Safeway 1998 Annual Report Download

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Safeway Inc.
P.O. Box 99
Pleasanton, CA 94566-0009

Table of contents

  • Page 1
    Safeway Inc. P.O. Box 99 Pleasanton, CA 94566-0009

  • Page 2
    Saf eway In c 1 9 9 8 Annu al Rep or P e rf o rm a n ce. P e rf o rm a n c e.

  • Page 3
    ...Canada. In support of its stores, Safeway has an extensive network of distribution, manufacturing and food processing facilities. On August 6, 1998, the company signed a definitive merger agreement to acquire Carr-Gottstein Foods Co., Alaska's leading food and drug retailer, which operated 49 stores...

  • Page 4
    ... 1) At Year-End: Common shares outstanding (in millions) (Note 2) Retail square feet (in millions) Number of stores Note 1: Defined on page 14 under "Capital Expenditure Program." Note 2: Net of 60.6 million and 61.2 million shares held in treasury in 1998 and 1997. $24,484.2 7,124.5 1,601.7 806...

  • Page 5
    ... negative working capital for the fifth consecutive year. Standard & Poor's added Safeway common stock to its S&P 500 Index in November 1998. Accelerated Capital Spending Capital investments increased to $1.2 billion in 1998, up from $829 million the prior year. We opened 46 new stores, remodeled...

  • Page 6
    ... reach and to benefit from the exchange of best practices. Dominick's has an excellent reputation in the Chicago market and operates attractive stores in good locations. We are confident we can build on that success. The pending acquisition of Carr-Gottstein Foods Co., Alaska's leading food and drug...

  • Page 7
    ...-to-sales margin rose to 23.51%. Operating cash flow as percentage of sales increased to 5.74%. Capital expenditures increased to $635 million. Opened new distribution center in northern California. Steve Burd, long-time consultant to Safeway, named president. In fourth quarter, implemented strategy...

  • Page 8
    ... Division received Martin Luther King, Jr. Community Service Award. Introduced Safeway SELECT line of premium quality privatelabel products. Steve Burd elected CEO. Raised $6.7 million for the National Easter Seal Society, Safeway's designated corporate charity. Identical-store sales increased...

  • Page 9
    ... acquisition of Vons), continuing a five-year trend. Operating cash flow margin improved to 7.70% of sales. Capital spending increased to $829 million. Stock split two-for-one in Februar y. Opened new distribution center in Maryland. Signed definitive agreement to acquire Car r-Gottstein Foods...

  • Page 10
    Safeway has undergone significant change since reemerging as a publicly traded company in mid-1990. Three years after the initial public stock offering, following a prolonged period of disappointing operating and financial results, a new management team set out to transform the company from an ...

  • Page 11
    ... key measures of financial performance:* • Identical-store sales growth • Expense ratio reduction • Working capital management • Operating cash flow margin • Earnings per share growth The value of Safeway common stock on the New York Stock Exchange at the close of trading in 1998 rose to...

  • Page 12
    ... cost. We began consolidating corporate administrative functions at Dominick's into Safeway's operations. We negotiated competitive labor agreements in several key markets. We continued to control the frequency and cost of workers' compensation claims in 1998. Ongoing improvements in procurement...

  • Page 13
    ... in significant improvements in all operations. Six more divisions introduced the Safeway Club Card in 1998. All divisions now have a card program to attract and rewar d loyal customers. We added another 139 new items to our Safeway SELECT line of premium quality products, bringing the total count...

  • Page 14
    ...'s acquisition, our interest coverage ratio rose to 9.11 times in 1998 from 7.18 times in 1997. Safeway, Vons and Dominick's opened 46 new stores and remodeled 234 existing stores. We opened a new 762,000 square foot distribution center in Maryland to better serve our 123-stor e Eastern Division...

  • Page 15
    ... million of debt and lease obligations, with a combination of bank borrowings and commercial paper. Dominick's sales for calendar year 1998 were $2.4 billion. Acquisition of Car r-Gottstein Foods Co. (" Carrs" ) In August 1998, Safeway and Carrs signed a definitive merger agreement in which Safeway...

