What You Should Know About Safeway's Private Brands

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Take a trip to Merced, CA, or some of the other relatively unknown cities scattered around the Western United States and Canada, and you are bound to run into a Lucerne Foods facility. Lucerne sounds a bit familiar but can't quite put your finger on it? Well, try strolling down the bread, beverage, or dairy aisle the next time you visit a Safeway grocery store. In doing so you are bound to, sure enough, come across a bevy of Lucerne products. To the untrained eye it may seem as though Safeway is merely playing favorites with an independent brand—and to a certain extent it may be—but more so, it is merely backing one of its best kept secrets. While Lucerne is just one example of what you may not know about the grocery giant, there are several other things you should consider before adding Safeway to your portfolio. 

What you may not know about Safeway
Lucerne Foods is a subsidiary of Safeway (UNKNOWN: SWY.DL  ) , but quite strategically the two seem to keep from associating too closely with each other. In fact, on Lucerne's website, it rather ambiguously describes the company as "Backed by a $44.2 billion Fortune 100 parent company."

Regardless of the attempt to keep a distance between Safeway and Lucerne, the two function quite nicely together. Lucerne supplies Safeway with products to stock the shelves of its stores, which it in turn sells at a cheaper price to grocery shoppers. Additionally, Safeway sells products made by Eating Right, Open Nature, and numerous other subsidiaries, all as private brands. 

Whether you feel that Safeway's bevy of subsidiaries is good, bad—or perhaps you are indifferent—it is hard to argue that such brands have not greatly benefited the megagrocer. With over 30 manufacturing facilities in both the U.S. and Canada, Lucerne is just one example of a private brand pulling its own weight in the vast empire of its parent company. Surely it has contributed to Safeway's rise in comparable store growth, which is currently on an upward trend for the first time since 2006 .

How Safeway stacks up against the competition
A grocery store selling products made "in-house" is certainly not unique to Safeway. Whole Foods Market (NASDAQ: WFM  ) sells products made under its 365 Everyday Value brand. The company also has brands for body care products, and Whole Trade, which is designed to help economic growth in developing countries. Similarly, Kroger (NYSE: KR  ) sells socially responsible products under its Simple Truth Organic brand. It also hosts the Private Selection brand with an artisan angle, among others, including Comforts for Baby, which is exclusively for babies and toddlers.

Like Lucerne, these private brands have undoubtedly influenced company performance. For instance, Kroger's annual sales per square foot trended above $600 in 2012, while Safeway's metric remained above the $500 mark. Moreover, Whole Foods' sales per square foot surpassed both competitors, rising above $900 for its third quarter during the same period . Sales per square foot is an increasingly useful barometer for investors analyzing companies dealing in consumer goods made in-house and supplied by private brands. Additionally, it accurately shows how efficiently the company is using its floor space while still focusing on sales.

Other useful metrics for Safeway include the company's cash flows from operations, which reached $533 million for its second quarter earnings report ended June 15. Kroger, on the other hand, produced $906 million in operating cash flows, with Whole Foods behind both competitors at $226 million. Lastly, Safeway has a return on assets of 3.6% and return on equity of 16.7%, which show the company's management and operational activities have significant promise for the future . Comparably, Whole Foods has a return on assets of 10.48% and a return on equity of 14.61%, whereas Kroger is at 7.57% and 36.82% respectively. While such metrics do not mean everything when evaluating a company, the comparison of these three grocers is still a useful indication of how each is currently performing in the market.  

A Foolish conclusion
As any wise investor knows, there are certain aspects of a stock that you look for prior to buying. Whether it is reading through archived articles on the company, or sifting through the seemingly endless number of useful and relevant metrics, researching a stock is always necessary before buying. In Safeway's case, such research includes its numerous wholly owned subsidiaries, like Lucerne. Because these private brands directly affect metrics like sales per square foot, and cash flows—among others—you should definitely consider them before adding the grocer to your portfolio. 

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