Stock, Debt Raters Negative on Safeway

Safeway Inc. took two hits Wednesday, as a ratings agency raised a cautionary flag on its debt and Smith Barney downgraded the company’s stock to a “sell,” citing in part the “likely damaging effect” of the Southland supermarket strike.

The downgrade is the first by a major Wall Street brokerage since the United Food and Commercial Workers union went on strike Oct. 11 against Pleasanton, Calif.-based Safeway’s Vons and Pavilions stores. Ralphs and Albertsons Inc. locked out their UFCW workers hours after the strike began.

Smith Barney research analyst Lisa F. Cartwright said the “sell” rating also reflected chronic troubles at the company’s Dominick’s chain of grocery stores, which Safeway said it would keep after a planned sale fell through.

Rebuilding sales at Dominick’s and at strike-weakened stores in California “will be costly and time consuming” and will hurt profits well into 2004, Cartwright said in a report. She is projecting 2004 earnings at $2.03 a share, down from $2.14.

“We believe the negative impact from the strike itself could run as high as $300 million-plus for all three retailers ($160 million-plus for Safeway) should the strike last through Thanksgiving,” she wrote.

Cartwright, who said previously that costs would escalate the longer the strike continued, noted that the new estimate was more than double her original projection.

In the other setback, Fitch Ratings lowered its rating outlook from “stable” to “negative” on $7.5 billion of Safeway debt. Fitch also cited the strike and the aborted Dominick’s sale.

Safeway’s stock fell Wednesday for the fifth straight session, dipping 15 cents to close at $20.05 on the New York Stock Exchange, down from $23.83 on Oct. 10, the day before the strike began. Safeway’s shares are down more than 14% this year.

Safeway’s Vons and Pavilions stores were the target of the UFCW strike when talks broke down last month on a new labor contract. Albertsons and Kroger Co., which owns Ralphs, locked out their unionized workers in a show of support for Safeway. The three chains negotiate jointly on the labor contract.

The strike and lockout, now in its fourth week, has idled 70,000 workers at 859 stores in Southern and Central California. Last week, the UFCW withdrew its pickets from Ralphs stores, putting more pressure on the other two chains to return to the bargaining table.

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On February 12, 2004 the United Food and Commercial Workers Union, which had stated repeatedly that 70,000 workers were involved in the supermarket labor dispute in Central and Southern California, said that the number of people on strike or locked out was actually 59,000. A union spokeswoman, Barbara Maynard, said that 70,000 UFCW members were, in fact, covered by the labor contract with supermarkets that expired last year. But 11,000 of them worked for Stater Bros. Holdings Inc., Arden Group Inc.’s Gelson’s and other regional grocery companies and were still on the job. (See: “UFCW Revises Number of Workers in Labor Dispute,” Los Angeles Times, February 13, 2004, Business C-11)

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