UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

ALBERTSON’S, INC.

(208) 395-6200
(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ       No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 CFR section 405) is not contained herein and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ      No o

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of July 29, 2004 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $8.9 billion.

The number of shares of the Registrant’s common stock, $1.00 par value, outstanding as of March 24, 2005 was 368,292,618.

Documents Incorporated by Reference

Listed hereunder are the documents, any portions of which are incorporated by reference and the Parts of this Form 10-K into which such portions are incorporated:

1.	The Registrant’s definitive proxy statement for use in connection with the Annual Meeting of Shareholders to be held on June 2, 2005 to be filed within 120 days after the Registrant’s year ended February 3, 2005, portions of which are incorporated by reference into Part III of this Form 10-K.

ALBERTSON’S, INC.
FORM 10-K
TABLE OF CONTENTS

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PART I

Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995

All statements other than statements of historical fact contained in this and other documents disseminated by the Company, including statements regarding the Company’s expected financial performance, are forward-looking information as defined in the Private Securities Litigation Reform Act of 1995. In reviewing such information about the future performance of the Company, it should be kept in mind that actual results may differ materially from those projected or suggested in such forward-looking information since predictions regarding future results of operations and other future events are subject to inherent uncertainties. These statements may relate to, among other things: statements of expectation regarding the Company’s results of operations had the labor dispute in Southern California not occurred; investing to increase sales; changes in cash flow; increases in general liability costs, workers’ compensation costs and employee benefit costs; attainment of cost reduction goals; impacts of the acquisitions of J Sainsbury plc’s U.S. retail grocery business (“Shaw’s”) and the Southern California gourmet and specialty food retailer Bristol Farms; achieving sales increases and increases in comparable and identical sales; opening and remodeling stores; and the Company’s five strategic imperatives. These statements are indicated by words or phrases such as “expects,” “plans,” “believes,” “estimate” and “goal.”

Important assumptions and other important factors that could cause actual results to differ materially from those set forth in the forward-looking information include actions taken by new or existing competitors (including nontraditional competitors), particularly those intended to improve their market share (such as pricing and promotional activities); changes in consumer spending; labor negotiations; adverse determinations with respect to, or the need to increase reserves for, litigation, taxes or other claims (including environmental matters); financial difficulties experienced by third-party insurance providers; employee benefit costs; the Company’s ability to recruit, retain and develop employees; the Company’s ability to develop new stores or complete remodels as rapidly as planned; the Company’s ability to implement new technology successfully; stability of product costs; the Company’s ability to integrate the operations of and realize synergies from acquired or merged companies, including Shaw’s; the Company’s ability to execute its restructuring plans; the Company’s ability to achieve its five strategic imperatives; and other factors affecting the Company’s business in or beyond the Company’s control. These other factors include changes in the rate of inflation; changes in state or federal legislation or regulation; the cost and stability of energy sources; the continued safety of the products the Company sells; changes in the general economy; changes in interest rates; and the occurrence of natural disasters.

Other factors and assumptions not identified above could also cause the actual results to differ materially from those projected or suggested in the forward-looking information. The Company does not undertake to update forward-looking information contained herein or elsewhere to reflect actual results, changes in predictions, assumptions, estimates or changes in other factors affecting such forward-looking information.

Item 1. Business.

General

Albertson’s, Inc. (“Albertsons” or the “Company”) is incorporated under the laws of the State of Delaware and is the successor to a business founded by J. A. Albertson in 1939. The Company’s general offices are located at 250 Parkcenter Boulevard, Boise, Idaho 83706 and its telephone number is (208) 395-6200. Information about the Company is available on the internet at www.albertsons.com.

Based on sales, the Company is one of the largest retail food and drug chains in the world. As of February 3, 2005, the Company’s divisions and subsidiaries operated 2,503 retail stores in 37 states.

The Company’s operations are within a single operating segment, the retail sale of food and drug merchandise. The Company’s operations are within the United States. As of February 3, 2005, the Company’s divisions and subsidiaries operated stores under the banners Albertsons, Acme, Bristol Farms, Grocery Warehouse, Jewel, Jewel-Osco, Max Foods, Osco Drug, Sav-on Drugs, Shaw’s, Star Market and Super Saver. The Company has invested in these brands, their development and their protection and considers them important assets.

The Company’s fiscal year ends on the Thursday nearest to January 31st. As a result, the Company’s fiscal year includes a 53rd week every five to six years. The Company’s fiscal year 2004 contained 53 weeks and ended on February 3, 2005. Fiscal years 2003 and 2002 each contained 52 weeks and ended on January 29, 2004 and January 30, 2003, respectively. The Company’s net sales, earnings from continuing operations and total assets for the past five fiscal years are set forth on page 12 of this Annual Report on Form 10-K.

All dollar amounts in this report are in millions, except per share data.

Retail Formats

As of February 3, 2005, the Company’s retail operations were organized into seven divisions, based primarily on geographic boundaries, and two independently managed subsidiaries. Division and subsidiary staff are responsible for day-to-day operations and for executing marketing and merchandising programs. This structure allows the division and subsidiary level employees, who are closest to the customer, to implement strategies tailored to each of the neighborhoods that the Company serves.

Historically, the Company has identified each of the stores operated by its divisions as a combination food-drug store, a conventional store, a stand-alone drugstore or a warehouse store. The Company’s ongoing dual-branding initiative and investment in new formats has made these identifiers less meaningful. The Company now identifies its stores as one of the following: combination food-drug store, conventional store (which includes non-Extreme Inc. warehouse stores), stand-alone drugstore,

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Bristol Farms store or Extreme Inc. store. The Company also operates fuel centers near existing stores and online grocery and drugstore Web sites.

The Company’s combination food-drug stores combine grocery and drug stores under one roof. Most of these stores include a complete grocery offering, prescription drugs and an expanded section of cosmetics and general merchandise in addition to specialty departments such as service seafood and meat, bakery, lobby/video, service delicatessen, liquor and floral. Many also offer meal centers, party supply centers, coffee bars, in-store banks, photo processing and destination categories for beverages, snacks, pet care products, paper products and baby care merchandise. These services and product offerings are provided for easy, one-stop shopping. Combination food-drug stores are typically located in neighborhood shopping centers and range in size from 35,000 to 60,000 square feet. As of February 3, 2005, the Company’s divisions operated 1,521 combination food-drug stores.

Conventional food stores are less than 35,000 square feet and focus their product and service offerings primarily on food departments. Conventional stores do offer many of the same product and service offerings as combination food-drug stores, but on a limited basis. As of February 3, 2005, the Company’s divisions operated 265 conventional stores.

The Company’s stand-alone drugstores offer convenient shopping and prescription pickup as well as a wide assortment of general merchandise, health and beauty care products, over-the-counter medication, greeting cards and photo processing. Many newer stores have expanded their product offerings to include limited grocery and convenience items requiring freezing or refrigeration. The Company’s stand-alone drugstores are typically located on corners and in shopping centers and many offer a drive-thru pharmacy. As of February 3, 2005, the Company’s divisions operated 695 stand-alone drugstores.

During 2004, the Company began an intense focus on format differentiation with the introduction of Extreme Inc. and the acquisition of Bristol Farms. Extreme Inc. is an independently managed subsidiary which operates price impact stores. These low-price, limited-service stores feature an innovative new store design coupled with a unique merchandising format tailored to the demands of customers in their neighborhoods. As of February 3, 2005, Extreme Inc. operated 11 stores under the Super Saver banner.

In September 2004 the Company acquired Bristol Farms, a gourmet and specialty food retailer. As of February 3, 2005, Bristol Farms operated 11 stores in Southern California. Bristol Farms stores offer a gourmet and natural product assortment in stores that range in size from 7,200 to 29,700 square feet. In addition, Bristol Farms offers premium catering services and several stores offer in-store dining.

As of February 3, 2005, the Company operated 234 fuel centers in 22 states. Fuel centers are generally located in the parking lots of stores operated by the Company’s divisions and subsidiaries. Fuel centers feature three to six fuel pumps and a small building, ranging in size from a pay-only kiosk to a convenience store.

In November 1999 Albertsons introduced its own grocery delivery Web site when Albertsons.com entered the Seattle, Washington market. Since the launch of Albertsons.com, the Company has continued to introduce this service to more areas. As of February 3, 2005, Albertsons.com operated in and around Phoenix, Arizona; Los Angeles, Oakland, Palm Springs, Sacramento, San Diego, San Jose, San Francisco and Santa Barbara, California; Boise, Idaho; Las Vegas, Nevada; New Jersey; Pennsylvania; Portland, Oregon; Dallas/Fort Worth, Texas; Salt Lake City, Utah; and Seattle and Vancouver, Washington. By using its brick-and-mortar stores, Albertsons has evolved its online model to take advantage of its retail grocery expertise, brand recognition and existing infrastructure. With more than five years of experience, Albertsons.com offers a reliable and proven online grocery service that delivers products direct from the store to the customer’s location. Savon.com, Albertsons online drugstore, serves the Company’s customers nationwide. Savon.com has a nationwide online pharmacy service that offers sundry items, new and refill prescriptions and consumer health information. The Web site allows customers across the country the freedom to have new or refilled prescriptions ready for pickup at any pharmacy operated by the Company’s divisions, or mailed to their location of preference.

Distribution Centers and Suppliers

The Company’s retail operations are supported by 19 major Company distribution centers. These distribution centers provide product to the stores operated by the Company’s divisions and subsidiaries.

In an effort to obtain merchandise at the lowest possible cost, the Company also supplies stores through outside suppliers and directly from manufacturers. The Company believes that it is not dependent on any one supplier and considers its relations with its suppliers to be satisfactory.

Marketing and Merchandising

The Company’s brand promise is “Working Hard to Make Life Easier for Our Customers”. This is reinforced to customers through associate education and print and media advertising.

With the Company’s brand promise in mind, the Company strives to merchandise stores that cater to the neighborhoods served. For example, some stores offer a variety of products in categories such as Asian, Hispanic and kosher foods.

