ACI — Q2 2026 Financial Report Analysis

Albertsons Q2 fiscal 2026: flat sales, profit down by more than two-thirds, and the outlook pulled

Albertsons Companies (the owner of Safeway, Vons, Jewel-Osco, Shaw's, ACME and 17 other grocery banners) reported its second fiscal quarter of 2026: the 12 weeks ended September 12, 2026. Revenue was essentially unchanged at $18.89 billion (-0.1%), but operating income fell 41% to $174.5 million and net income fell 69% to $51.5 million, or $0.11 per diluted share against $0.30 a year earlier. The cause is not one bad line item. Shoppers bought less in existing stores, the gross margin thinned because online orders cost more to pick and deliver, store costs did not fall in line with sales, and impairment charges and interest costs went up. Management then withdrew its full-year outlook, which it had already cut in July, and began a "comprehensive business review" of banners, markets, assets and costs. It plans to give new targets by its fourth-quarter earnings call.

The numbers

Operating margin is the share of revenue left after running the business, before interest and tax. A figure under 1% is thin even for a grocer. Adjusted EBITDA is the company's own measure of earnings before interest, tax, depreciation and amortization, with non-core items removed. (The filing's percent-of-sales table rounds the operating margin to 1.0%. The 0.9% here is operating income divided by revenue.)

Where the sales went

Flat total revenue hides two opposing trends. The table below is from the 10-Q's sales-by-product breakdown:

Fuel added $130 million of revenue. Fuel is low-margin, so it lifts sales more than profit. Without fuel, revenue fell about 0.8%, from $18.0 billion to $17.85 billion. The weakest category was fresh food, which is supposed to set a supermarket apart from discounters and online rivals. It fell 2.8%. That matters because Albertsons' July turnaround plan named "greater differentiation in fresh" as a goal.

Pharmacy grew 5.2% even though it faces a known headwind. The Inflation Reduction Act's Medicare drug-price negotiation took effect January 1, 2026. It lowers the prices of some drugs, which cuts pharmacy revenue per prescription. In July, Albertsons estimated this would take about 1.5 percentage points off full-year identical sales. Digital sales (Drive Up & Go curbside pickup plus home delivery) grew 11%, down from 13% in the first quarter. Online is still the fastest-growing part of the business, but its growth is slowing.

The store count did not change: 2,240 stores at the end of the quarter, with three opened and three closed.

Why profit fell faster than sales

Operating income fell $120.8 million. The 10-Q's figures split that into three parts:

1. Gross margin dollars fell $49.5 million. Gross margin is what's left of sales after the cost of the goods. Excluding fuel and LIFO (an inventory-accounting charge that tracks inflation), the gross margin rate fell 17 basis points (0.17 percentage points). The filing gives the reasons as "increases in delivery and handling costs related to the continued growth in digital sales, as well as higher shrink." Shrink is inventory lost to theft, damage or spoilage. Better pharmacy margins, which the filing ties to the IRA, offset part of this. So digital growth adds sales but takes margin away.
2. Selling and administrative costs rose $33.3 million, to 25.6% of sales from 25.4%. Excluding fuel, the increase was 38 basis points. Management calls this "sales deleveraging": rent, wages and utilities stayed roughly the same while sales per store fell. Merger-related litigation costs also went up.
3. Losses on property and impairments rose $38.0 million, to $42.4 million. This included $28.0 million of retail store impairments (writing down stores now expected to earn less) and $17.3 million of losses on disposing of equipment and technology assets.

Below operating income, interest expense rose 18.7% to $125.0 million because of "higher average outstanding borrowings." Other income fell to $13.2 million from $29.7 million. The year-ago figure included a one-off $26.8 million pension settlement gain.

