10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 19, 2010

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 1-00041

SAFEWAY INC.

(Exact name of registrant as specified in its charter)

Delaware	94-3019135
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5918 Stoneridge Mall Rd.
Pleasanton, California	94588-3229
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (925) 467-3000

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No.

As of July 21, 2010, there were issued and outstanding 381.6 million shares of the registrant’s common stock.

SAFEWAY INC. AND SUBSIDIARIES

Table of Contents

		Page
PART I–FINANCIAL INFORMATION (Unaudited)
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income for the 12 and 24 weeks ended June 19, 2010 and June 20, 2009	3
	Condensed Consolidated Balance Sheets as of June 19, 2010 and January 2, 2010	4
	Condensed Consolidated Statements of Cash Flows for the 24 weeks ended June 19, 2010 and June 20, 2009	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II–OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	25

2

SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per-share amounts)

(Unaudited)

	12 Weeks Ended						24 Weeks Ended
	June 19, 2010			June 20, 2009			June 19, 2010			June 20, 2009
Sales and other revenue	$	9,519.5		$	9,462.1		$	18,846.6		$	18,698.5
Cost of goods sold		(6,801.8	)		(6,730.6	)		(13,479.3	)		(13,314.1	)
Gross profit		2,717.7			2,731.5			5,367.3			5,384.4
Operating and administrative expense		(2,432.5	)		(2,373.9	)		(4,867.6	)		(4,745.3	)
Operating profit		285.2			357.6			499.7			639.1
Interest expense		(69.2	)		(77.2	)		(138.9	)		(155.4	)
Other income, net		2.4			3.3			5.7			4.5
Income before income taxes		218.4			283.7			366.5			488.2
Income tax expense		(77.1	)		(45.1	)		(129.4	)		(105.4	)
Net income before allocation to noncontrolling interests		141.3			238.6			237.1			382.8
Add noncontrolling interests		—			—			0.2			—
Net income attributable to Safeway Inc.	$	141.3		$	238.6		$	237.3		$	382.8
Income per common share attributable to Safeway Inc.
Basic	$	0.37		$	0.57		$	0.62		$	0.90
Diluted	$	0.37		$	0.57		$	0.61		$	0.90
Weighted average shares outstanding:
Basic		383.6			421.1			385.7			424.6
Diluted		385.7			422.3			387.9			425.7

See accompanying notes to condensed consolidated financial statements.

3

SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

	June 19, 2010			January 2, 2010
ASSETS
Current assets:
Cash and equivalents	$	547.2		$	471.5
Receivables		458.0			522.4
Merchandise inventories		2,632.9			2,508.9
Prepaid expenses and other current assets		475.0			322.5
Total current assets		4,113.1			3,825.3
Property		20,417.1			20,248.0
Less accumulated depreciation and amortization		(10,327.2	)		(9,965.3	)
Property, net		10,089.9			10,282.7
Goodwill		428.1			426.6
Investment in unconsolidated affiliates		174.4			169.9
Other assets		292.7			259.1
Total assets	$	15,098.2		$	14,963.6

(Continued)

4

SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

(In millions, except per-share amounts)

(Unaudited)

	June 19, 2010			January 2, 2010
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of notes and debentures	$	1,009.1		$	509.2
Current obligations under capital leases		31.4			31.6
Accounts payable		2,170.8			2,458.9
Accrued salaries and wages		419.9			426.8
Deferred income taxes		103.3			103.1
Other accrued liabilities		603.0			708.2
Total current liabilities		4,337.5			4,237.8
Long-term debt:
Notes and debentures		3,837.3			3,874.3
Obligations under capital leases		471.9			486.6
Total long-term debt		4,309.2			4,360.9
Deferred income taxes		175.1			150.5
Pension and postretirement benefit obligations		650.1			635.4
Accrued claims and other liabilities		656.1			632.6
Total liabilities		10,128.0			10,017.2
Commitments and contingencies
Stockholders’ equity:
Common stock: par value $0.01 per share; 1,500 shares authorized; 597.1 and 592.6 shares issued		6.0			5.9
Additional paid-in capital		4,299.5			4,212.4
Treasury stock at cost: 215.5 and 204.3 shares		(5,931.1	)		(5,661.8	)
Accumulated other comprehensive income (loss)		36.7			(13.8	)
Retained earnings		6,556.5			6,403.7
Total Safeway Inc. equity		4,967.6			4,946.4
Noncontrolling interests		2.6			—
Total equity		4,970.2			4,946.4
Total liabilities and stockholders’ equity	$	15,098.2		$	14,963.6

See accompanying notes to condensed consolidated financial statements.

