UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 27, 2004
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)
| Delaware | 94-3019135 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 5918 Stoneridge Mall Rd. Pleasanton, California |
94588-3229 | |
| (Address of principal executive offices) | (Zip Code) |
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. Yes x No ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨.
As of April 30, 2004 there were issued and outstanding 446.3 million shares of the registrant’s common stock.
EXPLANATORY NOTE
This Amendment No. 1 to the Quarterly Report on Form 10-Q/A for Safeway, Inc. (the “Company”) for the quarterly period ended March 27, 2004 is being filed solely to effect the amendment described below.
In Part I, Item 2, under the caption “Operating and Administrative Expense,” some wording in the second to the last sentence was inadvertently omitted from the Form 10-Q as filed with the Securities and Exchange Commission on May 6, 2004. In accordance with applicable rules, we have restated the entire Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations).
Except as expressly stated herein, this Form 10-Q/A continues to speak as of the date of the original filing of the Quarterly Report and we have not updated the disclosures contained therein to reflect any events that occurred at a later date. No changes have been made to the financial statements or other information contained in the Form 10-Q.
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SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part I.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net income for the first quarter of 2004 was $43.1 million ($0.10 per diluted share) and was significantly affected by a strike in Southern California and the impact of the previously announced closure of 12 under-performing Dominick’s stores. The Company estimates that the strike in Southern California and the previously announced closure of 12 under-performing Dominick’s stores reduced first quarter earnings by $122.0 million after tax ($0.27 per share) and $28.5 million after tax ($0.06 per share), respectively.
Net income for the first quarter of 2003 was $162.6 million ($0.36 per diluted share) and included a charge of $279.8 million after tax ($0.63 per share) for impairment of Dominick’s goodwill and long-lived assets. The Company also recorded a $249.0 million ($0.55 per share) net tax benefit related to the planned Dominick’s sale which was subsequently reversed in the fourth quarter of 2003 when Dominick’s was taken off the market. Net income for the first quarter of 2003 was also affected by adopting Emerging Issues Task Force (“EITF”) No. 02-16, on accounting for vendor allowances, which reduced first quarter 2003 earnings by $6.4 million after tax ($0.01 per share).
STRIKE IMPACT On October 11, 2003, seven UFCW local unions struck the Company’s 289 stores in Southern California. An agreement ending the strike was reached on February 26, 2004 and was ratified by the unions on February 28, 2004. The overall cost of the strike reduced first quarter 2004 earnings by approximately $122.0 million after tax ($0.27 per share). Safeway estimated the impact of the strike by comparing internal forecasts immediately before the strike with actual results during and after the strike at strike-affected stores. The estimate includes a contribution of $22.7 million after tax to the union health and welfare trust fund, a contract ratification bonus of $5.8 million after tax and the Company’s benefit for the quarter under an agreement with Kroger and Albertson’s that arises out of the multi-employer bargaining process in Southern California.
DOMINICK’S STORE CLOSING COSTS In January of 2004, Safeway announced it would incur a charge to close 12 under-performing Dominick’s stores in the first quarter of 2004. Closure of these stores resulted in a charge of $28.5 million after tax ($0.06 per share) in the quarter. This primarily represents store-lease exit charges determined by estimating future minimum lease payments and related ancillary costs from the date of closure to the end of the remaining term, net of estimated recoveries that may be achieved through subletting properties or through favorable lease terminations.
SALES Total sales decreased to $7.6 billion in the first quarter of 2004 from $8.0 billion in the first quarter of 2003, primarily due to the impact of the Southern California strike, partially offset by new store openings and additional fuel sales. Fuel sales are becoming an increasingly larger part of the Company’s sales mix. Below is a summary of same-store sales increases/(decreases) for the first quarter of 2004 :
| Comparable- Store Sales (includes replacement stores) |
Identical- Store Sales (excludes replacement stores) |
|||||
| INCLUDING FUEL: |
||||||
| Excluding strike-affected stores |
0.5 | % | 0.1 | % | ||
| EXCLUDING FUEL: |
||||||
| Excluding strike-affected stores |
(0.8 | )% | (1.3 | )% |
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SAFEWAY INC. AND SUBSIDIARIES
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 are also a component of cost of goods sold. Additionally, all vendor allowances are classified as an element of cost of goods sold.
