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Results From Operations
Safeway Inc. today reported net income of $128.8 million ($0.31 per diluted share) for the third quarter of 2009 compared to net income of $199.7 million ($0.46 per diluted share) for the third quarter of 2008.
"Safeway's sales remained soft, driven largely by deflation in dairy, produce and meat, and a sluggish economy," said Steve Burd, Chairman, President and CEO. "However, we are encouraged that our household and transaction counts increased in the quarter, and that volume trends continue to improve. In addition, our year-to-date free cash flow of $865 million is up $366 million, or 73%, over last year."
"In this difficult economy, we are working diligently to lower costs and meet the needs of our customers with high quality products, lower everyday prices and attractive club card specials," added Burd.
Sales and Other Revenue
Total sales declined 7.0% to $9.5 billion in the third quarter of 2009 compared to $10.2 billion in the third quarter of 2008. This decline was the result of lower fuel sales (which was due primarily to lower fuel prices), a 3.0% decline in identical-store sales for the quarter, excluding fuel, and a decline in the Canadian exchange rate.
Gross Profit
Gross profit increased 78 basis points to 28.27% of sales in the third quarter of 2009 compared to 27.49% of sales in the third quarter of 2008. Excluding the 84 basis point impact from fuel sales, gross profit declined six basis points. This decline was largely the result of investments in everyday price and increased advertising, partly offset by lower LIFO expense and lower energy expense.
Operating and Administrative Expense
Operating and administrative expense declined $13.3 million to $2,396.0 million in the third quarter of 2009 from $2,409.3 million in the third quarter of 2008. However, due to lower sales, operating and administrative expense margin increased 164 basis points to 25.33% of sales in the third quarter of 2009 from 23.69% of sales in the third quarter of 2008. Excluding the 75 basis point impact of lower fuel sales in the third quarter of 2009, operating and administrative expense margin increased 89 basis points. This increase was primarily the result of decreased sales leverage, increased charges from property impairments and retirements and increased pension expense.
Interest Expense
Interest expense declined to $78.3 million in the third quarter of 2009 from $80.0 million in the third quarter of 2008 due to lower average borrowings, partly offset by higher average interest rates.
Income Tax Expense
Income tax expense was 36.0% of pre-tax income in both the third quarters of 2009 and 2008.
36-Week Results
Net income for the first 36 weeks of 2009 was $511.6 million ($1.21 per diluted share) compared to $627.4 million ($1.43 per diluted share) in the first 36 weeks of 2008.
The gross profit margin was 28.62% in the first 36 weeks of 2009 compared to 28.19% for the first 36 weeks of 2008. Operating and administrative expense margin was 25.36% in the first 36 weeks of 2009 compared to 24.10% in the first 36 weeks of 2008.
Stock Repurchases
During the third quarter of 2009, Safeway purchased 10.2 million shares of its common stock at an average cost of $18.84 per share and a total cost of $191.6 million (including commissions). During the first 36 weeks of 2009, Safeway purchased 23.1 million shares of its common stock at an average cost of $19.10 per share and a total cost of $441.8 million (including commissions). The remaining board authorization for stock repurchases at quarter-end was approximately $720 million.
Capital Expenditures
Safeway invested $157.2 million in capital expenditures in the third quarter of 2009. The company opened five new Lifestyle stores, completed 16 Lifestyle remodels and closed 10 stores. During the first 36 weeks of 2009, Safeway invested $602.8 million in capital expenditures, opened seven new Lifestyle stores, completed 62 Lifestyle remodels and closed 16 stores. For the year, the company expects to spend approximately $1.0 billion in capital expenditures, open about 10 new Lifestyle stores and complete approximately 85 Lifestyle remodels.
Cash Flow
Net cash flow provided by operating activities was $1,287.3 million in the first 36 weeks of 2009. This was essentially flat compared to $1,284.8 million of net cash flow provided by operating activities in the first 36 weeks of 2008.
Net cash flow used by investing activities declined to $627.5 million in the first 36 weeks of 2009 from $980.1 million in the first 36 weeks of 2008 because of reduced capital expenditures, partly offset by lower proceeds from the sale of property.
