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Still feeling the aftershocks of a five-month labor strike that ended in February, Safeway (SWY) saw its second-quarter profit slip despite slightly higher sales.

The Pleasanton, Calif.-based supermarket operator said Tuesday that net income fell to $155.2 million, or 35 cent a share, down from $161 million, or 36 cents a share, from the same period last year.

Excluding the impact from recovering from the strike, as well as restructuring and impairment charges in the same period last year, earnings fell to $205.2 million, or 46 cents a share, from $212.5 million, 48 cents a share, in the prior year.

Sales rose slightly to $8.36 billion from $8.25 billion a year earlier.

Analysts had forecast earnings of 37 cents a share on revenue of $7.92 billion, according to Thomson First Call.

"Despite the strike, Safeway generated over $1.0 billion in cash from operations in the first two quarters of this year, up slightly from last year. Going forward, we still continue to focus on recovering from the effects of the strike and differentiating our offerings to provide superior value to our customers," the company said in a press statement.

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Excluding sales at strike-affected stores, comparable-store sales increased 2.3%, and identical-store sales (which exclude replacement stores) increased 1.9%. Further, excluding the effect of fuel sales, comparable-store sales were flat, and identical store sales declined 0.4%.

Gross profit fell 136 basis points to 28.75% of sales in the second quarter of 2004, from 30.11% in the second quarter of 2003. The estimated impact of the strike reduced gross profit by 63 basis points. Higher fuel sales (which have a lower gross margin) reduced gross profit by 80 basis points. Higher advertising expense reduced gross profit by 23 basis points. The remaining 30-basis-point increase in nonfuel gross profit was primarily attributable to improved shrink and lower cost of goods.

In December, Safeway provided earnings guidance for 2004 of $1.95 to $2.03 a share and free cash flow guidance of $700 million to $900 million. This guidance excluded the impact of the labor dispute in Southern California and the effect of 12 store closures at the company's Dominick's unit in the first quarter of 2004. Safeway also was recently notified that it will be required to contribute an additional $30 million to two union health and welfare plans for its share of funding deficits in the second half of 2004.

Excluding those items, Safeway is tracking at the lower end of the EPS range and within the range on cash flow.

Analysts expect Safeway to report full-year earnings of $1.54 on revenue of $34.9 billion.

Shares of Safeway were down recently 87 cents, or 4%, to $21.