Safeway

[FCharlie]

Hi all.

 

I wanted to run an idea by you guys and see what everyone thinks.

 

About a year ago I began buying Safeway, around $21.50.  At the time they had 368 million shares outstanding, so we're talking a $7.9 billion market cap.

 

Safeway produced $2.6 billion of cumulative free cash flow in 2009/2010, and at the time they projected $800 million of free cash flow for 2011. I averaged the 2009/2010 free cash flow with the projections for 2011 and realized that Safeway was sitting there with a 14+% free cash flow yield. Safeway also was very actively repurchasing their shares, which excited me as well.

 

One year later, here we are. Safeway ended up on target with their free cash flow. They got even more aggressive with the share repurchase at the end of 2011, so for the year, Safeway repurchased 19.5% of their shares during 2011. Subsequent to the end of 2011, Safeway has further repurchased 9.4% of it's shares this year, only a couple of months in. Today, they authorized a new $1 billion buyback.

 

The current Safeway share count is 268 million, the stock price has barely budged. The market cap is now only $5.8 billion, and Safeway has projected $900 million of free cash flow for 2012, and has projected cumulative free cash for the next five years of about $5.7 billion, almost equal to their current market cap.  What does Safeway do with their cash?

 

1)They pay the dividend, which has been increased at 20% annual rates for many years

2) They repurchase stock in large quantities (Safeway has repurchased 40% of it's shares in the past four years)

3) They have been developing entire shopping centers (currently 32 shopping centers under construction as we speak). Safeway has created a subsidiary for the sole purpose of buying land, developing entire shopping centers, anchoring them with new Safeway stores, and renting the entire shopping center with themselves as the landlord.  Safeway by the way currently has $31/share of owned real estate at cost (land + buildings)

 

 

The attraction here is simple. Hard assets and free cash flow. What's not attractive about a company that sells for $21.70/share with $31.00/share of real estate, generating around $1 billion annually ($3.75/share free cash flow)  Around a 17.5% free cash flow yield, repurchasing it's own shares at an astonishing rate, and a share price that is unchanged from 15 years ago??

 

I can happily discuss further, and will respond to questions/comments.. I'm looking for other opinions here. I think Safeway is one of the best deals out there. Cheap & safe.

 

What do you think?

[A_Hamilton]

Hi all.

 

I wanted to run an idea by you guys and see what everyone thinks.

 

About a year ago I began buying Safeway, around $21.50.  At the time they had 368 million shares outstanding, so we're talking a $7.9 billion market cap.

 

Safeway produced $2.6 billion of cumulative free cash flow in 2009/2010, and at the time they projected $800 million of free cash flow for 2011. I averaged the 2009/2010 free cash flow with the projections for 2011 and realized that Safeway was sitting there with a 14+% free cash flow yield. Safeway also was very actively repurchasing their shares, which excited me as well.

 

One year later, here we are. Safeway ended up on target with their free cash flow. They got even more aggressive with the share repurchase at the end of 2011, so for the year, Safeway repurchased 19.5% of their shares during 2011. Subsequent to the end of 2011, Safeway has further repurchased 9.4% of it's shares this year, only a couple of months in. Today, they authorized a new $1 billion buyback.

 

The current Safeway share count is 268 million, the stock price has barely budged. The market cap is now only $5.8 billion, and Safeway has projected $900 million of free cash flow for 2012, and has projected cumulative free cash for the next five years of about $5.7 billion, almost equal to their current market cap.  What does Safeway do with their cash?

 

1)They pay the dividend, which has been increased at 20% annual rates for many years

2) They repurchase stock in large quantities (Safeway has repurchased 40% of it's shares in the past four years)

3) They have been developing entire shopping centers (currently 32 shopping centers under construction as we speak). Safeway has created a subsidiary for the sole purpose of buying land, developing entire shopping centers, anchoring them with new Safeway stores, and renting the entire shopping center with themselves as the landlord.  Safeway by the way currently has $31/share of owned real estate at cost (land + buildings)

 

 

The attraction here is simple. Hard assets and free cash flow. What's not attractive about a company that sells for $21.70/share with $31.00/share of real estate, generating around $1 billion annually ($3.75/share free cash flow)  Around a 17.5% free cash flow yield, repurchasing it's own shares at an astonishing rate, and a share price that is unchanged from 15 years ago??

