Safeway Bags Big Gain as Asset Sales Trump Earnings Miss

Shares of Safeway have surged this morning as asset sales trumped atrocious earnings. Some analysts, however, remain unconvinced.

Bloomberg

Yesterday after the close, Safeway said it earned 10 cents a share, well below analyst forecasts for a 16 cent profit. The big news was Safeway’s decision to exit Chicago–its selling its stores one by one–and its desire to sell its Canadian business as well.

Citigroup’s Deborah Weinswig celebrates the announcement:

SWY has announced intentions to exit Chicago by early 2014, resulting in a cash tax benefit of $400-450M. The company will sell the 72 stores piecemeal, with 4 already gone to New Albertsons. We are pleased with the decision and speedy progress and we believe there could be further opportunities to unlock additional shareholder value through non-core asset divestitures, but for now SWY is still closing on Chicago and Canada.

Weinswig rates Safeway’s shares Neutral with a $33 price target, up from $31.

Cantor Fitzgerald’s Ajay Jain, however, focuses on the awful fundamentals:

[The miss] in 3Q should raise some fundamental questions – Safeway had a very material miss in 3Q. Gross margins were significantly lower than our estimates based on shrink issues. Excluding the impact of an impairment charge of $0.03 per share, earnings missed our below-consensus estimate of $0.14 by $0.04 and would have been $0.02 per share lower without an unexpectedly low tax rate of 19.6%. Safeway's operating margins are now below 1% (an unprecedented level for a major food retailer).

Guggenheim’s John Heinbockel believes asset sales and share buybacks will trump lousy fundamentals for now:

We are raising our PT to $35 from $30 but suspect shares may move higher in the NT before correcting. Bottom line, we believe a possible $2B + buyback in early 2014 could create strong demand for the shares (and short covering), although prices in excess of $35 may not be sustained as the buyback moderates, operating fundamentals remain somewhat challenged, and valuation becomes more expensive.

Shares of Safeway have gained 4.2% to $32.91 at 9:40 a.m., while Kroger (KR) has ticked up 10.4% to $40.83. Whole Foods Market (WFM) has ticked down 0.1% to $59.77, and Supervalu (SVU) is off 0.6% at $7.96.

I often mention when Barron’s get things wrong but we often get things right. Case in point: Jack Hough made the case for buying Safeway on Oct. 8.