Safeway Inc.'s second-quarter profit dropped 14 percent as higher gasoline prices and the costs of an ambitious makeover offset an uptick in sales at the big grocer.
The Pleasanton-based company said Tuesday that it earned $134 million, or 30 cents per share, during the three months ended June 18, down from $155.2 million, or 35 cents per share, at the same time last year.
The results matched the consensus forecast of analysts surveyed by Thomson Financial.
Revenue for the period totaled $8.8 billion, a 5 percent increase from $8.41 billion last year. Sales topped the mean analyst estimate of $8.66 billion, according to Thomson Financial.
In a key measure of a merchant's health, Safeway's identical store sales improved by 1.4 percent from last year, excluding the revenue that the supermarket collects from the gasoline pumps now outside many of its 1,800 stores. The barometer tracks sales at stores that have been open at least a year and hadn't been remodeled during that time.
Selling gasoline has helped Safeway attract more shoppers to its stores, but it also has eroded profit margins because the company doesn't mark up the price of fuel as much as many of the grocery items sold in its stores. As gasoline prices have risen, more people are buying gasoline from Safeway to take advantage of the grocer's discount prices.
Safeway's gross profit margin in this year's second quarter fell to 28.74 percent from 29.16 percent last year. If not for the gasoline sales, Safeway said its profit margin this year would have been 29.1 percent.
The company also is sacrificing some short-term profits to put itself in a better position to battle discounters like Wal-Mart Stores Inc. that have been invading the grocery business.
As part of that effort, management endured a 3 1/2-month strike in Southern California during late 2003 and early 2004 to lower the company's labor costs. Safeway achieved that goal, but the fallout from the Southern California showdown has reduced the company's profit by more than $350 million. Sales only recently have bounced back in the company's Vons and Pavilions chains in Southern California.
More recently, Safeway has been spending heavily to remodel its stores and promote itself as an upscale merchant peddling a reasonably priced smorgasbord of savory foods that can't be found at discount retailers. The makeover chewed into Safeway's second-quarter profits as the company spent more on labor, constructions and advertising.
By the end of this year, Safeway expects to have about one-fourth of its stores operating under its new "Lifestyles" format. The company has budgeted $100 million for one of the most aggressive advertising campaigns in its history.
Investors appear heartened by Safeway's recent progress. After years of erosion, Safeway's stock has gained 20 percent so far in 2005.
But industry analysts like Jason Whitmer of FTN Midwest Research still aren't convinced Safeway will be able to sustain its recent momentum over the long haul.
"The stock makes it look like things are a lot better than they really are," Whitmer said. "Things are certainly better than a year ago when nothing was going right for the company. But it remains to be seen whether this makeover will really cause people to shop more frequently and leave Safeway with bigger baskets (of merchandise)."
Safeway Chairman Steve Burd is convinced the changes are already paying off. "Consumers have responded enthusiastically ... to the greater everyday value we have brought to the center of our store," he said.