What happened
Shares of Albertsons Companies (ACI -0.54%), a grocery chain with more than 2,250 locations, rose as much as 20.4% this week according to data from S&P Global Market Intelligence. As trading got underway on Friday March 4, the stock was still higher by a whopping 20% or so. An announcement on Monday drove the big gains.
So what
Albertsons is one of the largest grocery chains in the United States. That said, it only came public in June 2020 and it wasn't an easy initial public offering (IPO). Originally seeking to sell 65.8 million shares for between $18 and $20 per share, the company ended up selling just 50 million shares for $16 a piece. From day one, basically, investors seem to have viewed the company with a bit of skepticism. The stock has risen since its IPO, but the board clearly still believes the company is undervalued.
Image source: Getty Images.
That conclusion is backed by the Monday announcement that Albertsons' board is "looking at strategic alternatives" to maximize growth and increase shareholder value. No specifics were presented, but the review will "include an assessment of various balance sheet optimization and capital return strategies, potential strategic or financial transactions and development of other strategic initiatives to complement Albertsons' existing businesses, as well as responding to inquiries." That covers a lot of ground and could result in everything from stock buybacks to special dividends to the acquisition of a non-grocery business to the outright sale of the company. Although it's hard to predict what the outcome of this review will be, and it could be absolutely nothing, investors seem to think that the grocery store will be more valuable at the end of the process. Thus, they bid the stock up.
Now what
The grocery business is boring in many ways, but it is also highly competitive. Margins tend to be very thin. That means that scale can be an important differentiator, as it often allows for more bargaining power with suppliers and means corporate overhead costs can be spread over more stores. To make matters worse, retail giants like Walmart, Target, and even Amazon have all established sizable grocery businesses that are supported by non-grocery operations.
It wouldn't be shocking to see Albertsons make a bold move to increase its competitive position or, for the right price, augment the position of a suitor by selling itself. Given the swift price advance, it seems as though this is the scale of what Wall Street is expecting. That said, it's probably not a great idea for most investors to jump into what now looks like a special situations play. Aggressive types are likely the only ones who should be looking at Albertsons until the "strategic review" has been completed, noting that there was no actual time frame presented for this process.
