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Safeway (NYSE:SWY)

Q4 2013 Earnings Call

February 19, 2014 5:00 pm ET

Executives

Melissa C. Plaisance - Senior Vice President of Finance & Investor Relations

Robert L. Edwards - Chief Executive Officer, President and Director

Peter J. Bocian - Chief Financial Officer and Executive Vice President

Analysts

Scott Andrew Mushkin - Wolfe Research, LLC

Edward J. Kelly - Crédit Suisse AG, Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Gregory Hessler - BofA Merrill Lynch, Research Division

Karen F. Short - Deutsche Bank AG, Research Division

Charles Edward Cerankosky - Northcoast Research

Meredith Adler - Barclays Capital, Research Division

Kelly A. Bania - BMO Capital Markets U.S.

Todd Duvick - Wells Fargo Securities, LLC, Research Division

Mark Wiltamuth - Jefferies LLC, Research Division

Andrew P. Wolf - BB&T Capital Markets, Research Division

Operator

Welcome to the Safeway 2013 Fourth Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time.

I will now turn the call over to Ms. Melissa Plaisance, Safeway's Senior Vice President of Finance and Investor Relations. Please go ahead.

Melissa C. Plaisance

Good afternoon, everyone. Welcome to Safeway's Fourth Quarter and Full Year 2013 Earnings Conference Call. With me today are Robert Edwards, President and CEO; and Pete Bocian, Executive Vice President and Chief Financial Officer.

In our earnings release this afternoon, we announced several strategic initiatives. As a result of these strategic initiatives, we have decided to postpone our Annual Investor Conference, which had been scheduled for early March.

Today, Robert will provide opening comments on these strategic initiatives. He will briefly discuss strategic actions completed in the fourth quarter, and he will talk about our plans to grow the core business. Pete will then provide financial details on the quarter with a focus on continuing operations, as we classified our Canadian and Chicago divisions as discontinued operations for both the fourth quarter and the full year. Pete will also discuss our guidance for 2014. Robert will then close with a few final comments.

So before I hand the call over to Robert, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated.

We undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a list and description of those risks and uncertainties, please see our press release and our filings with the SEC.

And with that, Robert?

Robert L. Edwards

Thanks, Melissa. I'm pleased to report to you today the progress we have made since our third quarter earnings call. As I mentioned during the third quarter call, we have undertaken a strategic assessment of our current business with the objective of improving how we allocate resources and developing enhanced growth strategy to build our competitive advantage and increase shareholder value. The scope of the assessment has been broad, and we are exploring a number of strategic initiatives for profitable growth and improving our core retail grocery business.

I first would like to cover the 3 strategic initiatives we just announced today. We communicated today that we are engaged in discussions concerning a possible transaction involving the sale of the company. Although discussions are continuing, we have not reached an agreement on a transaction, and there can be no assurance that these discussions will lead to an agreement or a completed transaction. We will not be commenting further on those discussions at this time.

In addition, if you'll recall last April, we sold approximately 11.5 million shares of Blackhawk Network Holdings in an initial public offering. Since that time, Blackhawk has been operating as a separate publicly traded company, and we've been pleased with Blackhawk's performance. We have continued to review our investment in Blackhawk to determine how best to maximize the value for our shareholders and to allow each business to build on its unique strengths and grow independently.

Based on our review, we have concluded that distributing the shares of Blackhawk to our shareholders, providing additional float and full independence will be an important step toward maximizing value of our long-term investment in Blackhawk. As a result, we are announcing today that we intend to distribute the approximately 37.8 million shares of Blackhawk that we own to Safeway shareholders. Our current plan is to make the distribution on a pro rata basis to all Safeway shareholders in a transaction that tended to be tax-free to Safeway and its stockholders. However, if we ultimately consummate a transaction involving the sale of the company, then the distribution may be taxable. The timing and details of the proposed distribution will be determined in the near future, and we will make a further announcement when those decisions have been finalized.

Another investments we are evaluating is our ownership of 49% of Casa Ley, the fifth largest food and general merchandise retailer in Mexico based on sales. Based on Casa Ley's improving performance as a result of our strategic review, we believe that this will be an appropriate time to evaluate the possibility of monetizing our interest in Casa Ley. While we have discussed our desire to monetize our investment with the majority owners of Casa Ley, there can be no assurance as to whether we will be able to sell our interest in Casa Ley at a price and on the terms that we find acceptable. We will provide updates on the status of these 3 strategic initiatives at the appropriate time.

During the fourth quarter, we completed 2 important strategic initiatives that came out of our review process. In October, we announced our decision to exit the Chicago market. As of year end 2013, we ceased doing business in the Chicago market. In November, we completed the previously announced sale of substantially all of the net assets of Canada Safeway Limited to Sobeys Inc. for CAD 5.8 billion in cash. With the anticipated tax loss benefit from the exit of the Chicago market, the net after-tax proceeds we received from the sale of our Canadian assets are estimated at approximately CAD 4.5 billion. We have used $500 million of the proceeds to retire outstanding debt and repurchased $663 million of our stock during the fourth quarter. As a result of these actions, along with our 2013 cash flow, our total debt at year end was $4.19 billion, and our total cash on the balance sheet was $4.65 billion. This year end cash balance included approximately $550 million of seasonal cash we had at year end from Blackhawk and is before we pay approximately $1.2 billion in taxes on the sale of our Canadian operations. We had planned to retire additional debt and repurchase more shares of stock with the proceeds. However, we did not proceed with the debt retirement, and we stopped our repurchase program late in the fourth quarter because of the discussions concerning a possible transaction involving the sale of the company. If we do not reach a definitive agreement related to the potential transaction involving the company, we expect to complete an additional $1.5 billion of debt retirement from the proceeds from the sale of our Canadian operations and to use the majority of the remaining roughly $1.4 billion of proceeds to buy back stock. In addition, some of the proceeds may be used to invest in growth opportunities.

