Is this a Safe-way to a Healthy Portfolio?
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a recent post of mine, I was convinced that with the consumer spending habits becoming weaker, there is a certain league of companies which are affirmed to do well. These are the ones which provide valuable discounts when consumers are most sensitive towards it. This definitely should be in necessities offered by the grocers.
Therefore, discount retailers such as Dollar General and Dollar Tree have been really doing a commendable job. $1 items have genuinely been working for them in the times of impending crisis. Both offer great discounts providing value to consumers. Therefore, companies which restrain themselves from doing so are the ones which fall prey to a harsh business environment.
But good businesses need to understand the need of the hour and adapt themselves accordingly. Safeway (NYSE: SWY), the food retailer, used a similar strategy to save itself from a bad performance in its second quarter. Let’s take a look.
A Quick View of the Quarter
Driven by increased promotional efforts and higher fuel sales, revenue increased 1.9% to $10.39 billion. A very important role was played by the loyalty discount program, called Just for U, initiated by the grocer to provide discounts to its loyal customers. The program is quite similar to what one of its peers, Kroger (NYSE: KR), had initiated some time back. Kroger mailed discount vouchers to its loyal customers. This move helped it increase customer visits and drive its revenue 5.8% north. The company did witness the program’s positive effects in terms of 0.8% increase in same store sales. But even greater effects will be seen in the months to come.
Turning to earnings, it was disheartening to see earnings of $122.7 million, a fall of 16%. Though Safeway managed to push its earnings to green, the uncertain economic conditions took a toll on the bottom line. A key pullback came from the commodity inflation which the company couldn’t manage efficiently since it incurred huge costs on marketing and the Just for U program.
Apart from the reasons stated above, Safeway faced problems on the competitive front also. It felt stiff competitive pressures from other retailers, especially Wal-Mart (NYSE: WMT). Its offering of lowest possible prices is driving consumers in large numbers to its stores. Additionally, the retail giant has been on an expansion spree. It has been growing its store base making itself bigger and stronger with each passing day. In an environment where consumer spending is limited, it is obvious that gain for one will be a loss to the other. But a relief to Safeway was the fact that though its earnings fell its market share didn’t, which should be seen as a positive by investors.
Every retailer can have a bad quarter because of a tough economic environment, but the players should know how to handle it. Though it was late for Safeway to realize which strategy would work best to combat competition and drive consumers, it’s never too late. Its discount program will probably go a long way in improving results. Moreover, the fact that in spite of the problems the food retailer had, its market share being intact is a great sign of a sound company. It seems like a safe bet from a long term perspective, driven largely by the moves that it’s making.
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