<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 6, 1997
OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _____
Commission file number 1-41
SAFEWAY INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 94-3019135
<S> <C>
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
5918 Stoneridge Mall Rd.
Pleasanton, California 94588-3229
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 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. YES X NO ___.
As of October 11, 1997 there were issued and outstanding 234.8
million shares of the registrant's common stock.
<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION (UNAUDITED) Page
- ------ ---------------------------------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 6, 1997 and 3
December 28, 1996
Condensed Consolidated Statements of Income for the 12 and 36 weeks 5
ended September 6, 1997 and September 7, 1996
Condensed Consolidated Statements of Cash Flows for the 36 weeks 6
ended September 6, 1997 and September 7, 1996
Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 13
RESULTS OF OPERATIONS
PART II OTHER INFORMATION
- ------- -----------------
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K 18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 6, December 28,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 32.1 $ 79.7
Receivables 187.0 160.9
Merchandise inventories 1,523.6 1,283.3
Prepaid expenses and other current assets 156.5 130.5
---------- ----------
Total current assets 1,899.2 1,654.4
---------- ----------
Property 6,367.1 5,069.6
Less accumulated depreciation and amortization (2,502.7) (2,313.2)
---------- ----------
Property, net 3,864.4 2,756.4
Goodwill, net of accumulated amortization
of $142.2 and $116.4 1,886.0 312.5
Prepaid pension costs 337.2 328.7
Investments in unconsolidated affiliates 89.5 362.4
Other assets 99.9 130.8
---------- ----------
Total assets $ 8,176.2 $ 5,545.2
========== ==========
</TABLE>
(Continued)
3
<PAGE> 4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 6, December 28,
1997 1996
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes
and debentures $ 194.9 $ 237.3
Current obligations under capital leases 22.2 18.4
Accounts payable 1,385.0 1,153.1
Accrued salaries and wages 260.3 231.2
Other accrued liabilities 536.7 390.0
---------- ----------
Total current liabilities 2,399.1 2,030.0
---------- ----------
Long-term debt:
Notes and debentures 2,908.9 1,568.1
Obligations under capital leases 227.2 160.4
---------- ----------
Total long-term debt 3,136.1 1,728.5
Deferred income taxes 238.5 223.8
Accrued claims and other liabilities 481.0 376.1
---------- ----------
Total liabilities 6,254.7 4,358.4
---------- ----------
Contingencies
Stockholders' equity:
Common stock: par value $0.01 per share;
750 shares authorized; 265.2 and 221.4
shares outstanding 2.7 2.2
Additional paid-in capital 2,459.0 750.3
Unexercised warrants purchased (322.7) (322.7)
Cumulative translation adjustments 9.6 12.0
Retained earnings 1,100.0 745.0
---------- ----------
3,248.6 1,186.8
Less: treasury stock at cost; 30.9
shares in 1997 (1,327.1) --
---------- ----------
Total stockholders' equity 1,921.5 1,186.8
---------- ----------
Total liabilities and stockholders' equity $ 8,176.2 $ 5,545.2
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
----------- ----------- ------------ ------------
Sept. 6, Sept. 7, Sept. 6, Sept. 7,
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 5,371.4 $ 3,954.0 $ 14,698.4 $ 11,782.1
Cost of goods sold (3,818.8) (2,867.4) (10,495.0) (8,500.9)
----------- ----------- ------------ ------------
Gross profit 1,552.6 1,086.6 4,203.4 3,281.2
Operating and administrative expense (1,235.3) (882.8) (3,363.3) (2,673.2)
----------- ----------- ------------ ------------
Operating profit 317.3 203.8 840.1 608.0
Interest expense (62.3) (39.8) (163.7) (126.3)
Equity in earnings of unconsolidated affiliates 4.1 13.1 25.6 34.3
Other income, net 0.7 1.0 2.1 3.4
----------- ----------- ------------ ------------
Income before income taxes
and extraordinary loss 259.8 178.1 704.1 519.4
Income taxes (109.8) (72.2) (297.5) (210.4)
----------- ----------- ------------ ------------
Income before extraordinary loss 150.0 105.9 406.6 309.0
Extraordinary loss related to early retirement of debt,
net of income tax benefit of $38.3 and $41.1 (59.9) -- (64.1) --
----------- ----------- ------------ ------------
Net income $ 90.1 $ 105.9 $ 342.5 $ 309.0
----------- ----------- ------------ ------------
Primary and fully diluted income per common
share and common share equivalent:
Income before extraordinary loss $ 0.60 $ 0.44 $ 1.64 $ 1.29
Extraordinary loss (0.24) -- (0.26) --
----------- ----------- ------------ ------------
Net income $ 0.36 $ 0.44 $ 1.38 $ 1.29
----------- ----------- ------------ ------------
Weighted average common shares and
common share equivalents:
Primary 251.4 240.3 247.3 239.5
----------- ----------- ------------ ------------
Fully diluted 251.4 240.5 247.5 240.1
----------- ----------- ------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks Ended
-----------------------
Sept. 6, Sept. 7,
1997 1996
---------- --------
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Net income $ 342.5 $ 309.0
Reconciliation to net cash flow from operations:
Extraordinary loss related to the early retirement of debt,
before income tax benefit 105.2 -
Depreciation and amortization 304.4 233.5
LIFO expense 2.3 6.9
Equity in undistributed earnings of unconsolidated affiliates (25.6) (34.3)
Other 4.0 (5.5)
Change in working capital items:
Receivables and prepaid expenses 28.9 (79.5)
Inventories at FIFO cost 115.7 9.2
Payables and accruals (149.0) 107.6
---------- --------
Net cash flow from operations 728.4 546.9
---------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions (355.2) (286.9)
Proceeds from sale of property 49.4 46.1
Net cash acquired in acquisition of The Vons Companies, Inc. 57.2 -
Other (9.1) (5.3)
---------- --------
Net cash flow used by investing activities (257.7) (246.1)
---------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings 277.5 121.7
Payments on short-term borrowings (245.5) (205.5)
Additions to long-term borrowings 3,188.2 148.4
Payments on long-term borrowings (2,378.2) (432.7)
Purchase of treasury stock (1,376.0) -
Net proceeds from exercise of stock options and warrants 31.7 14.0
Premium paid on early retirement of debt (10.2) -
Other (5.8) 4.0
---------- --------
Net cash flow used by financing activities (518.3) (350.1)
---------- --------
Decrease in cash and equivalents (47.6) (49.3)
CASH AND EQUIVALENTS
Beginning of period 79.7 74.8
---------- --------
End of period $ 32.1 $ 25.5
========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE 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 36 weeks ended
September 6, 1997 and September 7, 1996 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. The condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related
notes contained in the Company's 1996 Annual Report to Stockholders. The
results of operations for the 12 and 36 weeks ended September 6, 1997 are not
necessarily indicative of the results expected for the full year.
