Safeway's 2Q profit falls

Safeway's 2Q profit falls

	Published : Thu, 19 Jul 2007 18:07 By : Agencies Print this Story

SAN FRANCISCO (AP) - Safeway Inc.'s second-quarter profit slipped 11 percent 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 3 percent decrease in Safeway's stock price.

The Pleasanton-based company earned $218.2 million, or 49 cents per share, during the three months ended June 16. That compared with net income of $246.2 million, or 55 cents per share, at the same time last year.

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. If not for that windfall, Safeway said this year's second-quarter profit would been 17 percent 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 percent increase from last year. 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 percent. The benchmark refers to stores that have been open at least a year without undergoing a major makeover. Excluding gasoline pumped outside some locations, Safeway's same-store sales rose 3.7 percent.

Signaling its momentum should extend into the second half of the year, Safeway told investors that its annual earnings will fall on the high end of its previous guidance, which tops out at $2 per share. That would translate into an annual profit of about $900 million, Safeway's best result since earning $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.

Investors had been hoping Safeway would raise its earnings forecast. Safeway shares fell $1.30, or 3.6 percent, to $34.68 during Thursday's morning trading.

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

'As good as we feel about the back half, there is enough inflation worry out there that we want to be a little cautious,' said Burd, who described the recent price increases as the most dramatic he has seen in his 15 years at Safeway. 'If inflation moderates, we have an opportunity to do better than we are currently contemplating.'

Burd blamed much of the inflation on increased demand for ethanol as an alternative fuel source. Most ethanol in the United States is produced from corn, a factor that is driving up farming costs.

After struggling for several years amid tougher competition and labor strife, Safeway has bounced back by upgrading more than half of its 1,740 stores in an effort to better position itself against discount retailers like Wal-Mart Stores Inc. that have muscled their way into the grocery business.

In a separate development, Safeway plans to stop selling meat packaged in carbon monoxide gas, which is used to make products look fresher. Although Safeway doesn't believe the practice threatened consumer health, the grocer decided to make the change in response to a request from Reps. John D. Dingell and Bart Stupak, both Michigan Democrats.