SWY - Safeway

[FCharlie]

 

 

As of March SWY had $6.2 billion of debt.  Of that $1 billion was commercial paper (and is expected to decline to near zero at the end of the year).  They decided to issue $250 million of 18 month floating rate debt to reduce commercial paper and diversify funding sources.  The balance of their debt is fixed rate with $800 million coming due this year, the floating rates due at the end of next year, $1 billion due in 2014, and nothing in 2015.  Their average interest cost is about 4.5%.  Thus higher rates will not materially increase interest costs.  Their pension funding will actually do best if equities rise since the plan is 65% in equities.

 

The simple fact that commercial paper is at $1 billion and is expected to decline to zero by year end is an incredible testament to the cash generating power of Safeway. Sure there's no growth. Sure there's unions and pensions. But Safeway still generates $1 billion FCF annually and the market value is $3.8 billion.

[Sportgamma]

 

As of March SWY had $6.2 billion of debt.  Of that $1 billion was commercial paper (and is expected to decline to near zero at the end of the year).  They decided to issue $250 million of 18 month floating rate debt to reduce commercial paper and diversify funding sources.  The balance of their debt is fixed rate with $800 million coming due this year, the floating rates due at the end of next year, $1 billion due in 2014, and nothing in 2015.  Their average interest cost is about 4.5%.  Thus higher rates will not materially increase interest costs.  Their pension funding will actually do best if equities rise since the plan is 65% in equities. 

 

Thanks, Tim. Very helpful.

[Rabbitisrich]

 

 

As of March SWY had $6.2 billion of debt.  Of that $1 billion was commercial paper (and is expected to decline to near zero at the end of the year).  They decided to issue $250 million of 18 month floating rate debt to reduce commercial paper and diversify funding sources.  The balance of their debt is fixed rate with $800 million coming due this year, the floating rates due at the end of next year, $1 billion due in 2014, and nothing in 2015.  Their average interest cost is about 4.5%.  Thus higher rates will not materially increase interest costs.  Their pension funding will actually do best if equities rise since the plan is 65% in equities.

 

The simple fact that commercial paper is at $1 billion and is expected to decline to zero by year end is an incredible testament to the cash generating power of Safeway. Sure there's no growth. Sure there's unions and pensions. But Safeway still generates $1 billion FCF annually and the market value is $3.8 billion.

 

My impression was that the CP usage was a little high due to calendar effects, but that CP will be a bigger part of cash flow management, compared to previous years, due to Blackhawk seasonality.

 

 

 

[Rabbitisrich]

Some mixed results in 2Q12. Price per item increased by 1.8%, but SSS improved by 1.2% within Just4U markets, and 0.8% overall (not including fuel sales).

 

Burd's response to a question about price competition:

 

When we look at our full book price checks, it's really not possible for them to do any price reduction that could be sustained without turning their cash flow negative, it would even allow them to get anywhere near our prices. So, there really is no need for us to react, they are free to lower their prices, but there will be no need for us to react and I think that's true, I think that's true of most people.

 

I'm curious about this "wellness" story, but unfortunately it looks like we won't get to see it until 4Q.

[FCharlie]

Some mixed results in 2Q12. Price per item increased by 1.8%, but SSS improved by 1.2% within Just4U markets, and 0.8% overall (not including fuel sales).

 

Burd's response to a question about price competition:

 

When we look at our full book price checks, it's really not possible for them to do any price reduction that could be sustained without turning their cash flow negative, it would even allow them to get anywhere near our prices. So, there really is no need for us to react, they are free to lower their prices, but there will be no need for us to react and I think that's true, I think that's true of most people.

 

I'm curious about this "wellness" story, but unfortunately it looks like we won't get to see it until 4Q.

 

 

I thought it was a good quarter. Last quarter ID sales were flat. This quarter they were positive 0.8%. The most recent 12 weeks of Q3 are positive 1.2%. There is no way I could possibly view this business as dying. The stock however, remains at 3 1/2 - 4 times free cash flow.

 

I also find it interesting that $20 million of operating expenses were due to the roll out of Just for U. Higher interest expense hurt income by another $12 million. These two items together account for the entire decline in YOY net income and these two items will not exist next year because Just for U's roll out is a one time thing and SWY is focused on using it's next billion of free cash flow to repay debt. Excluding these two items, Net income would have been just over $145 million, compared to $145 million in Q2, 2011, and $141 million in Q2, 2010.  Incredibly stable business here. Very boring and very cheap.

