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Safeway (NYSE:SWY)

Q3 2011 Earnings Call

October 13, 2011 11:00 am ET

Executives

Steven A. Burd - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Robert L. Edwards - Chief Financial Officer and Executive Vice President

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

Analysts

John Heinbockel - Guggenheim Securities, LLC, Research Division

Charles Edward Cerankosky - Northcoast Research

Mark Wiltamuth - Morgan Stanley, Research Division

Tal Lev - Consumer Edge Research, LLC

Michael Palahicky

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

Karen F. Short - BMO Capital Markets U.S.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

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

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Operator

Welcome to the Safeway's Third Quarter 2011 Conference Call. [Operator Instructions] 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 morning, everyone, and thank you for joining us for our third quarter conference call. With me this morning is Steve Burd, Safeway's Chairman, President and CEO; and Robert Edwards, Executive Vice President and Chief Financial Officer.

Before we begin, 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. However, 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 filings with the SEC.

And with that, I'd like to turn the call over to Steve.

Steven A. Burd

Thank you, Melissa. Let me begin with net income. Net income for the quarter was just over $130 million. This compares with net income from the same quarter a year ago of just under $123 million. Expressed in terms of earnings per share, we made $0.38 this quarter. A year ago, we made $0.33 a share, representing a 15% increase in earnings per share.

By way of some quick highlights, our earnings per share results were above first consensus estimates and above our own internal expectations. ID sales were much stronger than they were in quarter 2, and they strengthened as we moved throughout the quarter. Our gross margin rate, adjusted by both fuel sales and the Blackhawk reporting change that we announced last quarter, was flat with last year despite all the challenges of keeping up with inflation. And then O&A expenses as a percentage of sales were less than last year. As a result, operating margin expanded moderately, just as it did in quarter 1.

Providing a little bit more detail, starting with sales. Total sales increased 7.1% over last year. This strong increase in reported sales is largely the result of 4 factors. These factors, in order of importance, start with much higher fuel sales. And those sales were driven by a 26% increase in price per gallon versus the previous year, coupled with a 13% increase in what we would call ID gallon, those gallons in the identical number of stations that we operated last year. Second element of improvement came from ID sales growth. Third was an increase in the Canadian exchange rate. And then finally, the change in the Blackhawk revenue reporting that we discussed at our last quarterly earnings call.

ID sales, excluding fuel, increased 1.5%. Now this is 3x the 0.5% increase we experienced in quarter 2 of this year. It is also the seventh consecutive quarter of improvement. In addition, we have 9 of 10 divisions that had positive ID in the quarter, indicating, while not uniform, a very broad base.

[Technical Difficulties]

Okay. ID sales started the quarter moderately stronger than quarter 2 and then picked up speed in the back half of the quarter. In fact, if you combine the last 6 weeks of quarter 3 with the first 4.5 weeks of quarter 4, we are running just under 2%.

Inflation, as we measure it, was just under 4% for the quarter, which represents a pickup from last quarter. And while volume declined in the quarter, as I believe it did for the entire sector, our market share on our sector, for the first time in several quarters, was flat with last year. Also encouraging was an increase in the number of unique households shopping with us this quarter.

Turning to gross margin. Our total gross margin rate declined 114 basis points from last year. When you exclude fuel sales and the reporting change for Blackhawk, our gross margin rate was actually flat with last year. While gross margin was negatively impacted by several factors including inflation, mix changes and LIFO charges, it was positively impacted by shrink improvements, also a comparison to last year's margin hit resulting from the closure of the Burnaby, B.C. distribution center and the severance cost that we took for that and then, of course, Blackhawk's strong performance.

Turning to O&A expenses. O&A expenses, expressed as a percentage of sales, declined 103 basis points from last year's third quarter. Excluding fuel sales and the Blackhawk reporting change, the O&A expense ratio declined 8 basis points. The largest positives contributing to this improvement were lower labor expenses and lower depreciation charges. On the negative side, the combination of property gains and losses plus impairment was considerably lower or worse than it was a year ago. Now given our level of ID sales, our O&A expenses were very well managed for the quarter.

Turning to interest expenses. Interest expense declined $8.7 million due to lower interest rates and lower average borrowing. Our average borrowing rate was lower by about 40 basis points, and that represented a little more than half of that interest savings. And then our average level of debt outstanding was lower by about $312 million, which also contributed to interest savings. We ended the quarter with total debt of just over $5 billion compared with almost $5.3 billion 1 year ago or a reduction of $244 million.

On the tax side, we've commented that a normal tax rate for us, we think, is 33%. In this particular quarter, it was actually 34% compared with 31% a year ago. So it hurt a little bit on the tax side in this quarter.

