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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

     [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 15, 2002

OR

     [   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to_____

Commission file number 1 - 41

SAFEWAY INC.

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SAFEWAY INC. AND SUBSIDIARIES

INDEX

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)

(Continued)

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SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In millions, except per-share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A — THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements of Safeway Inc. and subsidiaries (“Safeway” or the “Company”) for the 12 and 24 weeks ended June 15, 2002 and June 16, 2001 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s 2001 Annual Report to Stockholders. The results of operations for the 12 and 24 weeks ended June 15, 2002 are not necessarily indicative of the results expected for the full year.

Inventory

Net income reflects the application of the LIFO method of valuing certain domestic inventories, based upon estimated annual inflation (“LIFO Indices”). Safeway recorded estimated LIFO expense of $2.3 million during the first 24 weeks of 2002 and $4.6 million during the first 24 weeks of 2001. Actual LIFO Indices are calculated during the fourth quarter of the year based upon a statistical sampling of inventories.

Other Income/Expense

Other expense for the 12 and 24 weeks ended June 16, 2001 includes a $30.1 million impairment charge to reduce the carrying amount of Safeway’s investment in GroceryWorks to its estimated fair value.

Comprehensive Loss/Income

Comprehensive (loss) income consists primarily of net income and foreign currency translation adjustments. Total comprehensive loss was $33.4 million for the first 24 weeks of 2002 compared to total comprehensive income of $571.1 million for the first 24 weeks of 2001.

NOTE B — NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets in a business combination. In the event goodwill results from a future acquisition by Safeway it will not be amortized.

SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will be tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings.

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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company adopted SFAS No. 142 on December 30, 2001. Under the transitional provisions of SFAS No. 142, the Company’s goodwill was tested for impairment as of December 30, 2001. Each of the Company’s reporting units were tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined based on a valuation study performed by an independent third party which primarily considered the discounted cash flow, guideline company and similar transaction methods. As a result of the Company’s impairment test, the Company recorded an impairment loss to reduce the carrying value of goodwill at Dominick’s by $589 million and Randall’s by $111 million to its implied fair value. Impairment in both cases was due to a combination of factors including acquisition price, post-acquisition capital expenditures and operating performance. In accordance with SFAS No. 142, the impairment charge was reflected as a cumulative effect of accounting change in the Company’s first-quarter 2002 statement of operations. See Note C. Safeway will test goodwill for impairment again in 2002 at an annual impairment test date that has yet to be selected by the Company.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which replaces SFAS No. 121 and APB No. 30, became effective for Safeway in the first quarter of 2002. Adoption of this standard did not have a material effect on the Company’s financial statements.

NOTE C — GOODWILL

A summary of changes in Safeway’s goodwill during the first 24 weeks of 2002 by reportable operating segment is as follows (in millions):

(1)		Primarily represents final purchase price allocation adjustments related to the Genuardi's acquisition.
(2)		Represents cumulative effect of adoption of SFAS No. 142.
(3)		Represents foreign currency translation adjustments.

Safeway’s adoption of SFAS No. 142 eliminates the amortization of goodwill beginning in the first quarter of 2002. Goodwill amortization expense in the second quarter of 2001 was $32.9 million ($0.06 per diluted share). Goodwill amortization for the first 24 weeks of 2001 was $64.2 million ($0.13 per diluted share). The following table adjusts net income (loss) and net income (loss) per share for the adoption of SFAS No. 142 (in millions):

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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE D — FINANCING

Notes and debentures were composed of the following at June 15, 2002 and December 29, 2001 (in millions):

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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE E — RESTRUCTURING CHARGES

Safeway recorded restructuring charges totaling $58.9 million pre-tax in the second quarter of 2002 for costs associated with 10 announced store closures, for severance costs for 460 retail positions related to the centralization of marketing functions and for severance costs for 487 retail positions related to the restructuring of a 29-store labor contract. The revenue and net operating income associated with the 10 stores to be closed is not significant. Safeway has not made any cash payments related to these charges as of June 15, 2002 but expects these activities to be completed by the end of 2002. The following table presents the pre-tax charges recorded by category of expenditure (in millions):

NOTE F — CONTINGENCIES

Legal Matters

Note L to the Company’s consolidated financial statements, under the caption “Legal Matters” on pages 38 and 39 of the 2001 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. There have been no material developments to these matters, except as noted in subsequent filings, and except as described below.