5

SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	24 Weeks Ended
	June 19, 2010			June 20, 2009
OPERATING ACTIVITIES:
Net income before allocation to noncontrolling interests	$	237.1		$	382.8
Add noncontrolling interests		0.2			—
Reconciliation to net cash flow from operating activities:
Depreciation and amortization		538.6			532.7
Property impairment charges		30.8			25.4
Share-based employee compensation		26.2			27.4
Excess tax benefit from exercise of stock options		(0.7	)		—
Equity in earnings of unconsolidated affiliates		(4.5	)		(2.9	)
Net pension and post-retirement benefits expense		57.7			67.7
Contributions to pension and post-retirement plans		(8.7	)		(13.0	)
Loss on property retirements and lease exit costs, net		14.0			13.6
Increase (decrease) in accrued claims and other liabilities		29.4			(2.8	)
Amortization of deferred finance costs		2.2			2.2
Deferred income taxes		—			10.3
Other		(0.1	)		13.3
Changes in working capital items:
Receivables		21.1			20.4
Inventories at FIFO cost		(116.5	)		(36.7	)
Prepaid expenses and other current assets		(79.5	)		(61.1	)
Income taxes		(95.9	)		12.0
Payables and accruals		13.8			(121.0	)
Payables related to third-party gift cards, net of receivables		(356.1	)		(186.2	)
Net cash flow provided by operating activities		309.1			684.1
INVESTING ACTIVITIES:
Cash paid for property additions		(384.7	)		(445.6	)
Proceeds from sale of property		15.4			6.0
Other		(24.3	)		(21.6	)
Net cash flow used by investing activities		(393.6	)		(461.2	)
FINANCING ACTIVITIES:
Additions to (payments on) short-term borrowings		0.5			(0.5	)
Additions to long-term borrowings		538.9			530.5
Payments on long-term borrowings		(105.9	)		(602.7	)
Purchase of treasury stock		(268.6	)		(250.3	)
Dividends paid		(77.6	)		(70.9	)
Net proceeds from exercise of stock options		68.2			1.3
Excess tax benefit from exercise of stock options		0.7			—
Other		(0.6	)		(0.2	)
Net cash flow provided (used) by financing activities		155.6			(392.8	)
Effect of changes in exchange rates on cash		4.6			6.5
Increase (decrease) in cash and equivalents		75.7			(163.4	)
CASH AND EQUIVALENTS:
Beginning of period		471.5			382.8
End of period	$	547.2		$	219.4

See accompanying notes to condensed consolidated financial statements.

6

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE A–THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements of Safeway Inc. and subsidiaries (“Safeway” or the “Company”) for the 12 and 24 weeks ended June 19, 2010 and June 20, 2009 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. These condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared on an accrual basis in accordance with generally accepted accounting principles in the United States (“US GAAP”) have been condensed or omitted, pursuant to SEC regulations. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s 2009 Annual Report on Form 10-K. The results of operations for the 12 and 24 weeks ended June 19, 2010 are not necessarily indicative of the results expected for the full year.

Inventory

Net income reflects the LIFO method of valuing certain domestic inventories based upon estimated annual inflation or deflation. The LIFO method of inventory valuation can only be determined annually, when inflation or deflation rates and inventory levels are known; therefore, LIFO inventory costs for interim financial statements are estimated. Actual LIFO inflation or deflation indices for the year are calculated during the fourth quarter based upon a statistical sampling of inventories.

Vendor Allowances

Vendor allowances totaled $626.7 million for the second quarter of 2010 and $598.7 million for the second quarter of 2009. Vendor allowances totaled $1.3 billion for the first 24 weeks of 2010 and $1.2 billion for the first 24 weeks of 2009. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances. All vendor allowances are classified as an element of cost of goods sold.

Promotional allowances make up nearly 90% 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 weeks long.

Slotting allowances are a small portion of total allowances (typically less than 5% of all allowances). With slotting allowances, the vendor reimburses Safeway for the cost of placing new product on the shelf. Safeway has no obligation or commitment to keep the product on the shelf for a minimum period.

Contract allowances make up the remainder of all allowances. Under the typical contract allowance, a vendor pays Safeway to keep product on the shelf for a minimum period of time or when volume thresholds are achieved.

Slotting and promotional allowances are accounted for as a reduction in the cost of purchased inventory and recognized when the related inventory is sold. Contract allowances are recognized as a reduction in the cost of goods sold as volume thresholds are achieved or through the passage of time.

7

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Comprehensive Income

Comprehensive income consists of the following (in millions):

	12 Weeks Ended					24 Weeks Ended
	June 19, 2010			June 20, 2009		June 19, 2010		June 20, 2009
Net income before allocation to noncontrolling interests	$	141.3		$	238.6	$	237.1	$	382.8
Foreign currency translation adjustments, net of tax		(5.0	)		117.7		26.9		44.9
Recognition of pension actuarial loss, net of tax		10.8			12.9		22.6		25.7
Other, net of tax		0.4			0.9		1.0		(1.8	)
Comprehensive income including noncontrolling interests	$	147.5		$	370.1	$	287.6	$	451.6
Comprehensive income attributable to noncontrolling interests		—			—		0.2		—
Comprehensive income attributable to Safeway Inc.	$	147.5		$	370.1	$	287.8	$	451.6

Noncontrolling interests

In December 2007, the Financial Accounting Standards Board (“FASB”) issued new guidance on noncontrolling interests in consolidated financial statements. This guidance requires that (1) noncontrolling interests be reported as a separate component of equity; (2) net income attributable to the parent and to the noncontrolling interest be separately identified in the statement of operations; (3) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions; and (4) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. This guidance was effective for Safeway for the first quarter of fiscal 2009. However, due to the immateriality of the noncontrolling interests in 2009, the Company did not adopt this guidance until the first quarter of 2010. If Safeway had adopted the guidance in fiscal 2009, income attributable to noncontrolling interests, net of tax, would have been $2.2 million for the year, most of which was generated in the fourth quarter. Additionally, noncontrolling interests would have reduced accrued claims and other liabilities by $4.3 million, increased equity by $2.8 million and increased noncurrent deferred tax liability by $1.5 million. Fiscal 2009 results were not restated due to the insignificance of these amounts.

NOTE B–NEW ACCOUNTING STANDARDS

In January 2010, the FASB issued guidance which amends and clarifies existing guidance related to fair value measurements and disclosures. This guidance requires new disclosures for (1) transfers in and out of Level 1 and Level 2 fair value measurements and reasons for such transfers; and (2) the separate presentation of purchases, sales, issuances and settlement in the Level 3 reconciliation. It also clarifies guidance around disaggregation and disclosures of inputs and valuation techniques for Level 2 and Level 3 fair value measurements. Safeway adopted this guidance effective the first quarter of fiscal 2010, except for the new disclosures in the Level 3 reconciliation. The Level 3 disclosures are effective for Safeway for the first quarter of fiscal 2011 and are not expected to have a material impact on Safeway’s consolidated financial statements.

