Results beat expectations however and shares rose nearly 6 percent in aftermarket trading.
The grocery chain, which operates 1,406 stores in the U.S., also says it's exiting the Chicago market by early 2014 to focus on more profitable business. It operates 72 Dominick's stores in Chicago that have been losing money. The move comes after Safeway said in June it would sell its Canadian stores.
Safeway and other traditional supermarket chains have been working to focus operations and keep costs low to fight off competition from big-box discounters such as Target and Wal-Mart Stores, as well as drug stores and dollar stores that have been expanding their grocery sections.
"These actions will allow us to focus on improving and strengthening our core grocery business," said CEO Robert Edwards.
Safeway's net income fell to $85.8 million, or 27 cents per share. That compares with $157 million, or 66 cents per share, in the prior-year quarter. Excluding a software impairment charge, net income was 30 cents per share. Analysts expected net income of 16 cents per share, according to FactSet.
Revenue rose 1 percent to $8.62 billion. Analysts expected revenue of $8.52 billion. Revenue in stores open at least one year, a key retail metric, rose 0.8 percent including fuel and 1.9 percent excluding fuel sale.
Safeway expects to get a cash tax benefit of $400 million to $450 million for exiting the Chicago market. That will partly offset its cash tax expense related to selling its Canada stores in June.
Safeway also expects a multi-employer pension withdrawal liability which is generally paid over 20 years. The company expects to pay up to $375 million quarterly and the value of related tax benefits is up to $145 million.
For the year, the company now expects net income of 93 cents to $1, from a previous range of $1.02 to $1.12 per share. That excludes proceeds from selling its Canada business. Excluding the Dominick's business, the company expects net income of $1.05 to $1.12 per share. Analysts predict $1.09 per share.
Shares rose $1.84, or 5.8 percent, to $33.41 in aftermarket trading after closing up 77 cents at $31.57. The stock has traded between $15 and $32.72 over the past 52 weeks.
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