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Safeway’s sales up but profit falls 11%

From the Associated Press

Safeway Inc.'s second-quarter profit slipped 11% because of an unusual twist on its income taxes, but the second-largest U.S. grocer remained on a sales upswing that has been propelled by a makeover of its stores.

The results released Thursday were overshadowed by concerns that rising food and dairy prices might squeeze Safeway’s profit margins for the rest of the year. Those worries contributed to a more than 2% decrease in its stock price.

The Pleasanton, Calif.-based company earned $218.2 million, or 49 cents a share, during the three months ended June 16, compared with net income of $246.2 million, or 55 cents, in the same period a year earlier.

It wasn’t an apples-to-apples comparison because last year’s results were boosted by a $58.5-million gain from a federal income tax refund.

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If not for that windfall, Safeway said this year’s second-quarter profit would have been 17% higher than last year’s showing.

The earnings were a penny above the average estimate among analysts surveyed by Thomson Financial.

Safeway’s sales for the period totaled $9.82 billion, a 5% increase from a year earlier. The figure also beat the average analyst projection of $9.75 billion.

In a more telling indication of a merchant’s health, Safeway’s same-store sales increased 4.5%.

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The benchmark refers to stores that have been open at least a year without undergoing a major makeover. Excluding gasoline pumped at some locations, Safeway’s same-store sales rose 3.7%.

Signaling that its momentum should extend into the second half of the year, Safeway told investors that its annual earnings would fall on the high end of its previous guidance, which tops out at $2 a share. That would translate into an annual profit of about $900 million, Safeway’s best result since it earned $1.25 billion in 2001.

“We feel very good about our performance in the first half and we feel equally good about our performance in the second half,” Safeway Chairman Steve Burd told analysts in a conference call.

This week, Safeway’s Vons division in Southern California reached a contract agreement with the region’s grocery workers union. The pact ensured four years of labor peace and prevented a repeat of the 141-day strike that cost Safeway hundreds of millions of dollars in 2003-04.

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Investors had been hoping Safeway would raise its earnings forecast. Safeway shares fell 87 cents, or 2.4%, to $35.11.

Burd cited inflation as one of the main reasons for maintaining a conservative outlook, warning that the grocer would either have to raise its prices and risk alienating shoppers or swallow higher costs and narrow its profit margins.


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