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On Mar 15, 2013, we upgraded Safeway Inc. (SWY - Analyst Report) to Outperform following its robust results in the fourth quarter of 2012. With three consecutive positive earnings surprises and agreement among analysts, the stock also carries a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

On Feb 21, Safeway’s fourth-quarter results surpassed the Zacks Consensus Estimate by a sizeable margin. Earnings per share rose 58.2% year over year to $1.06, representing a solid double-digit beat over the Zacks Consensus Estimate, while revenues inched up 1.2% to $13.8 billion, edging past the respective Zacks Consensus Estimate.
 
In the fourth quarter, we were keeping an eye on the “Just for U” loyalty program and its potential to turn the tables for Safeway, as predicted by management. The success of the program is reflected in the higher identical-store (ID) sales (excluding fuel) growth and 5.4 million household registrants (higher than Safeway’s expectations).

Evidently, the loyalty program did not disappoint as it was a major positive catalyst increasing the market share and profitability for the company. We expect the trend to continue going forward.

Moreover, Safeway has undertaken several initiatives to catalyze future growth. The company plans to spin off its subsidiary Blackhawk into a public company. Safeway is likely to launch a Wellness initiative in the second quarter of 2013 to tap growth opportunities in the fast growing health care market in the U.S.

The company’s holistic approach to providing wellness products as well as services to its clientele reflects a deft plan to combine growth potential of the retail space with that of the burgeoning healthcare industry.

Recently, the company stepped up efforts to reduce cost and shrink expense to improve its bottom line. Safeway also sharpened focus on its Canadian operations. In the interim, Safeway rewards shareholders through dividend payments and share repurchases.

Other healthcare stocks such as Cyberonics (CYBX - Analyst Report), Given Imaging and Medical Action are also likely to do well. These stocks carry a Zacks Rank #1 (Buy).

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