In addition, a principal component of the Company’s merchandising strategy is to offer a broad array of products and time-saving services that are a part of a solution to today’s lifestyle demands. The Company’s dual branding initiative is designed to serve this merchandising strategy. One of Albertsons strategic advantages in today’s marketplace comes from the Company’s unique expertise in operating food stores and drugstores. Albertsons has decades of experience in operating these two formats. This unique position in the marketplace has enabled the Company to bring together separate retail brands, creating dual branded stores that leverage the Company’s separate food and drug expertise and brand equity and make life easier for customers by providing

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one-stop shopping for food and drug needs. The Company began expanding the dual branding concept in 2001 and continued to roll-out the dual branding concept through 2004. The Company expects to continue to dual brand stores in nearly every market in 2005. As of February 3, 2005, 677 of the stores operated by the Company’s divisions were dual branded.

The Company continues to test additional ways to further the Company’s brand promise by adding to its stores natural and organic sections, international food sections, in-store bakeries and delicatessens, prepared foods sections and gourmet coffee service. Some stores also feature a selection of prepared foods and daily selections of home meal replacement items, such as rotisserie chicken, fried chicken, tamales, meat loaf and other dinner entrees, sandwiches, pre-packaged salads and prepared fresh vegetables. The Company is also expanding the bakery in some stores, offering an expanded selection of baked goods and self-service selections. Finally, the Company has joined forces with other retailers (including Toys R Us^® and Starbucks^®) to provide a wider selection of quality merchandise to its customers.

All of the Company’s stores carry a broad range of national brands and offer Our Own Brands (or private label) products in many merchandise categories. During 2003, the Company launched its premium own brand, essensia^TM products. As of February 3, 2005, the Company offered 198 products under the essensia^TM brand. In 2004, the Company launched equaline^TM and HomeLife^TM, its own brand products in the health and beauty and general merchandise categories. The Company’s stores provide consumer information such as nutritional signing in the meat and produce departments, freshness code dating, unit pricing, meal ideas and food information pamphlets.

Associates

As of February 3, 2005, the Company employed approximately 241,000 associates, of which approximately 55% were covered by collective bargaining agreements, primarily with the United Food and Commercial Workers and International Brotherhood of Teamsters. Labor agreements covering approximately 37,000 associates expire during 2005. Negotiations with respect to some of these contracts have commenced. There can be no assurances that the Company will be able to successfully renegotiate its union contracts without work stoppages or on acceptable terms.

The Company considers its present relations with associates to be satisfactory. The Company values its associates and believes that loyalty, enthusiasm and commitment are key elements of its operating performance.

Environmental

The Company has identified environmental contamination sites related primarily to underground petroleum storage tanks and groundwater contamination at various store, warehouse, office and manufacturing facilities (related to current operations as well as previously disposed of properties). The Company conducts an ongoing program for the inspection and evaluation of potential new sites and the remediation and monitoring of contamination at existing and previously owned sites. Although the ultimate outcome and expense of environmental remediation is uncertain, the Company believes that the costs of required remediation and continuing compliance with environmental laws, in excess of current reserves, will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. Environmental remediation costs were not material in 2004, 2003 or 2002.

Government Regulation

The Company is subject to regulation by a variety of governmental agencies, including, but not limited to, the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the Occupational Safety and Health Administration, the Environmental Protection Agency and other federal, state and local agencies. The Company’s stores are also subject to local laws regarding zoning, land use, the sale of restricted products including tobacco, alcohol and pseudoephedrines, food preparation and sanitation. In recent years, an increasing number of legislative proposals have been introduced and passed in Congress and in some state legislatures that could result in major changes in health care coverage, delivery and reimbursement, both nationally and at the state level. For example, Congress passed the Medicare Prescription Drug Improvement and Modernization Act of 2003, which includes new prescription drug benefits for Medicare participants. Also, in recent years, both federal and state authorities have proposed or passed new legislation that imposes on healthcare providers, including pharmacies, significant additional obligations concerning the protection of confidential patient medical records and information. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes certain requirements, including the protection of confidential patient medical records and other information. Compliance with these regulations, particularly HIPAA, requires that we implement complex changes to our systems and processes. The Company believes that its locations comply, in material respects, with such laws and regulations.

Competition

Food, drug and general merchandise retailing involves intense competition with numerous competitors. Direct competition comes from a variety of sources, including supermarket chains, independent and specialty grocers, specialty retailers and large-scale drug retailers. Increasing competition also exists from convenience stores, prepared food retailers and Internet and mail order retailers. The biggest competitive impact on the food retailing industry, however, has been the growth of low-price retailers, primarily supercenters and discount stores. The rapid growth of the low-price format has shown that while convenience, quality, product assortment and customer service remain important factors in creating a competitive advantage, price is increasingly a significant driver of consumer choice in the food retailing industry.

Seasonality

The Company is subject to effects of seasonality. Sales have historically been higher in the Company’s fourth quarter than other quarters due to the holiday season and the increase in cold and flu occurrences.

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Available Information

The Company makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 free of charge through the Company’s Web site at http://www.albertsons.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”).

Item 2. Properties.

During the past ten fiscal years, the Company has built or acquired 2,198 stores. Approximately 90% of the Company’s retail square footage has been opened, acquired or remodeled during this period.

Albertsons stores are located in 37 states with concentration in the Northeast, Western, Midwest and Southern areas of the United States. The table below is a summary of the stores by state and classification as of February 3, 2005:

(a) Includes 11 Bristol Farms stores and 11 Extreme Inc. stores.

(b) All fuel centers are located adjacent to retail stores, therefore the Company does not count fuel centers as separate stores. The square footage of fuel centers is included with the square footage of adjacent stores.

The Company has expanded and improved its distribution facilities when opportunities exist to improve service to the retail stores and generate an adequate return on invested capital. It also examines opportunities to consolidate distribution facilities when

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appropriate. During 2004, approximately 79% of the merchandise purchased for resale in the retail stores operated by the Company’s divisions and subsidiaries was received from Company distribution centers.

Albertsons distribution system consists of 19 major distribution facilities located strategically throughout the Company’s operating markets and four smaller distribution facilities. The table below is a summary of the Company’s distribution facilities and the product categories they support, as of February 3, 2005:

The Company currently prefers to finance the construction of most new retail store and distribution facilities internally, thus retaining ownership of its land and buildings. During 2005, the Company’s internal expansion plans are expected to be financed primarily from cash provided by operating activities. The Company has and expects to continue to finance a portion of its new stores through lease transactions when it does not have the opportunity to own the property.

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As of February 3, 2005, the Company held title to both the land and buildings of 40% of the Company’s stores and held title to the buildings on leased land of an additional 10% of the Company’s stores. The Company also holds title to the land and buildings of most of its administrative offices and distribution facilities.

Item 3. Legal Proceedings.

The Company is subject to various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business.

In March 2000 a class action complaint was filed against Albertsons as well as American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc. and Lucky Stores, Inc., wholly owned subsidiaries of the Company, in the Superior Court for the County of Los Angeles, California (Gardner, et al. v. Albertson’s, Inc., et al.) by bonus-eligible managers seeking recovery of additional bonus compensation based upon plaintiffs’ allegation that the calculation of profits on which their bonuses were based improperly included expenses for workers’ compensation costs, cash shortages, premises liability and “shrink” losses in violation of California law. In October 2001 the court granted summary judgment against Sav-on Drug Stores, finding one of its bonus plans unlawful under plaintiffs’ liability theory. In August 2001 a class action complaint with very similar claims, also involving bonus-eligible managers, was filed against Albertsons as well as Lucky Stores, Inc. and American Stores Company, wholly owned subsidiaries of the Company, in the Superior Court for the County of Los Angeles, California (Petersen, et al. v. Lucky Stores, Inc., et al.). In June 2002 the cases were consolidated (“Gardner/Petersen case”) and in August 2002 a class action with respect to the consolidated case was certified by the court. On December 20, 2004, the court granted final approval to a settlement reached by the parties. Based on the information presently available to the Company, management does not expect that the payments under this settlement will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

In April 2000 a class action complaint was filed against Albertsons as well as American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc. and Lucky Stores, Inc., wholly owned subsidiaries of the Company, in the Superior Court for the County of Los Angeles, California (Gardner, et al. v. American Stores Company, et al.) by assistant managers seeking recovery of overtime pay based upon plaintiffs’ allegation that they were improperly classified as exempt under California law. In May 2001 a class action with respect to Sav-on Drug Stores assistant managers was certified by the court. A case with very similar claims, involving the Sav-on Drug Stores assistant managers and operating managers, was also filed in April 2000 against the Company’s subsidiary Sav-on Drug Stores, Inc. in the Superior Court for the County of Los Angeles, California (Rocher, Dahlin, et al. v. Sav-on Drug Stores, Inc.) and was also certified as a class action. In April 2002 the Court of Appeal of the State of California Second Appellate District reversed the Rocher class certification, leaving only two plaintiffs. However, on August 26, 2004, the California Supreme Court reversed this decision and remanded the case to the trial court. The Company continues to believe it has strong defenses against these lawsuits and is vigorously defending them. Although these lawsuits are subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of these lawsuits will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

In August 2000 a class action complaint was filed against Jewel Food Stores, Inc., an indirect wholly owned subsidiary of the Company and Dominick’s Finer Foods, Inc. in the Circuit Court of Cook County, Illinois alleging milk price fixing (Maureen Baker et al. v. Jewel Food Stores, Inc. and Dominick’s Finer Foods, Inc., Case No. 00L 009664). In February 2003 the trial court found in favor of the defendants and dismissed the case with prejudice. The plaintiffs appealed, but on January 12, 2005, the Illinois Appellate Court upheld the trial court’s dismissal of the case. Plaintiffs have now appealed to the Illinois Supreme Court. Although this lawsuit is subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

