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SKITTISH INVESTORS PUMMEL FOOD-DISTRIBUTION SHARE VALUES

There was a little more excitement on Wall Street last week than might have been necessary.The drama started Tuesday when, after the closing bell, Safeway issued a statement about what might be expected when the financial report of its first quarter is issued May 1. Safeway said earnings per share are expected to weigh in at 43 cents to 45 cents. As is suggested by the very fact that a pre-report

There was a little more excitement on Wall Street last week than might have been necessary.

The drama started Tuesday when, after the closing bell, Safeway issued a statement about what might be expected when the financial report of its first quarter is issued May 1. Safeway said earnings per share are expected to weigh in at 43 cents to 45 cents. As is suggested by the very fact that a pre-report estimate was made, those results weren't what securities analysts had in mind. Analysts' consensus had Safeway earning 54 cents for the quarter.

When the New York Stock Exchange opened the next day, the Dow Jones Industrial Average spiked up for a short time. At that same time, Safeway's shares plunged, shedding substantial value as 2 million Safeway shares were traded in less than 10 minutes, creating an order imbalance for a while. As the day proceeded, Safeway leveled off south of $17 per share, a decline of more than 17% against the previous day's close of $20.40. A new 52-week low was established. (The Dow slumped later that day, too. Safeway isn't a Dow component.)

Worse yet, much of the food-distribution sector dropped in early-day trading, seemingly in tandem with Safeway. Included in the roster of large-scale retailers with declining stock values were Winn-Dixie Stores, Kroger Co., Supervalu, Albertsons and A&P.

Let's look at what Safeway says caused anticipated earnings to be less than expected. The largest factor is the one most critical to any business: sales. Safeway's comparable-store sales from continuing operations are seen as flat, and identical-store sales are to drop 0.5%. Coupled with that, Safeway's anticipated costs for operations and administration increased and gross margins declined. The last was said to be caused by "learning-curve issues" for a new centralized-procurement initiative. In that, Safeway isn't alone. Centralized procurement has proven to be a difficult proposition for many retailers, often owing to complexities in information management, plus new needs of personnel management, including training and compensation. On top of that, a careful balance between centralized and localized buying must be maintained. More than one retailer has despaired of the process and thrown in the towel. Safeway, though, said its challenges will be "worked through" in the second quarter with "significant cost savings" to be realized. Safeway also acknowledged that a tiny per-share earnings decline would be experienced because of the adoption of new standards for the accounting of vendor allowances. (You'll see more on the front page.)

The saga of Safeway's stock demonstrates anew how skittish investors have become about any glimmer of bad news. Investors are so eager to avoid another disaster -- to bring it closer to home, another Ahold -- that transient problems are capable of lowering a company's equity value substantially, and of taking an entire sector down. Also, many observers fear that Wal-Mart Stores' aggressive move into food retailing may spell doom for traditional retailing, which also makes the situation excessively volatile. Doubtless, Wal-Mart is another reason behind Safeway's lower gross margins. You'll see more about Wal-Mart in the front-page feature and on Page 36.

TAGS: Walmart News