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UPDATE 2-Safeway sales miss Street view, shares tumble

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* 3rd-qtr EPS from continuing operations $0.45 vs Streetview $0.42

* Total sales $10.05 billion vs. Street view $10.24 billion * Shares close down more than 3 percent

(Adds analyst comment, details of financial results, updatesstock activity)

Oct 11 (Reuters) - Safeway Inc , the second-largestU.S. supermarket chain, reported quarterly sales that missedWall Street's view amid intense competition, and its shares fellmore than 3 percent.

Safeway's sales miss came as it was launching a shopperloyalty program to attract customers as part of its effort toreverse volume declines driven by a tepid economic recovery.Traditional grocers like Safeway and Kroger Co have toughcompetition from Wal-Mart Stores Inc and other retailersand they are fighting for every sale.

The operator of supermarkets such as Safeway, Vons andDominick's said third-quarter sales slipped to $10.05 billionfrom $10.06 billion a year ago. They were hurt by the loss ofthe Genuardi's store sales and a lower Canadian exchange rate,but partially offset by more gasoline sales.

Analysts, on average, had been expecting sales of $10.24billion, according to Thomson Reuters I/B/E/S.

Closely watched identical-store sales, excluding fuel, rose0.1 percent in the third quarter and are up 1 percent in thecurrent quarter due to "slightly improved volumes and higherinflation," Safeway said in a statement.

Fiscal third-quarter profit from continuing operations was$108 million, or 45 cents per share, down from $130.3 million,or 38 cents per share, a year ago. That topped analysts' averageforecast by 3 cents per share, according to Thomson ReutersI/B/E/S.

During the quarter, Safeway closed one Genuardi's store andsold 16 for an after-tax gain of $49 million. Including thatgain, it earned $157 million, or 66 cents per share, in thequarter ended Sept. 8.

Gross profit declined more than expected to 26.4 percent ofsales from 27.0 percent a year earlier, partly due to costsassociated with rolling out its "Just for U" loyalty program.

Reversing declining volume can be costly and take time, butgrocery stores must do it if they want to deliver healthyearnings growth. Volume is a measure of physical goods sold bygrocers.

Safeway's volume performance has lagged that of Wal-Mart,which sells more groceries than any other U.S. retailer. It hasalso trailed behind its larger rival Kroger.

BB&T Capital Markets analyst Andrew Wolf said it appearedthat Safeway's volume trends were improving. Investors shouldget a better measure of Safeway's progress when the companyreports financial results from the current fourth quarter, hesaid.

"There's not a long time to wait to see if Safeway isturning the corner or not," said Wolf.

Safeway shares closed down 3.6 percent at $15.71 on the NewYork Stock Exchange.

(Reporting By Lisa Baertlein in Los Angeles; Editing by GeraldE. McCormick)

((lisa.baertlein@thomsonreuters.com)(+1 213 955 6742))

Keywords: SAFEWAY RESULTS/