Safeway Shares Drop on Weak Forecast

Safeway Inc. (NYSE: SWY) reported fiscal third-quarter results before markets opened this morning. For the quarter, the grocery store chain posted diluted earnings per share (EPS) of $0.45 on revenues of $10 billion. In the same period a year ago, the company reported EPS of $0.38 on sales of $10.1 billion. Third-quarter results compare to the Thomson Reuters consensus estimates for EPS of $0.42 EPS and $10.24 billion in sales.

Competitor Kroger Co. (NYSE: KR) closes its third quarter at the end of this month and is expected to post EPS of $0.42 on sales of $21.57 billion. Last quarter the company beat EPS estimates by two cents.

Safeway's CEO said:

While our operating profit margin declined 30 basis points in the quarter, the decline is explained by items that will not continue in the fourth quarter. We are encouraged that in the fourth quarter to date our identical-store sales, excluding fuel, are running at 1.0% with slightly improved volumes and higher inflation than in the third quarter of 2012.

The company reiterated EPS guidance for the 2012 fiscal year of $1.90 to $2.10. The company also expects operating profit margin to deviate by plus or minus five basis points from last year's margin. The consensus estimate for full-year EPS is $1.98 on sales of $44.46 billion. That revenue estimate is probably not in the cards, given Safeway's comments today.

Safeway's gross profit fell by 56 basis points in the quarter when compared to the same period a year ago. Excluding an 11 basis points drop in fuel sales, the 0.45% decline was attributed to promoting the launch of the company's new loyalty program, costs incurred from the sale of some stores, higher shrinkage expenses and other items.

Both Safeway and Kroger face increasing competition from the big discount retailers like Wal-Mart Stores Inc. (NYSE: WMT) and Family Dollar Stores Inc. (NYSE: FDO). Even Walmart's grocery sales are threatened as the discounters push grocery sales harder as an enticement to get more traffic and sales.

Safeway's shares are down 3% in premarket trading at $16.29 in a 52-week range is $14.03 to $23.16. Thomson Reuters had a consensus analyst price target of around $18.00 before today's report.

Paul Ausick