Author Topic: SWY - Safeway  (Read 78109 times)

valueinvesting101

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Re: SWY - Safeway
« Reply #10 on: March 29, 2012, 03:44:39 PM »
I am reading through the company's annual report. I am trying to understand why did they incur goodwill impairment charges of 1.8 billion in 2009.

As per 2009 annual report:

Quote
Our goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of all reporting units to our total market capitalization. Therefore, a significant and sustained decline in our stock price could result in goodwill impairment charges.

I do not understand how can declining stock price reduce book value of company. Are they including value of stock after buyback since it is held in treasury?

When are they exactly cancelling shares which are bought back? Are they are issuing dividends on those shares? As per 2011 annual report they hold 307.9 million shares in treasury.


FCharlie

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Re: SWY - Safeway
« Reply #11 on: March 29, 2012, 08:22:07 PM »
I am reading through the company's annual report. I am trying to understand why did they incur goodwill impairment charges of 1.8 billion in 2009.

As per 2009 annual report:

Quote
Our goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of all reporting units to our total market capitalization. Therefore, a significant and sustained decline in our stock price could result in goodwill impairment charges.

I do not understand how can declining stock price reduce book value of company. Are they including value of stock after buyback since it is held in treasury?

When are they exactly cancelling shares which are bought back? Are they are issuing dividends on those shares? As per 2011 annual report they hold 307.9 million shares in treasury.

The 2009 goodwill impairment was primarily related to VONS in California. What the stock price has to do with goodwill impairment I don't know either.  Interestingly, 2009 was Safeway's best year ever for free cash flow, at $1.5 billion, almost 30% of today's market cap.




FCharlie

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Re: SWY - Safeway
« Reply #12 on: March 29, 2012, 08:25:41 PM »
Interestingly, SWY filed their proxy yesterday and claim to now have only 257 million shares outstanding on March 16th. This is 10.5 million fewer than they had on Feb 22nd when they filed the 10K. Looks like Safeway has been steadily buying over half a million shares each business day since that time.

This puts the total decline in share count over the past four years at 41.4%

Anyone care to bet on how long a company can repurchase stock at this rate and how many years a company can raise it's dividend by over 20% without the stock responding in a big way?

rranjan

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Re: SWY - Safeway
« Reply #13 on: March 29, 2012, 10:33:46 PM »
Interestingly, SWY filed their proxy yesterday and claim to now have only 257 million shares outstanding on March 16th. This is 10.5 million fewer than they had on Feb 22nd when they filed the 10K. Looks like Safeway has been steadily buying over half a million shares each business day since that time.

This puts the total decline in share count over the past four years at 41.4%

Anyone care to bet on how long a company can repurchase stock at this rate and how many years a company can raise it's dividend by over 20% without the stock responding in a big way?


I did very quick scan and I have not looked at their SEC filings.

http://finance.yahoo.com/news/swy-announces-dividend-buyback-plan-200935052.html

"In the fourth quarter of fiscal 2011, Safeway repurchased 43.3 million shares for $858.6 million (76.1 million shares for $1.6 billion during the year) and was left with $0.9 billion under its existing stock repurchase program at the fiscal end."

"The Board of Directors of the company also approved an additional $1.0 billion for the company's existing stock repurchase program with just $400 million remaining as of February 22, 2012."


Based on above two statements , it seems that Safeway had 0.9B left at fiscal end and on Feb 22, they had 0.4B left. So they spent 0.5B in buyback. Diluted share count on fiscal end was 344M. So if they bought on average 20 bucks a share then by using half billion they bought 25M shares. So

At Feb 22, their share count should be around 344 - 25 = 319M

Your numbers on Feb 22 comes at 268M.

Big difference in numbers. I need to check the source directly later.

I was just scanning quickly and came up with their pension underfunding issue.

http://finance.yahoo.com/news/safeway-shares-fall-downgrade-165735156.html

" Credit Suisse analyst Edward Kelly said that his firm's analysis of Safeway's multi-employer pension plans found a $7 billion pre-tax underfunded liability."

