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 26, 2005

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.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

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 26, 2005, we issued our second quarter 2005 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):

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

• “Adjusted EBITDA” which is defined by our bank credit agreement as EBITDA (earnings before interest, income taxes, depreciation and amortization), excluding the following:

• LIFO (income) expense;

• Stock option expense;

• Property impairment charges; and

• Equity in earnings of unconsolidated affiliates, net.

• “Adjusted EBITDA as a multiple of interest expense” which is calculated by dividing Adjusted EBITDA by interest expense.

• “Adjusted Debt to Adjusted EBITDA” which is calculated by dividing Adjusted Debt by Adjusted EBITDA.

• “Adjusted Debt” which is defined by our bank credit agreement as total debt less cash and equivalents in excess of $75.0 million.

Reconciliations of “free cash flow” to GAAP cash flow, “Adjusted EBITDA” to the most directly comparable GAAP financial measures – net income and net cash flow from operating activities – and “Adjusted Debt” are provided in the press release. Each of these non-GAAP financial measures provides 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”, “Adjusted Debt” 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.

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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.

“Free cash flow”, “Adjusted EBITDA”, “Adjusted Debt” 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 2005 is expected to be spent on mandatory debt service requirements or other non-discretionary expenditures.

These non-GAAP financial measures should not be considered 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 “free cash flow”, “Adjusted EBITDA” and “Adjusted Debt” 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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Item 9.01. Financial Statements and Exhibits.

(c) Exhibits.

The following exhibit is furnished pursuant to Item 2.02 of Form 8-K:

99.1     Press Release dated July 26, 2005 of Safeway Inc.

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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, 2005	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 26, 2005 of Safeway Inc.

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EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE

SAFEWAY INC. ANNOUNCES

SECOND-QUARTER 2005 EARNINGS

Safeway reports strong same store sales increases

Contacts: Melissa Plaisance (925) 467-3136

Julie Hong (925) 467-3832

Pleasanton, CA –July 26, 2005

Results From Operations

Safeway Inc. today reported net income of $134.0 million ($0.30 per diluted share) for the second quarter ended June 18, 2005 compared to $155.2 million ($0.35 per diluted share) for the second quarter of 2004.

Earnings per diluted share in the second quarter of 2005 were flat compared to the second quarter of 2004, after excluding stock option expense of $0.02 per diluted share in 2005 and an income tax benefit of $0.03 per diluted share in 2004.

“Our strategy to differentiate our offering has resulted in broad-based sales improvement,” said Steve Burd, Chairman, President and CEO. “Consumers have responded enthusiastically to the improved quality of our perishables, to our proprietary brands, to the greater everyday value we have brought to the center of our store, and to our Lifestyle stores. We have improved non-fuel identical store sales eight of the last ten quarters and experienced two consecutive quarters of markedly positive non-fuel identical store sales, which we believe confirms the strategy is working.”

Sales and Other Revenue

Total sales increased 4.7% to $8.8 billion in the second quarter of 2005 from $8.4 billion in the second quarter of 2004. Safeway’s marketing strategies and the recovery from last year’s strike in Southern California drove this sales increase. However, a shift in Easter holiday sales, which occurred in the second quarter of last year compared to the first quarter of this year, reduced the sales increase.

Comparable store sales increased 3.3% and identical store sales (which exclude replacement stores) increased 2.8% for the second quarter of 2005. Further, excluding the effect of fuel sales, identical store sales increased 1.4%. When adjusted for the Easter holiday, non-fuel identical store sales increased 2.6%.

Gross Profit

Gross profit margin declined 42 basis points to 28.74% of sales in the second quarter of 2005 compared to 29.16% in the second quarter of 2004. Higher fuel sales (which have a lower gross margin) reduced gross profit by 36 basis points. The recovery from the strike in Southern California improved gross margin but was offset by increased advertising, investments in price and other expenses.

