Ongoing Merger Woes Hit Albertson's Anew

The giant supermarket chain reported another round of disappointing earnings and warned that its future profits will be below expectations.
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Albertson's

(ABS)

Tuesday reported yet another round of disappointing quarterly results stemming from a problematic merger.

The number two supermarket chain in the U.S., behind

Kroger

(KR) - Get Report

, also warned that its profits in the fourth quarter and the next two fiscal years would also fall below Wall Street's expectations.

Trading in Albertson's stock was briefly delayed Tuesday morning, and the shares fell more than 16% immediately after they opened.

For the third quarter ended Oct. 28, net earnings fell to $130 million, or 44 cents a diluted share, from $218 million, or 52 cents a share, a year earlier, a 40% decline. Those figures exclude such extraordinary items as merger-related costs and a one-time charge. That figured drastically missed the 56-cent mean estimate of analysts polled by

First Call/Thomson Financial

.

Meanwhile, sales rose to $8.98 billion from $8.84 billion a year ago.

Albertson's shares were down 5 7/8 to 30 in morning trading. (The stock closed down 3 13/16, or 11%, to 32.) They have fallen steadily all year, down almost 40%, primarily on merger-related worries.

The food and drug retailer, based in Boise, Idaho, took a big hit related to its $12 billion merger with

American Stores

, completed in June. Those costs amounted to $56 million pre-tax, or $33 million after-tax, or 8 cents a diluted share. Albertson's also took a $37 million one-time charge to settle eight multistate class-action lawsuits combined in the federal district court in Boise. The suits accused the company of allowing employees to work "off the clock," which means that workers are not compensated for all the time they put in.

"This was a tough quarter. We are merging two large organizations into a single, rapidly growing food and drugstore chain," said Gary Michael, chairman and chief executive of Albertson's. "This undertaking adversely impacted earnings and evolved in a manner that prevented us from anticipating the magnitude of the impact sooner."

Last quarter was also tough for the chain. Some analysts downgraded the company because the second-quarter earnings report came in below expectations. In that report, profit came in at $236 million, or 56 cents a share, 2 cents less than expected by analysts.

Analyst Laurie Breidenbach of

Ragen Mackenzie

ascribed the problems this quarter to "execution risk," as Albertson's had difficulty converting over 400 stores to common systems and the Albertson's name in three states. She rates Albertson's a buy and her firm has done no underwriting for the company.

The company acknowledged those problems. "Although the conversion was more complicated and costly than we expected -- we estimate the effect at approximately $90 million pretax, or 13 cents per share -- and while our tracking systems in these areas were disrupted, we learned a lot and believe future endeavors will be smoother," Michael said in a statement.

That conversion also required Albertson's to change the names of some of the popular supermarket chains it acquired, such as the

Lucky

stores in California. Other analysts feared the name changes would be disruptive and subsequently downgraded the company last quarter.

The name change issue, or "banner risk," will be the thing to watch for in the fourth quarter, according to Breidenbach. She is encouraged, however, by Albertson's comparable stores sales increase of 2.2% in the third quarter, as well as the increase of 3.6% for the first four weeks of the fourth quarter. "There was a fear that Lucky customers would not shop at Albertson's, but it seems they are," she said.

The company projects fourth-quarter earnings, before extraordinary items, of approximately 70 cents a share, $2.22 a share for the 1999 fiscal year and $2.70 a share for the 2000 fiscal year. That earnings outlook reflects "the loss of sales and earnings from divested stores, costs of integration and realization of synergies," according to a statement. The First Call mean estimate is 87 cents for the fourth quarter, $2.55 for fiscal 1999 and $2.99 for the 2000 fiscal year.