netrashetty
Netra Shetty
Safeco Insurance, a member of Liberty Mutual Group, is a national U.S. insurance company. It holds naming rights to the Seattle Mariners' baseball stadium, Safeco Field.
Safeco was founded in Seattle, Washington in 1923 by Hawthorne K. Dent as the General Insurance Company of America, a property and casualty insurer. This name is still used by Safeco on some of its insurance products.[1] Thirty years later the company founded the Selective Auto and Fire Ensurance Company of America, or SAFECO (i.e., S.A.F.E. Co.).
General Insurance's first headquarters were in downtown Seattle at the corner of University Street and Fourth Avenue. In 1936, it moved to the eight-story Brooklyn Building at the corner of N.E. 45th Street and Brooklyn Avenue N.E. in the University District.
General Insurance began to sell life insurance in 1957. Eleven years later the corporate name changed from the General Insurance Company of America to Safeco Corporation. (The company would end up changing the capitalization of its name from SAFECO to Safeco at the turn of the century.) Around the same time the company began to offer mutual funds and commercial credit (though precursors to the Safeco Funds had been around since the 1930s).
Safeco replaced the Brooklyn Building with the 22-story Safeco Plaza building in 1973. It remains the tallest building in the city outside Downtown.
In 1997, Safeco bought American States Financial Corporation to expand beyond the West Coast. Washington Mutual's WM Life Insurance Company was purchased the same year. Two years later Safeco bought R.F. Bailey (Underwriting Agencies) Limited of London.
In 2001, new management was brought in to restructure the company. Commercial credit operations were sold to General Electric in 2001, and on March 15, 2004, the company announced the sale of its most profitable division, the life insurance and investments business, to a group of private investors led by Safeco board members and Warren Buffett's Berkshire Hathaway Inc. and White Mountains Insurance Group, Ltd., incorporating as Symetra Financial Corporation. The same day, it was announced that Hub International Ltd. was buying Safeco's insurance brokerage operations. Less than a month later, on April 12, it was announced that Mellon Financial Corporation would buy Safeco Trust Company, whose business is providing financial and estate planning services to individuals with over $1 million in assets. On August 2, the closure of Safeco Asset Management, the mutual-fund business, was announced.
Safeway (NYSE:SWY) is the third largest operator of traditional supermarkets in the United States and fourth largest food retailer after Wal-Mart (WMT), Kroger Company (KR), and SuperValu (SVU). Safeway sells food and other consumer products in 1,725 supermarkets under nine store brand names, including Safeway, Von's, Randalls, and Dominick's.[1] The stores are predominantly located in the western United States, Texas, Chicago, and the mid-Atlantic region.[2] Additionally, the company has a 49% stake in Casa Ley, a 137-store market chain in western Mexico.[1]
Safeway has placed a strong emphasis on its wholly owned subsidiary, Blackhawk Network, the industry leader in pre-paid third party gift cards. Through a network of 80,000 retail stores in the US, Canada, and the UK, Blackhawk Network sells gift cards for over 350 partner brands and charges 3-5% of the value of the gift card for commission.[3]
As a large retail grocer, Safeway faces competition from similar chains, local stores, and niche stores, such as Whole Foods Market (WFMI) and Kroger Company (KR). Wal-Mart (WMT), however, represents the most significant long term threat to the firm's continued growth. Wal-Mart (WMT) sells a wide variety of goods ranging from apparel to groceries. Because of its tremendous scale, the retailer is often able to offer below-market prices to its customers. Even if Safeway is able to compete in a lower price environment it is almost certain that doing so would eat into profits. To date, Safeway has been sheltered from the Wal-Mart effect given its predominantly West Coast locations. As the super-retailer invests more resources into beefing up its West Coast presence, Safeway may become more threatened by Walmart.