Net cash flow used by financing activities increased to $677.4 million in the first 36 weeks of 2009 compared to $209.4 million in the first 36 weeks of 2008 due primarily to a net reduction in borrowings and increased stock repurchases.
Guidance
Safeway is maintaining earnings guidance for the year 2009 of $1.70 - $1.90 per diluted share. Safeway is also maintaining free cash flow guidance for the year 2009 of $1.1 billion to $1.3 billion.
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 1,730 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 third-quarter results will be broadcast live over the Internet at www.safeway.com/investor_relations at 8:00 a.m. PT on October 15, 2009. 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. Such statements relate to, among other things, estimates of diluted earnings per share, identical-store sales, capital expenditures, free cash flow, financial and operating results, volume trends, and Lifestyle stores. 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; 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.
SAFEWAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
(Unaudited)
12 Weeks Ended 36 Weeks Ended
September 12, September 6, September 12, September 6,
2009 2008 2009 2008
Sales and other revenue $ 9,458.3 $ 10,169.3 $ 28,156.8 $ 30,288.1
Cost of goods sold (6,784.2 ) (7,373.7 ) (20,098.3 ) (21,749.0 )
Gross profit 2,674.1 2,795.6 8,058.5 8,539.1
Operating and administrative expense (2,396.0 ) (2,409.3 ) (7,141.3 ) (7,299.3 )
Operating profit 278.1 386.3 917.2 1,239.8
Interest expense (78.3 ) (80.0 ) (233.7 ) (246.2 )
Other income, net 1.5 5.7 6.0 7.3
Income before income taxes 201.3 312.0 689.5 1,000.9
Income taxes (72.5 ) (112.3 ) (177.9 ) (373.5 )
Net income $ 128.8 $ 199.7 $ 511.6 $ 627.4
Basic earnings per share $ 0.31 $ 0.46 $ 1.22 $ 1.44
Diluted earnings per share $ 0.31 $ 0.46 $ 1.21 $ 1.43
Weighted average shares outstanding:
Basic 411.3 432.3 420.1 436.2
Diluted 411.9 435.0 421.2 439.4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per-share amounts)
(Unaudited)
September 12, Year-end
2009 2008
ASSETS
Current assets:
Cash and equivalents $ 380.3 $ 382.8
Receivables 404.8 515.1
Merchandise inventories 2,601.0 2,591.4
Prepaid expense and other current assets 252.9 254.6
Income taxes receivable 95.1 232.3
Total current assets 3,734.1 3,976.2
Total property, net 10,385.8 10,643.1
Goodwill 2,397.3 2,390.2
Investment in unconsolidated affiliate 213.0 207.1
Other assets 294.3 268.1
Total assets $ 17,024.5 $ 17,484.7
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes and debentures $ 1,006.6 $ 758.4
Current obligations under capital leases 36.1 40.6
Accounts payable 1,965.3 2,448.5
Accrued salaries and wages 400.2 450.3
Deferred income taxes 114.7 107.2
Other accrued liabilities 663.4 694.2
Total current liabilities 4,186.3 4,499.2
Long-term debt:
Notes and debentures 3,829.5 4,184.2
Obligations under capital leases 495.9 516.6
Total long-term debt 4,325.4 4,700.8
Deferred income taxes 273.7 249.6
Pension and postretirement benefit obligations 619.2 597.2
Accrued claims and other liabilities 660.5 651.7
Total liabilities 10,065.1 10,698.5
Stockholders' equity
Common stock: par value $0.01 per share; 1,500 shares authorized; 5.9 5.9
591.3 and 590.7 shares issued
Additional paid-in capital 4,174.2 4,128.3
