netrashetty
Netra Shetty
AT&T Inc. is the largest provider of fixed telephony in the United States, and also provides broadband and subscription television services. As of January 2011, AT&T is the largest provider of mobile telephony service in the United States, with over 95.5 million wireless customers, just ahead of Verizon Wireless' 93.2 million, and more than 210 million total customers.[4]
As of 2010, AT&T is the 7th largest company in the United States by total revenue, as well as the 4th largest non-oil company in the US (Behind Walmart, General Electric and Bank of America). It is the 3rd largest company in Texas by total revenue (Behind ExxonMobil and ConocoPhillips) and the largest non-oil company in Texas. It is also the largest company headquartered in Dallas.[5] In 2010, Forbes listed AT&T as the 23rd largest company in the world by market value and the 18th largest non-oil company in the world by market value .[6]
Southwestern Bell Corporation was founded in 1983 as a Regional Bell Operating Company following the break-up of the original AT&T as a result of the United States v. AT&T antitrust suit. The company changed its name in 1995 to SBC Communications Inc. and again in 2005 to AT&T Inc. after it purchased its former parent company, AT&T Corporation. The newly merged company took on the iconic AT&T logo and T stock-trading symbol (for "telephone").
The current AT&T reconstitutes much of the former Bell System and includes ten of the original 22 Bell Operating Companies along with one it partially owned (Southern New England Telephone), and the original long distance division.[7] The company is headquartered in downtown Dallas, Texas.[8]
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,
As of 2010, AT&T is the 7th largest company in the United States by total revenue, as well as the 4th largest non-oil company in the US (Behind Walmart, General Electric and Bank of America). It is the 3rd largest company in Texas by total revenue (Behind ExxonMobil and ConocoPhillips) and the largest non-oil company in Texas. It is also the largest company headquartered in Dallas.[5] In 2010, Forbes listed AT&T as the 23rd largest company in the world by market value and the 18th largest non-oil company in the world by market value .[6]
Southwestern Bell Corporation was founded in 1983 as a Regional Bell Operating Company following the break-up of the original AT&T as a result of the United States v. AT&T antitrust suit. The company changed its name in 1995 to SBC Communications Inc. and again in 2005 to AT&T Inc. after it purchased its former parent company, AT&T Corporation. The newly merged company took on the iconic AT&T logo and T stock-trading symbol (for "telephone").
The current AT&T reconstitutes much of the former Bell System and includes ten of the original 22 Bell Operating Companies along with one it partially owned (Southern New England Telephone), and the original long distance division.[7] The company is headquartered in downtown Dallas, Texas.[8]
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,
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