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As the five-month California strike and lockout looks to be coming to an end, the credit spreads of the grocery chains targeted by picketers have improved on hopes of an end to the labour dispute's earnings drain.
On Thursday a representative of the union looking to block the supermarkets' proposed cuts in employee health care benefits said an agreement was coming fairly soon.
While news of a resolution should help the credit spreads of the grocery chains involved - Albertsons Inc, Kroger and Safeway, the main focus of the strike - attention will quickly turn the potential financial fallout for the supermarkets.
Much of the problem boils down to how retailing behemoth Wal-Mart has muscled into the territory of the grocery chains and slashed prices. Wal-Mart is preparing to open its first food-selling supercenter in California.
For now the businesses seem in solid shape, and earlier this week ratings agency Standard & Poor's said that the damage from the strike on profitability has exceeded its initial expectations, "the impact has been within a range tolerable for the current ratings.
All three grocery chains are rated triple-B by S&P, and the agency said their ratings would be placed on review for a cut only if the strike drags on for more than another few months.
Two weeks ago Safeway reported earnings that surpassed analysts expectations after the damage from the strike during the last three months of last year was not as big as expected. Still, Safeway was unable to give earnings guidance for 2004 due to the ongoing labour dispute.
Traders in the credit default swaps market said that the agreement should help the grocers compete better on price with Wal-Mart and get up to speed, but they also said that Wal-Mart made their operating environment very difficult. For that reason few expected a big improvement in their credit spreads.
The five-year spreads of Safeway and Albertsons trade very close to each other around 69 basis points, or $69,000 a year for buying $10 million of default protection.
That is down from highs around 87 basis points earlier this month but a low of 60 basis points last December.
Kroger's five-year spread traded around 51 basis points, also down from the recent strike-related spikes but above the low-40 basis point territory seen at the end of 2003.

Copyright Reuters, 2004

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