Safeway's profitability slips on launch of program

NEW YORK -- Safeway Inc. said Thursday that its profit margin slipped in the third quarter as it spent money on launching a new customer loyalty program, an investment the supermarket operator said should drive sales going forward.

The sale of Safeway's Genuardi's chain helped offset the declines and pushed the company's net income up 21 percent. Still, a key revenue figure came in lower than expected. Safeway's shares fell nearly 5 percent in morning trading.

The Pleasanton, Calif.-based company, which also owns Vons, Dominick's and other grocery chains, has been rolling out its "just for U" program in an attempt to hold onto shoppers in an increasingly competitive environment. In addition to big-box retailers such as Target, traditional supermarkets are trying to fend off drug store chains and dollar stores that are expanding their food selections.

Safeway said that revenue at locations open at least a year edged up a 0.1 percent during the period. The company said tepid increase was primarily because it raised prices less than expected. That was offset by improvement in volume from the new loyalty program.

Safeway said its loyalty program is expected drive sales during the current quarter, and noted that the costs associated with its launch won't continue. So far, the company said sales at established locations are running up 1 percent. The measure is a key indicator of health because it strips out the impact of newly opened and closed locations.

Safeway stood by forecast for the year, with earnings per share expected to be between $1.90 and $2.10. Analysts expect $1.99 per share.

For the quarter, the sale of the Genuardi's stores resulted in a $49 million after-tax gain and lifted its profit by 21 percent. The company earned $157 million, or 66 cents per share, for the three months ended Sept. 8. That compares with $130.2 million, or 38 cents per share, a year ago, when there were more outstanding shares.

Excluding discontinued operations, the company earned 45 cents per share. That was higher than the 43 cents per share analysts expected.

Total revenue declined to $10.05 billion, from $10.06 billion, primarily as a result of the Genuardi's sale and an unfavorable exchange rate for its stores in Canada. Analysts had expected sales of $10.24 billion, according to FactSet.

Shares of Safeway fell 77 cents, or 4.7 percent, to $15.52 in morning trading.