Marketing Strategy and Lifestyle Stores Drive Safeway's Sales

PLEASANTON, Calif. -- Safeway's new Lifestyle appears to be paying off. Although the chain saw a 14 percent drop in its Q4 earnings due to the costs of closing 26 Texas stores and the buyouts of employee contracts in Dominick's and Northern California, the retailer's net income beat most Wall Street estimates, boosting its shares more than 3 percent--and the rollout of its Lifestyle store format is playing a role, the company said.

Safeway reported yesterday that its total sales increased 5.8 percent to $12 billion in the fourth quarter, compared to $11.4 billion last year. During a conference call Steve Burd, chairman, president, and c.e.o., attributed sales gains to its current marketing strategy, Lifestyle store execution, and increased fuel sales.

During the conference call, Burd praised the Lifestyle format for its ability to improve sales by more than a third compared to the chain's conventional format.

When asked for a reaction to just-announced plans of British chain Tesco to invade the West Coast with an upscale convenience-style retail format, Burd said, "We're not frightened by competition in any of our markets. There are lots of good companies, and we have to compete with all of them, and so we expect to be game-ready, and we don't think that any of this will interrupt our success."

Comparable store sales increased 5.4 percent, and identical store sales (which exclude replacement stores) increased 5.1 percent for Q4. Excluding the effect of fuel sales, comparable store sales increased 3.9 percent and identical store sales increased 3.7 percent for the fourth quarter of 2005, Safeway said.

"We are very pleased with our 2005 results," said Burd. "When adjusted for Easter, our same store sales grew stronger each quarter, and we increased market share in the U.S. supermarket channel 51 of 52 weeks in 2005. We also completed the restructuring of our labor contracts and are beginning to experience solid operating and administrative expense leverage."

Net income for the fourth quarter of 2004 was $202.7 million, or 45 cents per share, a figure that had been reduced by 2 cents per share for contributions to a Northern California UFCW multi-employer health and welfare plan and an accrual for rent holidays.

Safeway's sales for the latest fiscal year, meanwhile, increased 7.2 percent to $38.4 billion, from $35.8 billion in fiscal 2004; and like the Q4 increase, sales were primarily attributed to the power trio of marketing strategy, Lifestyle stores, and increased fuel sales. Net income for 2005 was $561.1 million, or $1.25 per share, compared to $560.2 million (or $1.25 per share) in 2004.

During 2005, Safeway invested $1.4 billion in cash capital expenditures. The company opened 21 new Lifestyle stores, completed 293 Lifestyle remodels, and closed 48 stores. In 2006, it expects to spend approximately $1.6 billion in cash capital expenditures, open approximately 20 to 25 new Lifestyle stores, and complete approximately 280 Lifestyle remodels.

Safeway operates 1,775 stores in the United States and Canada, and had annual sales of $38.4 billion in 2005.
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