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Safeway's Strategies Look Impressive, But Should Investors Buy?

June 25, 2014 | About:
rusticnomad

rusticnomad

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Safeway (SWY) reported some good numbers in the fourth quarter and continues to please its investors. The company has plans to sell itself and is in talks with Cerberus Capital Management, which owns Safeway’s rival grocery chain Albertsons.

Strategic moves

At present, the company is going forward with three strategic initiatives, namely sale of the company, selling of Blackhawk shares, and evaluating its stake in Casa Ley. Starting with its first initiative, management is busy negotiating a deal to sell the company. The discussions are going on, and it is up to management as to what decision they take.

Last year, Safeway sold around 11.5 million shares of Blackhawk. Since then, Blackhawk has been operating as a separate publicly traded company, and has delivered good results. The company is reviewing its investment in Blackhawk and finding ways to maximize value to its shareholders. Consequently, it has planned to distribute around 37.8 million shares of Blackhawk to Safeway shareholders.

Thirdly, Safeway has been evaluating its 49% stake in Casa Ley, which is the fifth-largest food and general merchandise retailer (based on sales) in Mexico. Based on its review, Safeway considers this as the best time to monetize its interest in Casa Ley.

Some positives

As a part of its strategic initiative, the company had decided to exit the Chicago market, which was completed in the fourth quarter. Along with that, it has also exited the Canadian market with the sale of Canada Safeway Limited to Sobeys. The deal was completed for CAD 5.8 billion in cash, but the net after tax proceeds amount to CAD 4.5 billion. Of this, the company used $500 million to payback its debt, but in spite of this, Safeway still has a huge debt of $4.19 billion. Also, it has purchased shares worth $663 million, and has plans to do more.

But it did not proceed with the proposed buyback of shares as Safeway is in negotiations to sell itself. However, according to management, “If we do not reach a definitive agreement related to the potential transaction involving the company, we expect to complete an additional $1.5 billion of debt retirement from the proceeds from the sale of our Canadian operations and to use the majority of the remaining roughly $1.4 billion of proceeds to buy back stock." So, it would be a wait and watch situation till the final disclosure comes.

In the mean time, Safeway is completely dedicated to increase the sales numbers, operating income, and market share through its core grocery business. It has undertaken three initiatives to deliver value to its shoppers, namely clustering, localization, and personalization. The retailer is putting efforts to redesign the stores to enhance its premium offerings and increasing local assortment. It is also focusing on diverse geographical customers.

To retain the loyalty of its customers Safeway, is continuing with its “Just for U” service and fuel reward programs. It has partnered with CPG companies to build unique offers for its customers. Safeway is also performing well in its private brand portfolio and continues to grow, with sales at its all time high in 2013. In addition, its multi-category organic and natural brands are also seeing great success.

Conclusion

Safeway has made some changes in its strategy, which was evident from its recent results. Looking forward, it is too early to predict how things would turn up for the retailer. The discussion for the possible sale of the company is underway. In spite of these uncertainties, the stock is soaring and is near its 52-week high.

It will be prudent if investors wait for some time before taking a call. They can keep the stock on their watch list and look for a better entry point.


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