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SWY AT A GLANCE

P/E ► 10.9 AVG EV/EBITDA ► 5.70 AVG ROA ► 7% AVG ROE ► 12.3% AVG Debt to Equity ► 1.45 AVG Current Ratio ► 0.892 LOW Interest Coverage Ratio ► 4.45 AVG

 

 

 

 

 

 

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 1,743 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]

In 2003, Safeway repositioned its branding to compete with higher-end grocery stores, such as the Whole Foods Market.^[3] The new branding format, which the company calls "Lifestyle," includes refurbished decor, new uniforms for employees and an expanded premium product offering. The company expects to remodel its remaining stores to the Lifestyle format by the end of 2009.^[4] Additionally, 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.^[5] In the first three-quarters of 2008, Blackhawk sales grew 59%, and without a significant competitor, are expected to continue its rapid growth in the near term.^[6]

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 in beefing up its West coast presence, Safeway may very well feel the pinch.

Company Overview

With 8% of the market, Safeway is the second largest traditional supermarket operator in the United States.^[7] 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).^[5]

Business Financials

In the 53-week statistics for 2008, Safeway posted $44.1 billion in revenue, a 4% increase from $42.3 billion the year before.^[8] A 52-week comparison, however, reveals a nominal annual loss in revenue between 2007 and 2008.^[8] Similar trends were seen across the board for Safeway's business financials. A 53-week analysis of Safeway's gross profit also reveals a 3% increase between FY 2008 and FY 2007, with gross profit reaching $12.5 billion; however, a 52-week comparison reveals again, a slight decrease from the previous year. Operating profit and net income both increased in 2008, by 5% and 9% respectively. 53-week gains were driven by the addition of an extra work week; losses, however, were driven by diminished fuel sales, driven partly by decreases in fuel prices, as well as a weakening Canadian dollar.^[9]

Quarterly Results

Safeway reported revenues of $9.5 billion in Q2 2009 (ending 6-20-09), a decline of 6.5% from the previous year. However, Safeway announced a slight growth in net income of 1.8%, as it earned $238.4 million.^[10] Safeway issued a significant tempered guidance for 2009, dropping projected EPS from $2.10-$2.30 to $1.70-$1.90, prompting stock price to fall 7.9% on the announcement.^[11]

Stores

.Safeway operates 1,743 retail grocery stores in the United States and Canada. With its "Lifestyle" format, Safeway differentiates its stores by creating a warm ambiance through earth toned decor, custom flooring, and special lighting.^[1] 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.^[12]

Trends and Forces

The Wal-Mart Effect

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%.^[13] 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.^[14]

Safeway, is no exception in that it has loss 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 geographical distribution. Safeway is a predominantly west coast chain. As a result Safeway has only a 24% overlap with Wal-Mart when compared to chains like Kroger which 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.

Growth of Blackhawk Network

The Blackhawk Network is a wholly owned subsidiary of Safeway whose primary means of revenue is prepaid third-party gift cards. Blackhawk is the largest such provider of these cards, with $84 million in card sale commissions in 2007.^[15] Blackhawk distributed gift cards are sold in over 80,000 stores, including Safeway outlets, in the US, Canada, and the UK.^[5] Blackhawk offers gift cards for over 350 brands and reaches over 165 million customers every week.^[16] The Blackhawk Network produces revenue for Safeway in three ways. First, Blackhawk receives a half of the 6% sales commision for distributing the gift cards. Second, Safeway receives a 3% commission for carrying the cards in-store; however, since Safeway is the parent company of Blackhawk, the company pockets the full 6% commission. For cards carried in other stores, those stores receive a 3% commission, while Blackhawk receives the other half. Finally, Blackhawk earns interest on the full value of the card during the time before revenue is distributed to the appropriate third party.^[17]

As the industry leader in gift cards, Blackhawk enjoyed a 59% commission revenue growth rate in 2008.^[6] However, the subsidiary has yet to be challenged by a strong competitor. Its exponential 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.

Revenue Growth Depends on Success of Lifestyle Format

With the conversion of most Safeway stores to the "Lifestyle" format by the end of 2009, revenue growth will hinge upon the success of the rebranding program. Although the company's capital expenditure costs will fall with the end of costly remodels, it will have to keep interest in the format through advertising and maintaining product quality.^[18]

To complement "Lifestyle" stores, Safeway has also introduced several private label product lines. In 2006, the company introduced its "O for Organic" line to compete with rival Whole Foods Market (WFMI). In 2007, Safeway posted revenues of $300 million from "O for Organic" sales, an increase of 80% from the year before.^[19] Over 25% of Safeway's sales come from its private labels, Eating Right, Lucerne dairy products, and Primo Taglio deli products.^[20]

Safeway has also added fueling stations to some of its locations, offering discounted fuel in exchange for purchases of $100 or more from its stores. Though only serving a small portion of stores and contributing a small percentage of revenue, the addition of gas stations provides an extra incentive for consumers to shop at Safeway outlets.^[21]

Competition

In 2006, the most recent year for which data is available, US consumers spent a total of $1.1 trillion on food, 51.1% of it on groceries. ^[22] 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.^[23] 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.^[24]

SuperValu (SVU) SuperValu is the third largest food retailer and second largest operator of tradition supermarkets int he US, with 2,200 stores nationwide.^[25]

References

1. ↑ ^{1.0 1.1 1.2} SWY 2007 10-K pg. 5  
2. ↑ ^{2.0 2.1} Safeway 2008 Fact Book.
3. ↑ Safeway paying for new 'lifestyle'.
4. ↑ SWY 2007 10-K pg. 8  
5. ↑ ^{5.0 5.1 5.2} About Us.
6. ↑ ^{6.0 6.1} Safeway F3Q08 (Qtr End 9/6/08) Earnings Call Transcript.
7. ↑ Gurus Shop For Value At Safeway.
8. ↑ ^{8.0 8.1} 2008 Safeway Annual Report
9. ↑
10. ↑ Safeway Inc. Announces Second Quarter 2009 Earnings
11. ↑ Safeway cuts view on sales decline; shares slide
12. ↑ swy 2007 10-K pg. 6  
13. ↑ [1] Ideas & Trends: Discount Nation; Is Wal-Mart Good for America? - New York Times
14. ↑ [2]Wal-Mart chops prices in bid to lure shoppers - CNN Money
15. ↑ SWY 2007 10-K pg. 25  
16. ↑ Gift Card Mall.
17. ↑ Safeway Racks Up Fees Selling Home Depot, Best Buy Gift Cards.
18. ↑ Safeway paying for new 'lifestyle'.
19. ↑ Safeway to expand organic food sales.
20. ↑ Price-Conscious Shoppers Spur Private-Label Growth.
21. ↑ Safeway Expands "PowerPump" Fuel Rewards to BP, ARCO and More Safeway Fuel Centers Nationwide.
22. ↑ [3]Food CPI, Prices, and Expenditures - US Economic Research Service
23. ↑ [4]Wikinvest Wal-Mart Article
24. ↑ [5]Wikinvest Kroger Article
25. ↑ SUPERVALU INC (New York Stock Exchange).
26. ↑ 2009 Safeway Factbook
27. ↑ 2008 Kroger Fact Book
28. ↑ 2009 SuperValu Annual Report
29. ↑ 2009 Walmart Annual Report