Safeway Lowers Forecast Based on Q2 Performance

Tough competition and resulting lower grocery prices drove Safeway, Inc.’s second-quarter net income down 40 percent, the national grocery chain said Thursday.

Safeway also lowered its forecast for its full-year net income, saying it doesn’t expect prices to rebound until the fourth quarter.

Safeway’s struggle between price and profitability is reflected industrywide. Traditional grocers are in fierce competition to lure shoppers with low prices, sometimes at the expense of their profit margins, which are typically razor-thin.

Safeway’s second-quarter profits took a big hit as increased competition drove grocery prices down, causing the Pleasanton, Calif.-based chain to lower its forecast for the year, as it doesn’t expect prices to rebound until later this year.

“Our second-quarter results were in line with our expectations, and we are encouraged by our volume trends in the quarter,” said Steve Burd, chairman, president and CEO. “However, deflation continues in price per item and is not expected to significantly improve until the fourth quarter. As a result, we have lowered our expectations for the balance of the year.”

Safeway reported net income of $141.3 million (37 cents per share) for the second quarter of 2010, down from $238.6 million (57 cents per share) last year, which included a $57.8 million tax benefit from the resolution of a tax matter.

Sales for the quarter $9.5 billion were flat compared with last year, which also saw sales $9.5 billion in the year-ago period. A higher Canadian exchange rate and higher fuel sales were largely offset by a 2.5 percent decline in identical-store sales, excluding fuel.

Net income for the first 24 weeks of 2010 was $237.3 million (61 cents per share), down from $382.8 million (90 cents per share) in 2009.

As a result of the drop in sales an profits, Safeway updated its guidance for the year to $1.50 to $1.70 earnings per share and non-fuel identical-store sales of -1 percent to -1.5 percent. The company continues to expect cash capital expenditures of approximately $1 billion and free cash flow of $900 million to $1.1 billion.

The grocer invested $192.1 million in capital expenditures in the second quarter of 2010. It opened five new stores, completed 17 Lifestyle remodels and closed five stores. For the year, Safeway plans to open about 15 new Lifestyle stores and complete about 60 Lifestyle remodels.

Safeway operates 1,712 stores in the United States and Canada.