SWY - Safeway

[FCharlie]

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!

 

 

The strategy seems pretty clear if you listen to all the conference calls and presentations. Safeway is in a mature industry with mediocre margins but still produces an enormous amount of free cash flow. Strategy = Focus on controlling shrink, maintaining margins, producing free cash flow, property ownership, and develop subsidiaries that allow the corporation an opportunity to be more than just a dying business in a brutal industry.

 

Steve Burd gets a lot of criticism for his pay but look at the facts:

 

He has created PDC, a property development entity that has built almost three dozen shopping centers and acts as a landlord.

 

He has created Blackhawk. Blackhawk was created with only a couple of million dollars of capital and is now set to IPO with a potential market value into the high hundreds of millions. How is that a failure?

 

The focus on property ownership has allowed the company to control almost $9 billion of real estate, and the share count decline  has given the long-term owner an opportunity to own more and more of this.

 

I don't think his compensation is excessive. Burd has been here for 20 years and he's not had an easy job. Would we rather have a mediocre CEO at half the pay who simply runs the business until it dies and then there's nothing left? Burd is creating value whether or not the market realizes it.

[Sportgamma]

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!

 

 

The strategy seems pretty clear if you listen to all the conference calls and presentations. Safeway is in a mature industry with mediocre margins but still produces an enormous amount of free cash flow. Strategy = Focus on controlling shrink, maintaining margins, producing free cash flow, property ownership, and develop subsidiaries that allow the corporation an opportunity to be more than just a dying business in a brutal industry.

 

Steve Burd gets a lot of criticism for his pay but look at the facts:

 

He has created PDC, a property development entity that has built almost three dozen shopping centers and acts as a landlord.

 

He has created Blackhawk. Blackhawk was created with only a couple of million dollars of capital and is now set to IPO with a potential market value into the high hundreds of millions. How is that a failure?

 

The focus on property ownership has allowed the company to control almost $9 billion of real estate, and the share count decline  has given the long-term owner an opportunity to own more and more of this.

 

I don't think his compensation is excessive. Burd has been here for 20 years and he's not had an easy job. Would we rather have a mediocre CEO at half the pay who simply runs the business until it dies and then there's nothing left? Burd is creating value whether or not the market realizes it.

 

Charlie,

 

Thanks for all your input on SWY.

 

What´s your take on their disclosure? I must say that I find it very difficult to find any relevant information regarding PDC. Blackhawk is pretty unclear to me as well. Have you found any break-up or additional disclosure about those entities in SWY filings or other documentation?

 

Regards,

 

Gísli

 

 

[FCharlie]

 

Charlie,

 

Thanks for all your input on SWY.

 

What´s your take on their disclosure? I must say that I find it very difficult to find any relevant information regarding PDC. Blackhawk is pretty unclear to me as well. Have you found any break-up or additional disclosure about those entities in SWY filings or other documentation?

 

Regards,

 

Gísli

 

Gisli,

 

Steve Burd spoke for about an hour about PDC and Blackhawk at Investor Day last year.

 

The transcript can be found here:

 

http://seekingalpha.com/article/415981-safeway-inc-2012-guidance-update-call-mar-06-2012?part=single

 

 

I don't know of any new disclosure on Blackhawk. If the IPO is still on track, we should get tons of disclosure soon.

 

The next Investor day should be the first week of March.

 

 

 

[Sportgamma]

 

Charlie,

 

Thanks for all your input on SWY.

 

What´s your take on their disclosure? I must say that I find it very difficult to find any relevant information regarding PDC. Blackhawk is pretty unclear to me as well. Have you found any break-up or additional disclosure about those entities in SWY filings or other documentation?

 

Regards,

 

Gísli

 

Gisli,

 

Steve Burd spoke for about an hour about PDC and Blackhawk at Investor Day last year.

 

The transcript can be found here:

 

http://seekingalpha.com/article/415981-safeway-inc-2012-guidance-update-call-mar-06-2012?part=single

 

 

I don't know of any new disclosure on Blackhawk. If the IPO is still on track, we should get tons of disclosure soon.

 

The next Investor day should be the first week of March.

 

Great, thanks. I must have missed that transcript.

 

[Phaceliacapital]

Thanks FCharlie, completely missed that transcript too!

[Sportgamma]

Mr. Burd on the investor day:

 

"So I've talked about just for U. I've talked about Blackhawk. I've mentioned the PDC. I have not mentioned it, and it's really just a one-liner in here, but you would expect given all the knowledge that we have about health and I would tell you that we know more about controlling health care cost than any business that's in the game that I can think of. We know more about insurance companies who are mostly in the business of processing claims. We know more about how to control health care cost than I would say the top 10 medical centers in the United States. And so for more than 2 years now, we've been developing a wellness play that essentially takes that knowledge, productizes it and introduces it to consumers."