[Sportgamma]

 

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

 

It's Jefferies. I want to take a little bit of a turn on the questions here. I want to talk a little bit -- you bought in 30% of your stock at a much higher price. Kind of the verdict's in today, a little surprising to see the stock down as much as it is. Is there anything else that you contemplate, Steve, when you look at this? I mean, clearly, the management team and the Board use it much differently than the public markets. Do we -- one of your competitors just announced they've gotten people in to think about what to do with that company. I mean, do you go further with this? I mean, kind of frame it for me how you're thinking about it, especially with the market reacting the way it is today, which seemed to be at least decent results?

 

Steven A. Burd

 

Yes. I think that -- I mean, it's always difficult to predict the market reaction. What we act on is what we believe is the intrinsic value of the stock. And we, who work the business, will forever have more information, more confidence in what we think we can do than certainly the street during uncertain times. And so we have -- we talked pretty extensively here about how we intend to grow ID sales, how we intend to capture market share. We're now doing it across all channels and how we intend to grow operating profits. You're really saying -- what you're seeing is the first leg of a 3-legged stool here. And you're seeing it in its infancy. And that's where our confidence comes from. So I think that when -- sometimes when somebody else struggles, people say, "well, gosh, I guess everybody is struggling." And it never really occurs to them that others who might be having some level of success might actually be contributing to the struggles of others. And so I think that -- I'm a big shareholder in this company. I've never felt better about my shareholdings in the last 5 years than I feel today.

 

 

http://seekingalpha.com/article/734051-safeway-management-discusses-q2-2012-results-earnings-call-transcript?page=5&p=qanda

[Tim Eriksen]

Anyone else have any thoughts on SWY's "Just for U" strategy.  For those who don't know it is a way for SWY to individualize deals for specific customers in order to retain them.  For example they can track whether I every buy eggs at SWY and, if I don't, offer a promotion (i.e., lower price) just for me to entice me to shop and pick up the eggs and hopefully other things.  It is a far lower cost than putting eggs on sale for everyone and having the customer who would buy anyway get them for less (thus hurting margins).  I downloaded the app for my iphone and can just add items I want to buy to my discount card which is automatically noted at the register.   

 

While competitors can certainly copy it eventually, SWY thinks it will help them grow sales while still maintaining margins.  SWY contends that most of their profit decline in the last quarter was related to "Just for U" roll out costs.  Is this something that the smaller companies and cash restricted companies could not afford to do?  Does this give them an advantage for a few years? 

[Viking]

Tim, I am not familiar at all with Just-4-U (as it has not yet been rolled out to their Canadian location - but it is coming).

 

I worked for years at Kraft Foods and every couple of years they were developing a new marketing program that was going to give them control over high usage consumers and drive their business. The hype always sounded good; performance rarely lived up to the hype. Costs were always higher and year over year lift was hard to sustain.

 

We will all learn alot about SWY management over the next 6 months as they are sticking with their full year guidance. With the stock trading at $15 it certainly is pricing in weak profit growth at SWY; should Just 4 U perform then SWY stock should be a no brainer to out perform going forward.

[Sportgamma]

Interesting article:

http://www.nytimes.com/2012/08/11/business/in-grocery-stores-the-perimeters-take-center-stage.html?_r=1&pagewanted=all

 

Shoppers also are shopping differently, retailers and consumer experts say. “Generally, for grocery and food products, people are shopping much more frequently today than just a few years ago,” said Michael R. Minasi, president of marketing at Safeway. “They’re coming in for a fresh produce transaction, for tonight’s dinner transaction. I think the bigger shift has to do with how people are using grocery stores than with specific categories of food that are on the perimeter or in the center.”

 

Mr. Minasi said Safeway was not deliberately taking space away from the center of the store and reallocating it to perimeter areas. Rather, he said, “we continue to evolve the stores to be more relevant to shoppers and focus on what’s important to them. Right now, that’s health and wellness, and those products tend to be prevalent in the perimeter of the store.”

 

 

[tooskinneejs]

Safeway plans IPO for Blackhawk business...

 

http://finance.yahoo.com/news/safeway-announces-preparations-blackhawk-ipo-130000275.html

 

 

[FCharlie]

Safeway plans IPO for Blackhawk business...

