Management Change Imminent at SWY

Zacks

Safeway Inc. (SWY) recently announced that its Chief Executive Officer (CEO) and Chairman Steve Burd will retire from his office on May 14, 2013, after leading the company for almost 20 years. However, post-retirement, he would assist the incumbent to facilitate smooth transition in top management change.

During his tenure, Steve Burd held a key role in shaping Safeway’s strategic and operational plans. Over the years, he had successfully steered the company towards growth as it consistently outperformed the S&P 500 index through strategic initiatives and cost reduction efforts. Some of his notable initiatives include the establishment of a culture of thrift and capital discipline, the ‘Lifestyle’ store format, the well-regarded customer service program, and creation of a leading prepaid payment network which is currently one of the largest distributors of gift cards worldwide.

While Safeway made significant achievements under the leadership of Steve Burd, the company has been witnessing sluggish revenue growth over the past few quarters due to the impact of economic uncertainty on the company’s lifestyle strategy. Despite top-line challenges, Safeway continues to capture market share with its value-added offerings, which are expected to enhance brand equity and reduce the company's dependency on price.

Safeway has also been trying to improve its earnings on the back of continuous share buyback program. We believe this is not sustainable for the long term if sales remain sluggish. Also worth mentioning in this context is our concern regarding the highly leveraged balance sheet of Safeway.

Despite the milestones achieved in the last 20 years, certain issues are yet to be resolved. As a result, the new CEO is likely to have a daunting task ahead.

We currently have a long-term ‘Neutral’ recommendation on the stock. Safeway carries a Zacks #3 Rank which translates into a short-term Hold rating. The company confronts a wide spectrum of competitive threats from several players among which The Kroger Co. (KR), which carries a Zacks #2 Rank (Buy).

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