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

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 on July 29 fell to $125 million, or 34 cents a share, from $162 million, or 44 cents a share, a year earlier.

The analysts' average forecast was 33 cents a share, according to Reuters Estimates.

Albertsons said 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 cent 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 non-cash 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, whose every-day 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 that ended in February after idling their stores across Southern California for five-months.

Albertsons sales rose to $10.2 billion from $9 billion a year earlier, getting a boost from added sales volume from the company's acquisition of the Shaw's supermarket chain. The company said it estimated its sales took a hit of about $182 million because of the labor dispute.

Its identical-store sales, which exclude new or replacement stores, were flat, excluding the Southern California stores affected by the strike. Including the impact of the strike, identical-store sales fell 1.5 percent .

In the first quarter identical store sales declined by 0.1 percent, fueling concern that a long-anticipated recovery in the U.S. supermarket business may still be months away following more than two years of lackluster earnings growth.

Albertsons reiterated that its fiscal year 2004 earnings from continuing operations will be in the range of $1.40 to $1.50 per share, including Shaw's, as well as the additional health and welfare payments in Northern California.

The company also said it expects its third-quarter 2004 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 were expecting the company to post full-year earnings of $1.46 per share, third-quarter earnings of 39 cents per share, and fourth-quarter earnings of 57 cents per share, according to Reuters Estimates.

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