Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Safeway Inc. (NYSE:SWY)

Q4 2007 Earnings Call

February 21, 2008 11:00 am ET

Executives

Melissa Plaisance - SVP of Finance

Steven Burd - Chairman, President and CEO

Robert Edwards - EVP and CFO

Analysts

John Heinbockel - Goldman Sachs

Scott Mushkin - Banc of America

Neil Currie - UBS

Jason Whitmer - Cleveland Research

Bob Summers - Bear Stearns

Chuck Cerankosky - FTN Midwest

Mark Wiltamuth - Morgan Stanley

Ed Kelly - Credit Suisse

Deborah Weinswig - Citigroup

Andrew Wolf - BB&T Capital Markets

Redino Russell - JPMorgan

Karen Short - Friedman Billings

Meredith Adler - Lehman Brothers

Mark Cohodes - Copper River

Operator

Welcome to the Safeway's fourth quarter and yearend 2007 earnings call. All participants have been placed on listen-only mode until the question-and-answer session. (Operator Instructions)

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

Melissa Plaisance

Good morning, everyone, and thank you for joining us for our fourth quarter 2007 Earnings Call. With me this morning is Steve Burd, our Chairman, President and CEO and Robert Edwards, Executive Vice President and Chief Financial Officer.

Before I turn the call over to Steve, let me begin by telling you that this conference call may contain forward-looking statements. Such statements may relate to topics such as sales, gross margins, earnings growth, operating improvements, cost reduction, capital spending, debt reduction, labor relations and other related subjects. These statements are based on Safeway's current plans and expectations and are subject to risks and uncertainties that could cause actual events and results to vary significantly from those implied by such statements. We ask you to refer to Safeway's reports and filings with the SEC for further discussion of these risks and uncertainties and in Safeway's most recent 10-K and subsequent quarterly reports on the form 10-Q.

And with that let me turn the call over to Steve.

Steve Burd

Thank you, Melissa. Let me begin with net income. Net income for the quarter was just a touch over $301 million, that compares with a 2006 fourth quarter of $307.9 million. When you express those earnings on a per share basis, we reported for the fourth quarter $0.68 per share as contrasted with the fourth quarter of last year, which was $0.69 per share.

Many of you recall that last year we had a very large tax benefit in the fourth quarter that we quantified at that time, as worth $0.08. So, when you normalize the tax for 2006, you get a $0.61 per share number as compared this year's number of $0.68. And so, that represents an 11.5% increase in earnings per share.

Now I think it's safe to say that, we are pleased with our quarter. It represents really the tenth consecutive quarter of double-digit EPS growth. If you want to try to duplicate that calculation, it requires making those same kinds of adjustments in EPS to reflect kind of the normalized tax rate.

The $0.68 per share includes a handful of negative events that totaled about $0.04 a share and its worth of highlighting a couple of those. The largest of those was $0.02 a share of impact relative to last year. As you know, we accrue for LIFO on a quarterly basis, trying to estimate each year, what the LIFO charge would be, and in 14 of the last 15 years, we either been close or we have been on the high side, and then we reversed some of that in the fourth quarter. This is the first year in 15 years that we ended up being short of our LIFO accrual.

And so, we had to add $6 million to our LIFO accrual, which is almost a penny a share as contrasted with last year, where we were about $7 million high. So, that swing right there in LIFO, regarding relative to the fourth quarter represented about $0.02 a share. I think as we approach the end of the quarter, we felt increasingly that the LIFO charge would be fully used, but we were bit of surprised that we actually had to add to that.

Second negative event is actually a positive event, but it had a negative effect in '07. There is a change going forward in the Canadian tax rate that actually lowers our taxes going forward, so we had to make adjustments to an asset called deferred taxes that cost us $0.01 a share in the quarter.

And then the last one worthy of mention, is the tax effect that impacted us in Casa Ley, which was another penny a share. So, given the fact that we had $0.04 of things, it will basically be a non-operating type of event and we still produce a strong quarter of $0.68, we are quite pleased with that result.

Turning to some of the details, if you look at sales, total sales increased 6.8%, comparable store sales, which was always reported increased 4.5% with fuel and 2.8%, when you exclude the effect of fuel. ID sales, which is probably our favorite measure of sales performance it's a more conservative measure in comparable, increased 4.4%, when fuel was included and increased 2.7% when fuel was excluded. Now this 2.7% is on top of the 3.5% from last year yielding what we think is a very respectable two year ID of 6.2%. This actually marks the sixth consecutive quarter, where our two-year stack was north of 6%.

Our fourth quarter IDs, much like the third quarter, were negatively impacted by what has been an unprecedented trend of drugs being switched from really branded, to generic, thus the branded drugs come off patent. That occurred in the third quarter I think we quantify that was about 40 basis points, but that really accelerated a bit in the fourth quarter.

The fourth quarter impact was a full 50 basis points, when compared to '06. And if you follow the drug store chains that have also been reporting, they have been reporting very similar numbers. This was suggests that the non-RX, non-fuel business remained strong, despite lapping more than a 100 in market store closures in 2006. In fact, when you go through all of the math, and you look at the impact that RX trend to generic affected us in the second, third and fourth quarter.

And then, you recognize the effect of that extraordinary event that caused all those closures. You really find that the underlying business absent those two events has been very steady, and the performance would be about equal across the second, third, and fourth quarter.

Now keep in mind, that generic sales growth has a depressing effect on top line ID sales. It actually enhanced its profitability, because generic drugs are more profitable than branded drugs. And I know is that there is always a lot of focus on ID sales, and in general I think that's a very good thing, because it is the single best parameter as to the underlying health of the business. It just that we have a couple of things that are going on in the business that, where that's not entirely true. So, when you have Rx sales going generic, you have a decline in ID sales, while enhancing profitability.

You have a very similar effect with corporate brand, which has really stepped up not just for us, but for all supermarkets beginning in about November. So, corporate brand share is growing across the supermarket channel and that too is more profitable, but has a slightly dampening effect on ID sales. We also increased market share in the supermarket channel really for our 12th consecutive quarter now.

