Safeway 1Q Earnings Miss Ests. - Analyst Blog

Safeway (SWY) adjusted earnings per share (EPS) of 35 cents missed the Zacks Consensus Estimate by a penny in the first quarter of 2013. However it exceeded the year-ago EPS from continuing operations by 16.7%. The company's reported EPS for the quarter (which include a one-time income tax benefit of 14 cents per share), has been pegged at 49 cents.

Revenue

Total sales remained flat year-over-year at $10.0 billion in the first quarter, slightly missing the Zacks Consensus Estimate of $10.2 billion. Growth was led by a 1.5% increase in identical-store sales (excluding fuel), and partially offset by the disposition of Genuardi's stores and soft fuel sales in 2013.

Margins

Gross margin in the first quarter contracted 14 basis points (bps) year over year to 26.7%. However, excluding the impact from fuel sales of 15 bps, gross margin declined 29 bps as benefit from the generic wave in the pharmaceutical industry and lower advertising expenses were negated by investments in price.

Operating and administrative expenses declined 5 bps to 24.9% of sales in the reported quarter. Excluding the impact from fuel sales of 17 cents, operating and administrative expense margin dropped 22 bps on the back of lower depreciation, utilities and other store occupancy charges.

Operating margin fell 10 bps to 1.8% in the quarter. Operating profit, excluding fuel, dipped by 7 bps.

Balance Sheet

Safeway ended first quarter of 2013 with $295.0 million in cash and cash equivalents, which more than doubled year over year. Net cash flow provided by operating activities increased 2.5% from the prior year to $555.2 billion due to greater use of cash for working capital. In the reported quarter, Safeway incurred $144.9 million in capital expenditures.

Safeway made no share repurchase during the first quarter of 2013. We note that the company repurchased 57.6 million shares for $1,240.3 million (including commissions) during 2012 and is now left with $0.8 billion of authorization to buy back shares.

Guidance

Safeway reiterated its guidance for 2013. It expects EPS to be in the range of $2.25-$2.45. Non-fuel ID sales growth is anticipated to be between 2% and 3%. Operating margin, excluding fuel, is expected to be flat to up 10 bps. Fee cash flow guidance is forecast in the range of $850 million to $950 million.

Our Take

Safeway reported a strong first quarter on the back of market share gains in the U.S. Its strategy to improve identical-store sales on the heels of ‘Just for U' loyalty program yielded positive results. The loyalty program was a major positive catalyst leading to increased market share and profitability.

Following the settlement of the IPO price of Safeway's majority-owned subsidiary Blackhawk Network Holdings, Inc. (HAWK), this wing has reported separately, beginning this quarter.

The stock carries a Zacks Rank #2 (Buy). Other stocks such as Hot Topic Inc. (HOTT),  and The Kroger Co. (KR), carrying a Zacks Rank #1 (Buy), are expected to do well and warrant a look.