safeway 2002 Annual Report

Safeway Inc. Convenience
2 0 0 2 A N N UA L R E P ORT

Quality

Service

Value

Safeway Inc. is one of the largest food and drug retailers in North America. As of
December 28, 2002, the company operated 1,695 continuing stores in the Western,
Southwestern, Rocky Mountain and Mid-Atlantic regions of the United States and
in western Canada. In support of its stores, Safeway has an extensive network of
distribution, manufacturing and food processing facilities.

P E R C E N TA G E O F S T O R E S W I T H
S P E C I A LT Y D E PA R T M E N T S

2002 1998

Bakery 85%
93%
Deli 93
96
Floral 88
91
Pharmacy 58
70

M A N U FA C T U R I N G A N D P R O C E S S I N G FA C I L I T I E S
Year-end 2002

U.S. Canada

Milk Plants 7 3
Bread Baking Plants 6 2
Ice Cream Plants 2 2
Cheese and Meat Packaging Plants – 2
Soft Drink Bottling Plants 4 –
Fruit and Vegetable Processing Plants 1 3
Biscuit Plant 1 –
Pet Food Plant 1 –
22 12

CONTENTS

L E T T E R TO S TO C K H O L D E R S
2

E D I TO R I A L M AT E R I A L
4

F I NA N C I A L C O N T E N T S
12

D I R E C TO R S A N D PR I N C I PA L O F F I C E R S
52

I N V E S TO R I N F O R M AT I O N
53

FI NANC IAL HIG HLIG HT S

52 Weeks 52 Weeks 52 Weeks
(Dollars in millions, except per-share amounts) 2002 2001 2000

FOR THE YEAR
Sales $31,797.0 $29,441.5
$32,399.2
Gross profit 9,849.6 8,789.5
10,096.4
Operating profit 2,535.7 2,264.5
1,673.3
Income from continuing operations before
cumulative effect of accounting change 1,286.7 1,154.2
568.5
Net (loss) income 1,253.9 1,091.9
(828.1)
Diluted earnings per share:
Income from continuing operations before
cumulative effect of accounting change 2.51 2.26
1.20
Net (loss) income 2.44 2.13
(1.75)
Cash capital expenditures 1,672.3 1,435.7
1,370.5

AT Y E A R - E N D
Common shares outstanding (in millions) (Note 1) 488.1 504.1
441.0
Retail square feet (in millions) 71.8 66.5
74.6
Number of stores 1,656 1,570
1,695

Note 1: Net of 132.0 million, 82.7 million and 64.3 million shares held in treasury at year-end 2002, 2001 and 2000, respectively.

Sales Income from Continuing Diluted Earnings per Share:
Operations before Cumulative Income from Continuing
Effect of Accounting Change Operations before Cumulative
Effect of Accounting Change

$32.4 $1,286.7 $2.51
$31.8
$29.4 $1,154.2 $2.26
$26.3
$984.2 $1.91
$24.1

$807.7 $1.59

$1.20
$568.5

98 99 00 01 02 98 99 00 01 02 98 99 00 01 02

1
SAFEWAY INC. 2002 ANNUAL REPORT

TO O U R S TO C K H O L D E R S

s We recently decided to sell Dominick’s and leave the
After a decade of steady growth, Safeway had a disap-
pointing year in 2002. While we recorded modest total Chicago market. The total loss from discontinued Dominick’s
sales gains in continuing operations, certain operational store operations in 2002, including the impairment charge
issues and the soft economy had a negative effect on our noted above, was $696.6 million ($1.47 per share). The loss
same-store sales and profitability. Reported results were from discontinued Dominick’s store operations in 2001 was
also adversely affected by significant non-cash charges. $32.8 million ($0.07 per share).
Our results are discussed below.
Total sales in 2002 rose 2% to $32.4 billion, pri-
SALES

We incurred a net loss of $828.1 million marily due to new store openings. Comparable-store sales
N E T R E S U LT S

($1.75 per share) in 2002 compared to net income of declined 0.6%, while identical-store sales (which exclude
$1,253.9 million ($2.44 per share) in replacement stores) were down 1.2%.
2001. These results reflect negative Sales were negatively affected in the
impacts of $2,100.8 million ($4.43 per first half of the year by shrink-reduc-
share) in 2002, of which $1,988.0 mil- tion efforts and by transitional issues
We continue to
lion was due to the impairment of associated with the centralization of
modernize our store
goodwill, and $32.8 million ($0.07 per marketing functions. Continued soft-
share) in 2001 as a result of the follow- ness in the economy also had a
base to enhance our
ing factors: dampening effect on sales through-
growth prospects.
s In 2002 we adopted Statement of out the year.
Financial Accounting Standards No.
142, which eliminated goodwill amorti- G R O S S P R O F I T Gross profit increased

zation. The initial effect of adopting 18 basis points to 31.16% of sales,
SFAS No. 142 was a non-cash charge even though we reinvested a portion
of $700 million ($1.48 per share) in the first quarter of of our cost savings into pricing and promotion.
2002, which is recorded as a cumulative effect of a change in
accounting principle. SFAS No. 142 also requires an annual Operating and
O P E R AT I N G A N D A D M I N I S T R AT I V E E X P E N S E

review for impairment, which we completed in the fourth administrative expense rose 114 basis points to 23.82% of
quarter of 2002, resulting in two additional non-cash sales, due primarily to increases in employee benefit costs,
charges: $704.2 million ($1.48 per share) for Randall’s, which real estate occupancy costs and pension expense as well
is recorded as a component of operating income, and $583.8 as soft sales.
million for Dominick’s, which is recorded as a component of
discontinued operations. These charges reflect declining val- Interest expense was up slightly, to
INTEREST EXPENSE

uation multiples in the retail grocery industry and operating $368.6 million in 2002 from $366.1 million in 2001. The
performance at these acquired companies. Results for 2001 increase was due to higher average borrowings primarily
include a goodwill amortization charge of $101.0 million from debt incurred to finance the repurchase of Safeway
($0.20 per share) recorded in continuing operations. stock, partially offset by lower interest rates in 2002.