 

http://finance.yahoo.com/news/safeway-announces-preparations-blackhawk-ipo-130000275.html

 

 

Looks like more of a partial IPO, or a tracking stock. Blackhawk has $100 million of EBITDA, about $60 million of profits. Growing at 25%. What's that worth? And what does that say for Safeway excluding Blackhawk? Safeway has about $2.2 billion of EBITDA, about $900 million of free cash flow today, growing at about 0%. Excluding Blackhawk, Safeway would be about $2.1 billion EBITDA and $840 million of free cash flow.

 

These are just my guesses but having a value on Blackhawk that would probably be around $800 million just highlights the reality that Safeway isn't valued at much at all. About 2.5 times free cash flow.

[Tim Eriksen]

Safeway plans IPO for Blackhawk business...

 

http://finance.yahoo.com/news/safeway-announces-preparations-blackhawk-ipo-130000275.html

 

 

Looks like more of a partial IPO, or a tracking stock. Blackhawk has $100 million of EBITDA, about $60 million of profits. Growing at 25%. What's that worth? And what does that say for Safeway excluding Blackhawk? Safeway has about $2.2 billion of EBITDA, about $900 million of free cash flow today, growing at about 0%. Excluding Blackhawk, Safeway would be about $2.1 billion EBITDA and $840 million of free cash flow.

 

These are just my guesses but having a value on Blackhawk that would probably be around $800 million just highlights the reality that Safeway isn't valued at much at all. About 2.5 times free cash flow.

 

Assuming the sale of 20%, and a approximate near $1 billion valuation, it should give SWY a nice chunk of change to use for additional share repurchases, or a special dividend.  It will be interesting to see if they spin off the rest to shareholders.

[Sportgamma]

We commented often about just for U, so I thought I'd give you just a little bit of an update. The last time I had a chance to talk about this publicly was at a conference in New York.

 

We now have 4.5 million registrants and as a reference point, we see about 9 million unique households per week. These registered households represent about 40% of total sales. Our incremental spend continues to exceed our original estimates by more than 50%, and we believe that we're on track to have 5 million just for U registrants by the end of the year, and we expect that will represent about 45% of our sales.

 

----------

 

Karen F. Short - BMO Capital Markets U.S.

 

BMO Capital. Just turning to just for U, can you maybe give a little more details on the number of, I guess, regular users of the 4.5 million that have registered? And then, maybe can you talk a little bit about trends that you're seeing with the used, I guess, utilization with the mobile app in the iPad versus the desktop?

Steven A. Burd - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee

 

Sure. On regular users, the regular user number continues to run about 25%, 26% of registrants. So that puts us in the 1.1 million to 1.2 million range. A regular user, defined as somebody who has a pretty heavy spend and would visit the site with a lot of frequency. The incremental spend on the nonregular is about half of that of regular, so we used to be very focused on regular. But the nonregular incremental spend is actually equal to if not slightly greater than what we expected from regular spenders. So we no longer focus a lot on that separation, and the percentage of people that are going from nonregular to regular continues to grow. We started at about 20%, I think I saw a number yesterday that's around 26%. In terms of desktop versus mobile, there is a much greater propensity for people that have downloaded the mobile app to be on the high incremental spend side. I'll use the term become regular users. There's a 30% greater chance that they are regular users. And then also, mobile users spend between 40% and 50% more than desktop users. And it makes sense. I mean, we developed the site so that people could access it on their own time. And with all the mobile devices today, we all have downtime, and it's that downtime that people are using to access the site. We recently introduced an iPad application, which is organized a little bit differently than the traditional mobile application or the desktop. And I find in my own case, that I go on less often but do a more comprehensive application, and I'm quicker. So if somebody out there is just looking at number of times people go on, from comScore or somebody, it's not going to give you quite the same read. The way we organize the iPad application, it integrates your personal deals with coupons, and it separates things you buy from things we think you might buy. And so the speed at which someone can go through that is much faster than they could with either the desktop or the phone application.

 

 

http://seekingalpha.com/article/919121-safeway-management-discusses-q3-2012-results-earnings-call-transcript?page=3&p=qanda&l=last

 

 

[nsa122]

Has anyone gotten comfortable enough with Safeway to purchase? I generally agree with previous posters...a cheap valuation, aggressive buybacks, pretty stable business, high debt, uncertain pension obligations, and questionable management compensation. Worth following in my opinion, especially if they can tie up the pension loose ends. Could they do something similar to what GM has done (put obligations off on Metlife or someone for a lump sum)? I didnt see that this report on multi-employer pension plans from Credit Suisse had been posted, but I found it educational and something worth being aware of for this and other potential investments with legacy labor issues.

