S-4/A 1 d377366ds4a.htm AMENDMENT NO. 1 TO FORM S-4 Amendment No. 1 to Form S-4
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As filed with the Securities and Exchange Commission on June 12, 2017.

Registration No. 333-218138

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-4

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

Albertsons Companies, LLC

(Exact name of registrant as specified in its charter)

 

Delaware   5411   47-5579477

(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)

 

 

ADDITIONAL REGISTRANTS LISTED ON SCHEDULE A HERETO

(Address, including zip code, and telephone number, including area code, of co-registrants’ 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

 

 

Approximate date of commencement of proposed exchange offer: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, 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.  

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 Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.

 

 

 


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SCHEDULE A

CO-REGISTRANTS

 

Exact Name of Co-Registrants as specified in its Charter(1)

  

State or Other
Jurisdiction of
Incorporation or
Organization

   Primary Standard
Industrial
Classification
Code Number
   I.R.S.
Employer
Identification
Number

NEW ALBERTSON’S, INC.

   Ohio    5411    20-4057706

SAFEWAY INC.

   Delaware    5411    94-3019135

ALBERTSON’S LLC

   Delaware    5411    47-5579477

ABS CA-GL LLC

   Delaware    5411    *

ABS CA-O DC1 LLC

   Delaware    5411    *

ABS CA-O DC2 LLC

   Delaware    5411    *

ABS CA-O LLC

   Delaware    5411    *

ABS DFW INVESTOR LLC

   Delaware    5411    *

ABS DFW LEASE OWNER LLC

   Delaware    5411    *

ABS DFW OWNER LLC

   Delaware    5411    *

ABS FINANCE CO., INC.

   Delaware    5411    77-0593693

ABS FLA INVESTOR LLC

   Delaware    5411    *

ABS FLA LEASE INVESTOR LLC

   Delaware    5411    *

ABS FLA OWNER LLC

   Delaware    5411    *

ABS ID-GL LLC

   Delaware    5411    *

ABS ID-O DC LLC

   Delaware    5411    *

ABS ID-O LLC

   Delaware    5411    *

ABS MEZZANINE I LLC

   Delaware    5411    *

ABS MEZZANINE II LLC

   Delaware    5411    *

ABS MEZZANINE III LLC

   Delaware    5411    *

ABS MT-GL LLC

   Delaware    5411    *

ABS MT-O LLC

   Delaware    5411    *

ABS NOCAL LEASE INVESTOR LLC

   Delaware    5411    *

ABS NOCAL LEASE OWNER LLC

   Delaware    5411    *

ABS NV-GL LLC

   Delaware    5411    *

ABS NV-O LLC

   Delaware    5411    *

ABS OR-GL LLC

   Delaware    5411    *

ABS OR-O DC LLC

   Delaware    5411    *

ABS OR-O LLC

   Delaware    5411    *

ABS REAL ESTATE CORP.

   Delaware    5411    26-0163805

ABS REAL ESTATE HOLDINGS LLC

   Delaware    5411    *

ABS REAL ESTATE INVESTOR HOLDINGS LLC

   Delaware    5411    20-8379141

ABS REAL ESTATE OWNER HOLDINGS LLC

   Delaware    5411    20-8379233

ABS REALTY INVESTOR LLC

   Delaware    5411    *

ABS REALTY LEASE INVESTOR LLC

   Delaware    5411    *

ABS RM INVESTOR LLC

   Delaware    5411    *

ABS RM LEASE INVESTOR LLC

   Delaware    5411    *

ABS RM LEASE OWNER LLC

   Delaware    5411    *

ABS RM OWNER LLC

   Delaware    5411    *

ABS SW INVESTOR LLC

   Delaware    5411    *

ABS SW LEASE INVESTOR LLC

   Delaware    5411    *

ABS SW LEASE OWNER LLC

   Delaware    5411    *

ABS SW OWNER LLC

   Delaware    5411    *

ABS TX INVESTOR GP LLC

   Delaware    5411    *

ABS TX INVESTOR LP

   Texas    5411    *

ABS TX LEASE INVESTOR GP LLC

   Delaware    5411    *

ABS TX LEASE INVESTOR LP

   Texas    5411    *


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Exact Name of Co-Registrants as specified in its Charter(1)

  

State or Other
Jurisdiction of
Incorporation or
Organization

   Primary Standard
Industrial
Classification
Code Number
   I.R.S.
Employer
Identification
Number

ABS TX LEASE OWNER GP LLC

   Delaware    5411    *

ABS TX LEASE OWNER LP

   Texas    5411    *

ABS TX OWNER GP LLC

   Delaware    5411    *

ABS TX OWNER LP

   Texas    5411    *

ABS UT-GL LLC

   Delaware    5411    *

ABS UT-O DC LLC

   Delaware    5411    *

ABS UT-O LLC

   Delaware    5411    *

ABS WA-GL LLC

   Delaware    5411    *

ABS WA-O LLC

   Delaware    5411    *

ABS WY-GL LLC

   Delaware    5411    *

ABS WY-O LLC

   Delaware    5411    *

ACME MARKETS, INC.

   Delaware    5411    87-0440072

AFDI NOCAL LEASE INVESTOR LLC

   Delaware    5411    *

ALBERTSONS COMPANIES SPECIALTY CARE, LLC

   Delaware    5411    32-0515977

AMERICAN DRUG STORES LLC

   Delaware    5411    *

AMERICAN FOOD AND DRUG LLC

   Delaware    5411    *

AMERICAN PARTNERS, L.P.

   Indiana    5411    87-0572611

AMERICAN PROCUREMENT AND LOGISTICS COMPANY LLC

   Delaware    5411    *

AMERICAN STORES COMPANY, LLC

   Delaware    5411    *

AMERICAN STORES PROPERTIES LLC

   Delaware    5411    *

APLC PROCUREMENT, INC.

   Utah    5411    84-1379239

ASC MEDIA SERVICES, INC.

   Utah    5411    87-0347039

ASP REALTY, LLC

   Delaware    5411    87-0347040

ASP SW INVESTOR LLC

   Delaware    5411    *

ASP SW LEASE INVESTOR LLC

   Delaware    5411    *

ASP SW LEASE OWNER LLC

   Delaware    5411    *

ASP SW OWNER LLC

   Delaware    5411    *

ASR LEASE INVESTOR LLC

   Delaware    5411    *

ASR OWNER LLC

   Delaware    5411    *

ASR TX INVESTOR GP LLC

   Delaware    5411    *

ASR TX INVESTOR LP

   Texas    5411    *

ASR TX LEASE OWNER GP LLC

   Delaware    5411    *

ASR TX LEASE OWNER LP

   Texas    5411    *

AVIA PARTNERS, INC.

   Delaware    5411    94-3022728

CARR-GOTTSTEIN FOODS CO.

   Delaware    5411    92-0135158

CAYAM ENERGY, LLC

   Delaware    5411    *

CLIFFORD W. PERHAM, INC.

   Maine    5411    01-0315406

COLLINGTON SERVICES LLC

   Delaware    5411    26-3934820

CONSOLIDATED PROCUREMENT SERVICES, INC.

   Delaware    5411    68-0282708

DIVARIO VENTURES LLC

   Delaware    5411    *

DOMINICK’S FINER FOODS, LLC

   Delaware    5411    *

DOMINICK’S SUPERMARKETS, LLC

   Delaware    5411    *

EATING RIGHT LLC

   Delaware    5411    *

EXT LEASE OWNER LLC

   Delaware    5411    *

EXT OWNER LLC

   Delaware    5411    *

EXTREME LLC

   Delaware    5411    *

FRESH HOLDINGS LLC

   Delaware    5411    *

GENUARDI’S FAMILY MARKETS LP

   Delaware    5411    94-3383703


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Exact Name of Co-Registrants as specified in its Charter(1)

  

State or Other
Jurisdiction of
Incorporation or
Organization

   Primary Standard
Industrial
Classification
Code Number
   I.R.S.
Employer
Identification
Number

GFM HOLDINGS I, INC.

   Delaware    5411    94-3383697

GFM HOLDINGS LLC

   Delaware    5411    *

GIANT OF SALISBURY, INC.

   Maryland    5411    52-1070315

GOOD SPIRITS LLC

   Texas    5411    *

GROCERYWORKS.COM OPERATING COMPANY, LLC

   Delaware    5411    *

GROCERYWORKS.COM, LLC

   Delaware    5411    *

JETCO PROPERTIES, INC.

   Delaware    5411    36-6050192

JEWEL COMPANIES, INC.

   Delaware    5411    87-0438653

JEWEL FOOD STORES, INC.

   Ohio    5411    36-1282500

JEWEL OSCO SOUTHWEST LLC

   Illinois    5411    *

LLANO LOGISTICS, INC.

   Delaware    5411    98-0149758

LSP LEASE LLC

   Delaware    5411    *

LUCERNE DAIRY PRODUCTS LLC

   Delaware    5411    *

LUCERNE FOODS, INC.

   Delaware    5411    94-2617136

LUCERNE NORTH AMERICA LLC

   Delaware    5411    *

LUCKY (DEL) LEASE OWNER LLC

   Delaware    5411    *

LUCKY STORES LLC

   Ohio    5411    *

MEDCART SPECIALTY CARE, LLC

   Delaware    5411    32-0518480

NAI SATURN EASTERN LLC

   Delaware    5411    *

NEWCO INVESTMENTS, LLC

   Delaware    5411    *

NHI INVESTMENT PARTNERS, LP

   Delaware    5411    20-1208691

NHI TX LEASE OWNER GP LLC

   Delaware    5411    *

NHI TX LEASE OWNER LP

   Texas    5411    *

NHI TX OWNER GP LLC

   Delaware    5411    *

NHI TX OWNER LP

   Texas    5411    *

O ORGANICS LLC

   Delaware    5411    *

OAKBROOK BEVERAGE CENTERS, INC.

   Illinois    5411    36-3152153

RANDALL’S BEVERAGE COMPANY, INC.

   Texas    5411    76-0603967

RANDALL’S FOOD & DRUGS LP

   Delaware    5411    75-0873276

RANDALL’S FOOD MARKETS, INC.

   Delaware    5411    94-3396317

RANDALL’S HOLDINGS, INC.

   Delaware    5411    94-3396318

RANDALL’S INVESTMENTS, INC.

   Delaware    5411    94-3379041

RANDALL’S MANAGEMENT COMPANY, INC.

   Delaware    5411    76-0603966

SAFEWAY AUSTRALIA HOLDINGS, INC.

   Delaware    5411    94-3019144

SAFEWAY CANADA HOLDINGS, INC.

   Delaware    5411    94-3019145

SAFEWAY CORPORATE, INC.

   Delaware    5411    94-3019155

SAFEWAY DALLAS, INC.

   Delaware    5411    94-3019151

SAFEWAY DENVER, INC.

   Delaware    5411    94-3079150

SAFEWAY GIFT CARDS, LLC

   Arizona    5411    *

SAFEWAY HEALTH INC.

   Delaware    5411    26-2945963

SAFEWAY HOLDINGS I, LLC

   Delaware    5411    *

SAFEWAY NEW CANADA, INC.

   Delaware    5411    94-3019158

SAFEWAY PHILTECH HOLDINGS, INC.

   Delaware    5411    06-1714664

SAFEWAY SOUTHERN CALIFORNIA, INC.

   Delaware    5411    94-3019147

SAFEWAY STORES 28, INC.

   Delaware    5411    94-3021044

SAFEWAY STORES 42, INC.

   Delaware    5411    94-3021063

SAFEWAY STORES 44, INC.

   Delaware    5411    94-3021066

SAFEWAY STORES 45, INC.

   Delaware    5411    94-3021067

SAFEWAY STORES 46, INC.

   Delaware    5411    94-3021070

SAFEWAY STORES 47, INC.

   Delaware    5411    94-3021072


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Exact Name of Co-Registrants as specified in its Charter(1)

  

State or Other
Jurisdiction of
Incorporation or
Organization

   Primary Standard
Industrial
Classification
Code Number
   I.R.S.
Employer
Identification
Number

SAFEWAY STORES 48, INC.

   Delaware    5411    94-3021073

SAFEWAY STORES 49, INC.

   Delaware    5411    94-3019090

SAFEWAY STORES 58, INC.

   Delaware    5411    94-3019102

SAFEWAY STORES 67, INC.

   Delaware    5411    94-3019116

SAFEWAY STORES 71, INC.

   Delaware    5411    94-3019122

SAFEWAY STORES 72, INC.

   Delaware    5411    94-3019124

SAFEWAY STORES 78, INC.

   Delaware    5411    94-3022725

SAFEWAY STORES 79, INC.

   Delaware    5411    94-3022726

SAFEWAY STORES 80, INC.

   Delaware    5411    94-3022727

SAFEWAY STORES 85, INC.

   Delaware    5411    94-3022735

SAFEWAY STORES 86, INC.

   Delaware    5411    94-3022736

SAFEWAY STORES 87, INC.

   Delaware    5411    94-3022738

SAFEWAY STORES 88, INC.

   Delaware    5411    94-3022739

SAFEWAY STORES 89, INC.

   Delaware    5411    94-3022740

SAFEWAY STORES 90, INC.

   Delaware    5411    94-3022741

SAFEWAY STORES 91, INC.

   Delaware    5411    94-3022742

SAFEWAY STORES 92, INC.

   Delaware    5411    94-3022743

SAFEWAY STORES 96, INC.

   Delaware    5411    94-3022744

SAFEWAY STORES 97, INC.

   Delaware    5411    94-3022746

SAFEWAY STORES 98, INC.

   Delaware    5411    94-3022747

SAFEWAY STORES 99, INC.

   Delaware    5411    94-3320589

SHAW’S REALTY CO.

   Maine    5411    01-6010635

SHAW’S REALTY TRUST

   Massachusetts    5411    04-6043965

SHAW’S SUPERMARKETS, INC.

   Massachusetts    5411    04-1183420

SHORTCO OWNER LLC

   Delaware    5411    *

SPIRIT ACQUISITION HOLDINGS LLC

   Delaware    5411    *

SSI – AK HOLDINGS, INC.

   Delaware    5411    94-3372721

SSM HOLDINGS COMPANY

   Delaware    5411    01-0523835

STAR MARKETS COMPANY, INC.

   Massachusetts    5411    04-3243710

STAR MARKETS HOLDINGS, INC.

   Massachusetts    5411    04-3244277

STRATEGIC GLOBAL SOURCING, LLC

   Delaware    5411    *

SUNRICH MERCANTILE LLC

   California    5411    *

SUNRICH OWNER LLC

   Delaware    5411    *

THE VONS COMPANIES, INC.

   Michigan    5411    38-1623900

UNITED SUPERMARKETS, L.L.C.

   Texas    5411    75-0916445

USM MANUFACTURING L.L.C.

   Texas    5411    *

WILDCAT MARKETS OPCO LLC

   Delaware    5411    94-3295244

 

(1) The address and telephone number of each of the co-registrants is c/o Albertsons Companies, Inc., 250 Parkcenter Blvd. Boise, ID 83706, (208) 395-6200.
* This entity is a pass-through entity. which does not require an I.R.S. Employer Identification Number.


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The information in this prospectus is not complete and may be changed. We may not issue the exchange notes in the exchange offers until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

 

PRELIMINARY PROSPECTUS, DATED JUNE 12, 2017

SUBJECT TO COMPLETION

Prospectus

 

LOGO

Albertsons Companies

OFFER TO EXCHANGE

$1,250,000,000 of 6.625% Senior Notes due 2024 and the Related Guarantees

AND

$1,250,000,000 of 5.750% Senior Notes due 2025 and the Related Guarantees

The Offering:

Offered Securities:    The securities offered by this prospectus are our 6.625% Senior Notes due 2024 (the “New 2024 Notes”), which are being issued in exchange for our 6.625% Senior Notes due 2024 (the “Original 2024 Notes” and, together with the New 2024 Notes, the “2024 Notes”) and sold by us in our private placement that we consummated on May 31, 2016, and our 5.750% Senior Notes due 2025 (the “New 2025 Notes” and, together with the New 2024 Notes, the “New Notes”), which are being issued in exchange for our 5.750% Senior Notes due 2025 (the “Original 2025 Notes,” together with the New 2025 Notes, the “2025 Notes” or, together with the Original 2024 Notes, the “Original Notes”) and sold by us in our private placement that we consummated on August 9, 2016. The New 2024 Notes and the New 2025 Notes and related guarantees are substantially identical to the Original 2024 Notes and the Original 2025 Notes, respectively and are governed by the same respective indentures.

Expiration of Offering:    The exchange offer expires at 5:00 pm, New York City time, on                 , 2017, unless extended.

We will exchange all Original Notes that are validly tendered and not withdrawn prior to the expiration of the exchange offer.

We will not receive any proceeds from the exchange.

We believe that the exchange of Original Notes for New Notes will not be an exchange or otherwise a taxable event to a holder for United States federal income tax purposes, but you should see the discussion under the caption “Certain United States Federal Income Tax Consequences” for more information.

Each broker-dealer that receives New Notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. A broker-dealer who acquired Original Notes as a result of market making or other trading activities may use this exchange offer prospectus, as supplemented or amended from time to time, in connection with any resales of the New Notes.

The New Notes:

Maturity:    The New 2024 Notes will mature on June 15, 2024 and the New 2025 Notes will mature on March 15, 2025.

Interest Payment Dates:    We will pay interest on the New 2024 Notes semi-annually, on June 15 and December 15 of each year, commencing on December 15, 2017. We will pay interest on the New 2025 Notes semi-annually, on March 15 and September 15 of each year, commencing on September 15, 2017.

We do not intend to list the New Notes on any securities exchange and, therefore, no active public market is anticipated for the New Notes. No public market exists for the Original Notes.

You should carefully consider the risk factors beginning on page 27 of this prospectus before participating in the exchange offer.

