On Nov 19, we reaffirmed our long-term Neutral recommendation
) following an eventful third-quarter. The food and drug retailer
carries a Zacks Rank #3 (Hold).
On Oct 10, Safeway announced tepid second-quarter results
along with its decision to exit the Chicago market. Adjusted
earnings per share (EPS) from continuing operations was 10 cents,
which missed both the Zacks Consensus Estimate and the year-ago
quarter figure by 6 cents.
Total sales increased a marginal 1.1% to $8.6 billion, beating
the Zacks Consensus Estimate of $8.4 billion. Despite a
1.9% rise in identical-store sales (excluding fuel), the top line
decreased due to soft fuel sales and disposition of Genuardi's
stores in 2012.
Additionally, Safeway declared its plans to make an exit from
the Chicago market. Accordingly, it plans to sell 72 Dominick's
stores in Chicago by early 2014. A tax benefit of $400-$450
million is expected to emerge from the disposal of Dominick's
properties. This tax benefit and any other cash proceeds will be
invested to buy back stock and further growth opportunities for
the company. We are upbeat about the deal boosting shareholder
returns in future.
On the other hand, although the company asserts that the
divestment of Canadian operations reflects a deft plan to sharpen
focus on the U.S. market, we remain apprehensive due to the lack
of clarity in management plans to gain momentum in the domestic
market. Notably, Safeway's Canadian operations have been more
profitable than the U.S. operations, as proved by operating
profit levels over the past few years.
Assuming that there will be no gains from the sale of Safeway
Canada, the company expects adjusted EPS in the range of $0.93 to
$1.00, lower than the earlier range of $1.02-$1.12. Excluding
Dominick's operating results, adjusted EPS is expected to remain
in the range of $1.05 to $1.12.
On the positive side, the 'Just for U' program continues to be
seen as a major catalyst driving profitability and market share
gains. Moreover, Safeway's several strategic initiatives should
improve its growth profile. We are optimistic about cost-control
measures yielding positive results moving forward.
Stocks to Consider
While we remain on the sidelines regarding Safeway,
better-ranked stocks that are worth a look include
Marks & Spencer Group plc
The Kroger Co.
). All these stocks carry a Zacks Rank #2 (Buy).
CARREFOUR SA (CRRFY): Get Free Report
KROGER CO (KR): Free Stock Analysis Report
MARKS&SPENCER (MAKSY): Get Free Report
SAFEWAY INC (SWY): Free Stock Analysis Report
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