 

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=957405261&serialid=oe2EIsCzrA2IIIQ%2BXSl2YGknamAsVpXlIdX1Gfdn88w%3D

 

[A_Hamilton]

Has anyone gotten comfortable enough with Safeway to purchase? I generally agree with previous posters...a cheap valuation, aggressive buybacks, pretty stable business, high debt, uncertain pension obligations, and questionable management compensation. Worth following in my opinion, especially if they can tie up the pension loose ends. Could they do something similar to what GM has done (put obligations off on Metlife or someone for a lump sum)? I didnt see that this report on multi-employer pension plans from Credit Suisse had been posted, but I found it educational and something worth being aware of for this and other potential investments with legacy labor issues.

 

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=957405261&serialid=oe2EIsCzrA2IIIQ%2BXSl2YGknamAsVpXlIdX1Gfdn88w%3D

sure they could, but where are they going to come up with said lump sum? Also, SWY is a participant in many multi-employer pension plans that are underfunded. And from what I have read these plans are like asbestos liabilities...if one original participant in the plan goes BK and can't pay, the remaining parties pick up the tab. Kroger has been working its tail off to get out of these for the last several years.

[FCharlie]

Has anyone gotten comfortable enough with Safeway to purchase? I generally agree with previous posters...a cheap valuation, aggressive buybacks, pretty stable business, high debt, uncertain pension obligations, and questionable management compensation. Worth following in my opinion, especially if they can tie up the pension loose ends. Could they do something similar to what GM has done (put obligations off on Metlife or someone for a lump sum)? I didnt see that this report on multi-employer pension plans from Credit Suisse had been posted, but I found it educational and something worth being aware of for this and other potential investments with legacy labor issues.

 

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=957405261&serialid=oe2EIsCzrA2IIIQ%2BXSl2YGknamAsVpXlIdX1Gfdn88w%3D

 

 

With regards to the debt and the pension, the debt has been pretty aggressively paid down during the second half of 2012. The plan is to continue that into 2013, with the goal being 2.0X debt to adjusted EBITDA. The peak debt/EBITDA ratio was this summer at 2.86X, falling to 2.64X at Q3 and will fall again by year end as this is the monster cash flow quarter for SWY.

 

The pension is really the problem here. Perhaps ask yourself,  what would a fair valuation be for a company like Safeway if the pension were not an issue? $900 million free cash flow is pretty stable. $36 per share of owned real estate at cost. Dividend has risen 20%+ annually for seven years. Sales are stable, not booming, not falling.

 

Most would likely say that a 10% FCF yield would be appropriate. The company could pay a 4% dividend and use the remaining 6% to repurchase shares, make investments, pay down debt, or pay special dividends.

 

In Safeway's case, they have a 20%+ free cash flow yield. Is it safe to say that the multi-employer pension being underfunded is priced in?

 

Safeway is one of my largest positions. I think most here would agree that it appears cheap, but most here are not comfortable enough to pull the trigger.

[Rabbitisrich]

http://www.huffingtonpost.com/2012/12/21/safeway-supermarkets-overcharging_n_2345875.html?utm_hp_ref=business

 

In a CBS San Francisco article on Wednesday, CBS reports that recently-obtained results from 1,800 scanner inspections at Safeway-operated stores in 31 California counties and 11 different states showed that inspectors were overcharged on one out of every 50 items purchased over the past five years in California alone.

 

Has anyone experienced similar? I visited Safeway on a weekly basis when Just4U debuted, but every other receipt showed a missing discount.

[fareastwarriors]

http://www.huffingtonpost.com/2012/12/21/safeway-supermarkets-overcharging_n_2345875.html?utm_hp_ref=business

 

In a CBS San Francisco article on Wednesday, CBS reports that recently-obtained results from 1,800 scanner inspections at Safeway-operated stores in 31 California counties and 11 different states showed that inspectors were overcharged on one out of every 50 items purchased over the past five years in California alone.

 

Has anyone experienced similar? I visited Safeway on a weekly basis when Just4U debuted, but every other receipt showed a missing discount.

 

All the time as well. But this is not just a Safeway problem. I used to be a cashier at Whole Foods. Their prices were always wrong... and oftern times sold expired goods.

 

But it is frustrating. It is like the people making up weekly sales /creating new price tags do not talk to the IT folks about updating the prices in the system. How hard is it... 