ACQUISITION OF THE VONS COMPANIES, INC.
As discussed in Note C, Safeway completed the acquisition of The Vons
Companies, Inc. ("Vons") on April 8, 1997. The accompanying financial
statements include Vons' results of operations as of the beginning of the
second quarter of 1997. Summarized pro forma results of operations for 1996
and 1997 appear in Note D.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No. 128").
The Company is required to adopt SFAS No. 128 in the fourth quarter of 1997 and
at that time will restate earnings per share ("EPS") data for prior periods to
conform with SFAS No. 128. Earlier application is not permitted.
SFAS No. 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
contracts to issue common stock were exercised or converted to common stock.
Pro forma amounts for basic and diluted EPS assuming SFAS No. 128 had been in
effect for the 12 and 36 weeks ended September 6, 1997 and September 7, 1996
are as follows:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------ ------------------------
September 6, September 7, September 6, September 7,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic EPS:
Income before extraordinary $ 0.64 $ 0.49 $ 1.77 $ 1.42
loss
Extraordinary loss (0.26) -- (0.28) --
-------- -------- -------- --------
Net income $ 0.38 $ 0.49 $ 1.49 $ 1.42
======== ======== ======== ========
Diluted EPS:
Income before extraordinary $ 0.60 $ 0.44 $ 1.64 $ 1.29
loss
Extraordinary loss (0.24) -- (0.26) --
-------- -------- -------- --------
Net income $ 0.36 $ 0.44 $ 1.38 $ 1.29
======== ======== ======== ========
</TABLE>
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INVENTORY
Net income reflects the application of the LIFO method of valuing certain
domestic inventories, based upon estimated annual inflation ("LIFO Indices").
Safeway did not record LIFO expense in the second and third quarters of 1997,
reflecting management's expectation of little or no inflation for the full
year. LIFO expense was $2.3 million in the third quarter of 1996. For the
first 36 weeks of the year, LIFO expense was $2.3 million in 1997 and $6.9
million in 1996. Actual LIFO Indices are calculated during the fourth quarter
of the year based upon a statistical sampling of inventories.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
As discussed in Note E to the Company's consolidated financial statements on
page 26 of the 1996 Annual Report to Stockholders, Safeway has entered into
interest rate swap agreements to limit the exposure of its floating interest
rate debt to changes in market interest rates. In the second quarter of 1997,
Safeway purchased interest rate cap agreements with a notional principal amount
of $850 million at 7% for two years. On October 3, 1997, Safeway purchased an
interest rate swap with a notional principal amount of $100 million at 6.2075%
for ten years.
Interest rate cap agreements lock in a maximum rate if rates rise, but enable
the Company to otherwise pay lower market rates. The initial cost of interest
rate caps is amortized to interest expense over the life of the agreement. Any
payments received under the agreement reduce interest expense.
NOTE B - FINANCING
Notes and debentures were composed of the following at September 6, 1997 and
December 28, 1996 (in millions):
<TABLE>
<CAPTION>
September 6, 1997 December 28, 1996
---------------------------- --------------------------
Long-term Current Long-term Current
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Commercial paper, unsecured $ 1,407.0
10% Senior Subordinated Notes due 2001, unsecured 241.4 $ 241.4
9.65% Senior Subordinated Debentures due 2004,
unsecured 228.2 228.2
9.35% Senior Subordinated Notes due 1999,
unsecured 161.5 161.5
9.875% Senior Subordinated Debentures due 2007,
unsecured 110.0 110.0
8.375% Senior Subordinated Debentures due 1999,
unsecured 100.0 --
9.30% Senior Secured Debentures due 2007 70.7 70.7
10% Senior Notes due 2002, unsecured 59.1 59.1
6.625% Senior Subordinated Debentures due 1998,
unsecured -- $ 36.0 --
Bank Credit Agreement, unsecured 270.9 -- --
Credit Agreement, unsecured -- -- 360.6
Mortgage notes payable, secured 123.3 39.4 156.5 $ 149.9
Other notes payable, unsecured 111.3 4.5 114.6 4.4
Medium-term notes, unsecured 25.5 -- 65.5 --
Short-term bank borrowings, unsecured -- 115.0 -- 83.0
---------- ---------- ---------- --------
$ 2,908.9 $ 194.9 $ 1,568.1 $ 237.3
========== ========== ========== ========
</TABLE>
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the second quarter of 1997, the Company entered into a new $3.0 billion
bank credit agreement (the "Bank Credit Agreement" or "BCA") that provides for,
among other things, increased borrowing capacity, extended maturities and the
opportunity to pay lower interest rates based on interest coverage ratios or
public debt ratings. The restrictive covenants of the Bank Credit Agreement
continue to limit payments by the Company, for, among other things: (i) paying
cash dividends on its capital stock; (ii) repurchasing shares of its capital
stock; and (iii) acquiring any outstanding warrants, options or other rights to
acquire shares of any class of Safeway stock. These covenants also 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. Safeway also is required to meet certain financial tests under the
Bank Credit Agreement.