2 SAFEWAY INC. 2002 ANNUAL REPORT

During the year we repurchased 50.1 initial grant from the company and is sustained by fundrais-
SHARE REPURCHASES

million shares of Safeway common stock for $1.5 billion. ing events and an annual employee giving campaign.
Under the current program authorized by the board of direc-
tors, we have bought back $2.9 billion worth of our shares, Looking ahead, it is difficult to predict when the
OUTLOOK

leaving $0.6 billion available for additional repurchases as of long-awaited economic rebound will spark a resurgence in
year-end 2002. consumer confidence and spending. We remain focused on
what we can control – providing our customers with the
We continue to modernize our store pleasant, convenient shopping experience they expect and
S T O R E M O D E R N I Z AT I O N

base to enhance our growth prospects. During 2002 we invest- deserve. As noted on the following pages, we believe Safeway
ed approximately $1.4 billion in cash capital expenditures. We has distinct competitive advantages over other supermarket
opened 71 new stores, expanded or operators and retailers in alternate
remodeled 191 existing stores and closed channels. These advantages include
32 older ones, resulting in a 4% net addi- convenient, attractive store facilities
tion to total retail square footage in con- with exciting new specialty depart-
tinuing operations. Given the continuing ments; consistently superb quality, espe-
soft economic conditions, we have scaled cially in the perishable departments;
back our capital spending plans for friendly, helpful service delivered by
2003. In the coming year we expect to knowledgeable employees; and a broad
invest between $1.1 billion and $1.3 bil- assortment of products and services at
lion in cash capital expenditures and competitive prices. We continue to work
open 50 to 55 new stores while complet- hard to differentiate our stores from
ing between 100 and 125 remodels. those of our competitors.
In closing, I want to thank our
In 2002 we made cash and in- employees for their unwavering dedication and diligence dur-
C O M M U N I T Y I N V O LV E M E N T

kind donations to hundreds of non-profit organizations ing a difficult year. They have bolstered my strongly held con-
throughout the communities we serve. Among these viction that we have what it takes – the right facilities,
donations was approximately $60 million worth of mer- systems, programs, products and, most important of all, the
chandise to Second Harvest food banks. We also con- right people – to weather these tough times and achieve our
tributed more than $25 million to local schools through long-range objective of enhancing shareholder value.
eScrip and other educational programs. In addition, we
conducted major fundraising campaigns to support breast
and prostate cancer research, treatment and education.
During 2002 we launched The Safeway Foundation,
Steven A. Burd
through which we support charitable organizations that
Chairman, President and Chief Executive Officer
improve the quality of life in the communities where our
March 21, 2003
employees work and live. The foundation was funded by an

3

CONVENIENCE

Shoppers consistently cite convenience as one of we try to provide quick, efficient checkout service –
the leading reasons for choosing where they buy especially during peak business hours. With an
groceries and related items. Our stores ever-expanding array of products and services –
are typically located within a few miles of including ready-to-serve meals, prescription
our customers’ homes, and are situat- drugs, gasoline, online home shopping, in-store
ed on prime, easily accessible retail banking and one-hour photo processing – our
sites with close-in parking. stores are continuously evolving to pro-
Because most consumers today vide one-stop shopping convenience for
lead busy, demanding lives, time-pressed customers.


Consumers today are busier
We have prime store
than ever. We continue
locations in some
to expand our assortment
of time-saving products
of North America’s
and services such as ready-
to-serve meals, gasoline,
fastest-growing
online home shopping, in-
regions.
store banking and one-hour
photo processing.

With 1,289 in-store pharma-
Busy consumers like cies at year-end 2002, we
the convenience ranked among the 10 largest
drug retailers in North
of having their America. Our pharmacists
take the time to make each
prescriptions filled customer feel welcome and
while they shop. well informed about pre-
scribed medications.

Our online shopping and
home delivery services,
Safeway.com and Vons.com,
expanded into five new mar-
kets during 2002. For a
nominal fee, orders are filled
by trained personal shoppers
and delivered in tempera-
ture-controlled trucks.

Our in-store delis offer a
wide selection of made-to-
We operate more than
order gourmet sandwiches for
busy shoppers seeking alter-
200 fuel centers
natives to restaurant meals.
adjacent to our stores.
In addition, we have a new
line of restaurant-quality
heat and serve soups.

5

QUALITY

One of the most to significantly
effective ways we can enhance quality-
differentiate our stores from control standards for
our competitors’ is by consistently our fresh foods. We want our perish-
delivering best-in-class quality in our per- ables to be noticeably better than the offerings of
ishable foods departments. We are committed to other conventional supermarkets and clearly
superior quality and strive to be known as the superior to those found at mass merchants,
destination for tender meat and superb seafood; membership clubs and other non-traditional
garden-fresh produce and flowers; tempting food retailers. Our ultimate goal is to achieve
bakery, deli and dairy products; and wholesome and consistently maintain levels of freshness,
natural foods. During the past several months appearance, taste and presentation equal to
we have been working with our suppliers those at the finest specialty shops.


We’re convinced At Safeway and its affiliated
companies, top-quality pro-
our fresh breads, duce is artfully presented
in abundant displays. Unique
cakes and pastries merchandising methods
are the finest in impart a farm-fresh ambience
and create a special shop-
the industry. ping experience.

Café Paris White Chocolate
Look to Safeway
Raspberry is one of a dozen
for best-in-class
flavors available in our
Safeway SELECT Great
produce, meat,
Escapes line of super-premi-
um ice cream. Each flavor
deli products and
brings to mind the tastes and
baked goods.
traditions of exotic getaways
around the world.

We have field
inspectors in major
growing areas to
ensure that our
produce is picked
at its peak.

Since fresh foods typically
Quality also extends account for over 40% of all
to our facilities and supermarket purchases, it’s
imperative our perishables
our employees. be of consistently superior
quality. To achieve that
We believe we have goal, we are enhancing our
the best of both. product specifications and
quality control standards.

