) 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.
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
The company was founded in 1915 and has a market cap of $5.9
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
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
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.
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
Todd Bunton is the Growth & Income Stock Strategist for
and Co-Editor of the
Reitmeister Value Investor
SAFEWAY INC (
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