8

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE C–SHARE-BASED EMPLOYEE COMPENSATION

The Company recognized share-based compensation expense of $12.0 million and $12.6 million in the second quarter of 2010 and 2009, respectively, as a component of operating and administrative expense. The Company recognized share-based compensation expense of $26.2 million and $27.4 million for the first 24 weeks of 2010 and 2009, respectively, as a component of operating and administrative expense.

The Company determines fair value of such awards using the Black-Scholes option pricing model. The following weighted-average assumptions used to value Safeway’s grants through the second quarter, by year, are as follows:

	2010	2009
Expected life (in years)	6.5	6.5
Expected stock volatility	30.3% – 30.7%	36.8% – 40.2%
Risk-free interest rate	3.02% – 3.10%	2.35% – 2.54%
Expected dividend yield during the expected term	1.8% – 1.9%	1.3%

NOTE D–INCOME PER SHARE

Basic income per share is calculated on the basis of weighted average outstanding common shares. Diluted income per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock awards and other dilutive securities.

The following tables provide reconciliations of net earnings and shares used in calculating income per basic common share to those used in calculating income per diluted common share (in millions, except per-share amounts):

	12 Weeks Ended
	June 19, 2010				June 20, 2009
	Diluted		Basic		Diluted		Basic
Net income attributable to Safeway Inc.	$	141.3	$	141.3	$	238.6	$	238.6
Weighted average common shares outstanding		383.6		383.6		421.1		421.1
Common share equivalents		2.1				1.2
Weighted average shares outstanding		385.7				422.3
Income per share	$	0.37	$	0.37	$	0.57	$	0.57

Anti-dilutive shares totaling 22.8 million and 36.8 million have been excluded from diluted weighted average shares outstanding for the 12 weeks ended June 19, 2010 and June 20, 2009, respectively.

	24 Weeks Ended
	June 19, 2010				June 20, 2009
	Diluted		Basic		Diluted		Basic
Net income attributable to Safeway Inc.	$	237.3	$	237.3	$	382.8	$	382.8
Weighted average common shares outstanding		385.7		385.7		424.6		424.6
Common share equivalents		2.2				1.1
Weighted average shares outstanding		387.9				425.7
Income per share	$	0.61	$	0.62	$	0.90	$	0.90

Anti-dilutive shares totaling 21.8 million and 34.9 million have been excluded from diluted weighted average shares outstanding for the 24 weeks ended June 19, 2010 and June 20, 2009, respectively.

9

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE E–GOODWILL

A summary of changes in Safeway’s goodwill during the first 24 weeks of 2010 by geographic area is as follows (in millions):

	2010
	U.S.			Canada			Total
Balance – beginning of year:
Goodwill	$	4,324.4		$	93.5		$	4,417.9
Accumulated impairment charges		(3,991.3	)		—			(3,991.3	)
		333.1			93.5			426.6
Activity during the first 24 weeks of 2010:
Other adjustments		—			1.5	(1)		1.5
		—			1.5			1.5
Balance at June 19, 2010:
Goodwill		4,324.4			95.0			4,419.4
Accumulated impairment charges		(3,991.3	)		—			(3,991.3	)
Balance at June 19, 2010	$	333.1		$	95.0		$	428.1

(1) Represents foreign currency translation adjustments in Canada.

NOTE F–FINANCING

Notes and debentures were composed of the following at June 19, 2010 and January 2, 2010 (in millions):

	June 19, 2010			January 2, 2010
Commercial paper	$	498.7		$	50.0
Other bank borrowings, unsecured		2.6			2.1
Mortgage notes payable, secured		16.1			14.9
4.95% Senior Notes due 2010, unsecured		500.0			500.0
6.50% Senior Notes due 2011, unsecured		500.0			500.0
5.80% Senior Notes due 2012, unsecured		800.0			800.0
6.25% Senior Notes due 2014, unsecured		500.0			500.0
5.625% Senior Notes due 2014, unsecured		250.0			250.0
6.35% Senior Notes due 2017, unsecured		500.0			500.0
5.0% Senior Notes due 2019, unsecured		500.0			500.0
7.45% Senior Debentures due 2027, unsecured		150.0			150.0
7.25% Senior Debentures due 2031, unsecured		600.0			600.0
Other notes payable, unsecured		21.8			22.1
Interest rate swap fair value adjustment		7.0			(6.6	)
Unamortized deferred gain on swap termination		0.2			1.0
		4,846.4			4,383.5
Less current maturities		(1,009.1	)		(509.2	)
Long-term portion	$	3,837.3		$	3,874.3

10

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE G: FINANCIAL INSTRUMENTS

Safeway manages interest rate risk through the strategic use of fixed- and variable-interest rate debt and, from time to time, interest rate swaps. The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments.

Fair Value Hedges In December 2009, the Company effectively converted $800 million of its 5.80% fixed-rate debt due 2012 to floating-rate debt through interest rate swap agreements. These interest rate swaps, under which the Company agrees to pay variable rates of interest, are designated as fair value hedges of fixed-rate debt. The change in the fair value of the hedged debt is recognized as an increase or decrease in interest expense and, on the balance sheet, as an increase or decrease in debt (see Note F). The offsetting change in the fair value of the swap is also recognized as an increase or decrease in interest expense and, on the balance sheet, as a change to other assets or accrued claims and other liabilities.

