SWY » Topics » FINANCIAL CONDITION AND RESULTS OF OPERATIONS

These excerpts taken from the SWY 10-Q filed May 1, 2009.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 declined seven basis points to 28.72% of sales in the first quarter of 2009 compared to 28.79% of sales in the first quarter of 2008. The decline in fuel sales improved gross margin 79 basis points. The offsetting 86 basis-point decline was primarily the result of investments in everyday prices, as well as an elevated level of promotional spending. Investments in everyday prices will continue, while promotional spending is expected to return to normal levels.

Vendor allowances totaled $629.8 million for the first quarter of 2009 and $622.1 million for the first quarter of 2008. 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 when volume thresholds are achieved.

OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense declined approximately $100 million to $2.4 billion in the first quarter of 2009 from $2.5 billion in the first quarter of 2008. However, due to lower sales in 2009, operating and administrative expense increased 90 basis points to 25.67% of sales in the first quarter of 2009 from 24.77% of sales in the first quarter of 2008. Lower fuel sales in the first quarter of 2009 increased operating and administrative expense by 74 basis points. The remaining 16 basis-point increase was primarily the result of decreased sales leverage (partially due to the shift in holiday sales), increased occupancy costs as a percentage of sales and increased pension expense, partly offset by reduced labor costs.

INTEREST EXPENSE Interest expense declined to $78.2 million in the first quarter of 2009 from $84.5 million in the first quarter of 2008 due to a combination of lower average borrowings and lower interest rates.

INCOME TAX EXPENSE Income tax expense was $60.3 million, or 29.5% of pre-tax income, in the first quarter of 2009. Income tax expense in the first quarter of 2008 was $123.6 million, or 39.0% of pre-tax income. The decline in the tax rate was due primarily to benefits of $16.1 million from the favorable resolution of tax matters.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

equivalents in excess of $75.0 million) to Adjusted EBITDA ratio of 3.5 to 1. As of March 28, 2009, the Company was in compliance with these covenant requirements. As of March 28, 2009, there were borrowings of $7.9 million, and letters of credit totaled $34.1 million under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,558.0 million as of March 28, 2009.

SHELF REGISTRATION On December 8, 2008, the Company filed a shelf registration statement (the “Shelf”) with the SEC which enables Safeway to issue an unlimited amount of debt securities and/or common stock. The Shelf expires on December 8, 2011. The Safeway Board of Directors has authorized issuance of up to $2.0 billion of securities under the Shelf. As of March 28, 2009, $1.5 billion of securities were available for issuance under the board’s authorization.

INCOME TAXES On April 29, 2009, the Company was notified by the Internal Revenue Service that it approved a settlement of a disputed income tax matter. The result will be a reduction in income tax expense by an estimated $50 million during the second quarter of 2009.

Additionally, the resolution of the other income tax matters reported in the first quarter combined with this second quarter event will result in tax refunds of approximately $160 million that the Company expects to collect in the second quarter of 2009.

DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $35.6 million and $30.4 million for the first quarters of 2009 and 2008, respectively. Note J to the Company’s condensed consolidated financial statements in this report provides additional information on dividends declared and dividends paid on Safeway common stock.

STOCK REPURCHASE PROGRAM From the initiation of the Company’s stock repurchase program in 1999 through the end of the first quarter of 2009, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $3.9 billion, leaving an authorized amount for repurchases of approximately $1.1 billion. This includes an increase in the total authorized level of the repurchase program by $1.0 billion to $5.0 billion approved by the Board of Directors in May 2008. During the first quarter of 2009, Safeway repurchased 3.5 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $64.5 million. The average price per share, excluding commissions, was $18.40. The Company will evaluate the timing and volume of future repurchases based on several factors, including market conditions, and may repurchase stock in the near- or long-term as circumstances warrant.

CREDIT RATINGS The senior long-term and short-term debt ratings and outlooks currently assigned to unsecured Safeway public debt securities by the rating agencies are as follows:

 

    

Senior

Long-Term

   Short-Term    Outlook

Fitch Ratings

   BBB    F2    Stable

Moody’s Investors Services

   Baa2    P-2    Stable

Standard & Poor’s

   BBB    A-2    Stable

Investors should note that a credit rating is not a recommendation to buy, sell or hold securities and may be subject to withdrawal by the rating agency.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

   

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 new information, events or developments after the date hereof. Please refer to 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 more information regarding these risks and uncertainties. These reports are not intended to be a discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes regarding the Company’s market risk position from the information provided under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Company’s 2008 Annual Report on Form 10-K.