7

SERVICE

During the past five years, special requests. Behind the
Safeway has earned a reputation scenes in our support operations,
for consistently delivering our buyers negotiate deals on
superior customer service. the most popular national
We believe we are the brands, while experienced ware-
clear service leader in the house order selectors skillfully
supermarket industry. In assemble product shipments to
our stores, friendly the stores. The combined
checkers, stockers and courtesy efforts of every member of
clerks eagerly anticipate shoppers’ the Safeway team support a
needs, while expert meat cutters, bakers single overriding objective – to exceed
and deli clerks cheerfully accommodate our customers’ expectations.


During the past several years,
service has become an inte-
Service is a clear
gral part of our corporate
point of difference
culture and a key perform-
ance measure. We work hard
and a competitive
to provide the highest level
of customer service every
advantage for us.
day in every department in
every store.

Delivering superior service
We believe is a team effort at Safeway,
we have the best with store employees as well
as their backstage co-workers
in-stock condition striving to surprise and
delight our customers with
in the supermarket a pleasant, efficient shop-
industry. ping experience they cannot
find elsewhere.

By continuously monitoring
We want shoppers sales, transactions and traf-
to count on fic patterns in our stores,
we adapt work schedules
Safeway for fast, to our customers’ shopping
needs. Proper scheduling
friendly and and well-trained employees
reliable service. are the keys to prompt,
efficient checkout service.

Training is a top priority at
Safeway. Aided by state-of-
the-art instructional and
communications systems,
along with ongoing perform-
ance appraisals, we believe
we have some of the most
knowledgeable, proficient
employees in our industry.

9

VALUE

Superior quality, we have adjusted
selection and serv- everyday pricing on some key
ice – all at competitive prices high-volume items and have
in attractive, conveniently located facilities. enhanced our club card specials.
These are the key components of the value Shoppers can also find exceptional values with
equation for Safeway shoppers. With the an extensive line of award-winning Safeway
pricing component receiving greater emphasis brands. Our private-label products are designed
in the current economic environment, we have to be of equal or superior quality to comparable
taken several steps to help recession-weary nationally-advertised brands but are typically
consumers stretch their budgets. For example, priced much lower.


A “culture of thrift” perme-
ates Safeway. Employees at
We closely monitor every level of the company
our pricing, and our continuously search for ways
to simplify work methods,
price image, to ensure reduce expenses and increase
productivity. Most of these
we are competitive. improvements take place
behind the scenes.

Reinvesting cost savings
into the business results in
Shoppers can find
improved store standards,
exceptional values
enhanced customer service
and competitive pricing – all
with award-winning
of which drive sales. This
“productivity loop” enables
Safeway brands.
us to provide excellent value
for our customers.

By centralizing our buying
functions and establishing
a regional merchandising
network, we believe we can
significantly reduce our cost
of goods sold while continu-
ing to meet each of our
operating areas’ unique
marketing needs.

As consumers continue to
Our prices on many trim household expendi-
club card specials are tures, we have selectively
reduced prices throughout
lower than prices at our stores on many of the
items shoppers buy most
discount outlets often. Value-conscious cus-
and club stores. tomers also benefit from our
private-label program.

11

F I NAN CIAL C O NT ENT S

C OM PA N Y I N R E V I E W
13

F I V E - Y E A R S U M M A RY FI NANCI AL I NFO R MAT I O N
16

F I NA N C I A L R E V I E W
18

C ON S OL I DATE D STAT EMENT S O F O PER AT I O NS
25

C ON SOL I DATE D BA L ANCE S HEET S
26

C ON S OL I DATE D STAT EMENT S O F CAS H FLOW S
28

C ON S OL I DATE D STAT EMENT S O F S TO CKHO L D ER S ’ EQUI T Y
30

N OTE S TO C ON SOL I DAT ED FI NANCI AL S TAT EMENT S
31

M A NAG E M E N T’ S R E PO RT
50

I N D E P E N D E N T AU D I TO R S ’ R EPO RT
51

D I R E C TOR S A N D P R I NCI PAL O FFI CER S
52

I N V E S TOR I N F OR M ATI O N
53


C O MPANY IN REVIEW
S A F E WAY I N C . A N D S U B S I D I A R I E S

Safeway Inc. (“Safeway” or the “Company”) is one of the Safeway’s average store size is approximately
STORES

largest food and drug retailers in North America, with 1,695 44,000 square feet. Safeway’s primary new store prototype is
continuing stores and 113 Dominick’s stores which are held for 55,000 square feet and is designed both to accommodate
sale at year-end 2002. See Planned Disposition of Dominick’s. changing consumer needs and to achieve certain operating
The Company’s continuing U.S. retail operations are efficiencies. The Company determines the size of a new
located principally in California, Oregon, Washington, store based on a number of considerations, including the
Alaska, Colorado, Arizona, Texas and the Mid-Atlantic
needs of the community the store serves, the location and
region. The Company’s Canadian retail operations are
site plan, and the estimated return on capital invested.
located principally in British Columbia, Alberta and
Most stores offer a wide selection of food and general
Manitoba/Saskatchewan. In support of its retail operations,
merchandise and feature a variety of specialty departments
the Company has an extensive network of distribution,
such as bakery, delicatessen, floral, pharmacy, Starbucks cof-
manufacturing and food processing facilities.
fee shops and adjacent fuel centers.
Safeway also has a 49% interest in Casa Ley, S.A. de C.V.
Safeway continues to operate a number of smaller
(“Casa Ley”) which operates 102 food and general mer-
stores that also offer an extensive selection of food and
chandise stores in Western Mexico.
general merchandise, and generally include one or more
In addition, the Company has a strategic alliance with
specialty departments. These stores remain an important
and a 52.5% ownership interest in GroceryWorks Holdings,
part of the Company’s store network in smaller communi-
Inc., an Internet grocer.
ties and certain other locations where larger stores may not
be feasible because of space limitations and/or communi-
In November
PLANNED DISPOSITION OF DOMINICK’S

ty needs or restrictions.
2002, Safeway announced its decision to sell Dominick’s,
The following table summarizes Safeway’s stores by size
which consists of 113 stores, and to exit the Chicago market.
at year-end 2002:
In accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” Dominick’s Number Percent
of Stores of Total
operations are presented as a discontinued operation.
Less than 30,000 square feet 290 17%
Accordingly, Dominick’s results are reflected separately in the Company’s 30,000 to 50,000 763 45
consolidated financial statements and Dominick’s information is exclud- More than 50,000 642 38
ed from the accompanying notes to the consolidated financial statements Total stores 1,695 100%

