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Safeway Explains Stock Buybacks

PLEASANTON, Calif. — Safeway here expects operating profits to “grow nicely going forward” as a result of a refinancing plan and other ongoing initiatives, the chain’s senior vice president, finance and investor relations, said in a conference call last week.

According to Melissa Plaisance, Safeway believes the temporary shift in financial policy it initiated last November — using incremental leverage for share repurchases at very low interest rates — will enable the company to grow operating income over the next three years, at which point debt ratios will return to the levels they were at late last year.

Safeway adopted the temporary shift because stock prices were at a five-year low, she explained.

The call with investors was arranged on short notice, Plaisance said, “in response to a number of inquiries in the last week” regarding the temporary shift in financial policy and a floating-rate note debt issuance.

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“We expect to see operating profit grow nicely going forward as a result of our Just for U [digital] rollout, our work with corporate brands, our investment in natural lines like Open Nature, our fuel rewards and other loyalty programs and our health and welfare initiatives,” she said.

“We believe the prospects for our business continue to improve, and with the low stock price and the low interest rates, we are confident in the [temporary financial] plan and working hard to bring it to fruition by the end of 2013.”

At the same time it began buying back shares, Safeway also refinanced its $800 million debt due Aug. 15, 2012.

Plaisance said Safeway anticipates reducing debt through the balance of the year. “Our year-end debt balance should be lower by a significant amount than in the first half of this year,” she told investors.

Asked if Safeway plans to do any further incremental share repurchases, Plaisance said, “We will not put our investment-grade ratings at risk. We feel what we did was prudent and has worked out well, and we are mindful about retaining our investment-grade ratings.”

Profile of Safeway CEO Steve Burd

According to Plaisance, Safeway met with the ratings agencies before shifting its financial policy “so we would know what impact our actions would have on our ratings and could chart a prudent course, with the objective of retaining investment-grade ratings and access to the commercial paper market.”

Safeway retained its mid-BBB stable long-term rating and its A2 short-term rating with Standard and Poor’s but had a one-notch downgrade to Baa3/P3 with Moody’s and BBB-/F3 from Fitch.

If Safeway is able to bring its debt ratios back to their previous levels by the end of 2013, Plaisance said, “we would expect to be in a position to earn back the one-notch downgrade from Moody’s and Fitch, which would put us back in what we perceive is a sweet spot for our industry, allowing for what we believe to be optimal pricing and flexibility in the debt capital markets.

“It’s important to us to retain our investment-grade ratings, but even with the slight downgrade we think we have a tremendous amount of flexibility and good pricing,” she noted.

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