 

http://seekingalpha.com/article/415981-safeway-inc-2012-guidance-update-call-mar-06-2012?part=single

 

 

From the statement announcing the retirement of Burd:

"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]

A good writeup over at seekingalpha:

 

http://seekingalpha.com/article/1101441-safeway-and-consequences-of-large-share-repurchases-in-the-mid-term

 

• Repurchases since the end of 2010 have totaled 134 million shares (currently there are 239.6 million shares outstanding) at an average price of $21.13.
  
• The large reduction in the total numbers of shares outstanding has some interesting effects. One consequence of this is that index funds, which account for a significant proportion of Safeway's ownership, have to reduce their position in the company by a proportion equivalent to the total share count reduction.
  
• After the share purchases are reported arbitrageurs attempt to front run the index funds. The front runners are therefore net sellers preceding the index funds selling which should cause the price to fall following the announcement of large share repurchases. Since Safeway reported their very large debt-feuled repurchases short interest has grown from under 15% to 30.7% of the float.
  
• The message seems to be clear; Safeway is just waiting for a catalyst to reach intrinsic value.
  
• Third, a small revenue bump this coming year could have big consequences for earnings and the stock. Assuming that SG&A expenses are largely static with a 3% increase in revenue, this will lead to roughly a 50% increase in earnings. What happens to shorts when earnings get bumped by 50%? Of course this cuts both ways, a small drop in revenue could wipe out Safeway's profits, though its hard to see short interest growing much more from here.

 

I do not take credit for the above.

 

In my opinion, 2 largest issues:

 

- Underfunding

- New compensation scheme

 

Still very hesitant to buy, although the window of opportunity is closing with the upcoming Wellness initiative, blackhawk ipo...

 

[Sportgamma]

Why underfunding?

[Phaceliacapital]

I am sorry I meant the underfund state of their pension scheme, those numbers scare me a little and I am not actuarian enough to determine the appropriate input numebers to come up with my own underfunding amount...

 

You got any advice?

[Sportgamma]

I am sorry I meant the underfund state of their pension scheme, those numbers scare me a little and I am not actuarian enough to determine the appropriate input numebers to come up with my own underfunding amount...

 

You got any advice?

 

Got it. I struggling with the same issue. My take is to apply a margin of safety to the assumptions that management has presented...

 

I´ve been contemplating how to model it and my opinion at the moment is to assume higher costs and as such it will impact the flow rather than the stock.

[Rabbitisrich]

Does anyone know why the stock moved 5%+ on Wednesday?

[Phaceliacapital]

I think most movement was caused by rumours of SWY selling their Canadian Business

[Rabbitisrich]

I see, thanks.

[FCharlie]

If BMO analyst Karen Short had come out with an article that gave a sum of the parts valuation but with  no hope or potential for a sale transaction, I wonder how the stock would have reacted.

 

If you read her report, she actually thinks Safeway could get $5.5 billion for the sale of it's Canadian division.  That's greater than the entire market cap of the company. On top of this, Safeway is having a partial IPO for Blackhawk this year and Blackhawk is expected to have a market value of between half a billion and a billion. Blackhawk and Canada somehow have a value that approaches 150% of the entire market value of the company. Meanwhile, Safeway US produces the majority of the free cash flow, owns PDC, owns an enormous amount of real estate and somehow is worth nothing... Less than nothing.

 

 

[Sportgamma]

If BMO analyst Karen Short had come out with an article that gave a sum of the parts valuation but with  no hope or potential for a sale transaction, I wonder how the stock would have reacted.

 

If you read her report, she actually thinks Safeway could get $5.5 billion for the sale of it's Canadian division.  That's greater than the entire market cap of the company. On top of this, Safeway is having a partial IPO for Blackhawk this year and Blackhawk is expected to have a market value of between half a billion and a billion. Blackhawk and Canada somehow have a value that approaches 150% of the entire market value of the company. Meanwhile, Safeway US produces the majority of the free cash flow, owns PDC, owns an enormous amount of real estate and somehow is worth nothing... Less than nothing.

 

So the $5.5b was that equity value of Canada ops or enterprise? I´m guessing it included real estate? Did see give any estimate on how it would affect the unfunded pension liability?

 

Thanks,

 

Gísli

[Phaceliacapital]

Barclays thinks the runup in shares of Safeway (SWY -1.7%) on speculation the company might sell off its Canadian assets is overdone. After crunching the numbers, analyst Meredith Adler thinks the costs of redeeming debt and paying Canadian capital gains taxes doesn't make sense. Shares of Safeway are up close to 10% over the last 5 trading sessions.

 

From seekingalpha, this is outside my circle of competence, any comments?