During the third quarter of 1997, Safeway entered the commercial paper market.
The proceeds were used to pay down borrowings under the BCA. Commercial paper
outstanding at September 6, 1997 is classified as long-term because the Company
intends to refinance these borrowings on a long-term basis through either
continued commercial paper borrowings or utilization of the BCA.
During the first three quarters of 1997, the Company recorded an extraordinary
loss of $64.1 million, net of the related tax benefit, for the retirement of
$589.0 of Safeway's public debt, $285.5 million of Vons' public debt, and $40
million of medium-term notes. Safeway financed the redemption with $600
million of new senior debt securities issued on September 10, 1997 (the "Senior
Debt") and the balance with commercial paper. The Senior Debt consists of
6.85% Senior Notes due 2004, 7.00% Senior Notes due 2007 and 7.45% Senior
Debentures due 2027. The refinancing extends Safeway's overall long-term debt
maturities, increases financial flexibility and, based on current interest
rates, is expected to reduce interest expense. The indentures related to the
Senior Debt contain certain restrictive covenants which place limitations on
liens, sale and lease-back transactions, and merger transactions. In
connection with the redemption, the Company obtained consents from the holders
of the 9.30% Senior Secured Debentures and the Senior Subordinated Debentures
to amend the related indentures to eliminate the principal restrictive
covenants and amend certain other provisions contained therein.
NOTE C - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
On April 8, 1997, Safeway completed the acquisition of Vons pursuant to which
the Company issued 41.6 million shares of Safeway common stock for all of the
shares of Vons stock that it did not already own. Vons is now a wholly-owned
subsidiary of Safeway, and as of the beginning of the second quarter of 1997,
Safeway's consolidated financial statements include Vons' financial position
and results of operations. In connection with the acquisition, Safeway
repurchased 32.0 million shares of Safeway common stock from a partnership
affiliated with Kohlberg Kravis Roberts & Co. at $43 per share, for an
aggregate purchase price of $1.376 billion. To finance the repurchase, Safeway
entered into the Bank Credit Agreement described in Note B above.
At the end of the third quarter of 1997, Safeway's investment in unconsolidated
affiliates consisted of a 49% interest in Casa Ley, which operates 71 food and
general merchandise stores in western Mexico. Income from Safeway's equity
investment in Casa Ley decreased to $4.1 million in the second quarter of 1997
from $4.4 million in 1996. For the first 36 weeks of the year, Safeway's share
of Casa Ley's earnings rose to $13.4 million in 1997 from $12.5 million in
1996. Safeway's share of Vons' earnings was $12.2 million for the first quarter
of 1997, $7.2 million in the first quarter of 1996, and $21.8 million in the
first 36 weeks of 1996.
9
<PAGE> 10
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - UNAUDITED PRO FORMA SUMMARY FINANCIAL INFORMATION
The following unaudited pro forma summary financial information combines the
consolidated results of operations of Safeway and Vons as if the acquisition
had occurred as of the beginning of each of the years presented. The following
pro forma financial information is presented for informational purposes only
and may not be indicative of what the actual consolidated results of operations
would have been if the acquisition had been effective earlier (in millions,
except per-share amounts):
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
-------------- --------------
(Actual) (Pro Forma) (Pro Forma) (Pro Forma)
Sept. 6, 1997 Sept. 7, 1996 Sept. 6, 1997 Sept. 7, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 5,371.4 $ 5,205.8 $ 15,949.9 $ 15,476.8
Income before extraordinary loss $ 150.0 $ 90.1 $ 417.4 $ 314.3
Net income $ 90.1 $ 90.1 $ 353.3 $ 314.3
Fully diluted income per common
share and common share
equivalent:
Income before extraordinary loss $ 0.60 $ 0.36 $ 1.66 $ 1.25
Net income $ 0.36 $ 0.36 $ 1.41 $ 1.25
</TABLE>
Net cash acquired from the acquisition was as follows (in millions):
<TABLE>
<S> <C>
Fair value of assets acquired $ 3,170.2
Fair value of liabilities assumed (1,223.2)
Stock issued (1,693.0)
Safeway's equity investment in Vons (311.2)
---------
Net cash acquired $ (57.2)
=========
</TABLE>
10
<PAGE> 11
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - CONTINGENCIES
LEGAL MATTERS
Note K to the Company's consolidated financial statements, under the caption
"Legal Matters" on page 35 of the 1996 Annual Report to Stockholders, provides
information on certain claims and litigation in which the Company is involved.
In March 1996, a purported class action was filed in the Superior Court for
Alameda County, California, alleging that the Company fraudulently (i) obtained
settlements of certain claims arising out of the 1988 Richmond warehouse fire
and (ii) made statements that induced claimants not to file actions within the
time period under the statute of limitations. On April 21, 1997, the Court
sustained Safeway's demurrer to the second amended complaint without leave to
amend. In May 1997, the Court dismissed the case, and plaintiffs filed an
appeal.