Turning to capital expenditures. We spent $288 million on capital projects in the third quarter. We completed 5 new stores and 7 Lifestyle remodels. And this compares with capital expenditures of $171 million in last year's third quarter.

Turning now to free cash flow. Free cash flow for the quarter was $168 million. This compares with $383 million from last year's third quarter. The cash flow difference of $216 million is largely explained by 2 items. The first is that capital expenditures were up $117 million, and the second is that inventories, net of payables, have been increased by about $63 million this quarter. And it's really just in preparation for some activity that we have planned for the fourth quarter. So that inventory will easily be worked down as we move through the fourth quarter.

Free cash flow for the first 36 weeks was $284 million compared with $655 million through the first 3 quarters of last year. The year-to-date difference is largely explained by 3 factors. One is the pension contribution for our corporate pension plan where we made the first cash contribution to that plan since 1982. And that was $156 million. And then capital expenditures were up $128 million, and then of course, the inventory number that I just described, slightly lower than the $63 million. We remain confident that we are on target to achieve our free cash flow target in terms of our guidance, which is $750 million to $850 million range for 2011.

And then finally, some other notable events in the quarter. We purchased 10.1 million shares for a total cost of $195.2 million. And then Blackhawk continues its strong performance. And if you look at the sales increase in the face value of the cards that are sold, both inside Safeway and in the distribution channel that we manage, that was up 33% in the quarter. Now just to contrast that with last year, in the same quarter, we were up 12%. So once again, as I commented last quarter, all 3 quarters this year, we have accelerated the growth even though the base of this business is also much larger. That's a very unusual thing at this point to be able to accelerate your growth. And we would expect that the fourth quarter will be considerably better than the fourth quarter of last year.

And then finally, on Private Label sales, we continue to grow Private Label sales faster than national brands. Our Private Label sales are outpacing national brands by about a 3:1 of this factor. We've seen -- in a soft economy, it shouldn't be that surprising. But we think should the economy get better, we'll continue to outpace national brand growth.

So with that, Melissa, I'm ready to take questions.

Melissa C. Plaisance

Okay, Shirley.

Question-and-Answer Session

Operator

[Operator Instructions] Karen Short.

Karen F. Short - BMO Capital Markets U.S.

BMO Capital. So I just wanted to go back to the ID. It looks like given where inflation is, at the 4% level, volumes might have actually deteriorated sequentially. Can you maybe just give a little color on that? Is there a category that stands out? Or is that by geography or anything on that?

Steven A. Burd

No, I would say nothing stands out. I think it was a couple of quarters ago that I commented on the importance of fuel prices relative to grocery prices. And with fuel prices up, what did I say, 26% or 29%, that continues to have a dampening effect on overall consumer behavior. We believe, particularly based on looking at our market share, which was absolutely flat with last year, that you have negative volumes really across the channel. And I think that with the things that we have planned going forward, we expect that we can ultimately turn those volumes positive even in a soft economy. But right now, we sit with the rest of the industry with volume declines as people make changes in mix and try to respond to this economic environment.

Karen F. Short - BMO Capital Markets U.S.

Okay. And then last quarter, there was a lot of conversation about a lag in passing on inflation. Can you maybe just give us an update on what you're seeing on that now?

Steven A. Burd

Yes, I think that people maybe -- I don't know if they misunderstood it, they misinterpreted the lag. I mean, a lag is nothing new. And what you have going on in this particular economy is we have inflation, which is predominantly in perishable categories. Some of those categories are essentially pennies of profit opportunities and some of those perishable categories are gross margin rate sustainable opportunities. So it really depends a lot on whether the inflation is in a pennies of profit or whether it's in a gross margin category. We also have a couple of categories that actually had deflation. And I can't tell you that some of that wasn't mix, but we actually had some categories that represented deflation. So I would continue to say that when we get a cost increase, we consistently pass it along. But just as I said in the last couple of quarterly earnings releases, we're sensitive if we're approaching a holiday, and we're sensitive on the promotional price. So the promotional price change always changes second. I think that what you should take away from our quarter result is that we, like everybody else, and we look at everybody else, pass along cost increases. We, unlike other people, have managed a flat gross margin because we've been able to do it in a very efficient way and we're particularly good at managing shrink. And that was a major contributor to the quarter.

Karen F. Short - BMO Capital Markets U.S.

Okay. That's very helpful. And then just any update on just for U, how many markets it's in now and what the goal still is for the end of the year?

Steven A. Burd

Yes. Just for U is in 2 markets. I think we talked on previous calls that we have not done any heavy advertising in either of those markets, and we've been building a platform that we're confident will scale. We'll be rolling that to at least one other market this year, and we will complete the rollout of just for U sometime in the second quarter of next year. And if I were to add one more factoid to that pile, I would tell you that the 2 markets that we have just for U in a non-advertised, non-promoted fashion are the 2 markets where we've gained the most market share.

