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):

October 12, 2006

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 October 12, 2006, we issued our earnings press release for the third quarter of fiscal 2006. 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 and, with respect to the forecasted range for fiscal 2006, excludes $58.5 million of interest earned on the favorable income tax settlement, net of tax, reported in the Company’s Current Report on Form 8-K furnished to the Securities and Exchange Commission (the “SEC”) on April 10, 2006 and Quarterly Report on Form 10-Q filed with the SEC on July 21, 2006.

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

• “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.

Reconciliations of “free cash flow” to GAAP cash flow for the first 36 weeks of fiscal 2006 and 2005, excluding $58.5 million of interest earned on the above-referenced favorable income tax settlement, net of tax, are provided in the press release. Reconciliations of Adjusted EBITDA to the most directly comparable GAAP financial measures – net income and net cash flow from operating

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activities – also 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.

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 (income) 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 such 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 fiscal 2006 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;

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• “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.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

99.1 Press Release dated October 12, 2006 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: October 12, 2006	By:	/s/ Robert A. Gordon
	Name:	Robert A. Gordon
	Title:	Senior Vice President, Secretary & General Counsel

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EXHIBIT INDEX

Exhibit No.
99.1	Press Release dated October 12, 2006 of Safeway Inc.

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EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE

SAFEWAY INC. ANNOUNCES

THIRD-QUARTER 2006 EARNINGS

Company reports strong same-store sales and

earnings growth

Contacts: Melissa Plaisance (925) 467-3136

Julie Hong (925) 467-3832

Pleasanton, CA – October 12, 2006

Results From Operations

Safeway Inc. today reported net income of $173.5 million ($0.39 per diluted share) for the third quarter ended September 9, 2006.

Net income was $122.5 million ($0.27 per diluted share) for the third quarter of 2005. Net income in the third quarter of 2005 was reduced by $0.08 per diluted share due to an impairment charge in Texas and $0.03 per diluted share due to an employee buyout charge in Northern California. Net income in the third quarter of 2005 was increased by $0.06 per diluted share due to the favorable resolution of various tax issues.

Sales and Other Revenue

Total sales increased 5.3% to $9.4 billion in the third quarter of 2006 from $8.9 billion in the third quarter of 2005. Contributions from Lifestyle stores, strong perishable and non-perishable performance and increased fuel sales drove this increase. Identical-store sales increased 5.0% for the third quarter of 2006. Excluding fuel sales, identical-store sales increased 3.7%.

“We had another good quarter with strong sales and operating expense leverage,” said Steve Burd, Chairman, President and CEO. “We continue to execute on our strategy and are delivering the improved results we expected.”

Gross Profit

Gross profit margin declined 28 basis points to 28.30% of sales in the third quarter of 2006 compared to 28.58% in the third quarter of 2005. Higher fuel sales (which have a lower gross margin) reduced gross profit margin by 19 basis points. The remaining 9 basis point decline is largely the result of investments in price and advertising, partly offset by improvement in shrink.

Operating and Administrative Expense

Operating and administrative expense declined to 24.54% of sales in the third quarter of 2006 from 25.90% in 2005.

Operating and administrative expense in 2005 included a $54.7 million pre-tax impairment charge in Texas and a $21.9 million pre-tax employee buyout charge. Excluding these items, operating and administrative expense in 2006 improved 50 basis points. This improvement is primarily due to increased sales and lower employee costs as a percentage of sales.

Interest Expense

Interest expense was $90.0 million in the third quarter of 2006, down slightly from $93.5 million in the third quarter of 2005. Indebtedness was lower in the third quarter of 2006 compared to 2005, while average interest rates were higher.

Income Tax Expense

Income tax expense was $101.8 million, or 37.0% of pre-tax income, in the third quarter of 2006 compared to 19.4% in the third quarter of 2005.

Safeway’s effective tax rate in 2005 was lower due to $17 million of tax benefits associated with the repatriation of earnings from Safeway’s Canadian subsidiary and to the favorable resolution of various tax issues totaling $10 million. The total benefit of these tax items was $0.06 per diluted share.

36-Week Results

Net income for the first 36 weeks of 2006 was $562.6 million ($1.25 per diluted share) compared to $387.7 million ($0.86 per diluted share) for the first 36 weeks of 2005. The gross profit margin was 28.68% in 2006 compared to 28.84% in 2005. Operating and administrative expense was 24.87% of sales in 2006 compared to 25.67% of sales in 2005.