Vons has been named in a number of lawsuits in state and federal courts in
Washington, Nevada, Idaho and California arising from claims of food-borne
illness that allegedly was contracted from the consumption of hamburgers at
certain Jack In The Box restaurants in early 1993 (the "Outbreak"). Only a few
of these cases are pending; they are filed in state courts and a federal court
in the State of Washington. The restaurants involved either were directly
operated by Foodmaker, Inc. ("Foodmaker"), of which Jack In The Box is a
division, or were operated by franchisees. The suits seek an unspecified
amount of monetary damages. The plaintiffs in those actions allege, among
other things, that the hamburger patties in question were processed by Vons
before being cooked and served by a Jack In The Box outlet. The Company, in
consultation with its attorneys and insurance carriers, does not anticipate
that the total liability that it might face as a result of these claims will
exceed the insurance coverage it has available.
Vons also has been named as a defendant in two actions that have been
coordinated by the California Judicial Council. Claims have been asserted
against Vons in both actions by Foodmaker. In addition, Vons has asserted
claims in each action against Foodmaker for damages Vons suffered as a result
of the Outbreak and Foodmaker's post-Outbreak statements. Other parties to
these actions include a meat supplier and three Jack In The Box franchisees
that operated outlets from which claims of illness arose. These lawsuits
presently are set for trial in Los Angeles, Superior Court on November 24,
1997, but the parties have agreed, at the Court's direction, that the trial
date will be continued to a date in January 1998. Foodmaker seeks damages of
approximately $550 million; Vons seeks to recover damages of approximately $250
million and also seeks indemnity from other parties of any amounts it might be
held liable to pay to Foodmaker. The Company believes that Vons has
meritorious defenses to Foodmaker's claims.
On September 13, 1996, a class action lawsuit entitled McCampbell. et al. v.
Ralphs Grocery Company, et al., was filed in the Superior Court of San Diego
County, California against Vons and two other grocery store chains operating in
Southern California. In the complaint it is alleged, among other things, that
Vons and the other defendants conspired to fix the retail price of eggs in
Southern California. The plaintiffs claim that the defendants violated
provisions of the California Cartwright Act and engaged in unfair competition.
Plaintiffs seek damages they allege the class has sustained; the amount of
damages sought is not specified. If any damages were to be awarded, they may
be trebled under the applicable statute. In addition, plaintiffs seek an
injunction against future acts that would be in restraint of trade or that
would constitute unfair competition. An answer has been filed to the complaint
that denies plaintiffs' allegations and sets forth several defenses. On
October 3, 1997, the Court issued an order certifying a class of retail
purchasers of white chicken eggs by the dozen from defendants' stores within
the Counties of Los Angeles, Riverside, San Bernadino, San Diego, Imperial and
Orange during the period from September 13, 1993 to the present. The Company
believes that Vons has meritorious defenses to plaintiffs' claims.
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On August 28, 1997, the Bankruptcy Court for the Western District of Missouri
entered judgment denying all relief sought by Food Barn in its lawsuit against
the Company and others arising out of the February 1988 sale of Safeway's
Kansas City Division to a company formed by Morgan, Lewis, Githen & Ahn Fund I
and financed principally by the Prudential Insurance Company of America and its
affiliate, Pru Co. Insurance Company. The complaint alleged that the 1988
transaction was a fraudulent conveyance and that the Company fraudulently
induced Food Barn to enter into the 1988 transaction. In September 1997, Food
Barn filed a notice of appeal.
12
<PAGE> 13
SAFEWAY INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MERGER WITH THE VONS COMPANIES, INC. ("VONS")
On April 8, 1997, Safeway completed the acquisition of Vons (the "Merger").
Pursuant to the Merger, Safeway issued 1.425 shares of Safeway common stock for
each share of Vons stock that Safeway did not already own, or a total of 41.6
million shares of Safeway common stock. Vons is now a wholly-owned subsidiary
of Safeway, and as of the beginning of the second quarter of 1997, Safeway's
consolidated financial statements include Vons' financial position and results
of operations.
In connection with the Merger, Safeway repurchased 32.0 million shares of
Safeway common stock from a partnership affiliated with Kohlberg Kravis Roberts
& Co. ("KKR") at $43 per share, for an aggregate purchase price of $1.376
billion. To finance the repurchase, Safeway entered into a new $3.0 billion
bank credit agreement (the "Bank Credit Agreement") that provides for, among
other things, increased borrowing capacity, extended maturities and the
opportunity to pay lower interest rates based on interest coverage ratios or
public debt ratings. During the third quarter of 1997, Safeway entered the
commercial paper market and used the proceeds to pay down borrowings under the
Bank Credit Agreement. The Bank Credit Agreement is used primarily as a backup
facility to the commercial paper program. As a result of the stock repurchase,
Safeway increased its debt and interest expense, but also reduced the number of
common shares outstanding used to calculate earnings per share. This reduction
of 32.0 million shares partially offsets the increase of 41.6 million shares
issued pursuant to the Merger.
