Safeway’s Profit Is in Line With Reduced Forecast
Safeway Inc. on Monday posted weak second-quarter earnings in line with a reduced forecast as stronger competition from discounters ate into sales.
The No. 3 U.S. grocery chain, which owns Vons in Southern California, also warned that third-quarter profit may come in at the low end of previous guidance.
Safeway said operating profit in the second quarter ended June 15 fell 2% to $350.4 million, or 72 cents a share, from $358 million, or 69 cents, a year earlier. Net income, including one-time charges, was up less than 1% to $309.3 million, or 63 cents, from $307.3 million, or 59 cents, a year earlier.
Total sales edged up 1.2% to $8.1 billion in the quarter. Sales at stores open at least a year, or same-store sales, posted their first decline in more than nine years.
In recent years, Safeway has reported some of the strongest growth in same-store sales in the grocery sector, but the slowing economy and stiff competition on pricing has weighed on results.
“They’re going to try to drive sales first and earnings second,” said Andrew Wolf, an analyst with BB&T; Capital Markets. “[Earnings] are now secondary to sales, which means less visibility.”
In the second quarter, Safeway’s same-store sales fell 0.4%. Wolf estimates that the retailer’s sales per square foot are down 3% so far this year.
“[Sales] have to be positive,” Wolf said.
Last month, Safeway warned that its profit would fall short of analysts’ consensus estimate of 77 cents, citing economic softness and disruptions in its buying operations. The company then forecast profit of 71 cents to 73 cents.
Shares of Pleasanton, Calif.-based Safeway closed up 44 cents at $29.12 on the New York Stock Exchange. The stock has plunged 28% since early June.
Investors are trying to figure out whether Safeway’s sudden sales slump is a mere economic hiccup or the first sign of chronic indigestion.
Steve Burd, Safeway’s chief executive, attributes the company’s sales weakness to more frugal shoppers who are buying fewer expensive items at traditional supermarkets and buying more groceries from discount merchants such as Wal-Mart Stores Inc. and Costco.
The trend is provoking more price wars, Burd said, dampening sales and squeezing profit margins in the process.
Safeway has decided to join the fray by reducing its everyday prices as well as offering more sales promotions.
“We are not content with these [second-quarter] sales, by any stretch,” Burd told analysts during a conference call Monday. “We think we have made the adjustments to change” the recent trends.
With Safeway under the gun to lower its prices, Burd said the company’s third-quarter earnings probably will fall a penny or two below the consensus estimate of 62 cents among analysts polled by Thomson First Call.
