UPDATE 4-Safeway 3rd-qtr profit beats view, shares rise

* Q3 EPS 31 cents beats Street view of 29 cents

* Stands by full-year forecast

* Shares rise over 5 percent (Adds company comments, details deflation and price war, updates share activity)

By Lisa Baertlein and Brad Dorfman

LOS ANGELES/CHICAGO, Oct 15 (Reuters) - Supermarket chain Safeway Inc (SWY.N) posted quarterly profit that beat Wall Street's view, as sales were hurt less by price cuts than some analysts had expected, and its shares rose over 5 percent on Thursday.

The company also stood by its recently lowered full-year earnings forecast range, the high point of which is still above analysts' expectations.

Chief Executive Steve Burd said the fierce U.S. supermarket price war raging for most of this year showed some signs of easing during the recently completed third quarter.

"While it is more competitive than it has been in a long time ... I would tell you here in the third quarter that has not stepped up vis-a-vis the second quarter, and if anything, it's probably softened a little bit," he said.

He added that Safeway, which battles the perception that its store prices are higher than those of peers such as Kroger Co (KR.N) and Supervalu Inc (SVU.N), does not intend to position its stores as low everyday price leaders.

Shares in Safeway were up $1.20 at $22.63 in afternoon trade. Supervalu shares were up 1.9 percent, while stock in industry leader Kroger rose 3.5 percent.

The Pleasanton, California-based operator of Safeway, Vons and Dominick's stores said profit fell by nearly 36 percent to $128.8 million, or 31 cents per share, in the third quarter ended Sept. 12, topping analysts' expected earnings by 2 cents, according to Thomson Reuters I/B/E/S.

Revenue fell 7 percent to $9.46 billion, in line with analysts' estimates and weighed down by lower fuel sales in dollar terms as prices of gasoline fell. Operating and administrative expense declined $13.3 million to $2.4 billion.

Morningstar analyst Michelle Chang said the company did a good job controlling energy costs and managing inventory, which helped offset the falling sales.

Also, volume and traffic improved, she said. "They are still very focused on price to drive traffic."

Identical-store sales fell 3 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.

But excluding inflation, real sales fell less than in the previous quarter, down 3.4 percent versus 4.8 percent in the second quarter, said BB&T Capital markets analyst Andrew Wolf.

"It's still negative, but it's headed the right way," he said.

"Hope springs eternal," said Pali Capital analyst Robert Summers when asked about the share move. He said expectations were low ahead of the report because the company cut its full-year outlook in July. [ID:nN23383604]

Summers said gross margins excluding fuel were down 6 basis points, a "surprisingly strong" showing that was "likely not sustainable given the weakness in same store sales."

Some government data suggests that the longest recession since the great Depression may be waning, and Burd said shoppers are also sending mixed signals.

While they still flock to low-priced goods, some of the shoppers who traded down to drip coffee from pricier lattes at in-store kiosks are now switching back to lattes, he said.

Premium wine sales, which took a hit when the economy turned down, are ticking up, helped by lower prices, Burd said.

Safeway said it still expects earnings of $1.70 per share to $1.90 per share for the year with free cash flow of $1.1 billion to $1.3 billion. Analysts on average have forecast full-year earnings of $1.73 per share. (Reporting by Brad Dorfman; additional reporting by Lisa Baertlein, editing by Dave Zimmerman and Gerald E. McCormick)