Now turning to the core business and strategies for growth. We remain committed to driving sales, operating income and market share through core grocery business growth. To generate these results, we are focused on delivering value to our shoppers, offering a relevant assortment and providing a differentiated in-store experience. We continue to evolve our customer-centric approach down to the store level, while also driving a stronger level of personalization. We're encouraged by the results we have seen from these initiatives to date. We believe we have the right strategies to better serve the unique needs of our shoppers. These initiatives include clustering, localization and personalization.

Our initial efforts are focused on redesigning center of the store, enhancing our premium offering and increasing local assortment. We are also focused on improving results with our diverse customers, including Hispanic and Asian shoppers. The early results in stores that include these initiatives are strong and performing above the rest of the company. It is important to recognize that this effort is a journey, and we are only on version 1.0. We see similar opportunities in other clusters as well. We will continue to evaluate the results and roll out further enhancements to our stores going forward.

In addition, we are continuing to leverage our data to drive loyalty through Just for U and our fuel rewards program. We are using the data to partner with CPG companies and build unique offers. The Just for U digital coupons and personalized deals are available to our shoppers in all divisions. Registered users are nearly 6 million at year end. The fuel partner program with Chevron and ExxonMobil has now been successfully expanded to all divisions except one.

Our private brands portfolio continues to grow and contribute to loyalty and profitability. Private brand sales reached an all-time high in 2013 at 28.1%, as measured as a percent of total grocery sales. Additionally, we continue to realize success with our multi-category organic and natural brands. Open Nature sales increased 42% from last year and exceeded $200 million in 2013. We now have over 450 Open Nature items. Innovation of private brands continues, as we launched 774 new private brand items in 2013.

Finally, during our Q3 earnings call, we talked about the adjustments to how we think about shrink. Our fourth quarter performance was consistent with our revised targets. We are confident we have made the right changes and have a balanced approach focused on growing sales and operating profit.

Turning to Blackhawk, which reported fourth quarter results this afternoon. I'd like to share just a few key full year metrics for Blackhawk with you. Loan value increased 17% for the year. Adjusted operating revenue increased 21% to $541 million. Adjusted net income was $57.8 million, up 14%, and adjusted EBITDA was up 14.5% to $114 million.

I'd now like to ask Pete to cover the financials and our guidance for 2014.

Peter J. Bocian

Thanks, Robert, and good afternoon, everyone. Just to confirm up front, all my remarks today will be in the context of continuing operations. As Melissa mentioned, as of year end, both our Canadian and Chicago operations have been classified as discontinued operations.

Diluted earnings per share from our continuing U.S. operations for Q4 declined to $0.35 in 2013 from $0.71 in 2012. When the fourth quarter results are adjusted for our $0.14 per share foreign currency translation loss, an $0.08 per share impairment of notes receivable and a $0.04 per share gain from our Blackhawk acquisition adjustment in 2013 and $0.12 per share from legal settlements in 2012, adjusted diluted EPS was $0.53, down from $0.59 in Q4 of 2012. In the quarter, fuel operations negatively impacted EPS by about $0.04. As a point of clarity, there's about $0.01 of benefit from our Q4 share repurchases, which we had not planned for in our guidance. We have provided adjusted diluted EPS guidance for the year, assuming Chicago was moved to discontinued operations in the range of $1.05 to $1.12. For the adjusted fourth quarter EPS of $0.53 per share, we came in at $1.10 per share for the full year.

Our non-fuel U.S. ID sales increased 1.6% in the fourth quarter. In the first quarter to date, non-fuel IDs are running at just shy of 2%. Total sales for the quarter increased 76 basis points to $11.3 billion. While ID sales were stronger at 1.6%, this was largely offset by lower fuel sales. As a note, the shift to generic drugs in our pharmacy business negatively impacted Q4 2013 ID sales by about 20 basis points. The ID sales increase of 1.6% was the result of a 1.6% increase in price per item with flat volume.

During the fourth quarter, cost increases were largely passed along in line with competition. This is in contrast to the third quarter when there was a lag in passing the vast majority of these cost increases along.

The gross profit margin increased 20 basis points year-over-year in Q4. Excluding fuel and fuel partner discounts, gross profit margin increased 12 basis points. This increase is largely explained by a higher LIFO credit and reduced advertising expense, partly offset by increased shrink and higher gift card sales of Blackhawk, where we have a lower gross profit margin than grocery sales.

During the fourth quarter, our results were in line with the higher shrink targets we established in the third quarter, with the goal to improve sales and support our improvements in merchandising and assortment.

The O&A margin increased 58 basis points year-on-year in Q4; excluding fuel, increased 29 basis points. This increase is primarily the result of the gain from legal settlements in 2012; and in 2013, the impairment of notes receivable partly offset by reduced self-insurance expense, higher gains on sales of property and the Blackhawk contingent consideration adjustment.