Operator

Your next question comes from Deborah Weinswig.

Michael Palahicky

This is actually Palahicky actually on the line for Deborah. I just wanted to kind of dive into the ID. Have you noticed a trade-down with your customer? Or where is that kind of going? I think you've talked about it in previous calls.

Steven A. Burd

Yes. I think the trade-down phenomenon is really no different than it's been for the last several quarters. It depends on where you sit on the economic spectrum so that if you're comfortable and are on the high income, stable side of the equation with – I’ve talked about the bifurcated recovery, then you're back to buying luxury items, you're buying high-end wines, you're buying floral, just as you always were. And then there's the other, I'm estimating roughly 75%, that are really careful about how they spend. And so they look at the protein items that they might buy for their family. And those items change. They change from quarter to quarter. So they may change what they buy, but they're very conscious of price. And so I think that's been true for probably more than 2 years now. And I don't expect it's going to change in the next 12 months.

Michael Palahicky

And then just one quick follow-up. One of your major competitors has been talking about how -- their plans to try to widen the price gap with some of the competition. Have you noticed anything in the last 3 months? Or have you seen any difference in the competitive environment or the pricing environment?

Steven A. Burd

None.

Operator

Your next question comes from John Heinbockel.

John Heinbockel - Guggenheim Securities, LLC, Research Division

Sure, Guggenheim. So Steve, a couple of things. How do you think about making your own price investments as the comp gets better? Meaning as you go from 1 to 2 or even higher and you're getting more leverage on expenses, is there an inclination to invest some of that increment back into pricing somewhere or not really, the comp does not have any bearing on the pace or magnitude of investment?

Steven A. Burd

Yes. I mean, I think that what you will see, sales, it will be hard for you to see, but with the digital platform that we've created, our price investments will be very razor-like in their focus, and for the most part, invisible to our competition. So we're making pricing investments and we will build loyalty among our customers. At the investor conference, I showed some slides about the increased sales among our most loyal customers, and if I look at the top tier of that group, we continue to run double-digit sales increases with that group. And again, that's a group that we have a very personal relationship with. And the digital platform that we've created allows us to be completely stealth in our price investments.

John Heinbockel - Guggenheim Securities, LLC, Research Division

Now do you -- sort of as a follow-up to that, have you expanded -- and I know you've kind of piloted using just for U to recapture lost shoppers. Have you expanded the use of that in Northern California and Chicago? Or not yet?

Steven A. Burd

Essentially, what we're doing is we're testing that against various competitors and believe there's an opportunity to nullify competitive effect. But essentially, what you need to do is you need to develop a different solution, keying on ideally tools and assets that are unique to you. And we expect to have those in place and fully tested in the fourth quarter. And we might be able to comment on that a bit more at the investor conference.

John Heinbockel - Guggenheim Securities, LLC, Research Division

All right. Thirdly, if you look at -- was there anything onetime or unusual in the SG&A dollar number, the growth rate? Or that was pretty clean?

Steven A. Burd

In the last couple of quarters, beginning with the investor conference, I talked about sort of speaking to the pluses and minuses and whether or not we won or we lost and because of some exogenous number. And in the last 2 quarters, the pluses and minuses have exactly offset one another. So there's nothing unusual in the SG&A. There's really nothing unusual in the gross margin. And I think what I'll do on a go-forward basis, when there is something, I'll call it out. But if there's not, you won't really hear me comment on it.

John Heinbockel - Guggenheim Securities, LLC, Research Division

All right. And then finally, I mean, given the progress that you're making fundamentally in where the stock trades, have you guys rethought the idea of more aggressive buyback activity that might be debt-funded? Or is that still of very little interest to you?

Steven A. Burd

No, I mean, we constantly look at stuff like that. Obviously, there was a softening in our share price. So things are being more or less aggressive. Those are constantly being re-evaluated in the context of all the other things that we're trying to do. As you know, we made a significant move in the direction by creating this entity called Property Development Corp. You noticed our capital spend is up this quarter. So it's really a function of where you think you can get your best return.

Operator

Our next question comes from Ed Kelly.

Edward J. Kelly - Crédit Suisse AG, Research Division

Crédit Suisse. Steve, how should we think about dollar sales growth versus volume sales growth? And the reason I ask this is because you, as well as the industry, right, have negative volume growth right now. And I got to imagine it's hard to drive gross profit dollar growth when volumes aren’t up. So what's the risk that your competitors get more aggressive on pricing to drive volume in this scenario?

