Disappointed in the grocer's third-quarter performance, Albertson's Inc. chairman and chief executive Gary Michael announced plans for sharp cuts in operating expenses and capital spending.

Albertson's also told analysts that it will miss its fourth-quarter earnings target by 33 percent, although third-quarter profits were up 32 percent to $172 million from $130 million a year earlier. But general operating, selling and administrative costs were also up while sales at ongoing stores were down.

Earnings per share, including all merger-related costs and one-time charges, were 41 cents per diluted share, up from 31 cents a share.

But identical-store sales dipped 0.5 percent, and sales were down 0.2 percent at comparable stores, which include identical, relocated, replacement, remodeled and acquired locations.

The biggest disappointment, though, was that Albertson's slashed its fourth-quarter earnings outlook from 75 to 50 cents a share, analysts said.

"I think they're struggling to change the way they operate their business in a pretty competitive environment," said grocery industry analyst Meredith Adler at Lehman Brothers Inc., New York.

Among other status-quo practices, Albertson's has been an intensely top-down management system, and that prompted the company to change the then popular Lucky's supermarket chain name to the Albertson's banner following acquisition. Lucky's sales performance slipped.

"The customers didn't appreciate that," Adler told StoreAlliance.com.

But she said Albertson's struggles are less due to its massive merger with American Stores than just to its ability or willingness to change its old ways quickly to meet the rising competition and costs.

"They need to sharpen their pricing and become more focused on merchandising," Adler said. "It's impossible to say whether they're at the low end" of the company's downturn.

"It's certainly going to take some time to realize their goals," Adler said, adding that how much time is also impossible to forecast.

"The third quarter results were not terrible, not great but not terrible, either," she said. "It's what they're telling us for the fourth quarter that's really disappointing. They're saying a decline of 25 cents a share."

Adler said Albertson's hasn't clarified all the factors for the expected downturn. But among the causes cited by the grocer, she said, are higher costs for more promotions, sharper price reductions and improvements to customer service to fend against inroads by the competitors.

For the 39-week year-to-date period, net earnings - without merger-related costs and one-time charges - decreased 3 percent to $624 million from $645 million, Albertson's said. Earnings per diluted share of common stock were down to $1.48 from $1.52 a year earlier.

Total quarterly sales increased by just over 0.1 percent to $8.991 billion from $8.982 billion a year earlier while operating and administrative costs were up by nearly 1 percent. Those costs, at $2.168 billion, rose to 24.11 percent of sales from 23.91 percent a year earlier.

After excluding sales by divested stores, total third-quarter sales were up a modest 2.9 percent, Albertson's reported.

"Our goal is to reduce distribution and selling, general and administrative expenses next year by $250 million," said Craig Olson, executive vice president and chief financial officer. "We have made good progress in developing and initiating expense-reduction programs for store level labor, supplies and office costs. ... We completed the integration of Acme and we also converted over 550 stores to a common pharmacy system - both of which will create efficiencies in the business."

Michael and Olson announced a $500-million reduction in capital expenditures for 2001 and 2002. Capital expenditures for 2000, including leases, are expected to be about $1.9 billion, Olson said.

Operating profits were up to $384 million from $301 million, including merger-related costs and one-time charges. Excluding those costs, the operating income was $410 million.

"While we have seen some improvement in key areas, overall we are very disappointed with our quarterly results," Michael said.

"However, we remain focused on three key objectives - increase sales, reduce expenses and increase return on capital," he said.

"We have developed a very solid strategy to meet these objectives and regain our momentum in sales and earnings. Some of these strategic programs have been implemented this quarter while others will take more time to implement," Michael said.

"In this challenging environment, it's easy to lose sight of the positives. But we do have many underlying strengths: significant market share in some of the largest U.S. markets; the ability to strengthen market share in existing markets without taking on new territory; geographic diversity; large, modern stores; a growing pharmacy business; and a strong balance sheet," he said.

Michael said Albertson's took steps to improve pricing in some operating areas, enhance the center of the store and improve store-level labor and supply costs.

As part of its merger-related costs, after acquiring American Stores to rank by volume in the top three U.S. supermarket chains, the company integrated its Acme stores division, he said. Based in Boise, Idaho, the grocer operates about 2,500 retail stores, including Albertson's, Acme and Jewel Osco chains, in 36 states.

"We are building the right kind of company for the future with a focus on the customer, centralized distribution, common systems and neighborhood marketing. In addition, we have tremendous opportunity to leverage our size and our geographic diversity," Michael said.

Sales for the 39-week period, ended Nov. 2, were $27.2 billion, up 3.9 percent from a year earlier, excluding divested stores' sales, he said.

Including sales from the divested stores, sales for the 39-week period decreased 1.3 percent. Identical-store sales increased 0.3 percent, and comparable-store sales increased 0.6 percent, Michael reported.

By Worth Wren JR, StoreAlliance.com staff writer