Unemployment and persisting deflation were primarily responsible for the sluggish revenue growth at Safeway (SWY) for the past two quarters. The situation worsened with the company forecasting 1.2% deflation by the year end compared to the previous expectation of 0.4% inflation.
The scenario is better reflected in declining same-store sales which forced the company to lower its guidance for 2010. We also doubt the ability of the retailers to pass down the increase in prices to customers due to intense competition.
Although a recovery in the economy will be a lifeline for the company, we prefer to avoid the stock for the time being. Given these factors, we downgrade Safeway to Underperform.