Safeway Earnings Preview

Apr.27.11 | About: Safeway Inc. (SWY)

Safeway (NYSE:SWY), one of the largest food and drug retailers in North America, is expected to report its first quarter of fiscal 2011 results before the market opens on Thursday, April 28. The company is expected to earn EPS of 28 cents on revenues of $9.4 billion during the quarter, according to Zacks Consensus Estimates.

Barring the fourth quarter of fiscal 2010, Safeway has missed expectations in two of the preceding four quarters and exceeded the expectations in the remaining two quarters. It has a four-quarter positive surprise of 0.13%.

Previous Quarter Highlights

Safeway reported EPS of 62 cents for the fourth quarter of fiscal 2010, beating both the Zacks Consensus Estimate of $0.58 and the year-ago quarter’s adjusted EPS of $0.53.

The adjusted EPS in the fourth quarter of 2009 excludes a $1.9 billion of goodwill impairment charge due to the company’s reduced market capitalization and a weak economy.

The company reported sales of $12.8 billion, marginally exceeding both the Zacks Consensus Estimate and the previous quarter’s $12.7 billion. The effect of a higher Canadian exchange rate and higher fuel sales were partially offset by a 0.8% decline in identical-store sales (excluding fuel) and reduced sales due to store closures.

Following fourth quarter results, Safeway announced that it expects its fiscal 2011 EPS between $1.60 and $1.80. The company expects the ID store sales (excluding fuel) to grow 1.0% to 1.5%. Capital expenditures are expected to be $1.0 billion while free cash flow guidance remains at $0.85 to 0.95 billion.

Agreement of analysts and magnitude of estimate revisions

Out of 13 analysts covering the stock, none of them have revised the stock over the past seven days or 30 days. However, estimate revisions for fiscal 2011 reflect a positive bias. Over the last 30 days, one of the 16 analysts increased his/her forecast with no negative revision.

Although Identical-store (ID) sales, excluding fuel, declined 0.8% y/y in fourth quarter, driven mostly by deflation, the extent of decline was less compared to the 2% decline in the third quarter of fiscal 2010. Maintaining the trend, we expect same-store sales to show some improvement.

By the end of 2010, Safeway transformed about 85% of its stores to the new Lifestyle format with 1440 Lifestyle stores. The company opened 14 new stores and completed 60 remodels. As Safeway plans to eventually convert most of the remaining stores to Lifestyle stores, we expect to hear more from its remodeling program in the first quarter.

Although inflation is expected to set in by 2011, Safeway may find it difficult to pass on increased prices to its customers due to the tough competition. Food deflation could reduce sales growth and earnings, while food inflation, combined with reduced consumer spending could pull down its gross margin. We expect further clarity from the company on this front, which is one of the key challenges of the company.

The magnitude of revision has been modest following fourth quarter results. Overall, estimates for the first quarter have gone down by 1 cent to the current level of 28 cents per share in the last 90 days. For fiscal 2011, estimates have increased by 2 cents to the current level of $1.70 per share over the past three months.


Many factors were responsible for the sluggish revenue growth recently – unemployment, deflation and price competition make budget-conscious shoppers all the more alert.

However, the company expects the situation to improve going ahead, banking on better volume and pricing. We are also encouraged by the company’s cost saving activities, which is likely to improve margins further.

In addition, Safeway is well on track to complete the Lifestyle remodels, which should increase revenues in the future. With a strong cash balance, Safeway intends to reward shareholders in the form of dividends and buybacks.

Moreover, Safeway is putting a significant effort to enter international markets. The company is expanding its international business, especially in Canada, Australia and the UK.

On a long-term perspective, we are Neutral on the stock.