Safeway (SWY), one of the largest food and drug retailers in North America, is expected to report its fourth quarter and fiscal 2010 results before the market opens on Thursday, February 24, 2011.
Following third quarter results, Safeway announced that it expects its fiscal 2010 EPS to be at the lower end of its previous guidance range of $1.50-$1.70. The company expects same-store sales (excluding fuel) to decline 1%-1.5% with free cash flows of $0.9-$1.1 billion.
Safeway is expected to earn an EPS of 58 cents on revenues of $12.7 billion during the quarter and EPS of $1.51 on revenues of $40.9 billion during the fiscal, according to the Zacks Consensus Estimate.
Barring the third quarter of fiscal 2010, Safeway has missed expectations in two of the preceding four quarters and has a four-quarter negative surprise of 2.13%. This means that on average Safeway has missed the Zacks Consensus Estimate by this magnitude over the past four quarters.
Previous Quarter Highlights
Safeway reported an EPS of 33 cents during the third quarter of fiscal 2010, beating both the Zacks Consensus Estimate and year-ago quarter by $0.02. The reported quarter included employee severance charges of $0.02, offset by a lower tax rate as compared with the year-ago period. Excluding the severance cost, the company reported an EPS of $0.35.
The company reported sales of $9.4 billion, which met the Zacks Consensus Estimate, though marginally down from the year-ago quarter’s $9.5 billion. The effect of a higher Canadian exchange rate and higher fuel sales were partially offset by a 2% decline in identical-store sales (excluding fuel).
Agreement of analysts and magnitude of estimate revisions
Estimates for the fourth quarter have been towards the negative side over the past month, which implies a potential for some downward pressure on the stock. Out of 19 analysts covering the stock, 2 have lowered their earnings estimates with no positive revisions.
Estimate revisions for fiscal 2010 reflect a similar negative bias. Over the last 30 days, 4 of the 21 analysts have lowered their forecasts with only one positive revision. However, during the past week, estimates were raised by 1 analyst.
The bearish sentiment for the upcoming quarter reflects the economic concerns which are impacting Safeway’s same store sales. During the third quarter, the company recorded a 2% decline in identical store sales, primarily driven by deflation as volume remained almost unchanged.
However, the extent of decline is less than in the previous quarters. Maintaining the trend, we expect same-store sales growth to show some improvement.
Although inflation is expected to set in by 2011, Safeway may find it difficult to pass on increased prices to its customers due to the tough competition. As a result, it will lead to a drag on its gross margin. We expect further clarity from the company on this front, which is one of the key challenges of the company.
We are concerned about the weak macro conditions and the impact on the company’s Lifestyle strategy. The macro environment is taking a toll on consumers. Economic uncertainty and high unemployment rates are forcing many consumers to settle for cheaper substitutes or cut back on spending altogether. However, with a gradual economic recovery, the situation is expected to improve.
There have been no estimate revisions for the fourth quarter over the past 7 and 30 days. Estimates for 2010 have gone down by a penny over the past month.
Recommendation
Many factors were responsible for the sluggish revenue growth of the company in the recent past – unemployment, deflation and price competition to make the budget-conscious shoppers all the more alert. Viewing the near-term challenges, we have a Zacks #4 Rank (sell) in the short term.
However, the company expects the situation to improve going ahead banking on better volume and pricing. We are also encouraged by the company’s cost saving activities, which is likely to improve margins further.
In addition, Safeway is well on track to complete the Lifestyle remodels, which should increase revenues in future. With a strong cash balance, Safeway intends to reward shareholders in the form of dividends and buybacks.
Consequently, on a long-term perspective, we are Neutral on the stock.
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