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Safeway Inc (SWY) SEC Filing 10-K Annual report for the fiscal year ending Saturday, December 31, 2011

Safeway Inc

CIK: 86144 Ticker: SWY


FOR IMMEDIATE RELEASE

SAFEWAY INC. ANNOUNCES
FOURTH QUARTER
2011 RESULTS

Earnings per Diluted Share increases 8%

Contact: Melissa Plaisance (925) 467-3636
Christiane Pelz (925) 467-3832
                 
Pleasanton, CA - February 23, 2012



Results From Operations
Safeway Inc. today reported net income of $215.6 million ($0.67 per diluted share) for the fourth quarter of 2011. In the fourth quarter of 2010, Safeway reported net income of $229.6 million ($0.62 per diluted share).

"Our business continued to grow," said Steve Burd, Chairman, President and CEO. "With ID sales growth remaining steady and costs well-controlled, we increased earnings per share 8%. As we move into 2012, our personalized marketing efforts and innovation in private label brands should contribute to our growth."

Sales and Other Revenue
Total sales increased 6.2% to $13.6 billion in the fourth quarter of 2011 from $12.8 billion in the fourth quarter of 2010 due primarily to higher fuel sales, the impact of reporting Blackhawk commissions on a gross basis1 and a 1.5% increase in identical-store sales (excluding fuel).

Gross Profit
Gross profit declined 137 basis points to 26.71% of sales in the fourth quarter of 2011 compared to 28.08% of sales in the fourth quarter of 2010. Excluding the 48 basis-point impact from fuel sales and the 48 basis-point impact from the change in reporting gift card commissions, gross profit declined 41 basis points due primarily to increased LIFO expense.

_____________________________ 
1 Prior to 2011, Safeway recorded Blackhawk Network distribution commissions on the sale of certain gift cards net of the commissions shared with other retailers. In the first quarter of 2011, Safeway determined that these commissions should be reported on a gross basis. This change increased both revenue and cost of goods sold in 2011, but had no impact on identical-store sales, gross profit dollars or net income. Previously reported results are not adjusted because the impact is immaterial.



The following information was filed by Safeway Inc (SWY) on Thursday, February 23, 2012 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to         
Commission file number 1-00041
SAFEWAY INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
94-3019135
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
5918 Stoneridge Mall Road
 
 
Pleasanton, California
 
94588-3229
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant’s telephone number, including
area code:
 
(925) 467-3000
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Name of each exchange on which registered
Common Stock, $0.01 par value per share
  
New York Stock Exchange
7.45% Senior Debentures due 2027
  
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes   X   No     .
(Cover continued on following page)



SAFEWAY INC. AND SUBSIDIARIES
 
(Cover continued from previous page)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes      No X.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X   No     .
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes X   No     .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K X.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer X
 
Accelerated filer    
 
Non-accelerated filer    
Smaller reporting company    
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes      No X.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 18, 2011 was approximately $7.9 billion.
As of February 22, 2012, there were outstanding approximately 268.0 million shares of the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference to the extent specified herein:
 
Document Description
 
10-K Part
Portions of the definitive proxy statement for use in connection with the Annual Meeting of Stockholders (to be held May 15, 2012) to be filed within 120 days after the end of the fiscal year ended December 31, 2011
 
III


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SAFEWAY INC. AND SUBSIDIARIES
Table of Contents
 
 
Page
 
 
 
 
 
 
PART I
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
 
 
PART III
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
 
 
PART IV
 
 
 
 
 
Item 15.
 
 

 

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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for Safeway Inc. (“Safeway,” the “Company,” “we” or “our”) 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. The Company also provides forward-looking statements in other materials which are released to the public, as well as oral forward-looking statements. Forward-looking statements contain information about our future operating or financial performance. Forward-looking statements are based on our current expectations and involve risks and uncertainties, which may be beyond our control, as well as assumptions. If assumptions prove to be incorrect or if known or unknown risks and uncertainties materialize into actual events or circumstances, actual results could differ materially from those included in or contemplated or implied by these statements. Forward-looking statements do not strictly relate to historic or current facts. Forward-looking statements are indicated by words or phrases such as “continuing,” “ongoing,” “expects,” “estimates,” “anticipates,” “believes,” “guidance” and similar words or phrases and the negative of such words or phrases.
This Annual Report on Form 10-K includes forward-looking statements relating to, among other things: changes to the total closed store reserve; uses of cash; ability to borrow under commercial paper program and/or bank credit facilities; sufficiency of liquidity; indemnification obligations; dividend payments on common stock; our potential to grow operating profit; cash capital expenditures; outcomes of legal proceedings; the effect of new accounting standards; compliance with laws and regulations; pension plan expense and contributions; obligations and contributions under benefit plans; the rate of return on pension assets; unrecognized tax benefits; repatriation of future Canadian earnings, amount of indebtedness; unrecognized compensation cost; 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 the rate of inflation or deflation, consumer spending levels, currency valuations, population, employment and job growth and/or losses in our markets;
Sales volume levels and price per item trends;
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 expand 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 existing or new business ventures, including our Blackhawk and Property Development Centers subsidiaries;
Legislative, regulatory, tax, accounting or judicial developments, including with respect to Blackhawk;
The cost and stability of fuel, energy and other power sources;
The impact of the cost of fuel on gross margin and identical-store sales;

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Discount rates used in actuarial calculations for pension obligations and self-insurance reserves;
The rate of return on our pension assets;
The availability and terms of financing, including interest rates;
Adverse developments with regard to food and drug safety and quality issues or concerns that may arise;
Loss of a key member of senior management;
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 and effects from natural disasters;
Performance in new business ventures or other opportunities that we pursue; 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. For additional information regarding these risks and uncertainties, see “Item 1A. Risk Factors.” These 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.

PART I

Item 1.
Business
General    The Company began operations in 1926. In July 1986, Safeway was incorporated in the state of Delaware as SSI Holdings Corporation and, thereafter, its name was changed to Safeway Stores, Incorporated. In February 1990, the Company changed its name to Safeway Inc. The Company’s fiscal year ends on the Saturday nearest December 31. The last three fiscal years consist of the 52-week period ended December 31, 2011 (“fiscal 2011” or “2011”), the 52-week period ended January 1, 2011 (“fiscal 2010” or “2010”) and the 52-week period ended January 2, 2010 (“fiscal 2009” or “2009”).
Safeway Inc. is one of the largest food and drug retailers in North America, with 1,678 stores at year-end 2011. The Company’s U.S. retail operations are located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area and the Mid-Atlantic region. The Company’s Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. In support of its retail operations, the Company has an extensive network of distribution, manufacturing and food-processing facilities.
Safeway owns and operates GroceryWorks.com Operating Company, LLC (“GroceryWorks”), an online grocery channel doing business under the names Safeway.com, Vons.com and Genuardis.com (collectively “Safeway.com”).
Safeway also has a 49% ownership interest in Casa Ley, S.A. de C.V. (“Casa Ley”) which operates 185 food and general merchandise stores in Western Mexico.
Blackhawk Network, Inc. (“Blackhawk”), a majority-owned subsidiary of Safeway, provides prepaid products and payment services to consumers through a network of retail store locations in the United States, Canada, Europe, Mexico and Australia and various online channels. Prepaid products include: closed loop (private branded) cards, open loop (network branded) cards, financial services products and telecom products. Additionally, Blackhawk provides card production services, a secondary market for prepaid cards and has recently introduced digital wallet services.
Stores    Safeway’s average store size is approximately 47,000 square feet. The Company determines the size of a new store based on a number of considerations, including the needs of the community the store serves, the location and site plan and the estimated return on capital invested. Safeway’s “Lifestyle” store showcases the Company’s commitment to quality with an expanded perishables offering. It features an earth-

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toned décor package that is warm and inviting with special lighting to highlight products and departments, custom flooring and unique display features. The Company believes this warm ambience significantly enhances the shopping experience.
Safeway’s stores provide a full array of grocery items tailored to local preferences. Most stores offer a wide selection of food and general merchandise and feature a variety of specialty departments such as bakery, delicatessen, floral, seafood and pharmacy. In addition, the majority of stores offer Starbucks coffee shops, and many offer adjacent fuel centers.
Safeway continues to operate a number of smaller stores that also offer an extensive selection of food and general merchandise and that generally include one or more specialty departments. These stores remain an important part of the Company’s store network in smaller communities and certain other locations where larger stores may not be feasible because of space limitations and/or community needs or restrictions. 
The following table summarizes Safeway’s stores by size at year-end 2011:
 
Square footage
 
Number
of stores

 
Percent
of total

Less than 30,000
 
200

 
12
%
30,000 to 50,000
 
693

 
41

More than 50,000
 
785

 
47

Total stores
 
1,678

 
100
%
Store Ownership    At year-end 2011, Safeway owned 42% of its stores and leased its remaining stores.
Merchandising    Safeway's operating strategy is to provide value to its customers by maintaining high store standards and a wide selection of high-quality products at competitive prices. To provide one-stop shopping for today's busy shoppers, the Company emphasizes high-quality produce and meat and offers many unique items through its various specialty departments.

Safeway is focused on differentiating its offering with high-quality perishables. The Company believes it has developed a reputation for having the best produce in the market, through high-quality specifications and precise handling procedures, and the most tender and flavorful meat and poultry, through both the Company's Rancher's Reserve Tender Beef offering and Open Nature all natural beef, chicken and sausages. Safeway's deli/food service department has developed a variety of solutions for today's busy shoppers, including Signature Café sandwiches, soups and salads as well as Primo Taglio deli meats and cheeses. Many Safeway bakeries offer freshly made bread, and the floral department is recognized by its signature gazebo.

Safeway has continued to develop its portfolio of Consumer Brands private label products. The Company has focused its brands into three areas: Health & Wellness, Premium and Core. The prices in each category are generally lower than those of comparable products from national brands.

The Health & Wellness portfolio includes the O Organics, Eating Right, Bright Green and Open Nature brands. These offerings address consumers' specific health needs or preferences. O Organics is one of the largest exclusively organics brands. Eating Right offers a "spot your needs" labeling system, and Bright Green is an environmentally friendly household product line. Open Nature, an all-natural product line, was launched in the fourth quarter of 2010 and already achieved over $100 million in sales in 2011.

The Premium portfolio includes the Safeway SELECT, Signature Café, Rancher's Reserve, Primo Taglio, Waterfront BISTRO and Debi Lilly offerings. Safeway SELECT is a line of quality products that the Company believes are unique to the category. Waterfront BISTRO is a seafood brand designed to make preparing a

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restaurant-quality meal at home easy.