Stock Repurchase

During the third quarter of 2006, Safeway purchased 2.4 million shares of its common stock at an average price of $29.36 per share, and a total cost of $71.8 million (including commissions). The remaining board authorization for stock repurchases is approximately $354 million.

Capital Expenditures

Safeway invested $1.1 billion in capital expenditures in the first 36 weeks of 2006. The company opened 9 new Lifestyle stores and completed 149 Lifestyle remodels. For the year, the company expects to spend approximately $1.65 billion in capital expenditures and open approximately 20 new Lifestyle stores and complete approximately 275 Lifestyle remodels.

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Cash Flow

Net cash flow from operating activities was $1,453.6 million in the first 36 weeks of 2006 compared to $1,287.4 million in the first 36 weeks of 2005, primarily because of higher net income.

Net cash flow used by investing activities, which consists principally of cash paid for property additions, was $1,097.6 million for the first 36 weeks of 2006 compared to $835.7 million in 2005. The company incurred higher costs for purchases of land and buildings in the first quarter of 2006. In addition, a portion of the costs associated with the large number of Lifestyle projects completed late in the fourth quarter of 2005 was paid in the first quarter of 2006.

Financing activities used cash flow of $398.0 million in the first 36 weeks of 2006 compared to $386.9 million in 2005. The income tax refund related to prior years’ debt refinancing was offset by pay down of long-term borrowings, stock repurchases and dividends paid.

Guidance

Safeway is comfortable with the 2006 consensus earnings estimate of $1.72 per diluted share. The company reconfirms free cash flow guidance in the range of $400 million to $600 million. The earnings and cash flow guidance include any employee buyouts but exclude the impact of the favorable tax settlement. The company is adjusting guidance for non-fuel identical-store sales from 3.0% to a range of 3.1% to 3.3% 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 1,767 stores in the United States and Canada and had annual sales of $38.4 billion in 2005. 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 third-quarter results will be broadcast live over the Internet at www.safeway.com/investor_relations at 8:00 AM PDT October 12, 2006. 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 diluted earnings per share, identical-store sales, capital expenditures, free cash flow, financial and operating results, and Lifestyle stores. Forward-looking statements are indicated by words or phrases such as “guidance,” “believes,” “expects,” “anticipates,” “estimates,” “continuing,” “ongoing,” and similar words or phrases and the negative of such words and phrases. Forward-looking statements are based on our current plans and expectations and involve risks and uncertainties which are, in many instances, beyond our control, and which could cause actual results to differ materially from those included in or contemplated or implied by the forward-looking statements. Such risks and uncertainties include the following: general business and economic conditions in our operating regions, including consumer spending levels, currency valuations, population, employment and job growth in our markets; pricing pressures and competitive factors, which could include pricing strategies, store openings, remodels or acquisitions by our competitors; results of our programs to control or reduce costs, improve buying practices and control shrink; results of our programs to increase sales; results of our efforts to revitalize corporate brands; results of our programs to improve our perishables departments; results of our promotional programs; results of our programs to improve capital management; results of any on-going litigation in which we are involved or any litigation in which we may become involved; the ability to achieve satisfactory operating results in all geographic areas where we operate; changes in the financial performance of our equity investments; labor costs, including benefit plan costs and severance payments, or labor disputes that may arise from time to time 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; legislative, regulatory, tax or judicial developments; the cost and stability of fuel, energy and other power sources; unanticipated events or changes in real estate matters, including acquisitions, dispositions and impairments; adverse weather conditions; performance in new business ventures or other opportunities that we pursue; 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 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 our most recent Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q, and subsequent Current Reports on Form 8-K, 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						36 Weeks Ended
	September 9, 2006			September 10, 2005			September 9, 2006			September 10, 2005
Sales and other revenue	$	9,419.8		$	8,945.5		$	27,681.5		$	26,369.9
Cost of goods sold		(6,753.7	)		(6,388.9	)		(19,742.6	)		(18,763.9	)
Gross profit		2,666.1			2,556.6			7,938.9			7,606.0
Operating and administrative expense		(2,312.0	)		(2,316.9	)		(6,884.9	)		(6,768.5	)
Operating profit		354.1			239.7			1,054.0			837.5
Interest expense		(90.0	)		(93.5	)		(274.6	)		(278.3	)
Other income, net		11.2			5.7			25.4			21.8
Income before income taxes		275.3			151.9			804.8			581.0
Income tax expense		(101.8	)		(29.4	)		(242.2	)		(193.3	)
Net income	$	173.5		$	122.5		$	562.6		$	387.7
Basic earnings per share	$	0.39		$	0.27		$	1.26		$	0.87
Diluted earnings per share	$	0.39		$	0.27		$	1.25		$	0.86
Weighted average shares outstanding:
Basic		443.8			448.1			446.8			447.5
Diluted		447.0			451.6			449.0			450.0

