Safeway Inc. Announces Fourth-Quarter 2007 Earnings

Safeway Inc. (NYSE:SWY): Results From Operations Safeway Inc. today reported net income of $301.1 million for the fourth quarter of 2007 compared to net income of $307.9 million in the fourth quarter of 2006. Diluted earnings per share was $0.68 in the fourth quarter of 2007 compared to $0.69 in the fourth quarter of 2006. However, diluted earnings per share in the fourth quarter of 2006 was increased by $0.08 due to various favorable tax items. Sales and Other Revenue Total sales increased 6.8% to $13.4 billion in the fourth quarter of 2007 compared to $12.5 billion in the fourth quarter of 2006. Contributions from Lifestyle stores, increased fuel sales and an increase in the Canadian Dollar exchange rate drove this increase. Identical-store sales increased 4.4% in the fourth quarter of 2007. Excluding fuel, identical-store sales increased 2.7%. "We are pleased with our performance in the fourth quarter of 2007,” said Steve Burd, Chairman, President, and CEO. "Excluding the $0.08 tax benefit in the fourth quarter of 2006, our diluted earnings per share increased by 11.5%.” Gross Profit Gross profit declined 44 basis points to 28.69% of sales in the fourth quarter of 2007 compared to 29.13% of sales in the fourth quarter of 2006. Higher fuel sales (which have a lower gross margin) reduced gross profit by 50 basis points. The remaining 6 basis- point increase is the result of improved shrink, lower advertising expense and higher revenue from Blackhawk Network, partly offset by investments in price and higher LIFO expense. LIFO expense was $7.0 million in the fourth quarter of 2007 compared to LIFO income of $5.8 million in 2006. Operating and Administrative Expense Operating and administrative expense improved 55 basis points to 24.21% of sales in the fourth quarter of 2007 from 24.76% of sales in the fourth quarter of 2006. Higher fuel sales in 2007 reduced operating and administrative expense by 36 basis points. The remaining 19 basis point decline was the result of larger gains on disposal of property and reduced employee costs, partly offset by higher depreciation. Interest Expense Interest expense was $120.6 million in the fourth quarter of 2007 compared to $121.5 million in the fourth quarter of 2006. Indebtedness was lower in the fourth quarter of 2007 compared to 2006, while average interest rates were slightly higher. Other Income Other income declined to $3.2 million in the fourth quarter of 2007 from $10.8 million in the fourth quarter of 2006 due primarily to the resolution of various tax items at Casa Ley, Safeway’s unconsolidated affiliate in Mexico. Income Tax Expense Income tax expense was $179.2 million, or 37.3% of pre-tax income in the fourth quarter of 2007. Income tax expense in the fourth quarter of 2006 was $127.2 million, or 29.2% of pre-tax income. Income tax expense in the fourth quarter of 2006 included approximately $38.0 million of tax benefits ($0.08 per diluted share) due to the utilization of net operating loss carry forwards and various other favorable items. Annual Results Net income for the year 2007 was $888.4 million ($1.99 per diluted share) compared to $870.6 million ($1.94 per diluted share) in 2006. Results in 2006 were increased by income tax benefits of $96.5 million ($0.22 per diluted share) related to interest on federal and state income tax refunds and various other favorable tax items. Sales increased 5.2% to $42.3 billion in 2007 from $40.2 billion in 2006 primarily because of Safeway’s marketing strategy, Lifestyle store execution, increased fuel sales and an increase in the Canadian dollar exchange rate. Identical-store sales, excluding fuel, increased 3.4%. Gross profit decreased 8 basis points to 28.74% of sales in 2007 from 28.82% of sales in 2006. Higher fuel sales reduced gross profit by 20 basis points. Excluding fuel, gross profit increased 12 basis points primarily because of lower advertising expense, improved shrink, and benefits from supply-chain initiatives, partly offset by investments in price and higher LIFO expense. LIFO expense was $13.9 million in 2007 compared to $1.2 million in 2006. Operating