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    Safeway Sees Strong Q1 Sales, Sees Growth on Pace for Year

    PLEASANTON, Calif. -- Strong sales at Safeway's new and remodeled Lifestyle stores helped the retailer deliver solid results in the face of increasing fuel costs and an Easter that fell in the second quarter, the chain said yesterday.

    PLEASANTON, Calif. -- Strong sales at Safeway's new and remodeled Lifestyle stores helped the retailer deliver solid results in the face of increasing fuel costs and an Easter that fell in the second quarter, the chain said yesterday.

    Total sales and other revenue for Q1, ended March 25, 2006, increased 3.2 percent to $8.9 billion, compared to $8.6 billion during the same period last year. Identical-store sales increased 2.7 percent for Q1. Excluding the effect of fuel sales, identical-store sales increased 1.5 percent.

    "As expected, the momentum we built in 2005 has continued into the first quarter of 2006," said Steve Burd, chairman, president and c.e.o. "Taking into account the timing of the New Year's and Easter holidays, our identical-store sales increase of 1.5 percent is consistent with our guidance of 3 percent for the year. We also produced double-digit earnings growth while absorbing a number of significant cost increases."

    Safeway reported net income of $143 million (32 cents per share) for the quarter compared to $131 million (29 cents per share) last year.

    Gross profit increased to $2.6 billion for Q1, up from last year's $2.5 billion. Gross profit margin declined slightly to 29 percent of sales compared to 29.2 percent last year. The remaining net increase in gross profit margin of 18 basis points is due primarily to reduced shrink, partially offset by investments in pricing, higher advertising, and higher energy costs.

    "We're making great progress [in our shrink reduction efforts]," Burd said during yesterday's earnings conference call. "I think there is a practical upper limit in terms of percentage of shrink reduction. As long as you continue to increase sales, there will be a natural cash flow-through."

    Burd pointed out some examples of Safeway's shrink reduction efforts, such as optimizing the perishables supply chain, and cutting meats at the right time and selling through.

    Operating and administrative expense declined 27 basis points to 25.53 percent of sales in the Q1 from 25.80 percent last year. This decline was primarily due to increased sales and lower employee costs, partly offset by higher energy costs and employee buyouts.

    Safeway invested $413.5 million in capital expenditures during Q1, including the opening of one new Lifestyle store and the completion of 24 Lifestyle remodels. Burd noted, however, that the company saw 52 grand openings during Q1 including stores that were opened in Q4 of 2006. For the year, the company expects to spend approximately $1.6 billion in capital expenditures, open approximately 20 to 25 new Lifestyle stores and complete approximately 280 Lifestyle remodels.

    The retailer's market share increased for the fifth consecutive quarter.

    Safeway confirmed its guidance for 2006 of $1.55 to $1.65 earnings per share and $400 million to $600 million of free cash flow, and continues to expect non-fuel identical-store sales to grow 3 percent for the year.

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