Safeway 3Q profit climbs on improved revenue (AP)

PORTLAND, Ore. – Safeway Inc. says it coming up with new answers as it finds itself facing the same economic challenges that have plagued the grocery industry for years.

It's a tough time for the grocers: shoppers are still carefully watching what they spend, food prices continue to rise and competition is intensifying. The chains that are succeeding have found new ways to do so.

Safeway did not increase its sales volume during its most recent quarter and it saw fewer shoppers in its stores.

But the company managed to increase its fiscal third-quarter profit as it increased its sales of private-label products and relied more on gasoline sales to drive its revenue. It also has also put a heavy emphasis on reducing product loss, due to breakage, theft or other means, to control costs and improve its profitability.

"I think that it's a good assumption, the economy is not going to get materially better and then you've got to play in that environment and utilize the things that you have uniquely developed to win with," Safeway's CEO Steve Burd told investors Thursday. "And, you know, we wish our sales progress was much faster, but we love the fact that it's steady."

Safeway, based in Pleasanton, Calif., reported that its net income rose to $130.2 million, or 38 cents per share, for the period that ended Sept. 10, up from $122.8 million, or 33 cents per share, a year ago.

Revenue climbed 7 percent to $10.06 billion, largely on increased fuel sales and improved sales at established stores.

The results topped analysts' average expectations for earnings of 35 cents per share on revenue of $9.85 billion, according to a survey by FactSet.

Safeway's shares rose in morning trading on the news, but dropped later in the day as investors got a bigger, and not necessarily brighter, picture of the quarter and what lies ahead.

Safeway, like all grocers, has been struggling with higher food prices. While the company has passed along most of these price increases, this has continued to dampen the supermarket's performance.

Its gross margin fell to 27 percent from 28.1 percent in the third quarter. Fuel sales caused a 0.88 percentage point drop, and the cost of goods sold rose 8.8 percent.

While traffic was down in its stores as shoppers consolidated their trips, they spent more due to higher prices.

Safeway, which operates Von's, Dominicks, Safeway and other grocery chains, reported that revenue at stores open at least a year increased 1.5 percent, when excluding fuel. This figure is a key gauge of a retailer's health because it excludes results from recently opened or closed stores.

The company did manage to maintain its market share during the period, its first time in several quarters to do so.

Safeway does face increasing competition as Wal-Mart Stores Inc., which relies heavily on its low prices to attract shoppers, reported Wednesday that it plans to aggressively open more stores in the U.S.

But Safeway leaders were not concerned about the threat from the world's largest retailer, saying price alone has not won shoppers over to date. Safeway has managed to build a loyal customer base on a mix of environment and competitive prices that it thinks it can maintain.

It's still a split economy among shoppers, Burd said. Those that are financially comfortable are buying flowers, nicer wine and the products they had prior to the recession. The majority of shoppers — about 75 percent — are still carefully watching what they buy, switching products or trading down to keep their costs under control as they feel the pressure of higher gas prices, high unemployment and general economic unease in their lives.

"I think that's been true for probably more than two years now," Burd said. "And I don't expect it's going to change in the next 12 months."

Safeway expects sales momentum to pick up in the second-half of the year but stood by its full-year earnings guidance of $1.45 and $1.65 per share and revenue at stores open at least a year to be up about 1 percent when removing fuel.

Analysts predict full-year earnings of $1.66 per share.

Safeway, which runs 1,681 stores in the United States and Canada, has seen its stock price fall 16 percent over the past year, as of Wednesday's close at $17.97. The company's shares jumped in morning trading but fell 18 cents to $17.80 in afternoon trading.

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AP Business Writer Michelle Chapman contributed to this report from New York.

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