Safeway’s Profit Hit by Lingering Effects of Strike

Safeway Inc.’s stock hit a 52-week low Tuesday after the company reported a 21% drop in third-quarter profit because of the lingering effects of last winter’s supermarket strike and warned that this slowdown would stretch into next year.

Pleasanton, Calif.-based Safeway, the nation’s No. 3 grocer, said its net income dropped to $159.2 million, or 35 cents a share, from $202.5 million, or 45 cents, a year ago. Analysts surveyed by Thomson First Call expected Safeway to earn 37 cents a share in the latest quarter.

Sales in the quarter that ended Sept. 11 edged up to $8.3 billion from $8.28 billion.

Chief Executive Steve Burd said Safeway’s Vons and Pavilions stores in Southern and Central California were still trying to recover business lost to other grocers during the 4 1/2 -month strike, and the company was spending heavily on promotions and advertising to get these customers back.

The lost business cost the chain $45 million in profit, or 10 cents a share, in the quarter. Burd warned that the company’s earnings could continue to be strained by Southern California’s poor performance well into next year.

“Progress is slow,” Burd said during a conference call Tuesday. “Even today I can’t predict with certainty when we can get to that full recovery.”

Shares of Safeway, which operates 1,815 stores in the U.S. and Canada, dipped to a 52-week low of $18.28 before closing at $18.37, down 41 cents, on the New York Stock Exchange. Safeway’s stock has fallen 16% this year.

Although the company declined to break out sales for its 289 stores in Southern and Central California, Deutsche Bank estimates that Safeway’s sales are still 12% to 15% below pre-strike levels. “I think some of the sales are permanently lost,” analyst Edouard Aubin said.

“The company is clearly disappointed in its Southern California performance,” said FTN Midwest Research analyst Jason Whitmer, who rates Safeway stock a “sell.”

Kroger Co.’s Ralphs unit and Albertsons Inc. have offered bigger discounts than Safeway to win back customers, Whitmer said

These discounts, analysts said, are crucial for Safeway to effectively compete with discounters such as Wal-Mart Stores Inc. and Costco Wholesale Corp. Wal-Mart plans to build as many as 40 Supercenters -- discount stores that also sell groceries -- in California through 2006.

“Unless you are a niche player,” Aubin said, “it’s still a commodity business. The lowest price possible is paramount” to regaining sales companywide.

The supermarket dispute began in October 2003 and ended Feb. 29, when the United Food and Commercial Workers union ratified a new contract for its 59,000 members.

Safeway is also involved in three other major contract talks in Northern California, Denver and Chicago.

Excluding the strike-affected stores, sales at Safeway’s supermarkets open at least a year rose 0.6% in the third quarter. Excluding fuel sales, identical-store sales declined 0.9% for the quarter.

Safeway said it was on track to meet the lower end of its annual earnings guidance of $1.95 to $2.03 a share, but only if it excluded the lingering effects of last winter’s labor dispute.

Bloomberg News was used in compiling this report.