Safeway Inc. (SWY)

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Safeway (SWY)

Q3 2012 Earnings Call

October 11, 2012 11:00 am ET

Executives

Melissa C. Plaisance - Senior Vice President of Finance & Investor Relations

Steven A. Burd - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee

Robert L. Edwards - President and Chief Financial Officer

Analysts

Karen F. Short - BMO Capital Markets U.S.

Deborah L. Weinswig - Citigroup Inc, Research Division

Charles Edward Cerankosky - Northcoast Research

Andrew P. Wolf - BB&T Capital Markets, Research Division

Brian Cullinane - Jefferies & Company, Inc., Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Colin Guheen - Cowen and Company, LLC, Research Division

Shane Higgins - Deutsche Bank AG, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Kelly A. Bania - BofA Merrill Lynch, Research Division

Priya Ohri-Gupta - Barclays Capital, Research Division

Presentation

Operator

Welcome to the Safeway Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. I will now turn the call over to Ms. Melissa Plaisance, Safeway's Senior Vice President of Finance and Investor Relations. Please go ahead.

Melissa C. Plaisance

Good morning, everyone. Welcome to Safeway's Third Quarter Conference Call to discuss earnings. 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 such 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 me today are Steve Burd, Chairman and CEO; and Robert Edwards, President and Chief Financial Officer. And with that, I'd like to turn over the call to Steve to discuss our earnings.

Steven A. Burd

Thank you, Melissa. So let me start with net income. Net income from continuing operations was $108 million in the quarter. This compares to $130.3 million from the same quarter one year ago. And while that reflects a $22 million reduction in net income, it's interesting to note that a couple of factors that contribute to that were activities that really occurred as onetime events in the quarter that will not be repeated. For example, our just for U launch cost in this quarter, which we identified a quarter ago would essentially end at the end of the third quarter, represented about $16 million of that $22 million. And another $5 million was associated with the disposition cost related to the Genuardi's stores that we sold. So but for those 2 factors, net income would have been flat.

If you look at earnings per share, which benefits from significant share repurchase that we made, we have $0.45 a share we earned this quarter contrasted with $0.38 a share 1 year ago, representing an 18% increase in earnings per share. So if I were to try to describe the quarter as succinctly as I could, I would say it was a quarter of significant progress.

Turning first to some highlights, our EPS results were above first call estimates and frankly, above our own internal estimates. We gained market share in both the food channel and across all outlets. ID sales were softer than expected, largely due to a decline in price inflation.

While our gross margin rate was down, more than half of this decline is explained by non-repeatable events, another 25% resulted from mix changes and less than 5% was really related to changes in price. On O&A expenses as a percentage of sales, they were down and representing another quarter of well-controlled operating expenses.

So turning first to sales, total sales decreased 0.2% from last year. This decrease is primarily the result of the disposition of the 17 Genuardi's stores in combination with a lower Canadian exchange rate. The decrease was partially offset by higher fuel sales and net new stores not depicted in ID sales. ID sales, excluding fuel, increased 0.1%. This 0.1% sales increase was heavily impacted by decline in the rate of nonpharmacy inflation and going from 1.8% last quarter to 0.8% this quarter. Sales were also impacted by a rather significant increase, which was expected, in the number of generic script sales, lowering total company IDs by 0.7%. Now this would be something that virtually anybody in the pharmacy business would also experience.

Our U.S. volume was significantly better than rest of market inside the food channel, and our U.S. volume was slightly better than rest of market in the all-outlet definition. Our U.S. food channel market share improved for the third consecutive quarter, finishing at a positive 0.4. Now that's measuring on volume. And then Safeway's U.S. all-outlet market share improved for the fourth consecutive quarter and was positive for the second consecutive quarter in a row.

Giving you a brief update on fourth quarter to date, our volume has continued to improve during the fourth quarter. The inflation rate, as we expected, has increased and now stands at just under 2% in the U.S. It has declined a bit in Canada and is just under 1% in Canada. The U.S. divisions, which as you know, all have -- are all supported by our just for U platform, are currently running at 1.4%, and total company sales are currently at 1%.

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