Safeway (SWY)

Q3 2011 Earnings Call

October 13, 2011 11:00 am ET


Steven A. Burd - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Robert L. Edwards - Chief Financial Officer and Executive Vice President

Melissa C. Plaisance - Senior Vice President of Finance & Investor Relations


John Heinbockel - Guggenheim Securities, LLC, Research Division

Charles Edward Cerankosky - Northcoast Research

Mark Wiltamuth - Morgan Stanley, Research Division

Tal Lev - Consumer Edge Research, LLC

Michael Palahicky

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

Karen F. Short - BMO Capital Markets U.S.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

Andrew P. Wolf - BB&T Capital Markets, Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division



Welcome to the Safeway's Third Quarter 2011 Conference Call. [Operator Instructions] I will now turn the call over to Ms. Melissa Plaisance, Safeway's Senior Vice President of Finance and Investor Relations. Please go ahead.

Melissa C. Plaisance

Good morning, everyone, and thank you for joining us for our third quarter conference call. With me this morning is Steve Burd, Safeway's Chairman, President and CEO; and Robert Edwards, Executive Vice President and Chief Financial Officer.

Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. However, we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a list and description of those risks and uncertainties, please see our filings with the SEC.

And with that, I'd like to turn the call over to Steve.

Steven A. Burd

Thank you, Melissa. Let me begin with net income. Net income for the quarter was just over $130 million. This compares with net income from the same quarter a year ago of just under $123 million. Expressed in terms of earnings per share, we made $0.38 this quarter. A year ago, we made $0.33 a share, representing a 15% increase in earnings per share.

By way of some quick highlights, our earnings per share results were above first consensus estimates and above our own internal expectations. ID sales were much stronger than they were in quarter 2, and they strengthened as we moved throughout the quarter. Our gross margin rate, adjusted by both fuel sales and the Blackhawk reporting change that we announced last quarter, was flat with last year despite all the challenges of keeping up with inflation. And then O&A expenses as a percentage of sales were less than last year. As a result, operating margin expanded moderately, just as it did in quarter 1.

Providing a little bit more detail, starting with sales. Total sales increased 7.1% over last year. This strong increase in reported sales is largely the result of 4 factors. These factors, in order of importance, start with much higher fuel sales. And those sales were driven by a 26% increase in price per gallon versus the previous year, coupled with a 13% increase in what we would call ID gallon, those gallons in the identical number of stations that we operated last year. Second element of improvement came from ID sales growth. Third was an increase in the Canadian exchange rate. And then finally, the change in the Blackhawk revenue reporting that we discussed at our last quarterly earnings call.

ID sales, excluding fuel, increased 1.5%. Now this is 3x the 0.5% increase we experienced in quarter 2 of this year. It is also the seventh consecutive quarter of improvement. In addition, we have 9 of 10 divisions that had positive ID in the quarter, indicating, while not uniform, a very broad base.

[Technical Difficulties]

Okay. ID sales started the quarter moderately stronger than quarter 2 and then picked up speed in the back half of the quarter. In fact, if you combine the last 6 weeks of quarter 3 with the first 4.5 weeks of quarter 4, we are running just under 2%.

Inflation, as we measure it, was just under 4% for the quarter, which represents a pickup from last quarter. And while volume declined in the quarter, as I believe it did for the entire sector, our market share on our sector, for the first time in several quarters, was flat with last year. Also encouraging was an increase in the number of unique households shopping with us this quarter.

Turning to gross margin. Our total gross margin rate declined 114 basis points from last year. When you exclude fuel sales and the reporting change for Blackhawk, our gross margin rate was actually flat with last year. While gross margin was negatively impacted by several factors including inflation, mix changes and LIFO charges, it was positively impacted by shrink improvements, also a comparison to last year's margin hit resulting from the closure of the Burnaby, B.C. distribution center and the severance cost that we took for that and then, of course, Blackhawk's strong performance.

Turning to O&A expenses. O&A expenses, expressed as a percentage of sales, declined 103 basis points from last year's third quarter. Excluding fuel sales and the Blackhawk reporting change, the O&A expense ratio declined 8 basis points. The largest positives contributing to this improvement were lower labor expenses and lower depreciation charges. On the negative side, the combination of property gains and losses plus impairment was considerably lower or worse than it was a year ago. Now given our level of ID sales, our O&A expenses were very well managed for the quarter.

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