Safeway is no longer the company it was just nine months ago, and it is continuing to evolve.
Less than a year after Steve Burd retired as chairman, president and CEO, Safeway has sold off its Canadian division, discontinued its Dominick’s operation in Chicago and initiated a variety of operational changes while possibly considering further asset sales — all part of the company’s commitment to increase shareholder value under Robert Edwards, Burd’s successor as president and CEO.
“Safeway is looking at every possibility, and there are few sacred cows,” Karen Short, senior analyst at Deutsche Bank, New York, said. “Whatever would generate the most shareholder value would be an option.”
Neil Stern, senior partner at McMillanDoolittle, Chicago, said most of the changes at Safeway over the next year are likely to be internal.
“Selling Canada has provided Safeway with enough capital to try to turn things around without selling more assets, and discontinuing Dominick’s has eliminated a big drag on cash flow,” he told SN.
“The challenge now is to grow sales and profitability through pricing strategies, merchandising adjustments and promotional programs — all internal tools.”
Safeway declined to comment to SN for this article.
According to Chuck Cerankosky, managing director at Northcoast Research, Cleveland, Burd obviously had a hand in the decision to sell Canada, since the sale — for $5.8 billion — was concluded only about a month after Burd retired.
“Obviously that deal took months to negotiate and was driven by an unexpectedly generous price that Sobeys was willing to pay,” he told SN. “Most people thought Safeway would hang onto Canada because no one thought it would get so much money for the division.”
Cerankosky said the sale a couple of years ago of Genuardi’s, in the Philadelphia market, combined with the sale of Canada in mid-2013 and the writedown of Dominick’s at year’s end, “buys Safeway some time to review its strategic makeup.”
Kelly Bania, a research analyst for BMO Capital Markets, New York, said Safeway is taking a more targeted approach to individual customers, “[putting] less emphasis on the more historical one-size-fits-all approach” and opting instead to cluster stores based on demographic or ethnic patterns — a strategy Bania said could “aid Safeway in capturing a larger share of the customer’s wallet.”
Meredith Adler, managing director for Barclays Capital, New York, said Edwards has acknowledged that Safeway has “serious fundamental weaknesses,” and despite his intention to take steps to create additional shareholder value, she said she remains skeptical “that meaningful improvements can be achieved any time soon.”
Following the Canadian sale and the exit from its Chicago operation, Safeway sales — for just over 1,400 stores — are estimated at $37.3 billion for the fiscal year that ended Dec. 29.
The sale of the Canadian division has left Safeway with proceeds of approximately $4 billion on its balance sheet — half of which is earmarked for debt reduction, with another $1.8 billion for share repurchases and $200 million for investments in growth opportunities, observers said.
The presence of $4 billion of unspent cash on the chain’s books has piqued interest from private-equity buyers, who view Safeway as a possible takeout target. Adding to industry speculation about what Safeway might do were reports in the fall the chain had hired Goldman Sachs to help it explore its options.
Within days of that speculation, Safeway announced it was seeking buyers for Dominick’s — a chain whose market share had reportedly fallen to 9%, compared with 23% in 2000, two years after Safeway acquired it in 1998.
Observers said part of Safeway’s motivation for disposing of the chain may have been to offset a portion of the $1.89 million in capital-gains tax created by the sale of Canada.
The decision to sell Dominick’s was “a great first step” for Safeway to improve its operations, Scott Mushkin, managing director at Wolfe Research, New York, pointed out, “because it will yield $400 million to $450 million in tax savings, which will mitigate the gain on the Canada sale.”
According to Adler, “Safeway would almost have an incentive to dispose of [additional] assets at a low price since that would allow it to offset more of the gain from the sale of Canada. It would not be a surprise if the company had tried to sell these [assets] before without success, but it is only now that the sale price might not matter.”