Vons, Safeway profit hurt by missteps and competition

Thursday, April 17, 2003 | 11:36 a.m.

SUN STAFF AND WIRE REPORTS

PLEASANTON, Calif. -- Shares of Safeway Inc., the No. 3 U.S. supermarket company and a big operator in Las Vegas, fell 17 percent Wednesday, their biggest drop ever, after the company said first-quarter profit declined more than forecast.

The shares fell $3.53 to $16.87 at 4 p.m. in New York Stock Exchange composite trading Wednesday. They had already tumbled 53 percent in the past year. The stock fell again by 47 cents, or nearly 3 percent, this morning, trading at $16.40.

Problems related to centralizing different regional marketing and buying offices hurt profit, said Safeway -- owner of Vons markets in Las Vegas.

Spokeswoman Julie Hong declined to elaborate, saying that the company will provide details when it reports final results May 1. The procurement problems may continue through the third quarter, Lehman Brothers analyst Meredith Adler wrote in a report.

"It appears that the weakened outlook is due to (Safeway's) own missteps," Adler wrote. She rates Safeway "equal weight."

Safeway's profit from continuing operations fell to between 43 cents and 45 cents a share in the first quarter ended March 22, from 66 cents a year earlier, Melissa Plaisance, senior vice president of finance, said. The company was expected to earn 54 cents, according to analysts surveyed by Thomson Financial.

Pleasanton, Calif.-based Safeway didn't give net income figures. The firm, which has 1,695 stores in the United States and western Canada, had a net loss of $367.9 million, or 74 cents a share, in the first quarter of last year.

Safeway said health and pension expenses were higher. That company also has had to cut prices to lift sales. Safeway and larger rivals Kroger Co. and Albertson's Inc. have been losing customers to discounters such as Wal-Mart Stores Inc., the world's largest retailer, analysts said.

"The primary concern is the inroads Wal-Mart has been making because of its size," said David Dietze, president of Point View Financial Services Inc., whose $100 million in assets under management include Safeway shares. "The other thing is the whole consumer-confidence environment."

Kroger's shares fell 4.3 percent, while Albertson's declined 4.8 percent. Kroger operates in Las Vegas as Smith's Food & Drug Stores and Food4Less.

Safeway also changed the way it accounts for vendor allowances, in line with an accounting-rule change, and that reduced profit by 1.5 cents a share.

Identical-store sales, which exclude sales from replacement stores, dropped 0.5 percent, the company said.

Citigroup Inc.'s Smith Barney unit and Sanford C. Bernstein lowered their respective stock ratings on Safeway, while Egan-Jones Ratings Co. cut the grocer's credit rating.

Safeway reduced its profit-growth forecast for the next several years in November after being forced to reduce prices to keep shoppers from defecting to Wal-Mart and warehouse clubs such as Costco Wholesale Corp.

The grocer first sold shares to the public in April 1990.