Safeway Trims Staffing Amid Overall Cutbacks

ELLIOT ZWIEBACH

PLEASANTON, Calif. — Safeway trimmed its corporate staff around the country last week in what some analysts said could be a reaction to competitive pressures and an increasingly difficult operating environment.

Though industry estimates on the number of layoffs varied, trade sources told SN the total was close to 300, encompassing jobs at Safeway's main office here and “just a handful” of cuts, according to one observer, at the chain's offices in Northern and Southern California, Oregon, Washington, Arizona, Texas, Illinois, Maryland and Virginia.

Safeway told SN it made “a very modest number” of backstage layoffs at its offices here and around the U.S. as part of an effort to streamline its administrative staff across multiple functions. The chain declined to pinpoint the specific number but said it was not material, given the company's employee base of 207,000.

“Running a business requires a focus on expenses and the need always to calibrate staff levels, and this was part of an ongoing process,” a chain spokesman told SN. “A low-margin business like ours requires rigorous attention to operating and administrative expenses, and occasionally that means adjustments to backstage staffing levels.”

He said there are no immediate plans for further layoffs.

During its earnings call two weeks ago, Safeway said it was in the midst of a “very aggressive” cost-reduction effort designed to provide additional pricing flexibility and help the company achieve its earnings targets.

Steve Burd, chairman, president and chief executive officer, said the cost-reduction effort has several major components, one of which was expected to result in a first-quarter charge of about 1 cent per share, “but benefits will flow from that program,” he noted at the time.

Chuck Cerankosky, an analyst with FTN Midwest Research, Cleveland, said last week's personnel cutbacks “fit with Burd's comment that some cost reduction efforts would be responsible for a 1-cent charge, and a penny is quite modest in terms of financial impact.”

He said he doesn't know the actual number of layoffs or what functions were involved, “but it could be Safeway found that some jobs could be outsourced,” Cerankosky told SN.

Jonathan Ziegler, a Santa Barbara, Calif.-based analyst with Dutton Associates, El Dorado, Calif., said Safeway had to respond to retail sales slippage in the fourth quarter.

“What these layoffs say is that Burd is really bringing nonessential costs into line in an environment where there's been some slippage on the top line, which is what he has to do as head of a public company,” he said.

“When good times end on Wall Street, companies cut bonuses. When they end for a supermarket company, they shrink the head count.

“Safeway has come off a major positive roll as a result of a good economy and disciplined operations, so some ‘fat’ elements may have crept back into overhead, and it's now cutting back to the bone.”

Gary Giblen, executive vice president of Goldsmith & Harris, New York, said he was surprised there was anything to cut.

“For a company like Safeway and others, there's not a lot of fat anymore, so the industry must be pretty hard-pressed if there's a need for layoffs at the administrative level,” he explained.

“Most companies, including Safeway, have already cleaned up their overheads, and Safeway has always been spectacularly proud of its operating, general and administrative controls, so it's a little surprising they could find more to reduce.

“But with Wal-Mart getting very aggressive on price after backing off last year, and Whole Foods becoming less expensive, maybe it had to find more.”

The layoffs came less than a week after Safeway's fourth-quarter financial results left industry analysts divided on the chain's near-term prospects.

Of analysts surveyed, two had positive responses and two were more negative.

On the plus side, Perry Caicco, an analyst with CIBC World Markets, Toronto, called Safeway a company with “tremendous strength.”

“All retailers in almost every category will be impacted in some way by the consumer slowdown,” he said. However, the clear winners will include companies that have already upgraded their asset base and are making material advancements in their offers, trimming operating costs, judiciously lowering prices and finding low-cost avenues of growth — attributes that describe Safeway almost perfectly, he pointed out.

He expressed disappointment that the results “spooked the market” and sent Safeway stock to a 52-week low the day the numbers were released.

“In driving the stock down suddenly, the market ignored not just the implicit safety of supermarket investments during a consumer downturn but also the explicit strengths of Safeway at this point in its evolution,” Caicco said.

Karen Short, an analyst with Friedman Billings Ramsey, New York, said Safeway's stock “was unnecessarily punished by a disconnect in expectations, a jittery market and a misinterpretation that Safeway's tone [during its earnings conference call] was unusually negative and/or conservative. Safeway's performance is not deteriorating.

“The company's guidance [for year-end earnings between $2.25 and $2.35 per share] seems achievable, even with slightly weaker-than-guided comps. Although Safeway was reluctant to elaborate on cost-cutting opportunities, those opportunities will more than make up for any potential risks of IDs falling short of the 3% to 3.2% range of guidance.”

Taking a darker view, Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said a deceleration in the chain's identical-store sales for the quarter, excluding fuel, supports his view “that rapid increases in food retail prices reduce volume” — a situation likely to continue to impact Safeway's real sales growth and constrain earnings in the near term, he indicated.

The ID sales increase of 2.7% in the quarter was lower than the 3% in the third quarter and the 3.7% in the second, and the two-year stacked comp of 6.2% was down from 6.7% in the prior quarter, he said.

After adjusting for inflating retail prices, Wolf said, ID sales growth was actually down 2%, compared with a drop of 1.1% in the third quarter and 0.1% in the second.

Barring a severe economic downturn, Safeway's ongoing efforts to upgrade stores to the lifestyle format should enable it to maintain IDs at around 2.5%, which would be below the chain's 2.7% guidance, Wolf indicated.

“The reason is straightforward household economics,” he explained. “Given rising prices at the supermarket, consumers en masse will stretch their food dollars in various ways, including buying and wasting less and buying cheaper foodstuffs — a conundrum obviously further exacerbated by a weakening consumer environment.”

Deborah Weinswig, an analyst with Citigroup, New York, was also guarded in her outlook for Safeway.

The drop in ID sales was driven by higher penetrations of generic drugs and corporate brands, she pointed out, “and that, coupled with the belief that top-line benefits from its lifestyle stores are weakening, [could mean] the more sluggish consumer environment could dampen Safeway's near-term growth.”