Safeway Inc. (SWY) reported second quarter fiscal 2010 earnings per share of 37 cents, missing the Zacks Consensus Estimate by a penny. The company had reported an adjusted EPS of 57 cents in the year-ago quarter. However, the second quarter of 2009 included a tax resolution benefit of 14 cents.
The company reported sales of $9.5 billion, marginally exceeding the Zacks Consensus Estimate of $9.48 billion, though unchanged from the year-ago period. The effect of a higher Canadian exchange rate and higher fuel sales were partially offset by a 2.5% decline in identical-store sales (excluding fuel).
Gross margin of 28.55% for the quarter was 32 basis points lower than the second quarter of 2009. In the second half of 2009, Safeway reduced its prices to address competition, which has affected its gross margin. Moreover, increased advertising expenses were responsible for the decline in margin though fuel sales had no impact.
Operating and administrative expenses increased 2.5% to $2.43 billion due to increase in wages and deflation. Moreover, as a percentage of sales, expenses increased to 25.55% from 25.09% in the year-ago quarter.
Safeway opened 5 new stores, completed 17 Lifestyle remodels and closed 5 stores during the quarter, and targets opening 15 Lifestyle stores and completing 60 Lifestyle remodels. For the year, the company plans to invest $0.9 to $1 billion in capital expenditures. During the quarter, $192.1 million was spent on capital expenditure.
During the first half, Safeway generated an operating cash flow of $309.1 million, lower than $684.1 million in the comparable period. The primary reason for the decline was a reduction in third-party gift card payables, net of receivables, lower net income and higher income tax payments.
The company has repurchased 7.1 million shares of its common stock for a total cost of $169.4 million. At the end of the second quarter, Safeway had $1.0 billion remaining under the board authorization for stock repurchase.
Safeway has lowered its guidance for 2010 as the company is struggling with falling prices of meat, dairy and vegetables. The company now expects EPS in the range of $1.50-$1.70, down from the earlier guidance of $1.65-$1.85. It expects same store sales (excluding fuel) to decline 1%-1.5%. Free cash flow guidance remained unchanged at $0.9-$1.1 billion.
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