UPDATE 4-High gasoline prices weaken Safeway profit

Thu Apr 26, 2012 12:51pm EDT

* Q1 EPS from continuing operations 30 cents

* High gasoline prices dampened sales-CEO

* Shares down more than 4 percent

By Lisa Baertlein

April 26 (Reuters) - Supermarket operator Safeway Inc said high gasoline prices dented profits and squeezed grocery sales in the first quarter, sending its shares down more than 4 percent on Thursday.

Gasoline sales have low margins and can be a drag on earnings. In many areas outside large cities, supermarket companies sell gas and consumers may spend less on groceries when prices rise at the pump.

During Safeway's latest quarter, gross profit dropped 70 basis points to 26.8 percent of sales. Excluding the 62 basis-point impact from fuel sales, gross profit declined 8 basis points.

"Strong cost controls helped us meet earnings expectations despite a shift in the New Year's holiday, weather patterns and high gasoline prices, which dampened sales," Steve Burd, Safeway's chairman and chief executive, said in a statement.

Major supermarket chains are struggling with falling sales volumes as all but the top-earning shoppers remain cautious about spending. Unemployment remains elevated and about 11 million Americans owe more on their homes than the properties are worth.

"Our preliminary assessment is that operationally, (Safeway) is continuing to lose share and may have take taken another step back in volumes based on sequential trends," Cantor Fitzgerald & Co analyst Ajay Jain said in a client note.

The operator of the Safeway, Vons and Dominick's chains said first-quarter income from continuing operations was $81.6 million, or 30 cents per share, compared with $25.1 million, or 7 cents per share, a year earlier, when Safeway booked a large charge related to repatriating $1.1 billion from Safeway's wholly owned Canadian subsidiary.

Total sales rose 2.4 percent to $10 billion -- helped by higher fuel sales, increased revenue from its Blackhawk business and contributions from new stores -- but closely watched identical-store sales, excluding fuel, were flat.

At Safeway, identical-store sales include results from established supermarkets that have not been replaced or significantly renovated.

"In the last eight weeks, identical-store sales have been running at 1 percent, and we continue to believe sales will grow as our new marketing initiatives take hold," Burd said.

Safeway's competitors include Kroger Co, the largest U.S. supermarket operator, and Wal-Mart Stores Inc, which sells more groceries than any other U.S. retailer.

Earlier this month, Safeway promoted Chief Financial Officer Robert Edwards to the post of president in charge of its retail operations, marketing, merchandising, corporate brands, manufacturing, distribution and finance functions.

At the time, Burd said the move would give him "an opportunity to concentrate more of my time on innovation and a range of strategic initiatives that will drive core and non-core business growth in the long term."

J.P. Morgan analysts said in a client note a short time later that the comments and other moves by the company suggested that Safeway could be considering a leveraged buyout or a reverse Morris trust -- a deal structured to allow a corporation to avoid taxes when it sells unwanted assets.

Burd said on a conference call with analysts that the activities called out by J.P. Morgan -- including share buybacks, calling out Blackhawk results and Edwards' promotion -- were part of the company's normal course of business.

The CEO also said the company's Blackhawk gift card business has a lower gross margin rate than Safeway, but is growing faster than Safeway. Some analysts have suggested that the company could spin off the Blackhawk business.

Shares of Safeway, the second-largest U.S. supermarket operator, fell 4.3 percent to $20.67 in midday trading on the New York Stock Exchange.

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