Undeterred by an abundance of headwinds facing conventional supermarket retailers, Safeway chairman and CEO Steve Burd expressed optimism about his company’s performance and prospects during the second half of the year.
Following a modestly better than expected second quarter profit performance, Safeway confirmed a full year profit forecast that calls for earnings per share in the range of $1.90 to $2.10. Safeway is assuming it will achieve full year identical stores sales increases of 1% to 2% and product inflation will range from 2% to 3%. The affirmation of guidance that was provided earlier this year followed the July 19 release of financial results for the second quarter ended June 16 that analysts and investors found concerning.
During the period, Safeway generated income from continuing operations of $121.7 million, or 50 cents a share, compared to profits of $146 million or 41 cents a share the prior year. Total sales increased by $190 million or 1.9% to nearly $10.4 billion and identical store sales advanced 0.8% after a flat first quarter.
The reason the company was able to grow earnings per share nearly 22% on a decline in net income is because a massive stock buyback program reduced the number of outstanding shares. By the end of the second quarter Safeway’s outstanding shares had fallen to 240 million compared to 352 million at the end of the second quarter the prior year.
The share repurchase activity clearly helped the company’s profit performance, but Burd made the case that sales weren’t too bad either and are poised to accelerate during the back half of the year thanks to some new initiatives that are expected to gain traction.
“We are encouraged to see that our volume trends are improving as inflation has eased, and we are pleased to see market share gains in the grocery channel and a slight gain in market share in all food-related channels,” Burd said. “We expect continued momentum as participation grows in our Just for U loyalty program that is now available in all U.S. divisions and as we enhance our fuel rewards programs and expand our health and wellness initiatives.”
While Burd expressed optimism about the future, analysts fixated on the 73 basis point erosion in gross margins that saw the company’s rate of profitability decline to 26.3% of sales. One of the reasons for the decline was increased costs related to the roll out of the company’s Just 4 U loyalty program which is being relied upon to deliver longer term sales growth. Safeway was eager to get the initiative rolled out to the market to promote registration and usage because early indications are the program helped the company grow sales and gain share. After identical store sales were flat in the first quarter and up only 0.8% in the second, Safeway is counting on considerable improvement in third quarter and fourth quarter sales if it hopes to achieve the upper end of its full year identical-store sales target.
As for expenses, Safeway managed to offset the decline in its overall rate of profitability by controlling them. Operating and administrative expense decreased 39 basis points to 23.99% of sales in the second quarter.
Safeway invested $219.2 million in capital expenditures in the second quarter of 2012, while opening one new store in the company’s Lifestyle format and completing one Lifestyle remodel. However, the company also closed 10 stores, including three Genuardi's stores that were sold during the quarter. For the year, Safeway expects to invest approximately $900 million in capital expenditures to open approximately 10 new Lifestyle stores, complete approximately 10 Lifestyle remodels, refurbish in-store pharmacies and develop properties through the company’s wholly owned subsidiary, Property Development Centers LLC.