Gross profit increased 11 basis points to 29.80% of sales in the first quarter of 2004 from 29.69% in the first quarter of 2003. The net impact of the strike in Southern California, the Dominick’s store closures and the initial impact of adopting EITF 02-16 in the first quarter of 2003 reduced gross profit 34 basis points in the first quarter of 2004 compared to 2003. The remaining 45-basis point increase was primarily due to the increased benefits from centralizing the Company’s marketing and procurement functions, partly offset by a higher mix of lower margin fuel sales in 2004.
Vendor allowances totaled $493.0 million for the first quarter of 2004 and $505.0 million for the first quarter of 2003. Vendor allowances did not materially impact the Company’s gross profit in the first quarter of 2004 and the first quarter of 2003 because Safeway spends the allowances received on pricing promotions, advertising expenses and slotting expenses. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances, and contract allowances.
Promotional allowances make up nearly three-quarters 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.
To reduce the complexity and administrative expense of managing vendor allowances, the Company intends to emphasize lower net pricing from its vendors instead of allowances. Therefore, Safeway expects vendor allowances to decline gradually over time.
OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense consists primarily of store occupancy costs and backstage expenses, which, in turn, consist primarily of wages, employee benefits, rent, depreciation and utilities. Operating and administrative expense increased 266 basis points to 27.77% of sales in the first quarter of 2004 compared to operating and administrative expense of 25.11% of sales in the first quarter of 2003. Of this increase, 175 basis points were attributable to the estimated impact of the strike and 55 basis points were attributable to the 2004 Dominick’s store closure costs, partially offset by a decrease of 57 basis points due to the write down of long lived assets at Dominick’s in 2003. The remaining 93 basis point increase was primarily due to higher employee benefits, higher workers’ compensation costs, and increased store occupancy costs.
INTEREST EXPENSE Interest expense decreased to $96.2 million in the first quarter of 2004 compared to $103.7 million in the first quarter of 2003 primarily due to lower average borrowings in 2004. Despite the strike, the Company reduced total debt outstanding by $187.9 million to $7.63 billion during the first quarter of 2004.
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SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCOME TAX (EXPENSE) BENEFIT Income tax expense was $19.0 million in the first quarter of 2004, including a $4.5 million benefit arising from settlements with various taxing authorities. In the first quarter of 2003, income taxes were a benefit of $151.7 million. This included a tax benefit of $249.0 million related to the planned Dominick’s sale that was subsequently reversed in the fourth quarter of 2003.
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 2003 Annual Report to Stockholders includes a description of certain critical accounting policies, including those with respect to workers’ compensation, store closing and impairment charges, employee benefit plans, and goodwill.
New Accounting Pronouncements
In March 2004, the FASB issued Staff Position SFAS No. 106-b, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” SFAS No. 106-b supersedes SFAS No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” and provides guidance on the accounting, disclosure, effective date and transition related to the Prescription Drug Act. SFAS No. 106-b is expected to be effective for the first interim period beginning after June 15, 2004. Safeway is continuing to evaluate the impact of SFAS 106-b’s recognition, measurement and disclosure provisions on its financial statements.
In December 2003, the FASB published a revision to FIN No. 46 (hereafter referred to as “FIN No. 46R”) to clarify some of the provisions of FIN No. 46, and to exempt certain entities from its requirements. Under the new guidance, there are new effective dates for companies that have interests in structures that are commonly referred to as special-purpose entities. These rules are effective for financial statements for periods ending after March 15, 2004. The adoption of FIN No. 46R did not have any impact on Safeway’s financial statements, as the Company does not have any variable interest entities.
Liquidity and Financial Resources
Cash flow from operating activities was $388.1 million in the first quarter of 2004 and $233.5 million in the first quarter of 2003. The increase is due primarily to changes in working capital, largely in accrued liabilities and accounts payable. This was partially offset by lower net income adjusted for non-cash items.
