8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):

July 27, 2004

SAFEWAY INC.

(Exact name of registrant as specified in its charter)

Delaware	1-00041	94-3019135
(State or other jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification Number)

5918 Stoneridge Mall Road, Pleasanton, California	94588-3229
(Address of principal executive offices)	(Zip Code)

(925) 467-3000

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report.)

Item 7. Financial Statements and Exhibits.

(c) Exhibits.

The following exhibit is furnished pursuant to Item 12 of Form 8-K:

99.1 Press Release dated July 27, 2004.

Item 12. Results of Operations and Financial Condition.

Pursuant to Securities and Exchange Commission Release No. 33-8216 dated March 27, 2003, the following information is being furnished under Item 12 of Form 8-K. The information in this Form 8-K, including the exhibit, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

On July 27, 2004, we issued our second quarter 2004 earnings press release. A copy of our press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

In the press release and our other public statements in connection with the press release, we use the following financial measures that are not measures of financial performance under U.S. generally accepted accounting principles (non-GAAP financial measures):

• “adjusted earnings per share” which is defined as reported earnings per share, excluding the following:

• Certain restructuring and other expenses; and

• Impact of Southern California labor strike.

• “free cash flow” which is calculated as net cash flow from operating activities less net cash flow used by investing activities.

• “Adjusted EBITDA” is calculated on a rolling four quarter basis and is defined by our bank credit agreement as EBITDA (earnings before interest, income taxes, depreciation and amortization), excluding the following:

• LIFO (income) expense;

• equity in (earnings) losses of unconsolidated affiliates, net;

• inventory loss adjustments; and

• goodwill and SFAS 144 impairment charges relating to the planned sale of Dominick’s, which were subsequently reversed in the fourth quarter of 2003.

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• “Adjusted EBITDA as a multiple of interest expense” which is calculated by dividing Adjusted EBITDA by interest expense for the rolling four quarters.

• “Debt to Adjusted EBITDA” which is calculated by dividing total debt at June 19, 2004 by Adjusted EBITDA.

• “EPS for 2004 without giving effect to the estimated impact of the Southern California strike, the closure of 12 Dominick’s stores in the first quarter of 2004 and a contribution to two Northern California UFCW multi-employer health and welfare plans”.

Reconciliations of “adjusted earnings per share” to GAAP earnings per share and “free cash flow” to GAAP cash flow are provided in the press release. Reconciliations of “Adjusted EBITDA” to the most directly comparable GAAP financial measures – net income (loss) and net cash flow from operating activities – also are provided in the press release. These five measures provide information regarding various aspects of the cash that our business generates, which management believes is useful to understanding our business.

Management believes that “Adjusted EBITDA” and the related ratios are useful measures of operating performance that facilitate management’s evaluation of our ability to service debt and our capability to incur more debt to generate the cash needed to grow the business (including at times when interest rates fluctuate). Omitting interest, taxes and the enumerated non-cash items provides a financial measure that is useful to management in assessing operating performance because the cash our business operations generate enables us to incur debt and thus to grow.

Management believes that “Adjusted EBITDA” and the related ratios also facilitate comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness, tax structures, methodologies in calculating LIFO expense and unconsolidated affiliates that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of owned property, and because, in management’s experience, whether a store is new or one that is fully or mostly depreciated does not necessarily correlate to the contribution that that store makes to operating performance.

Management also believes that investors, analysts and other interested parties view our ability to generate “Adjusted EBITDA” as an important measure of our operating performance and that of other companies in our industry.

The non-cash charges included in “adjusted earnings per share” relate to (i) restructuring and other expenses, and (ii) Dominick’s long-lived asset impairment charges. The adjustments are described in the press release. Management believes that excluding these items provides a useful financial measure that will facilitate comparisons of our operating results before, during and after such expenses are incurred, as well as facilitating comparisons of our performance with that of other companies that might not have the non-cash charges or strike effects that we have experienced.

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Management also believes that investors, analysts and other interested parties view our “adjusted earnings per share” as an indicator of our ongoing operating performance.

