SAFEWAY LOWERS ESTMATES 2%

NEW YORK -- Safeway, Pleasanton, Calif., said last week it has lowered its earnings expectations for the next five years by 2%.Steve Burd, chairman, president and chief executive officer, told the company's annual investor conference here, "We are lowering our guidance because we want to have the flexibility to invest our cost savings into gross margins, which we feel will help us grow top-line sales.

NEW YORK -- Safeway, Pleasanton, Calif., said last week it has lowered its earnings expectations for the next five years by 2%.

Steve Burd, chairman, president and chief executive officer, told the company's annual investor conference here, "We are lowering our guidance because we want to have the flexibility to invest our cost savings into gross margins, which we feel will help us grow top-line sales. Also, we think this will help us deal more effectively with competitive flare-up."

Industry analysts told SN they were not surprised by the move and said it represented a welcome dose of realism.

The company also outlined its expected growth areas, saying it intends to add more fuel stations at stores, expand natural food selection, participate in more cross-branding efforts (such as installing Starbucks coffee kiosks in stores), and open more photo-finishing centers.

Burd noted that Safeway's pharmacy departments have been "the biggest growth area for the company in years."

Safeway added that in its capital spending plans for 2002 it plans to spend approximately $2.1 billion and expects to open 80 to 85 new stores, complete 250 remodels and increase square footage by approximately 4.5%.

"Safeway plans to put this capital to work at strong return levels," Burd said.

Chuck Cerankosky, analyst, McDonald Investments, Cleveland, said, "I think the new guidance is in line with our expectations. We are not surprised. The company has taken a realistic look at the competition and the state of the economy, as well as their own developmental activities."

Cerankosky said he expects the company will achieve the increased customer traffic and higher basket sales Safeway has identified as key goals.

"Pricing, merchandising mix and location all have to be right to offer the value customers expect from your type of store. Safeway is working hard at that," he told SN.

Jack Murphy, vice president, Credit Suisse First Boston here, said, "The lowering of estimates was inevitable. It was an important thing to get out of the way, since most investors have been skeptical of the previous numbers. The current estimates are more on track.

"The question still remains if the company will be able to hit some still challenging earnings growth expectations with a traditional sales growth of about 6% to 7%. How they bridge that gap will be important."

Murphy noted that Safeway has proven it can execute the kind of projects that will increase gross margin and sales, but these efforts may not prove to be as successful going forward given the competitive climate and a weakened economy.

Deborah Weinswig, food and drug chains analyst at Bear Stearns here, said the company's cost-cutting efforts, coupled with its plan of developing key growth areas, will help to keep it on track with its current lowered estimates.

"I believe that Safeway's earnings growth, while below our original expectations, is poised for a recovery in 2003 as the company continues to take advantage of ancillary growth opportunities," she said.

The company provided guidance for earnings per share for the year 2002, of $3.20, after changes in accounting for goodwill that are mentioned above. The goodwill adjustment is expected to add 27 cents to earnings per share in 2002.

The company said it is targeting five-year annual earnings per share growth of 13% to 15%, after changes in accounting for goodwill that are to become effective Jan. 1, based on targeted annual same-store sales growth of 3% to 4%, square footage growth of 4% to 5% and continued operating margin improvement.