SAFEWAY'S SALES AT VONS TOP OFF 2004-08-02 (2)

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- Sales at Safeway's Vons stores in Southern California plateaued in June after a steady increase, but the company is optimistic they will pick up again, Steve Burd, chairman, president and chief executive officer, told analysts here last week.

Sales rose steadily in the first 19 weeks after the strike, which ended in early March, due to increased promotional pricing, direct marketing and the introduction of new proprietary lines, including Ranchers Reserve Beef, Burd noted, "but they plateaued in the last several weeks," he said during a conference call to discuss financial results for the second quarter and first half ended June 19.

"We think the plateauing of sales recovery is temporary, but should we fail to fully recover our sales in Southern California, we remain confident we can recover our previous profit levels by making additional progress in reducing operating and administrative expenses."

Burd said sales at Vons had been "snapping back great" before they hit a plateau.

Noting that the company's longest strike lasted 44 weeks, compared with the 21-week duration in Southern California, Burd said, "In all previous strikes, we have fully recovered our sales.

Gross margins declined during the quarter by 136 basis points to 28.75% of sales "as we promoted heavily to improve sales," Burd explained. He said a drop of 63 basis points resulted from strike recovery efforts and a drop of 23 basis points reflected increased advertising.

Identical-store sales at the company's Dominick's division in Chicago are "close to being positive," Burd said, noting that eight of the company's nine divisions outside Souther California had positive ID's in the period.

Burd said Safeway's second quarter was the first "clean quarter that does not have some strike numbers in it," although the impact was felt in year-to-date figures.

Sales rose 1.4% to $8.4 billion for the quarter and fell 1.8% to $16 billion for the half, while comparable-store sales excluding fuel were flat for the quarter. Excluding sales at strike-affected stores, comps rose 2.3% for the quarter, the company noted.

Net income fell 3.6% to $155.2 million for the quarter and 38.7% to $198.3 million for the half. Safeway said earnings were reduced by approximately $50 million, or 11 cents per share, as the company recovered from the Southern California strike. Results in last year's second quarter included an impairment charge of $41.6 million and restructuring, and other expenses of $9.9 million, or 12 cents per share.

2ND-QUARTER RESULTS

Qtr Ended: 6/19/04; 6/14/03

Sales: $8.4 billion; $8.2 billion

Change: 1.4%

Comp-store: 0%

Net Income: $155.2 million; $161.0 million

Change: -3.6%

Inc/Share: 35 cents; 36 cents

24 Weeks: 2004; 2003

Sales: $16.0 billion; $16.3 billion

Change: -1.8%

Comp-store: N/A

Net Income: $198.3 million; $323.6 million

Change: -38.7%

Inc/Share: 44 cents; 73 cents