Safeway Inc. (SWY) reported EPS of 7 cents during the first quarter of fiscal 2011. However, repatriation of $1.1 billion from Safeway’s Canadian subsidiary resulted in $80.2 million tax charge (22 cents per share) during the quarter.

After adjusting for this charge, the company’s adjusted EPS came in at 29 cents, beating the Zacks Consensus Estimate of 28 cents and 16% higher than the year-ago quarter’s 26 cents.

The company reported sales of $9.8 billion during the quarter, exceeding both the Zacks Consensus Estimate of $9.4 billion and the year-ago quarter’s $9.3 billion. The impact of higher fuel sales, higher Canadian exchange rate, with a 0.4% increase in identical-store sales (excluding fuel) were partially offset by several store closure.

After several quarters of lower Identical-store sales (excluding fuel), the positive growth during the reported quarter, though small, comes as an encouragement.

Gross margin of 27.54% for the quarter was 87 basis points lower than the first quarter of 2010. However, excluding the 87 basis-point impact from fuel sales and the 18 basis-point impact from the accounting change in gift card commissions, gross margin increased 18 basis points due to shrink reduction, partially offset by employee severance charges and LIFO expense.

Safeway opened 3 new Lifestyle stores, completed the remodeling of 5 Lifestyle stores and closed 5 stores during the quarter. During 2011, Safeway aims to invest approximately $1 billion in capital expenditure, open 26 new Lifestyle stores and complete 30 Lifestyle remodels.

Safeway exited 2011 with $411.5 million in cash and cash equivalents, down from $778.8 million at the end of December 2010. During the quarter, Net cash flow used by operating activities was $60.0 million, lower than $242.0 million in the year-ago quarter. The company repurchased 7.7 million shares of its common stock for a total cost of $173.7 million during the quarter.


Safeway reaffirmed its guidance for fiscal 2011. The company expects to record EPS of $1.45 -$1.65 that includesthe estimated 15 cents per share negative impact from the Canadian dividend. In addition, it estimates sales growth of 1% to 1.5% from identical-store (excluding fuel). 


Safeway has witnessed an improvement in its situation banking on better volume and pricing. We are encouraged by theincrease in its Identical-store sales (excluding fuel). In addition, its Lifestyle store remodels and new store development are expected to boost revenues in future. With a strong cash balance, the company rewards shareholders in the form of dividends and buybacks.

We are currently Neutral on the stock.

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