Safeway 2002 Annual Report Download - page 20

18 SAFEWAY INC. 2002 ANNUAL REPORT
FINANCIAL REVIEW
SAFEWAY INC. AND SUBSIDIARIES
PLANNED DISPOSITION OF DOMINICK’S
In November 2002, Safeway announced its decision to sell
Dominick’s, which consists of 113 stores, and to exit the
Chicago market. In accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,” Dominick’s operations are presented as a discontin-
ued operation. Accordingly, Dominick’s results are reflected separate-
ly in the Company’s consolidated financial statements and Dominick’s
information is excluded from the accompanying notes to the consolidat-
ed financial statements and the rest of the financial information includ-
ed herein, unless otherwise noted. Sales at Dominick’s were $2.4
billion in 2002, $2.5 billion in 2001 and $2.5 billion in 2000.
In accordance with SFAS No. 144, Dominick’s net assets
and liabilities have been written down to estimated fair mar-
ket value. The fair value of Dominick’s was determined by
an independent third party appraiser which primarily used
the discounted cash flow method and the guideline compa-
ny 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 announced that its Board of Directors
had increased the authorized level of the Company’s stock
repurchase program to $3.5 billion from the previously
announced level of $2.5 billion. During 2002, Safeway
repurchased 50.1 million shares of common stock at a cost
of $1.5 billion. From initiation of the program in 1999
through the end of 2002, Safeway had repurchased 87.0
million shares of common stock at a cost of $2.9 billion,
leaving $0.6 billion available for repurchases.
ACQUISITION OF GENUARDI’S FAMILY
MARKETS, INC. (“GENUARDI’S”)
In February 2001, Safeway acquired all of the assets of
Genuardi’s for approximately $530 million in cash (the
“Genuardi’s Acquisition”). On the acquisition date, Genuardi’s
operated 39 stores in the greater Philadelphia, Pennsylvania
area, including New Jersey and Delaware. The Genuardi’s
Acquisition was accounted for as a purchase and was funded
through the issuance of commercial paper and debentures.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS Safeway’s income from continu-
ing operations before cumulative effect of accounting
change was $568.5 million ($1.20 per share) in 2002,
$1,286.7 million ($2.51 per share) in 2001 and $1,154.2 mil-
lion ($2.26 per share) in 2000.
Safeway adopted SFAS No. 142, “Goodwill and Other
Intangible Assets,” during the first quarter of 2002 and
recorded an aggregate impairment charge of $700 million
for the cumulative effect of adopting this statement. The
charge for Dominick’s of $589 million and Randall’s of $111
million reduced the carrying value of goodwill to its implied
fair value. Impairment in both cases was due to a combina-
tion of factors including acquisition price, post-acquisition
capital expenditures and operating performance.
During the fourth quarter of 2002, Safeway performed
its annual impairment review for goodwill under SFAS No.
142. As a result of this review Safeway recorded a charge of
$704.2 million for Randall’s, which is recorded as a compo-
nent of continuing operations, and $583.8 million for
Dominick’s, which is recorded as a component of discon-
tinued operations. These charges reflect declining multiples
in the retail grocery industry and the operating perform-
ance of these divisions. Net loss after the cumulative effect
of this accounting change, discontinued operations and the
fourth-quarter goodwill impairment was $828.1 million
($1.75 per share).
In 1987, Safeway assigned a number of leases to Furr’s
Inc. (“Furr’s”) and Homeland Stores, Inc. (“Homeland”) as
part of the sale of the Company’s former El Paso, Texas and
Oklahoma City, Oklahoma divisions. Furr’s filed for Chapter
11 bankruptcy on February 8, 2001. Homeland filed for
Chapter 11 bankruptcy on August 1, 2001. Safeway is con-
tingently liable if Furr’s and Homeland are unable to contin-
ue making rental payments on these leases. In 2001, Safeway
recorded a pre-tax charge to operating and administrative
expense of $42.7 million ($0.05 per share) to recognize the
estimated lease liabilities associated with these bankruptcies
and for a single lease from
Safeway’s former Florida division.
During 2002, the accrual was
reduced by $12.0 million as cash
was paid out. In addition, Furr’s
began the liquidation process and
Homeland emerged from bank-
ruptcy in 2002 and, based on the
resolution of various leases,
Safeway reversed $12.1 million of
the accrual, leaving a balance of
$18.6 million at year-end 2002.
Safeway is unable to determine
its maximum potential obligation
with respect to other divested
operations, should there be any
similar defaults, because informa-
tion about the total number of
leases from these divestitures that
are still outstanding is not avail-
able. Based on an internal assess-
Income From
Continuing Operations
(In Millions)
00
$1,154.2
01
$1,286.7
02
$568.5