Safeway's Q2 'in line with expectations'

PLEASANTON, Calif. Safeway chairman, president and CEO Steve Burd spent the better part of 40 minutes Thursday morning walking analysts through the company’s financials, and stating that Safeway’s results ought to show some improvements toward the back end of the third quarter as the grocer cycles through its decision to pursue an everyday-low-price strategy last year.

Gross profit declined 32 basis points to 28.55%, Safeway reported, noting that the drop was not influenced by fuel sales. “When you look at gross margin decline ... it’s simply the result of not yet having [cycled through] the price reductions we did in the third and fourth quarter [of 2009],” Burd told analysts. “The back half of the third” quarter should improve, he said, “and the fourth quarter should be significantly better as we lap the dollar changes.”

Sales totaled $9.5 billion for second quarter 2010, essentially flat compared with last year. Net income was $141.3 million for the quarter, which met with analyst expectations of 37 cents per diluted share, but was a 40.8% drop from net income of $238.6 million (57 cents per diluted share) for second quarter 2009. However, second quarter 2009 included a $57.8 million tax benefit from the resolution of a tax matter, which accounted for 14 cents per diluted share in net income last year, the company explained.

"Our second-quarter results were in line with our expectations, and we are encouraged by our volume trends in the quarter," Burd stated. "However, deflation continues in price per item, and is not expected to significantly improve until the fourth quarter. As a result, we have lowered our expectations for the balance of the year."

Safeway updated its guidance for the year to $1.50 to $1.70 earnings per diluted share, down from its prior outlook of $1.65 to $1.85 a share. The company continues to expect cash capital expenditures of approximately $0.9 billion to $1 billion and free cash flow of $0.9 billion to $1.1 billion.

Safeway invested $192.1 million in capital expenditures in second quarter 2010. The company opened five new stores, completed 17 Lifestyle remodels and closed five stores. For the year, Safeway plans to invest $900 million to $1 billion in capital expenditures, open approximately 15 new Lifestyle stores and complete approximately 60 Lifestyle remodels.

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