US retailer Safeway Inc has booked an increase in third-quarter earnings, helped by one-time items, but reported a drop in operating profit as it battled weak consumer confidence.
The company said yesterday (11 October) net profit increased 20.6% to US$157m in the three months to 8 September. The bottom line was boosted by proceeds from the sale of Safeway's 17 Genuardi stores, which was completed during the third quarter.
However, operating profit fell 12.1% in the period as the group invested heavily in its loyalty programme and battled depressed consumer sentiment. Operating profit dropped to $218.3m, the company revealed.
Nevertheless, chairman and CEO Steve Burd said that Safeway was "pleased" with its progress in operating profit. "While our operating profit margin declined 30 basis points in the quarter, the decline is explained by items that will not continue in the fourth quarter," he said.
"Our just for U loyalty program continues to gain momentum with our customers, and it is helping them save money every time they shop. The incremental sales driven by just for U helped to offset lower inflation in the third quarter and improve volume share," Burd added.
Total sales were down 0.2%, while same-store sales excluding fuel edged up 0.1%.
Safeway shares closed down more than 3% yesterday at $15.71.
Check back for more analysis from just-food Safeway's third-quarter numbers.
Safeway Inc. Announces Third Quarter 2012 Results Oct 11, 2012 (Marketwire via COMTEX) --Safeway Inc. (NYSE: SWY)
Results From Operations Safeway Inc. today reported income from continuing operations of $108.0 million ($0.45 per diluted share) for the third quarter of 2012 compared to $130.3 million ($0.38 per diluted share) in the third quarter of 2011.
"Our just for U™ loyalty program continues to gain momentum with our customers, and it is helping them save money every time they shop," said Steve Burd, Chairman and CEO. "The incremental sales driven by just for U helped to offset lower inflation in the third quarter and improve volume share. We are pleased with our progress in operating profit. While our operating profit margin declined 30 basis points in the quarter, the decline is explained by items that will not continue in the fourth quarter."
"We are encouraged that in the fourth quarter to date our identical-store sales, excluding fuel, are running at 1.0% with slightly improved volumes and higher inflation than in the third quarter of 2012," added Burd. "We expect identical-store sales in the fourth quarter will be driven by increased just for U engagement, the roll out of our partner fuel loyalty program and the launch of our Wellness initiative."
Sales and Other Revenue Sales and other revenue declined 0.2% to $10.0 billion in the third quarter of 2012 from $10.1 billion in the third quarter of 2011, primarily due to the disposition of Genuardi's stores and a lower Canadian exchange rate, partly offset by higher fuel sales. Identical-store sales, excluding fuel, were 0.1% for the quarter, which were lower than anticipated primarily due to a larger than expected decline in price inflation, partly offset by continued improvement in volume.
Operating Profit Operating profit declined 30 basis points from 2.47% in the third quarter of 2011 to 2.17% in the third quarter of 2012. Costs associated with the launch of just for U accounted for 23 basis points of this decline, and seven basis points resulted from the disposition of 17 Genuardi's stores. These costs will not continue in the fourth quarter of 2012.
Gross Profit Gross profit declined 56 basis points to 26.44% of sales in the third quarter of 2012 compared to 27.00% of sales in the third quarter of 2011. Excluding the 11 basis-point impact from fuel sales, gross profit declined 45 basis points due primarily to costs incurred to launch our just for U loyalty program, costs incurred to dispose of Genuardi's stores, slightly higher shrink expense, higher revenue from Blackhawk (a lower gross margin business) and changes in sales mix, partly offset by lower LIFO expense.
Operating and Administrative Expense Operating and administrative expense declined 26 basis points to 24.27% of sales in the third quarter of 2012 from 24.53% of sales in the third quarter of 2011. Excluding the 12 basis-point impact of higher fuel sales, operating and administrative expense margin declined 14 basis points, due primarily to higher gains from the sale of property and lower occupancy costs, partly offset by higher corporate pension expense and costs incurred to launch just for U.
