Is Safeway the Next SUPERVALU?

Safeway (NYSE: SWY) and SUPERVALU (SVU) are careening out of control in a cart down an aisle of low earnings and high debt, as shares of both grocers have both fallen by double digits for 2012. Having to fight for customers with Target (TGT -0.67%), Kroger (NYSE: KR), and Wal-Mart (WMT 0.26%) will do that to companies with vulnerable balance sheets.

The financials at Safeway much more resemble those of SUPERVALU than those for Wal-Mart or Target. Though all its grocery competitors have slim net profit margins, Safeway's is particularly thin at just 0.01% -- half the industry average. SUPERVALU fares even worse, with a net profit margin of negative-0.04%. And while SUPERVALU's huge debt-to-equity ratio of almost 100 dwarfs Safeway's 2.31, the latter still carries more debt than any of its major rivals, and nearly twice as much as the industry average.

Falling sales and earnings for Safeway
Competition in the grocery-store sector is cutthroat. Wal-Mart now has about one-third of the market share, with Target, SUPERVALU, Kroger, and Safeway all claiming less than 10%. Amazon.com's (AMZN -2.90%) entry into the sector now makes matters even worse for Safeway. Hoping to rebound from its price drop, Safeway has developed its Bright Green Label to capture natural-product dollars, a high-margin area, but Amazon has rolled out Vine.com, its natural-product line, also chasing the green from that sector. Vine.com carries many familiar brands for those seeking items in this niche. Amazon gutted Best Buy and Radio Shack by offering a better deal for consumer electronics, and it is now posed to do the same to Safeway with natural products.

Already, earnings-per-share growth for Safeway is down by 3.27% this year because of anemic same-store-sales growth resulting from competition from Wal-Mart and others. Over the past five years, EPS growth for the California-based grocery store chain has fallen more than 5%.

Source: Motley Fool CAPS.

Small returns
Safeway already provides very tiny returns to its shareholders, with its return on assets and return on investment below the industry average. Furthermore, the employees for Safeway deliver less in the way of net income than the industry average. Safeway's poor growth rates for sales and earnings will widen this gap with its competitors. All of these indicators point to a company that delivers a very poor overall return to its shareholders, as demonstrated by the stock price's downward trajectory. Safeway's stock-buyback program has yielded even worse returns. The company expanded its share-repurchase program by $1 billion in March, but since then its share price has fallen more than 20%.

Sources: Motley Fool CAPS and Finviz.

A big short position
Again like SUPERVALU, Safeway has a staggeringly high short position. A short float of 5% is considered to be troubling for a stock, and Safeway's now stands at 32.16%. The short float for Wal-Mart, Target, and Kroger is well under the 5% threshold.

History repeats itself
Safeway looks to present the same value trap as SUPERVALU, with its low profit margin, high level of competition, falling EPS growth, and declining sales growth. At around $16.70, Safeway is trading very close to its 52-week low of $14.97. Fitch just reduced the credit rating for Safeway to the lowest investment grade possible and changed its outlook from stable to negative because of weak same-store sales.

Safeway appears headed for the same falling stock price checkout counter that bagged SUPERVALU's shareholders. Shares of Wal-Mart and Target are the better buy for Foolish investors because of the superior EPS growth and capital structure.