Safeway 2006 Annual Report Download

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2006 annual report
Bringing more to the table.
2006 annual report

Table of contents

  • Page 1
    Bringing more to the table. 2006 annual report 2006 annual report

  • Page 2
    ... Long-term growth Corporate citizenship Directors and principal officers Annual report on Form 10-K Investor information 2 6 8 10 12 14 MANUFACTURING AND PROCESSING FACILITIES Year-end 2006 United States Canada Milk Plants Bakery Plants 6 6 2 - 4 1 1 20 3 2 2 2 - 3 - 12 16 Ice Cream Plants...

  • Page 3
    ... responsive solutions for busy lives. By successfully differentiating our offerings with superb perishables, high-quality proprietary brands and outstanding customer service, and by utilizing consumer insights to spur continuous innovation while completing new and remodeled Lifestyle stores, we are...

  • Page 4
    ... price investments and increased advertising expense. Lifestyle stores With 751 Lifestyle stores in operation as of year-end 2006, they accounted for 43% of our total store base. These stores contributed significantly to sales growth throughout the year, and their aggregate return on capital...

  • Page 5
    ...percentage of sales for store labor, workers' compensation and pension benefits. Interest expense Interest expense decreased $6.5 million to $396.1 million in 2006 despite higher average interest rates, primarily because average total debt declined. Capital spending Capital investments increased to...

  • Page 6
    ... growth outside of our core business. We are gratified with the progress made by Blackhawk Network, a Safeway subsidiary that is the largest provider of thirdparty gift cards in North America. At year-end 2006, the network comprised more than 60,000 storefronts in the U.S. and Canada. As more cards...

  • Page 7
    ... conventional supermarket operators. We firmly believe our strategy is paying off, as the following elements are setting us apart from the competition and enabling us to generate superior shareholder returns: Delivering superb quality perishables Building outstanding proprietary brands Leveraging...

  • Page 8
    His mom makes sure he has a high-quality apple while she drives the afternoon carpool. Safeway produce is inspected five times to ensure top quality.

  • Page 9
    ... sold in our stores. In blind taste tests, consumers routinely rate Rancher's Reserve beef above our competitors' products, giving it high marks for exceptional tenderness and ï¬,avor. Delivering superb quality perishables To help ensure the finest quality in produce, we conducted consumer panels...

  • Page 10
    ... line of grab-and-go sandwiches of exceptional quality. Building outstanding proprietary brands Our Signature soup line continued to expand in 2006 with the addition of rosemary chicken with white beans, minestrone and, during the holiday season, a creamy lobster bisque. Adding to the array of meal...

  • Page 11
    He brings his favorite Signature sandwich with him to watch his favorite team. Safeway deli/food service offerings are great for the family on the go.

  • Page 12
    She brings O Organicsâ„¢ yogurt to work each day to enjoy a healthy morning snack. Safeway tracks healthy eating trends to develop new products.

  • Page 13
    ... Good to Know, a comprehensive educational program that includes a nutritional guide, pamphlets on various health and wellness topics, and in-store point-of-sale signs featuring nutritional information to help customers make informed decisions about their food choices. * Produced consumer-focused...

  • Page 14
    ... of more than 60,000 stores reaching 135 million consumers each week, Blackhawk is the largest provider of third-party gift cards in North America. It provides cards to a broad group of top retailers, offering more than 185 brands from companies such as The Home Depot®, Gap, Nordstrom and Bed...

  • Page 15
    She loves the friendly, knowledgeable employees at the fullservice seafood counter in her newly remodeled Lifestyle store. Safeway completed another 293 Lifestyle stores in 2006, bringing the year-end total to 751.

  • Page 16
    She runs in memory of her mother in a Safewaysponsored race to raise funds for breast cancer research. Safeway addresses the charitable needs of the communities it serves.

  • Page 17
    ... annual internal review process and a mentoring program to identify and develop women and people of color. We also have a diverse supplier base and programs to give opportunities to more minorityand women-owned businesses. Leading and supporting environmental responsibility During 2006 we purchased...

  • Page 18
    ... Finance and Control (Chief Accounting Officer) Donald Keprta Dominick's Finer Foods, LLC Steven R. Frisby Randall's Food & Drugs, LP Robert I. MacDonnell Retired Partner KKR & Co. David T. Ching Senior Vice President and Chief Information Officer FOREIGN SUBSIDIARY Canada Safeway Limited...

