Safeway Inc.SWY

Morningstar Rating

Stock Research and Analysis

by Michelle Chang, CFA

Safeway is shifting its focus from heavily investing in its stores to cutting costs, lowering prices, and freeing up more cash. We think the firm is right to lay off the gas pedal and better leverage its scale to narrow price gaps, but its actions demonstrate Read more

Bulls Say

The significant capital Safeway has put into its stores since 2003 has given it one of the most attractive portfolios of stores in the industry. At the end of 2008 the firm had 73% of its stores converted into the "lifestyle" format.

By lowering capital expenditures in 2009, Safeway expects to have generated $1.1 billion-$1.3 billion in free cash flow. The company has been steadily using cash to buy back stock, totaling 23.1 million shares for $442 million through the first three quarters of 2009.

The firm's Blackhawk gift card subsidiary has continued to grow significantly even as the overall economy has softened. The face value of cards sold in 2008 increased 42%.

Safeway has proved adept at developing its own brands. O Organics and Eating Right combined would be $3 billion-$5 billion brands if sold outside Safeway, and the firm is currently selling these products through the food-service channel and internationally. Read more

Bears Say

Safeway's move up the quality ladder and relative neglect of price is hurting the firm in the current economic environment. Identical-store sales turned negative in 2009 after averaging 3% growth over the past four years.

Consumer perceptions take time to change, so Safeway's price cuts may not have their intended effect for some time.

The consumer flight to discounters such as Wal-Mart and Costco might harm grocers longer term if some decide not to return once economic conditions improve.

Safeway's new business ventures may disappoint and not give the company the earnings boost over time that it expects. Blackhawk has been successful, but the health-care and real estate offerings have yet to produce anything significant.

A spotty acquisition history limits the appeal of Safeway as an industry consolidator. Read more

Strategy

Safeway is reducing lifestyle remodels and focusing more on cutting costs, improving everyday pricing on certain products, and attempting to sharpen its promotions. The company continues to develop more Read more

Management

Steve Burd has been CEO since 1992. His current salary of $1.5 million is in line with that of other industry participants, but he has made outsize sums of money over the years while at the helm, even during hard times for the company. In 2004, with Read more

Profile

Safeway operates the nation's third-largest retail grocery chain with about 1,740 stores in the United States and Canada. Its primary markets include the Western United Read more

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