Supermarkets

Safeway, Inc.

Safeway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %> is well on its way toward creating a national brand identity. Currently, Safeway is the second-largest food and drug retailer in North America based on sales. The company operates 1,367 stores in the U.S. and Canada. It also owns almost 50% of Casa Ley, which operates food/variety and wholesale stores in western Mexico. Besides its grocery operations, it manufactures and sells private-label merchandise. Safeway is set to experience continued operating margin expansion in both its store base and as a result of the quickly accretive acquisition of Vons in April 1997. In the second quarter, Safeway opened 10 stores and closed 15, ending the quarter with 1,367 stores.

The company is on an expansion and remodeling binge, investing $204 million in capital expenditures during the first half of 1997. The company plans to invest $800 million (approximately $720 million in cash capital expenditures) in total capital expenditures during 1997 to open 40-45 new stores and remodel roughly 200 units. Total rise in square footage is expected to be in the neighborhood of 24.2% for 1997 including the Vons stores, and roughly 3% to 4% annual growth thereafter. Safeway continues to view additional acquisitions as an excellent source of growth.

Backing out goodwill, Safeway's return on tangible capital rockets to 16%. With an annualized growth rate of 25% projected two years out, Safeway trades at 20 times forward numbers, which also places it as the only company trading at a discount to its growth rate. The growth numbers for Safeway are aggressive (about half of the float is in institutional hands), but considering its current pace, it should be able to meet them.

Latest Financials

Safeway reported income (before extraordinary loss) of $134.1 million ($0.54 per share) for the second quarter ended June 14, 1997, compared to $106.7 million ($0.44 per share) for the second quarter of 1996. The company incurred an extraordinary loss of $4.2 million ($0.02 per share) in the second quarter of 1997 for the early retirement of debt, which reduced net income to $129.9 million ($0.52 per share). Quarterly results in both years were affected by labor disputes, and the current quarter was affected by the acquisition of The Vons Companies, Inc.

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