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Safeway, Inc. (NYSE:SWY)

Q4 2008 Earnings Call

February 26, 2009 11:00 am ET

Executives

Melissa C. Plaisance - SVP of Finance & IR

Steve Burd - Chairman, President & CEO

Robert Edwards - EVP & CFO

Analysts

John Heinbockel - Goldman Sachs

Chuck Cerankosky - FTN Equity Capital

Mark Wiltamuth - Morgan Stanley

Bakley Smith - Jefferies and Company

Doug Cooper- UBS

Bob Summers - Pali Capital

Deborah Weinswig - Citigroup

Meredith Adler - Barclays Capital

Ed Kelly - Credit Suisse

Karen Short - FBR Capital Markets

Andrew Wolf - BB&T

Charles Grom- JPMorgan

Operator

Welcome to the Safeway fourth quarter and year end 2008 earnings call. I will turn the call over to Ms. Melissa Plaisance, Safeway's Senior Vice President of Finance. Please go ahead.

Melissa Plaisance

Good morning, everyone and thank you for joining us for this fourth quarter 2008 conference call. With me this morning are Steve Burd our Chairman, President & CEO and Robert Edwards, Executive Vice President & Chief Financial Officer.

Before I turn the call over to Steve, let me remind you that this conference call may contain forward-looking statements. Such statements may relate to topics such as sales, gross margins, earnings, earnings growth, operating improvements, cost reduction, capital spending, free cash flow, growth of Blackhawk, depreciation, product development, lifestyle format and additional growth vehicles and other related subjects.

These statements are based on Safeway's current plans and expectations and are subject to risks and uncertainties that could cause actual events and results to vary significantly from those implied by such statements.

We ask you to refer to Safeway's reports and filings with the SEC for further discussion of these risks and uncertainties which are contained in Safeway's annual report 10-K and 10-Q. Thank you.

Steve Burd

All right, thank you, Melissa. Let me begin with net income. Net income for the quarter was $338 million. This compares with the same quarter last year, where we produced $301 million. Expressing that in terms of earnings per share, we earned $0.79 per share as contrasted with $0.68 per share a year ago, which represents more than a 16% increase in earnings per share on the quarter.

The quarter was affected, as I think you will all recall from a hurricane event that occurred in our Texas operations. We have insurance for that, but the uninsured losses equaled to about $0.01 a share, which I think is considerably lower than what I have heard others suggest their uninsured loss would be.

So if you think about that as an unusual event, were it not for Hurricane Ike, we would have earned $0.80 a share against that $0.68 which is better than a 17% increase in earnings per share. From our standpoint, we're very pleased with the earnings results for the quarter. These results were affected by a number of significant items that I'm going to call out, but they largely offset one another.

On the positive side we benefited $0.04 per share from having one additional week. The way the retail calendar is structured, every six or seven years, you end up with a 53-week year and this was our year for that. So this was a 17-week quarter, as opposed to a 16-week quarter which is worth $0.04 a share. We also benefited $0.04 a share from a lower tax rate.

While the tax benefits, I think, are always worth calling out, I think you know from our history that we regard taxes like any other cost. And we worked hard to drive those costs down and to achieve tax benefits as often as we could. If you look at the track record of this company tax benefits are quite routine, and we work hard to drive those costs down, and to achieve tax benefits as often as we can.

And if you look at the track record of this company, tax benefits are quite routine. If you look back at the last 28 quarters as I did recently, we have achieved some level of tax benefit in 23 of those 28 quarters. I know some people like to sort of exclude tax benefits from our earnings, but when you consider the fact as I did recently, we have achieved some level of tax benefit in 23 of those 28 quarters.

I know some people like to sort of exclude tax benefits from our earnings, but when you consider the fact that we have them every year, it is 23 out of 28 quarters, we do not think it is an appropriate exclusion. Now the 23 out of 28, just so everybody knows how I am calculating, that I am using a 38% tax rate as kind of a baseline and anytime we were below that, we had some level of tax benefit.

And that is a more conservative definition than what we talked about in the, investor conference in December. And if you have examined our recent 10-Q filing, you know we are expecting a significant tax benefit sometime this year. The difficulty with tax benefits is you can't always determine with precision, the quarter in which they can occur. You can often determine the year, but not necessarily the quarter.

So now on the negative side, again, talking about some significant events, we had what I would refer to as kind of non-operating expense increases, meaning that the operations were doing great, but there were some exogenous events which affected those, which are not really operating events and they affected us to the tune of $0.09 a share.

Now the first one, I will talk about is the decline in the discount rate which we use to value our worker's comp expenses. This is done every December, and we have been using a discount rate that’s tied to five year treasuries. That increased our worker's comp expense equal to $0.05 a share.

Now unless you sort of looked at 5 year T-Bill rates; the five-year T-bill rate in December which is the one when we valued this portfolio of possible future expenses was 1.75. So, I took a quick look at that. I knew that was a low number. Looking at the last 38 years and looking at the monthly T-bill rate at the end of each month, that is the lowest five-year T-bill rate in more than 38 years.

And so the good news for that item is we know interest rates are not going to stay at that level. And in fact, our average for the last ten years was a number closer to 425. So, we will someday get back to that average and what will spring forward is about $0.07 a share.

So, it is really important to understand the affects of that. We continue to do a terrific job of lowering the incidence in worker's comp and also by lowering the severity, because we have a sizeable number that we expect again this year to reduce worker's comp. Now we are assuming of course that the interest rate doesn't decline from 1.75 and in fact it is higher than that today. The second factor was the Canadian exchange rate, which experienced a very sharp drop in the fourth quarter.

In fact if you look at the exchange rate, it was really the end of September. We had an uninterrupted, six-year improvement in the Canadian dollar relative to the US dollar. And that process ended consistent with the financial meltdown that the news media has been talking about.

And then the last item that I would mention is the LIFO expense which you recall last year in the fourth quarter, I commented that we had just experienced the highest LIFO expense for a quarter's report in 15 years. Well, guess what? 2008, that number was even higher. And in fact the amount for the year was the highest in the 18-year history of the Company.

And so again those are things that change through time and given some of the deflation that we're experiencing now, I would think that LIFO expense would actually be lower in 2009. So, if you add the $0.05 for worker's comp and $0.03 for the Canadian exchange rate losses and a $0.01 for worker's comp, you get to that $0.09 and that is why I said it roughly equals the $0.08 benefit factor.

And our sales results remain soft for the quarter, but we had very strong expense reductions which drove Q4 earnings improvements. Turning next to sales, total sales increased 3.4% over last year and comparable store sales, which we always report along with ID, first including fuel declined 1.2%. But this decline was driven largely by the decline in fuel retails, which everyone has observed at the pump versus last year. So there should not be any surprise there.

The comparable store sales, excluding fuel, actually increased 0.5% and then if you look at IDs, again excluding fuel, our increase essentially matched the previous quarter at 0.4 positive. Our ID sales continue to be impacted by five factors, four of which I've been talking about for the last couple of quarters.