In making an investment decision, you must rely on your own examination of our business and the terms of this exchange offer, including the merits and risks involved. None of the SEC, any state securities commission or any regulatory authority has approved or disapproved the New Notes nor have any of the foregoing authorities passed upon or endorsed the merits of this offering or the accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is                 , 2017.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Special Note Regarding Forward-Looking Statements

     25  

Risk Factors

     27  

Use of Proceeds

     51  

Capitalization

     52  

Selected Historical Financial information of ACL

     53  

Supplemental Selected Historical Financial Information of Safeway

     54  

Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACL

     55  

Business

     81  

Management

     101  

Executive Compensation

     111  

Security Ownership of Certain Beneficial Owners and Management

     128  

Certain Relationships and Related Party Transactions

     129  

Description of Other Indebtedness

     133  

The Exchange Offer

     140  

Description of the New 2024 Notes

     147  

Description of the New 2025 Notes

     206  

Book-Entry; Delivery and Form

     265  

Plan of Distribution

     268  

Certain United States Federal Income Tax Consequences

     269  

Legal Matters

     270  

Experts

     270  

Where You Can Find More Information

     270  

Index to Financial Statements

     F-1  

INFORMATION ABOUT THE TRANSACTION

We have not authorized anyone to give you any information or to make any representations about us or the transactions we discuss in this prospectus other than those contained in this prospectus. If you are given any information or representations about these matters that is not discussed in this prospectus, you must not rely on that information. This prospectus is not an offer to sell or a solicitation of an offer to buy securities anywhere or to anyone where or to whom we are not permitted to offer or sell securities under applicable law. The delivery of this prospectus does not, under any circumstances, mean that there has not been a change in our affairs since the date of this prospectus. Subject to our obligation to amend or supplement this prospectus as required by law and the rules and regulations of the Securities and Exchange Commission (the “SEC”), the information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of these securities.

Until                 , 2017 (90 days after the date of this prospectus), all dealers effecting transactions in the exchange notes, whether or not participating in the exchange offer, may be required to deliver a prospectus. This 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.

Each prospective purchaser of the exchange notes must comply with all applicable laws and regulations in force in any jurisdiction in which it purchases, offers or sells the notes or possesses or distributes this prospectus and must obtain any consent, approval or permission required by it for the

 

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purchase, offer or sale by it of the exchange notes under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases, offers or sales, and we shall not have any responsibility therefore.

CERTAIN TERMS USED IN THIS PROSPECTUS

As used in this prospectus, unless the context otherwise requires, references to (i) the terms “company,” “Company,” “ACL,” “we,” “us” and “our” refer to Albertsons Companies, LLC, (ii) the term “AB Acquisition” refers to AB Acquisition LLC, ACL’s direct and sole parent, (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, (vii) the term “Co-Issuers” refers to Albertsons (and not any of its subsidiaries), NAI (and not any of its subsidiaries) and Safeway (and not any of its subsidiaries), (viii) the term “Additional Issuers has the meaning set forth in the “Description of the New 2024 Notes” and the “Description of the New 2025 Notes,” as applicable, (ix) the term “Lead Issuers” refers to ACL and the Co-Issuers and (x) 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.

All of the references to “notes” or “Notes” in this prospectus refer to the Original Notes and New Notes, collectively.

BASIS OF PRESENTATION

The consolidated financial statements and consolidated financial data included in this prospectus are those of ACL and its consolidated subsidiaries.

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, and “fiscal 2016” refers to our fiscal year ended February 25, 2017. 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. We acquired Safeway on January 30, 2015. Accordingly, this prospectus includes the 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. 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.

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

 

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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 ACL, which includes acquired Safeway, NAI and United stores, irrespective of their acquisition dates.

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 AND APPRAISALS

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 fiscal 2016. 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

 

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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 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.

SPECIAL NOTE REGARDING 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 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. See “Prospectus Summary—Summary Consolidated Historical Financial and Other Data” for further discussion and a reconciliation of Adjusted EBITDA and Adjusted Net Income.

EBITDA, Adjusted EBITDA and Adjusted Net Income (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 and Adjusted Net Income 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 manager 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

 

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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 do not reflect our cash 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.

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.

 

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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 participating in the exchange offer. You should read this 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” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACL” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

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 February 25, 2017, we operated 2,324 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 a service-oriented shopping experience, including convenient and value-added services through 1,786 pharmacies, 1,227 in-store branded coffee shops and 385 adjacent fuel centers. We have approximately 273,000 talented and dedicated employees serving on average 34 million customers each week.

Our 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.

We implement our playbook through a decentralized management structure. We believe this approach allows our division and district-level leadership teams to 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.

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. During fiscal 2014 and fiscal 2015, on a supplemental basis including acquired Safeway, NAI and United stores, our identical store sales grew at 4.6% and 4.8%, respectively, and decreased 0.4% during fiscal 2016. Given the deflationary trends in certain commodities, such as meat, eggs and dairy, identical store sales for the third and fourth quarters of fiscal 2016 decreased. However, despite such deflationary trends, we have been able to maintain or increase our overall share in the food retail channel during fiscal 2016. While we anticipate deflationary trends in certain commodities will continue in fiscal 2017, though at lower rates than in fiscal 2016, we believe we are well-positioned to take advantage of projected food price inflation in the second half of 2017 and we plan to maintain our price competitiveness in order to drive customer traffic. 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

 



 

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certain markets from our acquisition or re-opening of A&P and Haggen stores. The rates of identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, for fiscal 2014 and fiscal 2015 have been adjusted 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. Without adjusting for this impact, identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, during fiscal 2014 and fiscal 2015 would have been 4.7% and 4.6%, respectively.

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.

For fiscal 2015, we generated net sales of $58.7 billion, Adjusted EBITDA of $2.7 billion and free cash flow, which we define as Adjusted EBITDA less capital expenditures, of $1.7 billion. 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. 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

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 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 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.

 

   

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

 



 

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measure customer satisfaction scores weekly and hold management accountable for continuous improvement. Our focus on customer service is reflected in our improving customer satisfaction scores and identical store sales growth.

 

    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 Open Nature and O Organics. Our own brands products achieved over $10.5 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 fresh fruit and vegetables cut in-store, cookies and fried chicken prepared using our proprietary recipes, in-store roasted turkey and freshly-baked bread. Our decentralized operating structure enables our divisions to offer products that are responsive to local tastes and preferences.

 

    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-based rewards programs, as well as our strong own brand assortment, to improve customer perception of our value proposition.

 

    Drive Innovation Across our Network of Stores.    We focus on innovation to enhance our customers’ in-store experience, generate customer loyalty and drive traffic and sales growth. We ensure that our stores benefit from modern décor, fixtures and store layout. We systematically monitor emerging trends in food and source new and innovative products to offer in our stores. In addition, we are focused on continuing to deliver personalized and promotional offers to further develop our relationship with our customers. We are currently testing our “click-and-collect” program, in which items selected online by our customers are gathered from our store shelves by our associates and picked up by our customers from our stores.

 

    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. 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.

 



 

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IDENTICAL STORE SALES

We believe that the execution of our operating playbook has been an important factor in the identical store sales growth across our company. The charts below illustrate historical identical store sales growth across ACL (on a supplemental basis including the acquired Safeway, NAI and United stores) and separately for the Safeway stores:

 

LOGO

 

(1) Calculated irrespective of date of acquisition.
(2) 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.
(3) 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 from our acquisition or re-opening of A&P and Haggen stores.

 



 

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The following illustrative map represents our regional banners and combined store network as of February 25, 2017. We also operate 28 strategically located distribution centers and 18 manufacturing facilities. Approximately 46% of our operating stores are owned or ground-leased. Together, our owned and ground-leased properties have a value of approximately $12.1 billion.

 

 

LOGO

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.

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. 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, 18 Senior Vice Presidents and 13 division Presidents have an average of over 20, 22 and 32 years of service, respectively, with our company.

 



 

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Proven Operating Playbook.    We believe that the execution of our operating playbook has been an important factor in enabling us to achieve sales growth and increase our market share. During fiscal 2014 and fiscal 2015, on a supplemental basis including acquired Safeway, NAI and United stores, our identical store sales grew at 4.6% and 4.8%, respectively, and decreased 0.4% during fiscal 2016. Given the deflationary trends in certain commodities, such as meat, eggs and dairy, identical store sales for the third and fourth quarters of fiscal 2016 decreased. However, despite such deflationary trends, we have been able to maintain or increase our overall share in the food retail channel during fiscal 2016. While we anticipate deflationary trends in certain commodities will continue in fiscal 2017, though at lower rates than in fiscal 2016, we believe we are well-positioned to take advantage of projected food price inflation in the second half of 2017 and we plan to maintain our price competitiveness in order to drive customer traffic. 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 from our acquisition or re-opening of A&P and Haggen stores. The rates of identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, for fiscal 2014 and fiscal 2015 have been adjusted 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. Without adjusting for this impact, identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, during fiscal 2014 and fiscal 2015 would have been 4.7% and 4.6%, respectively.

Strong Free Cash Flow Generation.    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 $1.7 billion and $1.4 billion in fiscal 2015 and fiscal 2016, 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.

 



 

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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:

Continue to Drive Identical Store Sales Growth.    Consistent with our operating playbook, we plan to deliver identical store 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 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 Brand Offerings.    We continue to drive sales growth and profitability by extending our own brand offerings across our banners, including high-quality and recognizable brands such as O Organics, Open Nature, Eating Right and Lucerne. Our own brand products achieved over $10.5 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-based loyalty programs. In addition, we believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications. We expanded our home delivery offering to 10 new markets in fiscal 2016, and expect to serve eight of the ten most populous MSAs by the end of fiscal 2017.

 

    Capitalizing on Demand for Health and Wellness Services.    We intend to leverage our portfolio of 1,786 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 patients. We believe that these efforts will drive sales growth 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 seven and 15 new stores in fiscal 2015 and fiscal 2016, respectively, and expect to open a total of 15 new stores and complete approximately 150 upgrade and remodel projects during 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.

 

    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 will also seek to build new, and enhance existing, customer relationships through our digital capabilities.

 

   

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’ fresh fruit

 



 

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and vegetables cut in-store 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 continue to drive identical store sales growth.

Enhance Our Operating Margin.    Our focus on identical store sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefit through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. 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 brand 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 2015 and fiscal 2016, we achieved synergies from the Safeway acquisition of approximately $250 million and $575 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 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 seven and 15 new stores in fiscal 2015 and fiscal 2016, respectively, and expect to open a total of 15 new stores and complete approximately 150 upgrade and remodel projects during 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

 



 

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several potential acquisition opportunities, including ones that would be significant to us. Certain of our acquisitions may involve the issuance of our equity.

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 limited number of companies with a national footprint. From 2012 through 2017, 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 0.00% and 1.00% in 2017. 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 that 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. 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. It has also resulted in the emergence of a number of online-only food and drug offerings.

CORPORATE INFORMATION

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 the New Notes.

 



 

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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 December 31, 2016, Kimco Realty owned interests in 524 shopping centers comprising 85 million square feet of leasable space across 34 states and Puerto Rico. Publicly traded on the New York Stock Exchange 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.

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 $7.5 billion of equity into assets valued at over $17 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.

 



 

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THE EXCHANGE OFFER

The following summary is provided solely for your convenience. The summary is not intended to be complete. You should read the full text and more specific details contained elsewhere in this prospectus. For a more detailed description of the notes, please refer to the section entitled “The Exchange Offer” in this prospectus.

 

Exchange Offer

In the registration rights agreements dated May 31, 2016 and August 9, 2016, respectively (the “Registration Rights Agreements”), the respective holders of our Original Notes were granted exchange and registration rights. This exchange offer is intended to satisfy these rights. You have the right to exchange the Original Notes that you hold for our registered New Notes with substantially identical terms. Once the exchange offer is complete, you will no longer be entitled to any exchange or registration rights with respect to your Original Notes.

 

Expiration Date

The exchange offer will expire at 5:00 pm, New York City time, on                 , 2017, unless we decide to extend the exchange offer.

 

Condition to the Exchange Offer

The exchange offer is conditioned upon some customary conditions, which we may waive. All conditions to which the exchange offer is subject must be satisfied or waived on or before the expiration of this offer.

 

Consequences if You Do Not Exchange Your Original Notes

Original Notes that are not tendered in the exchange offer or that are not accepted for exchange will continue to be subject to the restrictions on transfer described in the legend on your Original Notes. In general, you may only offer or sell the Original Notes if they are registered under the Securities Act and applicable state securities laws, or offered and sold under an exemption from these requirements. After the completion of the exchange offer, we will no longer have an obligation to register the Original Notes. The tender of Original Notes under the exchange offer will reduce the principal amount of the currently outstanding Original Notes. The corresponding reduction in liquidity may have an adverse effect upon, and increase the volatility of, the market price of any Original Notes that you continue to hold following completion of the exchange offer. For more information, please refer to the section entitled “The Exchange Offer—Consequences of Failure to Exchange.”

 

Procedures for Tendering Original Notes

Each holder of Original Notes wishing to accept the exchange offer must follow the procedures established by The Depository Trust Company (“DTC”), for tendering notes held in

 



 

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book-entry form. These procedures for using DTC’s ATOP (as defined herein), require that (i) the exchange agent receive, prior to the expiration date of the exchange offer, a computer generated message known as an “agent’s message” that is transmitted through ATOP, and (ii) DTC confirms that:

 

    DTC has received your instructions to exchange your notes; and

 

    you agree to be bound by the terms of the letter of transmittal.

 

  Original Notes tendered in the exchange offer must be in denominations of principal amount of $2,000 and integral multiples of $1,000 in excess of $2,000.

 

  For more information on tendering your Original Notes, please refer to the sections entitled “The Exchange Offer—Procedures for Tendering” and “Book-Entry; Delivery and Form.”

 

Special Procedures for Beneficial Holders

If you beneficially own Original Notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your Original Notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender on your behalf. If you wish to tender your Original Notes in the exchange offer on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your Original Notes, either arrange to have the Original Notes registered in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time.

 

Guaranteed Delivery Procedures

If you wish to tender your Original Notes and:

 

    time will not permit your required documents to reach the exchange agent by the expiration date of the exchange offer; or

 

    your Original Notes are not immediately available,

 

  You must comply with the applicable guaranteed delivery procedures for tendering and complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal. You must also arrange for DTC to transmit required information in accordance with DTC’s procedures for transfer to the exchange agent in connection with a book-entry transfer.

 

Withdrawal of Tenders

You may withdraw your tender of Original Notes at any time on or prior to 5:00 p.m., New York City time, on the expiration

 



 

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date. To withdraw, you must submit a notice of withdrawal to the exchange agent using DTC’s ATOP procedures before 5:00 p.m., New York City time, on the expiration date of the exchange offer. Please refer to the section in this prospectus entitled “Exchange Offer—Withdrawal of Tenders.”

 

Failure to Exchange will Affect You Adversely

If you are eligible to participate in the exchange offer and you do not tender your Original Notes, you will not have further exchange or registration rights and you will continue to be restricted from transferring your Original Notes. Accordingly, the liquidity of the Original Notes will be adversely affected.

 

U.S. Federal Income Tax Consequences

We believe that the exchange of the Original Notes for New Notes pursuant to the exchange offer will not be a taxable event for United States federal income tax purposes. A holder’s holding period for New Notes will include the holding period for Original Notes, and the adjusted tax basis of the New Notes will be the same as the adjusted tax basis of the Original Notes exchanged. Please refer to the section entitled “Certain United States Federal Income Tax Consequences.”

 

Exchange Agent

We have appointed Wilmington Trust, National Association, trustee under each indenture under which the applicable New Notes will be issued, as exchange agent.

 

Use of Proceeds

We will not receive any proceeds from the exchange offer.

 

Risk Factors

You should carefully consider the information included in the section entitled “Risk Factors” beginning on page 27 and all other information in this prospectus in evaluating whether or not to tender your Original Notes in the exchange offer.

 



 

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TERMS OF THE NEW 2024 NOTES

The following summary contains basic information about the New 2024 Notes and is not intended to be complete. It does not contain all information that may be important to you. The New 2024 Notes will evidence the same debt as the Original 2024 Notes. They will be entitled to the benefits of the indenture governing the Original 2024 Notes and will be treated under the 2024 Indenture as a single series with the Original 2024 Notes. For a more complete understanding of the New Notes, please refer to the section entitled “Description of the New 2024 Notes” in this prospectus.

 

Issuers

Albertsons Companies, LLC, Safeway Inc., New Albertson’s, Inc. and Albertson’s LLC and the Additional Issuers.

 

Notes Offered

The form and terms of the New 2024 Notes will be the same as the form and terms of the Original 2024 Notes except that:

 

    the New 2024 Notes will bear a different CUSIP number from the Original 2024 Notes;

 

    the New 2024 Notes will have been registered under the Securities Act, and, therefore, will not bear legends restricting their transfer; and

 

    you will not be entitled to any exchange or registration rights with respect to the New 2024 Notes.

 

Maturity Date

The New 2024 Notes will mature on June 15, 2024.

 

Interest Rate

The New 2024 Notes will bear interest at a rate of 6.625% per annum.

 

Interest Payment Dates

June 15 and December 15 of each year, commencing on December 15, 2017.

 

Guarantees

The New 2024 Notes will be initially guaranteed on a senior unsecured basis by all of ACL’s wholly-owned domestic subsidiaries (other than the Co-Issuers) that guarantee or are borrowers under the ABL Facility and the Term Loan Facilities (each as defined herein).

 

Ranking

The New 2024 Notes and the related subsidiary guarantees will be the Lead Issuers’, Additional Issuers’ and the subsidiary guarantors’ senior unsecured obligations, as applicable, and will:

 

    rank equally in right of payment with all of the Lead Issuers’, Additional Issuers’ and subsidiary guarantors’ existing and future senior indebtedness, including the Original Notes and the New 2025 Notes;

 

    rank senior in right of payment to all of the Lead Issuers’, Additional Issuers’ and subsidiary guarantors’ existing and future subordinated indebtedness;

 



 

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    be effectively subordinated in right of payment to all of the Lead Issuers’, Additional Issuers’ and subsidiary guarantors’ existing and future secured indebtedness, including indebtedness under the ABL Facility and the Term Loan Facilities, to the extent of the value of the assets securing such indebtedness; and

 

    be structurally subordinated in right of payment to all existing and future indebtedness and other liabilities of ACL’s subsidiaries that are not Lead Issuers, Additional Issuers or subsidiary guarantors.

 

Optional Redemption

We will have the option to redeem the 2024 Notes, in whole or in part, prior to June 15, 2019, at a redemption price equal to 100% of the principal amount of the notes redeemed plus an applicable “make-whole” premium, plus accrued and unpaid interest to (but excluding) the redemption date.

 

  We will have the option to redeem the 2024 Notes, in whole or in part, on or after June 15, 2019, at the redemption prices specified under “Description of the New 2024 Notes—Optional Redemption,” plus accrued and unpaid interest to (but excluding) the redemption date.

 

  We will have the option to redeem up to 40% of the outstanding 2024 Notes prior to June 15, 2019 with the net proceeds of certain equity offerings at 106.625% of the principal amount of the 2024 Notes, plus accrued and unpaid interest to (but excluding) the redemption date.

 

Change of Control Offer Triggering Event

If a defined change of control triggering event occurs, we may be required to offer to repurchase the 2024 Notes at a price equal to 101% of the principal amount of the 2024 Notes, plus accrued and unpaid interest, if any, to the date of purchase. See “Description of the New 2024 Notes—Change of Control Triggering Event.”

