Safeway - 10-Q quarterly report FY2011 Q2

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 18, 2011

For the transition period from              to            

Commission File Number: 1-00041

SAFEWAY INC.

(Exact name of registrant as specified in its charter)

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 July 20, 2011, there were issued and outstanding 350.0 million shares of the registrant’s common stock.

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SAFEWAY INC. AND SUBSIDIARIES

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per-share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

(Continued)

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CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

(In millions, except per-share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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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 and 24 weeks ended June 18, 2011 and June 19, 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 on an accrual basis in accordance with generally accepted accounting principles in the United States (“US GAAP”) 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 and 24 weeks ended June 18, 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 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 $13.0 million of LIFO expense during the first 24 weeks of 2011 and no LIFO expense during the first 24 weeks of 2010.

Comprehensive Income

Comprehensive income consists of the following (in millions):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE B–NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, eliminating the option to present other comprehensive income in the statement of changes in equity. Under either choice, items that are reclassified from other comprehensive income to net income are required to be presented on the face of the financial statements where the components of net income and the components of other comprehensive income are presented. This amendment is effective for Safeway in 2012 and will be applied retrospectively. This amendment will change the manner in which the Company presents comprehensive income.

NOTE C–SHARE-BASED EMPLOYEE COMPENSATION

The Company recognized share-based compensation expense of $11.2 million and $12.0 million in the second quarter of 2011 and 2010, respectively, as a component of operating and administrative expense. The Company recognized share-based compensation expense of $22.1 million and $26.2 million for the first 24 weeks 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 following weighted-average assumptions used to value Safeway’s grants through the second quarter, by year, are as follows:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE D–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 tables provide reconciliations of net earnings 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):

Anti-dilutive shares totaling 20.6 million and 22.8 million have been excluded from diluted weighted average shares outstanding for the 12 weeks ended June 18, 2011 and June 19, 2010, respectively.

Anti-dilutive shares totaling 24.3 million and 21.8 million have been excluded from diluted weighted average shares outstanding for the 24 weeks ended June 18, 2011 and June 19, 2010, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE E–GOODWILL

A summary of changes in Safeway's goodwill during the first 24 weeks of 2011 by geographic area is as follows (in millions):

NOTE F–FINANCING

Notes and debentures were composed of the following at June 18, 2011 and January 1, 2011 (in millions):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE G: 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. These amounts were immaterial in both 2011 and 2010.

NOTE H–TAXES ON INCOME

Safeway anticipates that it may repatriate future Canadian earnings to the United States. Therefore, Safeway began accruing repatriation taxes on its Canadian earnings effective as of the second quarter of 2011. For the second quarter of 2011, Safeway accrued deferred taxes in the amount of $4.4 million. Safeway has not provided taxes on approximately $1.2 billion of previously undistributed foreign earnings which it considers indefinitely reinvested.

NOTE I–PENSION AND POST-RETIREMENT PLANS

The following tables provide the components of net pension and post-retirement expense (in millions):

The Company made $160.5 million of contributions to its defined benefit pension plans and post-retirement benefit plans in the first 24 weeks of 2011. For the remainder of 2011, Safeway currently anticipates contributing an additional $12 million to these plans.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE J–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, except as follows:

In State of California v. Safeway Inc. dba Vons, et al., on July 12, 2011, the U.S. Court of Appeals for the Ninth Circuit, sitting en banc, by an 8-3 vote, affirmed the judgment of the district court in favor of the defendants on the State’s antitrust claim. The en banc majority rejected defendants’ argument that the agreement at issue was immune from scrutiny under the federal non-statutory labor exemption from the antitrust laws, but agreed with defendants that the agreement was not amenable to “summary condemnation” under the antitrust laws under either a “per se” or “quick look” approach, but instead had to be tested under a “rule of reason” analysis. Because the State previously agreed not to pursue antitrust liability under a “rule of reason” analysis, the en banc ruling affirmed the district court’s judgment in favor of defendants on the State’s antitrust claim.

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.

NOTE K–STOCKHOLDERS’ EQUITY

Dividends Declared on Common Stock The following table presents information regarding dividends declared on Safeway’s common stock for the first 24 weeks of fiscal 2011 and 2010.