Our reported operating profit margin declined 38 basis points to 2.52% in the fourth quarter of 2013 from 2.89% in the fourth quarter of 2012. Excluding fuel and fuel partner markdowns, the operating profit margin declined 16 basis points.

Interest expense declined $81 million from $86 million in last year's fourth quarter. This $5 million decline was largely due to $1 billion in lower average borrowings, as we continue to pay down our debt, offset in part by a 54-basis-point higher average borrowing rate of 5.04% in Q4 of '13, up from 4.5% in Q4 of '12.

For the full year, we reduced debt by $1.38 billion, paying off $300 million of the bank term loan, $500 million of notes due on March 20, 2014, and $250 million of floating rate notes that came due in December. In addition, we met the criteria for satisfaction and discharge of the CAD 300 million of debt that would have been due in March of 2014.

In the quarter, taxes on continuing operations increased to 32.6% from 30.7% in Q4 of 2012. The increase was largely due to deferred taxes on Blackhawk stock.

Safeway invested $767 million in capital expenditures in 2013 compared to $821 million in 2012. Free cash flow for the year was $602 million versus $648 million last year. This is explained by higher cash taxes paid in 2013, offset in part by lower capital spending.

With this earnings release, we're initiating guidance on continuing operations for 2014. As a note, 2014 is a 53-week year for us.

Our guidance includes Blackhawk in 2014 for better comparability. We will update guidance as we move forward with our plan to distribute our ownership of Blackhawk to stockholders.

We expect ID sales, excluding fuel, of 1.5% to 2.5% for the year. The operating margin in 2014, excluding fuel, is expected to be flat to down 10 basis points from 2013. For 2014, we expect EBITDA to be in the range of $1.66 billion to $1.76 billion. This compares to $1.7 billion in 2013.

We expect earnings per diluted share of $1.15 to $1.35 per share. This assumes no benefits from further use of Canadian proceeds, nor use of free cash flow generated in 2014, given the uncertainty of when the cash will be utilized.

Capital spending for 2014 is expected to be approximately $800 million to $900 million. We expect free cash flow to be between $625 million and $725 million. If there is no transaction involving the sale of the company, we intend to return approximately 75% of our annual free cash flow to shareholders in 2014 through dividends and share repurchases and to apply the remaining 25% to debt repayment.

And now Robert will share some closing remarks.

Robert L. Edwards

Thanks, Pete. I'd like to finish our prepared remarks with a few comments.

First, we expect to continue our discussions concerning a possible transaction involving the sale of the company, and we will update you on those negotiations at the appropriate time. Second, we're working through the steps to distribute approximately 37.8 million shares of Blackhawk that we now own to our shareholders, and we'll inform you of the details as soon as they have been determined. And third, we are evaluating our 49% ownership of Casa Ley and looking at ways to monetize that investment.

The sale of our Canadian operations in the fourth quarter and the exit of the Chicago market should allow us to focus on growing our sales and profitability in our core U.S. markets. Through the actions taken, we have established a stronger foundation on which to achieve our goal of increasing sales and profitability. Each area that we compete in represents an opportunity to improve shareholder value.

We are encouraged by the recent momentum in our business with 2013 IDs of 1.7% and quarter-to-date IDs strengthening to just shy of 2%. We are confident that our strategic plan will enhance our ability to compete, strengthen our core business and prepare the company for future growth.

And now we will take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Scott Mushkin.

Scott Andrew Mushkin - Wolfe Research, LLC

Actually, it's multifaceted, but around SG&A self-insurance. I guess, the first part of it is, was that self-insurance, I guess, credit, was that contemplated when you first gave guidance? It was pretty large in the fourth quarter. And then, I guess, as we roll into next year, is that similarly going to benefit us? And then the third part of the question is just general overhead. I mean, you guys are a lot smaller than you once were, and I didn't hear too much about cuts or adjustments in kind of corporate SG&A and I was wondering what's contemplated in the guidance that way.

Peter J. Bocian

Yes. This is Pete. I characterize the self-insurance is probably about 50% in the guidance and then 50% was upside to that. So you saw we ended up towards the higher end of the range and I'd characterize it as half and half. Going forward, though, I think we've made some -- a very good inroad into how we look at the insurance, how we have a culture of safety within the company, and so I do see this as sustainable. The wildcard, of course, is the discount rate used in the calculations. So I'd say it's good news, a little better than we expected in Q4 but, going forward, good momentum. Going into the SG&A question, we didn't go through the whole P&L as to what feeds the EBITDA range or the EPS. But we have a number of initiatives going on through the P&L, inclusive of SG&A that helped feed the $1,660 million to $1,760 million kind of EBITDA number for next year. So there are activities in that space. We didn't highlight the piece parts today, but we do have already done and have activities under way. The other piece that comes out is in 2014, we'd pick up the -- we picked up a little bit of the TSA [ph] from Canada for Sobeys in 2013, but we'll pick up the full $20 million in 2014. So some of that SG&A applied to that contract also gives us a benefit.

Scott Andrew Mushkin - Wolfe Research, LLC

Right. That's perfect. And just so I understand, in the fourth quarter, have you guys been doing any adjustments to your SG&A corporate spend as of yet, since Canada and Dominick's are both gone? Have you done anything that way?

