreseeable future, and our stockholders will not be guaranteed, or have contractual or other rights, to receive dividends. Our board of directors may, in its

 

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discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors.

In addition, we are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries’ ability to pay dividends is restricted by agreements governing their debt instruments, and may be restricted by agreements governing any of our subsidiaries’ future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See “Description of Indebtedness.”

Under the DGCL, our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

You may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise.

After this offering, we will have              shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved up to     % of the shares of our common stock that will be available as of the consummation of this offering for issuance under existing restricted stock unit awards (following the conversion of our outstanding Phantom Unit awards granted under our Phantom Unit Plan (as defined herein)) and for future awards that may be issued under our 2015 Incentive Plan. See “Executive Compensation—Incentive Plans” and “Shares Eligible for Future Sale—Incentive Plans.” Any common stock that we issue, including under our 2015 Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and we are currently participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions, and none are currently probable, but any pending transaction could be entered into as soon as shortly after the closing of this offering. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future operating results and financial position, business strategy, and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

    the competitive nature of the industry in which we conduct our business;

 

    general business and economic conditions, including the rate of inflation or deflation, consumer spending levels, population, employment and job growth and/or losses in our markets;

 

    failure to successfully integrate Safeway or achieve anticipated synergies from the acquisition and integration of Safeway;

 

    failure to successfully integrate the acquired A&P and Haggen stores;

 

    failure to successfully integrate future acquisitions or to achieve anticipated synergies from the integration of future acquisitions;

 

    pricing pressures and competitive factors, which could include pricing strategies, store openings, remodels or acquisitions by our competitors;

 

    our ability to increase identical store sales, expand our own brands, maintain or improve operating margins, revenue and revenue growth rate, control or reduce costs, improve buying practices and control shrink;

 

    labor costs, including benefit plan costs and severance payments, or labor disputes that may arise from time to time and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future;

 

    disruptions in our manufacturing facilities’ or distribution centers’ operations, disruption of significant supplier relationships, or disruptions to our produce or product supply chains;

 

    results of any ongoing litigation in which we are involved or any litigation in which we may become involved;

 

    data security, or the failure of our (or through SuperValu) IT systems;

 

    increased costs as the result of being a public company;

 

    the effects of government regulation;

 

    our ability to raise additional capital to finance the growth of our business, including to fund acquisitions;

 

    our ability to service our debt obligations, and restrictions in our debt agreements;

 

    financing sources;

 

    dividends; and

 

    plans for future growth and other business development activities.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

 

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You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

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USE OF PROCEEDS

The selling stockholders are selling all of the shares of common stock in this offering, and we will not receive any proceeds from the sale of the shares.

 

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DIVIDEND POLICY

We do not intend to pay dividends for the foreseeable future. We are not required to pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights to receive, dividends. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, and other considerations that our board of directors deems relevant. Our board of directors may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely the payment of dividends.

The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. See “Risk Factors—Risks Related to This Offering and Owning Our Common Stock—Because we do not intend to pay dividends for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.”

We are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Following the consummation of the IPO-Related Transactions, Albertsons Companies, Inc. will be subject to restrictions under agreements governing its debt instruments and it and its subsidiaries will be subject to general restrictions imposed on dividend payments under the laws of their jurisdictions of incorporation or organization. See “Risk Factors—Risks Related to Our Indebtedness—Our debt instruments limit our flexibility in operating our business.”

 

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IPO-RELATED TRANSACTIONS AND ORGANIZATIONAL STRUCTURE

Our business is currently conducted through our operating subsidiaries, which are wholly-owned by AB Acquisition. The equity interests of AB Acquisition immediately prior to the IPO-Related Transactions were owned (directly and indirectly) by our Existing Owners and our independent directors.

Albertsons Companies, Inc. is a Delaware corporation, formed for the purpose of effecting the IPO-Related Transactions and this offering, and has engaged in no business or activities other than in connection with the IPO-Related Transactions.

In order to effectuate this offering, we expect to effect the following series of transactions prior to and/or concurrently with the closing of this offering, which will result in a reorganization of our business so that it is owned by Albertsons Companies, Inc. (together with this offering, the “IPO-Related Transactions”):

 

    our Existing Owners, other than Kimco and Management Holdco, will contribute all of their direct and indirect equity interests in AB Acquisition to Albertsons Investor, including their interests in NAI Group Holdings and Safeway Group Holdings;

 

    Albertsons Investor, Kimco and Management Holdco will contribute all of their equity interests in AB Acquisition to Albertsons Companies, Inc. in exchange for common stock of Albertsons Companies, Inc. and our independent directors will receive shares of restricted and unrestricted common stock in Albertsons Companies, Inc. in substitution for their interests in AB Acquisition;

 

    NAI Group Holdings, Safeway Group Holdings and other special purpose corporations owned by certain of the Sponsors through which they invested in AB Acquisition will be merged with and into Albertsons Companies, Inc., with Albertsons Companies, Inc. remaining as the surviving corporation in the mergers; and

 

    Certain stores owned by Albertson’s LLC will be contributed to a newly formed subsidiary, Albertson’s Stores Sub LLC, which subsidiary will be distributed to its ultimate owner AB Acquisition, AB Acquisition will transfer all of its equity interests in ACL to Albertsons Companies, Inc. and ACL will be merged with and into Albertsons Companies, Inc. with Albertsons Companies, Inc. remaining as the surviving corporation in the mergers.

As a result of the IPO-Related Transactions, (i) Albertsons Companies, Inc., the issuer of common stock in this offering, will be a holding company with no material assets other than its ownership of AB Acquisition and its subsidiaries, (ii) an aggregate of             ,              ,              and              shares of our common stock will be owned by Albertsons Investor, Kimco, Management Holdco and our independent directors, respectively, assuming that the underwriters do not exercise their option to purchase additional shares from the selling stockholders and that the common stock in this offering is offered at $             per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, and such parties will enter the Stockholders’ Agreement with Albertsons Companies, Inc., (iii) our Existing Owners, other than Kimco and Management Holdco, will become holders of equity interests in our controlling stockholder, Albertsons Investor and (iv) the capital stock of Albertsons Companies, Inc. will consist of (y) common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and (z) undesignated and unissued preferred stock. See the section of this prospectus entitled “Description of Capital Stock” for additional information. Investors in this offering will only receive, and this prospectus only describes the offering of, shares of common stock of Albertsons Companies, Inc.

 

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The following charts summarize our ownership structure (i) prior to the IPO-Related Transactions and (ii) after giving effect to the IPO-Related Transactions (assuming the common stock in this offering is offered at $         per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, before giving effect to dilution from outstanding restricted stock units and assuming no exercise of the underwriters’ option to purchase additional shares from the selling stockholders) and excluding the shares of restricted and unrestricted common stock held by our independent directors.

Ownership Structure Prior to the IPO-Related Transactions

 

 

LOGO

Ownership Structure After Giving Effect to the IPO-Related Transactions

 

 

LOGO

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 9, 2017:

 

    on an actual basis; and

 

    on a pro forma basis to reflect the IPO-Related Transactions (assuming the common stock in this offering is offered at $        per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus).

The information below is illustrative only and our capitalization following this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Selected Historical Financial Information of AB Acquisition” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 9, 2017  
     Actual     Pro Forma  
     (dollars in millions)  

Cash and cash equivalents(1)

   $ 572.2     $  
  

 

 

   

 

 

 

Debt, including current maturities, net of discounts and deferred financing costs(2)

    

ABL Facility(3)

   $     $  

Term Loan Facilities

     5,627.6       5,627.6  

ACL Notes - 2024 Notes

     1,236.5       1,236.5  

ACL Notes - 2025 Notes

     1,238.0       1,238.0  

Safeway Notes(4)

     1,266.9       1,266.9  

NAI Notes(5)

     1,530.4       1,530.4  

Capital Leases

     893.1       893.1  

Other notes payable, unsecured(6)

     111.4       111.4  

Mortgage notes payable, secured

     21.9       21.9  
  

 

 

   

 

 

 

Total Debt

   $ 11,925.8     $ 11,925.8  
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common Stock, $0.01 par value; no shares authorized, no shares issued and outstanding on an actual basis; 1,000,000,000 shares authorized, 409,832,959 shares issued and outstanding on a pro forma basis

        

Additional paid-in capital

    

Members’ investment

     1,750.3    

Accumulated other comprehensive income

     21.3    

Retained earnings/(accumulated deficit)

     (1,175.4  
  

 

 

   

 

 

 

Total members’ / stockholders’ equity

   $ 596.2     $  
  

 

 

   

 

 

 

Total capitalization

   $ 12,522.0     $  
  

 

 

   

 

 

 

 

(1) The company has agreed to pay all underwriting discounts and commissions, transfer taxes and transaction fees, if any, applicable to the sale of the common stock offered hereby and the fees and disbursements of counsel for the selling stockholders incurred in connection with the sale.
(2) Debt discounts and deferred financing costs totaled $286.6 million and $87.4 million, respectively, on an actual and pro forma basis as of September 9, 2017.
(3)

As of September 9, 2017, on an actual basis, the ABL Facility provided for a $4,000.0 million revolving credit facility. As of September 9, 2017, on an actual basis, the aggregate borrowing base on the ABL Facility was approximately $3,686.0 million, which was reduced by $636.2

 

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  million of outstanding standby letters of credit, resulting in a net borrowing base availability of approximately $3,049.8 million. See “Description of Indebtedness—ABL Facility.”
(4) Consists of the 2019 Safeway Notes, 2020 Safeway Notes, 2021 Safeway Notes, 2027 Safeway Notes and 2031 Safeway Notes (each as defined herein).
(5) Consists of the NAI Medium-Term Notes, 2026 NAI Notes, 2029 NAI Notes, 2030 NAI Notes and 2031 NAI Notes (each as defined herein).
(6) Consists of unsecured sale leaseback related financing obligations and the ASC Notes (as defined herein).

 

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DILUTION

All shares of our common stock being sold in the offering were issued and outstanding prior to this offering. As a result, this offering will not have a dilutive effect on our stockholders. Dilution results from the fact that the per share offering price of our common stock is substantially in excess of the tangible book value attributable to the existing equity holders. Our tangible book value represents the amount of total tangible assets less total liabilities, and our tangible book value per share represents tangible book value divided by the number of shares of common stock outstanding. As of September 9, 2017, our tangible book value per share of our common stock, after giving effect to the IPO-Related Transactions, was $    .

The following table summarizes, after giving effect to the IPO-Related Transactions, the number of shares of common stock purchased, the total consideration paid and the average price per share paid by the selling stockholders and by investors participating in this offering, based upon the initial public offering price of $    per share.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

                   $                   $           

Purchasers of common stock in this offering

                   $                   $           
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     409,832,959        100.0   $                     100.0   $               
  

 

 

    

 

 

   

 

 

    

 

 

   

The table above does not give effect to our reservation of up to     % of the shares of our common stock that will be available as of the consummation of this offering for issuance under existing restricted stock unit awards (following the conversion of our outstanding Phantom Unit awards granted under our Phantom Unit Plan) and for future awards that may be issued under our 2015 Incentive Plan. Any common stock that we issue, including under our 2015 Incentive Plan or other equity incentive plans that we may adopt in the future, would further dilute the percentage ownership held by the investors who purchase common stock in this offering.

 

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SELECTED HISTORICAL FINANCIAL INFORMATION OF AB ACQUISITION

The information below should be read along with “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition,” “Business” and the historical financial statements of AB Acquisition and accompanying notes included elsewhere in this prospectus. Our historical results set forth below are not necessarily indicative of results to be expected for any future period.

The selected consolidated financial information set forth below is derived from AB Acquisition’s annual consolidated financial statements for the periods indicated below, including the consolidated balance sheets at February 25, 2017, February 27, 2016 and February 28, 2015 and the related consolidated statements of operations and comprehensive (loss) income and cash flows for the 53-week period ended February 28, 2015 and each of the 52-week periods ended February 25, 2017, February 27, 2016 and February 20, 2014 and notes thereto appearing elsewhere in this prospectus. The data for the first two quarters of fiscal 2017 and the first two quarters of fiscal 2016 is derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and which, in the opinion of management, include all adjustments necessary for a fair statement of the results of the applicable interim periods.

 

    First Two Quarters                                

(in millions)

  Fiscal
2017
    Fiscal
2016
    Fiscal
2016
    Fiscal
2015
    Fiscal
2014(1)
    Fiscal
2013(2)
    Fiscal
2012
 

Results of Operations

             

Net sales and other revenue

  $ 32,291.7     $ 32,247.8     $ 59,678.2     $ 58,734.0     $ 27,198.6     $ 20,054.7     $ 3,712.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    8,788.2       8,886.9     $ 16,640.5     $ 16,061.7     $ 7,502.8     $ 5,399.0     $ 937.7  

Selling and administrative expenses

    8,769.1       8,586.3       16,000.0       15,660.0       8,152.2       5,874.1       899.0  

Goodwill impairment

    142.3                                      

Bargain purchase gain

                                  (2,005.7      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (123.2     300.6       640.5       401.7       (649.4     1,530.6       38.7  

Interest expense, net

    485.3       571.6       1,003.8       950.5       633.2       390.1       7.2  

Loss on debt extinguishment

          111.7       111.7                          

Other expense (income)

    18.9       3.5       (11.4     (7.0     96.0              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (627.4     (386.2     (463.6     (541.8     (1,378.6     1,140.5       31.5  

Income tax (benefit) expense

    (67.3     (14.5     (90.3     (39.6     (153.4     (572.6     1.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations, net of tax

    (560.1     (371.7     (373.3     (502.2     (1,225.2     1,713.1       29.8  

Income from discontinued operations, net of tax

                                  19.5       49.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (560.1   $ (371.7   $ (373.3   $ (502.2   $ (1,225.2   $ 1,732.6     $ 79.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at end of period)

             

Cash and equivalents

  $ 572.2     $ 930.6     $ 1,219.2     $ 579.7     $ 1,125.8     $ 307.0     $ 37.0  

Total assets

    22,334.5       23,773.9       23,755.0       23,770.0       25,678.3       9,281.0       586.1  

Total members’ equity (deficit)

    596.2       1,215.2       1,371.2       1,613.2       2,168.5       1,759.6       (247.2

Total debt, including capital leases

    11,925.8       12,509.4       12,337.9       12,226.3       12,569.0       3,694.2       120.2  

 

(1) Includes results from four weeks for the stores purchased in the Safeway acquisition on January 30, 2015.
(2) Includes results from 48 weeks for the stores purchased in the NAI acquisition on March 21, 2013 and eight weeks for the stores purchased in the United acquisition on December 29, 2013.

 

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SUPPLEMENTAL SELECTED HISTORICAL FINANCIAL INFORMATION OF SAFEWAY

You should read the information set forth below along with “Unaudited Pro Forma Condensed Consolidated Financial Information” and Safeway’s historical consolidated financial statements and related notes included elsewhere in this prospectus.

The supplemental selected historical financial information of Safeway set forth below has been derived from Safeway’s historical consolidated financial statements. Safeway’s historical consolidated financial statements as of January 3, 2015 and December 28, 2013 and for the fiscal years ended January 3, 2015, December 28, 2013 and December 29, 2012 have been included in this prospectus.

 

(in millions)

   Fiscal
2014
    Fiscal
2013
    Fiscal
2012
 

Results of Operations

      

Net sales and other revenue

   $ 36,330.2     $ 35,064.9     $ 35,161.5  
  

 

 

   

 

 

   

 

 

 

Gross profit

   $ 9,682.0     $ 9,231.5     $ 9,229.1  

Operating & administrative expense

     (9,147.5     (8,680.0     (8,593.7
  

 

 

   

 

 

   

 

 

 

Operating income

     534.5       551.5       635.4  

Interest expense

     (198.9     (273.0     (300.6

Loss on extinguishment of debt

     (84.4     (10.1      

Loss on foreign currency translation

     (131.2     (57.4      

Other income, net

     45.0       40.6       27.4  
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     165.0       251.6       362.2  

Income taxes

     (61.8     (34.5     (113.0
  

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

     103.2       217.1       249.2  

Income from discontinued operations, net of tax(1)

     9.3       3,305.1       348.9  
  

 

 

   

 

 

   

 

 

 

Net income before allocation to noncontrolling interests

     112.5       3,522.2       598.1  

Noncontrolling interests

     0.9       (14.7     (1.6
  

 

 

   

 

 

   

 

 

 

Net income

   $ 113.4     $ 3,507.5     $ 596.5  
  

 

 

   

 

 

   

 

 

 

 

(1) See Note B to Safeway’s historical consolidated financial statements included elsewhere in this prospectus.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma condensed consolidated financial information presents AB Acquisition’s unaudited pro forma condensed consolidated balance sheet as of September 9, 2017 and unaudited pro forma condensed consolidated statement of continuing operations for the 52 weeks ended February 25, 2017 (“fiscal 2016”) and the 28 weeks ended September 9, 2017 based upon the consolidated historical financial statements of AB Acquisition, after giving effect to the IPO-Related Transactions (assuming the common stock in this offering is offered at $         per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus).

The unaudited pro forma condensed consolidated balance sheet gives effect to the IPO-Related Transactions as if they had occurred on September 9, 2017. The unaudited pro forma condensed consolidated statement of continuing operations for fiscal 2016 and the 28 weeks ended September 9, 2017 gives effect to the IPO-Related Transactions as if they had been consummated on February 28, 2016, the first day of fiscal 2016.

AB Acquisition’s historical financial and operating data for fiscal 2016 and the 28 weeks ended September 9, 2017 is derived from its audited consolidated financial statements for fiscal 2016 and the unaudited condensed consolidated financial statements for the 28 weeks ended September 9, 2017, respectively.

