Safeway Inc. (SWY)

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Safeway Inc. (SWY)

Q2 2009 Earnings Call

July 23, 2009 11:00 am ET

Executives

Melissa C. Plaisance - Senior Vice President, Finance and Investor Relations

Steven A. Burd - President and Chief Executive Officer

Robert L. Edwards - Chief Financial Officer

Analysts

John Heinbockel - Goldman Sachs

Edward Kelly - Credit Suisse

Scott Mushkin - Jefferies & Co.

Simeon Gutman – Canaccord Adams

Regina Russell for Charles Grom - JP Morgan

Deborah Weinswig - Citigroup

Mark Wiltamuth - Morgan Stanley

Meredith Adler - Barclays Capital

Bob Summers - Pali Capital

Presentation

Operator

Welcome to the Safeway second quarter 2009 conference call. (Operator Instructions) I will now turn the call over to Ms. Melissa Plaisance, Safeway's Senior Vice President of Finance.

Melissa C. Plaisance

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

Before we begin, 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 reductions, 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. We ask you to refer to Safeway's reports and filings with the SEC for a 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 subsequent quarterly reports on Form 10-Q.

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

Steven A. Burd

Let me start with net income. Net income for the quarter was $238.6 million, which compares to a net income last year same quarter of $234.3 million. Expressed in terms of earnings per share, we earned $0.57 per share this quarter as contrasted with $0.53 per share for the same quarter in 2008.

Let me just start by trying to give you a couple of highlights on the quarter before we get into some of the details. For starters, tax benefits, as expected, contributed significantly to the second quarter earnings. I think last time, as we faced our first quarter call, we anticipated about $0.11 a share in tax benefits. Those tax benefits actually came in at about a $0.14 level.

In terms of ID sales, ID sales were soft, largely due to a significant change in the average ring per item. I will talk more about that in some detail. O&A expenses, we believe were well-controlled but we were unable to overcome the ID sales decline.

In terms of free cash flow it was a very strong quarter helped out by the fact that we received a $160.0 million in cash as a result of a refund from the federal government.

In terms of sales, total sales declined 6.5% versus last year. This decline was largely the result of three factors, again, I'm looking at total sales: we've got lower fuel prices, which wouldn't be news to anybody on this call; a decline in the Canadian exchange rate, although that exchange rate is improving, it's still a decline from last year; and then finally, a decline in the average ring per item.

Looking at ID store sales, excluding fuel, they were negative for the first time in 18 quarters. We had a negative 1.5% ID before adjusting for Easter and we had a negative 2.2% ID sales number after adjusting for Easter. While the ID sales results were clearly disappointing, we were encouraged by our transactional and volume trends in the quarter.

Our perishable volume was the best result that we've had in 9 quarters. Our non-perishable volume was the best result we've had in 4 quarters.

The negative IDs resulting from these volume trends are driven by factors that we believe to be temporary, but let me try to give you a breakdown of the most important one.

We've been talking about deflation in two key commodity areas, dairy and produce, now for several quarters. And of course, we've been trying to predict exactly where that has been headed. We have not been correct on that. The deflation is deeper and more sustained than we had earlier predicted.

If I just look at produce and dairy, that deflation reduced ID sales for the entire company about 1% in the second quarter, and that will actually be a deeper effect in the third quarter.

We have been talking about trading down. I have often talked about the trade down to corporate brand. That's a good thing from a profit standpoint. That continues. We have a trade down from branded to generic drugs. That's a good thing from a profit standpoint. That has continued.

And I suspect those two elements will continue, particularly the corporate brand, as long as the economy is still in decline. I think once the economy stabilizes the trade down in the corporate brands will probably stabilize, but for the fact that we have concerted strategy to try to drive that as a profit driver.

And what we've tried to do is to take all other categories, which early on in the recession it was difficult see and measure trade down, but now we see that really across the board in virtually all categories.

When I add up those three components, it is close to 90 basis points of effect on total ID sales for the quarter.

And then, as all of you know, we have a strategy to invest in price to get to those magic price points in virtually all of our markets that we believe will sustain long-term sales and income growth for us. And that was about 50 basis points in the quarter.

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