 

I can happily discuss further, and will respond to questions/comments.. I'm looking for other opinions here. I think Safeway is one of the best deals out there. Cheap & safe.

 

What do you think?

 

I have looked at SWY a number of times and know the story well. A number of questions to think about on this one:

 

1.) How are you determining free cash flow yield? What are you assuming for maintenance capex? SWY "overinvested" in CAPEX from 2004-2008 in order to refresh stores to their lifestyle models. By 2009 and 2010 they didn't need to do as much maintenance capex as others because the store base had been refreshed.

 

2.) What do you think about the fact that gross margins and operating margins fall religiously year in and year out?

 

3.) Referring to point #2, how much free cash flow will there be if gross margins fall another 200 bps.

 

4.) I agree with their current thought process in some respects on share repurchase. It certainly has a lower after tax cost than the dividend. However, the dividend is discretionary, interest payments are not.

 

5.) What do you believe it will cost to make up for pension shortfall overtime?

 

6.) What do you value Blackhawk at?

 

These are all just questions, but the margin questions are concerning enough that I've been unwilling to put more than immaterial sums into the name.

 

 

 

[A_Hamilton]

Hi all.

 

I wanted to run an idea by you guys and see what everyone thinks.

 

About a year ago I began buying Safeway, around $21.50.  At the time they had 368 million shares outstanding, so we're talking a $7.9 billion market cap.

 

Safeway produced $2.6 billion of cumulative free cash flow in 2009/2010, and at the time they projected $800 million of free cash flow for 2011. I averaged the 2009/2010 free cash flow with the projections for 2011 and realized that Safeway was sitting there with a 14+% free cash flow yield. Safeway also was very actively repurchasing their shares, which excited me as well.

 

One year later, here we are. Safeway ended up on target with their free cash flow. They got even more aggressive with the share repurchase at the end of 2011, so for the year, Safeway repurchased 19.5% of their shares during 2011. Subsequent to the end of 2011, Safeway has further repurchased 9.4% of it's shares this year, only a couple of months in. Today, they authorized a new $1 billion buyback.

 

The current Safeway share count is 268 million, the stock price has barely budged. The market cap is now only $5.8 billion, and Safeway has projected $900 million of free cash flow for 2012, and has projected cumulative free cash for the next five years of about $5.7 billion, almost equal to their current market cap.  What does Safeway do with their cash?

 

1)They pay the dividend, which has been increased at 20% annual rates for many years

2) They repurchase stock in large quantities (Safeway has repurchased 40% of it's shares in the past four years)

3) They have been developing entire shopping centers (currently 32 shopping centers under construction as we speak). Safeway has created a subsidiary for the sole purpose of buying land, developing entire shopping centers, anchoring them with new Safeway stores, and renting the entire shopping center with themselves as the landlord.  Safeway by the way currently has $31/share of owned real estate at cost (land + buildings)

 

 

The attraction here is simple. Hard assets and free cash flow. What's not attractive about a company that sells for $21.70/share with $31.00/share of real estate, generating around $1 billion annually ($3.75/share free cash flow)  Around a 17.5% free cash flow yield, repurchasing it's own shares at an astonishing rate, and a share price that is unchanged from 15 years ago??

 

I can happily discuss further, and will respond to questions/comments.. I'm looking for other opinions here. I think Safeway is one of the best deals out there. Cheap & safe.

 

What do you think?

 

I have looked at SWY a number of times and know the story well. A number of questions to think about on this one:

 

1.) How are you determining free cash flow yield? What are you assuming for maintenance capex? SWY "overinvested" in CAPEX from 2004-2008 in order to refresh stores to their lifestyle models. By 2009 and 2010 they didn't need to do as much maintenance capex as others because the store base had been refreshed.

