We note that the environment for retail industry is quite challenging. Consumer spending on durable products has been very weak. Riding on the economic uncertainty and price competition, Safeway has been witnessing sluggish revenue growth over the past few quarters.
Although, the swell in ID store sale appeared as a reflection of improved economic scenario, considering nearly 4% retail inflation during the third quarter 2011, ID store sales effectively declined 2.5% year over year. This induced the company to maintain its 1% ID store sales guidance for 2011 despite an upside in overall ID store sales.
Inflation, which is hitting the entire retail industry (largely through food and fuel), will likely dampen the sales growth of the overall industry. Safeway may find it difficult to pass on increased prices to its customers due to tough competition. This tough scenario has led certain consumers trading down to a less expensive mix of products or searching for discounts on grocery items, which in turn have impacted Safeway’s sales.
The company expects these difficult economic conditions to remain for the time being. The company confronts a wide spectrum of competitive threats, especially from players like SUPERVALU Inc. (NYSE:SVU - News), The Kroger Co (NYSE:KR - News) and Wal-Mart Stores (NYSE:WMT - News).
However, we are encouraged by Safeway’s constant effort to capture market share with its value-added offerings, which are expected to enhance its brand equity and reduce its dependency on price.
Safeway has undertaken cost reduction initiatives focused on cost of goods sold and supply chain efficiencies. The company is developing its distribution network in the US where some of its existing card content providers are becoming distributors, thereby reducing the number of retailers in the market.
Furthermore, in order to control operating expenses and to increase focus on areas where it has strong presence, Safeway decided to exit the greater Philadelphia market in January 2012. The company entered into an agreement with Giant Food Stores, a division of Ahold (Other OTC:AHONY.PK - News) US to sell 16 of its Genuardi's stores in the greater Philadelphia area. The company also plans to close 3 Genuardi's stores in Pennsylvania.
In addition, despite sluggish revenue growth, Safeway is in a perfect position to reward its shareholders by paying dividends, repurchase shares and reduce debt given its consistent cash generation ability, disciplined investment and limited balance sheet risk,.
At the end of the third quarter of 2011, Safeway repurchased $6.1 billion worth shares and was left with $0.9 billion under its existing stock repurchase program. More recently, in December 2011, the board of directors sanctioned another $1.0 billion for the company's stock repurchase program, thus bringing the total authorization level to $8.0 billion.
In addition, Safeway is turning its attention to penetrating international markets which is quite impressive. The company is expanding its overseas business especially in Canada, Australia and UK.
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