Safeway says it will cut costs, prices in '09

PORTLAND, Ore. - Safeway Inc. told investors Thursday that it will aggressively cut costs, lower prices and focus on improving its financial position in 2009.

"We are a very strong player in a very weak economy, and we think that creates a very strong opportunity to take (market share)," Steve Burd, the national grocery chain's chairman and chief executive officer, said during the company's annual investor meeting Thursday.

The Pleasanton, Calif.-based company said it expects to earn between $2.34 and $2.44 per share in 2009. Analysts polled by Thomson Reuters, on average, expect the company to earn $2.39.

Safeway, which also operates chains such as Vons and Randalls, said it expects its identical-store sales, excluding fuel, to grow between 2 percent and 3 percent.

"These results will be supported by an aggressive cost reduction effort, coupled with price reductions, to further the company's effort to lower everyday pricing," the company said in a statement.

Safeway leaders said the focus on value, such a heavy emphasis on its store brands and strategic promotions, is essential for success as consumers limit spending amid tough times.

The company plans to dial back capital investments, which have been heavy in recent years as it updated many of its stores. Company leaders said that within the year they also will take other measures to reduce costs such as controlling spending on energy through strategic arrangements.

Safeway said its cash expenditures will be $1.2 billion, down from $1.6 billion in 2008. And it will nearly double its free cash flow. Safeway's fiscal 2009 begins Jan. 3 so it is nearly identical to the calendar year.

Safeway executives said they still anticipate dividend increases during the year but will focus on paying down debt, rather than repurchasing stock, to stabilize the company during uncertain times. The company said it plans to lower its debt from $5.4 billion at the end of 2008 to $4.5 to $4.7 billion by the end of 2009.

"You don't build strategies for recessions, you build strategies for the long-term," Burd told investors.

Some analysts questioned whether the plans were too aggressive. Goldman Sachs analyst John Heinbockel said in a research note that Safeway is moving much faster toward some of its goals than anticipated. And if the company reaches its sales growth goals, it will perform much better than most retailers might next year.

Heinbockel reiterated a "buy" rating for Safeway shares with a one-year price target of $27.

In a his note Thursday, he called the company's news "very encouraging" — especially amid all the negative macro-economic and other news of the day.

Safeway shares climbed during the day but closed down 38 cents at $21.43 as the broader market fell on larger economic concerns.

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