QUOTE AND NEWS
Motley Fool  2 hrs ago  Comment 
Safeway and Kroger are grocery store darlings, but let's see which supermarket operator is the best investment.
TheStreet.com  Oct 16  Comment 
PLEASANTON, Calif. (AP) - Safeway Inc. on Wednesday reported earnings of $9.5 million in its third quarter. On a per-share basis, the Pleasanton, California-based company said it had profit of 4 cents. Earnings, adjusted for one-time gains and...
Wall Street Journal  Oct 15  Comment 
Safeway, which is on the verge of completing its merger with rival Albertsons, said its revenue for the most recent period increased slightly, as the supermarket operator expressed belief in a modest rebound in consumer confidence.
TheStreet.com  Oct 8  Comment 
NEW YORK (TheStreet) --aSafewaya reports third-quarter earnings after the closing bell Wednesday, and here's what analysts are expecting from the supermarket chain. The consensus estimate calls for Safeway to report earnings of 13 cents a share...
StreetInsider.com  Sep 30  Comment 
Visit StreetInsider.com at http://www.streetinsider.com/Corporate+News/Safeway+%28SWY%29+Q3+Comps+Rose+3.5%25/9869343.html for the full story.
TheStreet.com  Sep 12  Comment 
Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link. aTheStreet Ratings quantitative algorithm...
Reuters  Sep 10  Comment 
Empire Co Ltd, the operator of Canadian grocery chain Sobeys Inc, reported a better-than-expected quarterly profit, helped by its recently acquired Safeway Canada.
Insurance Journal  Aug 13  Comment 
A woman who says she hurt her back after slipping on a greasy spot at a Safeway store in Sandy, Ore. has filed a lawsuit against the grocery chain. The Oregonian newspaper reported that Tammy Hadley seeks at least $30,000 … The article $280K...
SeekingAlpha  Jul 28  Comment 
By Special Situations and Arbs: On Friday, July 25th, Safeway (NYSE:SWY) shareholders overwhelmingly approved their proposed merger with Albertsons, part of a group led by private-equity firm Cerberus Capital Management LP. The company said about...




 

Safeway (NYSE:SWY) is the third largest operator of traditional supermarkets in the United States and fourth largest food retailer after Wal-Mart (WMT), Kroger Company (KR), and SuperValu (SVU). Safeway sells food and other consumer products in 1,725 supermarkets under nine store brand names, including Safeway, Von's, Randalls, and Dominick's.[1] The stores are predominantly located in the western United States, Texas, Chicago, and the mid-Atlantic region.[2] Additionally, the company has a 49% stake in Casa Ley, a 137-store market chain in western Mexico.[1]

Safeway has placed a strong emphasis on its wholly owned subsidiary, Blackhawk Network, the industry leader in pre-paid third party gift cards. Through a network of 80,000 retail stores in the US, Canada, and the UK, Blackhawk Network sells gift cards for over 350 partner brands and charges 3-5% of the value of the gift card for commission.[3]

As a large retail grocer, Safeway faces competition from similar chains, local stores, and niche stores, such as Whole Foods Market (WFMI) and Kroger Company (KR). Wal-Mart (WMT), however, represents the most significant long term threat to the firm's continued growth. Wal-Mart (WMT) sells a wide variety of goods ranging from apparel to groceries. Because of its tremendous scale, the retailer is often able to offer below-market prices to its customers. Even if Safeway is able to compete in a lower price environment it is almost certain that doing so would eat into profits. To date, Safeway has been sheltered from the Wal-Mart effect given its predominantly West Coast locations. As the super-retailer invests more resources into beefing up its West Coast presence, Safeway may become more threatened by Walmart.