  • Page 19
    ... transition period from to Commission file number 1-00041 SAFEWAY INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 5918 Stoneridge Mall Road Pleasanton, California (Address of principal executive offices) Registrant...

  • Page 20
    ... a shell company (as defined in Rule 12b-2 of the Act). Yes State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of...

  • Page 21
    ... Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Market...

  • Page 22
    ... weather conditions; Performance in new business ventures or other opportunities that we pursue, including Blackhawk; The capital investment in and financial results from our Lifestyle stores; The rate of return on our pension assets; and The availability and terms of financing. We undertake...

  • Page 23
    ... to Safeway, as well as to a broad group of top North American retailers for sale to retail customers. Blackhawk has recently expanded its gift card business to the United Kingdom. Stores Safeway's average store size is approximately 46,000 square feet. The Company determines the size of a new store...

  • Page 24
    ..., closures and financing terms. Merchandising Safeway's operating strategy is to provide value to its customers by maintaining 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...

  • Page 25
    ... the Company's long-term growth strategy is its capital expenditure program. The Company's capital expenditure program funds, among other things, new stores, remodels, manufacturing plants, distribution facilities and information technology advances. Over the last several years, Safeway's management...

  • Page 26
    ...The number of competitors and the amount of competition experienced by Safeway's stores varies by market area. The principal competitive factors that affect the Company's business are location, quality, service, price and consumer loyalty to other brands and stores. Local, regional and national food...

  • Page 27
    ...furnished to, the SEC. We also maintain certain corporate governance documents on our Web site, including the Company's Corporate Governance Guidelines, our Director Independence Standards, the Code of Business Conduct and Ethics for the Company's corporate directors, officers and employees, and the...

  • Page 28
    ...continue to add supermarket fuel centers, which generate low profit margins but significant sales. Although this negatively affects our gross profit margin, fuel sales provide a positive effect on operating and administrative expense as a percent of sales. Opening and Remodeling Stores Our inability...

  • Page 29
    ... internationally, and it may find a different business or competitive environment in markets outside the U.S. that could adversely affect its profitability; and Blackhawk's prospects could be adversely affected as a result of regulatory changes affecting the sales of gift cards or other products...

  • Page 30
    ... results. Insurance Plan Claims We use a combination of insurance and self-insurance to provide for potential liabilities for workers' compensation, automobile and general liability, property insurance, director and officers' liability insurance, and employee health care benefits. We estimate...

  • Page 31
    ... business, such as workers' compensation, store closures, employee benefit plans, stock-based employee compensation, goodwill and income tax contingencies, these standards and their interpretations require management's most difficult, subjective or complex judgments. A change from current accounting...

  • Page 32
    ... President Secretary and General Counsel Chief Governance Officer Melissa C. Plaisance (6) Senior Vice President Finance and Investor Relations Kenneth M. Shachmut Senior Vice President Reengineering and Marketing Analysis David R. Stern (7) Senior Vice President Planning and Business Development 14...

  • Page 33
    ... 1991 (1) Brian C. Cornell was named Executive Vice President and Chief Marketing Officer of the Company in April 2004. Prior to joining Safeway, he was President of Pepsi Cola North America's ("PCNA") Food Services Division and Senior Vice President ("SVP") of Sales for PCNA, a role he assumed in...

  • Page 34
    ...Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock, $0.01 par value, is listed on the New York Stock Exchange. The following table presents quarterly high and low sales prices, as well as dividends declared...

  • Page 35
    ... of 2006. Total number of shares purchased as part of publicly announced plans or programs Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) (3) Fiscal period Total number of shares purchased (1) Average price paid per share (2) September 10...

  • Page 36
    SAFEWAY INC. AND SUBSIDIARIES Stock Performance Graph The following graph compares the yearly percentage change in the Company's cumulative total stockholder return on its common stock for the period from the end of its 2001 fiscal year to the end of its 2006 fiscal year to that of the Standard & ...

  • Page 37
    ... per-share amounts) Results of Operations Sales and other revenue Gross profit Operating and administrative expense Goodwill impairment charges Operating profit Interest expense Other income, net Income before income taxes and cumulative effect of accounting change Income taxes Income (loss) before...

  • Page 38
    ...store sales increases (decreases) excluding fuel (4) Gross profit margin Operating & administrative expense as a percentage of sales (5) Operating profit as a percentage of sales Cash capital expenditures Depreciation & amortization Total assets Total debt Total stockholders' equity Weighted average...

  • Page 39
    ... Company announced a strategic plan to revitalize its operations at Dominick's. This plan includes remodeling 20 stores to the Lifestyle format, new store development and closing 14 under-performing stores in 2007. While management believes this strategy will improve sales and profitability, there...

  • Page 40
    ...additional $31.1 million before tax ($0.04 per diluted share) during the year to two Northern California multi-employer health and welfare plans for its share of funding deficits. On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission issued a letter to the...

  • Page 41
    ... of sales from store labor, workers' compensation and pension expense. Operating and administrative expense decreased 53 basis points in 2005 to 25.77% of sales from 26.30% in 2004. The significant pre-tax charges discussed above (impairment of long-lived assets, store exit activities and employee...

  • Page 42
    ...is the Company's policy to record its self-insurance liability, as determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported, discounted at a risk-free interest rate. Any actuarial projection of losses concerning workers' compensation and general liability...

  • Page 43
    ... 5.7%. A lower discount rate increases the present value of benefit obligations and increases pension expense. Expected return on pension plan assets is based on historical experience of the Company's portfolio and the review of projected returns by asset class on broad, publicly traded equity and...

  • Page 44
    ... income tax refund related to prior years' debt financing and $45.4 million of proceeds from the exercise of stock options. Cash used by financing activities in 2004 consisted principally of cash used to pay down debt. Based upon the current level of operations, Safeway believes that net cash flow...

  • Page 45
    ... that Safeway's business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under its commercial paper program and credit agreement. Bank Credit Agreement On June 1, 2005, the Company entered into a $1,600.0 million credit agreement...

  • Page 46
    ... interest coverage ratio or credit ratings. Safeway's pricing was unaffected by S&P's lowered rating. However, changes in the Company's credit ratings may have an adverse impact on financing costs and structure in future periods, such as the ability to participate in the commercial paper market and...

  • Page 47
    ...-term debt (3) Capital lease obligations (2),(4) Interest on capital leases Self-insurance liability Interest on self-insurance liability Operating leases (4) Contracts for purchase of property, equipment and construction of buildings Contracts for purchase of inventory Fixed-price energy contracts...

  • Page 48
    ... in future earnings, fair values and cash flows from reasonably possible near-term changes in interest rates and exchange rates to be material. The table below presents principal amounts and related weighted-average rates by year of maturity for the Company's debt obligations at year-end 2006...

  • Page 49
    SAFEWAY INC. AND SUBSIDIARIES Item 8. Financial Statements and Supplementary Data Page Management's Annual Report on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations for fiscal 2006, 2005 and 2004 Consolidated ...

  • Page 50
    SAFEWAY INC. AND SUBSIDIARIES Management's Annual Report on Internal Control over Financial Reporting Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, ...

  • Page 51
    Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Safeway Inc.: We have audited the accompanying consolidated balance sheets of Safeway Inc. and subsidiaries (the "Company") as of December 30, 2006 and December 31, 2005, and the related ...

  • Page 52
    ... ("SFAS") No. 123(R), "Share-Based Payment." As discussed in Note I to the consolidated financial statements, on December 30, 2006, the Company adopted SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans." San Francisco, California February 26, 2007 34

  • Page 53
    SAFEWAY INC. AND SUBSIDIARIES Consolidated Statements of Operations (In millions, except per-share amounts) 52 Weeks 2006 Sales and other revenue Cost of goods sold Gross profit Operating and administrative expense Operating profit Interest expense Other income, net Income before income taxes Income...

  • Page 54
    ... Consolidated Balance Sheets (In millions, except per-share amounts) Year-end 2006 Assets Current assets: Cash and equivalents Receivables Merchandise inventories, net of LIFO reserve of $49.5 and $48.4 Prepaid expenses and other current assets Total current assets Property: Land Buildings Leasehold...

  • Page 55
    ... Obligations under capital leases Total long-term debt Deferred income taxes Pension and postretirement benefit obligations Accrued claims and other liabilities Total liabilities Commitments and contingencies Stockholders' equity: Common stock: par value $0.01 per share; 1,500 shares authorized; 582...

  • Page 56
    ... finance costs Deferred income taxes LIFO expense (income) Equity in earnings of unconsolidated affiliates Net pension expense Contributions to pension plans Stock-based employee compensation Other Long-term accrued claims and other liabilities (Gain) loss on property retirements Changes in working...

