Back to top

Analyst Blog

On Nov 19, we reaffirmed our long-term Neutral recommendation on Safeway Inc. (SWY - Analyst Report) following an eventful third-quarter. The food and drug retailer carries a Zacks Rank #3 (Hold).

Why Neutral?

On Oct 10, Safeway announced tepid second-quarter results along with its decision to exit the Chicago market. Adjusted earnings per share (EPS) from continuing operations was 10 cents, which missed both the Zacks Consensus Estimate and the year-ago quarter figure by 6 cents.

Total sales increased a marginal 1.1% to $8.6 billion, beating the Zacks Consensus Estimate of $8.4 billion.  Despite a 1.9% rise in identical-store sales (excluding fuel), the top line decreased due to soft fuel sales and disposition of Genuardi’s stores in 2012.

Additionally, Safeway declared its plans to make an exit from the Chicago market. Accordingly, it plans to sell 72 Dominick's stores in Chicago by early 2014. A tax benefit of $400–$450 million is expected to emerge from the disposal of Dominick's properties. This tax benefit and any other cash proceeds will be invested to buy back stock and further growth opportunities for the company. We are upbeat about the deal boosting shareholder returns in future.

On the other hand, although the company asserts that the divestment of Canadian operations reflects a deft plan to sharpen focus on the U.S. market, we remain apprehensive due to the lack of clarity in management plans to gain momentum in the domestic market. Notably, Safeway’s Canadian operations have been more profitable than the U.S. operations, as proved by operating profit levels over the past few years.

Assuming that there will be no gains from the sale of Safeway Canada, the company expects adjusted EPS in the range of $0.93 to $1.00, lower than the earlier range of $1.02–$1.12. Excluding Dominick's operating results, adjusted EPS is expected to remain in the range of $1.05 to $1.12.

On the positive side, the ‘Just for U’ program continues to be seen as a major catalyst driving profitability and market share gains. Moreover, Safeway’s several strategic initiatives should improve its growth profile. We are optimistic about cost-control measures yielding positive results moving forward.

Stocks to Consider

While we remain on the sidelines regarding Safeway, better-ranked stocks that are worth a look include Marks & Spencer Group plc (MAKSY), Carrefour SA (CRRFY) and The Kroger Co. (KR - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
PLANAR SYST… PLNR 4.34 +2.73%
CHINA BIOLO… CBPO 47.59 +2.60%
BITAUTO HOL… BITA 79.46 +2.23%
GILEAD SCIE… GILD 104.48 +2.16%
SOUTHWEST A… LUV 31.91 +2.14%