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SWY reported $0.31 vs. Street at $0.29.  Slightly weaker identical store sales at -3% vs. Street at -2.6%.  In digging through the margins and expenses, it looks like gross margin while still down slightly, came in better than expected.

Guidance of $1.70-$1.90 for the year and $1.1-$1.3 billion in FCF are both unchanged.  Street is at $1.74.  Noticeably absent from the press release is any comment on the sales outlook (normally identical store sales guidance is provided ex-fuel).  It’s likely they will address this on the conference call at 11am, but I’d take this as a sign that sales trends remain unpredictable (or maybe even getting worse?). 

Bottom line, a slightly better quarter on margins but still a challenging topline.  The market is going to be excited about this headline beat (merely because they did not miss again) but overall nothing has changed materially enough here in my view.  Key to the commentary on the call will be any insight into deflation/inflation, which is the most important topic for those bullish on the grocers. 

As it pertains to KR (a name we have been short), there is nothing out of this initial release that suggests the market has changed materially or will change materially in the next few months.  More to come after the call at 11AM…

Quick Take on Safeway - SWY SIGMA