The unaudited pro forma condensed consolidated financial information is prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information. The unaudited pro forma condensed consolidated financial information includes adjustments that give effect to events that are directly attributable to the transactions described above, are factually supportable and, with respect to our statement of operations, are expected to have a continuing impact.

The unaudited pro forma condensed consolidated financial information is provided for informational purposes only and is not necessarily indicative of the operating results that would have occurred if the IPO-Related Transactions had been completed as of the dates set forth above, nor is it indicative of the future results of the company.

The unaudited pro forma condensed consolidated financial information should be read in conjunction with the consolidated financial statements of AB Acquisition.

 

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AB ACQUISITION LLC AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS

52 WEEKS ENDED FEBRUARY 25, 2017

(in millions except share and per share amounts)

 

     AB
Acquisition
LLC
    Pro Forma
Adjustments for
IPO-Related
Transactions(2)
    Albertsons
Companies,

Inc. Pro Forma
 
     52 Weeks
Ended
February 25,
2017
          52 Weeks
Ended
February 25,
2017
 

Net sales and other revenue

   $ 59,678.2     $     —     $ 59,678.2  

Cost of sales

     43,037.7             43,037.7  
  

 

 

   

 

 

   

 

 

 

Gross profit

     16,640.5             16,640.5  

Selling and administrative expenses

     16,000.0       (14.4 )2(a)      15,985.6  
  

 

 

   

 

 

   

 

 

 

Operating income

     640.5       14.4       654.9  

Interest expense, net

     1,003.8             1003.8  

Loss on debt extinguishment

     111.7             111.7  

Other income

     (11.4           (11.4
  

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (463.6     14.4       (449.2

Income tax (benefit) expense

     (90.3     3.0 2(b)      (174.0
       (86.7 )2(c)   
  

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

   $ (373.3   $ 98.1     $ (275.2
  

 

 

   

 

 

   

 

 

 

Pro forma loss per share, continuing operations Basic and diluted

       $ (0.67 )2(d) 

Pro forma weighted average shares outstanding Basic and diluted

         409,832,959 2(d) 

 

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AB ACQUISITION LLC AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS

28 WEEKS ENDED SEPTEMBER 9, 2017

(in millions except share and per share amounts)

 

     AB
Acquisition
LLC
    Pro Forma
Adjustments
for IPO-Related
Transactions(2)
    Albertsons
Companies,
Inc. Pro Forma
 
     28 Weeks
Ended
September 9,
2017
          28 Weeks
Ended
September 9,

2017
 

Net sales and other revenue

   $ 32,291.7     $     $ 32,291.7  

Cost of sales

     23,503.5             23,503.5  
  

 

 

   

 

 

   

 

 

 

Gross profit

     8,788.2             8,788.2  

Selling and administrative expenses

     8,769.1             8,769.1  

Goodwill impairment

     142.3         142.3  
  

 

 

   

 

 

   

 

 

 

Operating loss

     (123.2           (123.2

Interest expense, net

     485.3             485.3  

Other expense

     18.9             18.9  
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (627.4           (627.4

Income tax benefit

     (67.3     (175.7 )2(c)      (243.0
  

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

   $ (560.1   $ 175.7       (384.4
  

 

 

   

 

 

   

 

 

 

Pro forma loss per share, continuing operations Basic and diluted

         (0.94 )2(d) 

Pro forma weighted average shares outstanding Basic and diluted

       $ 409,832,959 2(d) 

 

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AB ACQUISITION LLC AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 9, 2017

(in millions)

 

    AB Acquisition
LLC
    Pro Forma
Adjustments
for IPO-Related
Transactions(2)
    Albertsons
Companies, Inc.
Pro Forma
 

Assets

     

Current assets

     

Cash and cash equivalents

  $ 572.2     $       2(e)    $ 572.2  

Receivables, net

    608.8             608.8  

Inventories, net

    4,420.6             4,420.6  

Other current assets

    321.6             321.6  
 

 

 

   

 

 

   

 

 

 

Total current assets

    5,923.2             5,923.2  

Property and equipment, net

    11,277.5             11,277.5  

Intangible assets, net

    3,250.5             3,250.5  

Goodwill

    1,037.1             1,037.1  

Other assets

    846.2             846.2  
 

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

  $ 22,334.5     $     $ 22,334.5  
 

 

 

   

 

 

   

 

 

 

Liabilities and Members’/Stockholders’ Equity

     

Current liabilities

     

Accounts payable and accrued liabilities

  $ 4,024.2     $       4,024.2  

Current maturities of long-term debt and capitalized lease obligations

    178.7             178.7  

Other current liabilities

    1,402.9             1,402.9  
 

 

 

   

 

 

   

 

 

 

Total current liabilities

    5,605.8             5,605.8  

Long-term debt and capitalized lease obligations

    11,747.1             11,747.1  

Deferred income taxes

    1,350.9             1,350.9  

Other long-term liabilities

    3,034.5             3,034.5  
 

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES

    21,738.3             21,738.3  

Commitments and contingencies

     

Members’ equity

    596.2       (596.2 )2(f)       

Stockholders’ equity

          596.2  2(f)      596.2  
                          2(e)       
 

 

 

   

 

 

   

 

 

 

TOTAL MEMBERS’ / STOCKHOLDERS’ EQUITY

    596.2             596.2  
 

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND MEMBERS’/ STOCKHOLDERS’ EQUITY

  $ 22,334.5     $     $ 22,334.5  
 

 

 

   

 

 

   

 

 

 

 

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1. Basis of Presentation

The historical financial information of AB Acquisition was derived from the financial statements included elsewhere in this prospectus. The historical financial information has been adjusted to give pro forma effect to events that are (i) directly attributable to the transactions being reflected, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed consolidated statements of continuing operations, expected to have a continuing impact on the consolidated results.

2. Pro Forma Adjustments for IPO-Related Transactions

Unaudited Pro Forma Condensed Consolidated Statement of Continuing Operations

 

  (a) The pro forma adjustment to selling and administrative expenses represents the elimination of costs related to this offering recorded as expense in the historical operating results for fiscal 2016.

 

  (b) The pro forma adjustment to income tax (benefit) expense represents the tax impact of the elimination of expenses related to this offering in 2(a) above.

 

  (c) As part of the IPO-Related Transactions, all of our operating subsidiaries will become subsidiaries of Albertsons Companies, Inc., a Delaware corporation, and as a result all of our operations will be taxable as part of a consolidated group for federal income tax purposes. The pro forma adjustment to income tax (benefit) expense is derived by applying a combined federal and state statutory tax rate of 38.7% to the pro forma pre-tax earnings of the company, which assumes that all of the AB Acquisition entities are taxable as a group for federal and state income tax purposes. The pro forma adjustment is effective February 28, 2016 for the unaudited pro forma condensed consolidated statements of continuing operations for fiscal 2016 and the 28 weeks ended September 9, 2017.

 

  (d) Pro forma net loss per weighted average basic and diluted share outstanding gives effect to the exchange of all our outstanding units into shares of our common stock as part of the IPO-Related Transactions, based on an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover of this prospectus).

 

       No adjustment has been made to the unaudited pro forma condensed consolidated statement of continuing operations or the unaudited pro forma condensed consolidated balance sheet to reflect the $13.8 million in management fees to be paid in full upon the closing of this offering. See “Certain Relationships and Related Party Transactions—AB Acquisition LLC Agreement Management Fees.”

Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

  (e) The pro forma adjustments to cash and cash equivalents and stockholders’ equity represent the expenses related to the estimated underwriting discounts and commissions the company has agreed to pay in connection with this offering.

 

  (f) As part of the IPO-Related Transactions, all of our operating subsidiaries will become subsidiaries of Albertsons Companies, Inc., a Delaware corporation. The pro forma adjustments to members’ equity and stockholders’ equity represent the creation of share capital, paid in capital and retained earnings upon the corporate reorganization and the elimination of the historical membership equity. Upon the corporate reorganization, the outstanding units will be exchanged into 409,832,959 shares of common stock.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AB ACQUISITION

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Historical Financial Information of AB Acquisition,” “Unaudited Pro Forma Condensed Consolidated Financial Information” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve numerous risks and uncertainties, including those described in the “Risk Factors” section of this prospectus. Our actual results may differ materially from those contained in any forward-looking statements.

Our last three fiscal years consisted of the 52-week period ended February 25, 2017, the 52-week period ended February 27, 2016 and the 53-week period ended February 28, 2015. Our fiscal 2014 results include four weeks of Safeway’s financial results from January 31, 2015 through February 28, 2015. Comparability is affected by income and expense items that vary significantly between and among the periods, including as a result of our acquisition of Safeway during the fourth quarter of fiscal 2014 and an extra week in fiscal 2014.

Business Overview

We are one of the largest food and drug retailers in the United States, with both strong local presence and national scale. Over the past four years, we have completed a series of acquisitions that has significantly increased our portfolio of stores. We operated 2,328, 2,324, 2,271, 2,382, 1,075 and 192 stores as of September 9, 2017, February 25, 2017, February 27, 2016, February 28, 2015, February 20, 2014 and February 21, 2013, respectively. In addition, as of September 9, 2017, we operated 393 adjacent fuel centers, 27 dedicated distribution centers and 18 manufacturing facilities. Our operations are predominantly located in the Western, Southern, Midwest, Northeast, and Mid-Atlantic regions of the United States under the banners Albertsons, Safeway, Jewel-Osco, Vons, Shaw’s, Star Market, Acme, Tom Thumb, Pavilions, Carrs, Randalls, United Supermarkets, Market Street, Amigos, United Express, Haggen and Sav-On and are reported in a single reportable segment.

Our operations and financial performance are affected by U.S. economic conditions such as macroeconomic conditions, credit market conditions and the level of consumer confidence. While the combination of improved economic conditions, the trend towards lower unemployment, higher wages and lower gasoline prices have contributed to improved consumer confidence, there is continued uncertainty about the strength of the economic recovery. If the current economic situation does not continue to improve or if it weakens, or if gasoline prices rebound, consumers may reduce spending, trade down to a less expensive mix of products or increasingly rely on food discounters, all of which could impact our sales growth. In addition, consumers’ perception or uncertainty related to the economic recovery and future fuel prices could also dampen overall consumer confidence and reduce demand for our product offerings. Both inflation and deflation affect our business. Food deflation could reduce sales growth and earnings, while food inflation could reduce gross profit margins. Several food items and categories, such as meat, eggs and dairy, experienced price deflation in fiscal 2016 and price deflation is expected to continue in several food categories in fiscal 2017. We are unable to predict if the economy will continue to improve, or predict the rate at which the economy may improve, the direction of gasoline prices or when the deflationary trends we are currently experiencing will abate. If the economy does not continue to improve or if it weakens or fuel prices increase, our business and results of operations could be adversely affected.

We currently expect to achieve approximately $800 million of annual synergies by the end of fiscal 2018, with associated one-time costs of approximately $1.3 billion, or approximately $840 million, net of estimated synergy-related asset sale proceeds. Inclusion of the projected synergies in this

 

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prospectus should not be viewed as a representation that we in fact will achieve this annual synergy target by the end of fiscal 2018, or at all. In addition, although we achieved synergies from the Safeway acquisition of approximately $575 million during fiscal 2016 and approximately $330 million during the first 28 weeks of fiscal 2017, and we currently expect to achieve synergies of approximately $675 million during fiscal 2017, or approximately $750 million on an annual run-rate basis by the end of fiscal 2017, the inclusion of these expected synergy targets in this prospectus should not be viewed as a representation that we will in fact achieve these synergies by the end of fiscal 2017, or at all. To the extent we fail to achieve these synergies, our results of operations may be impacted, and any such impact may be material.

We have identified various synergies including corporate and division overhead savings, our own brands, vendor funds, the conversion of Albertsons and NAI onto Safeway’s IT systems, marketing and advertising cost reduction and operational efficiencies within our back office, distribution and manufacturing organizations. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from these estimates, and we cannot assure you that we will achieve the full amount of synergies on the schedule anticipated, or at all, or that these synergy programs will not have other adverse effects on our business. In light of these significant uncertainties, you should not place undue reliance on our estimated synergies.

Total debt, including both the current and long-term portions of capital lease obligations, increased by $111.6 million to $12.3 billion as of the end of fiscal 2016 compared to $12.2 billion as of the end of fiscal 2015. The increase in fiscal 2016 was primarily due to proceeds from the issuance of long-term debt of $3,053.1 million partially offset by payments on long-term borrowings of $2,832.7 million. Our substantial indebtedness could have important consequences for you. For example it could: adversely affect the market price of our common stock; increase our vulnerability to general adverse economic and industry conditions; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; and limit our ability to borrow additional funds. See “—Debt Management.” For fiscal 2016, our interest expense, net was $1,003.8 million. We have exposure to future interest rates based on the variable rate debt under our credit facilities and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with cash flow from operations and through the use of various committed lines of credit. The interest rate on these borrowing arrangements is generally determined from the London Inter-Bank Offering Rate (“LIBOR”) at the borrowing date plus a pre-set margin. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results. The interest rates we pay on borrowings under the Senior Secured Credit Facilities are dependent on LIBOR. We believe a 100 basis point increase on our variable interest rates would impact our interest expense by approximately $20 million. We rely on access to bank and capital markets as sources of liquidity for cash requirements not satisfied by cash flows from operations. A downgrade in our credit ratings from the internationally recognized credit rating agencies could negatively affect our ability to access the bank and capital markets, especially in a time of uncertainty in either of those markets. A rating downgrade could also impact our ability to grow our business by substantially increasing the cost of, or limiting access to, capital.

In fiscal 2016, we spent approximately $1,415 million for capital expenditures, including approximately $250 million of Safeway integration-related capital expenditures. We expect to spend

 

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approximately $1.5 billion in total for capital expenditures by the end of fiscal 2017, or approximately 2.5% of our fiscal 2016 sales, including $200 million of Safeway integration-related capital expenditures. By the end of fiscal 2017, we expect to have completed approximately 170 upgrade and remodel projects and opened 16 new stores. For additional information on our capital expenditures, see the table under the caption “Projected Fiscal 2017 Capital Expenditures” contained in “Liquidity and Financial Resources.”

Reflecting consumer preferences, we have a significant focus on perishable products. Sales of perishable products accounted for approximately 40.9% of our total sales in fiscal 2016 and 40.7% of our total sales in the first 28 weeks of fiscal 2017. We could suffer significant perishable product inventory losses and significant lost revenue in the event of the loss of a major supplier or vendor, disruption of our distribution network, extended power outages, natural disasters or other catastrophic occurrences. See “Risks Related to Our Business and Industry—Our stores rely heavily on sales of perishable products, and product supply disruptions may have an adverse effect on our profitability and operating results.”

We employed a diverse workforce of approximately 280,000, 273,000, 274,000 and 265,000 associates as of September 9, 2017, February 25, 2017, February 27, 2016 and February 28, 2015, respectively. As of February 25, 2017, approximately 170,000 of our employees were covered by collective bargaining agreements. During fiscal 2017, collective bargaining agreements covering approximately 10,000 employees are scheduled to expire. If, upon the expiration of such collective bargaining agreements, we are unable to negotiate acceptable contracts with labor unions, it could increase our operating costs and disrupt our operations.

A considerable number of our employees are paid at rates related to the federal minimum wage. Additionally, many of our stores are located in states, including California, where the minimum wage is greater than the federal minimum wage and where a considerable number of employees receive compensation equal to the state’s minimum wage. For example, as of September 9, 2017, we employed approximately 71,000 associates in California, where the current minimum wage was recently increased to $10.50 per hour effective January 1, 2017 and will gradually increase to $15.00 per hour by January 1, 2022. In Maryland, where we employed approximately 8,100 associates as of September 9, 2017, the minimum wage was recently increased to $9.25 per hour, and will increase to $10.10 per hour on July 1, 2018. Moreover, municipalities may set minimum wages above the applicable state standards. For example, the minimum wage in Seattle, Washington, where we employed approximately 1,700 associates as of September 9, 2017, was recently increased to $15.00 per hour effective January 1, 2017 for employers with more than 500 employees nationwide. In Chicago, Illinois, where we employed approximately 6,000 associates as of September 9, 2017, the minimum wage was recently increased to $11.00 per hour, and will gradually increase to $13.00 per hour by July 1, 2019. Any further increases in the federal minimum wage or the enactment of additional state or local minimum wage increases could increase our labor costs, which may adversely affect our results of operations and financial condition.

We participate in various multiemployer pension plans for substantially all employees represented by unions that require us to make contributions to these plans in amounts established under collective bargaining agreements. In fiscal 2016, we contributed $399.1 million to multiemployer pension plans, and in fiscal 2017, we expect to contribute approximately $420 million to multiemployer pension plans, subject to collective bargaining conditions. Based on an assessment of the most recent information available, the company believes that most of the multiemployer plans to which it contributes are underfunded. As of February 25, 2017, our estimate of the company’s share of the underfunding of multiemployer plans to which it contributes was approximately $3.5 billion. The company’s share of underfunding described above is an estimate and could change based on the results of collective bargaining efforts, investment returns on the assets held in the plans, actions taken by trustees who

 

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manage the plans’ benefit payments, interest rates, if the employers currently contributing to these plans cease participation, and requirements under the PPA, the Multiemployer Pension Reform Act of 2014 and applicable provisions of the Code. Additionally, underfunding of the multiemployer plans means that, in the event we were to exit certain markets or otherwise cease making contributions to these plans, we could trigger a substantial withdrawal liability. See “Risks Related to Our Business and Industry—Increased pension expenses, contributions and surcharges may have an adverse impact on our financial results.”

