Safeway Inc. Announces Fourth Quarter 2009 Results

Safeway Inc. (NYSE:SWY):

Results From Operations

Safeway Inc. today reported a net loss of $1,609.1 million ($4.06 per diluted share) for the 16-week fourth quarter of 2009. Excluding a non-cash goodwill impairment charge of $1,818.2 million, net of tax ($4.59 per diluted share), net income would have been $209.1 million ($0.53 per diluted share). Net income was $338.0 million ($0.79 per diluted share) for the 17-week fourth quarter of 2008.

"Excluding the non-cash goodwill impairment charge, our results were in line with our expectations,” said Steve Burd, Chairman, President and CEO. "Despite very challenging economic conditions, Safeway generated free cash flow of $1.5 billion in 2009. This exceeded our expectations and is the highest annual free cash flow ever achieved by Safeway.”

In the fourth quarter of 2009, Safeway recorded a non-cash goodwill impairment charge of $1,974.2 million ($1,818.2 million, net of tax). The impairment was due primarily to Safeway’s reduced market capitalization and a weak economy. The divisions affected were primarily Vons and Eastern. The goodwill originated from previous acquisitions.

Sales and Other Revenue

Total sales declined 8.1% to $12.7 billion in the fourth quarter of 2009 compared to $13.8 billion in the fourth quarter of 2008. This decline was the result of an additional week in 2008 and a 4.1% decline in identical-store sales, excluding fuel, for the quarter.

Gross Profit

Gross profit declined 14 basis points to 28.64% of sales in the fourth quarter of 2009 compared to 28.78% of sales in the fourth quarter of 2008. Excluding the two basis point impact from fuel sales, gross profit declined 16 basis points. This decline was largely the result of investments in everyday price and increased advertising, partly offset by lower LIFO expense and increased gift card sales.

Operating and Administrative Expense

Operating and administrative expense increased 92 basis points to 25.26% of sales in the fourth quarter of 2009 from 24.34% of sales in the fourth quarter of 2008. Excluding the two basis point impact of lower fuel sales in the fourth quarter of 2009, operating and administrative expense margin increased 90 basis points. This increase was primarily the result of decreased sales leverage, increased charges from property impairments, lower gains from the sale of property and increased pension expense, partly offset by lower workers’ compensation expense and lower utility expenses.

Interest Expense

Interest expense declined to $98.0 million in the fourth quarter of 2009 from $112.5 million in the fourth quarter of 2008 due to lower average borrowings and lower average interest rates.

Income Taxes

As a result of the goodwill impairment charge, the company recognized an income tax benefit of $33.7 million in the fourth quarter of 2009. Excluding the impairment charge, income tax expense was 36.9% of pre-tax income in the fourth quarter of 2009 compared to 32.9% in the fourth quarter of 2008. The income tax rate in 2008 was lower due to a reduction in a reserve on charitable contribution carryforwards and the favorable resolution of other tax items.

Annual Results

Net loss for the 52-week year 2009 was $1,097.5 million ($2.66 per diluted share). Excluding the goodwill impairment charge of $1,818.2 million, net of tax ($4.40 per diluted share), net income would have been $720.7 million ($1.74 per diluted share). This compares to net income of $965.3 million ($2.21 per diluted share) in the 53-week year 2008.

The gross profit margin was 28.62% in 2009 compared to 28.38% in 2008. Operating and administrative expense margin was 25.33% in 2009 compared to 24.17% in 2008.

Stock Repurchases

During the fourth quarter of 2009, Safeway purchased 19.4 million shares of its common stock at an average cost of $22.82 per share and a total cost of $443.1 million (including commissions). For the full year, Safeway purchased 42.5 million shares of its common stock at an average cost of $20.80 per share and a total cost of $884.9 million (including commissions). The remaining board authorization for stock repurchases at year-end was approximately $1.3 billion.

