Safeway feels impact of generics

PLEASANTON, Calif. —Safeway reported another strong quarter, but lower same-store sales were attributed in part to pharmacy sales. The chain also confirmed it would start testing a smaller-store format in the first half of the year.

The 1,743-store supermarket chain reported $301.1 million in earnings for its fourth quarter ended Dec. 29, with same-store sales increasing 4.4 percent, but only 2.8 percent when gas sales were excluded. For the full year, Safeway generated a 15.7 percent increase in profits of $888 million and a 5.2 percent jump in total sales of $42.3 billion.

In a Feb. 21 earnings call with analysts, Safeway chief executive officer Steve Burd said pharmacy sales had an impact on sales that were positive but on the low end of expectations.

“Same-store sales were negatively impacted by an unprecedented switch over from branded to generic drugs,” said Burd. “And if you look at the other drug store chains, you’ve seen the same thing happening.”

Burd also confirmed that Safeway is preparing to test a smaller store format to combat the arrival of Tesco in its home state of California. “It’s going to be an experiment and, traditionally, we like to keep experiments close to the vest,” Burd said. “So we’re not releasing any information about the concept except to say we should have something out of the ground in the first half of the year.” Safeway is expected to open the first stores somewhere in Northern California.

Safeway also continued to expand in 2007 and rolled out more stores and remodels. For the full year, it opened 20 new stores and remodeled 253 to its new Lifestyle format. “At the end of the fourth quarter, we had 57 percent of store base converted to our Lifestyle format, and that percentage is higher now with the stores we’ve remodeled this year,” Burd said.

The chain is forecasting that same-store sales will increase 3 percent to 3.2 percent in 2008 and plans to remodel 250 stores despite challenges in the economy and inflation that kicked in during the fourth quarter. “We are seeing a cautious consumer and just about everyone is forecasting a recession,” Burd said. “But we see no reason to change our earnings guidance for the year.”