) reported net income from continuing operations of $108.0 million
in the third quarter of 2012, much lower than $130.3 million in the
year-ago quarter. However, the company's earnings per share (EPS)
of 45 cents in the reported quarter were 3 cents ahead of the Zacks
Consensus Estimate and 18.4% above the year-ago quarter's 38 cents.
This was possible on the back of an approximately 31% reduction in
the outstanding share count.
The company reported a nominal 0.2% year-over-year decline in
total sales to $10.04 billion during the reported quarter,
marginally missing the Zacks Consensus estimate of $10.22 billion.
Disposition of Genuardi's stores during the quarter combined with a
lower Canadian exchange rate, partially offset by higher fuel sales
impacted the quarterly sales result.
Although volume improved on the back of encouraging performance
from the company's loyalty card program, this was more than offset
by larger-than-expected weakening in price inflation. All these
resulted in a mere 0.1% rise in identical-store sales (excluding
Notably, earlier the company expected identical-store sales,
excluding fuel, to rise in the range of 1-2% in the current fiscal.
We expect volume trends to improve further with easing of
Gross margin in the reported quarter contracted 56 basis points
(bps) year over year to 26.44%. However, excluding the 11 bps
impact from fuel sales, gross margin declined 45 bps. This was on
the back of higher expenses associated with the launch of 'just for
U' loyalty program, cost associated with Genuardi's stores
dispositions, a marginally high shrink expense, higher revenue from
the company's low-margin Blackhawk business and change in sales
mix, partially offset by lower LIFO expense.
Operating income during the quarter decreased 12.1% year over
year to $218.3 million, resulting in a 30 bps drag in operating
margin to 2.17%.
Safeway exited the quarter with $202.8 million in cash and cash
equivalents, down from $729.4 million at the end of fiscal 2011.
Net cash flow provided by operating activities in the first 36
weeks of 2012 was $358.5 million compared to $710.9 million in the
year-ago period due to greater use of cash for working capital in
2012, driven by increased inventory and settlement of Blackhawk
payables, partly offset by lower corporate pension
Safeway made no share repurchase during the third quarter of
2012. Year to date, the company repurchased 57.6 million
shares for $1,240.3 million (including commissions) and is now left
with $0.8 billion of authorization to buy back shares.
In the third quarter of 2012, Safeway incurred $159.2 million in
capital expenditures. The company opened 1 new Lifestyle store,
completed 1 Lifestyle remodel and closed 23 (including 17
Genauardi's) stores during the quarter.
Safeway reiterated its 2012 EPS guidance of $1.90-$2.10.
Operating profit margin change, excluding fuel, is expected to
range from positive to negative 5 bps. The company also expects
free cash flow in the range of $850-950 million (unchanged).
In fiscal 2012, Safeway expects to incur approximately $900
million in capital expenditures to open 10 new Lifestyle stores and
complete 5 Lifestyle remodels, refurbish in-store pharmacies and
Safeway has been witnessing a sluggish revenue growth over the
past few quarters due to economic uncertainty impacting the
company's lifestyle strategy. However, we are impressed by
Safeway's constant efforts to capture market share with its
value-added offerings, which are expected to enhance brand equity
and reduce the company's dependency on price.
We are also encouraged with the company's successful rollout of
"Just for U" loyalty program. According to the company, during the
reported quarter, the incremental sales through just for U helped
offset lower inflation and increase volume.
The company expects in the fourth quarter, identical-store sales
will improve with increased just for U engagement, roll out of
Safeway's partner fuel loyalty program and launch of Wellness
initiative. We believe, these initiatives will help the company
gain market share from competitors like
The Kroger Co
). Also these are expected to reduce costs and enhance shareholder
wealth. We currently have a Neutral recommendation on Safeway,
which carries a Zacks #3 Rank (short-term Hold rating).
KROGER CO (KR): Free Stock Analysis Report
SUPERVALU INC (SVU): Free Stock Analysis Report
SAFEWAY INC (SWY): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
To read this article on Zacks.com click here.