Cost of New Loyalty Program Cuts into Safeway Profits

Safeway said the cost of launching its “Just for U” loyalty program reduced its profit margins for the third quarter, but is already showing signs of success, with a boost in incremental sales.

"Our just for U loyalty program continues to gain momentum with our customers, and it is helping them save money every time they shop," said Steve Burd, chairman and CEO. "The incremental sales driven by just for U helped to offset lower inflation in the third quarter and improve volume share. We are pleased with our progress in operating profit. 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."

Safeway reported income from continuing operations of $108 million for the third quarter of 2012, down from $130.3 million last year.

"We are encouraged that in the fourth quarter to date our identical-store sales, excluding fuel, are running at 1 percent with slightly improved volumes and higher inflation than in the third quarter of 2012," added Burd. "We expect identical-store sales in the fourth quarter will be driven by increased just for U engagement, the roll out of our partner fuel loyalty program and the launch of our Wellness initiative."

Sales and other revenue declined 0.2 percent to $10 billion in the third quarter of 2012 from $10.1 billion in the third quarter of 2011, primarily due to the disposition of Genuardi's stores and a lower Canadian exchange rate, partly offset by higher fuel sales. Identical-store sales, excluding fuel, were 0.1 percent for the quarter, which were lower than anticipated, primarily due to a larger than expected decline in price inflation, partly offset by continued improvement in volume.

In January 2012, Safeway announced the planned sale or closure of its Genuardi's stores. In the third quarter of 2012, Safeway closed one Genuardi's store and sold 16 Genuardi's stores for a pre-tax gain of $80.4 million ($49 million after tax) and cash proceeds of $111 million. Safeway expects to close the final three Genuardi's stores in the fourth quarter of 2012 for an estimated pre-tax loss of approximately $17 million ($11 million after tax). For the year, Safeway expects cash proceeds of approximately $112 million and a pre-tax gain of approximately $51 million ($31 million after tax).

Safeway invested $159.6 million in capital expenditures in the third quarter of 2012, while opening one new Lifestyle store, completing one Lifestyle remodel, refurbishing in-store pharmacies and developing properties through its wholly owned subsidiary, Property Development Centers LLC. Safeway also closed 23 stores, including 17 Genuardi's stores sold or closed during the quarter. For the year, Safeway expects to invest approximately $900 million in capital expenditures to open approximately 10 new Lifestyle stores, complete approximately five Lifestyle remodels, refurbish in-store pharmacies and develop properties.

Safeway operates 1,644 stores in the United States and Canada.