UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 26, 2011
For the transition period from to
Commission File Number: 1-00041
SAFEWAY INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5918 Stoneridge Mall Rd.
Pleasanton, California
Registrant’s telephone number, including area code: (925) 467-3000
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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. x Yes ¨ 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). x Yes ¨ No
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No.
As of April 27, 2011, there were issued and outstanding 354.1 million shares of the registrant’s common stock.
SAFEWAY INC. AND SUBSIDIARIES
Table of Contents
Page
PART I–FINANCIAL INFORMATION (Unaudited)
Item 1.
Item 2.
Item 3.
Item 4.
PART II–OTHER INFORMATION
Item 1A.
Item 6.
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PART I–FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
(Unaudited)
Sales and other revenue
Cost of goods sold
Gross profit
Operating and administrative expense
Operating profit
Interest expense
Other income, net
Income before income taxes
Income taxes
Net income before allocation to noncontrolling interests
Add noncontrolling interests
Net income attributable to Safeway Inc.
Income per common share attributable to Safeway Inc.
Basic
Diluted
Weighted average shares outstanding:
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
ASSETS
Current assets:
Cash and equivalents
Receivables
Merchandise inventories
Prepaid expenses and other current assets
Total current assets
Property
Less accumulated depreciation and amortization
Property, net
Goodwill
Investment in unconsolidated affiliate
Other assets
Total assets
(Continued)
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CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of notes and debentures
Current obligations under capital leases
Accounts payable
Accrued salaries and wages
Deferred income taxes
Other accrued liabilities
Total current liabilities
Long-term debt:
Notes and debentures
Obligations under capital leases
Total long-term debt
Pension and postretirement benefit obligations
Accrued claims and other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Common stock: par value $0.01 per share;1,500 shares authorized; 602.3 and 599.8 shares issued
Additional paid-in capital
Treasury stock at cost: 239.7 and 231.8 shares
Accumulated other comprehensive income
Retained earnings
Total Safeway Inc. equity
Noncontrolling interests
Total equity
Total liabilities and stockholders’ equity
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Reconciliation to net cash flow used by operating activities:
Depreciation expense
Property impairment charges
Share-based employee compensation
Excess tax benefit from exercise of stock options
LIFO expense
Equity in earnings of unconsolidated affiliate
Net pension and post-retirement benefit expense
Contributions to pension and post-retirement plans
(Gain) loss on property retirements and lease exit costs, net
Increase in accrued claims and other liabilities
Amortization of deferred finance costs
Other
Change in working capital items:
Inventories at FIFO cost
Payables and accruals
Payables related to third-party gift cards, net of receivables
Net cash flow used by operating activities
INVESTING ACTIVITIES:
Cash paid for property additions
Proceeds from sales of property
Net cash flow used by investing activities
FINANCING ACTIVITIES:
Payments on short-term borrowings, net
Additions to long-term borrowings
Payments on long-term borrowings
Purchase of treasury stock
Dividends paid
Net proceeds from exercise of stock options
Net cash flow (used) provided by financing activities
Effect of changes in exchange rates on cash
Decrease in cash and equivalents
CASH AND EQUIVALENTS:
Beginning of period
End of period
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A–THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of Safeway Inc. and subsidiaries (“Safeway” or the “Company”) for the 12 weeks ended March 26, 2011 and March 27, 2010 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. These condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted, pursuant to SEC regulations. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s 2010 Annual Report on Form 10-K, as amended. The results of operations for the 12 weeks ended March 26, 2011 are not necessarily indicative of the results expected for the full year.
Inventory
Net income reflects the LIFO method of valuing certain domestic inventories based upon estimated annual inflation. The LIFO method of inventory valuation can only be determined on a reliable basis annually, when inflation rates and inventory levels are known; therefore, LIFO inventory costs for interim financial statements are estimated. Actual LIFO inflation indices for the year are calculated during the fourth quarter based upon a statistical sampling of inventories. Safeway recorded $4.0 million of LIFO expense during the first 12 weeks of 2011 and no LIFO expense during the first 12 weeks of 2010.
Vendor Allowances
Vendor allowances totaled $711.2 million for the first quarter of 2011 and $664.9 million for the first quarter of 2010. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances. All vendor allowances are classified as an element of cost of goods sold.
Promotional allowances make up nearly 90% of all allowances. With promotional allowances, vendors pay Safeway to promote their product. The promotion may be any combination of a temporary price reduction, a feature in print ads, a feature in a Safeway circular or a preferred location in the store. The promotions are typically one to two weeks long.