 

Certain Covenants

The indenture that governs the 2024 Notes contains covenants limiting ACL’s ability and the ability of its restricted subsidiaries to:

 

    pay dividends or distributions, repurchase equity or prepay subordinated debt or make certain investments;

 

    incur liens on assets to secure indebtedness;

 

    sell certain assets;

 

    merge or consolidate with another company or sell all or substantially all of its assets;

 

    incur additional debt or issue certain disqualified stock and preferred stock; and

 

    enter into certain transactions with our affiliates.

 



 

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  These covenants are subject to important exceptions and qualifications as described under “Description of the New 2024 Notes—Certain Covenants.”

 

Registration Rights

You have the right to exchange the Original 2024 Notes for New 2024 Notes with substantially identical terms. This exchange offer is intended to satisfy that right. The New 2024 Notes will not provide you with any further exchange or registration rights.

 

No Listing of the New 2024 Notes

We do not intend to list the New 2024 Notes on any securities exchange and, therefore, no active public market is anticipated for the New 2024 Notes. No public market exists for the Original 2024 Notes.

 

Resale Without Further Registration

Based on interpretations by the staff of the SEC set forth in no-action letters issued to third parties referred to below, we believe that you may resell or otherwise transfer New 2024 Notes issued in the exchange offer without complying with the registration and prospectus delivery requirements of the Securities Act, if:

 

    you are acquiring the New 2024 Notes in the ordinary course of your business;

 

    you do not have an arrangement or understanding with any person to participate in a distribution of the New 2024 Notes;

 

    you are not an “affiliate” of the Lead Issuers and Additional Issuers within the meaning of Rule 405 under the Securities Act; and

 

    you are not engaged in, and do not intend to engage in, a distribution of the New 2024 Notes.

 

  We have not entered into any arrangement or understanding with any person who will receive New 2024 Notes in the exchange offer to distribute such securities following completion of the exchange offer. We are not aware of any person that will participate in the exchange offer with a view to distribute the new 2024 Notes. If you are not acquiring the New 2024 Notes in the ordinary course of your business, or if you are engaging in, intend to engage in, or have any arrangement or understanding with any person to participate in, a distribution of the New 2024 Notes, or if you are our affiliate, then:

 

    you cannot rely on the position of the staff of the SEC enunciated in Morgan Stanley & Co., Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the SEC’s letter to Shearman & Sterling dated July 2, 1993, or similar no-action letters; and

 



 

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    in the absence of an exception from the position of the SEC stated in the first bullet point above, you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale or other transfer of the New 2024 Notes.

 

  If you are a broker-dealer and receive New 2024 Notes for your own account in exchange for outstanding unregistered notes that you acquired as a result of market-making or other trading activities, you must acknowledge that you will deliver a prospectus, as required by law, in connection with any resale or other transfer of the New 2024 Notes that you receive in the exchange offer. See “Plan of Distribution.”

For more information about the notes, please refer to the section entitled “Description of the New 2024 Notes” in this prospectus.

 



 

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TERMS OF THE NEW 2025 NOTES

The following summary contains basic information about the New 2025 Notes and is not intended to be complete. It does not contain all information that may be important to you. The New 2025 Notes will evidence the same debt as the Original 2025 Notes. They will be entitled to the benefits of the indenture governing the Original 2025 Notes and will be treated under the 2025 Indenture as a single series with the Original 2025 Notes. For a more complete understanding of the New Notes, please refer to the section entitled “Description of the New 2025 Notes” in this prospectus.

 

Issuers

Albertsons Companies, LLC, Safeway Inc., New Albertson’s, Inc. and Albertson’s LLC and the Additional Issuers.

 

Notes Offered

The form and terms of the New 2025 Notes will be the same as the form and terms of the Original 2025 Notes except that:

 

    the New 2025 Notes will bear a different CUSIP number from the Original 2025 Notes;

 

    the New 2025 Notes will have been registered under the Securities Act, and, therefore, will not bear legends restricting their transfer; and

 

    you will not be entitled to any exchange or registration rights with respect to the New 2025 Notes.

 

Maturity Date

The New 2025 Notes will mature on March 15, 2025.

 

Interest Rate

The New 2025 Notes will bear interest at a rate of 5.750% per annum.

 

Interest Payment Dates

March 15 and September 15 of each year, commencing on September 15, 2017.

 

Guarantees

The New 2024 Notes will be initially guaranteed on a senior unsecured basis by all of ACL’s wholly-owned domestic subsidiaries (other than the Co-Issuers) that guarantee or are borrowers under the ABL Facility and the Term Loan Facilities.

 

Ranking

The New 2025 Notes and the related subsidiary guarantees will be the Lead Issuers’, Additional Issuers’ and the subsidiary guarantors’ senior unsecured obligations, as applicable, and will:

 

    rank equally in right of payment with all of the Lead Issuers’, Additional Issuers’ and subsidiary guarantors’ existing and future senior indebtedness, including the Original Notes and the New 2024 Notes;

 

    rank senior in right of payment to all of the Lead Issuers’, Additional Issuers’ and subsidiary guarantors’ existing and future subordinated indebtedness;

 



 

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    be effectively subordinated in right of payment to all of the Lead Issuers’, Additional Issuers’ and subsidiary guarantors’ existing and future secured indebtedness, including indebtedness under the ABL Facility and the Term Loan Facilities, to the extent of the value of the assets securing such indebtedness; and

 

    be structurally subordinated in right of payment to all existing and future indebtedness and other liabilities of ACL’s subsidiaries that are not Lead Issuers, Additional Issuers or subsidiary guarantors.

 

Optional Redemption

We will have the option to redeem the 2025 Notes, in whole or in part, prior to September 15, 2019, at a redemption price equal to 100% of the principal amount of the notes redeemed plus an applicable “make-whole” premium, plus accrued and unpaid interest to (but excluding) the redemption date.

 

  We will have the option to redeem the 2025 Notes, in whole or in part, on or after September 15, 2019, at the redemption prices specified under “Description of the New 2025 Notes—Optional Redemption,” plus accrued and unpaid interest to (but excluding) the redemption date.

 

  We will have the option to redeem up to 40% of the outstanding 2025 Notes prior to June 15, 2019 with the net proceeds of certain equity offerings at 105.750% of the principal amount of the 2025 Notes, plus accrued and unpaid interest to (but excluding) the redemption date.

 

Change of Control Offer Triggering Event

If a defined change of control triggering event occurs, we may be required to offer to repurchase the 2025 Notes at a price equal to 101% of the principal amount of the 2025 Notes, plus accrued and unpaid interest, if any, to the date of purchase. See “Description of the New 2025 Notes—Change of Control Triggering Event.”

 

Certain Covenants

The indenture that governs the 2025 Notes contains covenants limiting ACL’s ability and the ability of its restricted subsidiaries to:

 

    pay dividends or distributions, repurchase equity or prepay subordinated debt or make certain investments;

 

    incur liens on assets to secure indebtedness;

 

    sell certain assets;

 

    merge or consolidate with another company or sell all or substantially all of its assets;

 

    incur additional debt or issue certain disqualified stock and preferred stock; and

 

    enter into certain transactions with our affiliates.

 



 

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  These covenants are subject to important exceptions and qualifications as described under “Description of the New 2025 Notes—Certain Covenants.”

 

Registration Rights

You have the right to exchange the Original 2025 Notes for New 2025 Notes with substantially identical terms. This exchange offer is intended to satisfy that right. The New 2025 Notes will not provide you with any further exchange or registration rights.

 

No Listing of the New 2025 Notes

We do not intend to list the New 2025 Notes on any securities exchange and, therefore, no active public market is anticipated for the New 2025 Notes. No public market exists for the Original 2025 Notes.

 

Resale Without Further Registration

Based on interpretations by the staff of the SEC set forth in no-action letters issued to third parties referred to below, we believe that you may resell or otherwise transfer New 2025 Notes issued in the exchange offer without complying with the registration and prospectus delivery requirements of the Securities Act, if:

 

    you are acquiring the New 2025 Notes in the ordinary course of your business;

 

    you do not have an arrangement or understanding with any person to participate in a distribution of the New 2025 Notes;

 

    you are not an “affiliate” of the Lead Issuers and Additional Issuers within the meaning of Rule 405 under the Securities Act; and

 

    you are not engaged in, and do not intend to engage in, a distribution of the New 2025 Notes.

 

  We have not entered into any arrangement or understanding with any person who will receive New 2025 Notes in the exchange offer to distribute such securities following completion of the exchange offer. We are not aware of any person that will participate in the exchange offer with a view to distribute the new 2025 Notes. If you are not acquiring the New 2025 Notes in the ordinary course of your business, or if you are engaging in, intend to engage in, or have any arrangement or understanding with any person to participate in, a distribution of the New 2025 Notes, or if you are our affiliate, then:

 

    you cannot rely on the position of the staff of the SEC enunciated in Morgan Stanley & Co., Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the SEC’s letter to Shearman & Sterling dated July 2, 1993, or similar no-action letters; and

 



 

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    in the absence of an exception from the position of the SEC stated in the first bullet point above, you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale or other transfer of the New 2025 Notes.

 

  If you are a broker-dealer and receive New 2025 Notes for your own account in exchange for outstanding unregistered notes that you acquired as a result of market-making or other trading activities, you must acknowledge that you will deliver a prospectus, as required by law, in connection with any resale or other transfer of the New 2025 Notes that you receive in the exchange offer. See “Plan of Distribution.”

For more information about the notes, please refer to the section entitled “Description of the New 2025 Notes” in this prospectus.

 



 

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SUMMARY CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA

The following tables summarize our consolidated historical financial and other data and should be read together with “Selected Historical Financial Information of ACL,” “Supplemental Selected Historical Financial Information of Safeway,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACL,” and our consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the summary balance sheet data as of February 25, 2017 and February 27, 2016 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.

 

(in millions, except identical store sales and store count)

   Fiscal
2016
    Fiscal
2015
    Fiscal
2014(1)(4)
 

Results of Operations:

    

Net sales and other revenue

   $ 59,678     $ 58,734     $ 27,199  

Gross profit

   $ 16,641     $ 16,062     $ 7,503  

Selling & administrative expenses

     16,000       15,660       8,152  
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     641       402       (649

Interest expense, net

     1,004       951       633  

Loss on debt extinguishment

     112              

Other (income) expense

     (11     (7     96  
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (464     (542     (1,378

Income tax benefit

     (90     (40     (153
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (374   $ (502   $ (1,225
  

 

 

   

 

 

   

 

 

 

Other Financial Data:

      

Adjusted EBITDA(2)

   $ 2,817     $ 2,681     $ 1,099  

Adjusted Net Income(2)

     378       365       58  

Capital expenditures

     1,415       960       337  

Free cash flow(3)

     1,402       1,721       762  

Other Operating Data:

      

Identical store sales

     (0.4 )%      4.4     7.2

Store count (at end of fiscal period)

     2,324       2,271       2,382  

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

     115       113       118  

Fuel sales

   $ 2,693     $ 2,955     $ 387  

Balance Sheet Data (at end of period):

      

Cash and equivalents

   $ 1,219     $ 580     $ 1,126  

Total assets

     23,755       23,770       25,678  

Total members’ equity

     1,371       1,613       2,169  

Total debt

     12,338       12,226       12,569  

 

Supplemental Identical
Store Sales

  Fiscal 2016     Fiscal 2015     Fiscal 2014     Fiscal 2013  
  Q4’16     Q3’16     Q2’16     Q1’16     Q4’15     Q3’15     Q2’15     Q1’15     Q4’14     Q3’14     Q2’14     Q1’14     Q4’13     Q3’13     Q2’13     Q1’13  

ACL(a)(b)

    (3.3)%       (2.1)%       0.1%       2.9%       4.7%       5.1%       4.5%       4.3%       4.1%       4.8%       5.4%       4.8%       3.5%       3.0%       1.1%       (0.1)%  

Safeway(c)

    (3.7)%       (2.2)%       0.1%       3.9%       5.8%       5.6%       4.9%       3.8%       3.5%       3.2%       3.1%       2.2%       1.1%       1.8%       1.8%       1.1%  

 

(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 ACL 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.

 



 

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(1) 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.

 

(2) 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.

Adjusted EBITDA and Adjusted Net Income 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 and Adjusted Net Income 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:

 

(in millions)

   Fiscal
2016
    Fiscal
2015
    Fiscal
2014(4)
 

Net Loss

   $ (374   $ (502   $ (1,225

Adjustments:

      

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

     (7     16       98  

Store transition and related costs(a)

     23       25        

Acquisition and integration costs(b)

     214       342       352  

Termination of long-term incentive plans

                 78  

Non-cash equity-based compensation expense

     53       98       344  

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

     (39     103       228  

LIFO (benefit) expense

     (8     30       43  

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

     253       82       72  

Pension and post-retirement expense, net of cash contributions(c)

     84       7       (3

Amortization of intangible assets resulting from acquisitions

     404       377       149  

Other(d)

     40       38       (14

Tax impact of adjustments to Adjusted Net Income(e)

     (265     (251     (64
  

 

 

   

 

 

   

 

 

 

Adjusted Net Income

   $ 378     $ 365     $ 58  

Adjustments:

      

Tax impact of adjustments to Adjusted Net Income(e)

   $ 265     $ 251     $ 64  

Income tax benefit

     (90     (40     (153

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

     (253     (82     (72

Interest expense, net

     1,004       951       633  

Loss on debt extinguishment

     112              

Amortization of intangible assets resulting from acquisitions

     (404     (377     (149

Depreciation and amortization

     1,805       1,613       718  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 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 charges 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) Excludes the company’s cash contribution of $260 million to the Employee Retirement Plan of Safeway Inc. and its domestic subsidiaries (the “Safeway ERP”) under a settlement with the Pension Benefit Guaranty Corporation (the “PBGC”) in connection with the closing of the Safeway acquisition.
  (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,

 



 

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  charges related to changes in the fair value of our Casa Ley CVR (as defined herein), earnings from Casa Ley (as defined herein), foreign currency translation gains and costs related to our planned initial public offering.
  (e) The tax impact was determined based on the taxable status of the subsidiary to which each of the above adjustments relates.

 

(3) We define “free cash flow” as Adjusted EBITDA less capital expenditures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACL,” included elsewhere in this prospectus, for a reconciliation of cash flow from operating activities to free cash flow.

 

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

 



 

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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;

 

    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; 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.

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

 

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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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RISK FACTORS

An investment in the notes offered hereby involves a high degree of risk. You should carefully consider the following information, together with other information in this prospectus, before participating in this exchange offer. 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, you may lose all or a part of your investment in the notes offered hereby.

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 food and/or drug retailers, supercenters, club stores, discount stores, online providers, specialty and niche supermarkets, drug stores, general merchandisers, wholesale stores, convenience stores and restaurants. 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 internet-only 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 and selection. In each of these areas, traditional and non-traditional competitors compete with us and may successfully attract our customers to their stores by matching or exceeding what we offer. In recent years, many of our competitors have 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

 

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in commodity prices may cause an increase in our input costs or the prices our vendors seek from us. 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 385 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 1,786 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 concerning its record keeping, reporting and related practices associated with the loss or theft of controlled substances. The two subpoenas have resulted in essentially a single investigation, and we are cooperating with the DEA in that investigation. We have met with the DEA on several occasions, including December 2015, May 2016 and June 2016 to discuss the investigation, and we anticipate further meetings in the near future. 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). We are cooperating with the DEA in that investigation. We anticipate that there will be monetary fines assessed, and administrative penalties. We have established an estimated liability for these matters, which is based on information currently available to us and may change as new information becomes available. 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

 

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our pharmacy 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

 

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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.

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 (as defined herein). 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), and, under certain circumstances, such liability could be senior to the notes offered hereby. 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

 

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$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.

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.

 

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See Note 11—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.

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 February 25, 2017, we employed approximately 70,000 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 8,000 associates as of February 25, 2017, the minimum wage was recently increased to $8.75 per hour, and will gradually increase to $10.10 per hour by 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 2,100 associates as of February 25, 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 5,500 associates as of February 25, 2017, the minimum wage was recently increased to $10.50 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.

 

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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 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 investors 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 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.

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 385 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 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

 

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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 750 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.

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

 

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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 plan to complete the transition of our Albertsons and NAI stores, distribution centers and systems onto Safeway’s IT systems by mid-2018,

 

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but may suffer disruptions as part of that process. In addition, we are dependent upon SuperValu to continue to provide these services to Albertsons and NAI until we transition Albertsons and NAI onto 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.

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 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). 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 a 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

 

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assessment and, on March 10, 2017, filed a lawsuit against MasterCard seeking recovery of the assessment. 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 intrusion 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.

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 stores, are subject to periodic testing for impairment.

Our long-lived assets, primarily stores, are subject to periodic testing for impairment. We have incurred significant impairment charges to earnings in the past. Long-lived asset impairment charges were $46.6 million, $40.2 million and $266.9 million in fiscal 2016, fiscal 2015 and fiscal 2014,

 

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respectively. Failure to achieve sufficient levels of cash flow at reporting units could result in impairment charges on long-lived assets.

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 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

 

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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.

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 $175

 

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million and $250 million of one-time integration-related capital expenditures in fiscal 2015 and fiscal 2016, respectively, and anticipated synergies are expected to require approximately $150 million of one-time integration-related capital expenditures during 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 “Casa Ley 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 Casa Ley 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 (each as defined herein) in this prospectus.

Pursuant to applicable 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.

We will incur significant acquisition-related costs in connection with the A&P Transaction and the Haggen Transaction.

We 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.

 

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Risks Related to Our Indebtedness and the Notes

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

We have a significant amount of indebtedness. As of February 25, 2017, we had $11.8 billion of debt outstanding, and we would have been able to borrow an additional $3.0 billion under our revolving credit facilities.

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

 

    make it more difficult for us to satisfy our obligations with respect to the notes;

 

    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.

Our debt instruments may restrict, or market or business conditions may limit, our ability to obtain additional indebtedness or refinance our indebtedness.

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 Term Loan Facilities and the ABL Facility and the indentures governing our existing notes permit, and the indentures that govern the notes 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 Other Indebtedness.”

To service our indebtedness and other obligations, we will require a significant amount of cash. Our ability to generate cash flow depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness, including the notes, and to fund working capital needs and planned capital expenditures, will depend on our ability to generate cash in the future. Our ability to generate cash flow in the future is subject to general economic, financial, competitive and other factors that are beyond our control.

Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under the ABL Facility or otherwise in an amount sufficient to enable us to pay our indebtedness, including the notes, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including the notes, on or before the maturity thereof. We may not be able to refinance any of our indebtedness, including the Term Loan Facilities, the ABL Facility, our existing notes and the notes, on commercially reasonable terms or at all.