The first is a shift from branded pharmaceuticals to generic, which if you recall is a good thing from an earnings standpoint. The second is market share gains in corporate brands. Again, our sales growth in corporate brands, relative to national brands, that gap, you could not describe it as anything, but extraordinary. And as long as our national brand, cost of goods remains high, we will be driving corporate brands. And again, that is good for our profitability.

The third factor is an effort that we have had underway for some time. To consciously invest in price, particularly providing a better everyday price point for the items that people purchase most often.

Fourth, which is a bit new is, we are beginning to see some deflation, particularly in some of the commodities. It should not surprise anybody. If you look, a lot of commodity prices have come down, and there are products that we carry and we sell that are basically commodities. And so we are seeing deflation. Some of that we saw in the fourth quarter. Frankly, we are seeing a lot more of that in the first quarter. Some we saw in the fourth quarter; we are seeing more in the first quarter.

And then we see, you know, what everybody else sees, is a continued decline in economic activity. I know when I first saw it was trading down, everybody got worried about that. Now, I think everybody fully appreciates that the consumer confidence is at an all time low since the Conference Board has been measuring that, going all the way back to 1974. So, you have a very set of worried consumers.

What I tell people on a routine basis when they ask me, how are things; I say look, this is a great time to be in the food business. Because while not insulated from this, you would be hard-pressed to find people that can report the kind of earnings increases that we generate in our business, and frankly, that you will see in our sector.

Turning to gross margin; our total gross margin rate increased nine basis points from last year's fourth quarter. But, when you exclude fuel sales, gross margin rates on our non-fuel basis actually declined 57 basis points. Now, this decline in gross margin was largely the result of price investment, but it also reflects a modest increase shrink. Meaning, we did not have a shrink reduction in the fourth quarter. What happened was, shrink was up a little bit, price investment was significant. We had some offsets from lower advertising expenses and obviously some strong improvements in Blackhawk's performance, which basically booked in the gross margin line.

Now, before anybody gets worried about shrink, and are we through reducing shrink in this company? No we're not. We still believe that the opportunity in front of this is in excess of $300 million. What you have to look at, and I know, everybody likes to look at quarterly results. But sometimes the quarterly results have got to be looked at in the longer perspective.

Last year in the fourth quarter, I'm sure long since forgotten; we had an extraordinary shrink result. In fact, we reduced shrink in the fourth quarter of last year some 39 basis points. So, when you try to go up against 39 basis points, it is pretty difficult because on the year, our shrink reduction was closer to the 15 basis points.

So, the good news is, if you look at the shrink target that we set out at the beginning of the year, which was that we were going to take another $50 million of shrink, and some of you who attended the investor conference know that that number for us now exceeds $500 million at the beginning of the program.

We actually beat that target on the year by more than 50%, okay? So, shrink reductions are not over at Safeway. It is just the unusual comparison that affected the numbers on gross margin in the quarter.

Turning to O&A expense. O&A expense increased 13 basis points from last year's fourth quarter, and this increase is due entirely to the decline in average fuel retail. So when you exclude fuel sales, the O&A expense margin improved 27 basis points on the quarter. Now, this improvement is largely the result of improvements in what I'm going to describe as employee related expenses.

As indicated earlier, these strong expense reductions were diluted by two non-operating events. Keep in mind that that the treasury bill, five year treasury bill affect, which is the discount rate of worker's comp, gets booked in O&A. And frankly, if we just had last year's number, the O&A cost reduction in the fourth quarter would have essentially matched the gross margin decline, ex-fuel.

Couple that with the Canadian currency thing, which is also a bit unusual, and you see that the pattern that has existed here at Safeway for more than four years, mainly cost reduction matching gross margin declines if there have been any, always covering that, so that we have operating margin improvements. So, we have had a steady improvement in operating and EBITDA margins really for the last four year, and we expect that to continue despite 2009 being a year of significant price investment.

Turning to interest expense; interest expense declined by $8.1 million due both to lower debt outstanding and a reduction in our average borrowing rate. The average debt outstanding was lower by $141 million, and our average borrowing rate declined by 29 basis points, from 6.52% to 6.23%.

Now, there was another significant event in the quarter that relates to interest expense, particularly at a go-forward basis. In November of 2008, we had just under $850 million of public debt mature. Now, a number of people these days worry about public debt matured. We don't worry at all because of the strength of our balance sheet.

We had $550 million in US debt maturing, and we had $281 million in Canadian debt. Because of the strength of our balance sheet, we were set to refinance at a time in which interest rates were very high. We were getting estimates from the street that we would have to pay 9% to replace that debt. Well, because of the strength of our balance sheet, we took a path. We floated more commercial paper. At some point in there we took on some bank debt, and we financed about $500 million at a five-year rate in mid-December, at a rate of 6.25%. So, just being able to wait saved us annual interest of about $14 million.

Not everybody in our sector could have that luxury. They would not have been able to wait. They do not all have access to commercial paper. And then the Canadian debt; we simply retired with Canadian cash. If you've looked at our debt maturities, you will know that we have got $250 million of US floating rate debt maturing at the end of March.

The plan is to meet the maturity again with commercial paper borrowing, and then frankly apply the cash from operations to retire the commercial papers that initially replaced that debt. We should be able to do that inside the second quarter because second quarter is traditionally a very strong free cash flow quarter for us, followed by a very strong third quarter free cash flow quarter. And of course, fourth quarters tend to also be quite strong.

Turning to capital expenditures, we completed 12 new stores and 113 remodels during the quarter. And for the full year we completed 20 new stores and 232 Lifestyle remodels, bringing Lifestyle total now to just under 1300 stores. The exact number is 1276, of course 73% of the store fleet. Our Lifestyle transformation is expected to be 88% complete by the year-end 2010, and then essentially finished off in the year 2011.

Spending just a moment on the full year results, our net income for the 53 week year was $965 million, which equates to $2.21 per share, which when you compare that to last year's 52-week year, that is an 11% earnings per share increase over last year. Total sales increased 4.3% to $44.1 billion. Non-fuel ID sales increased a positive 0.8%, and our gross margin rate, adjusted for fuel sales, declined on the year, 25 basis points, while the O&A expense margin, adjusted for fuel, actually improved 27 basis points; again, repeating the pattern of the last four years.

Our free cash flow, we achieved the upper end of our range. Free cash flow for the year was $681 million, which represents a 62% increase in free cash flow. Debt outstanding declined by $155 million. We repurchased 12.6 million shares earlier in the year at a cost of $360 million and a balance of our free cash flow went to pay dividends.

Just a brief update on Blackhawk; the Blackhawk sales, as you might expect, were impacted by the slowing economy. But, they remain very strong by any comparative measure that you can imagine. The face value of all card sales increased in the fourth quarter, some 28% and on the year, the face value of those card sales increased 42%.