Contents
1 Company Overview
1.1 Business Financials
1.2 FY2010 Q1 Earnings Summary
1.3 FY2010 Q2 Earnings Summary
1.4 FY2010 Q3 Earnings Summary
2 Key Trends and Forces
2.1 The Wal-Mart Effect has Cost Safeway Market Share and Must Find Ways to Product Niche to Survive
2.2 Growth of Blackhawk Network is Correlated with Growth of Safeway's Success
3 Competition
4 References
Company Overview
With 8% of the market, Safeway is the second largest traditional supermarket operator in the United States.[4] With its Blackhawk Network subsidiary, Safeway is also the largest distributor and seller of third party gift cards, offering brands such as Barnes & Noble (BKS), iTunes, and Home Depot (HD).[3]
Business Financials
Safeway earned $40.8 billion in revenue in 2009, down from $44.1 billion in 2008 (and the latter was reported for 53-weeks). In 2009 Safeway reported a net loss of $1,097 million, as compared to net income of $965 million the previous year. However, the poor result includes accounting for a non-cash goodwill impairment charge related to Safeway’s reduced market capitalization and the recession; excluding the charge, Safeway would have posted net income of $720 million. Management blamed the decline in revenues on reduced consumer spending and an increase in bargain shopping, lower fuel prices, and “unprecedented levels” of price deflation for items such as dairy, meat, and produce.[5]
Safeway Number of Stores by Square footage[6]
In December 2009, a food price index posted a 0.3% increase in its price basket -- the largest monthly increase in more than a year -- in a sign that deflation is easing in the U.S. If that trend holds, it may be good news for Safeway and other grocers. However, the price index was still down 2.4% from a year earlier.[7] Analysts say Safeway is betting on price inflation to improve results in 2010, yet competition may continue to hold down margins.[8]
FY2010 Q1 Earnings Summary
Safeway's first quarter FY2010 net income fell 33% while its sales rose by 1%, translating to $96.0 million of net income compared to $144.2 million of net profit in Q1 FY2009.[9] Safeway attributes this discrepancy between the top and bottom line for several reasons. First, thinner margins such as gross profit, which declined from 28.7% in Q1 FY2009 to 28.4% in Q1 FY2010, was led by an overall increase in COGS rather than sales.[10] Secondly, Safeway underwent major capital expenditures in this first quarter of $192.6 million, which again decreased the bottom line. Finally, an overall increase in operating and administrative expense due to both deflation and volume declines led to an increase of 44 bp for operating and administrative experience, which further added pressure to the bottom-line.[11]
Despite the decrease in net profit, Safeway continued to reaffirm its FY2010 earnings guidance of $1.65 to $1.85 per share, as encouragement from volume trends in the first quarter of FY2010 compared to fourth quarter FY2009 hints at positive trends in the second half of FY2010.[12]
FY2010 Q2 Earnings Summary
Safeway earned $141.3 million or $0.37 per share of profits for the second quarter of fiscal 2010 ended June 19, a 40.8% drop compared to same quarter in fiscal 2009.[13] However, these figures included a $57.8 million tax benefit. Total sales were $9.5 billion, which was flat compared to $9.5 billion in second quarter of FY2009.[14]
The drop in bottom-line with a top-line upheld was attributed to several major factors. Gross profit declined 32 basis points to 28.55% as a result of investments in price carried forward.[15] However, the largest influence to the drastic difference between bottom-line and top-line change was the result of operating and administrative expense, which increased by 46 basis points to 25.55% of sales as a result of deflation coupled with expected increases in wages and benefits.[16]
As a result, Safeway is cutting guidance for fiscal 2010 from $1.70 to $1.50 EPS, citing lower shelf prices and deflation as major issues. Safeway's same-store sales, which continue to fall as much as 1% for the year is evidence of these issues, as deflation combined with a struggling economy make consumers attract to lower-priced goods.[17]
FY2010 Q3 Earnings Summary
Safeway reported net income of $122.8 million or $0.33 diluted EPS for the third reporting quarter of FY2010, a decrease of 4.65% compared to $128.8 million or $0.31 diluted EPS same period last year.[18] However, the current quarter included $12 million or $0.02 per diluted share worth of employee severance charges.[19]
Total sales for the period were $9.4 billion, slightly down compared to $9.5 billion same quarter last year; however, identical-store sales excluding fuel were down 2.0% due to a decline in overall price per item.[20] As such, gross profit margins were also down 13 bps to 28.14% compared to 28.27% in third quarter FY2009. Overall, performance was considered "in-line with expectations" according to CEO Steve Burd. Safeway expects the price per item to improve while continue to offer everyday low price approach model as its overall bottom line driver in the the second half of the fiscal quarter.[21]
Key Trends and Forces
The Wal-Mart Effect has Cost Safeway Market Share and Must Find Ways to Product Niche to Survive
Wal-Mart is the greatest external force affecting any grocer. In markets that Wal-Mart has entered, grocery prices drop by an average of 10-15%.[22] Additionally, Wal-Mart is able to drop grocery prices 10-30% drastically during promotional periods because it can remain profitable on extremely low margins due to its volume of sales.[23]
Safeway is no exception, in that it has lost market share to Wal-Mart in the markets in which it competes. Safeway is, however, somewhat sheltered from Wal-Mart given its relatively more upscale focus and its geographic distribution, with Safeway’s presence focused predominantly on the West Coast. As a result, Safeway has only a 24% overlap with Wal-Mart, while chains like Kroger are closer to 70%. In the long-term, Wal-Mart is expected to continue its expansion into the urban centers of the West Coast and has begun experimenting with higher-end products and store formats. It poses the most significant long term threat to Safeway's continued profitability.
