Albertsons Inc., the grocer that put itself up for sale last week, recorded a second-quarter profit below analysts' estimates and stagnant sales amid competition from Wal-Mart Stores Inc.
Net income at the second-largest U.S. grocery chain increased 2.9 percent to $107 million, or 29 cents a share, from $104 million, or 28 cents, a year earlier. Boise-based Albertsons said Wednesday in a statement that sales were little changed at $10.2 billion, the worst performance in more than a year.
Chief Executive Larry Johnston's strategy of lowering prices on basic items such as paper towels narrowed the company's profit margin. Albertsons, which has 47 stores in Utah, is seeking a buyer for part or all of the company after competition from Wal-Mart and a 20-week labor strike led to a profit decline in three of the past four years.
"Management failed to come up with a winning strategy to fend off the competition at the low end with Wal-Mart and at the high end," said David Dietze, president of Point View Financial Services in Summit, N.J., which manages about $95 million, including Albertsons shares. "There is no strategy other than cutting costs."
The company was expected to earn 34 cents, the average estimate of 13 analysts surveyed by Thomson Financial. Albertsons reaffirmed profit from continuing operations for the full year will rise to $1.37 to $1.47 a share from $1.27 last year.
Identical-store sales, which exclude results at new, closed and replacement stores, fell 0.1 percent. Gross margin, or the portion of sales left after subtracting the cost of goods sold, narrowed to 28.03 percent from 28.24 percent a year earlier.
Albertsons had a $3 million loss from discontinued operations compared with $21 million a year earlier related to closing or selling 21 stores.
In addition to a sale of the company, Albertsons is considering selling off more stores. The grocer has been exiting markets where it doesn't have a No. 1 or No. 2 market share, including New Orleans; Omaha, Neb.; and Jacksonville, Fla.
Albertsons wants to create a "smaller, yet more profitable company," Johnston said on a conference call with investors and analysts.
During a strike in Southern California that began in 2003, Albertsons lost consumers to chains such as Whole Foods Markets Inc. Sales as of June had not returned to levels before the strike.
The cost of winning back shoppers "was extremely high, so profits in Southern California remain well below prior levels," wrote New York-based Lehman Bros. Inc. analyst Meredith Adler, who has an "equal weight" rating. "The long and bitter strike of 2003/04 pressured market share and profits" and a full recovery for the big grocers in that market isn't expected.
The company is also losing customers in areas such as Dallas/Ft. Worth, where it's in a battle with Wal-Mart, analysts said. Wal-Mart has added 1,000 U.S. supercenters that sell groceries since 2000.
"The problem is they've got really bad market share to begin with," Cleveland-based FTN Midwest Research Securities Corp. analyst Jason Whitmer said in an interview. "To move up the curve is not only difficult in terms of moving that large ship, but it's also generally more costly to regain or gain share the lower your market share." He rates the shares "neutral."
No. 1 Kroger Co. and No. 3 Safeway Inc. responded more aggressively to competition from Wal-Mart. Kroger slashed prices across the board, while Safeway is moving in the direction of Whole Foods. It is remodeling stores with wood floors and softer lighting and adding fresher produce to attract more upscale shoppers.
"Albertsons operating performance has been in stark contrast to the improving results at several other national retail operators," wrote New York-based Bear Stearns & Co. analyst Robert Summers, who has a "peer perform" rating on the stock.
Shares of Albertsons, which operates 2,500 stores in 37 states, fell 27 cents to close at $23.13 Wednesday on the New York Stock Exchange. They have fallen 8.1 percent in the past year. Shares of Cincinnati-based Kroger have risen 18 percent in the past year compared with a 16 percent jump at Safeway, based in Pleasanton, Calif.
Albertsons is one of several companies, including Winn-Dixie Stores Inc., Toys "R" Us Inc. and Penn Traffic Co., that have been forced to sell themselves or have been pushed into bankruptcy due to competition from Wal-Mart.
"We are now at the point in our turnaround where we are clarifying our end game . . . preparing to exit even more underperforming markets in order to monetize their embedded real estate and business value," Johnston, 57, said in the statement.
Albertsons owns more than 60 percent of its nearly 120 million square feet of real estate. The company is valued between $14 billion and $20 billion including debt, analysts and investors said.