In the Core portfolio are the Safeway brands, Lucerne, Refreshe, the Snack Artist and Pantry Essentials. In 2011, the Safeway brand was subdivided into four brands: Safeway Farms, Safeway Kitchens, Safeway Home and Safeway Care. The Lucerne brand has been producing quality dairy products for over 100 years. The Refreshe label was re-branded in 2010 to include all 14 private-label beverage brands.The Snack Artist offers high-quality and great value snacks in a variety of categories such as chips, cookies and frozen categories in whimsical, resealable packaging, a unique feature in the category. Pantry Essentials was launched in 2011 as a value line, including formerly branded Value Red and Dairy Glen items.
Manufacturing and Wholesale    The principal function of manufacturing operations is to purchase, manufacture and process private-label merchandise sold in stores operated by Safeway. As measured by sales dollars, 14% of Safeway’s private-label merchandise is manufactured in Company-owned plants, and the remainder is purchased from third parties.
Safeway’s Canadian subsidiary has a wholesale operation that distributes both national brands and private-label products to independent grocery stores and institutional customers.
Safeway operated the following manufacturing and processing facilities at year-end 2011:
 
 
U.S.
 
Canada
Milk plants
 
6
 
3
Bakery plants
 
6
 
2
Ice cream plants
 
2
 
2
Cheese and meat packing plants
 
 
1
Soft drink bottling plants
 
4
 
Fruit and vegetable processing plants
 
1
 
3
Cake commissary
 
1
 
Sandwich commissary
 
 
1
Total
 
20
 
12
In addition, the Company operates laboratory facilities for quality assurance and research and development in certain plants and at its corporate offices.
Distribution    Safeway has 17 distribution/warehousing centers (13 in the United States and four in Canada), which collectively provide the majority of all products to Safeway’s 12 retail operating areas. The distribution centers in Maryland and British Columbia are operated by third parties.



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Capital Expenditure Program    A key component of the Company’s long-term growth strategy is its capital expenditure program. The Company’s capital expenditure program funds, among other things, new stores, remodels, retail shopping center development, manufacturing plants, distribution facilities and information technology. Safeway’s management has maintained a rigorous program to select and approve new capital investments.
The table below details changes in the Company’s store base and presents the Company’s cash capital expenditures over the last five years (dollars in millions):
 
2011
2010
2009
2008
2007
Total stores at beginning of year
1,694

1,725

1,739

1,743

1,761

Stores opened:
 
 
 
 
 
New
6

3

3

8

13

Replacement
19

11

5

12

7

 
25

14

8

20

20

Stores closed
41

45

22

24

38

Total stores at year end
1,678

1,694

1,725

1,739

1,743

Remodels completed (1)
 
 
 
 
 
Lifestyle remodels
29

60

82

232

253

Other remodels

7

10

21

15

 
29

67

92

253

268

Number of fuel stations at year end
400

393

388

382

361

Total retail square footage at year end (in millions)
79.2

79.2

80.1

80.4

80.3

Cash paid for property additions
$
1,094.7

$
837.5

$
851.6

$
1,595.7

$
1,768.7

Cash paid for property additions as a percentage of sales and other revenue
2.5
%
2.0
%
2.1
%
3.6
%
4.2
%
 
(1)
Defined as store remodel projects (other than maintenance) generally requiring expenditures in excess of $0.2 million. Excludes pharmacy refurbishments.
In 2012, the Company expects to spend approximately $0.9 billion in cash for capital expenditures. At year-end 2011, 87% of Safeway’s store base were Lifestyle stores. Safeway expects to eventually convert most of the remaining stores to Lifestyle stores.
Financial Information about Segments, Geographic Areas and Sales Revenue by Type of Similar Product    Note N to the consolidated financial statements set forth in Part II, Item 8 of this report provides financial information about the Company’s segments, geographic areas and sales revenue by type of similar product.
Trade Names and Trademarks    Safeway has invested significantly in the development and protection of “Safeway” both as a trade name and a trademark and considers it to be an important asset. Safeway also owns more than 300 other trademarks registered and/or pending in the United States Patent and Trademark Office and other jurisdictions, including trademarks for its product lines such as Safeway, Safeway SELECT, Rancher’s Reserve, O ORGANICS, Lucerne, Primo Taglio, Eating Right, mom to mom, waterfront BISTRO, Bright Green, Pantry Essentials, In-Kind, Open Nature, Refreshe, Snack Artist, Signature Café and Priority, and other trademarks such as Pak’N Save Foods, Vons, Pavilions, Dominick’s, Randalls, Tom Thumb, Genuardi’s and Carrs Quality Centers. Each trademark registration is for an initial period of 10 or 20 years, depending on the registration date, and may be renewed so long as it is in continued use in commerce.

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Canada Safeway also has registered numerous trademarks in Canada. Canada Safeway has invested significantly in “Safeway” both as a trade name and a trademark and considers it to be an important asset in Canada. Canada Safeway owns and has registered in Canada approximately 200 trademarks, most of which replicate trademarks owned in the United States by Safeway. In addition to those trademarks used in common with Safeway, Canada Safeway owns certain trademarks unique to its business in Canada. For example, Canada Safeway has registered the trademarks, “Macdonalds Consolidated” and “Family Foods” in connection with wholesale distribution of merchandise to independent grocers. In Canada, each trademark registration is for an initial period of 15 years, and may be renewed for additional periods of 15 years, as long as the trademark continues to be used in commerce.
Safeway considers its trademarks to be of material importance to its business and actively defends and enforces its rights.
Working Capital    At year-end 2011, working capital consisted of $4.2 billion in current assets and $5.0 billion in current liabilities. Normal operating fluctuations in these substantial balances can result in changes to cash flow from operations presented in the consolidated statements of cash flows that are not necessarily indicative of long-term operating trends. There are no unusual industry practices or requirements relating to working capital items.
Seasonality    Blackhawk receives a significant portion of the cash inflow from the sale of third-party prepaid cards late in the fourth quarter of the year and generally remits the cash, less commissions, to the card partners early in the first quarter of the following year.
Competition    Food retailing is intensely competitive. The principal competitive factors that affect the Company’s business are location, quality, price, service, selection and condition of assets.
We face intense competition from traditional grocery retailers, non-traditional competitors such as supercenters and club stores, as well as from specialty and niche supermarkets, drug stores, dollar stores, convenience stores and restaurants. Safeway and its competitors engage in price competition which, from time to time, has adversely affected operating margins in the Company’s markets.
Raw Materials    Various agricultural commodities constitute the principal raw materials used by the Company in the manufacture of its food products. Management believes that raw materials for its products are not in short supply, and all are readily available from a wide variety of independent suppliers.
Compliance with Environmental Laws    The Company’s compliance with the federal, state, local and foreign laws and regulations which have been enacted or adopted regulating the discharge of materials into the environment or otherwise related to the protection of the environment, has not had and is not expected to have a material adverse effect upon the Company’s financial position or results of operations.
Employees   At year-end 2011, Safeway had more than 178,000 full- and part-time employees. Approximately 75% of Safeway’s employees in the United States and Canada are covered by collective bargaining agreements negotiated with union locals affiliated with one of nine different international unions. There are approximately 430 such agreements, typically having three- to five-year terms. Accordingly, Safeway renegotiates a significant number of these agreements every year.
During 2011, contracts covering approximately 39,000 employees were ratified. In particular, United Food and Commercial Workers International Union (“UFCW”) collective bargaining agreements which covered approximately 34,000 employees, primarily in stores in the Company’s Vons, Seattle and Northern California (Hawaii) divisions, as well as stores in Alberta, Canada, were ratified.
Available Information    Safeway’s corporate Web site is located at www.safeway.com. You may access our Securities and Exchange Commission (“SEC”) filings free of charge at our corporate Web site promptly after such material is electronically filed with, or furnished to, the SEC. We also maintain certain corporate

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governance documents on our Web site, including the Company’s Corporate Governance Guidelines, our Director Independence Standards, the Code of Business Conduct and Ethics for the Company’s corporate directors, officers and employees, and the charters for our Audit, Nominating and Corporate Governance, and Executive Compensation committees. We will provide a copy of any such documents to any stockholder who requests it. We do not intend for information found on the Company’s Web site to be part of this document.

Item 1A.
Risk Factors
We wish to caution you that there are risks and uncertainties that could affect our business. These risks and uncertainties include, but are not limited to, the risks described below and elsewhere in this report, particularly in “Forward-Looking Statements.” The following is not intended to be a complete discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.
Competitive Industry Conditions    We face intense competition from traditional grocery retailers, non-traditional competitors such as supercenters and club stores, as well as from specialty and niche supermarkets, drug stores, dollar stores, convenience stores and restaurants. Increased competition may have an adverse effect on profitability as the result of lower sales, lower gross profits and/or greater operating costs.
Our ability to attract customers is dependent, in large part, upon a combination of location, quality, price, service, selection and condition of assets. In each of these areas, traditional and non-traditional competitors compete with us and may successfully attract our customers to their stores by aggressively matching or exceeding what we offer. In recent years, many of our competitors have increased their presence in our markets. Our responses to competitive pressure, such as additional promotions and increased advertising, could adversely affect our profitability. We cannot guarantee that our actions will succeed in gaining or maintaining market share. Additionally, we cannot predict how our customers will react to the entrance of certain non-traditional competitors into the grocery retailing business.
Because we face intense competition, we need to anticipate and respond to changing consumer demands more effectively than our competitors. We strive to achieve and maintain favorable recognition of our unique private-label brands, effectively market our products to consumers, competitively price our products and maintain and enhance a perception of value for consumers. Finally, we need to source and market our merchandise efficiently and creatively. Failure to accomplish these objectives could impair our ability to compete successfully and adversely affect our growth and profitability.
Labor Relations    A significant majority of our employees are unionized, and our relationship with unions, including labor disputes or work stoppages, could have an adverse impact on our financial results. We are a party to approximately 430 collective bargaining agreements, of which 72 are scheduled to expire in 2012. These expiring agreements cover approximately 28% of our union-affiliated employees. In future negotiations with labor unions, we expect that rising health care, pension and wage costs, among other issues, will be important topics for negotiation. If, upon the expiration of such collective bargaining agreements, we are unable to negotiate acceptable contracts with labor unions, it could result in strikes by the affected workers and thereby significantly disrupt our operations. Further, if we are unable to control health care and pension costs provided for in the collective bargaining agreements, we may experience increased operating costs and an adverse impact on future results of operations.
Profit Margins    Profit margins in the grocery retail industry are very narrow. In order to increase or maintain our profit margins, we develop strategies to increase revenues, reduce costs and increase gross margins, such as new marketing programs, new advertising campaigns, productivity improvements, shrink reduction, distribution center efficiencies, energy efficiency programs and other similar strategies. Our failure to achieve forecasted cost reductions, revenue growth or gross margin improvement across the Company might have a material adverse effect on our business. Changes in our product mix also may negatively affect certain financial measures.
Opening and Remodeling Stores    Our inability to open and remodel stores as planned could have a

