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PLEASANTON, CA-Safeway Inc. said Thursday that its third quarter profit fell by approximately one-third due to increased expenses, a decline in sales volume and deflation in produce, dairy and fresh meat. The publicly traded operator of 1,730 stores in the US and Canada said most of the increased expenses would not be repeated in 2010, that deflation should subside soon and that volume trends are improving.

Safeway’s third quarter profit fell 35.5% to $128.8 million from $199.7 million in the same year-earlier period on a 7% decline in sales to $9.5 billion from $10.2 billion. Diluted earnings per share came in at $0.31, down 32.6% from $0.46 in the same year-earlier period but above analysts’ consensus estimate of $0.29. The sales decline was attributed to lower fuel sales, a 3.0% decline in identical-store sales for the quarter, excluding fuel, and a decline in the Canadian exchange rate.

On its quarterly conference call company president Steven Burd told analysts the largest factor in the increased expenses was a write-down of the value of its real estate, which the company has invested in heavily in recent years. The second largest factor was the decrease in sales volume.

Regarding the real estate, the company spent $157.2 million in the third quarter to open five new “lifestyle” stores, closed 10 stores and complete 16 lifestyle remodels. Year-to-date, the company has invested $602.8 million opening seven new lifestyle stores, closing 16 stores and remodeling 62 stores. By the end of the year, the company expects to have spent $1 billion opening 10 new stores and remodeling 85 stores. It did not speculate how many more store closures there would be prior to the end of the year.

When asked about decreasing store counts, Burd said the remodeling of stores to a large degree replaced new store development but added that its 2010 plans are to increase its number of new store openings. “I think that if we were not in a recessionary environment you’d probably see us opening 25- to 30 stores,” he said. “With competitors not investing heavily [in new stores] it’s not the best time to go ahead and build.”

At the same time, Burd said the company is using the lull in new store development to gain greater control of its real estate. “We are going to take on a much larger development role,” he said. “We believe we create the value for the centers so why not harvest some of that value.”

A company source tells GlobeSt.com that the company is looking to take greater advantage of its real estate expertise and opportunities to own more of its real estate and also to develop whole centers, something it has done only occasionally in the past. “From time to time we’ve developed entire centers and sold off the surrounding shops,” she says. “We have the opportunity [do to that more] and then choose whether we want to continue to be the landlord and gain the revenue stream or sell some of it. If we decided to do it [on a larger scale] we might seek out a partner because it would be capital intensive.”

Safeway currently owns about 40% of its stores and leases the remainder. The company source says that the company is also looking to take advantage of the down market to purchase stores it is currently leasing and to acquire land for future center developments at a discount. “We have great liquidity and have had opportunities presented to us,” she says.

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