* Cuts 2010 EPS view to $1.50-$1.70 from $1.65-$1.85
* Q2 EPS 37 cents, matching Street view
* Shares off 1.5 percent; Kroger, Supervalu also dip
(Adds analyst comments; updates shares)
By Lisa Baertlein
LOS ANGELES, July 22 Supermarket operator
Safeway Inc SWY.N cut its full-year outlook, saying it
underestimated the extent of falling grocery prices in a weak
economy, and its shares fell 1.5 percent.
At the height of the recession, grocery stores embarked on
a price war to attract and hold onto customers. Now, as the
economy improves slightly but unemployment remains high, food
manufacturers are backing aggressive price cuts to woo back
shoppers they lost to lower-priced store labels.
Safeway executives said the strength of that push on
pricing caught the company by surprise.
"Deflation continues in price per item and is not expected
to significantly improve until the fourth quarter," said Chief
Executive Steve Burd, who oversees supermarkets including
Safeway, Vons and Dominick's.
Burd now expects 2010 price deflation of 1.2 percent,
compared with his earlier call for inflation of 0.4 percent.
Safeway has been hit harder by deflation than its peers
because it made deep cuts in the second half of last year to
get its store pricing on par with key rivals. As it laps that
period, the impact should ease, Burd said.
Safeway cut its 2010 earnings forecast to a range of $1.50
to $1.70 a share, down from its previous view of $1.65 to
$1.85. Analysts were expecting $1.69 a share, according to
Thomson Reuters I/B/E/S.
Hapoalim Securities USA analyst Ajay Jain called Safeway's
move "appropriate and somewhat anticipated." But he warned in a
client note that the revised view may not be conservative
enough, and said 2010 earnings of $1.10 to $1.30 are "a
plausible downside scenario."
BB&T Capital Markets analyst Andrew Wolf said the
industry's price issues had likely hit bottom, but improvement
could be slow in coming.
Safeway "expected the recovery to start right around now
with a little more momentum and a little more pricing power,"
Wal-Mart Stores Inc (WMT.N), which sells more groceries
than any other U.S. retailer, has aggressively promoted
temporary discounts on food ranging from ketchup to ice cream
bars, but has not slashed prices across the board.
Kroger Co <KR.N, the biggest and top-performing U.S.
supermarket company, recently reported higher-than-expected
quarterly earnings, holding its own amid heated competition
from Walmart and other rivals. [ID:nN17152791]
The competitive threat from other stores has not waned,
making the industry reluctant to raise store prices and boost
margins even though production costs are heading higher.
"There is a pent-up demand" from consumer packaged goods
companies and retailers "to stop taking all these body blows
and pass some of that along," said Burd.
Safeway shares fell 1.5 percent to $19.91, while the wider
market rose more than 2 percent. Kroger stock slipped 1 percent
and Supervalu Inc (SVU.N) fell less than 1 percent.
Safeway's second-quarter net profit fell to $141.3 million,
or 37 cents per share, from $238.6 million, or 57 cents a
share. The year-earlier quarter included a tax benefit that
boosted earnings by 14 cents per share.
Results matched the expectations of analysts polled by
Thomson Reuters I/B/E/S.
Sales were $9.52 billion, up slightly from last year, and
volume hit the highest level in four years, Burd said.
A higher Canadian exchange rate and higher fuel sales were
largely offset by a 2.5 percent decline in identical-store
sales excluding fuel. At Safeway, identical-store sales include
established supermarkets that have not been significantly
renovated or replaced.
Gross profit declined 32 basis points during the latest
quarter to 28.6 percent of sales. Safeway attributed the drop
to increased advertising and efforts to make its prices more
Safeway had focused on a more upscale customer than Kroger
and Supervalu, and also competes with Whole Foods Market Inc
WFMI.O in some markets. It has been trying to jump-start its
business after lowering prices to levels that match its rivals.
Walmart recently won approval for a second store in
Chicago, a key market for Safeway's Dominick's chain.
(Reporting by Lisa Baertlein and Ben Klayman; editing by
Maureen Bavdek, Tim Dobbyn and John Wallace)