Safeway earnings up 77% amid cost cuts, makeover

Safeway Inc.’s fourth-quarter profit surged 77% to cap the grocer’s best performance in five years, a comeback driven by contentious cost-cutting and a recent makeover that has infused more elegance into its stores.

Although the results released Thursday exceeded analyst expectations, the showing still wasn’t enough to satisfy investors who were apparently disappointed by Safeway’s slowing sales growth and conservative outlook for this year. Safeway shares fell by more than 3%.

The Pleasanton, Calif.-based parent of the Vons and Pavilions chains said it earned $307.9 million, or 69 cents a share, in the three months ended Dec. 30. That compared with net income of $173.5 million, or 39 cents, at the same time in 2005.

Without a series of tax benefits, Safeway said it would have earned 61 cents a share. That figure was a penny above the average estimate among analysts polled by Thomson Financial.

Safeway’s earnings gains would have been less impressive if not for additional costs for employee buyouts and store closures incurred at the end of 2005. On an apples-to-apples basis, Safeway said its earnings for last year’s final quarter rose by 24%.

Sales totaled $12.5 billion, a 4% increase from $12.1 billion in the previous year.

In a more telling measure of its health, Safeway’s same-stores sales, excluding gasoline, improved by 3.5%. The barometer measures sales at stores that have been open at least a year without undergoing an overhaul.

Safeway is expecting sales growth to remain about the same in 2007, an indication that its turnaround may have reached a plateau, said Jeff Embersits, a former industry analyst who is now a portfolio manager for Shareholder Value Management.

For all of 2006, Safeway made $870.6 million, its highest annual profit since earning $1.25 billion in 2001. Sales last year increased 5% to $40.2 billion.

Despite the company’s momentum, management’s outlook for this year remained unchanged from projections issued two months ago when Safeway forecast earnings of $1.90 to $2 a share, excluding special items.

Safeway already is “comfortably ahead” of that pace this year, Chairman Steve Burd assured analysts during a Thursday conference call. “Everything is working, from cost controls to sales improvements,” Burd said. “The business is hitting on all cylinders.”

Those words didn’t appease investors as Safeway shares shed $1.36, or 3.7%, to $35.60.