Safeway 1st-quarter net income falls

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File photo: Shoppers stand in front of the Safeway grocery store on January 15, 2011 in Tucson, Arizona.

Taxes related to Safeway's effort to pay down debt reduced its first-quarter net income, but the company's adjusted results beat Wall Street's expectations as its revenue rose.

The grocery chain, based in Pleasanton, Calif., said Thursday that its sales are consistently improving. After many adjustments, it said it has raised prices enough to pass along higher commodity costs but also made adjustments to attract customers and remain competitive.

Safeway's profit margin, however, was hurt by the higher prices it paid for the gasoline it sold during the period, and its shares fell.

The company earned $25.1 million, or 7 cents per share, for the quarter, compared with $96 million, or 25 cents per share, a year earlier. This includes a hefty tax charge related to a plan to pay down its U.S. debt with part of a $1.1 billion dividend in cash and debt from its Canadian operations.

Excluding the $80.2 million charge and other one-time items, Safeway earned 29 cents per share. That tops analyst expectations of 23 cents per share, according to FactSet.

Revenue rose 5 percent to $9.77 billion, beating expectations for $9.45 billion.

Grocery chains, including Safeway, are facing increasing competition and are struggling with rising food costs. They want to lure cost-conscious shoppers with low prices and promotions but must do so without sacrificing their already thin profit margins.

Safeway has struggled with weak or uneven results for some time. The company returned to a profit last quarter as it improved its prices, offerings and operations. Company leaders say they are pleased with their recent sales trends.

Safeway saw its revenue in stores open at least a year, which is a key indicator of financial health for retailers because it excludes recently opened or closed stores, rise 3.5 percent. Excluding the impact of fuel, that figure rose 0.4 percent.

However, Hapoalim Securities analyst Ajay Jain said any improvement in sales trends from this point on will require further adjustments to its pricing and reiterated a "sell" rating on its stock.

Safeway reiterated its forecast for full-year earnings of $1.45 to $1.65 per share. Excluding the charge related to the Canadian dividend, the company expects net income of $1.60 to $1.80 per share. Analysts expect Safeway to earn $1.65 per share on that basis.

Shares of Safeway fell 71 cents, nearly 3 percent, to $25.47 in midday trading.

Sarah Skidmore contributed to this report from Portland, Ore. Mae Anderson contributed to this report from New York.

© 2011 The Associated Press.

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