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occur, the lenders under the Term Loan Facilities or the ABL Facility could elect to declare all amounts outstanding under the Term Loan Facilities or the ABL Facility immediately due and payable, and such lenders would not be obligated to continue to advance funds to us. In addition, if such a default were to occur, the notes and our existing notes would become immediately due and payable. If the amounts outstanding under these debt agreements are accelerated, our assets may not be sufficient to repay in full the money owed to the banks or to our debt holders, including holders of the notes.

The notes will be unsecured and effectively subordinated to the Lead Issuers’, the Additional Issuers’ and the guarantors’ indebtedness under the ABL Facility, the Term Loan Facilities and any other of the Issuers’ or the guarantors’ other secured indebtedness to the extent of the value of the assets securing that indebtedness. Noteholders may be limited in their ability to control any disposition of assets securing other indebtedness.

The notes will not be secured by any of the Lead Issuers’, Additional Issuers’ or the guarantors’ assets. As a result, the notes and the guarantees will be effectively subordinated to the Lead Issuers’, Additional Issuers’ and the guarantors’ existing secured indebtedness, including under the ABL Facility and the Term Loan Facilities, with respect to the assets that secure that indebtedness. As of February 25, 2017, the Lead Issuers, the Additional Issuers and the guarantors had $11.8 billion of indebtedness outstanding (other than capital lease obligations), of which $6.0 billion would have been secured under the Term Loan Facilities with no outstanding borrowings secured under the ABL Facility (excluding $622.3 million of outstanding letters of credit). As of February 25, 2017, we had approximately $954.0 million of capital lease obligations. Additionally, we expect that the Lead Issuers, the Additional Issuers and the guarantors will be able, if they obtain commitments from lenders, to incur significant additional indebtedness in the future, including additional secured indebtedness. For example, the ABL Facility permits us to incur incremental revolving loans and/or increase commitments thereunder, subject to satisfaction of certain conditions. All additional indebtedness under the ABL Facility would be secured. The effect of the effective subordination of the notes to the Lead Issuers’, the Additional Issuers’ and the guarantors’ secured indebtedness, to the extent of the collateral securing their secured indebtedness, is that upon a default in payment on, or the acceleration of, any of the Lead Issuers’, the Additional Issuers’ or the guarantors’ secured indebtedness, or in the event of bankruptcy, insolvency, liquidation, dissolution or reorganization of the Lead Issuers, the Additional Issuers or the guarantors, the proceeds from the sale of assets securing the Lead Issuers’, the Additional Issuers’ or the guarantors’ secured indebtedness will be available to repay obligations on the notes only after all obligations under the applicable secured debt have been paid in full. As a result, the holders of the notes may receive less, ratably, than the holders of secured debt in the event of a bankruptcy, insolvency, liquidation, dissolution or reorganization of the Lead Issuers, the Additional Issuers or the guarantors. See “Description of Other Indebtedness.”

In addition, the indentures that will govern the notes will not restrict the transfer, sale or other disposition of assets, subject to compliance with the terms of the indentures. To the extent any such asset transfers occur, and the agreements governing any secured indebtedness permit such transfers, noteholders will lose any claim to such assets if transferred to a third party.

The notes will be structurally subordinated to the debt and other liabilities of ACL’s subsidiaries that are not Lead Issuers, Additional Issuers or subsidiary guarantors, and your right to receive payments on the notes could be adversely affected if any of such non-guarantor subsidiaries declares bankruptcy, liquidates or reorganizes.

Not all of ACL’s subsidiaries will guarantee the notes. In particular, none of ACL’s foreign subsidiaries or captive insurance companies will guarantee the notes. ACL’s subsidiaries that are not Lead Issuers, Additional Issuers or subsidiary guarantors will have no obligation, contingent or otherwise, to pay amounts due under the notes or to make any funds available to pay those amounts,

 

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whether by dividend, distribution, loan or other payment. The notes will be structurally subordinated to all indebtedness and other obligations of any non-issuer or non-guarantor subsidiary (other than indebtedness and liabilities owed to a Lead Issuer or an Additional Issuer by one of the guarantors of the notes) such that in the event of insolvency, liquidation, reorganization, dissolution or other winding up of any subsidiary that is not an issuer or guarantor, all of that subsidiary’s creditors (including trade creditors and preferred stockholders, if any) would be entitled to payment in full out of that subsidiary’s assets before we would be entitled to any payment. Furthermore, our assets, including real property, may be contributed, sold, transferred or conveyed to non-guarantor subsidiaries subject to compliance with the covenants in the indentures that will govern the notes and any such contribution, sale, transfer or conveyance may be material. In addition, the indentures that will govern the notes offered hereby will, subject to some limitations, permit these subsidiaries to incur additional indebtedness and will not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by these subsidiaries.

The indentures that will govern the notes will contain restrictions that will limit our flexibility in operating our business.

The indentures that will govern the notes will contain various covenants that will limit ACL’s and its restricted subsidiaries’ ability to engage in specified types of transactions. These covenants will limit ACL’s and its restricted subsidiaries’ ability to, among other things:

 

    pay dividends or distributions, repurchase equity or prepay subordinated debt or make certain investments;

 

    incur liens on assets to secure indebtedness;

 

    sell certain assets;

 

    merge or consolidate with another company or sell all or substantially all of its assets;

 

    incur additional debt or issue certain disqualified stock and preferred stock; and

 

    enter into certain transactions with our affiliates.

A breach of any of these covenants could result in a default under the indentures that will govern the notes. Any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions. In addition, the covenants governing the ABL Facility, the Term Loan Facilities and our existing notes restrict, among other things, ACL’s and its restricted subsidiaries’ ability to, among other things:

 

    incur additional indebtedness or provide guarantees in respect of obligations of other persons;

 

    pay dividends on, repurchase or make distributions to our owners or make other restricted payments or make certain investments;

 

    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.

Further, the restrictive covenants in the credit agreement that governs the ABL Facility require us, in certain circumstances, to maintain certain financial ratios. Our ability to meet such financial ratios

 

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can be affected by events beyond our control, and we cannot assure you that we will be in compliance with such financial ratios. A breach of any of these covenants could result in a default under the ABL Facility and our other existing indebtedness. Moreover, the occurrence of a default under the ABL Facility could result in an event of default under our other indebtedness, including the notes offered hereby. Upon the occurrence of an event of default under the ABL Facility, the lenders thereunder could elect to declare all amounts outstanding under the ABL Facility 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 Other Indebtedness.”

If the notes are rated investment grade by both Standard & Poor’s and Moody’s, the restrictions on the payment of dividends, making of distributions on, or redemptions or repurchases of, capital stock or the prepayment of subordinated debt, incurrence of indebtedness or issuance of disqualified stock or preferred stock and sale of certain assets will be terminated, and you will lose the protection of these covenants.

If the notes are rated investment grade by both Standard & Poor’s and Moody’s and no default has occurred and is continuing, the restrictions in the indentures that will govern the notes on ACL’s ability and the ability of its restricted subsidiaries to pay dividends, make distributions to our owners, prepay subordinated debt, incur indebtedness, issue disqualified stock or preferred stock, sell certain assets or enter into transactions with affiliates will be terminated.

There can be no assurance that the notes will ever be rated investment grade. However, if these covenants are terminated, ACL and its restricted subsidiaries will be able to consummate transactions that may impair their ability to satisfy their obligations with respect to the notes and that would not be permitted if these covenants were otherwise in force, and the effects of any such transactions will be permitted to remain in place even if the notes are subsequently downgraded below investment grade. See “Description of the New 2024 Notes—Certain Covenants” and “Description of the New 2025 Notes—Certain Covenants”

If we default on our obligations to pay our indebtedness we may not be able to make payments on the notes.

Any default under the agreements governing our indebtedness, including a default under the ABL Facility or the Term Loan Facilities, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could make us unable to pay principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium (if any) and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including covenants in the credit agreements that govern our ABL Facility and the Term Loan Facilities, the indentures governing our existing notes and the indentures that will govern the notes), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, and the lenders under the ABL Facility could elect to terminate their commitments thereunder and cease making further loans and the lenders under the Term Loan Facilities and the ABL Facility could institute foreclosure proceedings against our assets and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under the Term Loan Facilities and the ABL Facility to avoid being in default. If we breach our covenants under the Term Loan Facilities or the ABL Facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the Term Loan

 

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Facilities or the ABL Facility, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation. See “Description of Other Indebtedness” and “Description of the notes.”

Federal and state statutes allow courts, under certain specific circumstances, to void guarantees and/or require noteholders to return payments received from guarantors.

Under current federal bankruptcy law and comparable provisions of state fraudulent transfer or fraudulent conveyance laws, a guarantee may be voided or cancelled, or claims in respect of a guarantee may be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:

 

    issued the guarantee with the intent to delay, hinder or defraud present or future creditors; or

 

    received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee, and either:

 

    was insolvent or rendered insolvent by reason of such incurrence; or

 

    was engaged, or about to engage, in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or

 

    intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature (as all of the foregoing terms are defined in or interpreted under the fraudulent transfer or conveyance statutes).

In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor.

A court likely would find that a guarantor did not receive reasonably equivalent value or fair consideration in exchange for its guarantee if the value received by the guarantor were found to be disproportionately small when compared with its obligations under the guarantee or, put differently, it did not benefit, directly or indirectly, from the issuance of the notes. The measures of insolvency for purposes of fraudulent transfer or conveyance laws will vary depending upon the particular law applied in any proceeding to determine whether a fraudulent transfer or conveyance has occurred. Generally, however, a guarantor would be considered insolvent if:

 

    the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; or

 

    if the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

    it could not pay its debts as they become due.

On the basis of historical financial information, recent operating history and other factors, we believe that each guarantor, after giving effect to its guarantee of the notes, will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not have incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.

 

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We may not have the ability to raise the funds necessary to finance the change of control offer required by the indentures that will govern the notes.

Upon the occurrence of certain kinds of change of control events, we will be required by the indentures that will govern the notes to offer to repurchase outstanding 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 triggering event to make the required repurchase of the notes or that restrictions in the credit agreements that govern the Term Loan Facilities and the ABL Facility will not allow such repurchases. Our failure to purchase the tendered notes would constitute an event of default under the indentures that will govern the New Notes which, in turn, would constitute a default under the credit agreements that govern the Term Loan Facilities and the ABL Facility and under the indentures governing certain of our existing notes. In addition, the occurrence of a change of control would also constitute a default under the credit agreements that govern the Term Loan Facilities and the ABL Facility. Subject to certain exceptions, a default under the credit agreements that govern the Term Loan Facilities and the ABL Facility or the indentures governing our existing notes would result in a default under the indentures that will govern the notes if the holders of such debt accelerate the applicable debt.

Moreover, the credit agreements that govern the Term Loan Facilities and the ABL Facility restrict, and any future indebtedness we incur may restrict, our ability to repurchase the notes, including following a change of control triggering event. As a result, following a change of control triggering event, we may not be able to repurchase the notes unless they first repay all indebtedness outstanding under the Term Loan Facilities and the ABL Facility, 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 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 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.

The market price for the notes may be volatile.

Historically, the market for noninvestment grade debt has been subject to disruptions that have caused substantial fluctuations in the price of securities similar to the notes. Even if a trading market for the notes develops, it may be subject to disruptions and price volatility. Any disruptions may have a negative effect on noteholders, regardless of our prospects and financial performance.

There is no public market for the exchange notes, so you may be unable to sell the exchange notes.

The New Notes are new securities for which there is currently no public trading market. We do not intend to list the New Notes on any securities exchange and, therefore, no active public market is anticipated for the New Notes. No public market exists for the Original Notes.Consequently, the New Notes may be relatively illiquid, and you may not be able to sell your New Notes at a particular time, or you may not be able to sell your New Notes at a favorable price.

Changes in our credit ratings or the debt markets may adversely affect the market price of the notes.

The market price for the notes will depend on a number of factors, including:

 

    our credit ratings with major credit rating agencies;

 

    the prevailing interest rates being paid by other companies similar to us;

 

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    our financial condition, operating performance and future prospects; and

 

    the overall condition of the financial markets and global and domestic economic conditions.

The condition of the financial markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. Such fluctuations could have an adverse effect on the price of the notes. In addition, credit rating agencies continually review their ratings for the companies that they follow, including us. The credit rating agencies also evaluate the industries in which we operate as a whole and may change their credit rating for us based on their overall view of such industries. A negative change in our rating could have an adverse effect on the price of the notes.

The requirements of complying with the Exchange Act and the Sarbanes Oxley Act may strain our resources and occupy the time and energies of management.

We will be subject to the Securities Exchange Act of 1934 (the “Exchange Act”) and the Sarbanes Oxley Act of 2002. These requirements may place a strain on our systems and resources. The Sarbanes Oxley Act of 2002 will require that we maintain and certify that we have effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required as we may need to devote additional time and personnel to legal, financial and accounting activities to ensure our ongoing compliance with the public company reporting requirements. In addition, the effort to maintain effective internal controls may divert management’s attention from other business concerns, which could adversely affect our business, financial condition and results of operations.

Holders of Original Notes who fail to exchange their Original Notes in the exchange offer will continue to be subject to restrictions on transfer.

If you do not exchange your Original Notes for New Notes in the exchange offer, you will continue to be subject to the restrictions on transfer applicable to the Original Notes. The restrictions on transfer of your Original Notes arise because we issued the Original Notes under exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, you may only offer or sell the Original Notes if they are registered under the Securities Act and applicable state securities laws, or offered and sold under an exemption from these requirements. We do not plan to register the Original Notes under the Securities Act. For further information regarding the consequences of tendering your Original Notes in the exchange offer, see the discussion below under the caption “Exchange Offer—Consequences of Failure to Exchange.”

You must comply with the exchange offer procedures in order to receive new, freely tradable New Notes.

We will only issue New Notes in exchange for Original Notes that you timely and properly tender. Therefore, you should carefully follow the instructions on how to tender your Original Notes. Neither we nor the exchange agent is required to tell you of any defects or irregularities with respect to your tender of Original Notes.

If you do not exchange your Original Notes for New Notes pursuant to the exchange offer, the Original Notes you hold will continue to be subject to the existing transfer restrictions. In general, you may not offer or sell the Original Notes except under an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not plan to register Original Notes under the Securities Act after the exchange offer is consummated unless our registration rights agreement with respect to the Original Notes requires us to do so. Further, if you continue to hold any

 

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Original Notes after the exchange offer is consummated, you may have trouble selling them because there will be fewer of these notes outstanding. See “Exchange Offer—Procedures for Tendering” and “Exchange Offer—Consequences of Failure to Exchange.”

Some holders who exchange their Original Notes may be deemed to be underwriters, and these holders will be required to comply with the registration and prospectus delivery requirements in connection with any resale transaction.

If you exchange your Original Notes in the exchange offer for the purpose of participating in a distribution of the New Notes, you may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

 

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USE OF PROCEEDS

We are making this exchange offer solely to satisfy our obligations under the Registration Rights Agreements governing the Original Notes, as applicable. We will not receive any proceeds from the issuance of the New Notes in the exchange offer. In consideration for issuing the New Notes as contemplated by this prospectus, we will receive Original Notes in a like principal amount. The form and terms of the New Notes are identical in all respects to the form and terms of the Original Notes, except the New Notes will be registered under the Securities Act and will not contain restrictions on transfer, registration rights or provisions for additional interest. Original Notes surrendered in exchange for New Notes will be retired and cancelled and will not be reissued. Accordingly, the issuance of New Notes will not result in any change in outstanding indebtedness.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of February 25, 2017.

You should read this table together with “Selected Historical Financial Information of ACL” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACL” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of
February 25,
2017
 

Cash and cash equivalents

   $ 1,219.2  
  

 

 

 

Debt, including current maturities, net of debt discounts and deferred financing costs(1)

  

ABL Facility(2)

   $  

Term Loan Facilities

     5,853.0  

2024 Notes

     1,235.8  

2025 Notes

     1,237.2  

Safeway Notes(3)

     1,368.4  

NAI Notes(4)

     1,552.2  

Capital leases

     954.0  

Other notes payable, unsecured(5)

     114.9  

Other debt(6)

     22.4  
  

 

 

 

Total Debt

   $ 12,337.9  
  

 

 

 

Total member equity

   $ 1,371.2  
  

 

 

 

Total capitalization

   $ 13,709.1  
  

 

 

 

 

(1) Debt discounts and deferred financing costs totaled $310.0 million and $118.2 million, respectively as of February 25, 2017.
(2) As of February 25, 2017, the ABL Facility provided for a $4,000.0 million revolving credit facility. As of February 25, 2017, the aggregate borrowing base on the ABL Facility was approximately $3,643.8 million, which was reduced by (i) $622.3 million of outstanding standby letters of credit and (ii) $3.2 million of interest, resulting in a net borrowing base availability of approximately $3,018.3 million. See “Description of Other Indebtedness—ABL Facility.”
(3) Consists of the 2017 Safeway Notes, 2019 Safeway Notes, 2020 Safeway Notes, 2021 Safeway Notes, 2027 Safeway Notes and 2031 Safeway Notes (each as defined herein).
(4) Consists of the NAI Medium-Term Notes, 2026 NAI Notes, 2029 NAI Notes, 2030 NAI Notes and 2031 NAI Notes (each as defined herein).
(5) Consists of unsecured sale leaseback related financing obligations and the ASC Notes (as defined herein).
(6) Consists of mortgage notes payable

 

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SELECTED HISTORICAL FINANCIAL INFORMATION OF ACL

The information below should be read along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACL,” “Business” and the historical financial statements 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 ACL’s annual consolidated financial statements for the periods indicated below, including the consolidated balance sheets at February 25, 2017 and February 27, 2016 and the related consolidated statements of operations and comprehensive (loss) income and cash flows for each of the 52-week periods ended February 25, 2017 and February 27, 2016 and the 53-week period ended February 28, 2015 and notes thereto appearing elsewhere in this prospectus.

