) reported net income from continuing operations of $255
million in the fourth quarter of 2012, up 17.6% year over year.
The company's earnings per share (EPS) shot up 58.2% year over
year to $1.06 in the reported quarter, representing a beat of
39.5% over the Zacks Consensus Estimate.
This was primarily due to a 26% reduction in outstanding
share count and benefit from legal settlement which led to a
gain of 17 cents and 12 cents, respectively.
Annual EPS rose 52.3% to $2.27 in 2012, surpassing the
Zacks Consensus Estimate by 12.9%. The company also exceeded
its 2012 EPS guidance. Apart from a 32 cents benefit from a
reduced share count, lower income tax expense helped 2012 EPS
exceed projection as well as the prior-year level.
Total sales increased 1.2% on a year-over-year basis to
$13.8 billion in the fourth quarter, edging past the Zacks
Consensus estimate of $13.7 billion. Growth was led by higher
gift and prepaid card sales combined with a 0.8% increase in
identical-store sales (excluding fuel), partially offset by
the disposition of the Genuardi's stores.
In 2012, total sales inched up 1.3% to $44.2 billion,
higher than the corresponding Zacks Consensus Estimate
of $44.1 billion. The quarterly as well as annual sales were
negatively impacted by calendar shifts as the fiscal year
ended on Dec 29, 2012 and did not include the entire impact
of New Year's holiday sales.
Gross margin in the fourth quarter contracted 21 basis
points (bps) year over year to 26.5%. However, excluding the
impact from fuel sales and fuel partner discounts of 10 bps,
gross margin declined 11 bps as benefit from the generic wave
in the pharmaceutical industry was negated by investments in
Operating and administrative expenses declined 60 bps to
23.24% of sales in the reported quarter. Consequently,
operating income increased 15% year over year to $448.8
million in the quarter. This resulted in a 39 bps expansion
in operating margin to 3.3%. Excluding the impact from fuel
sales and fuel partner discounts, operating margin expanded
Safeway exited 2012 with $352.2 million in cash and cash
equivalents, down 51.7% from 2011. Net cash flow provided by
operating activities in 2012 declined 22.4% from the prior
year to roughly $1.6 billion due to greater use of cash for
Safeway made no share repurchase during the fourth quarter
of 2012. However, the company repurchased 57.6 million shares
for $1,240.3 million (including commissions) during 2012 and
is now left with $0.8 billion of authorization to buy back
In the fourth quarter of 2012, Safeway incurred $240.4
million in capital expenditures. The company opened three new
Lifestyle store, completed two Lifestyle remodel and closed
six stores during the quarter. During 2012, the company
opened nine new Lifestyle stores, completed four Lifestyle
remodels and closed 46 stores (including 25 Genuardi's
Safeway reported a strong quarter to end 2012 on a
positive note. Its strategy to improve identical-store sales
on the heels of 'Just for U' loyalty program yielded positive
results as the loyalty program was a major positive catalyst
increasing market share and profitability. The fuel loyalty
program was another impetus in the quarter.
Like recent quarters, the reduction in outstanding share
count led the EPS upside for Safeway. However, this might not
be sustainable over the long haul. Despite the various costs
saving measures, gross margin also remained under
The stock carries a Zacks Rank #3 (Hold). While we remain
on the sidelines for Safeway, stocks such as
Rite Aid Corporation
), carrying a Zacks Rank #2 (Buy), are expected to do well
and warrant a look.
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