Leading food and drug retailer Safeway ( SWY - Analyst Report ) plans to take its majority-owned gift-card subsidiary Blackhawk Network Holdings public by next year. As per this preliminary plan, the company wants to file a registration statement for an initial public offering (IPO) of a minority stake in Blackhawk.

Although the number of shares on offer and the price range have yet to be released, based on the present market conditions the company expects this transaction to be executed by the first half of 2013.

Blackhawk, the worldwide gift card distribution network of Safeway, provides prepaid products and payment services to consumers through a network of retail store locations in the U.S., Canada, Europe, Mexico, Australia and various online channels. These prepaid products include closed loop or private branded cards, open loop or network branded cards, financial services products and telecom product brands.

The cards are available at grocery, big-box, convenience, pharmacy and specialty stores, and at Internet retailers including GiftCardMall.com. Additionally, Blackhawk provides card production services, a secondary market for prepaid cards and has recently introduced digital wallet services. Currently, the Blackhawk network connects to over 500 content providers and over 70,000 active retail distribution locations globally.

The macro environment in the U.S., Canada and Europe is taking a toll on consumers. The financial markets in these regions declined and experienced volatility due to uncertainties related to unemployment rates, energy prices, availability of credit, difficulties in the banking and financial services sectors, the decline in the housing market and decreasing consumer confidence.

This might have led to reduced consumer spending with some consumers trading down to a less expensive mix of products and others turning towards stores with better discounts for grocery items. These factors put together have a negative effect on Safeway’s sales.

Amidst such a difficult scenario, when the grocery arm of Safeway is facing increased competition and tough industry conditions, Blackhawk’s gift card business has been quite robust as people treated gift cards like alternative currency.

Earlier at an investor meeting, the company, with the growth in demand for gift cards, increased the store value of the cards by 25% in 2011 from 2010. In the second quarter of 2012, Blackhawk contributed $32 million of the revenue growth from the year-ago quarter.

We believe that with the upcoming spin-off of the Blackhawk business, Safeway should be able to focus on its core business area. Safeway has already taken steps to make its operations more streamlined and focused.

Continued operating losses forced the company to close its distribution centers in British Columbia and Vancouver. Safeway also decided to exit the greater Philadelphia market to control its operating expenses and to focus on areas where it has a strong presence.

The company is on track to shed 27 Genaurdi stores, of which it sold 3 in the second quarter to Giant Food Stores. The company expects to sell another 16 stores in the next quarter. Further, the rollout of the company’s cost savings program‘Just for U’ is expected to bring high returns on minimum investment.

We currently have a Neutral recommendation on Safeway, which carries a Zacks #3 Rank (short-term Hold rating).