PLEASANTON, CA-Despite reporting a lower quarterly profit for the period ended June 18, Safeway Inc. says its earning power has grown and that its “lifestyle” stores are delivering better results than expected. The company explained its profit picture and the progress on its conversion to lifestyle stores during a conference call with financial analysts on Tuesday.

For the quarter, the supermarket chain reported net income of $134 million, or 30 cents per share, compared with net income of $155.2 million, or 35 cents per share, for the second quarter of 2004. But those figures don’t tell the whole story, according to Steve Burd, Safeway’s chairman, president and CEO.

This year, Safeway began expensing stock options and that has lowered income by about 2 cents per share, Burd told listeners on the conference call. Also, “Last year, we had an unusually low tax rate,” so this year’s higher tax rate has cost approximately 3 cents per share, he said.

“When you consider some of the money that we’re spending in brand building and opening our lifestyle stores, which we did this quarter at the pace of almost one per day, I would tell you that the inherent earning power of the company is considerably stronger than it was last year,” Burd said.

The company has “modified and, we believe, significantly improved our approach to launching the lifestyle stores from what we had planned in December of last year,” Burd commented. Early this year, he said, the company “began to launch remodels with the same effort that we have traditionally done with new stores.” This means that, in addition to traditional weekly advertising, the remodel launches involve more advertising, markdowns and other promotional efforts than they previously did.

The new approach is paying off with sales increases that continue after the promotional period, according to Burd. “Historically, when we would launch a new store, we would see a significant drop down in sales trends once we discontinued the promotion. That’s not happening with either the new Lifestyle stores or the remodeled lifestyle stores,” the Safeway chief executive said.

Safeway opened eight new lifestyle stores and completed 83 lifestyle remodels during the quarter, with plans to open approximately 25 new lifestyle stores and complete approximately 290 to 295 lifestyle remodels this year. By the end of the year, approximately 25% of Safeway’s store base will be in the lifestyle format. The schedule of openings translates to almost a new store every day in the third quarter and more than one per day in the fourth quarter.

Along with its store openings and earnings, Safeway reported that total sales increased 4.7% to $8.8 billion in the second quarter from $8.4 billion in the second quarter of 2004. Comparable store sales increased 3.3% and identical store sales increased 2.8%. The company operates 1,801 stores in the US and Canada.

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