Turning to gross margin, our total gross margin declined by 44 basis points, of course that's reflecting a large impact of fuel, and kind of the price increases that have gone with that. When you exclude fuel sales, gross margin instead of declining actually improved about 6 basis points. But when you look beneath that, for us, this is a very good story. You recall we had a pretty aggressive target for shrink reduction. All of which, it looks in gross margin for the year that we had been running behind our $50 million target for the first three quarters, but we felt confident that we were very close to it by year end and we did.

So the fourth quarter gross margin reflects a very strong performance in terms of shrink reduction, which enhanced this gross margin. We also were able to effectively lower our advertising spend and then, of course we get the benefit from Blackhawk being a fourth quarter so the company, and that enhances our gross margin because of their revenue stream as well. That was offset by price investments, which we make on a continuous basis both from promotionally as well as on our basic pricing, and then of course the LIFO charge that I referred to earlier. So, when you add up all those pieces, again excluding fuel, you get a 6 basis point improvement in gross margin.

Turning to O&A expenses. O&A expenses declined 55 basis points from last year fourth quarter, again a large piece of that reflecting the impact of fuel. So, we like to look at it, in fact, our guidance is really done without fuel on the O&A expense line. And when you look at with excluding fuel, then you get to see the real improvement to the base business and we had a 19 basis point improvement in our O&A margin line.

This improvement was largely the result of two factors. The first being a higher gain on property disposals, and the second being a reduction in all of our employee expenses, including the workers' comp expense, which of course is a an employee like expense. This was offset in part by higher depreciation costs and some other kind of miscellaneous expenses.

Now, for those of you that were at the investor conference, in one of our sections there, we talked about the volatility of earnings, and we talked specifically about what happened with property gains and losses, and that whole process. Property gains can be quite volatile on a quarterly basis, but they are much more predictable on an annual basis. In fact, some of the benefits that we got here in the fourth quarter, we had actually anticipated in the third quarter.

But when we look at how property sales kind of contribute to our cash flow over the course of time here, I looked at the cash flow implications of property dispositions from 2002 to 2006 and we averaged $136 million. So it's an important piece of our business. And in 2007 that number was 140. So really nothing out of the ordinary and whether it becomes a gain or a loss is a function of book value, where there has been some impairment along the way. So those are less predictable but in essence, the dispositions were at sort of normal course for the year.

Turning to interest expense. Interest expense declined slightly just under a $1 million, really due to a lower level of debt, coupled with a modest increase in interest rate. Our average borrowings declined a $109 million on the quarter and interest rate nudged out 7 basis points from $6.45 to $6.52.

Looking at capital expenditures, we completed 14 new stores in the quarter, in 95 Lifestyle remodels consistent with past years, Our new store program tends to the fourth quarter, as the fourth quarter is always much stronger than the other quarters. So for the year, we completed 20 new stores, which has been pretty normal for us in the last couple of years, some 253 Lifestyle remodels. And as a result, by yearend '07, we had 59% of our store based or 1,024 stores in the Lifestyle format. Obviously, we continue to add to that to the first seven weeks to this year.

We invested $532 million during the quarter and finished the full year with $1.770 billion worth of capital spend, which is a bit higher than we had originally expected maybe by about $70 million. At the same time, it's hard to do it with absolute decision, and you always have the timing differences, but we're not at all concerning that we were $70 million higher there.

In terms of full year results, just to comment on those quickly. Reported net income for the year was a nudge over $888 million, or $1.99 per diluted shares. That represents an increase of 15.7% from last year's adjusted number. You recall last year on a reported basis, we actually reported $1.94 but that had a full $0.22 worth of tax benefit in it. And so the way we, and I think the Finance community, looked at last year's number, was on a normalize basis that was $1.72 and that's the basis of the almost 16% increase in earnings per share.

Total sales increase 5.2% bringing it to $42.3 billion. Our non-fuel related IDs increased 3.4%, again, yielding a two-year stack, which we think is a very respectable number at 6.7%. Our annual gross margin adjusted for fuel sales improved 12 basis points which is just below the low end of our annual guidance. On the O&A expenses after adjusting for fuel sales, we improved 13 basis points, which is near the upper end of our guidance. And again, it's hard sort of parcel both of these out. So our guidance for '08, if you recall, we really combined the numbers, and talked about an operating margin. That's a much more predictable number then trying to predict the two pieces.

In terms of free cash flow, again, excluding Blackhawk was at the low end of our range of some $420 million. Now, part of the explanation for that, is the additional capital that we spent. And that's why we wanted it kind of the middle in the range. And also with the inflation that we experienced in 2007, which is clearly the most inflation we've experienced in my 15 years here, also, added to inventory investment. But $420 million, given those two events we think is a good number for us.

During 2007, we purchased 6.7 million shares of stock, for a total cost including commissions of $226.1 million. Now, this leaves us with a remaining authorization of some $521 million.

Before kind of summarizing, and maybe talking a little bit about the economy, I want to just give you real quick update on Blackhawk. Blackhawk sales were somewhat below our expectations. Meaning our expectations, reflecting we think some of the consumer uncertainty that was quite evident in all of the non-food retail sales, that we have all watch be reported, really for the last several months.

At the same time when we look at the profit expectations that we were intending to draw from the pure Blackhawk fees, what we call the stand-alone fees from the profit that Safeway gets from its Gift Card business together with the businesses that Blackhawk use to manage for us that is now shifted over to Safeway. That long standing number has been a $100 million pre-tax contribution and that number was achieved.

The shortfall in face value sales was not enough to cause us to adjust our earnings expectations for Blackhawk either in the year 2008, or and what I think we forecasted to be a kind of five year look. So, it doesn't cause us to change any of our expectations in '08 through 2012. This remains a very high growth business, and that face value sales still on the year increased 86% against 2006 just to put that in the context.

And the face value sales as we look at what really is the first seven weeks of '08, if I look at the number one product in that portfolio, which is gift card sales, that number gift card sales not open loop, not sport, not telecom is up north of 80%. So, I think what we saw in the fourth quarter was, we saw a bit of the same kind of consumer response that you saw in typical retail, not food retail. And I think that's transitionary, this still a very high growth business. And gift card sales we expect, will continue to run strong as well some of the other products in the portfolio.

By way of summary, we would say that we had a good quarter and we think we had a very good year. ID sales were above our original forecast; obvious slightly behind maybe the last year annual guidance we gave. Our improvement in operating margin was consistent with our guidance, our EPS of $1.99 per share was at the top end of our range and we think we are well positioned to produce strong results again in 2008.

