We have reiterated our Neutral recommendation on
) with a target price of $17.00.
In the third quarter of fiscal 2012, the company reported a
nominal 0.2% year-over-year decline in total sales to $10.04
billion, marginally missing the Zacks Consensus estimate of
$10.22 billion. The quarterly sales result was impacted by the
disposition of Genuardi's stores during the quarter along with
lower Canadian exchange rate, and was partially offset by higher
Net income from continuing operations was $108.0 million, 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
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. In the reported quarter, Safeway recorded a mere 0.1%
increase in identical-store (ID) sales (excluding fuel).
However, volume growth is set to improve in the upcoming
quarters on the back of its successful rollout of the "Just for
U" loyalty program. The success of this program is all the more
evident from the fact that households registered for this program
now represent 40% of company's total sales. We believe that the
company is on track to have 5 million "Just for U" registrants by
the end of 2012, representing about 45% of sales. Meanwhile,
volume for the fourth quarter is on an improving trend with
slightly higher inflation leading to better ID store sales
(excluding fuel). This trend is expected to continue along with
the gradual recovery of the economy.
Safeway has also undertaken cost reduction initiatives focused
on cost of goods sold and supply chain efficiencies, which are
expected to improve its margins in the upcoming quarters.
Moreover, continued operating loss forced the company to close
its distribution centers in British Columbia and Vancouver.
Safeway also decided to exit the greater Philadelphia market to
control its operating expenses and to focus on areas where it has
a strong presence.
In addition, Safeway is turning its attention toward further
expansion in international markets, which is quite impressive. We
are also encouraged to note that despite sluggish revenue growth,
Safeway has been rewarding its shareholders by paying dividends
and repurchasing shares. We believe that the company'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 was spent to support the
company's gigantic share repurchase plan. 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
The Kroger Co
Currently, the company retains a Zacks #3 Rank, which
translates into a short-term 'Hold' rating.
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