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material adverse effect on our results. If, as a result of labor relations issues, supply issues or environmental and real estate delays, or other reasons, these capital projects do not stay within the time and financial budgets we have forecasted, our future financial performance could be materially adversely affected. Furthermore, we cannot ensure that the new or remodeled stores will achieve anticipated same-store sales or profit levels.
Food Safety, Quality and Health Concerns    We could be adversely affected if consumers lose confidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, whether valid or not, may discourage consumers from buying our products or cause production and delivery disruptions. The real or perceived sale of contaminated food products by us could result in product liability claims, a loss of consumer confidence and product recalls, which could have a material adverse effect on our sales and operations.
Current Economic Conditions    The United States and, to a lesser extent, Canadian economies and financial markets have declined and experienced volatility due to uncertainties related to unemployment rates, energy prices, availability of credit, difficulties in the banking and financial services sectors, the decline in the housing market and falling consumer confidence. As a result, consumers are more cautious. This may have led to reduced consumer spending, to some consumers trading down to a less expensive mix of products and to some consumers trading down to discounters for grocery items, all of which impacts Safeway’s sales growth. If these conditions continue or worsen, it could further impact Safeway’s sales growth. In 2010, Safeway experienced overall deflation, and in 2011, Safeway experienced overall inflation. In this uncertain economy, it is difficult to forecast with certainty the rate of inflation or deflation for 2012. Food deflation could reduce sales growth and earnings, while food inflation, combined with reduced consumer spending, could reduce gross profit margins. Challenging economic conditions may also impact consumer spending for our products. Higher fuel prices could also dampen overall consumer demand. We are unable to predict with certainty if the economies of the United States and Canada will continue to improve or the rate at which they will improve. If these economies do not improve, Safeway’s business, results of operations and financial condition could be adversely affected.
Future Growth of Blackhawk    Blackhawk’s business, financial condition, results of operations and prospects are subject to certain risks and uncertainties. Consequently, actual results could differ materially from Blackhawk’s targeted earnings growth. There is no assurance that Blackhawk will continue to grow at the same rate as it has in the past. Some of the specific risks and uncertainties include, but are not limited to, the following:
A significant portion of Blackhawk’s revenues and net earnings is realized during the last several weeks of the calendar year and is related to consumer gift purchases. A reduction in consumer spending for gifts, operational issues that result in limitations on gift cards available for sale in Blackhawk’s distribution channels or other factors that contribute to a shortfall in sales during this period could have an adverse effect on the Company’s consolidated results of operations and financial condition;
Blackhawk faces competition from other companies that offer similar products. This could limit Blackhawk’s future growth;
Blackhawk’s business depends on its ability to negotiate contract renewals with its key partners and on the active and effective promotion of Blackhawk's products and services by its distribution partners;
Blackhawk’s prospects could be adversely affected as a result of legal or regulatory changes affecting the sales of prepaid products or other products that Blackhawk sells or plans to sell in the future or as a result of Blackhawk's failure to comply with applicable laws and regulations;
Blackhawk is substantially dependent on the continuous operation and security of its information technology applications and infrastructure;
Blackhawk's prospects could be adversely affected as a result of changes in card association rules or standards set by Visa, MasterCard and others, or changes in card association and debit network fees or products or interchange rates; and

11





SAFEWAY INC. AND SUBSIDIARIES


Blackhawk has operations in several international locations, and it may find a different business or competitive environment in markets outside the U.S. that could adversely affect its profitability.
New Business Initiatives and Strategies The introduction, implementation, success and timing of new business initiatives and strategies, including but not limited to, initiatives to increase revenue, develop real estate, or enter into new areas of business may be less successful or may be different than anticipated, which could adversely affect Safeway's business.
Pension and Post-Retirement Plans    We maintain defined benefit retirement plans for substantially all employees not participating in multiemployer pension plans. The funded status of these plans (the difference between the fair value of the plan assets and the projected benefit obligation) is a significant factor in determining annual pension expense as well as cash contributions to fund the plans. Historically, Safeway’s retirement plans have been well funded, and prior to 2011, cash contributions to the plans have been relatively small.
The decline in the financial markets during 2008 resulted in a substantial reduction in the fair value of the retirement plan assets. Since 2008, the financial markets improved. Despite the improvement, the projected benefit obligation exceeded the fair value of the plan assets. As a result, cash contributions to pension and post-retirement plans increased from $17.7 million in 2010 to approximately $176.2 million in 2011 and are expected to be $160.0 million in 2012. If financial markets do not continue to improve or if financial markets decline, increased pension expense and cash contributions may have an adverse impact on our financial results.
In addition, we participate in various multiemployer pension plans for substantially all employees represented by unions. We are required to make contributions to these plans in amounts established under collective bargaining agreements. Under the Pension Protection Act of 2006 (“PPA”), additional contributions may be required in the form of a surcharge that is equal to 5% of the contributions due in the first year and 10% each year thereafter until the applicable bargaining agreement expires. If surcharges are required, many of our bargaining agreements provide for an offset against contribution amounts otherwise required under those agreements.
Pension expense for these plans is recognized as contributions are made. Benefits generally are based on a fixed amount for each year of service. We contributed $312.2 million, $292.3 million and $278.1 million to these plans in 2011, 2010 and 2009, respectively. Based on the most recent information available to us, a number of these multiemployer plans are underfunded. As a result, contributions to these plans may increase. The amount of any increase or decrease in our required contributions to these multiemployer pension plans will depend upon the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations, the actual return on assets held in the plans and the potential payment of a withdrawal liability if we choose to exit a market, among other factors. Additionally, the benefit levels and related issues will continue to create collective bargaining challenges. Under current law, an employer that withdraws or partially withdraws from a multiemployer pension plan may incur withdrawal liability, which is related to the portion of the plan’s underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. Multiemployer pension legislation passed in 2006 and 2008 will continue to apply to the funds in which we participate, which may have an impact on future pension contributions.
Substantial Indebtedness    We currently have, and expect to continue to have, a significant amount of debt, which could adversely affect our financial health. As of December 31, 2011, we had approximately $5.4 billion in total consolidated debt outstanding, including capital lease obligations. This substantial indebtedness could increase our vulnerability to general adverse economic and industry conditions. If debt markets do not permit us to refinance certain maturing debt: (i) we may be required to dedicate an unplanned portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, dividends on common stock, stock repurchases, acquisitions, development efforts and other general corporate purposes; (ii) our flexibility in planning for, or

12





SAFEWAY INC. AND SUBSIDIARIES


reacting to, changes in our business may be limited; (iii) we might be placed at a competitive disadvantage relative to our competitors that have less debt; and (iv) we may be limited by the financial and other restrictive covenants in the documents governing our indebtedness. Changes in our credit ratings may have an adverse impact on our financing costs and structure in future periods, such as higher interest costs on future financings and our ability to participate in the commercial paper market. Additionally, interest expense could be materially and adversely affected by increases in interest rates, increases in the amount of outstanding debt, decisions to incur premiums on the early redemption of debt and any other factor that results in an increase in debt.
Unfavorable Changes in Government Regulation    Our stores are subject to various federal, state, local and foreign laws, regulations and administrative practices that affect our business. We must comply with numerous provisions regulating health and sanitation standards, food labeling, energy, equal employment opportunity, minimum wages and licensing for the sale of food, drugs and alcoholic beverages. We cannot predict either the nature of future laws, regulations, interpretations or applications, or the effect either additional government regulations or administrative orders, when and if promulgated, or disparate federal, state, local and foreign regulatory schemes would have on our future business. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. Any or all of such requirements could have an adverse effect on our results of operations and financial condition.
Legal Proceedings    From time to time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims, intellectual property claims and other proceedings arising in the ordinary course of business. In  addition, there is an increasing number of cases being filed against companies generally, which contain class-action allegations under federal and state wage and hour laws. We estimate our exposure to these legal proceedings and establish reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings, or changes in management’s evaluations or predictions, could have a material adverse impact on our financial results.
Insurance Plan Claims    We use a combination of insurance and self-insurance to provide for potential liabilities for workers’ compensation, automobile and general liability, property risk (including earthquake coverage), director and officers’ liability, employment practices liability, cyber risks, terrorism and employee health care benefits. We estimate the liabilities associated with the risks retained by us, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.
The majority of the Company’s workers’ compensation liability is from claims occurring in California. California workers’ compensation has received intense scrutiny from the state’s politicians, insurers, employers and providers, as well as the public in general. Recent years have seen escalation in the number of legislative reforms, judicial rulings and social phenomena affecting our business. Some of the many sources of uncertainty in the Company’s reserve estimates include changes in benefit levels, medical fee schedules, medical utilization guidelines and apportionment. Reversals of reforms by legislation or judicial action could have a material adverse impact on our financial results.
Leadership Development and Succession Planning    The training and development of our future leaders is important to our long-term growth. We rely on the experience of our senior management, who have specific knowledge of our business and industry that is difficult to replace. If we are unable to attract and retain highly-qualified senior management or effectively provide for the succession of senior management, including our Chief Executive Officer, our business may be adversely affected.

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SAFEWAY INC. AND SUBSIDIARIES


Impairment of Long-Lived Assets    Our long-lived assets, primarily stores, are subject to periodic testing for impairment. Failure to achieve sufficient levels of cash flow at reporting units could result in impairment charges on long-lived assets. We have incurred significant impairment charges to earnings in the past, including fiscal 2011, 2010 and 2009.
Information Technology Risks    The Company has large, complex information technology systems that are important to business operations. If we were to experience difficulties maintaining, expanding or upgrading existing systems or implementing new systems, we could incur significant losses due to disruptions in our systems.
Additionally, Safeway gathers and retains personal information that customers provide to us. The Company also receives and stores personal information in connection with our human resources organization. Despite the Company’s considerable efforts to secure our computer network, security could be compromised, confidential information could be misappropriated or system disruptions could occur. This could cause significant damage to our reputation, affect our relationships with our customers and employees and lead to claims against the Company.
As a merchant who accepts debit and credit cards for payment, Safeway is subject to the Payment Card Industry Data Security Standard (“PCI DSS”), issued by the PCI Council. PCI DSS contains compliance guidelines and standards with regards to the Company’s security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. By accepting debit cards for payment, Safeway is also subject to compliance with American National Standards Institute encryption standards, and payment network security operating guidelines. Despite Safeway's compliance with these standards and other security measures, we cannot be certain that all of our IT systems are entirely free from attack or security breach. To the extent that any disruption results in a loss, damage or misappropriation of information, the Company could be adversely affected by claims from customers, financial institutions, regulatory authorities, payment card associations and others. In addition, the cost of complying with stricter privacy and information security laws and standards could be significant to the Company.
Energy and Fuel    Safeway’s operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store and transport products. Energy and fuel costs have experienced volatility over time. To reduce the impact of volatile energy costs, the Company has entered into contracts to purchase electricity and natural gas at fixed prices to satisfy a portion of its energy needs. This is discussed further in Part II, Item 7A of this report under the caption “Commodity Price Risk.”
Safeway also sells fuel. Significant increases in wholesale fuel costs could result in retail price increases and in lower gross profit on fuel sales. Additionally, consumer demand for fuel may decline if retail prices increase. Such volatility and the impact to our operations and financial results are difficult to predict with certainty.
 
