Safeway 2005 Annual Report Download - page 38

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SAFEWAY INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Safeway reported net income of $561.1 million ($1.25 per diluted share) in 2005, net income of $560.2 million ($1.25 per
diluted share) in 2004 and a net loss of $169.8 million ($0.38 per diluted share) in 2003. These results were significantly
affected by a strike in Southern California, goodwill and asset impairments at Dominick’s and Randall’s and other unusual
charges described below.
Strike Impact On October 11, 2003, seven UFCW local unions struck the Company’s 289 stores in Southern California. As
a result, pursuant to the terms of a multi-employer bargaining arrangement, Kroger and Albertson's locked out certain of
their retail union employees in Southern California food stores. An agreement ending the strike was ratified by the union on
February 28, 2004. Employees returned to work beginning March 5, 2004. Safeway estimates the overall cost of the strike
and its residual effects reduced 2004 earnings by $412.2 million before taxes ($0.57 per diluted share) and 2003 earnings by
$167.5 million before taxes ($0.23 per diluted share). Safeway estimated the impact of the strike by comparing internal
forecasts immediately before the strike with actual results during and after the strike, at strike-affected stores. The estimate
also includes the Company’s benefit under an agreement with Kroger and Albertson’s that arises out of the multi-employer
bargaining process in Southern California.
Dominick’s Pre-tax charges for goodwill impairment, long-lived asset impairment and store exit activities since 2003 at
Dominick’s are summarized below (in millions):
2005 2004 2003
Goodwill impairment - - $281.4
Impairment of long-lived assets (included in operating and administrative expense) - - 311.4
Store exit activities (included in operating and administrative expense) - $45.7 -
In November 2002, Safeway attempted to sell Dominick’s and exit the Chicago market due to labor issues. In the first 36
weeks of 2003, Safeway reduced the carrying value of Dominick’s by writing down $256.5 million ($0.56 per diluted share)
of goodwill and $120.7 million ($0.17 per diluted share) of long-lived assets, based on indications of value received during
the sale process. In November 2003, Safeway announced that it was taking Dominick’s off the market after the winning
bidder and the unions representing Dominick’s could not reach an agreement on a labor contract. Safeway reclassified
Dominick’s from an “asset held for sale” to “assets held and used” and adjusted Dominick’s individual long-lived assets to
the lower of cost or fair value. As a result, in the fourth quarter of 2003, Safeway incurred a pre-tax, long-lived asset
impairment charge of $190.7 million ($0.26 per diluted share) and a goodwill impairment charge of $24.9 million ($0.06 per
diluted share). As of year-end 2003, there was no goodwill remaining on Safeway’s consolidated balance sheet related to
Dominick’s.
In the first quarter of 2004, Safeway closed 12 under-performing Dominick’s stores, which resulted in a store-lease exit
charge of $45.7 million ($0.06 per diluted share).
Dominick’s incurred operating losses and declining sales in each of the last three fiscal years. The Company has negotiated a
new labor contract at Dominick’s and has begun to remodel a few stores into the Lifestyle format. While management
believes these transactions will improve sales and profitability, there can be no assurance that Dominick’s will achieve
satisfactory operating results in the future.
Randall’s Pre-tax charges for goodwill impairment, long-lived asset impairment and store exit activities since 2003 at
Randall’s are summarized below (in millions):
2005 2004 2003
Goodwill impairment -- $447.7
Impairment of long-lived assets (included in operating and administrative expense) $54.7 --
Store exit activities (included in operating and administrative expense) 55.5 --