Safeway replied that underfunding is only 1.9 Billion. These are big numbers and difference. I don't trust analyst's number so need to look at long terms return assumptions Safeway is making. I don't have much idea about Safeway but stock buy back looked aggresive.


Packer16

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Re: SWY - Safeway
« Reply #14 on: March 30, 2012, 08:34:11 AM »
What the stock price has to do with goodwill impariment is every year in the goodwill impairment test, the stock price is used as an indicator (typically weighted the most) to determine if the book value (which includes a goodwill write-up when an acquistion occurs) is impaired.  It is a non-cash charge and does not effect cash flow but typically tests whether the projections in the original acquisition are met or not.

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valueinvesting101

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Re: SWY - Safeway
« Reply #15 on: March 30, 2012, 09:21:27 AM »
As per 2011 Annual report Safeway had 296.6 millions common shares outstanding and at February they had 268 millions common shares outstanding.

Weighted average shares outstanding for year 2011 were 343.4 millions. Since they did big chunk of buyback in the last quarter weighted number seems higher compared to year end number.


I find this note on page 74 of 2011 Annual report:

Quote
Anti-dilutive shares totaling 25.1 million in 2011, 26.4 million in 2010 and 42.5 million in 2009 have been excluded from diluted
weighted-average shares outstanding.

Not sure what these shares are.


Interestingly, SWY filed their proxy yesterday and claim to now have only 257 million shares outstanding on March 16th. This is 10.5 million fewer than they had on Feb 22nd when they filed the 10K. Looks like Safeway has been steadily buying over half a million shares each business day since that time.

This puts the total decline in share count over the past four years at 41.4%

Anyone care to bet on how long a company can repurchase stock at this rate and how many years a company can raise it's dividend by over 20% without the stock responding in a big way?


I did very quick scan and I have not looked at their SEC filings.

http://finance.yahoo.com/news/swy-announces-dividend-buyback-plan-200935052.html

"In the fourth quarter of fiscal 2011, Safeway repurchased 43.3 million shares for $858.6 million (76.1 million shares for $1.6 billion during the year) and was left with $0.9 billion under its existing stock repurchase program at the fiscal end."

"The Board of Directors of the company also approved an additional $1.0 billion for the company's existing stock repurchase program with just $400 million remaining as of February 22, 2012."


Based on above two statements , it seems that Safeway had 0.9B left at fiscal end and on Feb 22, they had 0.4B left. So they spent 0.5B in buyback. Diluted share count on fiscal end was 344M. So if they bought on average 20 bucks a share then by using half billion they bought 25M shares. So

At Feb 22, their share count should be around 344 - 25 = 319M

Your numbers on Feb 22 comes at 268M.

Big difference in numbers. I need to check the source directly later.

I was just scanning quickly and came up with their pension underfunding issue.

http://finance.yahoo.com/news/safeway-shares-fall-downgrade-165735156.html

" Credit Suisse analyst Edward Kelly said that his firm's analysis of Safeway's multi-employer pension plans found a $7 billion pre-tax underfunded liability."

Safeway replied that underfunding is only 1.9 Billion. These are big numbers and difference. I don't trust analyst's number so need to look at long terms return assumptions Safeway is making. I don't have much idea about Safeway but stock buy back looked aggresive.

Viking

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Re: SWY - Safeway
« Reply #16 on: April 12, 2012, 01:15:00 AM »
FCharlie, thanks for posting the idea and answering questions (in the process providing much of the rationale).

After reading a fair bit, I am amazed at the speed with which they are repurchasing shares. This is not a small company and to take out over 40% of the stock in such a short amount of time is unusual. During the Q4 conference call one analyst stated the perception is SWY is repurchasing shares to enable it to hit guidance - telling me the analysts are not understanding or believing management - which also likely explains why the share price is not moving.

SWY 2012 plan is back end loaded; mgmt stated they expect Q1 to be tough with things getting better as the year progresses. This type of guidance will likely not help the share price in the short term. I wonder how low the share price will go in the next few months once SWY stops buying (perhaps thay have stopped and this explains the stocks fall into the $20 range.