The adjustments to interest expense from the change in fair value of the interest rate swap and the hedged debt are as follows (in millions):

	12 Weeks Ended June 19, 2010					24 Weeks Ended June 19, 2010
Income statement classification	Gain on interest rate swaps		Loss on debt			Gain on interest rate swaps		Loss on debt
Interest expense	$	5.3	$	(5.3	)	$	13.6	$	(13.6	)

The fair value and the balance sheet presentation of derivative instruments as of June 19, 2010 are as follows (in millions):

	Location in consolidated balance sheet	Fair Value
Derivative assets designated as hedges:
Interest rate swaps	Other assets	$	7.0
Total derivative assets		$	7.0

The fair value and the balance sheet presentation of derivative instruments as of January 2, 2010 are as follows (in millions):

	Location in consolidated balance sheet	Fair Value
Derivative liabilities designated as hedges:
Interest rate swaps	Accrued claims and other liabilities	$	6.6
Total derivative liabilities		$	6.6

NOTE H–TAXES ON INCOME

Income tax expense was reduced by $57.8 million in the second quarter of 2009 for previously unrecognized tax benefits and related interest income. The recognition of this item was due to the settlement of a claim with the Internal Revenue Service with respect to the 2002 and 2003 impairment of the Company’s investment in Dominick’s.

11

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE I–PENSION AND POST-RETIREMENT PLANS

The following tables provide the components of net pension and post-retirement expense (in millions):

	12 Weeks Ended
	June 19, 2010					June 20, 2009
	Pension			Other Post- Retirement Benefits		Pension			Other Post- Retirement Benefits
Estimated return on assets	$	(29.5	)	$	—	$	(25.3	)	$	—
Service cost		8.3			0.6		10.5			0.4
Interest cost		29.5			1.6		26.9			1.6
Amortization of prior service cost		4.0			—		4.6			—
Amortization of unrecognized losses		12.8			0.5		15.1			0.3
Total	$	25.1		$	2.7	$	31.8		$	2.3
	24 Weeks Ended
	June 19, 2010					June 20, 2009
	Pension			Other Post- Retirement Benefits		Pension			Other Post- Retirement Benefits
Estimated return on assets	$	(57.8	)	$	—	$	(50.4	)	$	—
Service cost		16.6			1.1		20.2			0.7
Interest cost		58.4			3.3		53.7			3.1
Amortization of prior service cost		8.0			—		9.1			—
Amortization of unrecognized losses		27.0			1.1		30.6			0.7
Total	$	52.2		$	5.5	$	63.2		$	4.5

The Company made approximately $8.7 million of contributions to its defined benefit pension plan trusts and the Retirement Restoration Plan, in the first 24 weeks of 2010. For the remainder of 2010, Safeway currently anticipates contributing an additional $9.3 million to these trusts and plan.

NOTE J–CONTINGENCIES

Legal Matters

Note M to the Company’s consolidated financial statements, under the caption “Legal Matters” on page 65 of the Form 10-K included in the 2009 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. There have been no subsequent material developments to these matters.

Guarantees

Note N to the Company’s consolidated financial statements, under the caption “Guarantees” of the 2009 Annual Report on Form 10-K provides information on guarantees.

12

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE K–STOCKHOLDERS’ EQUITY

Dividends Declared on Common Stock The following table presents information regarding dividends declared on Safeway’s common stock for the first 24 weeks of fiscal 2010 and 2009.

(in millions, except per-share amounts)	Date Declared	Record Date	Per-Share Amounts		Total		YTD Total
2010
Quarter 2	05/19/10	06/24/10	$	0.1200	$	45.8	$	84.6
Quarter 1	03/10/10	03/25/10		0.1000		38.8		38.8
2009
Quarter 2	04/29/09	06/25/09	$	0.1000	$	41.6	$	76.9
Quarter 1	03/05/09	03/26/09		0.0828		35.3		35.3

Dividends Paid on Common Stock The following table presents information regarding dividends paid on Safeway’s common stock through the second quarters of fiscal 2010 and 2009.

(in millions, except per-share amounts)	Date Paid	Record Date	Per-Share Amounts		Total		YTD Total
2010
Quarter 2	04/15/10	03/25/10	$	0.1000	$	38.8	$	77.6
Quarter 1	01/14/10	12/24/09		0.1000		38.8		38.8
2009
Quarter 2	04/16/09	03/26/09	$	0.0828	$	35.3	$	70.9
Quarter 1	01/14/09	12/24/08		0.0828		35.6		35.6

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SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE L–FAIR VALUE MEASUREMENTS

The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value into the following hierarchy:

Level 1	Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2	Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
Level 3	Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

The following table presents assets and liabilities which are measured at fair value on a recurring basis at June 19, 2010 (in millions):

	Fair Value Measurements
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Short-term investments 1	$	88.5	$	88.4	$	0.1	$	—
Non-current investments 2		27.2		—		27.2		—
Interest rate swap 2		7.0		—		7.0		—
Total	$	122.7	$	88.4	$	34.3	$	—
Liabilities:
Warrants 3	$	17.6	$	—	$	—	$	17.6
Total	$	17.6	$	—	$	—	$	17.6

1 Included in Prepaid Expenses and Other Current Assets on the balance sheet.

2 Included in Other Assets on the balance sheet.

3 Included in Accrued Claims and Other Liabilities on the balance sheet.

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SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents assets and liabilities which are measured at fair value on a recurring basis at year-end 2009 (in millions):

	Fair Value Measurements
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	1.2	$	1.2	$	—	$	—
Short-term investments 1		51.8		48.1		3.7		—
Non-current investments 2		24.3		—		24.3		—
Total	$	77.3	$	49.3	$	28.0	$	—
Liabilities:
Interest rate swap 3	$	6.6	$	—	$	6.6	$	—
Warrants 3		15.2		—		—		15.2
Total	$	21.8	$	—	$	6.6	$	15.2

1 Included in Prepaid Expenses and Other Current Assets on the balance sheet.

2 Included in Other Assets on the balance sheet.

3 Included in Accrued Claims and Other Liabilities on the balance sheet.

A reconciliation of the beginning and ending balances for Level 3 liabilities for the 24 weeks ended June 19, 2010 follows (in millions):

	Warrants
Balance as of January 2, 2010	$	15.2
Additions		0.1
Unrealized losses		2.3
Balance as of June 19, 2010	$	17.6

In determining the fair value of assets and liabilities, the Company maximizes the use of quoted market prices and minimizes the use of unobservable inputs. The Level 1 fair values are based on quoted market values for identical assets. The fair values of Level 2 assets and liabilities are determined using prices from pricing agencies and financial institutions that develop values based on observable inputs in active markets. Level 3 fair values are determined from industry valuation models based on externally developed inputs.

