Higher prices hurt at Safeway, shares fall

Higher prices hurt at Safeway, shares fall

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(Global Markets) - Safeway Inc (SWY.N) reported a quarterly profit that beat analysts' low expectations, but shares fell 2.8 percent as higher food prices showed signs of denting demand at the second-largest U.S. supermarket company.

Inflation hit 4 percent during Safeway's third quarter and sales volume declines accelerated more than in the previous period, Chief Executive Steve Burd said on a conference call with analysts.

Burd's comments sent shares, which had been up almost 7 percent earlier in the session, into reverse.

"You've now hit the inflection point where inflation is dampening demand. It makes it very, very tough to grow gross profit dollars in this framework," Susquehanna analyst Bob Summers told Global Markets.

"When you see the volume contraction accelerate, people aren't really going to stick around and ask any questions," Summers said.

The comments from Burd landed about a month after larger rival Kroger Co (KR.N) said its shoppers were getting more cautious -- visiting its stores more often, but buying cheaper items.

Major supermarket chains are struggling with falling sales volumes as all but the top-earning shoppers remain very cautious about spending.

Some analysts worry that grocery sellers may begin slashing prices to reverse the trend, a move that could revive the profit-denting price war that hobbled the industry during the throes of the U.S. recession in 2008.

Wal-Mart Stores Inc (WMT.N) threw fuel on that fire earlier this week, when it announced plans to cut prices to match those of competitors.

The comments from Wal-Mart, which sells more groceries than any other retailer, signaled a possible return to a strategy that caused upheaval in the supermarket industry.

Meanwhile, the operator of chains such as Safeway, Vons and Dominick's is working to narrow its performance gap with Kroger.

In the latest quarter, Safeway's closely watched sales at identical stores -- established supermarkets that have not been replaced or significantly renovated -- rose 1.5 percent, excluding fuel.

Higher gasoline prices and an increase in the Canadian exchange rate were among the factors that boosted sales, Burd said on the call. He added that Safeway's market share was flat, compared with the year earlier.

"We wish our sales progress was much faster," said Burd, who added that he was satisfied with the quarter's results.

Still, Kroger's identical-supermarket sales for the latest quarter were up 5.3 percent, excluding fuel, due to higher food prices.

LOW EXPECTATIONS

Safeway's net income for the third quarter ended September 10 rose 6 percent to $130.2 million, or 38 cents per share.

The results topped the analysts' average estimate by 3 cents a share, according to Thomson Global Markets I/B/E/S.

"Bottom line here is that the quarter was much better than very low expectations," Credit Suisse analyst Edward Kelly said in a client note.

Kelly attributed much of the earnings beat to higher-than-expected identical-store sales.

Safeway's revenue rose a bit more than 7 percent to $10.06 billion, primarily because of higher fuel sales, and beat analysts' estimates of $9.86 billion.

Gross profit fell 114 basis points to 27 percent of sales. But gross margin was flat, excluding an 88 basis-point hit from fuel sales and a 26 basis-point charge from reporting gift card commissions.

Europe's debt crisis, worries about slowing growth in China and stubbornly high unemployment in the United States are contributing to worries that global economies are weakening.

Amid those concerns, Safeway repeated its full-year earnings forecast of $1.45 to $1.65 per share, including an estimated hit of 15 cents from a Canadian dividend. It also affirmed its target for identical-store sales growth, excluding fuel, of about 1 percent for the year.

Safeway shares fell 2.8 percent at $17.46 in afternoon trading on the New York Stock Exchange, while Kroger was down 1.6 percent and Wal-Mart dipped 0.48 percent.

So far this year, shares in Kroger and Wal-Mart are up just slightly, while Safeway is off roughly 20 percent.

(Additional reporting by Jessica Wohl in Chicago; editing by Dave Zimmerman and Gunna Dickson)