Financial Statement Analysis Shkelqim Gerxhaliu 10/30/2012

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Contents

Company Profile: Safeway ............................................................................................................................ 2

Industry ......................................................................................................................................................... 3

Store Formats ................................................................................................................................................ 4

Industry Size .................................................................................................................................................. 5

Market Share ................................................................................................................................................ 6

Growth Ratios ............................................................................................................................................... 7

Activity ratios ................................................................................................................................................ 7

Profit ratios ................................................................................................................................................... 7

Liquidity ratios .............................................................................................................................................. 8

Solvency ratios .............................................................................................................................................. 8

Kroger Co. competitor analysis ..................................................................................................................... 9

Trend Analysis ............................................................................................................................................... 9

Stock movements........................................................................................................................................ 11

Conclusion ................................................................................................................................................... 13

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Company Profile: Safeway

Safeway Inc., together with its divisions, is a company which operates as a food and drug retailer

in North America. Safeway provides a variety of foods; from different departments, such as

bakery, delicatessen, floral, seafood, and pharmacy, as well as Starbucks coffee shops, and

adjacent fuel centers. Safeway’s consumers also have the option to order food online using,

Vons.com, and Genuardis.com. Safeway purchases, manufactures, and process private-label

merchandise comprising milk, bakery goods, ice cream, cheese, meat products, soft drinks,

fruits, vegetables, cakes, and sandwiches. Safeway offers Health and Wellness products under

the O Organics, Eating Right, Bright Green, and Open Nature brands; Premium products,

including the Safeway SELECT, Signature Café, Rancher's Reserve, Primo Taglio, Waterfront

BISTRO, and Debi Lilly offerings; and core products under the Safeway brands, such as

Lucerne, Refreshe, the Snack Artist, and Pantry Essentials. As of October 11, 2012, it operated

1,644 stores in the United States and Canada. Safeway Inc., through its interest in Casa Ley, S.A.

de C.V., also operates 185 food and general merchandise stores in western Mexico. The

company was formerly known as Safeway Stores, Incorporated and changed its name to Safeway

Inc. in February 1990. Safeway Inc. was founded in 1915 and is based in Pleasanton, California.

(Yahoo! Finance)

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Industry Supermarkets are evolving into a different format from what they were a decade ago and earlier.

Today, people live a much more dynamic way than they used to. As life has changed,

supermarkets as well have changed the way of approach to their consumers, making shopping

easier and more economical than it used to be.

The supermarket industry is a big part of a country’s industry. According to the U.S. Census

Bureau, 2005 sales at grocery stores amounted to $463.9 billion, or 12.5% of total U.S. retail

sales.” (Latella) When comparing this percentage to motor vehicle parts dealers, and general

merchandise stores, supermarket industry has a much higher share in the U.S. market.

Adjusting for inflation, this industry showed a gain in real sales of 2.7%, which is higher than in

more than five past years.

On the other hand, the traditional supermarkets are finding it hard to compete with big

supermarkets which offer a higher variety of products with low prices. According to William

Bishop’s annual Future of Food Retailing study, between 2005 and 2010, traditional supermarket

stores will decline for 50.4% dollar share of the grocery and consumables market to 44.1 percent,

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while non-traditional formats (Super Centers, wholesale clubs, and dollar stores) will increase

their dollar share from 33.4 percent to 40.5 percent in the same time period.

Store Formats Focusing on consumers’ grocery needs, Supermarkets today offer thousands of products in

spaces of more than 100,000 square feet specialized in a type of food. For this reason, there exist

different format of stores. The following table shows different definitions of store formats,

presented by Food Marketing Institute.

Conventional Supermarket: Traditional supermarket, usually with 30,000 square feet or less of

selling space.

Super/Combination Store: Larger version of conventional store, usually more than 30,000

square feet of selling space, expanded selection of nonfoods, perishables and customer service.

Supercenter: A minimum of 90,000 square feet and combines many of the merchandise

departments of a conventional supermarket and a

discount department store. Minimum of 30,000 square feet dedicated to each category.

Warehouse/Price Impact Store: Store with reduced variety compared to a super/combination

store, lower service levels, minimal décor and a streamlined merchandising presentation along

with aggressive pricing.

Typically attracts customers to the store from longer distances than super/combination stores

Limited Assortment Store: Food stores restricted in size, services, fixtures and variety in

order to reduce operating costs and sell goods at the lowest possible prices. Also known as box

stores and no-frills stores.

