Strike Hurts Albertsons, Bodes Ill for Competitors - TheStreet

Strike Hurts Albertsons, Bodes Ill for Competitors

The company says grocery workers strike shaved $70 million from its quarterly profit.
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If

Albertsons

(ABS)

earnings report on Friday is any indication, the strike in Southern California is having an even bigger-than-expected effect on the grocery chains.

Albertsons reported that its third-quarter earnings dropped 47% to 25 cents a share. A year ago, Albertsons earned 47 cents a share. Despite the strike, the company's sales did increase in the quarter, rising 1.6% to $8.79 million. But on a same-store basis, which compares results at like outlets open more than one year, Albertsons sales fell 0.8%.

The company's sales topped Wall Street's expectations of $8.76 billion in sales, but its earnings fell a whopping 12 cents a share short of consensus.

"The strike numbers were shocking in terms of the total amount it's costing," said Mark Hugh Sam, who covers the grocery chains as an analyst for Morningstar. (Morningstar does not do investment banking and Hugh Sam does not hold shares in the companies he covers.)

Albertsons' report could portend even worse results at rivals

Safeway

(SWY)

and

Kroger

(KR) - Get Report

: The strike affected more days of the quarter at both companies than at Albertsons -- Kroger's third quarter ended on Nov. 8, while Safeway's fourth quarter won't end until the end of this month. (Kroger reports its earnings Tuesday; Safeway reports next month.)

Meanwhile, 17% of Safeway stores are affected by the strike vs. 12% for Kroger and 11.2% for Albertsons.

Shares of all three of the grocery chains were down midday Friday. In recent trading, Albertsons shares were down 68 cents, or 3.2%, to $20.47. Safeway shares were down 23 cents, or 1.1%, to $20.09, while Kroger's stock was off 23 cents, or 1.3%, to $17.68.

Strike Marches On

Some 70,000 grocery workers in Southern California have been on strike since mid-October. The strike trimmed 23,000 jobs from Friday's nonfarm payroll data, the Labor Department said.

The labor dispute centers on efforts by the grocery chains to cut costs by having workers pay a greater portion of their health care expenses and reducing benefits for new employees. After recessing prior to Thanksgiving, negotiations between the parties resumed this week under the auspices of a federal mediator.

Analysts had already projected that the strike would slash into the grocery chains' earnings. But until Albertsons' report, the companies had given analysts and investors little indication of just how much of an effect the strike was having.

At a meeting with analysts on Thursday, Safeway pointedly declined to estimate the effect the strike was having on its revenue or bottom line. Last month, Albertsons withdrew its full-year earnings guidance, citing the effects of the strike.

The grocery chains are trying to reduce their costs ostensibly to compete with nonunion rivals, particularly

Wal-Mart

(WMT) - Get Report

. But some investors and analysts are worried that the strike may instead up end up

weakening the grocery chains ability to compete.

Even without including the direct effect of the strike, Safeway warned Thursday that its earnings next year would fall short of analysts' expectations. Meanwhile, Albertsons declined to give investors any kind of earnings outlook Friday.

"Since the Southern California strike is still ongoing and we can't accurately determine its magnitude or duration, we withdrew our guidance for 2003," Albertsons' CEO Larry Johnston said on a conference call with investors. "We will not be in a position to reinstate that guidance or give future guidance at this time."

Johnston said the company was on track to meet analysts' estimates before the strike. Without the effect of the strike, the company's same-store sales would have increased 0.7%, company officials added.

The company lost ground on expenses in the quarter, largely as a result of the strike, the officials said.

The company's gross profit margin, for instance, fell 49 basis points as a percentage of sales to 28.72%. Gross margin represents the difference between what a company charges customers for its products and the direct costs of selling those products, including vendor and occupancy expenses.

In addition to lost sales due to the strike, Albertsons gross margin was sunk by increased promotions and decreased prices, company officials said.

Meanwhile, Albertsons' operating expenses rose 92 basis points to 25.78% of sales. Lost sales as a result of the strike meant that expenses increased faster than revenue. Additionally, higher insurance, benefits and workers compensations expenses weighed on the company's operating expenses, company officials said.

Overall, Albertsons' quarter would have been OK without the strike, said Hugh Sam. But even setting aside the strike, the company still doesn't seem to be getting a handle on its expenses, he said. Meanwhile, the fact that the company had to cut prices in the quarter is a direct result of competition from the likes of Wal-Mart, he added.

"Cost pressure is growing faster than Albertsons' ability to cut costs," Hugh Sam said. "They had to bring prices down in order stay competitive with Wal-Mart."

The other grocery chains are feeling that same pressure. And it's likely to increase as Wal-Mart expands its so-called Supercenters, which add fresh produce and other grocery items to its selection of general merchandise.