Because I know there will be a lot of question on the economy particularly, since we are really the first conventional supermarket the kind of report. I thought that you would be interested in our view is to what we think is happening, I would tell you that regardless of what label you put in. I think that there we are clearly observing a cautious consumer and I think some of that cautions stems from the fact that they are a little bit concerned about the economy at least forecasting some kind of recession and then we have unusual situation, here where you will add to that uncertainty, the uncertainty of more inflation than consumers have experienced in some time.

We see some evidence of trading down, and as we look at the first seven weeks of the quarter, we see a very modest softening in our ID sales. You see the trading down, in items that you might consider really discretionary, like the ultra-premium wine category, and then as I commented earlier you see it in the growth of corporate brands not just for us, but for the industry in general.

However, we see no reason to alter our earnings guidance for 2008. I think we commented at our investor conference that given, where we are with the Lifestyle program, essentially today sitting here visiting 60% complete. We began in October, early November, which was after we put our 2008 plan to rest. We began a very concerted efforts to sort of return to some of our core strength, which has been cost reduction over the years. And so have put in place of very aggressive cost reduction efforts for 2008.

This effort is expected to provide additional pricing flexibility for us throughout 2008 and enable us to achieve our earnings target even in the event that the demand was softened further. At the same time, we believe that Safeway and other food retailers will continue to demonstrate, that the year developed that were essentially a very resilient form of retailer. It would be my view that as some of the bigger public company's effort you will see that while we our channels are little bit in the inflation front. I think you will see a real contrast to other forms of retail, and you will see a real contrast to other businesses in general.

Let me just talk a bit about guidance. As I indicated, we would offer no change in our annual guidance. Our earnings per share is expected to be in the range of 225 to 235 per diluted share. We have taken a look at the consensus estimates and as we look at the quarterly estimate, it appears that most, if not all of those that published estimates have correctly accounted for the Easter selling occurring in the first quarter, as opposed to the second quarter last year. So, there is that switch.

In fact the last selling day before Easter was the last day of the quarter, so it means that the following week in the first quarter of quarter two will be soft, and usual in that third week, it usually takes about three or four weeks to get the full effects of the Easter holiday. But I think people have in the main properly contemplated that. When we were at the investor conference, as we talked about some of the volatility in earnings. We talked about fuel and its effect.

For those of you that are curious, I would say the fourth quarter was a very normal full quarter for us. Maybe the margin was just a tad softer than the previous year, but not anything that would be worthy of mention. But you should consider two events, as you think about your quarterly split on earnings per share. We have been negotiating a settlement in Alberta for some time now. We have completed those negotiations and we have a recommended settlement, which is in the process of being voted. Now we should all know on February 26th how that vote comes out, but if ratifies it contains a retroactive wage increase that goes all the way back to when the contract expired, which I believe with March of '07.

And so this wage increase, should the contract get ratified, will appear in Q1 and it will appear and cost approximately $0.02 per share. So, that could not have been anticipated by any of you in your estimate because until we get a settlement and a recommended settlement, not even we can predict what that number would be. But now I think there is a lot more certainty and then just watch the news see whether or not it gets ratified on the 26th and most of the voting is completed by now by the way. It is just a few other localities to do the vote.

The secondly, as I indicated we have an aggressive cost reduction effort underway and it has many components. But there is a component of that cost reduction, which will result in a first quarter charge, which should be in the range of $0.01 per share. And then the benefits of course, will flow from that, and balance of the cost reduction effort will occur in quarter's two through four and beyond.

So, as we look at the consensus estimates, we are clearly comfortable with the consensus. But you would all be more accurate if you consider these two events and frankly move three cents from your first quarter estimate into later part of the year and probably the fourth quarter good place if any.

So, when you look at our guidance, our guidance for the year puts us in a range of a 13% to 18% increase in earnings per share. To put that in the context I would remind everyone that when you do the appropriate math on tax rates and everything, in '05, we had 22% increase in earnings; in '06, we had a 23% increase; in '07, we had a 15%, in virtually all of those years we met or beat our guidance on the year and in virtually all of those years we beat the top end of our long-term guidance.

And so once again, we feel comfortable with the '08 numbers and our comfort is added to because of the efforts that we frankly started in October. So we think that we're ready for any and all conditions and feel that we have opportunities to add to our sales growth as we move through 2008.

I think with that, we'll open it up for questions.

Melissa Plaisance

Wendy

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from John Heinbockel. You may ask your question and please state your company name.

John Heinbockel - Goldman Sachs

Goldman Sachs. So Steve, a couple of things, if you look at inflation as a whole right now, would you say that its still basically a neutral to the bottom line, or because of the impact on the consumer has it become a negative? Do you think it will become a negative as we move through '08 if it stays elevated?

Steven Burd

No. John, I would describe it as a challenging neutral, and the kind of inflation that we're experiencing in the first quarter is roughly equal to what we experienced in the fourth quarter. And as you know, our practice is to pass along those increases, which some you can do immediately and some you get done with a little bit of lag, some you protect your gross margins rate, others you protect only your pennies of profit.

And so, I think that given the fact that those have dampening effect on consumers, I think that it becomes challenging because you got competitive elements to worry about fuel. But I used to say for 14 years, as long as inflation is within in a range of 1%, it was a non-event. The number is clearly north of that, so I wouldn't call it a non-event, but I don't think we win and I don't think we lose. And I think it's a much more challenging thing to manage.

So I get that fine conventional wisdom, because there was always this feeling that it helps. It does create some opportunities along the way, which we will make efforts to capitalize on, but I think you should view it as kind of neutral events.

John Heinbockel - Goldman Sachs

Okay. Then if you look at variability between the high-end and the low-end of your range for '08, what's likely to be the one factor or two that takes it's from a high-end to the low-end? Is it inflation impact on IDs, is it a Blackhawk growing at 80 or different than 80? What's key variability there?

Steven Burd

Yeah. I think that what would take us to the top end of the range could be a combination of the benefits of our aggressive cost reduction, coupled with what we do with that to drive top line sales. So, I think it's going to be -- those two are kind of linked together. But I think that it's too early in the year to predict where in the range it will be, but our track record has been pretty good.

John Heinbockel - Goldman Sachs

And then finally, what's the update on the rollout of your prepared entrees and the new store format?

