Safeway Inc, one of the largest food and drug retailers in the US, yesterday [Thursday] reported income for the Q1 2002 of US$332.1m (US$0.67/share) before the cumulative effect of a required accounting change discussed below.

Net income for the Q1 2001 was US$283.9m (US$0.55/share). This represents a 22% increase in earnings per share before the cumulative effect of an accounting change.

SFAS No. 142, "Goodwill and Other Intangible Assets", eliminates the amortization of goodwill beginning in 2002. Excluding US$31.3m of goodwill amortization in the Q1 2001, earnings per share in 2002 before the cumulative effect of an accounting change increased 10%.

Q1 comparable-store sales increased 0.6%, while identical-store sales (which exclude replacement stores) were flat. Total sales increased 3.5% to US$7.9bn in 2002 from US$7.7bn in 2001 primarily because of new store openings and the Genuardi's acquisition.

Gross profit increased 79 basis points to 31.35% of sales in the Q1 2002 from 30.56% in the Q1 2001 due primarily to continued improvements in shrink control, buying practices and private-label growth. Operating and administrative expense increased 65 basis points to 23.65% of sales in the Q1 2002 compared to 23% in 2001. Pension expense, higher real estate occupancy costs and lower real estate gains contributed to a 106 basis point increase that was partially offset by a 41 basis point reduction due to the elimination of goodwill amortization.

The company repurchased 4.7 million shares of Safeway common stock for US$196m in the Q1 2002. From initiation of the program in 1999 through the end of the period, Safeway has repurchased 41.5 million shares of common stock at a cost of US$1.6bn, leaving US$900m available for repurchases under the current level authorized by the company's board of directors. The timing and volume of future repurchases will depend on market conditions.

Interest expense decreased from US$109.2m in the Q1 2001 to US$94.6m in the Q1 2002. This decrease is primarily due to lower interest rates in 2002 partially offset by higher average borrowings due to the repurchase of Safeway stock and the acquisition of Genuardi's. The interest coverage ratio (EBITDA divided by interest expense) remains very strong at 8.61 times for the first quarter of 2002. EBITDA as a percentage of sales was 10.27% for the quarter.

Other income was US$9m in the Q1 2002 compared to US$9.4m in the Q1 2001. Other income consists primarily of net equity in earnings of Casa Ley and GroceryWorks.com and interest income.

The income tax rate was 36.9% for the Q1 of 2002, down from 40.8% year on year. The decrease was primarily due to the elimination of goodwill amortization. In addition, the tax rate improved from continued tax planning strategies and a change in foreign tax law.

Safeway adopted SFAS No. 142 during the Q1 2002, which, in addition to eliminating goodwill amortization, requires that goodwill be tested annually for potential impairment. Almost all of Safeway's goodwill relates to the acquisition of five companies since 1997, which have been recently valued by an independent third party at over US$3bn. As SFAS No. 142 requires that each reporting unit be evaluated separately, Safeway determined that Dominick's goodwill is impaired by US$589m and Randall's by US$111m. Impairment in both cases is due to a combination of factors including acquisition price, post-acquisition capital expenditures and operating performance. In aggregate, Safeway recorded a US$700m charge for the cumulative effect of adopting SFAS No. 142. Net loss after the cumulative effect of this accounting change was US$367.9m (US$0.74/share).

During the Q1 2002, Safeway invested approximately US$247m in capital expenditures. The company opened 19 new stores and closed ten. Safeway expects to spend more than US$2.1bn in 2002 while opening 80 to 85 new stores and completing approximately 250 remodels.

Safeway is comfortable with the range of 2002 estimated earnings (before the cumulative effect of adoption of SFAS No. 142) of US$3.18 to US$3.20 per share.