“Free cash flow”, Adjusted EBITDA and the related ratios are useful indicators of Safeway’s ability to service debt and fund share repurchases that management believes will enhance stockholder value. Adjusted EBITDA also is a useful indicator of cash available for investing activities. A portion of the free cash flow that the Company generates in 2004 is expected to be spent on mandatory debt service requirements or other non-discretionary expenditures.

Our estimate of earnings per share for 2004 (without giving effect to the impact of the Southern California strike, store closures at Dominick’s and a contribution to two Northern California UFCW multi-employer health and welfare plans) is used by management as a baseline for estimating our 2004 net income per share (EPS). The previously announced closure of 12 Dominick’s stores reduced earnings in the first quarter of 2004 by $0.06 per share. Management is unable to estimate the effect that the Southern California strike will have on EPS for 2004, and therefore is not able to provide any reconciliation of any amounts set forth herein with respect to the effect of the Southern California strike. The expected $30 million contribution to two Northern California UFCW multi-employer health and welfare plans would impact 2004 EPS by $0.07 per share, based on the number of shares of common stock outstanding on July 23, 2004.

These non-GAAP financial measures should not be considered as an alternative to GAAP earnings per share as a measure of performance, or as an alternative to net cash from operating activities or other increases and decreases in cash as shown on Safeway’s Consolidated Statement of Cash Flows for the periods indicated as a measure of liquidity. These measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Other companies in our industry may calculate “adjusted earnings per share”, “free cash flow” and “Adjusted EBITDA” differently than we do, limiting their usefulness as comparative measures.

Additional limitations include:

• “Adjusted EBITDA” does not reflect our cash expenditures for capital expenditures;

• “Adjusted EBITDA” does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

• “Adjusted EBITDA” does not reflect cash requirements for income taxes paid; and

• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and “Adjusted EBITDA” does not reflect any cash requirements for such replacements.

Because of these limitations, our non-GAAP financial measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and use our non-GAAP financial measures supplementally.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	SAFEWAY INC.
	(Registrant)
Date: July 26, 2004	By:	/s/ Robert A. Gordon
	Name:	Robert A. Gordon
	Title:	Senior Vice President & General Counsel

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EXHIBIT INDEX

Exhibit No.
99.1	Press Release dated July 27, 2004 of Safeway Inc.

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EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE

SAFEWAY INC. ANNOUNCES

SECOND-QUARTER 2004 EARNINGS

Cash flow from operating activities tops $1.0 billion during the first 24 weeks of 2004

Company reduces debt by $584 million

Contact: Brad Fox (925) 467-3352

Pleasanton, CA – July 27, 2004

Results From Operations

Safeway Inc. today reported net income of $155.2 million ($0.35 per diluted share) for the second quarter ended June 19, 2004. This result includes the estimated impact of approximately $50 million, after tax ($0.11 per share) as the Company recovers from the strike in Southern California. Excluding the impact of the strike recovery, second quarter 2004 earnings were $0.46 per share.

Net income was $161.0 million ($0.36 per diluted share) for the second quarter of 2003. Included in these results were an impairment charge for Dominick’s of $41.6 million, after tax ($0.10 per share) and restructuring and other expenses totaling $9.9 million, after tax ($0.02 per share). Excluding these items, second quarter 2003 earnings were $0.48 per share.

“Despite the strike, Safeway generated over $1.0 billion in cash from operations in the first two quarters of the year, up slightly from last year,” said Steve Burd, Chairman, President and CEO. “Going forward, we will continue to focus on recovering from the effects of the strike and differentiating our offerings to provide superior value to our customers.”

Strike Recovery

On October 11, 2003 seven UFCW local unions struck the company’s 289 stores in Southern California. An agreement ending the strike was reached on February 26, 2004. As expected, promotional pricing, direct marketing and the introduction of new proprietary products, such as Ranchers Reserve Beef, have improved sales in Southern California, but not yet to pre-strike levels.

Sales

Total sales increased to $8.4 billion in the second quarter of 2004 from $8.2 billion in 2003, primarily due to additional fuel sales and new store openings. Excluding sales at strike-affected stores, comparable store sales increased 2.3% and identical store (which exclude replacement stores) sales increased 1.9%. Further, excluding the effect of fuel sales, comparable store sales were flat and identical store sales declined 0.4%.

