Safeway Inc. - Growth & Income


Management at Safeway Inc. ( SWY ) recently initiated its guidance for 2012 above consensus, prompting analysts to revise their estimates significantly higher. This sent the stock to a Zacks #2 Rank (Buy).

Based on current consensus estimates, analysts project 15% EPS growth this year and 6% growth next year. Part of this growth will come from the company aggressively buying back shares of its stock.

The company is also returning value to shareholders through dividends. It currently yields a solid 2.7%. Valuation is attractive too with shares trading well below the industry median on a price to earnings and price to cash flow basis.

Company Description

Safeway is one of the largest supermarket chains in North America. It operates 1,678 stores in the United States and Canada, with 87% remodeled into the company's Lifestyle brand.

The company was founded in 1915 and has a market cap of $5.9 billion.

Fourth Quarter Results

Safeway delivered better than expected results for the fourth quarter on February 23. Earnings per share came in at 67 cents, beating the Zacks Consensus Estimate of 64 cents. It was an 8% increase over the same quarter in 2010.

Total sales rose 6% to $13.598 billion, ahead of the Zacks Consensus Estimate of $13.486 billion. This was due in large part to higher fuel sales, but same-store sales did rise 1.5%.

Like many retailers, Safeway has had to contend with rising commodity costs and stagnant wages. In the fourth quarter, adjusted gross profit margin declined 41 basis points to 27.7% of sales.

This was somewhat offset, however, by the leveraging of its fixed expenses. Overall, operating income fell 6%. But EPS was boosted by a 13% decrease in average shares outstanding year-over-year as the company spent $1.6 billion buying back its stock.


Management provided guidance for 2012 in a press release on March 6. The company stated that it expects to earn between $1.90 and $2.00 per share, on same-store sales growth of 1-2% (excluding fuel).

This was above consensus at the time and prompted analysts to revise the estimates significantly higher, sending the stock to a Zacks #2 Rank (Buy).

The Zacks Consensus Estimate for 2012 is now $1.98, within guidance, and representing 15% growth over 2011 EPS. The 2013 consensus estimate is currently $2.11, corresponding with 6% EPS growth.

Returning Value to Shareholders

In 2011, Safeway spent a whopping $1.6 billion buying back 76.1 million shares of its stock. The company has continued buying back its stock in 2012 too, spending $626.2 million repurchasing 28.7 million shares from the end of 2011 through February 22.

That's one way to drive EPS growth.

The company also pays a dividend that yields a solid 2.7%. It has raised its dividend every year since it began paying one in 2005.

Reasonable Valuation

Valuation looks reasonable with shares trading at just 10.9x 12-month forward earnings, a discount to the industry median of 14.8x and its 10-year median of 12.3x.

It also trades at just 4.2x cash flow, below its peer at 7.8x and its historical median of 6.2x.

The Bottom Line

With rising earnings estimates, a strong growth outlook, shareholder-friendly management, a 2.7% yield and reasonable valuation, Safeway offers investors attractive total return potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor .

SAFEWAY INC ( SWY ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: SWY

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