and the rest of the financial information included herein, unless other-
At year-end 2002, Safeway owned
wise noted. Sales at Dominick’s were $2.4 billion in 2002, $2.5 STORE OWNERSHIP

approximately one-third of its stores and leased its remaining
billion in 2001 and $2.5 billion in 2000.
stores. In recent years, the Company has preferred ownership
In accordance with SFAS No. 144, Dominick’s net assets
and liabilities have been written down to estimated fair because it provides control and flexibility with respect to
market value. The fair value of Dominick’s was determined financing terms, remodeling, expansions and closures.
by an independent third-party appraiser which primarily
Safeway’s operating strategy is to provide
MERCHANDISING
used the discounted cash flow method and the guideline
value to its customers by maintaining high store standards
company method. The final valuation of Dominick’s is
and a wide selection of high quality products at competitive
dependent upon the results of negotiations with the ulti-
prices. To provide one-stop shopping for today’s busy shop-
mate buyer. Adjustment to the loss on disposition, together
pers, the Company emphasizes high quality produce and
with any related tax effects, will be made when additional
meat, and offers many specialty items through its various
information is known.
specialty departments.

13

Safeway has developed a line of some 1,265 premium In addition, the Company operates laboratory facilities
corporate brand products since 1993 under the “Safeway for quality assurance and research and development in cer-
SELECT” banner. The award-winning Safeway SELECT tain of its plants and at its corporate offices.
line is designed to offer premium quality products that the
Each of Safeway’s 11 retail operating areas is
DISTRIBUTION
Company believes are equal or superior in quality to com-
served by a regional distribution center consisting of one or
parable best-selling nationally advertised brands, or are
more facilities. Safeway has 15 distribution/warehousing cen-
unique to the category and not available from national
ters (12 in the United States and three in Canada), which col-
brand manufacturers.
lectively provide the majority of all products to Safeway stores.
The Safeway SELECT line of products includes carbon-
The Company’s distribution centers in northern California,
ated soft drinks; unique salsas; bagged salads; whole bean
Maryland and British Columbia are operated by third parties.
coffees; the Indulgence line of cookies and other sweets; the
Verdi line of frozen pizzas, fresh and frozen pastas, pasta
CAPITAL EXPENDITURE PROGRAM
sauces and olive oils; the Primo Taglio line of meats, cheeses
A component of the Company’s long-term strategy is its
and sandwiches; Artisan fresh-baked breads; NutraBalance
capital expenditure program. The Company’s capital
pet food; Ultra laundry detergents and dish soaps; and Softly
expenditure program funds, among other things, new stores,
paper products. The Safeway SELECT line also includes an
remodels, manufacturing plants, distribution facilities and
extensive array of ice creams, frozen yogurts and sorbets;
information technology advances. Over the last several
Healthy Advantage items such as low-fat ice creams and
years, Safeway management has continued to strengthen its
low-fat cereal bars; and Gourmet Club frozen entrees and
program to select and approve new capital investments.
hors d’oeuvres.
The table below presents the Company’s cash capital
The principal function
M A N U FA C T U R I N G A N D W H O L E S A L E
expenditures and details changes in the Company’s store
of manufacturing operations is to purchase, manufacture
base over the last three years:
and process private label merchandise sold in stores operat-
ed by the Company. As measured by sales dollars, approxi- (Dollars in millions) 2002 2001 2000

mately 28% of Safeway’s private label merchandise is
Cash capital
manufactured in Company-owned plants, and the remain- expenditures (Note 1) $1,672.3 $1,435.7
$1,370.5
der is purchased from third parties. Cash capital expenditures as
a percent of sales 5.3% 4.9%
4.2%
Safeway’s Canadian subsidiary has a wholesale opera-
Stores opened (Note 1) 91 70
71
tion that distributes both national brands and private Stores closed or sold 44 45
32
label products to independent grocery stores and institu- Remodels (Note 2) 231 236
191
Total retail square footage
tional customers.
at year-end (in millions) 71.8 66.5
74.6
Safeway operated the following manufacturing and pro-
Note 1. Excludes acquisitions. Includes 11 former ABCO stores purchased in 2001.
cessing facilities at year-end 2002: Note 2. Defined as store remodel projects (other than maintenance) generally requiring expendi-
tures in excess of $200,000.

U.S. Canada

Milk plants 7 3
Bread baking plants 6 2
Ice cream plants 2 2
Cheese and meat packaging plants – 2
Soft drink bottling plants 4 –
Fruit and vegetable processing plants 1 3
Biscuit plant 1 –
Pet food plant 1 –
Total 22 12


Safeway invested $1.4 billion in cash capital expenditures operating performance over several years, and other
in 2002 and opened 71 stores and remodeled 191 stores. In employees are covered by supply division results.
2003, Safeway expects to spend between $1.1 billion and
MARKET RISK FROM
$1.3 billion in cash capital expenditures and open 50 to
FINANCIAL INSTRUMENTS
55 new stores and complete between 100 and 125 remodels.
Safeway manages interest rate risk through the strategic use of
fixed and variable interest rate debt and, from time to time,
PERFORMANCE-BASED COMPENSATION
interest rate swaps. As of year-end 2002, the Company did
The Company has performance-based compensation
not have any outstanding interest rate swap agreements.
plans that cover more than 21,000 management and pro-
The Company does not utilize financial instruments for
fessional employees. Performance-based compensation
trading or other speculative purposes, nor does it utilize lever-
plans set overall bonus levels based upon operating
aged financial instruments. The Company does not consider
results and working capital management. Individual
the potential losses in future earnings, fair values and cash
bonuses are based on job performance. Certain employ-
flows from reasonably possible near-term changes in interest
ees are covered by capital investment bonus plans that
rates and exchange rates to be material.
measure the performance of capital projects based on

The table below presents principal amounts and related weighted average rates by year of maturity for the Company’s debt
obligations at year-end 2002 (dollars in millions):

