SWY - Safeway

[gary17]

FCharlie, where did you get the real estate value of $31/share?

I like the SWY prospect more than SHLD if they indeed have a lot of real estate

 

Because SWY is a grocer, they would probably own land closer to residential area whereas Sears probably own land near shopping centre. 

 

Perhaps I am biased being in Vancouver, BC, but I think real estate in residential area = more traffic = more value over time. 

 

I also like the cashflow

I am concerned about competition from Whole Foods and the like.

 

Thanks

 

[LC]

Why now...I mean, what has really changed from the sale of Safeway Canada to prompt this upgrade now? The only thing is perhaps a rise in value of the properties?

 

After paying 2b of debt with the Canadian money they will have what, a bit over 2.5b left? Then let's be conservative and take 300m FCF per the VIC short thesis from the remaining ops. That's 3b they're working with. They could halve the shares outstanding.

 

Given the competition (whole foods etc.) they should divest some real estate now while they can get good prices vs hanging on to them and trying to compete with better branded grocers.

[mcliu]

Feels like the typical IB marketing plan to generate more trading money from clients.

[gary17]

http://www.marketwatch.com/story/safeway-declares-dividend-distribution-of-preferred-stock-purchase-rights-2013-09-17

[fareastwarriors]

http://www.bloomberg.com/news/2013-09-17/safeway-jumps-after-poison-pill-as-unnamed-investor-buys-shares.html

 

 

Safeway Jumps After Poison Pill as Investor Buys Shares

 

[fareastwarriors]

Jana Partners LLC, the hedge-fund firm that presses for corporate change, acquired an approximately 6% position in the supermarket company, according to a person familiar with the investment. Jana representatives have talked with Safeway management about shedding some unprofitable regions and returning more capital to investors, the person said.

 

 

 

http://online.wsj.com/article/SB10001424127887324665604579080991290651328.html?mod=WSJ_business_whatsNews

[Sportgamma]

Man...I must say as a shareholder I would have much rather preferred that SWY would have been able to quietly buy back shares over the next 6-12 months. Don´t see how all the commotion and subsequent driving up of the share price is going to help.

 

 

[FCharlie]

Man...I must say as a shareholder I would have much rather preferred that SWY would have been able to quietly buy back shares over the next 6-12 months. Don´t see how all the commotion and subsequent driving up of the share price is going to help.

 

I can't tell you how much I agree. This is one of my largest positions and I was really, really hoping they could buy up $2+ billion of shares at $24 or so.....  Now we're talking about 25% fewer shares repurchased than what I was expecting. Geez.  I hate the thought of selling.. It's almost like getting divorced after having built this into such a giant position since 2011... but I don't know how much higher I can watch this trade before I start selling some.

 

 

[FCharlie]

FCharlie, where did you get the real estate value of $31/share?

I like the SWY prospect more than SHLD if they indeed have a lot of real estate

 

 

 

Hi,

 

I get the real estate value from the 10K. I add the land and buildings together and divide by shares outstanding. This is real estate at cost. Very likely the values are higher but I contain my enthusiasm and use cost as the value.

 

The most recent 10K shows $1.881 Billion of Land and $6.812 Billion of buildings for a total of $8.694 Billion.

 

Shares outstanding are 241 million so that's about $36 per share currently. $31 per share was last year.

 

The beauty here is that Safeway is expanding their real estate dramatically even as they shrink the store count, thanks to a subsidiary called PDC. They own about 35 shopping centers and they lease the outparcels around their Safeway anchor. Over the past few years, since PDC was created, Safeway has added between $300-$400 million of real estate per year while shrinking the share count dramatically. It indeed could be very much like SHLD in that the real estate provides a huge margin of safety here. Both SHLD and SWY have pension issues, but SWY is a very cash flow positive company whilst SHLD is struggling. SWY actually appears to be doing what everyone expected SHLD to do.... Steve Burd created subsidiaries and grew them, pushed for free cash flow, margin control, shrink control, real estate, and massive share repurchase. He's done very well and now Robert Edwards has taken over.

 

Sorry for the delay in responding. Please feel free to ask anything you want. This is a core holding for me.

[tytthus]

I get the real estate value from the 10K. I add the land and buildings together and divide by shares outstanding. This is real estate at cost. Very likely the values are higher but I contain my enthusiasm and use cost as the value.

 

surely there is some mortgage debt associated with all this RE.....

[krazeenyc]

FCharlie, where did you get the real estate value of $31/share?

I like the SWY prospect more than SHLD if they indeed have a lot of real estate

 

 

 

Hi,

 

I get the real estate value from the 10K. I add the land and buildings together and divide by shares outstanding. This is real estate at cost. Very likely the values are higher but I contain my enthusiasm and use cost as the value.

 

The most recent 10K shows $1.881 Billion of Land and $6.812 Billion of buildings for a total of $8.694 Billion.

 

Shares outstanding are 241 million so that's about $36 per share currently. $31 per share was last year.

