Safeway’s Guidance Disappoints – Analyst Blog

Recently, Safeway (SWY) provided its outlook for 2010. The company expects earnings per share (EPS) in the range of $1.65 − $1.85, lower than the Zacks Consensus Estimate of $1.88. Safeway did not have an impressive 2009 as sales dropped during the four consecutive quarters.

 

For 2009, the company’s earnings came in at $1.74 compared to $2.21 in 2008. Safeway expects to spend $900 million to $1 billion on capital expenditures this year and anticipates generating free cash flow of $900 million to $1.1 billion.

 

The 2010 guidance not only misses our expectations, past trends show that Safeway has generally missed expectations. On an average, the company has missed the Zacks Consensus Estimate by 11.85% over the last four quarters.

 

Safeway reported fourth quarter results last week, which were in line with the Zacks Consensus Estimate although gross and operating margins were lower. Following the quarterly results, estimate revisions by analysts had a negative bias. Over the last 7 days, out of 19 analysts covering the stock, 4 have lowered their estimates while 2 have moved in the opposite direction.

 

The trend is not so clear for the first two quarters of 2010. For the first quarter, 4 of the 12 analysts covering the stock raised their estimates in the last 7 days while 3 have reduced their estimates. The scenario for the second quarter is not encouraging since over the last 7 days, 4 of the 11 analysts following the stock have lowered their estimates with 2 moving in the opposite direction.

 

Safeway is leaving no stone unturned to win back customers. The company is struggling with the perception that its prices are higher than competitors such as Kroger (KR) and Supervalu Inc. (SVU). However, during the conference call for the latest quarter, management said that its current prices are at par with its rivals.

 

In addition, Safeway is in the process of converting its stores to a new format called the “Lifestyle” store to improve the shopping experience of its customers. At the end of 2009, about 79% of the company’s stores were converted into Lifestyle stores.

 

Although Safeway posted a disappointing performance during 2009, we were not surprised given the current economic scenario. Factors such as rising unemployment and deflation are primarily responsible for the dismal performance of the company. We note that the environment for the retail industry is quite challenging as consumer spending has been very weak. However, a recovery in the US economy will bring back shoppers to Safeway and lead to an improvement in its financials in the long term. We have a “Neutral” recommendation on the stock.