Albertsons Q2 Profit Misses Estimates

Albertsons Inc. (ABS), the No. 2 U.S. grocer that recently put itself up for sale, Wednesday posted a smaller-than-expected 3 percent gain in quarterly profit as price cuts hurt sales.

The retailer, struggling with competition from discounters like Wal-Mart Stores Inc. (WMT), said it would step up efforts to sell company-owned property to take advantage of a booming U.S. real estate market.

Net profit rose to $107 million, or 29 cents a share, in the second quarter that ended Aug. 4, versus $104 million, or 28 cents a share, a year earlier.

Excluding discontinued operations, earnings fell to 30 cents per share from 34 cents. On that basis, analysts expected a profit of 34 cents, according to Reuters Estimates.

Shares of Albertsons were little changed on the New York Stock Exchange, however, as analysts said Friday's announcement that the retailer was putting itself up for sale overshadowed the poor results.

Robert Campagnino, an analyst with Prudential Equity Group, said the weak quarter cast doubt on full-year profit prospects, although the retailer maintained its 2005 forecast.

"Bottom line for us is that we are skeptical as to what an acquirer would be willing to pay for a store base that, based upon this and past earnings results, is not performing particularly well," he wrote in a note to clients.

Campagnino, who maintained his "underweight" rating on the stock, said a lower-than-expected tax rate added about 4 cents per share to earnings, so results would have been even worse had the tax rate been higher.

Albertsons said its Southern California stores showed improvement after a labor strike that ended last year, but price cuts pressured sales, which rose only slightly, to $10.2 billion. Identical-store sales fell 0.1 percent.

Grocery stores have been hit hard by Wal-Mart's rapid supercenter expansion, and have responded by cutting prices and bringing in more upscale merchandise like organic food.

Campagnino said the sales were particularly disappointing because they included gasoline, which propped up revenue because prices have soared. Albertsons has gas stations at some of its stores.

Albertsons said it was looking to sell some company-owned real estate, which accounts for more than 60 percent of its 120 million square feet of property. The company said the sales would generate profit for shareholders and free it up to focus on its core grocery and drugstore business.

Retailers, including Sears Holdings Corp.'s (SHLD) Kmart, have made hundreds of millions of dollars by selling prime real estate, and chains with valuable real estate portfolios have seen their stock prices soar.

On a conference call with analysts, Albertsons Chief Executive Officer Larry Johnston said the company was dividing its retail business into strong "core" markets and weak "non-core" markets, and would speed up efforts to close or sell stores in those non-core areas.

"This real estate has tremendous value in today's market," he said.

Analysts said the company-owned real estate portfolio was larger than they had expected and would help buoy the stock price, but questioned whether the company could successfully boost results even after closing or selling weak stores,

"We believe the probability of a successful turnaround is extremely low for either core or none-core Albertsons markets," Jason Whitmer, an analyst with FTN Midwest Securities, wrote in a note to clients.

The retailer maintained its full-year profit forecast of $1.37 to $1.47 per share from continuing operations, and said it was on track to meet its goal of cutting costs by $1.25 billion by the end of the next fiscal year.

Whitmer said maintaining the profit forecast despite a weak first-half performance "does not make any sense," and repeated a "neutral" rating on the stock.

Shares of Albertsons were down 8 cents, or 0.3 percent, at $23.32.