  • Page 16
    ...; the Verdi line of fresh and frozen pastas, pasta sauces and olive oils; Artisan fresh-baked breads; Twice-theFruit yogurt; NutraBalance Pet Food; Ultra laundry detergents and dish soaps; and Softly paper products. The Safeway SELECT line also includes an extensive array of ice cream, frozen yogurt...

  • Page 17
    ... things, new stores, remodels, manufacturing plants, distribution facilities, and information technology advances. In the last several years, Safeway management has significantly strengthened its program to select and approve new capital investments, resulting in improved returns on investment. The...

  • Page 18
    ... sales increases for stores operating the entire measurement period in both the current and prior periods. 1997 and 1996 identical-store sales exclude British Columbia stores, which were closed during a labor dispute in 1996. Note 3. Defined in the table on page 14 under "Capital Expenditure Program...

  • Page 19
    ... Vons Merger, Safeway repurchased 64.0 million shares of its common stock from a partnership affiliated with KKR & Co., L.L.C. at $21.50 per share, for an aggregate purchase price of $1.376 billion. Safeway funded the repurchase with bank borrowings. Sales Strong store operations helped to increase...

  • Page 20
    ...of Safeway's public debt, $285.5 million of Vons' public debt, and $40.0 million of medium-term notes. These redemptions were financed with $600 million of new public senior debt securities and the balance with commercial paper. In 1997, Safeway entered into interest rate cap agreements which expire...

  • Page 21
    ... the commercial paper program. Safeway completed its acquisition of Dominick's in November 1998 and is in the process of identifying which systems and applications of Dominick's might not be year 2000 compliant, and integrating those systems and applications into its year 2000 project. The Company...

  • Page 22
    ... expense Operating profit Interest expense Equity in earnings of unconsolidated affiliates Other income, net Income before income taxes and extraordinary loss Income taxes Income before extraordinary loss Extraordinary loss related to early retirement of debt, net of income tax benefit of...

  • Page 23
    ... assets Property: Land Buildings Leasehold improvements Fixtures and equipment Property under capital leases Less accumulated depreciation and amortization Total property, net Goodwill, net of accumulated amortization of $211.0 and $157.0 Prepaid pension costs Investment in unconsolidated affiliate...

  • Page 24
    ... Total current liabilities Long-term debt: Notes and debentures Obligations under capital leases Total long-term debt Deferred income taxes Accrued claims and other liabilities Total liabilities Commitments and contingencies Stockholders' equity: Common stock: par value $0.01 per share; 1,500 shares...

  • Page 25
    Consolidated Statements of Cash Flows (In millions) 52 Weeks 1998 53 Weeks 1997 52 Weeks 1996 Cash Flow from Operations Net income Reconciliation to net cash flow from operations: Extraordinary loss related to early retirement of debt, before income tax benefit Depreciation and amortization ...

  • Page 26
    ... treasury stock Purchase of unexercised warrants Net proceeds from exercise of warrants and stock options Premiums paid on early retirement of debt Other Net cash flow from (used by) financing activities Effect of changes in exchange rates on cash Increase (decrease) in cash and equivalents $ 251...

  • Page 27
    ... to timing of recording earnings Shares issued for acquisition of Vons Treasury stock purchased Options and warrants exercised Stock bonuses Balance, year-end 1997 Net income Translation adjustments Dominick's options converted Options and warrants exercised Warrants canceled Balance, year-end 1998...

  • Page 28
    ... Foods Co. ("Carrs") signed a definitive merger agreement in which Safeway will acquire all of the outstanding shares of Carrs for $12.50 cash per share, or a total of approximately $110 million (the "Carrs Acquisition"). In April 1997, Safeway completed a merger with The Vons Companies, Inc. ("Vons...

  • Page 29
    ... months are presented net of related repayments. Long-term debt. Market values quoted on the New York Stock Exchange are used to estimate the fair value of publicly traded debt. To estimate the fair value of debt issues that are not quoted on an exchange, the Company uses those interest rates that...

