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Safeway Profit Down Amid Store Closings

Safeway Inc.(SWY) , the No. 3 U.S. grocery chain, Tuesday said third-quarter profit fell 23 percent, weighed down by charges, and said it would close 26 stores in Texas as it tries to revitalize that division.

The grocer, whose shares dropped 5 percent, also said it was comfortable with analysts' consensus forecast for full-year earnings of $1.44 per share. That forecast is down 1 cent from July, when Safeway also stood by analysts' estimates.

"It appears as if guidance was tweaked downward, even ignoring the lower-quality earnings posted this quarter," said Prudential Equity analyst Rob Campagnino, who has a "neutral weight" rating on Safeway.

Profit fell to $122.5 million, or 27 cents a share, in the fiscal third quarter ended Sept. 10, from $159.2 million, or 35 cents a share, a year earlier. Safeway said profit was reduced by 8 cents per share due to an impairment charge in Texas, and by 3 cents per share for an employee buyout charge in Northern California. The favorable resolution of various tax issues added 6 cents per share to earnings, it said.

Campagnino said the charges and income tax benefit suggest an operating profit of 32 cents per share. That falls below the average forecast of 35 cents as compiled by Reuters Estimates.

Shares of Safeway were off $1.26, or 5.2 percent, at $23.13 on the New York Stock Exchange (search). They hit a 52-week high of $26.46 two weeks ago.

Also on Tuesday, Great Atlantic & Pacific Tea Co. Inc. (GAP), the grocer known as A&P (search), swung to a quarterly profit due to a gain of $919 million from the sale of A&P Canada. A&P shares jumped more than 15 percent to $29.12 on the NYSE.

Pleasanton, Calif.-based Safeway is adding services such as bakeries, floral design centers and sushi bars at some so-called "lifestyle" stores to differentiate itself from discounters like Wal-Mart Stores Inc..

Total sales rose 7.2 percent to $8.9 billion, driven by higher fuel sales and new marketing activities, topping analysts' average forecast of $8.66 billion.

Safeway said identical-store sales, which exclude new or replacement stores, rose 5.4 percent. Identical-store sales are a key gauge of supermarket performance. Excluding fuel purchases, identical-store sales rose 3.4 percent.

Safeway said 2005 identical-store sales growth should come in at the top end of its previous forecast range of 2.5 percent to 2.8 percent. That view excludes fuel and excludes Vons for the first quarter to remove the effect of last year's strike at that chain.

Safeway took a pretax impairment charge of $54.7 million, or 8 cents per share, in the third quarter related to the Texas store closures and expects to take another charge of about 8 cents per share in the fourth quarter as it exits the stores.

By the end of the year Safeway, which operates 1,800 supermarkets, plans to close 16 stores in the Houston market, nine in Dallas/Fort Worth and one in Austin. It plans to bring organic foods, full-service meat counters and other items to attract shoppers to its remaining Randalls and Tom Thumb stores in Texas, which is known as a competitive grocery market.

Third-quarter gross profit fell 98 basis points to 28.58 percent of sales. Nearly two-thirds of the decline came from fuel sales, which have a lower gross margin, Safeway said. The rest of the decline was due to the opening of 79 stores with new offerings, higher advertising expenses and energy costs, and other factors. Safeway estimated that soaring energy costs cut profit by 3 cents per share.

Safeway trades at a price-to-earnings ratio of about 16.9 times this year's earnings, making it more highly valued than top-ranked rival Kroger Co., which trades at 15.4 times this year's earnings, but less richly valued than No. 2 rival Albertsons Inc.(ABS), which trades at about 17.8 times earnings, according to Reuters data.

Albertsons put itself up for sale in September.

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