Slotting allowances are a small portion of total allowances (typically less than 5% of all allowances). With slotting allowances, the vendor reimburses Safeway for the cost of placing new product on the shelf. Safeway has no obligation or commitment to keep the product on the shelf for a minimum period.
Contract allowances make up the remainder of all allowances. Under the typical contract allowance, a vendor pays Safeway to keep product on the shelf for a minimum period of time or when volume thresholds are achieved.
Slotting and promotional 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.
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Comprehensive Income
Comprehensive income consists of the following (in millions):
Foreign currency translation adjustments, net of tax
Recognition of pension and post-retirement benefits actuarial loss, net of tax
Other, net of taxes
Comprehensive income including noncontrolling interests
Comprehensive loss attributable to noncontrolling interests
Comprehensive income attributable to Safeway Inc.
NOTE B–SHARE-BASED EMPLOYEE COMPENSATION
The Company recognized share-based compensation expense of $10.9 million and $14.1 million in the first quarter of 2011 and 2010, respectively, as a component of operating and administrative expense.
The Company determines fair value of such awards using the Black-Scholes option pricing model. The weighted-average assumptions used to value Safeway’s first-quarter grants, by year, are as follows:
Expected life (in years)
Expected stock volatility
Risk-free interest rate
Expected dividend yield during the expected term
NOTE C–INCOME PER SHARE
Basic income per share is calculated on the basis of weighted average outstanding common shares. Diluted income per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock awards and other dilutive securities.
The following table provides a reconciliation of net income and shares used in calculating income per basic common share to those used in calculating income per diluted common share (in millions, except per-share amounts):
Weighted average common shares outstanding
Common share equivalents
Weighted average shares outstanding
Income per share
Anti-dilutive shares totaling 25.6 million and 21.5 million have been excluded from diluted weighted average shares outstanding for the 12 weeks ended March 26, 2011 and March 27, 2010, respectively.
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NOTE D–GOODWILL
A summary of changes in Safeway’s goodwill during the first 12 weeks of 2011 by geographic area is as follows (in millions):
Balance – beginning of year:
Accumulated impairment charges
Activity during the quarter:
Other adjustments
Balance – end of quarter:
Balance – end of quarter
NOTE E–FINANCING
Notes and debentures were composed of the following at March 26, 2011 and January 1, 2011 (in millions):
Commercial paper
Bank credit agreement
Other bank borrowings, unsecured
Mortgage notes payable, secured
6.50% Senior Notes due 2011, unsecured
5.80% Senior Notes due 2012, unsecured
6.25% Senior Notes due 2014, unsecured
5.625% Senior Notes due 2014, unsecured
6.35% Senior Notes due 2017, unsecured
5.0% Senior Notes due 2019, unsecured
3.95% Senior Notes due 2020, unsecured
7.45% Senior Debentures due 2027, unsecured
7.25% Senior Debentures due 2031, unsecured
Other notes payable, unsecured
Interest rate swap fair value adjustment
Less current maturities
Long-term portion
On March 31, 2011, Canada Safeway Limited, an indirect, wholly-owned subsidiary of Safeway, issued CAD300 million of 3.0% Second Series Notes which mature March 31, 2014.
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NOTE F: FINANCIAL INSTRUMENTS
Safeway manages interest rate risk through the strategic use of fixed- and variable-interest rate debt and, from time to time, interest rate swaps. The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments.
Fair Value Hedges In December 2009, the Company effectively converted $800 million of its 5.80% fixed-rate debt due 2012 to floating-rate debt through interest rate swap agreements. These interest rate swaps, under which the Company agrees to pay variable rates of interest, are designated as fair value hedges of fixed-rate debt. The gain or loss on the interest rate swap agreements, as well as the gain or loss on the debt being hedged, are recognized in current earnings. Safeway includes the gain or loss on the fixed-rate debt in interest expense along with the offsetting loss or gain on the related interest rate swap as follows (in millions):
Income statement classification
The fair value and the balance sheet presentation of derivative instruments as of March 26, 2011 are as follows (in millions):
Location in consolidated
balance sheet
Derivative assets designated as hedges:
Interest rate swaps
Total derivative assets
The fair value and the balance sheet presentation of derivative instruments as of January 1, 2011 are as follows (in millions):
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NOTE G–TAXES ON INCOME
In the first quarter of 2011, Safeway’s Board of Directors approved the repatriation of $1.1 billion from the Company’s wholly-owned Canadian subsidiary. As a result of this decision, Safeway provided additional income tax expense of $80.2 million in the first quarter of 2011 and expects to pay approximately $95 million in income tax payments in the second quarter of 2011.
