Safeway 1Q profits up 11 percent, beating expectations

The nation's second-biggest grocery store operator earned $193.4 million, or 44 cents per share, for the January-March period, up from $174.4 million, or 39 cents per share, a year earlier.

Revenue rose 7 percent to $10 billion from $9.3 billion in the year-ago period.

Analysts surveyed by Thomson Financial expected a profit of 42 cents per share on revenue of $9.72 billion.

Safeway said identical-store sales, or sales in stores open at least one year, rose 4.5 percent, or 2.9 percent excluding fuel. But adjusting for Easter revenue, which was in the second quarter last year, those sales rose only 2 percent. Identical-store sales are a closely watched benchmark for retailers.

The latest measure continues Safeway's decelerating growth pace, a factor of decreased consumer spending nationwide. Same-store sales grew 2.7 percent last quarter, the lowest growth rate in nearly two years.

Safeway said it's lowering its expectations for identical-store sales growth for the full year, excluding fuel, to 2 percent to 2.3 percent, down from previous estimates of 3 percent to 3.2 percent.

The company maintained its guidance for the full year, and expects earnings per share of $2.25 to $2.35.

Chief Executive Steve Burd said in a conference call with investors that cost-cutting measures and price competitiveness paid off to deliver strong revenue, but that the credit squeeze and rising food prices are clearly affecting consumer behavior.

Burd said many of Safeway's 30 million customers are living paycheck to paycheck.

"I can remember there was a time in my career when I did exactly the same thing. It doesn't make a difference if you make $30,000 a year or $150,000 a year. When prices go up, demand dampens. That is what we all learned in economics 101," he said.

As an example, he said regular coffee sales jumped as consumers moved away from premium brands.

Charles Cerankosky, an analyst with FTN Midwest Securities, said the grocer is proving it can weather a difficult economy and adjust quickly to changes in buying habits.

"You can't be trying to sell everybody who walks in the door $20-a-pound salmon when they are looking for $5-a-pound steak," Cerankosky said.

"What management did was frame what the worsening economy has done to their sales growth pace, and at the same time it allowed them to highlight an ability to meet earnings expectations despite that," Cerankosky said.

Safeway cut an undisclosed number of jobs in February. The cuts occurred at offices in California, Oregon, Washington, Arizona, Texas, Illinois, Maryland and Virginia. While Safeway spokesman Brian Dowling said last week that the cuts were "very modest," Burd told investors on Thursday those cuts still cost the company $5 million in severance pay.

The cuts included about 70 jobs at Safeway's Pleasanton, Calif., headquarters, according to documents filed with local government officials. Safeway employs about 200,000 workers in total.

Shares of Safeway rose 95 cents, or 3.4 percent, to $29.04 in late afternoon trading Thursday.