Acquisitions

Haggen Transaction

During the fourth quarter of fiscal 2014, in connection with the acquisition of Safeway, the company announced that it had entered into agreements to sell 168 stores as required by the FTC as a condition of closing the Safeway acquisition. The company sold 146 of these stores to Haggen. On September 8, 2015, Haggen commenced a case under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. After receiving FTC and state attorneys general clearance, and Bankruptcy Court approval, during the fourth quarter of fiscal 2015, the company re-acquired 35 stores from Haggen for an aggregate purchase price of approximately $33 million.

Haggen also secured Bankruptcy Court approval for bidding procedures for the sale of 29 additional stores. On March 25, 2016, we entered into a purchase agreement to acquire the 29 additional stores, which included 15 stores originally sold to Haggen as part of the FTC divestitures, and certain trade names and other intellectual property, for an aggregate purchase price of approximately $114 million. We completed the acquisition of these 29 stores on June 23, 2016. We refer to this acquisition, together with the fiscal 2015 acquisition of 35 stores from Haggen, in this prospectus as the “Haggen Transaction.”

A&P Transaction

In the fourth quarter of fiscal 2015, our indirect wholly owned subsidiary, Acme Markets, completed its acquisition of 73 stores from A&P. The purchase price for the 73 stores, including the cost of acquired inventory, was $292.7 million. The acquired stores, which are principally located in the northern New York City suburbs, northern New Jersey and the greater Philadelphia area, are complementary to Acme Markets’ existing store and distribution base and were re-bannered as Acme stores. During the third quarter of fiscal 2015, NAI entered into an amendment to its pre-existing term loan agreement and borrowed an additional $300 million thereunder, the proceeds of which were used to fund the balance of the purchase price. We refer to this acquisition as the “A&P Transaction.”

Safeway Acquisition

On January 30, 2015, the company completed its acquisition of Safeway by acquiring all of the outstanding shares of Safeway for cash consideration of $34.92 per share or $8,263.5 million and issuing contingent value rights with an estimated fair value of $1.03 and $0.05 per share relating to Safeway’s 49% interest in Casa Ley and deferred consideration related to Safeway’s previous sale of the PDC assets, respectively, for an aggregate fair value of $270.9 million. At the time of the Safeway acquisition, Safeway operated 1,325 retail food stores under the banners Safeway, Vons, Tom Thumb, Pavilions, Randalls and Carrs located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, and the Mid-Atlantic region. In addition, at the time of the Safeway acquisition, Safeway had 353 fuel centers, 15 distribution centers and 19 manufacturing facilities.

United Acquisition

On December 29, 2013, we acquired United Supermarkets for $362.1 million in cash, expanding our presence in North and West Texas, in a transaction that offered significant synergies and added a

 

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differentiated upscale store format, “Market Street,” to the Albertsons portfolio. At the time of the United acquisition, United operated 51 traditional, specialty and Hispanic retail food stores under its United Supermarkets, Market Street and Amigos banners, seven convenience stores and 26 fuel centers under its United Express banner and three distribution centers. United is located in 30 markets across North and West Texas.

NAI Acquisition

On March 21, 2013, the company acquired all of the issued and outstanding shares of NAI from SuperValu pursuant to a stock purchase agreement for a total purchase consideration of $253.6 million, including $69.9 million of working capital adjustments, and assumed debt and capital lease obligations with a carrying value prior to the acquisition date of $3.2 billion. The purchase consideration was primarily cash and a short-term payable that was fully paid as of February 20, 2014. At the time of the NAI acquisition, NAI operated 871 retail food stores under its Jewel-Osco, Acme, Shaw’s, Star Market and Albertsons banners, primarily located in the Northeast, Midwest, Mid-Atlantic and Western regions of the United States. In addition, we acquired NAI’s 10 distribution centers.

The following table shows stores operated, acquired, opened, divested and closed during the periods presented:

 

     First 28 Weeks
of Fiscal

2017
  Fiscal
2016
  Fiscal
2015
    Fiscal
2014(2)
    Fiscal
2013(3)
 

Stores, beginning of period

     2,324       2,271       2,382       1,075       192  

Acquired(1)

     5       78       74       1,330       926  

Divested

                 (153     (15      

Opened

     12       15       7       4       2  

Closed

     (13     (40     (39     (12     (45
  

 

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

 

Stores, end of period

     2,328       2,324       2,271       2,382       1,075  
  

 

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

 

 

(1) Excludes acquired stores not yet re-opened as of the end of each respective period.
(2) Primarily includes the 1,325 stores acquired through the Safeway acquisition on January 30, 2015.
(3) Stores acquired during this period include 871 stores acquired through the NAI acquisition on March 21, 2013, four stores acquired from Vons REIT, Inc. on October 10, 2013, and 51 stores acquired through the United acquisition on December 29, 2013.

Our Strategy

Our operating philosophy is simple: we run great stores with a relentless focus on sales growth. We believe there are significant opportunities to grow sales and enhance profitability and Free Cash Flow, through execution of the following strategies:

Consistent with our operating playbook, we plan to deliver sales growth by implementing the following initiatives:

 

    Enhancing and Upgrading Our Fresh, Natural and Organic Offerings and Signature Products.    We continue to enhance and upgrade our fresh, natural and organic offerings across our meat, produce, service deli and bakery departments to meet the changing tastes and preferences of our customers. We are rapidly growing our portfolio of USDA-certified organic products to include over 1,300 own brands products. We also believe that continued innovation and expansion of our high-volume, high-quality and differentiated signature products will contribute to stronger sales growth.

 

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    Expanding Our Own Brands Offerings.    We continue to drive sales growth and profitability by extending our own brands offerings across our banners, including high-quality and recognizable brands such as O Organics, Open Nature, Signature and Lucerne. Our own brands products achieved over $10.9 billion in sales in fiscal 2016.

 

    Leveraging Our Effective and Scalable Loyalty Programs.    We believe we can grow basket size and improve the shopping experience for our customers by expanding our just for U, MyMixx and fuel rewards programs. Over 12 million members (or 23% of our customer base) are currently enrolled in our loyalty programs, and we expect that over 13 million households (or 25% of our customer base) will be enrolled by the end of fiscal 2017. We believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications, to improve customer retention and provide targeted promotions to our customers. For example, our just for U and fuel rewards customers have demonstrated greater basket size, improved customer retention rates and an increased likelihood to redeem promotions offered in our stores.

 

    Providing Our Customers with Convenient Digital Solutions.    We seek to provide our customers with the means to shop how, when and where they choose. As consumer preferences evolve towards greater convenience, we are improving our online offerings, including home delivery and “click-and-collect” services. We continue to enhance our delivery platform to offer more delivery options and windows across our store base, including early morning deliveries, same-day deliveries, instant deliveries and unattended deliveries. In addition, we seek to expand our curbside “click-and-collect” program in order to enable customers to conveniently pick up their goods on the way home or to the office. We believe our strategy of providing customers with a variety of in-store and online options that suit their varying individual needs will drive additional sales growth and differentiate us from many of our competitors.

 

    Capitalizing on Demand for Health and Wellness Services.    We intend to leverage our portfolio of 1,779 pharmacies and our growing network of wellness clinics to capitalize on increasing customer demand for health and wellness services. Pharmacy customers are among our most loyal, and their average weekly spend is over 2.5x that of our non-pharmacy customers. We plan to continue to grow our pharmacy script counts through new patient prescription transfer programs and initiatives such as clinic, hospital and preferred network partnerships, which we believe will expand our access to more customers. To further enhance our pharmacy offerings, we recently acquired MedCart Specialty Pharmacy, a URAC-accredited specialty pharmacy with accreditation and license to operate in over 40 states, which will extend our ability to service our customers’ health needs. We believe that these efforts will drive sales and generate customer loyalty.

 

   

Continuously Evaluating and Upgrading Our Store Portfolio.    We plan to pursue a disciplined but committed capital allocation strategy to upgrade, remodel and relocate stores to attract customers to our stores and to increase store volumes. We opened 15 and 12 new stores in fiscal 2016 and the first 28 weeks of fiscal 2017, respectively, and expect to have opened a total of 16 new stores and completed approximately 170 upgrade and remodel projects by the end of fiscal 2017. We believe that our store base is in excellent condition, and we have developed a remodel strategy that is both cost-efficient and effective. In addition to store remodels, we continuously evaluate and optimize store formats to better serve the different customer demographics of each local community. We have identified approximately 300 stores across our divisions that we have started to re-merchandise to our “Premium” format, where we offer a greater assortment of unique items in our fresh and service departments, as well as more natural, organic and healthy products throughout the store. Additionally, we have started to reposition approximately 100 stores across our divisions from our “Premium” format to an “Ultra-Premium”

 

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format that also offers gourmet and artisanal products, upscale décor and experiential elements including walk-in wine cellars and wine and cheese tasting counters.

 

    Driving Innovation.    We intend to drive traffic and sales growth through constant innovation. We will remain focused on identifying emerging trends in food and sourcing new and innovative products. We are adjusting our store layouts to accommodate a greater assortment of grab-and-go, individually packaged, and snack-sized meals. We are also rolling out new merchandising initiatives across our store base, including the introduction of meal kits, product sampling events, quality prepared foods and in-store dining.

 

    Sharing Best Practices Across Divisions.    Our division leaders collaborate closely to ensure the rapid sharing of best practices. Recent examples include the expansion of our O Organics offering across banners, the accelerated roll-out of signature products such as Albertsons’ in-store fresh-cut fruit and vegetables and implementing Safeway’s successful wine and floral shop strategies, with broader product assortments and new fixtures across many of our banners.

We believe the combination of these actions and initiatives, together with the attractive industry trends described in more detail under “Business—Our Industry,” will position us to achieve sales growth.

Enhance Our Operating Margin.    Our focus on sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefits through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. We are investing in our supply channel, including the automation of several of our distribution centers, in order to create efficiencies and reduce costs. In addition, we maintain a disciplined approach to expense management and budgeting.

Implement Our Synergy Realization Plan.    We are currently executing on an annual synergy plan of approximately $800 million from the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018, with associated one-time costs of approximately $840 million (net of estimated synergy-related asset sale proceeds). Our detailed synergy plan was developed on a bottom-up, function-by-function basis by combined Albertsons and Safeway teams. The plan includes capturing opportunities from corporate and division cost savings, simplifying business processes and rationalizing headcount. Over time, Safeway’s information technology systems will support all of our stores, distribution centers and systems, including financial reporting and payroll processing, as we wind down our transition services agreement for our Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market banners with SuperValu on a store-by-store basis. We are extending the expansive and high-quality own brands program developed at Safeway across all of our banners. We believe our increased scale will help us to optimize and improve our vendor relationships. We also plan to achieve marketing and advertising savings from lower print, production and broadcast rates in overlapping regions and reduced agency spend. Finally, we intend to consolidate managed care provider reimbursement programs, increase vaccine penetration and leverage our combined scale. During fiscal 2016 and the first 28 weeks of fiscal 2017, we achieved synergies from the Safeway acquisition of approximately $575 million and $330 million, respectively, and we expect to achieve synergies from the Safeway acquisition of approximately $675 million in fiscal 2017, or approximately $750 million on an annual run-rate basis by the end of fiscal 2017, principally from savings related to corporate and division overhead, our own brands, vendor funds and marketing and advertising cost reductions. Approximately 80% of our $800 million annual synergy target is independent of sales growth, which we believe significantly reduces the risk of not achieving our target.

Selectively Grow Our Store Base Organically and Through Acquisition.    We intend to continue to grow our store base organically through disciplined but committed investment in new stores. We opened 15 and 12 new stores in fiscal 2016 and the first 28 weeks of fiscal 2017, respectively, and expect to have

 

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opened a total of 16 new stores and completed approximately 170 upgrade and remodel projects by the end of fiscal 2017. We acquired 73 stores from A&P for our Acme banner and 35 stores from Haggen for our Albertsons banner during fiscal 2015, and we acquired an additional 29 stores from Haggen during fiscal 2016, of which 15 operate under the Haggen banner. We evaluate acquisition opportunities on an ongoing basis as we seek to strengthen our competitive position in existing markets or expand our footprint into new markets. We believe our healthy balance sheet and decentralized structure provide us with strategic flexibility and a strong platform to make acquisitions. We believe our successful track record of integration and synergy delivery provides us with an opportunity to further enhance sales growth, leverage our cost structure and increase profitability and Free Cash Flow through selected acquisitions. Consistent with this strategy, we regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and we are currently participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us.

Results of Operations

Comparison of 28 weeks ended September 9, 2017 to 28 weeks ended September 10, 2016:

The following table and related discussion set forth certain information and comparisons regarding the components of our condensed consolidated statements of operations for the 28 weeks ended September 9, 2017 (“first 28 weeks of fiscal 2017”) and 28 weeks ended September 10, 2016 (“first 28 weeks of fiscal 2016”). As of September 9, 2017 and September 10, 2016, we operated 2,328 and 2,320 stores, respectively.

 

     28 weeks ended  
     September 9,
2017
     % of
Sales
    September 10,
2016
     % of
Sales
 

Net sales and other revenue

   $ 32,291.7        100.0   $ 32,247.8        100.0

Cost of sales

     23,503.5        72.8     23,360.9        72.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     8,788.2        27.2     8,886.9        27.6

Selling and administrative expenses

     8,769.1        27.2     8,586.3        26.6

Goodwill impairment

     142.3        0.4           
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating (loss) income

     (123.2      (0.4 )%      300.6        1.0

Interest expense, net

     485.3        1.5     571.6        1.8

Loss on debt extinguishment

                111.7        0.3

Other expense

     18.9        0.1     3.5       
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss before income taxes

     (627.4      (2.0 )%      (386.2      (1.1 )% 

Income tax benefit

     (67.3      (0.2 )%      (14.5     
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss

   $ (560.1      (1.8 )%    $ (371.7      (1.1 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Identical Store Sales, Excluding Fuel

Identical store sales are defined as stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis, excluding fuel. Acquired stores become identical on the one-year anniversary date of their acquisition. Identical store sales for the first 28 weeks of fiscal 2017 and the first 28 weeks of fiscal 2016, respectively, were:

 

     28 weeks ended  
     September 9,
2017
    September 10,
2016
 

Identical store sales, excluding fuel

     (2.0 )%      1.7

 

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Our identical store sales decrease for the 28 weeks ended September 9, 2017 was driven by a 3.8% decline in customer traffic, offset by an increase of 1.8% in average ticket size. During the 28 weeks ended September 9, 2017, our identical store sales were also impacted by a lack of food price inflation and making selective investments in prices to respond to the competitive environment and increase customer traffic.

Net Sales and Other Revenue

Net sales and other revenue increased 0.1% to $32.3 billion for the first 28 weeks of fiscal 2017 from $32.2 billion for the first 28 weeks of fiscal 2016. The increase in net sales and other revenue was primarily driven by sales of $435.6 million from new and acquired stores, net of sales related to store closings, and an increase in fuel sales of $204.8 million, partially offset by a decrease of $588.7 million from our 2.0% decline in identical store sales.

Gross Profit

Gross profit represents the portion of net sales and other revenue remaining after deducting the cost of sales during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with our distribution network. Advertising, promotional expenses and vendor allowances are also components of cost of sales.

Gross profit margin decreased to 27.2% for the first 28 weeks of fiscal 2017 compared to 27.6% for the first 28 weeks of fiscal 2016. Excluding the impact of fuel, gross profit margin also decreased 30 basis points during the first 28 weeks of fiscal 2017 as compared to the first 28 weeks of fiscal 2016. The decrease is primarily attributable to selectively lowering prices and a temporary increase in supply chain costs related to the integration and conversions of our distribution centers during the first quarter of fiscal 2017.

Selling and Administrative Expenses

Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.

Selling and administrative expenses increased to 27.2% of sales for the first 28 weeks of fiscal 2017 compared to 26.6% of sales for the first 28 weeks of fiscal 2016. Excluding the impact of fuel, selling and administrative expenses as a percent of sales increased 70 basis points during the first 28 weeks of fiscal 2017 compared to the first 28 weeks of fiscal 2016. The increase in selling and administrative expenses was primarily attributable to increased asset impairment charges, higher depreciation and amortization expense, higher employee wage and benefit costs and deleveraging of sales on fixed costs. These increases were partially offset by lower acquisition and integration costs and lower net pension expense in the first 28 weeks of fiscal 2017 compared to the first 28 weeks of fiscal 2016 primarily due to the $78.9 million charge related to the acquisition of Collington Services, LLC (“Collington”) from C&S Wholesale Grocers, Inc. during the first quarter of fiscal 2016.

Goodwill Impairment

Goodwill impairment was $142.3 million for the first 28 weeks of fiscal 2017. There was no goodwill impairment during the first 28 weeks of fiscal 2016. During the second quarter of fiscal 2017, there was a sustained decline in the market multiples of publicly traded peer companies. In addition, during the second quarter of fiscal 2017, we revised our short-term operating plan. As a result, we determined that an interim review of the recoverability of our goodwill was necessary. Consequently, we recorded a

 

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goodwill impairment loss of $142.3 million, substantially all within the Acme reporting unit relating to the A&P Transaction, due to changes in the estimate of our long-term future financial performance to reflect lower expectations for growth in revenue and earnings than previously estimated.

Interest Expense, Net

Interest expense, net was $485.3 million for the first 28 weeks of fiscal 2017 compared to $571.6 million for the first 28 weeks of fiscal 2016. The decrease in interest expense, net primarily reflects lower average interest rates on outstanding borrowings as a result of our refinancing transactions during fiscal 2016. The weighted average interest rate during the first 28 weeks of fiscal 2017 was 6.4% compared to 6.9% during the first 28 weeks of fiscal 2016, excluding amortization of deferred financing costs and original issue discount.

