PLEASANTON, Calif. -- Steve Burd is expected to break his silence late this week on the Southern California strike and its impact on Safeway's financial results.
Burd, chairman, president and chief executive officer of Safeway here, has been vilified by representatives of the United Food and Commercial Workers Union as the major roadblock to a settlement in the 17-week-old labor dispute.
Burd will talk about the strike's impact during a conference call with analysts to discuss Safeway's results for the fiscal year and fourth quarter ended Jan. 2 -- a 16-week period encompassing the start of the strike on Oct. 11, 2003.
Financial analysts told SN they believe the strike is likely to have a significant impact on the chain's results -- possibly lowering sales $750 million to $800 million, and costing the chain 20 to 30 cents or more per share.
Jonathan Ziegler, an analyst with PUPS Investment Management, Santa Barbara, Calif., said Safeway's fourth-quarter sales "will not be exuberant." With the strike ongoing in Southern California and with Safeway closing 23 Dominick's stores in the Chicago area, resulting in a write-off, "we could see some red ink when it all gets put together," he said.
Gary Giblen, senior vice president and director of research for C L King Associates, New York, also said he believes Safeway could report negative earnings for the quarter.
Safeway has been "hit really badly" by consumers refusing to shop at its Vons and Pavilions stores in Southern California, Giblen said, "though the impact of collateral picketing outside Southern California is modest. But Safeway can't afford a full assortment of perishables in Southern California, and most pharmacies there are operating with limited hours, so a lot of high-margin departments are pretty bare, and the impact on sales is enormous."
Whatever the impact, there's an assumption that it will be back to business as usual once the strike is settled, Giblen said. "But that's not the case because many people have discovered alternative formats like Costco, which has a fairly large food assortment that is cheaper and of better quality, so some shoppers may not ever come back to the supermarket on a regular basis."
Lisa Cartwright, an analyst with Citigroup Smith Barney, New York, also said she believes it will take time for consumer behavior in Southern California to change back in favor of supermarkets after the strike ends "[because] the strike introduced many new customers to alternative food outlets, and many of them will likely continue to shop there."
"In addition, we see investors eventually concluding that, while a 10% reduction in labor costs in California could lead to $65 million to $70 million in savings per year for Safeway, it is not nearly enough to offset the cost to rebuild sales, which increases every day the strike drags on," she said.
"For Safeway, this is a greater negative because of the importance of the Southern California market in terms of operating cash flow. In addition, the cost of rebuilding sales at Dominick's could lead to earnings misses and free cash flow well below the $600 million range -- perhaps as low as $300 million."
Two of the analysts contacted by SN said they believe Burd is in no danger of losing his job. "He will survive," Ziegler said.
"He represents the spine of the strike. He is the roadblock to any settlement, and if he were to back any concessions, he would probably have to resign because he's built his reputation on making a final offer that's non-negotiable and sticking to that. If he concedes now, he would lose most of his credibility.
According to Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., "Three companies are in this together, and I have to assume they received approval from their boards of directors before taking on this labor dispute. So I believe Burd will survive."
