Safeway 2001 Annual Report Download - page 17

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allowances did not materially impact the Company’s gross profit
in 2001, 2000 and 1999 because Safeway spends the allowances
received on pricing promotions, advertising expenses and slotting
expenses. Safeway includes store occupancy costs in operating
and administrative expense. Gross profit increased to 30.92% of
sales in 2001, from 29.69% in 2000 and 29.49% in 1999.
Safeway estimates that approximately 24 basis points of the
2001 increase in the gross profit margin was attributable to the
Summit strike. The remaining 99 basis point improvement was
due primarily to continuing improvements in shrink control,
buying practices and private-label growth.
The 2000 increase in the gross profit margin was positively
impacted by approximately 64 basis points due to continuing
improvements in buying practices and private-label growth. This
improvement was adversely impacted by approximately 24 basis
points due to the Summit strike and approximately 20 basis
points due to the Carrs and Randall’s Acquisitions in 1999.
OPERATING AND ADMINISTRATIVE EXPENSE Operating and
administrative expense, including amortization of goodwill, was
23.37% of sales in 2001 compared to 22.56% in 2000 and
22.57% in 1999.
Approximately 12 basis points of the 2001 increase was
attributable to the charge related to the Furr’s and Homeland
bankruptcies. Another 12 basis points was attributable to the
Genuardi’s Acquisition. The remaining 64 basis point increase
was due primarily to unfavorable comparisons in pension
income and property gains, higher real estate occupancy costs,
utility cost increases and higher workers’ compensation expense.
These increases were partially offset by a decrease of approxi-
mately seven basis points attributable to the Summit strike.
Safeway’s operating and administrative expense-to-sales ratio
remained essentially flat in 2000 compared to 1999, as an eight
basis point improvement due to increased sales and ongoing efforts
to reduce or control expenses was offset by approximately seven
basis points attributable to the Summit strike.
Annual goodwill amortization increased to $140.4 million in
2001 from $126 million in 2000 and $101.4 million in 1999.
Beginning in 2002, goodwill will no longer be amortized, but will
be tested annually for impairment in accordance with the provi-
sions of SFAS No. 142, “Goodwill and Other Intangible Assets.”
INTEREST EXPENSE Interest expense was $446.9 million in
2001, compared to $457.2 million in 2000 and $362.2 million in
1999. Interest expense decreased in 2001 primarily due to lower
interest rates on variable-rate debt, partially offset by higher average
borrowings primarily due to debt incurred to finance the repur-
chase of Safeway stock and the Genuardi’s Acquisition. Interest
expense increased in 2000 primarily due to debt incurred to finance
the Randall’s Acquisition, debt incurred to finance the repurchase
of Safeway stock during the fourth quarter of 1999 and, to a lesser
extent, higher interest rates on variable-rate borrowings.
Safeway terminated its swap agreement in 2001 at a net settle-
ment cost of $7.1 million. This amount, net of tax benefit, is
included in accumulated other comprehensive income in the con-
solidated statement of stockholders’ equity and is being amortized
over the original term of the swap agreement. At year-end 2000,
there was a net unrealized loss on this interest rate swap agreement
of $1.9 million. At year-end 2001, there were no outstanding inter-
est rate swap agreements. Interest rate swap agreements, and a cap
agreement that expired in 1999, increased interest expense by $1.8
million in 2001, $0.2 million in 2000 and $1.7 million in 1999.
OTHER (LOSS) INCOME Other (loss) income consists primarily of
net equity in earnings from Safeway’s unconsolidated affiliates,
which totaled $20.2 million in 2001, $31.2 million in 2000 and
$34.5 million in 1999. Additionally, Safeway recorded a $30.1 mil-
lion impairment charge in 2001 to reduce the carrying amount of
the Company’s investment in GroceryWorks to its estimated fair
value. Safeway also recorded a $51.0 million charge related to the
FBO bankruptcy.
At year-end 2001, 2000 and 1999, Safeway’s investment in
unconsolidated affiliates included a 49% ownership interest in
Casa Ley, which operates 99 food and general merchandise stores
in western Mexico. At year-end 2001, Safeway’s investment in
unconsolidated affiliates also included a 50% voting interest in
GroceryWorks and a 15% ownership interest in FBO.
RELATED PARTY TRANSACTIONS Safeway’s 2001, 2000 and
1999 transactions with related parties are not considered material.
See Note K of the Company’s consolidated financial statements.