  • Page 57
    ... Payments on long-term borrowings Purchase of treasury stock Dividends paid Income tax refund related to prior years' debt financing Net proceeds from exercise of stock options Other Net cash flow used by financing activities Effect of changes in exchange rates on cash (Decrease) increase in cash...

  • Page 58
    ... (net of income tax benefit of $16.4) Minimum pension liability (net of income tax benefit of $15.6) Other (net of income tax benefit of $1.5) Amortization of restricted stock Options exercised Balance, year-end 2005 Net income Stock-based employee compensation Cash dividends declared on common...

  • Page 59
    ... Safeway, as well as to a broad group of top North American retailers for sale to retail customers. Blackhawk has recently expanded its gift card business to the United Kingdom. The Company also has a 49% ownership interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which operates 127 food and general...

  • Page 60
    ... of all allowances. With promotional allowances vendors pay Safeway to promote their product. The promotion may be any combination of a temporary price reduction, a feature in print ads, a feature in a Safeway circular, or a preferred location in the store. The promotions are typically one to two...

  • Page 61
    ... Self-Insurance The Company is primarily self-insured for workers' compensation, automobile and general liability costs. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported, and is discounted using a risk-free rate of...

  • Page 62
    ... value of the hedged underlying debt. The fair value of the interest rate swaps outstanding at year-end 2006 was a liability of $25.9 million. Store Closing and Impairment Charges Safeway regularly reviews its stores' operating performance and assesses the Company's plans for certain store and plant...

  • Page 63
    ... option pricing model incorporates certain assumptions, such as risk-free interest rate, expected volatility, expected dividend yield and expected life of options, in order to arrive at a fair value estimate. Prior to January 2, 2005, Safeway accounted for stock-based awards to employees using...

  • Page 64
    ... pre-acquisition tax accrual. (3) Represents foreign currency translation adjustments in Canada. Safeway completed its annual impairment tests in the fourth quarters of 2006, 2005 and 2004. Fair value was determined based on a valuation study which primarily considered the discounted cash flow and...

  • Page 65
    ... following rates selected by the Company: (1) the prime rate; (2) 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...

  • Page 66
    ... rates selected by the Company: (1) the Canadian prime rate or (2) the rate for Canadian bankers acceptances plus the Pricing Margin. During 2006 the Company paid facility fees ranging from 0.06% to 0.10% on the total amount of the credit facility. Shelf Registration In 2004 the Company filed...

  • Page 67
    ...reduced rental rates during the option periods. Certain of these leases contain options to purchase the property at amounts that approximate fair market value. As of year-end 2006, future minimum rental payments applicable to non-cancelable capital and operating leases with remaining terms in excess...

  • Page 68
    ... 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 value at the grant date, as determined by the Executive Compensation Committee of the Board of Directors. Options generally...

  • Page 69
    ... to Safeway to satisfy tax-withholding obligations of employees. There were no cancellations of restricted stock during 2006, 2005 or 2004. The weighted-average intrinsic value at grant date of restricted stock outstanding at year-end 2006 was $20.81. Activity in the Company's stock option plans for...

  • Page 70
    ...-Scholes option pricing model. The following weighted-average assumptions were used to value Safeway's grants in 2006: 4.5 years expected life; expected stock volatility of 27.1% to 27.7%; risk-free interest rate of 4.43% to 4.78%; and expected dividend yield of 0.8% to 0.9% during the expected term...

  • Page 71
    ... statutory income tax rate to the Company's income taxes is as follows (dollars in millions): 2006 Statutory rate Income tax expense using federal statutory rate State taxes on income net of federal benefit Charitable donations of inventory Tax settlements Interest on debt financing tax refunds, net...

  • Page 72
    ... of the Company's net deferred tax liability at year end were as follows (in millions): 2006 Deferred tax assets: Workers' compensation and other claims Reserves not currently deductible Accrued claims and other liabilities Employee benefits Charitable contribution carryforwards Operating loss...

  • Page 73
    ... Company maintains defined benefit, non-contributory retirement plans for substantially all of its employees not participating in multi-employer pension plans. Safeway's adoption of SFAS No. 158 required the Company to recognize the funded status of its retirement plans on its consolidated balance...

  • Page 74
    ...: Fair value of plan assets Projected benefit obligation Funded status Amounts not yet recognized: Adjustment for difference in book and tax basis of assets Unamortized prior service cost Unrecognized actuarial loss Additional minimum liability adjustment Net amount recognized in financial position...