 

I also experienced problems with Just4U discounts not showing up and I am pretty meticulous to make sure I got the right product and all.

[Rabbitisrich]

I'm not sure that it impairs the investment case. As you said, and the article implies, these are existing problems (although I haven't had problems with other grocers, including Whole Foods). Subjectively, my poor experience resulted in less frequent visits, but my area contains several grocers. If Safeway is geographically convenient, you would probably just check the receipt at the store.

[fareastwarriors]

http://www.bloomberg.com/news/2013-01-03/loblaw-buying-canada-safeway-no-pipe-dream-real-m-a.html

 

Loblaw Buying Canada Safeway No Pipe Dream in Spinoff

 

...

Buying Safeway Inc. (SWY)’s Canadian unit is logical as Loblaw faces more competition from Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), said Veritas Investment Research Corp. Safeway, a grocer that got 15 percent of its $44 billion of sales in 2011 from Canada, is undervalued after falling 14 percent last year, Bank of Montreal said. Safeway trades at the cheapest price relative to revenue and earnings among North American food retailers larger than $1 billion, according to data compiled by Bloomberg. Edward Jones & Co. said closely held Overwaitea Food Group, the western Canadian chain, is another option for Loblaw.

 

...

[fareastwarriors]

Safeway Inc. (SWY), the second-largest U.S. grocery-store chain, said Chief Executive Officer Steven Burd, 63, will retire in May after 20 years at the company.

 

The board will begin a search for a successor and will consider candidates from inside and outside the company, Pleasanton, California-based Safeway said yesterday in a statement. Burd, who is leaving to have more personal time and pursue his interest in health care, will retire at the company’s annual meeting on May 14.

 

http://www.bloomberg.com/news/2013-01-03/safeway-ceo-burd-to-retire-after-20-years-at-supermarket-chain.html

[Phaceliacapital]

I have been researching Safeway for some time now and I belief these two events could be positive for the company. With Burd gone the company has the opportunity to get a new CEO who discloses just a little bit more concerning corporate strategy (What is the Wellness section??). Also, SWY owns 42% of its own stores, spinning these off together with the Blackhawk IPO (and hopefully positive Just For U results) should increase value for the shareholders.

[A_Hamilton]

I have been researching Safeway for some time now and I belief these two events could be positive for the company. With Burd gone the company has the opportunity to get a new CEO who discloses just a little bit more concerning corporate strategy (What is the Wellness section??). Also, SWY owns 42% of its own stores, spinning these off together with the Blackhawk IPO (and hopefully positive Just For U results) should increase value for the shareholders.

 

Also hopefully you get rid of Burd's nonsensical $10 million a year comp!

[fareastwarriors]

I'm not sure that it impairs the investment case. As you said, and the article implies, these are existing problems (although I haven't had problems with other grocers, including Whole Foods). Subjectively, my poor experience resulted in less frequent visits, but my area contains several grocers. If Safeway is geographically convenient, you would probably just check the receipt at the store.

 

 

I have not switched over to a competitor. Even though there is a Trader Joes nearby and 2 Luckys (another supermarket) not too far away. Trader Joes doesn't have the selection I like and Luckys' stores are too old and feel run down compared to Safeway. I "feel" better shopping at Safeway despite the occasional overcharge/mis-sale and culling of employees.

 

I know I know, chill out right it is just groceries...

 

 

[Phaceliacapital]

Also hopefully you get rid of Burd's nonsensical $10 million a year comp!

 

From their proxy: http://www.sec.gov/Archives/edgar/data/86144/000008614412000038/defa14aresponsetoproxyadvi.htm

 

http://www.sec.gov/Archives/edgar/data/86144/000008614412000038/reportedvrealizabledefa14a.jpg

 

"For Mr. Burd's realizable compensation to have equaled his reported compensation in 2011, our stock price at the end of 2011 would have had to have been $28.54 per share. If that had been our stock price at the end of 2011, our one-year TSR would have been approximately 31.3%, and our three-year TSR would have been about 29.3%. ISS, using its unusual methodology for calculating stock option grants, calculates Mr. Burd's 2011 compensation at $14,729,000. For Mr. Burd's realizable compensation to have equaled this ISS figure, our stock price at the end of 2011 would have had to have been $31.77, and our one- and three-year TSRs would have been 46.2% and 44%. These TSR results would have put the Company near the top of any reasonable peer group in terms of performance, and Mr. Burd's compensation would be regarded as entirely appropriate."