The recent investor day session was quite informative. Mgmt expects the underlying food business to be flat as it is a mature business. They touted 'just for U' marketing program as a key driver to reverse the decline in same store sales (after inflation). I am not a big believer in these sorts of programs (having worked for Kraft for years and hearing story after story...). SWY almost sounds like they are placing their food business in runoff and milking it for the cash flow (to buy back stock).

They expect the move the needle growth over the next few years to to come from non-food businesses they are growing within SWY leveraging the companies core competencies:
1.) Blackhawk - gift card company - profitable now
2.) Property Management Company - will help drive profits in 2013-14 and forward
3.) Health and Wellness (specifics not yet provided as it is just getting fleshed out)
What I like with this stuff is the entrepreneurial drive and the long term focus (these businesses take 4 years or more to really impact profitability and this is OK with SWY).

I still have trouble with the debt they are taking on to fund the stock repurchase. The rationale SWY provided is the after tax interest rate is lower than the dividend they pay on the shares they are repurchasing (it is accretive to earnings immediately). Fortunately, SWY still has much less debt than more levered competitors like SVU. SWY also recently invested heavily in their stores so near term capital costs are manageable.

Bottom line, SWY's management team are either smart like a fox or delusional. Unfortunately, my read is the analyst community is not drinking the Kool-Aid so Safeway will need to deliver before people buy in. Given they are forecasting a weak Q1 I am not sure what the catalyst will be for the stock over the next 6 months or so. I will likely buy an initial position should the stock drop closer to $19; should it fall back to its 52 week low of $16 I would be very interested.
« Last Edit: April 12, 2012, 01:21:54 AM by Viking »

FCharlie

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Re: SWY - Safeway
« Reply #17 on: April 12, 2012, 06:33:29 PM »
FCharlie, thanks for posting the idea and answering questions (in the process providing much of the rationale).

After reading a fair bit, I am amazed at the speed with which they are repurchasing shares. This is not a small company and to take out over 40% of the stock in such a short amount of time is unusual. During the Q4 conference call one analyst stated the perception is SWY is repurchasing shares to enable it to hit guidance - telling me the analysts are not understanding or believing management - which also likely explains why the share price is not moving.

SWY 2012 plan is back end loaded; mgmt stated they expect Q1 to be tough with things getting better as the year progresses. This type of guidance will likely not help the share price in the short term. I wonder how low the share price will go in the next few months once SWY stops buying (perhaps thay have stopped and this explains the stocks fall into the $20 range.

The recent investor day session was quite informative. Mgmt expects the underlying food business to be flat as it is a mature business. They touted 'just for U' marketing program as a key driver to reverse the decline in same store sales (after inflation). I am not a big believer in these sorts of programs (having worked for Kraft for years and hearing story after story...). SWY almost sounds like they are placing their food business in runoff and milking it for the cash flow (to buy back stock).

They expect the move the needle growth over the next few years to to come from non-food businesses they are growing within SWY leveraging the companies core competencies:
1.) Blackhawk - gift card company - profitable now
2.) Property Management Company - will help drive profits in 2013-14 and forward
3.) Health and Wellness (specifics not yet provided as it is just getting fleshed out)
What I like with this stuff is the entrepreneurial drive and the long term focus (these businesses take 4 years or more to really impact profitability and this is OK with SWY).

I still have trouble with the debt they are taking on to fund the stock repurchase. The rationale SWY provided is the after tax interest rate is lower than the dividend they pay on the shares they are repurchasing (it is accretive to earnings immediately). Fortunately, SWY still has much less debt than more levered competitors like SVU. SWY also recently invested heavily in their stores so near term capital costs are manageable.

Bottom line, SWY's management team are either smart like a fox or delusional. Unfortunately, my read is the analyst community is not drinking the Kool-Aid so Safeway will need to deliver before people buy in. Given they are forecasting a weak Q1 I am not sure what the catalyst will be for the stock over the next 6 months or so. I will likely buy an initial position should the stock drop closer to $19; should it fall back to its 52 week low of $16 I would be very interested.