Peter J. Bocian

Yes. So in addition to what you'd say were direct resources dedicated to Dominick's, we have taken some actions in Q4, in the early part of Q1, around rationalizing to, let's call it, a $36 billion company instead of a $44 billion company.

Robert L. Edwards

And Scott, as you know, we've had a strong emphasis on cost reduction for many years and that continues. And particularly in light of the strategic transaction we've done, it will continue to be a focus.

Scott Andrew Mushkin - Wolfe Research, LLC

And -- perfect. And I just have one more. Do you guys want to share what the EBITDA for Casa Ley is?

Robert L. Edwards

Casa Ley is a private company, Scott, so we don't share results based on that. And I think you know how we report that. Based on the equity method, it's reported in other income.

Peter J. Bocian

Yes. So the quick answer is, it's not in our EBITDA. It's in our EPS when it's done, and I think you can find that as an item. But it's not -- it's a minority interest, which is recorded in an OIE. It's not part of our EBITDA as calculation.

Operator

The next question is from Edward Kelly with Credit Suisse.

Edward J. Kelly - Crédit Suisse AG, Research Division

First, a follow-up for you, just to start on Casa Ley. Robert, what are sort of the logistical hurdles to selling this business, given that you own 49% ownership and not the whole thing?

Robert L. Edwards

Well, you've highlighted clearly one of the hurdles. But performance has improved recently. We think market conditions are good, and so it's a good asset. But we are the 49% partner here. We've had discussions with the majority holder, and so we think it's a good time to try to look at monetizing that asset at this time.

Edward J. Kelly - Crédit Suisse AG, Research Division

Okay. And then related to your EBITDA estimate for next year, could you help us out in terms of how much you're incorporating for the extra week? How much are you thinking about Hawk or at least the growth of Hawk? Is there anything in there for property gains, for instance? Could you just help us sort of wade through what the more normalized EBITDA will be?

Peter J. Bocian

Yes, so a couple of data points. It's about, call it, $10 million-ish of EBITDA for the extra week if you kind of run the math. So that's the way to think of the incremental drop. As you know with Hawk, we end up with the 72% ownership in our EBITDA, not the 100%, after we did the IPO. So you -- with the public information you'll get, you can go determine from their release what that number is.

Robert L. Edwards

And I think, add on that specific point, I'll let Pete continue in a minute. So Blackhawk will be holding their call in the morning, and so I think you'll get some further clarity on their outlook for 2014. So I may -- we'll defer that specific comment until Blackhawk management team comments tomorrow morning. Go ahead, Pete. Sorry.

Peter J. Bocian

And then lastly, on PDC, just to give you kind of a 3-year view, we did about $50 million or so of EBITDA in '12. In '13, as I mentioned, we had a bigger Q4. In my statements, we did closer to $70 million. And then what we have in our guidance for next year is about back to the $50 million. So very consistent with kind of the multi-year view that we show at the Investor Conference. We just had a bigger spike in '13, but the 2-year cumulative is actually better than we had shown before. But -- so '14 returns to more of '12's level. '13, we did get a pop of about $20 million.

Edward J. Kelly - Crédit Suisse AG, Research Division

Okay. And then Robert, just kind of a bigger-picture question for you here. The business itself -- interestingly, your business, I would say, this quarter is probably better than what most of us expected coming in. You do seem to have some sales momentum here. How do you think about weighing the options in terms of going concern, going forward versus selling the company? And how does -- how do you think about sort of value of what you've got today and the momentum of the business?

Robert L. Edwards

Well, we're pleased with the growth that we've seen. I think you saw in the quote in the press release said that the volume growth we had last year was the best we've had since 2006. And on an ID basis, it's the best growth we've had in the last 5 years. And as we think about everything we're doing on clustering, on localization, on personalization, we're very optimistic about what we can do going forward and because, as you know, we have a very diverse group of customers. And with all of the things that we have going on, we're optimistic about our ability to improve sales, improve operating income dollars and do well in market share. But having said that, the #1 guiding principle is maximizing shareholder value. And I think we did that, demonstrated that with the sale of our Canadian assets and also based on the decision regarding Chicago. So this clearly are weightier matters and we have to weigh all those things along with the Board of Directors and evaluating those, and we will update you on the progress of our deliberations.

Edward J. Kelly - Crédit Suisse AG, Research Division

And if you continue down the road of sort of standalone company, this -- are you still in the process of sort of evaluating assets and what you should have long term? And maybe what makes more sense to divest?

Robert L. Edwards

Yes. I think the strategic assessment that we first mentioned on the call, in the Q3 call, Ed, that what we -- I referenced earlier continues. It continues.

Operator

The next question is from John Heinbockel with Guggenheim Securities.

John Heinbockel - Guggenheim Securities, LLC, Research Division

So Robert, let me get your thoughts on where you stand in terms of balancing growth/price investments and volume. Where do you think we are on that? And then kind of as a follow-up, you would think right with the 2% comp that the leverage associated with that EBIT margin would go up. Is it solely down next year because you're cycling the spike in PDC and the self-insurance discount rate adjustment, absent that EBIT margin, would be up?

Robert L. Edwards

I mean, you're accurate, John. The guidance on operating margin that we talked about of flat to down 10 basis points is solely due to onetime items or unusual items that benefited 2013. If you look at kind of just pure operations, it's a much better story. And so while we -- I think we do well on workers comp. And particularly, here in California, the -- we're not projecting in 2014 the same kind of achievements that we realized in 2013. Now having said that, that doesn't mean we're not striving to achieve those because we're continuing to focus on reducing the frequency of accidents, the severity of those. And so we'll still strive for that, but I think your assessment is largely accurate.

