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Safeway Brings Some Sanity Back to Expectations (SWY)

Posted on | October 7, 2008 Time: 8:06 pm |

Safeway (SWY) breaks the consumer ice by essentially hitting targets of $.47 EPS and $10.2B sales (versus consensus of $.45 and $10.1B). Revenues were up 4% year-over-year, about the same as net earnings. My earlier thesis for the grocer highlights why I think this is a stock to overweight in this environment, not underweight as some analysts recently suggested. Safeway also reaffirmed EPS of $2.25 - $2.35 for the full year, with comps between 1-2 percent. Free cash flow should top $500 million, giving them flexibility to increase the dividend or add to the buyback program.

Gross margins in the 3rd quarter fell by just over 100 basis points, but 55 of those were due to higher fuel sales, so I’m happy with the general preservation of margins. Again, think about the economy as we see it now versus last year. Flat is fantastic, and a slight drop much better than the expectations currently built into the market.

Ok, So the Sky Isn’t Falling?

So a stock focused on the all-dreaded consumer was able to meet the estimates that were confirmed just a few months earlier in July. In addition to being over 2000 points ago on the Dow, it seems like 10 years ago in terms of investor sentiment. Safeway has been diligent on cost-cutting for over a year now, and has completed intensive renovations on over 60% of their stores. I don’t know how much of a harbinger Safeway’s earnings represent; I frankly don’t expect many consumer industries to even meet - let alone beat - estimates unless they’ve updated investors in the past month.

I can’t say how well Safeway’s earnings will stand up against the reports of other grocers, and against Costco (COST) and Wal-Mart (WMT). Today at least, Safeway with a flat YoY showing is good for a 6% stock pop.

Disclosure: Author does not hold positions in the securities mentioned; Safeway held in Secular Trends Model Portfolio.

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Category: Grocers, Secular Trends Portfolio
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