Viking,

I too am amazed at the speed that Safeway is repurchasing stock. I would say that is probably the most interesting part of this story. In my opinion, when you have a business that is selling this cheap that is repurchasing shares at this rate, you almost can't lose provided the core business remains on track. It sounds too simple and too good to be true, but if you look at this situation for what it is, a company with a $5 billion market cap repurchasing close to $1 billion of shares annually, in five years there won't be any shares left in existence. Any time I've ever come across situations like this in the past, the stock has taken off at some point. Think Philip Morris, AutoZone, DirecTV... Huge buyers of their own stock, core business remains constant, stock eventually explodes higher.

Analysts certainly don't believe management. One analyst even asked why guidance isn't higher and Steve Burd responded by saying that if guidance were higher, no one would believe it anyway.... Seems like management understands Wall Street doesn't care.

I personally don't see how the guidance isn't higher. If you simply take the historical earnings from Q2 2011 ($145.8 million) and divide by today's share count (257 million) you get almost 57 cents. Current estimates are for 47 cents.  If you take earnings from Q3 2011 ($130.2 million) and divide by today's share count you get 50 cents. Do the same for Q4 2012 and you get 84 cents. Put it all together and you're talking about current estimates being way, way off....  Safeway should be running E.P.S. growth at 25%+ by the end of this year. For some reason, Wall Street isn't impressed with that because it's not from ID Sales growth.

Regarding the debt they are taking on to repurchase stock, it's not as if they are funding the entire buyback with debt. This company could repurchase about 15% of it's shares even after paying the dividend simply funded with free cash flow. Management has made clear they will repurchase shares with all of their free cash flow plus however much debt they can take on without lowering their credit rating. They claim to know exactly how much debt they can take on and they don't seem to be slowing the rate of repurchase. I support the buyback funded with debt. I'd even get more aggressive if I were them. Geez. This is a company with an almost 20% free cash flow yield. If I could borrow from the bank at 3% and use the interest as a tax write off, then use the cash to buy an asset yielding 20%, I'd borrow as much as I could. During the three years 2009,2010,2011, what most would consider the financial crisis, Safeway produced $3.4 billion free cash flow, or 68% of their current market cap. Hard to imagine a financial crisis taking Safeway out of business.

There are very few times in life opportunities like this present themselves. An almost 20% free cash flow yield, dividend growth of 20%+ for six, seven years in a row, a stock price at the same price it was fifteen years ago, and no one cares. Wall Street doesn't care, even on this board, most don't care. People here can't get enough Bank of America (which I own lots of too) because it's selling for five times normalized earnings. Safeway is at five times free cash flow TODAY. I think you're the only one here who actually may be interested in what I have to say about Safeway.  Sometimes having not a soul on earth care about a company presents better opportunities for investors than being the most hated company on earth.


Viking

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Re: SWY - Safeway
« Reply #18 on: April 12, 2012, 09:52:42 PM »
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.

Rabbitisrich

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Re: SWY - Safeway
« Reply #19 on: April 13, 2012, 02:19:21 AM »



I was just scanning quickly and came up with their pension underfunding issue.

http://finance.yahoo.com/news/safeway-shares-fall-downgrade-165735156.html

" Credit Suisse analyst Edward Kelly said that his firm's analysis of Safeway's multi-employer pension plans found a $7 billion pre-tax underfunded liability."

Safeway replied that underfunding is only 1.9 Billion. These are big numbers and difference. I don't trust analyst's number so need to look at long terms return assumptions Safeway is making. I don't have much idea about Safeway but stock buy back looked aggresive.

Other reports indicated that the Credit Suisse number referred to the total MEP trust shortfall. Safeway does use a fairly high discount rate of 4.9% to determine pension obligations. That is hardly down from 2006. Look at the sensitivity analysis on page 26 of the 2011 10-k. The discount rate seems to be based upon their non-pension cost of debt, but their pension returns have substantially underperformed that benchmark over the last 10 years.

Does anyone worry that management changed accounting for Blackhawk simply to bulk up sales and diminish the operating expense ratio? They don't record a valuation allowance or accept recourse risk, so accounting for receipts on a gross basis only adds noise to the gross margin %.

Thanks for bringing up this idea. It's worth looking into.

« Last Edit: April 13, 2012, 05:11:44 PM by Rabbitisrich »