PLEASANTON, Calif. - Safeway here increased its earnings guidance for the year by 10 cents per share following strong financial results for the second quarter and first half that ended June 17.
"When you look at all the key metrics for the [second] quarter, every one had substantial improvement," Steve Burd, chairman, president and chief executive officer, told analysts during a conference call to discuss those results.
Burd said Safeway is boosting earnings guidance to a range of $1.65 to $1.75 per share, compared with previous guidance of $1.55 to $1.65. He also said Safeway expects non-fuel gross profit margin to be flat to improving by 10 basis points; non-fuel operating and administrative expense as a percentage of sales to improve by 30 to 40 basis points; and, as previously indicated, non-fuel identical-store sales to grow approximately 3% for the year.
Net income for the 12-week quarter rose 83.7% to $246.2 million, which included a federal income tax refund that reduced income tax expense for interest earned by $58.5 million. Burd said the company expects additional refunds from the state of California, though it's too early to predict the timing, he added. Sales for the quarter rose 6.4% to $9.3 billion, and comparable-store sales, excluding fuel, increased 4.5%. The shift in Easter holiday sales increased comps by approximately 1%, the company indicated.
For the half, net income jumped 46.7% to $389.1 million, sales rose 4.8% to $18.3 billion, and comps, excluding fuel, were up 4.2%.
Burd said sales growth came from a combination of increased traffic and increased basket size, including improved sales at stores that have been converted to the lifestyle format. At the end of the quarter, 543 Safeways, or 31% of the total, had been converted, with about 200 more due to open or reopen as lifestyle stores by year's end.
In response to a question, he said sales gains will not end once Safeway has completed the conversion of all stores to the lifestyle format over the next three years. "There are other ways to differentiate ourselves, and we don't think sales growth will come to a screeching halt at that point," he indicated.
Burd said Safeway achieved more in shrink reduction during the first half of the year than it had anticipated achieving for the full year. That, combined with higher-than-targeted procurement savings, "gave us the ability to make selected investments in price while expanding gross margin," he noted.
Asked how Safeway was achieving shrink reduction, Burd gave just one example, citing the chain's Signature soups that are sold hot and packaged. "Most of the shrink occurs in hot soups, so we put standards in place so store personnel know how much soup to put out relative to volume, including smaller containers at certain times of year. It's just a matter of raising awareness and setting standards, which creates opportunities to reduce shrink."
In non-perishables he said Safeway is focusing on the disciplines of best practices.
Burd said Safeway expects strong sales to continue through the balance of the year, with gains coming from the opening of additional lifestyle stores "and we also expect to benefit from 99 in-market store closures by a competitor" [Albertsons LLC, though he did not mention that company by name].
With those stores set to close in early August, he said he anticipates a positive sales impact in the back half of the third quarter and a bigger impact in the fourth.
While indicating Safeway might be interested in buying individual stores or small groups of stores in existing markets, he did not express much enthusiasm for buying the Albertsons stores in Northern California. "Most of the stores that are closing are small-volume stores that are bleeders, and they would not be attractive to other supermarket operators, though some may go to non-conventional operators," he said.
2ND-QUARTER RESULTS
Qtr Ended: 6/17/06; 6/18/05
Sales: $9.3 billion; $8.8 billion
Change: +6.4%
Comp-store: +4.5%*
Net Income: $246.2 million**; $134.0 million
Change: 83.7%
Inc/Share: 55 cents**; 30 cents
24 Weeks: 2006; 2005
Sales: $18.3 billion; $17.4 billion
Change: +4.8%
Comp-store: +4.2%*
Net Income: $389.1 million; $265.3 million
Change: +46.7%
Inc/Share: 86 cents; 59 cents
*Excludes fuel sales.
**Includes a federal income tax refund of $58.5 million, or 13 cents per diluted share, from a reduction in income tax expense for interest earned.
