Safeway 2002 Annual Report Download

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Safeway Inc. Convenience
Quality
Service
Value
2002 ANNUAL REPORT

Table of contents

  • Page 1
    Safeway Inc. 2 0 0 2 A N N UA L R E P ORT Convenience Quality Service Value

  • Page 2
    ... R O C E S S I N G FA C I L I T I E S Year-end 2002 U.S. Canada Milk Plants Bread Baking Plants Ice Cream Plants Cheese and Meat Packaging Plants Soft Drink Bottling Plants Fruit and Vegetable Processing Plants Biscuit Plant Pet Food Plant 7 6 2 - 4 1 1 1 22 3 2 2 2 - 3 - - 12 CONTENTS 2 4 12 52...

  • Page 3
    ... (in millions) (Note 1) Retail square feet (in millions) Number of stores Note 1: Net of 132.0 million, 82.7 million and 64.3 million shares held in treasury at year-end 2002, 2001 and 2000, respectively. 441.0 74.6 1,695 488.1 71.8 1,656 504.1 66.5 1,570 Sales Income from Continuing Operations...

  • Page 4
    ... at these acquired companies. Results for 2001 include a goodwill amortization charge of $101.0 million ($0.20 per share) recorded in continuing operations. N E T R E S U LT S â- We recently decided to sell Dominick's and leave the Chicago market. The total loss from discontinued Dominick's store...

  • Page 5
    ... program authorized by the board of directors, we have bought back $2.9 billion worth of our shares, leaving $0.6 billion available for additional repurchases as of year-end 2002. initial grant from the company and is sustained by fundraising events and an annual employee giving campaign. OUTLOOK...

  • Page 6
    ...of products and services - including ready-to-serve meals, prescription drugs, gasoline, online home shopping, in-store banking and one-hour photo processing - our stores are continuously evolving to provide one-stop shopping convenience for time-pressed customers. 4 SAFEWAY INC. 2002 ANNUAL REPORT

  • Page 7
    ... take the time to make each customer feel welcome and well informed about prescribed medications. Our online shopping and home delivery services, Safeway.com and Vons.com, expanded into five new markets during 2002. For a nominal fee, orders are filled by trained personal shoppers and delivered...

  • Page 8
    ... foods departments. We are committed to superior quality and strive to be known as the destination for tender meat and superb seafood; garden-fresh produce and flowers; tempting bakery, deli and dairy products; and wholesome natural foods. During the past several months we have been working...

  • Page 9
    ...top-quality produce is artfully presented in abundant displays. Unique merchandising methods impart a farm-fresh ambience and create a special shopping experience. Café Paris White Chocolate Raspberry is one of a dozen flavors available in our Safeway SELECT Great Escapes line of super-premium ice...

  • Page 10
    ...Safeway has earned a reputation for consistently delivering superior customer service. We believe we are the clear service leader in the supermarket industry. In our stores, friendly checkers, stockers and courtesy clerks eagerly anticipate shoppers' needs, while expert meat cutters, bakers and deli...

  • Page 11
    ... have the best in-stock condition in the supermarket industry. Delivering superior service is a team effort at Safeway, with store employees as well as their backstage co-workers striving to surprise and delight our customers with a pleasant, efficient shopping experience they cannot find elsewhere...

  • Page 12
    ... specials. Shoppers can also find exceptional values with an extensive line of award-winning Safeway brands. Our private-label products are designed to be of equal or superior quality to comparable nationally-advertised brands but are typically priced much lower. 10 SAFEWAY INC. 2002 ANNUAL REPORT

  • Page 13
    ... at discount outlets and club stores. As consumers continue to trim household expenditures, we have selectively reduced prices throughout our stores on many of the items shoppers buy most often. Value-conscious customers also benefit from our private-label program. SAFEWAY INC. 2002 ANNUAL REPORT...

  • Page 14
    ... I O NS C ON S OL I DATE D BA L A NCE S HEET S C ON SOL I DATE D S TATEMENT S O F CAS H FLOW S C ON SOL I DATE D S TATEMENT S O F S TO CKHO L D ER S ' EQUI T Y N OTE S TO... S ' R EPO RT D I R E C TOR S A N D P R I NCI PAL O FFI CER S I N V E S TOR I N F OR M ATI O N 12 SAFEWAY INC. 2002 ANNUAL REPORT

  • Page 15
    ...high store standards and a wide selection of high quality products at competitive prices. To provide one-stop shopping for today's busy shoppers, the Company emphasizes high quality produce and meat, and offers many specialty items through its various specialty departments. SAFEWAY INC. 2002 ANNUAL...

  • Page 16
    ... expenditures in excess of $200,000. Milk plants Bread baking plants Ice cream plants Cheese and meat packaging plants Soft drink bottling plants Fruit and vegetable processing plants Biscuit plant Pet food plant Total 7 6 2 - 4 1 1 1 22 3 2 2 2 - 3 - - 12 14 SAFEWAY INC. 2002 ANNUAL REPORT

  • Page 17
    ... average rates by year of maturity for the Company's debt obligations at year-end 2002 (dollars in millions): December 28, 2002 2003 2004 2005 2006 2007 Thereafter Total Fair value Commercial paper: Principal Weighted average interest rate Bank borrowings: Principal Weighted average interest rate...

