By Lisa Baertlein
LOS ANGELES (Reuters) - Supermarket operator Safeway Inc
The company, whose chains include Safeway, Vons and Dominick's, also said on Tuesday that current quarter sales have shown some improvement, and it stood by its full-year forecast.
"In a deteriorating consumer environment it's not a bad result," said UBS Investment Research analyst Neil Currie. "The company seems to be finding some costs to cut in order to make up the numbers."
Safeway's net income for the 12-week third quarter ended September 6 rose to $199.7 million, or 46 cents per share, from $194.6 million, or 44 cents per share, a year earlier.
Total sales were up 3.9 percent at $10.2 billion.
The results fell just short of analysts' consensus estimate for earnings of 47 cents per share, according to Reuters Estimates. Analysts had also expected sales of $10.06 billion.
"I think they've been a little bit caught out because they went upscale," Currie said, referring to the roll-out of higher priced Lifestyle stores that sell more prepared and gourmet foods.
The timing of the expansion has come under question as U.S. consumers struggle to make ends meet with a housing slump and higher fuel prices.
"There is a need now to have a better price image. Trying to find that balance between price cuts, sales growth and cost controls is going to be a challenge for the company," Currie said.
Identical-store sales rose 2.8 percent, or 0.5 percent excluding fuel sales. Safeway defines identical stores as those operating in the same period during the current and previous years. The figure does not include replacement stores.
Gross profit margin fell 102 basis points to 27.49 percent of sales in the quarter. Higher fuel sales -- which have a lower gross margin -- reduced gross profit margin by 55 basis points.
Safeway said it still expects 2008 same-store sales growth, excluding gasoline sales, of 1 percent to 2 percent.
Safeway also backed what Currie called a "somewhat confident" forecast for 2008 earnings of $2.25 to $2.35 per share, free cash flow of $500 million to $700 million and identical-store sales growth, excluding fuel, of 1 percent to 2 percent.
"We believe we have bottomed out in terms of our (identical-store) sales," Safeway Chief Executive Steve Burd said in a conference call with analysts.
Safeway said it expects $1.65 billion to $1.70 billion in capital expenditures for the year. It plans to open about 20 new Lifestyle stores and to complete the remodeling of roughly 240 existing supermarkets into Lifestyle stores.
Safeway shares were up $1.42 or 6.5 percent to $23.19 on the New York Stock Exchange in midsession trading.
But its shares are down more than 30 percent year-to-date, compared with larger rival Kroger Co's
(Additional reporting by Sarah Coffey in New York, editing by Maureen Bavdek and Gerald E. McCormick)