Steven A. Burd

I don't think there's a lot of risk there. You've heard me talk about the world kind of divided between you have price vehicles and then you have conventional vehicles and then maybe you have specialty vehicles. And I don't think anybody has had a great deal of success of finding highly responsive categories if they reduce the price. In addition to that, the way retailers have behaved over the years, if someone tries to take your market share in a certain category, you respond. When it proves not to be successful, you make a little note. You say, well, I guess, that didn't work. And so -- and I've been at this for 19 years and I've never really seen anybody do exactly what you described, unless they've been able to do it on a pure sales basis. So no, I don't worry that, that's about to happen. If you look at -- just in talking to the CPG companies that I have an opportunity to interact with, essentially, if they're running positive sales, they're running negative numbers in the U.S., they may be running -- they could be running slight positives in Canada and most of their growth is coming from emerging countries. And I would tell you that, that's the nature of 9% unemployment. So I think that what you can do in this environment is you can do things like we've done to dramatically improve your shrink results. You can do things to alter your mix and go for things that are more profitable, like Private Label. So you're not without the ability to increase earnings. And so I think that it's a good assumption. The economy is not going to get materially better, and then you've got to play in that environment and utilize the things that you have uniquely developed to win with. And we wish our sales progress were much faster, but we love the fact that it's steady. And so much of what we have been working on has really yet to play out in the marketplace. So we worry less about what others do and we focus on what we are confident we can execute.

Edward J. Kelly - Crédit Suisse AG, Research Division

And Steve, I'm sorry if I missed this, but did you give the price per item for the third quarter?

Steven A. Burd

I gave an inflation number, and that's basically the way we measure it, which is 4%.

Edward J. Kelly - Crédit Suisse AG, Research Division

Okay. And based on kind of what you're seeing from the vendors right now, would you expect that number to go higher in the next couple of quarters?

Steven A. Burd

I've read reports that people think it's going to go higher. Internally, most people around here think it could actually go lower. I've stopped trying to make estimates for this because the only thing I can guarantee, I will be wrong, and we clearly expected inflation on the euro. I think we highlighted at the investor conference that we thought it would be around 1%. It's been higher than that. So no surprise, our LIFO charge this year will be considerably higher than we expected.

Edward J. Kelly - Crédit Suisse AG, Research Division

And the idea that maybe it could go lower, is that because you think vendors might be having second thoughts? Or is that just because of what's going on with commodities?

Steven A. Burd

It's basically the commodity market. And keep in mind that if you were to look at the center of the store, I mean, we have quite modest inflation in the center of the store. And even that’s basically driven by commodities. And then we started this inflation in the fourth quarter of last year, and we'll be lapping that. That's one reason why this thing might begin to slow down.

Edward J. Kelly - Crédit Suisse AG, Research Division

And just last question for you. The gross margin, it's good progress in an inflationary environment. Do you think you can maintain at least a flat gross margin over the next few quarters even with inflation at this level?

Steven A. Burd

I think that probably about 18 months or maybe 2 years ago, we stopped trying to give guidance on the individual pieces. I think the gross margin environment is challenging, but we've been able to do a pretty good job with it. So I don't want to sort of predict gross margin, but what can you can be sure of is if we get price increases, we'll pass them along. And everything we look at in terms of our competition, the slides I showed at the investor conference, when I laid out all different formats, we do not stand alone in the speed with which we pass these things along, virtually everybody we compete with. And we look at this every month. So I have to confess, my last data point is September, not the first few days of October, but I believe they'll continue to pass along.

Operator

Our next question comes from Scott Mushkin.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

It's Jefferies. So we have been noticing a program -- I just want to get some insight on -- it's called Mix & Match [ph], and I think it's been in Chicago, it's been in Los Angeles where you're really taking some of these fast-turning items and dropping them quite a bit on price. And I guess the question is, in the short term, and I actually like the strategy, so I don't know if you want to comment on what's driving it, but I think it's a good strategy, but it usually kind of hurts gross margins as you do this, and obviously, that's not happening. So I was wondering if you can speak to why. And the second part of the question is that these types of programs also generally move that volume needle pretty quickly and, of course, we’re not seeing that. So I was wondering if you could give us some insight on why you don't think it's working on volumes just yet.

Steven A. Burd

I think that the Mix & Match [ph], we're not the only retailer to do this. The reason it doesn't hurt your gross margin is you get vendor support for this. And what we're really doing is we're trying to drive -- we're trying to drive a larger basket here. And for the group of folks that are fairly loyal to us, we are driving that large basket. And I think that what you find for the less loyal, really looking for price, they're just spreading their business among retailers, and so it's been a little bit harder to build that basket. But obviously, that's what this is focused on. But we break our shoppers into about 5 different groups. And as you move down the loyalty spectrum, we have less success. But as you move up, we have considerably more success. So I think that it's been an effective program. You'll probably see us continue to do it. You'll probably see us change some things. But it shouldn't cost us anything on the gross margin line.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

That's great color, Steve. So the other thing to your question here -- your answer about the loyalty, it seems to me, because we're looking at those prices and they're very competitive with the mass as you go and look, and so do you expect that to increase your loyal shoppers? I know you made a comment that loyal shoppers are increasing, and that should roll through volumes eventually, no?

