UPDATE 2-Safeway sales miss Street view, shares tumble

* 3rd-qtr EPS from continuing operations $0.45 vs Street view $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, updates stock activity)

Oct 11 (Reuters) - Safeway Inc , the second-largest U.S. supermarket chain, reported quarterly sales that missed Wall Street's view amid intense competition, and its shares fell more than 3 percent.

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

The operator of supermarkets such as Safeway, Vons and Dominick's said third-quarter sales slipped to $10.05 billion from $10.06 billion a year ago. They were hurt by the loss of the 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 $10.24 billion, according to Thomson Reuters I/B/E/S.

Closely watched identical-store sales, excluding fuel, rose 0.1 percent in the third quarter and are up 1 percent in the current quarter due to "slightly improved volumes and higher inflation," 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' average forecast by 3 cents per share, according to Thomson Reuters I/B/E/S.

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

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

Reversing declining volume can be costly and take time, but grocery stores must do it if they want to deliver healthy earnings growth. Volume is a measure of physical goods sold by grocers.

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

BB&T Capital Markets analyst Andrew Wolf said it appeared that Safeway's volume trends were improving. Investors should get a better measure of Safeway's progress when the company reports financial results from the current fourth quarter, he said.

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

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

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

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