Safeway, Supervalu quarterly earnings reflect positive strides

PLEASANTON, CALIF —Supervalu and Safeway both reported strong earnings for their first and second quarters, respectively, last month with Safeway faring better than its rival on the strength of its new Lifestyle store format.

The 1,740-store Safeway chain reported $218 million in earnings for its second quarter and a 4.5% increase in same-store sales. Total sales for the quarter increased 5% to $9.82 billion. “We feel very good about our performance in the first half and we feel equally good about our performance in the second half,” Safeway chairman Steve Burd told analysts during a July 19 conference call.

Safeway once again credited its remodeled Lifestyle stores for its strong performance. The store format that debuted in 2004 now accounts for more than 50% of its base and has a proven track record that’s reflected in Safeway’s nine consecutive quarters of improved same-store sales. Safeway plans to remodel about 300 stores in 2007 to increase that percentage to 60%. By the end of 2008, the company expects to have 77% of the store base converted.

Safeway enters the fall expecting sales to slow in the second half of the year, but still expects annual profits of about $900 million. Fears about inflation prompted Safeway to lower its expectations for the remainder of 2007. A Goldman Sachs report noted that Tesco’s debut in California this fall could also be a factor.

Supervalu reported strong first quarter earnings driven by sales at Albertsons stores it acquired last year. The 2,464-store chain earned $148 million in the first quarter on revenue of $13.3 billion.

The biggest downside for Supervalu during the quarter were same-store sales, which increased only 1.2%. Sales at the Albertsons stores it acquired last year rose 1.7% while sales at the rest of its banners dropped 0.4%.

While Supervalu’s same-store sales increase was fair at best, analyst Mark Petrie of CIBC World Markets said the chain is on track for improvement as it ramps up its store remodels. “From our point of view, it was a great quarter and nothing has shaken our conviction that there will be more to come,” said Petrie. Supervalu plans to remodel up to 110 stores this year.

He added that Supervalu “is just beginning to improve its vast acquired store network and develop its Premium Fresh & Healthy offering.” The new store format features new signs, wider aisles and better lighting.

Despite the strong earnings, Supervalu ceo Jeff Noddle said sales slowed the last few weeks of the quarter. He cited high gas prices and increasing prices on food and dairy products for the softness and noted the chain “seems to be in the teeth of the wind of inflation at the moment.”

The chain also gave an update on one of its newest banners, the Sunflower organic markets. Supervalu recently opened another Sunflower store in Columbus, Ohio to raise its total store count to five, and Noddle said the chain is still gauging customer interest in the stores.

“Organic products have really gone mainstream in the past year and we’re trying to determine if we want a stand-alone organic format or if incorporating it into our standard stores is a better path,” said Noddle. Supervalu also plans to close 15 more stores than planned this year across several banners, bringing the total clsings to 50 for 2007.

And in what was welcome news for both chains, Supervalu and Safeway signed a new four-year contract with members of the United Food and Commercial Workers Union in Southern California. The two chains, along with Kroger, had been negotiating for four months on the contract that gives workers improved health benefits and a wage increase.