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Safeway reports decline in profits

By James F. Peltz
Los Angeles Times

Safeway Inc., saying its central and southern California sales have not fully recovered from a lengthy strike that ended in February, posted a 4 percent drop in its fiscal second-quarter profit.

The company’s stock has dropped since Tuesday’s announcement.

Although the strike ended before the quarter began, Safeway — which owns Vons and Pavilions — said the labor dispute pulled earnings down by $50 million as it cut prices and stepped-up promotional spending to woo back customers.

One analyst, Douglas Christopher of Crowell, Weedon & Co. in Los Angeles, said many one-time regulars were probably lost for good during the 41/2-month strike, when scores avoided picketed stores and patronized alternate grocers.

“From their results ... I wouldn’t be surprised that 10 percent to 15 percent of their (California customer) base is permanently gone,” said Christopher, who has a “sell” rating on the stock of Pleasanton, Calif.-based Safeway.

In the quarter that ended June 19, Safeway’s net income fell to $155.2 million, or 35 cents a share, from $161 million, or 36 cents a share, a year earlier. Wall Street had expected earnings of 37 cents, according to analysts surveyed by Thomson First Call.

Safeway, which has 1,812 stores overall, said its second-quarter sales edged up 1.3 percent to $8.36 billion from $8.25 billion.

The labor dispute began Oct. 11 when members of the United Food and Commercial Workers union struck Vons and Pavilions after contract talks stalled. Albertsons Inc. and Kroger Co., which owns Ralphs, were bargaining jointly with Safeway and immediately locked out their UFCW workers. (Albertsons and Kroger have yet to report their second-quarter results.)

About 59,000 grocery workers were idled at 852 supermarkets in Central and Southern California. The dispute ended Feb. 29, when workers ratified a new three-year contract.

As the dispute dragged on, many of the three companies’ customers shopped at other chains, such as Whole Foods Market Inc., Arden Group Inc.’s Gelson Markets, Trader Joe’s and Stater Bros. Safeway’s sales rebounded sharply after the strike ended but “appear to have plateaued over the last several weeks,” Safeway Chief Executive Steven Burd told analysts on a conference call.

The company views the stall as temporary, but “should we fail to fully recover our sales in southern California, we remain confident we can recover our previous profit levels” with additional cost-cutting, he said.

Safeway’s stock closed Wednesday at $20.94, down $0.26.