Safeway (SWY) reported first quarter results on April 29. The company also provided an outlook for 2010.
First Quarter Highlights
Safeway reported first quarter fiscal 2010 earnings of 25 cents per share, below both the Zacks Consensus Estimate of 30 cents and the 34 cents in the prior-year period. The company recorded a marginal growth (1%) in sales which came in at $9.3 billion. Revenues were driven by a higher Canadian exchange rate and higher fuel sales, which was partially offset by a 3.1% decline in identical-store sales (excluding fuel).
For a full coverage on the earnings, read: Safeway Misses but Confirms
Agreement of Analysts
Following the release of first quarter results, estimate revision trends among the analysts depict a clear negative bias for Safeway’s earnings in the forthcoming period. Over the last 30 days, 13 analysts covering the stock have made downward revisions for the second quarter, with estimates for the third quarter, fiscal 2010 and fiscal 2011 being lowered by 3, 15 and 10 analysts, respectively.
While there have been no upward revisions over the last 30 days for the June quarter and fiscal 2010, 8 analysts have raised their estimates for the third quarter of 2010. For fiscal 2011, one analyst has raised his/her estimates.
There are a number of reasons for the negative sentiment on Safeway. After four consecutive quarters of declining sales, the company reported a marginal increase during the reported quarter. However, the 3.1% decline in identical store sales (excluding fuel sales) is a major concern on account of deflation (1%) and a reduction in volume (2.1%). The decline in identical store sales was lower at 0.7% in the first quarter of 2009.
In the second half of 2009, Safeway reduced its prices to address competition, which have brought down its gross margin by 31 basis points during the quarter. We also feel that consumer realization lags this reduction in price, due to which volume is yet to pick up.
Safeway is hopeful that volume will to pick up in the forthcoming period. Besides, while the company is under deflationary pressure for the time being, it expects to witness inflation in the second half. Moreover, Safeway expects its tax rate to be marginally lower in the second half of 2010. These factors might have prompted 8 analysts to upgrade their estimates.
Magnitude of Estimate Revisions
The magnitude of revisions is quite significant following the first quarter results. Overall, estimates for the June quarter have gone down by 7 cents to 38 cents while third quarter estimates remain unchanged at 40 cents. A negative trend can be seen for 2010 and 2011, with estimates going down by 5 cents ($1.74) and 7 cents ($1.99), respectively over the last 30 days.
Our Recommendation
Considering the estimate revision trends and the magnitude of revisions, we find that there is a clear negative outlook in the near term. However, we believe with a pick-up in volume, identical store sales should improve in the forthcoming period.
Safeway reiterated its guidance for 2010. The company expects EPS in the range of $1.65-$1.85 with free cash flow of $0.9-$1.1 billion. Moreover, non fuel identical store sales are expected in the range of 0% to 1%.
Although the short term outlook of the company is not very promising which is supported by the Zacks #4 Rank (Sell), we have a Neutral recommendation on the stock given the long-term potential of the company.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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