Safeway Dragged to Strong Sell - Analyst Blog

On Dec 31, Zacks Investment Research downgraded Safeway Inc. (SWY) to a Zacks Rank #5 (Strong Sell) from a Zacks Rank #4 (Sell).

Why the Downgrade?

The Zacks Consensus Estimate for 2013 decreased 5.4% to $1.05 per share over the last 90 days. Likewise, the Zacks Consensus Estimate for 2014 dropped to $1.68 from $1.73 over the same timeframe, reflecting a decline of 2.9%.

The weak U.S. economy has led to reduced consumer spending. Consumers are showing strong preference for less expensive mix of products, while others are shifting to discounters for purchase of grocery items. The persistent downturn in economic conditions has affected the performance of the company in the previous three quarters in 2013.

On Oct 10, Safeway reported adjusted earnings per share (EPS) from continuing operations of 10 cents in the third quarter of 2013 compared with 16 cents in the year-ago quarter. The results were also behind the Zacks Consensus Estimate by 37.5%. Safeway also missed the Zacks Consensus Estimates in the last three out of four quarters.

A marginal rise in revenues was, however, offset by contraction in both gross and operating margins. Moreover, Safeway is expected to undergo further margin pressure following the close of the Canadian operations, otherwise, a profitable business for the company.

Following a disappointing third quarter, Safeway also reduced its guidance for 2013.The company expects adjusted EPS to be in the range of 93 cents to $1.00, as against the last year of 99 cents.

Recently, Safeway also voluntarily recalled some of its products from the market supplied by Reser's Fine Foods or Taylor Farms. The recall came on the back of possible contamination of the food items with Listeria monocytogenes. Such events, we believe, might have a ripple effect, lowering investor confidence and hampering growth prospects for Safeway, going forward.

Other Stocks to Consider

Investors interested in the retail industry can consider stocks like Harris Teeter Supermarkets, Inc. (HTSI), Carrefour SA (CRRFY), and Herbalife Ltd. (HLF). All the stocks sport a Zacks Rank #2 (Buy).