BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

4 Months Ended

Jun. 18, 2022

Organization, Consolidation and Presentation of Financial Statements [Abstract]

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim Condensed Consolidated Financial Statements include the accounts of Albertsons Companies, Inc. and its subsidiaries (the "Company"). All significant intercompany balances and transactions were eliminated. The Condensed Consolidated Balance Sheet as of February 26, 2022 is derived from the Company's annual audited Consolidated Financial Statements, which should be read in conjunction with these Condensed Consolidated Financial Statements and which are included in the Company's Annual Report on Form 10-K for the fiscal year ended February 26, 2022, filed with the Securities and Exchange Commission (the "SEC") on April 26, 2022. Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for the year. The Company's results of operations are for the 16 weeks ended June 18, 2022 and June 19, 2021.

Significant Accounting Policies

Restricted cash: Restricted cash is included in Other current assets or Other assets depending on the remaining term of the restriction and primarily relates to surety bonds and funds held in escrow. The Company had $50.5 million and $50.6 million of restricted cash as of June 18, 2022 and February 26, 2022, respectively.

Inventories, net: Substantially all of the Company's inventories consist of finished goods valued at the lower of cost or net realizable value and net of vendor allowances. The Company primarily uses the retail inventory or the item-cost method to determine inventory cost before application of any last-in, first-out ("LIFO") adjustment. Interim LIFO inventory costs are based on management's estimates of expected year-end inventory levels and inflation rates. The Company recorded LIFO expense of $62.1 million and $14.5 million for the 16 weeks ended June 18, 2022 and June 19, 2021, respectively.

Convertible Preferred Stock: During the 16 weeks ended June 18, 2022, certain holders of the Company's Series A-1 convertible preferred stock ("Series A-1 preferred stock") and Series A convertible preferred stock ("Series A preferred stock" and together with the Series A-1 preferred stock, the "Convertible Preferred Stock") converted approximately 703,774 shares of Convertible Preferred Stock into 40,863,977 shares of the Company's Class A common stock, which were issued from treasury stock. Subsequent to the end of the 16 weeks ended June 18, 2022, through July 22, 2022, certain holders of the Convertible Preferred Stock converted approximately 4,411 shares of Convertible Preferred Stock into 256,162 shares of the Company's Class A common stock. As a result, the Company has issued, in the aggregate, 61,489,721 shares of Class A common stock to holders of Convertible Preferred Stock related to these non-cash conversions, representing approximately 61% of the originally issued Convertible Preferred Stock.

Concurrent with the issuance and sale of the Convertible Preferred Stock during the first quarter of fiscal 2020, a consolidated real estate subsidiary of the Company entered into a real estate agreement with an affiliate of the holders ("RE Investor") of the Convertible Preferred Stock. Under the terms of the real estate agreement, the Company placed fee owned real estate properties into its real estate subsidiary and contributed $36.5 million of cash into a restricted escrow account, with a total value of $2.9 billion (165% of the liquidation preference of the Convertible Preferred Stock). The real estate agreement provides that the Company may require the release of properties and/or cash from the escrow account if the holders of Convertible Preferred Stock convert their shares into Class A Common Stock, provided that certain conversion thresholds are met. Subsequent to the end of the 16 weeks ended June 18, 2022, due to the non-cash conversions of Convertible Preferred Stock to Class A common stock discussed above, real estate properties and cash of $36.5 million, representing approximately 60% of the

original $2.9 billion, have been released from the restricted escrow account, and the real estate properties are being transferred from the real estate subsidiary to operating subsidiaries. For additional information related to the Convertible Preferred Stock and the Investor Exchange Right, see "Part II—Item 8. Financial Statements and Supplementary Data—Note 9" of the Company's Annual Report on Form 10-K for the fiscal year ended February 26, 2022.

Income taxes: Income tax expense was $143.3 million, representing a 22.8% effective tax rate, for the 16 weeks ended June 18, 2022. The Company's effective tax rate for the 16 weeks ended June 18, 2022 differs from the federal income tax statutory rate of 21% primarily due to state income taxes, reduced by vesting of equity-based compensation. Income tax expense was $132.5 million, representing a 23.0% effective tax rate for the 16 weeks ended June 19, 2021. The Company's effective tax rate for the 16 weeks ended June 19, 2021 differs from the federal income tax statutory rate of 21% primarily due to state income taxes.

Segments: The Company and its subsidiaries offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel and other items and services in its stores or through digital channels. The Company's operating divisions are geographically based, have similar economic characteristics and similar expected long-term financial performance. The Company's operating segments and reporting units are its 12 operating divisions, which are reported in one reportable segment. Each reporting unit constitutes a business for which discrete financial information is available and for which management regularly reviews the operating results. Across all operating segments, the Company operates primarily one store format. Each division offers through its stores and digital channels the same general mix of products with similar pricing to similar categories of customers, has similar distribution methods, operates in similar regulatory environments and purchases merchandise from similar or the same vendors.

Revenue Recognition: Revenues from the retail sale of products are recognized at the point of sale or delivery to the customer, net of returns and sales tax. Pharmacy sales are recorded upon the customer receiving the product. Third-party receivables from pharmacy sales were $250.1 million and $247.5 million as of June 18, 2022 and February 26, 2022, respectively, and are recorded in Receivables, net. For digital related sales, which primarily include home delivery and Drive Up & Go curbside pickup, revenues are recognized upon either pickup in store or delivery to the customer and may include revenue for separately charged delivery services. The Company records a contract liability when rewards are earned by customers in connection with the Company's loyalty programs. As rewards are redeemed or expire, the Company reduces the contract liability and recognizes revenue. The contract liability balance was immaterial as of June 18, 2022 and February 26, 2022.

The Company records a contract liability when it sells its own proprietary gift cards. The Company records a sale when the customer redeems the gift card. The Company's gift cards do not expire. The Company reduces the contract liability and records revenue for the unused portion of gift cards ("breakage") in proportion to its customers' pattern of redemption, which the Company determined to be the historical redemption rate. The Company's contract liability related to gift cards was $101.9 million and $104.3 million as of June 18, 2022 and February 26, 2022, respectively.

Disaggregated Revenues

The following table represents Net sales and other revenue by product type (dollars in millions):


	16 weeks ended
	June 18, 2022				June 19, 2021
	Amount (1)		% of Total		Amount (1)		% of Total
Non-perishables (2)	$	11,446.0	49.1	%	$	10,742.7	50.5	%
Fresh (3)	7,881.5		33.8		7,412.5		34.9
Pharmacy	1,923.5		8.3		1,728.6		8.1
Fuel	1,654.7		7.1		1,049.3		4.9
Other (4)	404.6		1.7		336.3		1.6
Net sales and other revenue	$	23,310.3	100.0	%	$	21,269.4	100.0	%

(1) Digital related sales are included in the categories to which the revenue pertains.

(2) Consists primarily of general merchandise, grocery, dairy and frozen foods.

(3) Consists primarily of produce, meat, deli and prepared foods, bakery, floral and seafood.

(4) Consists primarily of wholesale revenue to third parties, commissions and other miscellaneous revenue.

Recently issued accounting standards: In June 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions" ("ASU 2022-03"). ASU 2022-03 clarifies the guidance on the fair value measurement of an equity security that is subject to a contractual sale restriction and requires specific disclosures related to such an equity security. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. The Company currently does not expect the adoption of this standard to have a material impact on its Consolidated Financial Statements and related disclosures, but evaluation is continuing.