Gross Profit

Gross profit decreased 136 basis points to 28.75% of sales in the second quarter of 2004 from 30.11% in the second quarter of 2003. The estimated impact of the strike reduced gross profit by 63 basis points. Higher fuel sales (which have a lower gross margin) reduced gross profit by 80 basis points. Higher advertising expense reduced gross profit by 23 basis points. The remaining 30 basis point increase in non-fuel gross profit was primarily attributable to improved shrink and lower cost of goods.

Operating and Administrative Expense

Operating and administrative expense declined 82 basis points to 24.96% of sales in the second quarter of 2004 from 25.78% in the second quarter of 2003. The Dominick’s impairment charge, restructuring charges and other expenses in 2003 increased operating and administrative expense as a percentage of sales by 104 basis points. The strike in 2004 increased operating and administrative expense as a percentage of sales by an estimated 23 basis points. Excluding these items, operating and administrative expense as a percentage of sales was essentially flat compared to last year.

For most of the 2003 fiscal year, Dominick’s was classified as an asset held for sale. In the fourth quarter of 2003, Safeway announced that Dominick’s was no longer held for sale. As a result, the second quarter 2003 estimated loss on disposal has been reclassified as a 2003 operating and administrative expense.

Interest Expense

Interest expense declined to $95.5 million in the second quarter of 2004 compared to $102.0 million in the second quarter of 2003 primarily because the company reduced debt by $584 million from $7.8 billion at year-end 2003 to $7.2 billion at June 19, 2004.

Income Tax Expense

Income tax expense was $71.0 million, or 31.4% of pretax income, in the second quarter of 2004, compared to $97.1 million, or 37.6%, in the second quarter of 2003. Safeway’s effective tax rate declined in the second quarter of 2004 due to a tax benefit of $12.5 million arising from the resolution of various tax issues.

24-Week Results

Net income for the first 24 weeks of 2004 was $198.3 million ($0.44 per diluted share) compared to $323.6 million ($0.73 per diluted share) for the first 24 weeks of 2003. The strike in Southern California reduced net income for the first 24 weeks of 2004 by an estimated $0.38 per share. Primarily as a result of the strike, sales declined 1.8% to $16.0 billion in the first 24 weeks of 2004 from $16.3 billion in 2003. The gross profit margin decreased 66 basis points to 29.25% in 2004 from 29.91% in 2003. Operating and administrative expense increased 85 basis points to 26.30% of sales from 25.45% in 2003.

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Capital Expenditures

During the first 24 weeks of 2004, Safeway invested $479.4 million in cash capital expenditures. For the year, the company expects to spend between $1.2 billion and $1.4 billion in cash capital expenditures and open approximately 40 new stores and complete 120 remodels.

Cash Flow

Net cash flow from operating activities was $1,047.7 million for the first 24 weeks of 2004 compared to $1,023.8 million for the first 24 weeks of 2003. Net cash flow used by investing activities, which consists principally of cash paid for property additions, increased to $432.1 million for the first 24 weeks of 2004 compared to $338.6 million in 2003. Net cash flow used by financing activities, which consists principally of cash used to pay down debt, was $576.4 million for the first 24 weeks of 2004 and $676.9 million in 2003.

Guidance

At the investor conference in December 2003, Safeway provided earnings guidance for 2004 in the range of $1.95 to $2.03 per share and free cash flow guidance of $700 million to $900 million. This guidance excluded the impact of the labor dispute in Southern California and the effect of 12 store closures at Dominick’s in the first quarter of 2004. Additionally, Safeway was recently notified that it will be required to contribute an additional $30 million to two Northern California UFCW multi-employer health and welfare plans for its share of funding deficits in the second half of 2004. Excluding those items, Safeway is tracking at the lower end of the EPS range and within the range on cash flow.

About Safeway

Safeway Inc. is a Fortune 50 company and one of the largest food and drug retailers in North America based on sales. The company operates 1,812 stores in the United States and Canada and had annual sales of $35.6 billion in 2003. The company’s common stock is traded on the New York Stock Exchange under the symbol SWY.