Loss on Debt Extinguishment

During the first 28 weeks of fiscal 2016, a portion of the net proceeds from the issuance of the 2024 Notes was used to fully redeem $609.6 million of principal amount of our 7.750% Senior Secured Notes due 2022 (the “Secured Notes”). In connection with such redemption, we recorded a $111.7 million loss on debt extinguishment comprised of an $87.7 million make-whole premium and a $24.0 million write-off of deferred financing costs and original issue discount.

Other Expense

Other expense was $18.9 million for the first 28 weeks of fiscal 2017 compared to other expense of $3.5 million for the first 28 weeks of fiscal 2016. Other expense during the first 28 weeks of fiscal 2017 and the first 28 weeks or fiscal 2016 was primarily driven by changes in the fair value of the CVRs, equity in the earnings of Casa Ley and gains and losses on the sale of investments.

Income Taxes

Income tax benefit was $67.3 million and $14.5 million in the first 28 weeks of fiscal 2017 and the first 28 weeks of fiscal 2016, respectively. The increase in income tax benefit for the first 28 weeks of fiscal 2017 as compared to the first 28 weeks of fiscal 2016 is primarily the result of an increase in loss before income taxes and a change in the mix of our income (loss) between companies within our affiliated group. We are organized as a partnership, which generally is not subject to entity level tax, and conduct our operations primarily through limited liability companies and Subchapter C corporations. We provide for federal and state income taxes on our Subchapter C corporations, which are subject to entity-level tax, and state income taxes on our limited liability companies where applicable. As such, our effective tax rate can fluctuate from period to period depending on the mix of pre-tax income or loss between our limited liability companies and Subchapter C corporations.

 

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Comparison of Fiscal Year 2016 to Fiscal Year 2015

The following table and related discussion sets forth certain information and comparisons regarding the components of our consolidated statements of operations for fiscal 2016, fiscal 2015 and fiscal 2014.

 

    52 weeks ended
February 25, 2017
    52 weeks ended
February 27, 2016
    53 weeks ended
February 28, 2015
 

Net sales and other revenue

  $ 59,678.2       100.0   $ 58,734.0        100.0   $ 27,198.6        100.0

Cost of sales

    43,037.7       72.1       42,672.3        72.7       19,695.8        72.4  
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

    16,640.5       27.9       16,061.7        27.3       7,502.8        27.6  

Selling and administrative expenses

    16,000.0       26.8       15,660.0        26.7       8,152.2        30.0  
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Operating profit (loss)

    640.5       1.1       401.7        0.6       (649.4      (2.4

Interest expense, net

    1,003.8       1.7       950.5        1.6       633.2        2.3  

Loss on debt extinguishment

    111.7       0.2                            

Other (income) expense

    (11.4           (7.0            96.0        0.4  
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Loss before income taxes

    (463.6     (0.8     (541.8      (1.0     (1,378.6      (5.1

Income tax benefit

    (90.3     (0.2     (39.6            (153.4      (0.6
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net loss

  $ (373.3     (0.6 )%    $ (502.2      (1.0 )%    $ (1,225.2      (4.5 )% 
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Identical Store Sales, Excluding Fuel

Identical store sales, on an actual basis, is defined as stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis, excluding fuel. Acquired stores become identical on the one-year anniversary date of their acquisition. The stores sold during the first quarter of fiscal 2015 as part of the FTC divestiture process are excluded from identical store sales for all periods presented below. Identical store sales results, on an actual basis, for the past three fiscal years were as follows:

 

     Fiscal 2016     Fiscal 2015     Fiscal 2014  

Identical store sales, excluding fuel(1)

     (0.4)     4.4     7.2
  

 

 

   

 

 

   

 

 

 
(1) The Safeway stores became identical on January 30, 2016, the stores acquired as part of the A&P Transaction became identical starting in mid-November of fiscal 2016, and three Haggen stores became identical during the last month of fiscal 2016.

Our identical store sales decrease in fiscal 2016 was driven by a decrease of 1.9% in customer traffic partially offset by an increase of 1.5% in average ticket size. During fiscal 2016 our identical store sales were negatively impacted by food price deflation in certain categories, including meat, eggs and dairy, together with pressure to maintain competitive pricing in response. We believe that our fiscal 2015 identical store sales and customer traffic benefited from the poor performance or closure of A&P and Haggen stores under prior ownership. We also believe that during fiscal 2016 our identical store sales and customer traffic comparisons to fiscal 2015 were negatively impacted in certain markets by the acquisition or re-opening of acquired A&P and Haggen stores. After adjusting for the positive sales impact in one of our divisions within NAI during the second quarter of fiscal 2014 resulting from a labor dispute at a competitor that caused a temporary closure of its stores, our estimated identical store sales growth for fiscal 2015 and fiscal 2014 would have been 4.8% and 6.8%, respectively.

 

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Operating Results Overview

Net loss was $373.3 million in fiscal 2016 and $502.2 million in fiscal 2015, an improvement of $128.9 million. This improvement was primarily attributable to an increase in operating income of $238.8 million in addition to higher income tax benefit, partially offset by the loss on debt extinguishment of $111.7 million and higher interest expense, net of $53.3 million. The improvement in operating income is primarily attributable to the synergies achieved as part of the Safeway acquisition in addition to the acquired Haggen and A&P stores. The loss on debt extinguishment and the increase in interest expense, net was primarily associated with our refinancing transactions during fiscal 2016.

Net loss was $502.2 million in fiscal 2015 and $1,225.2 million in fiscal 2014, an improvement of $723.0 million. This improvement was primarily attributable to an increase in operating income of $1,051.1 million and an increase in other income of $103.0 million partially offset by an increase in interest expense, net of $317.3 million and a lower income tax benefit of $113.8 million in fiscal 2015 compared to fiscal 2014. The improvements in operating income are primarily attributable to the acquired Safeway stores and improved Albertsons and NAI store operations. In addition, (i) equity-based compensation cost, (ii) loss on property dispositions, asset impairments and lease exit costs and (iii) the termination of the long-term incentive plans in fiscal 2014 drove reductions in selling and administrative expenses of $246.3 million, $124.4 million and $78.0 million, respectively, in fiscal 2015 compared to fiscal 2014.

Net Sales and Other Revenue

Net sales and other revenue increased $944.2 million, or 1.6%, from $58,734.0 million in fiscal 2015 to $59,678.2 million in fiscal 2016. The components of the change in net sales and other revenue for fiscal 2016 were as follows (in millions):

 

     Fiscal 2016  

Net sales and other revenue for fiscal 2015

   $ 58,734.0  

Additional sales due to A&P and Haggen Transactions, for the period not considered identical

     1,843.4  

Decline in sales from FTC-mandated divestitures

     (444.5

Decline in fuel sales

     (261.4

Identical store sales decrease of 0.4%

     (213.3

Other(1)

     20.0  
  

 

 

 

Net sales and other revenue for fiscal 2016

   $ 59,678.2  
  

 

 

 

 

(1) Primarily relates to changes in non-identical store sales and other revenue.

The primary increase in net sales and other revenue was driven by an increase of $1,843.4 million from the acquired A&P and Haggen stores, partially offset by a decline of $213.3 million from our 0.4% decline in identical store sales, a decline of $444.5 million in sales related to stores sold as part of the FTC divestiture process and $261.4 million in lower fuel sales driven by lower average retail pump prices.

 

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Net sales and other revenue increased $31,535.4 million, or 115.9%, from $27,198.6 million in fiscal 2014 to $58,734.0 million in fiscal 2015. The components of the change in net sales and other revenue for fiscal 2015 were as follows (in millions):

 

     Fiscal 2015  

Net sales and other revenue for fiscal 2014

   $ 27,198.6  

Additional sales due to Safeway acquisition, for the period not considered identical

     32,484.2  

Identical store sales increase of 4.4%

     1,049.3  

Additional sales due to A&P Transaction

     436.3  

Decline in sales from FTC-mandated divestitures of Albertsons stores

     (1,771.3

53rd-week impact

     (443.5

Other(1)

     (219.6
  

 

 

 

Net sales and other revenue for fiscal 2015

   $ 58,734.0  
  

 

 

 

 

(1) Primarily relates to changes in non-identical store sales and other revenue.

The primary increase in net sales and other revenue was driven by the stores acquired in the Safeway acquisition for the 48 week period ended January 30, 2016 that were not considered identical on an actual basis. Identical store sales of 4.4% also drove an increase of $1,049.3 million, due to a 2.6% increase in customer traffic and a 1.8% increase in average ticket size during fiscal 2015, as our stores continued to benefit from the implementation of our operating playbook, including the expansion of our own brands and continued enhancement of fresh, natural and organic offerings.

Gross Profit

The gross profit margin increased 60 basis points to 27.9% in fiscal 2016 compared to 27.3% in fiscal 2015. Excluding the impact of fuel, the gross profit margin increased 50 basis points. The increase was primarily attributable to synergies achieved as part of the Safeway integration related to the deployment of our own brand products across our Albertsons and NAI stores, improved vendor pricing and savings related to the consolidation of our distribution network. These increases were partially offset by higher shrink expense as a percentage of sales during fiscal 2016 compared to fiscal 2015.

 

Fiscal 2016 vs. Fiscal 2015

   Basis point
increase

(decrease)
 

Safeway acquisition synergies

     43  

Product mix

     28  

Lower LIFO expense

     7  

Higher shrink expense

     (27

Other

     (1
  

 

 

 

Total

     50  
  

 

 

 

Our gross profit margin decreased 30 basis points to 27.3% in fiscal 2015 compared to 27.6% in fiscal 2014. The decrease was primarily the result of the increase in low-margin fuel sales from the acquired Safeway fuel centers in fiscal 2015 in addition to increased shrink expense as we increased in-stock positions at acquired Safeway and A&P stores. These decreases were partially offset by improved product mix in fiscal 2015 compared to fiscal 2014 which includes the higher overall margins in certain acquired Safeway stores across several of our divisions and lower LIFO expense as a percentage of sales in fiscal 2015 compared to fiscal 2014.

 

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Fiscal 2015 vs. Fiscal 2014

   Basis point
increase
(decrease)
 

Product mix

     33  

Lower LIFO expense

     11  

Impact of fuel

     (57

Higher shrink expense

     (15

Other

     (2
  

 

 

 

Total

     (30
  

 

 

 

Selling and Administrative Expenses

Selling and administrative expenses increased 10 basis points to 26.8% of sales in fiscal 2016 from 26.7% in fiscal 2015. Excluding the impact of fuel, selling and administrative expenses as a percentage of sales was flat during fiscal 2016 compared to fiscal 2015.

 

Fiscal 2016 vs. Fiscal 2015

   Basis point
increase

(decrease)
 

Depreciation and amortization

     26  

Employee wage and benefit costs

     24  

Pension expense, including the charge related to the acquisition of Collington

     14  

Property dispositions, asset impairment and lease exit costs

     (25

Acquisition and integration costs

     (18

Safeway acquisition synergies

     (14

Other

     (7
  

 

 

 

Total

      
  

 

 

 

Increased depreciation and amortization expense in addition to higher pension and employee wage and benefit costs during fiscal 2016 compared to fiscal 2015 were offset by gains on property dispositions, a decrease in acquisition and integration costs and increased Safeway acquisition synergies in fiscal 2016 compared to fiscal 2015. The increase in pension expense is primarily driven by the $78.9 million charge related to the acquisition of Collington from C&S Wholesale Grocers, Inc. during fiscal 2016. The increase in depreciation and amortization expense is primarily driven by an increase in property, equipment and intangibles balances primarily related to the A&P Transaction and the Haggen Transaction and capital expenditures.

Selling and administrative expenses decreased 330 basis points to 26.7% of net sales and other revenue in fiscal 2015 from 30.0% in fiscal 2014:

 

Fiscal 2015 vs. Fiscal 2014

   Basis point
increase
(decrease)
 

Equity-based compensation

     (111

Acquisition and integration costs, including the charge to terminate the long-term incentive plans

     (100

Impact of fuel

     (78

Property dispositions, asset impairment and lease exit costs

     (66

Legal and professional fees

     (23

Depreciation and amortization

     14  

Debit and credit card fees

     14  

Other

     20  
  

 

 

 

Total

     (330
  

 

 

 

 

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Fiscal 2014 results included only four weeks of Safeway results. The company incurred significant equity-based compensation and acquisition and integration costs in fiscal 2014, improving the basis point comparison between fiscal 2015 and fiscal 2014. The increase in low-margin fuel sales from the acquired Safeway fuel centers also reduced the selling and administrative expenses as a percentage of sales in fiscal 2015 compared to fiscal 2014. In addition, the FTC-mandated divestitures in fiscal 2014 resulted in increased impairment charges. These reductions in selling and administrative expense margin in fiscal 2015 were partially offset by higher depreciation and amortization expense as a result of the application of acquisition accounting and increased debit and credit card fees as a result of chargebacks from EMV chip card transactions following the EMV Liability Shift.

Interest Expense, Net

Interest expense, net was $1,003.8 million in fiscal 2016, $950.5 million in fiscal 2015 and $633.2 million in fiscal 2014. The increase in interest expense, net for fiscal 2016 compared to fiscal 2015 is primarily due to $86.5 million of expenses incurred in connection with the June 2016 Term Loan Refinancing (as defined herein) and the December 2016 Term Loan Refinancing and related prepayments, consisting of $35.5 million in payments related to our debt modifications and the write-off of $51.0 million of deferred financing costs and original issue discount.

The following details our components of interest expense, net for the respective fiscal years (in millions):

 

     Fiscal 2016      Fiscal 2015     Fiscal 2014  

ABL Facility, senior secured and unsecured notes, term loans, notes and debentures

   $ 764.3      $ 777.0     $ 454.1  

Capital lease obligations

     106.8        97.0       77.5  

Amortization and write off of deferred financing costs

     84.4        69.3       65.3  

Amortization and write off of debt discount

     22.3        12.9       6.8  

Other interest expense (income)

     26.0        (5.7     29.5  
  

 

 

    

 

 

   

 

 

 

Total interest expense, net

   $ 1,003.8      $ 950.5     $ 633.2  
  

 

 

    

 

 

   

 

 

 

As of February 25, 2017, the company had total debt, including capital lease obligations, outstanding of $12.3 billion. The weighted average interest rate during the year was 7.8%, including amortization of debt discounts and deferred financing costs. The weighted average interest rate during fiscal 2015 and fiscal 2014 was 7.4% and 7.3%, respectively.

Loss on Debt Extinguishment

On June 24, 2016, a portion of the net proceeds from the issuance of the company’s 2024 Notes (as defined herein) was used to fully redeem $609.6 million of the Secured Notes. In connection with such redemption, the company recorded a $111.7 million loss on debt extinguishment comprised of an $87.7 million make-whole premium and a $24.0 million write off of deferred financing costs and original issue discount.

Other (Income) Expense

For fiscal 2016, other income was $11.4 million, primarily driven by gains related to the sale of certain investments. For fiscal 2015, other income was $7.0 million, primarily driven by equity in the earnings of our unconsolidated affiliate, Casa Ley. For fiscal 2014, other expense was $96.0 million, driven by the loss on our deal-contingent interest rate swap. In April 2014, we entered into a deal-contingent interest rate swap to hedge against adverse fluctuations in the interest rate on anticipated variable rate debt planned to be incurred to finance the Safeway acquisition. Prior to the Safeway acquisition, the swap was treated as an economic hedge with changes in fair value recorded through

 

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earnings. Upon closing of the Safeway acquisition, the interest rate swap was designated as a cash flow hedge, with any subsequent changes in fair value being recorded through accumulated other comprehensive income.

Income Tax Benefit

Income tax was a benefit of $90.3 million in fiscal 2016, $39.6 million in fiscal 2015 and $153.4 million in fiscal 2014. A substantial portion of the businesses and assets were held and operated by limited liability companies during these periods, which generally are not subject to entity-level federal or state income taxation. The components of the change in income taxes were as follows:

 

     Fiscal 2016     Fiscal 2015     Fiscal 2014  

Income tax benefit at federal statutory rate

   $ (162.3   $ (189.6   $ (482.5

State income taxes, net of federal benefit

     (20.2     (38.9     (38.4

Change in valuation allowance

     107.1       113.0       6.4  

Unrecognized tax benefits

     (18.7     3.1       11.3  

Members’ loss

     16.6       60.4       251.0  

Charitable donations

     (11.1     (11.1      

Tax Credits

     (17.3     (6.9     (2.4

Indemnification asset / liability

     5.1       14.0       (26.3

Transaction costs

                 62.1  

Nondeductible equity compensation

     4.2       12.3       51.0  

Other

     6.3       4.1       14.4  
  

 

 

   

 

 

   

 

 

 

Income tax benefit

   $ (90.3   $ (39.6   $ (153.4
  

 

 

   

 

 

   

 

 

 

As part of the IPO-Related Transactions, all of our operating subsidiaries will become subsidiaries of Albertsons Companies, Inc., a Delaware corporation, and, as a result, all of our operations will be taxable as part of a consolidated group for federal and state income tax purposes. The consolidation of our operations will result in higher income taxes and an increase in income taxes paid. Pro forma income for fiscal 2016 reflects a combined federal and state statutory tax rate of 38.7%. See Note 3(b) to the “Unaudited Pro Forma Condensed Consolidated Financial Information.”

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP operating financial measure that we define as earnings before interest, income taxes, depreciation and amortization, as further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. We believe that Adjusted EBITDA provides a meaningful representation of operating performance because it excludes the impact of items that could be considered “non-core” in nature. We use Adjusted EBITDA to measure overall performance and assess performance against peers. Adjusted EBITDA also provides useful information for our investors, securities analysts and other interested parties. Adjusted EBITDA is not a measure of performance under GAAP and should not be considered as a substitute for net earnings, cash flows from operating activities and other income or cash flow statement data. Our definition of Adjusted EBITDA may not be identical to similarly titled measures reported by other companies.

