US: Safeway ends FY with "pleasing" Q4

PLEASANTON, CA -- (MARKETWIRE) -- 02/21/13 -- Safeway Inc. (NYSE: SWY)

Results From Operations
Safeway Inc. today reported net earnings from continuing operations of $1.06 per diluted share for the fourth quarter which ended December 29, 2012. This includes a $0.12 per diluted share benefit from legal settlements. When you exclude this benefit, earnings per diluted share is $0.94. This represents a 58% improvement in earnings per diluted share over last year when the settlements are included and a 40% improvement when the settlements are excluded. Other highlights of the quarter include:

• Our third consecutive quarter of U.S. unit market share gains with a 38 basis-point improvement in the supermarket channel and a 10 basis-point improvement across all outlets.
  
• An identical-store sales increase (excluding fuel) of 0.8%, which was negatively impacted by a calendar shift* of 0.3% and a generic drug impact of 0.7%. 
  
• A unit volume increase of 0.3% in the U.S., when the market supermarket channel declined 2.1% and all outlets declined 0.6% in our U.S. markets.
  
• Operating profit margin improvement of 39 basis points including the gain from legal settlements and 10 basis points when you exclude the settlements, fuel sales and fuel partner discounts.

"We are pleased with our results for the quarter," said Steve Burd, Safeway's Chairman and Chief Executive Officer. "While the calendar shift of New Year's Eve and the shift to generic drugs had a significant drag on reported ID sales, our just for U™ and fuel loyalty programs are driving market share gains and profits."

Sales and Other Revenue
Sales and other revenue increased 1.2% to $13.8 billion in the fourth quarter of 2012. This increase was largely due to higher gift and prepaid card sales and a 0.8% increase in identical-store sales, excluding fuel, partly offset by the disposition of the Genuardi's stores.

* Safeway's fiscal year 2011 ended on December 31, 2011 and therefore captured New Year's holiday sales. Safeway's fiscal year 2012 ended on December 29, 2012 and therefore did not capture all New Year's holiday sales.

Gross Profit
Gross profit declined 21 basis points to 26.50% of sales in the fourth quarter of 2012 compared to 26.71% of sales in the fourth quarter of 2011. Excluding the 10 basis-point impact from fuel sales and fuel partner discounts, gross profit declined 11 basis points due primarily to investments in price, partially offset by the gross margin benefit from the shift to generic drugs.

Operating and Administrative Expense
Operating and administrative expense decreased 60 basis points to 23.24% of sales in the fourth quarter of 2012 from 23.84% of sales in the fourth quarter of 2011. Excluding the 38 basis-point impact of the $46.5 million gain from legal settlements and the one basis-point impact from fuel sales, operating and administrative expense decreased 21 basis points. This decrease was primarily the result of lower store labor costs and lower store occupancy costs, partly offset by lower property gains.

Interest Expense
Interest expense increased to $87.7 million in the fourth quarter of 2012 from $84.3 million in the fourth quarter of 2011 due to higher average borrowings, partly offset by lower average interest rates.

Income Taxes
Income tax expense was 31.0% of pre-tax income in the fourth quarter of 2012 compared to 30.0% in the fourth quarter of 2011.

Discontinued Operations
In January 2012, Safeway announced the planned sale or closure of its Genuardi's stores located in the eastern United States. In the fourth quarter of 2012, these transactions were completed with a pre-tax loss of $15.8 million ($9.6 million, after tax). For the year, the sale and closure of Genuardi's stores generated cash proceeds of $107.0 million and a pre-tax gain of $52.4 million ($31.9 million after tax).

Annual Results
Net income for the fiscal year 2012 increased to $596.5 million ($2.40 per diluted share) from net income for 2011 of $516.7 million ($1.49 per diluted share). Income from continuing operations increased to $566.2 million($2.27 per diluted share) in 2012 from $518.2 million ($1.49 per diluted share) in 2011. Net income in 2012 benefited from the $46.5 million gain ($28.4 million after tax, or $0.12 per diluted share) from legal settlements while net income in 2011 was reduced by the $98.9 million tax charge ($0.29 per diluted share) from the Canadian dividend paid in the first half of 2011.

Sales increased 1.3% to $44.2 billion in 2012 from $43.6 billion in 2011. This increase was primarily due to increased fuel sales, higher gift and prepaid card sales and an identical-store sales increase (excluding fuel) of 0.5%, partially offset by the disposition of the Genuardi's stores.

Gross profit margin declined 52 basis points to 26.51% in 2012 from 27.03% in 2011. Excluding the 30 basis-point impact from fuel sales, gross profit declined 22 basis points, primarily due to investments in price and cost incurred to launch our just for U loyalty program, partly offset by lower LIFO expense.

Operating and administrative expense decreased 42 basis points to 24.01% in 2012 from 24.43% in 2011. Excluding the 16 basis-point impact from fuel sales, operating and administrative expense decreased 26 basis points primarily because of the gain from legal settlements and lower labor expense.

Income tax expense decreased to 31.7% of pre-tax income in 2012 from 41.3% in 2011 primarily due to a$98.9 million tax charge in 2011 resulting from the repatriation of $1.1 billion of earnings from Safeway'swholly-owned Canadian subsidiary.

Cash Flow
Net cash flow provided by operating activities decreased to $1,569.7 million in 2012 from $2,023.6 million in 2011. This decrease was due primarily to a greater use of cash flow for working capital which was largely calendar driven.

Net cash flow used by investing activities decreased to $572.0 million in 2012 from $1,014.5 million in 2011 primarily due to increased proceeds from the sale of properties, net cash proceeds from discontinued operations and lower capital expenditures in 2012.

Net cash flow used by financing activities increased to $1,373.8 million in 2012 from $1,077.3 million in 2011 due primarily to lower net additions to debt in 2012, partially offset by a lower level of stock repurchases in 2012.

Capital Expenditures
Safeway invested $240.4 million in capital expenditures in the fourth quarter of 2012. The company opened three new Lifestyle stores, completed two Lifestyle remodels and closed six stores. For the year, Safewayinvested $927.6 million in capital expenditures, opened nine new Lifestyle stores, completed four Lifestyle remodels and closed 46 stores (including 25 Genuardi's stores sold or closed during the year).

Stock Repurchases
Safeway did not repurchase any shares of its common stock during the fourth quarter of 2012 under its previously announced share repurchase program. During 2012, Safeway repurchased 57.6 million shares of its common stock at an average cost of $21.51 per share and a total cost of $1,240.3 million (including commissions). The remaining board authorization for stock repurchases at year-end was approximately $0.8 billion.

Share repurchases in 2012, net of incremental interest expense, increased diluted earnings per share by$0.17 in the fourth quarter of 2012 and $0.32 for the year 2012.

Guidance
Safeway will issue a press release announcing earnings guidance for 2013 on Wednesday, March 6, 2013 in conjunction with our annual investor conference.