Company Overview

With 8% of the market, Safeway is the second largest traditional supermarket operator in the United States.[4] With its Blackhawk Network subsidiary, Safeway is also the largest distributor and seller of third party gift cards, offering brands such as Barnes & Noble (BKS), iTunes, and Home Depot (HD).[3]

Business Financials

Safeway earned $40.8 billion in revenue in 2009, down from $44.1 billion in 2008 (and the latter was reported for 53-weeks). In 2009 Safeway reported a net loss of $1,097 million, as compared to net income of $965 million the previous year. However, the poor result includes accounting for a non-cash goodwill impairment charge related to Safeway’s reduced market capitalization and the recession; excluding the charge, Safeway would have posted net income of $720 million. Management blamed the decline in revenues on reduced consumer spending and an increase in bargain shopping, lower fuel prices, and “unprecedented levels” of price deflation for items such as dairy, meat, and produce.[5]

Safeway Number of Stores by Square footage
Safeway Number of Stores by Square footage[6]

In December 2009, a food price index posted a 0.3% increase in its price basket -- the largest monthly increase in more than a year -- in a sign that deflation is easing in the U.S. If that trend holds, it may be good news for Safeway and other grocers. However, the price index was still down 2.4% from a year earlier.[7] Analysts say Safeway is betting on price inflation to improve results in 2010, yet competition may continue to hold down margins.[8]

FY2010 Q1 Earnings Summary

Safeway's first quarter FY2010 net income fell 33% while its sales rose by 1%, translating to $96.0 million of net income compared to $144.2 million of net profit in Q1 FY2009.[9] Safeway attributes this discrepancy between the top and bottom line for several reasons. First, thinner margins such as gross profit, which declined from 28.7% in Q1 FY2009 to 28.4% in Q1 FY2010, was led by an overall increase in COGS rather than sales.[10] Secondly, Safeway underwent major capital expenditures in this first quarter of $192.6 million, which again decreased the bottom line. Finally, an overall increase in operating and administrative expense due to both deflation and volume declines led to an increase of 44 bp for operating and administrative experience, which further added pressure to the bottom-line.[11]

Despite the decrease in net profit, Safeway continued to reaffirm its FY2010 earnings guidance of $1.65 to $1.85 per share, as encouragement from volume trends in the first quarter of FY2010 compared to fourth quarter FY2009 hints at positive trends in the second half of FY2010.[12]

FY2010 Q2 Earnings Summary

Safeway earned $141.3 million or $0.37 per share of profits for the second quarter of fiscal 2010 ended June 19, a 40.8% drop compared to same quarter in fiscal 2009.[13] However, these figures included a $57.8 million tax benefit. Total sales were $9.5 billion, which was flat compared to $9.5 billion in second quarter of FY2009.[14]

The drop in bottom-line with a top-line upheld was attributed to several major factors. Gross profit declined 32 basis points to 28.55% as a result of investments in price carried forward.[15] However, the largest influence to the drastic difference between bottom-line and top-line change was the result of operating and administrative expense, which increased by 46 basis points to 25.55% of sales as a result of deflation coupled with expected increases in wages and benefits.[16]

As a result, Safeway is cutting guidance for fiscal 2010 from $1.70 to $1.50 EPS, citing lower shelf prices and deflation as major issues. Safeway's same-store sales, which continue to fall as much as 1% for the year is evidence of these issues, as deflation combined with a struggling economy make consumers attract to lower-priced goods.[17]

FY2010 Q3 Earnings Summary

Safeway reported net income of $122.8 million or $0.33 diluted EPS for the third reporting quarter of FY2010, a decrease of 4.65% compared to $128.8 million or $0.31 diluted EPS same period last year.[18] However, the current quarter included $12 million or $0.02 per diluted share worth of employee severance charges.[19]

Total sales for the period were $9.4 billion, slightly down compared to $9.5 billion same quarter last year; however, identical-store sales excluding fuel were down 2.0% due to a decline in overall price per item.[20] As such, gross profit margins were also down 13 bps to 28.14% compared to 28.27% in third quarter FY2009. Overall, performance was considered "in-line with expectations" according to CEO Steve Burd. Safeway expects the price per item to improve while continue to offer everyday low price approach model as its overall bottom line driver in the the second half of the fiscal quarter.[21]

