Safeway Net Income Falls on Cost of Cutbacks
Vons parent Safeway Inc. said Tuesday that third-quarter profit plunged 23% as the costs of shedding higher-paid workers in Northern California and closing 26 Texas stores overshadowed a sales upturn.
The Pleasanton, Calif., company said it earned $122.5 million, or 27 cents a share, in the three months ended Sept. 10, compared with $159.2 million, or 35 cents, a year earlier.
Revenue rose 7% to $8.95 billion.
If not for after-tax charges of $47.5 million to account for the reorganization in Northern California and Texas, Safeway said, it would have earned 38 cents a share. That figure exceeded the consensus estimate of 35 cents a share among analysts surveyed by Thomson Financial.
The charges for the Texas store closures once again focused investor attention on a market that has tormented Safeway since it bought the Houston-based Randall’s chain for $1.3 billion.
Safeway, which trails only Ralphs parent Kroger Co. and Albertsons Inc. among supermarket owners, has previously absorbed large charges to account for Randall’s diminished value.
Chief Executive Steve Burd is betting that he can turn things around by closing nearly one-fifth of Safeway’s 138 stores in Texas and introducing more groceries that aren’t sold at lower-priced rivals such as Wal-Mart Stores Inc. The store closures will be concentrated in the Houston area.
“We believe we are setting the stage for further progress in 2006,” Burd told analysts during a conference call.
Investors seemed skeptical. Safeway’s shares fell $1.37, or 5.6%, to $23.02.
The competitive threat posed by Wal-Mart and other discounters also prompted Safeway to offer severance packages to Northern California store workers who have accumulated the tenure to earn premium wages.
Safeway plans to fill those jobs with workers who will be paid substantially less as part of a new labor contract negotiated last year. Burd believes that the employee buyouts in Northern California will begin to pay off for Safeway in early 2007.
But some industry analysts are worried that Safeway’s customer service will deteriorate as veteran workers are shown the door in favor of lower-paid and less-experienced replacements. Burd said Safeway was being careful to protect customer service as it reshaped its Northern California workforce.
Safeway also is hoping for better times in Chicago, which has been another troublesome market for the company.
Management has reached a tentative agreement on a new contract with workers at its Chicago-based Dominick’s chain, which has slumped badly since Safeway bought it for $1.2 billion seven years ago. Burd declined to provide details of Dominick’s new labor contract during Tuesday’s conference call.
Safeway unsuccessfully tried to sell Dominick’s in 2003 and later decided to close 12 stores in that market.
With the revenue gains in the third quarter, Safeway’s sales continued to improve at their highest rate in more than four years -- a stretch marked by customer defections to lower-cost rivals and by labor acrimony, including a protracted strike and lockout in Southern and Central California.
The company, which operates about 1,800 locations in the United States and Canada, said identical-store sales increased 5.4%. Excluding fuel sold at some Safeway locations, identical-store sales improved by 3.4%.
The gains have coincided with a makeover launched this year. The company is remodeling hundreds of stores in an effort to present itself as a more upscale grocer.
Also
* Home builder Ryland Group Inc. said higher sales prices and closing volume boosted net earnings 42.2% in the third quarter. The Calabasas company posted net income of $118 million, or $2.39 a share, compared with $83 million, or $1.66, a year earlier. Home-building revenue increased 21.7% to $1.2 billion, and orders for homes rose 10.9% to 4,361.
* Cheesecake Factory Inc. said earnings rose 43% in the third quarter ended Sept. 27. The Calabasas-based company said net income rose to $21.9 million, or 27 cents a share, from $15.3 million, or 19 cents, a year earlier. The operator of 98 casual restaurants in its namesake chain and five Grand Lux Cafes said revenue rose 18% to $292.8 million.
* Gilead Sciences Inc. said third-quarter profit climbed 58% as sales of Truvada, its HIV/AIDS drug, continued to capture market share. Net income increased to $179.2 million, or 38 cents a share, from $113.2 million, or 25 cents, a year earlier, the Foster City, Calif., company said. Revenue rose 51% to $493.5 million, propelled by AIDS medicines and royalties from antiviral drug Tamiflu.
* McClatchy Co., which publishes the Sacramento Bee in its home market and the Star Tribune in Minneapolis, said profit fell 1.1% to $38.6 million, or 82 cents a share, in the third quarter ended Sept. 25. Revenue rose 2.1% to $292.6 million. McClatchy said real estate and help-wanted advertising remained strong, offsetting weakness in retail and auto ads.
