Safeway Inc. (SWY)

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Safeway, Inc. (SWY)

Q4 2009 Earnings Call

February 25, 2010 11:00 AM ET

Executives:

Melissa Plaisance - SVP, Finance and IR

Steve Burd - Chairman, President and CEO

Robert L. Edwards - EVP and CFO

Analysts:

John Heinbockel - Goldman Sachs

Karen Short - BMO Capital

Mark Wiltamuth - Morgan Stanley

Scott Mushkin - Jefferies & Co

Edward Kelly - Credit Suisse

Chuck Cerankosky - Northcoast Research

Meredith Adler - Barclays Capital

Charles Grom - J.P. Morgan

Andrew Wolf - BB&T Capital Markets

Deborah Weinswig - Citi Group

Neil Currie - UBS

Presentation:

Operator

Welcome to the Safeway Fourth Quarter 2009 conference call. (Operator instructions). I would now turn the call over to Ms. Melissa Plaisance, Safeway's Senior Vice President of Finance.

Please go ahead.

Melissa Plaisance

Good morning everyone and thank you for joining us for our fourth quarter and year end 2009 conference call. With me this morning is Steve Burd, Chairman, President and CEO and Robert Edwards, Executive Vice President and Chief Financial Officer.

Before I turn the call over to Steve, let me remind you that this conference call may contain forward-looking statements. Such statements may relate to topics such as sales, margins, earnings, earnings growth, operating improvements, cost reduction, capital spending, debt financing, dividends, free cash flow, growth of Blackhawk, depreciation, product development, Lifestyle stores, additional growth vehicles, guidance and other related subjects.

These statements are based on Safeway's current plans and expectations and are subject to risks and uncertainties that could cause actual events and results to vary significantly from those implied by such statements. Please refer to Safeway's reports and filings with the SEC for further discussion of these risks and uncertainties including those set out under forward-looking statements and risk factors in Safeway's annual report to stockholders included in Safeway's most recent Form 10-K and 10-Q.

And with that, let me turn the call over to Steve.

Steve Burd

Thank you, Melissa. I feel compelled to start with a brief medical report. I’m suffering from a cold. The last time I had a cold, several people had right out suggested that I really seemed down on the call. So that’s why I start with that medical report. I’m not down. I’m just a little sick.

So let me start with the numbers for the quarter. Our fourth quarter results were negatively impacted by a non-cash goodwill impairment charge of $1.818 billion. This charge is a direct result of the decline in year-over-year share price. The divisions affected were primarily bonds and eastern. They represented 99% of the charge. The goodwill originated from previous acquisitions.

Now this created a reported quarterly loss of $1.609 billion. Excluding the non-cash impairment charge, net income for the quarter, was just a touch over $209 million and this compares to the $338 million from the same quarter a year-ago.

Expressed in terms of earnings per share, we earned $0.53 on the quarter, as contrasted with $0.79 a year-ago. Kind of a footnote to that $0.53, it did cost us about a penny in the quarter to - these would be ratification costs as a result of a couple of labor agreements recently ratified.

It was a very challenging quarter, but results were in line with our expectations and just based on the numbers, appear to be in line with expectations of the consensus. As expected, our earnings this quarter were well below last year’s fourth quarter. Now this shortfall from last year was largely the result of a sales shortfall, which was driven predominantly by deflation and secondarily by a decline in volume.

We also had one less week this year as well as the higher tax rate, but these were offset by other positive items. You can think of the earnings per share shortfall, absent this ratification cost as essentially being the result of deflation and a decline in volumes versus last year.

Turning first to sales, our total sales declined 8.1% versus last year. This decline in total sales is explained by one less week as well as a decline in ID of 4.1%. The ID’s ex-fuel which is that negative 4.1% are what I will expand on a bit. Total company volume was negative and was essentially equal to quarter three results.

On the good news side, volume continued to show improvement in the U.S where I am happy to report we are now at price parity with our primary conventional competition. I think for several months now, people have been saying, “Well, where are you in this baseball game”. And I am now telling you the game is over in the U.S and we won.

So we are at fully price parity with our primary conventional competition, which puts us well below our secondary competitors in virtually every market.

The other thing I would tell you is that while the volume was slightly improved in the U.S, it showed a marked improvement in the last four weeks quarter, which I think is indicative of how the marketplace is digesting the price movements that we made particularly in the third and fourth quarters of last year.

At the same time, our volume declined in Canada where we have not yet launched our price and what we call our promise campaign to consumers. Our perishable volume in the U.S is the best it has been in 12 quarters and has been a very healthy positive number now for two consecutive quarters.

Our non-perishable volume in the U.S had its sixth consecutive quarter of improvement, but is still running negative to last year. As expected, deflation accelerated in the fourth quarter and explains the entire difference in ID sales reported between quarter three and quarter four. So it’s essentially volume was flat with quarter three.

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