Steven Burd

In terms of the new entrees, we are in test mode with the entrees. We actually have them in 10 stores. We have proved in our consumer panel alert that consumers liked the product. In the 10 store test, which I think now has been running through more than four weeks now, maybe almost five weeks, we have proven that consumers will buy the product. In fact, we have beaten our internal estimates by a country mile in terms of the acceptance as consumers. And the next step is to prove out the business models that we can not just drive our top line sales with it, but we can do it profitably.

And so the supply chain is something we're working our way through right now. Some of that product has been sourced on the East Coast, and we're moving that sourcing to the West Coast. And that will lower our costs and it will expand our shelf life and improve the shrink. And then, of course, we discovered some items that don't work that well. So we're rationalizing the SKU line.

But I think that we remain very optimistic that this will work well. And just to give you a flavor, I mean it's real early at 10 stores, but we are beating our sales expectations roughly by a factor of three. And so, again, I would expect that demand would only grow, because there is not much of a marketing effort here. In fact, no consumer in this market could even tell which 10 stores they've been in. They could guess a few of them, but they couldn't tell you all 10. So we're please about that.

In terms of their format, I don't really have an update on that. I think that we will provide an update as we move further along. It is an experiment. Traditionally, we like to kind of keep the experiments a little bit close to the vest until we prove them out, just as when we built a three. I mean the word got out and everybody wondered what we were doing there. And it has been a real benefit to the meals program, as we've able to really develop those items post a three and watch that consumer acceptance. And so, I think nothing new of the concept, but we will have something out of the ground in the first half of the year.

John Heinbockel - Goldman Sachs

Okay. Thanks.

Operator

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

Scott Mushkin - Banc of America

Yeah, It’s Banc of America. Just to poke at this comp subject a little bit more, if I could. I think you commented that it will slow down a little bit more as we moved into the first half of the year. You guys seem to be seeing a little more of that than other people have reported, and I guess, well, time will tell here. But generally speaking, our view is that you guys have a phenomenal mouse trap that you put together with these Lifestyle stores and they continue and have gotten better.

Your comps seem to be a weakness, as we look at it. So I wonder, explore your thoughts on how to get that comp moving beyond just being kind of up and down with the tide of the economy, and what's maybe some of the proactive things you're doing, particularly in the center of the store, to maybe move that number up, maybe above the expectations as we move forward.

Steven Burd

Yeah. I think if you look at the -- lets take the comp apart just a little bit. Everybody, including us, would prefer that the number start with a three. If in fact we didn't have this move to generic, which you know is good for us, that number would start with three. That number would be a 32. And everybody saw the effects in the drug store chain business. Now, how it affects the retailer is a function of how much a drug store [complement] you really have. So I think it will affect different super markets differently.

In terms of what we're doing to drive the top line, the meals program that we just talked about is fully rolled out, it would have a material effect on top line sales growth. The cost reduction that we're engaged in is designed to invest some of that back end of the business to grow sales, not just in the perimeter but in the center of the store. So we know what we have to do to drive that number, and we think we're doing all of the preparatory work we need to in order to accomplish that.

And I think that the message that I'm trying to deliver on this call is that, regardless of 2008, bring there and we can sort of forecast with that might be. There is nothing to sort of shake our confidence and being able to deliver our guidance, and I'd just ask people to look at our track record historically here. And we think that we will be able to drive help you're IDs, but keep in mind if we start to really emphasize corporate brand that will by itself have a dampening effect on IDs.

But again like pharmaceutical generic items, it will have a promising effect on earnings. And so I don't want anybody to think that we for a moment think that IDs are not one of the single best parameters of the business, but in this environment you have to consider the other elements of this thing and we believe that we got a strategy with -- a few changes here and there. We will deliver good top line growth and probably best in industry earnings growth and at the end of the day, we think you have to do both.

Scott Mushkin - Banc of America

Okay. Maybe just follow-up quickly on that, I guess one of the things is curious to me, is that you put your box, or specifically, the current rendition of Lifestyle, next to lot of your competitiveness want him particular I would think of and it's hard to imagine you just couldn't take a lot share out of them. And the IDs will point to that necessarily. I guess, just as a comment?

Steven Burd

I think that keep in mind if you, whoever I mentioned on this call, we had a 12 consecutive quarter taking shares of the supermarket channel. So, your basic assumption that we can take share with the vehicle is correct. And not everybody is in the supermarket channel, and many of those they don't report publicly do not have robust ID sales and so what we look for is generating a strong ID, which we would regard to be in that 3% to 4% range, coupled with market share gains, coupled with good earnings performance and we think that we are doing the right things to accomplish that.

Scott Mushkin - Banc of America

Do you think your geographic focus is here, I mean being more medium, more exposed to some of these markets that are having issues from an economy, but also real estate is hurting you guys disproportionately?

Steven Burd

No, you have a little bit of -- some areas of the country are a bit more affected than others. I think a lot has been written about Southern California in the sub-prime market, so that probably has a bit of an effect there. But as we look at our business, we operate in 10 distinct geographies. We just got the fourth consecutive quarter in which all ten geographies had positive IDs. I'm not sure that we ever had that in early 90s, when we were generating 50% of our [rate] increases, if we always have something going in somewhere.

In addition to that, if I look at the fourth quarter, we had four of those that did better than they did in the third quarter. We had one that did the same, and we had five that did just a little worse. And then when I look here at the first quarter, guess what, it looks pretty much the same. We've got four that are doing better, we've got one that's basically the same, and we've got five that are doing a little worse. And it's not the same five that were in the fourth quarter.

So, one should not assume that the water glass is sort of moving up and down at the same rate in virtually every geography. Part of that is what's happening economically in those different geographic areas. Part of it is what's happening competitively in those different geographies, in combination with our response to that competition. And so, it's pretty much a moving target. But again, we feel very comfortable with our performance and what we expect will be our performance for the balance of '08, and think we have a number of things working for us, it will be added by the sales, and frankly added in the earnings.

Scott Mushkin - Banc of America

Great, thanks, helpful stuff there.

Operator

Thank you. Our next question is from Neil Currie. You may ask your question and please state your company name.

