By Michael Liedtke
Associated Press
SAN FRANCISCO – Safeway Inc.'s fourth-quarter profit surged 77 percent to cap the grocer's best performance in five years, a comeback driven by contentious cost cutting and a recent makeover that has infused more elegance into its stores.
Although the results released Thursday exceeded analyst expectations, the showing still wasn't enough to satisfy investors apparently disappointed by Safeway's slowing sales growth and conservative outlook for this year. Safeway shares dropped by more than 3 percent.
The Pleasanton-based company said it earned $307.9 million, or 69 cents per share, in the three months ended Dec. 30. That compared with net income of $173.5 million, or 39 cents per share, at the same time in 2005.
If not for a series of tax benefits, Safeway said it would have earned 61 cents per share. That figure was a penny above the average estimate among analysts polled by Thomson Financial.
Safeway's fourth-quarter earnings gains would have been less impressive if not for additional costs for employee buyouts and store closures incurred at the end of 2005. On an apples-to-apples basis, Safeway said its earnings for last year's final quarter rose by 24 percent.
Fourth-quarter sales totaled $12.5 billion, a 4 percent increase from $12.05 billion in the prior year.
In a more telling measure of its health, Safeway's “identical-store” sales, excluding gasoline, improved by 3.5 percent, slightly below the supermarket chain's pace earlier in 2006. The barometer basically measures sales at stores that have been open at least a year without undergoing a significant overhaul.
Safeway is expecting sales growth to remain roughly the same in 2007, an indication that its turnaround may have reached plateau, said Jeff Embersits, a former industry analyst who is now a portfolio manager for Shareholder Value Management. Embersits is betting Safeway's stock will continue to fall in the months ahead.
Although Safeway's sales growth is tapering off, the grocer appears to have regained its stride after stumbling through years of labor strife, losses from bungled acquisitions and tougher competition from discount merchants like Wal-Mart Stores Inc.
For all of 2006, Safeway made $870.6 million, its highest annual profit since earning $1.25 billion in 2001. Sales last year increased five percent to $40.2 billion.
Despite the company's momentum, management's outlook for 2007 remained unchanged from projections issued two months ago when Safeway forecast earnings of $1.90 to $2 per share, excluding special items.
Safeway already is “comfortably ahead” of that pace so far this year, Chairman Steve Burd assured analysts during a Thursday conference call. “Everything is working, from cost controls to sales improvements,” Burd said. “The business is hitting on all cylinders.”
Those words didn't appease investors as Safeway shares shed $1.36, or 3.7 percent, to close at $35.60 on the New York Stock Exchange. Although the company's stock price has climbed by 50 percent since the end of 2005, it remains well below of the highs reached in late 2000 and early 2001 when the shares rose above $60.
Safeway's downturn began as Wal-Mart Stores Inc. and other discount retailers began to sell more groceries, luring more budget-minded shoppers from traditional supermarkets saddled with higher expenses because of long-standing commitments to workers represented by labor unions.
Burd, Safeway's chief executive for the past 14 years, responded by trying to curtail the wage increases and benefits of the grocer's store workers. The cost cutting decimated employee morale and, in Southern California, provoked a bitter labor dispute that lasted for more than four months during 2003 and 2004.
As Safeway negotiates a new labor contract in Southern California, Burd vowed to hold the line on costs again. “We will negotiate a contract that will allow us to be competitive in the market,” Burd told analysts Thursday.
Burd offered little hope of having a new Southern California deal in place when the current contract expires March 5. He said Safeway hasn't agreed to a new labor contract before the expiration of the previous deal in 19 of its last 20 negotiations. On average, it has taken an additional seven months for Safeway and labor leaders to reach an accord, Burd said.
Besides lowering expenses, Burd has been investing heavily to change the look and feel of Safeway's stores in an effort to reel in more shoppers looking for something other than the more mundane experience offered by Wal-Mart and similar low-priced retailers. By the end of 2006, about 43 percent of Safeway's 1,761 stores had adopted the new format.
Safeway hopes to have all its stores remodeled by the end of 2009.
