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Will Safeway Stage a Comeback?

July 11, 2014 | About:
Suravi Thacker

Suravi Thacker

1 followers

The retail business has become highly competitive. With new entrants, competition is getting fierce wherein the industry players are willing to slash prices in order to attract more and more customers and to outperform other players. Also, marketing efforts have played an important role as the retailers ramp up their marketing efforts to draw customers. Although higher promotions have been successful, it has led to shrinkage in the margins. Thus, there are some players who are unable to fight back, resulting in underperformance.

One such example is that of Safeway (SWY) which is undergoing a difficult phase. The food and drug retailer is about to report its second quarter results next week. Let us first take a look at the company’s previous quarter performance.

Last quarter

In its last quarter, the retailer reported an increase of 1%, registering a total of $8.3 billion in revenue. The top line was driven by growth of 1.8% in comparable store sales. An increase in product prices and higher volumes led to the increase in store sales.

A primary reason for customers’ interests was Safeway’s natural and healthy products. Its private label brands such as Open Nature and O Organics is bringing in health conscious customers who are looking for organic products, even if it is at a premium. However, the effects of higher costs were seen on the bottom line, which shrank to $0.06 per share from $0.16 per share in the previous year’s quarter.

Analysts’ estimates

For the second quarter, analysts are expecting revenue of $8.39 billion. This was lower than the top line of $8.7 billion in the year ago quarter. The bottom line too is expected to drop. Analysts expect earnings to be at $0.27 per share as compared to $0.28 last year. In the last four quarters, the food retailer managed to beat the analysts’ expectations once only. It missed on the earnings estimate 3 times, which includes the last two quarters.

Efforts to look forward to

Safeway has taken up some measures to bring its performance back on track. Firstly, it intends to remodel its stores so that it is more attractive for customers. Also, it will make the stores easier to navigate for people. Moreover, it plans to increase the prices of its products which will help in expanding its margins as well as its earnings.

Further, Safeway is expected to enter into a merger deal with Albertsons by this year. The deal will make the combines entity a powerful one with a network of 2,400 stores. People are looking forward to this merger and the resultant entity can prove to be a threat to other players such as Kroger (KR). Kroger has a store network of 2,640 and enjoys a market share of 8%. Kroger’s special effort to focus on customers’ convenience is what drives its revenue. Also, Kroger offers products at a cheap price, enabling it to outperform other players. In fact, its revenue surged 2.4% in its last quarter due to higher store traffic. However, it will be interesting to see how the two retailers fare after the deal is closed.

What the future has in store?

Safeway is headed in the right direction and should be able to bring back its lost glory with the merger on its cards. Also, remodelling the stores should be helpful in attracting customers. However, increasing product prices might not be an appropriate measure since competitors are striving to cut prices. Hence, its bottom line will continue to suffer.


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