Item 1B.
Unresolved Staff Comments
None. 
Item 2.
Properties
The information required by this item is set forth in Part I, Item 1 of this report. 
Item 3.
Legal Proceedings
Information about legal proceedings appears under the caption “Legal Matters” in Note M to the consolidated financial statements set forth in Part II, Item 8 of this report.
Item 4.
Mine Safety Disclosures
Not applicable.

14





SAFEWAY INC. AND SUBSIDIARIES


Executive Officers of the Registrant
The names and ages of the current executive officers of the Company and their positions as of February 22, 2012 are set forth below. Unless otherwise indicated, each of the executive officers served in various managerial capacities with the Company over the past five years. None of the executive officers named below is related to any other executive officer or director by blood, marriage or adoption. Officers serve at the discretion of the Board of Directors.
 
Name and all positions with the Company
 
Year first elected
Age
Officer
 
Present office
Steven A. Burd
    Chairman, President and Chief Executive Officer
62
1992
 
1993
Diane M. Dietz(1)
    Executive Vice President and Chief Marketing Officer
45
2008
 
2008
Robert L. Edwards
    Executive Vice President and Chief Financial Officer
56
2004
 
2004
Bruce L. Everette
    Executive Vice President Retail Operations
60
1991
 
2001
Larree M. Renda
    Executive Vice President
    President, Safeway Health Inc.
53
1991
 
1999
David F. Bond
    Senior Vice President
    Finance and Control
58
1997
 
1997
David T. Ching
    Senior Vice President and Chief Information Officer
59
1994
 
1994
Robert A. Gordon
    Senior Vice President
    Secretary and General Counsel
    Chief Governance Officer
60
1999
 
2000
Russell M. Jackson(2)
    Senior Vice President
    Human Resources
54
2007
 
2007
Melissa C. Plaisance
    Senior Vice President
    Finance and Investor Relations
52
2004
 
2004
David R. Stern
    Senior Vice President
    Planning and Business Development
57
1994
 
2002
Jerry Tidwell
    Senior Vice President
    Supply Operations
60
2001
 
2003
Donald P. Wright
    Senior Vice President
    Real Estate and Engineering
59
1991
 
1991

(1)
Diane M. Dietz was appointed as Executive Vice President and Chief Marketing Officer in July 2008. Prior to joining the Company, Ms. Dietz was an Executive Vice President with Procter & Gamble. Prior to her appointment as Executive Vice President in 2007, she served Procter & Gamble in various positions since 1989.
(2)
Russell M. Jackson was appointed as Senior Vice President, Human Resources, of the Company in March 2007. Prior to joining Safeway, he was employed with PG&E Corporation for 27 years, where he most recently served as Senior Vice President, Human Resources. 

15





SAFEWAY INC. AND SUBSIDIARIES


PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock, $0.01 par value, is listed on the New York Stock Exchange. Information on dividends declared per common share is set forth in Part II, Item 7 of this report. The following table presents quarterly high and low sales prices for the Company’s common stock.
 
2011
 
Low
 
High
Quarter 4 (16 weeks)
 
$
15.93

 
$
21.37

Quarter 3 (12 weeks)
 
16.51

 
24.28

Quarter 2 (12 weeks)
 
21.90

 
25.43

Quarter 1 (12 weeks)
 
20.44

 
22.94

 
 
 
 
 
2010
 
  
 
  
Quarter 4 (16 weeks)
 
$
19.89

 
$
24.00

Quarter 3 (12 weeks)
 
18.73

 
21.91

Quarter 2 (12 weeks)
 
20.53

 
27.04

Quarter 1 (12 weeks)
 
20.91

 
25.41

There were 14,266 stockholders of record as of February 22, 2012; however, approximately 99% of the Company’s outstanding stock is held in “street name” by depositories or nominees on behalf of beneficial holders. The closing price per share of common stock, as reported on the New York Stock Exchange Composite Tape, was $22.67 at the close of business on February 22, 2012.
Although the Company expects to continue to pay quarterly dividends on its common stock, the payment of future dividends is at the discretion of the Board of Directors and will depend upon the Company’s earnings, capital requirements, financial condition and other factors.

16





SAFEWAY INC. AND SUBSIDIARIES


Issuer Purchases of Equity Securities
 
Fiscal period
Total number
 of shares
 purchased
 
Average price
 paid per share(2)
 
Total number of 
shares
purchased as part of
publicly announced
plans or programs
 
Approximate
 dollar
value of shares
 that may yet be
purchased under
 the plans or programs
(in millions) (3)
September 11, 2011 - October 8, 2011

  

 

 
$
925.9

October 9, 2011 - November 5, 2011
13,558,798

 (1) 
$
18.93

 
13,550,000

 
669.1

November 6, 2011 - December 3, 2011
14,850,000

  
19.50

 
14,850,000

 
1,379.3

December 4, 2011 - December 31, 2011
14,941,665

 (1) 
20.87

 
14,937,000

 
1,067.3

Total
43,350,463

  
$
19.79

 
43,337,000

 
$
1,067.3

 
(1)
Includes shares withheld (8,798 shares in the period October 9, 2011 through November 5, 2011 and 4,665 shares in the period December 4, 2011 through December 31, 2011), at the election of a certain holder of restricted stock, by the Company from the vested portion of restricted stock awards with a market value approximating the amount of the withholding taxes due from such restricted stockholder.
(2)
Average price per share excludes commissions. Average price per share excluding the restricted shares referred to in footnote 1 above was $19.79.
(3)
In November 2011, the Company’s Board of Directors increased the authorized level of the Company’s stock repurchase program from $7.0 billion to $8.0 billion. From the initiation of the repurchase program in 1999 through the end of fiscal 2011, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $6.9 billion, leaving an authorized amount for repurchases of approximately $1.1 billion. The timing and volume of future repurchases will depend on several factors, including market conditions. The repurchase program has no expiration date but may be terminated by the Board of Directors.

17





SAFEWAY INC. AND SUBSIDIARIES


Stock Performance Graph
The following graph compares the yearly percentage change in the Company’s cumulative total stockholder return on its common stock for the period from the end of its 2006 fiscal year to the end of its 2011 fiscal year to that of the Standard & Poor’s (“S&P”) 500 and a group of peer companies(*) in the retail grocery industry and assumes reinvestment of dividends. The stock price performance shown below is not necessarily indicative of future performance.
(*)
The peer group consists of The Kroger Co., SUPERVALU INC., Whole Foods Market, Inc., Loblaw Companies Limited and Delhaize Group.
The performance graph above is being furnished solely to accompany this annual report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.


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SAFEWAY INC. AND SUBSIDIARIES


Item 6.
Selected Financial Data
 
(Dollars in millions, except
    per-share amounts)
52 Weeks
2011
52 Weeks
2010
52 Weeks
2009
53 Weeks
2008
52 Weeks
2007
Results of Operations
 
 
 
 
 
Sales and other revenue
$
43,630.2

$
41,050.0

$
40,850.7

$
44,104.0

$
42,286.0

Gross profit
11,793.7

11,607.5

11,693.5

12,514.8

12,152.9

Operating and administrative expense
(10,659.1
)
(10,448.1
)
(10,348.0
)
(10,662.1
)
(10,380.8
)
Goodwill impairment charge


(1,974.2
)


Operating profit (loss)
1,134.6

1,159.4

(628.7
)
1,852.7

1,772.1

Interest expense
(272.2
)
(298.5
)
(331.7
)
(358.7
)
(388.9
)
Other income, net
19.7

20.3

7.1

10.6

20.4

Income (loss) before income taxes
882.1

881.2

(953.3
)
1,504.6

1,403.6

Income taxes
(363.9
)
(290.6
)
(144.2
)
(539.3
)
(515.2
)
Net income (loss) before allocation to noncontrolling interest
518.2

590.6

(1,097.5
)
965.3

888.4

Noncontrolling interests
(1.5
)
(0.8
)



Net income (loss) attributable to Safeway Inc.
$
516.7

$
589.8

$
(1,097.5
)
$
965.3

$
888.4

Basic earnings (loss) per share
$
1.49

$
1.56

$
(2.66
)
$
2.23

$
2.02

Diluted earnings (loss) per share
$
1.49

$
1.55

$
(2.66
)
$
2.21

$
1.99

Weighted average shares
    outstanding (in millions):





Basic
343.4

378.3

412.9

433.8

440.3

Diluted
343.8

379.6

412.9

436.3

445.7

Cash dividends declared
    per common share
$
0.5550

$
0.4600

$
0.3828

$
0.3174

$
0.2645


 


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SAFEWAY INC. AND SUBSIDIARIES



Item 6.
Selected Financial Data (continued)

 
(Dollars in millions, except
    per-share amounts)
52 Weeks
2011
52 Weeks
2010
52 Weeks
2009
53 Weeks
2008
52 Weeks
2007
Financial Statistics
 
 
 
 
 
Identical-store sales increases (decreases)(1)
4.4
%
(0.7
)%
(5.0
)%
1.4
%
4.1
%
Identical-store sales increases
(decreases) without fuel(1)
1.0
%
(2.0
)%
(2.5
)%
0.8
%
3.4
%
Gross profit margin
27.03
%
28.28
 %
28.62
 %
28.38
%
28.74
%
Operating & administrative expense as a percentage of sales(2)
24.43
%
25.45
 %
25.33
 %
24.17
%
24.55
%
Operating profit (loss) as a percentage of sales(3)
2.6
%
2.8
 %
(1.5
)%
4.2
%
4.2
%
Cash paid for property additions
$
1,094.7

$
837.5

$
851.6

$
1,595.7

$
1,768.7

Depreciation expense
$
1,148.8

$
1,162.4

$
1,171.2

$
1,141.1

$
1,071.2

Total assets(3)
$
15,073.6

$
15,148.1

$
14,963.6

$
17,484.7

$
17,651.0

Total debt
$
5,410.2

$
4,836.3

$
4,901.7

$
5,499.8

$
5,655.1

Total equity(3)
$
3,689.1

$
4,997.7

$
4,946.4

$
6,786.2

$
6,701.8

Other Statistics





Stores opened during the year
25

14

8

20

20

Stores closed during the year
41

45

22

24

38

Total stores at year end
1,678

1,694

1,725

1,739

1,743

Remodels completed(4)





Lifestyle remodels
29

60

82

232

253

Other remodels

7

10

21

15

Total remodels completed
29

67

92

253

268

 
 
 
 
 
 
Total retail square footage at year end (in millions)
79.2

79.2

80.1

80.4

80.3

 
(1)
Defined as stores operating the same period in both the current year and the previous year. 2008 is based on the same 53-week period in both years.
(2)
Management believes this ratio is relevant because it assists investors in evaluating Safeway’s ability to control costs.
(3)
2009 includes a pretax goodwill impairment charge of $1,974.2 million, ($1,818.2 million, after-tax).
(4)
Defined as store remodel projects (other than maintenance) generally requiring expenditures in excess of $0.2 million. Excludes pharmacy refurbishments.
 

