Safeway's profit falls 16 percent on higher costs

Associated Press

NEW YORK (AP) — Safeway Inc. says it net income in the second quarter fell 16 percent as the grocery store operator spent more on advertising and launched a new loyalty program.

The Pleasanton, Calif.-based company says higher costs offset a bump in sales and improving market share. Going forward, the company is hoping its new "just for U" loyalty program will bolster its market share even more.

Safeway and other grocery store operators have been struggling to hold onto customers at time when big-box retailers such as Target Corp. and Wal-Mart Stores Inc. are expanding their food offerings. Traditional supermarkets now account for 51 percent of grocery sales, down from 66 percent in 2000, according to UBS Investment Research.

For the three months ended June 16, Safeway said it earned $122.7 million, or 51 cents per share. That's compared with a profit of $145.8 million, or 41 cents per share, in the year ago period, when there were more outstanding shares. Not including one-time items, the company said it earned 50 cents per share.

By that measure, analysts polled by FactSet on average expected a profit of 49 cents per share.

Total sales rose 2 percent to $10.39 billion, which also topped Wall Street expectations. Sales from stores open at least a year edged up 0.8 percent, when excluding fuel costs. The metric is a key gauge of health, because it strips out the impact of newly opened and closed stores.

For the year, the company expects to spend about $900 million on capital expenditures, such as the opening about 10 new Lifestyle stores and the remodeling of another 10. Safeway stood by its full-year guidance of $1.90 to $2.10 per share.

Shares of Safeway fell 85 cents, or 5.2 percent, to $15.64 in morning trading.

Safeway operates about 1,700 stores in North America under names including Vons in Southern California and Nevada and Randalls in

Texas.

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