Coming out of 2011, Safeway looking toward higher comps, stronger pharmacy biz

PLEASANTON, Calif. — Pharmacy and identical-store sales were identified as positives for Safeway, which discussed its fourth-quarter results with analysts on Thursday.

However, a 4.4% drop in gross profit margin, from 28.3% to 27%, drove Safeway shares down significantly this morning — as of early afternoon shares were down by almost $2 to around $21 per share, or just under a 10% decline. Early reports noted that the juxtaposition between rising fuel costs and inflationary food costs, coupled with a cost-conscious, value-driven consumer, placed Safeway's ability to maintain profit margins between a rock and a hard place.

"When you have a 25% increase in [the cost of] fuel, and you have something close to a 5% increase in food ... fuel is a touch more than 8% of a consumer's budget and then you have food which is a little more than 13%," Safeway chairman, president and CEO Steve Burd said late Thursday morning during an analyst call. "That bucket of goods purchased goes up an average of 12.5%," he said. "Based on the market share data that we have, [this dynamic is impacting] virtually all food retailers."

So far into Safeway's first quarter fiscal 2012, Safeway market share is on the rise despite the "same kind of softness in sales," Burd said. Part of that increase can be traced, however, to an influx of pharmacy patients out of the Walgreens/Express Scripts situation. "We didn't see it in the first couple of weeks … but we've seen it ever since. It's significant," Burd said. But Safeway also is organically growing its pharmacy business, Burd added. "It's tough to generate positive [identical-store sales] in the script business … but we're able to do that. Part of that benefit is the strong vaccination business we have; part of that is an increased focus on specialty. So we expect pharmacy business for us to be quite good this year."

On Thursday morning, Credit Suisse analyst Ed Kelly was still bullish on Safeway, noting that Safeway's prevalence in the California market will be a strong positive to the grocer's bottom line in the coming year. "West Coast supermarket sales — as reported by Nielsen — have outpaced national industry sales by 150 basis points in the last two months," Kelly wrote in a Thursday morning note. "While industry sales nationally have been weak, it appears California (35% of Safeway stores, but likely over 50% of earnings) has been better. It’s too early to call a recovery in the region, but any sustained improvement would be a large positive for the stock."

Overall sales were up 6.3% to $43.6 billion for the fiscal 2011 year ended Dec. 31. Identical-store sales were up 4.4% for the year; however, excluding fuel sales, same-store sales were up 1%. Safeway has been seeing significant gains in fuel sales in the past two years, Burd said. While volume across branded gasoline stations is down 3%, Burd said, Safeway's fuel volume is up 15%. "That's the second year in a row that we've been running volume increases to that magnitude," he said. "People have been responding to our fuel program."

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