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SAFEWAY INC. AND SUBSIDIARIES


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The last three fiscal years consist of the 52-week period ended December 31, 2011 (“fiscal 2011” or “2011”), the 52-week period ended January 1, 2011 (“fiscal 2010” or “2010”) and the 52-week period ended January 2, 2010 (“fiscal 2009” or “2009”).
Results of Operations
Economic Outlook    The current economic environment has made consumers cautious. This may have led to reduced consumer spending, to some consumers trading down to a less expensive mix of products and to some consumers trading down to discounters for grocery items, all of which impacts Safeway’s sales. These difficult economic conditions may continue in 2012.
Safeway earned net income of $516.7 million ($1.49 per diluted share) in 2011, net income of $589.8 million ($1.55 per diluted share) in 2010 and a net loss of $1,097.5 million ($2.66 per diluted share) in 2009. Fiscal 2011 included a $98.9 million tax charge resulting from the decision to repatriate $1.1 billion from Safeway's wholly-owned Canadian subsidiary. Fiscal 2009 included a non-cash goodwill impairment charge of $1,974.2 million ($1,818.2 million, net of tax). The impairment was due primarily to Safeway’s reduced market capitalization and a weak economy. The difficult economic environment negatively impacted all of Safeway’s divisions; however, due to their large goodwill balances, the goodwill impairment resulted primarily from the Vons and Eastern divisions.
Sales    Identical-store sales increases (decreases) for the past three fiscal years were as follows:
 
  
2011
2010
2009
Including fuel
4.4
%
(0.7
)%
(5.0
)%
Excluding fuel
1.0
%
(2.0
)%
(2.5
)%
Sales increased 6.3% to $43.6 billion in 2011 from $41.1 billion in 2010. Fuel sales increased $1,408.7 million in 2011, as a result of the average retail price per gallon of fuel increasing 23.8% and gallons sold increasing 16.5%. Additionally, the change in the Canadian dollar exchange rate resulted in a $240.0 million increase in sales. Identical-store sales, excluding fuel, increased 1.0%, or $375 million, primarily due to inflation. Average transaction size increased during fiscal 2011, and transaction counts decreased slightly.
Prior to 2011, Safeway recorded Blackhawk Network distribution commissions on the sale of certain gift cards, net of commissions shared with other retailers. In the first quarter of 2011, Safeway determined that these commissions should be reported on a gross basis. This change increased both revenue and cost of goods sold in fiscal 2011 by $413.5 million but had no impact on identical-store sales, gross profit dollars or net income. Previously reported results are not adjusted because the impact is immaterial.
From 2009 to 2010, sales increased 0.5% to $41.1 billion from $40.9 billion. The change in the Canadian dollar exchange rate resulted in a $588.1 million increase in sales. Additionally, fuel sales increased $499.2 million. The average retail price per gallon of fuel increased approximately 19% in 2010 compared to 2009 primarily due to the increase in the cost of fuel. Identical-store sales, excluding fuel, declined 2%, or $734.8 million, as a result of economic conditions, investments in price and deflation. This decline reflects a slight decrease in transaction counts and a decline in average transaction size during fiscal 2010. Store closures reduced sales by approximately $230 million.
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 associated with Safeway’s distribution network. Advertising and promotional expenses are also a component

21





SAFEWAY INC. AND SUBSIDIARIES


of cost of goods sold. Additionally, all vendor allowances are classified as an element of cost of goods sold.
Gross profit margin was 27.03% of sales in 2011, 28.28% of sales in 2010 and 28.62% in 2009.
The gross profit margin decreased 125 basis points to 27.03% of sales in 2011 from 28.28% of sales in 2010. The impact from fuel sales decreased gross profit margin 80 basis points. The remaining 45 basis-point decline was largely the result of a 53 basis-point decline due to cost increases and investments in price, a 32 basis-point decline from the change in the reporting for gift card commissions, a 16 basis-point decline resulting from LIFO expense, partly offset by a 34 basis-point improvement in shrink and a 13 basis-point improvement from Blackhawk contributions.
The gross profit margin decreased 34 basis points to 28.28% of sales in 2010 from 28.62% of sales in 2009. The impact from fuel sales decreased gross profit margin 27 basis points. The remaining seven basis-point decline was largely the result of investments in everyday prices, partly offset by improvements in shrink.
Vendor allowances totaled $2.9 billion in 2011, $2.9 billion in 2010 and $2.6 billion in 2009. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances.
Promotional allowances make up more than 95% 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 (approximately 3% 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 a 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.
Promotional and slotting allowances are accounted for as a reduction in the cost of purchased inventory and recognized when the related inventory is sold. Contract allowances are recognized as a reduction in the cost of goods sold as volume thresholds are achieved or through the passage of time.
Operating and Administrative Expense    Operating and administrative expense consists primarily of store occupancy costs and backstage expenses, which, in turn, consist primarily of wages, employee benefits, rent, depreciation and utilities.
Operating and administrative expense was 24.43% of sales in 2011 compared to 25.45% of sales in 2010 and 25.33% in 2009.
Operating and administrative expense margin decreased 102 basis points to 24.43% of sales in 2011 from 25.45% of sales in 2010. Higher fuel sales in 2011 decreased operating and administrative expense margin by 69 basis points. The impact from the change related to gift card commissions reduced operating and administrative expense 28 basis points, and net gains on property dispositions reduced operating and administrative expense 17 basis points.
Operating and administrative expense margin increased 12 basis points to 25.45% of sales in 2010 from 25.33% of sales in 2009. Higher fuel sales in 2010 decreased operating and administrative expense margin by 31 basis points. The offsetting 43-basis-point increase was primarily the result of higher labor costs, partly offset by net gains on property dispositions.
Gain (Loss) on Property Dispositions    Operating and administrative expense included a net gain on property

22





SAFEWAY INC. AND SUBSIDIARIES


dispositions of $65.6 million in 2011, primarily consisting of a gain of $47.1 million on the sale of a distribution center in Burnaby, British Columbia. Operating and administrative expense included a net gain of $27.5 million in 2010 and a net loss of $12.7 million in 2009.
Interest Expense    Interest expense was $272.2 million in 2011, compared to $298.5 million in 2010 and $331.7 million in 2009. Interest expense decreased in 2011 and 2010 primarily due to a combination of lower average borrowings and a lower average interest rate.
Other Income    Other income consists primarily of interest income and equity in earnings (losses) from Safeway’s unconsolidated affiliate. Interest income was $6.7 million in 2011, $4.4 million in 2010 and $2.3 million in 2009. Equity in earnings of unconsolidated affiliate was $13.0 million in 2011, $15.3 million in 2010 and $8.5 million in 2009.
Income Taxes    Income tax expense was $363.9 million, or 41.3% of pre-tax income, in 2011. In 2010, Safeway had income tax expense of $290.6 million, or 33.0% of pre-tax income. Fiscal 2011 included a $98.9 million tax charge resulting from the decision to repatriate $1.1 billion from Safeway's wholly-owned Canadian subsidiary. In 2009, Safeway had income tax expense of $144.2 million despite having a pre-tax loss of $953.3 million. The 2009 tax expense reflects the tax effect of the goodwill impairment charge which is largely nondeductible for income tax purposes and, therefore, increases the Company’s effective income tax rate. The impact of the goodwill impairment charge on the tax expense was partly offset by a benefit of $74.9 million from the favorable resolution of various tax matters.

Critical Accounting Policies and Estimates
Critical accounting policies are those accounting policies that management believes are important to the portrayal of Safeway’s financial condition and results of operations and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. 
Workers’ Compensation    The Company is primarily self-insured for workers’ compensation, automobile and general liability costs. It is the Company’s policy to record its self-insurance liability as determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported.
Self-insurance reserves are actuarially determined primarily by applying historical paid loss and incurred loss development trends to current cash and incurred expected losses in order to estimate total losses. We then discount total expected losses to their present value using a risk free rate of return.
Any actuarial projection of self-insured losses is subject to a high degree of variability. For example, self-insurance expense was $151.1 million in fiscal 2011, $148.3 million in fiscal 2010 and $128.8 million in 2009. Litigation trends, legal interpretations, benefit level changes, claim settlement patterns and similar factors influenced historical development trends that were used to determine the current year expense and therefore contributed to the variability in annual expense. However, these factors are not direct inputs into the actuarial projection, and thus their individual impact cannot be quantified.
The discount rate is a significant factor that has led to variability in self-insured expenses. Since the discount rate is a direct input into the estimation process, we are able to quantify its impact. The discount rate, which is based on the United States Treasury Note rates for the estimated average claim life of five years, was 0.75% in 2011, 2.00% in 2010 and 2.75% in 2009. A 25-basis-point change in the discount rate affects the self-insured liability between $4 million and $5 million.
The majority of the Company’s workers’ compensation liability is from claims occurring in California. California workers’ compensation has received intense scrutiny from the state’s politicians, insurers, employers and providers, as well as the public in general. Recent years have seen escalation in the number of legislative reforms, judicial rulings and social phenomena affecting this business. Some of the many sources of