 

2.) What do you think about the fact that gross margins and operating margins fall religiously year in and year out?

 

3.) Referring to point #2, how much free cash flow will there be if gross margins fall another 200 bps.

 

4.) I agree with their current thought process in some respects on share repurchase. It certainly has a lower after tax cost than the dividend. However, the dividend is discretionary, interest payments are not.

 

5.) What do you believe it will cost to make up for pension shortfall overtime?

 

6.) What do you value Blackhawk at?

 

These are all just questions, but the margin questions are concerning enough that I've been unwilling to put more than immaterial sums into the name.

 

Separately, it may make sense to have SWY discussion moved to the Investment Ideas board.

[Kraven]

They are leveraged pretty good too.  Not as much as some, but the leverage is there.  I don't know the story that well, but if margins keep contracting how does that affect their debt coverage?  How close are they to their covenants?

[FCharlie]

 

I have looked at SWY a number of times and know the story well. A number of questions to think about on this one:

 

1.) How are you determining free cash flow yield? What are you assuming for maintenance capex? SWY "overinvested" in CAPEX from 2004-2008 in order to refresh stores to their lifestyle models. By 2009 and 2010 they didn't need to do as much maintenance capex as others because the store base had been refreshed.

 

2.) What do you think about the fact that gross margins and operating margins fall religiously year in and year out?

 

3.) Referring to point #2, how much free cash flow will there be if gross margins fall another 200 bps.

 

4.) I agree with their current thought process in some respects on share repurchase. It certainly has a lower after tax cost than the dividend. However, the dividend is discretionary, interest payments are not.

 

5.) What do you believe it will cost to make up for pension shortfall overtime?

 

6.) What do you value Blackhawk at?

 

These are all just questions, but the margin questions are concerning enough that I've been unwilling to put more than immaterial sums into the name.

 

Hi,

 

Here's are a few comments.

 

1) How am I determining Free Cash Flow yield?  I am taking average free cash flow from the past three years, and projected average free cash flow for the  next five years, and dividing it per share and then into the stock price. The average for the past three years and the forward projections for the next five average out to about $1.1 billion annually. The beauty here is that Safeway doesn't really need to achieve anything more than status quo to make this investment work.

 

Safeway indeed did "overinvest" in store remodels in the 2004-2007 time frame. This Lifestyle remodeling is nearly all complete. There are only a small percentage of stores that aren't remodeled and many of the remaining ones aren't going to be remodeled as they are close to the end of their leases. Safeway claims to have some of the most updated stores in the industry. I can't actually confirm this, I don't live anywhere near a Safeway store.

 

2) Gross margins are actually very stable if you strip out the impact from fuel sales and LIFO, which is a non-cash charge.  I would either ignore the fuel/LIFO impact, or pay attention to total gross margin dollars, which are very stable and increased last year even as margin rate declined (again due mostly do to fuel shifting the numbers around) Fuel is a good business, It's something that didn't exist not too long ago. It's a multi billion dollar business and it drives huge traffic into the stores.

 

3) Not sure. The margin rate isn't my concern... It's the margin rate excluding fuel and non-cash LIFO charges. As we've seen in 2011, gross margin rates can decline with a simultaneous increase in gross margin dollars.

 

4)Dividends are discretionary, Interest payments are not. Interest expense has declined every year since 2003. Even in 2011, a year when Safeway actually increased total debt. 2003 interest expense was $442 million. 2011 was $272 million... Interest rates are so low that the expense is declining as Safeway refinances, even as they have borrowed somewhat to repurchase stock. Last conference call Safeway stated that they are borrowing six month commercial paper for less than 1%, and using the cash to repurchase stock, which has a dividend yield of 2.6%.... a trade off that actually decreases cash out the door because the dividend yield is so much higher than the after tax cost of commercial paper.

 

5) Don't know about the pension. Pensions are a nightmare for many companies right now. (Sears Holdings)  This isn't something I'm terribly concerned with though. Pension accounting is subject to assumptions about the future. Interest rates are at 0% and the future projected obligation could change materially with changes in rates or equity prices.

