Morgan Stanley Underweight On Safeway Inc.

Morgan Stanley is out with a research report on Safeway Inc. SWY and it has an Underweight rating and a $16 price target on shares. In a note to clients, Morgan Stanley writes, "SWY reported disappointing 2Q results, with both volumes and margins adversely impacted by inflation. As this is the first grocer to call out an inflation impact in 2011, this reinforces our volume and margin risk thesis we laid out for the grocery group in January. Given 2%+ inflation during the quarter, Safeway's 0.5% ID sales growth implies volume growth decelerated from -0.5% in 1Q to -1.6% in 2Q. As we see food inflation building to 4-5% in 2H, we remain concerned that volume declines could get worse and ID sales growth could stay muted (below 1%). With negative volume growth in 6 of the last 7 quarters, If market share losses persist, Safeway may have to sharpen its pricing (posing margin risk). We remain Underweight on SWY shares." Shares of SWY lost $2.16 yesterday to close at $21.47, a loss of 9.16%.