Neil Currie - UBS

Thank you, UBS. I just wonder if you could just, to say the sales question in a different way, could you say that in the fourth quarter, and currently as well, that if you take out inflation, that your volumes or the cash volumes are positive? And also, could you comment on traffic versus average ticket, particularly taking into account if there has been some trading down, what that might have done to average ticket?

Steven Burd

Yeah, here also I'd say, if you look at the quarter, both traffic count and average ticket were up and we've seen that for a while. I think that part of that average ticket going up is the consolidation of trip, I think again, given the fact that we're a conveniently located vehicle, I think that also helps on the transaction front. People will occasionally ask while -- if you didn't have some inflation, would you have positive IDs.

My answer to that is, yes and I think they would be at about the same level. So, that everyone thinks that inflation is such a good thing -- just think about your own personal reaction, when the prices some goods goes up and we are looking at flour with 60% increases, alright. Think about something that you might buy everyday. If it had 60% increase, even at your income levels, you might just react a little bit to that. And so we see it as very interesting, if anybody on this call has ever worked [Kroger's] you would understand it intuitively, if Kroger's, while it’s not in areas that have necessarily a lot of inflation, it's an area with constant surprises and we have freeze and crops don't come in and rain hurt cherries.

So we are constantly on the move and have dramatic price increases as much as 100% and that affects the demand and but it's usually quite temporarily in Kroger. And so Kroger is a microcosm of what can happen in an economy. It’s actually an exaggerated microcosm, but we use our Kroger experience to actually manage the kind of inflation and demand dampening effect, that we now might experience on a smaller sale across the balance of the store. So, I'd much rather have no inflation and I'm confident ID's would be strong.

Neil Currie - UBS

Would you say that the divergence of the performances in the Lifestyle store and the non-Lifestyle store is pretty similar to what you've seen in the past two or three quarters?

Steven Burd

Yes, it is.

Neil Currie - UBS

And how about the older Lifestyle stores, are they still producing numbers you are pleased with.

Steven Burd

It still performing as described in past conference calls and at the investor conference.

Neil Currie - UBS

Okay. Thank you.

Operator

Thank you. Your next question is from Jason Whitmer. You may ask your question and please state your company name.

Jason Whitmer - Cleveland Research

Hi, Cleveland Research. Steve, can you talk a little about the trend between core grocery margin, and even maybe the movement within Blackhawk? It obviously has a significant contribution in the fourth quarter, but it seems like the grocery piece of it came a little below your expectations. I don't know if that's food inflation base or if it's pricing driven, maybe where that might be in 2008? Is there any tax reasons give us on that?

Steven Burd

Well, I think if you referring to the tax that gross margins went up only by six basis points, which would be heavily affected by -- it goes on in the core business year. That was a combination of a lot of things happening that would have enhanced gross margin like the shrink reduction and lower advertising expense, but we've made some significant investments, which I think that most people on this call have been saying for a long time. Gotcha we'd save, where we would make more investment supplies and so we have. Because we think that's a good thing for us.

And so that will continue to be part of what we do. So, I think that explains it now. Could we have produced a more powerful for the quarter -- earnings, without having done that, the answer is yes, but we've got long term objectives here, and so we invest where we think it’s appropriate.

Jason Whitmer - Cleveland Research

It somewhat sounds like there has been a bit of strategic shift within core grocery business, especially as you roll in the 2008. It relates to pricing overall and maybe even people. Is that fair to say that there has been a shift in focus?

Steven Burd

I wouldn't call it a shift in focus. I think if you look at our 15-year track record, no one matches us in our ability to control costs and reduce costs. I think it's fair to say that the Lifestyle program, which provides that major point of difference between us and our competition, in combination with the items that we carry in our stores, that has taken a tremendous amount of effort on the part of the entire organization.

And so, while we've made progress each and every year on our O&A expenses, we thought that 2008 would give us the opportunity, given where we are in the Lifestyle program, to really put that in a high gear and to flex some of our past muscles. We're good at this. And now that I see what could happen with the economy, our timing couldn't be more perfect. But this is something that we've put in the works in November of last year.

Jason Whitmer - Cleveland Research

So if that's being reinvested back into the business, are there any deliberate reinvestments from Blackhawk earnings spec in your grocery business?

Steven Burd

Blackhawk is really a stand-alone effort. And the other thing is that you shouldn't assume that all alone it's cost reduction necessarily get invested back in the business. You should assume that it's really a combination.

Jason Whitmer - Cleveland Research

Okay. Then last question, it looks like Lifestyle slowed down a bit in the fourth quarter, was that also a function of all of this cost reduction effort or is that just a timing thing?

Steven Burd

No, we don't believe that Lifestyle slowed down in the fourth quarter.

Jason Whitmer - Cleveland Research

Okay.

Steven Burd

Are you talking about remodels or something?

Jason Whitmer - Cleveland Research

Yeah. I mean the pace. Overall, it seem like it slowdown a bit.

Robert Edwards

Jason, it was right on our projections.

Jason Whitmer - Cleveland Research

Okay. Great. Thank you

Operator

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

Bob Summers - Bear Stearns

Bear Stearns. Good morning. Cautious consumer, changes in behavior, we're starting to see some modest softening in the comp and I guess what I would be curious to know, as I think with your ID expectation for '08, there has to be embedded in that some view of the consumer. So if you could share that, just in terms of how you see the consumer evolving over the year, can you can hit your guidance, if we see deterioration from here or, just sort of maybe lay that out for us?

Steven Burd

I think Bob as we look now, I mean, I don't want anyway so to blow my comments out of proportion here. We see very modest impact on the ID sales in the first seven weeks of the quarter. We see nothing that gets in a way of producing the earnings. I mean, if you look at the economy in general, we have a lot -- particularly retailers basically adjusting their numbers, reporting negative IDs, reductions in earnings per share. I said probably three months ago, that I think the worst thing that happens to a good supermarket operator during a recession is earnings growth slows, it never turn negative.

What I am saying on this call is that we don't expect any slowing in our ability to generate earnings in 2008. And I think that part of my confidence is bolstered by what we started doing in November of 2007, we don't know where the economy is going but we think it doesn't really make much difference. And so, as investors are looking to put their money somewhere, and they are looking for a reliable, predictable earnings growth, we think they ought to be looking at the supermarket sector because they should do well.