RESULTS OF OPERATIONS
Safeway's income before extraordinary loss was $150.0 million ($0.60 per share)
for the third quarter of 1997. This compares to $105.9 million ($0.44 per
share) for the third quarter of 1996, which includes an estimated $0.07 per
share reduction due to labor disputes in the British Columbia and Denver
operating areas. In the third quarter of 1997, the Company incurred an
extraordinary loss of $59.9 million ($0.24 per share) for the early retirement
of debt, which reduced net income to $90.1 million ($0.36 per share). Safeway
believes that the effects of the second quarter labor dispute in Alberta
reduced third quarter 1997 net income by approximately $0.01 per share. For
the first 36 weeks of the year, Safeway's income before extraordinary loss was
$406.6 million ($1.64 per share), compared to $309.0 million ($1.29 per share)
in 1996.
Safeway's 1997 income statements include Vons' operating results since the
second quarter, while the 1996 income statements reflect Safeway's 35% equity
interest in Vons. In order to facilitate an understanding of the Company's
operations, the pro forma information described below is based on the 1996
combined historical financial statements of the two companies as if the
acquisition had been effective as of the beginning of each of the years
discussed.
Due primarily to the acquisition of Vons during the second quarter of 1997,
total sales for the third quarter increased 36% on a historical basis from
$3.95 billion in 1996 to $5.37 billion in 1997. Combined sales for the third
quarter increased 3.2% from 1996 pro forma sales of $5.21 billion.
Identical-store sales (stores operating the entire measurement period in both
years excluding replacement stores) increased 0.5% while comparable-store
sales, which includes replacement stores, increased 1.5%. The lingering
effects of the second-quarter strike in Alberta have weakened 1997 identical
and comparable-store sales comparisons. Lack of inflation has also softened
third quarter 1997 sales. Excluded from identical and comparable store sales
comparisons are 86 stores in British Columbia that were closed during a
strike-lockout for a portion of the second and third quarters of last year.
For the first 36 weeks of the year, total sales increased 25% on a historical
basis to $14.7 billion in 1997 from $11.8 billion in 1996, primarily as a
result of the Vons acquisition.
13
<PAGE> 14
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross profit increased to 28.90% of sales in the third quarter of 1997 compared
to 27.48% in 1996 on a historical basis and 28.11% on a pro forma basis,
primarily due to improvements in buying practices and product mix. In
addition, the Company did not record LIFO expense in the second or third
quarters of 1997, reflecting management's expectation of little or no inflation
for the full year. For the first 36 weeks of the year, gross profit on a
historical basis was 28.60% of sales in 1997 compared to 27.85% in 1996.
Operating and administrative expense was 23.00% of sales in the third quarter
of 1997 compared to 22.33% on a historical basis in 1996 due to the effect in
1997 of Vons' higher operating and administrative expense margin. For the first
36 weeks of the year, operating and administrative expense on a historical
basis was 22.88% in 1997 compared to 22.69% of sales in 1996. Safeway's
operating and administrative expense-to-sales ratio has increased compared to
historical results because Vons' operating and administrative expense ratio,
when conformed to Safeway's presentation, has historically been higher than
Safeway's. In addition, annual goodwill amortization has increased by
approximately $25 million. Operating and administrative expense for the third
quarter of 1997 was down 27 basis points from 23.27% on a pro forma basis for
the same quarter of 1996, reflecting increased sales and efforts to reduce or
control expenses. Safeway plans to continue to apply its cost reduction, sales
growth and capital management strategies to Vons' operations in an effort to
offset these negative effects, although there can be no assurance as to the
results Safeway will be able to achieve in this regard.
Interest expense was $62.3 million for the third quarter of 1997, compared to
$39.8 million for the same period last year. For the first 36 weeks of the
year, interest expense rose to $163.7 million in 1997 from $126.3 million in
1996. The increase in 1997 is the result of debt incurred during the second
quarter of 1997 to repurchase stock in conjunction with the Vons merger.
During the third quarter of this year, Safeway recorded an extraordinary loss
of $59.9 million ($0.24 per share) for the redemption of $589.0 million of
Safeway's public debt, $135.5 million of Vons' public debt, and $40 million of
medium-term notes. Safeway financed this redemption with $600 million of new
senior debt securities and the balance with commercial paper. The refinancing
extends Safeway's overall long-term debt maturities, increases financial
flexibility and, based on current interest rates, is expected to reduce annual
interest expense. During the second quarter of 1997, Safeway recorded an
extraordinary loss of $4.2 million ($0.02 per share) for the early redemption
of $150.0 million of Vons' public debt. In the second quarter of 1997, Safeway
purchased interest rate caps with a notional principal amount of $850 million
at 7% for two years. On October 3, 1997, Safeway purchased an interest rate
swap with a notional principal amount of $100 million at 6.2075% for ten years.
These cap and swap agreements are intended to limit the exposure of its
floating interest rate debt to changes in market interest rates.
At the end of the third quarter of 1997, Safeway's investment in unconsolidated
affiliates consisted of a 49% interest in Casa Ley, which operates 71 food and
general merchandise stores in western Mexico. Income from Safeway's equity
investment in Casa Ley was $4.1 million in the third quarter of 1997 compared
to $4.4 million in 1996. For the first 36 weeks of the year, Safeway's share of
Casa Ley's earnings rose to $13.4 million in 1997 from $12.5 million in 1996.
Safeway's share of Vons' earnings was $12.2 million for the first quarter of
1997, $7.2 million in the first quarter of 1996, and $21.8 million in the first
36 weeks of 1996.
LIQUIDITY AND FINANCIAL RESOURCES
Net cash flow from operations for the first 36 weeks of the year was $726.7
million in 1997, compared to $546.9 million in 1996.