 

6) Don't know how to value Blackhawk. I know it's not worth zero though, and with a nearly 20% free cash flow yield, I think there is a negative value being applied to the core business, let alone Blackhawk.

 

Thanks for your comments.. I welcome more.

 

What do you think?

[FCharlie]

They are leveraged pretty good too.  Not as much as some, but the leverage is there.  I don't know the story that well, but if margins keep contracting how does that affect their debt coverage?  How close are they to their covenants?

 

Safeway's interest coverage was at 8.9X this most recent quarter. The second highest of any point in the past twenty years.

 

Safeway's historical debt at year end:

 

2002: $8.45 billion

2003: $7.82 billion

2004: $6.76 billion

2005: $6.35 billion

2006: $5.86 billion

2007: $5.65 billion

2008: $5.49 billion

2009: $4.90 billion

2010: $4.83 billion

2011: $ 5.41 billion

 

So during the past four years, Safeway has actually decreased their total debt levels while simultaneously repurchasing 40% of their shares outstanding. Prior the the past four years, Safeway spent almost all of their cash flow remodeling stores and repaying debt.

[fenris]

I believe they gave out some numbers on Blackhawk during the March analyst presentation. Unfortunately IR won't share the presentation. Do you have numbers for Blackhawk's EBITDA, margins or eps contribution?

 

How do you think about Walmart's consistent effort to move into California? A lot of communities are fighting it and delay the competition but do you think there is a scenario in which SWY can get 'caught in the middle' between WMT on the low end and competitors like Whole Foods in the high end?

 

Do you have any thoughts on their property development efforts?

 

They are guiding for 0.85-0.95b in FCF which I think comes out at around 16% FCF yield. If they can protect their core margins, that looks pretty interesting with Blackhawk as a kicker (I think NTSP and GDOT sell at around 8x EBITDA and 20x PE so there could be real value - though I'm really looking for some sort of margin or P&L profile for Blackhawk).

[FCharlie]

I believe they gave out some numbers on Blackhawk during the March analyst presentation. Unfortunately IR won't share the presentation. Do you have numbers for Blackhawk's EBITDA, margins or eps contribution?

 

How do you think about Walmart's consistent effort to move into California? A lot of communities are fighting it and delay the competition but do you think there is a scenario in which SWY can get 'caught in the middle' between WMT on the low end and competitors like Whole Foods in the high end?

 

Do you have any thoughts on their property development efforts?

 

They are guiding for 0.85-0.95b in FCF which I think comes out at around 16% FCF yield. If they can protect their core margins, that looks pretty interesting with Blackhawk as a kicker (I think NTSP and GDOT sell at around 8x EBITDA and 20x PE so there could be real value - though I'm really looking for some sort of margin or P&L profile for Blackhawk).

 

IR won't share the presentation, however Seeking Alpha has a transcript of it, and Edgar Online has a select group of slides in an 8K filing earlier this month.

 

http://seekingalpha.com/article/415981-safeway-inc-2012-guidance-update-call-mar-06-2012

 

http://www.sec.gov/Archives/edgar/data/86144/000008614412000009/ex9928-kinvestorconference.htm

 

I don't have an opinion about WalMart and California.

 

I think the property development idea is brilliant, they discuss it in great detail in the investor conference.

 

The beauty here, is the free cash flow. It's a 16% free cash flow yield today. It should be more like 20-24% next year based on the level of share repurchases at today's prices. That's the draw here. This company is so cheap that you really don't need to worry about specific details such as what Blackhawk is worth, or why ID sales are flat. In my world, cash is the only thing that matters.

 

Safeway is flooding shareholders with cash and Wall Street is asleep at the switch. It doesn't get better than this

[smathew]

Safeway pension underfunding

 

http://www.ft.com/intl/cms/s/0/2f021614-774a-11e1-baf3-00144feab49a.html#axzz1qFdhRBVc