So, not exactly experiencing the economic downturn of the rest of the economy because it is fundamentally a growth business.

Now that growth is in sharp contrast to the sales declines experienced by a number of our card partners, particularly those in non-food retail. Turning to guidance, we first provided guidance for 2009 in early December. While our December guidance did not contemplate a 2009 recovery, it also did not contemplate a continued decline in economic activity.

At this point, we remain comfortable with our earnings guidance. I know that surprises some people, but we remain comfortable with that, but we believe the sales guidance will be quite challenging, and we just think it is too early in the year to try to provide any additional guidance on that. I mean we don't even have eight weeks under our belt.

But the reason we are so confident on the earnings is that I think everybody on this call knows that while a lot of businesses today are really focused on cost reductions, this is a Company that's focused on cost reductions for 17 years. We used to have a slogan in our marketing campaign. It was a little jingle that actually said nobody does it better. Some of those in the Northern California market will remember that slogan.

Well on cost reductions, nobody does it better. I mean, we have established a 17-year culture of cost reductions. And so what did we do after we finished the Investor Conference? We went back to the table and teed up some additional cost reductions.

And a lot of that cost reduction is locked in place. In fact, the cost reductions that I talked about at the Investor Conference, which was more than 50% greater than 2008, which was a record year. At that time I think I said about 50% of that was locked in. In other words, it is already done; we don't have to do anymore. At this point about 65% of the cost reduction is locked in.

But, you can't lock in things like shrink because it happens as you move through the year. So, some of the cost reduction will not get locked until December of 2009. So, we are obviously seeing the economy soften. We are seeing an acceleration of trading down and as I commented earlier, we're seeing early signs of deflation which will take away from top line sales growth, but there is some good news there. It should lead to lower LIFO charge and frankly it should lead eventually to higher volume.

And so I think that deflation is actually a good thing. Our efforts to reduce costs continue to bear fruit and should offset any softening of sales. We still expect to generate EPS in the range of $2.34 to $2.44. We realize that current consensus estimates are a tad below that. And while the consensus estimates are a nudge below our guidance, if not everybody has provided sort of quarterly numbers, we have taken a look at the quarterly numbers, and we really think they're too high in the first quarter and frankly too low in the back half.

And I am going to try to help you out here a little bit so that we intend to make our number; I would just like you to be closer to your number. And so, commenting on the first quarter, it does not appear to us that people have properly contemplated the holiday shift.

And so, let me just try to walk you through the holiday shift here. Last year, Easter was in the first quarter. Now, when I say that it is the shopping that precedes Easter, okay. This year, that is going to be in the second quarter. It is subtle, but because our week ended in 2008 on January 3, the shopping that precedes New Year, which is heavy, New Year's Eve is as heavy as Christmas or any other holiday.

And so basically that already happened in 2008. So that softens, that actually has a holiday effect in the first quarter of this year. And then it seems like a small thing and then it’s the smaller of the three, but every once in a while, Valentine's Day falls on Saturday, which food retailers will tell you is the worst possible day for Valentine's Day.

And just think about what you all did on Valentine's Day. If it had happened during the week, you would have rushed into Safeway, grabbed an expensive floral display because you want to impress someone and you didn't do that, some of you went somewhere else.

So that holiday shift is worth about $0.04. The currency kit will be about $0.02 because we don't expect currency to recover there until the economy goes through a bit of recovery and interest rates return to more normalcy. Of course that's not going to be there in the fourth quarter, but it will be there in the first quarter.

And then, we have got eight weeks under our belt. It’s a 12-week quarter, so we have some insight into fuel margins. As you know when fuel costs come down or excuse me, when fuel costs go up, that squeezes margins. And so we think fuel margins will affect the first quarter about $0.02.

At the same time, our history is very consistent. Our fuel margins, over the last five, six years on an annual basis are very, very consistent. And so, again, what you might lose in the first quarter, we are highly confident we will get back sometime that year. Then there are three other things that affect the pattern of earnings.

Everybody knows that we are determined to make significant price investments. And that is why we stepped the O&A cost reductions so severely. And when you make those investments while you should get a demand response to that, it's not always immediate. And so we are front loading our price investments and some of those, you'll get pay back inside the quarter and some of those you won't. It will come in later quarters.

The sales building effort that we addressed in the Investor Conference, by its nature because a lot of it requires training and a lot of it requires some adjustments in marketing campaign that builds as we move through the year. And then cost reductions; there was a very significant difference in 2008 between the cost reduction that we experienced in Q1 and the cost reduction that we experienced in Q4.

And that pattern is even more pronounced in 2009 because the cost savings are so much larger. So, the difference between Q1 and Q4 is much larger. So, if you want to be more accurate with your quarterly estimates, you'd take the three items that I have quantified. The holiday shift, the currency exchange and the fuel margins and then you need to nudge that number to reflect these other three items that I didn't quantify for you.

And if you remove that from the first quarter and you put it in the back half and split it if you want between the third and fourth quarter, no change, in the numbers overall. The pattern will be more accurate. Okay, finally, free cash flow. It is going to be a great year for free cash flow, partly because of some of the changes that we made in the capital program, but as good as 2008 was.

Free cash flow is expected to increase 47% to 76%. And it'd be hard pressed to find other businesses that will have that kind of experience with free cash flow, taking us to a level of $1 billion to $2 billion.

Let me try to summarize and then take some questions. It is no secret that all the business operates in a uniquely tough environment. We are very pleased with our earnings growth, both for the fourth quarter and for the full year in what was a tough economic climate. We are disappointed in our sales growth, but our cost reduction effort enables us to produce strong earnings growth in 2008.

Going forward, we are encouraged by the results of our marketing efforts and have seen significant and positive change in transactions between Q4 and Q1. And that is also coupled with some other things like deflation and a reduction in items per transaction, but if you want to build sales, you have got to start with foot traffic and we are building transactions.

And there is a pronounced difference between Q4 and Q1. Now relative to most businesses, we expect strong results in 2009 as we build back our sales momentum and deliver on a very aggressive and well planned cost reduction effort. We believe that we have the best conditioned assets in our sector. We are on track to exceed 2008 cost reduction effort by more than 50%.

And again, 2008 was our best year ever on cost reduction. We are improving our price position virtually every day. We have the strongest balance sheet in our sector and not to repeat, but I guess to repeat, free cash flow is going to be extraordinary in 2009, increasing some 47% to 76%.

So, frankly, we thought we had a great quarter. We thought in the circumstances we had a great year, and we expect 2009 relative to the rest of the business to be a good year for Safeway. So, I'm willing to take questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from John Heinbockel. You may ask your question. Please state your company name.

John Heinbockel - Goldman Sachs

Yes, Goldman Sachs. Steve, a couple of things. How will deflation or moderating inflation impact gross margin, particularly, how do you think branded pricing will play through that, vendor trade spend, price rollback? And then, is there a lot of benefit to be had on margin on the self-manufactured private label product as those commodity costs come down?