 

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management’s control objectives. Management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are effective in reaching the level of reasonable assurance regarding management’s control objectives. The Company also has investments in certain unconsolidated entities, including Casa Ley, S.A. de C.V. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act reports. There has been no change during the Company’s fiscal quarter ended March 28, 2009 in the Company’s internal control over financial reporting that was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) which has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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This excerpt taken from the SWY 10-Q filed Jul 17, 2008.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA, as defined in the Credit Agreement, to interest expense ratio of 2.0 to 1 and not exceed an Adjusted Debt (total consolidated debt less cash and cash equivalents in excess of $75.0 million) to Adjusted EBITDA ratio of 3.5 to 1. As of June 14, 2008, the Company was in compliance with the covenant requirements. As of June 14, 2008, there were no borrowings, and letters of credit totaled $37.1 million under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,562.9 million as of June 14, 2008.

SHELF REGISTRATION In 2004, the Company filed a shelf registration statement covering the issuance from time to time of up to $2.3 billion of debt securities and/or common stock. As of June 14, 2008, $825.0 million of securities were available for issuance under the shelf registration. The Company may issue debt or common stock in the future depending on market conditions, the need to refinance existing debt and capital expenditure plans.

DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $30.2 million and $25.4 million for the second quarters of 2008 and 2007, respectively. Year-to-date dividends paid on common stock totaled $60.6 million and $50.7 million for 2008 and 2007, respectively. Note I to the Company’s condensed consolidated financial statements in this report provides additional information on dividends declared and dividends paid on Safeway common stock.

STOCK REPURCHASE PROGRAM From the initiation of the Company’s stock repurchase program in 1999 through the end of the second quarter of fiscal 2008, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $3.7 billion, leaving an authorized amount for repurchases of approximately $1.3 billion. This includes an increase in the total authorized level of the repurchase program by $1.0 billion to $5.0 billion approved by the Board of Directors in May 2008. During the second quarter of 2008, Safeway repurchased approximately 3.2 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $100.6 million. The average price per share, excluding commissions, was $31.07. The timing and volume of future repurchases will depend on several factors, including market conditions.

CREDIT RATINGS On April 8, 2008, Standard & Poor’s upgraded Safeway’s corporate credit and senior unsecured long-term debt ratings to ‘BBB’ from ‘BBB-’. Concurrently, the short-term rating was raised to ‘A-2’ from ‘A-3’. The outlook was revised from positive to stable.

Investors should note that a credit rating is not a recommendation to buy, sell or hold securities and may be subject to withdrawal by the rating agency.

This excerpt taken from the SWY 10-Q filed Apr 28, 2008.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

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 new information, events or developments after the date hereof. Please refer to 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 more information regarding these risks and uncertainties. These reports are not intended to be a discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes regarding the Company’s market risk position from the information provided under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Company’s 2007 Annual Report on Form 10-K.

 

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management’s control objectives. Management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are effective in reaching the level of reasonable assurance regarding management’s control objectives. The Company also has investments in certain unconsolidated entities, including Casa Ley, S.A. de C.V. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act reports. There has been no change during the Company’s fiscal quarter ended March 22, 2008 in the Company’s internal control over financial reporting that was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) which has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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This excerpt taken from the SWY 10-Q filed Apr 27, 2007.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

   

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 efforts to revitalize corporate brands;

 

   

Results of our programs to improve our perishables departments;

 

   

Results of our promotional programs;

 

   

Results of our programs to improve capital management;

 

   

Results of our efforts to improve working capital;

 

   

Results of any on-going 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 new information, events or developments after the date hereof. Please refer to 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 more information regarding these risks and uncertainties. These reports are not intended to be a discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes regarding the Company’s market risk position from the information provided under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Company’s 2006 Annual Report on Form 10-K.

 

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management’s control objectives. Management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are effective in reaching the level of reasonable assurance regarding management’s control objectives. The Company also has investments in certain unconsolidated entities, including Casa Ley. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act reports. There has been no change during the Company’s fiscal quarter ended March 24, 2007 in the Company’s internal control over financial reporting that was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) which has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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This excerpt taken from the SWY 10-Q filed Oct 13, 2006.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We undertake no obligation to update forward-looking statements to reflect new information, events or developments after the date hereof. Please refer to 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 more information regarding these risks and uncertainties. These reports are not intended to be a discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.

