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With the announcement of Safeway Inc.'s (NYSE:SWY) first quarter results on April 28, 2011, estimate revisions by analysts have been mixed.

First Quarter Highlights

Safeway reported an EPS of 7 cents during the first quarter of fiscal 2011. However, after adjusting $80.2 million of tax charge related to repatriation of income from its Canadian subsidiary, Safeway reported an adjusted EPS of 29 cents beating both the Zacks Consensus Estimate of 28 cents and year-ago quarter’s EPS of 26 cents.

The company reported sales of $9.8 billion, exceeding the Zacks Consensus Estimate of $9.4 billion and the year-ago quarter’s $9.3 billion. The effect of a higher Canadian exchange rate and higher fuel sales with a 0.4% climb in identical-store sales (excluding fuel) were partially offset by several store closures.

Safeway reaffirmed its guidance for fiscal 2011. The company expects to record an EPS of $1.45 - $1.65, which includes the estimated 15 cents per share negative impact from the Canadian dividend. In addition, it estimates a sales growth of 1% - 1.5% from identical-store (excluding fuel).

Agreement of Analysts

Following the release of first quarter results, estimate revision trends among the analysts represent a negative bias for the company’s earnings in the second quarter of fiscal 2011.

Over the last 7 days, 6 of the 15 analysts covering the stock have made downward revisions for the second quarter with no revision in the opposite direction. Moreover, in the past 30 days, 8 analysts have lowered their estimates for the second quarter with only one moving in the reverse direction.

We believe that the analysts remain concerned about the weak macro environment, which is taking a toll on consumers. Safeway continues to face challenges in the form of price competition as economic uncertainty and unemployment rates are forcing many consumers to settle for cheaper substitutes or cut back on spending altogether.

However, the situation for fiscal 2011 has improved with 3 upward revisions and 1 downward revision in the last 7 days. In the last 30 days, out of 16 analysts, 4 have improved their estimates and 3 lowered the same.

Although, Safeway had been witnessing sluggish revenue growth over the past few quarters, the situation is gradually improving, which is reflected in the surge in ID store sales, the best among the past eight quarters.

We are also encouraged by Safeway’s significant effort towards international market penetration. The company is expanding its international business especially in Canada, Australia and UK. Safeway’s subsidiary, Blackhawk Network, which has business in North America, United Kingdom and Australia showed strong results during the quarter. This resulted in improvement in pricing and volume.

Additionally, offsetting the adverse impact of store closures during the quarter, Safeway has almost completed the Lifestyle remodeling and opened new stores that should increase revenues in future.

In order to improve its bottom line in a recessionary environment, Safeway has undertaken cost reduction initiatives. The company is building its distribution network in US thereby reducing the number of retailers in the market. Moreover, the company has closed its distribution centers in British Columbia and Vancouver, which is expected to lower operating expenses throughout 2011. Moreover, the company is giving special emphasis on shrink reduction thereby increasing the inventory of Safeway.

Furthermore, with a strong cash balance Safeway rewards shareholders in the form of dividends and buybacks.

Magnitude of Estimate Revisions

The magnitude of estimate revisions is modest following the first quarter results. Over the past 7 days, estimates for the second quarter have gone down by 1 cent to 40 cents. While estimates for fiscal 2011 and third quarter of fiscal 2011 were up by 1 cent, estimates for fiscal 2012 have been lowered by 3 cents to $1.93.

Our Recommendation

Safeway still faces the issues of unemployment and price competition. The company expects the situation to improve banking on better volume and pricing.

We are also encouraged by the company’s cost saving activities, which are likely to improve margins further. Moreover, Safeway has almost completed its Lifestyle remodels, which should increase revenues in future.

We have a ‘Neutral’ recommendation on the stock, which corresponds to a Zacks # 3 Rank (Hold).

Source: Earnings Scorecard: Safeway