Dividends Paid on Common Stock The following table presents information regarding dividends paid on Safeway’s common stock through the second quarters of fiscal 2011 and 2010.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE L–FAIR VALUE MEASUREMENTS

The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value into the following hierarchy:

The following table presents assets which are measured at fair value on a recurring basis at June 18, 2011 (in millions):

The following table presents assets which are measured at fair value on a recurring basis at year-end 2010 (in millions):

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 second quarter of 2011, long-lived assets with a carrying value of $21.0 million, primarily store assets, were written down to their fair value of $6.1 million, resulting in an impairment charge of $14.9 million. For the first 24 weeks of 2011, long-lived assets with a carrying value of $31.7 million, primarily store assets, were written down to their fair value of $9.7 million, resulting in an impairment charge of $22.0 million. During the second quarter of 2010, long-lived assets with a carrying value of $26.9 million, primarily store assets, were written down to their fair value of $13.5 million, resulting in an impairment charge of $13.4 million. For the first 24 weeks of 2010, long-lived assets with a carrying value of $52.7 million, primarily store assets, were written down to their fair value of $21.9 million, resulting in an impairment charge of $30.8 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 cautious. In addition, there has been an increase in food cost inflation in the first half of 2011. 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 through 2011.

NET INCOME Net income attributable to Safeway Inc. was $145.8 million ($0.41 per diluted share) for the second quarter of 2011 compared to $141.3 million ($0.37 per diluted share) in the second quarter of 2010.

SALES AND OTHER REVENUE Total sales increased 7.1% to $10.2 billion in the second quarter of 2011 from $9.5 billion in the second quarter of 2010. Fuel sales increased $439.0 million from the second quarter of 2010 primarily because the average retail price per gallon of fuel increased 32.5%, reflecting an increase in the cost of fuel. Additionally, a higher Canadian exchange rate increased sales by $84.5 million.

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 the second quarter of 2011 by $92 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.

Identical-store sales, excluding fuel, increased 0.5%, or $45.3 million. This increase reflects an increase in average transaction size and a decrease in customer counts during the quarter.

The following table presents sales revenue by type of similar product (dollars in millions):

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Gross profit declined 155 basis points to 27.00% of sales in the second quarter of 2011 compared to 28.55% of sales in the second quarter of 2010. The impact from fuel sales reduced gross profit 104 basis points, and the gross presentation of gift card commissions reduced gross profit 32 basis points. The remaining 19 basis-point decline in gross profit was largely the result of a 57 basis-point decline due to a delay in recovering cost increases and a 10 basis-point decline due to LIFO expense, partly offset by a 40 basis-point improvement in shrink and a 10 basis-point improvement due to higher revenue from Blackhawk.

Vendor allowances are shown below (in millions):

With the large volume of vendor allowances that Safeway negotiates in a year, it is difficult to conclude with certainty why allowances are up in any particular quarter or to forecast whether that trend will continue. However, the Company believes that the recent increase is the result of vendors providing allowances to grocery retailers to mitigate a trend in price increases.

Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances.

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.

OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense decreased 127 basis points to 24.28% of sales in the second quarter of 2011 from 25.55% of sales in the second quarter of 2010. The impact from fuel sales reduced operating and administrative expense 95 basis points, and the change related to gift card commissions reduced operating and administrative expense 28 basis points.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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INTEREST EXPENSE Interest expense declined to $61.5 million in the second quarter of 2011 from $69.2 million in the second quarter of 2010 due to lower average borrowings and lower average interest rates.

INCOME TAXES Income tax expense was 33.3% of pre-tax income in the second quarter of 2011 compared to 35.3% in the second quarter of 2010. The decline in the tax rate is due primarily to higher earnings from Canadian operations which have a lower tax rate.

24-WEEKS ENDED JUNE 18, 2011 COMPARED WITH 24-WEEKS ENDED JUNE 19, 2010

Net income for the first 24 weeks of 2011 declined to $171.0 million ($0.48 per diluted share) from $237.3 million ($0.61 per diluted share) in the first 24 weeks of 2010 primarily due to the $80.2 million ($0.22 per diluted share) tax expense on repatriated earnings from Canada recorded in the first quarter of 2011.

Identical-store sales increases (decreases) through the second quarters of 2011 and 2010 were as follows:

The following table presents sales revenue by type of similar product (dollars in millions):

The gross profit margin was 27.26% in the first 24 weeks of 2011 compared to 28.48% in the first 24 weeks of 2010. Operating and administrative expense margin was 24.78% in the first 24 weeks of 2011 compared to 25.83% in the first 24 weeks of 2010.

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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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Financial Resources

Net cash flow provided by operating activities declined to $187.6 million in the first 24 weeks of 2011 compared to $309.1 million in the first 24 weeks of 2010 due primarily to taxes paid on the Canadian dividend and contributions to the pension plan.