December 28, 2002 2003 2004 2005 2006 2007 Thereafter Total Fair value

Commercial paper:
Principal $ – $ – $ – $1,744.1 $ – $ – $1,744.1 $1,744.1
Weighted average interest rate – – – 1.62% – – 1.62%
Bank borrowings:
Principal $ – $ – $ – $ 25.3 $ – $ – $ 25.3 $ 25.3
Weighted average interest rate – – – 2.91% – – 2.91%
Long-term debt:(1)
Principal $780.3 $ 699.6 $ 232.5 $ 710.3 $ 785.0 $2,812.4 $6,020.1 $6,483.3
Weighted average interest rate 4.86% 7.38% 3.87% 6.14% 5.78% 6.69% 4.60%
(1) Primarily fixed-rate debt

15

F IV E - YE A R S UM M A RY FINANC IAL INFO RMAT IO N

52 Weeks 52 Weeks 52 Weeks 52 Weeks 53 Weeks
(Dollars in millions, except per-share amounts) 2002 2001 2000 1999 1998

R E S U LT S O F O P E R AT I O N S
Sales $31,797.0 $29,441.5 $26,299.8 $24,086.9
$32,399.2

Gross profit 9,849.6 8,789.5 7,808.0 7,026.2
10,096.4
Operating and administrative expense (7,212.9) (6,437.8) (5,850.9) (5,380.4)
(7,718.9)
Impairment charge – – – –
(704.2)
Goodwill amortization (101.0) (87.2) (63.8) (50.7)
–

Operating profit 2,535.7 2,264.5 1,893.3 1,595.1
1,673.3
Interest expense (366.1) (363.6) (261.1) (230.7)
(368.6)
Other income (loss), net (46.9) 42.0 38.3 30.2
15.5

Income from continuing operations
before income taxes and cumulative
effect of accounting change 2,122.7 1,942.9 1,670.5 1,394.6
1,320.2
Income taxes (836.0) (788.7) 686.3 (586.9)
(751.7)

before cumulative effect of accounting change 1,286.7 1,154.2 984.2 807.7
568.5
Loss on discontinued operations, net of tax (32.8) (62.3) (13.3) (1.0)
(696.6)

(Loss) income before cumulative effect of
accounting change 1,253.9 1,091.9 970.9 806.7
(128.1)
Cumulative effect of accounting change – – – –
(700.0)

Net (loss) income $ 1,253.9 $ 1,091.9 $ 970.9 $ 806.7
$ (828.1)

Basic earnings per share:
before cumulative effect of accounting change $ 2.56 $ 2.32 $ 1.97 $ 1.67
$ 1.22
Loss on discontinued operations (0.07) (0.13) (0.02) –
(1.49)
(1.50)

Net (loss) income $ 2.49 $ 2.19 $ 1.95 $ 1.67
$ (1.77)

Diluted earnings per share:
before cumulative effect of accounting change $ 2.51 $ 2.26 $ 1.91 $ 1.59
$ 1.20
Loss on discontinued operations (0.07) (0.13) (0.03) –
(1.47)
(1.48)

Net (loss) income $ 2.44 $ 2.13 $ 1.88 $ 1.59
$ (1.75)


F I V E - YE A R S UM MARY FINANC IAL INFO RMAT IO N

52 Weeks 52 Weeks 52 Weeks 52 Weeks 53 Weeks
(Dollars in millions, except per-share amounts) 2002 2001 2000 1999 1998

F I N A N C I A L S TAT I S T I C S
Comparable-store sales (decreases) increases (Note 1) 2.7% 3.1% 2.6% 4.1%
(0.6)%
Identical-store sales (decreases) increases (Note 1) 2.0% 2.5% 2.0% 3.7%
(1.2)%
Gross profit margin 30.98% 29.85% 29.69% 29.17%
31.16%
Operating and administrative expense
as a percent of sales (Note 2) 22.68% 21.87% 22.25% 22.34%
23.82%
Operating profit as a percent of sales 8.0% 7.7% 7.2% 6.6%
5.2%
Cash capital expenditures $ 1,672.3 $ 1,435.7 $ 1,193.7 $ 1,022.9
$ 1,370.5
Depreciation 726.6 640.4 535.9 466.7
812.5
Total assets 17,462.6 15,965.3 14,900.3 11,389.6
16,047.3
Total debt 7,271.5 6,352.3 6,777.6 4,768.4
8,327.0
Total stockholders’ equity 5,889.6 5,389.8 4,085.8 3,082.1
3,627.5
Weighted average shares outstanding — basic
(in millions) 503.3 497.9 498.6 482.8
467.3
Weighted average shares outstanding — diluted
(in millions) 513.2 511.6 515.4 508.8
473.8

O T H E R S TAT I S T I C S
Genuardi’s stores acquired during the year 39 – – –
–
Randall’s stores acquired during the year – – 117 –
–
Carrs stores acquired during the year – – 32 –
–
Stores opened during the year 91 70 58 45
71
Stores closed or sold during the year 44 45 45 30
32
Total stores at year-end 1,656 1,570 1,545 1,383
1,695
Remodels completed during the year (Note 3) 231 236 240 234
191
Total retail square footage at year-end (in millions) 71.8 66.5 63.9 54.7
74.6

Note 1. Defined as stores operating the entire year in both the current year and the previous year. Comparable stores include replacement stores while identical stores do not. 2001 and 2000 sales increases
reflect actual results and have not been adjusted to eliminate the estimated 50-basis-point impact of the 2000 northern California distribution center strike.
Note 2. Excludes goodwill amortization. Management believes this ratio is relevant because it assists investors in evaluating Safeway’s ability to control costs.
Note 3. Defined as store remodel projects (other than maintenance) generally requiring expenditures in excess of $200,000.