 

The beauty here is that Safeway is expanding their real estate dramatically even as they shrink the store count, thanks to a subsidiary called PDC. They own about 35 shopping centers and they lease the outparcels around their Safeway anchor. Over the past few years, since PDC was created, Safeway has added between $300-$400 million of real estate per year while shrinking the share count dramatically. It indeed could be very much like SHLD in that the real estate provides a huge margin of safety here. Both SHLD and SWY have pension issues, but SWY is a very cash flow positive company whilst SHLD is struggling. SWY actually appears to be doing what everyone expected SHLD to do.... Steve Burd created subsidiaries and grew them, pushed for free cash flow, margin control, shrink control, real estate, and massive share repurchase. He's done very well and now Robert Edwards has taken over.

 

Sorry for the delay in responding. Please feel free to ask anything you want. This is a core holding for me.

 

Congratulations FCCharlie. Back in late June (post sale of canada operations) -- I was researching SHLD and I noticed this thread.  I noticed how similar  the investment thesis is for both (probably less real estate value but much more stable business). I ended up buying a lot more SHLD, but I still picked up decent sized position on SWY. Thanks for your work.

[gary17]

Congrats FCharlie, great work.

 

I'm wondering if you looked at Other food retailers such as TESCO Plc . Or any others recently.  Thanks.

[fareastwarriors]

I remember way back when my local store was renovated to a "lifestyle" store. It was the best in my town.

 

Now recently, my local Safeway was renovated again. It looks like the focus was more on the center of the store and towards the higher margin items like personal health (vitamins/OTC meds) and personal beauty products (make up/dental hygiene/lotions). The pharmachy area was also beefed up. Customers can enter a separate closed off area to see someone (doctor?/nurse?/flu shots/not sure...).

 

The newly renovated areas are brightly lit and the aisles seem a bit wider...

 

The one thing that bothered me was they reduce the size of the meat department... They took out some refrigerated cases for meat. Shame on them!

 

 

 

 

Do they have some kind corporate strategy name for this new rennovation?

[LC]

Sold a bit today...IMHO it is a lot closer to FV at 32 than 23.

[bmathews03]

FCharlie, where did you get the real estate value of $31/share?

I like the SWY prospect more than SHLD if they indeed have a lot of real estate

 

 

 

Hi,

 

I get the real estate value from the 10K. I add the land and buildings together and divide by shares outstanding. This is real estate at cost. Very likely the values are higher but I contain my enthusiasm and use cost as the value.

 

The most recent 10K shows $1.881 Billion of Land and $6.812 Billion of buildings for a total of $8.694 Billion.

 

Shares outstanding are 241 million so that's about $36 per share currently. $31 per share was last year.

 

The beauty here is that Safeway is expanding their real estate dramatically even as they shrink the store count, thanks to a subsidiary called PDC. They own about 35 shopping centers and they lease the outparcels around their Safeway anchor. Over the past few years, since PDC was created, Safeway has added between $300-$400 million of real estate per year while shrinking the share count dramatically. It indeed could be very much like SHLD in that the real estate provides a huge margin of safety here. Both SHLD and SWY have pension issues, but SWY is a very cash flow positive company whilst SHLD is struggling. SWY actually appears to be doing what everyone expected SHLD to do.... Steve Burd created subsidiaries and grew them, pushed for free cash flow, margin control, shrink control, real estate, and massive share repurchase. He's done very well and now Robert Edwards has taken over.

 

Sorry for the delay in responding. Please feel free to ask anything you want. This is a core holding for me.

 

After using the sales of Canada operations to pay down debt, the company will have $3 billion in net debt, nearly $1 billion in underfunded pension, up to $7 billion in multi-employer pension obligations, and lease obligations of $5 billion. Excluding the lease obligations, the company has over $10 billion owed, against its mere $8 billion market cap.

 

Who cares you say? The company will earn its way out of the whole. That might be hard when margins have been dropping consistently and will drop again without the more profitable Canadian operations. The business is barely profitable, and there's a good chance it will go under within 5 years.

 

If you want to feel depressed, look at the company's share count reduction (which has been good) and compare it to earnings per share. If you want to be annoyed, go to a Safeway and talk to an employee. If you want to feel sick, go to a Safeway and eat at the deli counter. If you want to waste time, study Sears. If you want to lose money, buy stock in Safeway. If you want to learn about investing, watch Jim Cramer on CNBC or follow Keith McCullough (Hedgeye) on Twitter.

 

No doubt, this company is a factory of sadness. Best of luck to everyone -- you're all certainly smarter than me.

[fareastwarriors]

Cleaning Up in Store-Brand Aisles

 

http://www.nytimes.com/2013/10/02/business/cleaning-up-in-store-brand-aisles.html?pagewanted=1&_r=0&ref=business

[fareastwarriors]

http://www.chicagotribune.com/business/breaking/chi-dominicks-parent-leaving-chicago-20131010,0,2828348.story

 

Dominick's parent seeks to sell Chicago area stores

 

 

 

 

 

Dominick’s parent Safeway Inc. said Thursday it will leave the Chicago market by next year.

