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Safeway profit may top forecasts

Its growth plan includes store remodels, more organic products and gift card unit expansion.

December 13, 2006|From Reuters

Safeway Inc. said Tuesday that plans including organic baby food and massive growth in its relatively unknown Blackhawk gift card unit should help increase long-term earnings per share by 12% to 15% and perhaps top Wall Street's expectations in 2007.

The No. 3 U.S. grocer, which met with analysts and investors, also said it planned to spend $1.7 billion to open about 25 stores and remodel about 275 others next year.

Shares of Safeway closed up 71 cents, or 2.2%, at $33.17 after climbing as high as $33.65, their best level since 2002.

The company has already remodeled about 43% of its 1,767 stores to the "Lifestyle" format, which includes bakeries, a produce section reminiscent of an outdoor market and large flower shop areas. It expects 94% of its stores to be set in the "Lifestyle" format in 2009.

Safeway, which has grown sales largely by opening stores and remodeling older ones, may also look at acquisitions down the road, but not for about five to 10 years, Chief Executive Steve Burd said.

Safeway has introduced exclusive products such as Rancher's Reserve beef and Signature soups to attract consumers looking for quality foods. It also now sells prepared foods such as grilled panini sandwiches to attract those who dine out or shop at stores such as Whole Foods Market Inc.

The Pleasanton, Calif., company, whose chains include Vons, Pavilions and Dominick's, hopes that enhancements including its own line of organic products, called O, will help it fend off tough competition from Wal-Mart Stores Inc., the largest U.S. seller of food, and high-end grocers such as Whole Foods.

Safeway said Tuesday that O had already pulled in more than $150 million in sales since its December 2005 launch. It now plans to add O products for babies and children and introduce Eating Right, a line focused on health and diet.

A growth area discussed heavily during Tuesday's investor meeting was the Blackhawk Network, a unit that distributes gift cards and plans seven new products or services in 2007.

Blackhawk gathers gift cards and brings them to supermarkets, drugstores and convenience stores. It then gets a share of the commission each time one of the cards is sold.

Safeway said Blackhawk had very low capital requirements, should contribute $100 million in pretax income in 2007 and had an annual growth rate in excess of 100%.

Safeway said it expected to earn $1.71 a share this year, adjusted for tax benefits seen in the first three quarters. That would represent a 22% rise from 2005.

Analysts, on average, expect $1.72 a share, according to Reuters Estimates.

In 2007, it expects to earn $1.90 to $2 a share; the average analysts' forecast is $1.91.

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