Peter J. Bocian

Yes, the only thing I'd add is as you look at the piece parts of our P&L, the element -- there's about $5 billion in store labor. So that does move up and even 1% would be $50 million. So that plays in, in terms of what we need to mitigate with some of the proceeds from the growth in sales. So you need to grow x% to kind of break even. And then this gives us the opportunity, I think, to get a healthier operational EBITDA than what we delivered. We stabilized in 2013, but I think more operational with what we're trying to do in 2014, based on the growth and a number of other key initiatives.

John Heinbockel - Guggenheim Securities, LLC, Research Division

So you think the pricing situation is such that a 2% comp should correlate to with leverage and EBIT margin expansion pretty consistently.

Robert L. Edwards

All things being equal.

John Heinbockel - Guggenheim Securities, LLC, Research Division

Okay. Just let me ask you, when you think about where the business is structured today, you sort of talk about -- you shrunk back a little bit. It is a local business. I assume you don't think you need more scale, okay? As Kroger gets bigger, Wal-Mart gets bigger. Do you think you need more scale? And as you get smaller, how do you think about what that does to purchasing leverage, maybe impact on private-label development manufacturing? Is there a -- that trade-off, do you think scale is kind of overrated?

Robert L. Edwards

Well, based on the current size of the company, John, I think we have sufficient scale to maximize all those variables that you talked about: consumer brands, purchasing, all those kinds of things. Clearly, sufficient scale for that. So that, to me, is not an issue.

John Heinbockel - Guggenheim Securities, LLC, Research Division

And you'd rather -- the idea that more likely outcome of the business gets a bit smaller than it gets bigger over the next couple of years.

Robert L. Edwards

No comments on that issue at this time.

Operator

The next question is from Greg Hessler with Bank of America.

Gregory Hessler - BofA Merrill Lynch, Research Division

I just have a -- I have 2 questions. The first one was just on the Canadian dollar note. Can you just explain, is that no longer an obligation of Safeway? Or has there been some change there?

Melissa C. Plaisance

Yes, it's off our balance sheet. We went through what's called satisfaction and discharge, essentially deposited the principal and interest with the trustee. So it is off our balance sheet.

Gregory Hessler - BofA Merrill Lynch, Research Division

Okay. And that's part of the -- that's still part of the overall debt reduction plan now.

Melissa C. Plaisance

It is and it's done.

Peter J. Bocian

Yes. So it's not part of the going-forward $1.5 billion to be paid off.

Gregory Hessler - BofA Merrill Lynch, Research Division

Got you. And just in terms of -- and I know these plans have been put on hold for now, but just in terms of that $1.5 billion number, have you given any thought as to how you might execute that debt reduction? Or anything you can share exactly?

Melissa C. Plaisance

Yes, we had a detailed plan in place that we set aside because of the potential transactions. We have it well thought out. And if we get back to that position, we will make it publicly known.

Operator

The next question is Karen Short with Deutsche Bank.

Karen F. Short - Deutsche Bank AG, Research Division

A couple of questions. I think, Robert, you said that on your balance sheet, the cash balance still reflected $1.2 billion, and I think you said in taxes that needed to be paid. I guess Dominick's would offset a chunk of that. So maybe an update on Dominick's. But has Dominick's already been netted out of that number?

Peter J. Bocian

Yes, this is Pete. If you recall, we got, and I'll try to deal in Canadian dollars even though there's a movement between U.S. taxes and Canadian, but we have CAD 5.8 billion as proceeds. And initially, the net after tax was going to be in the neighborhood of $4 billion. With the Dominick's tax benefit, it moved up to more $4.4 billion, $4.5 billion. So that's really the -- and we actually picked up a little bit more on our latest calculation. So think of it as we're getting -- we're only having to pay USD 1.2 billion in taxes on the transaction that includes the Dominick's benefit. It would have been much higher without the sale of the Dominick's equity.

Karen F. Short - Deutsche Bank AG, Research Division

Okay. And so the update on Chicago?

Robert L. Edwards

Things are going well. We're essentially executing on plan and pleased with how things have gone there.

Karen F. Short - Deutsche Bank AG, Research Division

Okay. And then just turning to your comments on Blackhawk. I'm just curious, why would you not consider a split-off as opposed to tax-free spinout? Maybe talk about some of the decisions or factors that played into that.

Robert L. Edwards

Yes, we've -- good question. We thought about that. The issues associated with the split-off are always the discount that has to be offered to current holders to exchange their shares for Blackhawk. And so as we look at the alternatives of a spinoff versus a split-off, our current thought is the spinoff is -- works better for our value for current shareholders. But the key issue is what's the discount you have to give to current holders to exchange the shares.

Karen F. Short - Deutsche Bank AG, Research Division

Got it. And then just the last question. If you were to exit another market at a loss, could you use that loss to offset the taxes associated with Canada? Or would you have to use that loss against another gain like, say, Casa Ley?

Robert L. Edwards

Yes. Not appropriate, really, to comment on that question at this time.

Operator

The next question is from Chuck Cerankosky with Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

If we could talk a little bit, start with the share repurchase activity during the fourth quarter, was that under a 10b5? And if so, does that sort of continue into the current period, current fiscal year, even though you are in discussions for selling the company?

