By Jessica Wohl
(Reuters) - Safeway Inc (SWY) said on Thursday it plans to leave the Chicago market by early next year as it continues to narrow its focus and posted a sharply lower profit for the third quarter.
The shares of Safeway, the second-largest U.S. mainstream grocery store operator, rose to $33.35 after hours after closing at $31.57 on the New York Stock Exchange.
Chicago is a competitive market for food stores. Newer entrants such as Roundy Inc's (RNDY.N) Mariano's chain, which features piano players in its stores, have gained ground with shoppers looking for a higher-end experience, while Aldi Inc has added more stores that draw cost-conscious customers. Wal-Mart Stores Inc (WMT), Target Corp (TGT), privately held Meijer Inc and other retailers have also focused more on food sales.
The Dominick's chain in Chicago has been a "noticeable drag" on Safeway's financial results, a "significant drain" on resources and its lowest performing division, Chief Executive Officer Robert Edwards said on a conference call with analysts.
Safeway bought Dominick's in 1998 for about $1.2 billion plus debt. The chain had 116 stores and $2.6 billion in sales back then, when Safeway lauded Dominick's "enviable reputation as a leading retailer in the Chicago region." Safeway now has 72 Dominick's stores in the market, which incurred losses before income taxes of 3 cents per share during the latest quarter.
Safeway has seen "significant interest" since it started to market Dominick's assets and plans to sell all or as many of the stores as it can, Edwards said on the call. Safeway has already sold four Dominick's stores to the company running rival chain Jewel-Osco, it said late on Thursday.
Supervalu Inc (SVU) got out of the Chicago market in March, when it sold Jewel-Osco and other chains in different parts of the country to an investor group led by Cerberus Capital Management LP (CBS.UL).
Leaving Chicago is the latest strategic move for Safeway, which plans to close the sale of its Canadian operations to Empire Company Ltd (EMP-A.TO), parent of Canada's No. 2 grocer Sobeys, during the fourth quarter. It continues to hold a controlling stake in its Blackhawk Network Holdings Inc (HAWK.O) gift card business, which went public earlier this year.
Safeway expects a cash tax benefit of $400 million to $450 million from exiting Chicago, which it can use to partly offset the cash tax expense on the sale of Canadian assets. It expects to use the cash tax benefit and any other cash proceeds from its disposal of the Dominick's properties to buy back stock and invest in other growth opportunities.
Its net income fell to $65.8 million, or 27 cents per share, in the fiscal third quarter that ended on September 7, compared with $157 million, or 66 cents per share, a year earlier.
Safeway earned 10 cents per share from continuing operations excluding an impairment charge related to a warehouse information software project, below analysts' average forecast of 16 cents per share, according to Thomson Reuters I/B/E/S.
Sales and other revenue rose 1.1 percent to $8.6 billion.
Identical-store sales, which include results from established supermarkets that have not been replaced or significantly renovated and exclude fuel sales, rose 1.9 percent. The company expects such sales to rise 1.6 percent to 1.9 percent this year.
It now expects adjusted earnings from continuing operations of 93 cents to $1 per share this year, compared with its prior forecast of $1.02 to $1.12 per share. The forecast excludes any reclassification of Dominick's to discontinued operations.
By leaving Chicago Safeway will trigger a multi-employer pension withdrawal liability generally paid evenly over 20 years. Safeway estimated that the present value of the required quarterly cash payments is up to $375 million and that the present value of related tax benefits is up to $145 million.
(Reporting by Lisa Baertlein in Los Angeles and Jessica Wohl in Chicago. Editing by Carol Bishopric, Andrew Hay and Andre Grenon)