Safeway Warns of Lower Profit
Supermarket giant Safeway Inc. on Tuesday warned of a lower-than-expected profit in its fiscal first quarter, a result of slumping sales, lower margins and higher expenses.
The Pleasanton, Calif.-based company, which operates about 1,700 stores including Vons and Pavilions in Southern California, blamed its declining profit on the high cost of streamlining its marketing efforts and continued soft sales.
“The issues related to our centralized marketing organization had a greater impact on gross margins than we expected,” said Steven Burd, Safeway’s chairman and chief executive.
“Although we have made progress during the quarter ... we expect to continue to work through these issues throughout the second quarter,” he said.
Safeway cut its fiscal first-quarter earnings expectations to 43 cents to 45 cents a share for the quarter ended March 22, well under the 67 cents a share the grocer earned in the same period last year and below the 54-cent consensus forecast of analysts surveyed by Thomson First Call.
The company is scheduled to report its first-quarter results May 1.
The earnings warning, released after the market closed, surprised analysts who said they didn’t expect the company’s marketing reorganization to have such an effect on its bottom line. The warning also raised questions about when the company will return to greater profitability.
“This leaves me with more questions than answers,” said Jeff Tryka, an analyst with Seattle-based Delafield Hambrecht, which has no banking relationship with Safeway and does not own its stock. “I want to know when we can expect a more normalized business.” Tryka has not yet made a change to his “buy” rating on the stock.
A sluggish economy and competition with discounters such as Wal-Mart Stores Inc. pushed Safeway’s same-store sales down 0.5% during the quarter. And the company said Tuesday that a new method of accounting for vendor allowances will depress earnings by an additional 1.5 cents a share.
Tryka said Safeway’s turnaround will depend largely on its ability to unload the troubled Dominick’s chain in Chicago, which it bought for $1.85 billion in 1998.
Safeway’s shares have lost more than half their value since their 52-week high of $45.14 last April. The company’s shares edged down 10 cents to close at $20.40 on the New York Stock Exchange, and fell to $20.31 in after-hours trading.
