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Safeway Expects Store Remodel to Give Earnings a Boost in ’06

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From Bloomberg News

Vons parent Safeway Inc. said Wednesday that profit might rise as much as 15% next year as the grocery company benefited from remodeled stores.

Earnings will probably climb to $1.55 to $1.65 a share, Pleasanton, Calif.-based Safeway said in a statement. The company said comparable-store sales would increase about 3% in 2006, exceeding its forecast gain of as much as 2.8% this year.

Safeway, the third-largest U.S. grocer, has been introducing a format called Lifestyle, which is designed to attract upscale shoppers to stores with wood floors, organic produce and exclusive brands. The company, seeking to differentiate itself from discounter Wal-Mart Stores Inc., expects capital expenditures of $1.6 billion next year to complete as many as 25 new stores and remodel about 280.

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“Lifestyle stores continue to outperform our expectations,” Chief Executive Steven Burd said at an investor conference at the company’s headquarters.

Analysts surveyed by Thomson Financial expect Safeway to earn $1.59 a share in 2006. The company said in October that it was comfortable with analysts’ average estimate at the time of $1.44 for 2005.

Safeway said it would generate free cash flow of $400 million to $600 million next year. It plans to introduce its own brand of organic foods in 2006.

The company’s shares fell 41 cents, or 1.7%, to $24.08. The stock has climbed 22% this year.

Safeway, along with Ralphs parent Kroger Co. and Albertsons Inc., has struggled to regain customers lost during a 4 1/2 -month strike and lockout in Southern and Central California that ended in February 2004. Customers shifted to grocers such as Whole Foods Market Inc. and warehouse clubs including Costco Wholesale Corp. Safeway’s Vons chain has about 280 stores in the region.

Safeway’s sales in Southern California are strong, Burd said at the meeting. Gross margin in the region remains below the company’s plan. Safeway forecast that annual earnings would rise 12% to 15% in the next five years and that comparable-store sales -- which exclude new, closed and replacement locations -- would rise 3% to 4%.

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