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Safeway Sales Dip, but Eyes Recovery in 2010

Safeway experienced its first negative identical-store sales results in 18 quarters during the second quarter, but said last week it believes it is well positioned to come out of the recession in good shape. Industry analysts contacted by SN said they were somewhat skeptical about Burd's optimistic timetable. IDs, excluding fuel, declined 2.2% after excluding the shift of Easter

PLEASANTON, Calif. — Safeway here experienced its first negative identical-store sales results in 18 quarters during the second quarter, but said last week it believes it is well positioned to come out of the recession in good shape.

Industry analysts contacted by SN said they were somewhat skeptical about Burd's optimistic timetable.

IDs, excluding fuel, declined 2.2% after excluding the shift of Easter to the second quarter; with Easter sales included, IDs were down 1.5%.

“The results are clearly disappointing,” Steve Burd, chairman, president and chief executive officer, said last week in a conference call with analysts, “but we are encouraged by our transaction and volume trends, which include the best perishables results in nine quarters and the best non-perishables results in four quarters.

“But those results are being offset by the greatest rate of deflation in 17 years, which reduced IDs for the quarter by about 1%, and deflation will have a deeper effect in the third quarter — though we believe the factors driving those declines are only temporary.

“We believe they will begin letting up in the fourth quarter and will normalize in 2010, which creates opportunities for volume and ID sales increases.”

He said the price investments Safeway is making at its stores to offer everyday pricing along with promotions are succeeding, “and we should be in a great position if the economy stabilizes next year; and even if it only begins to recover, we will be in terrific shape.”

Net income for the quarter, which ended June 20, rose 1.8% to $238.6 million — including a tax benefit of $57.8 million — while sales fell 6.5% to $9.5 billion. For the half, net income fell 10.5% to $382.8 million and sales dropped 7.1% to $18.7 billion.

Meredith Adler, an analyst with Barclays Capital, New York, told SN Safeway's locations, service, quality and capital investments should enable it to normalize sales once the economy recovers. “But the question is, how quickly will it normalize? I'm somewhat skeptical about Burd's optimism for next year, since he has no more visibility than anyone else about when the economy will recover.”

Simeon Gutman, a New York-based analyst with Canaccord Adams, British Columbia, noted that Safeway's rivals will not just sit by and watch.

“Safeway may do a good job changing consumer perceptions, as indicated by the increases it's experiencing in store traffic and unique households, but at some point the rest of the industry is going to react to what Safeway is doing,” he said.

Safeway cut its 2009 earnings guidance to a range of $1.70-$1.80 per share, vs. earlier guidance of $2.10-$2.30, and reduced ID-sales guidance, excluding fuel, to -1% to -1.7%, down from previous guidance of +0.5% to +1.5%.

Burd said deflation in produce and dairy, which account for 20% of volume, accounts for one-third of the reduced guidance; the acceleration in trading-down activity for another third; and a slower-than-expected economic recovery and competitive pressures for the balance.

“The competitive environment has required much greater price investments than we had planned,” Burd explained.