Safeway 2006 Annual Report Download - page 39

SAFEWAY INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Safeway reported net income of $870.6 million ($1.94 per diluted share) in 2006, net income of $561.1 million ($1.25
per diluted share) in 2005 and net income of $560.2 million ($1.25 per diluted share) in 2004. Results in fiscal 2006
were affected by a $62.6 million reduction of income tax expense which is described in this report under the caption
“Income Taxes.” Results in fiscal 2005 and fiscal 2004 were significantly affected by a strike in Southern California,
asset impairments, store exit activities and other unusual charges described below.
(pre-tax, in millions) 2006 2005 2004
Strike impact –– $412.2
Dominick’s store exit activities (1) –– 45.7
Randall’s (1):
Store exit activities –$55.5 –
Impairment of long-lived assets –54.7 –
Other charges (1):
Employee buyouts, severance costs and other related costs –59.4 –
Northern California health and welfare contribution –– 31.1
Accrual for rent holidays –– 10.6
(1) Included in operating and administrative expense.
Strike Impact On October 11, 2003, seven UFCW union locals 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 union 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). 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 2004, Safeway closed 12 under-performing Dominick’s stores, which resulted in a
store-lease exit charge of $45.7 million ($0.06 per diluted share).
Dominick’s incurred operating losses and declining sales in each of the last three fiscal years. In February 2007, the
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 can be no assurance that Dominick’s will achieve
satisfactory operating results in the future.
Randall’s In the third quarter of 2005, the Company announced a plan to revitalize the Texas market which
included the closure of 26 under-performing stores, a focused Lifestyle remodel program and the introduction of
proprietary products. This resulted in a pre-tax, long-lived asset impairment charge of $54.7 million ($0.08 per diluted
share). In the fourth quarter of 2005, Safeway recorded $55.5 million pre-tax ($0.07 per diluted share) in store exit
activities for these stores.
Other Charges In 2005 the Company incurred $59.4 million before tax ($0.08 per diluted share) in employee
buyout charges, severance and related costs, relating primarily to Dominick’s and Northern California.
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