Can Safeway Earnings Stand Up to Kroger's Competition?

Safeway (NYSE: SWY) will release its quarterly report on Thursday, and excited investors have lifted the stock to five-year highs in light of interest from outside investors in the company's shares. Yet Safeway earnings face the big challenge of dealing with competitive threats on multiple fronts, and any failure to execute could prove devastating to its long-term growth prospects.

It's hard to exaggerate the pressure that Safeway and its peers have been under lately. In the traditional grocery industry, Kroger (KR 0.64%) has done a good job of outpacing Safeway's narrow margins and capitalizing on key trends. Even SUPERVALU (SVU) has shown signs of life after its transformative breakup, with private equity firms buying several of its more successful chains to leave it with a smaller but easier-to-manage core business. Meanwhile, innovative disruptor Whole Foods Market (WFM) continues to present challenges to Safeway by capturing some of its potential high-end customer base. Let's take an early look at what's been happening with Safeway over the past quarter and what we're likely to see in its report.

Stats on Safeway

Source: Yahoo! Finance.

Will Safeway earnings finally start growing?
In recent months, analysts have sliced their Safeway earnings estimates dramatically, cutting 65% off their third-quarter projections and reducing their full-year 2013 views by more than half. That hasn't stopped the stock's run, however, with shares up more than 30% since early July.

Safeway managed to impress investors with its second-quarter results back in July. The company topped earnings estimates by a penny per share despite its revenue falling by 2%. Future guidance was also optimistic, with projected same-store sales growth of 1.5% to 2% and earnings calls in line with analyst estimates proving encouraging.

But the reason for the recent rebound was that Jana Partners reported taking a 6.2% stake in Safeway's stock last month. With the activist investors planning to work with Safeway to find ways to enhance profits and boost stock performance, Safeway could face some business challenges. After all, SUPERVALU's experience with private equity resulted in the division of the company. The final result for Safeway, though, might be good news for investors.

Meanwhile, Safeway has continued to work on its efforts to remodel stores and refocus its efforts on organics and other healthier food offerings. Kroger has reaped substantial success from that strategy in the past, even as it fights to retain business that might otherwise go to Whole Foods. Safeway has also boosted its ready-to-eat Signature Café brand in an effort to give customers more convenient eating options.

In the Safeway earnings report, watch to see how the grocer expects to move forward after the sale of its Safeway Canada unit. With the opportunity to reduce debt with the sale proceeds, Safeway will hopefully put itself in better financial condition, giving it more options to consider in light of Jana Partners' advances and better ways to hold off Kroger's successful attempts to hold its own in the grocery industry.

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