* Slashes FY EPS view to $1.70-$1.90 from $2.10-$2.30
* Q2 EPS 57 cents; Street view 55 cents
* Shares fall 7.9 percent (Adds executive comment, details; updates stock activity)
LOS ANGELES/CHICAGO, July 23 (Reuters) - Supermarket chain Safeway Inc SWY.N cut its profit forecast on Thursday, sending its shares down 7.9 percent, as food prices drop and consumers pinch pennies during a lingering recession.
"The economy is not performing as well as we had expected it would at this time ... Early on in the second quarter, we saw a measurable downshift in the economy," Chief Executive Steve Burd said in a conference call with analysts.
Safeway is battling the perception its store prices are higher than those of peers such as Kroger Co (KR.N) and Supervalu Inc (SVU.N) and it has been working to offer more competitive prices on everyday items. [ID:nN12326481]
Supervalu warned in late June that its quarterly profit would be "substantially below" analysts' expectation after it cut prices and boosted promotions as competition ranging from Wal-Mart Stores Inc (WMT.N) to dollar stores mount. [ID: nN29387732]
Safeway shares were down $1.58 at $18.36 in afternoon trading on the New York Stock Exchange. Kroger was down 1.8 percent and Supervalu shares were up 1.3 percent.
The Pleasanton, California-based operator of Safeway, Vons and Dominick's stores said profit rose to $238.6 million, or 57 cents per share, in the second quarter, ended June 20, from $234.3 million, or 53 cents per share, a year earlier. The resolution of a tax matter added 14 cents per share to profit in the latest period.
Analysts, on average, expected Safeway to earn 55 cents per share, according to Reuters Estimates.
Sales fell 6.5 percent to $9.5 billion, hurt by the lower price of fuel, which reduced revenue from fuel sales. The sales were lighter than analysts' average forecast of $9.64 billion.
Identical-store sales dropped a bigger-than-expected 1.5 percent, excluding fuel. Safeway defines identical stores as those operating in the same period during the current and previous years. The figure does not include replacement stores.
Identical-store sales were impacted by the Easter holiday falling in the second quarter this year and the first quarter last year. Excluding the weeks affected by that shift, identical-store sales, excluding fuel, fell 2.2 percent.
Executives said prices were down on everything from milk and eggs to apples and cherries.
Safeway now expects to earn $1.70 to $1.90 per share this year, with a decline in identical-store sales, excluding fuel, of 1 percent to 1.7 percent.
"This is worse than we would have expected," Jefferies & Co analyst Scott Mushkin said in a client note.
In April, Safeway lowered its full-year forecast to a profit of $2.10 to $2.30 per share. At that time, it expected identical-store sales, excluding fuel, to rise 0.5 percent to 1.5 percent.
Safeway said it still expects free cash flow of $1.1 billion to $1.3 billion this year.
Mushkin remains optimistic on Safeway's long-term prospects: "While this report stunk, we continue to believe that Safeway is setting up as one of the best staples longs for 2010."