Safeway Inc.
(
SWY
) reported EPS of 30 cents in the first quarter of fiscal 2012, in
line with the Zacks Consensus Estimate. Quarterly earnings,
however, were well above the year-ago level of 7 cents, which
included a tax charge of 22 cents per share related to the
repatriation of $1.1 billion from Safeway's Canadian
subsidiary.
Despite the New Year's holiday shift, weather patterns and high
gasoline prices leading to sluggish sales, several cost reduction
initiatives during the quarter helped the company improve its
bottom line.
The company reported total sales of $10.0 billion during the
reported quarter, marginally missing the Zacks Consensus Estimate
of $10.08 billion but increasing 2.4% year over year. Despite flat
year-over-year identical-store sales, the upside in sales was
attributable to higher fuel sales coupled with higher revenue from
Blackhawk commissions and additional sales from new stores.
Gross margin in the reported quarter contracted 70 basis points
(bps) year over year to 26.8%. However, excluding the 62 bps impact
from fuel sales, gross margin declined 8 bps. Operating profit
during the quarter decreased 13.4% to $189.8 million, resulting in
a 35 bps drag in operating margin to 1.89%.
Safeway exited the quarter with $134.5 million in cash and cash
equivalents, down from $729.4 million at the end of December 2011.
Net cash flow used by operating activities in the quarter was
$541.8 million compared with $60 million in the year-ago quarter
due to greater use of cash for working capital in 2012, driven by
inventory renewal and the settlement of Blackhawk holiday
payables.
The company repurchased 46 million shares during the quarter for
$1 billion. The company also increased the authorization for stock
repurchases by $1.0 billion. It is now left with $1.1 billion of
authorization to buy back shares. From the end of the reported
quarter till April 25, 2012, Safeway repurchased 10.6 million
shares for $219.5 million (including commissions).
In the first quarter of 2012, Safeway incurred $308.4 million in
capital expenditures. The company opened 4 new Lifestyle stores and
closed 7 stores during the quarter.
Outlook
Safeway reiterated its fiscal 2012 EPS guidance of $1.90-$2.10.
Also, the company expects identical-store sales, excluding fuel, to
rise in the range of 1-2%. 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.
In fiscal 2012, Safeway expects to incur approximately $900
million in capital expenditures, open 10 new Lifestyle stores and
complete 10 Lifestyle remodels.
Recommendation
In order to improve its bottom line in a recessionary
environment, Safeway has stepped up its efforts to reduce cost,
which we believe will improve its margins in the upcoming quarters.
However, we are concerned regarding flat identical store (excluding
fuel) sales of the company during the quarter that was affected by
prevailing weak macroeconomic conditions.
The macro environment in the U.S. and Canada is taking a toll on
consumers. Falling consumer confidence is forcing people to opt for
cheaper substitutes or cut back on overall spending.
Safeway confronts a wide spectrum of competitive threats,
especially from
SUPERVALU Inc
.
(
SVU
),
The Kroger Co
.
(
KR
) and
Wal-Mart Stores
(
WMT
).
Safeway currently retains a Zacks #2 Rank (short-term Buy
rating). Over the long term, we are Neutral on the stock.
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 Report
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