Steve Burd

Okay. On the deflation, on what we're experiencing; we're experiencing a combination of things. We do have some national brand vendors that have rolled back prices. You've also heard other national brand vendors comment that they intend to hold the line. I say, wait and see, because we're going to chew them up on corporate brand. And we're just going to keep driving corporate brands, and that is always been a disciplined mechanism on the national brands. And so I think they either have to contend with market share declines, which they will not like, while we make higher margins on corporate brands. We're quite comfortable with that.

So there's some deflation there although I think if you look across all national brands, I would not regard that as deflationary at this point. But it's fair to say, we're not seeing inflation levels that others predicted. The two categories that we have seen the most deflation right now would be the dairy category, which is a pure commodity, and you may have read that there's a movement underfoot to bring supply and demand back into balance by slaughtering some of the dairy herd. So, that will eventually return to normalcy, but I can't predict when.

But, we're seeing more deflation in that category in the first quarter than what we saw in the fourth quarter, by a considerable amount. And then also, we've seen very significant declines in the produce category. Of course this time of year, you're getting a lot of your products from places like Chile. Now, that could reverse. You're probably familiar with the rainfall conditions on the West Coast, which are a major source of produce, and things are picking up there, but, if we continue to have a drought year, that might flip those numbers.

Still, my view, John, would be, that 2009 is not going to be the kind of inflation that we experienced in the past couple of years, which is going to help us out, I'm confident on the LIFO line. But this economy is so peculiar; I think to all of us, that we're anticipating some deflation in the near term. I'm anticipating as we build our corporate brand market share, we'll see some softening on the national brand side. So, I expect this to be a year of somewhat moderate inflation. I'll predict it here. I think it will be in the 0% to 1% range, which is more normal. But, if not, we'll have a heyday in corporate brands.

John Heinbockel - Goldman Sachs

All right, secondly, can you just highlight the two or three biggest cost reductions initiatives when you think about what gets you to the earnings guidance you've given? Obviously Lifestyle remodels dropping off. But in addition to that, some people just have a little bit of some visibility, what are the two or three biggest items and what is their relative size?

Steve Burd

One of the items that I think quantified at the investors conference, which is an item, you know, north of $50 million, and which is all locked down. It is just the reduction in Lifestyle launch costs. That’s a very big item. We've done things that that others have done or maybe not done with respect to pension expenses. And a lot of people are delaying deferring or eliminating typical merit increases and that kind of thing. So those things weigh in there.

But, there are a lot of efficiencies occurring in sort of the details of the business, as we re-examine some of the efficiency with which we go about work by eliminating some of the work. You'll recall at the investor conference, I teed up four projects that are $50 million or more. 19 of which were $10 million to $50 million. It is difficult for me to give a lot of detail, John because we compete with a lot of people that will listen to this call, and we're sort of in a race here.

We think our cost reduction will exceed that of anybody we compete with by some distance, and I'm reluctant to give them a hint about where we find our money. I know that is not as satisfying, but I think our track record speaks for itself.

John Heinbockel - Goldman Sachs

All right. Then, finally, the tax benefit that you talked about; I think as I recall from the analyst meeting, that is not in the guidance, is that still the case or has that changed?

Steve Burd

That's still the case, but I would also tell you and remind you that that it's not in the guidance. That's correct. At the same time, we commented in the investor conference that we might, and again, we don't know the exact timing of this, but depending on the timing, we might choose to use that to accelerate our reductions in price. But, as it stands right now, that's not the earnings guidance.

John Heinbockel - Goldman Sachs

All right. Thanks.

Operator

Your next question comes from Chuck Cerankosky. You may ask your question and please state your company name.

Chuck Cerankosky - FTN Equity Capital

FTN Equity Capital. Good morning everyone.

Steve Burd

Good morning.

Chuck Cerankosky - FTN Equity Capital

Steve, if we take a look at Blackhawk from a different angle, what's the purchasing behavior of those buying the Blackhawk gift cards telling you where their heads are at and the state of the economy?

Steve Burd

That's a good question. As I sort of evaluate what happened in the fourth quarter, and kind of looking right now, what affected the fourth quarter besides the economy was you had retailers as you know advancing markdowns, post-Christmas markdowns, pre-Christmas. So the gift card was competing with that $200 sweater that has been marked down 60%. And I think some people made the choice that that would look better under the tree than a gift card in a small envelope.

But, I will tell you that was sort of an unprecedented event, and we still sold a lot of gift cards. What we've created is a virtual shopping mall that is unique; it allows people that are hurried, and I think consumers will forever be hurried over Christmas. They'll forever shop late. They'll always be in a hurry. They can go to a single location and buy over 450 different gift cards. So, as we look here in the first quarter, our first quarter results are actually stronger than our fourth quarter results.

So, I think things are kind of returning to normalcy. And even though, there's a fair amount of marked down activity out there in retailers, I think that what you're seeing is that, we and the network we've created have become a distribution channel of choice for gift cards. And so I continue to think that business will remain strong and it's too early to predict what kind of Christmas we'll have, but this will remain a growth business.

Chuck Cerankosky - FTN Equity Capital

When you look at what people were buying, were they buying smaller denomination cards and were they switching the type of retailer they were favoring?

Steve Burd

I don't think we saw any big shifts there, Chuck. There could have been some subtle things that I haven't put under a microscope, but I think the big branded retailers that were generally winning pre-Christmas continued to have a strong results at Christmas. I don't think there was any material change in the denomination.

Chuck Cerankosky - FTN Equity Capital

That face value was up 28% in the fourth quarter, did I get that right?

Steve Burd

Correct

Chuck Cerankosky - FTN Equity Capital

And you said first quarter Blackhawk results are stronger than fourth quarter, is that rate of growth or dollars?

Steve Burd

That's rate of growth.

Chuck Cerankosky - FTN Equity Capital

Okay. You mentioned on the call, you're seeing trading down accelerating, can you talk a little bit about that?

Steve Burd

Well, if you just look at the value of the item, I know in non-retail, they talk about average retail. And so the average retail is on a decline and we're seeing more shifts in meat category to cheaper meats, ground beef, chicken than we saw earlier in the year. So, I think you see a trading down virtually across the board. When I look at what's happening on the item count, remember, foot traffic is up, and I think we see a lot more consumers shopping with a list, feeling like they're really on a restricted budget, buying from the list.

We have a lot of merchandising to create that I mean, we have a lot of merchandising to create that impulse sale and there are a number of areas that we're having great success with on that, but I do think that we're constrained a little bit by that shopping with a list because I think I saw a survey recently. 49% of Americans fear losing their jobs, and even though they have a job and there is no real change in circumstances, the saving rate in this country has gone up, and it's probably gone up for some time yet to come.

Chuck Cerankosky - FTN Equity Capital

Well, thank you very much.