Peter J. Bocian

Yes, it was under a 10b5 plan. Given the -- where the discussions got to, we halted that plan and would have to initiate a new one. When we're -- we're in a period without significant information -- inside information.

Charles Edward Cerankosky - Northcoast Research

I see. And Pete, the CapEx, based on quick look I did, the total CapEx for 2013 was below guidance. Why was that?

Peter J. Bocian

Yes. I'd say a little bit was spillover but still could be captured in the guidance we have for next year, the $800 million to $900 million. So nothing material. We were probably -- we were thinking at the lower end of the range we gave you to begin with. And then if I look at the year-on-year, most of the delta is in PDC, even though there are puts and takes elsewhere, just to add some color there.

Robert L. Edwards

But Chuck, from prior calls, predicting the timing of some of these, particularly larger projects, can be challenging. And so most of the shortfall is timing and, as Pete said, primarily to projects at PDC.

Charles Edward Cerankosky - Northcoast Research

Okay. And then looking at the impairment of the notes receivable and the foreign currency translation in the fourth quarter, I believe both of those were noncash in nature. Is that correct?

Peter J. Bocian

Well, the FX, because we're translating at a different rate, still was to be -- it was translated at 1.06, so take the Canadian dollars and divide it by 1.06. So to the extent the rate changes in a certain place as we repatriate, it is cash, right? In terms of U.S. dollars. But it's translated at 1.06 at year end, just for the record, and then it's a bit worse than that, as we look at it today. The notes receivable, noncash.

Charles Edward Cerankosky - Northcoast Research

Okay. How was fuel? Can you give us some insight into fuel profitability in the fourth quarter?

Peter J. Bocian

Yes. So I mentioned that it was about $0.04 negative in total year-on-year. I kind of look at it and say, 2012 first -- starting point 2012 was a very good year in terms of both gallons and yields. We've had, I think, 2 quarters where we're relatively flat and 2 quarters where we lost several pennies against prior year. So it did hurt us in the $0.53 versus $0.59 comparison year-on-year. Some element of that is gallons, which, with the partner program that's going to happen, some gallons will go to our partners, which is not a bad thing as long as it comes back around with incremental IDs with the flow-through, right? So net-net, $0.04 both gallons and rate. Some of that, though, I'd characterize as movement between us and our partners.

Charles Edward Cerankosky - Northcoast Research

Okay. And then finally, you have $144 million of assets held for sale on the balance sheet at the end of the year. What was that tied to?

Peter J. Bocian

It's all Dominick's.

Robert L. Edwards

It's Dominick's. It's Dominick's, Chuck.

Charles Edward Cerankosky - Northcoast Research

And does that represent stores -- the store transactions that have already been announced? Or is that sort of like an anticipated cash inflow yet to come?

Peter J. Bocian

Yes. So it's transactions that we have been booked at our year end. I can't -- not going to provide what the gain or loss might be on those assets held for sale. But as we move to discontinue operations, we closed some stores, we sold some stores and then we had other ones under contract, which then, there will be proceeds that we'll identify as we go through 2014 still from the assets.

Robert L. Edwards

Chuck, as we -- again, as I commented earlier, as we think about Dominick's, we're executing on plan that we had originally thought about.

Operator

Next question is with Meredith Adler with Barclays.

Meredith Adler - Barclays Capital, Research Division

Just as long as on the subject of Dominick's, I have heard that even if you had owned the real estate for the Dominick's stores, you have decided to keep the real estate and lease the stores to whoever wants to operate them. First, I just want to confirm that, that's accurate. And also, shall we assume that those stores are part of Property Development Corp. now?

Robert L. Edwards

In saying that we're on plan, it's a -- we're doing a combination of things. There's -- some are outright sales. There are a few limited circumstances where we own the fees, that we are leasing those interests. So a couple of cases what you described is accurate. But relative to the total store base, relatively limited number that, that description applies to.

Peter J. Bocian

The only thing I was going to add is, really, none of it's PDC.

Robert L. Edwards

Yes, none of it's PDC. Independent stores, the way to think of it.

Meredith Adler - Barclays Capital, Research Division

Great, got it. And then I don't know whether you have the information to be able to update us at all on your pension. Obviously, 2013 is a year we'd like to repeat in terms of the stock market. And that must have changed the situation of underfunding in your multi-employer pension plans and then maybe also if you could comment on the corporate plan.

Robert L. Edwards

The -- on the multi-employer pension plan, we will have an update in just a couple of weeks, and so we'll have much -- we don't have the information. I wish we could share it with you now, but we're waiting for the report. And so we'll have more up-to-date view of the multi-employer pension amount in just a couple of weeks, Meredith. And then on the company plan, all good news. Expenses down in 2013 versus '12, cash contributions down in '13 versus 2012, and the good news will continue in 2014. Cash contributions and expenses for the corporate plan will be down in 2014 relative to 2013. And so I think it's going to be a couple of weeks before we have the updated numbers on the multi-employer pension plan and then that -- those will be available to be shared.

Meredith Adler - Barclays Capital, Research Division

And that will go into the 10-K when you file it or a separate filing?

Melissa C. Plaisance

Only the corporate plan is disclosed in the 10-K, Meredith. But the MEPP, we'll find an opportunity to share the information.

