Safeway profit misses Wall St. view; shares drop

LOS ANGELES (Reuters) - Safeway Inc (SWY.N) posted lower-than-expected quarterly profit on Thursday, hurt by modest market share losses and efforts to lower prices, and the supermarket chain's shares fell nearly 12 percent.

The operator of stores such as Safeway, Vons and Dominick's is working to offer more competitive prices on "everyday" items at a time when food and personal care product sellers like Kraft Foods Inc (KFT.N) and Procter & Gamble Co (PG.N) are charging more.

Chief Executive Steve Burd said in a conference call that the company had won some price reductions from several national-brand vendors in January, but he did not name them.

Those more-expensive names are losing market share to cheaper store brands, Burd said. He predicted that the makers of national brands would find it increasingly difficult to justify high prices as commodity costs fall.

"I'm anticipating that some of the national brand vendors will get tired of losing share," Burd said. "They have to feel that they're reasonably well tapped out" on pricing.

Safeway, which is battling the perception that its prices are higher than its peers, said fourth-quarter net income rose to $338 million, or 79 cents per share, from $301.1 million, or 68 cents per share, a year earlier.

Excluding damage from Hurricane Ike, the company earned 80 cents per share in the most recent quarter, missing the analysts' average forecast of 81 cents, according to Reuters Estimates.

Sales rose 3.4 percent to $13.8 billion. An additional week in 2008 and identical-store sales increases of 0.4 percent, excluding fuel, offset a decrease in the Canadian exchange rate and lower fuel sales.

Safeway defines identical stores as those operating in the same period during the current and previous years. The figure does not include replacement stores.

Excluding the 0.66-percentage-point benefit from improved gross margin on fuel sales, gross profit margin fell by 0.57 percentage point. The decline stemmed from the company's push to lower prices on key items, partly offset by lower advertising expense and higher revenue from third-party gift cards.

"Sales seem to have decelerated markedly in December, which is of course the most important part of the (fourth quarter)," Barclay's analyst Meredith Adler said in a client note. She said gross margin was disappointing and expenses should have been down more, given the company's track record of controlling costs.

As the economy continues to flounder, Safeway is pulling back expansion plans for 2009. It plans capital expenditures of $1.2 billion on this year as it opens about 10 new Lifestyle stores and completes about 135 Lifestyle remodels.

In 2008, Safeway invested almost $1.6 billion, opened 20 Lifestyle stores, finished 232 Lifestyle remodels and closed 24 stores.

The grocery chain repeated its 2009 earnings forecast of $2.34 to $2.44 per share and free cash flow of $1 billion to $1.2 billion.

According to published reports, Safeway temporarily suspended shipments of P&G products at year end.

The company's shares were down $2.44, or 11.6 percent, at $18.68 in afternoon trading on the New York Stock Exchange.

(Reporting by Lisa Baertlein; Editing by Lisa Von Ahn)