  • Page 18
    ...except per-share amounts) 52 Weeks 2002 52 Weeks 2001 52 Weeks 2000 52 Weeks 1999 53 Weeks 1998 R E S U LT S O F O P E R AT I O N S Sales Gross profit Operating and administrative expense Impairment charge Goodwill amortization Operating profit Interest expense Other income (loss), net Income...

  • Page 19
    ... 1) Identical-store sales (decreases) increases (Note 1) Gross profit margin Operating and administrative expense as a percent of sales (Note 2) Operating profit as a percent of sales Cash capital expenditures Depreciation Total assets Total debt Total stockholders' equity Weighted average shares...

  • Page 20
    ... guideline company method. The final valuation of Dominick's is dependent upon the results of negotiations with the ultimate buyer. Adjustment to the loss on disposition, together with any related tax effects, will be made when additional information is known. STOCK REPURCHASE In July 2002, Safeway...

  • Page 21
    ...of 2000, Summit Logistics, a company that operates Safeway's northern California distribution center, was engaged in a 47-day strike (the "Summit strike") which had an adverse effect on sales, product costs and distribution expenses at 246 Safeway stores in northern California, Nevada and Hawaii. In...

  • Page 22
    ... used the discounted cash flow method and the guideline company method. The final valuation of Dominick's is dependent upon the results of negotiations with the ultimate buyer. Adjustment to the loss on disposition, together with any related tax effects, will be made when additional information is...

  • Page 23
    ... hourly pay rate and the average number of hours worked. The law also has several cost containing measures, such as the establishment of some medical fee schedules and abolishment of the treating physician presumption. The impact of the increase in benefits on Safeway is mitigated by the high ratio...

  • Page 24
    ... the Company's commercial paper program and bank credit agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway's business...

  • Page 25
    ... the annual impairment testing date selected by Safeway. Fair value was determined based on a valuation study performed by an independent third party appraiser which primarily used the discounted cash flow method and guideline company method. As a result of this annual review, Safeway recorded...

  • Page 26
    ... statements: general business and economic conditions in our operating regions, including the rate of inflation, consumer spending levels, population, employment and job growth in our markets; pricing pressures and competitive factors, which could include pricing strategies, store openings and...

  • Page 27
    ...I E S (In millions, except per-share amounts) 52 Weeks 2002 52 Weeks 2001 52 Weeks 2000 Sales Cost of goods sold Gross profit Operating and administrative expense Impairment charge Goodwill amortization Operating profit Interest expense Other income (loss), net Income from continuing operations...

  • Page 28
    ...Current assets: Cash and equivalents Receivables Merchandise inventories, net of LIFO reserve of $65.1 and $82.6 Prepaid expenses and other current assets Assets held for sale Total current assets Property....2 161.6 2,846.2 535.2 208.3 188.3 $16,047.3 $17,462.6 26 SAFEWAY INC. 2002 ANNUAL REPORT

  • Page 29
    ... under capital leases Accounts payable Accrued salaries and wages Other accrued liabilities Liabilities of operations held for sale Total current liabilities Long-term debt: Notes and debentures Obligations under capital leases Total long-term debt Deferred income taxes Accrued claims and other...

  • Page 30
    ...Gain on pension settlement Contributions to Canadian pension plan Increase (decrease) in accrued claims and other liabilities Loss (gain) on property retirements Changes in working capital items: Receivables Inventories at FIFO cost Prepaid expenses and other current assets Payables and accruals Net...

  • Page 31
    ...456.2 728.6 $ 469.5 414.4 Tax benefit from stock options exercised Capital lease obligations entered into Mortgage notes assumed in property additions See accompanying notes to consolidated financial statements. 29.2 163.0 5.9 34.8 73.7 4.8 148.9 53.3 19.5 SAFEWAY INC. 2002 ANNUAL REPORT 29

  • Page 32
    ... (Loss) Income Total Stockholders' Equity Comprehensive Income (Loss) Balance, year-end 1999 Net income Translation adjustments Options exercised Balance, year-end 2000 Net income Translation adjustments Loss on settlement of interest rate swap, net of tax benefit Treasury stock purchased Options...

  • Page 33
    ... and balances have been eliminated in consolidation. The Company's investment in Casa Ley is reported using the equity method and is recorded on a one-month delay basis because financial information for the latest month is not available from Casa Ley in time to be included in Safeway's consolidated...

  • Page 34
    ... 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 are currently available to it for 32 SAFEWAY INC. 2002 ANNUAL REPORT

  • Page 35
    ... income - as reported Less: Total stock-based employee compensation expense determined under fair valuebased method for all awards, net of related tax effects Net (loss) income - pro forma Basic (loss) earnings per share: As reported Pro forma Diluted (loss) earnings per share: As reported Pro forma...