Long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. Fair value of long-lived assets is determined by estimating the amount and timing of net future cash flows (including rental expense for leased properties, sublease rental income, common area maintenance costs and real estate taxes) and discounting them using a risk-adjusted rate of interest. Safeway estimates future cash flows based on its experience and knowledge of the market in which the store is located and, when necessary, uses real estate brokers. During the second quarter of 2010, long-lived assets with a carrying value of $26.9 million, primarily store assets, were written down to their fair value of $13.5 million, resulting in an impairment charge of $13.4 million. For the first 24 weeks of 2010, long-lived assets with a carrying value of $52.7 million, primarily store assets, were written down to their fair value of $21.9 million, resulting in an impairment charge of $30.8 million. During the second quarter of 2009, long-lived assets with a carrying value of $18.9 million, primarily store assets, were written down to their fair value of $4.6 million, resulting in an impairment charge of $14.3 million. For the first 24 weeks of 2009, long-lived assets with a carrying value of $37.1 million, primarily store assets, were written down to their fair value of $11.7 million, resulting in an impairment charge of $25.4 million.

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SAFEWAY INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

ECONOMIC OUTLOOK The current economic environment has made consumers more cautious. This has led to reduced consumer spending, to consumers trading down to a less expensive mix of products and to consumers trading down to discounters for grocery items, all of which have reduced Safeway’s sales. Additionally, the Company has experienced deflation in certain product categories. These difficult economic conditions may continue for the remainder of 2010.

Net income attributable to Safeway Inc. was $141.3 million ($0.37 per diluted share) for the second quarter of 2010 compared to $238.6 million ($0.57 per diluted share) in the second quarter of 2009. Earnings in the second quarter of 2009 included a $57.8 million tax benefit ($0.14 per diluted share) from the resolution of a tax matter.

SALES AND OTHER REVENUE Same-store sales decreases for the second quarters of 2010 and 2009 were as follows:

	12 Weeks Ended
	June 19, 2010				June 20, 2009
	Comparable- Store Sales Decreases		Identical-Store Sales Decreases*		Comparable- Store Sales Decreases		Identical-Store Sales Decreases*
As reported	(1.0	%)	(1.2	%)	(5.5	%)	(5.6	%)
Excluding fuel sales	(2.3	%)	(2.5	%)	(1.5	%)	(1.5	%)**

* Excludes replacement stores.

** Negative 2.2% after excluding the weeks affected by the shift in Easter holiday sales.

Total sales were $9.5 billion in the second quarter of 2010, essentially flat compared to $9.5 billion in the second quarter of 2009. A favorable change in the Canadian exchange rate of $182.9 million (in U.S. Dollars) and a $107.7 million increase in fuel sales were largely offset by a 2.5% decline in identical-store sales, excluding fuel. Customer counts increased slightly while average transaction size decreased during the quarter.

At the end of the second quarter of 2010, Safeway had 1,396 Lifestyle stores compared to 1,324 at the end of the second quarter of 2009.

The following table presents sales revenue by type of similar product (dollars in millions):

	12 Weeks Ended
	June 19, 2010				June 20, 2009
Non-perishables (1)	$	4,233.7	44.5	%	$	4,359.5	46.1	%
Perishables (2)		3,656.2	38.4			3,605.5	38.1
Fuel		728.4	7.6			620.7	6.5
Pharmacy		901.2	9.5			876.4	9.3
Total sales and other revenue	$	9,519.5	100.0	%	$	9,462.1	100.0	%

(1) Consists primarily of general merchandise, grocery, meal ingredients, soft drinks and other beverages, snacks and frozen foods.

(2) Consists primarily of produce, dairy, meat, bakery, deli, floral and seafood.

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SAFEWAY INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GROSS PROFIT Gross profit represents the portion of sales revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs of Safeway’s distribution network. Advertising and promotional expenses are also a component of cost of goods sold. Additionally, all vendor allowances are classified as an element of cost of goods sold.

Gross profit declined 32 basis points to 28.55% of sales in the second quarter of 2010 compared to 28.87% of sales in the second quarter of 2009. This decline was largely the result of investments in price carried forward from the second half of fiscal 2009 and increased advertising. Fuel sales had almost no impact on the decline in gross profit margin.

OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense increased 46 basis points to 25.55% of sales in the second quarter of 2010 from 25.09% of sales in the second quarter of 2009. Excluding the 31 basis point impact of higher fuel sales in the second quarter of 2010, operating and administrative expense margin increased 77 basis points. This increase was largely the result of deflation coupled with expected increases in wages and benefits, including a $14.5 million employee buyout in the second quarter of 2010. Excluding the 16 basis point impact of the employee buyout, operating and administrative expense margin, excluding fuel, increased 61 basis points.

INTEREST EXPENSE Interest expense declined to $69.2 million in the second quarter of 2010 from $77.2 million in the second quarter of 2009 due to lower average borrowings and lower average interest rates.

