PLEASANTON -- Safeway profits plunged in its second quarter as the grocery chain attempted to battle a rising tide of competitors in Northern California and to cope with increasingly cautious consumers.

The Pleasanton-based company's stock fell to its lowest price in 16 years, plunging 4.2 percent on Thursday to close at $15.80.

Perhaps the toughest challenge that confronts Safeway is shoppers feeling besieged by an economy that has yet to take off following the recession, said Steve Burd, Safeway's chief executive officer.

"There is so much uncertainty in the economy, and that is contributing to a consumer who is very, very cautious," Burd said in a conference call with analysts.

Perhaps 25 percent of consumers in Safeway's territory feel confident, have kept their job or found a better one, are seeing improvement in their net worth and may be shopping at high-end retailers and supermarkets, Burd said.

"For the other 75 percent of the economy, they believe they're in a recession," Burd said.

Accordingly, the vast majority of consumers are watching where and how they shop.

"People are making different choices about what they buy and they're really trying to stretch their budget," Burd said. "They buy more chicken than beef, that sort of thing."

Patty Edwards, chief investment officer with Trutina Financial, a Seattle-area investment firm, agreed that the weak economy is putting a crimp on shopping.


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"A lot of things are weighing on the consumer," she said.

Safeway earned $122.7 million on sales of $10.39 billion for the April-June quarter. Compared to the year-ago quarter, profits fell 15.8 percent while revenue rose 1.9 percent. The company said same-store sales, excluding fuel, rose 0.8 percent.

The results equated to a profit of 51 cents a share. Analysts had predicted a profit of 49 cents, according to a Zack's survey.

Safeway faces increasingly fierce competition from an array of foes that seek to capture customers across the pricing spectrum.

"The plain vanilla grocery stores like Safeway and Lucky and Kroger are having more trouble," said David Livingston, a Milwaukee-based retail consultant.

Walmart is opening more Neighborhood Market stores and Target has beefed up its grocery offerings. The Dollar Store and Grocery Outlet offer low-price groceries.

On the high end, Whole Foods has expanded its locations, and smaller rivals such as Fresh & Easy and Sprouts Farmers Market have invaded the region.

"Safeway is in that middle space, and throughout retail, being in the middle is not a comfortable place to be," Edwards said.

One bright note for Safeway is that the company appears to be holding its own in market share and maybe even gaining share.

The company recently introduced a customer loyalty and discount and program called Just for U that analysts and the company say is gaining traction in attracting shoppers.

Even if the economy were to bounce back, Safeway will have to deal with rising competition, warned Jonathan Feeney, an analyst with Janney Capital Markets.

"The number of new food outlets, their relative price, and current consumer behavior do not seem cyclical," Feeney wrote Thursday in a research note about the earnings.

Contact George Avalos at 925-977-8477. Follow him at twitter.com/george_avalos.

SAFEWAY 2nd quarter RESULTS
Revenue: $10.39 billion, up 1.9 percent from year ago
Profit: $122.7 million, down 15.8 percent from year ago
Closing stock price Thursday: $15.80, down 4.2 percent for day and down 33 percent from year ago
Source: Mercury News reporting