Steven A. Burd

Yes. Well, if you look at the most loyal group, we basically have basket’s up, traffic’s up, volume’s up. Everything is up. And some of the tools that we've been working so hard on and practicing really now in just 2 markets, there are features of those -- of that digital platform that are specifically designed for the less loyal. And there's an opportunity for the consumer to save 15% to 20% in our store off a normal club-promoted prices. So I mean, the promoted prices are one level of savings that anyone with a loyalty card has access to. But by sort of planning the trip and using this digital platform, you can save another 15% to 20%. And that, I think, will drive sales.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

So that's a good segue into my -- and I'll just do 2 questions at once, then I'll yield the floor. Just for U, when it rolls out, I'm a loyal customer, my basket, price versus what I could pick up at a mass merchant guy like a Target or a Walmart, where do you think you're going to come in there when this is all fully implemented? And then my second question has nothing to do with it, but just free cash flow, looks like you have to generate $400 million to $500 million in the fourth quarter, I think, something like that. How do you get there?

Steven A. Burd

Robert, do you want to take the free cash flow?

Robert L. Edwards

Yes. Scott, if you look at free cash flow last year in the fourth quarter, we had a strong quarter at just over $400 million. Steve had mentioned earlier that we've been building inventory for a number of promotional reasons. Also, we've done a number of investment buys this year because of the inflationary environment. Those investment buys will sell through, and so we expect inventory reduction and change in payables to be a significant source of cash during the fourth quarter. So our plan is to generate significant cash in the quarter and make the forecast.

Steven A. Burd

So turning back to the first question, you probably have your own impressions of how we'll price relative to mass. But just imagine spending 4 minutes on the just for U side and saving 15% to 20%. I mean, my view would be that there is no reason to go to mass. You have a conveniently-located best shopping environment, best perishable content, friendly service environment. We've eliminated the reason to go elsewhere. And what we've really been working on over the last several months, and at times it's been frustrating, is really enhancing the consumer experience. It's great to have the tool, but really working on the consumer experience so that it is in every aspect pleasing.

Operator

Our next question comes from Mark Wiltamuth.

Mark Wiltamuth - Morgan Stanley, Research Division

I'm Mark Wiltamuth from Morgan Stanley. Steve, as you're looking at your performance here, are you more focused on your market share, the overall comp or the volume component of the comp? We're just trying to gauge whether you feel like the need to cut price at some point.

Steven A. Burd

Yes. I would tell you that what we're focused on is market share. And the sales number will sort of fall out as you build market share. And it will be -- in the near term, it will be heavily influenced by inflation. But the reason I switched from looking at volume to looking at market share, and I announced that a couple of quarters ago, was that in an environment where fuel prices are approaching $4 a gallon and it's such a large portion of consumer's budget, coupled with commodity inflation in the food business, you're going to have a very hard time generating positive volumes. You're going to need inflation of probably no more than 3%. And you're going to need some unique capability, which we think we're building. So I would tell you that in 2012, we'll get the positive volumes in 2012. But that should also lead to some pretty significant share gains. And so I think -- think about you're going for share, sales kind of fall out and volume happens along the way. But in an environment where everybody has negative volumes, we have positive market share in markets for which we have -- I can think of one market, we have negative ID but we have nice market share gains. Now I would like to have both. But it varies by market. But I think market share is what we're after.

Mark Wiltamuth - Morgan Stanley, Research Division

And how's your volume number looking versus traffic? So maybe give us a sense for what's going on with the trade-down within the store.

Steven A. Burd

I think the traffic, if you measure traffic in households shopping with us, that's up. If you measure the number of transactions, the transactions are down. But people are consolidating trips, and so then your basket is up. So what you'd like to do is you'd like to ultimately have household up, basket up, traffic up and just kind of normal inflation.

Mark Wiltamuth - Morgan Stanley, Research Division

Okay. And maybe a question for Robert. On Blackhawk, where does that get to the point where it's material enough, you need to break it out? And as we're watching your other sales that are disclosed in the Qs, how much of that is the Blackhawk number? And how much of it are other factors in the store?

Robert L. Edwards

Mark, at this point, really, the only metric we've chosen to give is the face value. And Steve commented on the accelerating growth that we're seeing. So at this point, our conclusion is that's the item we'll disclose. We review it from time to time, giving more color on Blackhawk performance. And so we'll evaluate that in the coming quarters and possibly at the investor conference next March we’ll give more color on Blackhawk.

