Safeway Inc. (SWY) reported EPS of 41 cents during the second quarter of fiscal 2011, surpassing the Zacks Consensus Estimate of 39 cents and topping the year-ago earnings of 37 cents by 10.8%.
The company reported sales of $10.2 billion during the quarter, exceeding both the Zacks Consensus Estimate of $9.9 billion and the year-ago level of $9.5 billion.
Gross margin in the reported quarter plunged 155 basis points year over year to 26.99%. However, excluding the 104 basis-point impact from fuel sales and the 32 basis-point impact from the accounting change in gift card commissions, gross margin deceased 19 basis points due to a delay in recovering increased cost and increased LIFO expenses, partly offset by improved shrink and higher gross margin from Blackhawk.
Safeway opened 6 new stores, completed the remodeling of 7 Lifestyle stores and closed 11 stores during the quarter. During 2011, Safeway aims to invest approximately $1 billion in capital expenditure, open 26 new Lifestyle stores and complete 30 Lifestyle remodels.
Safeway exited the quarter with $150.9 million in cash and cash equivalents, down from $778.8 million at the end of December 2010. Net cash flow used by operating activities in the first 24 weeks was $187.6 million, lower than $309.1 million in the corresponding period of the previous year.
The company repurchased 14.9 million shares during the quarter for $360.8 million. The remaining board authorization for stock repurchases at quarter-end was around $1.1 billion.
Outlook
Safeway reaffirmed its guidance for fiscal 2011. The company expects to deliver EPS of $1.45 -$1.65, including the negative impact of 15 cents related to the Canadian dividend. In addition, the company estimates identical-store (excluding fuel) growth of 1% and free cash flow in the range of $0.75–$0.85 billion for 2011.
Recommendation
Safeway witnessed sluggish revenue growth, primarily due to unemployment, deflation and price competition, which make budget-conscious shoppers all the more alert. The company confronts a wide spectrum of competitive threats, especially from the likes of SUPERVALU Inc (SVU), The Kroger Co (KR) and Wal-Mart Stores (WMT).
However, with the Lifestyle transformation program nearing completion, we believe that the company’s capital expenditure will decline going ahead. Moreover, Safeway intends to strengthen its presence in the international markets. The company is expanding its international business, especially in Canada, Australia and the UK. Moreover, as retail food price inflation is gradually taking pace, we strongly expect further price acceleration, which indicates positive earnings implications going forward.
We are currently Neutral on the stock.
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