INCOME TAXES Income tax expense was 35.3% of pre-tax income in the second quarter of 2010 compared to 15.9% in the second quarter of 2009. The income tax rate in 2009 was lower due to a benefit of $57.8 million from the favorable resolution of a tax matter.

24-WEEKS ENDED JUNE 19, 2010 COMPARED WITH 24-WEEKS ENDED JUNE 20, 2009

Net income for the first 24 weeks of 2010 was $237.3 million ($0.61 per diluted share) compared to $382.8 million ($0.90 per diluted share) in the first 24 weeks of 2009.

The gross profit margin was 28.48% in the first 24 weeks of 2010 compared to 28.80% in the first 24 weeks of 2009. Operating and administrative expense margin was 25.83% in the first 24 weeks of 2010 compared to 25.38% in the first 24 weeks of 2009.

Same-store sales decreases through the second quarters of 2010 and 2009 were as follows:

	24 Weeks Ended
	June 19, 2010				June 20, 2009
	Comparable- Store Sales Decreases		Identical-Store Sales Decreases*		Comparable- Store Sales Decreases		Identical-Store Sales Decreases*
As reported	(1.2	%)	(1.3	%)	(4.8	%)	(4.9	%)
Excluding fuel sales	(2.7	%)	(2.8	%)	(1.1	%)	(1.1	%)

* Excludes replacement stores.

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SAFEWAY INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents sales revenue by type of similar product (dollars in millions):

	24 Weeks Ended
	June 19, 2010				June 20, 2009
Non-perishables (1)	$	8,478.4	45.0	%	$	8,690.9	46.5	%
Perishables (2)		7,177.3	38.1			7,130.2	38.1
Fuel		1,377.9	7.3			1,125.3	6.0
Pharmacy		1,813.0	9.6			1,752.1	9.4
Total sales and other revenue	$	18,846.6	100.0	%	$	18,698.5	100.0	%

(1) Consists primarily of general merchandise, grocery, meal ingredients, soft drinks and other beverages, snacks and frozen foods.

(2) Consists primarily of produce, dairy, meat, bakery, deli, floral and seafood.

Critical Accounting Policies

Critical accounting policies are those accounting policies that management believes are important to the portrayal of Safeway’s financial condition and results and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s 2009 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to workers’ compensation, store closures, employee benefit plans, goodwill and income tax contingencies.

New Accounting Pronouncements

See Part I, Item 1, Note B to this report for disclosure of accounting pronouncements which are applicable to the Company.

Liquidity and Financial Resources

Net cash flow provided by operating activities was $309.1 million in the first 24 weeks of 2010 compared to $684.1 million in the first 24 weeks of 2009. This was primarily due to a decline in third-party gift card payables, net of receivables, lower net income and increased income tax payments.

Net cash flow used by investing activities declined to $393.6 million in the first 24 weeks of 2010 from $461.2 million in the first 24 weeks of 2009 because of reduced capital expenditures.

Net cash flow provided by financing activities increased to $155.6 million in the first 24 weeks of 2010 from a use of $392.8 million in the first 24 weeks of 2009 due primarily to a net increase in borrowings.

Based upon the current level of operations, management believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway’s commercial paper program and its Credit Agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments and stock repurchases and scheduled principal payments for the foreseeable future. There can be no assurance, however, 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 the commercial paper program and Credit Agreement.

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SAFEWAY INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FREE CASH FLOW Free cash flow is calculated as net cash flow from operating activities, as adjusted to exclude payables related to third-party gift cards, net of receivables, less net cash flow used by investing activities. Cash from the sale of third-party gift cards is held for a short period of time and then remitted, less our commission, to card partners. Because this cash flow is temporary, it is not available for other uses, and it is therefore excluded from our calculation of free cash flow.

	12 Weeks Ended						24 Weeks Ended
(in millions)	June 19, 2010			June 20, 2009			June 19, 2010			June 20, 2009
Net cash flow provided by operating activities, as reported	$	551.1		$	835.1		$	309.1		$	684.1
(Increase) decrease in payables related to third-party gift cards, net of receivables		(20.2	)		(30.9	)		356.1			186.2
Net cash flow from operating activities, as adjusted		530.9			804.2			665.2			870.3
Net cash flow used by investing activities		(200.9	)		(208.4	)		(393.6	)		(461.2	)
Free cash flow	$	330.0		$	595.8		$	271.6		$	409.1

Free cash flow provides information regarding the cash that the Company’s business generates, which management believes is useful to understanding the Company’s business. Free cash flow is also a useful indicator of Safeway’s ability to service debt, fund share repurchases and pay dividends that management believes will enhance stockholder value.

This non-GAAP financial measure should not be considered as an alternative to net cash flow from operating activities or other increases and decreases in cash as shown on our Consolidated Statements of Cash Flows as a measure of liquidity. Non-GAAP financial measures have limitations as analytical tools, and they should not be considered in isolation or as substitutes for analysis of the Company’s results as reported under GAAP. Other companies in the Company’s industry may calculate free cash flow differently, limiting its usefulness as a comparative measure.

CREDIT AGREEMENT The Company has a $1,600.0 million credit agreement (as amended, the “Credit Agreement”) with a syndicate of banks which has a termination date of June 1, 2012 and provides for two additional one-year extensions of the termination date. The Credit Agreement provides (i) to Safeway a $1,350.0 million revolving credit facility (the “Domestic Facility”), (ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, at the option of the lenders and subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA, as defined in the Credit Agreement, to interest expense ratio of 2.0 to 1 and is required to not exceed an Adjusted Debt (total consolidated debt less cash and cash equivalents in excess of $75.0 million) to Adjusted EBITDA ratio of 3.5 to 1. As of June 19, 2010, the Company was in compliance with these covenant requirements. As of June 19, 2010, there were no borrowings outstanding and $81.4 million in letters of credit under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,518.6 million as of June 19, 2010.

