Safeway Inflates $1B Stock Buyback - Analyst Blog

Recently the board of directors of Safeway Inc. ( SWY ) approved an additional $1.0 billion to the company's stock repurchase program, thus bringing the total authorization level to $8.0 billion. At the end of third quarter 2011, Safeway repurchased $6.1 billion worth shares and was left with $0.9 billion under its existing stock repurchase program. This is noteworthy that Safeway's stock repurchase authorization does not have an expiration date.

Despite the current volatile macro environment, Safeway possesses high earnings visibility, consistent cash generation ability, disciplined investment and limited balance sheet risk. At the end of September 2011, the company had $180.5 million in cash and cash equivalents compared with $778.8 million at the end of 2010.

Free cash flow during the most recent quarter declined to $168 million from the year-ago level of $383 million as capital expenditures increased by $117 million coupled with $63 million increase in inventories. However, the company remains confident of achieving its targeted free cash flow guidance ($750- $850 million) for 2011.

Debt balance came down to $5 billion as against $5.3 billion a year ago. However the debt to total capital remains almost flat at 47.9% from end 2010. Moreover, during the quarter, the company spent $288 million on capital projects, which include 5 new stores, 7 Lifestyle remodels and 11 stores closures.

With the Lifestyle transformation program nearing its completion, we believe Safeway's capital expenditure will decline going ahead. We expect Safeway's cash position to improve further, thus enabling the company to pay dividends, repurchase shares and reduce its debt.

We are also of the opinion that the board's decision of increasing the share repurchase authorization reflects the company's sound fundamentals even amidst sluggish revenue growth, resulting from fuel and food inflation, and will also help drive bottom-line growth going forward.

However, retail inflation is rapidly gaining momentum and Safeway may find it difficult to pass on increased prices to its customers due to tough competition. This tough scenario has led certain consumers trading down to less expensive mix of products or searching for discounts on grocery items, which in turn have impacted Safeway's sales.

The company expects that these difficult economic conditions to remain for the time being. The company confronts a wide spectrum of competitive threats, especially from players like SUPERVALU Inc ( SVU ), The Kroger Co ( KR ) and Wal-Mart Stores ( WMT ).

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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