(Update adds details from conference call, updates share prices.)
By Paul Ziobro
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Safeway Inc.'s (SWY) shares bagged gains after cost cuts helped the supermarket chain top third-quarter profit estimates and signs emerged that price competition may have softened.
Deflation in categories like produce and dairy, which have been a drag on sales, also appears to be abating, while Safeway's efforts to lower prices on other items is helping add new customers as transaction counts and sales volumes improve.
"We think all the trends are working in a positive direction," Safeway's Chairman, President and Chief Executive Steve Burd said on Thursday's earnings call.
Analysts still think supermarkets need the employment market to strengthen for sales to improve, but Safeway's results offered another sign that two major headwinds of inflation and price competition are lifting. Safeway shares rose $1.03, or 4.8%, in recent trading to $22.46, while Supervalu Inc. (SVU) rose 36 cents, or 2.3%, to $15.98, and Kroger Co. (KR) added 76 cents, or 3.3%, to $23.60.
"If this is as bad as it gets, that might be O.K.," Jefferies & Co. analyst Scott Mushkin said. "People are looking for the earnings trough and we should be in it."
Safeway's fiscal third-quarter earnings fell 35% to $128.8 million, or 31 cents a share, with sales down 7% to $9.46 billion on lower prices and a decline in the Canadian exchange rate. Excluding fuel, identical-store sales, which exclude new, remodeled and relocated stores, fell 3%. Margins improved as the company cut overhead and contained other costs.
Analysts polled by Thomson Reuters most recently expected Safeway to report earnings of 29 cents on revenue of $9.46 billion.
Safeway also reiterated full-year guidance for per-share earnings of $1.70 to $1.90.
Burd said while price environment remains cutthroat, especially as traditional grocers compete with Wal-Mart Stores Inc. (WMT) and discount operators, the competition "softened a bit" in the latest quarter.
There was also some indication that consumers may be trading up, with shoppers buying more premium wine after switching to bargain versions during the recession. Granted, premium wine prices have fallen, but it's a promising glimpse into the consumer psyche, Burd said.
"My impression is that we're at or near the bottom of this whole thing, and that would be good for all of us if this is true," Burd said.
High unemployment continued to weigh on one grocery chain, as shares of Spartan Stores Inc. (SPTN) were down 80 cents, or 5.3%, to $14.32 in recent trading.
Spartan, which reported fiscal second-quarter earnings Wednesday, owns grocery stores in Michigan, where the high unemployment rate contributed to a same-store sales decline of 5.1% in the latest quarter. The company expects the economy there to stay soft and is seeing more competition from supercenters in its markets.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com
(Tess Stynes contributed to this article)