23





SAFEWAY INC. AND SUBSIDIARIES


uncertainty in the Company’s reserve estimates include changes in benefit levels, medical fee schedules, medical utilization guidelines, vocation rehabilitation and apportionment.
Store Lease Exit Costs and Impairment Charges    Safeway assesses store impairment quarterly. Safeway’s policy is to recognize losses relating to the impairment of long-lived assets when expected net future cash flows are less than the assets’ carrying values. When stores that are under long-term leases close, Safeway records a liability for the future minimum lease payments and related ancillary costs, net of estimated cost recoveries. In both cases, fair value is determined by estimating net future cash flows and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based on its experience and knowledge of the market in which the closed store is located and, when necessary, uses real estate brokers. However, these estimates project future cash flows several years into the future and are affected by factors such as inflation, real estate markets and economic conditions.
At any one time, Safeway has a portfolio of closed stores which is widely dispersed over several markets. While individual closed store reserves are likely to be adjusted up or down in the future to reflect changes in assumptions, the change to the total closed store reserve has not been nor is expected to be material.
Employee Benefit Plans    The Company recognizes in its balance sheet a liability for the underfunded status of its employee benefit plans. The Company measures plan assets and obligations that determine the funded status as of fiscal year end. Additional disclosures are provided in Note K to the consolidated financial statements, set forth in Part II, Item 8 of this report.
The determination of Safeway’s obligation and expense for pension benefits is dependent, in part, on the Company’s selection of certain assumptions used by its actuaries in calculating these amounts. These assumptions are disclosed in Note K to the consolidated financial statements and include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rate of compensation increases. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. In accordance with generally accepted accounting principles (“GAAP”), the amount by which actual results differ from the actuarial assumptions is accumulated and amortized over future periods and, therefore, affects recognized expense in such future periods. While Safeway believes its assumptions are appropriate, significant differences in actual results or significant changes in the Company’s assumptions may materially affect Safeway’s pension and other postretirement obligations and its future expense.
Safeway bases the discount rate on current investment yields on high quality fixed-income investments. The discount rate assumption used to determine the year-end projected benefit obligation is increased or decreased to be consistent with the change in yield rates for high-quality fixed-income investments for the expected period to maturity of the pension benefits. The discount rate used to determine 2011 pension expense was 5.6%. A lower discount rate increases the present value of benefit obligations and increases pension expense. Expected return on pension plan assets is based on historical experience of the Company’s portfolio and the review of projected returns by asset class on broad, publicly traded equity and fixed-income indices, as well as target asset allocation. Safeway’s target asset allocation mix is designed to meet the Company’s long-term pension requirements. For 2011, the Company’s assumed rate of return was 8.5% on U.S. pension assets and 6.8% on Canadian pension assets. For 2012, the Company's assumed rate of return is 7.75% on U.S pension assets and 6.75% on Canadian pension assets. Over the 10-year period ended December 31, 2011, the average rate of return was approximately 4% for U.S. and 5% for Canadian pension assets. The deteriorating conditions in the global financial markets during 2008 led to a substantial reduction in the 10-year average rate of return on pension assets. We expect that the markets will eventually recover to our assumed long-term rate of return.

24





SAFEWAY INC. AND SUBSIDIARIES


The following table summarizes actual allocations for Safeway’s plans at year-end:
 
 
 
 
Plan assets
Asset category
 
Target
 
2011
 
2010
Equity
 
65
%
 
65.5
%
 
67.6
%
Fixed income
 
35

 
33.3

 
31.1

Cash and other
 

 
1.2

 
1.3

Total
 
100
%
 
100.0
%
 
100.0
%
The investment policy with regard to Safeway’s pension plans also emphasizes the following key objectives: (1) maintain a diversified portfolio among asset classes and investment styles; (2) maintain an acceptable level of risk in pursuit of long-term economic benefit; (3) maximize the opportunity for value-added returns from active investment management while establishing investment guidelines and monitoring procedures for each investment manager to ensure the characteristics of the portfolio are consistent with the original investment mandate; and (4) maintain adequate controls over administrative costs.
Sensitivity to changes in the major assumptions for Safeway's pension plans are as follows (in millions):
 
 
 
 
United States
 
Canada
  
 
Percentage
point
change
 
Projected benefit
obligation
decrease
(increase)
 
Expense
decrease
(increase)
 
Projected benefit
obligation
decrease
(increase)
 
Expense
decrease
(increase)
Expected return on assets
 
+1 pt
 
 
$
13.3

 

 
$
3.5

 
 
-1 pt
 
 
$
(13.3
)
 

 
$
3.5

Discount rate
 
+1 pt
 
$
237.1

 
$
28.9

 
$
72.2

 
$
5.4

 
 
-1 pt
 
$
(297.4
)
 
$
(34.5
)
 
$
(76.7
)
 
$
(5.5
)
Cash contributions to the Company’s pension and post-retirement benefit plans are expected to total approximately $160 million in 2012 and totaled $176.2 million in 2011, $17.7 million in 2010 and $24.4 million in 2009.
Income Tax Contingencies    The Company is subject to periodic audits by the Internal Revenue Service and other foreign, state and local taxing authorities. These audits may challenge certain of the Company’s tax positions such as the timing and amount of income and deductions and the allocation of taxable income to various tax jurisdictions. The Company evaluates its tax positions and establishes liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. These tax uncertainties are reviewed as facts and circumstances change and are adjusted accordingly. This requires significant management judgment in estimating final outcomes. Actual results could materially differ from these estimates and could significantly affect the Company’s effective tax rate and cash flows in future years. Note J to the consolidated financial statements set forth in Part II, Item 8 of this report provides additional information on income taxes.



25





SAFEWAY INC. AND SUBSIDIARIES


Liquidity and Financial Resources
Net cash flow from operating activities was $2,023.6 million in 2011, $1,849.7 million in 2010 and $2,549.7 million in 2009. Net cash flow from operating activities increased in 2011 compared to 2010 primarily due to greater cash flow from working capital, partly offset by increased contributions to pension plans and lower net income.
Blackhawk receives a significant portion of the cash inflow from the sale of third-party gift cards late in the fourth quarter of the year and remits the majority of the cash, less commissions, to the card partners early in the first quarter of the following year. Changes in payables related to third-party gift cards, net of receivables increased to a source of cash of $293.6 million in 2011 from a use of cash of $6.9 million in 2010, primarily as a result of the timing of certain vendor payments in 2010, higher revenue and a shift in the mix of business with longer payment terms.

The decline in the financial markets during 2008 resulted in a substantial reduction in the fair value of the retirement plan assets. Since 2008, the financial markets improved. Despite the improvement, the projected benefit obligation exceeds the fair value of the plan assets in each of the last four years. As a result, cash contributions to pension and post-retirement plans were $176.2 million and $17.7 million in 2011 and 2010, respectively, and are expected to be approximately $160 million in 2012. If return on plan assets is less than expected, or if discount rates decline, plan contributions could increase significantly in 2012 and beyond.
Net cash flow used by investing activities, which consists principally of cash paid for property additions, was $1,014.5 million in 2011, $798.8 million in 2010 and $889.0 million in 2009. Net cash flow used by investing activities increased in 2011 compared to 2010 primarily as a result of higher capital expenditures, partly offset by higher proceeds from the sale of property in 2011. Net cash flow used by investing activities declined in 2010 compared to 2009 due to higher proceeds from the sale of property in 2010.
Cash paid for property additions increased to $1.1 billion in 2011 from $0.8 billion in 2010 and $0.9 billion in 2009. The increase in capital expenditures was primarily due to an increase in new store openings and the refurbishment of some in-store pharmacies. In 2011, the Company opened 25 new Lifestyle stores and completed 29 Lifestyle store remodels.  In 2010, the Company opened 14 new Lifestyle stores and completed 60 Lifestyle store remodels. In 2009, the Company opened eight new Lifestyle stores and completed 82 Lifestyle store remodels. In 2012, the Company expects to spend approximately $0.9 billion in cash capital expenditures.
Net cash flow used by financing activities was $1,077.3 million in 2011, $768.1 million in 2010 and $1,600.3 million in 2009. In 2011, Safeway added $609.1 million of debt, repurchased $1,554.0 million of common stock and paid $188.0 million in dividends. In 2010, Safeway paid down $84.8 million of debt, repurchased $621.1 million of common stock and paid $168.1 million in dividends. In 2009, the Company paid down $599.5 million of debt, repurchased $884.9 million of common stock and paid $153.1 million in dividends.
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, its credit agreement, its term loan agreement and debt offerings, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments, stock repurchases, if any, 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 its commercial paper program and credit agreements.

26





SAFEWAY INC. AND SUBSIDIARIES


Free cash flow    Free cash flow is calculated as (1) net cash flow from operating activities adjusted to exclude payables related to third-party gift cards, net of receivables, less (2) net cash flow used by investing activities adjusted to exclude cash used by investments and business acquisitions. Cash from the sale of third-party gift cards is held for a short period of time and then remitted, less our commission, to card partners. Because this cash flow is temporary, it is not available for other uses, and it is therefore excluded from our calculation of free cash flow. We add back cash used by investments and business acquisitions to our calculation of free cash flow in order to provide a more accurate indication of our capacity to apply our available free cash flow to its intended uses.
 
 
Fiscal Year
(in millions)
 
2011
2010
2009
Net cash flow from operating activities
 
$
2,023.6

$
1,849.7

$
2,549.7

(Increase) decrease in payables related to third-party gift cards, net of receivables
 
(293.6
)
6.9

(170.4
)
Net cash flow from operating activities, as adjusted
 
1,730.0

1,856.6

2,379.3

 
 
 
 
 
Net cash flow used by investing activities
 
(1,014.5
)
(798.8
)
(889.0
)
Investments and business acquisitions
 
35.9



Net cash flow used by investing activities, as adjusted
 
(978.6
)
(798.8
)
(889.0
)
Free cash flow
 
$
751.4

$
1,057.8

$
1,490.3

 
Free cash flow provides information regarding the cash that the Company’s business generates, which management believes is useful to understanding the Company’s business. Free cash flow is also a useful indicator of Safeway’s ability to service debt and fund share repurchases that management believes will enhance stockholder value.
This non-U.S. GAAP financial measure should not be considered as an alternative to net cash flow from operating activities or other increases and decreases in cash as shown on our Consolidated Statements of Cash Flows as a measure of liquidity. Non-U.S. GAAP financial measures have limitations as analytical tools, and they should not be considered in isolation or as substitutes for analysis of the Company’s results as reported under U.S. GAAP. Other companies in the Company’s industry may calculate free cash flow differently, limiting its usefulness as a comparative measure. Because of these limitations, free cash flow should not be considered as a measure of discretionary cash available to us to invest in the growth of our business.
Income taxes    During 2009, the Company received tax refunds of $413 million as follows: (1) the Company accelerated certain tax deductions for its 2008 income tax returns resulting in approximately $224 million of tax refunds; and (2) the resolution of certain other income tax matters resulted in tax refunds of approximately $189 million. These tax refunds increased cash flow from operating activities by $396 million and reduced cash flow used by financing activities by $17 million.