and administrative expense decreased 29 basis points to 24.55% of sales in 2007 from 24.84% of sales in 2006. Higher fuel sales in 2007 reduced operating and administrative expense by 16 basis points. The remaining 13 basis point decline is primarily the result of reduced employee costs as a percentage of sales and higher gains on disposal of property, partly offset by higher depreciation expense. Stock Repurchase During the fourth quarter of 2007, Safeway purchased 3.0 million shares of its common stock at an average price of $31.62 per share and a total cost of $93.6 million (including commissions). For the year, Safeway purchased 6.7 million shares of its common stock at an average price of $33.57 per share and a total cost of $226.1 million (including commissions). The remaining board authorization for stock repurchases as of year-end 2007 is $521.1 million. Capital Expenditures During 2007, Safeway invested $1.77 billion in capital expenditures. The company opened 20 new Lifestyle stores, completed 253 Lifestyle remodels and closed 38 stores. In 2008 the company expects to spend $1.70 to $1.75 billion in capital expenditures, open 20 to 25 new Lifestyle stores and complete 250 to 255 Lifestyle remodels. Cash Flow Net cash flow from operating activities was $2,190.5 million in 2007 compared to $2,175.0 million in 2006. Net cash flow used by investing activities declined slightly to $1,686.4 million in 2007 from $1,734.7 million in 2006. Cash paid for property additions was greater in 2007 than in 2006. However, proceeds from the sale of property were also greater in 2007. In addition Safeway spent $83.8 million to acquire businesses in 2006. Net cash flow used by financing activities was $454.0 million in 2007 compared to $596.3 million in 2006. In 2007 Safeway paid down $261.3 million of debt, repurchased $226.1 million of common stock, and paid $111.5 million of dividends. In 2006 Safeway paid down $493.1 million of debt, repurchased $318.0 million of common stock, paid $96.0 million in dividends and received $262.3 million in income tax refunds. Guidance Safeway confirmed guidance for the 53-week year 2008 of $2.25 to $2.35 diluted earnings per share and free cash flow of $500 million to $700 million. Identical-store sales, excluding fuel, are expected to grow 3.0% to 3.2%. About Safeway Safeway Inc. is a Fortune 100 company and one of the largest food and drug retailers in North America based on sales. The company operates 1,743 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 over the Internet at www.safeway.com/investor_relations at 8:00 AM PST February 21, 2008. Click on Webcast Events to access the live call. An on-demand webcast of the conference call will also be available for approximately one week following the live 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, 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, consumer spending levels, currency valuations, population, employment and job growth 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 improve 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 or judicial developments, including with respect to Blackhawk; the cost and stability of fuel, energy and other power sources; 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; the capital investment in and financial results from our Lifestyle stores; the rate of return on our pension assets; and the availability and terms of financing. 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)                   16 Weeks 16 Weeks 52 Weeks 52 Weeks Ended Ended Ended Ended December 29, December 30, December 29, December 30, 2007 2006 2007 2006   Sales and other revenue $ 13,356.4 $ 12,503.5 $ 42,286.0 $ 40,185.0   Cost of goods sold (9,524.5 ) (8,861.4 ) (30,133.1 ) (28,604.0 )   Gross profit 3,831.9 3,642.1 12,152.9 11,581.0   Operating and administrative expense (3,234.2 ) (3,096.3 ) (10,380.8 ) (9,981.2 )   Operating profit 597.7 545.8 1,772.1 1,599.8   Interest expense (120.6 ) (121.5 ) (388.9 ) (396.1 )   Other income, net 3.2   10.8   20.4   36.3     Income before income taxes 480.3 435.1 1,403.6 1,240.0   Income taxes (179.2 ) (127.2 ) (515.2 ) (369.4 )   Net