UPDATE 3-Safeway grocery prices not falling as much-CEO

* Price per item sold fell in Q3, but declines easing-CEO

* Sees 2010 EPS and sales at lower end of forecast

* Q3 adj EPS 35 cents versus Wall Street view of 31 cents

* Shares up 2.2 percent
(Adds analyst comment, industry background, executive comment;
updates share activity)

By Lisa Baertlein

LOS ANGELES, Oct 14 (BestGrowthStock) – Safeway Inc (SWY.N: ) said a
drop in prices at its supermarkets moderated in the third
quarter and continued to improve in the current quarter, and
its shares rose more than 2 percent.

The company, which operates Safeway, Vons and Dominick’s
grocery stores, slashed prices last year to bring them more in
line with those of Kroger Co (KR.N: ), Wal-Mart Stores Inc
(WMT.N: ) and other competitors. That, coupled with the impact of
falling prices overall, has weighed on results.

Wall Street has been bearish on Safeway, which has lagged
competitors like Kroger.

“Everyone was expecting worse,” said Jefferies & Co analyst
Scott Mushkin. He called Thursday’s share move a relief rally.

Safeway’s U.S. price deflation moderated as the third
quarter progressed, a trend that continued in the first five
weeks of the current quarter, Chief Executive Steve Burd said
on a conference call.

“Price-per-item changes have been the biggest issue as the
year has unfolded … We expect the U.S. numbers in terms of
price per item to just continue to get better,” he said.

“We should be in very good shape on a price-per-item basis
by the time the fourth quarter ends,” Burd said.

Many experts see prices for key food items heading higher
in the coming months, which could benefit all grocers.

Kraft Foods (KFT.N: ), J.M. Smucker Co (SJM.N: ) and Starbucks
Corp (SBUX.O: ) already have passed on price increases for coffee
at commodity level, and a recent jump in corn prices could
soon push up prices for everything from meat to soft drinks.
[ID:nN13243823]

But with the U.S. economy still squeezed by high
unemployment and consumer debt, major makers of branded foods
will have to move carefully to avoid losing customers to
lower-priced private label goods produced by supermarket
operators.

Safeway and other grocers have declared a truce in a brutal
price war that caused bargain-seeking shoppers to cherry-pick
the best deals, but competition remains fierce and supermarket
operators also will have to proceed with caution when it comes
to passing on higher costs to consumers.

Safeway shares were up 2.2 percent at $21.78 in afternoon
trading on the New York Stock Exchange. Kroger and Supervalu
Inc (SVU.N: ) were up 0.8 percent and 0.2 percent, respectively,
while Wal-Mart was down 1.4 percent.

A MIXED BAG

Safeway company reported a stronger-than-expected
third-quarter profit (Read more your timing to make a profit.) on Thursday but said that 2010 earnings
would come in at the lower end of its forecast.

The Pleasanton, California, company posted third-quarter
net income of $122.8 million, or 33 cents per share. That
compared with a profit of $128.8 million, or 31 cents a share,
a year earlier, when it had fewer shares outstanding.

Excluding employee services charges, the company earned 35
cents per share, which topped the analysts’ average estimate of
31 cents, according to Thomson Reuters I/B/E/S.

Sales fell 0.6 percent to $9.4 billion, in part because of
store closures.

The price per item sold fell again, resulting in a 2
percent drop in identical-store sales excluding fuel. At
Safeway, identical-store sales include established supermarkets
that have not been significantly renovated or replaced.

Lower taxes, a higher Canadian exchange rate, higher fuel
sales and more favorable interest rates benefited results in
the latest quarter, Safeway said. The company also cut
advertising spending and reduced the amount of product lost to
waste and theft.

Safeway in July cut its 2010 earnings forecast to a range
of $1.50 to $1.70 a share. Analysts on Thursday prodded Burd to
explain why, after posting a third-quarter profit (Read more your timing to make a profit.) beat, he
called for 2010 earnings at the low end of that guidance.

Burd said deflation continued to weigh on Safeway’s results
and that very low interest rates were having a negative impact
on its workers compensation costs.

Two weeks ago, Kroger’s CEO said the largest U.S.
supermarket chain for several months had been expecting a
little more inflation in the grocery aisle, but that it had not
yet come to pass. [ID:nN29256907]

“I just think (Safeway’s) sales have not rebounded as much
as they had hoped,” Mushkin said.
(Reporting by Lisa Baertlein; Editing by Lisa Von Ahn, Matthew
Lewis and Steve Orlofsky)

UPDATE 3-Safeway grocery prices not falling as much-CEO