Safeway Inc. (SWY) 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 has recorded a marginal growth of 1% in sales to $9.3 billion driven by higher Canadian exchange rate and higher fuel sales, partially offset by a 3.1% decline in identical-store sales (excluding fuel).

Gross margin of 28.41% for the quarter was 31 basis points lower than the first quarter of 2009. However, the gross margin has declined 5 basis points, excluding the impact of fuel sales.

Although operating and administrative expense increased 44 basis points to 26.11% during the quarter, operating margin improved 83 basis points excluding the impact of higher fuel sales in the reported quarter. The increase in expenses was driven by factors such as deflation, a decline in volume and increased wages.

Safeway completed 9 Lifestyle remodels and closed 13 stores during the quarter with the target to open 20 Lifestyle stores and complete 80 Lifestyle remodels. For the year, the company plans to invest $0.9 to $1 billion in capital expenditures.

During the quarter, Safeway generated operating cash flow of $242 million, higher than $151 million in the year-ago quarter. The company has repurchased 4 million shares of its common stock for a total cost of $99.2 million. At the end of the first quarter, Safeway had $1.2 billion remaining under the board authorization for stock repurchase.

Safeway reiterated its guidance for 2010. The company expects earnings per share in the range of $1.65-$1.85 with free cash flow of $0.9-$1.1 billion.

After four consecutive quarters, the company has posted an increase in revenues, though marginal. Factors such as rising unemployment and deflation were primarily responsible for the sluggish performance of the company. However, the company is confident that trends have improved which will bring back shoppers to Safeway. We have a Neutral recommendation on the stock.
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