Albertsons (ACI): Downgrading to Neutral — Lingering Challenges and Another Review Could Delay Earnings Recovery

We are downgrading the ACI shares to Neutral from Overweight, following the company's fiscal 2Q earnings earlier this week. The shares trade at a sizable discount to other US food retailers on P/E and EV/EBITDA (which has been the case for most of ACI's life as a public company); however, we are not sure that this is entirely unwarranted when considering (a) ongoing operational challenges (LTM EBITDA is down 20% versus FY22) and (b) the company's acknowledgement this week that its self-help initiatives have not been as effective as it planned for and its strategy needs to be reassessed. We believe growing digital engagement while grocery shopping has increased price transparency and diminished the perception of value that ACI's high-low pricing strategy historically created. Even if ACI resists deeper price investments, earnings could remain pressured by market share losses to lower priced retailers. We appreciate that there could be some optionality to consider, including potential st