Net cash flow used by investing activities was $405.3 million in the first 24 weeks of 2011 compared to $393.6 million in the first 24 weeks of 2010.

Net cash flow from financing activities declined to a use of $429.5 million in the first 24 weeks of 2011 from a source of $155.6 million in the first 24 weeks of 2010 due primarily to a greater net addition to long-term borrowings in 2010 and increased purchases of treasury stock in 2011.

Based upon the current level of operations, management 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.

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.

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CREDIT AGREEMENT On June 1, 2011, the Company entered into a $1.5 billion credit agreement (the “Credit Agreement”) with a syndicate of banks. The Credit Agreement has a termination date of June 1, 2015 and replaced the former credit agreement that was scheduled to expire on June 1, 2012. The Credit Agreement provides (i) to Safeway, a four-year revolving domestic credit facility of up to $1,250.0 million for U.S. dollar advances, (ii) to Safeway and Canada Safeway Limited (“CSL”), a four-year revolving Canadian credit facility of up to $250.0 million for U.S. dollar and Canadian dollar advances and (iii) to Safeway, a $400.0 million subfacility of the domestic facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the domestic or Canadian credit facility commitments up to an additional $500.0 million, subject to the satisfaction of certain conditions. Safeway will guarantee the obligations of CSL under the Credit Agreement. The Credit Agreement contains various covenants that restrict, among other things and subject to certain exceptions, the ability of Safeway, CSL and their respective subsidiaries to incur certain liens, make certain asset sales, enter into certain mergers or amalgamations, engage in certain transactions with shareholders and affiliates and alter the character of its business from that conducted on the closing date. The Credit Agreement also contains two financial maintenance covenants: (i) an interest coverage ratio that requires Safeway not to permit the ratio of consolidated Adjusted EBITDA, as defined in the Credit Agreement, to consolidated interest expense to be less than 2.00:1.00, and (ii) a leverage ratio that requires Safeway not to permit the ratio of consolidated total debt, less unrestricted cash in excess of $75.0 million, to consolidated Adjusted EBITDA, to exceed 3.50:1.00. As of June 18, 2011, the Company was in compliance with these covenant requirements. As of June 18, 2011, there were $40.8 million of borrowings outstanding and $73.5 million in letters of credit under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,385.7 million as of June 18, 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 June 18, 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 $43.8 million and $38.8 million for the second quarters of 2011 and 2010, respectively. Year-to-date dividends paid on common stock totaled $88.0 million and $77.6 million for 2011 and 2010, respectively. Note K to the Company’s condensed consolidated financial statements in this report provides additional information on dividends declared and dividends paid on Safeway common stock.

STOCK REPURCHASE PROGRAM From the initiation of the Company’s stock repurchase program in 1999 through the end of the second quarter of 2011, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $5.9 billion, leaving an authorized amount for repurchases of approximately $1.1 billion. During the second quarter of 2011, Safeway repurchased approximately 14.9 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $360.8 million. The average price per share, excluding commissions, was $24.13. 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 $209.0 million in capital expenditures in the second quarter of 2011. The Company opened six new stores, completed seven Lifestyle remodels and closed 11 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.

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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 pension and post-retirement benefit plan contributions; sufficiency of liquidity for the foreseeable future; 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:

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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’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. The Company also has investments in certain unconsolidated entities, including Casa Ley, S.A. de C. V. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. There has been no change during the Company’s fiscal quarter ended June 18, 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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PART II–OTHER INFORMATION

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, except as follows:

In State of California v. Safeway Inc. dba Vons, et al., on July 12, 2011, the U.S. Court of Appeals for the Ninth Circuit, sitting en banc, by an 8-3 vote, affirmed the judgment of the district court in favor of the defendants on the State’s antitrust claim. The en banc majority rejected defendants’ argument that the agreement at issue was immune from scrutiny under the federal non-statutory labor exemption from the antitrust laws, but agreed with defendants that the agreement was not amenable to “summary condemnation” under the antitrust laws under either a “per se” or “quick look” approach, but instead had to be tested under a “rule of reason” analysis. Because the State previously agreed not to pursue antitrust liability under a “rule of reason” analysis, the en banc ruling affirmed the district court’s judgment in favor of defendants on the State’s antitrust claim.

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.

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The following table contains information for shares repurchased during the second quarter of 2011.

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Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

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.

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Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

Exhibit Index

LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD

ENDED JUNE 18, 2011

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