income $ 301.1   $ 307.9   $ 888.4   $ 870.6     Basic earnings per share $ 0.68   $ 0.70   $ 2.02   $ 1.96     Diluted earnings per share $ 0.68   $ 0.69   $ 1.99   $ 1.94     Weighted average shares outstanding: Basic 440.8   440.7   440.3   444.9   Diluted 444.9   445.1   445.7   447.8   SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In millions, except per-share amounts) (Unaudited)   Year-end Year-end 2007 2006 ASSETS   Current assets: Cash and equivalents $ 277.8 $ 216.6 Receivables 577.9 461.2 Merchandise inventories 2,797.8 2,642.5 Prepaid expense and other current assets 354.0   245.4     Total current assets 4,007.5   3,565.7     Total property, net 10,622.0 9,773.3   Goodwill 2,406.3 2,393.5 Prepaid pension costs 73.2 137.3 Investment in unconsolidated affiliate 216.0 219.6 Other assets 326.0   184.4     Total assets $ 17,651.0   $ 16,273.8     LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Current maturities of notes and debentures $ 954.9 $ 790.7 Current obligations under capital leases 42.5 40.8 Accounts payable 2,825.4 2,464.4 Accrued salaries and wages 506.7 485.8 Income taxes 88.0 100.6 Other accrued liabilities 718.9   719.1     Total current liabilities 5,136.4   4,601.4     Long-term debt: Notes and debentures 4,093.5 4,428.7 Obligations under capital leases 564.2   607.9     Total long-term debt 4,657.7 5,036.6   Deferred income taxes 254.7 117.4 Pension and postretirement benefit obligations 236.7 204.0 Accrued claims and other liabilities 663.7   647.5     Total liabilities 10,949.2 10,606.9   Stockholders' equity Common stock: par value $0.01 per share; 1,500 shares authorized; 589.3 and 582.5 shares outstanding 5.9 5.8 Additional paid-in capital 4,038.2 3,811.5 Treasury stock at cost; 149.2 and 142.4 shares (4,418.0 ) (4,188.7 ) Accumulated other comprehensive income 246.2 94.8 Retained earnings 6,829.5   5,943.5   Total stockholders' equity 6,701.8   5,666.9     Total liabilities and stockholders' equity $ 17,651.0   $ 16,273.8   SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited)   52 Weeks   52 Weeks Ended Ended December 29, December 30, 2007 2006 OPERATING ACTIVITIES Net income $ 888.4 $ 870.6 Reconciliation to net cash flow from operating activities: Depreciation expense 1,071.2 991.4 Property impairment charges 27.1 39.2 Stock option expense 48.4 51.2 Excess tax benefit from exercise of stock options (38.3 ) (6.3 ) LIFO expense 13.9 1.2 Equity in earnings of unconsolidated affiliate (8.7 ) (21.1 ) Net pension expense 72.1 83.1 Contributions to pension plans (33.0 ) (29.2 ) Gain on property retirements and lease exit costs, net (42.3 ) (17.8 ) (Decrease) increase in accrued claims and other liabilities (5.8 ) 10.8 Deferred income taxes 130.8 1.1 Amortization of deferred finance cost 5.3 5.8 Other 15.8 7.3 Changes in working capital items: Receivables (3.0 ) (45.1 ) Inventories at FIFO cost (102.1 ) 96.9 Prepaid expenses and other current assets (22.7 ) (9.3 ) Income taxes (8.7 ) (14.9 ) Payables and accruals 98.0 89.0 Payables related to third-party gift cards, net of receivables 84.1   71.1   Net cash flow from operating activities 2,190.5   2,175.0     INVESTING ACTIVITIES Cash paid for property additions (1,768.7 ) (1,674.2 ) Proceeds from sale of property 140.0 80.1 Cash used to acquire businesses - (83.8 ) Other (57.7 ) (56.8 ) Net cash flow used by investing activities (1,686.4 ) (1,734.7 )   FINANCING ACTIVITIES Additions to short-term borrowings 285.0 - Payments on short-term borrowings (190.0 ) - Additions to long-term borrowings 1,864.6 1,418.9 Payments on long-term borrowings (2,220.9 ) (1,912.0 ) Purchase of treasury stock (226.1 ) (318.0 ) Dividends paid on common stock (111.5 ) (96.0 ) Net proceeds from exercise of stock options 106.8 45.4 Excess tax benefit from exercise of stock options 38.3 6.3 Income tax refund related to prior years' debt financing 7.0 262.3 Other (7.2 ) (3.2 ) Net cash flow used by financing activities (454.0 ) (596.3 )   Effect of changes in exchange rate on cash 11.1 (0.7 )   Increase (decrease) in cash and equivalents 61.2 (156.7 )   CASH AND EQUIVALENTS Beginning of period 216.6   373.3   End of period $ 277.8   $ 216.6   SAFEWAY INC. