Analysts blamed the decline on Safeway's increased advertising spending and costs incurred during the launch of its U loyalty program.
Even so, the supermarket firm's revenue increased to $10.39 billion from $10.2 billion as shares outstanding dropped to 239.8 million from 352.3 million.
"We are encouraged to see that our volume trends are improving as inflation has eased, and we are pleased to see market share gains in the grocery channel and a slight gain in market share in all food-related channels," said Steve Burd, chairman and chief executive officer.
"We expect continued momentum as participation grows in our just for U loyalty program that is now available in all U.S. divisions and as we enhance our fuel rewards programs and expand our health and wellness initiatives," Burd said.
Sales and other revenue increased 1.9% to $10.4 billion in the second quarter of 2012 from $10.2 billion in the second quarter of 2011, primarily due to higher fuel sales and an identical-store sales increase of 0.8%, excluding fuel, partly offset by a lower Canadian exchange rate.
Gross profit declined 73 basis points to 26.27% of sales in the second quarter of 2012 compared to 27% of sales in the second quarter of 2011. Excluding the 47 basis-point impact from fuel sales, gross profit declined 26 basis points due primarily to increased advertising and costs incurred to launch the just for U loyalty program.
Operating and administrative expense decreased 39 basis points to 23.89% of sales in the second quarter of 2012 from 24.28% of sales in the second quarter of 2011. Excluding the 22 basis-point impact of higher fuel sales, operating and administrative expense margin decreased 17 basis points, primarily due to lower labor expense, partly offset by the launch costs of just for U and several individually immaterial items.
Last January, Safeway announced the planned sale or closure of 27 Genuardi's stores, including the sale of 16 Genuardi's stores to Giant Food Stores. Safeway closed three of the Genuardi's stores and incurred impairment and lease exit losses of $14 million in the second quarter, but the retailer also sold three Genuardi's stores for $6.9 million and recorded a gain of $2 million in the third (Fiscal Year) quarter of 2012. Safeway completed and recorded the sale of 16 Genuardi's stores to Giant for a pre-tax gain of $85 million and cash proceeds of $111 million.
Safeway invested $219.2 million in capital expenditures in the second quarter of 2012, while operating its new Lifestyle store in Pleasanton and completing one Lifestyle remodel. Safeway also closed 10 stores, including three Genuardi's stores sold during the quarter.
For the year, Safeway expects to invest approximately $900 million in capital expenditures to open approximately 10 new Lifestyle stores, complete approximately 10 Lifestyle remodels, refurbish in-store pharmacies and develop properties through its wholly owned subsidiary, Property Development Centers LLC.