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The Honolulu Advertiser

Posted at 12:08 p.m., Monday, July 8, 2002

Safeway reports quarterly sales decline

By Michael Liedtke
Associated Press

SAN FRANCISCO Supermarket giant Safeway Inc. today reported its first quarterly sales decline in more than nine years, prodding the grocer to lower its prices to lure back bargain-hunting shoppers and fend off increasingly popular discount merchants.

Laying most of the blame on a listless economy, Pleasanton-based Safeway said its second-quarter "identical-store" sales a key industry barometer fell by 1.1 percent from the prior year. It marked Safeway's first year-to-year drop in identical store sales in 37 quarters, dating back to the final three months of 1992.

The identical-store yardstick measures sales at stores that had been open for at least a year and hadn't been remodeled. Factoring in the sales from all 1,792 of its stores, Safeway's revenue in the 12 weeks ended June 15 totaled $8.1 billion, a 1 percent increase from last year.

Safeway has 15 stores in Hawai'i, including nine on O'ahu, three on Maui, two on the Big Island and one on Kaua'i.

Safeway earned $309.3 million, or 63 cents per share, in the second quarter, a slight increase from net income of $307.3 million, or 59 cents per share, at the same time last year.

If not for a series of special accounting charges, Safeway said its second-quarter profit would have been $350.4 million, or 69 cents per share, a 2 percent decrease from the same time last year.

Today's announcement wasn't a surprise. Safeway warned its second quarter would be disappointing nearly a month ago, provoking the biggest one-day drop in the company's stock since the 1980s.

Safeway's shares rose 44 cents to close at $29.12 today on the New York Stock Exchange. The stock remains nearly 20 percent below its price before management's June 12 warning.

Investors are trying to figure out whether Safeway's sudden sales slump is merely an economic hiccup or a the first sign of chronic indigestion.

Steve Burd, Safeway's chief executive officer, attributes the company's sales weakness to more frugal shoppers who are buying less expensive items at traditional supermarkets and buying more groceries from discount merchants, such as Costco, Target and Wal-Mart.

The trend is provoking more price wars, Burd said, dampening sales and squeezing profit margins in the process. Safeway has decided to join the fray by lowering its everyday prices as well as offering more sales promotions.

"We are not content with these (second-quarter) sales, by any stretch," Burd told analysts during a conference call today. "We think we have made the adjustments to change" the recent trends.

With Safeway under the gun to lower its prices, Burd said the company's third-quarter earnings will likely fall a penny or two below the consensus estimate of 62 cents per share among analysts polled by Thomson Financial/First Call.

While most analysts agree a sluggish economy tends to change shopping patterns, not everyone is convinced consumers will revert to their old ways once times get better.

When the last recession hit in the early 1990s, consumers had fewer alternatives to traditional supermarkets because major discounters weren't selling as many groceries as they do today.

"We are in sort of uncharted territory this time around," said Banc of America Securities analyst Robert Summers. "There are people out there who may have started to go to Costco and Wal-Mart for some of their groceries and found out that it's not that inconvenient so they may just keep on going there. Shoppers tend to be creatures of habit."