Cash flow used by investing activities for the first quarter of 2004 increased to $205.9 million in 2004 compared to $106.7 million in 2003 primarily because of higher capital expenditures.
Cash flow used by financing activities was $177.7 million in 2004 and $115.8 million in 2003 reflecting the utilization of cash from operations to pay down debt.
Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including borrowing under Safeway’s commercial paper program and bank credit agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments 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 bank credit agreement.
If the Company’s credit rating were to decline below its current level of Baa2/BBB, the ability to borrow under the commercial paper program would be adversely affected. Safeway’s ability to borrow under the bank credit agreement is unaffected by Safeway’s credit rating. However, Safeway is required under a material covenant in its bank credit agreement to maintain certain interest coverage and debt coverage
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SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ratios. As of March 27, 2004, the Company was in compliance with the covenant requirements. If Safeway does not maintain these ratios, its ability to borrow under the bank credit agreement would be impaired.
Capital Expenditure Program
During the first 12 weeks of 2004, Safeway invested $237.2 million in cash capital expenditures. The Company opened 3 new stores and closed 12 stores. For the year, the Company expects to spend between $1.2 billion and $1.4 billion in cash capital expenditures. This will involve approximately 40 new stores and 120 remodels.
Forward -Looking Statements
This Quarterly Report on Form 10-Q/A 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. Such statements relate to, among other things, estimates of sales, identical store sales, earnings, pension plan contributions, capital expenditures, performance of acquired companies, the valuation of Safeway’s investments, operating improvements, cost reductions, financial and other effects of the Southern California labor strike and obligations with respect to divested operations and are indicated by words or phrases such as “continuing,” “on-going,” “expects,” and similar words or phrases. These statements are based on our current plans and expectations and involve risks and uncertainties. The following are among the principal factors that could cause actual results to differ materially from the forward-looking statements: general business and economic conditions in our operating regions, including the rate of inflation, consumer spending levels, population, employment and job growth in our markets; pricing pressures and competitive factors, which could include pricing strategies, store openings and remodels by our competitors; results of our programs to control or reduce costs, improve buying practices and control shrink; results of our programs to increase sales, including private-label sales, improvements in our perishable departments and our pricing and promotional programs; results of our programs to improve capital management; the ability to integrate any companies we acquire and achieve operating improvements at those companies, including Dominick’s and Randall’s; changes in financial performance of our equity investments; increases in labor costs and relations with union bargaining units representing our employees or employees of third-party operators of our distribution centers; the effects on operating performance at stores affected by the Southern California labor strike, including the time it takes to return to pre-strike operating performance and the resolution of lawsuits challenging certain provisions of the agreement with Kroger and Albertson’s that arise out of the multi-employer bargaining process in Southern California; work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions (such as Chicago and Arizona) or are scheduled to expire in the near future (such as Portland, Seattle, Northern California, Denver and Las Vegas); changes in state or federal legislation, regulation or judicial developments, including with respect to taxes; the cost and stability of power sources; opportunities or acquisitions that we pursue; the availability and timely delivery of perishables and other products; market valuation assumptions and internal projections of future operating results which affect the valuation of goodwill; the rate of return on our pension assets; 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. The Company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaims any obligation to do so.
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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: June 24, 2004 |
/s/ Steven A. Burd | |
| Steven A. Burd | ||
| Chairman, President and Chief Executive Officer | ||
| Date: June 24, 2004 |
/s/ Robert L. Edwards | |
| Robert L. Edwards | ||
| Executive Vice President and Chief Financial Officer | ||
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SAFEWAY INC. AND SUBSIDIARIES
Exhibit Index
LIST OF EXHIBITS FILED WITH FORM 10-Q/A FOR THE PERIOD
ENDED March 27, 2004
| Exhibit 31.1 | Rule 13(a)-14(a)/15d-14(a) Certification. | |
| Exhibit 31.2 | Rule 13(a)-14(a)/15d-14(a) Certification. | |
| Exhibit 32 | Section 1350 Certifications. | |
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