Robert L. Edwards

Yes, with everyone.

Meredith Adler - Barclays Capital, Research Division

Okay. That's helpful. And I just have kind of one final question and kind of related. You talked about inflation. I'd like to get just a little more detail on how you see the outlook for inflation for this year. And there is a drought in California. We want to know whether that would have an impact on cost. And then you said that you are passing along whatever inflation there was, which was kind of a change, and a good change. So maybe you could just talk about your outlook for 2014 in terms of both inflation and passing any along or whatever.

Robert L. Edwards

Yes, good question. The -- our current forecast for inflation for 2014 is somewhere in the 1% range, something like that. The -- we've tried to factor all variables that we can try to predict. The biggest inflation items that we -- the biggest categories of the store, we think, will probably be produce and meat. To some extent, prices in the meat area could be driven by the drought conditions in California. Those things are difficult to predict, but our current thought is somewhere around the 1% level.

Meredith Adler - Barclays Capital, Research Division

And that 1%, usually, you only calculate inflation on dry grocery. But you're talking here about kind of what you think will happen to your cost for all products.

Robert L. Edwards

Yes. If you recall from prior investor conferences, the way we defined inflation is average price per item change in our stores.

Meredith Adler - Barclays Capital, Research Division

But you didn't include perishables, right?

Robert L. Edwards

No, we include the whole store.

Melissa C. Plaisance

Everything.

Peter J. Bocian

And just to clarify the other question. So we had a, in Q3, 2 big items that impacted gross profit or gross margin were the shrink and how we missed the target. But thought it was a good idea to have raised the target to try to get more sales, and I think we corrected that in Q4. But also Q3 was an environment different than Q2 and Q4 where, of course, pricing needs to be competitive. What we saw in Q4 was less of a lag between costs going up and costs moving and price following. So better margins, better answer. But we're always watching the markets to be competitive in price.

Operator

And the next question is from Kelly Bania with BMO Capital.

Kelly A. Bania - BMO Capital Markets U.S.

Just first a clarification on the operating margin guidance. I'm assuming that is, compared to last year, was excluding Dominick's. But if you could just confirm that and maybe give us what operating margin we should be thinking about compared to last year.

Peter J. Bocian

Yes. So all -- basically, Dominick's is in discontinued, and we've restated 2012, 2013 and the guidance is without Dominick's. So the only other point I'd make is it also would exclude the items we called out in '13, depending on where they showed up. Some might have been in other income and expense. But -- so use the adjusted EPS and the profit related to that, and I believe there's a table that you can work through in the schedules and attachments, as to be the baseline with the flattish to down to slightly down.

Kelly A. Bania - BMO Capital Markets U.S.

And then just in terms of IDs, I think you had started out the quarter just over 2, and just curious how trends flow through the quarter. Any comment on either the competitive environment, the consumer, weather, internal factors, particularly now that you've kind of reaccelerated a little closer to that 2% level?

Robert L. Edwards

A good question. Clearly, I think that not just for us, but based on a number of data points, I think for all grocery retail, that December was soft. Now I think one last week between Thanksgiving and Christmas, clearly, wasn't helpful. And so IDs in the early part of Q4 were higher than the end. But I think that's consistent with -- I think, it's almost consistent across the board based on our vantage point. And so we're pleased with where IDs are for the quarter, and with the initiatives that we talked about and have lined up for the year, we're optimistic that we're going to have a good sales year.

Kelly A. Bania - BMO Capital Markets U.S.

Great. And if I could just ask one more, it's -- you seem very positive on the localization and clustering initiatives. Maybe just remind us what percent of stores that's really impacting at this moment and what the plans are, more specifically, for 2014.

Robert L. Edwards

Well, on a relative basis, it's in the 200-plus range. And so I would say early stages, relative to the total company, and then also, Kelly, part of the -- part -- we're using this phrase 1.0, which is almost kind of a software term. But -- and it's similar to what we did with the lifestyle stores. We're evolving as we move through the stores. And so if you think about what we've done with center store or some of the premium stores, the stores we're doing today will have modifications or enhancements or refinements. And also the work that we've done, say, on merchandising for areas that index high for Hispanic shoppers, we're learning as we move through the stores and then we're applying that artificial intelligence, if you will, to the new versions of the stores. And so we're encouraged that we'll be doing more stores, but also that we're applying the learnings that we've acquired from the early efforts to the current stores that we'll be doing this year.

Operator

The next question is from Todd Duvick with Wells Fargo.

Todd Duvick - Wells Fargo Securities, LLC, Research Division

Robert, you have consistently stated that you think an investment-grade rating is important to Safeway, running it both through the Canadian transaction, as well as previously as the CFO. Could you tell us if the parties that you're talking to have a similar view? Or any color that you can provide us along those lines?

Robert L. Edwards

Yes. We had stated in -- early in our comments that based on where we're at, based on those discussions, that we won't -- wouldn't be commenting any further, and so I'll refer you back to those comments and wouldn't offer any more clarity at this point on that topic.

Todd Duvick - Wells Fargo Securities, LLC, Research Division

Okay. And then, I guess, the next debt maturity you have coming due is several months on the road, I believe August, if I'm not mistaken. Should we assume that if the discussions linger until that point that you will just refinance that with commercial paper or pay that off?

Melissa C. Plaisance

We would likely pay it off, if we have cash.

