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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 September 7, 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.
(Exact name of registrant as specified in its charter)

Not Applicable

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 [X] No [   ]. As of October 11, 2002 there were issued and outstanding 441.1 million shares of the registrant’s common stock.

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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 INCOME
(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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 36 weeks ended September 7, 2002 and September 8, 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 36 weeks ended September 7, 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 36 weeks of 2002 and $6.9 million during the first 36 weeks of 2001. Actual LIFO Indices are calculated during the fourth quarter of the year based upon a statistical sampling of inventories.

Investment in GroceryWorks

During the third quarter Safeway invested $5.9 million in GroceryWorks bringing Safeway’s ownership interest in GroceryWorks to 52.5%. Therefore, Safeway changed its method of accounting for its investment in GroceryWorks from the equity method to consolidation beginning in the third quarter of 2002. This change in accounting has no effect on reported earnings.

Other Income/Expense

Other expense for the 36 weeks ended September 8, 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 Income

Comprehensive income consists primarily of net income and foreign currency translation adjustments. Total comprehensive income was $239.2 million for the first 36 weeks of 2002 compared to total comprehensive income of $861.7 million for the first 36 weeks of 2001.

NOTE B — NEW ACCOUNTING STANDARDS

SFAS No. 142, “Goodwill and Other Intangible Assets,” 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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 the fourth quarter of 2002. Since December 30, 2001, when Safeway initially tested its goodwill for impairment, the market capitalization of many retail grocery companies, including Safeway, has declined significantly. The effects of these external market factors may result in additional goodwill impairment.

In October 2001, the Financial Accounting Standards Board (“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.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs, including store closures. SFAS No. 146 replaces previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under Issue 94-3, a liability for an exit cost was recognized at the date of the company’s commitment to an exit plan. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future store closures and restructuring costs, if any, as well as the amounts recognized. The Company adopted the provisions of SFAS No. 146 during the third 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 36 weeks of 2002 by reportable operating segment is as follows (in millions):

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

Safeway’s adoption of SFAS No. 142 eliminated the amortization of goodwill beginning in the first quarter of 2002. The following table adjusts net income and net income per share for the adoption of SFAS No. 142 (in millions):

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

NOTE D — FINANCING

Notes and debentures were composed of the following at September 7, 2002 and December 29, 2001 (in millions):

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 administrative 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 was not significant. Safeway 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):

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

NOTE F — FURR’S AND HOMELAND CHARGE

In 2001, Safeway recorded a pre-tax charge to earnings of $42.7 million to recognize estimated lease liabilities associated with the bankruptcies of Furr’s Inc. (“Furr’s”) and Homeland Stores, Inc. (“Homeland”). During the first 36 weeks of 2002 Safeway reduced the accrual by $8.4 million for cash expenditures. In addition, Homeland emerged from bankruptcy during the third quarter of 2002 and, based on the resolution of various leases, Safeway reversed $5.2 million of the accrual, leaving a balance of $29.1 million as of September 7, 2002.

NOTE G — 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.

NOTE H — SUBSEQUENT EVENTS

Casa Ley has informed Safeway that it has discovered discrepancies in physical inventory counts of certain of its stores. Casa Ley has advised Safeway that it has taken steps to improve its inventory control procedures and is conducting a company-wide physical inventory which it expects to complete in the fourth quarter of 2002. The amount of any inventory adjustment cannot be estimated until the physical inventory counts are completed. Safeway has a 49% equity interest in Casa Ley and will reflect in its income statement 49% of any adjustment to Casa Ley’s inventory. However, Safeway does not expect any adjustment to Casa Ley’s inventory to be material to Safeway’s financial statements.

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

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

Results of Operations

Safeway’s net income was $281.3 million ($0.60 per share) for the third quarter ended September 7, 2002, compared to $309.2 million ($0.60 per share) for the third quarter of 2001.

Third-quarter 2002 comparable-store sales decreased 0.7%, while identical store sales (which exclude replacement stores) fell 1.4%. Sales were impacted by continued softness in the economy and competitive factors. Total sales increased to $8.1 billion from $8.0 billion in the third quarter of 2001 primarily due to new store openings.

Gross profit decreased 26 basis points to 30.69% of sales in the third quarter of 2002 from gross profit of 30.95% in the third quarter of 2001 as cost savings were reinvested in pricing and promotion.

Operating and administrative expense increased 90 basis points to 23.92% of sales in the third quarter of 2002 compared to operating and administrative expense of 23.02% in the third quarter of 2001 primarily due to higher employee benefit costs, higher real estate occupancy costs and pension expense.