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION (Dollars in millions) (Unaudited)         TABLE 1: CAPITAL EXPENDITURES AND OTHER STATISTICAL DATA   Fourth Quarter Year Ended December 29, December 30, December 29, December 30, 2007 2006 2007 2006 Cash capital expenditures $ 532.1 $ 562.6 $ 1,768.7 $ 1,674.2 Stores opened 14 8 20 17 Stores closed 9 14 38 31 Lifestyle remodels completed 95 127 253 276 Stores at end of period 1,743 1,761 Square footage (in millions) 80.3 80.8   Fuel sales $ 1,115.4 $ 848.1 $ 3,487.8 $ 3,002.0 Number of fuel stations at end of period 361 340 TABLE 2: RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA       Year Ended December 29, 2007   Net income $ 888.4 Add (subtract): Income taxes 515.2 Interest expense 388.9 Depreciation 1,071.2 LIFO expense 13.9 Stock option expense 48.4 Property impairment charges 27.1 Equity in earnings of unconsolidated affiliates (8.7 ) Dividend received from unconsolidated affiliate 8.9   Adjusted EBITDA $ 2,953.3     Total debt at December 29, 2007 $ 5,655.1   Less cash and equivalents in excess of $75.0 at December 29, 2007 202.8   Adjusted Debt $ 5,452.3     Adjusted EBITDA as a multiple of interest expense 7.59 x Minimum Adjusted EBITDA as a multiple of interest expense under bank credit agreement 2.00 x   Adjusted Debt to Adjusted EBITDA 1.85 x Maximum Adjusted Debt to Adjusted EBITDA under bank credit agreement 3.50 x SAFEWAY INC. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION (Dollars in millions) (Unaudited)   TABLE 3: RECONCILIATION OF NET CASH FLOW FROM OPERATING ACTIVITIES TO ADJUSTED EBITDA     Year Ended December 29, 2007   Net cash flow from operating activities $ 2,190.5 Add (subtract): Income taxes 515.2 Interest expense 388.9 Amortization of deferred finance cost (5.3 ) Excess tax benefit from exercise of stock options 38.3 Deferred income taxes (130.8 ) Net pension expense (72.1 ) Contributions to pension plans 33.0 Accrued claims and other liabilities 5.8 Gain on property retirements and lease exit costs 42.3 Changes in working capital items (45.6 ) Other (6.9 ) Adjusted EBITDA $ 2,953.3   TABLE 4: RECONCILIATION OF GAAP CASH FLOW MEASURE TO FREE CASH FLOW1         Year Ended Forecasted Range 2007 2006 Fiscal 2008 Net cash flow from operating activities $ 2,190.5 $ 2,175.0 Increase in payables related to third party gift cards, net of receivables (84.1 ) (71.1 ) Interest earned on favorable income tax settlement, net of tax -   (62.6 ) Net cash flow from operating activities as adjusted 2,106.4 2,041.3 $ 2,220.0 $ 2,350.0   Net cash flow used by investing activities (1,686.4 ) (1,734.7 ) (1,720.0 ) (1,650.0 ) Cash used to acquire businesses/stores, net of tax benefits -   49.5   -   -   Net cash flow used by investing activities as adjusted (1,686.4 ) (1,685.2 ) (1,720.0 ) (1,650.0 )   Free cash flow $ 420.0   $ 356.1   $ 500.0   $ 700.0     1Excludes 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 therefore is excluded from the company's calculation of free cash flow. Free cash flow in 2006 has been reclassified to conform with the 2007 presentation. Free cash flow in 2006 was originally reported as $427.2 million because it included payables related to third-party gift cards, net of recivables.   SAFEWAY INC. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION (Unaudited)             TABLE 5: SAME-STORE SALES INCREASES   Fourth Quarter 2007 Year Ended 2007 Comparable- Identical- Comparable- Identical- Store Sales Store Sales Store Sales Store Sales Increases Increases2 Increases Increases2   As reported 4.5% 4.4% 4.4% 4.1% Excluding fuel sales 2.8% 2.7% 3.6% 3.4%   2Excludes replacement stores. TABLE 6: DILUTED EARNINGS PER SHARE HISTORY ADJUSTED FOR CERTAIN TAX ITEMS             Fourth Quarter Year Ended December 29, December 30, December 29, December 30, 2007 2006 2007 2006   Diluted earnings per share, as reported $ 0.68 $ 0.69 $ 1.99 $ 1.94   Certain tax adjustments (0.08 ) (0.08 ) Interest earned on favorable income tax settlement, net of tax       (0.14 )   Diluted earnings per share, as adjusted $ 0.68   $ 0.61   $ 1.99   $ 1.72     Percentage increase over prior year 11.5 % 15.7 %