Safeway profit up 7% but its shares tumble

Higher gasoline sales and a boost from its more upscale stores helped grocer Safeway Inc. post higher second-quarter earnings Thursday, but a downbeat outlook caused by reduced consumer spending sent its shares tumbling more than 10%.

The nation’s second-largest grocer, which owns Vons, said that cutting costs and revising its retail strategy helped it to report the higher earnings, which beat Wall Street expectations.

Chief Executive Steve Burd said Safeway had a very strong quarter but acknowledged that the economy and its effect on shoppers’ spending habits made for soft same-store sales. Safeway lowered its expectation for 2008 same-store sales growth, excluding gas sales.

“Consumer confidence is at an all-time low,” Burd said in a conference call with investors. “Could it drop lower? Yes. Do I think sales for us are going to get worse? I don’t think so. That is more on the basis of actions that we’ve taken as opposed to how I feel about the economy.”

Burd said the Pleasanton, Calif.-based company was trying to improve the value it offers customers, which should pay off later this year.

Safeway said profit rose about 7% to $234.3 million, or 53 cents a share, compared with earnings of $218.2 million, or 49 cents, a year earlier. Analysts polled by Thomson Financial expected a profit of 52 cents a share.

Revenue rose 3% to $10.1 billion, missing analysts’ expectations by $130 million. Sales were hurt by the timing of the Easter holiday, which fell in the first quarter this year versus in the second quarter last year.

Safeway reiterated its profit outlook for this year of $2.25 to $2.35 a share, compared with the $2.27-a-share estimate of analysts. But the grocer lowered its outlook for same-store sales growth, excluding fuel, to 1% to 2% from previous expectations of 2% to 2.3%.

Safeway shares fell $3.23 to $26.78.