FY2010 Q4 Earnings Summary

Safeway reported net income of $229.6 million, or $0.62 EPS, for the fourth quarter of FY2010, with sales rising less than 1% to $12.8 billion.[22] These figures beat analyst consensus estimates of $0.58 EPS for net income and $12.45 billion for sales. Despite beating analyst estimates though, Safeway continues to face weak sales at existing stores open at least one year. For example, SWY's identical store sales fell 0.8% excluding fuel sales, the company's 8th consecutive decline in identical store sales. However, SWY is confident that sales trends are improving, driven by price cuts, private label brands and increased marketing.[23]

Food inflation, which has begun to affect all sectors of the economy, is taking a toll on SWY as well. With major U.S. food makers passing along the sharp cost increase in agricultural commodities to stores like SWY, this could definitely affect its profit margins, which has already been cutting prices for two years.[24] Going forward, along with rising gasoline prices, Safeway expects the first quarter results to be below normal.[25]

Key Trends and Forces

The Wal-Mart Effect has Cost Safeway Market Share and Must Find Ways to Product Niche to Survive

Wal-Mart is the greatest external force affecting any grocer. In markets that Wal-Mart has entered, grocery prices drop by an average of 10-15%.[26] Additionally, Wal-Mart is able to drop grocery prices 10-30% drastically during promotional periods because it can remain profitable on extremely low margins due to its volume of sales.[27]

Safeway is no exception, in that it has lost market share to Wal-Mart in the markets in which it competes. Safeway is, however, somewhat sheltered from Wal-Mart given its relatively more upscale focus and its geographic distribution, with Safeway’s presence focused predominantly on the West Coast. As a result, Safeway has only a 24% overlap with Wal-Mart, while chains like Kroger are closer to 70%. In the long-term, Wal-Mart is expected to continue its expansion into the urban centers of the West Coast and has begun experimenting with higher-end products and store formats. It poses the most significant long term threat to Safeway's continued profitability.

Further, with its "Lifestyle" format, Safeway differentiates its stores by creating a warm ambiance through earth toned decor, custom flooring, and special lighting.[1] With 82 new store remodels in 2009, 79% of Safeway stores were converted to the “Lifestyle” format by year end.[28]In order to compete with other premium retailers, such as Whole Foods Market (WFMI), Safeway offers a 300 private label product line of "O for Organic" items as well as premium meats such as its Rancher’s Reserve Tender Beef brand. Approximately 22% of all private label are manufactured by Safeway plants; the remainder are purchased from third party suppliers. Many stores also offer additional services like gas stations and in-store Starbucks kiosks.[29]

Growth of Blackhawk Network is Correlated with Growth of Safeway's Success

As the industry leader in gift cards, Blackhawk, a wholly-owned subsidiary of Safeway that primarily sells third-party gift cards, enjoyed 59% growth in its commission revenues in 2008. Blackhawk makes money by charging a 6% sales commission, half of which Blackhawk keeps and the other half which the vendor receives for distributing it. However, the subsidiary has yet to be challenged by a strong competitor. Its success will almost certainly encourage other companies to enter the third-party gift card market. The future success of Blackhawk will depend on how the company continues to foster this growth while confronting the difficulties posed by anticipated competition.

Blackhawk typically receives a significant portion of its cash inflow from third-party gift card retailers late in the fourth quarter of the year from the holiday season so a seasonality factor must be adjusted. In this fashion for example, Blackhawk's net payables related to third-party gift cards increased to $170.4 million in 2009 from $23.9 million in 2008 primarily as a result of the growth of the business and the change in the timing of holiday sales compared to fiscal year end.[30]

Competition

As a retail grocer, Safeway faces its stiffest competition several sources:

Wal-Mart Stores (WMT) Wal-Mart is the largest food retailer in the US with more than 3,550 stores and supercenters.[31] Wal-Mart is able to provide low prices through its distribution network and economies of scale. Consumers turn to discount stores such as Wal-Mart when their disposable income falls.

