Safeway Brings Some Sanity Back to Expectations

Safeway (SWY) breaks the consumer ice by essentially hitting targets of $.47 EPS and $10.2B sales (versus consensus of $.45 and $10.1B). Revenues were up 4% year-over-year, about the same as net earnings. My earlier thesis for the grocer highlights why I think this is a stock to overweight in this environment, not underweight as some analysts recently suggested. Safeway also reaffirmed EPS of $2.25 - $2.35 for the full year, with comps between 1-2 percent. Free cash flow should top $500 million, giving it flexibility to increase the dividend or add to the buyback program.

Gross margins in the 3rd quarter fell by just over 100 basis points, but 55 of those were due to higher fuel sales, so I’m happy with the general preservation of margins. Again, think about the economy as we see it now versus last year. Flat is fantastic, and a slight drop much better than the expectations currently built into the market.

Ok, So the Sky Isn’t Falling?

So a stock focused on the all-dreaded consumer was able to meet the estimates that were confirmed just a few months earlier in July. In addition to being over 2000 points ago on the Dow, it seems like 10 years ago in terms of investor sentiment. Safeway has been diligent on cost-cutting for over a year now, and has completed intensive renovations on over 60% of their stores. I don’t know how much of a harbinger Safeway’s earnings represent; I frankly don’t expect many consumer industries to even meet - let alone beat - estimates unless they’ve updated investors in the past month.

I can’t say how well Safeway’s earnings will stand up against the reports of other grocers, and against Costco (COST) and Wal-Mart (WMT). Yesterday at least, Safeway with a flat YoY showing is good for a 6% stock pop.

Disclosure: Author does not hold positions in the securities mentioned; Safeway held in Secular Trends Model Portfolio.

Comments

[Urbane Gori...:]

Safeway really isn't comparable to WMT or COST. Those are big-box one stop stores (At least I've never seen an expanded SWY selling the variety that the other two do... ). AT least on the Left Coast, SWY is a grocer. A more comparable chain would be Kroegers, although the Kroegers I've been to in the MidWest are more upscale, with drive up grocery loading and everything from a Starbucks to in-house eateries. Safeway is more of a middle class, self load, kids in the car eating burgers type of outlet. IMHO, it is stuck in an odd market position. Not attractive enough for upscale shoppers, not one-stop for hockey Moms and not a discount or bulk outlet. I suspect that as we descend into our recession, that it will lose custom for those reasons.

As to numbers, Yahoo Finance shows that if nothing, it does have positive earnings and sales growth, low debt and positive cash flow. However, if you compare SWY to KR, WMT or COST, it doesn't compete on a number basis with those outlets.

Having said that, I have been following it and it does look like it is ready to break out of its down trend. It seems to have made a bottom on Oct 10 and a higher low on Oct 16th. However, it has yet to make a higher high and the peaks are still bouncing off that trend down.. I'm looking at a $21.50 entry point, and expect it will move up with the hoped for bear market rally. I see resistance on a daily chart at $25.30ish....

Anyway... Thanks for reminding me to have a look.. jegan ;-)

2008 Oct 21 02:59 PM