 

(in millions)

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

Results of Operations

          

Net sales and other revenue

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   $ 16,640.5     $ 16,061.7     $ 7,502.8     $ 5,399.0     $ 937.7  

Selling and administrative expenses

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

Bargain purchase gain

                       (2,005.7      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     640.5       401.7       (649.4     1,530.6       38.7  

Interest expense, net

     1,003.8       950.5       633.2       390.1       7.2  

Loss on debt extinguishment

     111.7                          

Other (income) expense

     (11.4     (7.0     96.0              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

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

Income tax (benefit) expense

     (90.3     (39.6     (153.4     (572.6     1.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations, net of tax

     (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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at end of period)

          

Cash and equivalents

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

Total assets

     23,775.0       23,770.0       25,678.3       9,281.0       586.1  

Total members’ equity (deficit)

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

Total debt, including capital leases

     12,337.9       12,226.3       12,569.0       3,694.2       120.2  

Other Financial Data

          

Ratio of earnings to fixed charges(3)

                       3.3       2.2  

 

(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.
(3) For purposes of this computation, “earnings” consist of pre-tax losses from continuing operations before adjustment for income from equity investees, plus fixed charges. “Fixed charges” consist of interest costs, both expensed and capitalized, plus the interest component of lease rental expense and charges related to certain guarantee related obligations. Due to ACL’s losses in fiscal 2016, fiscal 2015 and fiscal 2014, the ratio coverage was less than 1:1 in each of those periods. ACL would have needed to generate additional earnings of $488.9 million, $558.3 million and $1,380.2 million to achieve a coverage ratio of 1:1 during those periods.

 

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SUPPLEMENTAL SELECTED HISTORICAL FINANCIAL INFORMATION OF SAFEWAY

You should read the information set forth below along with 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 profit

     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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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ACL

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Historical Financial Information of ACL” 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. In this Management’s Discussion and Analysis of Financial Condition and Results of Operations of Albertsons Companies, LLC, the words “Albertsons Companies,” “we,” “us,” “our” and “ours” refer to Albertsons Companies, LLC, together with its subsidiaries.

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 2,324, 2,271, 2,382, 1,075 and 192 stores as of February 25, 2017, February 27, 2016, February 28, 2015, February 20, 2014 and February 21, 2013, respectively. In addition, as of February 25, 2017, we operated 385 adjacent fuel centers, 28 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 decrease 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, fuel prices increase or deflationary trends increase materially, our business and results of operations could be adversely affected.

 

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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 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 $250 million during fiscal 2015 and approximately $575 million during fiscal 2016, 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: 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 “—Liquidity and Financial Resources—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 ABL Facility and the Term Loan 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.

 

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In fiscal 2016, we spent approximately $1,415 million for capital expenditures, including $250 million of Safeway integration-related capital expenditures. We expect to spend approximately $1,400 million in total for capital expenditures in fiscal 2017, or approximately 2.3% of our fiscal 2016 sales, including $150 million of Safeway integration-related capital expenditures. In fiscal 2017, we expect to complete approximately 150 upgrade and remodel projects and open 15 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 40.3% of our total sales in fiscal 2015 and 40.9% in fiscal 2016. 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 “Risk Factors—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 273,000, 274,000 and 265,000 associates as of 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 February 25, 2017, we employed approximately 70,000 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 8,000 associates as of February 25, 2017, the minimum wage was recently increased to $8.75 per hour, and will gradually increase to $10.10 per hour by 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 2,100 associates as of February 25, 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 5,500 associates as of February 25, 2017, the minimum wage was recently increased to $10.50 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 “Risk Factors—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.

 

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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 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:

 

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

Stores, beginning of period

     2,271       2,382       1,075       192  

Acquired(1)

     78       74       1,330       926  

Divested

           (153     (15      

Opened

     15       7       4       2  

Closed

     (40     (39     (12     (45
  

 

 

   

 

 

   

 

 

   

 

 

 

Stores, end of period

     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:

Continue to Drive Identical Store Sales Growth.    Consistent with our operating playbook, we plan to deliver identical store 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

 

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and preferences of our customers. 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 Brand Offerings.    We continue to drive sales growth and profitability by extending our own brand offerings across our banners, including high-quality and recognizable brands such as O Organics, Open Nature, Eating Right and Lucerne. Our own brand products achieved over $10.5 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-based loyalty programs. In addition, we believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications. We expanded our home delivery offering to 10 new markets in fiscal 2016, and expect to serve eight of the ten most populous MSAs by the end of fiscal 2017.

 

    Capitalizing on Demand for Health and Wellness Services.    We intend to leverage our portfolio of 1,786 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 patients. We believe that these efforts will drive sales growth 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 seven and 15 new stores in fiscal 2015 and fiscal 2016, respectively, and expect to open a total of 15 new stores and complete approximately 150 upgrade and remodel projects during 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.

 

    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 will also seek to build new, and enhance existing, customer relationships through our digital capabilities.

 

    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’ fresh fruit and vegetables cut in-store 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 continue to drive identical store sales growth. During fiscal 2014 and fiscal 2015, on a supplemental basis including acquired Safeway, NAI and United stores, our identical store sales grew at 4.6% and 4.8%, respectively, and decreased 0.4% during fiscal 2016. Given the deflationary trends in certain commodities, such as meat, eggs and dairy, identical store sales for the third and fourth quarters of fiscal 2016 decreased. However, despite such deflationary trends, we have been able to maintain or increase our overall share in the food retail channel during fiscal 2016. While we anticipate deflationary trends in certain commodities will continue in fiscal 2017, though at lower rates than in fiscal 2016, we believe we are well-positioned to take

 

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advantage of projected food price inflation in the second half of 2017, and we plan to maintain our price competitiveness in order to drive customer traffic. 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 from our acquisition or re-opening of A&P and Haggen stores.

Enhance Our Operating Margin.    Our focus on identical store sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefit through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. 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 $1.3 billion, or approximately $840 million (net of estimated synergy-related asset sale proceeds). During fiscal 2015 and fiscal 2016, we achieved synergies from the Safeway acquisition of approximately $250 million and $575 million, respectively. Achieved synergies required approximately $175 million and $250 million of one-time integration-related capital expenditures in fiscal 2015 and fiscal 2016, respectively, and anticipated synergies will require approximately $150 million in additional capital expenditures during fiscal 2017. 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 brand program developed at Safeway across all of our banners. We believe our increased scale will 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 and leverage our combined scale for volume discounts on branded and generic drugs. 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 corporate and division overhead savings, including information technology systems, 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 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 seven and 15 new stores in fiscal 2015 and fiscal 2016, respectively, and expect to open a total of 15 new stores and complete approximately 150 upgrade and remodel projects during 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,

 

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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. Certain of our acquisitions may involve the issuance of our equity.

Results of Operations

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, respectively (in millions).

 

     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) expense

     (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

 

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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.

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

Gross profit represents the portion of sales and other revenue remaining after deducting the cost of goods sold 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 goods sold.

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

 

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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.

 

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 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 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 Services, LLC (“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.

 

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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
  

 

 

 

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 and the December 2016 Term Loan Refinancing (each as defined herein) 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.

 

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Loss on Debt Extinguishment

On June 24, 2016, a portion of the net proceeds from the issuance of the 2024 Notes was used to fully redeem (the “Redemption”) $609.6 million of our then existing 7.750% senior secured notes due 2022. In connection with the 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 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 Taxes

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
  

 

 

   

 

 

   

 

 

 

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

 

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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.

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.

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 (benefit) expense

     (7.9     29.7       43.1  

Pension and postretirement expense, net of cash contributions(5)

     84.0       6.7       (3.0

Facility closures and related transition costs(6)

     23.0       25.0        

Other(7)

     40.0       38.0       (14.1
  

 

 

   

 

 

   

 

 

 

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, 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 $78.9 million 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. Fiscal 2014 excludes the company’s cash contribution of $260.0 million to the Safeway ERP under a settlement with the PBGC in connection with the closing of the Safeway acquisition.

 

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(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 our Casa Ley CVR, earnings from Casa Ley, foreign currency translation gains and costs related to our planned initial public offering.

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

 

     Fiscal 2016     Fiscal 2015     Fiscal 2014  

Cash flow provided by (used in) operating activities

   $ 1,813.5     $ 901.6     $ (165.1

Income tax benefit

     (90.3     (39.6     (153.4

Deferred income taxes

     219.5       90.4       170.1  

Interest expense, net

     1003.8       950.5       633.2  

Changes in operating assets and liabilities

     (251.9     466.5       39.3  

Amortization and write-off of deferred financing costs

     (84.4     (69.3     (65.3

Loss on extinguishment of debt

                  

Acquisition and integration costs

     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

     (7.3     39.0       (50.1
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     2,816.5       2,681.1       1,098.7  

Less: capital expenditures

     (1,414.9     (960.0     (336.5
  

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 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 $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 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 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 36-month 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.

In fiscal 2017, the company expects to spend approximately $1,400 million in capital expenditures, including $150 million of Safeway integration-related capital expenditures, as follows (in millions):

 

Projected Fiscal 2017 Capital Expenditures

  

Integration capital

   $ 150.0  

New stores and remodels

     650.0  

Maintenance

     200.0  

Supply chain

     100.0  

IT

     150.0  

Real estate and expansion capital

     150.0  
  

 

 

 

Total

   $ 1,400.0  
  

 

 

 

Net Cash (Used In) Provided By Financing Activities

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

 

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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, 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. 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. The proceeds from the issuance of the New Term Loans were used to repay the loans that were outstanding under the Term Loan Agreement and to pay related interest and fees (collectively, the “December 2016 Term Loan Refinancing”). 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 New 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.

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

 

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primarily of $1,354.2 million of principal payments on the Term Loan Facilities, $609.6 million of principal payments related to the Redemption, 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.

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 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). As of February 27, 2016, we had approximately $311.0 million of borrowings outstanding under our ABL Facility and total availability of approximately $2.8 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 fiscal 2016 and fiscal 2015, there were no financial maintenance covenants in effect under our asset-based revolving credit facilities 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

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 of $281.0 million.
(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 12—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 13—Commitments and contingencies and off balance sheet arrangements in the consolidated financial statements of ACL 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 $622.3 million outstanding as of February 25, 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.

 

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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.

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.

 

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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 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 $46.6 million, $40.2 million and $266.9 million in 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 in the 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. We review goodwill for impairment by initially assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it is necessary to perform

 

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the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step test is performed to identify potential goodwill impairment. If it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it is unnecessary to perform the two-step goodwill impairment test. We may elect to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test. We recognize goodwill impairment for any excess of the carrying value of the reporting unit’s goodwill over the implied fair value. The impairment review requires the use of management judgment and financial estimates. Application of alternative estimates and assumptions, such as reviewing goodwill for impairment at a different level, could produce significantly different results. The cash flow projections embedded in our goodwill impairment reviews can be affected by several factors such as inflation, business valuations in the market, the economy and market competition.

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.

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 a dedicated defined benefit plan for Safeway, a plan for NAI and a plan for 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 fiscal 2015. See Note 11—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.

 

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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 11—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 10—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 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

 

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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 LIBOR, 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 ABL Facility and the Term Loan Facilities. The interest rate we pay on future borrowings under the ABL Facility and the Term Loan 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

   $ 60.1     $ 60.1     $ 60.1     $ 60.1     $ 3,168.4     $ 2,605.1     $ 6,103.9     $ 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 February 25, 2017, we operated 2,324 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 a service-oriented shopping experience, including convenient and value- added services through 1,786 pharmacies, 1,227 in-store branded coffee shops and 385 adjacent fuel centers. We have approximately 273,000 talented and dedicated employees serving on average 34 million customers each week.

Our 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.

We implement our playbook through a decentralized management structure. We believe this approach allows our division and district-level leadership teams to 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.

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. During fiscal 2014 and fiscal 2015, on a supplemental basis including acquired Safeway, NAI and United stores, our identical store sales grew at 4.6% and 4.8%, respectively, and decreased 0.4% during fiscal 2016. Given the deflationary trends in certain commodities, such as meat, eggs and dairy, identical store sales for the third and fourth quarters of fiscal 2016 decreased. However, despite such deflationary trends, we have been able to maintain or increase our overall share in the food retail channel during fiscal 2016. While we anticipate deflationary trends in certain commodities will continue in fiscal 2017, though at lower rates than in fiscal 2016, we believe we are well-positioned to take advantage of projected food price inflation in the second half of 2017 and we plan to maintain our price competitiveness in order to drive customer traffic. 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 from our acquisition or re-opening of A&P and Haggen stores. The rates of identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, for fiscal 2014 and fiscal 2015 have been adjusted 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. Without adjusting for this impact, identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, during fiscal 2014 and fiscal 2015 would have been 4.7% and 4.6%, respectively.

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.

 

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For fiscal 2015, we generated net sales of $58.7 billion, Adjusted EBITDA of $2.7 billion and free cash flow, which we define as Adjusted EBITDA less capital expenditures, of $1.7 billion. 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. 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 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.

The following illustrative map represents our regional banners and combined store network as of February 25, 2017. We also operate 28 strategically located distribution centers and 18 manufacturing facilities. Approximately 46% of our stores are owned or ground-leased. Together, our owned and ground-leased properties have a value of approximately $12.1 billion (see “—Properties”). Our principal banners are described in more detail below.

 

 

LOGO

 

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Albertsons

Under the Albertsons banner, which dates back to 1939, we operate 475 stores in 15 states across the Western and Southern United States. In addition to our broad grocery offering, approximately 388 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 1,270 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 996 in-store pharmacies and 342 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 24 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.

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

Under the Acme, Jewel-Osco, Shaw’s and Star Market banners, we operate 517 stores, 349 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 62 stores under the United Supermarkets, Amigos and Market Street banners, together with 53 in-store pharmacies, 33 adjacent fuel centers and 12 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.

 

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Our Organizational Structure and Operating Playbook

Our Organizational Structure

We are organized across 14 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 14 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 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.

 

    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 improving customer satisfaction scores and identical store sales growth.

 

   

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 Open Nature and O Organics. Our own brands products achieved over $10.5 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 fresh fruit and vegetables cut in-store, cookies and fried chicken prepared using our proprietary recipes, in-store roasted turkey and freshly-baked bread. Our

 

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decentralized operating structure enables our divisions to offer products that are responsive to local tastes and preferences.

 

    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-based rewards programs, as well as our strong own brand assortment to improve customer perception of our value proposition.

 

    Drive Innovation Across our Network of Stores.    We focus on innovation to enhance our customers’ in-store experience, generate customer loyalty and drive traffic and sales growth. We ensure that our stores benefit from modern décor, fixtures and store layout. We systematically monitor emerging trends in food and source new and innovative products to offer in our stores. In addition, we are focused on continuing to deliver personalized and promotional offers to further develop our relationship with our customers. We are currently testing our “click-and-collect” program, in which items selected online by our customers are gathered from our store shelves by our associates and picked up by our customers from our stores.

 

    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. 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.

Identical Store Sales

We believe that the execution of our operating playbook has been an important factor in the identical store sales growth across our company. The charts below illustrate historical identical store

 

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sales growth across ACL (on a supplemental basis including the acquired Safeway, NAI and United stores) and separately for the Safeway stores:

 

 

LOGO

 

(1) Calculated irrespective of date of acquisition.
(2) 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.
(3) 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 from our acquisition or re-opening of A&P and Haggen stores.

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.

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. Wayne Denningham, President & Chief Operating Officer, and Shane Sampson, Executive Vice President & Chief Marketing and Merchandising Officer, both bring significant leadership and

 

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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, 18 Senior Vice Presidents and 13 division Presidents have an average of over 20, 22 and 32 years of service, respectively, with our company.

Proven Operating Playbook.    We believe that the execution of our operating playbook has been an important factor in enabling us to achieve sales growth and increase market share. During fiscal 2014 and fiscal 2015, on a supplemental basis including acquired Safeway, NAI and United stores, our identical store sales grew at 4.6% and 4.8% respectively, and decreased 0.4% during fiscal 2016. Given the deflationary trends in certain commodities, such as meat, eggs and dairy, identical store sales for the third and fourth quarters of fiscal 2016 decreased. However, despite such deflationary trends, we have been able to maintain or increase our overall share in the food retail channel during fiscal 2016. While we anticipate deflationary trends in certain commodities will continue in fiscal 2017, though at lower rates than in fiscal 2016, we believe we are well-positioned to take advantage of projected food price inflation in the second half of 2017 and we plan to maintain our price competitiveness in order to drive customer traffic. 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 from our acquisition or re-opening of A&P and Haggen stores. The rates of identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, for fiscal 2014 and fiscal 2015 have been adjusted 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. Without adjusting for this impact, identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, during fiscal 2014 and fiscal 2015 would have been 4.7% and 4.6%, respectively.

Strong Free Cash Flow Generation.    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 $1.7 billion and $1.4 billion in fiscal 2015 and fiscal 2016, 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 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.

 

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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.”

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:

Continue to Drive Identical Store Sales Growth.    Consistent with our operating playbook, we plan to deliver identical store 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 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 Brand Offerings.    We continue to drive sales growth and profitability by extending our own brand offerings across our banners, including high-quality and recognizable brands such as O Organics, Open Nature, Eating Right and Lucerne. Our own brand products achieved over $10.5 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-based loyalty programs. In addition, we believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications. We expanded our home delivery offering to 10 new markets in fiscal 2016, and expect to serve eight of the ten most populous MSAs by the end of fiscal 2017.

 

    Capitalizing on Demand for Health and Wellness Services.    We intend to leverage our portfolio of 1,786 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 patients. We believe that these efforts will drive sales growth 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 seven and 15 new stores in fiscal 2015 and fiscal 2016, respectively, and expect to open a total of 15 new stores and complete approximately 150 upgrade and remodel projects during 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.

 

    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 will also seek to build new, and enhance existing, customer relationships through our digital capabilities.

 

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    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’ fresh fruit and vegetables cut in-store 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 continue to drive identical store sales growth.

Enhance Our Operating Margin.    Our focus on identical store sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefit through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. 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 2015 and fiscal 2016, we achieved synergies from the Safeway acquisition of approximately $250 million and $575 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 achieving our target.

Our detailed synergy plan was developed on a bottom-up, function-by-function basis by combined Albertsons and Safeway teams. Synergies are expected to consist of approximately 28% from operational efficiencies within our back office, distribution and manufacturing operations, 20% from the conversion of Albertsons stores onto Safeway’s information technology systems, 14% from increased own brand penetration and improved synergies and 15% from improved vendor relationships. An additional 23% of synergies are expected to come from optimizing marketing and advertising spend in adjacent regions, as well as actionable synergies in pharmacy, utilities and insurance. A more detailed description of the expected sources of synergy is set out below:

 

    Corporate and Division Cost Savings.    We are removing complexity from our business by simplifying business processes and rationalizing redundant positions. As part of this process, we have finalized the plans and timing of headcount reductions in connection with our acquisition of Safeway, and, as of February 25, 2017, these reductions were substantially complete. In addition, we are taking steps to reduce transportation costs due to reduced mileage, improved facility utilization and fleet rationalization.

 

    IT Conversion.    We are in the process of converting our Albertsons and NAI stores, distribution centers and systems onto Safeway’s IT systems, which we believe will result in significant savings as we wind down our transition services agreements with SuperValu. We have obtained Safeway systems access for Albertsons and NAI users, developed initial consolidated reporting, launched our Data Integrity/Validation team and consolidated email directories across the company. In addition, we hired new Chief Information and Chief Information Security Officers in fiscal 2015.