 

There are 72 Dominick's locations in the Chicago area. The decision comes as Pleasanton, Calif.-based Safeway reported third-quarter net income that tumbled to $65.8 million from $157 million a year ago. In the first nine months of the year, the Dominick's unit lost $13.7 million before taxes of $13.7 million.

 

 

 

Safeway, the country's second-largest grocery chain, said the move will save it between $400 million and $450 million. It said it will use that money to buy back stock and invest in other growth opportunities.

 

But leaving the market will also cost up to an estimated $375 million in pension withdrawal liability, Safeway said, which is generally paid over 20 years. The tax benefits are valued at up to $145 million.

[fareastwarriors]

http://www.safeway.com/ShopStores/Investors.page#iframetop

 

Third Quarter 2013 Results

 

 

 

 

 

 

Operating profit margin declined 43 basis points to 0.94% in the third quarter of 2013 from 1.37% in the third quarter of 2012. Excluding fuel, operating profit declined 33 basis points.

 

 

Safeway did not repurchase any shares of its common stock during the first 36 weeks of 2013 under its previously announced stock repurchase program. The remaining board authorization for stock repurchases at quarter-end was approximately $0.8 billion.

[JAllen]

 

How does the board think AmazonFresh will affect Safeway?  I know that AmazonFresh is already operating in some zip codes in LA and Seattle and they're hiring for the Tracy, CA FC location (this is Bay Area + Central Valley; though the job posting has been taken down).  506 of 1600 total SWY stores are in CA, not to mention other states where AmazonFresh is going to launch.

 

 

SWY's 1% operating margin is a little scary when you think about price competition.

 

 

We shop pretty regularly at SWY here in SF and I have to say that their stores here are fairly insulated to additional bricks-and-mortar competition, but I don't think I can say the same for a good-quality delivery service.

 

 

http://fresh.amazon.com/

[no_free_lunch]

That is exactly my concern with safeway.  Not just amazonfresh but competition in general.  Their margins just keep on getting compressed, hard to say where it ends.

 

Regarding amazonfresh, do you have a feel for how they are as far as price?  Are they competitive with safeway?

[JAllen]

The only thing I've read specifically about pricing is that it appeared high, which might be because the service had only rolled out to specific LA zip codes that I believe were middle-upper income zips, so they were attempting to roll it out slowly.  This makes a lot of sense actually.

 

 

 

The Prime Fresh membership program is $299/year, so you pay $220 more than normal Prime but get same-day delivery of grocery orders over $35 and 500,000 other Amazon products if you choose.

 

 

I wasn't aware of it until now but Walmart is actually testing grocery delivery here in the Bay Area.  They don't seem to believe in it much though.  They said they're not going to expand it in the reuters article below.

 

 

http://www.reuters.com/article/2013/06/06/us-walmart-meeting-ecommerce-idUSBRE95517X20130606

 

 

http://techcrunch.com/2013/06/10/amazon-bets-on-web-groceries-expands-amazonfresh-to-l-a/

 

 

 

 

[no_free_lunch]

It all comes down to price I think.  I am pretty confident amazon will nail the logistics part of it, so really just what they are charging is the thing.  Personally, I would use it if the price was comparable, who wants to grocery shop?  What is scary, from safeway's perspective, is amazon is willing to go at this at no profit just to get the delivery mechanism setup so they can use it with their other products.  Retail is so brutal and amazon is playing such a long-term game, I just don't like to be in it's path.  Otherwise safeway has great management but given the competition I am staying out of this one.

[cr6196]

Initiation note from DB - share repurchases, cheap on SOTP, further asset rationalization to improve ROIC

Safeway.pdf

[accutronman]

 

 

Credit Suisse View: Safeway appears to be accelerating down the road of value creation, as the company announced the

exit of Chicago, hinted at a further review of its asset base, and telegraphed an avenue to potentially offset at least a portion

of its $1.8 billion Canadian tax bill. While the underlying quarter disappointed, the miss was not enough to matter, in our

view. Further strategic moves now seem likely, and the opportunity to unlock value looks to be even greater than we

initially estimated. Our analysis suggests a stock price of over $40 is now a possibility (depending upon further strategic

action/potential Canadian tax offsets). We raised our target price to $40 from $34 and continue to rate the stock

Outperform. We are revising our 2013-2015 EPS estimates to $0.48/$1.86/$1.96 from $1.06/$1.73/$1.87 respectively.

 

[JAllen]

Initiation note from DB - share repurchases, cheap on SOTP, further asset rationalization to improve ROIC

 

 

Does anyone have the report on AmazonFresh the report mentions: More Bark Than Bite: Amazon Fresh Poses Little Threat for Now[/size]?

 

 

 

[/size]"While we acknowledge Amazon can be relentless, we conducted two separate surveys – one in Seattle and one nationally – and the results give us confidence that the Amazon Fresh threat has, for now, been garnering much more attention than it deserves (please refer to our separate survey report, titled More Bark Than Bite: Amazon Fresh Poses Little Threat for Now). "