Adjusted EBITDA was $1,256.9 million, or 3.9% of sales, for the first 28 weeks of fiscal 2017, a decrease of 13.6% compared to $1,455.2 million, or 4.5% of sales, for the first 28 weeks of fiscal 2016. The decrease in Adjusted EBITDA primarily reflects lower gross profit, higher employee wage and benefit costs and a deleveraging of sales on fixed costs in the first 28 weeks of fiscal 2017 compared to the first 28 weeks of fiscal 2016.

 

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The following is a reconciliation of net loss to Adjusted EBITDA (in millions):

 

     28 weeks ended  
     September 9,
2017
    September 10,
2016
 

Net loss

   $ (560.1)     $ (371.7

Depreciation and amortization

     1,017.6       949.0  

Interest expense, net

     485.3       571.6  

Income tax benefit

     (67.3     (14.5
  

 

 

   

 

 

 

EBITDA

     875.5       1,134.4  

Gain on interest rate and commodity hedges, net

     (3.3     (7.4

Acquisition and integration costs (1)

     100.1       117.2  

Equity-based compensation expense

     18.1       15.3  

Loss on debt extinguishment

           111.7  

Net loss (gain) on property dispositions, asset impairments and lease exit costs

     51.3       (50.8

Goodwill impairment

     142.3        

LIFO expense

     23.6       19.7  

Collington acquisition (2)

           78.9  

Facility closures and related transition costs (3)

     9.5       17.0  

Fair value adjustments to CVRs

     34.2       16.8  

Other (4)

     5.6       2.4  
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 1,256.9     $ 1,455.2  
  

 

 

   

 

 

 

 

(1) Primarily includes costs related to acquisitions, integration of acquired businesses, and expenses related to management fees paid in connection with acquisition and financing activities.
(2) The 28 weeks ended September 10, 2016 includes a charge to pension expense, net related to the settlement of a pre-existing contractual relationship and assumption of the pension plan related to the Collington acquisition.
(3) Includes costs related to facility closures and the transition to our decentralized operating model.
(4) Primarily includes lease adjustments related to deferred rents and deferred gains on leases. Also includes amortization of unfavorable leases on acquired Safeway surplus properties, estimated losses related to the security breach, earnings from Casa Ley, foreign currency translation gains, costs related to this offering and pension expense (exclusive of the charge related to the Collington acquisition) in excess of cash contributions.

For fiscal 2016, Adjusted EBITDA was $2.8 billion, or 4.7% of sales, an increase of 5.1% compared to $2.7 billion, or 4.6% of sales, for fiscal 2015. The increase in Adjusted EBITDA for fiscal 2016 reflects improved operating performance in addition to synergies achieved as part of the Safeway integration partially offset by decreases in our identical store sales as a result of the deflationary environment in fiscal 2016.

 

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The following is a reconciliation of net loss to Adjusted EBITDA (in millions) for each of fiscal 2016, fiscal 2015 and fiscal 2014:

 

     Fiscal
2016(1)
    Fiscal
2015(1)
    Fiscal
2014(2)
 

Net loss

   $ (373.3   $ (502.2   $ (1,225.2

Depreciation and amortization

     1,804.8       1,613.7       718.1  

Interest expense, net

     1,003.8       950.5       633.2  

Income tax benefit

     (90.3     (39.6     (153.4
  

 

 

   

 

 

   

 

 

 

EBITDA

     2,345.0       2,022.4       (27.3

(Gain) loss on interest rate and commodity hedges, net

     (7.0     16.2       98.2  

Acquisition and integration costs (3)

     213.6       342.0       352.0  

Loss on debt extinguishment

     111.7              

Termination of long-term incentive plans

                 78.0  

Equity-based compensation expense

     53.3       97.8       344.1  

Net (gain) loss on property dispositions, asset impairment and lease exit costs (4)

     (39.2     103.3       227.7  

LIFO expense (benefit)

     (7.9     29.7       43.1  

Collington acquisition (5)

     78.9              

Facility closures and related transition costs (6)

     23.0       25.0        

Other (7)

     45.1       44.7       (17.1
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 2,816.5     $ 2,681.1     $ 1,098.7  
  

 

 

   

 

 

   

 

 

 

 

(1) Includes results for the stores acquired in the Safeway acquisition on January 30, 2015.
(2) Includes results from four weeks for the stores acquired in the Safeway acquisition on January 30, 2015.
(3) Primarily includes costs related to acquisitions, integration of acquired businesses, and expenses related to management fees paid in connection with acquisition and financing activities, adjustments to tax indemnification assets and liabilities and losses on acquired contingencies in connection with the Safeway acquisition.
(4) Fiscal 2016 includes a net gain of $42.9 million related to the disposition of a portfolio of surplus properties. Fiscal 2015 includes losses of $30.6 million related to leases assigned to Haggen as part of the FTC-mandated divestitures that were subsequently rejected during the Haggen bankruptcy proceedings and additional losses of $41.1 million related to the Haggen divestitures and its related bankruptcy. Fiscal 2014 includes impairment charges of $233.4 million related to the stores sold in the FTC-mandated divestiture process.
(5) Fiscal 2016 includes a charge to pension expense, net related to the settlement of a pre-existing contractual relationship and assumption of the pension plan related to the Collington acquisition.
(6) Includes costs related to facility closures and the transition to our decentralized operating model.
(7) Primarily includes lease adjustments related to deferred rents and deferred gains on leases. Also includes amortization of unfavorable leases on acquired Safeway surplus properties, estimated losses related to the security breach, charges related to changes in the fair value of the CVRs, earnings from Casa Ley, foreign currency translation gains, costs related to this offering and pension expense (exclusive of the charge related to the Collington acquisition) in excess of cash contributions.

 

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The following is a reconciliation of cash flow from operating activities to Free Cash Flow (in millions):

 

     28 weeks ended                    
     September 9,
2017
    September 10,
2016
    Fiscal
2016
    Fiscal
2015
    Fiscal
2014
 

Cash flow provided by (used in) operating activities

   $ 872.7     $ 886.9     $ 1,813.5     $ 901.6     $ (165.1

Income tax benefit

     (67.3     (14.5     (90.3     (39.6     (153.4

Deferred income taxes

     127.9       236.9       219.5       90.4       170.1  

Interest expense, net

     485.3       571.6       1,003.8       950.5       633.2  

Changes in operating assets and liabilities

     (204.7     (273.4     (251.9     466.5       39.3  

Amortization and write-off of deferred financing costs

     (40.9     (53.1     (84.4     (69.3     (65.3

Acquisition and integration costs

     100.1       117.2       213.6       342.0       352.0  

Termination of long-term incentive plans

                             78.0  

Pension contribution in connection with Safeway acquisition

                             260.0  

Other adjustments

     (16.2     (16.4     (7.3     39.0       (50.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     1,256.9       1,455.2       2,816.5       2,681.1       1,098.7  

Less: capital expenditures

     (752.6     (740.2     (1,414.9     (960.0     (336.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

   $ 504.3     $ 715.0     $ 1,401.6     $ 1,721.1     $ 762.2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Financial Resources

Net Cash Provided By (Used In) Operating Activities

Net cash provided by operating activities was $872.7 million for the first 28 weeks of fiscal 2017 compared to $886.9 million for the first 28 weeks of fiscal 2016. The slight decrease in cash flow from operations was primarily due to the decrease in operating income, offset by $120.7 million in lower interest paid, a $112.0 million reduction in income taxes paid and other changes in working capital.

Net cash provided by operating activities was $1,813.5 million during fiscal 2016 compared to net cash provided by operating activities of $901.6 million during fiscal 2015. The $911.9 million increase in net cash flow from operating activities during fiscal 2016 compared to fiscal 2015 was primarily due to an increase in operating income of $238.8 million, a Safeway appraisal settlement payment of $133.7 million in fiscal 2015 and changes in working capital primarily related to inventory and accounts payable partially offset by an increase in income taxes paid of $207.5 million. Fiscal 2016 cash provided by operating activities also includes a correction in the classification of certain book overdrafts resulting in an increase of $139.2 million.

Net cash provided by operating activities was $901.6 million during fiscal 2015 compared to net cash used in operating activities of $165.1 million during fiscal 2014. The $1,066.7 million increase in net cash flow from operating activities during fiscal 2015 compared to fiscal 2014 was primarily related to additional contributions from the acquired Safeway stores and improvement in operations of our Albertsons and NAI stores, partially offset by an increase of $382.9 million in interest paid due to borrowings used to fund the Safeway acquisition and a $260.0 million contribution to the Employee Retirement Plan of Safeway Inc. and its domestic subsidiaries (the “Safeway ERP”) under a settlement with the PBGC in fiscal 2014. As a result of this payment we do not expect to make additional contributions to the Safeway ERP until fiscal 2018.

 

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Net Cash Used In Investing Activities

Net cash used in investing activities was $756.1 million for the first 28 weeks of fiscal 2017 compared to $531.0 million for the first 28 weeks of fiscal 2016. Payments for property and equipment, including lease buyouts, of $752.6 million, and the acquisition of MedCart for $34.5 million comprised the primary cash used in investing activities for first 28 weeks of fiscal 2017. For the first 28 weeks of fiscal 2016, payments for property and equipment, including lease buyouts, of $740.2 million, payments for business acquisitions, consisting primarily of 29 stores from Haggen, of $160.9 million and an increase in restricted cash of $89.6 million were partially offset by proceeds from the sale of assets of $396.1 million. Asset sale proceeds were primarily from the sale and subsequent short-term leaseback of two distribution centers in Southern California and the sale of a portfolio of surplus properties.

Net cash used in investing activities during fiscal 2016 was $1,076.2 million primarily due to payments for property and equipment, including lease buyouts, of $1,414.9 million, which includes approximately $250 million of Safeway integration-related capital expenditures, and payments for business acquisitions of $220.6 million partially offset by proceeds from the sale of assets of $477.0 million. Asset sale proceeds include the sale and subsequent short-term leaseback of two distribution centers in Southern California and the sale of a portfolio of surplus properties.

Net cash used in investing activities during fiscal 2015 was $811.8 million primarily due to the merger consideration paid in connection with the Safeway acquisition appraisal settlement, purchase consideration paid for the A&P Transaction and the Haggen Transaction and cash paid for capital expenditures, partially offset by proceeds from the sale of our FTC-mandated divestitures in connection with the Safeway acquisition and a decrease in restricted cash due to the elimination of certain collateral requirements.

Net cash used in investing activities was $5,945.0 million in fiscal 2014, consisting primarily of cash paid for the Safeway acquisition, net of cash acquired, of $5,673.4 million and cash paid for property additions of $336.5 million.

On September 20, 2017, subsequent to the end of the second quarter of fiscal 2017, we acquired Plated, a provider of meal kit services. The acquisition consideration was comprised of $125.0 million in initial cash consideration, $50.0 million in deferred cash consideration to be paid over the next three years, and an earn-out of up to a maximum of $125.0 million, in cash or equity that is puttable in certain circumstances, to be paid over the next three years if the business achieves specified performance targets. The acquisition will be accounted for under the acquisition method of accounting, and we are currently evaluating the accounting for the earn-out.

In fiscal 2017, the company expects to spend approximately $1.5 billion in capital expenditures, including $200 million of Safeway integration-related capital expenditures, as follows (in millions):

 

Projected Fiscal 2017 Capital Expenditures

  

Integration capital

   $ 200.0  

New stores and remodels

     575.0  

Maintenance

     200.0  

Supply chain

     175.0  

IT

     175.0  

Real estate and expansion capital

     175.0  
  

 

 

 

Total

   $ 1,500.0  
  

 

 

 

Net Cash (Used In) Provided By Financing Activities

Net cash used in financing activities was $763.6 million for the first 28 weeks of fiscal 2017 compared to cash used in financing activities of $5.0 million for the first 28 weeks of fiscal 2016. Net cash used in financing activities was primarily due to payments on long-term debt and capital lease

 

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obligations of $501.4 million and a member distribution of $250.0 million for the first 28 weeks of fiscal 2017. Net cash used in financing activities consisted primarily of payments on long-term debt and capital lease obligations of $2,678.0 million and payment of a make-whole premium of $87.7 million, offset by proceeds from the issuance of long-term debt of $2,852.9 million for the first 28 weeks of fiscal 2016.

Net cash used in financing activities was $97.8 million in fiscal 2016 due primarily to payments on long-term debt and capital lease obligations, partially offset by proceeds from the issuance of long-term debt. Net cash used in financing activities was $635.9 million in fiscal 2015 due primarily to payments on our asset-based revolving credit facility and term loan borrowings from the proceeds of the FTC-mandated divestitures, partially offset by $300.0 million in borrowings under NAI’s pre-existing term loan facility to fund the A&P Transaction. Net cash used in financing activities was $6,928.9 million in fiscal 2014 primarily as a result of proceeds from the issuance of long-term debt and equity contributions used to finance the Safeway acquisition.

Proceeds from the issuance of long-term debt were $3,053.1 million in fiscal 2016, $453.5 million in fiscal 2015 and $8,097.0 million in fiscal 2014. In fiscal 2016, cash payments on long-term borrowings were $2,832.7 million, cash payments for obligations under capital leases were $123.2 million, and payment of a make-whole premium was $87.7 million. In fiscal 2015, cash payments on long-term borrowings were $903.4 million, cash payments for obligations under capital leases were $120.0 million and cash payments for debt financing costs were $41.5 million. In fiscal 2014, cash payments on long-term borrowings were $2,123.6 million, including $864.6 million of assumed debt that was immediately paid following the Safeway acquisition, cash payments for debt financing costs were $229.1 million and cash payments for obligations under capital leases were $64.1 million. Cash proceeds provided by financing activities in fiscal 2014 also includes proceeds from equity contributions related to the Safeway acquisition of $1,283.2 million.

On June 22, 2016, the company amended the Term Loan Agreement (as defined herein) pursuant to which three term loan tranches were established and certain provisions of such agreement were amended. The tranches consisted of $3,280.0 million of a 2016-1 term B-4 loan, $1,145.0 million of a 2016-1 term B-5 loan and $2,100.0 million of a term B-6 loan. The proceeds from the borrowings of these loans, together with $300.0 million of borrowings under the ABL Facility, were used to repay the term loans that were outstanding under the Term Loan Agreement as of June 22, 2016 and to pay related interest and fees (collectively, the “June 2016 Term Loan Refinancing”). The June 2016 Term Loan Refinancing was accounted for as a debt modification. In connection with the June 2016 Term Loan Refinancing the company expensed $27.6 million of financing costs and also wrote off $12.8 million of deferred financing costs associated with the original term loans. The 2016-1 term B-4 loan had an original maturity date of August 25, 2021, and had an interest rate of LIBOR, subject to a 1.0% floor, plus 3.5%. The 2016-1 term B-5 loan had an original maturity date of December 21, 2022, and had an interest rate of LIBOR, subject to a 1.0% floor, plus 3.75%. The term B-6 loan had an original maturity date of June 22, 2023, and had an interest rate of LIBOR, subject to a 1.0% floor, plus 3.75%.

On August 9, 2016, the company, using a portion of the net proceeds from the issuance of the 2025 Notes (as defined herein), repaid approximately $470.0 million then outstanding under the ABL Facility and repaid $500.0 million of principal on the term B-6 loan.

On December 23, 2016, the company amended the Term Loan Agreement pursuant to which three new term loan tranches were established and certain provisions of such agreement were amended (such amendment, the “December 2016 Term Loan Refinancing”). The new tranches consisted of $3,271.8 million of a new 2016-2 term B-4 loan, $1,142.1 million of a new 2016-2 term B-5 loan and $1,600.0 million of a new 2016-1 term B-6 loan (collectively, the “December Term Loans”). The proceeds from the issuance of the December Term Loans were used to repay the loans that were

 

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outstanding under the Term Loan Agreement and to pay related interest and fees. The December 2016 Term Loan Refinancing was accounted for as a debt modification. In connection with the December 2016 Term Loan Refinancing the company expensed $7.9 million of financing costs and also wrote off $14.0 million of deferred financing costs associated with the original term loans. The new 2016-2 term B-4 loan matures on August 25, 2021, and has an interest rate of LIBOR, subject to a 0.75% floor, plus 3.0%. The new 2016-2 term B-5 loan matures on December 21, 2022, and has an interest rate of LIBOR, subject to a 0.75% floor, plus 3.25%. The new 2016-1 term B-6 loan matures on June 22, 2023, and has an interest rate of LIBOR, subject to a 0.75% floor, plus 3.25%. Contemporaneously with the December 2016 Term Loan Refinancing, the company amended each of its existing interest rate swaps to reduce the floor on LIBOR from 100 basis points to 75 basis points. As a result, the company dedesignated its original cash flow hedges and redesignated the amended swaps prospectively. Losses deferred into other comprehensive income as of the dedesignation date which are associated with the original cash flow hedges will be amortized to interest expense over the remaining life of the hedges.

On June 16, 2017, we repaid $250.0 million of the existing term loans. In addition, on June 27, 2017, we entered into a repricing amendment to the Term Loan Agreement which established three new term loan tranches. The new tranches consist of $3,013.6 million of a new Term B-4 Loan, $1,139.3 million of a new Term B-5 Loan and $1,596.0 million of a new Term B-6 Loan (collectively, the “New Term Loans”). The (i) new Term B-4 Loan will mature on August 25, 2021, and has an interest rate of LIBOR, subject to a 0.75% floor, plus 2.75%, (ii) new Term B-5 Loan will mature on December 21, 2022, and has an interest rate of LIBOR, subject to a 0.75% floor, plus 3.00%, and (iii) new Term B-6 Loan will mature on June 22, 2023, and has an interest rate of LIBOR, subject to a 0.75% floor, plus 3.00%. The New Term Loans, together with cash on hand, were used to repay the term loans then outstanding under the Term Loan Agreement.