 

   

Own Brands.    We are leveraging the high-quality and expansive portfolio of our own brand products, consumer brands and manufacturing facilities owned by Safeway to improve

 

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profitability across our company. We recently developed a plan to redesign and consolidate our own brand packaging, which will no longer be differentiated by banners. Upon completion, each of our banners will offer the same own brand products. We have launched 3,000 distinct products with our new “Signature” branding and have made the majority of our own brand products available to most or all of our Albertsons and NAI stores for sale to our customers.

 

    Vendor Funding.    We believe our increased scale will provide optimized and improved vendor relationships, through which we receive allowances and credits for volume incentives, promotional allowances and new product placement. We intend to leverage our scale through our joint accelerated growth program with leading consumer packaged goods vendors.

 

    Marketing and Advertising.    We believe our scale provides opportunities for marketing and advertising savings, primarily from lower advertising rates in overlapping regions and reduced agency spend. We intend to leverage our scale, but operate locally. Our national team will execute cutting-edge merchandising programs, optimize best practice sharing across divisions and enhance consumer understanding through consumer insight and analysis. Our local marketing teams will set brand strategy and communicate brand message to customers through the use of direct mail, radio, email and web applications, just for U and MyMixx personalization, television, social media, display and signage, search engines and weekly inserts. We also intend to develop and leverage cutting-edge loyalty and digital marketing programs. Since the Safeway acquisition, we have outsourced tactical advertising functions and implemented a standardized consumer survey index across the company.

 

    Pharmacy, Utilities and Insurance.    We intend to consolidate managed care provider reimbursement programs increase vaccine penetration and leverage our combined scale for volume discounts on branded and generic drugs. We entered into a five-year distribution agreement with McKesson Corporation (“McKesson”) to source and distribute both branded and generic pharmaceuticals, which commenced on April 1, 2016. Purchases from McKesson represented approximately 7.6% of our fiscal 2016 sales. We will also benefit from the conversion of our banners to Safeway’s leading energy purchasing program that will allow us to buy a portion of our electrical power needs at wholesale prices. In addition, we expect to lower our corporate insurance costs by leveraging best practices and scale across the combined company. In addition, in May 2015 we hired a new Senior Vice President of Pharmacy, Health and Wellness to help grow our pharmacy business.

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.”

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 seven and 15 new stores in fiscal 2015 and fiscal 2016, respectively, and expect to open a total of 15 new stores and complete approximately 150 upgrade and remodel projects during 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,

 

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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. Certain of our acquisitions may involve the issuance of our equity.

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 limited number of companies with a national footprint. From 2012 through 2017, 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 0.00% and 1.00% in 2017. 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 that 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. 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. It has also resulted in the emergence of a number of online-only food and drug offerings.

 

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Properties

As of February 25, 2017, we operated 2,324 stores located in 35 states and the District of Columbia as shown in the following table:

 

Location

   Number of
Stores
    

Location

   Number of
Stores
    

Location

   Number of
Stores
 

Alaska

     25     

Indiana

     4      New York      17  

Arizona

     143      Iowa      1      North Dakota      1  

Arkansas

     1      Louisiana      18      Oregon      125  

California

     602      Maine      21      Pennsylvania      52  

Colorado

     112      Maryland      70      Rhode Island      8  

Connecticut

     4      Massachusetts      78      South Dakota      3  

Delaware

     20      Montana      38      Texas      221  

District of Columbia

     13      Nebraska      5      Utah      5  

Florida

     3      Nevada      48      Vermont      19  

Hawaii

     22      New Hampshire      27      Virginia      40  

Idaho

     41      New Jersey      82      Washington      224  

Illinois

     181      New Mexico      35      Wyoming      15  

The following table summarizes our stores by size as of February 25, 2017:

 

Square Footage

   Number of Stores      Percent of Total  

Less than 30,000

     210        9.0

30,000 to 50,000

     812        35.0

More than 50,000

     1,302        56.0
  

 

 

    

 

 

 

Total stores

     2,324        100.0
  

 

 

    

 

 

 

Approximately 46% of our operating stores are owned or ground-leased properties. Together, our owned and ground-leased properties have a value of approximately $12.1 billion. Appraisals of our real estate were conducted by Cushman & Wakefield, Inc. between the fourth quarter of 2012 and the second quarter of fiscal 2016. The foregoing value estimate includes a third-party valuation of United properties relied on by management and is adjusted to give effect to FTC-mandated divestitures and other asset sales since the dates of the appraisals.

Our corporate headquarters are located in Boise, Idaho. We own our headquarters. The premises is approximately 250,000 square feet in size. In addition to our corporate headquarters, we have corporate offices in Pleasanton, California and Phoenix, Arizona. We are in the process of consolidating our corporate campuses and division offices to increase efficiency.

On December 23, 2014, Safeway and its wholly-owned real estate development subsidiary, PDC, sold substantially all of the net assets of PDC to Terramar Retail Centers, LLC, an unrelated party. PDC’s assets were comprised of shopping centers that are completed or under development. Most of these centers included grocery stores that are leased back to Safeway.

Products

Our stores offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel and other items and services. We are not dependent on any individual supplier, and one third-party supplier represented more than 5% of our fiscal 2016 sales. During fiscal 2016, approximately 22% of sales, excluding fuel and pharmacy, were from our own brand products. The

 

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following table represents sales by revenue by similar type of product (in millions). Year over year increases in volume reflect acquisitions as well as identical store sales growth.

 

     Fiscal Year  
     2016     2015     2014  
     Amount      % of Total     Amount      % of Total     Amount      % of Total  

Non-perishables(1)

   $ 26,699        44.7   $ 26,284        44.8   $ 12,906        47.5

Perishables(2)

     24,399        40.9     23,661        40.3     11,044        40.6

Pharmacy

     5,119        8.6     5,073        8.6     2,603        9.6

Fuel

     2,693        4.5     2,955        5.0     387        1.4

Other(3)

     768        1.3     761        1.3     259        0.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 59,678        100.0   $ 58,734        100.0   $ 27,199        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Consists primarily of general merchandise, grocery and frozen foods.
(2) Consists primarily of produce, dairy, meat, deli, floral and seafood.
(3) Consists primarily of lottery and various other commissions and other miscellaneous income.

Distribution

As of February 25, 2017, we operated 28 strategically located distribution centers, 64% of which are owned or ground-leased. Our distribution centers collectively provide approximately 62% of all products to our retail operating areas. We are in the process of consolidating our distribution centers and moving Albertsons and NAI stores, distribution centers and systems onto Safeway’s IT systems in order to operate our entire distribution network across one unified platform.

Manufacturing

As measured by units for fiscal 2016, 10% of our own brand merchandise was manufactured in company-owned facilities, and the remainder of our own brand merchandise was purchased from third parties. We closely monitor make-versus-buy decisions on internally sourced products to optimize our profitability. In addition, we believe that our scale will provide opportunities to leverage our fixed manufacturing costs in order to drive innovation across our own brand portfolio.

We operated the following manufacturing and processing facilities as of February 25, 2017:

 

Facility Type

   Number  

Milk plants

     6  

Soft drink bottling plants

     4  

Bakery plants

     3  

Grocery/prepared food plants

     2  

Ice cream plants

     2  

Ice plant

     1  
  

 

 

 

Total

     18  
  

 

 

 

In addition, we operate laboratory facilities for quality assurance and research and development in certain plants and at our corporate offices.

Marketing, Advertising and Online Sales

Our marketing efforts involve collaboration between our national marketing and merchandising team and local divisions and stores. We augment the local division teams with corporate resources and

 

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are focused on providing expertise, sharing best practices and leveraging scale in partnership with leading consumer packaged goods vendors. Our corporate teams support divisions by providing strategic guidance in order to drive key areas of our business, including pharmacy, general merchandise and our own brands. Our local marketing teams set brand strategy and communicate brand messages through our integrated digital and physical marketing and advertising channels. We expanded our home delivery offering to 10 new markets in fiscal 2016, and expect to serve eight of the ten most populous MSAs by the end of fiscal 2017. Additionally, we are currently testing our “click-and-collect” program, in which items selected online by our customers are gathered from our store shelves by our associates and picked up by our customers from our stores.

Relationship with SuperValu

Transition Services Agreements with SuperValu

Services.    Currently, SuperValu provides certain business support services to Albertsons and NAI pursuant to the SVU TSAs. The services provided by SuperValu to Albertsons and NAI include back office, administrative, IT, procurement, insurance and accounting services. Albertsons provides records management and retention services and environmental services to SuperValu, and also provides office space to SuperValu at our Boise offices. NAI provides pharmacy services to SuperValu.

Fees.    Albertsons’ and NAI’s fees under the SVU TSAs are 50% fixed and 50% variable, and are determined in part based on the number of stores and distribution centers receiving services, which number can be reduced by Albertsons and by NAI at any time upon five weeks’ notice, with a corresponding reduction in the variable portion of the fees due to SuperValu.

Albertsons, in its capacity as a recipient of services from SuperValu, paid total fees related to the SVU TSAs of $60.0 million for fiscal 2016. The expected fee due to SuperValu for fiscal 2017 is $26.8 million. SuperValu reimburses Albertsons’ monthly expenses incurred in connection with providing office space to SuperValu at our Boise offices, as well as fees for records management and retention services, and environmental services.

NAI, in its capacity as a recipient of services from SuperValu, paid total fees related to the SVU TSAs of $97.1 million for fiscal 2016. The expected fee due to SuperValu for fiscal 2017 is $102.3 million. SuperValu pays NAI fees based on the number of operating SuperValu pharmacies receiving services.

Term.    The provision of services commenced in March 2013 and terminates on September 21, 2018. Each of SuperValu, Albertsons and NAI has seven remaining one-year consecutive options to extend the term for receipt of services under the SVU TSAs, exercisable one year in advance.

Transition and Wind Down of SuperValu TSA Services

We are in the process of converting our Albertsons and NAI stores, distribution centers and systems to Safeway’s IT systems and, in April 2015, we reached an agreement with SuperValu for its support of our implementation of this IT conversion. Specifically, we have agreed to pay SuperValu $50 million in the aggregate, subject to certain conditions, by November 1, 2018 to support the transition and wind down of the SVU TSAs, including the transition of services supporting Albertsons and NAI stores, distribution centers, divisions, back office, general office, surplus properties and other functions and facilities. We also agreed with SuperValu to negotiate in good faith if either the costs associated with the transition and wind down services are materially higher (i.e., 5% or more) than anticipated, or SuperValu is not performing in all material respects the transition and wind down services as needed to support our transition and wind down activities.

 

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SuperValu—Albertsons and NAI Trademark Cross Licenses

In March 2013, NAI and Albertsons each entered into a trademark cross licensing agreement with SuperValu, pursuant to which each party granted the other a non-exclusive, royalty-free license to use certain proprietary rights (e.g., trademarks, trade names, trade dress, service marks, banners, etc.) consistent with the parties’ past practices and uses of the relevant proprietary rights. The cross license agreements will each remain in effect for so long as and to the extent that either party to the cross-license agreements owns any of the proprietary rights subject to the agreements.

Lancaster Operating and Supply Agreement

In March 2013, NAI entered into an operating and supply agreement with SuperValu for the operation of, and supply of products from, the distribution center located in the Lancaster, Pennsylvania area (the “Lancaster Agreement”). Under the Lancaster Agreement, NAI owns the Lancaster distribution center and SuperValu manages and operates the distribution center on behalf of NAI. In addition, SuperValu supplies NAI’s Acme and Shaw’s stores from the distribution center under a shared costs arrangement, allocating costs ratably based on each parties’ use of the distribution center. Unless earlier terminated, the initial term of the Lancaster Agreement continues until March 21, 2018. Subject to either party’s right to terminate the Lancaster Agreement for any reason and without cause upon 24 months’ notice, SuperValu may extend the term of the agreement for up to two consecutive periods of five years each. For fiscal 2016, NAI paid SuperValu approximately $1.7 billion under the Lancaster Agreement.

Capital Expenditure Program

Our capital expenditure program funds new stores, remodels, distribution facilities and IT. We apply a disciplined approach to our capital investments, undertaking a rigorous cost-benefit analysis and targeting an attractive return on investment. In fiscal 2016, we spent approximately $1,415 million for capital expenditures, including $250 million of Safeway integration-related capital expenditures. We expect to spend approximately $1,400 million in total for capital expenditures during fiscal 2017, or approximately 2.3% of our fiscal 2016 sales, including $150 million of Safeway integration-related capital expenditures. In fiscal 2017, we expect to complete approximately 150 upgrade and remodel projects and open 15 new stores.

Trade Names and Trademarks

We have invested significantly in the development and protection of “Albertsons” and “Safeway” as both trade names and as trademarks, and consider each to be an important business asset. We also own or license more than 650 other trademarks registered and/or pending in the United States Patent and Trademark Office and other jurisdictions, including trademarks for products and services such as Essential Everyday, Wild Harvest, Baby Basics, Steakhouse Choice, Culinary Circle, Safeway, Rancher’s Reserve, O Organics, Lucerne, Primo Taglio, the Deli Counter, Eating Right, mom to mom, waterfront BISTRO, Bright Green, Open Nature, Refreshe, Snack Artist, Signature Café, Signature Care, Signature Farms, Signature Kitchens, Signature Home, Signature SELECT, Value Corner, Priority, just for U, My Simple Nutrition, Ingredients for Life and other trademarks such as United Express, United Supermarkets, Amigos, Market Street, Haggen, Lucky, Pak’N Save Foods, Vons, Pavilions, Randalls, Tom Thumb, Carrs Quality Centers, ACME, Sav-On, Shaw’s, Star Market, Super Saver and Jewel-Osco.

 

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Seasonality

Our business is generally not seasonal in nature.

Competition

The food and drug retail industry is highly competitive. The principal competitive factors that affect our business are location, quality, price, service, selection and condition of assets such as our stores.

We face intense competition from other food and/or drug retailers, supercenters, club stores, online providers, specialty and niche supermarkets, drug stores, general merchandisers, wholesale stores, discount stores, convenience stores and restaurants. We and our competitors engage in price and non-price competition which, from time to time, has adversely affected our operating margins.

For more information on the competitive pressures that we face, see “Risk Factors—Risks Related to Our Business and Industry—Competition in our industry is intense, and our failure to compete successfully may adversely affect our profitability and operating results.”

Raw Materials

Various agricultural commodities constitute the principal raw materials used by the company in the manufacture of its food products. We believe that raw materials for our products are not in short supply, and all are readily available from a wide variety of independent suppliers.

Environmental Laws

Our operations are subject to regulation under environmental laws, including those relating to waste management, air emissions and underground storage tanks. In addition, as an owner and operator of commercial real estate, we may be subject to liability under applicable environmental laws for clean-up of contamination at our facilities. Compliance with, and clean-up liability under, these laws has not had and is not expected to have a material adverse effect upon our business, financial condition, liquidity or operating results. See “—Legal Proceedings” and “Risk Factors—Risks Related to Our Business and Industry—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.”

Employees

As of February 25, 2017, we employed approximately 273,000 full- and part-time employees, of which approximately 170,000 were covered by collective bargaining agreements. During fiscal 2016, collective bargaining agreements covering approximately 82,000 employees were renegotiated. During fiscal 2017, 103 collective bargaining agreements covering approximately 10,000 employees are scheduled to expire. We believe that our relations with our employees are good.

Legal Proceedings

We are subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits involving trade practices, lawsuits alleging violations of state and/or federal wage and hour laws (including alleged violations of meal and rest period laws and alleged misclassification issues), real estate disputes and other matters. Some of these suits purport or may be determined to be class actions and/or seek substantial damages.

 

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It is our management’s opinion that although the amount of liability with respect to certain of the matters described herein cannot be ascertained at this time, any resulting liability of these and other matters, including any punitive damages, will not have a material adverse effect on our business or financial condition.

During fiscal 2014, we received two subpoenas from the DEA requesting information concerning our record keeping, reporting and related practices concerning the theft or significant loss of controlled substances. The two subpoenas have resulted in essentially a single investigation, and we are cooperating with the DEA in that investigation. We have met with the DEA on several occasions, including December 2015, May 2016 and June 2016 to discuss the investigation, and we anticipate further meetings in the near future. On June 7, 2016, we received a third subpoena, which requested information concerning potential diversion by one former employee in the Seattle/Tacoma area (Washington State). We are cooperating with the DEA in that investigation. We anticipate that there will be monetary fines assessed, and administrative penalties. We have established an estimated liability for these matters which is based on information currently available to us and may change as new information becomes available.

In January 2016, we received a subpoena from the Office of the Inspector General of the Department of Health and Human Services (the “OIG”) pertaining to the pricing of drugs offered under our MyRxCare discount program and the impact on reimbursements to Medicare, Medicaid and TRICARE (the “Government Health Programs”). In particular, the OIG is requesting information on the relationship between the prices charged for drugs under the MyRxCare program and the “usual and customary” prices reported by our company in claims for reimbursements to the Government Health Programs or other third party payors, and we are cooperating with the OIG in the investigation. We are currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.

On December 16, 2016, we received a civil investigative demand from the United States Attorney for the District of Rhode Island in connection with a False Claims Act investigation relating to our influenza vaccination programs. The investigation concerns whether our provision of store coupons to our customers who received influenza vaccinations in our in-store pharmacies constituted an improper benefit to those customers under the federal Medicare and Medicaid programs. We believe that our provision of the store coupons to our customers is an allowable incentive to encourage vaccinations. We are cooperating with the U.S. Attorney in the investigation. We are currently unable to determine the probability of the outcome of this matter or the range of possible loss, if any.

On August 14, 2014, we announced that we had experienced a criminal intrusion by installation of malware on a portion of our computer network that processes payment card transactions for our retail store locations including our Shaw’s, Star Market, Acme, Jewel-Osco and Albertsons retail banners. On September 29, 2014, we announced that we had experienced a second and separate criminal intrusion. We believe these were attempts to collect payment card data. Relying on our IT service provider, SuperValu, we took immediate steps to secure the affected part of the network. We believe that we have eradicated the malware used in each intrusion. We notified federal law enforcement authorities, the major payment card networks, and our insurance carriers and are cooperating in their efforts to investigate these intrusions. As required by the payment card brands,, we retained a firm to conduct a forensic investigation into the intrusions. The forensic firm has issued separate reports for each intrusion (copies of which have been provided to the card networks). Although our network had previously been found to be compliant with PCI DSS, in both reports the forensic firm found that not all of these standards had been met at the time of the intrusions, and 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

 

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costs) as well as a case management assessment. We believe it is probable that 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. 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 claims against us. We will continue to evaluate information as it becomes available and will record an estimate of additional losses, 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. As a result of the criminal intrusions, two class action complaints were filed against us by consumers and are currently pending, Mertz v. SuperValu Inc. et al. filed in federal court in the state of Minnesota and Rocke v. SuperValu Inc. et al. filed in federal court in the state of Idaho, alleging deceptive trade practices, negligence and invasion of privacy. The plaintiffs seek unspecified damages. The Judicial Panel on Multidistrict Litigation has consolidated the class actions and transferred the cases to the District of Minnesota. On August 10, 2015, we and SuperValu filed a motion to dismiss the class actions, which was granted without prejudice on January 7, 2016. The plaintiffs have 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. The filing of the appellate briefs was completed by both parties on September 29, 2016 and oral arguments are scheduled for May 10, 2017. 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 multi-state 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. 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 intrusion 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.