Capital Expenditures

Safeway invested $248.8 million in capital expenditures in the fourth quarter of 2009. The company opened one new Lifestyle store, completed 20 Lifestyle remodels and closed six stores. For the year, Safeway invested $851.6 million in capital expenditures, opened eight new Lifestyle stores, completed 82 Lifestyle remodels and closed 22 stores. At year-end 2009, 79% of our stores were Lifestyle stores.

Cash Flow

Net cash flow provided by operating activities was $2,549.7 million in the year 2009 compared to $2,250.9 million in the year 2008. Certain tax items increased cash flow from operating activities in 2009 by approximately $396 million.

Net cash flow used by investing activities declined to $889.0 million in the year 2009 from $1,546.0 million in 2008 because of reduced capital expenditures, partly offset by lower proceeds from the sales of property.

Net cash flow used by financing activities increased to $1,600.3 million in the year 2009 from $594.3 million in 2008 due primarily to a net reduction in borrowings and increased stock repurchases.

Guidance

Safeway’s investor conference will be held on Wednesday, March 3, 2010. At that time, Safeway will issue a press release announcing earnings guidance for 2010.

About Safeway

Safeway Inc. is a Fortune 50 company and one of the largest food and drug retailers in North America based on sales. The company operates 1,725 stores in the United States and Canada. The company’s common stock is traded on the New York Stock Exchange under the symbol SWY.

Safeway Conference Call

Safeway’s investor conference call discussing fourth-quarter results will be broadcast live at www.safeway.com/investor_relations at 8:00 a.m. PT on February 25, 2010. Click on Webcast Events to access the call. A replay will be available via webcast for approximately one week following the conference call.

This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are indicated by words or phrases such as "guidance,” "believes,” "expects,” "anticipates,” "estimates,” "plans,” "continuing,” "ongoing,” and similar words or phrases and the negative of such words and phrases. Forward-looking statements are based on our current plans and expectations and involve risks and uncertainties which are, in many instances, beyond our control, and which could cause actual results to differ materially from those included in or contemplated or implied by the forward-looking statements. Such risks and uncertainties include the following: general business and economic conditions in our operating regions, including the rate of inflation or deflation, consumer spending levels, currency valuations, population, employment and job growth and/or losses in our markets; pricing pressures and competitive factors, which could include pricing strategies, store openings, remodels or acquisitions by our competitors; results of our programs to control or reduce costs, improve buying practices and control shrink; results of our programs to increase sales; results of our continuing efforts to expand corporate brands; results of our programs to improve our perishables departments; results of our promotional programs; results of our capital program; results of our efforts to improve working capital; results of any ongoing litigation in which we are involved or any litigation in which we may become involved; the resolution of uncertain tax positions; the ability to achieve satisfactory operating results in all geographic areas where we operate; changes in the financial performance of our equity investments; labor costs, including benefit plan costs and severance payments, or labor disputes that may arise from time to time and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future; failure to fully realize or delay in realizing growth prospects for new business ventures including Blackhawk Network Holdings, Inc. ("Blackhawk”); legislative, regulatory, tax, accounting or judicial developments, including with respect to Blackhawk; the cost and stability of fuel, energy and other power sources; the impact of the cost of fuel on gross margin and identical-store sales; discount rates used in actuarial calculations for pension obligations and self-insurance reserves; the rate of return on our pension assets; the availability and terms of financing, including interest rates and our ability to issue commercial paper or public debt or to borrow under our lines of credit as a result of current financial market conditions; adverse developments with regard to food and drug safety and quality issues or concerns that may arise; loss of a key member of senior management; data security or other information technology issues that may arise; unanticipated events or changes in real estate matters, including acquisitions, dispositions and impairments; adverse weather conditions and effects from natural disasters; performance in new business ventures or other opportunities that we pursue, including Blackhawk; and the capital investment in and financial results from our Lifestyle stores. We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so. Please refer to our reports and filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q, and subsequent Current Reports on Form 8-K, for a further discussion of these risks and uncertainties.