Treasury stock at cost; 184.9 and 161.8 shares (5,218.7 ) (4,776.8 )
Accumulated other comprehensive loss (53.6 ) (228.7 )
Retained earnings 8,051.6 7,657.5
Total stockholders' equity 6,959.4 6,786.2
Total liabilities and stockholders' equity $ 17,024.5 $ 17,484.7
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
36 Weeks Ended
September 12, September 6,
2009 2008
OPERATING ACTIVITIES
Net income $ 511.6 $ 627.4
Reconciliation to net cash flow used by operating activities:
Depreciation expense 803.1 770.8
Property impairment charges 45.2 31.5
Stock-based employee compensation 38.5 42.4
Excess tax benefit from exercise of stock options - (1.4 )
LIFO expense - 23.2
Equity in (earnings) loss of unconsolidated affiliate (5.9 ) 1.3
Net pension expense 93.7 58.2
Contributions to pension plans (22.9 ) (25.5 )
Loss on property retirements and lease exit costs 18.8 1.6
Increase in accrued claims and other liabilities 11.6 16.1
Amortization of deferred finance costs 3.3 3.5
Deferred income taxes 10.2 6.4
Other 19.2 3.2
Changes in working capital items:
Receivables 47.6 3.0
Inventories at FIFO cost 27.1 58.3
Prepaid expenses and other current assets 3.3 (0.6 )
Income taxes 92.2 84.7
Payables and accruals (204.3 ) (224.7 )
Payables related to third-party gift cards, net of receivables (205.0 ) (194.6 )
Net cash flow provided by operating activities 1,287.3 1,284.8
INVESTING ACTIVITIES
Cash paid for property additions (602.8 ) (1,007.3 )
Proceeds from sale of property 7.1 62.6
Other (31.8 ) (35.4 )
Net cash flow used by investing activities (627.5 ) (980.1 )
FINANCING ACTIVITIES
Payments on short-term borrowings (0.9 ) (10.0 )
Additions to long-term borrowings 1,033.6 692.3
Payments on long-term borrowings (1,168.1 ) (466.8 )
Purchase of treasury stock (441.8 ) (359.5 )
Dividends paid (112.5 ) (96.6 )
Net proceeds from exercise of stock options 3.3 27.4
Excess tax benefit from exercise of stock options - 1.4
Income tax refund related to prior years' debt financing 16.8 2.8
Other (7.8 ) (0.4 )
Net cash flow used by financing activities (677.4 ) (209.4 )
Effect of changes in exchange rate on cash 15.1 (14.9 )
(Decrease) increase in cash and equivalents (2.5 ) 80.4
CASH AND EQUIVALENTS
Beginning of period 382.8 277.8
End of period $ 380.3 $ 358.2
SAFEWAY INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(Dollars in millions)
(Unaudited)
TABLE 1: CAPITAL EXPENDITURES AND OTHER STATISTICAL DATA
12 Weeks Ended 36 Weeks Ended
September 12, September 6, September 12, September 6,
2009 2008 2009 2008
Cash capital expenditures $ 157.2 $ 330.5 $ 602.8 $ 1,007.3
Stores opened 5 4 7 8
Stores closed 10 6 16 13
Lifestyle remodels completed 16 51 62 119
Stores at end of period 1,730 1,738
Square footage (in millions) 80.3 80.2
Fuel sales $ 712.4 $ 1,077.9 $ 1,837.6 $ 2,940.0
Number of fuel stations at end of period 385 371
(Decrease) increase in sales from change in Canadian exchange rate $ (96.6 ) $ 27.9 $ (613.0 ) $ 376.0
TABLE 2: RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(A+B-C) A B C
Rolling Year Ended 36 Weeks 36 Weeks
Four Quarters January 3, Ended Ended
Sept. 12, 2009 2009 Sept. 12, 2009 Sept. 6, 2008
Net income $ 849.5 $ 965.3 $ 511.6 $ 627.4
Add (subtract):
Income taxes 343.7 539.3 177.9 373.5
Interest expense 346.2 358.7 233.7 246.2
Depreciation 1,173.4 1,141.1 803.1 770.8
