Industry Stocks Ride Market Surge

MARK HAMSTRA

SHARES OF PUBLICLY TRADED food retailers have largely lagged the market overall during the third quarter, although for the most part they have enjoyed a September surge in concert with the major indices.

The three largest traditional supermarket operators have all seen third-quarter gains. Kroger Co., Cincinnati, was up about 5%; Safeway, Pleasanton, Calif., was up about 6%; and Supervalu, Minneapolis, rose about 6%.

Those gains compare with an increase of nearly 10% for the S&P 500 and the Dow Jones Industrial Average.

Safeway's share-price gains last week followed a report that the company could be a candidate for a leveraged buyout, based on an analysis of credit swaps.

At least one analyst, however, said he saw “no reasonable basis” for the prospect of an LBO at Safeway, which is scheduled to report its third-quarter results this week.

The analyst, Ajay Jain of Hapoalim Securities, New York, maintained his “sell” rating on Safeway's shares and said he expects that management will reduce its earnings outlook for the fiscal year when it reports results.

“We think that Safeway remains especially vulnerable to Center Store price competition at this time,” he said, adding that his firm's analysis of sales trends predicts negative same-store sales for the third quarter.

Karen Short, a New York-based analyst with BMO Capital Markets, also said she “sees risk” to Safeway's full-year-earnings guidance of $1.50 to $1.70 per share, although she rates the stock as “outperform.”

She projects a 1.5% decline in same-store sales for the quarter, vs. a 2.5% decline in the second quarter.