We are reiterating our long-term 'Neutral' recommendation on
), one of the largest food and drug retailers in North America.
Why the Reiteration?
Safeway missed the Zacks Consensus Estimate for revenues as it
declined 0.2% year over year to $10.04 billion in the third
quarter. However, the company surpassed the Zacks Consensus
Estimate for earnings primarily due to a 31% reduction in the
outstanding share count.
Estimate revision for Safeway exhibited a mixed trend for 2012
and 2013 over the last 60 days, as most earnings estimates were
revised up for the former and down for the latter. With no
definitive directional guidance, the company carries a Zacks Rank
#3 which translates into a short-term Hold rating.
Although a slowdown in the identical-store (ID) sales (excluding
fuel) in the quarter was a cause of concern, the company expects
to turn the tables on the back of successful rollout of "Just for
U" loyalty program. As the program gains traction, we expect
volume growth to improve in the future.
We are also encouraged by Safeway's efforts to reward its
stockholder via dividends and share repurchases. The company has
undertaken cost saving initiatives to improve it's bottom-line
amid the continued macroeconomic challenges. However, gross
margin contracted in the most recent quarter as the cost saving
measures failed to yield positive results.
Safeway has also been taking a number of strategic steps to
expand its global foothold, especially in Canada. However, the
efforts might weigh on the highly leveraged balance sheet of the
Despite various efforts to revive its top-line, sluggish sales
growth continues to remain Safeway's prime concern. The imminent
top management change also draws our attention. While the stock
consistently outperformed the S&P 500 index under the
leadership of Steve Burd, the current top-line challenges imply
that the incumbent might have a daunting task ahead.
Despite positive driving events, near-term headwinds prevail.
While we remain on the sidelines for Safeway, its peer
) carries a Zacks Rank #2 (Buy).
KROGER CO (KR): Free Stock Analysis Report
SAFEWAY INC (SWY): Free Stock Analysis Report
To read this article on Zacks.com click here.