Operator

Thank you, our next question comes from Mark Wiltamuth. You may ask your question. Please state your company name.

Mark Wiltamuth - Morgan Stanley

Hi, Mark Wiltamuth from Morgan Stanley. We just had a price survey that came back that showed you're getting more promotional. It looks like you're putting more investment into promotions than everyday prices. I just wanted to see if that was the case across your firm and is the promotion coming from your side or you are getting some support from the packaged food companies?

Steve Burd

It's a combination of where the support comes from, but I would say that probably the majority of that is basically our own investment. I guess what I would tell you, is to look more closely because we're promotional retailers. This is kind of a promotional time period, but I would tell you that our investments are more in the area of everyday value than they are in promotions.

Mark Wiltamuth -- Morgan Stanley

Okay. And if you could talk a little bit more about what kind of response you are getting from consumers? Are they reacting to more of the promotional changes or the everyday low price changes?

Steve Burd

They are reacting to both. I think that what we trying to do is trying to make everyday price changes in areas that are the most demand responsive. And we're trying to call attention to that through various mechanisms, both in the ads, as you move down to a new price point as well as the in-store communication.

I am sure you know that the vast majority of decisions about what to buy are actually made in store and so communication in store is really critical. And so I would tell you that we're having an effect in both categories. You always have an effect with promotions. We'd love to be lowering everyday prices in a more normal environment and the reason you have to do a combination of both is if people are looking for deals. And they're accustomed in us and looking at shelf tags to accomplish that, but our investments to everyday price step up there is greater than the step up in promotion.

Mark Wiltamuth -- Morgan Stanley

Okay, and just to focus a little on gasoline, our models were showing you're having a big swing this quarter because of the big declines in price that happened in October, end of November. You maybe just quantify how big that was, and also on your commentary on the first quarter, sounds like you were saying gas is going to hurt a little bit in the first quarter? Is that right?

Steve Burd

Gas is going to hurt in the first quarter, frankly it helped in the fourth quarter. I think Robert we've probably quantified that in the past?

Robert Edwards

Mark, it was a strong quarter for fuel. I'm sure we give quarterly numbers, but it's consistent with what we said on a long-term basis. The first quarter, this year, looks like it's going to hurt us a bit relative to last year. We gave about $0.02 in the first quarter.

Steve Burd

I guess if we gave $0.02 in the first quarter, fourth quarter actually helped us out by $0.03.

Mark Wiltamuth -- Morgan Stanley

Okay, thank you very much.

Operator

Thank you. Our next question comes from the Scott Mushkin. You may ask your question and please state your company name.

Bakley Smith - Jefferies and Company

This is actually Bakley Smith, in for Scott here with Jefferies and Company. Just wanted to ask about traffic, what are you guys seeing in terms of traveling versus ticket?

Steve Burd

In the fourth quarter, we saw a decline in traffic, and in the first quarter, we are seeing positive traffic and that swing [approaches] 2%. So that's what I meant by quite pronounced by those are sort of by today's standards. I would consider that a big swing, and in the first quarter, it's offset by a combination of the price per unit being down, some of that significant amount reflecting from the deflation that you heard earlier

And then the items in the basket are also down. So, if you adjusted our sales in the first quarter, which is 7.5 weeks for deflation, we're essentially at the same run rate we were in the fourth quarter.

Bakley Smith - Jefferies and Company

Obviously we talk a lot about private label customers trading down. You're seeing a lot of products added to the shelves over the last couple of years that are sort of value-add type products. Are you seeing people trading down from the sort of fancier soups to the traditional kind of products?

Steve Burd

Well, I think that consumers are looking for value. And we have one of the strongest corporate brands, class private label offerings in the sector, and we're taking advantage of their demand for value and our merchandising those corporate brands, promoting those corporate brands, drawing attention to those brands, but even without that, you'd see a gravitation to those items. It's terrific when you can have corporate brands like organics or eating right that I have seen that have unique qualities to them.

If this were Wall Street, you would say there's a basically a full market for corporate brands right now. Probably the most pronounced difference in sales increase between national brands and corporate brands that we've seen occurred in the fourth quarter and I think that will equal or accelerate in the first quarter and beyond.

Bakley Smith - Jefferies and Company

And just last one, on the cost reductions, how do you balance the in-store execution with the need to manage those costs? How are you going to deal with hours and are you thinking of taking people off of, out of the deli or out of the butcher shop or whatever?

Steve Burd

We covered some of that in the investor conference. We do several things to make sure that we're not negatively affecting the shopping experience because people come in not just for your products and your prices; they come in for the shopping experience. So we have mystery shoppers, we've had them for 12 to 13 years. They help measure the length of our lines at checkstands. We have basically improved our checkstand performance over the last three or four years. They measure the interaction with our employees. It might surprise you, I would consider morale in this Company to be quite high because our employees appreciate the fact that they're in the food business and they have got friends that are not in the food business.

And times are tough and so our mystery shoppers examine presentations, we measure in stock condition on a regular basis and then we have elaborate labor standards that we measure on a weekly basis and essentially those labor standards have been a pretty constant performance indicator for more than a decade.

So, we're confident, that we're not harming the shopping experience. Can that occur in a store here and there? You bet. Is it occurring across the board? No. So, when we tee up cost reductions, none of this is engaging in false economy. We've been at this too long; it's too much a part of our culture. Service is every bit a part of our culture as is cost reduction.

So, we don't even get people making suggestions that we dramatically cut the labor content. Because they know that's out of bounds. So, basically it's a well-balanced game here and we're just good at it.

Bakley Smith - Jefferies and Company

Thanks.

Operator

Thank you, our next question comes from Doug Cooper. You may ask your question and please state your company name.

Doug Cooper- UBS

Good morning, everyone. This is Doug Cooper from UBS. Steve, I was wondering if you could tell me a little bit about your price investments and whether the decision was yours or was there any reaction to others in the market?

Steve Burd

The decision's clearly ours. I think that we've, when we outlined our strategy on lifestyle stores and the effort to differentiate, reach for quality and create a new shopping experience; we expressed an ambition at that time to become less promotional and have better everyday values.

Now we had a decision to make in 2008 about whether we make x amount of progress or whether we use our cost reduction to essentially tee the guidance. So we chose to achieve the guidance.

And that nearly caused us to step up the cost reduction effort in 2009 and to commit to further efforts on the price side. So now, do you react to competition on a regular basis? Sure we do. But I would tell you, I get this question often, I think it's competitively; it's pretty normal out there. I know someone wrote, recently, they wondered if you were going to have a modern day price war.

And I think they used the word modern because they didn't believe you could have a price war like the 70s. Our view is that we can outrun anybody in this business on cost reductions. We have got a stronger balance sheet than anybody in this business and there are a lot of people that we compete with that cannot keep up with us and so people that can't adjust the price if they have to competitively, will lose sales and market share.

And that's what adds to our confidence that we're going to build sales as we move through the year because we have got a plan and the plan's working and we don't worry about cost reduction and the pricing environment is pretty normal.

