Safeway Inc. (SWY)

SWY 
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Safeway (SWY)

Q1 2011 Earnings Call

April 28, 2011 11:00 am ET

Executives

Melissa Plaisance - Senior Vice President of Finance & Investor Relations

Robert Edwards - Chief Financial Officer and Executive Vice President

Steven Burd - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Analysts

Alex Bisson - Northcoast Research

Edward Kelly - Crédit Suisse AG

Meredith Adler - Barclays Capital

Joseph Agnese - S&P Equity Research

John Heinbockel - Guggenheim Securities, LLC

Scott Mushkin - Jefferies & Company, Inc.

Mark Wiltamuth - Morgan Stanley

Karen Short - BMO Capital Markets U.S.

Deborah Weinswig - Citigroup Inc

Robert Ohmes - BofA Merrill Lynch

Stephen Grambling - Goldman Sachs Group Inc.

Presentation

Operator

Welcome to the Safeway First Quarter 2011 Conference Call. [Operator Instructions] I will now turn the call over to Ms. Melissa Plaisance, Safeway Senior Vice President of Finance. Please go ahead.

Melissa Plaisance

Good morning, everyone, and thank you for joining us for Safeway's First Quarter Earnings Release Conference Call. With me today is Steve Burd, Safeway's Chairman, President and CEO; and Robert Edwards, Executive Vice President and Chief Financial Officer.

Before I turn the call over to Steve, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws.

Forward-looking statements contain information about our future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. However, we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a list and description of those risks and uncertainties, please see our filings with the SEC.

And with that, I'll turn the call over to Steve.

Steven Burd

Thank you, Melissa. Let me start with net income. Net income for the quarter was just over $25 million as compared to net income last year for the same quarter of $96 million. Now that $25 million net income number included a tax expense relating to the repatriation of $1.1 billion from Canada, which was reflected in a dividend and announced really at our investor conference. So it was anticipated, I think, by everybody. If you adjust for that to get a real understanding of the operating performance for the quarter, you get an adjusted net income number of $105.3 million compared to last year's $96 million, which is really the basis in which all the first call estimates were done.

Reflected in terms of earnings per share, we earned $0.29 per share as contrasted with $0.25 a share a year ago, which is a nice 16% increase in earnings per share. By way of kind of some summary comments about the quarter, I would say that we're clearly pleased with our results for the quarter as it shows continued progress on behalf of the company. After adjusting for the taxes, as described earlier, we were $0.01 higher than the first call consensus estimate and completely in line with our expectations on the quarter.

We also had positive IDs for the quarter, which we have not had in a while, and we had an improvement in gross margin rate. And we had an expansion in operating margin. You'll recall in our guidance that we said that our operating margin would be flat to maybe up slightly, so good to see the first quarter actually showing an improvement in operating margin.

If you read the press release, you know that we also made an accounting change this quarter and in Blackhawk. It has the effect of increasing Blackhawk's revenue as well as Blackhawk's cost of goods. This has no effect on our ID sales, no effect on gross profit dollars and no effect on net income. But when I talk about gross margin and O&A expense ratios later, you will see that it does have an effect of lowering the company's gross margin rate and also lowering the O&A expense ratio, but more on that in a minute.

Turning first to sales. Total sales increased 4.8% versus last year. This increase in order of magnitude is largely explained by higher fuel sales, which should surprise no one, and increase in the Canadian exchange rate, higher non-fuel-related IDs, and then finally, the Blackhawk accounting change. ID sales, when you exclude fuel, increased 0.4%, and that's the positive number I referenced earlier. This is our fifth consecutive quarter of improvement in ID sales. The non-fuel IDs were 120 basis points higher than last quarter and now stand 450 basis points stronger than the low point of the recession, which for us was the fourth quarter of 2009, so a substantial improvement from that low point.

While the improvement is not uniform, 9 of 10 operating divisions improved in quarter 4. And frankly, we're it not for extraordinary snow conditions that occurred in 2010, I believe the snowfall difference was sixfold in of our geographies. That spiked the 2010 ID numbers. And were if not for that, we would not be reporting 10 of 10 operating divisions showing improvement relative to the fourth quarter of 2010.

Transactions were up slightly from last year. Volume, as we talked about in terms of item count, was still a bit negative but stronger than the fourth quarter so showing improvements in volume. And then price per item increased for the quarter, just under 1%, so very close to 1%. And that's consistent with what we had called in our guidance where we thought we would see for the year., Obviously, there's some indication that inflation will continue, and that number as we play out the year will probably become higher. Consistent with the last 4 quarters, our sales and volume increases continue to come from our most loyal customers, showing the most improvement from the most loyal of the loyal.

Turning to gross margin. Our gross margin rate declined 87 basis points from last year. When you exclude both fuel sales and the accounting change, if you could pair an apples to apples, our gross margin improved 18 basis points over quarter one of 2010. Now this improvement in gross margin was largely the result of very strong improvement in strength. Now those improvements we've planned, but nonetheless, very strong compared to last year and quite similar to the what we experienced in the fourth quarter, when we initiated that extra effort in strength improvement. So that's been sustained, and we continue to add to it.

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