In September 2000 an agreement was reached and court approval granted, to settle eight purported class and/or collective actions which were consolidated in the United States District Court in Boise, Idaho and which raised various issues including “off-the-clock” work allegations and allegations regarding certain salaried grocery managers’ exempt status. Under the settlement agreement, current and former employees who met eligibility criteria have been allowed to present their off-the-clock work claims to a settlement administrator. Additionally, current and former grocery managers employed in the State of California have been allowed to present their exempt status claims to a settlement administrator. The Company mailed notices of the settlement and claims forms to approximately 70,500 associates and former associates. Approximately 6,000 claim forms were returned, of which approximately 5,000 were deemed by the settlement administrator to be incapable of valuation, presumed untimely, or both (the “Unvalued Claims”). The claims administrator was able to assign a value to approximately 1,080 claims, which amount to a total of approximately $14, although the value of many of those claims is still subject to challenge by either party. Two other claims processes occurred during fiscal 2004. First, there was a supplemental mailing and in-store posting directed toward a narrow-subset of current and former associates. This process resulted in approximately 260 individuals submitting claims documents. These documents are being assessed. Second, in response to the Court’s instruction to plaintiffs counsel to submit supplemental and/or corrected information for the Unvalued Claims, plaintiffs’ counsel submitted such information for approximately 4,700 of the Unvalued Claims. This information is being assessed. The Company is presently unable to determine the amounts that it may ultimately be required to pay with respect to all claims properly submitted. Based on the information presently available to it, management does not expect that the satisfaction of valid claims submitted pursuant to the settlement will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

On October 13, 2000, a complaint was filed in Los Angeles County Superior Court (Joanne Kay Ward et al. v. Albertsons, Inc. et al.) alleging that Albertsons, Lucky Stores and Sav-on Drug Stores paid terminating employees their final paychecks in an untimely manner. The lawsuit seeks statutory penalties. On January 4, 2005, the case was certified as a class action. The Company believes that it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that

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the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

On November 1, 2001, the Environmental Protection Agency (“EPA”) notified Jewel Food Stores, Inc., an indirect wholly owned subsidiary of the Company, of alleged violations of the Clean Air Act. No notice of violation was issued, but following discussions between the Company and the EPA, the Company and the EPA entered a consent decree establishing technical protocols for the refrigerant management program, setting a penalty of $0.1, and requiring Jewel to substitute non-ozone depleting refrigerant for existing refrigerant in some stores sooner than the industry-wide deadline.

On February 2, 2004, the Attorney General for the State of California filed an action in Los Angeles federal court (California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company; Albertsons, Inc. and Ralphs Grocery Company, a division of The Kroger Co., United States District Court Central District of California, Case No. CV04-0687) claiming that certain provisions of the agreements (the “Labor Dispute Agreements”) between the Company, The Kroger Co. and Safeway Inc. (the “Retailers”) which provided for “lock-outs” in the event that any Retailer was struck at any or all of its Southern California facilities during the 2003-2004 labor dispute in Southern California when the other Retailers were not and contained a provision designed to prevent the union from placing disproportionate pressure on one or more Retailer by picketing such Retailer(s) but not the other Retailer(s) during the labor dispute violate section 1 of the Sherman Act. The lawsuit seeks declarative and injunctive relief. The Company filed its answer on February 24, 2004. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

In March 2004 a lawsuit seeking class action status was filed against Albertsons in the Superior Court of the State of California in and for the County of Alameda, California (Dunbar v. Albertson’s, Inc.) by a grocery manager seeking recovery including overtime pay based upon plaintiff’s allegation that he and other grocery managers were improperly classified as exempt under California law. The Dunbar case is currently in discovery, and a class certification hearing is scheduled for June 2005. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

In July 2004, a case similar to Dunbar involving salaried drug/merchandise managers was filed in the same court (Victoria A. Moore, et al. v. Albertson’s, Inc.). In March 2005, the parties reached a tentative settlement, which remains subject to court approval. Based on information presently available to the Company, management does not expect that payments under this settlement, if approved in the present form, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The Company is also involved in routine legal proceedings incidental to its operations. Some of these routine proceedings involve class allegations, many of which are ultimately dismissed. Management does not expect that the ultimate resolution of these legal proceedings will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The statements above reflect management’s current expectations based on the information presently available to the Company. However, predicting the outcomes of claims and litigation and estimating related costs and exposures involve substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. In addition, the Company regularly monitors its exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and its estimates with respect to related costs and exposures. It is possible that material differences in actual outcomes, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates, could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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Item 3A. Executive Officers of the Registrant.

Lawrence R. Johnston has served as President since July 24, 2003 and Chairman of the Board and Chief Executive Officer since April 23, 2001. Previously, he served as President and Chief Executive Officer, General Electric Appliances Division (maker of major household appliances and a division of General Electric Company, a diversified industrial corporation) from November 1999; President and Chief Executive Officer, General Electric Medical Systems-Europe, Middle East and Africa from 1997 and Chairman of General Electric Company’s European Corporate Executive Council from 1998 to 1999.

Robert C. Butler became Executive Vice President, Food Operations and President, Intermountain West Division on February 20, 2004. Previously, he served as Executive Vice President, Operations from March 21, 2000.

Romeo R. Cefalo became Executive Vice President, Real Estate, Construction, Store Development and New Formats on February 20, 2004. Previously, he served as Executive Vice President, Operations from March 21, 2000.

Robert J. Dunst, Jr. became Executive Vice President and Chief Technology Officer on November 19, 2001. Previously, he served as Vice President, Applications Development, Safeway, Inc. (food and drug retailing) and Director, Systems Architecture and Infrastructure, Safeway, Inc. from 1995.

Clarence J. Gabriel became Executive Vice President, Supply Chain and Asset Management on February 4, 2005. Previously, he served as Executive Vice President, Merchandising and Supply Chain from January 8, 2004; Executive Vice President, Supply Chain from January 13, 2003; President, Chief Executive Officer and Chairman of the Board, Newgistics, Inc. (returns management solutions for direct retailers) from June 2000 and Division President, Corporate Express (business-to-business supplier of office and computer products and services) from November 1997.

Paul T. Gannon became Executive Vice President and Chief Marketing Officer on September 13, 2004. Previously, he served as President and Chief Executive Officer, Shaw’s Division from April 2004. Prior to the Company’s acquisition of Shaw’s in April 2004, Mr. Gannon served as the President and Chief Executive Officer of Shaw’s Supermarkets, Inc. (food and drug retailing) from November 2002; President and Chief Operating Officer of Shaw’s Supermarkets, Inc. from May 2002, Chief Operating Officer of Shaw’s Supermarkets, Inc. from February 2001, and Executive Vice President, Real Estate and Marketing of Shaw’s Supermarkets, Inc. from September 1999.

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Kathy J. Herbert became Executive Vice President, Human Resources on September 17, 2001. Previously, she served as Vice President, Human Resources, Jewel-Osco Division, American Stores Company (food and drug retailing) and subsequently Albertsons from April 1998.

Duncan C. Mac Naughton became an executive officer on February 4, 2005, and has served as Senior Vice President, Merchandising since June 18, 2004. Previously, he served as Group Vice President, Grocery Merchandising from November 2003 and Group Vice President, Grocery Merchandising and Own Brand, HEB Grocery Company (food retailing) from 1998.

John R. Sims became Executive Vice President and General Counsel on March 25, 2002. Previously, he was Vice President and Deputy General Counsel with Federated Department Stores, Inc. (department store retailing) from 1990.

Felicia D. Thornton became Executive Vice President and Chief Financial Officer on August 22, 2001. Previously, she was a business consultant for HASC (private real estate holdings) from January 2001 and Group Vice President, The Kroger Co. (food and drug retailing) from February 1999.

Kevin H. Tripp became Executive Vice President, Drugstore Operations and President, Drug Division on April 1, 2004. Previously, he served as Executive Vice President, Operations and Pharmacy from June 1, 2002, Executive Vice President, Drug and General Merchandise from December 11, 2000 and President, Drug Region from June 23, 1999.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted during the fourth quarter of 2004 to a vote of security holders through the solicitation of proxies or otherwise.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock is traded on both the New York Stock Exchange and the Pacific Stock Exchange under the symbol ABS. As of March 24, 2005, there were approximately 26,358 holders of record. The following table sets forth the reported high and low stock prices by quarter as reported by the NYSE and dividends declared:

The Company has paid cash dividends on its common stock since 1959. The Company pays these dividends at the discretion of the Board of Directors. The continuation of these payments, the amount of such dividends and the form in which the dividends are paid (cash or stock) depend upon many factors, including the results of operations and the financial condition of the Company.

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Information concerning the Company’s stock repurchases during each month in the 14 weeks ended February 3, 2005 (dollars in millions except per share data):

Issuer Purchases of Equity Securities

Item 6. Selected Financial Data.

The following data have been derived from the consolidated financial statements of the Company and should be read in conjunction with those statements.

The operating results include restructuring initiatives that were implemented in 2001, 2002 and 2004 (refer to Note 6 “Discontinued Operations, Restructuring Activities and Closed Stores” in the notes to the accompanying consolidated financial statements). Although these initiatives were similar, the adoption of Statement of Financial Accounting Standard (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” on February 1, 2002 required the financial statement presentation of these actions to be dissimilar. The Company’s financial statements were restated to classify the results of operations for the 2004 restructuring that resulted in the divestiture of 28 stores and three non-operating properties and the 2002 restructuring that resulted in the divestiture of 95 stores and two distribution centers and the elimination of four division offices, as discontinued operations for all periods. The operating results of the 165 stores divested under the 2001 restructuring are included in continuing operations of the Company’s financial statements for the periods prior to their sale or closure.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Overview

All dollar amounts in this report are in millions, except per share data.

Albertsons is one of the largest retail food and drug chains in the world, based on sales. As of February 3, 2005, Albertsons, through its subsidiaries and divisions, operated 2,503 retail stores in 37 states. These stores operate under banners including Albertsons, Acme, Bristol Farms, Grocery Warehouse, Jewel, Jewel-Osco, Max Foods, Osco Drug, Sav-on Drugs, Shaw’s, Star Market and Super Saver. As of February 3, 2005, the Company employed a diverse workforce of approximately 241,000 associates. The Company’s operations are within a single operating segment, the retail sale of food and drug merchandise.

