Things are slowly returning to normal in the embattled grocery world. This morning, Albertsons (NYSE:ABS), the No. 2 player in the group, reported an 18% jump in third-quarter net income to $107 million, or $0.29 per share, from $91 million the year before. Excluding the negative impact from four hurricanes that swept through the Southeast early in the quarter, per-share earnings would have been $0.32, in line with internal targets but a penny short of Street expectations.
It has been a difficult stretch for the food and drug retailer, which earlier this year was mired in a crippling labor dispute in Southern California that also entangled rivals such as Safeway (NYSE:SWY) and Kroger (NYSE:KR). Last quarter, for example, management estimated that the lingering effects of the strike reduced earnings by $50 million, or $0.13 per share. Six months earlier, the strike took a heavy fourth-quarter toll, erasing $700 million in sales and $90 million in net income.
Today's results, though, show some progress. Albertsons' sales rose 15% to $10 billion, and comps actually gained 0.3%, reversing a string of strike-impacted declines. Furthermore, both revenues and market share in Southern California have now eclipsed pre-strike levels. Operating cash flows are also on the rise, up 27% over last year's comparable quarter to $276 million. Finally, reduced employee benefits helped drive selling, general, and administrative expenses down by over half a point to 25.2%, and the company's cost containment initiative, introduced several years ago, has now yielded over $900 million in savings.
However, some of the sales growth came at the expense of gross margins, which dropped about 80 basis points because of "targeted promotions in key markets." Two recent acquisitions also played a role -- 206 Shaw's stores were purchased, along with the small but high-end Bristol Farms specialty supermarket chain. Though Shaw's will provide a stronger foothold in New England, Albertsons is now saddled with an additional $1.6 billion in debt, along with several hundred million dollars in capital lease assumptions.
Albertsons is headed in the right direction, and the company's attractive 2.9% dividend yield should appeal to income investors. However, the company is beset with competition, not only from traditional grocers, but also from rivals such as Wal-Mart (NYSE:WMT) and Walgreen (NYSE:WAG), forcing deeper price cuts to battle for market share in what is already a low-margin business. Furthermore, the threat of another protracted labor dispute is an ongoing concern. For now, at least, I'd rather shop elsewhere.
Fool contributor Nathan Slaughter owns none of the companies mentioned.
