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In What Will Become a Familiar Theme, Safeway Surprised by Magnitude of Deflation

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When Safeway (SWY) reported earnings last Thursday, the focus was largely on the fact the grocer cut its full-year outlook, but that only tells part of the story.

During the company's earnings call, Safeway Chairman, President and Chief Executive Officer Steven Burd explained that the company was experiencing deflation in far greater magnitude than anticipated. While the company accurately predicted a 1% deflation rate for the first quarter, after that things really went off the rails. Safeway had anticipated inflation of 0.5% for the second quarter. Instead, the company experienced 2.4% deflation.

How severe is this deflation, and can we read anything into how shaken the company is by the magnitude of it? Well, consider this: In the transcript of the earnings call, the word "deflation" was used 57 times. Fifty-seven. The word "deflationary" was used another three times.

During the early part of the call, Burd said, "We don't like the deflation component, but we believe still deflation will come
to an end." In light of the call, that viewpoint seems more hopeful than predictive.
POSITION:  No positions in stocks mentioned.