(Mario Petitti/Chicago Tribune)

Associated Press | Safeway Inc. reported its first-quarter
profit fell 33 percent as the grocery chain struggled with deflation in
key food items and fierce competition from rivals.

The grocery chain, based in Pleasanton, Calif., said Thursday that it
earned $96 million, or 25 cents per share, in the quarter. That
compares with $144.2 million, or 34 cents per share, in the same period
last year. Revenue rose to $9.33 billion, up from $9.23 billion a year
ago.

Analysts surveyed by Thomson Reuters expected a profit of 29 cents per share on revenue of $9.24 billion.

The company backed its earnings guidance for 2010 of $1.65 to $1.85 per share. Analysts expect $1.80 per share for the fiscal year.

In a statement, Steve Burd, chairman, president and CEO, said that he was encouraged by first-quarter sale trends compared with the fourth quarter of 2009 and said improvement has continued into the second quarter.

“We believe we will continue to see positive trends in the second half of the year as the economy improves, deflation subsides and consumer confidence builds,” Burd said.

Safeway had struggled during the down economy because it was slower than its rivals to lower prices when the recession hit. But the grocery chain has brought more customers in the door in recent months as it made its prices more competitive with rivals.

Another issue has been deflation, which has hurt Safeway’s profit as it passed along to consumers price drops in such commodities as milk and eggs. Safeway executives have been betting inflation will help improve results this year.

Credit Suisse recently downgraded its rating of Safeway, saying the grocer needs to prove its earnings can recover and beat analyst estimates.

That could be tough, given tight competition and thin profit margins in the grocery business now, Credit Suisse analyst Edward Kelly said in a research note.