Safeway Projects Weak Sales

PLEASANTON, Calif. — Safeway stock plummeted by more than 10% last Thursday after the retailer here said quarterly sales were down — and likely to remain down while the retailer adjusts pricing to better compete during the current economic downturn.

Steve Burd, Safeway's chairman, president and chief executive officer, emphasized that earnings per share of 53 cents for the second quarter, which ended June 14, were a penny ahead of analysts' expectations, citing cost reductions against the head-winds of higher energy costs, higher taxes, an early Easter holiday and property gains. But identical-store sales, excluding fuel, were down by 0.3% — below what analysts and Safeway were expecting, particularly given food price inflation that Burd called the highest he'd seen in 16 years.

“There's no getting around it — ID sales were soft,” Burd told analysts. He said the sales decrease was due partially to the shift of the Easter holiday to the first quarter this year and was reflective of a sales shift toward corporate brands and generic drugs. “That said, we are not happy with our ID sales.”

Safeway reiterated its annual earnings guidance, but it adjusted annual identical-store sales expectations downward to a range of 1% to 2%, vs. earlier projections of 2% to 2.3%. Burd said Safeway's earnings expectations remain unchanged in part because the company “overdelivered” on cost reductions so far this year and because he expected sales momentum would build later in the year as the result of initiatives to enhance everyday pricing.

Safeway heretofore had devoted its resources to upgrading its store base and quality perception through “lifestyle” store remodels and presentations emphasizing proprietary fresh and prepared foods. In the conference call, Burd defended that strategy — and said it would continue — despite questions from analysts who asked whether the falling sales and the need to improve price perception indicated a “day of reckoning” had come.

“If I had predicted the timing of the [economic] softness and the duration, I might have invested [in price] a little bit earlier. But I would not change my strategy about quality,” he insisted. “I go back to the fact that in a 10-year period, in probably eight of those 10 years, our differentiation is going to win.

“What happens in soft economic times is that there is a bit of a movement away from quality, and a movement toward price and value,” he added.

Burd said Safeway's goal will be to enhance overall value with lower everyday prices, as opposed to investing in hot promotions.

“We are renowned as one of the, if not the, most promotional operator out there,” Burd said. “Long-term, it is useful to change that impression, which creates more of a need to invest in everyday price, particularly the items that people are most interested in. That works against creating a hockey-stick sales curve. But it works in favor of long-term value creation.”

Karen Short, an analyst with Friedman, Billings, Ramsey & Co., New York, in a research note said she believes Safeway's sales will remain weak for several more quarters. In a previous note she was expecting ID sales of 1.7%, excluding fuel.

“[T]iming is everything, and the upscale image is now putting the company at a disadvantage with the consumer,” Short said. “We anticipate the consumer mind-set eventually changing again — and believe Safeway will once again reap the rewards of a healthier consumer — but not for several quarters.”

Q2 RESULTS