Safeway Posts Loss In 4th Quarter, IDs Drop 4.1 Percent 

March 2010

Safeway late last month announced that it posted a net loss of $1.61 million ($4.06 per diluted share) for the 16-week fourth quarter of 2009 ended January 2, 2010. Excluding a non-cash goodwill impairment charge of $1.82 million, net of tax ($4.59 per diluted share), net income would have been $209.1 million ($0.53 per diluted share). In the 17-week fourth quarter of 2008 net income was $338.0 million ($0.79 per diluted share).

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

“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.”
On February 25, in a conference call with financial analysts, Burd commented on several related issues. including the company’s decision last year to drop prices on thousand of items.
“On the good news side, volume continued to show improvement in the U.S where I am happy to report we are now at price parity with our primary conventional competition. I think for several months now, people have been saying, “Well, where are you in this baseball game”. And I am now telling you the game is over in the U.S and we won,” Burd noted..

And when asked about recent trends, the veteran CEO stated: “Most of the year what we saw was increased transactions, increased households and still a negative basket size, which is I think a symptom of economic circumstances where people are being very careful with their money and maybe shopping multiple channels and so on....In the fourth quarter it was predominantly about increasing household, still some negative relative to last year on items per basket and we had a little down shift in the fourth quarter in terms of transactions.

Also during the conference call, Safeway chief financial officer Robert Edwards, opined that the current recession has led to decreased merger and acquisition activity in the entire industry.

“I guess what I would say is that maybe there has been a moderate up tick in interest but not - I wouldn’t say its material, I think that what you saw happen over the last 18 months to a year is a lot of people not having our balance sheet, our strength really struggled with this economic downturn. And so these can be 20 store chains, 50 store chains, that kind of thing. And so I think that they are much more amenable to considering a sale. But I don’t see anything on a sort of a transformational scale out there that grabs our attention,” Edwards asserted.

Also in the fourth quarter of 2009, Safeway recorded a non-cash goodwill impairment charge of $1.97 million ($1.89 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 its Eastern division based in Lanham, MD.

For its 52 week fiscal year, Safeway’s net loss was $1.09 million ($2.66 per diluted share). Excluding the goodwill impairment charge, net of tax ($4.40 per diluted share), net income would have been $720.7 million ($1.74 per diluted share) the company noted. 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 percent in 2009 compared to 28.38 percent in 2008. Operating and administrative expense margin was 25.33 percent in 2009 compared to 24.17 percent in 2008.

Safeway said it 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.

On March 3, at its Pleasanton, CA headquarters, Safeway held an investor conference in which it revealed its 2010 earnings guidance and cap-ex budget. The big retailer is predicting that it will earn between $1.65 - $1.85 per diluted share. This guidance takes into account non-fuel ID sales growth in a range of 0-1 percent in 2010, an operating profit margin change of negative 10 to positive 5 basis points, cash capital expenditures of approximately $900 million - $1.0 billion and free cash flow in a range of $900 - $1.1 billion.

“With the accomplishments we achieved in a difficult 2009, we are confident we have laid the foundation to grow our business,” said Burd. “We invested in lowering our prices on everyday items, and we also continued to invest in transforming our store base. With 79 percent (1,366 units) of our store base remodeled into Lifestyle stores, we believe we have the freshest asset base in the supermarket industry, and combined with our differentiated offering and lower pricing, we believe we are very well positioned for future growth.”