Safeway’s Net Income Falls 14%, but Store Makeovers Boost Sales

Safeway Inc.’s fourth-quarter profit dropped 14% as the company paid for previously disclosed cutbacks, but a recent makeover continued to provide a sales lift that has rejuvenated the nation’s third-largest grocer.

The Pleasanton, Calif.-based parent of the Vons and Pavilions chains said Thursday that it earned $173.5 million, or 39 cents a share, in the fourth quarter, compared with $202.7 million, or 45 cents, a year earlier.

If not for the costs of Texas store closures and employee buyouts, Safeway said, it would have earned 51 cents a share. That figure topped the average per-share estimate of 46 cents by analysts surveyed by Thomson Financial.

Sales for the fourth quarter totaled $12 billion, eclipsing the average analyst estimate of $11.9 billion and up 5.8% from a year earlier.

In a more telling measure of a merchant’s health, Safeway’s sales at stores that had been open at least a year without being remodeled or expanded also outpaced overall inflation.

Safeway’s so-called same-store sales increased 5.1% during the fourth quarter. Even after subtracting a boost from the high prices for gasoline sold outside some of its stores, same-store sales climbed 3.7%.

Management also reiterated its expectation that this year’s earnings, excluding charges for more employee buyouts, would be $1.55 to $1.65 a share -- about 16% to 24% above 2005’s comparable figure.

Investors seemed pleased with Safeway’s progress. The company’s shares rose $1.10, or 4.7%, to $24.35, continuing a comeback from a financial funk that caused the stock price to sink below $18 in the last year from more than $60 five years ago.

After rebuffing a shareholder rebellion that threatened his job in 2004, Safeway Chairman Steven Burd has been trying to reposition the supermarket chain as an alternative to Wal-Mart and a more economical option than upscale grocers such as Whole Foods Market Inc.

Toward that end, Safeway has converted hundreds of its stores to a “lifestyle” format that emphasizes fresh produce and reasonably priced meals that are easy to prepare for two-worker households pressed for time.

Safeway expects the pending sale of Albertsons Inc., one of its biggest rivals, to give it a chance to win over shoppers.

“That could be a good thing for us,” Burd said.

For all of 2005, Safeway earned $561.1 million, or $1.25 a share, on revenue of $38.4 billion. That compared with net income of $560.2 million, or $1.25, on revenue of $35.8 billion in 2004.