SHELF REGISTRATION On December 8, 2008, the Company filed a shelf registration statement (the “Shelf”) with the SEC which enables Safeway to issue an unlimited amount of debt securities and/or common stock. The Shelf expires on December 8, 2011. The Safeway Board of Directors has authorized issuance of up to $2.0 billion of securities under the Shelf. As of June 19, 2010, $1.0 billion of securities were available for issuance under the board’s authorization.

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SAFEWAY INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $38.8 million and $35.3 million for the second quarters of 2010 and 2009, respectively. Year-to-date dividends paid on common stock totaled $77.6 million and $70.9 million for 2010 and 2009, respectively. Note K to the Company’s condensed consolidated financial statements in this report provides additional information on dividends declared and dividends paid on Safeway common stock.

STOCK REPURCHASE PROGRAM From the initiation of the Company’s stock repurchase program in 1999 through the end of the second quarter of 2010, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $5.0 billion, leaving an authorized amount for repurchases of approximately $1.0 billion. This includes an increase in the total authorized level of the repurchase program by $1.0 billion to $6.0 billion approved by the Board of Directors in December 2009. During the second quarter of 2010, Safeway repurchased 7.1 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $169.4 million. The average price per share, excluding commissions, was $23.76. The Company will evaluate the timing and volume of future repurchases based on several factors, including market conditions, and may repurchase stock in the near- or long-term as circumstances warrant.

Capital Expenditure Program

Safeway invested $192.1 million in capital expenditures in the second quarter of 2010. The Company opened five new stores, completed 17 Lifestyle remodels and closed five stores. For the year, Safeway plans to invest $0.9 to $1.0 billion in capital expenditures, open approximately 15 new Lifestyle stores and complete approximately 60 Lifestyle remodels.

Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 (“Exchange Act”). Forward-looking statements contain information about our future operating or financial performance. Forward-looking statements are based on our current expectations and involve risks and uncertainties, which may be beyond our control, as well as assumptions. If assumptions prove to be incorrect or if known or unknown risks and uncertainties materialize into actual events or circumstances, actual results could differ materially from those included in or contemplated or implied by these statements. Forward-looking statements do not strictly relate to historic or current facts. Forward-looking statements are indicated by words or phrases such as “will,” “may,” “continuing,” “ongoing,” “expects,” “estimates,” “anticipates,” “believes,” “guidance” and similar words or phrases and the negative of such words or phrases.

This Quarterly Report on Form 10-Q includes forward-looking statements, including forward-looking statements relating to pension plan contributions; sufficiency of liquidity for the foreseeable future; capital expenditures; new accounting standards; and Lifestyle stores. The following are among the principal factors that could cause actual results to differ materially from those included in or contemplated or implied by the forward-looking statements:

• General business and economic conditions in our operating regions, including the rate of inflation or deflation, consumer spending levels, currency valuations, population, employment and job growth and/or losses 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 continuing efforts to expand corporate brands;

• Results of our programs to improve our perishables departments;

• Results of our promotional programs;

20

SAFEWAY INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Results of our capital program;

• Results of our efforts to improve working capital;

• Results of any ongoing litigation in which we are involved or any litigation in which we may become involved;

• The resolution of uncertain tax positions;

• 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;

• Failure to fully realize or delay in realizing growth prospects for existing or new business ventures, including our Blackhawk subsidiary;

• Legislative, regulatory, tax, accounting or judicial developments, including with respect to Blackhawk;

• The cost and stability of fuel, energy and other power sources;

• The impact of the cost of fuel on gross margin and identical-store sales;

• Discount rates used in actuarial calculations for pension obligations and self-insurance reserves;

• The rate of return on our pension assets;

• The availability and terms of financing, including interest rates;

• Adverse developments with regard to food and drug safety and quality issues or concerns that may arise;

• Loss of a key member of senior management;

• Data security or other information technology issues that may arise;

• Unanticipated events or changes in real estate matters, including acquisitions, dispositions and impairments;

• Adverse weather conditions and effects from natural disasters;

• Performance in new business ventures or other opportunities that we pursue; and

• The capital investment in and financial results from our Lifestyle stores.

We undertake no obligation to update forward-looking statements to reflect new information, events or developments after the date hereof. Please refer to 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 more information regarding these risks and uncertainties. These reports are not intended to be a discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.

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SAFEWAY INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes regarding the Company’s market risk position from the information provided under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Company’s 2009 Annual Report on Form 10-K.

Item 4. Controls and Procedures

The Company maintains “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, 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 timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, the Company’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company also has investments in certain unconsolidated entities, including Casa Ley, S.A. de C. V. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. There has been no change during the Company’s fiscal quarter ended June 19, 2010 in the Company’s internal control over financial reporting that was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) which has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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SAFEWAY INC. AND SUBSIDIARIES

PART II–OTHER INFORMATION

Item 1. Legal Proceedings

Note M to the Company’s consolidated financial statements, under the caption “Legal Matters” on page 65 of the Form 10-K included in the 2009 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. There have been no subsequent material developments to these matters.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, in the Company’s 2009 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Safeway 401(k) Savings Plan (the “Plan”) includes shares of the Company’s common stock as an investment choice for participants. The Plan trustee purchases shares of Company common stock on the open market, or acquires shares through intraplan transfers, and then allocates the shares to participants’ Plan accounts at the election of participants. The Company is required to register the sale of its shares of common stock to Plan participants. In March 2002, the Company filed a Form S-8 (File No. 333-85132) to register 700,000 shares of Company common stock under the Plan. In July 2010, the Company determined that more than the 700,000 registered shares of Company common stock were allocated to Plan participant accounts. In the past three years, from the period from July 1, 2007 to June 21, 2010, we believe that an aggregate of approximately 822,000 shares of Company common stock were sold under the Plan through intraplan transfers or open market purchases by the Plan trustee that were not registered under the Securities Act of 1933. During that timeframe, the Company’s common stock price ranged from a low of $17.19 per share to a high of $37.14 per share. The Company did not receive any consideration in connection with such sales, which were funded with participants’ contributions to the Plan. Prior to July 1, 2007, additional shares that were not registered were sold under the Plan to Plan participants.

