Hope springs eternal; too bad it’s winter. The market grasped at seemingly
constructive comments around the overall operating environment that seemed a
bit disconnected from operational results as well as recent trends (rising
unemployment and accelerating deflation just for starters).
 Deflation will remain a headwind. Deflation remains and will continue to be a
significant problem for at least another two quarters, in our view. The
September CPI food at home (-2.5% indicates widespread deflationary
pressures and PPI finished foods (-4.0%) clearly suggests we have not reached
a bottom.
 Optimism surrounding volumes misplaced given deflationary driven
gains. We believe the companies’ focus on tonnage/volume is a bit self serving
and misplaced. In the wake of disastrous and eroding sales, the talking points
have turned to tonnage/volume trends. We remind investors that it is sales that
drive leverage and gross profit dollars and ultimately EPS – but let’s cheer
deflation driven volume gains (volume that likely resulted in incremental labor
expense). Steve Burd indicated that “when you get deflation probably in excess
of 4%, you probably get demand enhancing” At Safeway, and likely
representative of the industry, produce is running down 8%, milk is running
down 19% and the broader dairy category is down 11.6% and meat deflation
continues to accelerate.