Bob Summers - Bear Stearns

Okay. And then on Blackhawk, in terms of the shortfall in face value, could you get little granular in that, was it the comp store side or was it new ad's? How did that really shake itself out?

Steven Burd

I think that we pointed out at the Investors Conference that when 46% of your business accrues in the last eight weeks, I mean it’s pretty hard to predict this stuff. And I think we got caught in the general retail downdraft, we pulled a little bit more uncertain, and so I think that affected our numbers. What I'm encouraged by is that, as I look at just the gift card component, which reflects all of those retailers, we're up north of 80% in the first seven weeks of the year.

In addition to that, we're constantly experimenting with different merchandising techniques and so we've piloted something in the fourth quarter, which then we have scaled up to attempt store test and it’s only in Safeway, but obviously it’s available to all of Blackhawk distribution partners. And we have consistently added 15% to Blackhawk's business with its merchandising approach. And so we have one more change in terms of the fixture itself but that's in the most mature piece of the Blackhawk's business. And we had good growth before we passed that 15% to pilot stores. So, the thing I worry about the least in 2008 is frankly Blackhawk and its ability to perform in 2008.

Bob Summers - Bear Stearns

Okay. Are you guys had a point -- are you willing to what the profit expectations for Blackhawk are in '08?

Steven Burd

No. It's too early to do that, and I think that we built a very good business. And one of the ways we have been able to build the very good business is that we, as a private company there, we don't have to report all these things that we would have to report if we were public. And that just allows us to build this business -- build a much stronger business. So, we want to continue to do that.

Bob Summers - Bear Stearns

Okay. Thank you.

Operator

Thank you. Our next question is from Chuck Cerankosky. You may ask you question. Please state your company name?

Chuck Cerankosky - FTN Midwest

FTN Midwest. Good morning everyone. And looking at one thing, I guess this question’s for Robert, you talked about some gains in the fourth quarter real estate gains. If we look at the cash flow statement and it's $42 million gain on property retirement in the full year cash flow and compared to about $19 million in the months. Is that the dealt in the fourth quarter Robert?

Robert Edwards

Well, it's partly fourth quarter, Chuck, and partly all year. I mean we had a very good year on the property disposition side. But as Steve mentioned in his comments, I mean this really is a core -- the real estate function, I think there are companies at core competency. And if you look at the cash flow it has been generated as Steve commented over the last five years. 2007 was right our five year average.

And as we talked in the past, we actually developed centers, we built shops around the stores and we'll lease those up and we monetize those and so that activity is continued. So I really think we differentiate ourselves by our real estate activity. And so some of the transactions that happened in the fourth quarter, we had actually anticipated happening earlier in the year. And then those got pushed into the fourth quarter.

So, essentially our real estate activities were on plan and really consistent with what we've done, say, over the last five years. And when we expect to continue to generate value by real estate development and then subsequent transactions in future years, I mean some of the cash that we spend on capital spending is to develop these four properties, development of those and then at the right time, we monetize those. And those are the gains that you're seeing in the P&L. So, it's a very good activity and one that I think shareholders appreciate.

Chuck Cerankosky - FTN Midwest

I understand that. No, I am just trying to isolate what the impact might be in a single quarter, versus the year ago quarter and then just making a substraction it looks like it's roughly $20 million versus $3 million or $4 million a year ago.

Robert Edwards

I mean it's in that range in the quarter. But again, as we indicated at the investor conference, the gains real estate transactions within a given year can vary from quarter-to-quarter by $0.02 to $0.03 a share. And one of the reasons that we show that chart at the Investor Conference was to demonstrate this principle that from quarter-to-quarter, EPS can swing $0.02 to $0.03 a share and you saw that, say, in the fourth quarter.

Chuck Cerankosky - FTN Midwest

Got you. And the main thing is that $140 million in cash that you get out of them.

Robert Edwards

It's a very positive thing. And again, we do very well at this and we expect to continue to that going forward.

Chuck Cerankosky - FTN Midwest

Steve, can you talk about fuel as an element of your promotional efforts. Kind of update us on your thinking there? What's new, and has it become more significant or not?

Steven Burd

There is not a whole of lot new there. We provide a discount for all card members, and then in many of our markets there would be an additional discount for loyalty store. We account for the fuel discount differently than some of our competitors. We account for-- the fuel discount goes on the fuel P&L, where some other people take the fuel discount and apply it to the non-fuel business. And that has the effect of looking like they’re lowering their gross margin maybe, where ours is staying over in the fuel side. So, when we talk about gross margin ex-fuel, that markdown is over on the fuel side. It’s just something to keep in mind when you try to do company by company comparison, and if you're not clear on who accounts for where, I think you have to ask them.

Chuck Cerankosky - FTN Midwest

Got you. So, not a lot new in fuel, it continues to be something consumers respond to, however?

Steven Burd

They do, it's a sensitive item and we have, I think, probably over of 340 -- 360 fuel stations. And so, the return on the fuel stations has always been a combination of the margin that comes from fuel and the left that comes from the stores.

Chuck Cerankosky - FTN Midwest

Okay. And I'd like to throw on couple questions about Blackhawk. I think your original goal for last year was about $3.4 million in face values sales. Can you let us know what it was and how was the split between revenue from cards sold in Safeway stores versus third-party retailers?

Steven Burd

The 3.4 is a high number. We had a number at investor conference that -- we actually had one of the few slides where we used that little sign that does approximately, we had an approximately $3 billion face values number. And I don't want to give specifics on that, but it's the approximately $3 billion that we fell somewhat short of, although again, not to the point where it would causes if any great heart burn about the future and we think its serve the transition that I referred to.

And then the Safeway piece of business, I can't remember if we had a slide in the investor conference that laid that out. We did it historically, increasingly the business is much greater from others than it is from Safeway. So, Safeway is becoming a smaller and smaller piece and far less than half, so you can safely think that well more than half of the business comes from other distribution partners, and I think we had a slide a couple of years ago that number is going to reduce itself in the north to distant future to maybe 25% and then it will continue to go down particularly as we expand.

Chuck Cerankosky - FTN Midwest

Thank you

Operator

Thank you. Our next question is from Mark Wiltamuth, you may ask your question and please state your company name.

Mark Wiltamuth - Morgan Stanley

Hi, Mark Wiltamuth from Morgan Stanley. Is the Canadian dollar effect in the ID number, and if so how big is that if you could listen to that?

