Albertsons 2014 Annual Report Download - page 47

The expectations on timing of disposition and the estimated sales price or subtenant rentals associated with
closed properties, owned or leased, are impacted by variable factors including inflation, the general health of the
economy, resultant demand for commercial property, the ability to secure subleases, the creditworthiness of
sublessees and the Company’s success at negotiating early termination agreements with lessors. While
management believes the current estimates of reserves for closed properties and related impairment charges are
adequate, it is possible that market and economic conditions in the real estate market could cause changes in the
Company’s assumptions and may require additional reserves and asset impairment charges to be recorded.
The Company’s net reserve for closed properties was $47, net of estimated sublease recoveries of $29, as of
February 22, 2014, and $61, net of estimated sublease recoveries of $34, as of February 23, 2013.
Goodwill
Goodwill is tested at least annually for impairment and more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test is performed using a two-step process. In the first
step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including
goodwill. If the estimated fair value is less than the carrying amount of the reporting unit, there is an indication
that goodwill impairment exists and a second step is completed in order to determine the amount of the goodwill
impairment, if any, that should be recorded. In the second step, an impairment loss is recognized for any excess
of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.
The Company’s determination of reporting units considers the quantitative and qualitative characteristics of
aggregation of each of the components within the Independent Business, Save-A-Lot and Retail Food operating
segments. The significant qualitative and economic characteristics used in determining our components to
support their aggregation include types of businesses and the manner in which the components operate,
consideration of key impacts to net sales, cost of sales, competitive risks and the extent to which components
share assets and other resources. The Company’s reporting units are the operating segments of the business
which consist of Independent Business, Save-A-Lot and Retail Food. Goodwill was assigned to the reporting
units as of the acquisition date, with no amounts being allocated between reporting units.
The Independent Business reporting unit is comprised of the aggregation of four geographic distribution areas,
which are organized based on region components: Eastern, Southeast, Midwest and Northern. In March 2014,
Independent Business’s regional components were re-aligned into two geographic distribution areas to further
streamline the organization and reduce operating costs, resulting in the combination of the Eastern and Southeast
regional components into the East region and the combination of the Midwest and Northern region into the West
region. The Company’s hard-discount stores reporting unit is comprised of a single component under one banner:
Save-A-Lot. The Company’s Retail Food reporting unit is comprised of the aggregation of five traditional retail
food store components under a variety of banners: Cub Foods, Shoppers Food & Pharmacy, Shop ‘n Save, Farm
Fresh and Hornbacher’s.
The fair values of the Company’s reporting units are determined by using both the market approach, applying a
multiple of earnings based on guidelines for publicly traded companies, and the income approach, discounting
projected future cash flows based on management’s expectations of the current and future operating
environment. The rates used to discount projected future cash flows reflect a weighted average cost of capital
based on the Company’s industry, capital structure and risk premiums including those reflected in the current
market capitalization.
Fair value calculations contain significant judgments and estimates related to each reporting unit’s projected
weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities.
When preparing these estimates, management considers each reporting unit’s historical results, current operating
trends and specific plans in place. These estimates are impacted by variable factors including inflation, the
general health of the economy and market competition. The Company has sufficient current and historical
information available to support its judgments and estimates. However, if actual results are not consistent with
the Company’s estimates, future operating results may be materially impacted.
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