17

F I NANC IAL REVIEW

PLANNED DISPOSITION OF DOMINICK’S Safeway adopted SFAS No. 142, “Goodwill and Other
In November 2002, Safeway announced its decision to sell Intangible Assets,” during the first quarter of 2002 and
Dominick’s, which consists of 113 stores, and to exit the recorded an aggregate impairment charge of $700 million
Chicago market. In accordance with SFAS No. 144, for the cumulative effect of adopting this statement. The
“Accounting for the Impairment or Disposal of Long-Lived charge for Dominick’s of $589 million and Randall’s of $111
Assets,” Dominick’s operations are presented as a discontin- million reduced the carrying value of goodwill to its implied
ued operation. Accordingly, Dominick’s results are reflected separate- fair value. Impairment in both cases was due to a combina-
ly in the Company’s consolidated financial statements and Dominick’s tion of factors including acquisition price, post-acquisition
information is excluded from the accompanying notes to the consolidat- capital expenditures and operating performance.
ed financial statements and the rest of the financial information includ- During the fourth quarter of 2002, Safeway performed
ed herein, unless otherwise noted. Sales at Dominick’s were $2.4 its annual impairment review for goodwill under SFAS No.
billion in 2002, $2.5 billion in 2001 and $2.5 billion in 2000. 142. As a result of this review Safeway recorded a charge of
In accordance with SFAS No. 144, Dominick’s net assets $704.2 million for Randall’s, which is recorded as a compo-
and liabilities have been written down to estimated fair mar- nent of continuing operations, and $583.8 million for
ket value. The fair value of Dominick’s was determined by Dominick’s, which is recorded as a component of discon-
an independent third party appraiser which primarily used tinued operations. These charges reflect declining multiples
the discounted cash flow method and the guideline compa- in the retail grocery industry and the operating perform-
ny method. The final valuation of Dominick’s is dependent ance of these divisions. Net loss after the cumulative effect
upon the results of negotiations with the ultimate buyer. of this accounting change, discontinued operations and the
Adjustment to the loss on disposition, together with any fourth-quarter goodwill impairment was $828.1 million
related tax effects, will be made when additional information ($1.75 per share).
is known. In 1987, Safeway assigned a number of leases to Furr’s
Inc. (“Furr’s”) and Homeland Stores, Inc. (“Homeland”) as
STOCK REPURCHASE part of the sale of the Company’s former El Paso, Texas and
In July 2002, Safeway announced that its Board of Directors Oklahoma City, Oklahoma divisions. Furr’s filed for Chapter
had increased the authorized level of the Company’s stock 11 bankruptcy on February 8, 2001. Homeland filed for
repurchase program to $3.5 billion from the previously Chapter 11 bankruptcy on August 1, 2001. Safeway is con-
announced level of $2.5 billion. During 2002, Safeway tingently liable if Furr’s and Homeland are unable to contin-
repurchased 50.1 million shares of common stock at a cost ue making rental payments on these leases. In 2001, Safeway
of $1.5 billion. From initiation of the program in 1999 recorded a pre-tax charge to operating and administrative
through the end of 2002, Safeway had repurchased 87.0 expense of $42.7 million ($0.05 per share) to recognize the
million shares of common stock at a cost of $2.9 billion, estimated lease liabilities associated with these bankruptcies
leaving $0.6 billion available for repurchases. and for a single lease from
Safeway’s former Florida division. Income From
ACQUISITION OF GENUARDI’S FAMILY During 2002, the accrual was Continuing Operations
MARKETS, INC. (“GENUARDI’S”) reduced by $12.0 million as cash (In Millions)

In February 2001, Safeway acquired all of the assets of was paid out. In addition, Furr’s
Genuardi’s for approximately $530 million in cash (the began the liquidation process and
“Genuardi’s Acquisition”). On the acquisition date, Genuardi’s Homeland emerged from bank- $1,286.7

operated 39 stores in the greater Philadelphia, Pennsylvania ruptcy in 2002 and, based on the $1,154.2

area, including New Jersey and Delaware. The Genuardi’s resolution of various leases,
Acquisition was accounted for as a purchase and was funded Safeway reversed $12.1 million of
through the issuance of commercial paper and debentures. the accrual, leaving a balance of
$18.6 million at year-end 2002.
RESULTS OF OPERATIONS Safeway is unable to determine
$568.5
C O N T I N U I N G O P E R AT I O N S Safeway’s income from continu- its maximum potential obligation
ing operations before cumulative effect of accounting with respect to other divested
change was $568.5 million ($1.20 per share) in 2002, operations, should there be any
$1,286.7 million ($2.51 per share) in 2001 and $1,154.2 mil- similar defaults, because informa-
lion ($2.26 per share) in 2000. tion about the total number of
leases from these divestitures that
are still outstanding is not avail- 00 01 02
able. Based on an internal assess-