NOTE H–PENSION AND POST-RETIREMENT PLANS
The following table provides the components of net pension and post-retirement expense for retirement plans for the first 12 weeks of 2011 and 2010 (in millions):
Estimated return on assets
Service cost
Interest cost
Amortization of prior service cost
Amortization of unrecognized losses
Total
The Company made approximately $6.6 million of contributions to its defined benefit pension plan trusts and the Retirement Restoration Plan in the first quarter of 2011. In the second quarter of 2011, Safeway contributed $145 million to its U.S. pension plans. For the year, Safeway expects to contribute approximately $175 million to pension and post-retirement benefit obligations in the United States and Canada.
NOTE I–CONTINGENCIES
Legal Matters
Note M to the Company’s consolidated financial statements, under the caption “Legal Matters” on page 63 of the Form 10-K included in the 2010 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. There have been no subsequent material developments to these matters.
Guarantees
Note P to the Company’s consolidated financial statements, under the caption “Guarantees” of the 2010 Annual Report on Form 10-K provides information on guarantees.
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NOTE J–STOCKHOLDERS’ EQUITY
Dividends Declared on Common Stock The following table presents information regarding dividends declared on Safeway’s common stock during the first quarters of fiscal 2011 and 2010.
(in millions, except per-share amounts)
2011
Quarter 1
2010
Dividends Paid on Common StockThe following table presents information regarding dividends paid on Safeway’s common stock during the first quarters of fiscal 2011 and 2010.
NOTE K–FAIR VALUE MEASUREMENTS
The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value into the following hierarchy:
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The following table presents assets which are measured at fair value on a recurring basis at March 26, 2011 (in millions):
Assets:
Short-term investments 1
Non-current investments 2
Interest rate swap 2
The following table presents assets which are measured at fair value on a recurring basis at year-end 2010 (in millions):
Cash equivalents
In determining the fair value, the Company maximizes the use of quoted market prices and minimizes the use of unobservable inputs. The Level 1 fair values are based on quoted market values for identical assets. The fair values of Level 2 are determined using prices from pricing agencies and financial institutions that develop values based on observable inputs in active markets. Level 3 fair values are determined from industry valuation models based on externally developed inputs.
Long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. Fair value of long-lived assets is determined by estimating the amount and timing of net future cash flows (including rental expense for leased properties, sublease rental income, common area maintenance costs and real estate taxes) and discounting them using a risk-adjusted rate of interest. Safeway estimates future cash flows based on its experience and knowledge of the market in which the store is located and, when necessary, uses real estate brokers. During the first quarter of 2011, long-lived assets with a carrying value of $10.7 million were written down to their fair value of $3.6 million, resulting in an impairment charge of $7.1 million. During the first quarter of 2010, long-lived assets with a carrying value of $25.8 million were written down to their fair value of $8.4 million, resulting in an impairment charge of $17.4 million.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
ECONOMIC OUTLOOK The economic environment has continued to make consumers more cautious. This has led to reduced consumer confidence, to certain consumers trading down to a less expensive mix of products and/or trading down to discounters for grocery items, all of which have impacted Safeway’s sales. These difficult economic conditions may continue in 2011.
Net income attributable to Safeway Inc. was $25.1 million ($0.07 per diluted share) for the first quarter of 2011 compared to $96.0 million ($0.25 per diluted share) in the first quarter of 2010. Net income for the first quarter of 2011 included an $80.2 million tax charge ($0.22 per diluted share) resulting from the previously announced decision to repatriate $1.1 billion from Safeway’s wholly-owned Canadian subsidiary.
SALESSame-store sales for the first quarters of 2011 and 2010 were as follows:
As reported
Excluding fuel sales
Total sales increased 4.8% to $9.8 billion in the first quarter of 2011 compared to $9.3 billion in the first quarter of 2010. Higher fuel sales increased sales $287.0 million. The average retail price per gallon of fuel increased approximately 19.3% in the first quarter of 2011 compared to the first quarter of 2010 primarily due to the increase in the cost of fuel. Additionally, a higher Canadian exchange rate resulted in an $82.1 million increase in sales. Identical-store sales, excluding fuel, increased 0.4%, or $34.2 million. This increase reflects an increase in both customer counts and average transaction size during the quarter. Store closures reduced sales by approximately $59 million.