Operator

Our next question comes from Robbie Ohmes.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

All right. Just a couple of quick questions, Steve. The first one, you mentioned in the commentary that there was some fourth quarter activity plan associated with an inventory investment. Can you give us any sort of thoughts on what you guys are planning there? And then the second question is, can you also sort of give us any thoughts on what the fourth quarter early comp trends look like and whether you think the back half levels for the quarter will hold or you could see some improvement there in your comps for the fourth quarter? And then the final question is just the unique household increase. Can you just remind us how long that's been going on? And what do you think has been driving that? Has gas helped drive that for you guys? Or what do you think is going on there?

Steven A. Burd

On the inventory thing, I can't really shed any light on that without shedding light to my competition. And really, the only reason that inventory is up, the nature of what we were doing there just sort of was -- you had to build sort of between right at the end of the quarter. Otherwise, it's a promotion where a little bit later it’ll all have been self-contained inside a quarter. On the issue of the fourth quarter, I did talk earlier in the call, I don't know if you were on it, about the last 6 weeks of quarter 3 and the first 4.5 weeks of quarter 2, and that number is just a tad below 2 -- probably if I threw gift cards in there, it probably is at 2. And I think that this is a long quarter for us. But my expectation right now would be that that's probably about where this thing is going this quarter. I'm not expecting a falloff. I'm not expecting a big ramp-up. And obviously, we're going to be doing things that could change that trajectory. But I think if -- what we've tended to do with our sales increases, if you think about it, we've tended to get some pretty decent jumps and then we've tended to plateau and then we’ve tended to get another jump. And so I think it's fair to think about the last 10 weeks as kind of a plateau. And I think it's reasonable to think that they could come in, in that range, give or take, or they could be up a little bit.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

And then just on the unique households, the trend there and what's been driving the growth there?

Steven A. Burd

The trend there is positive household increases now for 3 consecutive quarters. And I do think -- you might be familiar that we've gotten fairly aggressive on our rewards program and, like a number of other people, linking it to fuel. And so it works particularly well in markets where we have a good complement of fuel stations. But we have some other ideas for markets that are not as well complemented with fuel. So we think this idea of rewarding loyalty is a good one. And I think you'll see us continue to do that.

Operator

Our next question comes from Stephen Grambling.

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

This is Stephen Grambling from Goldman Sachs. Just had a quick question on shrink during the quarter and kind of your expectations going forward. It seems like it's been roughly a year now where you've seen the benefit from that. So how do you think about that going forward?

Steven A. Burd

Well, you might recall that it was about a year ago when after having made a lot of progress over the years, and we were essentially reducing shrink at the rate of about $50 million a year, I decided that we ought to step it up. And we gave ourselves a $300 million goal that we thought we should get to that run rate at about 18 months. So we're actually sitting here at about the 1-year, at the 12-month, level. And we're not -- we didn't expect to be quite at the $300 million, but we're better than the numbers that we put in the plan for the year. And we are a tad behind what we call our targeted pace. But I think when we get to the 18 months, we should be fine. So I don't recall the exact number that we put in the bank this year, but it's a very large number by comparison to anybody that's ever talked about this subject. And now we're rounding into the fourth quarter. So we're going against that first sort of quantum leap forward. So we expect the shrink improvement in the fourth quarter. We clearly expect it to be better than last year. But we expect the pace of that to slow a little bit. But we fully expect that when we hit the 18-month bar, we'll be at a run rate that has captured $300 million in savings.

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

And then one quick follow-up, if I may. Just you had mentioned potentially rolling out some new initiatives in the healthcare side, potential services. Is there anything you can share with us there, the timing?

Steven A. Burd

We're working hard on trying to take what we've learned about managing our own healthcare and bringing that to the marketplace. You may have noticed that we recently hired a Chief Medical Officer. Until we hired him, I sort of occupied that role, I guess. And his responsibility, among other things, is to continue to help us drive our own internal healthcare cost to also provide and assist on Safeway Health, which is the new vehicle we created, and then third, take what we've done so well internally and see if we can productize that and bring that to the marketplace. Now he's not the only person working on that. But you will see us, I think, over the next 12 to 18 months, you'll see us introduce things as a result of the knowledge, and I think pretty unique knowledge that we've learned in the healthcare area. And so we have a very strong immunization business, and we think there's a lot more upside there. But we've sort of cracked the code, we think, on obesity, and I expect you'll see us develop a weight management tool or service for consumers generally. And so we're just going to try to take some things that we've done so well with our own workforce of 200,000 people and essentially provide those valuable services to others.

