Safeway Inc.'s profits nose-dived and the company lowered its 2010 earnings projections Thursday, saying its campaign to slash prices at its supermarkets eroded profit prospects.
Pleasanton-based Safeway earned $141.3 million, or 37 cents a share, on sales of $9.52 billion, for its second quarter of fiscal 2010 that ended June 19.
Compared with the year-ago quarter, profit plunged 40.8 percent and sales rose 0.6 percent.
"Our second quarter results were in line with our expectations, and we are encouraged by our volume trends in the quarter," Steve Burd, Safeway's chief executive officer, said.
The deflationary trend for prices won't abate until the last three months of 2010.
As a result of the pricing pressures, Safeway lowered its forecast for 2010 profits to a range of $1.50 to $1.70 a share. Previously, Safeway had told Wall Street that full-year profits would range from $1.65 to $1.85 a share.
Safeway shares fell 2.7 percent, or 54 cents a share, to finish at $19.68 Thursday.
"Unfortunately, the retail deflation was much greater than anticipated," Burd said Thursday.
Prices declined for store items at least in part because of a campaign by Safeway to slash everyday prices for a wide range of items.
Safeway said it believes the effects of that price-cutting gambit should be complete by the final three months of this year. At that point, the price pressures should ease.
Yet Safeway must also confront an array of foes, including Walmart and Lucky. Some rivals have undercut Safeway on numerous items.
"Competition is coming from everywhere," said Meredith Adler, an analyst with Barclays Capital, an investment firm.
One big headwind: Key markets for Safeway remain in recession.
"A lot of the economic areas they are in are pretty bad, such as California. And California stinks," said Scott Mushkin, an analyst with investment firm Jefferies & Co. "Safeway makes a lot of money in California."
Analysts also were concerned about Safeway's reduction in its profit outlook.
"What's really important is the guidance they gave for the rest of the year," Adler said. "It came down quite substantially."
Still, analysts did embrace a few elements of Safeway's quarterly results.
"There are some good things to like," Mushkin said. "They have lowered their prices and customers are probably happy about that. They are executing more efficiently, and customers are probably happy about that."
Safeway also suggested that more customers are coming into the store and buying more items — volume, in other words — even if prices have sagged.
Safeway also believes its price cuts have helped it capture sales from its foes.
"Our volume is building against all competitors in a down economy," Burd said. "So we're starting to build market share."
The grocery store operator painted a brighter picture for next year than for the remainder of 2010.
"With our cost-reduction efforts in high gear and volumes steadily improving, we think we're going to be well-positioned for 2011 and beyond," Burd said.
Contact George Avalos at 925-977-8477.