Safeway Inc. (SWY): This Grocer Still Isn’t Safe

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.

Safeway Inc. (NYSE:SWY)
The uptick in the stock comes as the cash injection could alleviate some liquidity concerns. Safeway appears to struggling on the liquidity front; its cash on hand is below $300 million and its current ratio is less than 1.0.



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).

Going a step further, Safeway Inc. (NYSE:SWY) has also seen its leverage position deteriorate over the past five years, with its leverage ratio and debt-to-equity ratio having risen drastically over that period.
2008 2009 2010 2011 2012
Leverage ratio 2.6 3.0 3.0 4.1 5.0
Debt-to-equity 0.69 0.88 0.86 1.26 1.79
The latest
Safeway Inc. (NYSE:SWY)is still paying investors a 3.2% dividend yield, but sales are expected to be up only 1.5% in 2013. But the grocer is looking to continue its cost-saving campaign. Safeway has already closed its distribution centers in British Columbia and Vancouver due to continued operating losses. The grocer is also exiting the Philadelphia market, having closed 25 Genuardi stores in 2012.
A better way?
One of the best ways to play the industry is Whole Foods. This organic grocer has been one of the great growth stories of the industry, namely due to its organic and fresh-food concepts. The company posted 2Q EPS of $0.76, compared to $0.64 for the same period last year, on the back of 6.9% higher comparable-store sales.

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.

The square footage growth should be a key growth driver going forward. Whole Foods opened 16 stores in fiscal 2010, 18 in 2011 and 25 in 2012. The company hopes to open some 32 in 2013 and then 33 to 38 for 2014. The long-run goal is for upwards of 1,000 stores, with expansion opportunities in Canada and the U.K.

Being the U.S.’ largest grocer, Kroger is one of the best at returning cash to shareholders via dividends and share buybacks. Kroger recently upped its dividend payment by 30% and has plans to enhance shareholder return by 10% to 13.5% over the long run, with 2% to 2.5% of that coming via dividends.
Kroger is also looking to grow its bottom line. The grocer plans to either build or expand 50 supermarkets in 2013. One nice thing about Kroger is its pharmacies, which help improve its sales profile. This, in part, is expected to help its EBITDA margin remains above 4% for fiscal 2014.
However, one of the big issues that Kroger will face is pricing pressure from the like of Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). Wal-Mart already offers groceries via its super-center locations and Target is implementing its P-fresh model, which includes consumables, and both of the retail giants also have in-store pharmacies.
The other struggling grocer, SuperValue, also sold off some of its key assets. Back in March, the grocer sold off some 877 supermarkets to Cerberus Capital. The sale includes stores from the Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market chains. The move will allow SuperValu to focus on its Save-A-Lot discount chain. But even with the cash injection from the sale of Cerberus, SuperValu, like Safeway Inc. (NYSE:SWY), still has a highly levered balance sheet.
Hedge fund trade
Safeway Inc. (NYSE:SWY)has some 28 hedge funds long the stock, which was a 27% increase from the previous quarter. This includes billionaire Ken Griffin of Citadel Investment Group with the largest position, owning some $75 million in stock (check out Citadel’s cheap stocks).
Meanwhile, Kroger had only 23 hedge funds long the stock. Steve Richman’s East Side Capital had the largest position in the stock, worth some $188 million and accounting for 9.4% of its total 13F portfolio (see East Side’s top stocks).
Holding some of the highest hedge fund interest among grocers was Whole Foods, with 32 hedgies long the stock. Having the largest position was billionaire Jim Simons of Renaissance Technologies, worth some $191 million (check out Simons’ cheap stock picks).
Bottom line
I still like Whole Foods as the best grocer given the company’s robust growth prospects and strong balance sheet. Kroger has a debt-to-equity ratio of 1.4, with Safeway Inc. (NYSE:SWY) at 1.9, while Whole Foods has no debt. Notice I didn’t mention the troubled SuperValu, which has a negative equity due to a $3.3 billion accumulated deficit in retained earnings. Whole Foods is at the forefront of the changing consumer preferences and has an awareness of health consciousness shoppers; thus, it’s the top investment in the grocery space.

It’s hard to believe that a grocery store could book investors more than 30 times their initial investment, but that’s just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse.


Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market.

The article This Grocer Still Isn’t Safe originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!