Operator

Our next question comes from Tal Lev.

Tal Lev - Consumer Edge Research, LLC

It's Consumer Edge Research. A few questions. One is, you haven't spoken about Canada in a while, and I just wanted to get an update of the business and what's the contribution to overall performance.

Steven A. Burd

Sure. I mean, Canada, we typically don't call out markets by geography. But essentially, Canada had a dip in the economic activity later than the U.S. It had inflation while we were still having deflation. Then it, too, experience deflation, but it was a shorter duration. Their economic dip was of shorter duration. The economy is doing better in Canada. And so translation, the business is doing well.

Tal Lev - Consumer Edge Research, LLC

Great. And then if you look at ID as trying to look at it another way, was there any difference in performance between the kind of perishables and center store?

Steven A. Burd

I think that if you think about where the inflation was, it's reasonable to conclude that the sales in the perishable side were stronger than the nonperishable side. But the nonperishable side has continued to get better over the last several quarters. And so I think that we're increasingly pleased with what's going on in the center of the store.

Tal Lev - Consumer Edge Research, LLC

Okay. Great. Now one of your large competitors yesterday announced plans to large investments in pricing over the next 2 years and plans for expansion of large stores in multiple markets. Any initial thoughts about reaction or how do you think this will play out?

Steven A. Burd

I've read about that this morning, and I think a couple of things to keep in mind is, first of all, I believe their price investment is across virtually all items in the store. Okay? And if you follow the apparel and hard lines world, that hasn't been a great ride for them the last couple of years. So I suspect that some of that money was directed in that direction. Also, every bit of evidence we have suggests that there's a limitation to the market share that price vehicle can capture. And so I think that they increasingly are competing with other price vehicles. And so I suspect that that's where some of the focus is. So again, we have a completely different shopping experience, and I'm very confident, particularly with the digital platform that we're putting in place, that we have more pricing flexibility than virtually anybody that we compete with, and we can do it on a personalized basis. And we should be able to capture the loyalty of our customers because we can give them what they want in a nearby terrific environment. So this stuff always grabs headlines, but I think I learned a long time ago, as a retailer, you need to develop a strategy and you need to be -- as you develop that strategy, you think about your competition. But the last thing you try to do is mimic your competitors and you do your own thing. And I think we'll be fine.

Tal Lev - Consumer Edge Research, LLC

That's very helpful. One last question. You had something like $50 million in other investing activities in this quarter, which is a lot more than the coverage. I know there's a lot of puts and takes, but anything you can call out to explain that number?

Robert L. Edwards

It's just a number of individually relatively small items there. Nothing to call out at this point.

Operator

Our next question comes from Andrew Wolf.

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

BB&T. I just wanted to get back to the ramp-up in the comps to around 2% from under 1%. It's sort of -- it sounds like it was mid-quarter, you had a nice jump and now it's kind of sustained and built a bit. Now has that all been price with volume sort of going down, obviously, less than the amount of the price increase because of -- relatively in the last [indiscernible], it's sort of what's being portrayed? Or has volume actually been improving as well?

Steven A. Burd

I think when you do the math, I mean, with a 1.5% ID and 4% inflation, volume declined. And volume declined more than it did in the second quarter. That's true for the sector at large, and that's why we were able to flatline our share. The kind of share loss that we've had in the last couple of quarters has been pretty de minimis. I think people thought from a share standpoint that we were losing bunches of share, and that, frankly, was never true. It was fairly de minimis. And the fact that we have -- that we are basically flat from last year, I think, speaks to just general consumer behavior. If you don't have a 1.5% ID, if you have a negative 3% ID, then you really have serious volume problems. And others have reported numbers even north of 4% who have said their volume is flat. Now I will tell you that inflation is not uniform across this country. I can't ever tell you how others measure it. We've made it pretty transparent how we measure it. But our inflation measured on price per item runs from a low of maybe something in the low 3% to something just over 5%. But for the company, it came in around 4%.

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

Yes, I was actually, I guess, probably not clear enough from my question. I was trying to get you to cut the period of time not into quarter-to-quarter, which was the obvious math, but since I think it sounds like most of the jump into dollars of the same-store sales increase occurred mid-quarter on, how much of the price increase getting to 4% was already baked in halfway through the quarter? In other words, how are volumes doing lately? Are volumes still trending down more than they were in the prior quarter? Or are they trending down less, which would be a relative improvement? That's what I'm really asking.