Operating and Administrative Expense

Operating and administrative expense improved 9 basis points to 25.30% of sales in the second quarter of 2005 from 25.39% in the second quarter of 2004. This improvement is primarily due to the ongoing recovery from the strike at Vons, increased sales from fuel and restructured labor agreements, offset by stock option expense, labor costs associated with the grand opening of Lifestyle stores, higher retail bonus accruals and other store operating costs.

In 2005, Safeway early adopted Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment, which requires that stock options be expensed. The noncash expense for stock options was $17.7 million ($0.02 per diluted share) in the second quarter of 2005.

Interest Expense

Interest expense was $94.5 million in the second quarter of 2005, down slightly from $95.5 million in the second quarter of 2004. Indebtedness was lower in the second quarter of 2005 compared to the second quarter of 2004, while average interest rates were higher.

Income Tax Expense

Income tax expense was $82.4 million, or 38.1% of pretax income, in the second quarter of 2005 compared to 31.4% in the second quarter of 2004. Safeway’s effective tax rate was lower in the second quarter of 2004 due to a tax benefit of $12.5 million arising from the favorable resolution of various tax issues.

24-Week Results

Net income for the first 24 weeks of 2005 was $265.3 million ($0.59 per diluted share) compared to $198.3 million ($0.44 per diluted share) in the first 24 weeks of 2004. The gross profit margin was 28.98% in 2005 compared to 29.66% in 2004. Operating and administrative expense was 25.55% of sales in 2005 compared to 26.73% of sales in 2004.

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Capital Expenditures

Safeway invested $515.1 million in capital expenditures in the first 24 weeks of 2005. The company opened eight new Lifestyle stores and completed 83 Lifestyle remodels. For the year, the company has increased expected capital expenditures to approximately $1.5 billion from $1.4 billion. The company expects to open approximately 25 new Lifestyle stores and complete approximately 290 to 295 Lifestyle remodels. By year-end 2005, approximately 25% of Safeway’s store base will be in the Lifestyle format.

Cash Flow

Net cash flow from operating activities was $671.8 million in the first 24 weeks of 2005 compared to $1,047.7 million in the first 24 weeks of 2004. This change was primarily because of higher income tax payments in 2005 and lower prepaid expense and receivables in 2004.

Net cash flow used by investing activities, which consists principally of cash paid for property additions, was $484.7 million for the first 24 weeks of 2005 compared to $432.1 million in 2004.

Financing activities, which consist primarily of cash used to pay down debt, used cash flow of $131.9 million in the first 24 weeks of 2005 compared to $576.4 million in 2004.

Quarterly Dividend

On July 7, 2005, Safeway paid a dividend of $0.05 per common share to shareholders of record as of June 16, 2005. The payout totaled $22.4 million.

Guidance

Safeway is raising guidance for 2005 identical store sales (excluding fuel) to a range of 2.5% to 2.8% from the previously provided range of 1.2% to 1.5%. The company is comfortable with current analyst consensus earnings estimates of $1.45 per diluted share for 2005 (excluding any voluntary employee buyouts) as posted by Thomson First Call.

As a result of the $100 million increase in forecasted capital spending in the second half of 2005, the company’s expected free cash flow is being narrowed to a range of $500 million to $600 million for the year.

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 1,801 stores in the United States and Canada and had annual sales of $35.8 billion in 2004. The company’s common stock is traded on the New York Stock Exchange under the symbol SWY.

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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 July 26, 2005. 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.