Doug Cooper- UBS

Thank you and actually with respect to market share, are you gaining or losing market share in your markets?

Steve Burd

We did not gain market share in the fourth quarter. You have got to have a sales increase; now you got to adjust for deflation and corporate brands and all that kind of stuff, but you probably need to be generating a 1% ID in general.

But keep in mind when you got the push to generics and you get the push to corporate brands that number might be a little out of date, but on positive 0.4, no we did not gain market share.

Doug Cooper- UBS

Okay, and lastly, sales at the beginning of quarter, can you give us a read on that?

Steve Burd

I touched on that earlier, what I said was that if you adjust for deflation, which we'll quantify on our first quarter earnings call, if you adjust for deflation, we're basically at the same run rate, but we’re encouraged by the fact that transactions have really stepped up.

Because that's where sales begin. You get the foot traffic, you build the impulsive displays, you get more items in the basket and your pricing actions take hold and you start building sales. Keep in mind that when you look at the absolute number, you're comparing to an Easter quarter of last year.

And so I think generally, Easter is going to cost you, somewhere between 1 and 1.2%. We'll quantify it at the end of the quarter for not being inside of this quarter.

Doug Cooper- UBS

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the Bob Summers. You may ask your question and please state your company name.

Bob Summers - Pali Capital

Hi, good morning, Pali Capital. Just one quick question. What's the current rate of deflation? What's the right way to think about that?

Steve Burd

Well, I don't want to quantify it because it’s too early. We will capture the quarter. It was modest in the fourth quarter, but it's quite measurable here in the first quarter. And we've got to see what happens to dairy. We've got to see whether produce prices begin to firm up. It was in January that we got some price reductions with several national brand vendors. Again, that could change.

So, I want to try to be current and complete at the end of the quarter. We're kind of measuring this thing somewhat anecdotally. I mean, when you take a category like dairy which is a huge category, or you take something like produce which is a huge category, you can really see the effects.

Overall, I had predicted earlier in the call that I thought inflation as measured by, say our LIFO index, which typically, predominantly centered the store would probably be in a 0% to 1% in the year. Now, we had a $34 million LIFO charge this year, and if you do the math, 0% to 1% would lead you closer to $9 million or $10 million LIFO charge.

Now again, it's too early to take to the bank Steve Burd's prediction that it'll be 0% to 1%. I've never been that bold before. But, again, I'm anticipating that some of the national brand vendors will get tired of losing share, because I think they have to feel that they're reasonably well tapped out of the price increase. And it's disingenuous to consumers that all off commodity costs are coming down, interest rates are coming down, everything is coming down, and they're taking their prices up. It's great for short-term earnings, I guess, but it's not good for long-term market share, and being both the manufacturer and people that make very strong corporate brand positions.

What everybody in this call needs to remember is, don't get preoccupied with top line ID sales. If we're building major market share gains in corporate brands, which are more profitable, at the end of the day, this is all about earnings and cash flow. And from an earnings and cash flow standpoint, 2009 is going to be a good year for Safeway.

Bob Summers - Pali Capital

So, just thinking through it a little bit more, how much of the deflation is from you being proactive and taking a lead on price, versus simply passing through changes in the input costs?

Steve Burd

Proactive in making price investments?

Bob Summers - Pali Capital

Right. Exactly.

Steve Burd

I would say that the deflation is led by commodity activity, pronounced in dairy and produce, probably followed by our own investments in price, followed by the national brand vendors, some of them softening up on cost of goods. That would be my order of magnitude.

Bob Summers - Pali Capital

Okay. Thank you.

Operator

And your next question is from Deborah Weinswig of Citigroup. You may ask your question. Please state your company name.

Deborah Weinswig - Citigroup

Citigroup. Steve, I am very impressed with your corporate brand increases in the quarter. In terms of thinking back on either 2008 as a whole or the fourth quarter of 2008, how should we think about private brand growth versus national brand growth? And how should we think about that going forward?

Steve Burd

I think I've quantified this in the past. The spread right now, between corporate brand growth and national brand growth is a 1000 basis points. That’s significant.

Deborah Weinswig - Citigroup

Would that be the greatest in company history?

Steve Burd

It’s the greatest in modern times. I'm looking at a chart here. It goes back a couple of years, and yes, it is the biggest spread in years.

Deborah Weinswig - Citigroup

Okay, and then also in the last quarter, you had given us an update on the home meal replacement initiative, and I think at that time it was in 50 to 70 stores. And one of the big focuses was improving shrink. Can you also update us on that initiative at this point of the game?

Steve Burd

What we've done is we've done a fair amount of retooling. The real difficulty, and however, we've always had a meals program, [trill] nouveau, rotisserie chicken, turkey breasts and things of that nature. We execute at a high level and we have a large block of business, our soup business, a large block of business and it is growing.

I think the meals that you're talking about would be the meals that we introduced at an investment conference a little over a year-ago. We had both salads; I'll call them entree salads, as well as typical sort of quick meal replacements. And what we have done is something very similar to the pattern of Lifestyle stores. We didn't like our initial result. The quality was great, shrink was high. Initially, we rolled it to about 70 stores in northern California then opened it up in another division, only after reengineering the product.

We're still in the process of reengineering some of the packaging. And we've completed that work on the salad side. I don't think those products are in the market yet, but will be soon. And what we've done with all of these products has had dramatic increases in shelf life, with no deterioration in quality. And I think the salads are going to hit the stores, sometime in the second quarter. If you get into one of our stores, you need to go and look at them. It's a real step-up in our gain and has extended shelf life and should virtually eliminate shrink in that entree palette category.

On the heavier meal side of the gain, the real difficulty a lot of other retailers know – if you can produce this great product, but when it sits there in refrigerated case, it's very difficult to make it not look like leftovers. And if they are your leftovers, you probably feel pretty good about them, but if they're our leftovers offered to you, they look like somebody else's leftover and so the packaging there is going to become key.

So we kept the quality in the product, with extent of the shelf life and tuned up the packaging and that will roll this year and we're expecting good results with that, but you'll see salad, you'll also see some other entree items which are much easier to execute and they are not on the package side that represent products that we believe are high demand by consumers and they will also be hitting our stores in the second quarter.

Deborah Weinswig - Citigroup

Thank you and then last question, I also think last quarter you discussed the improvement, if you will, in terms of penetration of perishables and that you're seeing gains in that category as well. Can you update us on what you saw in the fourth quarter and what you're seeing in the first as well?

Steve Burd

In the first quarter, it's closer to a blend with essentially perishable, non-perishable having roughly the same kind of success, but probably if I took deflation out of that, that might flip.

Deborah Weinswig - Citigroup

Okay. That was my thought process. Thanks so much. We appreciate the color and best of luck.

Steve Burd

All right, thanks.

Operator

Thank you. Our next question comes from Meredith Adler. You may ask your question. Please state your company name.

