Safeway Inc said fourth quarter sales and margins eroded amid fierce competition on price and renewed worries about U.S. unemployment, sending shares down about 1 percent on Thursday.

Safeway's gross profit fell 14 basis points to 28.6 percent of sales in the fourth quarter. Excluding a two basis point impact from fuel sales, gross profit dropped 16 basis points.

Higher advertising spending and efforts to lower prices contributed to the margin erosion, the company said.

The Pleasanton, California-based operator of Safeway, Vons and Dominick's stores long has battled the perception that its grocery prices are higher than those of stores operated by rivals like Kroger Co and, to a lesser extent, Supervalu Inc .

U.S. consumers, bruised by the worst downturn since the Great Depression, remain cautious about spending as national unemployment hovers around 10 percent and the prospect of a brisk economic recovery dims.

Consumer confidence has been fading, and earlier on Thursday the U.S. government said number of U.S. workers filing initial claims for unemployment benefits rose a bigger-than-expected 496,000.

Prior to the recession, Safeway was targeting higher-income shoppers with upscale stores that offered such things as prepared food and a variety of wines.

That strategy backfired when the economy tanked, leaving the company at a disadvantage to its rivals when it came to store prices.

LOSS ON CHARGES

Net loss for the fourth-quarter was $1.61 billion, or $4.06 per share, after a noncash goodwill impairment charge of $1.97 billion related to reduced market capitalization and the weak economy. Safeway reported net income of $338 million, or 79 cents per share for the year-earlier quarter.

Excluding the charge, the company earned 53 cents per share, matching the average forecast complied by Thomson Reuters I/B/E/S.

Total sales fell to $12.7 billion, down 8.1 percent from a year earlier, when there was an extra week in the quarter. Identical-store fell 4.1 percent, excluding fuel. Safeway defines identical stores, a key gauge of supermarket performance, as those operating in the same period during the current and previous years. The figure does not include replacement stores.

Safeway bought back $443 million in shares during the fourth quarter.

Shares in Safeway fell 55 cents or 2.3 percent to $22.95 in morning trading.

(Reporting by Lisa Baertlein, editing by Gerald E. McCormick)

California