Debt Management

Total debt, including both the current and long-term portions of capital lease obligations, increased by $111.6 million to $12.3 billion as of the end of fiscal 2016 compared to $12.2 billion as of the end of fiscal 2015. The increase in fiscal 2016 was primarily due to proceeds from the issuance of long-term debt of $3,053.1 million, which principally comprised the issuance of the 2024 Notes and the 2025 Notes and borrowings under our ABL Facility partially offset by payments on long-term borrowings of $2,832.7 million. The $2,832.7 million in payments on long-term borrowings consisted primarily of $1,354.2 million of principal payments on the Term Loan Facilities, $609.6 million of principal payments related to the June 2016 redemption of the Secured Notes, and $786.0 million of payments under our ABL Facility.

Outstanding debt, including current maturities and net of debt discounts and deferred financing costs, principally consisted of (in millions):

 

     February 25, 2017  

Term loans

   $ 5,853.0  

Notes and debentures

     5,393.6  

Capital leases

     954.0  

Other notes payable and mortgages

     137.3  
  

 

 

 

Total debt, including capital leases

   $ 12,337.9  
  

 

 

 

Total debt, including both the current and long-term portions of capital lease obligations, decreased by $342.7 million to $12.2 billion as of the end of fiscal 2015 compared to $12.6 billion as of the end of fiscal 2014. The decrease in fiscal 2015 was primarily due to payments on long-term borrowings of $903.4 million, partially offset by proceeds from the issuance of long-term debt of $453.5 million, which were primarily comprised of additional borrowings used to fund the A&P Transaction.

 

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On October 31, 2017, certain of our subsidiaries completed the sale of 71 of our store properties to the Purchaser for an aggregate purchase price, exclusive of closing costs, of approximately $720 million. The estimated after-tax net proceeds are expected to be approximately $650 million. We intend to use the net proceeds to repay outstanding debt or invest in our operations. In connection with the Sale-Leaseback Transaction, we entered into lease agreements for each of the Properties for initial terms of 20 years with varying multiple five-year renewal options, that we expect will qualify for sale-leaseback accounting. Any gain on the sale of the Properties will be deferred and amortized over the term of the leases. The aggregate initial annual rent payment for the Properties will be approximately $48 million, with scheduled rent increases occurring generally every one or five years over the initial 20-year term.

For additional information on the company’s recent refinancing transactions, see “Description of Indebtedness.”

See Note 8—Long-Term Debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information related to our outstanding debt.

Liquidity and Factors Affecting Liquidity

We estimate our liquidity needs over the next fiscal year to be in the range of $4.5 billion to $5.0 billion, which includes anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments of debt, operating leases, capital leases and our TSA agreements with SuperValu. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our ABL Facility, will be adequate to meet our liquidity needs for the next 12 months and for the foreseeable future. We believe we have adequate cash flow to continue to maintain our current debt ratings and to respond effectively to competitive conditions. In addition, we may enter into refinancing transactions from time to time. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our ABL Facility. See “—Contractual Obligations” for a more detailed description of our commitments as of the end of fiscal 2016.

As of September 9, 2017, we had no borrowings outstanding under our ABL Facility and total availability of approximately $3.0 billion (net of letter of credit usage). As of February 25, 2017, we had no borrowings outstanding under our ABL Facility and total availability of approximately $3.0 billion (net of letter of credit usage).

The ABL Facility contains no financial maintenance covenants unless and until (a) excess availability is less than (i) 10% of the lesser of the aggregate commitments and the then-current borrowing base at any time or (ii) $250 million at any time or (b) an event of default is continuing. If any such event occurs, we must maintain a fixed charge coverage ratio of 1.0:1.0 from the date such triggering event occurs until such event of default is cured or waived and/or the 30th day that all such triggers under clause (a) no longer exist.

During the 28 weeks ended September 9, 2017, fiscal 2016 and fiscal 2015, there were no financial maintenance covenants in effect under our ABL Facility because the conditions listed above (and similar conditions in our refinanced asset-based revolving credit facilities) had not been met.

 

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Contractual Obligations

Other than the Sale-Leaseback Transaction as previously described under “Debt Management,” there have been no material changes to our contractual obligations during the 28 weeks ended September 9, 2017.

The table below presents our significant contractual obligations as of February 25, 2017 (in millions)(1):

 

     Payments Due Per Year  
     Total      2017      2018-2019      2020-2021      Thereafter  

Long-term debt(2)

   $ 11,812.1      $ 202.6      $ 406.3      $ 3,503.8      $ 7,699.4  

Estimated interest on long-term debt(3)

     5,037.9        623.3        1,226.1        1,120.1        2,068.4  

Operating leases(4)

     5,666.7        770.0        1,327.6        1,016.5        2,552.6  

Capital leases(4)

     1,575.7        204.4        344.3        284.8        742.2  

Other long-term liabilities(5)

     1,264.9        293.3        370.5        174.4        426.7  

2013 SuperValu TSA(6)

     214.8        129.1        85.7                

Purchase obligations(7)

     499.3        303.8        133.8        41.5        20.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 26,071.4      $ 2,526.5      $ 3,894.3      $ 6,141.1      $ 13,509.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The contractual obligations table excludes funding of pension and other postretirement benefit obligations, which totaled approximately $11.5 million in fiscal 2016 and is expected to total approximately $21.9 million in fiscal 2017. This table excludes contributions under various multi-employer pension plans, which totaled $399.1 million in fiscal 2016 and are expected to total approximately $420 million in fiscal 2017. This table also excludes potential payments related to our contingent value rights liabilities.
(2) Long-term debt amounts exclude any original issue discount and deferred financing costs. See Note 8—Long-Term Debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information.
(3) Amounts include contractual interest payments using the interest rate as of February 25, 2017 applicable to our variable interest term debt instruments and stated fixed rates for all other debt instruments, excluding interest rate swaps. See Note 8—Long-Term Debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information.
(4) Represents the minimum rents payable under operating and capital leases, excluding common area maintenance, insurance or tax payments, for which the company is also obligated.
(5) Consists of self-insurance liabilities which have not been reduced by insurance-related receivables. Excludes the $180.1 million of assumed withdrawal liabilities related to Safeway’s previous closure of its Dominick’s division and excludes the unfunded pension and postretirement benefit obligation of $709.4 million. The amount of unrecognized tax benefits of $418.0 million as of February 25, 2017 has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined. Excludes deferred tax liabilities and certain other deferred liabilities that will not be settled in cash and other lease-related liabilities already reflected as operating lease commitments.
(6) Represents minimum contractual commitments expected to be paid under the SVU TSAs and the wind-down agreement, executed on April 16, 2015. See Note 15—Related Parties in our consolidated financial statements, included elsewhere in this prospectus, for additional information.
(7) Purchase obligations include various obligations that have annual purchase commitments. As of February 25, 2017, future purchase obligations primarily relate to fixed asset, marketing and information technology commitments, including fixed price contracts. In addition, in the ordinary course of business, the company enters into supply contracts to purchase product for resale to consumers which are typically of a short-term nature with limited or no purchase commitments. The company also enters into supply contracts which typically include either volume commitments or fixed expiration dates, termination provisions and other customary contractual considerations. The supply contracts that are cancelable have not been included above.

 

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Off-Balance Sheet Arrangements

Guarantees

The company is party to a variety of contractual agreements pursuant to which it may be obligated to indemnify the other party for certain matters. These contracts primarily relate to the company’s commercial contracts, operating leases and other real estate contracts, trademarks, intellectual property, financial agreements and various other agreements. Under these agreements, the company may provide certain routine indemnifications relating to representations and warranties (for example, ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. The company believes that if it were to incur a loss in any of these matters, the loss would not have a material effect on the company’s financial statements.

We are liable for certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, we could be responsible for the lease obligation, including the 11 store leases that Haggen rejected in its bankruptcy case. As a result of these lease rejections, the company recorded a loss of $32.2 million for this contingent liability, of which $1.6 million was recorded in the first quarter of fiscal 2016 and $30.6 million was recorded during fiscal 2015. See Note 16—Commitments and contingencies and off balance sheet arrangements in the consolidated financial statements of AB Acquisition for additional information. Because of the wide dispersion among third parties and the variety of remedies available, we believe that if an assignee became insolvent it would not have a material effect on our financial condition, results of operations or cash flows. See “Risk Factors—Risks Related to Our Business and Industry—We may have liability under certain operating leases that were assigned to third parties.”

In the ordinary course of business, we enter into various supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. These contracts typically include volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations.

Letters of Credit

We had letters of credit of $636.2 million outstanding as of September 9, 2017. The letters of credit are maintained primarily to support our performance, payment, deposit or surety obligations. We pay bank fees ranging from 1.25% to 1.75% plus a fronting fee of 0.125% on the face amount of the letters of credit.

New Accounting Policies Not Yet Adopted

See Note 1—Description of Business, Basis of Presentation and Summary of Significant Accounting Policies in our consolidated financial statements, included elsewhere in this prospectus, for new accounting pronouncements which have not yet been adopted.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a fair and consistent manner. See Note 1—Description of Business, Basis of Presentation and Summary of Significant Accounting Policies in our consolidated financial statements, included elsewhere in this prospectus, for a discussion of our significant accounting policies.

 

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Management believes the following critical accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of our consolidated financial statements.

Vendor Allowances

Consistent with standard practices in the retail industry, we receive allowances from many of the vendors whose products we buy for resale in our stores. These vendor allowances are provided to increase the sell-through of the related products. We receive vendor allowances for a variety of merchandising activities: placement of the vendors’ products in our advertising; display of the vendors’ products in prominent locations in our stores; supporting the introduction of new products into our retail stores and distribution systems; exclusivity rights in certain categories; and compensation for temporary price reductions offered to customers on products held for sale at retail stores. We also receive vendor allowances for buying activities such as volume commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of the vendor allowance contracts have terms of less than one year.

We recognize vendor allowances for merchandising activities as a reduction of cost of sales when the related products are sold. Vendor allowances that have been earned because of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. The amount and timing of recognition of vendor allowances as well as the amount of vendor allowances to be recognized as a reduction of ending inventory require management judgment and estimates. We determine these amounts based on estimates of current year purchase volume using forecast and historical data and a review of average inventory turnover data. These judgments and estimates affect our reported gross profit, operating earnings (loss) and inventory amounts. Our historical estimates have been reliable in the past, and we believe the methodology will continue to be reliable in the future. Based on previous experience, we do not expect significant changes in the level of vendor support.

Self-Insurance Liabilities

We are primarily self-insured for workers’ compensation, property, automobile and general liability. The self-insurance liability is undiscounted and determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We have established stop-loss amounts that limit our further exposure after a claim reaches the designated stop-loss threshold. In determining our self-insurance liabilities, we perform a continuing review of our overall position and reserving techniques. Since recorded amounts are based on estimates, the ultimate cost of all incurred claims and related expenses may be more or less than the recorded liabilities.

Any actuarial projection of self-insured losses is subject to a high degree of variability. Litigation trends, legal interpretations, benefit level changes, claim settlement patterns and similar factors influenced historical development trends that were used to determine the current year expense and, therefore, contributed to the variability in the annual expense. However, these factors are not direct inputs into the actuarial projection, and thus their individual impact cannot be quantified.

Long-Lived Asset Impairment

We regularly review our individual stores’ operating performance, together with current market conditions, for indications of impairment. When events or changes in circumstances indicate that the carrying value of an individual store’s assets may not be recoverable, its future undiscounted cash flows are compared to the carrying value. If the carrying value of store assets to be held and used is greater than the future undiscounted cash flows, an impairment loss is recognized to record the assets at fair value. For property and equipment held for sale, we recognize impairment charges for the

 

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excess of the carrying value plus estimated costs of disposal over the fair value. Fair values are based on discounted cash flows or current market rates. These estimates of fair value can be significantly impacted by factors such as changes in the current economic environment and real estate market conditions. Long-lived asset impairment charges were $62.0 million, $46.6 million, $40.2 million and $266.9 million in the first 28 weeks of fiscal 2017, fiscal 2016, fiscal 2015 and fiscal 2014 respectively.

On December 19, 2014, in connection with the Safeway acquisition, we, together with Safeway, announced that we had entered into agreements to sell 111 Albertsons and 57 Safeway stores across eight states to four separate buyers. The divestiture of these stores was required by the FTC as a condition of closing the Safeway acquisition and was contingent on the closing of the Safeway acquisition. The impairment charge in fiscal 2014 was primarily related to the divestiture of the Albertsons stores.

Business Combination Measurements

In accordance with applicable accounting standards, we estimate the fair value of acquired assets and assumed liabilities as of the acquisition date of business combinations. These fair value adjustments are input into the calculation of goodwill related to the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition.

The fair value of assets acquired and liabilities assumed are determined using market, income and cost approaches from the perspective of a market participant. The fair value measurements can be based on significant inputs that are not readily observable in the market. The market approach indicates value for a subject asset based on available market pricing for comparable assets. The market approach used includes prices and other relevant information generated by market transactions involving comparable assets, as well as pricing guides and other sources. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required market rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for certain assets for which the market and income approaches could not be applied due to the nature of the asset. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, adjusted for obsolescence, whether physical, functional or economic.

Goodwill

As of February 25, 2017, our goodwill totaled $1.2 billion, of which $942.4 million was recorded as part of our acquisition of Safeway. We review goodwill for impairment on the first day of our fourth quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our reporting units that have goodwill balances. Beginning on the first day of fiscal 2017, we prospectively adopted accounting guidance that simplifies goodwill impairment testing. See Note 1—Basis of Presentation and Summary of Significant Accounting Policies in our consolidated financial statements, included elsewhere in this prospectus, for additional information.

During the second quarter of fiscal 2017, there was a sustained decline in the market multiples of publicly traded peer companies. In addition, during the second quarter of fiscal 2017, we revised our short-term operating plan. As a result, we determined that an interim review of the recoverability of our goodwill was necessary. Consequently, we recorded a goodwill impairment loss of $142.3 million, substantially all within the Acme reporting unit relating to the A&P Transaction, due to changes in the estimate of our long-term future financial performance to reflect lower expectations for growth in revenue and earnings than previously estimated. The goodwill impairment loss was based on a

 

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quantitative analysis using a combination of a discounted cash flow model (income approach) and a guideline public company comparative analysis (market approach).

The fair values of the remaining reporting units were substantially in excess of their carrying values, and we currently believe that the likelihood of an additional material goodwill impairment in the next twelve months related to our remaining reporting units is remote as a 10% decrease in the fair value of any of the remaining reporting units would not result in additional goodwill impairment.

The annual evaluation of goodwill performed for our reporting units during the fourth quarters of fiscal 2016, fiscal 2015 and fiscal 2014 did not result in impairment.

Equity-Based Compensation

We periodically grant membership interests to employees and non-employees in exchange for services. The membership interests we grant to employees are not traditional stock options or stock awards, but are equity interests in a privately held company that participate in earnings, subject to certain distribution thresholds. We account for these as equity-based awards in accordance with the applicable accounting guidance for equity awards issued to employees and non-employees, respectively. To value these awards, the company has determined that an option pricing model is the most appropriate method to measure the fair value of these awards.

In fiscal 2014, we granted the following equity awards to employees and non-employees:

 

    3.3 million series 1 Incentive Units (as defined herein) to a member of management under the Incentive Unit Plan (as defined herein). 50% of the series 1 Incentive Units have a service vesting period of four years from the date awarded and vest 25% on each of the subsequent four anniversaries of such date. The remaining 50% have performance-based vesting terms, which vest 25% on the last day of the company’s fiscal year for each of the following four fiscal years, subject to specific performance targets. The units accelerate upon a qualifying change of control.

 

    3.3 million fully vested, non-forfeitable “Investor Incentive Units” in exchange for services. The units convert into an equal number of ABS units, NAI units and Safeway units based on the fair value of the Investor Incentive Units on the conversion date after five years or upon a qualifying change of control.

 

    11.6 million fully vested, non-forfeitable Investor Incentive Units to five institutional investors. The units granted and issued to our institutional investors were treated as non-employee compensation for merger consulting services and direct equity issuance costs related to the Safeway acquisition. The units vest immediately and convert into an equal number of ABS units, NAI units and Safeway units based on the fair market value of the Investor Incentive Units on the conversion date after five years or upon a qualifying change of control.

In fiscal 2015, we issued the following equity awards to employees and non-employees:

 

   

11.7 million Phantom Units to employees and directors of the company. Each Phantom Unit provides the participant with a contractual right to receive upon vesting one incentive unit. Generally, fifty percent of the Phantom Units are Time-Based Units (as defined herein) that will vest in four annual installments of 25% on the last day of the fiscal year in which the units are granted and an additional 25% on the last day of each of the three subsequent fiscal years thereafter, subject to continued service through each vesting date. The remaining 50% of the Phantom Units are Performance Units (as defined herein) that will vest in four annual installments of 25% on the last day of the fiscal year in which the units are granted and an additional 25% on the last day of each of the three subsequent fiscal years thereafter, subject

 

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to continued service through each vesting date, and will also be subject to the achievement of annual performance targets established for each such fiscal year. Upon the consummation of an initial public offering, the unvested Phantom Units that are Performance Units will convert into Phantom Units that are solely Time-Based Units. Following the consummation of the IPO-Related Transactions, all unvested Phantom Units will accelerate and become vested in the event of the termination of the participant’s employment due to death or disability or by the company without cause.

