Safeway's Profits Way Down

NEW YORK - Safeway, Inc. today reported a significantly lower first-quarter profit as it worked to revitalize its business in the wake of an expensive Southern California strike, according to Reuters.

The Pleasanton, Calif.-based supermarket chain said it earned $43.1 million, or 10 cents a share, in the quarter ended March 27, compared with a profit of $162.6 million, or 36 cents a share, last year.

Excluding items, Safeway reported profit as 43 cents a share. Analysts' average estimate was 28 cents a share, according to Reuters Research, a unit of Reuters Group Plc.

Safeway's latest quarter included roughly two months of disruptions as a result of the five-month-long labor dispute. The company said, however, that excluding the strike impact and costs to shut down 12 money-losing stores of Chicago-based Dominick's, its financial performance so far this year was in line with its 2004 profit forecast of $1.95 a share to $2.03 a share, and free cash flow of $700 million to $900 million.

Safeway said it estimates that the strike, which ended at the end of February, reduced its first-quarter earnings by $122 million, or 27 cents per share. Additionally, costs for the Dominick's store closures decreased profit by $28.5 million, or six cents a share.

Without those events, Safeway said it would have earned 43 cents a share. Its total quarterly sales tumbled to $7.6 billion from $8.0 billion the previous year. Its identical-store sales, which exclude new or replacement supermarkets, moved up by 0.5 percent, mostly because of fuel sales.

But excluding fuel, identical-store sales went down 1.3 percent. Safeway, like Kroger and Albertsons, which also were involved in the Southern California labor dispute, has been forced to spend heavily on promotions to entice customers who began patronizing other stores in one of the United States' most highly contested food markets.

Yesterday Safeway said it would appoint three new independent directors and start expensing stock options next year. The move came amid rising demands for corporate reforms at company from six public pension funds, including the California Public Employees Retirement System (CalPERS, the biggest U.S. public pension fund.

Safeway said that as a result of the planned changes, George Roberts and James Greene, who have served on the company's board for almost 20 years and are partners of New York-based investment firm Kohlberg Kravis Roberts & Co., will step down as soon as appropriate replacements are chosen. KKR once controlled Safeway after its leveraged buyout in 1986. Embattled Safeway chairman and c.e.o. Steven Burd was a KKR consultant before he became the supermarket chain's president in 1992.

Safeway said a search for candidates will begin at once and that its board has elected a current board member, Paul Hazen, lead independent director. In addition, William Tauscher, the board's executive compensation committee chair, will be replaced by an independent director, and Robert MacDonnell will be removed from the audit committee, effective immediately. According to Safeway, both men, who are also at the center of pension fund complaints, would stay on the board as independent directors.

In further Safeway news, San Francisco-based McKesson Corp announced today that it had signed a five-year contract renewal with Safeway, Inc. to continue to supply the large supermarket chain with pharmaceuticals. According to McKesson, Safeway runs about 1,300 pharmacies.
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