  • Page 36
    ... the annual impairment testing date selected by Safeway. Fair value was determined based on a valuation study performed by an independent third party appraiser which primarily used the discounted cash flow method and guideline company method. As a result of this annual review, Safeway recorded...

  • Page 37
    ... GOODWILL A summary of changes in Safeway's goodwill during 2002 and 2001 by reportable operating segment is as follows : 2002 (In millions, except per-share amounts) U.S Canada Total U.S 2001 Canada Total Balance - beginning of year Genuardi's acquisition Amortization Impairment charge Cumulative...

  • Page 38
    .... The following table adjusts net (loss) income and net earnings per share for the adoption of SFAS No. 142 (in millions): 2002 2001 2000 NOTE D: STORE CLOSING AND IMPAIRMENT CHARGES Safeway recognized impairment charges on the write-down of long-lived store assets to be closed of $8.4 million in...

  • Page 39
    ...selected by the Company: (i) the prime rate; (ii) a rate based on rates at which Eurodollar deposits are offered to first-class banks by the lenders in the bank credit agreement plus a pricing margin based on the Company's debt rating or interest coverage ratio (the "Pricing Margin"); or (iii) rates...

  • Page 40
    ... from one to 21 years, have a weighted average interest rate of 8.94% and are secured by properties with a net book value of approximately $131 million. O T H E R N O T E S PAYA B L E L E T T E R S O F C R E D I T The Company had letters of credit of $148.0 million outstanding at year-end 2002...

  • Page 41
    ... and non-qualified options to purchase common stock at an exercise price equal to or greater than the fair market value at the grant date, as determined by the Compensation and Stock Option Committee of the Board of Directors, as well as other stock-based awards. Options generally vest over five or...

  • Page 42
    ... to purchase 100,000 shares of common stock to a member of the Company's Board of Directors as compensation for services to Safeway as a consultant regarding the Company's equity investment in Future Beef Operations Holdings, LLC ("FBO"). The option has an exercise price of $41.00 per share and...

  • Page 43
    ... income and earnings per share as if the Company had adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the...

  • Page 44
    ...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 Genuardi's Acquisition in 2001, the Randall's acquisition in 1999 and the Vons merger...

  • Page 45
    ... (expense) income for the retirement plans (in millions): 2002 2001 2000 Change in benefit obligation: Beginning balance Service cost Interest cost Plan amendments Actuarial loss Acquisition of Genuardi's Benefit payments Transfer of plan liabilities Currency translation adjustment Ending balance...

  • Page 46
    ... Retirement Restoration Plan benefits, the Company sponsors plans that provide postretirement medical and life insurance benefits to certain salaried employees. Retirees share a portion of the cost of the postretirement medical plans. Safeway pays all the costs of the life insurance plans. The plans...

  • Page 47
    ... 2000 for reimbursement of expenses related to management and real estate services provided by PDA. HBS Limited Partnership ("HBS") is a limited partnership formed in 1996 to own, develop and operate a shopping center in Hawaii. Safeway is sole general partner of HBS. Safeway had a note receivable...

  • Page 48
    ..., against the Company's subsidiary, Dominick's Finer Foods, Inc. (predecessor of Dominick's Finer Foods, LLC), and Jewel Food Stores, a subsidiary of Albertson's, Inc. The complaint alleged, among other things, that Dominick's and Jewel conspired to fix the retail price of milk in nine Illinois...

  • Page 49
    ... used the discounted cash flow method and the guideline company method. The final valuation of Dominick's is dependent upon the results of negotiations with the ultimate buyer. Adjustment to the loss on disposition, together with any related tax effects, will be made when additional information is...

  • Page 50
    ... shares Common shares assumed purchased with potential proceeds Common share equivalents Calculation of common shares assumed purchased with potential proceeds: Potential proceeds from exercise of options to purchase common shares Common stock price used under the treasury stock method Common shares...

  • Page 51
    ...of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented. (in millions, except per-share amounts) 52 Weeks Last 16 Weeks Third 12 Weeks Second 12 Weeks First 12 Weeks 2002(1) Sales Gross profit Operating profit (loss) Income...

  • Page 52
    ...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 Audit Committee of the Board, and corrective actions are taken to address control...

  • Page 53
    ... statements, in fiscal 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." San Francisco, California March 21, 2003 SAFEWAY INC. 2002 ANNUAL REPORT 51

  • Page 54
    ... and Chief Financial Officer President, E-Commerce Businesses LARREE M. RENDA Northern California Division President TIMOTHY J. HAKIN Member KKR & Co., LLC PA U L H A Z E N Executive Vice President Retail Operations, Human Resources, Public Affairs, Labor and Government Relations, Reengineering...

  • Page 55
    ...N DE N T AU D I TOR S The Bank of New York Bondholder Relations Department Corporate Trust Division Fiscal Agencies Department 101 Barclay Street, 7-East New York, NY 10286 800-548-5075 9.30% Senior Secured Debentures As an equal opportunity employer, Safeway values and actively supports diversity...

  • Page 56
    S A F E WAY I N C . P.O. Box 99 Pleasanton, CA 94566-0009