On June 17, 2011, a customer of Safeway’s home delivery business (safeway.com) filed a class action complaint in the United States District Court for the Northern District of California entitled Rodman v. Safeway Inc., alleging that Safeway had inaccurately represented on its home delivery website that the prices paid there were the same as the prices in the brick-and-mortar retail store. Rodman asserted claims for breach of contract and unfair business practices under California law. The court certified a class for the breach of contract claim, but denied class treatment for the California business practices claims. On December 10, 2014, the court ruled that the terms and conditions on Safeway’s website should be construed as creating a contractual promise that prices on the website would be the same as in the stores and that Safeway had breached the contract by charging more on the website. On August 31, 2015, the court denied Safeway’s affirmative defenses and arguments for limiting liability, and determined that website registrants since 2006 were entitled to approximately

 

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$31.0 million in damages (which amount was reduced to $23.2 million to correct an error in the court’s calculation), plus prejudgment interest. The court then set a trial date of December 7, 2015 to determine whether pre-2006 registrants are entitled to any recovery. The parties thereafter stipulated to facts regarding the pre-2006 registration process, whereupon the court vacated the December trial date and extended its prior liability and damages rulings to class members who registered before 2006. Consequently, on November 30, 2015, the court entered a final judgment in favor of the plaintiff class in the amount of $41.9 million (comprised of $31.0 million in damages and $10.9 million in prejudgment interest). Safeway filed a Notice of Appeal from that judgment to the Ninth Circuit Court of Appeals on December 4, 2015. The company has established an estimated liability for these claims, but intends to contest both liability and damages on appeal. On April 6, 2016, the plaintiff moved for discovery sanctions against Safeway in the district court, seeking an additional $2.0 million. A hearing on the sanctions motion was held on August 25, 2016, and the court awarded sanctions against us in an amount under $1.0 million.

On June 29, 2015, counsel for Haggen delivered a notice of claims to Albertson’s LLC and Albertson’s Holdings LLC asserting that those companies had committed fraud and breached the Asset Purchase Agreement under which Haggen purchased 146 divested stores by improperly transferring inventory out of purchased stores, overstocking and understocking inventory, failing to advertise in the ordinary course of business, misusing confidential information and failing to use commercially reasonably efforts to preserve existing relationships. Haggen made no specific monetary demands, but withheld payment of approximately $41.1 million due for purchased inventory at 38 stores on the basis of these allegations. On July 17, 2015, Albertson’s LLC and Albertson’s Holdings LLC commenced a lawsuit against Haggen in the Superior Court of Los Angeles County, alleging claims for breach of contract and fraud arising out of Haggen’s failure to pay the approximately $41.1 million due for the purchased inventory. On July 20, 2015, an essentially identical complaint was filed in the Superior Court of the State of Delaware in and for New Castle County (the “State Court Action”). On August 26, 2015, we voluntarily dismissed the action we had commenced in Superior Court in Los Angeles County. On September 1, 2015, Haggen commenced a lawsuit against Albertson’s LLC and Albertson’s Holdings LLC in the United States District Court for the District of Delaware, alleging claims for violation of Section 7 of the Clayton Act, attempted monopolization under the Sherman Act, breach of contract, indemnification, breach of implied covenant of good faith and fair dealing, fraud, unfair competition, misappropriation of trade secrets under the Uniform Trade Secrets Acts, conversion and violation of the Washington Consumer Protection Act (the “District Court Action”). In the complaint, Haggen alleged that we, among other actions set out in the complaint, misused Haggen’s confidential information to draw customers away from Haggen stores, provided inaccurate, incomplete and misleading inventory data and pricing information on products transferred to Haggen, deliberately understocked and overstocked inventory in stores acquired by Haggen and wrongfully cut off advertising prior to the transfer of the stores to Haggen. Furthermore, Haggen alleged that, if it is destroyed as a competitor, its damages may exceed $1 billion, and asserted it is entitled to treble and punitive damages and to seek rescission of the asset purchase agreement. On September 8, 2015, the State Court Action was stayed due to Haggen’s Chapter 11 bankruptcy case. In addition, On September 17, 2015, we received a letter from the legal counsel of another purchaser of a small number of our FTC-mandated divested stores, alleging claims similar to those presented in Haggen’s lawsuit. We believe that the claims asserted by the additional purchaser are without merit and intend to vigorously defend against the claims. On January 21, 2016, we entered into a settlement agreement with (i) Haggen and its debtor and non-debtor affiliates, (ii) the Official Committee of Unsecured Creditors appointed in the Haggen bankruptcy case (the “Creditors’ Committee”) and (iii) Comvest Partners and its affiliates pursuant to which we resolved the District Court Action and State Court Action. The settlement agreement, which was approved by the Bankruptcy Court administering Haggen’s bankruptcy case and which is now final, provides for the dismissal with prejudice of the Pending Litigations in exchange for (a) a cash payment by us of $5.75 million to the creditor trust formed by the Creditors’ Committee (the “Creditor Trust”), (b) an agreement that we will have an

 

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allowed unsecured claim against Haggen in its bankruptcy case of $8.25 million, which we will transfer to the Creditor Trust, and (c) an exchange of releases of any and all claims among the settling parties. The settlement agreement was approved by an order of the Bankruptcy Court administering the Haggen bankruptcy case on February 16, 2016, and the order became final on March 2, 2016. Subsequently, the State Court Action was dismissed with prejudice on March 7, 2016, the District Court Action was dismissed with prejudice on March 8, 2016, and we paid $5.75 million to the Creditor Trust on March 11, 2016. The $5.75 million cash payment is incremental to the previously recorded losses of $41.1 million related to the purchased inventory in the second quarter of fiscal 2015 and $32.2 million related to our contingent lease liability for the rejected Haggen leases.

Two lawsuits have been brought against Safeway and the Safeway Benefits Plan Committee (the “Benefit Plans Committee,” and together with Safeway, the “Safeway Benefits Plans Defendants”) and other third parties alleging breaches of fiduciary duty under ERISA with respect to Safeway’s 401(k) Plan (the “Safeway 401(k) Plan”). On July 14, 2016, a complaint (“Terraza”) was filed in the United States District Court for the Northern District of California by a participant in the Safeway 401(k) Plan individually and on behalf of the Safeway 401(k) Plan. An amended complaint was filed on November 18, 2016. On August 25, 2016, a second complaint (“Lorenz”) was filed in the United States District Court for the Northern District of California by another participant in the Safeway 401(k) Plan individually and on behalf of all others similarly situated against the Safeway Benefits Plans Defendants and against the Safeway 401(k) Plan’s former recordkeepers. An amended complaint was filed on September 16, 2016 and a second amended complaint was filed on November 21, 2016. In general, both lawsuits allege that the Safeway Benefits Plans Defendants breached their fiduciary duties under ERISA regarding the selection of investments offered under the Safeway 401(k) Plan and the fees and expenses related to those investments. We believe these lawsuits are without merit, and intend to contest each of them vigorously. The Safeway Benefits Plans Defendants filed motions to dismiss both cases, and the hearings on the Terraza and Lorenz motions were held in February 2017. On March 13, 2017, the judge hearing the cases issued orders denying the motions to dismiss in both cases. We are currently unable to estimate the range of loss, if any, that may result from these matters due to the early procedural status of the cases.

 

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MANAGEMENT

Executive Officers and Managers

We are a Delaware single member limited liability company. We are managed by our sole member, AB Acquisition. Accordingly, our business and affairs are currently managed under the limited liability company board of managers of AB Acquisition. As a result, we refer to AB Acquisition’s board of managers as our board of managers. We refer to the committees of the board of managers of AB Acquisition as the committees of our board of managers. The following table sets forth information regarding our executive officers and the board of managers for AB Acquisition.

 

Name

   Age   Position

Robert G. Miller(a)

   72   Chairman and Chief Executive Officer

Wayne A. Denningham

   55   President & Chief Operating Officer

Shane Sampson

   52   Chief Marketing and Merchandising Officer

Robert B. Dimond

   55   Executive Vice President and Chief Financial Officer

Justin Ewing

   48   Executive Vice President, Corporate Development and Real
Estate

Robert A. Gordon

   65   Executive Vice President, General Counsel and Secretary

Susan Morris

   48   Executive Vice President, Retail Operations, West Region

Jim Perkins

   53   Executive Vice President, Retail Operations Special
Projects

Andrew J. Scoggin

   54   Executive Vice President, Human Resources, Labor
Relations, Public Relations and Government Affairs

Anuj Dhanda

   54   Executive Vice President and Chief Information Officer

Mike Withers

   57   Executive Vice President, Retail Operations, East Region

Dean S. Adler

   60   Manager

Sharon L. Allen*

   65   Manager

Steven A. Davis*

   58   Manager

Raymond Edwards(b)

   54   Manager

Kim Fennebresque*(b)(c)

   66   Manager

Lisa A. Gray(a)

   61   Manager

Hersch Klaff

   63   Manager

Ronald Kravit(c)

   59   Manager

Alan Schumacher*(c)

   70   Manager

Jay L. Schottenstein

   62   Manager

Lenard B. Tessler(b)

   64   Lead Manager

Scott Wille

   36   Manager

 

  As of February 25, 2017
* Independent Director
(a) Member, Compliance Committee
(b) Member, Compensation Committee
(c) Member, Audit and Risk Committee

Executive Officer and Manager Biographies

Robert G. Miller, Chairman and Chief Executive Officer.    Mr. Miller has served as our Chairman and Chief Executive Officer since April 2015 and has served as a member of our board of managers since 2006. Mr. Miller previously served as our Executive Chairman from January 2015 to April 2015, and as Chief Executive Officer from June 2006 to January 2015. Mr. Miller has over 50 years of retail food and grocery experience. Mr. Miller previously served as Chairman and Chief Executive Officer of Fred Meyer Inc. and Rite Aid Corp. He is the former Vice Chairman of Kroger and former Chairman of

 

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Wild Oats Markets, Inc., a nationwide chain of natural and organic food markets. Earlier in his career, Mr. Miller served as Executive Vice President of Operations of Albertson’s, Inc. Mr. Miller is a current or former board member of Nordstrom Inc., JoAnn Fabrics, Harrah’s Entertainment Inc. and the Jim Pattison Group, Inc. Mr. Miller has detailed knowledge and valuable perspective and insights regarding our business and has responsibility for the development and implementation of our business strategy.

Wayne A. Denningham, President & Chief Operating Officer.    Mr. Denningham has been our Chief Operating Officer since April 2015, and was named President & Chief Operating Officer in April 2017. Previously, he served as our Executive Vice President and Chief Operating Officer, South Region, from January 2015 to April 2015 and President of our Southern California division from March 2013 to January 2015. From 2006 to March 2013, he led Albertson’s LLC’s Rocky Mountain, Florida and Southern divisions. Mr. Denningham began his career with Albertson’s, Inc. in 1977 as a courtesy clerk and served in a variety of positions with the company, including Executive Vice President of Marketing and Merchandising and Executive Vice President of Operations and Regional President.

Shane Sampson, Chief Marketing and Merchandising Officer.    Mr. Sampson has been our Chief Marketing and Merchandising Officer since April 2015. Previously, Mr. Sampson served as our Executive Vice President, Marketing and Merchandising from January 2015 to April 2015. He previously served as President of NAI’s Jewel-Osco division from March 2014 to January 2015. Previously, in 2013, Mr. Sampson led NAI’s Shaw’s and Star Market’s management team. Prior to joining NAI, Mr. Sampson served as Senior Vice President of Operations at Giant Food, a regional American supermarket chain and division of Ahold USA, from 2009 to January 2013. He has over 35 years of experience in the grocery industry at several chains, including roles as Vice President of Merchandising and Marketing and President of numerous Albertson’s, Inc. divisions.

Robert B. Dimond, Executive Vice President and Chief Financial Officer.    Mr. Dimond has been our Chief Financial Officer since February 2014. Prior to joining our company, Mr. Dimond previously served as Executive Vice President, Chief Financial Officer and Treasurer at Nash Finch Co., a food distributor, from 2007 to 2013. Mr. Dimond has over 27 years of financial and senior executive management experience in the retail food and distribution industry. Mr. Dimond has served as Chief Financial Officer and Senior Vice President of Wild Oats, Group Vice President and Chief Financial Officer for the western region of Kroger, Group Vice President and Chief Financial Officer of Fred Meyer, Inc. and as Vice President, Administration and Controller for Smith’s Food and Drug Centers Inc., a regional supermarket chain. Mr. Dimond is a Certified Public Accountant.

Justin Ewing, Executive Vice President, Corporate Development and Real Estate.    Mr. Ewing has been our Executive Vice President of Corporate Development and Real Estate since January 2015. Previously, Mr. Ewing had served as Albertson’s LLC’s Senior Vice President of Corporate Development and Real Estate since 2013, as its Vice President of Real Estate and Development since 2011 and its Vice President of Corporate Development since 2006, when Mr. Ewing originally joined Albertson’s LLC from the operations group at Cerberus. Prior to his work with Cerberus, Mr. Ewing was with Trowbridge Group, a strategic sourcing firm. Mr. Ewing also spent over 13 years with PricewaterhouseCoopers LLP. Mr. Ewing is a Chartered Accountant with the Institute of Chartered Accountants of England and Wales.

Robert A. Gordon, Executive Vice President, General Counsel and Secretary.    Mr. Gordon has been our Executive Vice President, General Counsel and Secretary since January 2015. Previously, he served as Safeway’s General Counsel from June 2000 to January 2015 and as Chief Governance Officer since 2004, Safeway’s Secretary since 2005 and as Safeway’s Deputy General Counsel from 1999 to 2000. Prior to joining Safeway, Mr. Gordon was a partner at the law firm Pillsbury Winthrop from 1984 to 1999.

 

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Susan Morris, Executive Vice President, Retail Operations, West Region.    Ms. Morris has been our Executive Vice President, Retail Operations, West Region, since April 2017. Previously, Ms. Morris served as our Executive Vice President, Retail Operations, East Region from April 2016 to April 2017, and as President of our Denver Division from March 2015 to March 2016 and as President of our Intermountain Division from March 2013 to March 2015. From June 2012 to February 2013, Ms. Morris served as our Vice President of Marketing and Merchandising, Southwest Division. From February 2010 to June 2012, Ms. Morris served as a Sales Manager in our Southwest Division. Prior to joining our company, Ms. Morris served as Senior Vice President of Sales and Merchandising and Vice President of Customer Satisfaction at SuperValu. Ms. Morris also previously served as Vice President of Operations at Albertson’s, Inc.

Jim Perkins, Executive Vice President, Retail Operations Special Projects.    Mr. Perkins has been our Executive Vice President, Retail Operations Special Projects since April 2017. He also served as our Executive Vice President, Retail Operations, West Region from April 2016 until April 2017, and our Executive Vice President, Retail Operations, East Region, from April 2015 to April 2016. He served as President of NAI’s Acme Markets division from March 2013 to April 2015. Previously, he served as regional Vice President of Giant Food, a regional American supermarket chain, from 2009 to 2013. He began his career with Albertson’s, Inc. as a clerk in 1982. Mr. Perkins served in roles of increasing responsibility, ultimately being named Vice President of Operations for Albertson’s, Inc. In 2006, Mr. Perkins joined Albertson’s LLC’s southern division as Director of Operations.

Andrew J. Scoggin, Executive Vice President, Human Resources, Labor Relations, Public Relations and Government Affairs.    Mr. Scoggin has served as our current Executive Vice President, Human Resources, Labor Relations, Public Relations and Government Affairs since January 2015. Mr. Scoggin has also served as Executive Vice President, Human Resources, Labor Relations and Public Relations for Albertson’s LLC since March 2013, and served as the Senior Vice President, Human Resources, Labor Relations and Public Relations for Albertson’s LLC from June 2006 to March 2013. Mr. Scoggin joined Albertson’s, Inc. in the Labor Relations and Human Resources department in 1993. Prior to that time, Mr. Scoggin practiced law with a San Francisco Bay Area law firm.

Anuj Dhanda, Executive Vice President and Chief Information Officer.    Mr. Dhanda has been our Executive Vice President and Chief Information Officer since December 7, 2015. Prior to joining our company, Mr. Dhanda served as Senior Vice President of Digital Commerce of the Giant Eagle supermarket chain since March 2015, and as its Chief Information Officer since September 2013. Previously, Mr. Dhanda served at PNC Financial Services as Chief Information Officer from March 2008 to August 2013, after having served in other senior information technology positions at PNC Bank from 1995 to 2013.

Mike Withers, Executive Vice President, Retail Operations, East Region.    Mr. Withers has served as our Executive Vice President, Retail Operations, East Region since April 2017. Mr. Withers began his career with Albertsons in 1976 in Boise. Mr. Withers served as district manager in both Washington and Florida and was promoted to Big Sky Division President with responsibilities for store operations in Montana and North Dakota, a role he also held in both the Florida and Portland divisions. Since 2006, Mr. Withers has served as Vice President of Marketing and Merchandising for the Florida and Southern divisions, and President of the Southern and Jewel-Osco divisions.

Dean S. Adler, Manager.    Mr. Adler has been a member of our board of managers since 2006. Mr. Adler is CEO of Lubert-Adler, which he co-founded in 1997. Mr. Adler has served on the board of directors of Bed Bath & Beyond Inc., a nationwide retailer of domestic goods, since 2001, and previously served on the board of directors for Developers Diversified Realty Corp., a shopping center

 

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real estate investment trust, and Electronics Boutique, Inc., a mall retailer. Mr. Adler’s extensive experience in the retail and real estate industries, as well as his extensive knowledge of our company, provides valuable insight to our board of managers in industries critical to our operations.