Robert Edwards

Mark, as we said in the past for ID's we exclude the impact of any currency changes.

Mark Wiltamuth - Morgan Stanley

Okay. And if you could let us know what the inflation number was in the quarter for cost inflation, and sounds like you're passing it through?

Steven Burd

The cost inflation we probably talked about it. I think, in every conference call we ever had. It is a very difficult thing to measure because the market basket is constantly changing. So, I think the best sort of indicator we can give you is what happened to LIFO layers, but keep in mind that's predominately center of store, and doesn't reflect, in the main, the inflation that [tackling] the parameter, which tends to be high return merchandise. So, that you can probably conclude from that, that whatever inflation was impacted in LIFO, probably real inflation would be a bit higher than that.

Mark Wiltamuth - Morgan Stanley

So, it's safe to say it's running in the 3% range?

Steven Burd

We haven't really tried to quantify it through for investors.

Mark Wiltamuth - Morgan Stanley

Okay. And then if you could give us a little update on how you are doing with the new organic programs selling outside of the Safeway store. If you have any updates on new sign ups there?

Steven Burd

We talked at the conference about where we were and those are always like labor negotiations. You are in a negotiation and you are trying to get all the [piece across] and I decided no update there, except we continue to make progress and obviously we are selling to the people that we've identified. But we think that it won't be too long and we will have some announcement we can make.

Mark Wiltamuth - Morgan Stanley

Okay. Thank you.

Operator

Thank you. Our next question is from Ed Kelly. You may ask your question and please state your company name.

Ed Kelly - Credit Suisse

Hi, Credit Suisse. I was just wondering what your outlook for inflation is for the rest of the year. I mean are you kind of assuming that current level is where it will be at? Is there the potential for us to see higher inflation in your mind? What level does that get more concerning to you, and then as we just think about the consumer, it's soft. I mean if the consumer slowdown gets more pronounced, those inflations at some point, get negative.

Steven Burd

Yeah, it it's really difficult to predict. I think that it's generally been my view that probably half the inflation that exists there is the result of the government energy policy to promote ethanol. And I'm sure you've read about this, I mean it’s not, I don't want to get into the politics here, but it's not a particularly well thought out energy policy. It takes more energy to produce a gallon of ethanol than ethanol produces. But of course I can tell, no one outside of me is willing to say that, and therefore it created an explosive demand for grains of all types, which has caused inflation across almost every product, and so as long as that policy exits you will see inflation in those basic elements.

Now, I also think that there is sort of a check on inflation and we had a kind of corporate brands representation that we have and a few other people are sort of blessed with strong corporate brands. You have a checkpoint on the consumer package food business because they very well know that, when they pass along cost increases, that it has a dampening effect. The difficulty here is that when inflation is in a low level, it's easy to find things that will absorb that. But when inflation gets to be high, then even though it might have dampening effect on sales for consumer packaged goods company, the earnings effects is not doing at often greater. And therefore you see at a period of higher inflation, there is more of that passing long. And so it really depends at what point the consumer has an overpowering reaction, but I think all of that favors a strong corporate brand program like we have, and gives us an opportunity to do well in spite of inflation.

Some of the things that I've been reading, and I can't really put a value judgment on them, but people are suggesting that we're going to have inflation not only in 2008, but that this inflation might be with us for a while. And it's kind of it's a crazy thing, because you've got relatively lower interest rates plus inflation.

So, you could conceivably have with consumers, it's not impossible to get a negative real interest rate. And I don't know what that will do to investors, maybe it'll cause them to buy equities, which I would favor that will be good. So, I think it's very hard to predict, but most of the prognosticators are saying inflation is going to be relatively well.

Ed Kelly - Credit Suisse

But are you concerned at all about your ability to pass it through in '08, if the consumer does so more meaningfully?

Steven Burd

No, I mean, I think that we believe that we'll be able to pass it along. I referred to it early on the call, as the challenging neutral and I'd still stick with that description. And I think that we have to do more things, w have to do different things because of inflation. We have to stay much closer to the inflation on a commodity-by-commodity basis. We've have to have senior executives that are very in touch with what's going on in the vendor community.

And so it's just that its a different allocation of your time to stand top of it, it's affects labor standards in stores in a non-inflationary world you just drive in off the sales model, now you have to adjust those sales for inflation, you had adjust them more often than you did in the past. And so it's challenging, but we don't see it as a problem that can't be managed.

Ed Kelly - Credit Suisse

And at your Investor Day you gave us your gross profit per gallon for fuel over last few years, could you share that for this past quarter?

Steven Burd

I don't have that at the front of me, but it was a pretty normal quarter, nothing worthy of mention. It was about a penny below last year but pretty normal quarter. We didn't benefit and we weren't really harmed by it. So the gyrations were pretty consistent with sort of the annual margin.

Ed Kelly - Credit Suisse

Okay, great. Thank you.

Operator

Thank you. Our next question is from Deborah Weinswig. You may ask your question and please state your company name.

Deborah Weinswig - Citigroup

Citigroup. Steve, in terms of a shrink reduction initiative at some place in '07, how did you I mean that was obviously very impressive in terms of being you all can meet your goal in the fourth quarter, but also can you talk about what initiative we might see in place for '08.

Steven Burd

You mean, in terms of shrink?

Deborah Weinswig - Citigroup

Correct.

Steven Burd

Well, its still a very large expense for us and I'm sure other retailers. And so we have a number of things, you'll be surprised how many $40 million buckets there are out there. I think that one of the things that we are quite focused on in '08, is to make sure that consumers don't leave the store inadvertently with items in the bottom of the basket, below the basket itself, that didn't get properly rung up.

And what we've learned in our efforts here is that, while the vast majority of that is inadvertent, there are people that actually do that intentionally. And so you just have to be diligent about what you do in the check stand to accomplish that. You actually have organized retail crime that pretty boldly just fills the carton and leaves the store. So we've got things in place to materially affect that.

And then you've just got, we typically look at all of our departments and the different elements of shrink and we know which items it is, and we know which store and we know which department, and one of the things that's helped us a lot is, we focus on the screamers, if you will. We break it down by quartile and we look at that. And we put extra efforts into it. We put teams around it, make sure that the best practices work.

