Safeway Reports Higher 2Q Profit; Eroding Market Share

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Safeway store

A Safeway store at the Potrero Center shopping complex in San Francisco. (AP)

PLEASANTON (CBS/AP) — Grocery store operator Safeway Inc. reported Thursday that its second-quarter profit grew as higher prices and strong gasoline sales helped offset its rising costs for commodities.

Like most grocers, Safeway, which has brands that include Vons, Genuardi’s and Pak N’ Save, is facing the challenge of how to pass along higher prices for commodities to consumers without making sure items aren’t so expensive that customers won’t buy them. At the same time, the industry is struggling to keep customers as consumers continue to cut back on spending during the down economy.

During a conference call with investors, CEO and Chairman Steve Burd said the company’s customers tend to “skew higher-income” than its competitors’ customers. Still, he said 75 percent of Safeway customers are still feeling economic pressure and shopping around more than in the past.

“I would encourage all of you to think about the fact that, when fuel costs are up 32 percent and food costs are up 2 percent and you add those two baskets together, it’s a pretty impactful event for consumers,” said. And he added, “You should not have heard anything different on other calls.”

Although Pleasanton-based Safeway, which has 1,687 stores, has been squeezed by high costs for commodities, it raised prices on food products. Additionally, Burd said recent fluctuations in fuel prices have been good for Safeway. Safeway, which sells gas at about 25 percent of its stores, profits from fuel have stayed roughly the same as a year earlier, he said.

Burd acknowledged that Safeway’s market share has eroded slightly each of the last three quarters while the amount of groceries sold industry-wide also has fallen. He said Safeway is relying on gaining market share from competitors for growth. He said Safeway has made more progress fighting theft and improving its marketing than other traditional grocers, which he says makes its profit margins solid.

Safeway said net income was $145.8 million, or 41 cents per share, for the quarter that ended June 18. That’s up from $141.3 million, or 37 cents per share, last year. Analysts expected 39 cents per share. The difference in earnings per share came mostly from a reduction in the number of outstanding shares.

Revenue rose 7 percent to $10.2 billion from $9.5 billion a year ago. That beat the $9.9 billion analysts had expected.

On the news, Safeway shares fell $2.14, or 9 percent, by midday to $21.49. They have traded in a range of $18.73 to $25.43 the past year.

Safeway reaffirmed the guidance it gave in March for earnings. The company expects to earn $1.45 to $1.65 per share for the year, including the estimated 15 cents per share from paying a dividend in Canada, and it said revenue from stores open at least a year could rise 1 percent for the year.

Analysts on average expect Safeway to report earnings of $1.71 per share and revenue of $42.6 billion for the year, according to FactSet.

A reduction in Safeway’s outstanding stock, from 386 million shares a year ago to 352 million at the end of the second quarter, boosted its earnings by 4 cents per share. During the second quarter, Safeway repurchased about 14.9 million shares of its common stock at an average price of $24.13 or a total cost of $360.8 million.

 

(Copyright 2011 by CBS San Francisco. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)

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