On May 21, we downgraded our long-term recommendation on
) to Neutral from Outperform as this North American food and drug
retail giant is showing signs of sluggish growth. The stock
carries a Zacks Rank #3 (Hold).
Why the Downgrade?
On Apr 25, Safeway reported a weak first quarter which lagged our
expectations. Despite earnings growth of 16.7%, adjusted earnings
of 35 cents missed the Zacks Consensus Estimate by a penny.
Revenues stood at about $10 billion, flat year over year,
trailing the Zacks Consensus Estimate of $10.2 billion.
Margins were under pressure in the first quarter. Despite the
benefit of New Year sales, identical store (ID) sales (excluding
fuel) inched up 1.5% from the year-ago quarter. ID sales growth
was negated by the disposition of Genuardi's stores in 2012 and
soft fuel sales.
On the positive side, Safeway gained market share with rising
uptake of the "Just for U" loyalty program. We are encouraged by
the company's working plan to save costs and expand foothold in
the U.S. healthcare market. The recent initiative of the sale of
a minority stake in its subsidiary
Blackhawk Network Holdings
) should support improve Safeway's focus on mainstream retail
However, a high debt level and lower income on account of
Blackhawk offering adds to our concern. The company also faces a
tough competitive landscape with other players recording healthy
sales growth. While improving macroeconomic conditions are likely
to boost growth for Safeway, any near-term comfort from ongoing
headwinds is unlikely.
Other Stocks to Consider
While we have a neutral disposition on Safeway, other stocks such
The Kroger Co.
), carrying a Zacks Rank #2 (Buy) are worth
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