We reiterate our Neutral recommendation on
Safeway Inc.
(
SWY
) with a target price of $16.00.
We note that the retail environment is quite challenging and
consumer spending on durable products has also been very weak. Amid
economic uncertainties and price competition, Safeway has been
witnessing sluggish revenue growth over the past few quarters.
However, Safeway recorded a 0.8% increase in identical-store
(ID)sales (excluding fuel) during the second quarter 2012 compared
with flat sales in the first quarter of 2012. Despite a 300 basis
points (bps) decline in price-per-item, the increase in ID sales
was primarily on the back of the company's successful roll out of
"Just for U" loyalty program. This also represented a volume
improvement of 160 bps year over year and 360 bps sequentially.
Amid a difficult economic scenario, we are thus pleased with the
company's reaffirmation of ID sales growth guidance of 1-2%.
Safeway has also undertaken cost reduction initiatives focused
on cost of goods sold and supply chain efficiencies. The company
decided to exit the greater Philadelphia market to control its
operating expenses and better focus on areas where it has a strong
presence. The company is on track to dispense with 27 Genuardi's
stores in this region and sold 3 in the second quarter (3 in the
first quarter and 16 in the third quarter to Giant Food
Stores).
In addition, Safeway is turning its attention to expanding
further in international markets, which is quite impressive. The
company is expanding its overseas business especially in Canada,
Australia and UK.
We are also encouraged to note that despite sluggish revenue
growth, Safeway has been rewarding its shareholders by paying
dividends and repurchasing shares. During the second quarter, the
company repurchased 11.6 million shares for $240.4 million and is
now left with $0.8 billion in its existing share repurchase plan.
We believe that Safeway's effective capital deployment policy
should benefit its shareholders over the long term.
However, we remain highly concerned about the high borrowing
level of Safeway, a portion of which were spent to support the
company's gigantic share repurchase plan. Notably, in the first
quarter of 2012, the company made a huge stock repurchase of $1
billion. We also remain concerned about the company's share buyback
policy to improve its EPS despite sluggish sales.
Moreover, higher fuel prices are likely to dampen overall
consumer demand impacting Safeway's sales. These difficult economic
conditions may continue for the rest of 2012. The company confronts
a wide spectrum of competitive threats, especially from players
like
Supervalu Inc
. (
SVU
),
The Kroger Co
(
KR
) and
Wal-Mart Stores
(
WMT
).
Notably, the recent disappointing first quarter fiscal 2013
performance of Supervalu also reflects the global economic slowdown
badly hitting the entire retail industry.
Currently, the company retains a Zacks #3 Rank, which translates
into a 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
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