Albertsons is set to report a better-than-expected fiscal second quarter, forecasting identical sales growth that exceeds previous estimates and surpasses Wall Street expectations. RBC Capital Markets highlighted this in a Monday note, revealing that they now project a 1.6% increase in identical store sales for Albertsons in the fiscal second quarter.
This is an improvement from their earlier estimate of 1.3%, aligning closely with Wall Street's consensus. This positive outlook is bolstered by RBC's proprietary state-weighted Circana data analysis. In the previous quarter, Albertsons reported a 1.4% increase in identical sales, indicating a stable upward trend. Furthermore, Albertsons has demonstrated a competitive advantage over Kroger, outperforming them in eight of the last ten quarters by an average of 160 basis points.
RBC analyst Steven Shemesh indicated that the company's identical sales could reach nearer to 2%. However, amid a changing landscape, RBC has adjusted its forecast for Albertsons' gross margin to 27.6%, marking a slight contraction of 10 basis points. This adjustment reflects anticipated challenges due to a continued shift in pharmacy mixes, pricing pressures, and increasingly tough productivity comparisons. The brokerage is now projecting an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of approximately $882.6 million, a revision from their previous forecast of $900 million.
Allegations regarding a merger plan also loom large. In October 2022, Kroger entered into an agreement to acquire Albertsons for approximately $24.6 billion, which includes net debt of $4.7 billion. Nonetheless, challenges have arisen, as the U.S. Federal Trade Commission filed a lawsuit in February to block the merger citing significant competition concerns. Considering these circumstances, with a trial decision anticipated soon, RBC speculates that arbitrage investors are quoting a break price around $17, hinting that fundamental investors may start to show interest around the $16 mark.
Despite the merger's uncertainties, the brokerage has reiterated its price target of $23 on Albertsons stock, indicating a 35% chance of the merger closing and a 65% probability of its demise. RBC holds an outperform rating on Albertsons' shares as they observe the evolving dynamics in the grocery sector.
Currently, Albertsons is trading at $18.26, reflecting a minor change of -0.12, representing a -0.63% decline from previous valuations..