What the headline numbers hide

• Part of the year-on-year decline in net income is a one-off in last year's base. Without the $26.8 million pension gain, last year's pre-tax income would have been $192.9 million rather than $219.7 million. This year's $62.7 million is still down about two-thirds on that basis, so the conclusion holds, but the comparison is somewhat less severe than -69%.
• The GAAP-to-adjusted gap is large, and some excluded items keep coming back. The quarter's adjustments add $168.5 million before tax: business transformation $35.6M, merger-related costs $35.3M (mainly the litigation against Kroger), property losses and impairments $42.4M, legal and regulatory accruals $19.7M, equity-based pay $14.4M, acquisition intangible amortization $11.4M, and smaller items. Business transformation cost $35.3 million in the same quarter last year as well, and stock-based pay is an ordinary cost of employing people. Treat adjusted EPS of $0.36 as the generous figure and $0.11 as the strict one.
• Buybacks cushioned EPS. The diluted share count fell 13.2% in a year, from 562.5 million to 488.2 million. Adjusted net income fell 27.9% ($248.4M to $179.0M), but adjusted EPS fell only 18.2% because the profit was split across fewer shares. A lower tax rate (17.9% against 23.3%, helped by a settled state tax audit) added only about $3 million, so it does not explain much.
• Cash conversion is fine. What the cash is used for is the problem. Operating cash flow for the 28 weeks was $1,210.3 million against net income of $136.2 million. That is normal for a business with $1.03 billion of depreciation. After $899.6 million of capital spending, free cash flow was about $311 million (down from about $332 million). Dividends ($166.6M) and share repurchases ($398.8M in cash) came to $565 million. The company drew $400 million on its asset-backed credit line, which now has $825 million outstanding.
• Leverage is rising while earnings fall. Total debt including finance leases was $9.33 billion against $8.13 billion a year ago. Trailing-12-month adjusted EBITDA fell to $3.74 billion from $3.88 billion. Together these took net debt to adjusted EBITDA (a common measure of how many years of earnings the debt represents) to 2.42x from 2.02x. Shareholders' equity fell to $1.43 billion from $1.84 billion in February.
• Opioid settlement payments are still ahead. Albertsons booked a $773.8 million charge in the fourth quarter of fiscal 2025 for its opioid settlement framework. Over a 12-month window that charge outweighs everything else, which is why trailing GAAP net income is a $51.3 million loss. The payments run over nine years, a little over a third in the first two. $288.8 million is now classed as due within a year, and the first $136.6 million is held in a separate account. Adjusted EBITDA excludes this cash outflow.
• Working capital looks normal. Receivables rose $135.6 million and inventories $129.3 million over the 28 weeks, close to last year's pattern ($133.7M and $226.7M). Inventory grew less than a year ago, so there is no sign of unsold stock building up.

Takeaway: Albertsons' problem is that its core grocery sales are shrinking. Sales at existing stores fell 0.8% for a second straight quarter while rent, wages and the cost of online orders kept rising, so a flat top line turned into a 41% drop in operating income. Meanwhile the company is buying back stock and paying a growing dividend with more than its free cash flow and borrowing the rest. Pulling guidance until the business review is finished means the next big signal will be the new plan (which banners, markets or assets get cut or sold), not another quarter of results.

Outlook and what to watch

Guidance: none. In July management cut its fiscal 2026 targets: identical sales of -1.5% to -0.5% (from 0.0% to +1.0%), adjusted EBITDA of $3.550-3.625 billion (from $3.850-3.925 billion) and adjusted EPS of $1.75-1.85 (from $2.22-2.32). It said the second quarter was "in line with the expectations in our revised outlook." Even so, it has now withdrawn the outlook entirely and "will not provide an updated outlook until the comprehensive business review is completed during its fourth quarter." A refreshed short- and long-term financial framework is due by the fourth-quarter earnings call, with an investor day in spring 2027. For reference, adjusted EBITDA for the first 28 weeks was $1,797.2 million, about half the midpoint of the July range, with 24 of the year's 52 weeks still to come.

Things that will move the story before then:

• The Kroger lawsuit. Trial in Delaware began October 19, 2026. Albertsons is seeking the $600 million termination fee from the failed merger plus further damages, and Kroger has counterclaimed. For scale, $600 million is roughly a year of free cash flow at this year's pace, so either outcome matters to the balance sheet.
• The State of Washington opioid case, which is outside the settlement framework. A decision is expected around November 5, 2026, and the company says it cannot yet estimate a possible loss.
• New leadership. Meg Whitman is now Executive Chair, four directors joined between September 30 and October 15, and CFO Sharon McCollam has stepped down in favor of interim CFO Cody Perdue while a permanent search runs. Combined with a review that covers "portfolio of banners, markets, assets and businesses," this points to possible store sales or exits, not just cost cuts.

Our read: Identical sales have been negative for two quarters, digital growth has slowed (13% to 11%), and the adjusted EBITDA margin is steady at 4.1% only because pharmacy margins and productivity savings are offsetting weaker grocery. With no guidance, the third quarter (which ends in early December) has to show whether identical sales stabilize near zero or fall further. The other key question is whether management slows buybacks to stop net debt rising above about 2.4x adjusted EBITDA. Unless identical sales turn positive, the review's cost savings seem more likely to fund price cuts, as the CEO says ("reinvest savings in customer value"), than to rebuild the margin quickly.

Source: Albertsons Companies Form 10-Q for the quarter ended September 12, 2026 (filed October 20, 2026); second-quarter earnings release (Form 8-K Exhibit 99.1, October 13, 2026) for the net debt ratio and the withdrawn outlook; first-quarter earnings release (July 23, 2026) for the July outlook.