This excerpt taken from the SWY 8-K filed Feb 23, 2006.
Non-Fuel Identical Store Sales Increase 3.7%
Contacts: Melissa Plaisance (925) 467-3136
Julie Hong (925) 467-3832
Pleasanton, CA February 23, 2006
Results From Operations
Safeway Inc. today reported net income of $173.5 million ($0.39 per diluted share) for the fourth quarter ended December 31, 2005. Net income for the quarter was reduced by a total of $0.12 per diluted share for previously announced store exit activities in Texas and employee buyouts primarily in Dominicks and Northern California. These items are outlined on Table 1 of this release.
Net income for the fourth quarter of 2004 was $202.7 million ($0.45 per diluted share). Net income for the quarter was reduced by a total of $0.02 per diluted share for contributions to a Northern California UFCW multi-employer health and welfare plan and an accrual for rent holidays. In addition, pro forma stock option expense in the fourth quarter of 2004 was $0.02 per diluted share. These items are outlined on Table 1.
We are very pleased with our 2005 results, said Steve Burd, Chairman, President and CEO. When adjusted for Easter, our same store sales grew stronger each quarter and we increased market share in the U.S. supermarket channel 51 of 52 weeks in 2005. We also completed the restructuring of our labor contracts and are beginning to experience solid operating and administrative expense leverage.
Total sales increased 5.8% to $12.0 billion in the fourth quarter of 2005 compared to $11.4 billion in 2004. Safeways marketing strategy, Lifestyle store execution and increased fuel sales drove this sales increase. Comparable store sales increased 5.4% and identical store sales (which exclude replacement stores) increased 5.1% for the fourth quarter of 2005. Excluding the effect of fuel sales, comparable store sales increased 3.9% and identical store sales increased 3.7% for the fourth quarter of 2005.
Lifestyle stores have contributed significantly to sales growth throughout 2005. As expected, the cost of promoting Lifestyle openings reduced gross margin and increased operating and administrative expense as a percentage of sales. The company expects that
as the Lifestyle stores opened in 2005 mature in 2006, their margins will improve and they will contribute at a higher level to Safeways operating profit.
Gross profit declined 36 basis points to 29.11% of sales in the fourth quarter of 2005 compared to 29.47% of sales in the fourth quarter of 2004. Higher fuel sales (which have a lower gross margin) reduced gross profit by 27 basis points. Higher energy costs reduced gross profit by 4 basis points in the fourth quarter of 2005. The remaining decline is the result of the grand opening of Lifestyle stores and targeted investments in price, offset by improved shrink.
Operating and Administrative Expense
Operating and administrative expense increased 8 basis points to 25.98% of sales in the fourth quarter of 2005 from 25.90% of sales in the fourth quarter of 2004. In the fourth quarter of 2005, Safeway incurred previously announced pretax charges of $55.5 million for store exit activities related to the closure of 26 Texas stores and $37.5 million for employee buyouts. Adjusting for these charges and other unusual and pro forma charges in 2004 as outlined in Table 7 of this release, operating and administrative expense improved 69 basis points.
This improvement in operating and administrative expense is primarily the result of increased sales (including fuel sales), restructured labor agreements and reduced workers compensation costs, partly offset by labor costs associated with the grand opening of Lifestyle stores and higher energy costs. Higher energy costs increased operating and administrative expense by 6 basis points in the fourth quarter of 2005.
Interest expense was $124.3 million in the fourth quarter of 2005 compared to $123.0 million in the fourth quarter of 2004. Lower debt was offset by an increase in the average interest rate from 5.76% to 6.32%.
Income Tax Expense
Income tax expense was $94.6 million, or 35.3% of pretax income, in the fourth quarter of 2005 compared to $101.2 million, or 33.3% of pretax income in the fourth quarter of 2004. Income tax expense in the fourth quarter of 2005 included $7.3 million of tax benefits ($0.02 per diluted share) associated with the favorable resolution of certain tax issues. Income tax expense in the fourth quarter of 2004 included a tax benefit of $8.8 million ($0.02 per diluted share) due to tax law changes and the favorable resolution of certain tax issues.
