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PLEASANTON, Calif. Safeway confirmed plans to test a new, smaller store format this year and reported a slight dip in fourth quarter earnings.

The 1,743-store supermarket chain posted $301.1 million in earnings for the quarter ended Dec. 29 – down from $307.9 million the previous fourth quarter – with same-store sales increasing 4.4% but only 2.8% when gas sales were excluded. For the full year, Safeway generated a 15.7% increase in profits of $888 million and a 5.2% jump in total sales of $42.3 billion.

In a Feb. 21 earnings call with analysts, Safeway ceo Steve Burd confirmed that Safeway is preparing to test a smaller store format to combat the arrival of Tesco in its home state of California.

“It’s going to be an experiment and, traditionally, we like to keep our experiments close to the vest,” said Burd. “So we’re not releasing any information about the concept except to say we should have something out of the ground in the first half of the year.” Safeway is expected to open the first stores somewhere in Northern California near its corporate home.

Safeway also continued to expand in 2007 and rolled out more new stores and remodels. For the full year, it opened 20 new stores and remodeled 253 to its new Lifestyle format. The chain is forecasting a same-store sales increase of 3% to 3.2% in 2008 and plans to remodel 250 stores despite challenges in the economy and inflation that kicked in during the fourth quarter.

“We are seeing a cautious consumer and just about everyone is forecasting a recession,” said Burd. “But we see no reason to change our earnings guidance for the year.”