In the lawsuit entitled Baker, et al. v. Jewel Food Stores, Inc., et al., the Court certified the action as a class action on July 9, 2002. Trial is scheduled to begin in early 2003.

NOTE G — SUBSEQUENT EVENTS

On July 16, 2002, Safeway issued $480 million of 4.80% Senior Notes due in 2007. Proceeds from this issuance were used to repay borrowings under the Company’s commercial paper program.

On July 18, 2002, the Company filed a shelf registration with the Securities and Exchange Commission to sell, periodically, up to $2 billion in debt securities and common stock.

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SAFEWAY INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Safeway’s net income was $309.3 million ($0.63 per share) for the second quarter ended June 15, 2002, compared to $307.3 million ($0.59 per share) for the second quarter of 2001.

Second-quarter 2002 comparable-store sales decreased 0.4%, while identical store sales (which exclude replacement stores) fell 1.1%. Sales were impacted by continued softness in the economy, an increase in competitive activity, an overly aggressive shrink effort and disruptions associated with the centralization of buying and merchandising. Total sales increased 1.2% to $8.1 billion from $8.0 billion in the second quarter of 2001 primarily because of new store openings.

Gross profit increased to 31.59% of sales in the second quarter of 2002 from gross profit of 31.16% in the second quarter of 2001 due to continued improvements in shrink control, buying practices and private-label growth.

Operating and administrative expense increased to 23.60% of sales in the second quarter of 2002 from 23.07% in 2001. Higher real estate occupancy costs, pension expense and employee benefit costs contributed to a 94 basis point increase that was partially offset by a 41 basis point reduction due to the elimination of goodwill amortization under SFAS No. 142.

Safeway recorded an after-tax charge of $36.7 million ($0.08 per share) in the second quarter of 2002 consisting of charges associated with 10 announced store closures, severance costs related to the centralization of marketing functions and severance costs related to the restructuring of a 29-store labor contract. In addition, Safeway incurred transition costs related to the centralization effort of $4.4 million after-tax ($0.01 per share).

Interest expense declined to $95.4 million in the second quarter of 2002 compared to $105.6 million in the second quarter of 2001 due primarily to lower interest rates partially offset by higher average borrowings because of the repurchase of Safeway common stock. EBITDA (defined on page 13) as a percentage of sales was 9.76% for the quarter. The interest coverage ratio (EBITDA divided by interest expense) remains very strong at 8.27 times for the quarter. Safeway has reduced outstanding debt by $138 million since the beginning of 2002 while continuing to invest in capital expenditures and purchasing its common stock.

Other income was $4.3 million in the second quarter of 2002 compared to other expense of $21.6 million in 2001. Other expense in 2001 included an impairment charge of $30.1 million related to GroceryWorks.

For the first 24 weeks of 2002, net income before the cumulative effect of an accounting change was $641.4 million ($1.30 per share) on sales of $16.0 billion compared to net income of $591.2 million ($1.14 per share) on sales of $15.7 billion for the first 24 weeks of 2001. The gross profit margin increased to 31.47% in the first 24 weeks of 2002 from 30.87% in 2001. Operating and administrative expense increased to 23.62% of sales in the first 24 weeks of 2002 from 23.03% in the first 24 weeks of 2001. Results for the 24 weeks ended June 15, 2002 were the result of trends similar to those experienced for the 12 weeks ended June 15, 2002, which are discussed above. Net loss after the cumulative effect of an accounting change related to SFAS No. 142 was $58.6 million ($0.12 per share) for the first 24 weeks of 2002. See Notes B and C to the condensed consolidated financial statements.

