Updated Research Report on Safeway - Analyst Blog

On April 15, 2014, we issued an updated research report on Safeway Inc. SWY following the company's mixed results for fourth-quarter fiscal 2013 and its announcement that it will merge with Cerberus Capital Management LP's Albertsons for a deal valued at approximately $9.0 billion.

The last fiscal remained quite eventful for Safeway. The company was in news several times due to the Blackhawk IPO, its exit from the Canadian market, the decisions to sell off its Dominic stores and to exit the Chicago market by fiscal 2014, along with its plan to voluntarily recall many of its products.

Amid a challenging macroeconomic environment, plagued by uncertainties related to unemployment rates, energy prices, difficulties in the banking and financial services sectors, and dwindling consumer confidence leading to reduced consumer spending, Safeway continued to experience poor identical stores (ID) sales. Moreover, the sluggish non-fuel ID sales growth guidance for 2014 failed to deliver any positive indication about an improvement in the economy.

Given such a difficult scenario, Safeway announced that it will merge with Albertsons for $9.0 billion. The company also revealed two other strategic initiatives – the distribution of the remaining 37.8 million shares of Blackhawk Network to its shareholders and the monetization of its 49% stake in Casa Ley.

Safeway expects to fight back with the merger deal. After the closure of the agreement, a diversified network will be formed by Albertsons-Safeway with more than 2,400 stores, 27 distribution facilities, 20 manufacturing plants and 250,000 employees.

Safeway is looking forward to this possible sellout/merger which it expects will improve the merged entity's position in the competitive niche. The combined company should be able to offer more competitive prices and better customer service in a fiercely competitive and dynamic retail market.

Safeway currently carries a Zacks Rank #4 (Sell). While the upside potential of the stock is limited, stocks worth considering in the retail/supermarket sector are Spartan Stores Inc. SPTN, The Kroger Co. KR and Marks & Spencer Group plc (MAKSY). While SPTN sports a Zacks Rank #1 (Strong Buy), KR and MAKSY hold a Zacks Rank #2 (Buy).