Last week, Safeway
In the first part of the presentation, entitled "Committed to Creating Superior Shareholder Returns," the company argues that long-term returns have been greater than the market and than its "peer group," which includes Alberstons
Over the current CEO's tenure, from Oct. 1992 to April 2004, Safeway has returned 667% versus 239% for the S&P 500 and 80% for its peer group. While the company concedes that in more recent years (since April 1999), it has significantly underperformed the S&P 500, the presentation reassures potential investors that "recent share price performance is in line with our peer group." Looking at it that way, the stock perhaps doesn't sound like a bad investment.
But the real comparison should not be against other struggling business models in the "peer group," but against new, innovative retailers like Wal-Mart and Whole Foods Market
The presentation also provides some insight into how Safeway and other traditional grocery stores are trying to fight back against discounters. The strategy articulated by Safeway is two-pronged. First, it is "positioning for long-term competitiveness," which is no more than a fancy way of saying that the company is trying to cut costs wherever it can. Also, it is "creating a superior retail offering," which involves a series of actions taken to try to create differentiation, with higher-quality perishables and better service as the key factors.
In my opinion, the strategy is doomed to fail on both fronts. Conventional grocery stores will simply never be able to match the low-cost structure of Wal-Mart or Costco
With the stock valued at an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) number of 8.4, it's clear that certain investors are buying Safeway's story. But a more critical look at its recent presentation indicates that the viability of the underlying business model is questionable and that its strategy to defend against innovative retailers is fundamentally flawed.
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Fool contributor Salim Haji lives in Denver, Colo., and owns shares of Costco and Whole Foods.