| LOS ANGELES
LOS ANGELES Safeway Inc SWY.N, the second second-biggest U.S. supermarket operator, said higher gasoline prices could squeeze profit margins in the current quarter and its shares fell 1.5 percent.
Margins at the company, which operates Safeway, Vons and Dominick's grocery stores, get pinched when gasoline prices rise. As a result, margins for the current first-quarter likely will be below normal, Safeway Chief Executive Steve Burd said on a conference call with analysts.
Safeway and other supermarket chains sell fuel for cars at some of their stores.
On the other hand, rising costs for key food items ranging from coffee to beef should boost results at supermarkets that can pass on those costs to shoppers.
The question is how high prices can go before shoppers -- who are still grappling with high unemployment and the threat of a further spike in gasoline prices due to unrest in the Middle East -- pull back.
"We're starting to see the benefits of moderate inflation" said Burd, who added that inflation has been up less than 1 percent so far this quarter.
He predicted that "virtually all" of Safeway's suppliers would raise prices by the end of 2011 and said he would use price increases in stores to offset those higher costs.
"We are not seeing a demand depressing effect and the reason is because consumers in the main, particularly our consumers, are feeling better off than they were a year ago," he said. "It's when inflation gets to 5 percent that you can have a demand depressing result."
Higher food prices are good news for Safeway, which last year put pressure on its profits after it slashed prices to bring them more in line with those of bigger rivals like Kroger Co (KR.N) and Wal-Mart Stores Inc (WMT.N).
Safeway is in a relatively good position versus those two brands because its customers tend to come from the middle and upper income brackets, which have been spending a bit more freely than low-income shoppers. To that end, upscale grocer Whole Foods Market Inc WFMI.O recently reported an sharp acceleration in quarterly sales fueled by its well-heeled shoppers.
Safeway shares were down 1.5 percent at $21.71 in afternoon trading on the New York Stock Exchange. Rivals Whole Foods, Kroger and Wal-Mart -- which sells more groceries than any other U.S. retailer -- were down, while Supervalu Inc (SVU.N) was up 0.5 percent.
SWING TO PROFIT
Pleasanton, California-based Safeway posted fourth-quarter net profit of $229.6 million, or 62 cents per share, topping analysts' average forecast of 57 cents, according to Thomson Reuters I/B/E/S. It attributed the better-than-expected result to improving sales trends that were continuing into the current first quarter.
Sales grew almost 1 percent to $12.8 billion. Higher fuel sales and an increase in the Canadian exchange rate were offset by reduced sales due to store closures and a 0.8 percent decline in identical-store sales excluding fuel.
Identical-store sales are a key gauge of performance for grocery stores and at Safeway include established supermarkets that have not been significantly renovated or replaced.
The drop in the latest quarter was more than the 0.3 percent decline analysts expected, Credit Suisse analyst Edward Kelly said in a client note.
During the fourth quarter, Safeway invested $282 million in capital expenditures. It opened seven new upscale Lifestyle stores, completed 25 Lifestyle remodelings and closed 15 stores.
Safeway said it would issue a full-year earnings forecast at its investor conference on March 8.
(Reporting by Lisa Baertlein, editing by Gerald E. McCormick, John Wallace, Dave Zimmerman)