PLEASANTON, Calif. — Safeway stock fell last week after the company disclosed a decline in net income for the second quarter — although the company attributed the stock decline in part to an extension of negative investor sentiment about rival Supervalu.
“It’s always difficult to predict the market reaction,” Steve Burd, chairman and chief executive officer, said. “But I think when somebody else [in the industry] struggles, people say, ‘I guess everybody is struggling,’ and it never really occurs to them that others who might be having some level of success might actually be contributing to the struggles of others.”
Minneapolis-based Supervalu had announced lowered expectations a week earlier and said it was considering a possible asset sale.
For the second quarter, which ended June 16, Safeway said net income fell 15.8% to $122.7 million as a result of one-time costs associated with the rollout of the Just for U marketing platform and added interest expense on borrowings of $1.8 billion to repurchase stock. Sales for the 12-week quarter rose 1.9% to $10.4 billion, and identical-store sales, excluding fuel, were up 0.8%.
For the first half, net income rose 14.4% to $195.6 million, while sales increased 2.1% to $20.4 billion and ID sales, excluding fuel, were up 0.4%.
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Burd said sales for the last 12 weeks, including the first few weeks of the third quarter, are up 0.4% in eight of the company’s nine U.S. divisions (the ninth division, in Texas, added the program early in the third quarter), he pointed out; identical store sales are up about 1%.
Ajay Jain, an analyst with Cantor Fitzgerald, New York, said Safeway appears to be gaining traction from the Just for U rollout. “However, we have persistent concerns over quality of earnings and fundamentals, both for the sector in general and Safeway specifically.”
Given that Safeway indicated non-fuel ID sales in the last eight weeks of the first quarter were up 1%, “we would infer some slight deterioration in comps during the [second] quarter,” he said.
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Just for U Results
According to Burd, results of Safeway’s Just for U personalized pricing program are running ahead of the chain’s expectations. Even if competitors were to develop their own digital platforms, he added, Safeway would have a lead of at least 18 months and plans to continue to tweak the program to improve it.
Burd said approximately 70% of Safeway customers have tried Just for U, with 35% using it on a regular basis.
He also said conversions of customers to become regular users of the system is 20% higher than Safeway anticipated; the average spend by those customers is 100% higher than anticipated; and the average spend by more casual users is 50% higher than anticipated.
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The results are exceeding Safeway’s expectations, he explained, because it wasn’t sure how to gauge the impact of adding a mobile application to the system, noting that the number of people using the mobile app are 50% higher than those using a desktop.
“What we’re doing is still in its infancy,” Burd added, “and if the current program is Just for U 2.0, we still have a 3.0 and a 4.0 in the planning stages.
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“And while we believe other companies will follow us in developing more personalized shopping systems, it would require a minimum of 18 months for them to develop it, so we believe we have a substantial lead. And our system will be so much better in 18 months that it won’t matter who else is into personalizing their offers.”
In response to a question, he declined to say how many people had registered for Just for U “because it might provide too much encouragement to competitors to develop their own programs,” Burd explained.
He said Safeway expects to introduce Just for U in Canada, though he did not offer a time frame.
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