The Company’s results of operations, financial position and sources and uses of cash in the current and future periods reflect management’s focus on five strategic imperatives:

Aggressive Cost and Process Control. Each main category of expense, including labor, is monitored by a member of executive management. The Company committed to achieve annual cost reductions and cost avoidance of $1,000 by the end of fiscal 2005. Through February 3, 2005, one year ahead of schedule, the Company successfully met this goal by eliminating $1,002 of cost. The Company has now committed to reducing costs by an additional $250 by the end of fiscal 2006. The Company believes that continued focus on its consumer demand chain initiative, the multiple interlocking processes of marketing, merchandising and supply chain, coupled with savings generated through its recently launched Six Sigma program will play a key role in achieving these additional savings.

Maximize Return on Invested Capital. The Company has a formal process to review and measure all significant investments in corporate assets. The Company’s goal is to hold a number one or two market share position in each market it operates, or have a plan of action which provides a reasonable expectation of achieving this goal in order to continue to maintain an investment in that market. This process involves a thorough review at the individual asset or store level and at the market level. As a result of this process, the Company has taken the following actions:

	•	In 2002, exited four underperforming markets, resulting in the sale or closure of 95 stores, two distribution centers and the elimination of four division offices.
	•	In 2003, closed 61 underperforming stores.
	•	In 2004, exited two underperforming markets, resulting in the sale or closure of 28 stores and three non-operating properties, and implemented a new organizational structure in its Intermountain West and Dallas/Ft. Worth Divisions intended to eliminate layers of management and streamline operations. More importantly, however, the Company began an intense focus on format differentiation in 2004 and made investments in Bristol Farms, a premier fresh and specialty retailer in Southern California, and Extreme Inc., price impact stores being operated, as of February 3, 2005, in Dallas, Texas and Baton Rouge, Louisiana.

During 2005, the Company intends to continue to examine both its asset portfolio and opportunities to expand its format differentiation program.

Customer-focused Approach to Growth. The Company intends to invest many of the savings from its expense and process control programs back into the marketplace in order to drive sales and earnings growth over time, although potentially at the expense of gross margin in the near term. The Company’s focus is on the following programs:

	•	Target investments in Southern California to enhance customer loyalty and increase profitability.
	•	Expand the “Check the Price” program launched in September 2004, under which the Company is lowering everyday prices on selected products.
	•	Increase Our Own Brands product penetration through continued introductions in essensiaTM, the Company’s premium line, equalineTM, the Company’s new brand for health and beauty products, HomeLifeTM, the Company’s new line of general merchandise products and the Company’s other banner product lines.
	•	Continue rollout of the new “Renaissance” drug store format, which provides an expanded product selection in several key categories and an enhanced shopping experience with the revitalized look and feel of the store compared to a traditional drugstore.

Company-wide Focus on Technology. Albertsons utilizes technology to better serve customers, connect with consumers and to improve operating efficiencies. In 2002, Albertsons established an information technology plan, which called for the replacement or upgrade of over three-quarters of the Company’s current systems by 2007. As the five-year strategy continues to be executed, the Company is leveraging technology as a strategic asset throughout the Company, from supply chain, merchandising and customer service to human resources. The Company believes that its investment in technology systems and processes will help to create an industry leadership position and a competitive advantage. A robust governance council manages the strategic roadmap, ensuring that projects are on track and on time.

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Energized Associates. The Albertsons leadership team is charged with creating an uplifting atmosphere for associates and inspiring positive attitudes throughout the Company. Albertsons believes that a team of energized associates who share a positive attitude will help to create a competitive advantage for the Company. Associates are energized by a culture of lifelong learning, the ability to participate in career development and advancement opportunities, diversity networks and affinity groups and a performance management process that requires goal setting, tracking and measuring. The Company has successfully established a “pay for performance” environment that rewards associates who consistently achieve or exceed targets and deliver results. Competitive compensation programs are reviewed on a regular basis to ensure they are meeting the needs of associates and the Company. Consistent, frequent communication from leaders is well established through a series of weekly and monthly satellite broadcasts, a weekly online message from the CEO, and regularly scheduled town hall meetings.

The Company’s focus on these five strategic imperatives is designed to address the intense competitive landscape of the retail food and drug industry. Today, direct competition comes from a variety of sources, including supermarket chains, independent and specialty grocers, specialty retailers and large-scale drug retailers. Increasing competition also exists from convenience stores, prepared food retailers, Internet and mail-order retailers. The biggest competitive impact on the food retailing industry, however, has been the growth of low price retailers, primarily supercenters and discount stores. The rapid growth of this format has shown that while convenience, quality, product assortment and customer service remain important factors in creating a competitive advantage, price is increasingly a significant driver of consumer choice in the food retailing industry. Rapid growth of the supercenter format has been most evident in markets such as the Northwest and Southwest portions of the United States. Competition from discount formats is now increasing in other geographic areas.

Also impacting the retail food and drug industry is the overall economy of the United States. While most key economic indicators impact the Company’s operations to some degree, there are higher correlations to food inflation, fuel prices and consumer confidence. As the low price retail format continues to grow, the ability of the Company to pass along price increases in times of food inflation is challenging, which negatively impacts gross margin. Similarly, when fuel prices increase and consumer confidence remains low, the price sensitivity of the already price-conscious consumer increases.

Notwithstanding these competitive and economic forces, the Company believes that its relentless focus on its five strategic imperatives will enable it to eventually achieve its vision – becoming the world’s number one food and drug retailer in the areas of market value, scale and profitability.

Certain amounts in the Company’s Consolidated Balance Sheet as of February 3, 2005 included herein differ from those amounts reported in the Company’s preliminary unaudited balance sheet included in the earnings release dated March 15, 2005. These differences arose from a change in tax balances and goodwill related to the Company’s acquisition of Shaw’s, specifically in Prepaid and other current assets, Goodwill, Other current liabilities and Other long-term liabilities and deferred credits. The Company believes that these revised amounts are not materially different from those reported in the earnings release.

Significant Events

Southern California Labor Dispute
Results of operations for the years ended February 3, 2005 and January 29, 2004 were unfavorably impacted by the labor dispute with the Company’s retail union associates in Southern California that began on October 12, 2003 and lasted into the first quarter of 2004 (the “Labor Dispute”). The Labor Dispute resulted in decreased sales in the Company’s Southern California combination food-drug and conventional food stores and decreased gross margin as a result of decreased volume, increased inventory shrink, sales mix changes and increased distribution costs. Sales in Southern California did rebound to pre-Labor Dispute levels by the third quarter of 2004, but through the fourth quarter of 2004, earnings had not yet returned as expected. Additional costs incurred in connection with the terms of new collective bargaining agreements resulting from the dispute included funding a one-time contribution to the union health and welfare fund of $36 and strike ratification bonus payments of $10. These amounts were charged to earnings in 2004.

The Company, The Kroger Co. and Safeway Inc. (the “Retailers”) engaged in multi-employer bargaining with the United Food and Commercial Workers (“UFCW”) in connection with the Labor Dispute and, as a result, the Retailers entered into agreements (“Labor Dispute Agreements”) that, among other things, were designed to prevent the union from placing disproportionate pressure on one or more Retailer. The Labor Dispute Agreements provided for payments from any of the Retailers who gained from such disproportionate pressure to any of the Retailers who suffered from such disproportionate pressure. Amounts earned by the Company under the terms of the Labor Dispute Agreements totaled $46 in 2003 and $17 in 2004. Amounts earned were recorded as a reduction to selling, general and administrative expenses in the respective years and all amounts were collected in 2004.

Acquisition of Shaw’s
On April 30, 2004, the Company acquired J Sainsbury plc’s U.S. retail grocery store business (“Shaw’s”). The results of Shaw’s operations have been included in the Company’s consolidated financial statements since that date. The operations acquired consisted of 206 grocery stores in the New England area operated under the banners of Shaw’s and Star Market. The Company acquired Shaw’s for a variety of reasons, including attractive market share positions and real estate, the opportunity to realize numerous synergies and strong historical financial performance.

The aggregate purchase price was $2,578, which included $2,134 of cash, $441 of assumed capital lease obligations and debt and $3 of transaction costs. The Company used a combination of cash-on-hand and the proceeds of the issuance of $1,603 of commercial paper to finance the acquisition. The Company used the net proceeds from a subsequent mandatory convertible security offering (refer to Note 11 “Indebtedness” in the notes to the accompanying consolidated financial statements) to repay $1,117 of such commercial paper. The outstanding commercial paper is backed by the Company’s credit facilities.

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Acquisition of Bristol Farms
On September 21, 2004, the Company acquired Bristol Farms for $137 in cash. Bristol Farms operates 11 specialty food retail stores in Southern California.

Southeastern United States Hurricanes
The 2004 results of operations were unfavorably impacted by the hurricanes that struck the Southeastern United States and the Company’s Florida operations during the third quarter of 2004. The Company has a combination of self-insured and purchased insurance coverage for natural disasters and incurred approximately $28 in unplanned costs on a pre-tax basis. Costs incurred primarily related to inventory spoilage, building and equipment repair costs, employee and community relief efforts and increased payroll. These costs were partially offset by a favorable pre-tax earnings impact estimated at $6 as residents purchased merchandise in advance of and shortly after the hurricanes.

Lease Accounting Correction
On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease-related accounting issues and their application under generally accepted accounting principles in the United States (“GAAP”). In light of this letter, the Company’s management initiated a review of its lease accounting and determined that its then-current method of accounting for rent holidays was not in accordance with GAAP. Historically, the Company did not commence recognizing rent expense until the start of the primary lease term. The Company now recognizes rent expense when it takes “possession and control” of the property, regardless of when the lease term begins. This period typically includes pre-opening construction or fixturing activity. As a result of this change, the Company incurred a pre-tax charge resulting in an increase to rent expense of $8 in 2004. See Note 2 “Summary of Significant Accounting Policies” in the notes to the accompanying consolidated financial statements for a discussion of the Company’s accounting policy for leases. The accompanying discussion of the Company’s results of operations and financial position includes the effect of the correction.

