Look before you leap -- especially in regard to Safeway's
True, net income did decline by 11%, to $218 million. Earnings per share fell by a similar percentage, to $0.49. But investors who focused on the bottom line missed the bigger story. Last year, Safeway's tax rate was an abnormally low 17%; this year, it was a more reasonable 35%. By my calculations, if the tax rate were the same as a year ago, net income would've been about 14% higher.
Total sales rose 4.9%, and same-store sales climbed 4.5%. Even excluding gasoline, which benefited from higher prices, comps still climbed a respectable 3.7%. That all goes to show what Fools can miss by only reading the headline.
Safeway's recent investment in its Lifestyle stores appears to be paying off. The new format boasts 55,000 square feet, with large perishable food offerings. Safeway will continue to put money into the stores, with five new locations and 82 remodels thus far this year. It has spent more than $750 million on the endeavor for the first half of this year. By the end of 2009, the company expects to have all of its stores done, which should help free up cash flow.
Safeway has formidable competitors, including Wal-Mart
Importantly, management's expectations for the year are pretty much in line with its prior statements. In fact, it raised the lower end of that guidance, now expecting to earn between $1.95-$2.00 a share, versus its previous expectation of $1.90-$2.00.
Safeway had a solid quarter. Investors solely focused on the bottom-line number, without reading further, are missing the whole picture. The sliding share price may be just the bargain astute investors can't pass up.
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Fool contributor Larry Rothman is happy to receive feedback, and promises to read it when not being wrestled by his three children. He doesn't have any positions in the companies mentioned.