Safeway Beats Estimates

Safeway Inc. (SWY) reported third quarter fiscal 2010 earnings per share (EPS) of 33 cents beating both the Zacks Consensus Estimate and year-ago quarter’s EPS of 31 cents. The third quarter of 2010 EPS included employee severance charges of 2 cents, offset by a lower tax rate as compared with the year-ago quarter.

The company reported sales of $9.4 billion, which matches the Zacks Consensus Estimate, though is marginally down from the year-ago quarter’s $9.5 billion. The effect of a higher Canadian exchange rate and higher fuel sales were partially offset by a 2% decline in identical-store sales (excluding fuel).

Gross margin of 28.14% for the quarter was 13 basis points lower than the third quarter of 2009. In the second half of 2009, Safeway reduced its prices to address competition, which has affected its gross margin. It was partially offset by decreased advertising expenses, though fuel sales had a 13 basis point impact.

Operating and administrative expenses were flat at $2.4 billion as compared with the year-ago quarter. Moreover, as a percentage of sales, expenses (including the 14 basis points impact of higher fuel sales) increased to 25.56% from 25.33% in the year-ago quarter due to increase in wages and benefits.

Safeway opened 2 new stores, completed 9 Lifestyle remodels and closed 12 stores during the quarter, and targets opening 15 Lifestyle stores and completing 60 Lifestyle remodels. For the year, the company plans to invest $900 million in capital expenditures. During the quarter, $170.7 million was spent on capital expenditure.

Safeway generated an operating cash flow of $846.6 million as at the end of September 2010, lower than $1,287.3 million in the comparable period of fiscal 2009. The primary reason for the decline was a reduction in third-party gift card payables, net of receivables, lower net income and higher income tax payments.

The company has repurchased 8.8 million shares of its common stock for a total cost of $182.5 million. At the end of the third quarter, Safeway had $0.8 billion remaining under the board authorization for stock repurchase.

Outlook

Safeway now expects its fiscal year 2010 EPS to be at the lower end of its previous guidance range of $1.50-$1.70. It expects the same-store sales (excluding fuel) to decline 1%-1.5%. Free cash flow guidance remained unchanged at $0.9-$1.1 billion. The Zacks Consensus EPS Estimate is $1.54 for the fiscal year 2010.

SAFEWAY INC (SWY): Free Stock Analysis Report

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