Why Did Safeway Shares Fall?

Grocer Safeway (NYS: SWY) reported higher second-quarter earnings that beat Street estimates. However, its shares plunged by more than 9% on the day of the report as it forecasted low same-store sales this year, citing weak economic conditions. Shares have traded down every day since then, too.

A look at the numbers
Revenues for the quarter rose to $10.2 billion, up 7% year over year. Higher overall sales were a result of higher gas sales at Safeway stores and higher selling prices. Comparable-store sales rose 0.5% from a year ago.

All that good news aside, a somewhat tepid same-store sales outlook weighed on investor sentiments. Safeway said it now sees same-store sales slowly rising to 1% for the year, compared with its earlier view that that comparable-store sales, excluding gas, would rise by 1% to 1.5%.

In this kind of economy, costs are weighing heavily. Gross margins declined to 27.0% from 28.5% a year ago, largely because of fuel sales. But the company still posted higher net profit as it reduced its interest expenses. Thus, Safeway's net income rose 3%, to $145.8 million.

Safeway's total debt declined to $4.96 million from $5.35 million in the year-ago period.

The company spent $209 million in capex, which resulted from six new store openings and the remodeling of seven Lifestyle stores. It plans to spend $1 billion in capex this year to open 26 Lifestyle stores and remodel another 30.

Value and returns
Let's look at how the company is valued compared with its industry peers.


Trailing P/E

Forward P/E


Kroger (NYS: KR)
The Fresh Market (NAS: TFM) 66.526.527.7
Wal-Mart (NYS: WMT) 11.410.619.2

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.

Excluding SUPERVALU, Safeway looks cheaper than its peers on a cash basis. The company's enterprise value has fallen as a result of declining share prices, which is certainly helping that metric appear all the more attractive.  That said, the same-store sales forecast is a worry, but I think that might change as economic conditions improve.  

For investors who are keen to know how they'll be rewarded, Safeway has repurchased 14.9 million shares this quarter and still has $1.1 billion in its authorization for further repurchases. Safeway also recently raised its dividend by 21%, to $0.145 per share from $0.12 per share.

The Foolish bottom line
Safeway performed reasonably this quarter, and its cost-cutting initiatives should help it maintain its performance for the balance of the year. However, a weak economy will definitely result in sluggish sales. With shares trading at just 13.6 times earnings and a rising dividend, investors should take note.

At the time this article was published Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above.The Motley Fool owns shares of Wal-Mart and SUPERVALU. Motley Fool newsletter services have recommended buying shares of Wal-Mart and The Fresh Market, buying calls in SUPERVALU, and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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