Interest Expense Interest expense increased to $71.3 million in the third quarter of 2012 from $60.7 million in the third quarter of 2011 because of higher average borrowings, partly offset by lower average interest rates.
Income Taxes Income tax expense was 31.5% of pre-tax income in the third quarter of 2012 compared to 33.6% in the third quarter of 2011. The income tax rate was lower in the third quarter of 2012 due to individually immaterial items. The tax rate is expected to be approximately 33% for the remainder of 2012.
Discontinued Operations In January 2012, Safeway announced the planned sale or closure of its Genuardi's stores. In the third quarter of 2012, Safeway closed one Genuardi's store and sold 16 Genuardi's stores for a pre-tax gain of $80.4 million ($49.0 million after tax) and cash proceeds of $111 million. Safeway expects to close the final three Genuardi's stores in the fourth quarter of 2012 for an estimated pre-tax loss of approximately $17 million ($11 million after tax). For the year, we expect cash proceeds of approximately $112 million and a pre-tax gain of approximately $51 million ($31 million after tax).
36-Week Results Income from continuing operations increased to $311.2 million ($1.23 per diluted share) in the first 36 weeks of 2012 from $301.4 million ($0.85 per diluted share) in the first 36 weeks of 2011 primarily due to the $92.8 million ($0.26 per diluted share) tax expense on repatriated earnings from Canada recorded in the first 36 weeks of 2011. Excluding this charge, income from continuing operations would have been $394.2 million ($1.11 per diluted share) in the first 36 weeks of 2011.
The gross profit margin was 26.52% in the first 36 weeks of 2012 compared to 27.17% in the first 36 weeks of 2011. Operating and administrative expense margin was 24.36% of sales in the first 36 weeks of 2012 compared to 24.70% in the first 36 weeks of 2011.
Cash Flow Net cash flow provided by operating activities was $358.5 million in the first 36 weeks of 2012 compared to $710.9 million in the first 36 weeks of 2011. This change was largely due to the higher use of cash for working capital in 2012, which was driven primarily by the settlement of Blackhawk payables and increased inventory (net of payables), partly offset by lower corporate pension contributions.
Net cash flow used by investing activities declined to $435.9 million in the first 36 weeks of 2012 from $744.4 million in the first 36 weeks of 2011 primarily due to increased proceeds from the sale of properties and net cash proceeds from discontinued operations in 2012.
Net cash flow used by financing activities was $448.6 million in the first 36 weeks of 2012 compared to $583.2 million in the first 36 weeks of 2011. This change was due primarily to higher net proceeds from borrowings in 2012, partly offset by a higher level of stock repurchases in 2012.
Free cash flow was $505.4 million in the third quarter of 2012, which was used primarily to reduce debt by $468 million during the quarter.
Capital Expenditures Safeway invested $159.6 million in capital expenditures in the third quarter of 2012, while opening one new Lifestyle store, completing one Lifestyle remodel, refurbishing in-store pharmacies and developing properties through our wholly owned subsidiary, Property Development Centers LLC. Safeway also closed 23 stores, including 17 Genuardi's stores sold or closed during the quarter. For the year, Safeway expects to invest approximately $900 million in capital expenditures to open approximately 10 new Lifestyle stores, complete approximately five Lifestyle remodels, refurbish in-store pharmacies and develop properties.
Stock Repurchases Safeway did not repurchase any shares of its common stock during the third quarter of 2012. For the first 36 weeks of 2012, Safeway repurchased 57.6 million shares of its common stock at an average cost of $21.51 per share and a total cost of $1,240.3 million (including commissions). The remaining board authorization for stock repurchases at quarter-end was approximately $0.8 billion.
Guidance Safeway's guidance for 2012 remains at $1.90 to $2.10 earnings per diluted share, operating profit margin change, excluding fuel, of negative five basis points to positive five basis points, and free cash flow of $850 million to $950 million.