Is This Retailer a Buy After Continous Share Buybacks?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Stock buyback seems to be a quite common theme these days in the market. There is one company, which has reduced its number of shares outstanding substantially over the last 3 years, from around 380 million at the end of 2010 to only around 266 million shares now, a reduction of around 30%. Thus, in 2010, the company generated $590 million in net income, or $1.55 earnings per share. However, trailing twelve months, the net income was $568 million, but the EPS has grown to $2.14. That company is Safeway (NYSE: SWY).

Continuous Buybacks Financed Mainly by Debts

Over the trailing twelve months, it has spent more than $2 billion for share buybacks, and it was reported that $700 million in debt was raised for that purpose. Indeed, Safeway has been buying back their shares for the last 5 years. The amount of treasury stock went from $4.4 billion in 2007 to $9.12 billion currently. In the same period, the long-term debt has increased from $4 billion to nearly $6 billion. As of September, Safeway booked $2.78 billion in stockholders’ equity, with only $203 million in cash, and nearly $6 billion in long-term debt. However, it is the good thing for the company that the weighted average interest rate is not so high, in the range of 2.48% and 5.81%.

Highest Dividend Yield with High Leverage Among the Peers

Compared to The Kroger (NYSE: KR), Wal-Mart Stores (NYSE: WMT), Safeway is the most leveraged food and drug retailer. Its D/E ratio is 2.3x, whereas the D/E of Kroger and Wal-Mart are 1.8x and 0.6x, respectively. However, Safeway is in the better balance sheet position than SUPERVALU (NYSE: SVU), with negative equity and more than $6 billion in debt. Kroger has accelerated its cash return to shareholders by increasing the quarterly dividend by 30% to 15 cents per share, payable on Dec. 1. Currently, Safeway is paying 3.8% dividend yields, much higher than a dividend yield of Kroger, of 1.9%. Wal-Mart’s yield is in the middle of the two, of 2.3%. SUPERVALU just recently has cut its dividend payment since the middle of this year for its survival.

Operating figures

In terms of profitability in retailing business, which retailer has the best gross margin would seem to manage its merchandise purchasing most efficiently.

<table> <tbody> <tr> <td> <p> 2011</p> </td> <td> <p><strong>SWY</strong></p> </td> <td> <p><strong>KR</strong></p> </td> <td> <p><strong>WMT</strong></p> </td> <td> <p><strong>SVU</strong></p> </td> </tr> <tr> <td> <p><strong>Gross margin</strong></p> </td> <td> <p>27</p> </td> <td> <p>20.9</p> </td> <td> <p>25</p> </td> <td> <p>22.2</p> </td> </tr> <tr> <td> <p><strong>Net margin</strong></p> </td> <td> <p>1.18</p> </td> <td> <p>0.67</p> </td> <td> <p>3.51</p> </td> <td> <p>-2.88</p> </td> </tr> </tbody> </table>

Compared to its peers, in 2011, Safeway demonstrated the best gross margin, of 27%. The second ranking belonged to Wal-Mart, with 25% gross margin. However, Safeway’s net margin was significantly lower than Wal-Mart’s, due to the high interest expense it had to bear. Wal-Mart ranked the best in terms of net margin, of 3.5%, more than three times higher than Safeway’s. Over the last 10 years, Safeway has been consistently generating positive operating cash flow and free cash flow. However, the amount of free cash flow generated has been quite fluctuating during the period.

<table> <tbody> <tr> <td> <p><em>USD million</em></p> </td> <td> <p><strong>2002</strong></p> </td> <td> <p><strong>2003</strong></p> </td> <td> <p><strong>2004</strong></p> </td> <td> <p><strong>2005</strong></p> </td> <td> <p><strong>2006</strong></p> </td> <td> <p><strong>2007</strong></p> </td> <td> <p><strong>2008</strong></p> </td> <td> <p><strong>2009</strong></p> </td> <td> <p><strong>2010</strong></p> </td> <td> <p><strong>2011</strong></p> </td> </tr> <tr> <td> <p><strong>OCF</strong></p> </td> <td> <p>1,919</p> </td> <td> <p>1,610</p> </td> <td> <p>2,226</p> </td> <td> <p>1,881</p> </td> <td> <p>2,175</p> </td> <td> <p>2,191</p> </td> <td> <p>2,251</p> </td> <td> <p>2,550</p> </td> <td> <p>1,850</p> </td> <td> <p>2,024</p> </td> </tr> <tr> <td> <p><strong>FCF</strong></p> </td> <td> <p>549</p> </td> <td> <p>674</p> </td> <td> <p>1,014</p> </td> <td> <p>498</p> </td> <td> <p>501</p> </td> <td> <p>422</p> </td> <td> <p>655</p> </td> <td> <p>1,698</p> </td> <td> <p>1,012</p> </td> <td> <p>929</p> </td> </tr> </tbody> </table>

Average 10 years, the operating cash flow is more than $2 billion and the free cash flow is nearly $800 million. 


Valuation-wise, Safeway and SUPERVALU are the cheapest in terms of EV multiples.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>SWY</strong></p> </td> <td> <p><strong>KR</strong></p> </td> <td> <p><strong>WMT</strong></p> </td> <td> <p><strong>SVU</strong></p> </td> </tr> <tr> <td> <p><strong>EV/EBITDA</strong></p> </td> <td> <p>4.67</p> </td> <td> <p>5.34</p> </td> <td> <p>7.8</p> </td> <td> <p>4.2</p> </td> </tr> </tbody> </table>

It is understandable that Wal-Mart is the most expensive, with 7.8x EV/EBITDA, because of its global market leading position, whereas Safeway is valued at 4.67x EV/EBITDA, and SUPERVALU is the cheapest, with 4.2x EV/EBITDA.

Foolish Take

Safeway seems to be a decent pick, along with the trend of business deleveraging. However, I am still not very comfortable with the current debt level of the company now. Wal-Mart is the most conservative with the lowest debt/equity ratio. Long-term investors might pick Wal-Mart and just keep holding it.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Supervalu. Motley Fool newsletter services recommend Supervalu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus