Safeway 2004 Annual Report Download - page 22

20 SAFEWAY INC. 2004 ANNUAL REPORT
SAFEWAY INC. AND SUBSIDIARIES
Results of Operations
Safeway reported net income of $560.2 million ($1.25 per
diluted share) in 2004, a net loss of $169.8 million ($0.38
per diluted share) in 2003 and a net loss of $828.1 million
($1.77 per diluted share) in 2002. These results were signifi-
cantly affected by a strike in Southern California, goodwill
and asset impairments at Dominick’s and Randall’s and
other unusual charges described below.
STRIKE IM PACT On October 11, 2003, seven UFCW local
unions struck the Company’s 289 stores in Southern
California. As a result, pursuant to the terms of a multi-
employer bargaining arrangement, Kroger and Albertson’s
locked out certain of their retail union employees in
Southern California food stores. An agreement ending the
strike was ratified by the unions on February 28, 2004.
Employees returned to work beginning March 5, 2004.
Safeway estimates the overall cost of the strike and its
residual effects reduced 2004 earnings by $412.2 million
before taxes ($0.57 per diluted share) and 2003 earnings by
$167.5 million before taxes ($0.23 per diluted share).
Safeway estimated the impact of the strike by comparing
internal forecasts immediately before the strike with actual
results during and after the strike, at strike-affected stores.
The estimate also includes the Company’s benefit under an
agreement with Kroger and Albertson’s that arises out of
the multi-employer bargaining process in Southern California.
DOMINICK’S In the first quarter of 2002, Safeway adopted
Statement of Financial Accounting Standards (“SFAS”) No.
142, “Goodwill and Other Intangible Assets,” and recorded
a pre-tax goodwill impairment charge of $589.0 million at
Dominick’s. In November 2002, Safeway announced the
decision to sell Dominick’s and exit the Chicago market due
to labor issues. In accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,” Safeway recorded a pre-tax charge for the
impairment of long-lived assets of $201.3 million in the
fourth quarter of 2002 to adjust Dominick’s to its estimated
fair market value less cost to sell. Also in the fourth quarter
of 2002, Safeway performed its annual review of goodwill
and recorded a pre-tax impairment charge of $583.8 million
for Dominick’s.
In the first 36 weeks of 2003, Safeway reduced the
carrying value of Dominick’s by writing down an additional
$256.5 million of goodwill and $120.7 million of long-lived
assets, based on indications of value received during the
sale process. In November 2003, Safeway announced that it
was taking Dominick’s off the market after the winning
bidder and the unions representing Dominick’s could not
reach an agreement on a labor contract. Safeway reclas-
sified Dominick’s from an “asset held for sale” to “assets
held and used” and adjusted Dominick’s individual long-
lived assets to the lower of cost or fair value. As a result, in
the fourth quarter of 2003 Safeway incurred a pre-tax, long-
lived asset impairment charge of $190.7 million and a
goodwill impairment charge of $24.9 million. As of year-end
2003, there is no goodwill remaining on Safeway’s consol-
idated balance sheet related to Dominick’s.
In the first quarter of 2004, Safeway closed 12 under-
performing Dominick’s stores which resulted in a store-
lease exit charge of $45.7 million.
Pre-tax long-lived asset and goodwill impairment at
Dominick’s are summarized below (in millions):
2004 2003 2002
Cumulative effect of adopting
SFAS No. 142 (goodwill
impairment) –– $589.0
Goodwill impairment –$281.4 583.8
Impairment of long-lived assets
(included in operating and
administrative expense) –311.4 201.3
Store lease exit costs
(included in operating and
administrative expense) $45.7 ––
Dominick’s incurred operating losses and declining sales
in each of the last three fiscal years and faces substantial
hurdles to achieving satisfactory operating profit in the
future. These hurdles include a highly competitive market
and an unfavorable labor contract. Dominick’s is operating
under a labor contract that expired in 2003 and is currently
negotiating a new labor contract. A more competitive labor
contract is vital to Dominick’s future viability. Safeway
believes a satisfactory contract can be negotiated.
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