Safeway Inc. (NYSE:SWY) Friday (28 September) reported net income of $309.2 million ($0.60 per share) for the third quarter ended September 8, 2001. This represents a 15% increase from net income of $270.0 million ($0.53 per share) for the third quarter of 2000.

Total sales increased 6.8% to $8.0 billion from $7.5 billion in the third quarter of 2000 primarily because of the Genuardi’s acquisition, new store openings and increased sales at continuing stores. Third-quarter 2001 comparable-store sales increased 1.6%, while identical-store sales (which exclude replacement stores) rose 0.8%.

Gross profit increased 95 basis points to 30.95% of sales in the third quarter of 2001 from pro forma gross profit of 30.00% in the third quarter of 2000 due primarily to continuing improvements in buying practices, shrink control, private-label growth and targeted adjustments in promotional spending. Operating and administrative expense, including goodwill amortization, increased 77 basis points to 23.43% of sales in the third quarter of 2001 compared to pro forma operating and administrative expense of 22.66% in the third quarter of 2000 due primarily to previously discussed unfavorable comparisons in property gains and pension income, as well as higher real estate occupancy costs.

The Company has repurchased 4.6 million shares of Safeway’s common stock at a total purchase price of $191.1 million from the beginning of the quarter through September 27, 2001. Due to timing of the repurchases, the net impact of the reduced shares outstanding and the related interest expense incurred had no material impact on earnings per share in the third quarter.

Safeway’s Board of Directors has increased the authorized level of the company’s stock repurchase program by $500 million to $1.5 billion from the previously announced level of $1.0 billion. To date, Safeway has repurchased $842 million of common stock, leaving $658 million available to be repurchased under the new authorized level. The timing and volume of future repurchases will depend on market conditions.

“The increased authorization of our stock repurchase program reflects the Board’s continued high level of confidence in the growth prospects of the company,” said Steve Burd, Chairman, President and CEO of Safeway. “Current market conditions provide an excellent opportunity for us to buy back our shares.”

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Interest expense decreased slightly to $101.2 million in the third quarter of 2001 from $104.1 million in the third quarter of 2000. This decrease is primarily due to lower interest rates, partially offset by higher average borrowings because of the Genuardi’s acquisition. The interest coverage ratio (EBITDA divided by interest expense) remains very strong at 8.2 times for the quarter. EBITDA as a percentage of sales was 10.41% for the quarter.

Third-quarter other income consists primarily of equity in earnings of Casa Ley, Safeway’s unconsolidated affiliate. Equity in earnings of Casa Ley totaled $5.9 million for the quarter compared to $7.5 million in 2000. Casa Ley operates 99 food and general merchandise stores in western Mexico. Safeway has owned 49% of Casa Ley since 1981.

As a result of continued tax reduction efforts, Safeway’s income tax rate is expected to be 40.15% for 2001, down from the 40.8% estimated during the first two quarters of 2001.

Sales for the first 36 weeks of 2001 were $23.6 billion compared to sales of $22.0 billion in 2000. The gross profit margin increased 106 basis points to 30.89% of sales for the first 36 weeks of 2001 from a pro forma gross profit margin of 29.83% in 2000. Operating and administrative expense, including goodwill amortization, increased 76 basis points to 23.17% of sales in 2001 from pro forma expense of 22.41% in 2000.

During the first three quarters of 2001, Safeway invested approximately $1.2 billion in capital expenditures. The company opened 50 new stores and closed 29 stores. For the year, the company expects to spend more than $2.1 billion in 2001 while opening 90 to 95 new stores and completing approximately 250 remodels.

As previously announced, Safeway acquired Genuardi’s in February 2001. Consequently, Safeway’s income statement for the first 36 weeks of 2001 includes 31 weeks of Genuardi’s operating results while the income statement for 2000 does not. In order to facilitate an understanding of Safeway’s operations, the pro forma amounts presented in this announcement were computed as if Safeway had owned Genuardi’s for the comparable 31 weeks of 2000.

Safeway Inc. is a Fortune 50 company and one of the largest food and drug retailers in North America based on sales. The company operates 1,759 stores in the United States and Canada and had annual sales of $32.0 billion in 2000. The company’s common stock is traded on the New York Stock Exchange under the symbol SWY.

This press release 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, earnings estimates, capital expenditures, operating improvements, and cost reduction and are indicated by words or phrases such as “comfortable,” “continuing,” “on-going,” “expects,” and similar words or phases. These statements are based on Safeway’s current plans and expectations and involve risks and uncertainties, including unanticipated events or changes in future operating results, financial condition or business over time, that could cause actual events and results to vary significantly from those included in or contemplated 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. Please refer to Safeway’s reports and filings with the Securities and Exchange Commission for a further discussion of these risks and uncertainties.

                     SAFEWAY INC. AND SUBSIDIARIES
OPERATING RESULTS
(Dollars in millions, except per-share amounts)
(Unaudited)

12 Weeks Ended 36 Weeks Ended
——— ——— ———- ———-
Sept. 8, Sept. 9, Sept. 8, Sept. 9,
2001 2000 2001 2000
——— ——— ———- ———-

Sales $ 7,962.3 $ 7,457.2 $ 23,614.6 $ 21,961.5
——— ——— ———- ———-

Gross profit $ 2,464.3 $ 2,236.7 $ 7,295.4 $ 6,548.1

Operating and
administrative
expense (1,833.0) (1,652.7) (5,374.3) (4,808.0)

Goodwill
amortization (32.7) (29.1) (96.9) (87.4)
—— —— —— ——
Operating
profit 598.6 554.9 1,824.2 1,652.7

Interest expense (101.2) (104.1) (316.1) (322.2)

Other income
(loss), net 8.4 10.8 (3.8) 24.7
— —- —– —-
Income before
income taxes 505.8 461.6 1,504.3 1,355.2

Income taxes (196.6) (191.6) (604.0) (562.4)
——- ——- ——- ——-

Net income $ 309.2 $ 270.0 $ 900.3 $ 792.8
——- ——- ——- ——-

Diluted earnings
per share $ 0.60 $ 0.53 $ 1.75 $ 1.55
—— —— —— ——

Weighted average
shares
outstanding –
diluted
(in millions) 515.2 511.7 515.9 510.0
—— —– —– —–

SAFEWAY INC. AND SUBSIDIARIES
EBITDA
(Dollars in millions)
(Unaudited)

12 Weeks Ended 36 Weeks Ended
——————– ——————-
Sept. 8, Sept. 9, Sept. 8, Sept. 9,
EBITDA: 2001 2000 2001 2000
——————– ——————-

Net income $ 309.2 $ 270.0 $ 900.3 $ 792.8
Add (subtract):
Income taxes 196.6 191.6 604.0 562.4
Interest expense 101.2 104.1 316.1 322.2
Depreciation 193.2 157.7 555.2 479.2
Goodwill amortization 32.7 29.1 96.9 87.4
LIFO expense 2.3 2.3 6.9 3.6
Impairment charge – – 30.1 –
Equity in earnings
of unconsolidated
affiliates (5.9) (7.5) (15.3) (18.0)

——- ——- ——— ———
Total EBITDA $ 829.3 $ 747.3 $ 2,494.2 $ 2,229.6
——- ——- ——— ———

As a percent of sales 10.41% 10.02% 10.56% 10.15%
As a multiple of
interest expense 8.19 x 7.18 x 7.89 x 6.92 x