Further, with its "Lifestyle" format, Safeway differentiates its stores by creating a warm ambiance through earth toned decor, custom flooring, and special lighting.[1] With 82 new store remodels in 2009, 79% of Safeway stores were converted to the “Lifestyle” format by year end.[24]In order to compete with other premium retailers, such as Whole Foods Market (WFMI), Safeway offers a 300 private label product line of "O for Organic" items as well as premium meats such as its Rancher’s Reserve Tender Beef brand. Approximately 22% of all private label are manufactured by Safeway plants; the remainder are purchased from third party suppliers. Many stores also offer additional services like gas stations and in-store Starbucks kiosks.[25]
Growth of Blackhawk Network is Correlated with Growth of Safeway's Success
As the industry leader in gift cards, Blackhawk, a wholly-owned subsidiary of Safeway that primarily sells third-party gift cards, enjoyed 59% growth in its commission revenues in 2008. Blackhawk makes money by charging a 6% sales commission, half of which Blackhawk keeps and the other half which the vendor receives for distributing it. However, the subsidiary has yet to be challenged by a strong competitor. Its success will almost certainly encourage other companies to enter the third-party gift card market. The future success of Blackhawk will depend on how the company continues to foster this growth while confronting the difficulties posed by anticipated competition.
Blackhawk typically receives a significant portion of its cash inflow from third-party gift card retailers late in the fourth quarter of the year from the holiday season so a seasonality factor must be adjusted. In this fashion for example, Blackhawk's net payables related to third-party gift cards increased to $170.4 million in 2009 from $23.9 million in 2008 primarily as a result of the growth of the business and the change in the timing of holiday sales compared to fiscal year end.[26]
Competition
As a retail grocer, Safeway faces its stiffest competition several sources:
Wal-Mart Stores (WMT) Wal-Mart is the largest food retailer in the US with more than 3,550 stores and supercenters.[27] Wal-Mart is able to provide low prices through its distribution network and economies of scale. Consumers turn to discount stores such as Wal-Mart when their disposable income falls.
Kroger Company (KR) Kroger is the second largest food retailer and largest operator of traditional supermarkets in the US, with 2,400 stores nationwide.[28]
SuperValu (SVU) SuperValu is the third largest food retailer and second largest operator of tradition supermarkets int he US, with 2,200 stores nationwide.[29]
Comparison of Operational Metrics, Margins and Capital Expenditure
Company (Fiscal Year) Comp Sales Growth Square Footage Growth Revenue per Square Footage (Millions USD) New Store Additions Closures Average Store Size (Square Feet) Gross Margin (%) Operating Margin (%) Net Profit Margin (%) Capital Expenditure/Sales (%)
Whole Foods Market (WFMI) (FY2010)[30] 7.1% 6.0% 882.0 16 3 38,000 34.8% 5.9% 2.7% 2.9%
Safeway (SWY) (FY2009)[31] (4.90%) (0.40%) 509.99 8 23 46,000 28.62% (1.54%) (2.69%) 2.08%
Kroger Company (KR) (FY2009)[32] 0.90% 0.01% 518.47 14 27 60,000 22.60% 1.42% 0.07% 2.99%
SuperValu (SVU) (FY2009) [33] (5.1%) (6.2%) 624.57 40 112 29,000 22.50% 2.96% 0.97% 1.70%
Safeco was founded in Seattle, Washington in 1923 by Hawthorne K. Dent as the General Insurance Company of America, a property and casualty insurer. This name is still used by Safeco on some of its insurance products.[1] Thirty years later the company founded the Selective Auto and Fire Ensurance Company of America, or SAFECO (i.e., S.A.F.E. Co.).
