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

Published on June 26, 2013 at 11:29 am by The Motley Fool in News

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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 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.