SAFEWAY ENDS 9 YEARS OF SAME-STORE SALES GAINS

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- Safeway here said last week it expects to get back to leading the supermarket sector in terms of same-store sales following its first same-store sales decline in 38 consecutive quarters during the second quarter ended June 15.

Comparable-store sales fell 0.4% for the 12-week quarter, while identical-store sales fell 1.1%, compared with the year-ago period.

But Steve Burd, chairman and chief executive officer, said he expects sales to show steady improvement going forward on a quarter-by-quarter basis. "We're definitely not content with where we are by any stretch," he told securities analysts during a conference call last week.

Safeway sales rose 1.2% to $8.1 billion for the quarter -- primarily because of new store openings, the company noted -- and 2.3% to $16 billion for the half.

The company said net income in the most recent quarter was impacted by previously announced after-tax charges of $36.7 million for restructuring and $4.4 million for transition costs related to its centralization effort. The restructuring charge encompassed severance costs related to a 29-store labor contract in Manitoba, Canada; severance related to the centralization program; and charges associated with 10 planned store closures. Net income after those charges was $309.3 million, an increase of less than 1% from last year's second-quarter net income.

Burd said Safeway is maintaining its earnings guidance for the year at $2.86 to $2.90 per share but has adjusted its guidance for the third quarter to 60 to 62 cents per share, "with expectations we will be at the low end of the range," he said.

During the conference call, Burd said he attributed the company's weak sales performance to the impact of continued softness in the economy as consumers shift from conventional supermarkets to more price-driven retailers; an increase in competitive activity; Safeway's own overly aggressive shrink effort, which slowed meat and produce sales; and disruptions associated with centralizing its buying and merchandising programs.

He said the centralization process is 36% complete, compared with 22% at the end of the first quarter, with the company anticipating 100% centralization by the end of next year's first quarter, "and we expect savings on the buying side alone to total $1 billion over the next five years."

One of the things Safeway is discovering through centralization, Burd said, "is more visibility into what each division paid for the same product. We've found large differences in cost and significant differences in the quantity of goods sold without good reasons other than the fact each division operated with different price points, so we're learning how to price products for maximum sales."

Burd reiterated Safeway's intention to invest gross margin savings into sales-building programs, including pricing, better buying and private-label growth. Gross margins improved by 42 basis points during the second quarter, Burd said, "and we will continue to enhance gross margins while investing 75% to 100% of the improvements back into price in both promotional and everyday shelf pricing."