Safeway Inc. reported Thursday net income of $0.49 per diluted share for the first quarter of 2013. This includes tax benefits of $0.14 per diluted share, of which $0.07 was contemplated in our annual guidance. These results compare with income from continuing operations in the first quarter of 2012 of $0.30 per diluted share. Other highlights of the quarter include:
• The company’s fourth consecutive quarter of U.S. market share gains in both the supermarket channel and in all outlets.
• An identical-store sales increase of 1.5 percent (excluding fuel), which was positively impacted by a calendar shift of 0.4 percent and negatively impacted by a shift to generic drugs of 0.9 percent.
• A unit volume increase of 0.5 percent, which also was positively impacted by the calendar shift.
“We are pleased that we continued to see market share gains in the first quarter,” said Steve Burd, chairman and CEO. “Just for U usage continues to grow, and our partner fuel reward program is rolling out on schedule and resonating well with consumers.”
“In addition,” said Burd, “the successful IPO of Blackhawk Network Holdings last week highlights the value we are creating for our stockholders. The proceeds from our sale of Blackhawk stock were used to pay down debt.”
Sales and other revenue
Total sales were $10.0 billion in the first quarter of 2013, essentially flat compared to the first quarter of 2012. An identical-store sales increase of 1.5 percent (excluding fuel) was offset primarily by the disposition of Genuardi’s stores in 2012 and lower fuel sales in 2013.
Gross profit
Gross profit declined 14 basis points to 26.70 percent of sales in the first quarter of 2013 compared to 26.84 percent of sales in the first quarter of 2012. Excluding the 15 basis-point impact from fuel sales, gross profit declined 29 basis points due primarily to investments in price, partially offset by improved pharmacy gross margin and reduced advertising expense.
Operating and administrative expense
Operating and administrative expense decreased five basis points to 24.90 percent of sales in the first quarter of 2013 from 24.95 percent of sales in the first quarter of 2012. Excluding the 17 basis-point impact of lower fuel sales, operating and administrative expense margin decreased 22 basis points primarily due to lower depreciation, utilities and other store occupancy costs.
Operating profit
Operating profit margin declined 10 basis points to 1.80 percent in the first quarter of 2013 from 1.90 percent in the first quarter of 2012. Excluding fuel, operating profit declined seven basis points.
Interest expense
Interest expense decreased to $65.0 million in the first quarter of 2013 from $71.4 million in the first quarter of 2012 because of lower average interest rates and lower average borrowings.
Income taxes
Income tax expense was 2.1 percent of pre-tax income in the first quarter of 2013. In the first quarter of 2013, Safeway withdrew $68.7 million from the accumulated cash surrender value of corporate-owned life insurance policies purchased in the early1980s and determined that a majority of remaining cash surrender value would be received in the future through tax-free death benefits. Consequently, Safeway reversed deferred taxes on that remaining cash surrender value and reduced income tax expense by $17.2 million. In addition, income tax expense in the first quarter of 2013 was reduced by $16.7 million due to the resolution of federal income tax matters. Excluding these items, income tax expense was 30.0 percent of pre-tax income in the first quarter of 2013 compared to 34.0 percent of pre-tax income in the first quarter of 2012.
Discontinued operations
In January 2012, Safeway announced the planned sale or closure of its Genuardi’s stores. In the first quarter of 2012, Safeway closed three of the Genuardi’s stores and incurred impairment and lease exit losses of $14.2 million ($8.6 million, net of tax). The disposition of Genuardi’s was completed during 2012.
Cash flow
Net cash flow used by operating activities increased to $555.2 million in the first quarter of 2013 from $541.8 million in 2012 due primarily to an increase in the use of cash for working capital.
Net cash flow used by investing activities declined to $71.6 million in the first quarter of 2013 from $273.0 million in 2012 primarily due to lower capital expenditures in 2013 and cash received from proceeds on COLI policies in 2013, partially offset by lower proceeds from the sale of property in 2013.
Net cash flow provided by financing activities increased to $571.1 million in the first quarter of 2013 from $220.6 million in 2012 due primarily to the repurchase of stock in 2012, partly offset by lower proceeds from the issuance of debt in 2013.
Capital expenditures
Safeway invested $144.9 million in capital expenditures in the first quarter of 2013. For the year, Safeway expects to invest approximately $1.0 billion to $1.1 billion in capital expenditures.
Stock repurchases
Safeway did not repurchase any shares of its common stock during the first quarter of 2013 under its previously announced share repurchase program. The remaining board authorization for stock repurchases at quarter-end was approximately $0.8 billion.
Guidance
Safeway’s guidance for 2013 remains unchanged at $2.25 to $2.45 earnings per diluted share. Half of the $0.14 per diluted share of tax benefits was anticipated in the original earnings guidance and half was not. However, the unanticipated tax benefits roughly offset the expected dilution to Safeway’s earnings from the Blackhawk IPO. Guidance for non-fuel ID sales growth remains at 2 to 3 percent, operating profit margin change, excluding fuel, at flat to a positive 10 basis points, and free cash flow at $850 million to $950 million.
