Safeway Issues Warning as Profit Soars

Safeway Inc.’s first-quarter profit more than tripled, but its shares fell almost 5% as it warned Wall Street of a weaker-than-expected second quarter.

The Pleasanton, Calif.-based owner of Vons and Pavilions stores said its net income surged to $131.3 million, or 29 cents a share, for the period ended March 26, up from $43.1 million, or 10 cents, a year earlier when it was struggling with a supermarket strike in Southern California. Analysts polled by Thomson First Call expected Safeway to earn 25 cents a share in the latest quarter.

Revenue for the period rose 12% to $8.6 billion from $7.7 billion, as the 1,801 store chain continued to recoup sales lost during the strike which ended in February 2004.

“We think we had a very good quarter,” said Safeway Chief Executive Steven Burd in a conference call Tuesday. “Sales were much better than we expected in Southern California,” although the company has not yet regained pre-strike sales and profitability levels here.

Burd also said second-quarter profit would come in about 5 cents a share lower than the 34 cents analysts were expecting. Safeway shares fell 99 cents Tuesday to $20.98 on the New York Stock Exchange.

Safeway executives attributed the weaker-than-expected second-quarter guidance to an earlier Easter season this year that shifted more sales into the first quarter, and increased expenses from its $100-million advertising campaign and image makeover launched April 5.

“The first quarter was better than we all thought, and the second quarter [guidance] was a bit worse,” said Mark Husson, an analyst with HSBC Securities in New York.

Excluding the effect of fuel sales, strike-affected stores and new or replacement stores, Safeway’s identical store sales rose 2.8% in the first quarter. Adjusting for the earlier Easter holiday, sales rose 1.6%, the company said.

Safeway is opening Lifestyle stores to try to lure upscale customers who shop at supermarkets such as Whole Foods. It also is emphasizing fresher produce, fruits and proprietary brands of meats, soups and sandwiches.

Safeway said Tuesday that it would spend about $1.4 billion this year to open about 30 Lifestyle stores and remodel about 290 into that format. By year’s end about one-quarter of its stores will have this format.

Burd expects a strong second half for Safeway and maintained the company’s earnings projection of $1.41 to $1.51 a share for the year.

However, some analysts were skeptical that Safeway could achieve such strong results for the year, given the pressure on its bottom line.

In the first quarter, Safeway’s gross margin dipped to 29.2%, from 30.2% in the same period last year, because of higher advertising expenses, discounting and rising wholesale fuel prices.

“Achieving improved earnings for the second half looks to us a tough task,” said Neil Currie of UBS in New York, in a note to investors.

Many say it’s too soon to tell whether Safeway’s recovery is back on track. “There’s a great sales building effort going on, but perhaps at a greater cost to earnings than previously anticipated,” said analyst Andrew Wolf of BB&T; Capital Markets in Richmond, Va.

Bloomberg News was used in compiling this report.