Safeway to Exit Chicago, Q3 Profits Fall

Safeway Inc. plans to exit the Chicago market, where it operates 72 Dominick's stores, by early 2014, a move that will result in a cash tax benefit of $400 million to $450 million which will be available in the short-term to partly offset the cash tax expense on the sale of the net assets of Canada Safeway Limited (CSL).

The Pleasanton, Calif.-based retailer said it expects to use the cash tax benefit and any other cash proceeds from the disposal of Dominick's properties to buy back stock and to invest in growth opportunities.

"The decision to sell Canada Safeway and to exit the Chicago market is consistent with Safeway's priority of maximizing shareholder value," said Robert Edwards, president and CEO. "These actions will allow us to focus on improving and strengthening our core grocery business. We are continuing to review all of our businesses to optimize our allocation of resources, improve sales and grow operating profits."

The chain has already unloaded four Dominick's stores in the greater Chicago area to Jewel-Osco's parent, Albertsons Inc., including:

1340 S. Canal Street, Chicago, Ill.
2550 N. Clybourn Avenue, Chicago, Ill.
14200 S. Bell Road (at 143rd), Homer Glen, Ill.
1340 Patriot Boulevard, Glenview, Ill.

During a short transition period, the stores will continue to operate under the Dominick's banner until their conversion to Jewel-Osco stores, during which time both companies will work together with local labor unions to ease the transition for store employees, and to facilitate continued employment for as many of them as possible.

As for its 2013 third quarter financials, Dominick's incurred losses before taxes of $13.7 million (3 cents per share) and $35.2 million (9 cents per share) in the first 36 weeks of 2013. Since the decision to exit the Chicago market was reached after the end of Q3, Dominick's net assets were not classified as held for sale and its operations have not been included in discontinued operations. Safeway anticipates that Dominick's will be accounted for as a discontinued operation in the fourth quarter.

The move follows Safeway's divesture in June 2013 of its Canadian operations to Sobeys Inc., a Canadian food retailer and wholly owned subsidiary of Empire Co., Ltd., for $5.6 billion, proceeds of which will be applied toward paying down $2 billion of debt, with the majority of the remainder to be used to buy back stock. The transaction is expected to close in the fourth quarter of 2013.

As for Safeway's Q3 performance, sales increased 1.1 percent to $8.6 billion from $8.5 billion a year ago, primarily due to an identical-store sales (excluding fuel) increase of 1.9 percent, partly offset by lower fuel sales in 2013 and the disposition of Genuardi's stores in 2012.

Net income for the third quarter of 2013 was $65.8 million (27 cents per share). After adjusting for the $6.1 million impairment charge from a warehouse software project in its Canadian operations – which has been discontinued -- net income for the third quarter of 2013 was $71.9 million (30 cents per share), down from a net income of $157 million (66 cents per share) last year.

Sales and other revenue was $25.8 billion in the first 36 weeks of 2013, slightly down from $25.9 billion in the first 36 weeks of 2012. An identical-store sales (excluding fuel) increase of 1.6 percent and higher revenue from Blackhawk were offset by lower fuel sales and the disposition of Genuardi's stores in 2012.

Safeway invested $181.6 million in capital expenditures in the third quarter of 2013 compared to $139.8 million last year. For the first 36 weeks of 2013, capital expenditures were $438.3 million compared to last year’s $629.8 million.

The closing-bell news sent the company's stock up more than 6 percent to top $33.50 in after-hours trading, besting it’s 52-week high of $32.72 and closing price of $31.57.

For related coverage, be sure to check out PG's Jim Dudlicek's blog post here.