Results of Operations
Sales for 2004 (53 week year) were $39,897 compared to $35,107 in 2003 and $35,316 in 2002. The following table sets forth certain components of the Consolidated Earnings Statements expressed as a percent to sales and the year-to-year percentage changes in the amounts of such components:

n.m. — not meaningful

Fiscal Year 2004 Compared to Fiscal Year 2003
Sales for the 53 weeks ended February 3, 2005 (“2004”) increased $4,790 or 13.6% as compared to the 52 weeks ended January 29, 2004 (“2003”). This increase was primarily due to the addition of 206 stores as a result of the Shaw’s transaction on April 30, 2004 and 11 stores acquired in the Bristol Farms transaction on September 21, 2004, lower than normal sales in 2003 as a result of the Labor Dispute and an extra week in 2004 as compared to 2003. By the fourth quarter of 2004, the Company had recaptured its 2002 pre-Labor Dispute market share and sales in its Southern California area. However, sales were unfavorably impacted by competitive pressures in other markets such as Dallas/Ft. Worth and in certain markets where the Company does not have a number one or number two market share position.

Identical store sales, calculated on a 53 week basis for both 2004 and 2003, decreased 0.3% and comparable store sales, also calculated on a 53 week basis for both 2004 and 2003, increased 0.2% as compared to 2003. The first week of 2004 has been used as the 53^rd week of 2003. Identical stores are defined as stores that have been in operation for both full fiscal periods. Comparable store sales use the same store base as the identical stores except it includes replacement stores. The 206 acquired Shaw’s stores and the 11 acquired Bristol Farms stores are not included in the identical or comparable store sales annual computations and will not be included in the annual computation until fiscal year 2006, however the Shaw’s stores will be included in the quarterly calculation beginning in the second quarter of 2005 and Bristol Farms stores will be included in the quarterly calculation beginning in the fourth quarter of 2005. Declines in identical store sales and the slight increase in comparable store sales during 2004 are a result of the soft economy, increased competition from low-priced retailers such as supercenters, club stores and large-scale drugstore retailers and heavy promotional activity by traditional competitors. During 2005, the Company expects to continue to invest in pricing, promotion and advertising to capture market share and increase sales in key geographic markets.

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Management estimates that overall inflation in products the Company sells was 0.8% in the 12 months ended February 3, 2005 as compared to 0.5% in the 12 months ended January 29, 2004.

During 2004 the Company acquired 172 combination food-drug stores, 34 conventional food stores and 11 specialty retail stores as part of the Shaw’s and Bristol Farms acquisitions. The Company also opened 43 combination food-drug stores, 15 stand-alone drugstores, one conventional food store, 11 Extreme Inc. price impact stores and 13 fuel centers. The Company closed or sold 47 combination food-drug stores, 15 conventional food stores and 27 stand-alone drugstores. The Company also remodeled 186 stores. Net retail square footage of continuing operations was 104.2 million square feet at the end of 2004 as compared to 94.0 million square feet in 2003.

Gross profit, as a percent to sales, decreased in 2004 as compared to 2003 due to continued planned investments in pricing, promotion and advertising to drive sales growth and market share. These investments occurred throughout the Company, especially in Southern California, in an effort to recapture market share following the resolution of the Labor Dispute. The factors causing a decline in gross profit, as a percentage of sales, were partially offset by savings generated from strategic sourcing and consumer demand chain initiatives, increased pharmacy gross margins as a result of benefits from a supply contract and increased Company-sourced generic drugs and increased sales growth in the Company’s Own Brands.

Selling, general and administrative (“SG&A”) expenses as a percent to sales increased slightly in 2004 as compared to 2003. This increase was primarily attributable to higher employee benefit costs, additional legal expense associated with pending and settled litigation, and higher professional expenses related to information technology infrastructure improvements and the Company’s consumer demand chain initiatives. The increase was also attributable to the unplanned and self-insured costs associated with the Southeastern United States hurricanes, ratification bonuses of $16 associated with the terms of the new collective bargaining labor agreements in California and Nevada, increased credit and debit card transaction fees and increased rent expense. In addition, SG&A as a percent to sales in 2003 was favorably impacted by $46 earned under the Labor Dispute Agreements. Partially offsetting these factors, SG&A as a percent to sales benefited in 2004 from lower wages and benefits related to a decrease in bonus expense, increased sales leverage from the acquisition of Shaw’s, gains recognized on the disposal of property, a reduction in business taxes as a result of favorable state audit settlements and a reduction in incremental Labor Dispute costs recognized in the prior year.

The increase in employee benefit costs referenced above was a result of a one-time contribution to a union health and welfare fund of $36 associated with the terms of the new collective bargaining labor agreement in Southern California and unanticipated payments to two Northern California UFCW multi-employer health and welfare plans for funding deficits in 2004. Additionally, there was a $36 gain recognized in 2003 associated with the curtailment of postretirement medical benefits. The impact of these factors was partially offset by lower Company-sponsored health and welfare costs in 2004 due to the restructuring of the Company’s benefit plans in June 2004. Payments to multi-employer health and welfare plans represent mandatory contributions which are based on reserve requirements set forth in the related collective bargaining agreements. Some of the collective bargaining agreements up for renewal in the next several years contain reserve requirements that may trigger unanticipated contributions resulting in increased health care expenses. If these health care provisions cannot be renegotiated in a manner that reduces the prospective health care cost as the Company intends, the Company’s selling, general and administrative expenses could continue to increase, possibly significantly, in the future.

Interest, net, during 2004 totaled $500 as compared with $409 in 2003. This increase was attributable to interest costs on the issuance of the $1,150 mandatory convertible security used to repay commercial paper that was used to finance the acquisition of Shaw’s (refer to Note 11 “Indebtedness” in the notes to the accompanying consolidated financial statements) and an increase in interest on capital lease obligations resulting from the acquisition of Shaw’s.

The Company’s effective income tax rate from continuing operations for 2004 was 34.9%, as compared to 38.6% for 2003. This decrease was due primarily to a tax benefit arising from the resolution of prior year tax issues with the Internal Revenue Service and the implementation and effects of the Company’s tax savings initiatives which had a favorable impact on the current tax rate and also resulted in a favorable adjustment upon completion of the prior year tax returns.

Earnings from continuing operations were $474 in 2004 compared to $556 for 2003. This decrease was due to lower gross margins as a result of increased investments in pricing and promotion, higher employee benefit expenses as a result of a one-time contribution to the union health and welfare fund of $36 made under new collective bargaining labor agreements, and $46 earned in 2003 under the Labor Dispute Agreements compared to $17 earned in 2004. The decrease was also attributable to increased legal expense associated with pending and settled litigation, higher professional expenses for technology services, increased interest expense, unplanned and self-insured hurricane costs, increased credit and debit card transaction fees and increased rent expense. Although sales and market share in Southern California had returned to 2002 pre-Labor Dispute levels by the fourth quarter of 2004, earnings had not recovered to pre-Labor Dispute levels as a result of increased investment in pricing and promotion to grow sales and capture market share. The Company experienced earnings pressure in Northern California and Dallas/Ft. Worth due to intense competition, which also resulted in higher than anticipated pricing and promotional investment during 2004, and in certain other markets where the Company does not have a number one or number two market share position. The decline in earnings was partially offset by earnings from Shaw’s operations that were acquired in 2004, a reduction in wages and benefits, gains on the disposal of property and a reduction in the effective tax rate.

Net loss from discontinued operations was $30 in 2004 as compared to $0 in 2003. This loss resulted primarily from the Company’s decision, announced in June 2004, to sell, close or otherwise dispose of 21 operating stores in Omaha, Nebraska and

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the Company’s decision, announced in April 2004, to sell, close or otherwise dispose of seven operating stores and three non-operating properties in New Orleans, Louisiana.

Fiscal Year 2003 Compared to Fiscal Year 2002
Sales decreased $209 in 2003 as compared to the 52 weeks ended January 30, 2003 (“2002”) primarily due to the Labor Dispute. The Labor Dispute resulted in decreased sales in the Company’s Southern California combination food-drug and conventional food stores. These decreases were partially offset by an increased number of operating stores in 2003 as compared to 2002. In 2003, identical store sales decreased 2.8% as compared to 2002 and comparable store sales decreased 2.4% in 2003 as compared to 2002. This decrease in identical and comparable store sales was a direct result of the Labor Dispute. Excluding food stores in the Company’s Southern California area for the last 110 days of 2003 and 2002, identical store sales decreased 0.5% and comparable store sales decreased 0.1% in 2003 as compared to 2002.

The following table reconciles actual identical store sales and comparable store sales to adjusted identical store sales and comparable store sales as presented herein. The Company presents these non-GAAP financial measures because it believes a comparison of actual to adjusted store sales data is useful to investors to communicate management’s belief of the impact of the Labor Dispute on trends in sales experienced during the last 110 days of 2003.

Management estimates that overall inflation in products the Company sells was 0.5% in the 12 months ended January 29, 2004 as compared to an overall deflation of 0.1% in the 12 months ended January 30, 2003.

During 2003 the Company opened 50 combination food-drug stores, 27 stand-alone drugstores, two conventional food stores and 29 fuel centers. The Company closed or sold 15 combination food-drug stores, 18 conventional food stores and 28 stand-alone drugstores. The Company also remodeled 192 stores. Net retail square footage of continuing operations was 94.0 million square feet at the end of 2003 as compared to 92.1 million square feet in 2002.

Gross profit, as a percent to sales, decreased in 2003 as compared to 2002 due to decreased sales leverage as a result of the Labor Dispute and continued, planned investments in pricing and promotion in key markets and categories to drive sales growth and market share. These investments were partially offset by savings generated from strategic sourcing initiatives, increased pharmacy gross margins as a result of benefits from a supply contract and increased Company-sourced generic drugs and increased Our Own Brands sales growth.

SG&A expenses as a percent to sales increased in 2003 as compared to 2002. This increase was attributable to the lack of sales leverage due to the Labor Dispute as well as higher depreciation costs associated with the Company’s continued investment in information technology and store development; increased compensation costs; increased workers’ compensation costs, primarily due to actual costs of prior years’ claims exceeding prior years’ estimated costs; increased employee benefit costs, primarily due to increases in Company and union sponsored health and welfare plans and increased pension charges, partially offset by a $36 gain associated with the curtailment of postretirement medical benefits for employees retiring after June 1, 2004; and contingent lease charges. The increased employee benefit costs experienced during the year were due, in part, to increases in mandatory contributions to multi-employer health care and pension plans to which the Company contributes.

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Interest, net, during 2003 totaled $409 as compared with $396 in 2002. This increase was attributable to less interest being capitalized on construction projects during 2003. The decrease in capitalized interest was due to an overall reduction in capital expenditures, particularly for new stores.

Earnings from continuing operations were $556 in 2003 compared to $866 in 2002. This decrease was due to lost sales and earnings associated with the Labor Dispute, decreased gross margin associated with planned investments in pricing and promotion and an increase in depreciation, compensation costs, workers’ compensation costs and employee benefits costs.

Net earnings in 2003 were $556 or $1.51 per diluted share as compared to $485 or $1.22 per diluted share. The improvement in 2003 was a result of a charge of $379 in 2002 related to a strategic decision to exit underperforming markets and a charge of $94 in 2002 related to the adoption of a new accounting principle for the recognition of vendor funds, partially offset by the reduction in earnings from continuing operations in 2003 as a result of the Labor Dispute.

Discontinued Operations and Restructuring Activities
The Company has a process to review its asset portfolio in an attempt to maximize returns on its invested capital. As a result of these reviews, in recent years the Company has closed and disposed of a number of properties through market exits, restructuring activities and on-going store closures. The Company recognizes lease liability reserves and impairment charges associated with these transactions. Summarized below are the significant transactions the Company has undertaken and the related lease accrual activity.

Discontinued Operations
In June 2004 the Company announced its plan to sell, close or otherwise dispose of its operations in the Omaha, Nebraska market, which consisted of 21 operating stores. Results of operations for those stores have been reclassified and presented as discontinued operations for 2004, 2003 and 2002. As of February 3, 2005 the Company had disposed of 14 properties, resulting in seven remaining properties with a value of $2 classified as Assets Held for Sale in the Consolidated Balance Sheet.

In April 2004 the Company announced its plan to sell, close or otherwise dispose of its operations in the New Orleans, Louisiana market, which consisted of seven operating stores and three non-operating properties. Results of operations for those stores and properties have been reclassified and presented as discontinued operations for 2004, 2003 and 2002. As of February 3, 2005, the Company had disposed of six properties, resulting in four remaining properties with a value of $15 classified as Assets Held for Sale in the Consolidated Balance Sheet.

In 2002 the Company announced its plan to sell, close or otherwise dispose of its operations in four underperforming markets: Memphis, Tennessee; Nashville, Tennessee; Houston, Texas; and San Antonio, Texas. This involved the sale or closure of 95 operating stores and two distribution centers and the elimination of four division offices. As of February 3, 2005 the Company had disposed of 82 properties, resulting in 13 remaining properties with a value of $2 classified as Assets Held for Sale in the Consolidated Balance Sheet.

Discontinued operations stores generated sales of $155, $329 and $600 for 2004, 2003 and 2002, respectively. The loss from discontinued operations of $30 for 2004 consisted of a loss from operations of $3, a write down of fixed assets and lease settlements of $63, gain on disposal of $18 and an income tax benefit of $18. The income from discontinued operations was not material to 2003 Consolidated Earnings. The loss from discontinued operations was $287 in 2002 and consisted of a loss from operations of $49, a write down of fixed assets, lease settlements and other costs of $379 and an income tax benefit of $141.

Restructuring Activities
In 2001 the Company committed to a plan to restructure its operations by 1) closing 165 underperforming stores, 2) closing four division offices, 3) centralizing processing functions to its store support centers, and 4) reducing overall store support center headcount. As of February 3, 2005, the Company had disposed of 136 properties, resulting in 29 remaining properties with a value of $2 classified as Assets Held for Sale in the Consolidated Balance Sheet.

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The following table summarizes the accrual activity for future lease obligations related to discontinued operations, restructuring activities and closed stores:

Liquidity and Capital Resources
Cash provided by operating activities during 2004 was $2,100, compared to $1,526 in 2003 and $1,984 in 2002. The increase in cash provided by operating activities in 2004 as compared to 2003 was due primarily to the implementation of strategic initiatives to lower inventories, increases in accounts payable as a result of lower payable balances in the prior year due to the Labor Dispute, collections of amounts earned under the Labor Dispute Agreements and return of a deposit from a third-party service provider. The increase in cash provided by operating activities in 2004 as compared to 2003 was also attributable to increased non-cash charges including depreciation and amortization and charges related to discontinued operations. The increase in depreciation and amortization was due to the Shaw’s acquisition and a higher mix of information technology expenditures which have a shorter useful life compared to store investments. These sources of operating cash were partially offset by lower earnings from continuing operations, gains on disposal of assets and the cost of funding the Company’s pension plans.

The decrease in cash provided by operating activities in 2003 as compared to 2002 was primarily due to lower earnings before interest, taxes, depreciation and amortization from continuing operations, a reduction in accounts payable due to lower inventory purchases and inventory turns in the Southern California area directly related to the Labor Dispute and increased inventory levels as a result of increased store count. These uses of cash were partially offset by a reduction in the Company’s income tax payable as a result of implementation of tax planning initiatives in 2003.

Cash flow used in investing activities for 2004 increased to $3,054 compared to $901 and $662 in 2003 and 2002, respectively. The increase in cash flow used in investing activities for 2004 as compared to 2003 was primarily the result of the $2,080 paid, net of cash acquired, to purchase Shaw’s and $134 paid, net of cash acquired, to purchase Bristol Farms, partially offset by capital expenditures in 2004 that were flat versus 2003 and lower than 2002. The increase in cash used in investing activities in 2003 as compared to 2002 was due primarily to proceeds from the sale of assets (primarily associated with the 2001 restructuring activities and the 2002 market exits) that were $488 greater than asset sale proceeds received in 2003, partially offset by lower capital expenditures in 2003.

Cash provided by financing activities in 2004 was $666 as compared to cash used in financing activities of $492 and $1,297 in 2003 and 2002, respectively. The primary difference in financing activity cash flows in 2004 as compared to 2003 was the receipt of proceeds from the mandatory convertible security offering and commercial paper borrowings used to acquire Shaw’s and Bristol Farms. These sources of cash were partially offset by cash used for payment on long-term borrowings in 2004. The decrease in cash provided by financing activities in 2003 as compared to 2002 was primarily due to the Company’s decision to purchase fewer shares of its common stock in 2003. In 2002, the Company purchased $862 of its common stock as compared to $108 in 2003.

The Board of Directors, at its March 2005 meeting, declared a quarterly cash dividend of $0.19 per share.

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The Company utilizes its commercial paper and bank line programs primarily to supplement cash requirements for seasonal fluctuations in working capital and to fund its capital expenditures and to a lesser extent acquisitions. Accordingly, commercial paper and bank line borrowings will fluctuate between reporting periods.

The Company had three revolving credit facilities totaling $1,400 during 2004. The first agreement, a 364-Day revolving credit facility with total availability of $400, will expire in June 2005. The second agreement, a five-year facility with total availability of $900, will expire in June 2009. The third agreement, a five-year facility with total availability of $100, will expire in July 2009. The 364-Day credit agreement contains an option which would allow the Company, upon due notice, to convert any outstanding amount at the expiration date to a term loan. The Company’s commercial paper program is backed by all three of these credit facilities. All of the agreements contain two financial covenants: 1) a minimum fixed charge coverage ratio and 2) a maximum consolidated leverage ratio, each as defined in the credit facilities. Under these facilities, the fixed charge coverage ratio shall not be less than 2.5 to 1 through April 30, 2005, 2.6 to 1 through April 30, 2006, and 2.7 to 1 thereafter and the consolidated leverage ratio shall not exceed 4.5 to 1 through April 30, 2006, 4.25 to 1 through April 30, 2007, and 4.0 to 1 thereafter. As of February 3, 2005, the Company was in compliance with these requirements. The Company had $349 in commercial paper borrowings outstanding and backed by these credit facilities at February 3, 2005 and no commercial paper or bank line borrowings outstanding at January 29, 2004.

In May 2004 the Company completed a public offering registered with the Securities and Exchange Commission of 40,000,000 of 7.25% mandatory convertible securities (“Corporate Units”), yielding net proceeds of $971. In June 2004 the underwriters purchased an additional 6,000,000 Corporate Units pursuant to an overallotment option, yielding net proceeds of $146. Each Corporate Unit consists of a purchase contract and, initially, a 2.5% ownership interest in one of the Company’s senior notes with a principal amount of one thousand dollars, which corresponds to a twenty-five dollar principal amount of senior notes. The ownership interest in the senior notes is initially pledged to secure the Corporate Unit holder’s obligation to purchase Company common stock under the related purchase contract. The senior notes bear an annual interest rate of 3.75%. In the first half of 2007 the aggregate principal amount of the senior notes will be remarketed, which may result in a change in the interest rate and maturity date of the senior notes. Proceeds from a successful remarketing would be used to satisfy in full each Corporate Unit holder’s obligation to purchase common stock under the related purchase contract. If the senior notes are not successfully remarketed, the holders will have the right to put their senior notes to the Company to satisfy their obligations under the purchase contract. The purchase contracts yield 3.5% per year on the stated amount of twenty-five dollars.

