Safeway profit, shoppers hit by gas prices

Thu Feb 23, 2012 1:23pm EST
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(Reuters) - Supermarket operator Safeway Inc SWY.N posted a drop in quarterly net income after higher fuel prices dented profits and squeezed already cautious shoppers, and its shares dropped more than 7 percent.

Safeway and its rivals are fighting for every dollar and rising fuel prices are casting a new chill across the grocery industry, which has yet to recover from a brutal price war at the beginning of the recession.

"Higher gas prices were just one of many headwinds (Safeway's) shoppers wrestled with during the quarter," said Walter Stackow, senior research analyst at Manning & Napier.

Major supermarket chains are struggling with falling sales volumes as all but the top-earning shoppers remain very cautious about spending. Unemployment remains high and many consumers are still dealing with the fallout from the housing bust.

"We believe the volume declines are the direct result of both rising fuel prices and rising food inflation," Safeway Chief Executive Steve Burd said on a conference call with analysts on Thursday.

Rising gas prices can boost top-line sales, but they are low margin and can be a drag on profit.

Gas prices per gallon were up 19 percent for the quarter at Safeway, which also saw gallons of gas sold increase by 10 percent, Burd said.

Food inflation ticked up to 4.7 percent for the latest quarter, up from around 4 in the third quarter.

Burd said that, so far this quarter, inflation is running higher than in the fourth quarter, but he expects it to moderate.   Continued...

A sign for a Safeway grocery store is shown in San Francisco, California, February 23, 2009.  REUTERS/Robert Galbraith