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SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(Unaudited)

	September 9, 2006			Year-end 2005
ASSETS
Current assets:
Cash and equivalents	$	332.1		$	373.3
Receivables		365.9			350.6
Merchandise inventories		2,622.5			2,766.0
Other current assets		230.5			212.5
Total current assets		3,551.0			3,702.4
Property		17,139.7			16,128.8
Less accumulated depreciation and amortization		(7,654.6	)		(7,031.7	)
Total property, net		9,485.1			9,097.1
Goodwill		2,403.7			2,402.4
Prepaid pension costs		144.2			179.4
Investment in unconsolidated affiliate		223.7			201.8
Other assets		171.5			173.8
Total assets	$	15,979.2		$	15,756.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of notes and debentures	$	544.5		$	714.2
Current obligations under capital leases		42.5			39.1
Accounts payable		2,127.9			2,151.5
Accrued salaries and wages		429.6			526.1
Other accrued liabilities		934.8			833.0
Total current liabilities		4,079.3			4,263.9
Long-term debt:
Notes and debentures		4,739.9			4,961.2
Obligations under capital leases		620.1			644.1
Total long-term debt		5,360.0			5,605.3
Deferred income taxes		222.8			223.1
Accrued claims and other liabilities		749.2			744.9
Total liabilities		10,411.3			10,837.2
Stockholders’ equity:
Common stock: par value $0.01 per share; 1,500 shares authorized; 581.7 and 580.1 shares outstanding		5.8			5.8
Additional paid-in capital		3,775.0			3,445.1
Accumulated other comprehensive income		207.7			172.8
Retained earnings		5,660.9			5,171.7
		9,649.4			8,795.4
Less: Treasury stock at cost; 138.7 and 130.7 shares		(4,081.5	)		(3,875.7	)
Total stockholders’ equity		5,567.9			4,919.7
Total liabilities and stockholders’ equity	$	15,979.2		$	15,756.9

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SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

	36 Weeks Ended
	September 9, 2006			September 10, 2005
OPERATING ACTIVITIES
Net income	$	562.6		$	387.7
Reconciliation to net cash flow from operating activities:
Property impairment charges		26.4			70.4
Stock option expense		34.7			42.9
Depreciation expense		673.6			636.5
Deferred income tax		—			(67.0	)
LIFO expense		6.9			6.9
Equity in earnings of unconsolidated affiliates, net		(14.0	)		(6.8	)
Net pension expense		55.1			80.3
Gain on property retirements and lease exit costs		(14.0	)		(13.1	)
Increase in accrued claims and other liabilities		49.4			32.3
Other		(10.0	)		0.6
Change in working capital items:
Receivables and prepaid expenses		(32.3	)		18.9
Inventories at FIFO cost		148.3			78.9
Income taxes		112.0			(127.4	)
Payables and accruals		(145.1	)		146.3
Net cash flow from operating activities		1,453.6			1,287.4
INVESTING ACTIVITIES
Cash paid for property additions		(1,111.6	)		(855.5	)
Proceeds from sale of property		62.7			45.4
Other		(48.7	)		(25.6	)
Net cash flow used by investing activities		(1,097.6	)		(835.7	)
FINANCING ACTIVITIES
Payments on short-term borrowings, net		—			(10.8	)
Additions to long-term borrowings		995.5			151.0
Payments on long-term borrowings		(1,423.8	)		(517.0	)
Net proceeds from exercise of stock options		31.7			14.2
Repurchase of common stock		(193.1	)		—
Dividends paid		(70.6	)		(22.4	)
Income tax refund related to prior years’ debt financing		259.2			—
Other		3.1			(1.9	)
Net cash flow used by financing activities		(398.0	)		(386.9	)
Effect of changes in exchange rates on cash		0.8			3.9
(Decrease) increase in cash and equivalents		(41.2	)		68.7
CASH AND EQUIVALENTS
Beginning of period		373.3			266.8
End of period	$	332.1		$	335.5