The Company filed a shelf registration statement with the Securities and Exchange Commission, which became effective on February 13, 2001 (“2001 Shelf Registration”) to authorize the issuance of up to $3,000 in debt securities. In May 2001 the Company issued $600 of term notes under the 2001 Shelf Registration. The term notes are composed of $200 of principal bearing interest at 7.25% due May 1, 2013 and $400 of principal bearing interest at 8.0% due May 1, 2031. Proceeds were used primarily to repay borrowings under the Company’s commercial paper program. During 2002, 2003 and 2004, no securities were issued under the 2001 Registration Statement. As of February 3, 2005, $2,400 of debt securities remain available for issuance under the 2001 Registration Statement; however, there can be no assurance that the Company will be able to issue debt securities under this registration statement at terms acceptable to the Company.

There were no purchases of the Company’s stock during 2004. During 2003, the Company purchased and retired 5.3 million shares of its common stock for a total expenditure of $108 at an average price of $20.26 per share. During 2002, the Company purchased and retired 35.1 million shares of its common stock for $862, at an average price of $24.54 per share. In December 2004, the Board of Directors reauthorized a program authorizing management, at their discretion, to purchase and retire up to $500 of the Company’s common stock through December 31, 2005. The Company may continue or, from time to time suspend, purchasing shares under its stock purchase program without notice, depending on prevailing market conditions, alternate uses of capital and other factors.

At February 3, 2005, cash flows from operations and available borrowings were adequate to support planned business operations, stock purchases and capital expenditures. The Company has short-term financing capacity in the form of commercial paper or bank line borrowings up to $1,400 and long-term capacity under the 2001 Registration Statement of $2,400.

As of February 3, 2005, the Company’s credit ratings were as follows:

On March 16, 2005, Standard & Poor’s Rating Services (“S&P”) announced that it had placed the ratings of the Company, The Kroger Co., and Safeway, Inc. on credit watch with negative implications. S&P also announced that they expected any downgrade to be limited to one notch with ratings not expected to fall below investment grade. The Company does not have any credit rating downgrade triggers that would accelerate repayment in the Company’s fixed-term debt portfolio were a downgrade in the Company’s credit ratings to occur. Similarly, a downgrade in the Company’s credit ratings would not affect the Company’s ability to borrow amounts under the revolving credit facilities. However, any adverse changes to the Company’s credit ratings would increase the cost of borrowings under the Company’s credit facilities. In addition, a downgrade could limit the Company’s ability to issue commercial paper. Should this occur the Company might seek alternative sources of funding, including the issuance of notes under the 2001 Registration Statement. In addition, up to $1,400 could be drawn upon from the Company’s senior unsecured credit facilities.

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Contractual Obligations, Commercial Commitments and Guarantees

Contractual Obligations
The Company enters into a variety of legally binding obligations and commitments in the normal course of its business. The table below presents, as of February 3, 2005, the Company’s long-term contractual obligations and commitments which are considered to represent known future cash payments that the Company will be required to make under existing contractual arrangements. Some amounts are based on management’s estimates and assumptions and amounts actually paid may vary from those reflected in the table.

Commercial Commitments

Guarantees

The Company is contingently liable for certain operating leases that were assigned to third parties in connection with various store closures and dispositions. If any of these third parties fails to perform its obligations under the lease, the Company could be responsible for the lease obligations. In 2003 the Company was notified that certain of these third parties had become insolvent and were seeking bankruptcy protection. At January 29, 2004, approximately 26 store leases for which the Company was contingently liable were subject to the bankruptcy proceedings of such third parties and 22 of those had been rejected by the applicable third party. The Company recorded pre-tax charges of $20 in 2003, which represents the remaining minimum lease

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payments and other payment obligations under the 22 rejected leases, less estimated sublease income and discounted at the Company’s credit-adjusted risk-free interest rate. As of February 3, 2005, approximately 17 store leases remained for which the Company is contingently liable. Terminations and payments made on these leases in 2004 resulted in a reduction of the Company’s contingent liability of $16. As of February 3, 2005, the Company had remaining guarantees on approximately 208 stores with leases extending through 2026. Assuming that each respective purchaser became insolvent, an event the Company believes to be remote because of the wide dispersion among third parties and the variety of remedies available, the minimum future undiscounted payments, exclusive of any potential sublease income, are $371.

The Company enters into a wide range of indemnification arrangements in the ordinary course of business. These include tort indemnities, tax indemnities, indemnities against third party claims arising out of arrangements to provide services to the Company, indemnities in merger and acquisition agreements and indemnities in agreements related to the sale of Company securities. Also, governance documents of the Company and substantially all of its subsidiaries provide for the indemnification of individuals made party to any suit or proceeding by reason of the fact that the individual was acting as an officer, director or agent of the relevant company or as a fiduciary of a company-sponsored welfare benefit plan. The Company also provides guarantees and indemnifications for the benefit of many of its wholly owned subsidiaries for the satisfaction of performance obligations, including workers’ compensation obligations. It is difficult to quantify the maximum potential liability under these indemnifications; however at February 3, 2005 the Company was not aware of any material liabilities arising from these indemnification arrangements.

Off Balance Sheet Arrangements

Capital Expenditures
The Company is committed to keeping its stores up to date. In the last three years, the Company has opened or remodeled 679 stores, representing 29% of the Company’s retail square footage as of February 3, 2005. The following summary of historical capital expenditures includes capital leases, excluding the Shaw’s and Bristol Farms acquisitions:

Total capital expenditures include capitalized lease obligations incurred of $111 in 2004, $62 in 2003 and $75 in 2002.

The Company’s financial position provides the flexibility for the Company to grow through its store development program and future acquisitions. The Company’s capital expenditure budget for 2005 is estimated between $1,300 to $1,400 and includes new capital and operating lease obligations.

Related Party Transactions
Transactions with related parties were not considered material. See Note 18 “Related Party Transactions” in the notes to the accompanying consolidated financial statements.

Insurance Contingencies
The Company has outstanding workers’ compensation and general liability claims with a former insurance carrier that is experiencing financial difficulties. If the insurer fails to pay any covered claims that exceed deductible limits, creating “excess claims”, the Company may have the ability to present these excess claims to guarantee funds in certain states in which the claims originated. As of February 3, 2005, the insurance carrier continued to pay the Company’s claims. The Company currently cannot estimate the amount of the covered claims in excess of deductible limits which will not be paid by the insurance carrier or otherwise. Although the Company currently believes that it may recover at least some of these excess claim amounts, the unrecoverable amount could be material. The Company is in discussions with the carrier regarding transfer of primary claim responsibility back to the Company in exchange for a payment, which payment may be less than the projected claim liability. The Company is presently unable to determine the outcome of these discussions.

Environmental
The Company has identified environmental contamination sites related primarily to underground petroleum storage tanks and groundwater contamination at various store, warehouse, office and manufacturing facilities (related to current operations as well as previously disposed of properties). The Company conducts an ongoing program for the inspection and evaluation of potential new sites and the remediation and monitoring of contamination at existing and previously owned sites. Although the ultimate outcome and expense of environmental remediation is uncertain, the Company believes that the costs of required remediation and continuing compliance with environmental laws, in excess of current reserves, will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. Environmental remediation costs were not material in 2004, 2003 or 2002.

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Critical Accounting Policies
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, inventories, vendor funds, intangible assets, income taxes, assets held for sale, impairment of long-lived assets, self-insurance, restructuring, benefit costs, contingencies, litigation and unearned income. The Company bases its estimates on historical experience and on various other assumptions and factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company, based on its ongoing review, will make adjustments to its judgments and estimates where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.

The Company believes the following critical accounting policies are important to understand the Company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Vendor Funds
The Company receives funds from many of the vendors whose products the Company buys for resale in its stores. These vendor funds are provided to increase the sell-through of the related products. The Company receives funds for a variety of merchandising activities: placement of the vendor’s products in the Company’s advertising; display of the vendor’s products in prominent locations in the Company’s stores; introduction of new products into the Company’s distribution system and retail stores; exclusivity rights in certain categories that have slower-turning products; and to compensate for temporary price reductions offered to customers on products held for sale at retail stores. The Company also receives vendor funds for buying activities, such as volume commitment rebates and credits for purchasing products in advance of their need. As of February 3, 2005, the terms of the Company’s vendor funds arrangements varied in length from short-term arrangements that are to be completed within a quarter to long-term arrangements that are expected to be completed within eight years.

Accounting for vendor funds is discussed in Emerging Issues Task Force “EITF” Issue 02-16: “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”), which the Company adopted as of the beginning of 2002. As a result of this guidance, the Company began recognizing the vendor funds for merchandising activities as a reduction of cost of sales when the related products are sold as opposed to the previous method of recognizing these credits as a reduction of cost of sales when the merchandising activity was performed in accordance with the underlying agreements. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. The amount of vendor funds remaining in ending inventory requires management judgment and estimates. Management estimates these amounts based on the average inventory turnover rates by product category for the Company’s grocery, general merchandise and lobby departments and by average inventory turnover rates by department for the Company’s remaining inventory. The amount of vendor funds reducing the Company’s inventory (“inventory offset”) as of February 3, 2005, including those resulting from the acquisitions made during fiscal 2004 (refer to Note 5 “Business Acquisitions” in the notes to the accompanying consolidated financial statements) was $126, a decrease of $29 from the beginning of fiscal 2004. The vendor funds inventory offset as of January 29, 2004 was $155, an increase of $3 from the beginning of fiscal 2003.

Long-Lived Asset Impairments
The Company regularly reviews long-lived assets for indicators of impairment. Management’s judgments regarding the existence of impairment indicators are based on operational performance. Future events could cause management to conclude that impairment indicators exist and that the value of long-lived assets is impaired. When events or changes in circumstances indicate that the carrying value of an asset or an asset group is not recoverable, the fair value of the asset is compared to its carrying value. Impairment losses are measured as the amount by which the carrying value of the asset exceeds its estimated fair value. The estimated fair value of the assets is determined by internal real estate specialists or by independent valuations from subject matter experts. These estimates can be significantly impacted by factors such as changes in real estate market conditions, the economic environment and inflation.

For properties that have closed and are under long-term operating lease agreements, the present value of any remaining liability under the lease, discounted using credit risk-free rates and net of estimated sublease rentals that could be reasonably obtained for the property, is recognized as a liability and charged to operations. The value of any equipment and leasehold improvements related to a closed store is reduced to reflect net recoverable values. Internal real estate specialists estimate the subtenant income and asset recovery values based on their historical experience and knowledge of (1) the market in which the store to be closed is located, (2) the results of the Company’s previous efforts to dispose of similar assets and (3) the current economic conditions. The actual cost of disposition for these leases and related assets is affected by factors such as specific real estate markets, the economic environment and inflation.

Goodwill
The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” in 2002. Upon adoption, the aggregate of the goodwill allocated to the stores in each reporting unit became the reporting units’ goodwill balance. In order to determine if a reporting unit’s goodwill was impaired, a combination of internal analyses and estimates of fair value from independent valuation specialists were used. Based on these analyses, there was no impairment of goodwill at the adoption date. Subsequently, during the fourth quarter of 2002, 2003 and 2004, the Company completed its annual impairment review and determined that there was no

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impairment. The fair value estimates could change in the future depending on internal and external factors, including the success of strategic sourcing initiatives, labor cost controls and competitive activity.

Self-Insurance
The Company is primarily self-insured for property loss, workers’ compensation, automobile liability costs and general liability costs. The Company records its self-insurance liability, determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. Any actuarial projection of ultimate losses is subject to a high degree of variability. Sources of this variability are numerous and include, but are not limited to, future development of previous claims, future economic conditions, court decisions and legislative actions. For example, workers’ compensation costs were $372, $361 and $282 in 2004, 2003 and 2002 respectively. Excluding the results of Shaw’s and Bristol Farms, workers’ compensation expense remained flat in 2004 as compared with 2003. The increase in costs from 2002 to 2003 was primarily attributable to development of prior year claims that were higher than previously estimated while the annual number of workers’ compensation claims had decreased year to year.

The Company’s workers’ compensation liabilities are from claims occurring in various states. Individual state workers’ compensation regulations have received a tremendous amount of attention from state politicians, insurers, employers and providers, as well as the public in general. Recent years have seen an escalation in the number of legislative reforms, judicial rulings and social phenomena affecting workers’ compensation. The changes in a state’s political and economic environment increase the variability in the unpaid claim liabilities. The Company’s workers’ compensation reserves do not contemplate any of these potential developments.

Legal Contingencies
The Company records reserves for legal contingencies, in accordance with SFAS No. 5, “Accounting for Contingencies”, when the information available to the Company indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Predicting the outcomes of claims and litigation and estimating related costs and exposures involve substantial uncertainties that could cause actual costs to vary materially from estimates. In addition, the Company regularly monitors its exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and its estimates with respect to related costs and exposures. It is possible that material differences in actual outcomes, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates, could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Pension Costs
Pension benefit obligations and the related effects on operations are dependent on the Company’s selection of actuarial assumptions, including the discount rate and the expected long-term rate of return on plan assets. Actual returns on plan assets exceeded return assumptions over an extended period in the past, which kept pension expense and cash contributions to the plans at modest levels. Weaker market performance may significantly increase pension expense and cash contributions in the future. Changes in the interest rates used to determine the discount rate may also cause volatility in pension expense and cash contributions. Actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and, therefore, generally affect the Company’s recognized expense and recorded obligation in such future periods.

For example, in 2004 the Company maintained the existing Albertsons defined benefit and defined contribution plans for Albertsons associates and, following the acquisition of Shaw’s, assumed the obligations of the Shaw’s retirement plans. In 2004, the discount rate assumption for the Albertsons plans was 5.80% and its long-term asset return assumption was 8.0%. Using these assumptions, the Company’s 2004 pension expense for the Albertsons plans was $25, following expense of $30 in 2003 and $12 in 2002. If the Company had decreased its estimated discount rate to 5.55% and its expected return on plan assets to 7.5%, the Company’s 2004 pension expense for the Albertsons plans would have been $33 and net earnings would have decreased approximately $5. If the Company had increased its discount rate assumption to 6.05% and its expected return on plan assets to 8.5%, 2004 pension expense for the Albertsons plans would have been $18 and net earnings would have increased approximately $4. For the Shaw’s plans, the Company’s 2004 pension expense was $12 using a discount rate assumption of 6.15% and a long-term asset return assumption of 8.0%. If the Company had decreased its estimated discount rate to 5.90% and its expected return on plan assets to 7.5% for the Shaw’s plans, 2004 pension expense would have been $14 and net earnings would have decreased approximately $1. If the Company had increased its discount rate assumption to 6.40% and its expected return on plan assets to 8.5% for the Shaw’s plans, 2004 pension expense would have been $11 and net earnings would have increased approximately $1.

Recently Issued and Adopted Accounting Standards
In July 2001 the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 became effective for the Company on January 31, 2003 and did not have a material effect on the Company’s consolidated financial statements.

In November 2002 the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for guarantees issued after December 31, 2002, while the disclosure requirements were effective for financial statements for periods ending after December 15, 2002. The adoption of FIN 45 did not have a material effect on the Company’s consolidated financial statements.

In January 2003 the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the

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entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 were required to be applied for the first interim or annual period beginning after June 15, 2003. In December 2003 the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46(R)”). FIN 46(R) provides additional guidance related to identifying variable interest entities and determining whether such entities should be consolidated. Neither the adoption of FIN 46 or FIN 46(R) had a material effect on the Company’s consolidated financial statements.

In May 2003 the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 requires that certain financial instruments, which under previous guidance could be accounted for as equity, be classified as liabilities in statements of financial position. SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003 and was effective for the Company in the third quarter of 2003. The adoption of SFAS No. 150 did not have a material effect on the Company’s consolidated financial statements.

In November 2003 the EITF confirmed as a consensus EITF Issue No. 03-10, “Application of EITF Issue No. 02-16, ‘Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,’ by Resellers to Sales Incentives Offered to Consumers by Manufacturers” (“EITF 03-10”). EITF 03-10 did not impact the Company’s existing accounting and reporting policies for manufacturers’ coupons that can be presented at any retailer that accepts coupons. Under EITF 03-10, vendor coupons that provide for direct reimbursement, are negotiated between the retailer and the vendor and which can only be redeemed at a specific retailer’s store are recorded as a reduction of cost of sales (instead of sales). This modification to the Company’s accounting and reporting policies, adopted in the Company’s first quarter of 2004, did not have a material effect on the Company’s financial statements.

In December 2003 the FASB issued SFAS No. 132 (Revised 2003), “Employers’ Disclosure about Pensions and Other Postretirement Benefits – An Amendment of FASB Statements No. 87, 88 and 106” (“SFAS No. 132(R)”). This statement increases the required disclosure regarding pension plan assets, benefit obligations, cash flows, benefit costs and related information. The Company adopted SFAS No. 132(R) in January 2004. The newly required disclosures are included in Note 15 “Employee Benefit Plans and Collective Bargaining Agreements”.

In May 2004 the FASB issued Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“SFAS No. 106-2”). SFAS No. 106-2 supersedes SFAS No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” and provides guidance on the accounting and disclosure related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”), which was signed into law in December 2003. SFAS No. 106-2 is effective beginning in the third fiscal quarter of 2005. The impact of the Medicare Act and SFAS No. 106-2 is not expected to have a material effect on the Company’s consolidated financial statements.

In November 2004 the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 clarifies that inventory costs that are “abnormal” are required to be charged to expense as incurred as opposed to being capitalized into inventory as a product cost. SFAS No. 151 provides examples of “abnormal” costs to include costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage). SFAS No. 151 is effective for the Company’s fiscal year beginning February 3, 2006. The impact of SFAS No. 151 is not expected to have a material effect on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic value method in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated earnings statements. SFAS 123(R) will be effective for periods beginning after June 15, 2005 and allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-based payments under SFAS 123(R). The Company intends to adopt SFAS 123(R) using the “modified prospective” transition method beginning with its third quarter of 2005. Under this method, awards that are granted, modified, or settled after June 15, 2005, will be measured and accounted for in accordance with SFAS 123(R). In addition, in the Company’s third quarter of 2005, expense must be recognized in the earnings statement for unvested awards that were granted prior to the start of the Company’s third quarter of 2005. The expense will be based on the fair value determined at grant date under SFAS 123, “Accounting for Stock-Based Compensation”. The Company estimates that earnings per share in the second half of 2005 will be reduced by approximately $0.04 per diluted share as a result of implementing SFAS 123(R). However, the calculation of compensation cost for share-based payment transactions after the effective date of SFAS 123(R) may be different from the calculation of compensation cost under SFAS 123, but such differences have not yet been quantified.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to certain market risks that are inherent in the Company’s financial instruments, which arise from transactions entered into in the normal course of business. From time to time, the Company enters into certain derivative transactions, however the Company does not enter into derivative financial instruments for trading purposes. The Company uses derivatives primarily as cash flow hedges to set interest rates for forecasted debt issuances, such as interest rate locks.

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The Company is subject to interest rate risk on its fixed and variable interest rate debt obligations. Generally, the fair value of debt with a fixed interest rate will increase as interest rates fall and the fair value will decrease as interest rates rise. Commercial paper borrowings are subject to rollover risk because these borrowings generally have maturities of less than three months. The Company manages its exposure to interest rate risk by utilizing a combination of fixed rate borrowings and commercial paper borrowings.

As of February 3, 2005, the Company had no foreign exchange exposure and no outstanding derivative transactions. There have been no material changes in the primary risk exposures or management of the risks since the prior year. The Company expects to continue to manage risks in accordance with the current policy.

The table below provides information, as of February 3, 2005, about the Company’s debt obligations that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates:

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Item 8. Financial Statements and Supplementary Data.

Albertson’s, Inc.
Index to Consolidated Financial Statements