SAN RAMON, Calif. -- Safeway told shareholders at its annual meeting here it has "set aside plans to do a whole series of acquisitions," a declaration that did not stop reports from circulating last week that the chain might be interested in acquiring Longs Drug Stores.
Executives at Safeway, Pleasanton, Calif., and Longs, Walnut Creek, Calif., declined comment last week. Safeway reportedly made an offer to Longs two years ago but was rebuffed.
Longs operates 455 drug stores in California, Hawaii, Nevada, Colorado, Washington and Oregon. Sales in 2002 rose 2.8% to $4.43 billion, and same-store sales also rose 2.8%, with pharmacy sales up 5.8% and front-end sales up 0.5%. Net income for the year fell 85.8% to $6.7 million, or 18 cents per share, following an accounting change. Prior to the change, net income was down 33.7% to $31.3 million.
Speaking at Safeway's annual meeting, Steve Burd, Safeway chairman, president and chief executive officer, said the chain had set aside acquisition plans as part of its efforts to reduce costs. Instead of making acquisitions, Burd said the company plans to leverage its size through central procurement, greater category expertise, and working with labor unions "to get better cost structures in our contracts."
He said Safeway intends to use free cash flow to pay down debt, do more share buybacks, pay a dividend, or make acquisitions.
While most industry analysts contacted last week told SN they thought a Safeway acquisition of Longs was unlikely at this time, one analyst said the speculation might have some merit.
"Safeway has to do something to create shareholder value," Jonathan Ziegler, principal, PUPS Management, Santa Barbara, Calif., said, "and acquiring Longs would be a great strategy for Safeway to strengthen its presence in California and the other Western states where the two companies overlap. It would be a great step to fortify Safeway against Wal-Mart's supercenter onslaught in California."
Other analysts said they doubted the reports have much veracity. "It's the most preposterous nonsense," Gary Giblen, senior vice president and director of research for C L King Associates, New York, told SN. "The article in Business Week that kicked off the speculation was apparently planted by someone who wanted to get out of his position in Longs before its first-quarter numbers came out [four days later], and while the stock did rise 15% on the news [to $15.48 per share], it fell back below $15 the next trading day."
According to Giblen, Safeway is already struggling with the supermarket acquisitions it has made, encompassing Dominick's, which it plans to sell; Randalls; and Genuardi's; "and most of the Longs units are in shopping centers where Safeway has stores with pharmacies, so there would be no purpose in buying most of them," he added.
Neil Currie, an analyst with UBS Warburg, New York, said he would be surprised if Safeway made an acquisition "right now, never mind one outside its core competencies." Meredith Adler, an analyst with Lehman Brothers, New York, echoed that comment, saying, "Safeway doesn't have a track record with stand-alone drug stores, and they have a bad track record with supermarket acquisitions, [so] it doesn't make sense."
During Safeway's annual meeting, Burd outlined the chain's strategies for fiscal 2003 -- what he termed a transition year. "We're getting ourselves ready to grow sales and earnings in 2004 and beyond," he said.
Total sales increased during fiscal 2002, Burd noted, but identical-store sales declined 1.2%. While earnings before an extraordinary charge rose last year, the company said prior to the meeting it is anticipating an earnings drop this year.
In an effort to spend capital more productively in a slower economy, Burd said Safeway has scaled back capital investment this year to $1.1 billion to $1.3 billion, compared with $1.4 billion in 2002 and $1.7 billion in 2001.