Historically, Safeway has 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, which increased both revenue and cost of goods sold in the first quarter of 2011 by less than 1%. This gross presentation had no impact on same-store sales, gross profit dollars, or net income. Previously reported results are not adjusted because the impact is immaterial.
The following table presents sales revenue by type of similar product (dollars in millions):
Non-perishables (1)
Perishables (2)
Fuel
Pharmacy
Other (3)
Total sales and other revenue
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
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freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs of Safeway’s distribution network. Advertising and promotional expenses are also a component of cost of goods sold. Additionally, all vendor allowances are classified as an element of cost of goods sold and are shown below (in millions):
Quarter 2
Quarter 3
Quarter 4
2009
Gross profit declined 87 basis points to 27.54% of sales in the first quarter of 2011 compared to 28.41% of sales in the first quarter of 2010. The impact from fuel sales reduced gross profit 87 basis points, and the gross presentation of gift card commissions reduced gross profit 18 basis points. This was offset by an 18 basis-point increase in gross profit which was largely the result of improved shrink, partly offset by investments in price, employee severance charges and LIFO expense.
OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense declined 81 basis points to 25.30% of sales in the first quarter of 2011 from 26.11% of sales in the first quarter of 2010. The impact from fuel sales reduced operating and administrative expense 67 basis points, and the gross presentation of gift card commissions reduced operating and administrative expense 16 basis points. The remaining two basis-point increase was largely the result of higher labor costs and an increased reserve for real estate litigation, partly offset by reduced losses from property impairment and disposal, lower occupancy costs and reduced store indirect expenses.
INTEREST EXPENSE Interest expense declined to $65.7 million in the first quarter of 2011 from $69.7 million in the first quarter of 2010 due to lower average borrowings and lower average interest rates.
INCOME TAX EXPENSE At January 1, 2011, certain undistributed earnings of the Company’s foreign operations totaling $2,051.1 million were considered to be permanently reinvested. No deferred tax liability had been recognized for the remittance of such earnings to the U.S., since it was the Company’s intention to utilize those earnings in the foreign operations for an indefinite period of time or to repatriate such earnings only when it was tax-efficient to do so.
In the first quarter of 2011, Safeway’s Board of Directors approved a $1.1 billion dividend from the Company’s Canadian subsidiary to the U.S. parent. As a result of the dividend, Safeway accrued additional income tax expense of $80.2 million in the first quarter of 2011 and expects to make approximately $95 million in income tax payments in the second quarter of 2011.
After evaluating the Company’s cash flow needs in Canada and the potential use of any future repatriated earnings, Safeway continues to consider the remaining undistributed foreign earnings to be permanently reinvested.
Critical Accounting Policies
Critical accounting policies are those accounting policies that management believes are important to the portrayal of Safeway’s financial condition and results 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. The Company’s 2010 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to workers’ compensation, store closures, employee benefit plans, goodwill and income tax contingencies.
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Liquidity and Financial Resources
Net cash flow used by operating activities was $60.0 million in the first quarter of 2011 compared to $242.0 million in the first quarter of 2010. This decrease was primarily due to a lower use of cash by working capital in the first quarter of 2011 compared to the first quarter of 2010 primarily driven by a lower increase in inventory and a lower reduction in payables and accruals.
Net cash flow used by investing activities was $188.4 million in the first quarter of 2011 compared to $192.7 million in the first quarter of 2010 primarily because of reduced capital expenditures.
Net cash flow used by financing activities was $132.8 million in the first quarter of 2011 compared to net cash flow provided by financing activities of $416.3 million in the first quarter of 2010 due primarily to a net reduction in borrowings.
Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway’s commercial paper program and its Credit Agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments and stock repurchases and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the commercial paper program and Credit Agreement.
FREE CASH FLOW Free cash flow is calculated as net cash flow from operating activities, as adjusted to exclude payables related to third-party gift cards, net of receivables, less net cash flow used by investing activities. 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.
Net cash flow used by operating activities, as reported
Decrease in payables related to third-party gift cards, net of receivables
Net cash flow from operating activities, as adjusted
Free cash flow
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, fund share repurchases and pay dividends that management believes will enhance stockholder value.
This non-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-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 GAAP. Other companies in the Company’s industry may calculate free cash flow differently, limiting its usefulness as a comparative measure.
