July 19, 2012 / 3:57 PM / in 6 years

Safeway profit falls amid tougher competition

(Reuters) - Supermarket operator Safeway Inc SWY.N posted a lower quarterly profit on Thursday as it increased spending on advertising and introduced a new loyalty program to entice shoppers, and its shares fell 7.2 percent.

The results are the latest sign of how competitors are coming under pressure from Kroger Co (KR.N), the largest supermarket company, and Wal-Mart Stores Inc (WMT.N), the world’s largest retailer. Both have vowed to keep everyday prices low

Supervalu Inc (SVU.N), the third-largest U.S. supermarket operator just trailing Safeway, last week suspended its dividend to fund aggressive price cuts aimed at winning back shoppers and said it was looking at options for overhauling the company, including a sale. It also reported a 45 percent drop in profits for the quarter that ended June 16.

Analysts said they were concerned that the pressure was also hitting Safeway, which operates its namesake chain as well as Vons and Dominick‘s.

“We believe the gross margin decline may have been partially caused by increased competitive activities,” J.P. Morgan grocery analyst Ken Goldman said in a client note issued before that call.

Goldman added that Safeway for the first time blamed the launch of its “Just for U” loyalty program as a drag on profits.

Its shares fell 7.2 percent to $15.29 in late morning trading on the New York Stock Exchange, where it was the second-worst performer in the Standard & Poor's 500 .SPX.

    Second-quarter income from continuing operations was $121.7 million, or 50 cents per share, down from $146.0 million, or 41 cents per share, a year earlier. Safeway had nearly 32 percent fewer shares outstanding in the latest quarter.

    Analysts on average were looking for a profit of 49 cents per share, according to Thomson Reuters I/B/E/S.

    Safeway’s gross profit margin declined 73 basis points to 26.27 percent in the second quarter. Excluding the 47 basis-point impact from fuel sales, margins fell 26 basis points due primarily to increased advertising and one-time costs from the introduction of the “Just for U” loyalty program.

    Sales rose 1.9 percent to $10.39 billion. Closely watched identical-store sales, excluding fuel, were up 0.8 percent, matching some analysts’ estimates.

    Reporting By Lisa Baertlein in Los Angeles; Editing by Lisa Von Ahn and Maureen Bavdek

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