Sharon L. Allen, Manager.    Ms. Allen has been a member of our board since June 2015. Ms. Allen served as U.S. Chairman of Deloitte LLP from 2003 to 2011, retiring from that position in May 2011. Ms. Allen was also a member of the Global Board of Directors, Chair of the Global Risk Committee and U.S. Representative of the Global Governance Committee of Deloitte Touche Tohmatsu Limited from 2003 to May 2011. Ms. Allen worked at Deloitte for nearly 40 years in various leadership roles, including partner and regional managing partner, and was previously responsible for audit and consulting services for a number of Fortune 500 and large private companies. Ms. Allen is currently an independent director of Bank of America Corporation. Ms. Allen has also served as a director of First Solar, Inc. since 2013. Ms. Allen is a Certified Public Accountant (Retired). Ms. Allen’s extensive leadership, accounting and audit experience broadens the scope of our board of managers’ oversight of our financial performance and reporting and provides our board of managers with valuable insight relevant to our business.

Steven A. Davis, Manager.    Mr. Davis has been a member of our board since June 2015. Mr. Davis is the former Chairman and Chief Executive Officer of Bob Evans Farms, Inc., a foodservice and consumer products company, where he served from May 2006 to December 2014. Mr. Davis has also served as a director of Sonic Corp., the nation’s largest chain of drive-in restaurants since January 2017, Marathon Petroleum Corporation, a petroleum refiner, marketer, retailer and transporter, since 2013, Walgreens Boots Alliance, Inc. (formerly Walgreens Co.), a pharmacy-led wellbeing enterprise, from 2009 to 2015, and CenturyLink, Inc. (formerly Embarq Corporation), a provider of communication services, from 2006 to 2009. Prior to joining Bob Evans Farms, Inc. in 2006, Mr. Davis served in a variety of restaurant and consumer packaged goods leadership positions, including president of Long John Silver’s LLC and A&W All-American Food Restaurants. In addition, he held executive and operational positions at Yum! Brands, Inc.’s Pizza Hut division and at Kraft General Foods Inc. Mr. Davis brings to our board of managers extensive leadership experience. In particular, Mr. Davis’ leadership of retail and food service companies and pharmacies provides our board of managers with valuable insight relevant to our business.

Raymond Edwards, Manager.    Mr. Edwards has been a member of our board since January 2015, and was previously a member of our board from June 2006 until August 2010. Mr. Edwards has served as Executive Vice President – Retailer Services of Kimco Realty Corporation since August 2016 and has previously served as Vice President of Retail Property Solutions at Kimco Realty Corporation from July 2011 to 2016 and as Senior Vice President and Managing Director of SBC Group from 1998 to July 2001. Mr. Edwards also serves on the board of directors of Blue Ridge Real Estate Company. Mr. Edwards’ real estate expertise and knowledge of the retail industry are valuable to our board of managers’ understanding of our business and strategic planning.

Kim Fennebresque, Manager.    Mr. Fennebresque has been a member of our board of managers since March 2015. Mr. Fennebresque has served as a senior advisor to Cowen Group Inc., a diversified financial services firm, since 2008, where he also served as its chairman, president and chief executive officer from 1999 to 2008. He has served on the boards of directors of Ally Financial Inc., a financial services company, since May 2009, BlueLinx Holdings Inc., a distributor of building products, since May 2013 and as Chairperson of BlueLinx Holdings Inc. since May 2016 and Delta Tucker Holdings, Inc. (the parent of DynCorp International, a provider of defense and technical services and government outsourced solutions) since May 2015. From 2010 to 2012, Mr. Fennebresque served as chairman of Dahlman Rose & Co., LLC, an investment bank. He has also served as head of the corporate finance and mergers & acquisitions departments at UBS and was a general partner and co-head of investment banking at Lazard Frères & Co. He has also held various

 

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positions at First Boston Corporation, an investment bank acquired by Credit Suisse. Mr. Fennebresque’s extensive experience as a director of several public companies and history of leadership in the financial services industry brings corporate governance expertise and a diverse viewpoint to the deliberations of our board of managers.

Lisa A. Gray, Manager.    Ms. Gray has been member of our board of managers since July 2014. Ms. Gray has served as Vice Chairman of Cerberus Operations and Advisory Company, LLC (“COAC”), an affiliate of Cerberus, since May 2015, and has served as General Counsel of COAC since 2004. Prior to joining Cerberus in 2004, she served as Chief Operating Executive and General Counsel for WAM!NET Inc., a provider of content hosting and distribution solutions, from 1996 to 2004. Prior to that, she was a partner at the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd from 1986 to 1996. Ms. Gray serves as Vice Chairman and General Counsel of COAC, an affiliate of our largest beneficial owner, and has extensive experience and familiarity with us. Ms. Gray has also served as a member of the board of directors of Keane Group, Inc., a provider of hydraulic fracturing, wireline technologies and drilling services, since March 2011. In addition, Ms. Gray has extensive legal and corporate governance skills which broadens the scope of our board of managers’ experience.

Hersch Klaff, Manager.    Mr. Klaff has served as a member of our board of managers since 2010. Mr. Klaff is the Chief Executive Officer of Klaff Realty, which he formed in 1984. Mr. Klaff began his career with the public accounting firm of Altschuler, Melvoin and Glasser in Chicago and is a Certified Public Accountant. Mr. Klaff’s real estate expertise and accounting and investment experience, as well as his extensive knowledge of our company, broadens the scope of our board of managers’ oversight of our financial performance.

Ronald Kravit, Manager.    Mr. Kravit has served as a member of our board of managers since 2006. Mr. Kravit is currently a Senior Managing Director and head of real estate investing at Cerberus, which he joined in 1996. Mr. Kravit has currently or previously served on the boards of Chrysler Financial Services Americas LLC, a financial services company, LNR Property LLC, a diversified real estate investment company, and Residential Capital LLC, a real estate finance company. Mr. Kravit joined Cerberus in 1996. Prior to joining Cerberus, Mr. Kravit was a Managing Director at Apollo Real Estate Advisors, L.P., a real estate investment firm, from 1994 to 1996. Prior to his tenure at Apollo, Mr. Kravit was a Managing Director at G. Soros Realty Advisors/Reichmann International, an affiliate of Soros Fund Management, from 1993 to 1994. Mr. Kravit is a Certified Public Accountant. Mr. Kravit’s experience in the real estate and financial services industries, and his extensive knowledge of our company, provides valuable insight to our board of managers.

Alan Schumacher, Manager.    Alan H. Schumacher has served as a member of our board of managers since March 2015. He has also served on the board of Warrior Met Coal, Inc., a leading producer and exporter of metallurgical coal for the global steel industry, since its initial public offering in April 2017. He has currently or previously served as a director of BlueLinx Holdings Inc., a distributor of building products, Evertec Inc., a full-service transaction processing business in Latin America, School Bus Holdings Inc., an indirect parent of school-bus manufacturer Blue Bird Corporation, Quality Distribution Inc., a chemical bulk tank truck operator, and Noranda Aluminum Holding Corporation, a producer of aluminum. Mr. Schumacher was a member of the Federal Accounting Standards Advisory Board from 2002 through June 2012. The board of managers has determined that the simultaneous service on more than three audit committees of public companies by Mr. Schumacher does not impair his ability to serve on our audit and risk committee nor does it represent or in any way create a conflict of interest for our company. Mr. Schumacher’s experience as a board director of several public companies, and his deep understanding of accounting principles, provides our board of managers with experience to oversee our accounting and financial reporting.

Jay Schottenstein, Manager.    Mr. Schottenstein has served as a member of our board of managers since 2006. Mr. Schottenstein has served as interim Chief Executive Officer of American

 

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Eagle Outfitters, Inc. (“American Eagle”), an apparel and accessories retailer, since January 2014 and as Chairman of their board of directors since March 1992. Mr. Schottenstein previously served as Chief Executive Officer of American Eagle from March 1992 until December 2002. He has also served as Chairman of the Board and Chief Executive Officer of Schottenstein Stores since March 1992 and as president since 2001. Mr. Schottenstein also served as chief executive officer of DSW, Inc., a footwear and accessories retailer, from March 2005 to April 2009, and as chairman of the board of directors of DSW since March 2005. Mr. Schottenstein’s experience as a chief executive officer and a director of other major publically-owned retailers, and his prior experience as a member of our board of managers, gives him and our board of managers valuable knowledge and insight to oversee our operations.

Lenard B. Tessler, Lead Manager.    Mr. Tessler has served as a member of our board of managers since 2006. Mr. Tessler is currently Vice Chairman and Senior Managing Director at Cerberus, which he joined in 2001. Prior to joining Cerberus, Mr. Tessler served as Managing Partner of TGV Partners, a private equity firm that he founded, from 1990 to 2001. From 1987 to 1990, he was a founding partner of Levine, Tessler, Leichtman & Co. From 1982 to 1987, he was a founder, Director and Executive Vice President of Walker Energy Partners. Mr. Tessler is a member of the Cerberus Capital Management Investment Committee. Mr. Tessler has also served as a member of the board of directors of Keane Group, Inc., a provider of hydraulic fracturing, wireline technologies and drilling services, since October 2012, and as a Trustee of New York Presbyterian Hospital, where he also serves as member of the Investment Committee and the Budget and Finance Committee. Mr. Tessler’s leadership roles at our largest beneficial owner, his board service and his extensive experience in financing and private equity investments and his in-depth knowledge of our company and its acquisition strategy, provides critical skills for our board of managers to oversee our strategic planning and operations.

Scott Wille, Manager.    Mr. Wille has served as a member of our board of managers since January 2015. Mr. Wille is currently Co-Head of North American Private Equity and Managing Director at Cerberus, which he joined in 2006. Prior to joining Cerberus, Mr. Wille worked in the leveraged finance group at Deutsche Bank Securities Inc. from 2004 to 2006. Mr. Wille has served as a director of Remington Outdoor Company, Inc., a designer, manufacturer and marketer of firearms, ammunition and related products, since February 2014 and Keane Group, Inc., a provider of hydraulic fracturing, wireline technologies and drilling services, since 2011. Mr. Wille previously served as a director of Tower International, Inc., a manufacturer of engineered structural metal components and assemblies, from September 2010 to October 2012. Mr. Wille serves as Managing Director of our largest beneficial owner, and his experience in the financial and private equity industries, and his in-depth knowledge of our company and its acquisition strategy, are valuable to our board of managers’ understanding of our business and financial performance.

Board of Managers

Family Relationships

None of our officers or managers has any family relationship with any director or other manager. “Family relationship” for this purpose means any relationship by blood, marriage or adoption, not more remote than first cousin.

Board Composition

Our board of managers has 13 members, comprised of one executive officer, eight managers affiliated with the Sponsors and four independent managers.

 

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Manager Independence

Our board of managers has affirmatively determined that Sharon L. Allen, Steven A. Davis, Kim Fennebresque and Alan Schumacher are independent managers as such term is defined in Rule 10A-3(b)(1) under the Exchange Act.

Board Committees

Our board of managers has assigned certain of its responsibilities to permanent committees consisting of board members appointed by it. Our board of managers has an audit and risk committee, compensation committee and compliance committee, each of which has the responsibilities and composition described below:

Audit and Risk Committee

Our audit and risk committee consists of Kim Fennebresque, Alan Schumacher and Ronald Kravit, with Mr. Schumacher serving as chair of the committee. The committee assists the board in its oversight responsibilities relating to the integrity of our financial statements, our compliance with legal and regulatory requirements (to the extent not otherwise handled by our compliance committee), our independent auditor’s qualifications and independence, and the establishment and performance of our internal audit function and the performance of the independent auditor. We have three independent managers serving on our audit and risk committee. Our board of managers has determined that Alan Schumacher is an “audit committee financial expert” under SEC rules and regulations.

Our board of managers has adopted a written charter under which the audit and risk committee operates.

Compensation Committee

Our compensation committee consists of Kim Fennebresque, Lenard B. Tessler and Raymond Edwards, with Mr. Fennebresque serving as chair of the committee. The compensation committee of the board of managers is authorized to review our compensation and benefits plans to ensure they meet our corporate objectives, approve the compensation structure of our executive officers and evaluate our executive officers’ performance and advise on salary, bonus and other incentive and equity compensation.

Compliance Committee

Our compliance committee consists of Lisa A. Gray and Robert Miller, with Ms. Gray serving as chair of the committee. The purpose of the compliance committee is to assist the board in implementing and overseeing our compliance programs, policies and procedures that are designed to respond to the various compliance and regulatory risks facing our company, and monitor our performance with respect to such programs, policies and procedures.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee is or has at any time during the past year been an officer or employee of ours. None of our executive officers serves as a member of the compensation committee or board of directors or board of managers of any other entity that has an executive officer serving as a member of our board of managers or compensation committee.

 

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Code of Business Conduct and Ethics

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and managers, including those officers responsible for financial reporting.

Manager Compensation

Only our independent managers received compensation for their service on our board of managers or any board committees in fiscal 2016. We reimburse all of our managers for reasonable documented out-of-pocket expenses incurred by them in connection with attendance at board of managers and committee meetings.

For fiscal 2016, all of our independent managers received an annual fee in the amount of $150,000. Messrs. Fennebresque and Schumacher each received an additional fee for fiscal 2016 in the amount of $25,000 for their service as the chairs of the compensation committee and the audit and risk committee, respectively.

In March 2017, the board of managers approved a change to the compensation plan for our independent managers. Commencing with the 2017 fiscal year, each independent manager will receive an annual cash fee in the amount of $125,000. Messrs. Fennebresque and Schumacher will receive additional annual fees for serving as a committee chair and/or member as follows:

 

Name

  

Committee Position

  

Additional Annual Fee

Kim Fennebresque

   Chair of Compensation Committee    $20,000
   Member of Compensation Committee    $20,000
   Member of Audit Committee    $25,000

Alan Schumacher

   Chair of Audit Committee    $25,000
   Member of Audit Committee    $25,000

During fiscal 2015, AB Acquisition awarded Messrs. Fennebresque, Schumacher and Davis Phantom Units (the “2015 Manager Phantom Units”) under the AB Acquisition LLC Phantom Unit Plan (the “Phantom Unit Plan”). 50% of the 2015 Manager Phantom Units are subject to time-based vesting in four annual installments of 25% (“Time-Based Units”). The second installment of the Time-Based Units vested on the last day of fiscal 2016. The remaining 50% of the 2015 Manager Phantom Units were initially subject to both time-based vesting in four annual installments of 25% and to the achievement of fiscal year performance targets (“Performance Units”). The second installment of the Performance Units were subject to vesting on February 25, 2017, the last day of fiscal 2016, subject to AB Acquisition’s achievement of an annual Adjusted EBITDA target for fiscal year 2016 of $3,031 million. In October 2016, the compensation committee determined that all such Performance Units converted to Time-Based Units that would vest solely subject to the manager’s continued service through the last day of fiscal 2016. Accordingly, each of Messrs. Fennebresque, Schumacher and Davis became vested in such Phantom Units on February 25, 2017. In May 2017, the compensation committee determined that all remaining outstanding Performance Units awarded to our independent managers converted to Time-Based Units that would vest solely subject to the manager’s continued service through the last day of the applicable fiscal year. In the event that following an initial public offering of AB Acquisition’s equity, a manager’s service is terminated without cause (as defined in the Phantom Unit Plan), or due to the manager’s death or disability, all of such manager’s 2015 Manager Phantom Units will become 100% vested.

On April 28, 2016, AB Acquisition awarded 5,848 Phantom Units to each of Messrs. Davis, Fennebresque and Schumacher and Ms. Allen. These Phantom Unit awards became 100% vested on February 25, 2017, the last day of fiscal 2016.

 

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On February 26, 2017, AB Acquisition awarded 9,191 Phantom Units to each of Messrs. Davis, Fennebresque and Schumacher and Ms. Allen, each with a grant date value of $125,000, that, if vested, will be settled upon the termination of the applicable manager’s service. These Phantom Units will vest 100% on the last day of fiscal 2017, subject to the manager’s continuous service through the vesting date.

See “Executive Compensation—Incentive Plans—Phantom Unit Plan” for additional information regarding the Phantom Unit Plan.

In March 2017, the board of managers approved a manager compensation plan for all of our non-employee managers that will become effective upon the consummation of an initial public offering of the equity of AB Acquisition (or any parent entity of AB Acquisition) pursuant to which:

 

    each non-employee manager will receive an annual cash fee in the amount of $125,000, which the manager may elect to receive in the form of a grant of a fully vested restricted unit award that will be settled upon the termination of the manager’s service;

 

    our Lead Manager will receive an additional annual fee in the amount of $30,000; and

 

    non-employee managers serving as chair and/or committee members will receive an additional annual fee as set forth in the table below:

 

Committee

  

Additional Annual Chair Fee

    

Additional Annual Member Fee

 

Audit and Risk

   $ 25,000      $ 25,000  

Compensation

   $ 20,000      $ 20,000  

Compliance

   $ 20,000      $ 20,000  

In addition, following any such initial public offering, each manager will receive an annual grant of restricted units with respect to the equity of the public company with a grant date value of $125,000 that, if vested, will be settled upon the termination of the manager’s service. The restricted units grants will vest 100% upon the one-year anniversary of the grant date, or, if earlier, the first stockholder meeting of the public company in the calendar year following the year in which the grant date occurs, subject to the manager’s continuous service through the vesting date. A manager appointed to serve on our board of managers during a fiscal year, or between annual stockholder meetings of the public company, will receive a pro-rated grant of any such restricted units for the year of appointment, subject to the same terms (including timing of vesting) as the grants made to the other managers for such year, but based on the grant date value on the date of grant.

Manager Compensation Table

Four members of our board of managers, Sharon L. Allen, Steven A. Davis, Kim Fennebresque and Alan Schumacher, received compensation for their service on our board during fiscal 2016, as set forth in the table below and as described in “—Manager Compensation.”

 

(in dollars)

Name

  Fees
Earned or
Paid in
Cash
    Unit
Awards(1)
     Option
Awards
    Non-Equity
Incentive Plan
Compensation
    Change in
Pension Value
and
nonqualified
Deferred
Compensation
Earnings
    All Other
Compensation
    Total  

Sharon L. Allen

    150,000       100,000                                250,000  

Steven A. Davis

    150,000       100,000                                250,000  

Kim Fennebresque

    175,000       100,000                                275,000  

Alan Schumacher

    175,000       100,000                                275,000  

 

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(1) Reflects the grant date fair value calculated in accordance with ASC 718. The amount reflects the 5,848 Phantom Units granted to each manager on April 28, 2016. Such Phantom Units became fully vested on February 25, 2017,

As of February 25, 2017, the aggregate number of outstanding vested and unvested Phantom Units held by each independent manager was:

 

Name

   Number of
Vested
Phantom
Units
     Number of
Unvested
Phantom
Units
 

Sharon L. Allen

     65,848         

Steven A. Davis