Cash flow used by investing activities for the first 36 weeks of the year was
$262.3 million in 1997, compared to $246.1 million in 1996. The change in cash
flow used by investing activities is primarily the result of the acquisition of
Vons' cash, offset by increased capital expenditures to open 16 stores, to
continue construction of a manufacturing plant in California and to begin work
on a new distribution center in Maryland.
Cash flow used by financing activities for the first 36 weeks of the year
increased to $512.0 million in 1997, from $350.1 million in 1996, primarily
due to the early retirement of long-term debt.
14
<PAGE> 15
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash flow from operations as presented on the Condensed Consolidated
Statements of Cash Flows is an important measure of cash generated by the
Company's operating activities. Operating cash flow, as defined below, is
similar to net cash flow from operations because it excludes certain noncash
items. However, operating cash flow also excludes interest expense, income
taxes and changes in working capital. Management believes that operating cash
flow is relevant because it assists investors in evaluating Safeway's ability
to service its debt by providing a commonly used measure of cash available to
pay interest, and it facilitates comparisons of Safeway's results of operations
with those companies having different capital structures. However, other
companies may define operating cash flow differently, and as a result, such
measures may not be comparable to Safeway's operating cash flow. Safeway's
computation of operating cash flow is as follows (dollars in millions):
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
-------------- --------------
September 6, September 7, September 6, September 7,
1997 1996 1997 1996
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss $ 259.8 $ 178.1 $ 704.1 $ 519.4
LIFO expense -- 2.3 2.3 6.9
Interest expense 62.3 39.8 163.7 126.3
Depreciation and amortization 111.5 79.7 304.4 233.5
Equity in earnings of unconsolidated
affiliates (4.1) (13.1) (25.6) (34.3)
--------- --------- ----------- ---------
Operating cash flow $ 429.5 $ 286.8 $ 1,148.9 $ 851.8
========= ========= =========== =========
As a percent of sales 8.00% 7.25% 7.82% 7.23%
========= ========= =========== =========
As a multiple of interest expense 6.89x 7.21x 7.02x 6.74x
========= ========= =========== =========
</TABLE>
Based upon the current level of operations, Safeway believes that operating
cash flow and other sources of liquidity, including borrowings under Safeway's
commercial paper program and the Bank Credit Agreement, will be adequate to
meet anticipated requirements for working capital, capital expenditures,
interest payments and scheduled principal payments. The proceeds from the
commercial paper program were used to pay down borrowings under the Bank Credit
Agreement. The Bank Credit Agreement is used primarily as a backup facility to
the commercial paper program.
CAPITAL EXPENDITURE PROGRAM
A component of the Company's long-term strategy is its capital expenditure
program. During the first three quarters of 1997, Safeway and Vons together
invested $380 million in capital expenditures, including Vons' first quarter
1997 capital spending of $7 million, to, among other things, open 16 new stores,
continue the construction of a manufacturing plant in California and begin work
on a new distribution center in Maryland. Combined capital expenditures for
Safeway and Vons in fiscal 1997 are expected to exceed $800 million to open
approximately 40 new stores, complete approximately 180 remodels and continue
construction of the new plant and distribution center. In 1998, the combined
company expects to spend in excess of $950 million to open 40 to 45 new stores,
complete more than 200 remodels and finish the construction of the distribution
center.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
relating to, among other things, capital expenditures, cost reduction, cash
flow and operating improvements. Such statements are subject to inherent
uncertainties and risks, including among others: general business and economic
conditions in the Company's operating regions; pricing pressures and other
competitive factors; results of the Company's programs to reduce costs; the
ability to integrate Vons and achieve operating improvements at Vons; relations
with union bargaining units; and the availability and terms of financing.
Consequently, actual events and results may vary significantly from those
included in or contemplated or implied by such statements.
15
<PAGE> 16
SAFEWAY INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note K to the Company's consolidated financial statements, under the caption
"Legal Matters" on page 35 of the 1996 Annual Report to Stockholders, provides
information on certain claims and litigation in which the Company is involved.
In March 1996, a purported class action was filed in the Superior Court for
Alameda County, California, alleging that the Company fraudulently (i) obtained
settlements of certain claims arising out of the 1988 Richmond warehouse fire
and (ii) made statements that induced claimants not to file actions within the
time period under the statute of limitations. On April 21, 1997, the Court
sustained Safeway's demurrer to the second amended complaint without leave to
amend. In May 1997, the Court dismissed the case, and plaintiffs filed an
appeal.
Vons has been named in a number of lawsuits in state and federal courts in
Washington, Nevada, Idaho and California arising from claims of food-borne
illness that allegedly was contracted from the consumption of hamburgers at
certain Jack In The Box restaurants in early 1993 (the "Outbreak"). Only a few
of these cases are pending; they are filed in state courts and a federal court
in the State of Washington. The restaurants involved either were directly
operated by Foodmaker, Inc. ("Foodmaker"), of which Jack In The Box is a
division, or were operated by franchisees. The suits seek an unspecified
amount of monetary damages. The plaintiffs in those actions allege, among
other things, that the hamburger patties in question were processed by Vons
before being cooked and served by a Jack In The Box outlet. The Company, in
consultation with its attorneys and insurance carriers, does not anticipate
that the total liability that it might face as a result of these claims will
exceed the insurance coverage it has available.