Meredith Adler - Barclays Capital

This is Meredith Adler from Barclays Capital. Thank you very much. You mentioned when you were talking about things that would impact the first quarter, that new years slipped into the fourth quarter. Could you talk about what you think that did for the fourth quarter?

Steve Burd

Well, I think it had a positive effect on the fourth quarter. What I did Meredith is that I tried to merge the effects of Easter, New Years, and Valentine's Day and it's sort of in that order. Easter has the biggest effect. New Years the second biggest effect followed by Valentine's Day. The New Years effect is probably closer to a penny, although I haven't run a sharp pencil on that, but for the fact that New Years was in the fourth quarter, they would have been a penny lower. I mean, it is what it is.

I think the thing that people ought to focus on is that we're not for this financial meltdown, T-Bill rates would not have been 1.75%, and the currency exchange in Canada, we would not have had a recent loss. So I could pretty easily describe the fourth quarter, it's not good, not great; I could describe it as extraordinary. I've chosen not to do that, but if you're looking for a number, probably in the one plus range, a penny.

Meredith Adler - Barclays Capital

Okay, great, and then there was a smaller food retailer that mentioned that when costs come down, retail prices tend to come down more slowly. I know people are very worried about deflation hurting profits, but is it fair to say that the gross profit is at worse, the gross profit dollars are at worse, neutral in say a category like milk. And I know you said that when they were going up, you try to maintain gross profit dollars. Do you think that's true when it's going down too?

Steve Burd

I think, in general, in the center of the store, gross margin rate is generally protected going up and down. In the commodity areas, generally protected is pennies in profit. Sometimes there's a timing difference there and so I can think of markets where costs went down, and we got more than our pennies in profit and I can think of markets where costs went down and we got equal to or less than a pennies in profits. So I think in general on the commodity side of things, the pennies in profits are pretty well protected.

The reason I think deflation is a good thing, is I think it's demand stimulating, and so you recall, I've never considered inflation a good thing and I think given the mindset of shoppers today and the propensity to want to increase their savings and fill their 401Ks, we're all better off if costs come down and we as retailers reflect that and win the business for our company.

Meredith Adler - Barclays Capital

And then maybe as we're talking about penny profit private label I think the gross margin percent is higher and is the penny profit also higher? And I know you do manufacturer some, would you distinguish between what you manufacturer yourself and what you buy from third parties?

Steve Burd

The penny profit would generally be higher.

Meredith Adler - Barclays Capital

Okay.

Steve Burd

And what was the second part of that question?

Meredith Adler - Barclays Capital

Well would you distinguish between what you manufacturer yourself and what you buy from third parties?

Steve Burd

I think that the only advantage to self manufacturer is if we see an opportunity to dramatically increase sales, and we start looking at our marginal costs instead of our average costs. And typically when you're having somebody else make that product for you, you're pretty well stuck with that average cost.

So, I think there's a bit of an advantage with self manufacturer because increasingly, particularly as we reach for better everyday prices, we're looking at opportunities to exploit our marginal costs.

Let's take an item that could cost $2.30. The marginal cost could easily be $1.80. And so I think that's important.

Meredith Adler - Barclays Capital

And then I just have one final question. There was a lot of stuff running around the news about destocking and Safeway's name got tied into that destocking. I don't know if you can comment on that. You may be doing things to adjust inventories you hold, maybe put more private label in the stores or in the distribution centers.

Could you just talk a little bit about that?

Steve Burd

About the inventory levels?

Meredith Adler - Barclays Capital

Or destocking, that it's been -- [Campbell] I think talked about it and maybe P&G.

Steve Burd

Okay, what I've been reading about is people saying that the retail trade has essentially, I don't know, what term they use. You're saying destocking. What I've heard and described is that the retail trade is carrying less inventory. It's almost like the retail trade had a pantry, and they skin it down –the pantry.

That's not my point of view. My point of view is real simple. Their costs are high, therefore our retails are high and therefore they're selling less product. And we made modest adjustments in inventory because that’s part of our cost reduction effort.

But that’s not overpowering the scheme of things. The bottomline is they are selling less product and they're going to keep selling less product as long as their cost to goods are at that level.

Meredith, let me just go back to one point just to make sure you understood that the extra week that we had in – I don't want to misguide you. The extra week that we had in the quarter, which will happen to include that New Years, we judged to be worth $0.04 a share.

And so I wasn't sure, I thought you were really talking about the notion of New Year's Eve, sort of being in 2008 versus 2009. That's what that penny was, but the week it self was $0.04.

Meredith Adler - Barclays Capital

Got it. No, that makes sense. And so you included it all, the $0.04 include the benefit of having New Year move up.

Steve Burd

Correct.

Meredith Adler - Barclays Capital

You had an interesting 2008. You had two New Year’s holidays in 2008.

Steve Burd

Yes except that last year, the shopping on New Years was actually in the previous year.

Meredith Adler - Barclays Capital

Okay, right. But the day was in the year?

Steve Burd

Right.

Meredith Adler - Barclays Capital

Right. Got it. Okay, thank you very much.

Operator

Thank you, our next question comes from the Ed Kelly. You may ask your question and please state your company name.

Ed Kelly - Credit Suisse

Hi, Credit Suisse. Steve, you obviously have confidence in your earnings outlook and free cash flow generation. The credit markets have obviously gotten much better. Why not buy back stock? It's at $19. The market obviously doesn't believe the guidance. It's very accretive for you; it would send a strong message. So could you just help us understand how you're thinking about that currently?

Steve Burd

Yes, well, we've talked about this a little at the Investor. It's a good and it’s very logical question because if you ask me, do I think our stock is undervalued? My answer is yes, I think it's undervalued.

At the same time, these are unprecedented circumstances. And I see great advantages right now to have an overpoweringly strong balance sheet. It was, and you heard me say earlier, being able to say no, thanks to a 9% interest rate and come back and borrow at 6.25, to be able to go into the commercial paper market and borrow at less than 1%, which is our current borrowing rate, on a rollover commercial paper, that gives us advantages to seize opportunities that we don't even know what they might look like if it could come our way.

And I don’t expect that the stock price could get away from us in the near term. So right now we have the opportunity to operate with a strong balance sheet, directionally deleverage a bit more to see if an opportunity comes along that we’d like to seize and we want to change that philosophy and buy back stock, we still think by every indication, it looks there's going to be opportunity to buy our stock at a low price.

So the fact of it is, we bought stock earlier in 2008. We thought that was a good price. Our forward multiple right now is running it well. Right now it is probably running in the upper 8 somewhere. A long-term multiple to this company is 16.3.

We carried a premium to the S&P 500 for some 17 years. Why have we done that? Because we've outperformed S&P 500. We've outperformed them again in 2008. We'll outperform them in 2009. But, you can tell me with P/E multiples that will be covered in normal; I'd like to time my stock purchases accordingly.