Operator

The next question is from Mark Wiltamuth with Jefferies.

Mark Wiltamuth - Jefferies LLC, Research Division

First, I wanted to dig in a little bit more on the Dominick's. Have you included all of the proceeds from the lease transfers to date? And is there more cash to come in, since we're all going to be focused on what the right cash number is here during the year?

Robert L. Edwards

Yes. There clearly will be more cash coming in. I mean, some of the cash -- some cash was received prior to year end. But there clearly will be cash coming in during the course of 2014. I think it's always hard -- we have a plan put together based on various assumptions. But as you might suspect, Mark, it is difficult to predict all those individual events with certainty. But we've got a plan put together, and there clearly will be additional cash in 2014.

Mark Wiltamuth - Jefferies LLC, Research Division

You kind of presented the worst case of Dominick's on the last call and obviously, you've gotten some proceeds to date and -- did anything change on the pension liability front or is that all still the same?

Robert L. Edwards

It's actually down somewhat.

Mark Wiltamuth - Jefferies LLC, Research Division

Okay. And you're one of the first conventional grocers to really report earnings with the snap impact that went in, in November. Can you talk about how that impacted your customers and you think it impacted comps at all?

Robert L. Edwards

Yes. I think some impact, Mark, but I would say minimal. But I think there -- I mean, it's hard as you think about all the variables affecting our sales and try to isolate one and hold everything else constant, sometimes it's challenging. But as we analyze it, our best estimate is there was some impact but it would -- but I would characterize it as minimal.

Mark Wiltamuth - Jefferies LLC, Research Division

And can you quantify how big the snap users are in your base as a percentage of sales?

Robert L. Edwards

Relatively small, Mark. Relatively small.

Mark Wiltamuth - Jefferies LLC, Research Division

Okay. And any weather impacts from this harsh winter we're going through? Or are you relatively protected since you're more West Coast focused?

Robert L. Edwards

Well, it clearly has impacted our business in our eastern division and so there clearly has been some impact there as well.

Mark Wiltamuth - Jefferies LLC, Research Division

Okay. And just on the quarter -- the fourth quarter O&A number, can you give us a basis point change that was clean, if you exclude all the unusuals and the gas effects? Because I think you just gave us the gas -- the x gas number.

Peter J. Bocian

Yes. I mean, there -- to your point, there are a lot of moving pieces. I haven't pulled out all of them to have a data point right now.

Operator

Our final question is from Andrew Wolf with BB&T.

Andrew P. Wolf - BB&T Capital Markets, Research Division

A lot of questions which I think were asked, but in fact, volume, was that sort of -- the volume you had in the quarter was just flat, but was that also kind of trend the way the comps did positive and then maybe slightly negative, now that's positive?

Robert L. Edwards

Yes. I would say, that's generally true, Andy. And we -- that's right. We had a bit of a higher comparable. This business, you always have to be looking at what happened in the earlier period, and so the comp volume was a little tougher compare in Q4 2012 so -- but your comment is accurate.

Andrew P. Wolf - BB&T Capital Markets, Research Division

I guess the guidance for 1%, was it 1% inflation next year? But it -- you're running 1.6% now? Or was there a range, and I just didn't hear it?

Melissa C. Plaisance

1.6% in the fourth quarter.

Peter J. Bocian

So IDs were 1.6% in the fourth quarter and the guidance is 1.5% to 2.5%. Then Robert answered the question about what the relative inflation was, was about 1% assumed in our guidance. And it was roughly similar to that in '13.

Andrew P. Wolf - BB&T Capital Markets, Research Division

I know. But you said in Q4 was 1.6% and volume was flat. You're basically -- are you baking in less price -- more price investment or you just think the market -- the manufacturers are going to be less -- have less price inflation?

Robert L. Edwards

Yes. There's lots of factors affecting that market. But -- and 1% is a general range. It's approximately 1%.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Okay. Lastly, natural foods -- Kroger, last quarter, said that they -- after Whole Foods, they'd be the second largest natural foods and organic food seller, retailer. And they also basically said they plan to double that business in 5 years. Could you either rank order, obviously, not as big as Kroger, but are you in that vicinity, probably #3 or up there with some of the other natural chains after Whole Foods? And/or how you're looking at growth? I'm sure it's double digit, but if you could give us a sense of that.

Robert L. Edwards

It's hard, given I was -- I'm not sure what data they were looking at, so it'd be hard to rank order or comment on those data points since we don't have the data. But we commented earlier that our Open Nature sales are up 42%, and so that category has done well. And we expect continued strong growth across all those products. We've got quite a few SKUs in the Open Nature products. So it's a big category. It's going very nicely, and our consumers are responding very well to the offering that we have in the natural area.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Last question on -- just on natural. Is Safeway still expanding linear footage in a major way? Or has that sort of been ramped up in the last few quarters?

Robert L. Edwards

No. We clearly are allocating more space in the store for these kinds of products, and I think we'll be allocating more based on the receptivity we've seen from our consumers to our Open Nature product.

Peter J. Bocian

Andy, thanks.

Melissa C. Plaisance

Thanks, everyone. We appreciate you participating in the call. Christiane Pelz and I will be available for any follow-up clarifications. Thank you very much.

Operator

This concludes today's conference. Thank you for your attendance. You may disconnect at this time.

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Source: Safeway Management Discusses Q4 2013 Results - Earnings Call Transcript

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