Safeway (SWY)

12 WEEKS ENDED SEPTEMBER 10, 2005 COMPARED WITH 12 WEEKS ENDED SEPTEMBER 11, 2004

Net income was $122.5 million ($0.27 per diluted share) for the third quarter ended September 10, 2005. Safeway’s results were reduced $0.08 per diluted share due to an impairment charge in Texas and $0.03 per diluted share for an employee buyout charge in Northern California.

Net income was $159.2 million ($0.35 per diluted share) for the third quarter of 2004. Net income was reduced by $0.03 per diluted share for contributions to two Northern California UFCW multi-employer health and welfare plans.

The favorable resolution of various tax issues increased net income by $0.06 per diluted share in the third quarter of 2005 and $0.07 per diluted share in 2004.

In 2005, Safeway early adopted Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” which requires that stock options be expensed. The non-cash expense for stock options was $14.6 million, pre-tax ($0.02 per diluted share) in the third quarter of 2005.

Texas Strategy

Safeway plans to revitalize the Texas division through a strategy which includes the closure of 26 under-performing stores, a focused Lifestyle remodel program and the introduction of proprietary products. Safeway incurred a $54.7 million pre-tax impairment charge ($0.08 per diluted share) on these stores in the third quarter of 2005 and expects to incur a charge of approximately $59 million, pre-tax ($0.08 per diluted share) for store exit activities in the fourth quarter of 2005. The impact of closing these stores is expected to be cash neutral in 2005.

Energy Costs

Fuel and energy prices increased significantly over last year. Safeway avoided a portion of this increase with the use of fixed price natural gas and electricity contracts. However, the net impact of higher fuel and natural gas prices increased store utility costs, store supply costs and distribution costs. It also lowered operating profit from fuel stations. Safeway estimates that higher energy costs reduced net income by approximately $23 million, pre-tax ($0.03 per diluted share) in the third quarter of 2005.

SALES Sales and other revenue increased 7.2% to $8.9 billion in the third quarter of 2005 from $8.3 billion in the third quarter of 2004. Increased fuel sales, Safeway’s marketing strategy and Lifestyle store execution drove this sales increase.

Comparable store sales increased 5.7% and identical store sales (which exclude replacement stores) increased 5.4% for the third quarter of 2005. Excluding the effect of fuel sales, identical store sales increased 3.4%.

GROSS PROFIT Gross profit represents the portion of sales revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs of Safeway’s distribution network. Advertising and promotional expenses are also a component of cost of goods sold. Additionally, all vendor allowances are classified as an element of cost of goods sold.

Primarily because of fuel sales, which have a lower gross margin, gross profit declined 98 basis points to 28.58% of sales in the third quarter of 2005 compared to 29.56% in the third quarter of 2004. Fuel sales reduced gross profit margin by 65 basis points. The remaining 33 basis point decline is largely the result of the grand opening of 79 Lifestyle stores, increased advertising expenses, investments in price and higher energy costs.

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12 WEEKS ENDED JUNE 18, 2005 COMPARED WITH 12 WEEKS ENDED JUNE 19, 2004

Net income was $134.0 million ($0.30 per diluted share) for the second quarter ended June 18, 2005 compared to $155.2 million ($0.35 per diluted share) for the second quarter of 2004.

Stock option expense reduced net income in the second quarter of 2005 by $0.02 per diluted share. In the second quarter of 2004, the favorable resolution of various income tax issues increased net income by $0.03 per diluted share.

SALES Total sales increased 4.7% to $8.8 billion in the second quarter of 2005 from $8.4 billion in the second quarter of 2004. Safeway’s marketing strategies and the recovery from last year’s strike in Southern California drove this sales increase. However, a shift in Easter holiday sales, which occurred in the second quarter of last year compared to the first quarter of this year, reduced the sales increase.

Comparable store sales increased 3.3% and identical store sales (which exclude replacement stores) increased 2.8% for the second quarter of 2005. Further, excluding the effect of fuel sales, identical store sales increased 1.4%. When adjusted for the Easter holiday, non-fuel identical store sales increased 2.6%.

GROSS PROFIT Gross profit represents the portion of sales revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs of Safeway’s distribution network. Advertising and promotional expenses are also a component of cost of goods sold. Additionally, all vendor allowances are classified as an element of cost of goods sold.

Gross profit margin declined 42 basis points to 28.74% of sales in the second quarter of 2005 compared to 29.16% in the second quarter of 2004. Higher fuel sales (which have a lower gross margin) reduced gross profit by 36 basis points. The recovery from the strike in Southern California improved gross margin but was offset by increased advertising, investments in price and other expenses.

Vendor allowances totaled $542.1 million for the second quarter of 2005 and $527.3 million for the second quarter of 2004. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances, and contract allowances.

Promotional allowances make up nearly three-quarters of all allowances. With promotional allowances, vendors pay Safeway to promote their product. The promotion may be any combination of a temporary price reduction, a feature in print ads, a feature in a Safeway circular, or a preferred location in the store. The promotions are typically one to two weeks long.

Slotting allowances are a small portion of total allowances (typically less than 5% of all allowances). With slotting allowances, the vendor reimburses Safeway for the cost of placing new product on the shelf. Safeway has no obligation or commitment to keep the product on the shelf for a minimum period.

Contract allowances make up the remainder of all allowances. Under the typical contract allowance, a vendor pays Safeway to keep product on the shelf for a minimum period of time or until volume thresholds are achieved.

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