Kroger Company (KR) Kroger is the second largest food retailer and largest operator of traditional supermarkets in the US, with 2,400 stores nationwide.[32]

SuperValu (SVU) SuperValu is the third largest food retailer and second largest operator of tradition supermarkets int he US, with 2,200 stores nationwide.[33]

Comparison of Operational Metrics, Margins and Capital Expenditure
Company (Fiscal Year) Comp Sales Growth Square Footage Growth Revenue per Square Footage (Millions USD) New Store Additions Closures Average Store Size (Square Feet) Gross Margin (%) Operating Margin (%) Net Profit Margin (%) Capital Expenditure/Sales (%)
Whole Foods Market (WFMI) (FY2010)[34] 7.1% 6.0% 882.0 16 3 38,000 34.8% 5.9% 2.7% 2.9%
Safeway (SWY) (FY2009)[35] (4.90%) (0.40%) 509.99 8 23 46,000 28.62% (1.54%) (2.69%) 2.08%
Kroger Company (KR) (FY2009)[36] 0.90% 0.01% 518.47 14 27 60,000 22.60% 1.42% 0.07% 2.99%
SuperValu (SVU) (FY2009) [37] (5.1%) (6.2%) 624.57 40 112 29,000 22.50% 2.96% 0.97% 1.70%


References

  1. 1.0 1.1 1.2 SWY 2007 10-K pg. 5  
  2. Safeway 2008 Fact Book.
  3. 3.0 3.1 About Us.
  4. Gurus Shop For Value At Safeway.
  5. SWY 10-K 2009 Item 7 Pg. 22
  6. SWY FY2009 10K Pg 6
  7. [1]
  8. [ http://www.businessweek.com/ap/financialnews/D9F6BIQO2.htm]
  9. Safeway's 1Q results at a glance
  10. Safeway Inc. Reports Operating Results (10-Q)
  11. Safeway, Inc. Reaffirms FY 2010 EPS Guidance
  12. Safeway Inc. Announces First Quarter 2010 Results
  13. Safeway's 2nd-quarter net income falls 40 pe
  14. Safeway profits plummet nearly 41 percent, sales rise 0.6 percent
  15. Safeway Inc. Announces Second Quarter 2010 Results
  16. 2nd Safeway 2Q Profit Fell 41% After 2009 Tax Gain
  17. US: Safeway Q2 profits plummet
  18. Safeway Reports 3Q 2010 Results
  19. Safeway Inc. Announces Third Quarter 2010 Results
  20. Safeway Inc. CEO Discusses Q3 2010 Results - Earnings Call Transcript
  21. 2nd UPDATE:Safeway 3Q Net Down 4.7%; 2010 Trending Toward Low End Of View
  22. 2nd UPDATE: Safeway Swings To 4Q Profit On Prior-Year Charge, Higher Sales
  23. Safeway posts stronger fourth-quarter profit
  24. Safeway returns to 4th-quarter profit
  25. Rising gas prices could squeeze Safeway profit: CEO
  26. [2] Ideas & Trends: Discount Nation; Is Wal-Mart Good for America? - New York Times
  27. [3]Wal-Mart chops prices in bid to lure shoppers - CNN Money
  28. [4]
  29. swy 2007 10-K pg. 6  
  30. SWY 10-K Page 27
  31. [5]Wikinvest Wal-Mart Article
  32. [6]Wikinvest Kroger Article
  33. SUPERVALU INC (New York Stock Exchange).
  34. WFMI 10-K FY2010
  35. SWY 10-K FY2009
  36. KR FY2010 10-K
  37. SVU 10-K FY2009
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