Author Topic: SWY - Safeway  (Read 77684 times)

FCharlie

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Re: SWY - Safeway
« Reply #20 on: April 13, 2012, 04:03:23 AM »
The good news for SWY is that as mgmt continues to deliver the stock will pop at some point. My guess is the dividend will get increased another 15 or 20% in May and this will likely get peoples attention.

Perhaps the issue is everyone thinks that Walmart/Target will rule the retail food world and SWY and SVU are zeros.

Perhaps the issue is the amount debt they are taking on (not to beat a dead horse); the risk for SWY in taking on more debt is if rates rise (a bunch) at the same time EBITDA falls (a bunch). Yes, today that outcome looks remote. However, lots of other well managed businesses were destroyed by leverage working on them in the wrong direction. The debt they have today does look manageable and management is experienced and looks like they have their act together. And, to your point, part of the buyback has been paid via their free cash flow.

The picture that is forming for me is SWY views their core business like an annuity (they are not looking to grow their food business) that will deliver $750 million or more in free cash flow per year = $2.92/share = 14% yield. And yes the $750 is a conservative estimate.


A handful of quarters back, Safeway said on a conference call that they budget for about $200 million towards the dividend. Based on the level of share repurchase, the dividend would need to go up 33% this year to hit that target.. I don't expect 33%, but I think 20% for the next two years is likely.

Regarding Wal-Mart and Target.... It seems like Wal-Mart made their moves into grocery this past decade and they are pretty well established. I also have heard Steve Burd comment on Target where he specifically mentioned that stores like Target end up competing for the shoppers that would already be shopping at Wal-Mart, and that it's a different customer that shops at Safeway. I think this makes sense. I think about produce at a store like Safeway vs. produce at a store like Wal-Mart and I can see a big difference in appeal.

Also, last I checked Wal-Mart offers 3 cents off gas per gallon at their fuel stores, Safeway you can get up to $1.00 off per gallon with $1,000 in grocery purchases. $500 in purchases gets 50 cents off per gallon, $100 in purchases gets 10 cents off etc... The beauty here is that there is a limit of 30 gallons, so when someone spends $1,000 on food, the gross profit for Safeway is $275, then the hit at the gas station is about $27(factoring in the fuel margin plus the $1.00 off per gallon).... That also assumes they have a 30 gallon tank and fill up all the way, so likely the hit is much smaller... It's a huge draw and I can see people who "hate" big oil and hate the price of gas happily shopping at Safeway just to feel better about gas prices.  This is why Safeway's fuel sold when measured in gallons tends to be up 10-15% year over year during times like these.

And finally, yes, the debt thing I understand people's concern. We just witnessed businesses fail one after another over lack of financing. That was why I brought up the point earlier about how much cash Safeway generated during that same time period. You could also logically assume that once rates rise, Safeway will redirect buyback cash into debt repayment. I don't think anyone would have issue with rolling over Safeway commercial paper or Safeway bonds if Safeway were directing $300-$400 million annually to debt repayment. Just look at SuperValu, their bonds are not distressed at all.
« Last Edit: April 13, 2012, 04:03:09 PM by FCharlie »


biaggio

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Re: SWY - Safeway
« Reply #21 on: April 13, 2012, 05:47:36 AM »
FCharlie, thanks for posting your idea.

Have been following thread.

What do you think at looking at FCF/EV as a valuation metric in this case? I am asking that in light of the issue of the debt being issued to buy back stock. Especially with record low interest rates i.e mortgage rates, interest on debt will be higher in the future.

$1.1b vs ~ $10b EV still looks good still- a 11% yield vs 20%.

finetrader

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Re: SWY - Safeway
« Reply #22 on: April 13, 2012, 08:53:32 AM »
What about gross margin? I've noticed that their profits or FCF are about the same than 10 years ago while their sales have doubled.
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Tim Eriksen

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Re: SWY - Safeway
« Reply #23 on: April 13, 2012, 09:24:52 AM »
What about gross margin? I've noticed that their profits or FCF are about the same than 10 years ago while their sales have doubled.

Not exactly.  In 2001 sales were $34.3 billion and gross profit was $10.6 billion.  In 2011 sales were $43.6 billion and gross profit was $11.8 billion.  Sales have not doubled, they have increased only 27%.  Store count is down 6%.  You are correct that gross margin has fallen.  It has declined from 30.9% in '01 to 27% in '11.  The decline in gross margin may be due in part to increased fuel sales.  The stock price is 50% lower.  EV/EBITDA has declined from 8.0 at the end of 2001 to 4.8 at the end of 2011.


finetrader

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Re: SWY - Safeway
« Reply #24 on: April 13, 2012, 10:39:54 AM »
Quote
What about gross margin? I've noticed that their profits or FCF are about the same than 10 years ago while their sales have doubled.

