SAFEWAY PREPARES FOR REBOUND

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- Safeway here said last week it is disappointed in its same-store sales results of minus-0.7%, but expects the "pump-priming" it's doing to pay off once the economy bounces back.

"Some of our investments of gross margins in promotional pricing are generating immediate and positive results, while investments in regular pricing are pump-priming and part of a longer-term strategy," Steve Burd, chairman, president and chief executive officer, told securities analysts last week.

"Obviously, we're disappointed in sales and we'd like them to be better, but we have absolutely no control over the economy, so we're working on things we can control. But efforts to differentiate ourselves and to change consumers' price perceptions take awhile to accomplish, and we're experimenting our way through that and keeping at it.

"The process [of investing in prices to drive sales] is stalled because consumers make different choices in tough times, and while they may frequent other distribution channels more often as price becomes more important, the vast majority still prefers a conventional, conveniently located shopping experience, so when the economy improves, we expect a nice pop in sales."

Burd said he bases his expectations on what happened at the end of the last recession in the early 1990s, "when we had a pronounced sales improvement -- at the same time club stores and, to some degree, mass merchandisers, experienced a downturn in their growth -- because the price component moved back into its normal position in the equation."

Safeway's efforts to stimulate sales differ from market to market, Burd said. "With 40,000 stockkeeping units, there are a lot of things we tinker with, so we're experimenting with different things in different markets, and what works in one, we transport to another.

"We don't want to overspend, but we have to make these investments to change the perception of our prices, with the payoff coming in subsequent quarters."

He said Safeway is in "the early beginnings" of that process. "It would be nice if we could just figure out all the price adjustments we need to make and then go live, but it doesn't work that way. So we're proceeding at a measured pace -- making some simple adjustments, seeing the response and then rolling out programs that work to other markets."

Burd made his comments following release last week of Safeway's financial results for the third quarter and 36 weeks ended Sept. 7.

Sales rose 1.2% to $8.1 billion for the 12-week quarter and 1.9% to $24.1 billion for the year to date -- with the company attributing the modest increases to new-store openings -- while same-store sales fell 0.7% for the quarter, which the company attributed to softness in the economy.

Net income, which was affected by the elimination of goodwill amortization, declined 9% for the quarter to $281.3 million and 75.3% to $222.7 million for the 36-week period.

Gross margins dropped 26 basis points to 30.69% of sales for the quarter -- "because of a conscious investment to drive sales," Burd said -- and rose 32 basis points for the year to date to 31.21% of sales.

In other comments during the conference call:

Burd said the competitive environment did not change much during the third quarter, "although the economy got a little bit tougher as the quarter went along -- it was stronger at the beginning and a little weaker at the end."

He said he doesn't know if the industry has seen the worst of the economic downturn. "No one really knows how the economy will play out, so we've just got to defend our market share."

Efforts to become less aggressive in its shrink-control efforts have paid off, Burd said. "Our shrink has improved from a year ago, though we're moving a bit more slowly. But we've found there is a way to move forward without sacrificing sales."