In fiscal 2016, we issued the following equity awards to employees and non-employees:

 

    3.3 million Phantom Units to employees of the company, consisting of 1.9 million new awards and 1.4 million previously issued performance-based awards that were deemed to be reissued in October 2016 as time-based awards upon approval by our board of directors of a resolution to waive the performance condition related to fiscal 2016.

 

    23,392 Phantom Units to independent directors that vested on the last day of fiscal 2016.

For the 28 weeks ended September 9, 2017, we issued the following equity awards to employees and non-employees:

 

    1.9 million Phantom Units to employees of the company.

 

    36,764 Phantom Units to independent directors that will vest 100% on the last day of fiscal 2017 subject to the applicable independent director’s continued service through such date.

As of the date of this prospectus, 5,062,806 Phantom Units are reserved for future issuance.

We determine fair value of unvested and issued awards on the grant date using an option pricing model, adjusted for a lack of marketability and using an expected term or time to liquidity based on judgments made by management. We also consider forfeitures for equity-based grants which are not expected to vest. Expected volatility is calculated based upon historical volatility data from a group of comparable companies over a time frame consistent with the expected life of the awards. The expected risk-free rate is based on the U.S. Treasury yield curve rates in effect at the time of the grant using the term most consistent with the expected life of the award. Dividend yield was estimated at zero as we do not anticipate making regular future distributions to stockholders. Changes in these inputs and assumptions can materially affect the measurement of the estimated fair value of our equity-based compensation expense.

We are required to estimate the enterprise value underlying our equity-based awards when performing fair value calculations. Due to the prior absence of a market for our equity interests, enterprise value is determined by management with the assistance of valuation specialists. The most recent valuation was performed as of February 25, 2017 and uses a Market and Income approach weighted at 50% each. The Market Approach uses the Guideline Public Company Method, which focuses on comparing the subject entity to selected reasonably similar (or guideline) publicly traded companies. Under this method, valuation multiples are: (i) derived from the operating data of selected guideline companies; (ii) evaluated and adjusted based on the strengths and weaknesses of the subject entity relative to the selected guideline companies; and (iii) applied to the operating data of the subject entity to arrive at an indication of value. The Income Approach utilized the Discounted Cash Flow (“DCF”) Method. The DCF Method measures the value of the enterprise by estimating the present worth of the net economic benefit (cash receipts less cash outlays) to be received over the life of the company. The steps followed in applying this approach include estimating the expected after-tax cash flows attributable to the company over its life and discounts the cash flows using a rate of return that accounts for both the time

 

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value of money and investment risk factors. Management utilized future projections discounted using a present value factor ranging from 9% to 10% and a long-term terminal growth rate of 2.5%. Grants subsequent to our initial public offering will be based on the trading value of our common stock.

The series 1 Incentive Units and Investor Incentive Units granted in January 2015 were valued at $22.11 per unit with a $403.7 million aggregate fair value.

The Phantom Units issued in fiscal 2015 were valued at a weighted average of $21.75 per unit with a $254.8 million aggregate fair value. The Phantom Units issued in fiscal 2016 were valued at a weighted average of $16.67 per unit with a $55.0 million aggregate fair value.

The following assumptions were used for the equity awards issued and granted:

 

     Fiscal 2016      Fiscal 2015  
     February 25, 2017      February 27, 2016  

Dividend yield

     —%        —%  

Expected volatility

     54.5%        41.7%  

Risk-free interest rate

     0.70%        0.61%  

Time to liquidity

     1.5 years        1.9 years  

Discount for lack of marketability

     19.1%        16.0%  

Employee Benefit Plans and Collective Bargaining Agreements

Substantially all of our employees are covered by various contributory and non-contributory pension, profit sharing or 401(k) plans, in addition to dedicated defined benefit plans for Safeway, NAI and United employees. Certain employees participate in a long-term retention incentive bonus plan. We also provide certain health and welfare benefits, including short-term and long-term disability benefits to inactive disabled employees prior to retirement. Most union employees participate in multiemployer retirement plans under collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by us.

We recognize a liability for the under-funded status of the defined benefit plans as a component of pension and post-retirement benefit obligations. Actuarial gains or losses and prior service costs or credits are recorded within other comprehensive income (loss). The determination of our obligation and related expense for our sponsored pensions and other post-retirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate and expected long-term rate of return on plan assets.

The objective of our discount rate assumptions was intended to reflect the rates at which the pension benefits could be effectively settled. In making this determination, we take into account the timing and amount of benefits that would be available under the plans. As of February 27, 2016, we changed the method used to estimate the service and interest rate components of net periodic benefit cost for our defined benefit pension plans and other post-retirement benefit plans. Historically, the service and interest rate components were estimated using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We have elected to use a full yield curve approach in the estimation of service and interest cost components of net pension and other post-retirement benefit plan expense by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. We utilized weighted discount rates of 4.25% and 3.92% for our pension plan expenses for fiscal 2016 and fiscal 2015, respectively. To determine the expected rate of return on pension plan assets held by us for fiscal 2016, we considered current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories. Our weighted assumed pension plan investment rate of return was 6.96% for fiscal 2016 and 6.96% for

 

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fiscal 2015. See Note 14—Employee Benefit Plans and Collective Bargaining Agreements in our consolidated financial statements, included elsewhere in this prospectus, for more information on the asset allocations of pension plan assets.

Sensitivity to changes in the major assumptions used in the calculation of our pension and other post-retirement plan liabilities is illustrated below (dollars in millions).

 

     Percentage
Point Change
    Projected Benefit Obligation
Decrease /(Increase)
   Expense
Decrease / (Increase)
 

Discount rate

     +/- 1.00   $282.1 / $(348.2)      $13.2 / $  3.8    

Expected return on assets

     +/- 1.00   — / —      $16.9 / $(16.9)  

In fiscal 2016 and fiscal 2015, we contributed $11.5 million and $7.4 million, respectively, to our pension and post-retirement plans. In the fourth quarter of fiscal 2014, we contributed $260.0 million to the Safeway ERP under a settlement with the PBGC in connection with the Safeway acquisition closing. We expect to contribute approximately $21.9 million to our pension and post-retirement plans in fiscal 2017.

Multiemployer Pension Plans

We contribute to various multiemployer pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Expense is recognized in connection with these plans as contributions are funded. We made contributions to these plans of $399.1 million, $379.8 million and $113.4 million in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. During fiscal 2017, we expect to contribute approximately $420 million to multiemployer pension plans, subject to collective bargaining conditions.

Additionally, in conjunction with the Safeway acquisition, we assumed withdrawal liabilities of $221.8 million related to Safeway’s previous closure of its Dominick’s division. The amount of the withdrawal liability as of February 25, 2017 with respect to the Dominick’s division was $180.1 million, which primarily reflects minimum required payments made subsequent to the date of the Safeway acquisition.

See Note 14—Employee Benefit Plans and Collective Bargaining Agreements in our consolidated financial statements, included elsewhere in this prospectus, for more information relating to our participation in these multiemployer pension plans.

Income Taxes and Uncertain Tax Positions

We review the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in our consolidated financial statements. See Note 13—Income Taxes in our consolidated financial statements, included elsewhere in this prospectus, for the amount of unrecognized tax benefits and other disclosures related to uncertain tax positions. Various taxing authorities periodically examine our income tax returns. These examinations include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating these various tax filing positions, including state and local taxes, we assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant

 

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information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our financial statements. A number of years may elapse before an uncertain tax position is examined and fully resolved. As of February 25, 2017, we are no longer subject to federal income tax examinations for fiscal years prior to 2012 and in most states are no longer subject to state income tax examinations for fiscal years before 2007. Tax years 2007 through 2016 remain under examination. The assessment of our tax position relies on the judgment of management to estimate the exposures associated with our various filing positions.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from a variety of sources, including changes in interest rates, foreign currency exchange rates and commodity prices. We have from time to time selectively used derivative financial instruments to reduce these market risks. We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments. Our market risk exposures related to interest rates, foreign currency and commodity prices are discussed below and have not materially changed from the prior fiscal year. We use derivative financial instruments to reduce these market risks related to interest rates.

Interest Rate Risk and Long-Term Debt

We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps (“Cash Flow Hedges”). Our risk management objective and strategy is to utilize these interest rate swaps to protect the company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. We believe that we are meeting our objectives of hedging our risks in changes in cash flows that are attributable to changes in the LIBOR rate, which is the designated benchmark interest rate being hedged (the “hedged risk”), on an amount of the company’s debt principal equal to the then-outstanding swap notional amount.

Additionally, we had a Deal-Contingent Swap that was entered into on April 16, 2014 in order to reduce our exposure to anticipated variable rate debt issuances in connection with the Safeway acquisition. In accordance with the swap agreement, we receive a floating rate of interest and pay a fixed rate of interest over the life of the contract.

Interest rate volatility could also materially affect the interest rate we pay on future borrowings under the Senior Secured Credit Facilities. The interest rate we pay on future borrowings under the Senior Secured Credit Facilities are dependent on LIBOR. We believe a 100 basis point increase on our variable interest rates would impact our interest expense by approximately $20 million.

The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including debt instruments and interest rate swaps. For debt obligations, the table presents principal amounts due and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents average notional amounts and weighted average interest rates by expected (contractual) maturity dates (dollars in millions):

 

    Fiscal
2017
    Fiscal
2018
    Fiscal
2019
    Fiscal
2020
    Fiscal
2021
    Thereafter     Total     Fair Value  

Long-Term Debt

               

Fixed Rate – Principal payments

  $ 142.5     $ 13.4     $ 272.7     $ 141.0     $ 134.3     $ 5,094.3     $ 5,798.2     $ 5,843.0  

Weighted average interest rate

    6.6     6.9     5.0     4.0     4.8     6.9     6.7  

Variable Rate – Principal payments

  $ 60.1     $ 60.1     $ 60.1     $ 60.1     $ 3,168.4     $ 2,605.1     $ 6,013.9     $ 6,038.9  

Weighted average interest rate

    4.0     4.0     4.0     4.0     3.8     4.3     4.0  

 

(1) Excludes effect of interest rate swaps. Also excludes deferred financing costs and debt discounts.

 

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     Pay Fixed/Receive Variable  
     Fiscal
2017
    Fiscal
2018
    Fiscal
2019
    Fiscal
2020
    Fiscal
2021
    Thereafter  

Cash Flow Hedges

            

Average notional amount outstanding

   $ 3,807     $ 2,925     $ 1,921     $ 1,364     $ 1,060     $  

Average pay rate

     5.7     5.6     5.8     5.8     5.8    

Average receive rate

     4.3     4.8     5.0     5.2     5.3    

Commodity Price Risk

We have entered into fixed price contracts to purchase electricity and natural gas for a portion of our energy needs. We expect to take delivery of these commitments in the normal course of business, and, as a result, these commitments qualify as normal purchases. We also manage our exposure to changes in diesel prices utilized in the company’s distribution process through the use of short-term heating oil derivative contracts. These contracts are economic hedges of price risk and are not designated or accounted for as hedging instruments for accounting purposes. Changes in the fair value of these instruments are recognized in earnings. We do not believe that these energy and commodity swaps would cause a material change to the financial position of the company.

 

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BUSINESS

Our Company

We are one of the largest food and drug retailers in the United States, with both strong local presence and national scale. As of September 9, 2017, we operated 2,328 stores across 35 states and the District of Columbia under 20 well-known banners, including Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market, Carrs and Haggen. We operate in 122 MSAs and are ranked #1 or #2 by market share in 66% of them. We provide our customers with convenient and value-added services, including through our 1,779 pharmacies, 1,254 in-store branded coffee shops and 393 adjacent fuel centers. Complementary to our large network of stores, we aim to provide our customers a seamless omni-channel shopping experience by offering a growing set of digital offerings, including home deliveries, “click-and-collect” store pickup, and online prescription refills. We have approximately 280,000 talented and dedicated employees serving on average more than 34 million customers each week. With over 12 million loyalty rewards members and one of the largest data sets in the food and drug retail industry, we strive to offer each of our customers a personalized shopping experience with targeted promotions and relevant product offerings.

Our core operating philosophy is simple: we run great stores with a relentless focus on driving sales. We believe that our management team, with decades of collective experience in the food and drug retail industry, has developed a proven and successful operating playbook that differentiates us from our competitors. Our strategy is to drive customer loyalty and sales by offering our customers an excellent in-store experience, superior customer service, an attractive value proposition and compelling and original product offerings, including our O Organics and Open Nature brands. We also engage directly with our customers through a variety of digital media channels and personalized digital offers in our just for U and MyMixx rewards programs. We are focused on providing our customers with a choice of how, when and where they shop through the continued expansion of our online offerings, including the roll-out of new delivery models and our “click-and-collect” pick-up program.

We implement our playbook through a decentralized management structure. We believe this approach allows our division and district-level leadership teams to consistently create a superior customer experience and deliver outstanding operating performance. These leadership teams are empowered and incentivized to make decisions on product assortment, placement, pricing, promotional plans and capital spending in the local communities and neighborhoods they serve. Our store directors are responsible for implementing our operating playbook on a daily basis and ensuring that our employees remain focused on delivering outstanding service to our customers. This strategy extends beyond our stores to our e-commerce and loyalty platforms, where our local leadership teams are instrumental in determining which promotions and offerings to target to our customers in their local communities.

We believe that the execution of our operating playbook, among other factors, including improved economic conditions and consumer confidence, has enabled us to grow sales, profitability and Free Cash Flow across our business. While recent deflationary trends in certain commodities, such as meat, eggs and dairy, have contributed to a decrease in identical store sales in our stores since the third quarter of fiscal 2016, we believe our operating playbook has enabled us to improve our competitive positioning in the food retail channel during the period. As a result, we believe we are well-positioned to take advantage of projected food price inflation in the latter half of fiscal 2017 and during fiscal 2018.

We believe that our ability to drive innovation will become increasingly important to the success of our company as our customers’ preferences trend towards greater convenience and personalization.

 

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We have introduced new delivery and pick-up options at many of our stores across the country, and intend to grow our home delivery network to include eight of the ten most populous MSAs by the end of fiscal 2017. We have expanded our just for U, MyMixx and fuel rewards programs to over 12 million members. We are focused on and continue to improve the convenience of our offerings such as grab-and-go meals, prepared foods, in store dining and online pharmacy refills. We continue to offer a wide range of complementary amenities in our store base, including pharmacies, branded coffee shops and fuel centers.

For fiscal 2016, we generated net sales of $59.7 billion, Adjusted EBITDA of $2.8 billion and Free Cash Flow of $1.4 billion. For the first two quarters of fiscal 2017, we generated net sales of $32.3 billion, Adjusted EBITDA of $1,256.9 million and Free Cash Flow of $504.3 million. In addition to realizing increased sales, profitability and Free Cash Flow through the implementation of our operating playbook, we expect synergies from the Safeway acquisition to enhance our profitability and Free Cash Flow over the next few years.

Our Integration History and Banners

Over the past ten years, we have completed a series of acquisitions, beginning with our purchase of Albertson’s LLC in 2006. This was followed in March 2013 by our acquisition of NAI from SuperValu, which included the Albertsons stores that we did not already own and stores operating under the Acme, Jewel-Osco, Shaw’s and Star Market banners. In December 2013, we acquired United, a regional grocery chain in North and West Texas.

In January 2015, we acquired Safeway in a transaction that significantly increased our scale and geographic reach. We are currently executing on an annual synergy plan of approximately $800 million related to the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018. We expect to deliver annual run-rate synergies related to the acquisition of Safeway of approximately $750 million by the end of fiscal 2017.

We also completed the acquisition of 73 stores from A&P for our Acme banner and 35 stores from Haggen during fiscal 2015, and we acquired an additional 29 stores from Haggen during fiscal 2016, 15 of which operate under the Haggen banner. We continually review acquisition opportunities that we believe are synergistic with our existing store network and we intend to continue to participate in the ongoing consolidation of the food retail industry. Any future acquisitions may be material.

 

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The following illustrative map represents our regional banners and combined store network as of September 9, 2017. We also operate 27 strategically located distribution centers and 18 manufacturing facilities. Approximately 42% of our stores are owned or ground-leased. Together, our owned and ground-leased properties have a value of approximately $11.5 billion (see “—Properties”). Our principal banners are described in more detail below.

 

LOGO

Albertsons

Under the Albertsons banner, which dates back to 1939, we operate 435 stores in 15 states across the Western and Southern United States. In addition to our broad grocery offering, approximately 350 Albertsons stores include in-store pharmacies (offering prescriptions, immunizations, online prescription refills and prescription savings plans), and we operate five fuel centers adjacent to our Albertsons stores. The operating performance of the Albertsons stores that we acquired in 2013 has significantly improved since acquisition.

Safeway

We operate 1,293 Safeway stores in 19 states across the Western, Southern and Mid-Atlantic regions of the United States, as well as the District of Columbia. We operate these stores under the Safeway banner, which dates back to 1926, as well as the Vons, Pavilions, Randalls, Tom Thumb, Carrs and Haggen banners. Our Safeway stores also provide convenience to our customers through a network of 1,010 in-store pharmacies and 349 adjacent fuel centers.

The Safeway acquisition has better positioned us for long-term growth by providing us with a broader assortment of products, a more efficient supply chain, enhanced fresh and perishable offerings and a high-quality and expansive portfolio of own brand products. These improvements enable us to respond to changing customer tastes and preferences and compete more effectively in a highly competitive industry.

