Will Wal-Mart, Amazon and Target make Safeway the next Supervalu?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As if Wal-Mart (NYSE: WMT), Target (NYSE: TGT) and The Kroger Co. were not torment enough for Safeway (NYSE: SWY) Amazon (NASDAQ: AMZN) is now moving into its space with even more punishment that will have the shareholders experiencing pain like those owning stock in Supervalu (NYSE: SVU)
Supervalu is down about 70% for 2012.
It collapsed under a massive debt load from an ill-advised acquisition that was exacerbated by declining sales growth and falling earnings-per-share growth. With a debt-to-equity ratio of close to 100, Supervalu has a negative profit margin of 3.25%. It is difficult to see how Supervalu can stay out of bankruptcy court. Having to fight for customers with Target, Kroger's and Wal-Mart will do that to entities with vulnerable balance sheets.
Competition in the grocery store sector, moreover, was brutal long before Wal-Mart entered it in 1988 and Target shortly thereafter in the early 1990s. It has since become much more punishing as Wal-Mart now has about one-third of the grocery market with Target, Supervalu, The Kroger Co. and Safeway all under 10% each. That market share held by Safeway is endangered, too.
Amazon will make matters even worse for Safeway. Hoping to rebound, Safeway has developed its Bright Green Label to capture health product dollars. From Amazon now competing for this market share is Vine.com, its natural product store. The Vine.com carries many familiar brands for those seeking items in this niche, such as Tom's of Maine and SimplyFido. What Amazon did to Best Buy and Radio Shack in the consumer electronics sector is a costly lesson that Safeway will likely be learning with its Bright Green Label efforts to revitalize revenues.
Already earnings-per-share growth for Safeway is down by 3.27% this year. Over the past five years, earnings-per-share growth for the California-based grocery store chain has fallen more than 5%. Safeway barely makes money with a profit margin of only 1.25%.
Like Supervalu, Safeway is in the untenable position of not making enough while having way too much debt. With is earnings-per-share growth falling and profit margin so thin, Safeway has little room to spare on its balance sheet for such a heavy debt load. It is that unenviable combination that has crushed SuperValu, which is down 52.73% for the last quarter alone. Wall Street agrees as the chart below reveals how the debt-to-equity ratio for Safeway has increased as its stock price has fallen.
SWY Debt to Equity Ratio data by YCharts
Like Supervalu for so long, Safeway continues to maintain their relatively high dividend. The dividend yield for Safeway is 4.38%. The funds that go out each quarter in dividend payments would be far better utilized reducing the massive debt-load for Safeway. With a quick ratio of 0.29 and a current ratio of 0.92, the cash position of Safeway is very tenuous. Eventually Supervalu ended its dividend payment. Safeway could easily be forced to do that, too. That would exert even more downward pressure on the share price as income seekers would sell.
Maintaining the dividend will be even more difficult when Safeway spins off gift card subsidiary, Blackhawk Network Holdings, in a planned initial public offering. Highly profitable, Blackhawk Network Holdings contributed $32 million of the revenue growth for Safeway in the second quarter of 2012 from the previous year's period. The demand for gift cards increased by 25% for the most recent year.
Safeway has been selling off its other assets. There are plans to sell more than 40 stores. Three Genaurdi stores were sold to Giant earlier this year.
Furthermre, the turnover in accounts receivable at Safeway is much worse than the industry average, almost twice as high. Net income per Safeway employee is $3,043.00. For the grocery store industry, the average net income is $4,032.00.
Before Supervalu's shares collapsed, there was an article in Barron's touting it as an $11 stock, based on its asset value, according to Ken Goldman, an analyst with JPMorgan. At the time of that article, SuperValu was at $5.54 a share. It is now around $2.40. With a price-to-sales ratio of 0.09, Safeway appears to be the same value trap. At present, the price-to-sales ratio for SuperValu is just 0.01.
While the JPMorgan analyst was wrong about the correct price level for Supervalu, the shorts were not. This conviction that the share price should fall is another similarity, again, for Safeway and Supervalu. A short float of 5% is considered to be troubling for a stock. Supervalu now has a short float of 39.94%. For Safeway, the short float is 29.34%. That is stunningly high.
Year to date, Safeway is down by 21.89%. At around $16, it is trading very close to its 52 week low of $14.97. The mean analyst rating for Safeway is a 2.80, which is bearish as 5 is a Strong Sell with 1 being a Strong Buy.
That same bearish combination of high debt along with the stagnant sales growth and falling earnings growth that imperiled Supervalu is present with Safeway. For a company that barely makes money, those can hardly be considered positive for Safeway. Down for the last week, quarter, six months and 52 weeks of market action, the share price is trending downwards along with the sales growth and earnings growth of Safeway. That certainly appears to be headed for the same check out counter that bagged Supervalu.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article.
