Safeway Shares Plunge 12%

Safeway Inc., the nation’s third-largest supermarket operator, lowered profit forecasts for the rest of the year and said it will close stores and trim prices in an effort to stay competitive, sending its shares into the biggest decline in at least two decades.

The announcement sparked a sell-off in supermarket sector shares as investors worried that conventional grocers could struggle into the second half of the year as a result of an expanding Wal-Mart Stores Inc., which attracts customers with lower prices on groceries.

Safeway, which owns the Von’s and Pavilion chains as well as its namesake stores, said earnings will be as much as 6 cents a share less than analysts’ 77-cent average estimate for its second quarter ending Saturday. Profit will be $2.86 to $2.90 a share for the fiscal year, rather than the $3.15 analysts were expecting, the Pleasanton, Calif.-based company said.

Chief Executive Steve Burd said on a conference call that he plans to close as many as 14 stores and reduce prices to compete with larger rivals Kroger Co. and Albertson’s Co., as well as Wal-Mart and other discounters. Kroger is the owner of Ralphs Grocery Co.

Safeway faces the looming threat of 40 new Wal-Mart super centers planned for California over the next few years. Albertson’s also has announced plans for a $1-billion expansion in the state, where about a third of Safeway’s stores are located.

“They’re going to have to defend their markets a little bit to get sales,” said David Yucius, president of Aurora Investment Counsel, which owns 30,000 Safeway shares. “The bang they’re going to get from cutting costs won’t be consistent with what they’ve done in the past because of competition.”

Safeway shares fell $4.42 to $31.76 in New York Stock Exchange trading, the lowest close since January 2000. The 12% drop was the largest since at least 1981.

On the NYSE, Kroger, the largest grocer, fell $1.30, or 6.1%, to $19.90, and Albertson’s dropped $1.51, or 4.7%, to $30.50.

Analysts said investors are concerned about narrowing margins as supermarket chains slash prices to compete with Wal-Mart.

Kroger, which competes with Safeway in about 45% of its locations, and Albertson’s, which competes in about 55%, lowered prices last year and both gained market share, said Andy Wolf, an analyst for BB&T; Capital Markets. Wolf has a “hold” rating on Safeway and doesn’t own the shares.

Albertson’s on Wednesday reiterated its profit forecasts of 53 cents a share for the first quarter and $2.31 for the year. Kroger said it expects its profit, excluding some costs, to exceed forecasts.

Safeway may find it difficult to boost profit margins because it already has the highest in the business, said Deutsche Bank Securities analyst Charles Lemos.

Safeway, which operates 1,782 stores, also cited disruptions in its efforts to centralize buying and merchandising in reducing its profit outlook.

The company said it expects expenses of $60 million to $70 million in the second quarter to close the stores, mostly in Texas and Illinois, and fire workers as it centralizes marketing and restructures a 29-store labor contract.

Capital spending this year will be cut by about 10% to $1.9 billion.

Analysts said the company may have been too ambitious in its five- year, same-store sales forecasts of 3% to 4% growth.

Burd said sales at stores open at least a year, excluding new and closed locations as well as replacement stores, will decline this quarter.

“We will try very hard to make this a one-quarter event,” he said.