Safeway: Food Still Sells

Folks are still eating. Safeway Inc. (NYSE:SWY) reported a Q4 EPS Increase of 16% Annual Free Cash Flow Increases to $681 Million

Results From Operations

Safeway Inc. today reported net income of $338.0 million ($0.79 per diluted share) for the 17-week fourth quarter of 2008 compared to net income of $301.1 million ($0.68 per diluted share) for the 16-week fourth quarter of 2007.

“Despite a difficult economic environment, our efforts to control costs helped increase fourth quarter earnings per share by 16% over last year,” said Steve Burd, Chairman, President and CEO. “In addition, we increased annual free cash flow 62% to $681 million. We are stepping up our efforts to provide increased value to our customers by lowering prices on everyday items, while continuing to provide quality perishables and great service.”

The fourth quarter of 2008 was affected by a number of significant items that largely offset each other. Items that reduced diluted earnings per share consisted of increased workers’ compensation expense due to a decline in the discount rate ($0.05 per diluted share), Canadian dollar exchange losses ($0.03 per diluted share) and damages from Hurricane Ike ($0.01 per diluted share). Items that increased fourth quarter diluted earnings per share were a reduction in tax reserves ($0.04 per diluted share) and the additional week in the 17-week fourth quarter ($0.04 per diluted share).

Sales and Other Revenue

Total sales increased 3.4% to $13.8 billion in the fourth quarter of 2008 compared to $13.4 billion in the fourth quarter of 2007. This increase was driven by the additional week in 2008 and identical-store sales increases, excluding fuel, of 0.4%, partly offset by a decrease in the Canadian exchange rate and lower fuel sales.

Gross Profit

Gross profit increased nine basis points to 28.78% of sales in the fourth quarter of 2008 compared to 28.69% of sales in the fourth quarter of 2007. Excluding the 66 basis point benefit from improved gross margin on fuel sales, gross profit declined 57 basis points. This decline was the result of investments in price, partly offset by lower advertising expense and higher revenue from third-party gift cards.