General Insurance's first headquarters were in downtown Seattle at the corner of University Street and Fourth Avenue. In 1936, it moved to the eight-story Brooklyn Building at the corner of N.E. 45th Street and Brooklyn Avenue N.E. in the University District.
General Insurance began to sell life insurance in 1957. Eleven years later the corporate name changed from the General Insurance Company of America to Safeco Corporation. (The company would end up changing the capitalization of its name from SAFECO to Safeco at the turn of the century.) Around the same time the company began to offer mutual funds and commercial credit (though precursors to the Safeco Funds had been around since the 1930s).
Safeco replaced the Brooklyn Building with the 22-story Safeco Plaza building in 1973. It remains the tallest building in the city outside Downtown.
In 1997, Safeco bought American States Financial Corporation to expand beyond the West Coast. Washington Mutual's WM Life Insurance Company was purchased the same year. Two years later Safeco bought R.F. Bailey (Underwriting Agencies) Limited of London.
In 2001, new management was brought in to restructure the company. Commercial credit operations were sold to General Electric in 2001, and on March 15, 2004, the company announced the sale of its most profitable division, the life insurance and investments business, to a group of private investors led by Safeco board members and Warren Buffett's Berkshire Hathaway Inc. and White Mountains Insurance Group, Ltd., incorporating as Symetra Financial Corporation. The same day, it was announced that Hub International Ltd. was buying Safeco's insurance brokerage operations. Less than a month later, on April 12, it was announced that Mellon Financial Corporation would buy Safeco Trust Company, whose business is providing financial and estate planning services to individuals with over $1 million in assets. On August 2, the closure of Safeco Asset Management, the mutual-fund business, was announced.
Safeway (NYSE:SWY) is the third largest operator of traditional supermarkets in the United States and fourth largest food retailer after Wal-Mart (WMT), Kroger Company (KR), and SuperValu (SVU). Safeway sells food and other consumer products in 1,725 supermarkets under nine store brand names, including Safeway, Von's, Randalls, and Dominick's.[1] The stores are predominantly located in the western United States, Texas, Chicago, and the mid-Atlantic region.[2] Additionally, the company has a 49% stake in Casa Ley, a 137-store market chain in western Mexico.[1]
Safeway has placed a strong emphasis on its wholly owned subsidiary, Blackhawk Network, the industry leader in pre-paid third party gift cards. Through a network of 80,000 retail stores in the US, Canada, and the UK, Blackhawk Network sells gift cards for over 350 partner brands and charges 3-5% of the value of the gift card for commission.[3]
As a large retail grocer, Safeway faces competition from similar chains, local stores, and niche stores, such as Whole Foods Market (WFMI) and Kroger Company (KR). Wal-Mart (WMT), however, represents the most significant long term threat to the firm's continued growth. Wal-Mart (WMT) sells a wide variety of goods ranging from apparel to groceries. Because of its tremendous scale, the retailer is often able to offer below-market prices to its customers. Even if Safeway is able to compete in a lower price environment it is almost certain that doing so would eat into profits. To date, Safeway has been sheltered from the Wal-Mart effect given its predominantly West Coast locations. As the super-retailer invests more resources into beefing up its West Coast presence, Safeway may become more threatened by Walmart.