[Tim Eriksen]

Barclays thinks the runup in shares of Safeway (SWY -1.7%) on speculation the company might sell off its Canadian assets is overdone. After crunching the numbers, analyst Meredith Adler thinks the costs of redeeming debt and paying Canadian capital gains taxes doesn't make sense. Shares of Safeway are up close to 10% over the last 5 trading sessions.

 

From seekingalpha, this is outside my circle of competence, any comments?

I'd be curious to read the logic of that.  If SWY could actually get $5.5 billion for its Canadian operations, I think they should take it.  Canadian ops only earned $382 million pre tax in 2011 on $6.7 billion in sales.  That is a huge multiple of earnings and sales.  Per the 10-K total assets in Canada were just over $2 billion.  Even if the paid tax on a $3.5 billion gain I would guess that would be $1 to $1.5 billion.  That would leave them with $4 billion in proceeds.  Assuming all the debt was attributable to the US operations (worst case) they could pay it down to around $1 billion.  That would lower interest expense by $250 million per year.  EPS would decrease (since $250 million is less than the loss of $382 million) but that doesn't mean it is not smart since leverage would decrease substantially.  That removes much of the short thesis regarding leverage since it would also allow them to easily handle any pension issues.

 

[Phaceliacapital]

http://www.bloomberg.com/article/2013-02-21/anyP_2bz5.1U.html

 

--  Our third consecutive quarter of U.S. unit market share gains with a

    38 basis-point improvement in the supermarket channel and a 10

    basis-point improvement across all outlets.

   

   

--  An identical-store sales increase (excluding fuel) of 0.8%, which was

    negatively impacted by a calendar shift* of 0.3% and a generic drug

    impact of 0.7%.

   

   

--  A unit volume increase of 0.3% in the U.S., when the market

    supermarket channel declined 2.1% and all outlets declined 0.6% in our

    U.S. markets.

   

   

--  Operating profit margin improvement of 39 basis points including the

    gain from legal settlements and 10 basis points when you exclude the

    settlements, fuel sales and fuel partner discounts.

[fareastwarriors]

http://www.reuters.com/article/2013/02/21/us-safeway-results-idUSBRE91K17820130221

 

 

Safeway Inc (SWY.N) said Thursday a new personalized discount program boosted sales in the first quarter of 2013 compared with the fourth quarter, sending shares up nearly 14 percent on the New York Stock Exchange.

[FCharlie]

Safeway's cumulative free cash flow for the past four years totals $4.3 billion vs. today's market cap of $5.7 billion.

 

From today's investor presentation, Safeway projects cumulative free cash flow over the next five years of $5.7 billion vs. today's market cap of $5.7 billion.

 

For anyone who's concerned about Safeway's debt, today they announced their forecast for year end debt of $4.8 billion, which would be an eleven year low, after which they intend to resume share repurchases as their primary use of free cash flow.

 

 

 

 

[fareastwarriors]

http://www.dataroma.com/m/activity.php?sym=SWY&typ=a

 

interesting to see Eddie Lampert owning 844k shares.

as of 4q12

[fareastwarriors]

http://www.bloomberg.com/news/2013-04-19/safeway-s-blackhawk-advances-after-raising-230-million-in-ipo.html

 

 

Blackhawk Network Holdings Inc., the gift-card provider owned by grocer Safeway Inc. (SWY), climbed in trading after raising $230 million in an initial public offering, pricing the shares above the marketed range.

 

The shares advanced 9.4 percent to $25.15 at 11:25 a.m. in New York. The Pleasanton, California-based company priced 10 million shares at $23 each, according to a statement yesterday. The company’s existing shareholders had earlier offered the stock for $20 to $22.

 

[Sportgamma]

Some back-of-the-envelope calculation:

 

The IPO of Blackhawk went through today. SWY sold ~20% of the company for $230M, right?

 

HAWK is up ~13% in the first day of trading, or around $26 per share. So the equity value of the 80% should be around $1B.

 

SWY stock has not budged today and market cap stands at $6.3B.

 

 

 

 

[FCharlie]

Some back-of-the-envelope calculation:

 

The IPO of Blackhawk went through today. SWY sold ~20% of the company for $230M, right?

 

HAWK is up ~13% in the first day of trading, or around $26 per share. So the equity value of the 80% should be around $1B.

 

SWY stock has not budged today and market cap stands at $6.3B.

 

 

What's truly amazing is that not long ago at all this company had a market cap of only $3.5 billion dollars.  At that price, if you net out the value of and free cash flow from BlackHawk, Safeway had a free cash flow yield of over 40%... Other than Eddie Lampert, raise your hand if you were a buyer back then.

 

 

[Phaceliacapital]

Fuck me :D

 

Congrats to those who did pull the trigger!