Safeway Conference Call

Safeway’s investor conference call discussing second-quarter results will be broadcast live over the Internet at www.safeway.com/investor_relations at 8:00 AM PDT today. Click on Webcast Events to access the live call. An on-demand webcast of the conference call will also be available for approximately one week following the live call.

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This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements relate to, among other things, estimates of earnings per share, capital expenditures, free cash flow, and the effects of the Southern California strike, including the improvement of

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sales since the strike, and are indicated by words or phrases such as “guidance,” “on-going,” “expects,” “estimate,” and similar words or phrases. These statements are based on Safeway’s current plans and expectations and involve risks and uncertainties which are, in many instances, beyond our control, including general business and economic conditions, competitive factors, currency valuations, results of our programs to reduce costs, increase sales and improve capital management, achievement of operating improvements in companies that we acquire, labor costs, labor disputes that may arise from time to time, including the effect of the Southern California labor dispute, the resolution of lawsuits challenging certain provisions of the agreement with Kroger and Albertson’s that arise out of the multi-employer bargaining process in Southern California and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions (such as Chicago) or are scheduled to expire in the near future (such as Seattle, Northern California, Denver and Las Vegas), unanticipated events or changes in future operating results, financial condition, real estate matters, including dispositions and impairments, or business over time, or unfavorable legislative, regulatory, tax or judicial developments, that could cause actual events and results to vary significantly from those included in or contemplated by such statements. The company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaims any obligation to do so. Please refer to Safeway’s reports and filings with the Securities and Exchange Commission, including the Annual Report to Stockholders in Safeway’s most recent Form 10-K and subsequent Quarterly Reports on Form 10-Q for a further discussion of these risks and uncertainties.

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SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in millions, except per-share amounts)

(Unaudited)

	12 Weeks Ended						24 Weeks Ended
	June 19, 2004			June 14, 2003			June 19, 2004			June 14, 2003
Sales	$	8,361.1		$	8,248.1		$	15,999.9		$	16,291.4
Cost of goods sold		(5,957.4	)		(5,764.3	)		(11,319.6	)		(11,419.3	)
Gross profit		2,403.7			2,483.8			4,680.3			4,872.1
Operating and administrative expense		(2,086.7	)		(2,126.4	)		(4,208.1	)		(4,146.1	)
Goodwill impairment charges		—			—			—			(256.5	)
Operating profit		317.0			357.4			472.2			469.5
Interest expense		(95.5	)		(102.0	)		(191.7	)		(205.7	)
Other income, net		4.7			2.7			7.8			5.2
Income before income taxes		226.2			258.1			288.3			269.0
Income tax (expense) benefit		(71.0	)		(97.1	)		(90.0	)		54.6
Net income	$	155.2		$	161.0		$	198.3		$	323.6
Basic earnings per share	$	0.35		$	0.36		$	0.45		$	0.73
Diluted earnings per share	$	0.35		$	0.36		$	0.44		$	0.73
Weighted average shares outstanding (in millions):
Basic		445.6			441.4			444.8			441.3
Diluted		449.4			445.8			448.8			445.9

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SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

(Unaudited)

	June 19, 2004		Year-end 2003
ASSETS
Current assets:
Cash and equivalents	$	206.4	$	174.8
Receivables		323.5		383.2
Merchandise inventories		2,629.5		2,642.2
Other current assets		185.6		307.5
Total current assets		3,345.0		3,507.7
Total property, net		8,404.9		8,405.8
Goodwill		2,399.4		2,404.9
Other long-term assets		737.7		778.3
Total assets	$	14,887.0	$	15,096.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of notes and debentures	$	608.5	$	699.5
Current obligations under capital leases		48.0		50.5
Accounts payable		1,638.5		1,509.6
Other current liabilities		1,154.5		1,204.7
Total current liabilities		3,449.5		3,464.3
Long-term debt:
Notes and debentures		5,930.8		6,404.0
Obligations under capital leases		650.9		668.3
Total long-term debt		6,581.7		7,072.3
Other long-term liabilities		1,048.5		915.8
Total liabilities		11,079.7		11,452.4
Total stockholders’ equity		3,807.3		3,644.3
Total liabilities and stockholders’ equity	$	14,887.0	$	15,096.7

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SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

