Safeway

Business

Owns 1,775 grocery stores, mostly in the western United States

Recommendation: Buy at $29

Fundamentals

Safeway has been trying to take advantage of trends toward organic and natural foods and healthier eating in general. The company has shifted its branding and begun renovating its stores in recent years to a "Lifestyle" format, which, along with a shift to the sort of "inviting decor" typical of more upscale grocers like Whole Foods, emphasizes perishables, prepared foods, and organics. In addition, Safeway has launched its "O Organics" private label brand. On the Q2 conference call, CEO Steven Burd said that the company is seeing "very strong double-digit growth in organics." Cost cutting has also contributed to Safeway's turnaround, as the company has managed to boost operating margins over the last three years, jumping to 4.1% in Q2 from 3.4% a year.

Technicals

Sept. 9, 2006: On July 19, 2006 Safeway broke out on volume from a base surging $2.25 to $27.92 and moved up to $31.18 by Sept. 1, 2006 and has moved into a consolidate phase as profit takers battle bargin hunters. A strong overall market and/or expectional fundatmentals are needed to push the stock price higher.

Details

Safeway is on track emulate the popular Whole Foods grocery chain, which sports a 6.1% operating margin compared to Safeway's 4.1% in 2005 up from 3.4% in the prior year.

At year-end 2005, Safeway owned approximately 38% of its 1,1775 stores and lease the remaining. The Company prefers ownership because it provides control and flexibiltiy with respect to remodeling, expansion, closures and financing terms.

Safeway' new store prototype is referred to as the "Lifestyle"

store and is approximately 55,00 square feet. The Lifestyle store showcases the Company's commitment to quality, particularly in the perishable departments. The Lifestyle store has an earth-tone decor package, subdued lighting, custom flooring, unique display fixtures and other special features that impact a warm ambience that the Company believes significantly enhances the customer shopping experience.

The Company is engaged in a process to remodel virtually all of its existing stores to the "Lifestyle" format over the next 5 years. At year-end 2005, 458 stores or 26% of the store base was remodeled to this format.

in 2006, Safeway plans to spend approximately $1.6 billion in cash capital expenditures and plans to open approximately 20-25 new Lifestyle stores and complete approximately 280 Lifestyle remodels.

Notes

*Sept. 6, 2006: Zacks upgrades Safeway from Sell to Hold with a six month target price of $29.50, below the current price. They note that Safeway's "strong results from LifeStyle stores, improved supply chain, and benefits from Albertson's separation are driving its solid performance". Zacks estimates Safewary to earn $1.73 in 2006 $1.85 in 2007. In the 2006 Qtr3 Safeways needs to be the 42 cent estimate.

*Sept. 18, 2006: Business Week article notes that "identical-store sales has swung from -4.5% in 2003 to 4.3% in" 2005. Safeway continues to spend $1.6 billion a year over the next 3 years to upgrade its stores to the LifeStyle design.