Safeway’s Net Income Declines 14%
Safeway Inc.’s fiscal second-quarter profit fell 14% as the nation’s third-largest grocer increased spending on promotion and store remodelings to boost sales.
The Pleasanton, Calif.-based company, which owns Vons and Pavilions, has been revamping its stores, offering more prepared foods, branded fresh meat and produce to lure affluent customers away from Whole Foods Market Inc. and to differentiate itself from discounters such as Wal-Mart Stores Inc.
Safeway’s net income in the quarter ended June 18 fell to $134 million, or 30 cents a share, from $155.2 million, or 35 cents, a year earlier, matching analysts’ estimates. Sales rose 5% to $8.8 billion from $8.4 billion.
The company said its remodeled stores brought in more business and Vons regained more sales that it had lost during the lengthy Southern and Central California supermarket strike in late 2003 and early 2004.
Vons, however, has not yet matched its pre-strike profit levels. Safeway Chief Executive Steven Burd said he expected that to occur next year. “If you look at our non-pharmacy sales, we are dangerously close to a full recovery,” he said in a call with analysts.
Safeway’s identical-store sales -- a key performance gauge that excludes new and replacement stores and fuel centers -- grew 1.4% in the quarter. The company maintained its fiscal 2005 earnings guidance of $1.45 a share.
“This lack of leverage is disturbing,” said analyst Robert T. Campagnino of Prudential Equity Group in a note to investors. “We were hoping for a reason to increase our earnings estimates.”
With Safeway stock trading at a premium to historical levels, Campagnino said, he is considering downgrading his “overweight” rating on the stock.
Safeway shares gained 38 cents Tuesday to $23.92. The stock has risen 21% this year, compared with a 13% increase for Kroger Co., owner of the Ralphs chain, and an 11% drop for Albertsons Inc.
In April, Safeway unveiled its “Ingredients for Life” advertising campaign, its largest promotion ever, and kicked off a remodeling campaign, which is converting Safeway’s 1,800 stores at the rate of about one a day, Burd said.
Burd expects to spend $1.5 billion this year to open 25 new stores and remodel 295 to the new format. Including the 142 stores remodeled last year, about one-quarter of the company’s stores will fit the new prototype.
However, that expense is tugging at the bottom line. Safeway’s gross profit margin narrowed to 28.7% in the quarter from 29.2% a year earlier.
“They really have to differentiate themselves” because Safeway can’t match Wal-Mart’s low prices, said David Dietze, president of Summit, N.J.-based Point View Financial, which manages $95 million in assets, including Safeway shares. “The strategy makes sense. But is it because it’s the best of all options or the only option available?”
Bloomberg News was used in compiling this report.
