Safeway Inc. (SWY)

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Safeway Inc. (SWY)

Q3 2010 Earnings Call Transcript

October 14, 2010 11:00 am ET

Executives

Melissa Plaisance – SVP, Finance and IR

Steve Burd – Chairman, President and CEO

Robert Edwards – EVP and CFO

Analysts

Scott Mushkin – Jefferies

Karen Short – BMO Capital

John Heinbockel – Guggenheim

Ed Kelly – Credit Suisse

Robby Ohmes – Bank of America Merrill Lynch

Neil Currie – UBS

Jonathan Feeney – Janney Montgomery Scott

Alton Stump – Longbow Research

Sean Kras – Barclays Capital

Deborah Weinswig – Citigroup

Mark Wiltamuth – Morgan Stanley

Bob Summers – Susquehanna

Andrew Wolf – BB&T

Presentation

Operator

Welcome to the Safeway Third Quarter 2010 Conference Call. At this time, all participants are in a listen-only mode. (Operator instructions)

I will now like to turn the call over to Ms. Melissa Plaisance, Safeway’s Senior Vice President of Finance. Please go ahead.

Melissa Plaisance

Good morning, everyone, and thank you for joining us for Safeway’s third quarter earnings conference call. With me this morning is Steve Burd, our Chairman, President and CEO; and Robert Edwards, Executive Vice President and Chief Financial Officer.

Before I hand the call over to Steve, I’d like to remind you that management will make statements during this call that includes 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.

With that, let me turn the call over to Steve.

Steve Burd

Thank you, Melissa. Let me start with net income. Net income for the quarter was $122.8 million. This compares with $128.8 million from the same quarter one year ago.

Expressing earnings on a per share basis, we made $0.33 in the quarter as contrasted with $0.31 a year ago, which represents a 6.5% increase in earnings per share.

Our results for the quarter were completely in line with our internal expectations and $0.02 above the consensus estimate. While we benefited $0.02 per share from lower taxes, this was offset by some severance expenses equaling $0.02 per share. These one-time severance cost relate to the closing of a distribution center in British Columbia as we begin to move to a third-party facility.

This work is being moved because it will lower ongoing operating expenses and has the additional virtue of bringing out a facility that sits on 44 acres near downtown Vancouver. We will be able to ultimately harvest some great real estate value and bring some cash into the company as a result of this move.

There will be additional closing cost that currently we estimate at $0.02 per share in the fourth quarter, but the annual value of making this move with this distribution center is about $0.04 a share beginning in the year 2011, a positive $0.04.

Our results for the third quarter reflect a modest improvement in volume, a measurable reduction in deflation, what I would describe as a healthy growth margin and very strong cost control for the quarter.

Turning first to sales, total sales declined modestly for the quarter. They declined 0.6% versus last year. This was largely the result of the comparable sales decline and fewer operating store. These were offset in part by an increase in the Canadian exchange rate and higher fuel prices for the quarter.

ID sales, excluding fuel, which is how most of us look at the IDs, declined 2%. So we had a negative 2% ID, excluding fuel, in the quarter. This decline in IDs, much like quarter two, resulted entirely from a decline in price per item, which is how we measure deflation.

Volume was flat for the quarter, and therefore, the price per item decline was itself 2%. Now this reflects an improvement from last quarter’s decline of 2.4%. This improvement of 40 basis points resulted from a 70 basis point improvement in the US coupled with 120 basis point deterioration in Canada.

I think it was our last quarter earnings discussion that Canada, both from an economy standpoint in terms of strength of the economy as well as deflation, is running about five quarters behind the US deflation, slowing of the economy not nearly as great, but we seem to have about a five quarter lag in Canada, which is reflected, of course, in these numbers.

After almost five weeks in quarter four, the US has improved another 60 basis points, while the Canadian price per item has held essentially constant here in the fourth quarter. It would be our expectations that that would hold true for the balance of the quarter.

Given that we lapped all of our US price investments in the middle of this quarter, we expect US numbers in terms of price per item to just continue to get better.

Turning to gross margin, our total gross margin rate declined 13 basis points from last year. When you exclude fuel sales, the gross margin rate was really unchanged from last year. While the gross margin rate is unchanged, it does reflect a combination of investments and benefits.

On the investment side, it reflects the US price investments largely made in 2009, but not yet cycled. And then it also reflects the severance costs associated with the closing of the distribution center I talked about earlier. So those severance costs, because they are in distribution, because distribution gets booked in gross margin, they actually depressed gross margin.

On the benefit side, our margin was enhanced by more efficient advertising spend, positive mix changes coming from strong growth from private label and improvements in trend.

Were it not for the severance costs associated with the British Columbia distribution center, gross margin excluding fuel would have actually improved 14 basis points, which is really a reversal of a trend, largely the result of our reaching for price parity against our conventional competition. So, nice to see that now behind us.

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