Steven A. Burd

What I did in preparation for this call is draw an imaginary line between the first half of the quarter and the back half of the quarter. And there was -- sales really jump around a lot. The worst thing that could happen to you, which happened to us recently, was the first of the month, which is a common payday, occurred on a Saturday. But whenever that happens, your Friday is not that good, your Saturday is miserable, your Sunday is horrible, and then your Monday gets a little bit better and Tuesday gets even better and those kinds of things. So I think if you're trying to track volume relative to sales, I think that you'd find a correlation there so that if the back half were considerably stronger than the front half, that you would find that the volume correlated with that. And it all correlates with inflation. And because I didn't put it under a microscope, I can't precisely tell you what inflation was in the first 6 weeks versus the last 6 weeks. But if what you're trying to do is to get a feel for momentum, which is, I think, what you're after, I've tried to answer the momentum question by suggesting that we're not contemplating that inflation will get worse. In fact, there are people around here that think it might soften and that we've been running for 10 weeks in that 2% range. I think that's a pretty good assumption about the fourth quarter. We'll try to do better. And if we hit 2% and inflation subsides, that will be some pretty strong good news.

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

Okay. And my other question is just on the guidance. Unless I missed something, it's pretty wide, obviously, for Q4. Do you want to narrow it in any way, either with reference to the consensus at $0.64 or just narrow the range, pretty wide guidance range?

Steven A. Burd

I think that we've been very consistent on the guidance we gave you at the beginning of the year. Essentially, it's remained unchanged. And that fourth quarter number, in combination with the 3 quarters that are in the bag, leads you right to the midpoint of the guidance that we gave. I can't really say anymore than that.

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

And lastly, fuel profitability. I don't know if you could give us a sense of whether that helped -- was material to the quarter.

Steven A. Burd

Robert, I feel like...

Robert L. Edwards

Yes, Andy, it was up $0.01, $0.015 relative to the quarter last year, so slightly up. And as Steve commented, we're seeing very good growth in gallons, and so slightly higher gross margins and good gallon growth contributed to improved profitability in fuel.

Melissa C. Plaisance

Okay. We have time for one more question.

Operator

Our final question comes from Chuck Cerankosky.

Charles Edward Cerankosky - Northcoast Research

Northcoast Research. Steve, when you're talking about Blackhawk, and we're talking about a very soft economy, what do you think accounts for the nice uptick in face card value that you reported?

Steven A. Burd

I think it's heavily driven by the fact that increasingly, the retailers in the Blackhawk distribution channel are deploying a rewards program often linked to fuel. And that process is really spreading throughout the country. And as I think you can appreciate in your own market, when somebody does it and they're having success, it's hard for others not to follow suit. And so I really expect that, that's going to be with us for an extended period of time. And I think increasingly, retailers will use fuel as part of their loyalty program. And it works very well when gas is at these levels, but if I were to go back even a year ago when gas were considerably lower, it still worked well. So I think that we think the long-term growth prospects for Blackhawk are very good, and it's connected to loyalty and fuel.

Charles Edward Cerankosky - Northcoast Research

Yes, we're certainly seeing that in the Cleveland market. And that fuel ties to another question I had, Steve, about -- with the recent moderation in fuel costs, do you see that positively impacting the trend you've seen lately in your same-store sales?

Steven A. Burd

I think it's helpful. I mean, if I were to put together a wish list, it would be for fuel prices to continue to come down. I think that would be good for our business. I think it would bolster some consumer confidence. I think people would be more willing to spend. So we should all want those costs to come down. I don't think there's any question it would be good for our business. If you go back to the investor conference, and I tried to lay out what a 1% increase in sales was worth, and I talked about the tolerance for 3% inflation, fuel prices completely changed that dynamic. And so if we could get back to $3, that would be wonderful. If it stabilizes, that's a good thing. So as you know, it's come down, I think, Robert, about 6%.

Robert L. Edwards

6% for the quarter [ph].

Steven A. Burd

And we're about to get to a period where it’s started to increase more than a year ago so that difference will be less. But I think as fuel costs come down on an absolute basis, that's going to help our business.

Charles Edward Cerankosky - Northcoast Research

A related but maybe a more complicated answer, Steve, is as you look at, say, a stable 2% rate of comps, how does that change as food inflation perhaps backs off some? Can you translate or convert lower food inflation into more volume?

Steven A. Burd

Yes, I think that -- I'm not worried if inflation comes down. In fact, if I'd add one more thing to my wish list, I would like food inflation to come down to no more than 3%. And again, I think I said this before and I think – people didn’t particularly like it, but others have since said it, if you’ve got inflation in food and inflation in fuel, it's demand depressing. So I'm anticipating that if food inflation comes down and fuel comes down, that will have a positive effect on volume. And I don't think it's going to hurt our ability to hold or build on that 2%.

Melissa C. Plaisance

Okay. Thank you, everyone, for participating today. Christiane Pelz and I will be available for the balance of the day for any follow-up questions. Thanks a lot.

Operator

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

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