PLEASANTON, Calif. - The sale and subsequent breakup of Albertsons is "loaded with opportunity" for Safeway, according to Steve Burd, chairman and chief executive officer of the retailer here.
"There's nothing in the Supervalu-Albertsons deal that bothers us," Burd said in a conference call with analysts last week.
Of particular interest to Safeway are markets where Cerberus Capital and several real estate partners will take over Albertsons' underperforming stores. Safeway operates in four of the five markets - Northern California, the Rocky Mountains, Texas, and the Southwest - expected to go to the Cerberus group upon the deal's closing later this year.
"Like everybody else, we're trying to figure out what happens to the so-called underperforming assets that got sold to a group that has a lot of real estate players as a component of it," Burd said. "Whatever happens in those markets, we think it's a real advantage we're in four of those five markets. We think that presents a nice opportunity for us, and frankly, there's a degree of uncertainty out there that's an opportunity in itself."
In those markets, Burd explained, the buyer will inherit the same market position and strategies that led to Albertsons' difficulties, and with real estate partners in the deal, a temptation to sell stores will be strong. "To put it somewhat crudely, "he said, "a strategy that wasn't leading to success is something that the new guys inherit, and that is loaded with opportunity for us."
Mark Husson, an analyst with HSBC Securities, New York, preferred to say the impending changes at Albertsons leave Safeway "pregnant with opportunity," since any number of possibilities for the former Albertsons assets stand to benefit Safeway in different ways.
"They could break [Albertsons] into tiny bits which would allow Safeway to buy some stores which could help sales, or some could close or be sold to non-food operators, which would help Safeway gain share," Husson said. "Less likely, in my opinion, is that another food retailer could buy them, but as Steve Burd said, the stores would be inheriting a brand image that failed."
Burd's confidence came while sharing details of a fourth quarter and fiscal year he termed "very strong." Sales were up 5.8% for the fourth quarter and 7.2% for the year, which ended Jan. 31. Net income for the quarter was down 14.4%, but when adjusted up for one-time costs to close stores in Texas and pay for employee buyouts in Northern California and Chicago, and adjusted down for tax benefits, earnings of 49 cents per share represented a 8.9% increase from 45 cents in the same period last year and exceeded consensus estimates by 3 cents per share.
Comparable-store sales increased by 5.4% during the quarter, and identical-store sales, excluding fuel, gained by 3.7% - increases Burd attributed to the success of Safeway's lifestyle store initiative. Burd said identical-store sales were positive in nine of its 10 operating areas for both the quarter and the year, and that Safeway gained market share from competitors in 51 of 52 weeks of the year.
The company completed 314 lifestyle store makeovers in 2005, and by the end of the year had more than 450 makeovers completed. Burd said he was especially pleased with having reduced costs associated with launching the lifestyle stores without impacting results. This helped reduce operating expenses as a percentage of sales by 69 basis points, when adjusted for the one-time costs: $55.5 million to pay for previously announced store closures in Texas; and $37.5 million spent to buy out senior union employees in Northern California and Chicago.
"This [operating cost reduction] is a solid number, aided by leverage on the sales line and an improved labor cost structure," Robert Campagnino, an analyst for Prudential Securities, New York, said in a research note.
"The underlying cost reductions are now becoming visible, as they lap the investments they made on lifestyle stores and the image advertising campaign," Husson said.
Burd said more employee buyouts could be possible in 2006, and that the company would continue to benefit from those already under way not only because of the reduced costs - which Burd estimated at $30 million a year - but because competitors have not made corresponding offers to their senior employees.
"One of the things we like about the buyouts that we've done is that none of our competitors have matched us," Burd said. "We like the fact that we've gotten these benefits and no one else has decided to do it."