27





SAFEWAY INC. AND SUBSIDIARIES


Bank Credit Agreement and Term Loan Agreement    Information about the Company’s bank credit agreement and term loan agreement appear in Note D to the consolidated financial statements set forth in Part II, Item 8 of this report.
The computation of Adjusted EBITDA, as defined by the credit agreement, is provided below solely to provide an understanding of the impact that Adjusted EBITDA has on Safeway’s ability to borrow under the credit agreement and term loan agreement. Adjusted EBITDA should not be considered as an alternative to net income or cash flow from operating activities (which are determined in accordance with U.S. GAAP) and is not being presented as an indicator of operating performance or a measure of liquidity. Other companies may define Adjusted EBITDA differently and, as a result, such measures may not be comparable to Safeway’s Adjusted EBITDA (dollars in millions).
 
  
52 Weeks
2011
Adjusted EBITDA:
 
 
Net income attributable to Safeway Inc.
$
516.7
 
Add (subtract):
 
 
Income taxes
363.9
 
Interest expense
272.2
 
Depreciation expense
1,148.8
 
LIFO expense
35.1
 
Share-based employee compensation
50.0
 
Property impairment charges
44.7
 
Equity in earnings of unconsolidated affiliate
(13.0
)
Dividend from unconsolidated affiliate
6.1
 
Total Adjusted EBITDA
$
2,424.5
 
Adjusted EBITDA as a multiple of interest expense
8.91

x

Minimum Adjusted EBITDA as a multiple of interest expense under bank credit agreement
2.00

x

Total debt at year-end 2011
$
5,410.2
 
Less cash and equivalents in excess of $75.0 at December 31, 2011
654.4
 
Adjusted Debt
$
4,755.8
 
Adjusted Debt to Adjusted EBITDA
1.96

x

Maximum Adjusted Debt to Adjusted EBITDA under bank credit agreement
3.50

x

Shelf Registration    On October 24, 2011, the Company filed a shelf registration statement (the “Shelf”) with the SEC which permits Safeway to issue an unlimited amount of debt securities and/or common stock. The Shelf expires on October 24, 2014. The Safeway Board of Directors has authorized issuance of up to $3.0 billion of securities under the Shelf. As of December 31, 2011, $2.2 billion of securities were available for issuance under the board’s authorization.
Commercial Paper Information about the Company's commercial paper borrowings appear in Note D to the consolidated financial statements set forth in Part II, Item 8 of this report.

28





SAFEWAY INC. AND SUBSIDIARIES


Dividends Declared on Common Stock    The following table presents information regarding dividends declared on Safeway’s common stock during fiscal 2011, 2010 and 2009.
(in millions, except per-share amounts)
 
Date
Declared
 
Record
Date
 
Per-Share
Amounts
 
Total
 
Year-to-date
Total
2011
 
 
 
 
 
 
 
 
 
 
Quarter 4
 
12/07/11
 
12/22/11
 
$
0.1450

 
$
43.8

 
$
187.6

Quarter 3
 
08/24/11
 
09/22/11
 
0.1450

 
49.3

 
143.8

Quarter 2
 
05/19/11
 
06/23/11
 
0.1450

 
50.7

 
94.5

Quarter 1
 
03/15/11
 
03/24/11
 
0.1200

 
43.8

 
43.8

2010
 
 
 
 
 
 
 
 
 
 
Quarter 4
 
12/07/10
 
12/23/10
 
$
0.1200

 
$
44.2

 
$
173.5

Quarter 3
 
08/24/10
 
09/23/10
 
0.1200

 
44.7

 
129.3

Quarter 2
 
05/19/10
 
06/24/10
 
0.1200

 
45.8

 
84.6

Quarter 1
 
03/10/10
 
03/25/10
 
0.1000

 
38.8

 
38.8

2009
 
 
 
 
 
 
 
 
 
 
Quarter 4
 
12/10/09
 
12/24/09
 
$
0.1000

 
$
38.8

 
$
156.3

Quarter 3
 
08/25/09
 
09/24/09
 
0.1000

 
40.6

 
117.5

Quarter 2
 
04/29/09
 
06/25/09
 
0.1000

 
41.6

 
76.9

Quarter 1
 
03/05/09
 
03/26/09
 
0.0828

 
35.3

 
35.3

Dividends Paid on Common Stock    The following table presents information regarding dividends paid on Safeway’s common stock during fiscal 2011, 2010 and 2009.
(in millions, except per-share amounts)
 
Date Paid
 
Record
Date
 
Per-Share
Amounts
 
Total
 
Year-to-date
Total
2011
 
 
 
 
 
 
 
 
 
 
Quarter 4
 
10/13/2011
 
9/22/2011
 
$
0.1450

 
$
49.3

 
$
188.0

Quarter 3
 
7/14/2011
 
6/23/2011
 
0.1450

 
50.7

 
138.7

Quarter 2
 
4/14/2011
 
3/24/2011
 
0.1200

 
43.8

 
88.0

Quarter 1
 
1/13/2011
 
12/23/2010
 
0.1200

 
44.2

 
44.2

2010
 
 
 
 
 
 
 
 
 
 
Quarter 4
 
10/14/2010
 
9/23/2010
 
$
0.1200

 
$
44.7

 
$
168.1

Quarter 3
 
7/15/2010
 
6/24/2010
 
0.1200

 
45.8

 
123.4

Quarter 2
 
4/15/2010
 
3/25/2010
 
0.1000

 
38.8

 
77.6

Quarter 1
 
1/14/2010
 
12/24/2009
 
0.1000

 
38.8

 
38.8

2009
 
 
 
 
 
 
 
 
 
 
Quarter 4
 
10/15/2009
 
9/24/2009
 
$
0.1000

 
$
40.6

 
$
153.1

Quarter 3
 
7/16/2009
 
6/25/2009
 
0.1000

 
41.6

 
112.5

Quarter 2
 
4/16/2009
 
3/26/2009
 
0.0828

 
35.3

 
70.9

Quarter 1
 
1/14/2009
 
12/24/2008
 
0.0828

 
35.6

 
35.6


29





SAFEWAY INC. AND SUBSIDIARIES


Stock Repurchase Program    From the initiation of the Company’s stock repurchase program in 1999 through the end of fiscal 2011, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $6.9 billion, leaving an authorized amount for repurchases of approximately $1.1 billion. During fiscal 2011, Safeway repurchased approximately 76.1 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $1,588.2 million. This includes $34.2 million of common stock repurchases that were executed in fiscal 2011 but were settled in fiscal 2012. The average price per share, excluding commissions, was $20.85. Taking into consideration stock prices, low interest rates and management's belief regarding our potential to grow operating profit over the next several years, Safeway used the net proceeds from borrowings to repurchase common stock at an increased level during the fourth quarter of 2011. This level of purchases has continued in 2012. From year-end 2011 through February 22, 2012, Safeway has purchased 28.7 million shares of its common stock at an average cost of $21.83 per share and a total cost of $626.2 million (including commissions). The timing and volume of future repurchases will depend on factors such as Safeway's day-to-day business needs as well as its stock price and economic and market conditions. Stock repurchases may be affected from time to time through open market purchases or pursuant to a Rule 10b5-1 plan. The stock repurchase program may be accelerated, suspended, delayed or discontinued at any time.
Contractual Obligations    The table below presents significant contractual obligations of the Company at year-end 2011 (in millions) (1):
 
2012
2013
2014
2015
2016
Thereafter
Total
Long-term debt (2)
$
806.9

$
1.6

$
1,048.7

$
41.3

$
401.9

$
2,671.5

$
4,971.9

Estimated interest on long-term debt
264.7

218.4

198.3

164.1

164.1

1,034.9

2,044.5

Capital lease obligations (2),(3)
29.2

29.1

29.6

30.9

30.5

284.6

433.9

Interest on capital leases
41.6

38.4

35.5

32.3

29.4

148.0

325.2

Self-insurance liability
129.4

90.3

60.8

39.7

28.7

122.0

470.9

Interest on self-insurance liability
0.5

1.0

1.1

1.1

1.0

10.1

14.8

Operating leases (3)
478.9

452.2

421.5

370.8

328.7

2,219.5

4,271.6

Marketing development funds
29.7

20.7

18.0

12.7

7.0

8.3

96.4

Contracts for purchase of property, equipment and construction of buildings
252.6






252.6

Fixed-price energy contracts (4)
85.7

18.4

18.4

16.6

0.7

6.0

145.8

Other purchase obligations
80.3

21.9

7.3

2.5



112.0

Total
$
2,199.5

$
892.0

$
1,839.2

$
712.0

$
992.0

$
6,504.9

$
13,139.6

 (1) Excludes funding of pension and post-retirement benefit obligations which were $176.2 million in 2011. The Company currently expects to contribute approximately $160 million to its pension and post-retirement benefit plans in 2012. Also excludes contributions under various multiemployer pension plans, which totaled $312.2 million in 2011. Additionally, the amount of unrecognized tax benefits ($161.3 million at December 31, 2011) has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined. Purchase orders for inventory are not included in the above table as they are cancelable by their terms.
(2)
Required principal payments only.
(3)
Excludes common area maintenance, insurance or tax payments for which the Company is also obligated. In fiscal 2011, these charges totaled approximately $217.2 million.
(4)
See Part II, Item 7A to this report under the caption “Commodity Price Risk.”

