Safeway Inc. (NYSE:SWY) got a big boost last week, in both its stock price and its coffers, but does that make the stock any safer for investors? The grocer’s stock was up as much as 12.5% on news that it was will pocket some C$4 billion thanks to the sale of its Canadian operations. However, the stock might not be so safe.
The sale of Safeway Canada will help with this liquidity problem, but even with the upcoming cash injection, there is still another fundamental issue; this includes the grocer’s cash flow generating capabilities. Over the past couple of years, Safeway Inc. (NYSE:SWY) has seen growth in free cash flow turn negative, while other major industry players, including Whole Foods Market, Inc. (NASDAQ:WFM), have been on a tear when it comes to churning out cash.
Part of this free cash flow contraction is a result of margin pressure, related to the entry of new nontraditional competitors, such as Whole Foods, as well as pressure from other major grocers The Kroger Co. (NYSE:KR) and SUPERVALU INC. (NYSE:SVU).
Whole Foods has also seen improvement in its inventory turnover, meaning it’s selling inventory faster, leading to less waste and markdowns. Days in inventory went from a high of 22 days in 2009 to roughly 16 days over the past 12 months. Sales are expected to be up an impressive 11% in fiscal 2013, thanks to 8% growth in square footage.