LIFO expense 11.7 34.9 - 23.2
Stock-based employee compensation 58.4 62.3 38.5 42.4
Property impairment charges 54.0 40.3 45.2 31.5
Equity in (earnings) loss of unconsolidated affiliate (4.7 ) 2.5 (5.9 ) 1.3
Adjusted EBITDA $ 2,832.2 $ 3,144.4 $ 1,804.1 $ 2,116.3
Total debt at September 12, 2009 $ 5,368.1
Less cash and equivalents in excess of $75.0 at September 12, 2009 305.3
Adjusted Debt $ 5,062.8
Adjusted EBITDA as a multiple of interest expense 8.18 x
Minimum Adjusted EBITDA as a multiple of interest expense under 2.00 x
bank credit agreement
Adjusted Debt to Adjusted EBITDA 1.79 x
Maximum Adjusted Debt to Adjusted EBITDA under bank credit 3.50 x
agreement
SAFEWAY INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(Dollars in millions)
(Unaudited)
TABLE 3: RECONCILIATION OF NET CASH FLOW FROM OPERATING
ACTIVITIES TO ADJUSTED EBITDA
(A+B-C) A B C
Rolling Year Ended 36 Weeks 36 Weeks
Four Quarters January 3, Ended Ended
Sept. 12, 2009 2009 Sept. 12, 2009 Sept. 6, 2008
Net cash flow provided by operating activities $ 2,253.4 $ 2,250.9 $ 1,287.3 $ 1,284.8
Add (subtract):
Income taxes 343.7 539.3 177.9 373.5
Interest expense 346.2 358.7 233.7 246.2
Amortization of deferred finance costs (4.9 ) (5.1 ) (3.3 ) (3.5 )
Excess tax benefit from exercise of stock options 0.1 1.5 - 1.4
Deferred income taxes (175.5 ) (171.7 ) (10.2 ) (6.4 )
Net pension expense (120.1 ) (84.6 ) (93.7 ) (58.2 )
Contributions to pension plans 31.2 33.8 22.9 25.5
Accrued claims and other liabilities (19.9 ) (24.4 ) (11.6 ) (16.1 )
Gain (loss) on property retirements and lease exit costs 1.8 19.0 (18.8 ) (1.6 )
Changes in working capital items 190.7 225.5 239.1 273.9
Other (14.5 ) 1.5 (19.2 ) (3.2 )
Adjusted EBITDA $ 2,832.2 $ 3,144.4 $ 1,804.1 $ 2,116.3
TABLE 4: RECONCILIATION OF GAAP CASH FLOW MEASURE TO FREE CASH
FLOW*
36 Weeks Ended 12 Weeks Ended
Sept. 12, 2009 Sept. 6, 2008 Sept. 12, 2009 Sept. 6, 2008
Net cash flow provided by operating activities, as reported $ 1,287.3 $ 1,284.8 $ 603.3 $ 571.9
Decrease in payables related to third-party gift cards, net of 205.0 194.6 18.8 12.5
receivables
Net cash flow from operating activities, as adjusted 1,492.3 1,479.4 622.1 584.4
Net cash flow used by investing activities (627.5 ) (980.1 ) (166.3 ) (323.1 )
Free cash flow $ 864.8 $ 499.3 $ 455.8 $ 261.3
Forecasted Range
Fiscal 2009
Net cash flow from operating activities, as adjusted $ 2,100.0 $ 2,250.0
Net cash flow used by investing activities (1,000.0 ) (950.0 )
Free cash flow $ 1,100.0 $ 1,300.0
*Excludes cash flow from payables related to third-party gift
cards, net of receivables. Cash from the sale of third-party gift
cards is held for a short period of time and then remitted, less
Safeway's commission, to card partners. Because this cash flow is
temporary it is not available for other uses, and is therefore
excluded from the company's calculation of free cash flow.
SAFEWAY INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(Unaudited)
TABLE 5: SAME-STORE SALES
Third Quarter 2009
Comparable- Identical-
Store Sales Store Sales
Decreases Decreases*
As reported -6.3 % -6.4 %
Excluding fuel sales -3.0 % -3.0 %
*Excludes replacement stores.
SOURCE: Safeway Inc.
Safeway Inc. Melissa Plaisance, 925-467-3136 Christiane Pelz, 925-467-3832
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