Vons also has been named as a defendant in two actions that have been
coordinated by the California Judicial Council. Claims have been asserted
against Vons in both actions by Foodmaker. In addition, Vons has asserted
claims in each action against Foodmaker for damages Vons suffered as a result
of the Outbreak and Foodmaker's post-Outbreak statements. Other parties to
these actions include a meat supplier and three Jack In The Box franchisees
that operated outlets from which claims of illness arose. These lawsuits
presently are set for trial in Los Angeles, Superior Court on November 24,
1997, but the parties have agreed, at the Court's direction, that the trial
date will be continued to a date in January 1998. Foodmaker seeks damages of
approximately $550 million; Vons seeks to recover damages of approximately $250
million and also seeks indemnity from other parties of any amounts it might be
held liable to pay to Foodmaker. The Company believes that Vons has
meritorious defenses to Foodmaker's claims.
On September 13, 1996, a class action lawsuit entitled McCampbell. et al. v.
Ralphs Grocery Company, et al., was filed in the Superior Court of San Diego
County, California against Vons and two other grocery store chains operating in
Southern California. In the complaint it is alleged, among other things, that
Vons and the other defendants conspired to fix the retail price of eggs in
Southern California. The plaintiffs claim that the defendants violated
provisions of the California Cartwright Act and engaged in unfair competition.
Plaintiffs seek damages they allege the class has sustained; the amount of
damages sought is not specified. If any damages were to be awarded, they may
be trebled under the applicable statute. In addition, plaintiffs seek an
injunction against future acts that would be in restraint of trade or that
would constitute unfair competition. An answer has been filed to the complaint
that denies plaintiffs' allegations and sets forth several defenses. On
October 3, 1997, the Court issued an order certifying a class of retail
purchasers of white chicken eggs by the dozen from defendants' stores within
the Counties of Los Angeles, Riverside, San Bernadino, San Diego, Imperial and
Orange during the period from September 13, 1993 to the present. The Company
believes that Vons has meritorious defenses to plaintiffs' claims.
16
<PAGE> 17
SAFEWAY INC. AND SUBSIDIARIES
On August 28, 1997, the Bankruptcy Court for the Western District of Missouri
entered judgment denying all relief sought by Food Barn in its lawsuit against
the Company and others arising out of the February 1988 sale of Safeway's
Kansas City Division to a company formed by Morgan, Lewis, Githen & Ahn Fund I
and financed principally by the Prudential Insurance Company of America and its
affiliate, Pru Co. Insurance Company. The complaint alleged that the 1988
transaction was a fraudulent conveyance and that the Company fraudulently
induced Food Barn to enter into the 1988 transaction. In September 1997, Food
Barn filed a notice of appeal.
17
<PAGE> 18
SAFEWAY INC. AND SUBSIDIARIES
ITEM 6(A). EXHIBITS
Exhibit 11.1 Computation of Earnings Per Common Share and Common Share
Equivalent.
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27.1 Financial Data Schedule (electronic filing only).
ITEM 6(B). REPORTS ON FORM 8-K
On August 5, 1997, the Company filed a Current Report on Form 8-K stating under
"Item 5. Other Events" that on August 4, 1997, Safeway announced its offer to
purchase for cash all of its outstanding 9.35% Senior Subordinated Notes due
1999, 10.00% Senior Subordinated Notes due 2001, 10.00% Senior Notes due 2002,
9.65% Senior Subordinated Debentures due 2004, 9.30% Senior Secured Debentures
due 2007 and 9.875% Senior Subordinated Debentures due 2007.
On September 3, 1997, the Company filed a Current Report on Form 8-K stating
under "Item 5. Other Events" that the judge denied all relief sought by Food
Barn in the lawsuit described in Note K to the Company's consolidated financial
statements, under the caption "Legal Matters" on page 35 of the 1996 Annual
Report to Stockholders.
18
<PAGE> 19
SAFEWAY INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: October 16, 1997 \s\ Steven A. Burd
-------------------- ------------------------------------
Steven A. Burd
President and Chief Executive Officer
Date: October 16, 1997 \s\ Julian C. Day
-------------------- ------------------------------------
Julian C. Day
Executive Vice President and Chief
Financial Officer
19
<PAGE> 20
SAFEWAY INC. AND SUBSIDIARIES
EXHIBIT INDEX
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED SEPTEMBER 6, 1997
Exhibit 11.1 Computation of Earnings Per Common Share and Common Share
Equivalent
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27.1 Financial Data Schedule (electronic filing only)
20
<PAGE> 1
EXHIBIT 11.1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENT
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks Ended
------------------------------------------------
September 6, 1997 September 7, 1996
---------------------- ----------------------
Fully Fully
Diluted Primary Diluted Primary
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income before extraordinary loss $ 150.0 $ 150.0 $ 105.9 $ 105.9
Extraordinary loss (59.9) (59.9) -- --
--------- --------- --------- ---------
Net income $ 90.1 $ 90.1 $ 105.9 $ 105.9
--------- --------- --------- ---------
Weighted average common shares outstanding 233.7 233.7 218.1 218.1
Common share equivalents 17.7 17.7 22.4 22.2
--------- --------- --------- ---------
Weighted average common shares and common
