Apparently we're not impressed by increased income when you rely on tax benefits to generate that income. Safeway (UNKNOWN:SWY.DL) was down 16% in early trading after reporting earnings per share of $0.49 in its last quarter. That's up from the previous year, but $0.14 of those earnings came from one-time tax benefits relating to corporate-owned life insurance policies. The company would have paid a 30% rate on its pre-tax income, but with the adjustments, it paid just 2.1%. 

The move itself was fine -- cash is cash -- but Safeway should have made it in a stronger quarter. The market was never going to really count that income, so now it just looks like management was desperate to buffer the numbers. Instead, Safeway would have been better off waiting until a quarter when it was going meet expectations to get the little boost. Then we would have said, "Hey, look how clever!" instead of, "Wow, that's a stretch!"

Underlying sales at Safeway
Safeway's comparable sales -- excluding fuel -- were up 1.5% last quarter, which isn't going to set any records. The company was hurt by a switch to generic drugs, and helped by a shift in the calendar, which pushed New Year's supply shopping into the last quarter. That small increase in comparable sales pales in comparison with Kroger (NYSE:KR), which saw a 3% increase in comparable sales in its past quarter.

Safeway was also hurt by a drop in operating margin, which was down from 1.9% to 1.8%. Again, Kroger set the bar, with operating margin at 3.4% in its last quarter. The drop at Safeway came from a fall in gross margins, which fell because of markdowns but were buoyed slightly by that switch to higher margin generic drugs. 

Backroom dealings
Recently, Safeway has had a lot going on behind the scenes, and this quarter was no exception. Safeway's biggest news was clearly the tapping of a cash pile associated with its corporate-issued life insurance policies. These policies came through in the '80s, and this quarter, Safeway tapped the accumulated cash in the plan for $68.7 million. That drawdown reduced the company's tax liability by $17 million. Safeway also finalized some tax matters with the federal government, saving another $16.7 million in taxes in the quarter.

More recently, the company IPO'd its gift-card business last week as Blackhawk Network Holdings (NASDAQ:HAWK). Safeway sold off about 22% of its holding, generating $243 million in cash, which the company used to repay some of its debt. That will be reflected in the next earnings statement.

From my perspective, Safeway is like a troubled duck. Underwater, the legs are churning furiously to speed the little guy along, but for some reason, he's just paddling in a circle. Unless that all gets straightened out, I'll stick with Kroger.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.