Safeway Inc. (SWY) has been experiencing an upswing lately as the stock has risen nearly 3% to reach $34.13 on Tuesday’s adjusted close since the company reported its financial results for the third quarter of 2014 on Oct 15 (in the course of its 10Q filing). In fact, the stock was upgraded to a Zacks Rank #1 (Strong Buy) on Oct 21 following a better-than-expected third quarter.
Prior to the completion of its merger with Cerberus Capital Management LP’s Albertsons for a deal valued at approximately $9.0 billion (expected sometime in Q4), Safeway reported adjusted earnings per share (EPS) from continuing operations of 16 cents in the third quarter of 2014, up a huge 60% from the year-ago period. The adjusted EPS number also surpassed the Zacks Consensus Estimate of 12 cents.
Sales and other revenues also increased 2.6% year over year to $8.31 billion in the quarter, ahead of the Zacks Consensus Estimate of $8.28 billion. Higher identical-store sales of $216 million were partially offset by lower fuel sales of $10 million. Fuel sales decreased primarily because the gallons sold were down 3.7%, which was partially offset by an increase in the average retail price per gallon of fuel by 2.8%. Average transaction size and transaction counts also scaled up during the quarter.
After several quarters of drag, gross margin in the quarter improved 31 basis points (bps) year over year to 26.2%. In the quarter, the 38 bps expansion in gross profit was due to lower fuel sales. Safeway also made significant progress passing on cost inflation in produce, dairy and pharmacy through successful price increases, during the quarter.
Operating and administrative expense margin expanded 26 bps to 25% in the reported quarter. Operating margin in the quarter improved 5 bps to 1.13% in the quarter.
Safeway ended the third quarter with cash and cash equivalents of $1.35 billion compared with $4.64 billion at the end of 2013. The company’s long-term debt was $2.74 billion, lower than $3.89 billion at the end of 2013. Year-to-date net cash flow used by operating activities was $1,095.9 million, compared to net cash flow earned from operating activities of $22.2 million in the year-ago period.
Per the terms of the merger agreement, Safeway bought back no shares under its stock repurchase program and is not expected to do so in the future. The remaining board authorization for stock buybacks as of Sep 6, 2014 was approximately $2.2 billion. The repurchase program has no expiration date but may be terminated by the board of directors.
Earlier, following the merger agreement and the Blackhawk share distribution, Safeway suspended its earlier provided fiscal 2014 guidance. The company is not keen on providing any future guidance or holding conference calls.
Our Take
We are impressed with the company’s financial results for the third quarter of 2014, where both EPS and revenues surpassed the respective Zacks Consensus Estimate. Moreover, the company’s improved gross margin performance in the reported quarter, which had moved downward over the last three consecutive quarters, adds to our confidence. Significantly, earnings estimates for the company have risen over the past month, suggesting that investor sentiment for Safeway is moving in the right direction.
Amid a challenging macroeconomic environment and dwindling customer confidence, Safeway had decided to merge with Albertsons. Also, as per its earlier announcement, the company completed the distribution of 37.8 million shares of Class B common stock of Blackhawk Networks Holdings, Inc. owned by Safeway. The company also plans monetization of its 49% stake in Casa Ley and is currently exploring suitable alternatives to sell its interest in the latter.
Safeway competitor Kroger Co. (KR) is currently a Zacks Rank #2 (Buy) stock.
(We are reissuing this article to correct a mistake. The original article, issued yesterday, Oct. 29, 2014, should no longer be relied upon.)
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