On June 22, 2010, the Company filed a Form S-8 (File No. 333-167681) to register 1,000,000 additional shares of Safeway common stock under the Plan.

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SAFEWAY INC. AND SUBSIDIARIES

The following table contains information for shares repurchased during the second quarter of 2010.

Fiscal period	Total number  of shares purchased1	Average price paid per  share2		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
March 28, 2010 – April 24, 2010	1,833	$	25.34	—	$	1,177.4
April 25, 2010 – May 22, 2010	7,125,000		23.76	7,125,000		1,008.0
May 23, 2010 – June 19, 2010	—		—	—		1,008.0
Total	7,126,833	$	23.76	7,125,000	$	1,008.0

¹ Includes 1,833 shares withheld, at the election of a certain holder of restricted stock, by the Company from the vested portion of a restricted stock award with a market value approximating the amount of the withholding taxes due from such restricted stockholder.

² Average price per share excludes commissions. Average price per share excluding the shares referred to in footnote 1 above was $23.76.

³ In 1999, the Company’s Board of Directors initiated a $2.5 billion stock repurchase program. The Board increased the authorized level of the stock repurchase program to $3.5 billion in 2002, to $4.0 billion in 2006, to $5.0 billion in 2008 and then to $6.0 billion in December 2009. From the initiation of the repurchase program in 1999 through the end of the second quarter of 2010, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $5.0 billion, leaving an authorized amount for repurchases of approximately $1.0 billion. The timing and volume of future repurchases will depend on several factors, including market conditions. The repurchase program has no expiration date but may be terminated by the Board of Directors.

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SAFEWAY INC. AND SUBSIDIARIES

Item 6. Exhibits

Exhibit 3.2	Certificate of Amendment of Restated Certificate of Incorporation of Safeway Inc. (incorporated by reference to Exhibit 3(i) to the registrant’s Current Report on Form 8-K dated May 19, 2010).
Exhibit 3.3	Amended and Restated By-Laws of Safeway Inc. (incorporated by reference to Exhibit 3(ii) to the registrant’s Current Report on Form 8-K dated May 19, 2010).
Exhibit 31.1	Rule 13(a)-14(a)/15d-14(a) Certification.
Exhibit 31.2	Rule 13(a)-14(a)/15d-14(a) Certification.
Exhibit 32	Section 1350 Certifications.
Exhibit 101 **	The following materials from the Safeway Inc. Quarterly Report on Form 10-Q for the quarter ended June 19, 2010 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes.

** The Company will be furnishing Exhibit 101 within 30 days of the filing date of this Form 10-Q, as allowed under the rules of the Securities and Exchange Commission.

25

SAFEWAY INC. AND SUBSIDIARIES

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 thereunto duly authorized.

	SAFEWAY INC.
Date: July 26, 2010	/s/ Steven A. Burd
	Steven A. Burd
	Chairman, President and Chief Executive Officer
Date: July 26, 2010	/s/ Robert L. Edwards
	Robert L. Edwards
	Executive Vice President and Chief Financial Officer

26

SAFEWAY INC. AND SUBSIDIARIES

Exhibit Index

LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD

ENDED JUNE 19, 2010

Exhibit 3.2	Certificate of Amendment of Restated Certificate of Incorporation of Safeway Inc. (incorporated by reference to Exhibit 3(i) to the registrant’s Current Report on Form 8-K dated May 19, 2010).
Exhibit 3.3	Amended and Restated By-Laws of Safeway Inc. (incorporated by reference to Exhibit 3(ii) to the registrant’s Current Report on Form 8-K dated May 19, 2010).
Exhibit 31.1	Rule 13(a)-14(a)/15d-14(a) Certification.
Exhibit 31.2	Rule 13(a)-14(a)/15d-14(a) Certification.
Exhibit 32	Section 1350 Certifications.
Exhibit 101 **	The following materials from the Safeway Inc. Quarterly Report on Form 10-Q for the quarter ended June 19, 2010 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes.

** The Company will be furnishing Exhibit 101 within 30 days of the filing date of this Form 10-Q, as allowed under the rules of the Securities and Exchange Commission.

27

EX-31.1

Exhibit 31.1

Certification

I, Steven A. Burd, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Safeway Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. 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 Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial 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: July 26, 2010	/s/ Steven A. Burd
	Steven A. Burd
	Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification

I, Robert L. Edwards, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Safeway Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. 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 Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial 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: July 26, 2010	/s/ Robert L. Edwards
	Robert L. Edwards
	Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Safeway Inc. (the “Company”) hereby certifies that:

(i) the quarterly report on Form 10-Q of the Company for the quarterly period ended June 19, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, 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: July 26, 2010	/s/ Steven A. Burd
	Steven A. Burd
	Chief Executive Officer

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Safeway Inc. (the “Company”) hereby certifies that:

(i) the quarterly report on Form 10-Q of the Company for the quarterly period ended June 19, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, 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: July 26, 2010	/s/ Robert L. Edwards
	Robert L. Edwards
	Chief Financial Officer

The foregoing certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be 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.

A signed original of this written statement as required by Section 906 has been provided to Safeway Inc., and will be retained by Safeway Inc. and furnished to the Securities and Exchange Commission or its staff upon request.