February 23, 2012 / 6:28 PM / 6 years ago

Safeway profit, shoppers hit by gas prices

(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.

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

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.


The operator of the Safeway, Vons and Dominick’s said fourth-quarter net income fell to $215.6 million, or 67 cents per share, from $229.6 million, or 62 cents per share, a year earlier.

The grocer aggressively bought back stock last year. That boosted its earnings per share result in the latest quarter.

Total sales increased 6.2 percent to $13.6 billion, due primarily to increased fuel sales, the impact of reporting Blackhawk gift card commissions on a gross basis and a 1.5 percent increase in identical-store sales, excluding fuel.

Higher expenses related to last in, first out (LIFO) inventory asset valuation also hurt profits.

“This large swing in our LIFO charge is the direct result of transitioning from a year of unprecedented deflation to a year of above normal inflation,” Burd said.

To that end, Safeway’s gross profit fell 137 basis points to 26.7 percent of sales in the fourth quarter. Fuel sales reduced gross profit by 48 basis points, a change in reporting gift card commissions resulted in a similar reduction and LIFO expense added another 41 basis-point hit.

Safeway said it would issue 2012 forecasts on March 6.

The shares in Safeway, the second-largest U.S. supermarket operator, were down $1.61, or 7.1 percent, at $21.06 in afternoon trading on the New York Stock Exchange.

Reporting By Lisa Baertlein in Los Angeles; editing by Maureen Bavdek, Mark Porter and Andre Grenon

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