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Safeway’s High-End Concept Lifts Earnings

Times Staff Writer

Safeway Inc.'s effort to lure shoppers from upscale rivals such as Whole Foods Market appears to be paying dividends at the checkout counter.

The Pleasanton, Calif.-based parent of the Vons and Pavilions grocery chains said Thursday that fiscal third-quarter profit jumped 42% as it continued to roll out stores based on its so-called lifestyle format, which features high-end meat and produce as well as design flourishes such as subdued lighting and earth-tone color schemes.

The new format “is what they’re focused on and it appears to be doing well,” said Craig Hutson, an analyst at fixed-income research firm GimmeCredit.

Safeway reported net income of $173.5 million, or 39 cents a share, for the quarter ended Sept. 9, up from $122.5 million, or 27 cents, in the third quarter of 2005. Sales increased 5.3% to $9.4 billion.

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Although the results matched Wall Street’s expectations, Safeway’s stock initially sank more than 7% when the company didn’t raise its full-year profit outlook and investors worried about thinner profit margins. The stock recovered to close down 42 cents, or 1.4%, at $29.11.

The results follow an 84% year-over-year gain in second-quarter profit and come as Safeway and other Southern California grocery operators are gearing up for contract talks with their unionized workers. Failure to agree on a new contract in 2003 led to a 4 1/2 -month strike and lockout that hammered the grocery chains’ profits and disrupted the region’s grocery market.

Analysts said that labor dispute, which resulted in a contract that reduced benefits and pay rates for new hires, was finally paying off for Safeway.

“There’s no question the restructured labor contracts have had a positive impact” on the company’s bottom line, Hutson said.

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The labor agreement covering workers at Vons and Southland competitors Ralphs and Albertsons -- owned by Kroger Co. and Supervalu Inc., respectively -- expires March 5. Talks on a new pact haven’t started.

During a conference call with analysts, Safeway Chief Executive Steve Burd noted that his company’s results for the third quarter of 2005 included several one-time charges that depressed profit, including the cost of closing 29 Texas stores and giving buyouts to an undisclosed number of workers in Northern California.

Excluding the year-earlier charges, a more realistic year-over-year profit growth rate would be around 22%, Burd said.

Sales at stores open for at least one year grew 5%; excluding gasoline sales, so-called same-store sales were up 3.7%. The company raised its forecast for full-year same-store sales growth from 3% to a range of 3.1% to 3.3%.

During the third quarter, Safeway built four lifestyle stores and converted 69 stores to the new format. The company expects to eventually convert all of its 1,767 locations.

Offering a more upscale ambience and higher-quality, more expensive perishable goods -- including proprietary brands such as Select Artisan bakery goods -- should help Safeway attract customers from discount grocers such as Wal-Mart Stores Inc., analysts say.

The strategy also is aimed at helping the company compete with the likes of Whole Foods, which is winning over customers with organic foods, high-quality meats and produce, and extensive bakery and deli offerings.

martin.zimmerman@latimes.com

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