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Safeway sales positive thanks to fuel, loyal shoppers

PLEASANTON, Calif. — Sales at Safeway are looking up thanks in large part to fuel gains, but the grocer's loyalty card program is expected to continue driving that sales momentum into next year as the company rolls out its Just for U digital marketing platform and explores health-and-wellness initiatives.

"The upside in the quarter was driven mostly by better than expected sales, as [identical store sales] of [greater than] 1.5% exceeded consensus and our estimate of just under a 1% increase," Edward Kelly, research analyst for Credit Suisse, wrote in a note Thursday morning. "Bottom line here is that the quarter was much better then very low expectations. While it does not represent an inflection point in the company's challenging fundamentals, it does provide more comfort in the company's ability to achieve current years numbers against a low valuation."

Safeway also beat analyst earnings estimates and same-store sale projections.

"Our sales momentum continued to build in the third quarter, and our costs were well-controlled," stated Steve Burd, chairman, president and CEO. "At the same time, we continued to innovate throughout the business to meet our customers' needs and build their loyalty. Our 'Just for U' digital marketing platform and our proprietary Open Nature line of 100% natural foods are good examples of these efforts."

Safeway has currently rolled out its Just for U platform — a personalized deal generator that utilizes purchase histories from Safeway's loyalty card program — in just two markets. Safeway is rolling that platform into one more market this year and plans to have it available companywide by second quarter 2012, Burd told analysts Thursday morning during a conference call. And while the program has not been heavily promoted within those two markets, Burd added, those are "the two markets where we gained the most this year." Safeway is realizing double-digit sales increases across its most loyal consumers, Burd said.

The company's overall loyalty card is helping to drive positive lifts in households shopping Safeway. Deals associated with the loyalty card program are "fairly aggressive," Burd said, and are linked to savings at the pumps. Safeway has realized the greatest success in those markets saturated with Safeway fuel stations. "We have some other deals for markets that are not as well-compelemented with fuel," Burd said.

Higher fuel revenue was credited to a 26% increase in the price per gallon of gas as compared to the year-ago and a 13% lift in same-store gallons of gas sold.

Burd also suggested Safeway will be rolling out several health-and-wellness initiatives into 2012. Safeway named its first chief medical officer, Kent Bradley, in September. Bradley has been charged with lowering Safeway's healthcare outlay for its more than 200,000 covered employees. Simultaneously, Bradley is part of a team at Safeway exploring ways to monetize those health-and-wellness initiatives at its stores. For example, a weight management tool may be one of the initiatives to be introduced in the coming year, Burd said.

For the third quarter ended Sept. 10, Safeway posted sales of $10.1 billion, a 7.4% increase credited primarily to higher fuel sales. Safeway reported a 1.5% increase in identical-store sales (excluding fuel).

Safeway completed five new stores and seven Lifestyle remodels, and closed 11 stores in the quarter. For the year, Safeway plans to invest approximately $1 billion in capital expenditures, while completing 26 new Lifestyle stores and 30 Lifestyle remodels.

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