Not exactly.  In 2001 sales were $34.3 billion and gross profit was $10.6 billion.  In 2011 sales were $43.6 billion and gross profit was $11.8 billion.  Sales have not doubled, they have increased only 27%.  Store count is down 6%.  You are correct that gross margin has fallen.  It has declined from 30.9% in '01 to 27% in '11.  The decline in gross margin may be due in part to increased fuel sales.  The stock price is 50% lower.  EV/EBITDA has declined from 8.0 at the end of 2001 to 4.8 at the end of 2011.

You're right,
my point is that cash flow from operating activities have stayed constant in 10 years while sales have increased.
In those circonstances (no earnings growth, and higher leverage) I think it is justified that evaluation ratios have decreased.

Something to consider.
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Rabbitisrich

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Re: SWY - Safeway
« Reply #25 on: April 13, 2012, 02:10:00 PM »
What about gross margin? I've noticed that their profits or FCF are about the same than 10 years ago while their sales have doubled.

Not exactly.  In 2001 sales were $34.3 billion and gross profit was $10.6 billion.  In 2011 sales were $43.6 billion and gross profit was $11.8 billion.  Sales have not doubled, they have increased only 27%.  Store count is down 6%.  You are correct that gross margin has fallen.  It has declined from 30.9% in '01 to 27% in '11.  The decline in gross margin may be due in part to increased fuel sales.  The stock price is 50% lower.  EV/EBITDA has declined from 8.0 at the end of 2001 to 4.8 at the end of 2011.

 Another factor gross margin decline is the change in accounting for Blackhawk revenues. Not sure why management is so confident that margins are approaching a bottom. Why maintain debt at 5X EBIT after 4 years of negative real comps? Operating and administrative costs were 24.7% of sales in 2011 compared to 23% in 2001. Kroger grew comps at 4.9% (and uses a 4.6% pension discount rate FWIW) while Whole Foods grew at 8.5%. Safeway competes for customers who seek an experience a little better than Ralph's and cheaper than Whole Foods, yet closer than Costco or Wal-Mart. Fresh and Easy is throwing money to compete against Pavilions and QFC targets the same customers as the Safeway brand. The future is uncertain enough to justify lower leverage.
 
 
 

FCharlie

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Re: SWY - Safeway
« Reply #26 on: April 13, 2012, 04:13:40 PM »
FCharlie, thanks for posting your idea.

Have been following thread.

What do you think at looking at FCF/EV as a valuation metric in this case? I am asking that in light of the issue of the debt being issued to buy back stock. Especially with record low interest rates i.e mortgage rates, interest on debt will be higher in the future.

$1.1b vs ~ $10b EV still looks good still- a 11% yield vs 20%.

Hi, Biaggio.

It's fair to take enterprise value into consideration. The reason I'm not especially concerned with it is because Ben Bernanke is blatantly saying zero% rates until late 2014, and because Safeway management is blatantly saying they have no intention to repay debt when interest rates are this low. The money they are using to fund share repurchase is coming from free cash flow, commercial paper between 0.65%-1.0%, and long term debt around 3%-4%... Blending the commercial paper and LT debt rates leaves you with an after tax cost of debt around 2.5-3.0% and remember, the entire buyback isn't debt funded. In fact, the four years prior to now, Safeway repurchased 40% of it's shares and simultaneously decreased it's total debt. Even with the added debt today, interest expense has declined year after year. I think many people hear the words Debt Funded Share Repurchase and get very concerned. You have to remember the first $700-$800 million of the annual buyback is funded with FCF.

dcollon

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Re: SWY - Safeway
« Reply #27 on: April 18, 2012, 05:44:35 AM »
From Bloomberg (see attached)

A_Hamilton

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Re: SWY - Safeway
« Reply #28 on: April 18, 2012, 06:24:33 AM »
From Bloomberg (see attached)

I don't see what KKR would do with the company anyway. The board and management are already full up with individuals who have very close ties to KKR. I don't see where they are going to find all kinds of cost saves just by bringing this thing private, the recent share repurchase plan is effectively an LBO, just with no premium being paid for the takeout.

FCharlie, don't you have any concerns about what happens to your equity position if cash flow declines in a recession? Further, think about what happens if cash flow declines, borrowing costs will go up substantially on any debt that they need to rollover (like their 30-45 CP program). Bernanke and the Fed, broadly, have the ability to control treasury rates (at least for the forseeable future). However, that says nothing about what will happen to credit spreads over those rates.

Viking

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Re: SWY - Safeway
« Reply #29 on: April 18, 2012, 09:25:05 AM »
When I look at the sector SWY, SVU and KR each look interesting. SVU looks to be the cheapest, but also carries the most risk. KR looks to be the most expensive (of the three), but also looks to be the best managed. If I was looking for a buy and hold for 10 years it would be KR. I also loved the disclosure of KR; they lay things out very well and they answer questions directly. Understanding their business is quite easy. As an example, their pension return assumptions are 6.5%; they mentioned one of their large competitors uses 8.5% (I trhink they were referencing SVU or SWY). I have added KR to my watch list.