Grocer Safeway (NYSE: SWY) reported higher second-quarter earnings that beat Street estimates. However, its shares plunged by more than 9% on the day of the report as it forecasted low same-store sales this year, citing weak economic conditions. Shares have traded down every day since then, too.
A look at the numbers
Revenues for the quarter rose to $10.2 billion, up 7% year over year. Higher overall sales were a result of higher gas sales at Safeway stores and higher selling prices. Comparable-store sales rose 0.5% from a year ago.
All that good news aside, a somewhat tepid same-store sales outlook weighed on investor sentiments. Safeway said it now sees same-store sales slowly rising to 1% for the year, compared with its earlier view that that comparable-store sales, excluding gas, would rise by 1% to 1.5%.
In this kind of economy, costs are weighing heavily. Gross margins declined to 27.0% from 28.5% a year ago, largely because of fuel sales. But the company still posted higher net profit as it reduced its interest expenses. Thus, Safeway's net income rose 3%, to $145.8 million.
Safeway's total debt declined to $4.96 million from $5.35 million in the year-ago period.
The company spent $209 million in capex, which resulted from six new store openings and the remodeling of seven Lifestyle stores. It plans to spend $1 billion in capex this year to open 26 Lifestyle stores and remodel another 30.
Value and returns
Let's look at how the company is valued compared with its industry peers.
|
Company |
Trailing P/E |
Forward P/E |
TEV/FCF |
|---|---|---|---|
| Safeway | 13.6 | 10.2 | 13.3 |
| Kroger (NYSE: KR) | 13.1 | 11.1 | 19.0 |
| SUPERVALU (NYSE: SVU) | NM | 6.2 | 17.5 |
| The Fresh Market (Nasdaq: TFM) | 66.5 | 26.5 | 27.7 |
| Wal-Mart (NYSE: WMT) | 11.4 | 10.6 | 19.2 |
Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.
Excluding SUPERVALU, Safeway looks cheaper than its peers on a cash basis. The company's enterprise value has fallen as a result of declining share prices, which is certainly helping that metric appear all the more attractive. That said, the same-store sales forecast is a worry, but I think that might change as economic conditions improve.
For investors who are keen to know how they'll be rewarded, Safeway has repurchased 14.9 million shares this quarter and still has $1.1 billion in its authorization for further repurchases. Safeway also recently raised its dividend by 21%, to $0.145 per share from $0.12 per share.
The Foolish bottom line
Safeway performed reasonably this quarter, and its cost-cutting initiatives should help it maintain its performance for the balance of the year. However, a weak economy will definitely result in sluggish sales. With shares trading at just 13.6 times earnings and a rising dividend, investors should take note.