	24 Weeks Ended
	June 19, 2004			June 14, 2003
OPERATING ACTIVITIES
Net cash flow from operating activities	$	1,047.7		$	1,023.8
INVESTING ACTIVITIES
Cash paid for property additions		(479.4	)		(376.0	)
Proceeds from sale of property		80.3			68.8
Other		(33.0	)		(31.4	)
Net cash flow used by investing activities		(432.1	)		(338.6	)
FINANCING ACTIVITIES
(Payments on) additions to short-term borrowings, net		(1.0	)		0.2
Additions to long-term borrowings		28.5			90.8
Payments on long-term borrowings		(621.2	)		(773.3	)
Net proceeds from exercise of stock options		17.2			5.4
Other		0.1			—
Net cash flow used by financing activities		(576.4	)		(676.9	)
Effect of changes in exchange rates on cash		(7.6	)		2.3
Increase in cash and equivalents		31.6			10.6
CASH AND EQUIVALENTS
Beginning of period		174.8			76.0
End of period	$	206.4		$	86.6

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SAFEWAY INC. AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP MEASURES & SUPPLEMENTAL INFORMATION

(Dollars in millions, except per share amounts)

(Unaudited)

TABLE 1: RECONCILIATION OF GAAP NET INCOME TO ADJUSTED INCOME AND ADJUSTED EARNINGS PER SHARE

	Second Quarter 2004						Second Quarter 2003
	Before taxes		After taxes		Per diluted share		Before taxes		After taxes		Per diluted share
Net income, as reported	$	226.2	$	155.2	$	0.35	$	258.1	$	161.0	$	0.36
Estimated strike impact		82.0		50.0		0.11		—		—		—
Restructuring and other expenses		—		—		—		15.8		9.9		0.02
Dominick’s long-lived asset impairment charges		—		—		—		69.8		41.6		0.10
Adjusted income and adjusted earnings per share	$	308.2	$	205.2	$	0.46	$	343.7	$	212.5	$	0.48

TABLE 2: RECONCILIATION OF FORECASTED GAAP CASH FLOW MEASURE TO FREE CASH FLOW

	Forecasted Range (1) Fiscal 2004
Net cash flow from operating activities	$	1,900.0		$	2,000.0
Net cash flow used by investing activities		(1,200.0	)		(1,100.0	)
Free cash flow	$	700.0		$	900.0

(1) Excludes impact of Southern California labor dispute, Dominick’s store closures and additional health and welfare benefit plan contribution.

TABLE 3: CAPITAL EXPENDITURES AND OTHER STATISTICAL DATA

	24 Weeks
	2004		2003
Cash capital expenditures	$	479.4	$	376.0
Stores opened		12		23
Stores closed		17		16
Stores at end of period		1,812		1,815
Square footage at end of period ( in millions)		82.3		82.1
Number of fuel stations at end of period		292		239

TABLE 4: ROLLING FOUR QUARTER ADJUSTED EBITDA

	(A+B-C) Rolling Four Quarters June 19, 2004			A Year Ended Jan. 3, 2004			B 24 Weeks Ended June 19, 2004			C 24 Weeks Ended June 14, 2003
Net (loss) income	$	(295.1	)	$	(169.8	)	$	198.3		$	323.6
Add (subtract):
Income taxes		455.5			310.9			90.0			(54.6	)
Interest expense		428.4			442.4			191.7			205.7
Depreciation		877.4			863.6			406.2			392.4
Lifo (income) expense		(1.3	)		(1.3	)		4.6			4.6
Goodwill impairment charges		472.6			729.1			—			256.5
SFAS 144 impairment charges		206.0			322.0			—			116.0
Inventory loss adjustments		71.0			71.0			—			—
Equity in losses (earnings) of unconsolidated affiliates, net		3.5			7.1			(0.5	)		3.1
Total Adjusted EBITDA	$	2,218.0		$	2,575.0		$	890.3		$	1,247.3
Total debt at June 19, 2004	$	7,238.2
Adjusted EBITDA as a multiple of interest expense		5.18
Minimum Adjusted EBITDA as a multiple of interest expense under bank credit agreement.		2.00
Debt to Adjusted EBITDA		3.26
Maximum debt to Adjusted EBITDA under bank credit agreement.		4.00

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