Safeway 2005 Annual Report Download - page 5

each Lifestyle store with extensive promotional
support. During the past year we have refined these
activities so we can reduce the cost of promotions
without diminishing operating results. Nevertheless, as
anticipated, the cost of promoting Lifestyle openings in
2005 reduced gross margin and increased operating
and administrative expense as a percentage of sales.
As the Lifestyle stores opened last year mature in 2006,
we expect their margins to improve and their contri-
bution to operating profit to increase.
Gross Profit
Gross profit in 2005 decreased 65 basis points to
28.93% of sales. Higher fuel sales (which have a lower
gross margin) accounted for 39 basis points of the
decline. The remaining 26 basis-point reduction was
due to grand openings of Lifestyle stores, targeted
price investments, increased advertising expense and
higher energy costs.
Operating and Administrative Expense
Operating and administrative expense last year decreased
53 basis points to 25.77% of sales. The significant pre-tax
charges in 2005 and 2004 reflected in the table on page 4
(other than pro forma stock option expense) increased
operating and administrative expense as a percentage of
sales by a net 20 basis points. Stock option expense,
labor costs associated with Lifestyle grand openings and
higher energy costs also increased our O&A expense-to-
sales ratio. However, these items were more than offset
by the restructured labor agreements, increased fuel
sales and reduced workers’ compensation costs.
Interest Expense
Interest expense decreased $8.6 million to $402.6
million in 2005 despite higher average interest rates,
primarily because total debt declined to $6.4 billion.
Capital Spending
Cash capital investments increased to $1.4 billion in 2005.
During the year we opened 21 new Lifestyle stores,
completed 293 Lifestyle remodels and closed
48 older stores. In 2006 we plan to invest approxi-
mately $1.6 billion in cash capital expenditures and
open 20 to 25 new Lifestyle stores while completing
some 280 Lifestyle remodels.
We also opened 20 fuel stations adjacent to our
stores. As of year-end 2005, 314 of our stores sold
gasoline, boosting sales at these locations while
enhancing one-stop shopping convenience for
our customers.
Cash Flow
Net cash flow from operating activities was $1.9 billion
in 2005, down from $2.2 billion in 2004. Working
capital contributed to cash flow in 2005, but at a lower
level than in 2004. Net cash flow used by investing
activities, which consists principally of cash paid for
property additions, increased $243 million to $1.3
billion in 2005. Net cash flow used by financing
activities – mainly cash used to retire debt – was
$467 million in 2005, down from $1.1 billion the
prior year.
Free cash flow was $567.5 million in 2005.2As a
result, debt declined $404.8 million, cash and cash
equivalents increased $106.5 million and we paid
$44.9 million in dividends to stockholders.
Outlook
Looking ahead, we are encouraged by the strong
rebound in our sales over the past year and by the
unprecedented
success of our
Lifestyle stores. With
our operating results
steadily improving,
our capital invest-
ments continuing to
exceed targeted rates
of return, and our
NET INCOME
IN 2005:
$561
Million