Interest expense remained relatively flat at $101.5 million in the third quarter of 2002 compared to $101.2 million in the third quarter of 2001 as lower interest rates were offset by higher average borrowings resulting from the repurchase of Safeway stock. EBITDA (defined on page 13) as a percentage of sales was 9.35% for the quarter and 9.92% over the last 52 weeks. The interest coverage ratio (EBITDA divided by interest expense) remains very strong at 7.4 times for the quarter and 8.2 times for the last 52 weeks.

For the first 36 weeks of 2002, net income before the cumulative effect of an accounting change was $922.7 million ($1.90 per share) compared to net income of $900.3 million ($1.75 per share) for the first 36 weeks of 2001. Sales in the first 36 weeks of 2002 increased 1.9% to $24.1 billion from sales of $23.6 billion in the first 36 weeks of 2001. Sales were adversely impacted by continued softness in the economy, competitive factors, an overly aggressive shrink effort and disruptions associated with centralization of buying and merchandising. The gross profit margin increased to 31.21% in the first 36 weeks of 2002 from 30.89% in 2001 due to continued improvements in shrink control, buying practices and private-label growth. Operating and administrative expense increased to 23.72% of sales in the first 36 weeks of 2002 from 22.76% in the first 36 weeks of 2001 due to higher real estate occupancy costs, pension expense and higher employee benefit costs. Safeway recorded an after-tax restructuring 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. Other expense for the first 36 weeks of 2001 included an impairment charge of $30.1 million related to GroceryWorks. Net income after the cumulative effect of an accounting change related to SFAS No. 142 was $222.7 million ($0.46 per share) for the first 36 weeks of 2002. See New Accounting Pronouncements below and 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

Fourth Quarter 2002

Casa Ley has informed Safeway that it has discovered discrepancies in physical inventory counts of certain of its stores. Casa Ley has advised Safeway that it has taken steps to improve its inventory control procedures and is conducting a company-wide physical inventory which it expects to complete in the fourth quarter of 2002. The amount of any inventory adjustment cannot be estimated until the physical inventory counts are completed. Safeway has a 49% equity interest in Casa Ley and will reflect in its income statement 49% of any adjustment to Casa Ley’s inventory. However, Safeway does not expect any adjustment to Casa Ley’s inventory to be material to Safeway’s financial statements.

New Accounting Pronouncements

SFAS No. 142, “Goodwill and Other Intangible Assets,” 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 the fourth quarter of 2002. Since December 30, 2001, when Safeway initially tested its goodwill for impairment, the market capitalization of many retail grocery companies, including Safeway, has declined significantly. The effects of these external market factors may result in additional goodwill impairment.

In October 2001, the Financial Accounting Standards Board (“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.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs, including store closures. SFAS No. 146 replaces previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under Issue 94-3, a liability for an exit cost was recognized at the date of the company’s commitment to an exit plan. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future store closures and restructuring costs, if any, as well as the amounts recognized. The Company early adopted the provisions of SFAS No. 146 during the third quarter of 2002. Adoption of this standard did not have a material effect on the Company’s financial statements.

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

Liquidity and Financial Resources

Cash flow from operating activities was $1,573.5 million in the first 36 weeks of 2002 compared to cash flow from operations of $1,697.3 million in the first 36 weeks of 2001. This change is due primarily to changes in working capital. Working capital (excluding cash and debt) at September 7, 2002 was $34.1 million compared to a deficit of $145.5 million at September 8, 2001.

Cash flow used by investing activities for the first 36 weeks of the year decreased to $890.5 million in 2002 compared to $1,492.7 million in 2001. Cash flow used by investing activities was greater in 2001 because of the Genuardi’s acquisition and higher cash capital expenditures.

Cash flow used by financing activities was $681.5 million in the first 36 weeks of 2002 primarily due to the purchase of Safeway common stock, partially offset by additional borrowings to fund part of the purchases. Cash flow used by financing activities was $227.3 million in the first 36 weeks of 2001 primarily due to the issuance of debentures and commercial paper to help finance the acquisition of Genuardi’s, partially offset by the utilization of cash from operations to pay down debt.

The Company repurchased 32.9 million shares of Safeway’s common stock at a total purchase price of $918 million during the third quarter of 2002. From initiation of the program in 1999 through the end of the third quarter of 2002, Safeway has repurchased 79.7 million shares of common stock at a total purchase price of $2.8 billion leaving $0.7 billion available for repurchases under the current level authorized by the company’s board of directors. The timing and volume of future repurchases 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. On August 12, 2002, Safeway issued $225 million of 3.80% Senior Notes due in 2005 and $800 million of 5.80% Senior Notes due in 2012. Proceeds from these issuances were used to repay borrowings under the Company’s commercial paper program.

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:

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