No Surprises from Safeway

Safeway Inc. (SWY - Analyst Report) reported third quarter earnings of 31 cents per share, slightly above the Zacks Consensus Estimate of 30 cents per share. However, quarterly earnings were down 33% from prior-year earnings of 46 cents per share.

Safeway’s sales fell 7.0% year over year to $9.5 billion in the third quarter of 2009. The company attributed this decline to lower fuel sales (which was primarily due to lower fuel prices), a 3.0% decline in identical-store sales (excluding fuel), and a weak Canadian exchange rate. Sales remained soft due to deflation in dairy, produce and meat, besides a weak economy.

Gross margin of 28.27% for the quarter was 78 basis points higher than the previous year. The company said that the gross margin declined 6 basis points excluding the impact of fuel sales. Operating margin declined to 2.9% from the year ago level of 3.8% due to decreased sales leverage, increase in charges from property impairments and retirements, and higher pension expense.

Safeway opened 7 new Lifestyle stores, completed 62 Lifestyle remodels and closed 16 stores during the first nine months of 2009. For the full year, the company expects to open 10 new Lifestyle stores and complete approximately 85 Lifestyle remodels.

Year-to-date, Safeway generated operating cash flow of $1.3 billion, similar to the prior-year levels. The company repurchased 23.1 million shares of its common stock for a total cost of $441.8 million during the first nine months. At the end of the quarter, Safeway had $720 million remaining under the board authorization for stock repurchases.

Safeway has reiterated full-year earnings guidance in the range of $1.70−$1.90 per share. Also, the company has maintained free cash flow guidance of $1.1 billion to $1.3 billion for the year.