Safeway has achieved consistent positive identical store sales growth over 22 of the past 26 fiscal quarters, driven in part by continued investment in the store base and the implementation of local marketing programs to enhance sales. Safeway experienced an acceleration in identical store sales growth, from 1.4% in fiscal 2013 to 3.0% in fiscal 2014 and 5.0% in fiscal 2015 but a decline in identical store sales of 0.2% in fiscal 2016 and 2.6% in the first two quarters of fiscal 2017.

 

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Acme, Jewel-Osco, Shaw’s and Star Market

Under the Acme, Jewel-Osco, Shaw’s and Star Market banners, we operate 519 stores, 348 in-store pharmacies and five adjacent fuel centers in 14 states across the Mid-Atlantic, Midwest and Northeast regions of the United States. Each of these banners has an operating history going back more than 100 years, has excellent store locations and has a loyal customer base. The operating performance of these banners has significantly improved since we acquired them in 2013.

United Supermarkets

In the North and West Texas area, we operate 81 stores under the United Supermarkets, Amigos and Market Street banners, together with 71 in-store pharmacies, 34 adjacent fuel centers and 14 United Express convenience stores. Our acquisition of United in December 2013 represented a unique opportunity to add a growing and profitable business in the large Texas market with an experienced and successful management team in place. Retaining the local management team was critical to our acquisition thesis. We have leveraged their abilities by both re-assigning and opening additional stores under their direct oversight. The United management team has considerable expertise in meeting the preferences of an upscale customer base with its Market Street format. United addresses its significant Hispanic customer base through its Amigos format, which we intend to leverage across other relevant regions going forward. We also benefit from distribution center and transportation efficiencies as a result of United’s adjacencies to our other operating divisions in the Southwest.

Our Organizational Structure and Operating Playbook

Our Organizational Structure

We are organized across 13 operating divisions. We operate with a decentralized management structure. Our division and district-level leadership teams are responsible and accountable for their own sales, profitability and capital expenditures, and are empowered and incentivized to make decisions on product assortment, placement, pricing, promotional plans and capital spending to best serve the local communities and neighborhoods they serve. Our division leaders collaborate to facilitate the rapid sharing of best practices. Our local merchandising teams spend considerable time working with store directors to make sure we are satisfying consumer preferences. Our store directors are responsible for ensuring that our employees provide outstanding service to our customers. We believe that this aspect of our operating playbook, combined with ongoing investments in store labor, coordinated employee training and a simple, well-understood quarterly sales and EBITDA-based bonus structure, fosters an organization that is nimble and responsive to the local tastes and preferences of our customers.

Our executive management team sets long-term strategy and annual objectives for our 13 divisions. They also facilitate the sharing of expertise and best practices across our business, including through the operation of centers of excellence for areas such as our own brands, space planning, pricing analytics, promotional effectiveness, product category trends and consumer insights. They seek to leverage our national scale by driving our efforts to maintain and deepen strong relationships with large, national consumer products vendors. The executive management team also provides substantial data-driven analytical support for decision-making, providing division management teams with insights on their relative performance. Together, all of these elements reinforce our high standards of store-level execution and foster a collaborative, competitive and winning culture.

Our Operating Playbook

Our management team has developed and implemented a proven and successful operating playbook to drive sales growth, profitability and Free Cash Flow. Our playbook covers every major facet

 

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of store-level operations and is executed by local leadership under the supervision of our executive management team. Our playbook is based on the following key concepts:

 

    Operate Our Stores to the Highest Standards.    We ensure that our stores are always “full, fresh, friendly and clean.” Our efforts are driven through our rigorous G.O.L.D. (Grand Opening Look Daily) program that is focused on delivering fresh offerings, well-stocked shelves, and clean and brightly lit departments. Our high-quality local stores serve as the “last mile” of our distribution platform for our home delivery and “click-and-collect” pick-up services and are instrumental in ensuring consistent quality and freshness of products delivered to customers.

 

    Drive Convenience Through a Broad Array of Products and Services.    We provide a broad array of products and services to enhance our customers’ shopping experience, generate customer loyalty, drive traffic and generate sales growth. We are focused on deploying innovative, value-added services including in-store dining, meal kits, customized bakery orders and catering services. We have also introduced a greater assortment of grab-and-go, individually packaged, and snack-sized meals. To further enhance our pharmacy offerings, we recently acquired MedCart Specialty Pharmacy, a URAC accredited specialty pharmacy with accreditation and license to operate in over 40 states, which will extend our ability to service our customers’ health needs. We are focused on providing our customers with a choice of how, when and where they shop. We have prioritized the roll-out of new delivery models, including same-day delivery, instant delivery and unattended delivery, and are expanding our “click-and-collect” pick-up program.

 

    Leverage Data to Offer an Attractive Value Proposition to our Customers.    We maintain price competitiveness through systematic, selective and thoughtful price investment to drive customer traffic and basket size. We also use our loyalty programs, including just for U, MyMixx and our fuel rewards programs, to target promotional activity and improve our customers’ experience. Over 12 million members (or 23% of our customer base) are currently enrolled in our loyalty rewards programs, and we expect that over 13 million households (or 25% of our customer base) will be enrolled by the end of fiscal 2017. We have recently deployed and are continuing to refine cloud-based enterprise solutions to quickly process proprietary customer, product and transaction data and efficiently provide our local managers with targeted marketing strategies for customers in their communities. By leveraging customer and transaction information with data driven analytics, our “personalized deal engine” is able to select, out of the thousands of different promotions offered by our suppliers, the offers that we expect will be most compelling to each of our more than 34 million weekly customers. In addition, we use data analytics to optimize shelf assortment and space in our stores by continually and systematically reviewing the performance of each product. We believe that as we optimize our data-driven analytic programs, we will be able to drive incremental sales and customer satisfaction through increasingly effective promotions and enhanced store product assortment and layout.

 

 

    Deliver Superior Customer Service.    We focus on providing superior customer service. We consistently invest in store labor and training, and our simple and well-understood sales- and EBITDA-based bonus structure ensures that our employees are properly incentivized. We measure customer satisfaction scores weekly and hold management accountable for continuous improvement. Our focus on customer service is reflected in our strong customer satisfaction scores. Our commitment to superior customer service extends from our stores to our more than 1,000 home-delivery “brand ambassadors.” Similar to our in-store team members, we provide each of our brand ambassadors with best-in-class customer training and empower them to build relationships with our delivery customers to promote our products and process refunds and returns at the point of delivery.

 

   

Provide a Compelling Product Offering.    We focus on providing the highest quality fresh, natural and organic assortments to meet the demands of our customers, including through our

 

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private label brands, which we refer to as our own brands, such as O Organics and Open Nature. Our own brands products achieved over $10.9 billion in sales in fiscal 2016, and our company’s portfolio of USDA-certified organic products is one of the largest and fastest growing in the industry. In addition, we offer high-volume, high-quality and differentiated signature products, including in-store fresh-cut fruit and vegetables, cookies and fried chicken prepared using our proprietary recipes, in-store roasted turkey and freshly-baked bread. Our decentralized operating structure, together with our data analytics capabilities, enables our divisions to offer products and store layouts that are responsive to local tastes and preferences. In addition, we believe our store-based model provides us with a proven “last-mile” delivery solution that offers our home-delivery customers a wide variety of superior, fresh products and a variety of delivery options.

 

    Make Disciplined Capital Investments.    We believe that our store base is modern and in excellent condition. We apply a disciplined approach to our capital investments, undertaking a rigorous cost-benefit analysis and targeting an attractive return on investment. We are investing in our supply channel, including the automation of several of our distribution centers, in order to create efficiencies and reduce costs. Our capital budgets are subject to approval at the corporate level, but we empower our division leadership to prudently allocate capital to projects that will generate the highest return.

Our Competitive Strengths

We believe the following strengths differentiate us from our competitors and contribute to our ongoing success:

Powerful Combination of Strong Local Presence and National Scale.    We operate a portfolio of well-known banners with both strong local presence and national scale. We have leading positions in many of the largest and fastest-growing MSAs in the United States. Given the long operating history of our banners, many of our stores form an important part of the local communities and neighborhoods in which they operate and occupy “First-and-Main” locations. We believe that our combination of local presence and national scale provides us with competitive advantages in brand recognition, customer loyalty and purchasing, marketing and advertising and distribution efficiencies, particularly as customers seek additional convenience options such as home delivery and “click-and-collect” pickup services. We believe our network of stores provides us with an effective solution to the “last mile” delivery challenge of online ordering by allowing us to provide convenient delivery to our customers while preserving the value, quality and freshness they receive from our stores.

Commitment to an Innovative Customer Experience.    We believe our commitment to innovative service solutions, store offerings and data-driven analytics positions us to drive sales and capture market share. With over 12 million loyalty accounts, tens of thousands of products and a large database of historical transactions, we are able to leverage our data analytics capabilities to offer our customers more personalized offerings and increase customer loyalty. We now use the power of cloud-based enterprise solutions to quickly process proprietary customer, product and transaction data in order to efficiently provide our divisional and local managers with targeted marketing strategies. In addition to driving targeted customer promotions, we are beginning to utilize our data analytics capabilities to optimize shelf assortment and space by continually and systematically reviewing product performance. We are also continuously upgrading our online web portal and mobile application, which is currently the fourth-largest home delivery portal nationwide among food retailers, to improve ease-of-use and visual design for our desktop and mobile customers and to better integrate our customers’ loyalty rewards accounts.

Best-in-Class Management Team with a Proven Track Record.    We have assembled a best-in-class management team with decades of operating experience in the food and drug retail industry.

 

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Our Chairman and Chief Executive Officer, Bob Miller, has over 50 years of food and drug retail experience, including serving as Chairman and CEO of Fred Meyer and Rite Aid and Vice Chairman of Kroger. We recently appointed Kevin Turner, former Chief Operating Officer of Microsoft and former CEO and President of Sam’s Club, as our Vice Chairman and Senior Advisor to our CEO, and believe Mr. Turner will complement our experienced operations team and recently expanded digital team to enhance our ability to connect with and serve our customers in innovative ways. Wayne Denningham, President & Chief Operating Officer, and Shane Sampson, Executive Vice President & Chief Marketing and Merchandising Officer, both bring significant leadership and operational experience to our management team with long tenures at our company and within the industry. Our Executive and Senior Vice Presidents and our division, district and store-level leadership teams are also critical to the success of our business. Our eight Executive Vice Presidents, 19 Senior Vice Presidents and 12 division Presidents have an average of over 21, 22, and 35 years of service, respectively, with our company. We are actively building out our digital marketing and information technology teams to ensure we are best positioned to capitalize on dynamic changes occurring in our industry.

Proven Operating Playbook Driving Strong Free Cash Flow Generation.    We believe that the execution of our operating playbook has been an important factor in enabling us to achieve sales growth and increase our profitability and market share. Our strong operating results, in combination with our disciplined approach to capital allocation, have resulted in the generation of strong Free Cash Flow. We generated Free Cash Flow of approximately $1.4 billion and $504.3 million in fiscal 2016 and the first two quarters of fiscal 2017, respectively. Our ability to grow Free Cash Flow will be enhanced by the synergies we expect to achieve from our acquisition of Safeway. We expect to deliver approximately $800 million of annual synergies by the end of fiscal 2018, and expect to achieve approximately $750 million of synergies on an annual run-rate basis by the end of fiscal 2017.

Significant Acquisition and Integration Expertise.    Growth through acquisition is an important component of our strategy, both to enhance our competitiveness in existing markets and to expand our footprint into new markets. We acquired 73 stores from A&P for our Acme banner and 35 stores from Haggen for our Albertsons banner during fiscal 2015, and we acquired an additional 29 stores from Haggen during fiscal 2016, including 15 stores that operate under the Haggen banner. We continually review acquisition opportunities that we believe are synergistic with our existing store network. We have developed a proprietary and repeatable blueprint for integration, including a clearly defined plan for the first 100 days. We believe that our ability to integrate acquisitions is significantly enhanced by our decentralized approach, which allows us to leverage the expertise of incumbent local management teams. We have also developed significant expertise in synergy planning and delivery. We believe that the acquisition and integration experience of our management team, together with the considerable transactional expertise of our equity sponsors, positions us well for future acquisitions as the food and drug retail industry continues to consolidate.

For more information on our ability to achieve any expected synergies, see “Risk Factors—Risks Related to the Safeway, A&P and Haggen Acquisitions and Integration—We may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the Safeway acquisition.”

 

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Our Strategy

Our operating philosophy is simple: we run great stores with a relentless focus on sales growth. We believe there are significant opportunities to grow sales and enhance profitability and Free Cash Flow through execution of the following strategies:

Consistent with our operating playbook, we plan to deliver sales growth by implementing the following initiatives:

 

    Enhancing and Upgrading Our Fresh, Natural and Organic Offerings and Signature Products.    We continue to enhance and upgrade our fresh, natural and organic offerings across our meat, produce, service deli and bakery departments to meet the changing tastes and preferences of our customers. We are rapidly growing our portfolio of USDA-certified organic products to include over 1,300 own brands products. We also believe that continued innovation and expansion of our high-volume, high-quality and differentiated signature products will contribute to stronger sales growth.

 

    Expanding Our Own Brands Offerings.    We continue to drive sales growth and profitability by extending our own brands offerings across our banners, including high-quality and recognizable brands such as O Organics, Open Nature, Signature and Lucerne. Our own brands products achieved over $10.9 billion in sales in fiscal 2016.

 

    Leveraging Our Effective and Scalable Loyalty Programs.    We believe we can grow basket size and improve the shopping experience for our customers by expanding our just for U, MyMixx and fuel rewards programs. Over 12 million members (or 23% of our customer base) are currently enrolled in our loyalty programs, and we expect that over 13 million households (or 25% of our customer base) will be enrolled by the end of fiscal 2017. We believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications, to improve customer retention and provide targeted promotions to our customers. For example, our just for U and fuel rewards customers have demonstrated greater basket size, improved customer retention rates and an increased likelihood to redeem promotions offered in our stores.

 

    Providing Our Customers with Convenient Digital Solutions.    We seek to provide our customers with the means to shop how, when and where they choose. As consumer preferences evolve towards greater convenience, we are improving our online offerings, including home delivery and “click-and-collect” services. We continue to enhance our delivery platform to offer more delivery options and windows across our store base, including early morning deliveries, same-day deliveries, instant deliveries and unattended deliveries. In addition, we seek to expand our curbside “click-and-collect” program in order to enable customers to conveniently pick up their goods on the way home or to the office. We believe our strategy of providing customers with a variety of in-store and online options that suit their varying individual needs will drive additional sales growth and differentiate us from many of our competitors.

 

   

Capitalizing on Demand for Health and Wellness Services.    We intend to leverage our portfolio of 1,779 pharmacies and our growing network of wellness clinics to capitalize on increasing customer demand for health and wellness services. Pharmacy customers are among our most loyal, and their average weekly spend is over 2.5x that of our non-pharmacy customers. We plan to continue to grow our pharmacy script counts through new patient prescription transfer programs and initiatives such as clinic, hospital and preferred network partnerships, which we believe will expand our access to more customers. To further enhance our pharmacy offerings, we recently acquired MedCart Specialty Pharmacy, a URAC-accredited specialty pharmacy with accreditation and license to operate in over 40 states, which will extend our ability to

 

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service our customers’ health needs. We believe that these efforts will drive sales and generate customer loyalty.

 

    Continuously Evaluating and Upgrading Our Store Portfolio.    We plan to pursue a disciplined but committed capital allocation strategy to upgrade, remodel and relocate stores to attract customers to our stores and to increase store volumes. We opened 15 and 12 new stores in fiscal 2016 and the first two quarters of fiscal 2017, respectively, and expect to have opened a total of 16 new stores and completed approximately 170 upgrade and remodel projects by the end of fiscal 2017. We believe that our store base is in excellent condition, and we have developed a remodel strategy that is both cost-efficient and effective. In addition to store remodels, we continuously evaluate and optimize store formats to better serve the different customer demographics of each local community. We have identified approximately 300 stores across our divisions that we have started to re-merchandise to our “Premium” format, where we offer a greater assortment of unique items in our fresh and service departments, as well as more natural, organic and healthy products throughout the store. Additionally, we have started to reposition approximately 100 stores across our divisions from our “Premium” format to an “Ultra-Premium” format that also offers gourmet and artisanal products, upscale décor and experiential elements including walk-in wine cellars and wine and cheese tasting counters.

 

    Driving Innovation.    We intend to drive traffic and sales growth through constant innovation. We will remain focused on identifying emerging trends in food and sourcing new and innovative products. We are adjusting our store layouts to accommodate a greater assortment of grab-and-go, individually packaged, and snack-sized meals. We are also rolling out new merchandising initiatives across our store base, including the introduction of meal kits, product sampling events, quality prepared foods and in-store dining.

 

    Sharing Best Practices Across Divisions.    Our division leaders collaborate to ensure the rapid sharing of best practices. Recent examples include the expansion of our O Organics offering across banners, the accelerated roll-out of signature products such as Albertsons’ in-store fresh-cut fruit and vegetables and implementing Safeway’s successful wine and floral shop strategies, with broader product assortments and new fixtures across many of our banners.

We believe the combination of these actions and initiatives, together with the attractive industry trends described in more detail under “—Our Industry,” will position us to achieve sales growth.

Enhance Our Operating Margin.    Our focus on sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefits through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. We are investing in our supply channel, including the automation of several of our distribution centers, in order to create efficiencies and reduce costs. In addition, we maintain a disciplined approach to expense management and budgeting.

Implement Our Synergy Realization Plan.    We are currently executing on an annual synergy plan of approximately $800 million from the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018, with associated one-time costs of approximately $840 million (net of estimated synergy-related asset sale proceeds). During fiscal 2016 and the first two quarters of fiscal 2017, we achieved synergies from the Safeway acquisition of approximat