Contents
1 Company Overview
1.1 Business Financials
1.2 FY2010 Q1 Earnings Summary
1.3 FY2010 Q2 Earnings Summary
1.4 FY2010 Q3 Earnings Summary
2 Key Trends and Forces
2.1 The Wal-Mart Effect has Cost Safeway Market Share and Must Find Ways to Product Niche to Survive
2.2 Growth of Blackhawk Network is Correlated with Growth of Safeway's Success
3 Competition
4 References
Company Overview
With 8% of the market, Safeway is the second largest traditional supermarket operator in the United States.[4] With its Blackhawk Network subsidiary, Safeway is also the largest distributor and seller of third party gift cards, offering brands such as Barnes & Noble (BKS), iTunes, and Home Depot (HD).[3]
Business Financials
Safeway earned $40.8 billion in revenue in 2009, down from $44.1 billion in 2008 (and the latter was reported for 53-weeks). In 2009 Safeway reported a net loss of $1,097 million, as compared to net income of $965 million the previous year. However, the poor result includes accounting for a non-cash goodwill impairment charge related to Safeway’s reduced market capitalization and the recession; excluding the charge, Safeway would have posted net income of $720 million. Management blamed the decline in revenues on reduced consumer spending and an increase in bargain shopping, lower fuel prices, and “unprecedented levels” of price deflation for items such as dairy, meat, and produce.[5]
Safeway Number of Stores by Square footage[6]
In December 2009, a food price index posted a 0.3% increase in its price basket -- the largest monthly increase in more than a year -- in a sign that deflation is easing in the U.S. If that trend holds, it may be good news for Safeway and other grocers. However, the price index was still down 2.4% from a year earlier.[7] Analysts say Safeway is betting on price inflation to improve results in 2010, yet competition may continue to hold down margins.[8]
FY2010 Q1 Earnings Summary
Safeway's first quarter FY2010 net income fell 33% while its sales rose by 1%, translating to $96.0 million of net income compared to $144.2 million of net profit in Q1 FY2009.[9] Safeway attributes this discrepancy between the top and bottom line for several reasons. First, thinner margins such as gross profit, which declined from 28.7% in Q1 FY2009 to 28.4% in Q1 FY2010, was led by an overall increase in COGS rather than sales.[10] Secondly, Safeway underwent major capital expenditures in this first quarter of $192.6 million, which again decreased the bottom line. Finally, an overall increase in operating and administrative expense due to both deflation and volume declines led to an increase of 44 bp for operating and administrative experience, which further added pressure to the bottom-line.[11]
Despite the decrease in net profit, Safeway continued to reaffirm its FY2010 earnings guidance of $1.65 to $1.85 per share, as encouragement from volume trends in the first quarter of FY2010 compared to fourth quarter FY2009 hints at positive trends in the second half of FY2010.[12]
FY2010 Q2 Earnings Summary
Safeway earned $141.3 million or $0.37 per share of profits for the second quarter of fiscal 2010 ended June 19, a 40.8% drop compared to same quarter in fiscal 2009.[13] However, these figures included a $57.8 million tax benefit. Total sales were $9.5 billion, which was flat compared to $9.5 billion in second quarter of FY2009.[14]
The drop in bottom-line with a top-line upheld was attributed to several major factors. Gross profit declined 32 basis points to 28.55% as a result of investments in price carried forward.[15] However, the largest influence to the drastic difference between bottom-line and top-line change was the result of operating and administrative expense, which increased by 46 basis points to 25.55% of sales as a result of deflation coupled with expected increases in wages and benefits.[16]
As a result, Safeway is cutting guidance for fiscal 2010 from $1.70 to $1.50 EPS, citing lower shelf prices and deflation as major issues. Safeway's same-store sales, which continue to fall as much as 1% for the year is evidence of these issues, as deflation combined with a struggling economy make consumers attract to lower-priced goods.[17]
FY2010 Q3 Earnings Summary
Safeway reported net income of $122.8 million or $0.33 diluted EPS for the third reporting quarter of FY2010, a decrease of 4.65% compared to $128.8 million or $0.31 diluted EPS same period last year.[18] However, the current quarter included $12 million or $0.02 per diluted share worth of employee severance charges.[19]
Total sales for the period were $9.4 billion, slightly down compared to $9.5 billion same quarter last year; however, identical-store sales excluding fuel were down 2.0% due to a decline in overall price per item.[20] As such, gross profit margins were also down 13 bps to 28.14% compared to 28.27% in third quarter FY2009. Overall, performance was considered "in-line with expectations" according to CEO Steve Burd. Safeway expects the price per item to improve while continue to offer everyday low price approach model as its overall bottom line driver in the the second half of the fiscal quarter.[21]
Key Trends and Forces
The Wal-Mart Effect has Cost Safeway Market Share and Must Find Ways to Product Niche to Survive
Wal-Mart is the greatest external force affecting any grocer. In markets that Wal-Mart has entered, grocery prices drop by an average of 10-15%.[22] Additionally, Wal-Mart is able to drop grocery prices 10-30% drastically during promotional periods because it can remain profitable on extremely low margins due to its volume of sales.[23]
Safeway is no exception, in that it has lost market share to Wal-Mart in the markets in which it competes. Safeway is, however, somewhat sheltered from Wal-Mart given its relatively more upscale focus and its geographic distribution, with Safeway’s presence focused predominantly on the West Coast. As a result, Safeway has only a 24% overlap with Wal-Mart, while chains like Kroger are closer to 70%. In the long-term, Wal-Mart is expected to continue its expansion into the urban centers of the West Coast and has begun experimenting with higher-end products and store formats. It poses the most significant long term threat to Safeway's continued profitability.