  • Page 75
    ... weighted-average rate Rate of compensation increase: United States plans Canadian plans The actuarial assumptions used to determine net periodic benefit cost were as follows: 2006 Discount rate: United States plans Canadian plans Combined weighted-average rate Expected return on plan assets: United...

  • Page 76
    ... of the employee benefit trusts, resulting in a weighted average rate of return on plan assets. Equity returns were based primarily on historical returns of the S&P 500 Index. Fixedincome projected returns were based primarily on historical returns for the broad U.S. bond market. Safeway expects to...

  • Page 77
    ...-Employer Pension Plans Safeway participates in various multi-employer retirement plans, covering substantially all Company employees not covered under the Company's non-contributory retirement plans, pursuant to agreements between the Company and various unions. These plans are generally defined...

  • Page 78
    ...operates in the U.S. and Canada, is its only reportable segment. The following table presents information about the Company by geographic area (in millions): U.S. 2006 Sales and other revenue Operating profit Income before income taxes Long-lived assets, net Total assets 2005 Sales and other revenue...

  • Page 79
    ...assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Historically, Safeway has not made significant payments for these indemnifications. The Company believes that if it were to incur a loss...

  • Page 80
    ...related to closing 26 underperforming Texas stores and a $23.0 million after-tax charge for an employee buyout in Dominick's and Northern California. (3) Net income for the third 12 weeks of 2005 includes a $33.9 million after-tax impairment charge relating to 26 under-performing Texas stores closed...

  • Page 81
    ..., processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow...

  • Page 82
    ... of the code of ethics definitions, as enumerated in Item 406(b) of SEC Regulation S-K, will be posted on our Web site at www.safeway.com within four business days following the date of the amendment or waiver. Item 11. Executive Compensation The information called for by Item 11 is incorporated by...

  • Page 83
    ..., 1997, between Safeway Inc. and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the registrant's Current Report on Form 8-K dated September 10, 1997). Form of Officers' Certificate establishing the terms of the 7.00% Senior Notes due 2007 and the Company's 7.45% Senior...

  • Page 84
    ... year ended January 2, 1998). Retirement Restoration Plan of Safeway Inc. (incorporated by reference to Exhibit 10(iii).11 to the registrant's Form 10-K for the year ended January 1, 1994). Form of stock option agreement for former directors of The Vons Companies, Inc. (incorporated by reference to...

  • Page 85
    ...'s Current Report on Form 8-K dated March 10, 2005). Form of Credit Agreement dated as of June 1, 2005 by and among Safeway Inc., Canada Safeway Limited, Banc of America Securities LLC and J.P. Morgan Securities Inc., as joint lead arrangers, Deutsche Bank AG New York Branch, as administrative agent...

  • Page 86
    ... report). Computation of Ratio of Earnings to Fixed Charges. Safeway Inc. Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to the registrant's Current Report on Form 8-K dated March 10, 2005). Schedule of Subsidiaries. Consent of Independent Registered Public Accounting...

  • Page 87
    ...(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SAFEWAY INC. By: /s/ Steven A. Burd Steven A. Burd Chairman, President and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that...

  • Page 88
    SAFEWAY INC. AND SUBSIDIARIES Director /s/ Rebecca A. Stirn Rebecca A. Stirn /s/ William Y. Tauscher William Y. Tauscher /s/ Raymond G. Viault Raymond G. Viault Date: February 26, 2007 February 26, 2007 February 26, 2007 70

  • Page 89
    ... information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 26, 2007 /s/ Steven A. Burd Steven A. Burd Chairman, President and Chief Executive Officer

  • Page 90
    ... for, the periods presented in this report; The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in...

  • Page 91
    ..., of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 26, 2007 /s/ Steven A. Burd Steven A. Burd Chief Executive Officer...

  • Page 92
    Investor Information SAFEWAY INC. AND SUBSIDIARIES EXECUTIVE OFFICES Mailing address: Safeway Inc. P.O. Box 99 Pleasanton, CA 94566-0009 CERTIFICATION The company submitted a Section 12(a) CEO certification to the New York Stock Exchange within 30 days of its 2006 Annual Meeting of Stockholders. ...

  • Page 93
    Safeway Inc. PO Box 99 Pleasanton, California 94566-0009 safeway.com