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    Safeway Shares Soar on Strong Q2

    PLEASANTON, Calif. -- Safeway's stock price yesterday soared to its highest level in nearly four years after the retailer reported second quarter income growth of 80 percent, surpassing analysts' earnings expectations. The chain also raised its outlook for the remainder of the year.

    PLEASANTON, Calif. -- Safeway's stock price yesterday soared to its highest level in nearly four years after the retailer reported second quarter income growth of 80 percent, surpassing analysts' earnings expectations. The chain also raised its outlook for the remainder of the year.

    "If you look at all of the key metrics, every one has shown substantial improvement," Safeway president and c.e.o. Steve Burd said during yesterday's earnings conference call.

    Total sales were $9.4 billion in the second quarter, up 6.4 percent from $8.8 billion last year. Identical-stores sales increased 5.6 percent for the quarter -- 4.2 percent, excluding fuel sales. Safeway estimates that the shift in Easter holiday sales (which occurred in the second quarter of 2006 compared to the first quarter of 2005) increased identical-store sales by approximately 1 percent.

    Safeway's net income was $246.2 million, or 55 cents per share, in the three months ended June 17, an 84 percent increase from net income of $134 million, or 30 cents per share, for the same period last year.

    "These improved results were driven by strong sales growth, a healthy expansion in non-fuel gross margin, and significant operating and administrative expense leverage," said Burd. "We believe we are well positioned to deliver improved results for the year, and therefore are raising our earnings guidance for 2006."

    Gross profit increased to $2.7 billion in Q2 compared to last year's $2.5 billion. Gross profit margin decreased 28.66 percent of sales in the latest quarter compared to 28.74 percent in the second quarter of 2005.

    "A large part of the non-fuel gross margin increased came from improvements in shrink reduction," said Burd. "We started shrink efforts in 1998 and have made enormous progress. We've achieved now more in our shrink-reduction efforts during the first quarter in terms of dollars than we planned to for the year. We expect to see more progress in the second half through 2007 and beyond."

    Safeway also surpassed its targeted procurement savings, and combined with savings from shrink allowed the retailer to make selected investments in price, according to Burd.

    Net income for the first half of 2006 was $389.1 million, or 86 cents per share, compared to $265.3 million or 59 cents last year. Gross profit margin was 28.87 percent in 2006 compared to 28.98 percent in 2005.

    Safeway invested $741.3 million in capital expenditures during the first half of 2006, during which it opened five new Lifestyle stores and completed 80 Lifestyle remodels. For the year, the company expects to spend approximately $1.6 billion in capital expenditures, open approximately 20 new Lifestyle stores, and complete approximately 280 Lifestyle remodels.

    Not surprisingly, Safeway increased its earnings guidance for 2006 to a range of $1.65 to $1.75 per share (excluding the 13 cents per share impact of the favorable tax settlement) from $1.55 to $1.65 per share. It continues to expect non-fuel identical-store sales to grow approximately 3 percent for the year.

    Safeway operates 1,770 stores in the United States and Canada and had annual sales of $38.4 billion in 2005.

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