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Safeway Inc. (SWY) has significantly outperformed the market this year. Its share price is up by 50.61% as compared to S&P 500 which is up by 18.07%.

Source: Google Finance

The company's performance was driven by private label growth, acceleration of Just for U and fuel programs. The company will get additional cash from the sale of its Canadian business and the Blackhawk IPO. Along with this, growth will be driven by its remodeling initiative. Let's have a look at these initiatives.

Sale of Canadian operations

Safeway entered into an agreement to sell its Canadian operations through a sale of net assets of Canada Safeway Limited to Sobeys Inc., a Canadian food retailer and wholly owned subsidiary of Empire Company limited. The transaction was valued at $5.7 billion (C$5.8 billion), which the company will use to pay off its $2 billion of debt. Safeway will remain responsible for Canada Safeway's C$300 million public debt due in 2014 which is not included in the transaction. In past 12 months, Canada Safeway's revenue was $6.6 billion (C$6.7 billion).

Remodeling and private label growth

The company has completed 19 center stores remodels and it has a target to complete around 250 stores by the end of 2013. In addition to this, 87 premium stores were re-merchandised in the perishables format by the end of the second quarter. The company has a target of re-merchandising a total of 150 premium stores by the end of 2013. The company has successfully managed private labels by leading health and wellness category brands with maximum private labels available at its stores. It has more than 2000 SKUs in the natural and organic category which is four times more than the supermarket competitors and eight times more than the mass retailers. The company is expecting to cross $200 million sales in natural and organic products. Open nature products sales increased by 38% in the second quarter and 42% year-to-date.

Blackhawk IPO

Blackhawk, a Safeway Inc. subsidiary completed its initial public offering on April 24, 2013. Safeway sold 11.3 million shares of its Class A common stock at $23 per share for a total sum of $237.9 million. The company's ownership has reduced to approximately 73% of Blackhawk's outstanding shares from about 95% initially. Safeway will use these proceeds to pay off debt and share buybacks.

Just for U and Fuel program

Safeway started its 'Just for U' loyalty program in the fourth quarter of 2012. This program aims at retention of loyal customers as well as attracting new customers. This program continues to drive sales for the company as 5.8 million households registered for this program. The company is also trying to launch an iPad app soon for this program. Safeway has partnered with Chevron and Exxon to offer fuel rewards. The launch of the fuel program in Texas should be completed by the fourth quarter of 2013. Both the programs will boost ID sales.

Peer Analysis

The Kroger Company and Supervalu Inc. are immediate peers of Safeway in the traditional grocery stores industry.

The Kroger Company (KR) is more focused on its digital strategy trying to connect with most of the customers through its Kroger app and Kroger.com. It has experienced 50% increase in Kroger.com visitors and a 120% increase in app users. Kroger announced its merger agreement with Harris Teeter Supermarkets, Inc. on July 9, 2013. Under this agreement, Kroger will purchase all outstanding shares of Harris at $49.38 per share and in exchange Harris is bringing 212 stores at attractive locations with established brand name. The company has raised its market share in 9 out of 17 markets where it is facing tough competition from Wal-Mart.

Another peer Supervalu Inc. (SVU) initiated to introduce fresh meat cut program. It has tested this program in most of the licensee stores and analysis by the company shows that stores with this program performed better as compared to the stores without this program. This program will help in better tailoring of the offerings to each store and in lowering the retail price. The company is planning to launch this program in all stores by the end of 2013. The company's CEO has implemented a decentralized decision making process in the retail food segment. Stores were allowed to offer merchandise as per the local shopper's requirements. It will help the company to lower the cost and also ease operations.

Company

PEG ratio

Forward PE

SWY

1.89

14.57

KR

1.49

12.22

SVU

1.91

12.23

If we compare the above three traditional grocery stores on the basis of PEG and PE, Kroger is the best option available with the lowest PEG of 1.49 and PE of 12.22. Safeway is trading at very high forward PE of 14.57. However, above mentioned growth drivers justify its premium valuations. Supervalu has slightly higher forward PE of 12.23 as compared to Kroger, but its PEG at 1.91 is highest among the peers.

Conclusion

Safeway's remodeling strategy and private label growth will help it to attract more customers and generate additional revenue. Proceeds from selling of its Canadian operations and Blackhawk IPO will be used to pay off debt as well as share buyback. The company's 'Just for U' and fuel programs have started gaining momentum with more people subscribing to these programs. Looking forward, all these initiatives will help the company to grow faster. So I recommend buying.

Source: Safeway: What's Driving This Grocer's Growth