Albertsons 2016 Annual Report Download - page 19

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or agreed to sell all 164 stores. While the Company continues to provide services under the Haggen TSA, it expects that all
such services will cease under the Haggen TSA in the second quarter of fiscal 2017. Certain of the stores under the Haggen
TSA will or have been sold to Albertson's LLC and will or have been added to the TSA with Albertson's LLC. The Company
has filed for approximately $2 of administrative 503(b)(9) priority claims and for approximately $8 of other claims with the
bankruptcy court. The Company could also be exposed to claims from third parties from which the Company sourced products,
services, licenses and similar benefits on behalf of Haggen. Failure to recover the amounts payable by Haggen or any adverse
results from any such claims from third parties could adversely impact the Company’s results of operations.
The impact of the wind down of the TSA with NAI and Albertson’s LLC and the Haggen TSA on the Company’s results of
operations depends on the amount and timing of lost revenue compared to the Company’s ability to identify and execute on cost
reductions (including costs not directly related to providing TSA services), new services relationships, growth strategies and
additional investments in the business that accelerate revenue growth. The Company expects that the decline in TSA revenue
from stores and distribution centers no longer receiving services under the TSA as part of the transition and wind down of the
TSA will happen earlier than the decline in TSA services the Company is required to perform, which the Company expects will
prevent it from being able to take out certain costs until some period of time after the TSA revenue declines. This timing
difference creates challenges for the Company in managing its costs and could adversely impact the Company’s results of
operations in any given period.
The Company continues to develop and engage in cost reduction initiatives and other strategies to generate services revenue
streams. There can be no assurance that the Company will be able to successfully implement and execute on these initiatives
and strategies or that the Company will otherwise be able to fully address the impact of the termination of these TSAs and
failure to do so could adversely impact the Company’s results of operations.
The Company’s ability to continue to perform services under the TSAs at the applicable service level, and to provide transition
and wind down services for the TSA, will depend partly on its ability to attract and retain qualified personnel. Retaining such
personnel may be more difficult in connection with the transition and wind down of the TSA. A shortage of qualified
employees who devote time to services under the TSAs could increase the Company’s costs and decrease the Company’s ability
to effectively serve these customers. The Company could face claims for disruptions or other impacts to the businesses of NAI,
Albertson’s LLC or Haggen.
The Company is also a party to an Operating and Supply Agreement with NAI under which the Company operates a
distribution center owned by NAI. The Company provides wholesale distribution of products to certain NAI banners and to
certain of the Company’s independent retail customers from this distribution center. This agreement may be terminated by
either party on 24 months’ notice. If the Company were not able to supply its independent retail customers from this
distribution center, it would need to identify an alternative distribution center to service those customers. Identifying, and
potentially building, a replacement distribution center could be time consuming and resource intensive for the Company and a
delay or failure to do so could adversely impact the Company’s results of operations.
The Company experienced information technology intrusions in fiscal 2015 that could adversely impact its business and
future operating results.
In fiscal 2015, the Company experienced separate criminal intrusions into the portion of its computer network that processes
payment card transactions for some of its owned and franchised retail food stores, including some of the associated stand-alone
liquor stores. These intrusions may have resulted in the theft of account numbers, and in some cases also the expiration date,
other numerical information and/or the cardholder’s name, from payment cards used at some point of sale systems at some of
the Company’s owned and franchised stores.
While the costs that the Company has incurred to date in connection with the intrusions primarily include professional advisory
and legal costs relating to its continuing investigation of the intrusions, the Company expects to incur additional costs and
expenses related to the intrusions in the future. The Company may also be adversely affected by claims from customers,
financial institutions, payment card brands, stockholders and others and by costly inquiries or enforcement actions on the part
of regulatory authorities.
The Company has also expended significant time and resources on enhanced protective technology. The Company continues to
take actions to implement further security enhancements and the Company is committed to continuing to improve its
information security safeguards to protect its stores against intrusions. The time and resources devoted to enhancing the
Company’s information security can be disruptive to the day-to-day operations of the Company’s businesses, which could
adversely affect the Company’s results of operations.