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Safeway Stock Review: Pretty Bad!

November 09, 2010 | About:
Safeway is the third largest retail grocery chain in the US, after Wal-Mart and Kroger and just ahead of Supervalu. I am reviewing this stock as part of an effort to review retailers in the Grocery, Drugstore and Discount Store industries. Over the last month SWY has been trading between $20 and $22

Please refer to the stock review explained post if you have questions on what I look for in this analysis. Click on this annotated Surfmark if you want to see the source data for this stock review

1- Business Performance Risk (-) and intrinsic returns (-)

Metric Status
FCF / Sales Last twelve months = 3.4%, higher than historical performance over the last 10 years, between 1 and 2% (similar to WMT and WAG)
ROE LTM: -20.9% (!) below SWY's 5-year average of 7.7%. Historically SWY has had periods of acceptable ROE between 12-16%+, coupled with negative years, a very negative sign for me.
ROA LTM: -7.8%, below the company's 5-year average of 2.6%. Generally even in good years, ROA has been very low, never meeting my minimum stated goals of 9%
Revenue Growth Growth over the last 10 years averaged 3.5% lower than WMT and WAG for example. More importantly the company's sales dropped by 7%+ in 2009 and have been flat on a TTM basis
Cash distribution to shareholders Despite its negative earnings, SWY is paying and even increasing its dividend, reaching a yield of 2.1%

In addition, SWY has been buyback shares, retiring 13% of its shares over the last 5 years.


Well, not really a good business for my long term / steady type portfolio. Not only the company is regularly experiencing negative earnings, it also performs rather poorly from an ROE and ROA standpoint in what seem to be its peak years.

In terms of intrinsic investment returns, I am not quite sure where to start given the company’s negative earnings over the last couple of years. In addition to a 2% dividend, the company is buying about 2% of its shares back per year. Interestingly the analyst consensus is that the business will grow at ~9% in the future…but I don’t really buy it and I don’t see how SWY could meet my bar of 10% intrinsic returns with negative earnings and bad growth momentum: Even in good years, SWY peaked at 15% ROE!



2- Balance Sheet Risk (-)

Metric Status
LT Debt / Equity Debt is a bit high although not going over 1.0x. but given the somewhat questionable health of the business, debt is a concern for me.
Current Ratio 0.95x which seems ok for a retailer and is higher than WMT. Historically, SWY's current ratio was between 0.8 and 1.1x
High debt/equity and improving due to accumulated losses on the Balance Sheet, not a good sign.

3- Valuation Risk (-)

Metric Status
Cash Return 10.7%
Price to earnings ratio N/A (negative)
It is interesting to see that SWY seems to have an interesting valuation on a FCF basis with a cash return of 10.7%. This is in large part due to a recent “spike” in free cash flow as the company has significantly dialed down its store Capex and focused on cost cutting. While this could be positive, it also speaks to SWY’s low growth prospects in the future. On a more “standard” FCF, cash return would be ~5% which I would not consider attractive

Conclusion

I will pass on SWY and will not perform a Company Analysis as I believe the company does not have a strong, steady/reliable business and would probably not be in a position to provide a good combination of growth/dividend/buybacks and deliver intrinsic returns.

Many happy returns!

Ben

http://marginofsafetyinvesting.com


Rating: 2.2/5 (5 votes)

Comments

MEinvestor
MEinvestor - 4 years ago


i think, while your general takeaways are on-point, the negative earnings in 2009 (and resulting negative returns on capital) result from a one-time goodwill impairment that many companies (even outside of this industy) recorded in 2009. important to note that operating earnings are positive, and so is free cash flow. but, yes, the impact of safeway's much touted "price investments" on company performance and competitive positioning remains to be seen. would def. avoid.
rnagarajan
Rnagarajan - 4 years ago
I've looked at Safeway before but I applied the "Peter Lynch" approach in terms of considering my personal experience at the chain which has been dismal. If you compare Whole Foods or Trader Joe locations, generally the stores have a similar appearance and quality, but the same is certainly not true for Safeway where the experience is hit or miss. In urban areas, such as where I live, the stores are simply awful and reminiscent of a Soviet style commissary in terms of cleanliness and dearth of selections.

One other factor to consider is the chain's uniformly poor computer systems - and this applies to every store I've been to - both nice and horrible. Sales and other promotions rarely register correctly and, in my urban location, clerks are downright hostile when it comes to customers pointing out discrepancies. Errors are always in the store's favor (I've yet to see an item marked down where I wasn't expecting it).

Anyway, you mentioned filters that can abort the need to perform a complete analysis and my personal qualitative filter is that if my experience with a business is uniformly poor and frustrating, I don't want to own the stock. It's likely that I'll miss some opportunities but also avoid many disasters. I think Peter Lynch would approve.
superguru
Superguru - 4 years ago
I agree with Ravi on Peter Lynch rule. The rule works.

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