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Safeway's 3Q Earnings Still Show Effects of Strike

PLEASANTON, Calif. - Safeway, Inc. yesterday reported a disappointing net income of $159.2 million, or 35 cents per diluted share, for the third quarter ended Sept. 11. The grocer said the result was due to the continuing effect of the Southern California labor dispute that ended in the first quarter of 2004, partially offset by a tax benefit of $32.4 million, or 7 cents per diluted share, coming from the resolution of certain tax issues. Net income was $202.5 million, or 45 cents per diluted share, for the third quarter last year.

Net income for the third quarter 2004 includes an estimated impact of approximately $45 million, after tax, or 10 cents per diluted share, as the company recovers from the effects of the strike, and additionally includes contributions to two Northern California UFCW multi-employer health and welfare plans of $12.1 million, after tax, or 3 cents per diluted share. Excluding the effect of these items, which is consistent with the retailer's guidance for the year, third-quarter 2004 earnings would have been 48 cents per diluted share.

According to Safeway, although post-strike sales have improved, they still have not come up to pre-strike levels. "The company continues to focus on rebuilding sales through promotional pricing, direct marketing, and the introduction of new proprietary products, such as Ranchers Reserve Beef," the retailer noted in a statement.

Total sales stayed relatively flat at $8.3 billion in the third quarter of 2004 as the effects of the strike offset additional sales from fuel and new-store openings. Sales in the month of July were soft for Safeway and other retailers, but the company's sales got stronger during the balance of the quarter. Excluding sales at strike-affected stores, comparable-store sales went up 1.0 percent and identical-store sales, which exclude replacement stores, rose 0.6 percent for the quarter. Further, excluding the effect of fuel sales, comparable-store sales decreased 0.5 percent and identical-store sales went down 0.9 percent.

Gross profit declined 76 basis points to 29.13 percent of sales in the third quarter of 2004 from 29.89 percent in the same period last year. The estimated effect of the strike lowered gross profit by 54 basis points. Higher fuel sales, which have a lower gross margin, lowered gross profit by 34 basis points. Higher advertising costs to support the launch of proprietary products lowered gross profit by 16 basis points. The remaining 28 basis point increase in non-fuel gross profit was mainly due to improved shrink and lower cost of goods.
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