2nd Safeway 2Q Profit Fell 41% After 2009 Tax Gain; View Cut

First Published Thursday, 22nd July 2010 02:47 pm - © 2010 Dow Jones


(Adds analyst comment and updates share price.)

By Paul Ziobro

Of Dow Jones NEWSWIRES

NEW YORK -(Dow Jones)- Safeway Inc. (SWY) cut its guidance for the year as deflation continues to hurt profits and sales at the supermarket chain, whose second-quarter profit fell 41%.

Safeway now sees per-share earnings of $1.50 to $1.70 for fiscal 2010, down from a previous view of $1.65 to $1.85 a share. Identical-store sales, excluding fuel, are now seen falling 1% to 1.5% for the year, as Safeway won't get the second-half sales rebound it had expected. The previous view had been for identical sales to fall as much as 1% for the year.

Safeway Chairman and Chief Executive Steve Burd said lower shelf prices were the main culprit behind the lower guidance, and that deflation wasn't expected to subside until the fourth quarter.

Deflation crimps supermarkets because shoppers wind up paying less for items like produce, milk and cereal than they were a year earlier. The lower prices are compounded by a struggling economy with high unemployment, as consumers already gravitate to lower-priced goods, like private-label products.

"If you married deflation to an economy that's not doing well, you're not getting any trade up either," Jefferies & Co. analyst Scott Mushkin said.

While Safeway's second-quarter earnings met Street estimates, Safeway shares fell 40 cents, or 1.9%, in recent trading to $19.84 on the weak view. Other supermarket chains were mixed on the news, with Supervalu Inc. (SVU) up 1.3% to $11.31, and Kroger Co. (KR) fell 0.4% to $20.53.

The third-biggest U.S. supermarket chain by revenue has been encouraged by improving volume trends in recent quarters. However, grocers have continued to rely on price cuts and promotions to attract still-cautious consumers, which may weigh on margins.

Safeway also had to step up its advertising spending in the quarter, likely the result of pressure from Wal-Mart Stores Inc. (WMT) and other retailers aggressively touting newly lowered prices.

Safeway reported a profit of $141.3 million, or 37 cents a share, down from $238.6 million, or 57 cents, a year earlier. The prior year included a tax gain of 14 cents. Revenue rose 0.6% to $9.52 billion, as identical store sales excluding fuel fell 2.5%.

Analysts polled by Thomson Reuters most recently forecast earnings of 37 cents on revenue of $9.47 billion.

Gross margin eased to 28.6% from 28.9%.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com

(Tess Stynes contributed to this article.)

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