Albertsons Inc. (ABS), the No. 2 U.S. grocer, on Tuesday reported a substantial drop in its quarterly profit, hurt by heavy promotions as it tried to revive Southern California sales after a strike.

The earnings beat analysts' average estimate, but sales were lackluster and Albertsons' shares fell more than 3 percent.

Albertsons Chief Executive Larry Johnston on a conference call said that in the wake of sluggish sales in June and July, "we haven't seen a big change in the retail environment in the first few weeks of the third quarter."

Robert Toomey, managing director and securities analyst at RBC Dain Rauscher, said the drop in the share price may have reflected a little disappointment with their (comparable-store) sales." Some investors may also have been unhappy that the company failed to raise its forecasts, he said.

The Boise, Idaho-based grocer, which operates 2,500 stores under the Albertsons, Jewel-Osco, Shaw's and other names, said profit in the second quarter ended July 29 fell to $125 million, or 34 cents a share, from $162 million, or 44 cents share, a year earlier.

Wall Street analysts polled by Reuters Estimates had forecast a profit of 33 cents a share.

Total sales rose to $10.2 billion from $9 billion a year earlier, boosted by the acquisition of the Shaw's supermarket chain. The company said sales took a hit of about $182 million because of the labor dispute, which ended in February after a five-month strike.

Sales at stores open at least a year, or comparable-store sales, fell 1.3 percent. Barring the impact from the strike, they rose 0.2 percent.

Identical-store sales, which exclude new or replacement stores, fell 1.5 percent. Excluding the Southern California stores affected by the strike, they were flat.

Chief Executive Larry Johnston on a conference call said that in the wake of sluggish sales in June and July, "we haven't seen a big change in the retail environment in the first few weeks of the third quarter."

Albertsons declined to give a detailed update of its sales for the current quarter.

Shares of the company were down 89 cents, or 3.6 percent, to $24.21 in afternoon trading on the New York Stock Exchange.

Albertsons said its recovery efforts in the wake of the Southern California labor dispute cut earnings by 13 cents a share in the quarter. The company also contributed an additional $7 million to two Northern California health and welfare union plans, which reduced earnings by a penny a share.

Excluding these items, Albertsons earned $180 million, or 48 cents a share.

The company's exits from the Omaha, Nebraska, and New Orleans markets also reduced net earnings by 6 cents a share due to noncash impairment write-downs from the sale of property and equipment.

Albertsons, along with rivals Safeway Inc. (SWY) and Kroger Co. (KR), has been aggressively cutting prices to better compete with discounters like Wal-Mart Stores Inc. (WMT), whose low prices have become a boon in a skittish U.S. employment market.

All three supermarket chains have also been grappling with the fallout from the employee strike, which idled stores of all three across Southern California for five months.

In the company's conference call, Johnston was upbeat about the company's efforts to get its Southern California stores back up to speed.

"For the full quarter, our total Southern California division sales were ahead of our internal plan," he said.

Albertsons reiterated its forecast for fiscal year 2004 earnings from continuing operations in the range of $1.40 to $1.50 per share.

The company also said it expects third-quarter earnings from continuing operations to range between 31 cents to 35 cents per share and fourth-quarter earnings from continuing operations to range from 60 cents to 66 cents per share.

Wall Street analysts expect the company to post full-year earnings of $1.46 per share, third-quarter earnings of 39 cents and fourth-quarter earnings of 57 cents, according to Reuters Estimates.

During August, the company also settled labor contracts covering 19,000 associates.