Economy, Generic Drugs Hit Safeway Q4 Results; Cost Cuts Planned

PLEASANTON, Calif. -- Safeway, Inc. here cited a weakening economy and an increase in generic drug availability as the chief culprits in a slowdown of same store sales growth and a profits slip for the fourth quarter. The chain's stock price dropped to a 52-week low yesterday.

"Our fourth quarter IDs, much like the third quarter, were negatively impacted by what has been an unprecedented trend of drugs being switched from really branded, to generic, thus the branded drugs come off patent," said Safeway chairman and c.e.o. Steve Burd during an earnings conference call yesterday. "That occurred in the third quarter, but that really accelerated a bit in the fourth quarter."

Burd remained positive about the company's outlook, however, and did not alter Safeway's guidance for the year. "We began a very concerted efforts to sort of return to some of our core strength, which has been cost reduction over the years," he said. "And so have put in place of very aggressive cost reduction efforts for 2008."

Safeway's sales increased 6.8 percent to $13.4 billion in the fourth quarter of 2007, up from $12.5 billion for the same period last year. Contributions from Lifestyle stores, increased fuel sales, and an increase in the Canadian dollar exchange rate helped drive this increase, the company reported. Identical-store sales increased 4.4 percent for the quarter. Excluding fuel, however, the increase was just 2.7 percent.

Net income was $301.1 million for the quarter, down from $307.9 million last year. Earnings per share also dropped, to 68 cents, compared to last years 69 cents per share, which was higher due to various favorable tax items, said Burd.

"I would say the fourth quarter was a very normal full quarter for us," said Burd. "Maybe the margin was just a tad softer than the previous year, but not anything that would be worthy of mention.

"But you should consider two events, as you think about your quarterly split on earnings per share," Burd said. "We have been negotiating a settlement in Alberta for some time now. We have completed those negotiations and we have a recommended settlement, which is in the process of being voted. Now we should all know on February 26th how that vote comes out, but if ratifies it contains a retroactive wage increase that goes all the way back to when the contract expired, which I believe with March of '07."

Despite the negative news for the quarter, the period ended Safeway's most profitable year since 2001. The retailer saw profits of $888.4 million, or $1.99 per share, last year on sales $42.3 billion, up from $870.6 million, or $1.94 per share in 2006, which saw $40.2 billion in sales.

In addition to a renewed focus on cost-cutting, Safeway plans to continue launching innovative programs to help drive top-line growth in the face of a weakening economy such as a take out entree program that recently saw success in a 10-store pilot, and an expansion of Safeway wellness initiatives.

"In terms of what we're doing to drive the top line, the meals program that we just talked about is fully rolled out, it would have a material effect on top line sales growth," said Burd. "The cost reduction that we're engaged in is designed to invest some of that back end of the business to grow sales, not just in the perimeter but in the center of the store. So we know what we have to do to drive that number, and we think we're doing all of the preparatory work we need to in order to accomplish that."
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