What Do Safeway Short-Sellers See?
Sammy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As of the most recently reported figures (Jan. 31, 2013), short interest in Safeway stood at more than 82 million shares, or 32.3% of the float. The high short interest has led me to look at what the short sellers see.
One of the reasons the major supermarket stocks have struggled over the past few years is increasing competition. Wal-Mart has continued to expand its grocery offerings and is now the largest grocery retailer in the world. In addition to taking business from traditional grocery stories such as Safeway, Wal-Mart has also put pressure on industry margins. To compete with Wal-Mart, Safeway has been forced to cut prices. Grocery offerings have also been increasing at dollar stores such as Family Dollar, Dollar General, and Dollar Tree. In addition to competition on the low end, Safeway also faces competition on the high end. Whole Foods and Fresh Market cater to shoppers who are wealthier and looking for higher quality groceries.
Declining Revenue Growth
As shown by the chart below, Safeway is not growing revenues. At one point, in the late 1990's and early 2000's, Safeway was growing revenues by double digits. The major reason for this gradual decline is the increasing competition discussed above. While overall grocery sales may be increasing nicely, Safeway is struggling to maintain the business it currently has.
As shown by the chart below, in addition to slowing sales growth, Safeway has also seen a major decline in margins. The decline in margins is also attributable to the increase in competition. In an effort to hold on to customers, Safeway has been forced to cut prices to compete.
Over the past few years Safeway has significantly increased its debt load. This has sent the debt-to-equity ratio soaring. Safeway's debt to equity ratio has surged because the company has been using debt to buy back stock and pay dividends in the wake of weak earnings results.
The recent struggles of America's third largest supermarket chain, Supervalu (NYSE: SVU), have also raised questions of the future for Safeway. Like Safeway, Supervalu has faced difficult business prospects and carries a significant debt load. Recently, Supervalu agreed to a deal to sell some of its stores and a stake of itself to Cerberus Capital Management. This deal was in many way a last ditch effort to save the company. Safeway short-sellers are betting Safeway will go down a similar path as Supervalu.
In my opinion, the challenges Safeway faces are very severe. Despite the cheap valuation, just 9 times earnings, I would avoid investing in Safeway. While the stock may be a candidate for a short squeeze given any positive news, I think the problems the company is facing are unlikely to abate any time soon.
Thoughts on Kroger
As shown by the chart below, shares of the largest pure grocery retail operator, Kroger, have fared far better than Safeway. However, I fear that many of the problems that have plagued Safeway over the past few years, most notably the increase in competition, are also a major threat going forward for Kroger. True, Kroger is a very strong, brand but I do not believe there is a strong enough "moat" around the company to warrant an investment.
sammypollack has no position in any stocks mentioned. The Motley Fool owns shares of 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!