Safeway Inc. (SWY)

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Safeway (SWY)

Q4 2010 Earnings Call

February 24, 2011 11:00 am ET

Executives

Melissa Plaisance - Senior Vice President of Finance & Investor Relations

Robert Edwards - Chief Financial Officer and Executive Vice President

Steven Burd - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Analysts

Edward Kelly - Crédit Suisse AG

Meredith Adler - Barclays Capital

John Heinbockel - Guggenheim Securities, LLC

Scott Mushkin - Jefferies & Company, Inc.

Adrianne Shapira - Goldman Sachs Group Inc.

Mark Wiltamuth - Morgan Stanley

Karen Short - BMO Capital Markets U.S.

Deborah Weinswig - Citigroup Inc

Robert Ohmes - BofA Merrill Lynch

Damian Witkowski - Gabelli & Company, Inc.

Andrew Wolf - BB&T Capital Markets

Charles Cerankosky - Northcoast Research

Presentation

Operator

Welcome, and thank you for standing by, and welcome to the Safeway Fourth Quarter 2010 Conference Call. [Operator Instructions] I'll now turn the conference over to Ms. Melissa Plaisance, Safeway Senior Vice President of Finance. Please go ahead.

Melissa Plaisance

Good morning, everyone, and thank you for joining us for this Fourth Quarter and Full Year 2010 Earnings Conference Call. I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws.

Forward-looking statements contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. However, we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a list and description of those risks and uncertainties, please see our filings with the SEC.

And with that, I'd like to turn the call over to Steve Burd, our Chairman, President and Chief Executive Officer.

Steven Burd

Thank you, Melissa. Let me begin with net income. Net income for the quarter was $229.6 million. This compares with a goodwill adjusted income from the same quarter last year of $209.1 million. Expressed as earnings per share, we made $0.62 per share this quarter, contrasted with $0.53 per share last quarter, or an increase of 17%.

For starters, I would tell you that we're pleased with the results of the quarter, for the most part because all of our trends are improving and those trends have continued into the first quarter. We have some quick highlights. Q4 represents our second consecutive quarter of year-over-year EPS growth. We also had our best ID sales performance of the year in the fourth quarter.

Looking at operating margin, it improved with both gross margin rate and O&A expense ratios, excluding fuel, showing positive changes. Price per item, which had been negative all year, was flat when compared with Q4 of last year. While we had a benefit of $0.03 per share in terms of taxes, we also had lower fuel margins, which offset that, of $0.03 per share. And then just as I had indicated on the third quarter call, when we announced the closure of the British Columbia distribution center, it was going to cost us another $0.02 a share in the fourth quarter, and that in fact happened.

Turning to sales. Total sales for the quarter increased 0.9% over last year. The higher sales were largely the result of higher fuel prices and an increase in the Canadian exchange rate, offset by store closures and a decline in ID sales.

Looking at ID sales excluding fuel, they declined 0.8%. This decline was a combination of a negative 1.9% during the first eight weeks of the quarter, which represents that magic moment where we lapped last year's price investments. So in the back-half of this quarter, essentially weeks 45 through 52, we had a positive ID of 0.1%. Price per item was flat for the quarter, but comfortably positive in the second-half of the quarter just as we anticipated. Transaction and household changes were both positive and were the best results for 2010.

Equally important, our sales improvement is coming from our best customers, who were shopping more often. These positive trends have continued through the first seven and a half weeks of Q1. For seven and a half weeks, nine of 10 operating divisions are showing stronger IDs than they had in quarter four. Currently, seven of 10 operating divisions have positive IDs, again, excluding fuel. And much like the fourth quarter, our best customers are responsible for most of these sales increases showing us increased royalty.

Turning to gross margin. Our total gross margin rate declined 56 basis points from last year's fourth quarter. However, when you exclude fuel sales, the gross margin rate actually improved four basis points over last year's fourth quarter. As I indicated earlier, closing the distribution center in British Columbia, which will lower distribution expenses throughout 2011 and beyond and will free up a very valuable asset, actually reduced gross margin seven basis points in this quarter. The improvement in gross margin was largely the result of what I would call an extraordinary but planned effort to reduce shrink in Q4.

For the last several years, we've had a shrink target of $50 million per year, and we stepped that up beginning in the fourth quarter. We actually beat our $50 million target by $56 million on the year, with virtually all of that beating a target coming in the fourth quarter. The positive effects of shrink improvement were offset in part by investments in price that occurred in the first-half of the quarter, as we laid our mid-quarter anniversary of those investments from last year, the distribution center I already mentioned and then a smaller LIFO credit than we had last year. The great thing about the shrink effort is all of those benefits should be with us for the first three quarters of 2011.

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