Earnings Lag Ests, Revs in Line at Safeway

Zacks

Following its last month’s announcement that it will merge with Cerberus Capital Management LP’s Albertsons for a deal valued at approximately $9.0 billion, recently Safeway Inc. (SWY) reported its financial results for the first quarter of 2014.

Notably, as expected, on Apr 14, Safeway completed the distribution of all the 37.8 million shares of Blackhawk Network Holdings (HAWK) Class B common stock to its shareholders. As the company did not distribute the Blackhawk shares until after the end of the first quarter of 2014, Blackhawk has been included in continuing operations in the reported quarter’s performance.

Safeway reported adjusted earnings per share (EPS) from continuing operations of 6 cents in the first quarter of 2014, down a huge 62.5% from the year-ago quarter. The EPS number also missed the Zacks Consensus Estimate of 19 cents by a wide range. However, after considering certain one-time items in both the quarters, post tax loss from continuing operations was 36 cents per share for the first quarter of 2014 compared to post-tax income from continuing operations of 16 cents per share a year ago.

Quarter in Detail

Sales and other revenues inched up 1.0% year over year to $8.3 billion in the quarter, marginally in line with the Zacks Consensus Estimate. A 1.8% rise in identical-store (:ID) sales (excluding fuel) in the quarter contributed to year-over-year top-line growth. The improvement in ID sales, in turn, resulted from a 1.6% increase in price per item with no change in volumes.

Gross margin in the quarter declined 34 basis points (bps) year over year to 26.15%. However, excluding the impact from sluggish fuel sales of 30 bps, gross margin decreased 64 bps due to strong cost inflation in produce, meat and pharmacy that were not fully passed on to consumers.

Operating and administrative expense margin rose 40 bps to 25.49% in the reported quarter. Excluding the impact from fuel sales of 27 bps, operating and administrative expense margin increased 13 bps as increased store occupancy and merger-related expenses were partly offset by lower depreciation and property impairment. Operating margin declined 74 bps to 0.66% in the quarter. Operating profit, excluding fuel sales, declined 77 bps.

Safeway ended the first quarter with cash and cash equivalents of $2.69 billion compared with $4.65 billion at the end of 2013. The company’s long-term debt was $3.73 billion, lower than $3.89 billion at the end of 2013. Operating cash flow for the quarter was $795.2 million, up from $583.5 million in the year-ago quarter. In the reported quarter, Safeway incurred $154.3 million in capital expenditures compared with $129.9 million in the year-ago quarter.

Per the terms of the merger agreement, Safeway bought back no shares under its stock repurchase program and will neither do the same in the future.

Guidance

Following the merger agreement and the Blackhawk share distribution, Safeway suspended its earlier provided fiscal 2014 guidance. The company is not keen on providing any future guidance and holding conference calls.

Merger Details

On Mar 6, 2014, Safeway declared that it will merge with Cerberus Capital Management LP’s Albertsons for a deal valued at approximately $9.0 billion. As per the terms of the agreement, each shareholder of Safeway will receive $32.50 in cash plus $3.65 per share of other contingent consideration and $3.95 per share of Blackhawk, representing a total value of $40.10 per Safeway share.

Accordingly on Apr 14, Safeway completed the distribution of all the 37.8 million shares of Blackhawk Network Class B common stock to its shareholders.Apart from the Blackhawk spin-off, Safeway also revealed its plan to monetize its 49% stake in Casa Ley – the fifth-largest food and general merchandise retailer in Mexico based on sales. According to Safeway, its shareholders are expected to earn $3.65 per share as a result of net proceeds from its primarily non-core assets, Property Development Centers (:PDC) and Casa Ley.

Our Take

Amid a challenging macroeconomic environment, due to uncertainties related to unemployment rates, energy prices, difficulties in the banking and financial services sectors, and dwindling consumer confidence leading to reduced consumer spending, Safeway continued to experience poor identical stores (:ID) sales. However, we expect Safeway to fight back after the completion of the merger deal.

According to Safeway, after the closure of the agreement, a diversified network will be formed by Albertsons-Safeway with more than 2,400 stores, 27 distribution facilities, 20 manufacturing plants and 250,000 employees. Safeway is looking forward to this possible sellout/merger which it expects will improve the merged entity's position in the competitive niche.

Currently, Safeway retains a Zacks Rank #4 (Sell). Retail-supermarket stocks such as Carrefour SA (CRRFY) and The Kroger Co. (KR) are expected to do well. Both these stocks hold a Zacks Rank #2 (Buy).

Read the Full Research Report on KR
Read the Full Research Report on SWY
Read the Full Research Report on CRRFY
Read the Full Research Report on HAWK


Zacks Investment Research

Rates

View Comments (0)