Profit Drops at Safeway After Strike
Safeway Inc., saying its Central and Southern California sales haven’t fully recovered from a lengthy strike that ended in February, posted a 4% drop in fiscal second-quarter profit Tuesday.
The supermarket company’s stock then fell 3%.
Although the strike ended before the quarter began, Safeway -- which owns Vons and Pavilions -- said the labor dispute pulled earnings down by $50 million as it cut prices and stepped up promotional spending to woo back customers.
One analyst, Douglas Christopher of Crowell, Weedon & Co. in Los Angeles, said many onetime regulars were probably lost for good during the 4 1/2-month strike, when scores avoided picketed stores and patronized alternative grocers.
“From their results ... I wouldn’t be surprised that 10% to 15% of their [customer] base is permanently gone,” said Christopher, who has a “sell” rating on the stock of Pleasanton, Calif.-based Safeway.
In the quarter that ended June 19, Safeway’s net income fell to $155.2 million, or 35 cents a share, from $161 million, or 36 cents, a year earlier. Wall Street had expected 37 cents a share, according to analysts surveyed by Thomson First Call.
Safeway, which has 1,812 stores, said its second-quarter sales edged up 1.3% to $8.36 billion from $8.25 billion.
After the results were announced, Safeway’s stock tumbled as much as 7%, rebounding somewhat to close at $21.20 a share, down 67 cents, on the New York Stock Exchange.
The labor dispute began Oct. 11, when members of the United Food and Commercial Workers union struck Vons and Pavilions after contract talks stalled. Albertsons Inc. and Kroger Co., which owns Ralphs, were bargaining jointly with Safeway and immediately locked out their UFCW workers. (Albertsons and Kroger have yet to report their second-quarter results.)
About 59,000 grocery workers were idled at 852 supermarkets in Central and Southern California. The dispute ended Feb. 29, when workers ratified a new three-year contract.
As the dispute dragged on, many of the three companies’ customers shopped elsewhere, such as Whole Foods Market Inc., Arden Group Inc.’s Gelson’s, Trader Joe’s and Stater Bros. Holdings Inc.’s stores.
During the strike, a Los Angeles Times poll of shoppers who had been regular customers of Vons, Pavilions, Ralphs or Albertsons found that 14% of them expected to keep shopping at other stores, switching their buying habits for the long haul.
Safeway’s results indicated that many consumers did just that, and the other competitors “have gained permanent [market] share,” Christopher said.
Safeway’s sales rebounded sharply after the strike ended but “appear to have plateaued over the last several weeks,” Safeway Chief Executive Steven Burd told analysts in a conference call.
The company views the stall as temporary, but “should we fail to fully recover our sales in Southern California, we remain confident we can recover our previous profit levels” with additional cost cutting, he said.
Safeway, Kroger and Albertsons won substantial labor concessions in the bitter contract fight, mainly by creating a two-tier system in which new hires earn substantially less in wages and benefits than pre-strike workers. “Over time, we expect the retailers to benefit from the new labor contract,” analyst Meredith Adler of Lehman Bros. said in a report last week.
But for now, “we continue to be concerned” about Safeway’s “slow recovery of sales and earnings in Southern California post-strike,” she wrote.
Other financial measures indicated that, regardless of the strike, Safeway’s two-year struggle to increase its core grocery sales remained a problem.
In the latest quarter, Safeway said its same-store sales fell 4% from a year earlier. The figure excludes new, closed and replacement stores, along with fuel sales and unusual events such as the strike. The measure has fallen for nine straight quarters.
Safeway also said it was “tracking at the lower end” of its earlier earnings guidance for all of 2004, in which it had said per-share earnings would range from $1.95 to $2.03. The guidance excluded the effect of the strike.
