Vons plans to lower prices to compete

Wednesday, June 12, 2002 | 11:13 a.m.

SUN STAFF AND WIRE REPORTS

PLEASANTON, Calif. -- Safeway Inc. shares had their biggest drop in at least two decades this morning after the third-largest U.S. supermarket chain lowered profit forecasts for the rest of the year as it lowers prices, closes some stores and cuts jobs.

The shares fell as much as 16 percent after Safeway said profit will be as much as 73 cents a share in the second quarter ending Saturday and $2.86 to $2.90 a share for the fiscal year.

Chief Executive Officer Steve Burd said on a conference call that he plans to close as many as 14 stores and reduce prices to compete with larger supermarket rivals Kroger Co. and Albertson's Inc., as well as discount retailers such as Wal-Mart Stores Inc. Albertson's and Wal-Mart have announced plans to expand in California, where Safeway is based.

Safeway operates as Vons in Las Vegas. Kroger has Smith's Food & Drug and Food 4 Less stores in Las Vegas. Wal-Mart and Albertson's are also big grocery operators in Las Vegas.

Safeway officials could not be reached for comment on whether any of the company's seven Safeway stores in Northern Nevada will be closed.

But Daymond Rice, Vons' public affairs manager, said Safeway's 22 Vons stores in the Las Vegas area will remain open.

"They let prices slip out of control," said Andy Wolf, an analyst for BB&T Capital Markets who has a "hold" rating on Safeway and doesn't own the shares. "Now they're saying they're going to have to lower prices in order to drive sales."

The company will have second-quarter expenses of $60 million to $70 million to close the stores, mostly in Texas and Illinois, and fire workers as it centralizes marketing and restructures a 29-store labor contract. Safeway will reduce capital spending this year by about 10 percent to $1.9 billion.

Burd said on the call with investors that sales at stores open at least a year, excluding new and closed locations as well as replacement stores, will decline this quarter. "We will try very hard to make this a one-quarter event," he said.

The grocer was expected to earn 77 cents a share for the quarter and $3.15 for the year, according to the average estimate of analysts surveyed by Thomson First Call.

The company's shares fell $4.33 to $31.85 in early afternoon trading, after dropping to $30.55. The 16 percent drop was the largest since at least 1981. The stock had declined 28 percent in the past year.

Safeway's 6.5 percent notes maturing in 2011 fell to $1,029 from $1,033, lifting the yield to 6.07 percent from 6.01 percent. The spread, or premium to U.S. Treasury yields, widened 8 basis points to 111 basis points traders said. A basis point is 0.01 percentage point.

Efforts to reduce stolen or spoiled goods may have resulted in out-of-stock items, while centralized buying may have alienated some vendors, Wolf said.

Analysts said Safeway may have been too ambitious in its five-year, same-store sales forecasts of 3 percent to 4 percent. The company may find it difficult to boost profit margins because it already has the highest in the business, said Deutsche Bank Securities analyst Charles Lemos.

The U.S. economic slowdown didn't help, as shoppers turned to less expensive food to fill out their menus.

"There hasn't been a recovery in food sales," said Elizabeth Shamir, an analyst with PNC Advisors, which owns 835,000 Safeway shares. "People eat less shrimp platters and more macaroni and cheese when pinched."

No. 1 supermarket chain Kroger, which competes with Safeway in about 45 percent of its locations, and Albertson's, which competes in about 55 percent, lowered prices last year, Wolf said. Both have gained market share.