 

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This excerpt taken from the SWY 10-Q filed Jul 21, 2006.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes forward-looking statements relating to pension plan contributions; dividend payments on common stock; the amount, timing of the receipt and use of federal and state income tax refunds and interest thereon; defenses to legal proceedings; obligations arising out of divested operations; repurchases of common stock; and Lifestyle stores. The following are among the principal factors that could cause actual results to differ materially from those included in or contemplated or implied by the forward-looking statements:

 

  General business and economic conditions in our operating regions, including 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, including private-label sales;

 

  Results of our programs to improve our perishables departments;

 

  Results of our promotional programs;

 

  Results of our programs to improve capital management;

 

  Results of any on-going litigation in which we are involved or any litigation in which we may become involved;

 

  The ability to achieve satisfactory operating results at Dominick’s and our Texas stores;

 

  Changes in the financial performance of our equity investments;

 

  Labor costs, including 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;

 

  Legislative, regulatory, tax or judicial developments;

 

  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;

 

  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 new information, events or developments after the date hereof. Please refer to 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 more information regarding these risks and uncertainties. These reports are not intended to be a discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.

 

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This excerpt taken from the SWY 10-Q filed May 3, 2006.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

approximately $1.6 billion in capital expenditures, open approximately 20 to 25 new Lifestyle stores and complete approximately 280 Lifestyle remodels.

This excerpt taken from the SWY 10-Q filed Oct 20, 2005.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

On June 29, 2005, Standard & Poor’s (S&P) lowered its long-term credit rating on the Company to BBB- (with a stable outlook) from BBB. Moody’s and Fitch ratings remained unchanged at Baa2 and BBB, respectively (both with a negative outlook). Safeway’s ability to borrow under the Credit Agreement is unaffected by Safeway’s credit ratings. Also, the Company maintains no debt which requires accelerated repayment based on the lowering of credit ratings. Pricing under the Credit Agreement is generally determined by the better of Safeway’s interest coverage ratio or credit ratings. Safeway’s pricing was unaffected by S&P’s lowered rating. However, changes in the Company’s credit ratings may have an adverse impact on financing costs and structure in future periods, such as the ability to participate in the commercial paper market and higher interest costs on future financings. Additionally, if Safeway does not maintain the financial covenants in its Credit Agreement, its ability to borrow under the Credit Agreement would be impaired. Investors should note that a credit rating is not a recommendation to buy, sell or hold securities and may be subject to withdrawal by the rating agency. Each credit rating should be evaluated independently.

 

This excerpt taken from the SWY 10-Q filed Jul 28, 2005.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

In 2004, the Company filed a shelf registration statement covering the issuance from time to time of up to $2.3 billion of debt securities and/or common stock. The Company may issue debt or equity securities in the future depending on market conditions, the need to refinance existing debt and capital expenditure plans. At June 18, 2005, $1.6 billion of securities were available for issuance under the shelf registration.

 

On July 7, 2005, Safeway paid a quarterly dividend of $0.05 per common share to stockholders of record as of June 16, 2005. The payout totaled $22.4 million. Assuming the Company continues to pay quarterly dividends in the same amount, annual dividends on common stock would approximate $90 million.

 

The Company has offered voluntary severance packages to Northern California, union employees. Compensation expense related to this offer will be incurred in the second half of 2005.

 

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway’s commercial paper program and Credit Agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the commercial paper program and Credit Agreement.

 

On June 29, 2005, Standard & Poor’s (S&P) lowered its long-term credit rating on the Company to BBB- (with a stable outlook) from BBB. Moody’s and Fitch ratings remained unchanged at Baa2 and BBB, respectively (both with a negative outlook). Safeway’s ability to borrow under the Credit Agreement is unaffected by Safeway’s credit ratings. Also, the Company maintains no debt which requires the accelerated repayment based on the lowering of credit ratings. Pricing under the Credit Agreement is generally determined by the better of Safeway’s interest coverage ratio or credit ratings. Safeway’s pricing was unaffected by S&P’s lowered rating. However, changes in the Company’s credit ratings may have an adverse impact on financing costs and structure in future periods, such as the ability to participate in the commercial paper market and higher interest costs on future financings. Additionally, if Safeway does not maintain the financial covenants in its Credit Agreement, its ability to borrow under the Credit Agreement would be impaired.

 

Capital Expenditure Program. Safeway invested $515.1 million in capital expenditures in the first 24 weeks of 2005. The Company opened eight new Lifestyle stores and completed 83 Lifestyle remodels. For the year, the Company has increased expected capital expenditures to approximately $1.5 billion from $1.4 billion. The Company expects to open approximately 25 new Lifestyle stores and complete approximately 290 to 295 Lifestyle remodels. By year-end 2005, approximately 25% of Safeway’s store base will be in the Lifestyle format.

 

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