Convenience Store: A small, easy-access food store with a limited assortment. Many

convenience stores also sell fast food and gasoline.

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Target Market-Focused: Caters to a very narrow clientele such as ethnic gourmet,

natural/organic, etc. Typically looking to have low market share, but spread over many markets.

Usually approximately 15,000 square feet. (Food Marketing Institute)

Industry Size

According to the latest report published on May, 2012 by “Progressive Grocer”, as of February

2006, the top supermarket chains totaled an amount of $412.9 billion in their annual sales.

Safeway ranks the 4th

on this report.

Table 1 – Industry size, (Progressive Grocer)

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Market Share Safeway owns 6.0% of the market shares in the grocery industry

Table 2 – Market Share, (Progressive Grocer)

Ratio Analysis of Safeway

RATIO ANALYSIS 2011 2010

Growth Ratios

Sales Growth 6.3% 0.5%

Income Growth -12.4% -153.7%

Asset Growth -0.5% 1.2%

Activity Ratios

Receivable Turnover 72.1 76.0

Inventory Turnover 12.5 11.5

Fixed Asset Turnover 4.5 4.1

Profit Ratios

Profit Margin 1.2% 1.4%

Return on Assets 3.4% 3.9%

Return on Equity 11.9% 23.6%

Dividend Payout Ratio 36.4% 28.5%

Price Earnings Ratio 14.1 14.4

Liquidity Ratios

Current Ratio 0.83 0.98

Quick Ratio 0.27 0.31

Solvency Ratios

Debt to Total Assets 0.76 0.67

Times Interest Earned 4.24 3.95

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(Accrual)

Times Interest Earned (Cash)

7.69 6.86

Growth Ratios

There is a pretty good income growth of 6.3% in 2011. However there is a negative income

growth but still it is better than in 2010. There also is a negative assets growth.

Activity ratios

There is a slight decrease of the receivable turnover in 2011, which is good since the company

receives the cash a little bit faster than in the previous year. The inventory turnover is higher than

in 2010, which means that there were better sales in 2011, therefore the goods are being sold

faster. There is a higher fixed asset turnover which means that the company has been a little bit

more efficient in using the investment in fixed assets.

Profit ratios

The profit margin ratio in 2011 is lower for 0.2% compared to 2010, which means that the

company is slightly less profitable, and is having less control over its costs.

Return on assets is 3.4% which is lower than in 2010, when it was 3.9. This means that the

company is earning less in its investments.

There is a lower return on equity in 2011 than in 2010, which means that the company is less

profitable of the use of the money the shareholders have invested.

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Dividend payout ratio is higher in 2011 than in 2010, which means that the support of the

earnings in paying the dividends has increased.

Price earnings ratio is a little bit lower, which means that the investors expect a slightly lower

earnings growth in the future.

Liquidity ratios

Safeway has a current ratio of 0.83 which is even lower than in 2010, and it means that Safeway

has a low ability to meet its short-term obligations. Quick ratio of 0.27 in 2011, is very low as

well, which means that the company is not able to meets its obligations quickly by using its

most liquid assets (Cash and its equivalents).

Solvency ratios

Debt to total assets in 2011 is 0.76 which is not that high. However, it is higher than in the

previous year which means more risk and more risk and leverage for Safeway.

Times interest earned, both in accrual and cash methods, in 2011 is higher than in 2011 which

means that more earnings are available to meet Safeway’s interest payments.

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Kroger Co. competitor analysis

RATIO ANALYSIS Safeway Kroger

Income Statement Common Size Data

Gross Profit/Sales 27.0% 22.2%

Income from Continuing Operations/Sales

1.2% 1.4%

Balance Sheet Common-Size Data

Current Assets/Total Assets 27.8% 33.0%

Current Liabilities/Total Assets 33.4% 33.4%

Liabilities/Total Assets 75.5% 79.0%

Equity/Total Assets 24.5% 22.9%

Profit Ratios

Profit Margin 1.2% 1.4%

Return on Assets 3.4% 4.8%

Return on Equity 11.9% 22.0%

Dividend Payout Ratio 36.4% 22.4%

Liquidity Ratios

Current Ratio 0.83 0.99

Quick Ratio 0.27 0.22

Solvency Ratios

Liabilities/Total Assets 0.76 0.79

Times Interest Earned (Accrual) 4.24 4.83

Operational Ratios

Receivable Turnover 72.1 93.6

Inventory Turnover 12.5 12.9

When comparing the ratios between Safeway and Kroger Co., we can see that in most of the cases,

Kroger is ahead Safeway. However Safeway is better in Gross Profit, in the ratio between equity and the

total assets, in dividend payout ratio, as well as in its quick ratio.

Trend Analysis

2007 2008 2009 2010 2011

Revenue $44,104 $42,286 $40,851 $41,050 $43,630

Income - Continuing Operations

$888 $965 $1,098 $590 $517

Cash Flow from Operations $1,550 $1,850 $2,024

Total Assets $14,964 $15,148 $15,074

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The revenue started decreasing until 2009 where it decreased to $40,851, and then started

coming up again in 2010, and in 2011 it got even better, increasing to $43,630.

In 2009, Safeway recorded a non-cash impairment charge in the amount of $1,974.2 million

(pre-tax) to reduce the carrying value of goodwill. The impairment was due primarily to

Safeway’s reduced market capitalization and a weak economy.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

2007 2008 2009 2010 2011

REVENUE TREND

$0

$200

$400

$600

$800

$1,000

2007 2008 2009 2010 2011

NET INCOME TREND

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After the year 2009, the income started increasing back again

The company has been holding a stable level of total assets during the period 2009-2011

Stock movements

Stock movements of Safeway (Sep. 4, 2012 – Oct. 26, 2012), (Yahoo! Finance)

$0

$500

$1,000

$1,500

$2,000

$2,500

2009 2010 2011

INCOME TO CASH FLOW COMPARISON

Income -ContinuingOperations

Cash FlowfromOperations

$0$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000

2009 2010 2011

ASSET CHANGES

Total Assets

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Increase: September 25, 2012

Whitestone REIT (WSR) announces the acquisition of a community center in Fountain Square.

This is because the retail market around Phoenix had been going through a positive trend in

terms of net absorption and vacancy rates. The major contributors to this, were submarkets of

Phoenix like Scottsdale, Mesa, and Gilbert. Many stockholders of Safeway did not want to be in

this market, since there was more competition, the prices were not likely to increase, therefore

they value of stocks would later decrease.

Increase: October 11, 2012

At this day, Safeway reported its earnings which attracted investors and so the trading volume

reached the highest point of 22,311,800. Safeway reported its net income from its continuing

operations of $108 million in the third quarter of 2012. This net income was much lower than in

the third quarter of the previous year. However, the earnings per share were 45 cents, which was

3 cents more than the Zacks Consensus estimated and 18.4% more than in the third quarter of the

previous year. Safeway also reported a nominal year-to-year decline of 0.2% in its total sales of

$10.05 billion, missing the Zacks Consensus estimate of $10.22 billion.

The volume increased as a result of the performance of Safeway’s loyalty card program, which

contributed in weakening the price inflation. These resulted in a rise of 0.1 % in identical-store

sales, excluding fuel.

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Increase: October 17, 2012

There was the ex-date for dividend payment of $0.175. The volume did not decrease as a result

of this. It only increased for a little bit, which means that the volume is not necessarily related to

the ex-date for dividend payments, or to the price of stocks, which in this case, it has slightly

increased.

Conclusion

Safeway had difficulties in 2009, as a result of the impairment charge it had. However after

2009, Safeway has started recovering from this, increasing its sales, following increases in

income as well. But, Safeway yet has some other problems it has to deal with. Its current ratio

is below 1, which means that Safeway may have difficulties in meeting its short-term

obligations. Safeway got better in the last two years. However, its competitors, such as Kroger

Co., are in a better situation. So, as a conclusion I would recommend to the investor to wait for

Safeway to improve some of its ratios, and then buy stocks as Safeway will grow.

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Work Cited

"Safeway Inc." Yahoo! Finance. N.p., n.d. Web. <http://finance.yahoo.com/q?s=SWY>.

"Supermarket Facts." Food Marketing Institute. Progressive Grocer's 2010 Marketing Guidebook

and Willard Bishop, The Future of Food Retailing, 2009 ., n.d. Web. 30 Oct. 2012.

<http://www.fmi.org/research-resources/supermarket-facts>.

Latella, Richard W. "Supermarket Industry Overview." Http://valuation.cushwake.com.

Cushman & Wakefield Valuation Services – Retail Industry Group, n.d. Web. 30 Oct.

2012. <http://valuation.cushwake.com/Documents/50905.pdf>.