PLEASANTON, Calif. -- Safeway last week delivered the good quarterly sales news it had promised, but surprised some analysts by telling them their expectations for the current quarter were too high.
Safeway projected second-quarter earnings of around 29 cents a share, below consensus estimates of 34 cents and below the 35 cents the company earned last year. In a conference call discussing first-quarter results, Steve Burd, Safeway's chief executive officer, said that while Safeway remains comfortable with its yearly earnings expectations, analysts overestimated how much would be contributed during the second quarter.
"While the consensus estimates proved to be 4 cents low in the first quarter, we believe they are high in the second quarter and a bit low in the third quarter," Burd explained, saying the shift of the Easter holiday from the second to the first quarter this year redistributed about half of the difference and the rest related to the timing of investments in marketing and branding. "It's our belief that a number of the estimates out there didn't really contemplate that."
Burd said he expected Safeway would earn between $1.41 and $1.51 per share for the fiscal year, and the company had never indicated how those profits would distribute themselves throughout the year.
The resulting benefit to earnings in the first quarter, which ended March 26, "appeared to be more cosmetic than fundamental," Stephen Chick, an analyst for JP Morgan, said in research note.
Safeway reported overall earnings of $131.3 million, or 29 cents a share, on sales of $8.6 billion. Earnings were up 204.6%, as compared to the same period last year, while sales jumped 10.9%.
As Safeway said last month when it announced preliminary first-quarter sales results, identical-store sales excluding strike-affected stores in California increased by 4%, which Burd noted was the best quarterly performance in more than three years.
However, he said that excluding fuel sales and the Easter holiday shift, comps increased 1.6%.
The performance of Safeway's Vons division in Southern California, which is recovering from the strike-lockout that ended during the first quarter last year, exceeded Safeway's internal expectations, but has yet to achieve pre-strike sales and profitability levels, Burd said. He added he expected the division would recover its profitability levels in 2006, ahead of the point at which pre-strike sales levels would be met.
Burd said Safeway is ramping up its conversion of stores to its Lifestyle format, supported by a new advertising campaign that launched last month. These stores cost between $2 million and $3 million to convert, he said.
