Safeway stock climbs on news of Chicago market exit, despite 'disappointing' third quarter

PLEASANTON, Calif. — Safeway on Thursday evening may have posted what analysts have described as disappointing earnings, but that's not stopping Wall Street from recognizing the value Safeway is unlocking with its exit from a pair of markets — Chicago and Canada. After closing at $31.57 Thursday, Safeway's stock was selling at more than $2 higher early Friday afternoon, and at least one analyst has targeted $40 as the potential inherent in Safeway stock. 

"Q3 earnings disappoint, but does it matter?" asked Credit Suisse analyst Ed Kelly in a note published Thursday. "While the quarter disappointed, we are at least somewhat encouraged by the acceleration in [identical store sales] so far in Q4 — [up] 2.2%, including a small Dominick’s drag — and management’s confidence that shrink has improved. We also believe quarterly earnings have become less important to the new asset sale/buy the last share thesis absent a material blow-up. … The [quarterly] miss was not enough to matter in our view."

Safeway announced that it intends to exit the Chicago market, where it operates 72 Dominick's stores, by early 2014. Safeway sold the first four of its Dominick's stores to New Albertsons, which operates Jewel-Osco grocery stores. "This will result in a cash tax benefit of $400 million to $450 million which will be available in the short-term to partly offset the cash tax expense on the sale of the net assets of Canada Safeway Limited," the company noted. "We expect to use the cash tax benefit and any other cash proceeds from the disposal of Dominick's properties to buy back stock and to invest in growth opportunities."

Safeway may not stop at exiting Chicago and Canada. "As the company announced the exit of Chicago, [they] hinted at a further review of its asset base and telegraphed an avenue to potentially offset at least a portion of its $1.8 billion Canadian tax bill," Kelly wrote. "Further divestitures seem likely. Safeway indicated that the company will continue to review all businesses and allocate resources to improving 'the core.'"

"One key component of our strategy going forward will be the increased sales and enhanced profitability in core markets," Robert Edwards, CEO, president and director Safeway, told analysts Thursday evening. "We expect to also focus on meaningful differentiation strategies to better serve our diverse shoppers."

One way Safeway will be accomplishing those objectives is through its Just for U loyalty platform, which now stands at more than 6 million registered users. "We are leveraging our data to drive our business," Edwards said. "Our Club Card gives us rich data on our shoppers. We are using our digital Just for U platform to build the basket and reward our most loyal shoppers. We're also using this data to partner with consumer packaged goods partners to build unique and robust offers," he said. 

"There will be significant benefits from us tailoring the assortment in individual stores to the local demographic," Edwards added. "And the success that we're seeing, if you combine center of store, premium, Hispanic, if you look at the IDs of those stores relative to the average that we've just reported for the quarter, they're substantially higher than the average for the company. And so we are very encouraged by that and we have plans to significantly expand what we've done."

Safeway's sales and other revenue increased 1.1% to $8.6 billion in the third quarter of 2013, primarily due to an identical-store sales (excluding fuel) increase of 1.9%.