updated 10/18/2005 1:55:10 PM ET 2005-10-18T17:55:10

Safeway Inc.’s third-quarter profit plunged 23 percent as the costs of closing 26 Texas stores and shedding higher-paid workers in Northern California overshadowed an upturn in the long-struggling grocer’s sales.

The Pleasanton, Calif.-based company said Tuesday that it earned $122.5 million, or 27 cents per share, during the three months ended Sept. 10. That compared with net income of $159.2 million, or 35 cents per share, at the same time last year.

Revenue for the period totaled $8.95 billion, a 7 percent increase from $8.34 billion last year.

If not for after-tax charges of $47.5 million to account for the reorganization in Texas and Northern California, Safeway said it would have earned 38 cents per share. That figure exceeded the consensus estimate of 35 cents per share among analysts surveyed by Thomson Financially.

The charges for the Texas store closures once again focused investor attention on a market that has tormented Safeway since it bought the Houston-based Randall’s chain for $1.3 billion.

Safeway, one of the nation’s largest supermarket owners, has previously absorbed large charges to account for Randall’s diminished value.

CEO Steve Burd is now betting that he can turn things around by closing nearly one-fifth of Safeway’s 138 stores in Texas and introducing more groceries that aren’t sold at other lower-priced rivals such as Wal-Mart Stores Inc. The store closures will be concentrated in the Houston area.

“We believe we are setting the stage for further progress in 2006,” Burd told analysts during a Tuesday conference call.

Investors seemed skeptical. Safeway’s shares fell 99 cents, or 4.1 percent, to $23.40 in midday trading on the New York Stock Exchange.

The competitive threat posed by Wal-Mart and other discounters also prompted Safeway to offer severance packages to Northern California store workers who have accumulated the tenure to earn premium wages.

Safeway plans to fill those jobs with workers who will be paid substantially less as part of a new labor contract negotiated last year. Burd believes the employee buyouts in Northern California will begin to pay off for Safeway in early 2007.

But some industry analysts are worried Safeway’s customer service will deteriorate as veteran workers are shown the door in favor of lower-paid and less-experienced replacements. Burd said Safeway is being careful to protect customer service as it reshapes its Northern California work force.

Paying for the Texas shake up will continue to depress Safeway’s earnings in the fourth quarter when the company expects to absorb another charge of 8 cents per share to account for the overhaul’s expenses.

Safeway also is hoping for better times in Chicago, which has been another troublesome market for the company.

Management has reached a tentative agreement on a new contract with its workers at its Chicago-based Dominick’s chain, which has slumped badly since Safeway bought it for $1.2 billion seven years ago. Burd declined to provide details of Dominick’s new labor contract during Tuesday’s conference call.

Safeway unsuccessfully tried to sell Dominick’s in 2003 and later decided to close 12 stores in that market.

In a heartening sign, Safeway’s sales continued to improve at their highest rate in more than four years — a stretch marked by customer defections to lower-cost rivals and by labor acrimony.

Reflecting a key measure of merchant’s health, Safeway’s identical-store sales increased 5.4 percent. Excluding fuel sold at some Safeway locations, identical-store sales improved by 3.4 percent.

The gains have coincided with an ambitious makeover that Safeway launched earlier this year. The company is remodeling hundreds of stores in an effort to present itself as an upscale grocer that offers a reasonably priced smorgasbord of savory food.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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