But the bottom line here is that, it's little bit like a poker game. The guy that goes to the no-limit poker game with the most money usually walks away with winning. So, we think it's a smart thing for us to do. We've seen people borrow at effective rates of 20%. And that's not just in the retail sector. It's in other sectors where they've had to pay a high coupon rate, plus provide some warrants. And we just have the ultimate flexibility right now. So, I think you can assume, as we continue to produce good earnings, good positive cash flow and if we can achieve our plan of taking market share, that might be a good opportunity to change priorities. We don't think we'll miss the window.

Ed Kelly - Credit Suisse

Okay. And just a second question for you. Can you help us dimensionalize the benefit that you expect to get from a lower tax rate this year?

Steve Burd

There's a number in the 10-Q filing. I might just direct you to that, where we have to make a routine assessment as to what we think that would be, and that number is in the 10-Q.

Operator

Okay, thank you. Our next question comes from the Karen Short. You may ask your question. Please state your company name.

Karen Short - FBR Capital Markets

Hi. FBR Capital Markets. Just to follow-up on that question. I think $81 million was the number that you called out on your Q for the potential tax benefit. So, you're saying your guidance incorporates the benefits of that $81 million at some point during the year?

Steve Burd

No, we specifically said it doesn't contemplate that in the earnings guidance. At the same time, I did say previously on this call as well as the investor conference, depending on the timing of when that occurs, that we may in fact, you know, use that to accelerate some of our pricing estimates, if we think that’s a prudent thing to do. But, if we do that, we'll call that out.

Karen Short - FBR Capital Markets

Okay. And just on IDs in the fourth quarter, do you have any sense of what the impact on IDs was from investing in price? Do you have a basis point estimate?

Steve Burd

Everything sort of gets merged together so to speak. I think as we look at individual categories, we in fact see some sales increases there. But, generally, what you look for is, you look for something anywhere between four and eight weeks out. Although, I can think of something's that we've done where we got an immediate demand response on day one. So, those are the ones we particularly enjoy.

Karen Short - FBR Capital Markets

Okay. Then, to housekeeping. Your guidance assumes that the currency remains at the current level or what are you thinking in terms of the currency exchange rate, in terms of your guidance?

Steve Burd

In terms of earnings guidance, is that what you're talking about?

Karen Short - FBR Capital Markets

Yes.

Steve Burd

At this juncture, we would stick with guidance that we gave in early December on earnings. The only other comment I provided was that, we're not really prepared to comment on the sales piece of that guidance because it's too early in the quarter.

Karen Short - FBR Capital Markets

Right. But the exchange rate, the Canadian exchange rate?

Steve Burd

Essentially the assumption on the exchange rate is that it holds.

Karen Short - FBR Capital Markets

At the current level? Okay. And then just lastly, you said that you lost share in the fourth quarter. Can you maybe elaborate on that a little bit? Who do you think you're losing share to?

Steve Burd

No, I don't think I would elaborate on that. It's a modest amount, and it's always hard to tell you where that goes. We think that we can turn that with relative ease, so I don't want to get into practice of suggesting where it's gone.

Karen Short - FBR Capital Markets

Okay. Thanks a lot.

Melissa Plaisance

We have time for two last questions.

Operator

Our next comes from Andrew Wolf. You may ask your question. Please state your company name.

Andrew Wolf - BB&T

Good morning. BB&T. On the swing that you said is approaching 2% in the same-store transactions. Can you quantify that? What it was in Q4 and what it is this quarter so far?

Steve Burd

No, I don't think I want to quantify that. It’s a 2% swing. I did say directionally that the fourth quarter transactions were negative, and the first quarter transactions were positive. That's as far as I'll go.

Andrew Wolf - BB&T

Okay. And are you saying that currently the items per basket are running about flat, but the per item ring or the dollars per item is actually down? And that's what you're calling deflation?

Steve Burd

No. What's happening is the items per basket, even though transactions are up, the items per basket are on a decline. The retail per item is till positive because of all of the cost inflation on the vendor side, but because of deflation we are seeing in certain areas, it is less positive than it was throughout 2008.

Andrew Wolf - BB&T

Thank you, that clarifies that a lot. In terms of the Easter effects this quarter and then helping second quarter, is going to be similar to last year as far as you can tell, which was 90 basis points?

Steve Burd

It lot depends. We'll quantify that at the end of the first quarter, but its going to be somewhere between say 90 and 120, somewhere in that range.

Andrew Wolf - BB&T

Okay, just lastly on the currency issue in Canada, I think you're putting that in terms of really a swing and what the swing in the currency meant to the swing in operating profits or is there some kind of adverse hedge or something else in there?

Steve Burd

No, there's no hedge in there, just operating profits.

Andrew Wolf - BB&T

Could you just comment on how Canada did this quarter and how it did for the year? I know it has been doing pretty well for a couple years. Does this also reflect any operational slowing, let's say changing more than the US or does Canada kind of reflect what's going on in the US in same currencies?

Steve Burd

Well, as a matter of practice, we don't comment on specific geographies, but we're very pleased with how the Canadian business is doing.

Melissa Plaisance

You'll get a read on that when we file our 10-K because we do break it out in our 10K, but that's a few days away.

Steve Burd

The other thing in I would just tell you in terms of economy and you may know this, but the Canadian economy has been stronger if you look at unemployment. It's been stronger than the US economy and Western Canada, which is where we're located, has been stronger than all of Canada. So that maybe helps you out a little bit.

Andrew Wolf - BB&T

Okay, thank you.

Melissa Plaisance

Last question

Operator

Thank you. Our final question comes from the Charles Grom. You may ask your question. Please state your company name.

Charles Grom- JPMorgan

JPMorgan. Thank you. Just on your balance sheet, just wondering why your inventory was down 7%? Is that a combination of units or price or both, can you just give us sort of color there?

Steve Burd

Inventory was down year-over-year a little over $200 million. We've had a conscious program for a number of years to reduce the amount of inventory we need to run the business, while not affecting sales. So we had very good results. The 53rd week helped us. Currency actually helped a bit on inventory, but the biggest driver was just our consistent effort to reduce inventory during the year. So, it was a very good year for inventory and that helped free cash flow

Charles Grom- JPMorgan

Okay, thanks and then just on your 234 to 244 guidance, could you quantify what you're expecting the benefit to be from the reverse of the worker's comp accrual if the treasury were to rise and what your expectation for the LIFO relief number to be? I think it was $30 million of a hit this year. What do you think for 09?

Steve Burd

We had virtually nothing in there for those possible good events.

Charles Grom- JPMorgan

Okay. So no benefit there. Okay, Thanks very much

Melissa Plaisance

Okay. Thank you everyone. Christiane Pelz and I will be available for the balance of the day for follow-up clarification questions and so forth. Appreciate you're participating in the call

Operator

Thank you. This does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.

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Source: Safeway, Inc. Q4 2008 Earnings Call Transcript

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