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SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets in a business combination. In the event goodwill results from a future acquisition by Safeway it will not be amortized.

SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will be tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings.

The Company adopted SFAS No. 142 on December 30, 2001. Under the transitional provisions of SFAS No. 142, the Company’s goodwill was tested for impairment as of December 30, 2001. Each of the Company’s reporting units were tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined based on a valuation study performed by an independent third party which primarily considered the discounted cash flow, guideline company and similar transaction methods. As a result of the Company’s impairment test, the Company recorded an impairment loss to reduce the carrying value of goodwill at Dominick’s by $589 million and Randall’s by $111 million to its implied fair value. Impairment in both cases was due to a combination of factors including acquisition price, post-acquisition capital expenditures and operating performance. In accordance with SFAS No. 142, the impairment charge was reflected as a cumulative effect of accounting change in the Company’s first-quarter 2002 statement of operations. See Note C. Safeway will test goodwill for impairment again in 2002 at an annual impairment test date that has yet to be selected by the Company.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which replaces SFAS No. 121 and APB No. 30, became effective for Safeway in the first quarter of 2002. Adoption of this standard did not have a material effect on the Company’s financial statements.

Liquidity and Financial Resources

Cash flow from operating activities was $1,096.7 million in the first 24 weeks of 2002 compared to cash flow from operations of $830.3 million in the first 24 weeks of 2001. This change is due primarily to improved results of operations and changes in working capital. Working capital (excluding cash and debt) at June 15, 2002 was $73.3 million compared to $180.9 million at June 16, 2001.

Cash flow used by investing activities for the first 24 weeks of the year decreased to $518.6 million in 2002 compared to $1,127.5 million in 2001, due primarily to the Genuardi’s acquisition and higher cash capital expenditures in 2001.

Cash flow used by financing activities was $596.1 million in the first 24 weeks of 2002 primarily due to the purchase of Safeway common stock and the utilization of cash from operations to pay down debt. Cash flow provided by financing activities was $308.0 million in the first 24 weeks of 2001 primarily due to the issuance of the debentures and commercial paper to help finance the acquisition of Genuardi’s.

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SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safeway repurchased 5.2 million shares of Safeway common stock at a total purchase price of $225 million in the second quarter of 2002. Safeway’s board of directors has increased the authorized level of the Company’s stock repurchase program to $3.5 billion from $2.5 billion. From initiation of the program in 1999 through the end of the second quarter of 2002, the Company has repurchased 46.7 million shares of common stock at a cost of $1.9 billion, leaving $1.6 billion available for repurchases under the new authorized level. The timing and volume of future purchases will depend on market conditions.

On July 16, 2002, Safeway issued $480 million of 4.80% Senior Notes due in 2007. Proceeds from this issuance were used to repay borrowings under the Company’s commercial paper program. On July 18, 2002, the Company filed a shelf registration with the Securities and Exchange Commission to sell, periodically, up to $2 billion in debt securities and common stock.

Net cash flow from operating activities as presented in the condensed consolidated statements of cash flows is an important measure of cash generated by the Company’s operating activities. EBITDA, as defined below, is similar to net cash flow from operations because it excludes certain noncash items. However, EBITDA also excludes interest expense and income taxes. EBITDA should not be considered as an alternative to net income or cash flows from operating activities (which are determined in accordance with GAAP) as an indicator of operating performance or a measure of liquidity. Management believes that EBITDA is relevant because it assists investors in evaluating Safeway’s ability to service its debt by providing a commonly used measure of cash available to pay interest, and it facilitates comparisons of Safeway’s results of operations with those of companies having different capital structures. Other companies may define EBITDA differently and, as a result, such measures may not be comparable to Safeway’s EBITDA. Safeway’s computation of EBITDA is as follows: