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Safeway: Strike at Competitor Could Boost Q4 Sales

 November 08, 2012 12:27 PM

(By Mani) Supermarket chain Safeway Inc. (NYSE:SWY) is expected to benefit from the strike at Raley's. On Nov. 4, union employees at Raley's – a privately held, conventional supermarket operator that competes with Safeway in Northern California  – decided to strike and began picketing outside Raley's stores.

These 98 striking stores compete with about 242 Safeway stores. Raley's is a formidable competitor that shares a top-three market share position with Safeway in five markets. Raley's stores will remain open during the strike because some employees likely the non-union component of the employee base is crossing picket lines.

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However, picketing generally deters customers, so strikes usually benefit other conventional (or non-conventional) food retailers in the market such as Safeway and Save Mart.

"We estimate that ~15% of Safeway's store base – or ~242 stores – overlaps with Raley's, and believe this could have a positive impact on Safeway's 4Q12 sales," BMO Capital Markets analyst Karen Short said in a note to clients.

Depending on the duration of the strike, these sales gains could result in permanent share shifts as evidenced by the 2003-04 strike in SoCal, which had a severe, negative impact on market share at Albertsons, Safeway and Kroger, Inc. (NYSE:KR).

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Picketing in front of Raley's 98 union stores in California represents an opportunity for competitors, including Safeway, to gain share. Revenues in the fourth quarter of 2012 could positively benefit from the strike if customers that are discouraged by the picketing decide to shop elsewhere.

Safeway is well positioned – as are Winco and Save Market – to gain some of Raley's lost business in all of its major Northern California markets in the fourth quarter.

Nevertheless, Safeway, once the darling of investors, is already squeezed from the heavy rivalry with traditional operators like Kroger, Supervalu (NYSE:SVU) and others.

Now, the company is under more pressure as even big box retailers and dollar stores such as Target Corp. (NYSE:TGT), Wal-Mart Stores, Inc. (NYSE:WMT), Dollar Tree, Inc. (NASDAQ:DLTR) and Dollar General Corp. (NYSE:DG) are offering groceries.

The food and drug retailer posted an unexpected drop in third-quarter sales and contraction of gross margins. Earnings, however, beat market projections. Earnings per share from continuing operations increased 18.4 percent to 45 cents, beating Wall Street projections of 42 cents.

In the third quarter, Safeway closed one Genuardi's store and sold 16 Genuardi's stores for a gain of $49.0 million after tax, or 21 cents. Sales and other revenue fell 0.2 percent to $10.0 billion, while market expectations were for a growth of 1.70 percent.

For the full year 2012, the company continues to expect earnings per share in the range of $1.90 to $2.10 while analysts expect $1.98.



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