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SAFEWAY INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION

(Dollars in millions)

(Unaudited)

TABLE 1: CAPITAL EXPENDITURES AND OTHER STATISTICAL DATA

	12 Weeks Ended				36 Weeks Ended
	September 9, 2006		September 10, 2005		September 9, 2006		September 10, 2005
Cash capital expenditures	$	370.3	$	340.4	$	1,111.6	$	855.5
Stores opened		4		5		9		13
Stores closed		7		6		17		15
Lifestyle remodels completed		69		73		149		156
Lifestyle remodel grand openings		69		75		170		159
Stores at end of period		1,767		1,800
Square footage (in millions)		80.8		82.2
Fuel sales	$	796.7	$	669.6	$	2,154.1	$	1,790.7
Number of fuel stations at end of period		325		325

TABLE 2: RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA

	(A+B-C) Rolling Four Quarters September 9, 2006			A Year Ended December 31, 2005			B 36 Weeks Ended September 9, 2006			C 36 Weeks Ended September 10, 2005
Net income	$	736.0		$	561.1		$	562.6		$	387.7
Add (subtract):
Income taxes		336.8			287.9			242.2			193.3
Interest expense		398.9			402.6			274.6			278.3
Depreciation		969.8			932.7			673.6			636.5
LIFO (income) expense		(0.2	)		(0.2	)		6.9			6.9
Stock option expense		51.5			59.7			34.7			42.9
Property impairment charges		34.9			78.9			26.4			70.4
Equity in earnings of unconsolidated affiliates, net		(23.0	)		(15.8	)		(14.0	)		(6.8	)
Adjusted EBITDA	$	2,504.7		$	2,306.9		$	1,807.0		$	1,609.2
Total debt at September 9, 2006	$	5,947.0
Less cash and equivalents in excess of $75.0 at September 9, 2006		257.1
Adjusted Debt	$	5,689.9
Adjusted EBITDA as a multiple of interest expense		6.28	x
Minimum Adjusted EBITDA as a multiple of interest expense under bank credit agreement		2.00	x
Adjusted Debt to Adjusted EBITDA		2.27	x
Maximum Adjusted Debt to Adjusted
EBITDA under bank credit agreement		3.50	x

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SAFEWAY INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION

(Dollars in millions)

(Unaudited)

TABLE 3: RECONCILIATION OF NET CASH FLOW FROM OPERATING ACTIVITIES TO ADJUSTED EBITDA

	(A+B-C) Rolling Four Quarters September 9, 2006			A Year Ended December 31, 2005			B 36 Weeks Ended September 9, 2006			C 36 Weeks Ended September 10, 2005
Net cash flow from operating activities	$	2,047.2		$	1,881.0		$	1,453.6		$	1,287.4
Add (subtract):
Income taxes		336.8			287.9			242.2			193.3
Interest expense		398.9			402.6			274.6			278.3
Deferred income taxes		148.9			215.9			—			67.0
Net pension expense		(90.4	)		(115.6	)		(55.1	)		(80.3	)
Accrued claims and other liabilities		(61.2	)		(44.1	)		(49.4	)		(32.3	)
(Loss) gain on property retirements and lease exit costs		(12.7	)		(13.6	)		14.0			13.1
Changes in working capital items		(277.1	)		(310.9	)		(82.9	)		(116.7	)
Other		14.3			3.7			10.0			(0.6	)
Adjusted EBITDA	$	2,504.7		$	2,306.9		$	1,807.0		$	1,609.2

TABLE 4: RECONCILIATION OF GAAP CASH FLOW MEASURE TO FREE CASH FLOW

	36 Weeks						Forecasted Range Fiscal 2006*
	2006			2005
Net cash flow from operating activities	$	1,453.6		$	1,287.4		$	2,150.0		$	2,250.0
Net cash flow used by investing activities		(1,097.6	)		(835.7	)		(1,750.0	)		(1,650.0	)
Free cash flow	$	356.0		$	451.7		$	400.0		$	600.0

* Excludes $58.5 of interest earned on the favorable income tax settlement, net of tax.

TABLE 5: SAME-STORE SALES INCREASES

	Third Quarter 2006
	Comparable- Store Sales Increases		Identical- Store Sales Increases*
As reported	5.3	%	5.0	%
Excluding fuel sales	4.0	%	3.7	%

* Excludes replacement stores

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