Further, with its "Lifestyle" format, Safeway differentiates its stores by creating a warm ambiance through earth toned decor, custom flooring, and special lighting.[1] With 82 new store remodels in 2009, 79% of Safeway stores were converted to the “Lifestyle” format by year end.[24]In order to compete with other premium retailers, such as Whole Foods Market (WFMI), Safeway offers a 300 private label product line of "O for Organic" items as well as premium meats such as its Rancher’s Reserve Tender Beef brand. Approximately 22% of all private label are manufactured by Safeway plants; the remainder are purchased from third party suppliers. Many stores also offer additional services like gas stations and in-store Starbucks kiosks.[25]
Growth of Blackhawk Network is Correlated with Growth of Safeway's Success
As the industry leader in gift cards, Blackhawk, a wholly-owned subsidiary of Safeway that primarily sells third-party gift cards, enjoyed 59% growth in its commission revenues in 2008. Blackhawk makes money by charging a 6% sales commission, half of which Blackhawk keeps and the other half which the vendor receives for distributing it. However, the subsidiary has yet to be challenged by a strong competitor. Its success will almost certainly encourage other companies to enter the third-party gift card market. The future success of Blackhawk will depend on how the company continues to foster this growth while confronting the difficulties posed by anticipated competition.
Blackhawk typically receives a significant portion of its cash inflow from third-party gift card retailers late in the fourth quarter of the year from the holiday season so a seasonality factor must be adjusted. In this fashion for example, Blackhawk's net payables related to third-party gift cards increased to $170.4 million in 2009 from $23.9 million in 2008 primarily as a result of the growth of the business and the change in the timing of holiday sales compared to fiscal year end.[26]
Competition
As a retail grocer, Safeway faces its stiffest competition several sources:
Wal-Mart Stores (WMT) Wal-Mart is the largest food retailer in the US with more than 3,550 stores and supercenters.[27] Wal-Mart is able to provide low prices through its distribution network and economies of scale. Consumers turn to discount stores such as Wal-Mart when their disposable income falls.
Kroger Company (KR) Kroger is the second largest food retailer and largest operator of traditional supermarkets in the US, with 2,400 stores nationwide.[28]
SuperValu (SVU) SuperValu is the third largest food retailer and second largest operator of tradition supermarkets int he US, with 2,200 stores nationwide.[29]
Comparison of Operational Metrics, Margins and Capital Expenditure
Company (Fiscal Year) Comp Sales Growth Square Footage Growth Revenue per Square Footage (Millions USD) New Store Additions Closures Average Store Size (Square Feet) Gross Margin (%) Operating Margin (%) Net Profit Margin (%) Capital Expenditure/Sales (%)
Whole Foods Market (WFMI) (FY2010)[30] 7.1% 6.0% 882.0 16 3 38,000 34.8% 5.9% 2.7% 2.9%
Safeway (SWY) (FY2009)[31] (4.90%) (0.40%) 509.99 8 23 46,000 28.62% (1.54%) (2.69%) 2.08%
Kroger Company (KR) (FY2009)[32] 0.90% 0.01% 518.47 14 27 60,000 22.60% 1.42% 0.07% 2.99%
SuperValu (SVU) (FY2009) [33] (5.1%) (6.2%) 624.57 40 112 29,000 22.50% 2.96% 0.97% 1.70%
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