CREDIT AGREEMENT The Company has a $1,600.0 million credit agreement (as amended, the “Credit Agreement”) with a syndicate of banks which has a termination date of June 1, 2012 and provides for two additional one-year extensions of the termination date. The Credit Agreement provides (i) to Safeway a $1,350.0 million revolving credit facility (the “Domestic Facility”), (ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, at the option of the lenders and subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA, as defined in the Credit Agreement, to interest expense ratio of 2.0 to 1 and is required to not exceed an Adjusted Debt (total consolidated debt less cash and cash equivalents in excess of $75.0 million) to Adjusted EBITDA ratio of 3.5 to 1. As of March 26, 2011, the Company was in compliance with these covenant requirements. As of March 26, 2011, there were $168.9 million of borrowings, and letters of credit totaled $78.9 million under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,352.2 million as of March 26, 2011.
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The Company is currently in the process of refinancing the Credit Agreement. The refinancing is expected to be complete by June 2011.
SHELF REGISTRATION On December 8, 2008, 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 December 8, 2011. The Safeway Board of Directors has authorized issuance of up to $2.5 billion of securities under the Shelf. As of March 26, 2011, $1.0 billion of securities were available for issuance under the board’s authorization.
DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $44.2 million and $38.8 million for the first quarters of 2011 and 2010, respectively. Note J to the Company’s condensed consolidated financial statements in this report provides additional information on dividends declared and dividends paid on Safeway common stock.
STOCK REPURCHASE PROGRAM From the initiation of the Company’s stock repurchase program in 1999 through the end of the first quarter of 2011, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $5.5 billion, leaving an authorized amount for repurchases of approximately $1.5 billion. During the first quarter of 2011, Safeway repurchased approximately 7.7 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $173.7 million. The average price per share, excluding commissions, was $22.47. The Company will evaluate the timing and volume of future repurchases based on several factors, including market conditions, and may repurchase stock in the near- or long-term as circumstances warrant.
Capital Expenditure Program
Safeway invested $185.1 million in capital expenditures in the first quarter of 2011. The Company opened three new Lifestyle stores, completed five Lifestyle remodels and closed five stores. For the year, Safeway plans to invest approximately $1.0 billion in capital expenditures, open 26 new Lifestyle stores and complete 30 Lifestyle remodels.
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 (“Exchange Act”). 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 “will,” “may,” “continuing,” “ongoing,” “expects,” “estimates,” “anticipates,” “believes,” “guidance” and similar words or phrases and the negative of such words or phrases.
This Quarterly Report on Form 10-Q includes forward-looking statements, including forward-looking statements relating to income tax payments; pension and post-retirement benefit plan contributions; sufficiency of liquidity for the foreseeable future; the refinancing of the Credit Agreement; capital expenditures; 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;
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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;
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. Please refer to our most recent Annual Report on Form 10-K, as amended, subsequent Quarterly Reports on Form 10-Q and subsequent Current Reports on Form 8-K for more information regarding these risks and uncertainties. These reports are not intended to be a discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.
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There have been no material changes regarding the Company’s market risk position from the information provided under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Company’s 2010 Annual Report on Form 10-K.
The Company maintains “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, the Company’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company also has investments in certain unconsolidated entities, including Casa Ley, S.A. de C. V. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.
The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. There has been no change during the Company’s fiscal quarter ended March 26, 2011 in the Company’s internal control over financial reporting that was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) which has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, in the Company’s 2010 Annual Report on Form 10-K.
The following table contains information for shares repurchased during the first quarter of 2011.
Fiscal period
January 2, 2011 – January 29, 2011
January 30, 2011 – February 26, 2011
February 27, 2011 – March 26, 2011
TOTAL
Includes 94,409 shares of restricted stock withheld, at the election of certain holders 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 stockholders.
Average price per share excludes commissions. Average price per share excluding the restricted shares referred to in footnote 1 was $22.47.
In December 2010, the Company’s Board of Directors increased the authorized level of the Company’s stock repurchase program from $6.0 billion to $7.0 billion. From the initiation of the repurchase program in 1999 through the end of the first quarter of 2011, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $5.5 billion, leaving an authorized amount for repurchases of approximately $1.5 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.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Steven A. Burd
Chairman, President
and Chief Executive Officer
/s/ Robert L. Edwards
Executive Vice President
and Chief Financial Officer
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Exhibit Index
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED MARCH 26, 2011
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