Portions of 2002 Sales Dollar
ment by the Company, performed by taking the original Identical-store sales
inventory of assigned leases at the time of the divestitures increased 2.0% in 2001,
and accounting for the passage of time, Safeway expects while comparable-store
that any potential losses beyond those recorded, should there sales rose 2.7%. Safe-
be any similar defaults, would not be material to Safeway’s way estimates that the
net operating results, cash flow or financial position. Summit strike in 2000
Safeway also recorded a pre-tax charge of $30.1 million had a positive impact
($0.04 per share) in other loss in 2001 to reduce the carrying on 2001 comparable-
amount of the Company’s investment in GroceryWorks store and identical-store
Holdings, Inc. (“GroceryWorks”) to its estimated fair value. sales of approximately
Future Beef Operations Holdings, LLC (“FBO”), a meat 50 basis points.
processing company based in Denver, Colorado, was placed Total sales for 2002
in bankruptcy in March 2002. Safeway was a 15% equity were $32.4 billion, com-
investor in FBO, had a supply contract for the purchase of pared to $31.8 billion s Costs of Goods Sold: 68.8%
beef from FBO, and had a common board member with for 2001 and $29.4 bil- s Operating and Administrative Expense: 23.8%
s Operating Profits: 5.2%
FBO. Safeway had a first-loss deficiency agreement with lion for 2000. Sales s Impairment Charge: 2.2%
FBO’s principal lender which provided that, under certain increased in 2002 pri-
circumstances and in the event of a liquidation of FBO being marily due to new store
initiated, Safeway would pay the lender up to $40 million if openings. 2001 sales increases were attributable to the
proceeds from the sale of collateral did not fully repay the Genuardi’s Acquisition, new store openings and increased
amount owed by FBO to the lender. Safeway accrued a pre- sales at continuing stores as well as the effect of the Summit
tax charge of $51.0 million ($0.06 per share) in other income strike in 2000.
(loss) related to the bankruptcy in 2001. The charge was pri-
G R O S S P R O F I T Gross profit represents the portion of sales
marily for payments under contractual obligations and the
revenue remaining after deducting the costs of inventory
first-loss deficiency agreement in the event FBO was liqui-
sold during the period, including purchase and distribution
dated. FBO is currently in the process of being liquidated
costs. In addition, advertising and promotional expenses, net
and Safeway paid the lender $40 million in January 2003.
of vendor allowances, are a component of cost of goods sold.
During the fourth quarter of 2000, Summit Logistics, a
Vendor allowances that relate to the Company’s buying and
company that operates Safeway’s northern California distri-
merchandising activities consist primarily of promotional
bution center, was engaged in a 47-day strike (the “Summit
allowances, advertising allowances and, to a lesser extent,
strike”) which had an adverse effect on sales, product costs
slotting allowances and are included as a component of cost
and distribution expenses at 246 Safeway stores in northern
of sales. Vendor allowances totaled $2.1 billion in 2002 and
California, Nevada and Hawaii. In 2002, Safeway settled a
2001 and $1.9 billion in 2000. Safeway includes all store
dispute with Summit over certain of these distribution
occupancy costs in operating and administrative expense.
expenses without a material impact to the Company’s
Gross profit increased to $10,096.4 million, or 31.16% of
consolidated financial statements. Safeway estimates that the
sales, in 2002, from $9,849.6 million, or 30.98% of sales, in
overall cost of the strike reduced 2000 net income by
2001 and $8,789.5 million, or 29.85% of sales, in 2000.
approximately $113.8 million ($0.13 per share). Safeway
The 2002 increase in the gross profit margin was prima-
estimated the impact of the strike by comparing internal
rily due to shrink control and continued improvements in
forecasts immediately before the strike with actual results
buying practices. The increase in the gross profit margin in
during the strike.
2002 was less than in 2001 because much of the Company’s
S A L E S Identical-store sales (stores operating the entire year cost savings were reinvested in pricing and promotion.
in both 2002 and 2001, excluding replacement stores) Safeway estimates that approximately 26 basis points of
decreased 1.2% in 2002 while comparable-store sales, which the 2001 increase in the gross profit margin was attributable
include replacement stores, decreased 0.6%. Sales were to the Summit strike in 2000. The remaining 87-basis-point
impacted by continued softness in the economy, an increase improvement was due primarily to continuing improvements
in competitive activity, an overly aggressive shrink-reduction in shrink control, buying practices and private-label growth.
effort and disruptions associated with the centralization of
buying and merchandising.

19

Operating and includes interest income of $8.5 million in 2002, $13.5 million
O P E R AT I N G A N D A D M I N I S T R AT I V E E X P E N S E
administrative expense was $7,718.9 million, or 23.82% of in 2001 and $12.0 million in 2000. Other loss in 2001 includes
sales, in 2002 compared to $7,212.9 million, or 22.68% of sales, a $30.1 million impairment charge to reduce the carrying
in 2001 and $6,437.8 million, or 21.87% of sales, in 2000. amount of the Company’s investment in GroceryWorks to its
Operating and administrative expense as a percentage of estimated fair value. Safeway also recorded a $51.0 million
sales increased 114 basis points in 2002 due primarily to high- charge related to the FBO bankruptcy in 2001.
er employee benefit costs, higher real estate occupancy costs,
In November 2002, Safeway
D I S C O N T I N U E D O P E R AT I O N S
higher pension expense and soft sales. These increases were
announced its decision to sell Dominick’s, which consists of 113
partially offset by a decrease of approximately 10 basis points
stores, and to exit the Chicago market. In accordance with
due to income received from Canadian Imperial Bank of
SFAS No. 144, Dominick’s operations are presented as a
Commerce for the termination of an in-store banking agree-
discontinued operation.
ment with Safeway.
As a result of the planned exit of the Chicago market, the
Approximately 13 basis points of the 2001 increase was
Company recorded a pre-tax loss from discontinued opera-
attributable to the charge related to the Furr’s and
tions of $787.9 million ($1.47 per share) in 2002, consisting
Homeland bankruptcies. Another 14 basis points was attrib-
of $583.8 million in Dominick’s goodwill impairment,
utable to the Genuardi’s Acquisition. The remaining 54-
$201.3 in estimated loss on disposal of Dominick’s and $2.8
basis-point increase was due primarily to unfavorable
million in loss from store operations. Pre-tax loss from dis-
comparisons in pension income and property gains, higher
continued operations was $27.7 million ($0.07 per share) in
real estate occupancy costs, utility cost increases and higher
2001 and $76.4 million ($0.13 per share) in 2000. Loss from
workers’ compensation expense. These increases were par-
discontinued operations includes all direct charges to opera-
tially offset by a decrease of approximately eight basis points
tions at Dominick’s as well as allocated interest expense of
attributable to the Summit strike.
$62.2 million in 2002, $80.8 million in 2001 and $93.6 mil-
Annual goodwill amortization was $101.0 million in
lion in 2000. Loss from discontinued operations also includ-
2001 and $87.2 million in 2000. Beginning in 2002, good-
ed goodwill amortization of $39.4 million in 2001 and $39.0
will no longer is being amortized. Goodwill was tested for
million in 2000. Corporate overhead is not included in dis-
impairment upon adoption of SFAS No.142, and is being
continued store operations. Sales at discontinued operations
tested annually for impairment.
were $2.4 billion in 2002, $2.5 billion in 2001 and $2.5 bil-
Interest expense from continuing opera- lion in 2000.
INTEREST EXPENSE
tions was $368.6 million in 2002, $366.1 million in 2001 and In accordance with SFAS No. 144, Dominick’s net assets
$363.6 million in 2000. and liabilities have been written down to estimated fair mar-
In accordance with EITF Issue No. 87-24, interest expense ket value. The fair value of Dominick’s was determined by an
was allocated to discontinued operations based on the ratio of independent third party appraiser which primarily used the
Dominick’s net assets to total Safeway net assets. Interest discounted cash flow method and the guideline company
expense of $62.2 million in 2002, $80.8 million in 2001 and method. The final valuation of Dominick’s is dependent upon
$93.6 million in 2000 was allocated to, and is included in, loss the results of negotiations with the ultimate buyer. Adjustment
on discontinued operations. Allocated interest decreased in to the loss on disposition, together with any related tax effects,
2002 and 2001 primarily because Dominick’s net assets have will be made when additional information is known.
decreased relative to total Safeway net assets.
R E L AT E D P A R T Y T R A N S A C T I O N S See Note L of the
Interest expense from continuing operations increased in
Company’s consolidated financial statements.
both 2002 and 2001 primarily due to less interest allocated
to discontinued operations and higher average borrowings
CRITICAL ACCOUNTING POLICIES
primarily from debt incurred to finance the repurchase of
Critical accounting policies are those accounting policies
Safeway stock and the Genuardi’s Acquisition in 2001, par-
that management believes are important to the portrayal of
tially offset by lower interest rates.
Safeway’s financial condition and results and require man-
Other income (loss) consists primari- agement’s most difficult, subjective or complex judgments,
OTHER INCOME (LOSS)
ly of net equity in earnings or losses from Safeway’s unconsol- often as a result of the need to make estimates about the
idated affiliates, which was a loss of $0.2 million in 2002, and effect of matters that are inherently uncertain.
income of $20.2 million in 2001 and $31.2 million in 2000.
Equity in losses, net, in 2002 includes approximately $15.8 mil-
lion in charges related to the resolution of physical inventory
count discrepancies at Casa Ley. Other income (loss) also