share equivalents 251.4 251.4 240.5 240.3
--------- --------- --------- ---------
Earnings per common share and common share equivalent:
Income before extraordinary loss $ 0.60 $ 0.60 $ 0.44 $ 0.44
Extraordinary loss (0.24) (0.24) -- --
--------- --------- --------- ---------
Net income $ 0.36 $ 0.36 $ 0.44 $ 0.44
--------- --------- --------- ---------
Calculation of common share equivalents:
Options and warrants to purchase common shares 28.9 28.9 33.6 33.6
Common shares assumed purchased with potential
proceeds (11.2) (11.2) (11.2) (11.4)
--------- --------- --------- ---------
Common share equivalents 17.7 17.7 22.4 22.2
--------- --------- --------- ---------
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options and
warrants to purchase common shares $ 581.0 $ 581.0 $ 425.5 $ 404.7
Common stock price used under the treasury
stock method $ 51.67 $ 51.67 $ 37.87 $ 35.35
Common shares assumed purchased with
potential proceeds 11.2 11.2 11.2 11.4
</TABLE>
(Continued)
21
<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENT (CONTINUED)
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks Ended
------------------------------------------------
September 6, 1997 September 7, 1996
--------- --------- --------- ---------
Fully Fully
Diluted Primary Diluted Primary
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income before extraordinary loss $ 406.6 $ 406.6 $ 309.0 $ 309.0
Extraordinary loss (64.1) (64.1) -- --
--------- --------- --------- ---------
Net income $ 342.5 $ 342.5 $ 309.0 $ 309.0
--------- --------- --------- ---------
Weighted average common shares outstanding 229.2 229.2 217.0 217.0
Common share equivalents 18.3 18.1 23.1 22.5
--------- --------- --------- ---------
Weighted average common shares and common
share equivalents 247.5 247.3 240.1 239.5
--------- --------- --------- ---------
Earnings per common share and common share equivalent:
Income before extraordinary loss $ 1.64 $ 1.64 $ 1.29 $ 1.29
Extraordinary loss (0.26) (0.26) -- --
--------- --------- --------- ---------
Net income $ 1.38 $ 1.38 $ 1.29 $ 1.29
--------- --------- --------- ---------
Calculation of common share equivalents:
Options and warrants to purchase common shares 30.1 29.9 34.6 34.6
Common shares assumed purchased with potential
proceeds (11.8) (11.8) (11.5) (12.1)
--------- --------- --------- ---------
Common share equivalents 18.3 18.1 23.1 22.5
--------- --------- --------- ---------
Calculation of common shares assumed purchased with potential proceeds:
Potential proceeds from exercise of options and
warrants to purchase common shares $ 610.8 $ 568.2 $ 434.1 $ 377.5
Common stock price used under the treasury
stock method $ 51.44 $ 47.98 $ 37.80 $ 31.32
Common shares assumed purchased with
potential proceeds 11.8 11.8 11.5 12.1
</TABLE>
22
<PAGE> 1
EXHIBIT 12.1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks Fiscal Year
----------------------- ----------------------------------------------------------------
Sept. 6, Sept. 7,
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes,
extraordinary loss and cumulative
effect of accounting changes $ 704.1 $ 519.4 $ 767.6 $ 556.5 $ 424.1 $ 216.3 $ 197.4
Add interest expense 163.7 126.3 178.5 199.8 221.7 265.5 290.4
Add interest on rental expense (a) 61.2 62.3 90.0 87.5 86.6 88.0 88.0
Less equity in earnings of
unconsolidated affiliates (25.6) (34.3) (50.0) (26.9) (27.3) (33.5) (39.1)
Add minority interest in subsidiary 3.0 2.1 3.4 3.9 3.0 3.5 1.7
--------- --------- --------- --------- --------- --------- ---------
Earnings $ 906.4 $ 675.8 $ 989.5 $ 820.8 $ 708.1 $ 539.8 $ 538.4
--------- --------- --------- --------- --------- --------- ---------
Interest expense $ 163.7 $ 126.3 $ 178.5 $ 199.8 $ 221.7 $ 265.5 $ 290.4
Add capitalized interest 3.7 2.6 4.4 4.6 2.9 4.2 8.0
Add interest on rental expense (a) 61.2 62.3 90.0 87.5 86.6 88.0 88.0
--------- --------- --------- --------- --------- --------- ---------
Fixed charges $ 228.6 $ 191.2 $ 272.9 $ 291.9 $ 311.2 $ 357.7 $ 386.4
--------- --------- --------- --------- --------- --------- ---------
Ratio of earnings to fixed charges 3.97 3.53 3.63 2.81 2.28 1.51(b) 1.39
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
(a) Based on a 10% discount factor on the estimated present value of future
operating lease payments.
(b) Safeway's ratio of earnings to fixed charges during 1993 was adversely
affected by a $54.9 million charge to operating and administrative expense
for severance payments made to retail employees in the Alberta, Canada
division as part of a voluntary employee buyout. Excluding this charge, the
ratio of earnings to fixed charges for 1993 would have been 1.66.
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheets and the condensed consolidated statements
of income on pages 3 through 5 of the Company's Form 10-Q for the quarterly
period ended September 6, 1997 and is qualified in its entirety by reference to
such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-06-1997
<CASH> 32,100
<SECURITIES> 0
<RECEIVABLES> 187,000
<ALLOWANCES> 0
<INVENTORY> 1,523,600
<CURRENT-ASSETS> 1,899,200
<PP&E> 6,367,100
<DEPRECIATION> (2,502,700)
<TOTAL-ASSETS> 8,176,200
<CURRENT-LIABILITIES> 2,399,100
<BONDS> 2,908,900
0
0
<COMMON> 2,700
<OTHER-SE> 1,918,800
<TOTAL-LIABILITY-AND-EQUITY> 8,176,200
<SALES> 5,371,400
<TOTAL-REVENUES> 5,371,400
<CGS> 3,818,800
<TOTAL-COSTS> 3,818,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,300
<INCOME-PRETAX> 259,800
<INCOME-TAX> 109,800
<INCOME-CONTINUING> 150,000
<DISCONTINUED> 0
<EXTRAORDINARY> (59,900)
<CHANGES> 0
<NET-INCOME> 90,100
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
