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Safeway 1Q Results Show Big Same-Store Sales Increases, Improved Earnings

PLEASANTON, Calif. -- Safeway, Inc. yesterday reported net income of $131.3 million, or 29 cents per diluted share, for the first quarter ended March 26, 2005, more than triple the $43.1 million, or 10 cents per diluted share, posted for the year-ago period.

Total sales grew 12 percent to $8.6 billion in the first quarter of 2005, vs. $7.7 billion in the first quarter of 2004. Sales in the first quarter of 2004 were affected by the labor dispute in Southern California, which covered eight weeks of the 12-week quarter. Additionally, Easter holiday sales occurred in first quarter of 2005, compared to the second quarter of 2004. Excluding sales at strike-impacted stores, comparable-store sales rose 4.4 percent and identical-store sales, which exclude replacement stores, went up 4.0 percent for the first quarter of 2005. Further, excluding the effect of fuel sales, comparable-store sales grew 3.2 percent and identical-store sales rose 2.8 percent. After an adjustment for the Easter holiday, nonfuel identical-store sales went up 1.6 percent.

"We are pleased with our first quarter," said Safeway chairman, president, and c.e.o. Steve Burd in a statement. "We believe our results are directly related to the strategy we developed nearly three years ago and to the tremendous efforts of our employees to deliver our consumer proposition."

"Today we are offering our customers outstanding quality meat and produce, and a growing variety of proprietary products such as Signature Soups, Signature Sandwiches, and prepared meals," continued Burd. "In addition, we continue to refine and improve our in-store bakeries, while providing industry-leading customer service. These quality products and services are highlighted in our new and remodeled Lifestyle stores, which provide a warm and comfortable shopping environment for our customers. We believe these improvements are giving our customers 'Ingredients for Life' and will provide us with a great opportunity to profitably grow our business for years to come."

During yesterday's conference call, Burd noted that sales Southern California Safeway banner Vons had exceeded expectations for the first quarter and that the company had enjoyed its best identical-store sales in three years, leading him to "expect sales momentum to continue." He added that Safeway's recently announced brand-building strategy was "an opportunity to materially differentiate ourselves from everybody else in the supermarket sector," with the first-quarter results representing "the first installment in that process." However, he characterized the company as being "in the very first spring" of changing its offering and demonstrating its responsiveness to changing needs. While answering questions from financial analysts, Burd said that the Genuardi's banner, which up to now has not been part of this transformation, wouldn't be left out of Safeway's branding campaign.

Also during the conference call, e.v.p. and c.f.o. Robert Edwards noted that Safeway expected to recover prestrike profitability levels sometime in 2006, but that the company had surpassed expected sales and profitability levels for the past two quarters.

Although gross profit jumped 8.6 percent to $2.5 billion in the first quarter of 2005, from $2.3 billion in the first quarter of 2004, gross profit margin decreased 99 basis points to 29.22 percent of sales in the first quarter of 2005, vs. 30.21 percent in the year-ago period. Higher fuel sales (which have a lower gross margin) lowered gross profit by 33 basis points. According to Safeway, the rest of the decrease is attributable to investments in price and increased advertising, partially offset by the recovery from the Southern California labor dispute.

Safeway invested $216.1 million in capital expenditures in the first quarter of 2005. The company opened seven new stores and completed 28 Lifestyle remodels. For the year Safeway expects to spend about $1.4 billion in capital expenditures through the opening of about 30 new Lifestyle stores and the completion of about 280 to 290 Lifestyle remodels. By the end of 2005, the company estimates that 25 percent of its store base, or 450 locations, will have been converted to the Lifestyle format, up from the current figure of 10 percent, or 142 units. Burd noted in the conference call that the company would look at the return from the brand-building effort, and then "tailor-spend" based on that return. "Brand building is as much art as science," he said, adding that an aggressive remodel program uses less capital than a new-store program does.

In relation to the Lifestyle format, Burd observed during the call that it was "important to grow sales and share with a value proposition that is a combination of what you offer, the environment in which you offer it, and the prices you charge. We think the value proposition is doing a good job of growing sales." He said that the format worked in all demographics, with low-income shoppers viewing it "as a great value."

Safeway, Inc. operates 1,801 stores in the United States and Canada and had annual sales of $35.8 billion in 2004.
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