The Company is primarily self- using a risk-adjusted rate of interest. The Company esti-
W O R K E R S ’ C O M P E N S AT I O N
insured for workers’ compensation, automobile and general mates future cash flows based on its experience and knowl-
liability costs. It is the Company’s policy to record its esti- edge of the market in which the closed store is located and,
mated self-insurance liability, as determined actuarially, when necessary, utilizes local real estate brokers. However,
based on claims filed and an estimate of claims incurred but these estimates project cash flow several years into the future
not yet reported, discounted at a risk-free interest rate. Any and are affected by variable factors such as inflation, the
actuarial projection of losses concerning workers’ compen- strength of the real estate markets and economic conditions.
sation and general liability is subject to a high degree of vari-
E M P L O Y E E B E N E F I T P L A N S The determination of Safeway’s
ability. Among the causes of this variability are
obligation and expense for pension and other post-retire-
unpredictable external factors affecting future inflation
ment benefits is dependent, in part, on the Company’s selec-
rates, discount rates, litigation trends, legal interpretations,
tion of certain assumptions used by its actuaries in
benefit level changes and claim settlement patterns. An
calculating these amounts. These assumptions are disclosed
example of how change in discount rates can affect
in Note J to the consolidated financial statements and
Safeway’s reserve occurred in 2002 when a 100-basis-point
include, among other things, the discount rate, the expected
reduction in the Company’s discount rate, based on changes
long-term rate of return on plan assets and the rates of
in market rates, increased its liability by approximately
increase in compensation and health care costs. In accor-
$9.0 million.
dance with generally accepted accounting principles, actual
The majority of the Company’s workers’ compensation
results that differ from the Company’s assumptions are accu-
liability is from claims occurring in California. California
mulated and amortized over future periods and, therefore,
workers’ compensation has received a significant amount of
affect its recognized expense and recorded obligation in such
attention from the state’s politicians, insurers, employers and
future periods. While Safeway believes that its assumptions
providers, as well as the public in general. Recent years have
are appropriate, significant differences in Safeway’s actual
seen an escalation in the number of legislative reforms, judi-
experience or significant changes in the Company’s assump-
cial rulings and social phenomena affecting workers’ com-
tions may materially affect Safeway pension and other post-
pensation in California. Some of the factors that may affect
retirement obligations and its future expense.
the Company’s reserve estimates include changes in benefit
An example of how changes in these assumptions can
levels and medical fee schedules. In 2002, the State of
affect Safeway’s financial statements occurred in 2002. Based
California passed AB-749 which increases the maximum
on the Company’s review of market interest rates, actual
weekly temporary-disability rate beginning in 2003. Weekly
return on plan assets and other factors, Safeway lowered its
benefits are calculated as a function of the hourly pay rate
discount rate for U.S. plans to 6.50% at year-end 2002 from
and the average number of hours worked. The law also has
7.50% at year-end 2001. The Company also lowered its
several cost containing measures, such as the establishment
expected return on plan assets for U.S. plans to 8.50% at
of some medical fee schedules and abolishment of the treat-
year-end 2002 from 9.00% at year-end 2001. These rates are
ing physician presumption. The impact of the increase in
applied to the calculated value of plan assets and liabilities
benefits on Safeway is mitigated by the high ratio of part-
which results in an amount that is included in pension
time workers, who typically qualify for benefit amounts
expense or income in the following years. When not consid-
below the weekly maximum.
ering other changes in assumptions or actual return on plan
The Company’s workers’ compensation future funding
assets, the 100-basis-point change in the discount rate alone
estimates anticipate no change in the benefit structure.
will negatively impact 2003 U.S. pension expense by approx-
Statutory changes could have a significant impact on future
imately $19.8 million and the 50-basis-point change in
claim costs. The California Legislature is currently dis-
expected return on plan assets alone will negatively impact
cussing additional benefit reforms. At this point it is
2003 U.S. pension expense by $6.5 million.
unknown what, if any, changes will result.
While changes in assumptions may materially affect the
S T O R E C L O S U R E S It is the Company’s policy to recognize Company’s future expense, the most significant factor in
losses relating to the impairment of long-lived assets when determining this amount is the fair value of plan assets at
expected net future cash flows are less than the assets’ carry- year end. Not considering any changes in assumptions, a
ing value. For stores closed that are under long-term leases, $100 million change in plan assets in 2002 would impact
the Company records a liability for the future minimum 2003 U.S. pension expense by approximately $8.5 million.
lease payments and related ancillary costs from the date of The fair value of plan assets can vary significantly from year
closure to the end of the remaining lease term, net of esti- to year.
mated cost recoveries. In both cases, fair value is determined
by estimating net future cash flows and discounting them

21

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