30





SAFEWAY INC. AND SUBSIDIARIES


Off-Balance Sheet Arrangements
Guarantees    The Company is party to a variety of contractual agreements under which it may be obligated to indemnify the other party for certain matters. These contracts primarily relate to the Company’s commercial contracts, operating leases and other real estate contracts, trademarks, intellectual property, financial agreements and various other agreements. Under these agreements, the Company may provide certain routine indemnifications relating to representations and warranties (for example, ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. The Company believes that if it were to incur a loss in any of these matters, the loss would not have a material effect on the Company’s financial statements. 
Letters of Credit    The Company had letters of credit of $50.9 million outstanding at year-end 2011. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company. The Company pays commissions ranging from 0.15% to 1.00% on the face amount of the letters of credit.
New Accounting Pronouncements Not Yet Adopted
See Part II, Item 8, Note A to this report for new accounting pronouncements which have not yet been adopted by the Company.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Safeway is exposed to market risk from changes in interest rates, foreign currency exchange rates and commodity prices. The Company has, from time to time, selectively used derivative financial instruments to reduce these market risks. The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments.
Safeway’s market risk exposures related to interest rates, foreign currency and commodity prices are discussed below and have not materially changed from the prior fiscal year.
Interest Rate Risk    Safeway manages interest rate risk through the use of fixed- and variable-interest rate debt and, from time to time, interest rate swaps. See Note E to the consolidated financial statements set forth in Part II, Item 8 of this report.
The table below presents information on interest rate swaps at year-end 2011 (dollars in millions):
 
 
2012
2013
2014
2015
2016
There-after
Total
Interest rate swaps:
 
 
 
 
 
 
 
Fixed to variable notional amount (1)
$
800.0






$
800.0

Average pay rate during 2011
4.61
%





4.61
%
Average receive rate during 2011
5.80
%





5.80
%
 
(1)
The fair value of the interest rate swaps at year-end 2011 was an asset of $4.4 million.
Foreign Currency Exchange Risk    Safeway is exposed to foreign currency risk, primarily through its operations in Canada. Certain transactions and the Company’s net equity investment in Canada are exposed to economic losses in the event of adverse changes in the currency exchange rate. Currently, Safeway does not use derivative financial instruments to offset the risk of foreign currency.

31





SAFEWAY INC. AND SUBSIDIARIES


Commodity Price Risk    Safeway has entered into fixed-priced contracts to purchase electricity and natural gas for a portion of its energy needs. Safeway expects to take delivery of these commitments in the normal course of business, and as a result, these commitments qualify as normal purchases. See Part II, Item 7, under the caption “Contractual Obligations” for the Company’s obligations related to fixed-price energy contracts as of year-end 2011.
Long-Term Debt    The table below presents principal amounts and related weighted-average rates by year of maturity for the Company’s debt obligations at year-end 2011 (dollars in millions):
 
 
2012
2013
2014
2015
2016
Thereafter
Total
Fair value
Long-term debt: (1)
 
 
 
 
 
 
 
 
Principal
$
806.9

$
1.6

$
1,048.7

$
41.3

$
401.9

$
2,671.5

$
4,971.9

$
5,371.3

Weighted average interest rate
5.81
%
6.72
%
5.18
%
2.48
%
3.42
%
5.68
%
5.38
%
 
 
(1)
Primarily fixed-rate debt.


32





SAFEWAY INC. AND SUBSIDIARIES


Item 8.
Financial Statements and Supplementary Data
 


33


SAFEWAY INC. AND SUBSIDIARIES
Management’s Annual Report on Internal Control over Financial Reporting
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. The Company’s internal controls were designed to provide reasonable assurance as to the reliability of its financial reporting and the preparation and presentation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Through this evaluation, management did not identify any material weakness in the Company’s internal control over financial reporting. There are inherent limitations in the effectiveness of any system of internal control over financial reporting; however, based on the evaluation, management has concluded the Company’s internal control over financial reporting was effective as of December 31, 2011.
The Company’s independent registered public accounting firm has audited the accompanying consolidated financial statements and the Company’s internal control over financial reporting. The report of the independent registered public accounting firm is included in this Annual Report on Form 10-K and begins on the following page.
 
/s/ Steven A. Burd
 
/s/ Robert L. Edwards
STEVEN A. BURD
 
ROBERT L. EDWARDS
Chairman, President and Chief Executive Officer
 
Executive Vice President and Chief Financial Officer
February 27, 2012
 
February 27, 2012


34


Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Safeway Inc.:
We have audited the accompanying consolidated balance sheets of Safeway Inc. and subsidiaries (the “Company”) as of December 31, 2011 and January 1, 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2011. We also have audited the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

35


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Safeway Inc. and subsidiaries as of December 31, 2011 and January 1, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note A to the financial statements, the Company changed its method of presenting comprehensive income in 2011 due to the adoption of FASB Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income. The change in presentation has been applied retrospectively to all periods presented.

/s/ Deloitte & Touche LLP
San Francisco, California
February 27, 2012


36


SAFEWAY INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In millions, except per-share amounts)
 
 
52 Weeks
2011
52 Weeks
2010
52 Weeks
2009
Sales and other revenue
$
43,630.2

$
41,050.0

$
40,850.7

Cost of goods sold
(31,836.5
)
(29,442.5
)
(29,157.2
)
Gross profit
11,793.7

11,607.5

11,693.5

Operating and administrative expense
(10,659.1
)
(10,448.1
)
(10,348.0
)
Goodwill impairment charge


(1,974.2
)
Operating profit (loss)
1,134.6

1,159.4

(628.7
)
Interest expense
(272.2
)
(298.5
)
(331.7
)
Other income, net
19.7

20.3

7.1

Income (loss) before income taxes
882.1

881.2

(953.3
)
Income taxes
(363.9
)
(290.6
)
(144.2
)
Net income (loss) before allocation to noncontrolling interests
518.2

590.6

(1,097.5
)
Less noncontrolling interests
(1.5
)
(0.8
)

Net income (loss) attributable to Safeway Inc.
$
516.7

$
589.8

$
(1,097.5
)
Basic income (loss) per common share attributable to Safeway Inc.
$
1.49

$
1.56

$
(2.66
)
Diluted income (loss) per common share attributable to Safeway Inc.
$
1.49

$
1.55

$
(2.66
)
Weighted average shares outstanding – basic
343.4

378.3

412.9

Weighted average shares outstanding – diluted
343.8

379.6

412.9

See accompanying notes to consolidated financial statements.


37


SAFEWAY INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In millions)

 
52 Weeks
2011
52 Weeks
2010
52 Weeks
2009
Net income (loss) before allocation to noncontrolling interests
$
518.2

$
590.6

$
(1,097.5
)
Other comprehensive income (loss):



Translation adjustments, net of tax
8.8

90.6

162.2

Pension and post-retirement benefits adjustment to funded status, net of tax
(210.3
)
(38.9
)
(2.0
)
Recognition of pension and post-retirement benefits actuarial loss, net of tax
51.0

49.1

54.9

Other, net of tax
1.0

1.0

(0.2
)
Total other comprehensive income (loss)
(149.5
)
101.8

214.9

Comprehensive income (loss) including noncontrolling interests
368.7

692.4

(882.6
)
Comprehensive income attributable to noncontrolling interests
(1.5
)
(0.8
)

Comprehensive income (loss) attributable to Safeway Inc.
$
367.2

$
691.6

$
(882.6
)
See accompanying notes to consolidated financial statements.



38


SAFEWAY INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions, except per-share amounts)
 
 
Year-end
2011
 
Year-end
2010
Assets
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
729.4

 
$
778.8

Receivables
652.1

 
557.4

Merchandise inventories, net of LIFO reserve of $70.1 and $35.1
2,469.6

 
2,623.4

Prepaid expenses and other current assets
335.7

 
273.4

Total current assets
4,186.8

 
4,233.0

Property:
 
 
 
Land
1,775.5

 
1,796.8

Buildings
6,527.2

 
6,170.5

Leasehold improvements
3,664.1

 
3,934.9

Fixtures and equipment
7,819.7

 
7,694.0

Property under capital leases
591.4

 
637.2

 
20,377.9

 
20,233.4

Less accumulated depreciation and amortization
(10,740.3
)
 
(10,323.2
)
Total property, net
9,637.6

 
9,910.2

Goodwill
469.8

 
430.9

Investments in unconsolidated affiliate
196.8

 
187.2

Other assets
582.6

 
386.8

Total assets
$
15,073.6

 
$
15,148.1


39



SAFEWAY INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions, except per-share amounts)
 
 
Year-end
2011
Year-end
2010
Liabilities and Stockholders’ Equity
 
 
Current liabilities:
 
 
Current maturities of notes and debentures
$
811.3

$
505.6

Current obligations under capital leases
29.2

30.7

Accounts payable
2,917.0

2,533.4

Accrued salaries and wages
500.9

468.9

Deferred income taxes
61.2

96.3

Other accrued liabilities
718.7

679.3

Total current liabilities
5,038.3

4,314.2

Long-term debt:
 
 
Notes and debentures
4,165.0

3,843.8

Obligations under capital leases
404.7

456.2

Total long-term debt
4,569.7

4,300.0

Deferred income taxes
141.9

153.5

Pension and post-retirement benefit obligations
904.5

727.9

Accrued claims and other liabilities
730.1

654.8

Total liabilities
11,384.5

10,150.4

Commitments and contingencies


Stockholders’ equity:
 
 
Common stock: par value $0.01 per share; 1,500 shares authorized; 604.5 and 599.8 shares issued
6.0

6.0

Additional paid-in capital
4,463.9

4,363.1

Treasury stock at cost: 307.9 and 231.8 shares
(7,874.4
)
(6,283.8
)
Accumulated other comprehensive (loss) income
(61.5
)
88.0

Retained earnings
7,149.1

6,820.0

Total Safeway Inc. equity
3,683.1

4,993.3

Noncontrolling interest
6.0

4.4

Total equity
3,689.1

4,997.7

Total liabilities and stockholders’ equity
$
15,073.6

$
15,148.1

See accompanying notes to consolidated financial statements.


40


SAFEWAY INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions)
 

52 Weeks
2011
52 Weeks
2010
52 Weeks
2009
Operating Activities:


 
Net income (loss) before allocation to noncontrolling interest
$
518.2

$
590.6

$
(1,097.5
)
Reconciliation to net cash flow from operating activities:


 
Goodwill impairment charge


1,974.2

Depreciation expense
1,148.8

1,162.4

1,171.2

Property impairment charges
44.7

71.7

73.7

Share-based employee compensation
50.0

55.5

61.7

Excess tax benefit from share-based employee compensation
(1.8
)
(1.6
)
(0.1
)
LIFO expense (income)
35.1

(28.0
)
(35.2
)
Equity in earnings of unconsolidated affiliate
(13.0
)
(15.3
)
(8.5
)
Net pension and post-retirement benefits expense
114.3

125.2

140.1

Contributions to pension and post-retirement benefit plans
(176.2
)
(17.7
)
(24.4
)
(Gain) loss on property dispositions and lease exit costs, net
(65.6
)
(27.5
)
12.7

Increase (decrease) in accrued claims and other liabilities
23.2

36.2

(34.3
)
Deferred income taxes
(63.7
)
(31.3
)
(142.1
)
Amortization of deferred finance costs
5.4

4.8

4.8

Other
19.9

(6.6
)
26.7

Changes in working capital items:


 
Receivables
(2.1
)
14.6

26.0

Inventories at FIFO cost
95.0

(64.4
)
173.5

Prepaid expenses and other current assets
(13.1
)
(15.3
)
(30.4
)
Income taxes
91.4

(3.7
)
188.6

Payables and accruals