Safeway Is Headed the Wrong Way

The Oxford Short Alert
Wednesday, October 27, 2004
By Alexander Green, Investment Director

Email – #228

** Safeway Is Headed the Wrong Way

You might think the grocery business would be quiet, steady and utterly predictable.
But tell that to the shareholders at Winn-Dixie Stores (NYSE: WIN). The Southeastern grocer has seen its share price plunge from more than $30 a share to less than $3.50 over the last three and a half years.

Now Safeway (NYSE: SWY) appears to be making a similar swan dive.

Safeway is one of the largest food and drug retailers in the country, and the third-largest supermarket operator in the U.S. The company operates 1,812 stores throughout North America, as well as food-processing facilities and several major distribution centers.

But Safeway’s business is rapidly taking a turn for the worse.

For starters, the company is still grappling with the aftermath of a labor strike in Southern California. During this strike – in its largest market – the company lost customers at 289 stores, and it’s having a negative impact on operating results.

Safeway is also struggling with intense competition from Albertson’s and Kroger. And has been losing market share to both. On top of this, Safeway is losing customers to non-traditional food retailers like Whole Foods, Costco and Stater Brothers.

The 900-pound gorilla, Wal-Mart, is now competing head-to-head with Safeway in several markets, too.

The result? Safeway is increasing advertising and lowering prices to try and maintain market share. But that means costs are rising and gross margins are deteriorating.

These problems are already showing up in the company’s financials. For the 36 weeks through 9/11/04, net income plummeted 32% on a 1% drop in sales. Management cited lower income, smaller margins, higher operating costs, higher administrative expenses and a rise in income tax expenses.

Technically, the stock has broken down, too. At its current price, Safeway is selling below both its 200-day moving average ($21.73) and its 50-day moving average ($19.86), a big negative.

In short, this is a stock on its way to the woodshed.

**Action to Take***

Sell short Safeway (NYSE: SWY) at market. And place a buy stop at $21 for protection. Speculators may want to take a look at the January $17.50 puts (symbol: SWY-MT). But don’t pay more than $0.95.
Elsewhere in our short portfolio, we hit our buy stop on British Airways (NYSE: BAB) yesterday, locking in a short-term, double-digit gain.

And Janus Capital (NYSE: JNS) reported flat earnings last week. CEO Steve Scheid said the company is still hurting from fund redemptions in the wake of poor performance and the company’s admission of wrongdoing in the recent mutual fund scandal. Keep selling this one short.

Allied Waste (NYSE: AW) reported lackluster results after the bell yesterday. Operating income fell to $228 million, from $282 million a year ago. That caused the stock to plunge more than 5% on the opening this morning. We now have a 16% profit in this short. Move your buy stop down to $8.25 to protect it.

And we’re sitting on a 17% gain in Newell Rubbermaid (NYSE: NWL). Move your buy stop down to $20 to further protect your profits here.

If you have any questions, feel free to call one of our VIP Trading Services representatives at 888.570.9830 (toll-free) or e-mail: viptrader@oxfordclub.com, or contact Pillar One Advisor Greg Galloway at 800.438.3040 or 407.667.4729.

 

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Stock: Safeway (NYSE: SWY)
Current Price: $17.66
Comments: Sell short at market. Buy stop is $21.

Stock: Avnet (NYSE: AVT)
Current Price: $16.64
Comments: Sell short. Buy stop is $18.

Stock: Allied Waste (NYSE: AW)
Current Price: $7.88
Comments: Sell short. Buy stop is $8.75.

Stock: British Airways (NYSE: BAB)
Current Price: Buy to Cover
Comments: Stock hit buy stop. Take profits.

Stock: Health Net (NYSE: HNT)
Current Price: $23.75
Comments: Sell short. Buy stop is $25.

Stock: Carolina Group (NYSE: CG)
Current Price: $26.15
Comments: Sell short. Buy stop is $27.

Stock: Newell Rubbermaid (NYSE: NWL)
Current Price: $19.09
Comments: Sell short. Buy stop is $20.50.

Stock: Janus (NYSE: JNS)
Current Price: $15.15
Comments: Sell short. Buy stop is $18.

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Bio: Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 16 years experience as a research analyst, investment advisor, and professional portfolio manager. Mr. Green is also considered one of the most talented financial writers in the business. He’s been featured on “The O’Reilly Factor,” profiled by Forbes and Marketwatch.com, and has written for Louis Rukeyser and several other leading financial publications. He currently writes and directs The Oxford Club Communiqué, the Oxford Insight e-letter, and four elite trading services: one focused on momentum stocks, another focused on companies with significant insider buying, another dedicated to international growth stocks and another focused on short-selling fundamentally flawed companies. Mr. Green is also a top-rated speaker at financial conferences around the country.
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