Net income for the year ended 2005 was $561.1 million ($1.25 per diluted share) compared to $560.2 million ($1.25 per diluted share) in 2004. Sales increased 7.2% to $38.4 billion in 2005 from $35.8 billion in 2004, primarily because of Safeways marketing strategy, Lifestyle store execution and increased fuel sales.
The gross profit margin decreased 65 basis points to 28.93% of sales in 2005 from 29.58% in 2004. Higher fuel sales reduced gross profit by 39 basis points. The remaining decline is due to grand openings of Lifestyle stores, investment in price, increased advertising expense and higher energy costs.
Operating and administrative expense decreased 53 basis points to 25.77% of sales from 26.30% in 2004. Excluding the unusual items outlined on Table 7, operating and administrative expense decreased 94 basis points. This improvement is the result of restructured labor agreements, increased fuel sales, and reduced workers compensation costs, partly offset by labor costs associated with the grand opening of Lifestyle stores and higher energy costs.
During 2005, Safeway invested $1.4 billion in cash capital expenditures. The company opened 21 new Lifestyle stores, completed 293 Lifestyle remodels and closed 48 stores. In 2006, the company expects to spend approximately $1.6 billion in cash capital expenditures, open approximately 20 to 25 new Lifestyle stores and complete approximately 280 Lifestyle remodels.
Net cash flow from operating activities was $1,881.0 million in 2005 compared to $2,226.4 million in 2004. Working capital contributed to cash flow in 2005, but at a lower level than in 2004.
Net cash flow used by investing activities, which consists principally of cash paid for property additions, increased to $1,313.5 million in 2005 from $1,070.3 million in 2004.
Net cash flow used by financing activities, which consists principally of cash used to pay down debt, was $466.9 million in 2005 and $1,077.6 million in 2004.
Free cash flow was $567.5 million in 2005. As a result, debt declined $404.8 million, cash and equivalents increased $106.5 million and the company paid $44.9 million in dividends to its stockholders.
Safeway confirms guidance for 2006 of $1.55 to $1.65 earnings per diluted share and free cash flow of $400 million to $600 million, both excluding employee buyouts. Non-fuel identical store sales are expected to grow 3.0%. The timing of holidays is expected to affect the quarterly pattern of sales and earnings in the first half of 2006. Shopping for the Easter holiday occurred in the first quarter of the 2005, but will occur in the second quarter of 2006.
On January 20, 2006, Safeway paid a dividend of $0.05 per common share to stockholders of record as of December 30, 2005. The payout was $22.5 million.
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 1,775 stores in the United States and Canada and had annual sales of $38.4 billion in 2005. The companys common stock is traded on the New York Stock Exchange under the symbol SWY.
Safeway Conference Call
Safeways 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 23, 2006. 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, operating profit, estimates of earnings per diluted share, identical store sales, comparable store sales, dividend payments, capital expenditures, free cash flow, effects of restructuring labor contracts and Lifestyle stores and are indicated by words or phrases such as guidance, expects, estimate, forecast and similar words or phrases. These statements are based on our current plans and expectations and involve risks and uncertainties which are, in many instances, beyond our control, including general business and economic conditions, competitive factors, currency valuations, results of our programs to reduce costs, increase sales and improve capital management, achievement of operating improvements in companies that we acquire, labor costs, 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, voluntary employee buyouts, unanticipated events or changes in future operating results, financial condition, real estate matters, including dispositions and impairments, or business over time, performance in new business ventures, or unfavorable legislative, regulatory, tax or judicial developments, that could cause actual events and results to vary significantly from those included in or contemplated by such statements. 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 the Annual Report to Stockholders in our most recent Form 10-K and subsequent Quarterly Reports on Form 10-Q for a further discussion of these risks and uncertainties.