-o0o-

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 diluted earnings per share, identical store sales, comparable store sales, dividend payments, capital expenditures, free cash flow, effects of restructuring labor contracts, and the effects of the Southern California strike, including the improvement of sales since the strike, and are indicated by words or phrases such as “guidance,” “expects,” “estimate,” “forecast” and similar words or phrases. These statements are based on our 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, and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future, voluntary employee buyouts, unanticipated events or changes in future operating results, financial condition, real estate matters, including dispositions and impairments, or business over time, performance in new business ventures, 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. We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so. Please refer to our reports and filings with the Securities and Exchange Commission, including the Annual Report to Stockholders in our 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

(In millions, except per-share amounts)

(Unaudited)

	12 Weeks Ended						24 Weeks Ended
	June 18, 2005			June 19, 2004			June 18, 2005			June 19, 2004
Sales and other revenue	$	8,803.0		$	8,406.5		$	17,424.4		$	16,089.3
Cost of goods sold		(6,273.1	)		(5,954.8	)		(12,375.0	)		(11,316.6	)
Gross profit		2,529.9			2,451.7			5,049.4			4,772.7
Operating and administrative expense		(2,227.5	)		(2,134.7	)		(4,451.6	)		(4,300.5	)
Operating profit		302.4			317.0			597.8			472.2
Interest expense		(94.5	)		(95.5	)		(184.8	)		(191.7	)
Other income, net		8.5			4.7			16.2			7.8
Income before income taxes		216.4			226.2			429.2			288.3
Income tax expense		(82.4	)		(71.0	)		(163.9	)		(90.0	)
Net income	$	134.0		$	155.2		$	265.3		$	198.3
Basic earnings per share	$	0.30		$	0.35		$	0.59		$	0.45
Diluted earnings per share	$	0.30		$	0.35		$	0.59		$	0.44
Weighted average shares outstanding:
Basic		447.5			445.6			447.2			444.8
Diluted		450.1			449.4			449.2			448.8

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SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

	June 18, 2005		Jan. 1, 2005
ASSETS
Current assets:
Cash and equivalents	$	317.1	$	266.8
Receivables		339.6		339.0
Merchandise inventories		2,673.9		2,740.7
Other current assets		258.8		251.2
Total current assets		3,589.4		3,597.7
Total property, net		8,699.9		8,689.4
Goodwill		2,403.1		2,406.6
Other long-term assets		649.4		683.7
Total assets	$	15,341.8	$	15,377.4
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of notes and debentures	$	1,291.9	$	596.9
Current obligations under capital leases		38.8		42.8
Accounts payable		1,806.0		1,759.4
Other current liabilities		1,170.3		1,393.0
Total current liabilities		4,307.0		3,792.1
Long-term debt:
Notes and debentures		4,655.1		5,469.7
Obligations under capital leases		642.6		654.0
Total long-term debt		5,297.7		6,123.7
Other long-term liabilities		1,175.1		1,154.7
Total liabilities		10,779.8		11,070.5
Total stockholders’ equity		4,562.0		4,306.9
Total liabilities and stockholders’ equity	$	15,341.8	$	15,377.4

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SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	24 Weeks Ended
	June 18, 2005			June 19, 2004
OPERATING ACTIVITIES
Net cash flow from operating activities	$	671.8		$	1,047.7
INVESTING ACTIVITIES
Cash paid for property additions		(515.1	)		(479.4	)
Proceeds from sale of property		48.9			80.3
Other		(18.5	)		(33.0	)
Net cash flow used by investing activities		(484.7	)		(432.1	)
FINANCING ACTIVITIES
Payments on short-term borrowings, net		(10.9	)		(1.0	)
Additions to long-term borrowings		151.0			28.5
Payments on long-term borrowings		(280.0	)		(621.2	)
Net proceeds from exercise of stock options		8.5			17.2
Other		(0.5	)		0.1
Net cash flow used by financing activities		(131.9	)		(576.4	)
Effect of changes in exchange rates on cash		(4.9	)		(7.6	)
Increase in cash and equivalents		50.3			31.6
CASH AND EQUIVALENTS
Beginning of period		266.8			174.8
End of period	$	317.1		$	206.4

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SAFEWAY INC. AND SUBSIDIARIES

RECONCILIATION OF NON GAAP MEASURES & SUPPLEMENTAL INFORMATION

(Dollars in millions)

(Unaudited)

