From store closing to lackluster earnings reports, Safeway appears to be dead in the water in terms of impetus. A recent Motley Fool article looks at what the future might hold in store for the grocery giant.
From the article:
In November, the company sold its Canadian business to Sobeys for $5.8 billion in order to focus more on the US market. The move, however, has been met with great skepticism by many analysts, as the company’s Canadian operations had been generating healthy profits for the past few years. According to the company, the proceeds from the deal will be used for a stock-buyback program and paying off debt.
At the end of the third quarter, Safeway announced that it wanted to exit the Chicago market by selling all its Dominick’s locations in the region. The company has already sold 15 stores; four to New Albertsons and 11 to Roundy’s. For the remaining 57 stores, Safeway is still looking for buyers.
Safeway is expecting a tax benefit of $400 million to $450 million by exiting the Chicago market. The net present value of these tax benefits is around $145 million, as estimated by the company. This cash will be used for the share-repurchase program and investing activities.
On the other hand, leaving the market is going to trigger a multi-employer pension withdrawal liability for Safeway, which is amortized for more than 20 years. Safeway estimates the present value of these payments to be around $375 million. For this reason, many analysts are of the view that exiting the Chicago market may not be a very judicious decision.
Safeway is facing intense competition from big players like Kroger, Whole Foods, Wal-Mart, and Target, which means that the company’s margins aren’t going to increase significantly, at least in the near future. Hence, the company will not be able to generate considerable profits, casting a shadow of doubt over its future prospects.