  • Page 30
    ... the repayment of approximately $560 million of debt and lease obligations, with a combination of bank borrowings and commercial paper. In April 1997, Safeway completed the Vons Merger pursuant to which the Company issued 83.2 million shares of Safeway common stock valued at $1.7 billion for all of...

  • Page 31
    ... and Carrs signed a definitive merger agreement in which Safeway will acquire all of the outstanding shares of Carrs for $12.50 cash per share, or a total of approximately $110 million. In addition, Carrs has approximately $220 million of debt. The acquisition will be accounted for as a purchase and...

  • Page 32
    ...secured by a deed of trust which created a lien on the land, buildings and equipment owned by Safeway at its distribution center in Tracy, California. Letters of Credit The Company had letters of credit of $143.9 million outstanding at year-end 1998 of which $63.2 million were issued under the bank...

  • Page 33
    ...-end 1998 and 476.2 million shares (net of 61.2 million shares of treasury stock) at year-end 1997. Stock Option Plans Under Safeway's stock option plans, the Company may grant incentive and non-qualified options to purchase common stock at an exercise price equal to or greater than the fair market...

  • Page 34
    ... purchase 18.4 million shares were available for grant at year-end 1998. Additional Stock Option Plan Information The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees...

  • Page 35
    ... excludes the $41.1 million tax benefit on an extraordinary loss related to the early retirement of debt. Tax benefits from the exercise of employee stock options of $85.2 million in 1998, $42.4 million in 1997 and $51.9 million in 1996 were credited directly to paid-in capital and, therefore, are...

  • Page 36
    ... Agreements Retirement Plans The Company maintains defined benefit, non-contributory retirement plans for substantially all of its employees not participating in multi-employer pension plans. In connection with the Vons Merger, the Company assumed the obligations of Vons' retirement plan. The...

  • Page 37
    ... of the operation, planning and financing of the Company. Annual payments for management fees, special services and reimbursement of expenses were approximately $1.4 million in 1998, 1997 and 1996. The Company holds an 80% interest in Property Development Associates ("PDA"), a partnership formed in...

  • Page 38
    ... personal injury and property damage claims arising out of the fire. On September 13, 1996, a class action lawsuit entitled McCampbell et al. v. Ralphs Grocery Company, et al., was filed in the Superior Court of San Diego County, California against Vons and two other grocery store chains operating...

  • Page 39
    has meritorious defenses to plaintiffs' claims and plans to defend this lawsuit vigorously. Safeway acquired Dominick's in November 1998. At that time, there was pending against Dominick's a class action lawsuit that had been filed in the U.S. District Court for the Northern District of Illinois in ...

  • Page 40
    ...proceeds Common share equivalents Calculation of common shares assumed purchased with potential proceeds: Potential proceeds from exercise of options and warrants to purchase common shares Common stock price used under the treasury stock method Common shares assumed purchased with potential proceeds...

  • Page 41
    ... operations for the periods presented. Last 16 Weeks Third 12 Weeks Second 12 Weeks First 12 Weeks (In millions, except per-share amounts) 52 Weeks 1998 Sales Gross profit Operating profit Income before income taxes Net income Earnings per share: Basic Diluted Price range, New York Stock Exchange...

  • Page 42
    ...which are communicated throughout Safeway, and the careful selection, training and development of employees. Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Board, and corrective actions are taken to address control...

  • Page 43
    ... The Vons Companies, Inc. Timothy J. Hakin President Dominick's Finer Foods, Inc. EXECUTIVE OFFICERS Steven A. Burd Chairman, President and Chief Executive Officer Kenneth W. Oder Executive Vice President Labor Relations, Human Resources, Law, Public Affairs and Information Technology David...

  • Page 44
    ..., Finance and Public Affairs, at our executive offices. To obtain or access financial reports, please write to our Investor Relations Department, call 925-467-3790 or check our web site at http://www.safeway.com. STOCK TRANSFER AGENT AND REGISTRAR First Chicago Trust Company of New York P.O. Box...