We reiterate our Neutral recommendation on Safeway Inc.(SWY) following our assessment of its fourth quarter results. Earnings for both fourth quarter and fiscal 2010 beat the Zacks Consensus Estimates. Revenues of $12.8 billion for the quarter marginally exceeded both the Zacks Consensus Estimate and the year-ago sales.
We note that the environment for the retail industry is quite challenging. Consumer spending on durable products has been very weak. This is evident from the decline in non-fuel identical (“ID”) store sales growth over the past few quarters.
Moreover, there was a reduction in sales due to store closures. However, the extent of decline in fourth-quarter 2010 was significantly less on a sequential basis, reflecting a recovering economy.
Safeway has undertaken cost reduction initiatives focused on cost of goods sold and supply chain efficiencies. The company is building its distribution network in the US where some of its existing card content providers are becoming distributors, thereby reducing the number of retailers in the market.
Safeway has also closed a distribution center in British Columbia, Canada which is expected to lower operating expenses. The company is also emphasizing on shrink reduction.
Furthermore, Safeway is giving a significant effort on international market penetration. The company is expanding its international business especially in Canada, Australia and UK. Safeway expects a boost in its international operations in the next three to four years on the back of new product launches.
Moreover, the Canadian subsidiary of Safeway has planned to pay $1.1 billion dividends to the parent company in two parts, $600 million (in first-quarter 2011) and $500 million (in second-quarter 2011). Safeway plans to use $600 million to repay U.S. debt and the rest (after tax balance) for share repurchases.
The company expects further improvement going ahead banking on better volume and pricing. We are also encouraged by Safeway’s cost-saving activities. In addition, the company is well on track to complete the conversion of most of its remaining stores to the new “Lifestyle” format, which should lead to higher sales in future.
However, Safeway is faced with increased competition and tough industry conditions. The company confronts a wide spectrum of competitive threats, especially from the likes of SUPERVALU Inc (SVU), The Kroger Co (KR) and Wal-Mart Stores(WMT) Moreover, other major issues such as food inflation and reduced consumer spending may be a drag on its margins.
KROGER CO (KR): Free Stock Analysis Report
SUPERVALU INC (SVU): Free Stock Analysis Report
SAFEWAY INC (SWY): Free Stock Analysis Report
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