Safeway Seeks to Trim Costs

Safeway said last week it is in the midst of a very aggressive cost-reduction effort that's expected to provide additional pricing flexibility and help the company achieve its earnings targets, even if demand softens further. The company's stock slid about 7% after the report, in which Steve Burd, chairman, president and chief executive officer, spoke of a more cautious consumer

PLEASANTON, Calif. — Safeway here said last week it is in the midst of a “very aggressive” cost-reduction effort that's expected to provide additional pricing flexibility and help the company achieve its earnings targets, even if demand softens further.

The company's stock slid about 7% after the report, in which Steve Burd, chairman, president and chief executive officer, spoke of a more cautious consumer amid inflation and economic worries.

Burd said the cost-cutting program was initiated in late October. “With our lifestyle conversions approaching 60%, we began a very concerted effort to return to our core strengths on cost reduction,” he explained.

Although he did not give any specifics during a conference call with analysts, he said the effort has several major components, one of which will result in a first-quarter charge of about 1 cent per share, “but benefits will flow from that program,” he noted.

The balance of the efforts will occur “in quarters two to four of this year and beyond,” he added.

The purpose of the conference call was to discuss financial results for the fourth quarter and fiscal year ended Dec. 29.

Net income for the 16-week quarter declined 2.2% to $301.1 million, which translated to a 1-cent drop in earnings per share to 68 cents, compared with 69 cents a year ago. However, the year-ago quarter included favorable tax items that added 8 cents per share, the company pointed out.

Sales for the quarter rose 6.8% to $13.4 billion, and comparable-store sales, excluding fuel, rose 2.8%.

For the year net income rose 2% to $888.4 million, while sales climbed 5.2% to $42.3 billion and comps, excluding fuel, increased 3.6%.

Regarding the economic outlook, Burd said, “Regardless of the label, we are clearly observing a cautious consumer. Some of that caution stems from concerns with the economy and a possible recession, added to the uncertainties of more inflation than we've experienced in a long time.”

He characterized inflation as “a challenging neutral that's just more challenging to manage, though it also creates opportunities we will try to capitalize on.

“But it means we have to do more and different things. For example, we must stay closer to inflation commodity by commodity, so our senior executives are very much in touch with the vendor community and that requires a different allocation of time to stay on top of it. But we don't see it as a problem that can't be managed.”

Burd said he sees some indications that consumers are trading down, based on “a modest softening” of identical store sales — a 2.7% fourth-quarter increase, compared with a 3.5% increase a year ago.

Most of the trading down is occurring in more discretionary items, he said, such as the ultra-premium wine category, as well as in the growth of corporate-brand sales, “but we see no reason to alter our 2008 earnings guidance of $2.25 to $2.35 per diluted share,” he indicated.

In other comments during the call:

  • Burd said Safeway will probably begin testing a smaller-format store during the first half of the year, “but it will be an experiment — the kind of thing we like to keep close to the vest until we prove it out.”

  • He said the chain has been testing a line of prepared entrees at 10 stores for about five weeks, “and we've learned from consumer panels that consumers like the products and will buy it. The next step will be not just to drive top-line sales but to do it profitably. Right now we're beating our sales expectations by a factor of three, and because we haven't made much of a marketing effort so far, we expect that demand will grow.”

    Some products that are being sourced from the East Coast will be moving to West Coast sources “to improve shrink and extend shelf life, and we will also be rationalizing some items that aren't selling,” Burd added.

    “So we don't assume the water glass is moving up or down at the same rate in every division. It depends on the economy, the competition and our response in each area, so it's a moving target.”

  • Burd advised analysts that first-quarter results are likely to be impacted by a wage increase retroactive to last March of approximately 2 cents per share if a contract settlement in Alberta is ratified later this week.

4TH-QUARTER RESULTS
Qtr Ended 1/29/08 1/30/07
Sales $13.4 billion $12.5 billion
Change +6.8%
Comp-store* +2.8%
Net Income $301.1 million $307.9 million
Change -2.2%
Inc./Share 68 cents 69 cents
52 Weeks 2007 2006
Sales $42.3 billion $40.2 billion
Change +5.2%
Comp-store* +3.6%
Net Income $888.4 million $870.6 million
Change +2%
Inc./Share $1.99 $1.94
*Excluding fuel