TABLE 1: RECONCILIATION OF GAAP CASH FLOW MEASURE TO FREE CASH FLOW

	24 Weeks Ended						Forecast Fiscal 2005						Fiscal 2004
	June 18, 2005			June 19, 2004			Low			High
Net cash flow from operating activities	$	671.8		$	1,047.7		$	1,900.0		$	2,000.0		$	2,226.4
Net cash flow used by investing activities		(484.7	)		(432.1	)		(1,400.0	)		(1,400.0	)		(1,070.3	)
Free cash flow	$	187.1		$	615.6		$	500.0		$	600.0		$	1,156.1

TABLE 2: CAPITAL EXPENDITURES AND OTHER STATISTICAL DATA

	24 Weeks Ended
	June 18, 2005		June 19, 2004
Capital expenditures	$	515.1	$	479.4
Stores opened		8		12
Stores closed		9		17
Stores at end of period		1,801		1,812
Remodels completed		83		30
Square footage (in millions)		82.2		82.3
Number of fuel stations at end of period		322		292

TABLE 3: RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA

	(A+B-C) Rolling Four Quarters June 18, 2005			A Year Ended Jan. 1, 2005			B 24 Weeks Ended June 18, 2005			C 24 Weeks Ended June 19, 2004
Net income	$	627.2		$	560.2		$	265.3		$	198.3
Add (subtract):
Income taxes		307.6			233.7			163.9			90.0
Interest expense		404.3			411.2			184.8			191.7
Depreciation		909.7			894.6			421.3			406.2
Lifo (income) expense		(15.2	)		(15.2	)		4.6			4.6
Stock option expense		28.3			—			28.3			—
Property impairment charges		40.0			39.4			15.2			14.6
Equity in earnings of unconsolidated affiliates, net		(19.1	)		(12.6	)		(7.0	)		(0.5	)
Total Adjusted EBITDA	$	2,282.8		$	2,111.3		$	1,076.4		$	904.9
Total debt at June 18, 2005	$	6,628.4
Less cash and equivalents in excess of $75.0 at June 18, 2005		(242.1	)
Adjusted Debt		6,386.3
Adjusted EBITDA as a multiple of interest expense		5.65
Minimum Adjusted EBITDA as a multiple of interest under bank credit agreement		2.00
Adjusted Debt to Adjusted EBITDA		2.80
Maximum Adjusted Debt to Adjusted EBITDA under bank credit agreement		3.50

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SAFEWAY INC. AND SUBSIDIARIES

RECONCILIATION OF NON GAAP MEASURES & SUPPLEMENTAL INFORMATION

(Dollars in millions)

(Unaudited)

TABLE 4: RECONCILIATION OF NET CASH FLOW FROM OPERATING ACTIVITIES TO ADJUSTED EBITDA

	(A+B-C) Rolling Four Quarters June 18, 2005			A Year Ended Jan. 1, 2005			B 24 Weeks Ended June 18, 2005			C 24 Weeks Ended June 19, 2004
Net cash flow from operating activities	$	1,850.5		$	2,226.4		$	671.8		$	1,047.7
Add (subtract):
Income taxes		307.6			233.7			163.9			90.0
Interest expense		404.3			411.2			184.8			191.7
Deferred income taxes		29.2			29.2			—			—
Net pension expense		(114.7	)		(112.9	)		(53.5	)		(51.7	)
Accrued claims and other liabilities		(93.0	)		(117.5	)		(47.9	)		(72.4	)
Gain (loss) on property retirements and lease exit costs		25.3			(20.6	)		11.3			(34.6	)
Changes in working capital items		(126.4	)		(538.2	)		146.0			(265.8	)
Adjusted EBITDA	$	2,282.8		$	2,111.3		$	1,076.4		$	904.9

TABLE 5: SAME STORE SALES INCREASES

	12 Weeks Ended June 18, 2005
	Comparable Store Sales Increases		Identical Store Sales Increases
As reported	3.3	%	2.8	%
Excluding fuel sales	1.9	%	1.4	%
Adjusted for Easter holiday	3.1	%	2.6	%

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