And so, I think we said maybe a year ago, that we still thought of the money that we can harvest in shrink. There is probably $300 million of shrink reduction in our future. And so in the last two years we have reduced shrink a $156 million. In the last eight years, we have reduced shrink in excess of $400 million. And so, again, we have a $50 million target for ourselves this year. I expect to beat that target.

Deborah Weinswig - Citigroup

And what was there that specifically that you did in the fourth quarter. I think you had said in the first three quarters you are running behind your goal that you made it up in the fourth quarter. Was there anything specific that happened in the fourth, or was it the ones that are going to rally around the goal?

Steven Burd

I think that the fourth quarter probably benefited from some comparisons for last year. Even though we made great progress last year, the fourth quarter of last was not as good as the trend had been in the first three quarters. And so of that $116 million that we saved last year, not much of that was in the fourth quarter. So, again, we retained that $116 million, and then we added about $50 million to that this year.

Deborah Weinswig - Citigroup

Okay. And then the last time I remember you talking about turning down, was I think at your Investor Meeting back in 2001. Can you talk about what you are seeing now versus what you saw that time and how do [I get somewhere different]?

Steven Burd

2001 goes back a long away. I can't tell you about 2001, but I can tell about trading down today versus maybe some trading down in the past. I think that in the past, we're on the first place as you would see a trade from beef to chicken to check-in. Well, since they feed off the same grain and these grains have gone through the roof, we're not seeing that kind of a trade off, because they have both gone up by a large amount.

And so you look in other areas. I am sure we were seeing -- last time around, we would have seen acceleration in corporate brand. And I think last time around in 2001, we probably didn't have a large ultra premium over $20 on our wine business we do today. And so, that's a very easy thing for us to look at. So, you just kind of look around the store for items that you’re confident most consumers would regard as kind of premium, and I think you see it there first along with corporate brands.

But I think it's because of maybe some of the impacts of inflation, it looks differently. And I have heard other retailers, speak about the demand in certain formats they have picked and that's how they kind of look at it. But this is a little bit like medicine. There is a little science and a little art. And so you have to look at both the science and the art to see this stuff.

Deborah Weinswig - Citigroup

Okay. And then, last question. Recently you announced that you'd be in the strength through vaccination and your pharmacies. Should we expect more healthcare services in your in-store pharmacies going forward, and also any intention in terms of following some of your competitors with $4 generic?

Steven Burd

I think that you can expect us to continue to innovate in terms of the whole health and wellness agenda. You're probably familiar with the profile I have taken on that issue, the work that we are doing internally on cost reduction. And we want to make some of the cost reduction efforts that we have achieved here with our own population available to some of the consumers that we deal with on a weekly basis.

So I think that the vaccinations we do are -- that's a great service to the community and it saves their money. They don't have to pay for a doctor's visit. So again, it provides value and provides a great service. So I think you will continue to see us innovate in that direction.

Deborah Weinswig - Citigroup

Great. Thanks so much, and best of luck in '08.

Steven Burd

Thanks.

Operator

Thank you, our next question is from Andrew Wolf. You may ask your question and please state your company name.

Andrew Wolf - BB&T Capital Markets

Thank you, BB&T Capital Markets. Couple follow-up on Blackhawk. Can you give us a percentage of revenue for the year; what percent was generated in the fourth quarter versus rest of year?

Steven Burd

I couldn't give you a precise number because I haven't looked at it. If the last eight weeks is around 46%. I think that, fourth quarter, it’s got to be close to 50, it's a 16 week quarter but I couldn't give you a precise number because I don't have it.

Andrew Wolf - BB&T Capital Markets

Okay. So its fair to say a 50 is a decent ballpark always to start for --

Steven Burd

Yeah. I think you are within 2% or 3% with a number like that.

Andrew Wolf - BB&T Capital Markets

Okay. And the gross profit dollars or that would be the same 50% but the SG&A would be spread out evenly. And I am trying to get to one thing is, is the operating profit contribution even more heavily skewed than the sales?

Steven Burd

Yes. It would be

Andrew Wolf - BB&T Capital Markets

Okay. And lastly, I think on the six bips of profit margin expansion, you guys included the Blackhawk in the explanation on your press release, if you use some basic math at least if I do, I want to run it by you and see if you've done this calculation; it looks like the gross profit margin if you x out Blackhawk contribution probably contracted pretty meaningfully, am I in the right direction according to your numbers?

Steven Burd

Say that again.

Andrew Wolf - BB&T Capital Markets

I'm trying to take out the Blackhawk contribution in sales and gross profit dollars, given what I've got to work with, and I'm assuming you have done this calculation. And given what I have got to work with, it looks like gross profit margin contracted for the business ex-Blackhawk somewhere around 30 bets or more is that something that is reasonably accurate?

Steven Burd

No, it's not.

Andrew Wolf - BB&T Capital markets

Okay. Thank you.

Operator

Thank you. Our next question is from [Redino Russell]. You may ask your question and please state your company name.

Redino Russell - JPMorgan

Hi, this is Redino Russell from JP Morgan. I had a couple of questions here. First back to the LIFO charge, you briefly mentioned that the food inflation that you are seeing was mostly on high current perishable merchandize, and so wasn't affecting the LIFO too much; is that still the case or what is change there?

Steven Burd

Okay. I don't believe I've said that the inflation was mostly in the perishable area maybe that was in a previous quarter, but I was trying to clarify for everybody is that the LIFO charge for us is predominately in packaged goods.

Redino Russell - JPMorgan

Okay.

Steven Burd

Which we will represented in the standard of the store. We clearly currently had inflation in the parameter of the store and therefore inflation represents LIFO, would in fact understate the amount of inflation that we had overall.

Redino Russell - JPMorgan

Okay. And then kind of switching gears to Blackhawk in terms of the sales by category; it was previously mentioned at the analyst day that Gift card was about 65%, 67% of all of the sales. Is that still the case or did that change?

Steven Burd

Again I don't have the investor presentation in front of me. Gift card, as a piece of the product portfolio, is distinguished from what we call open loop and telecom, would be the biggest piece, okay? Okay. Somebody just gave me the investor presentation. So, we had Gift at 67%, which most of the number you wrote down. So, you are asking was it materially different?

Redino Russell - JPMorgan

Exactly?

Steven Burd

I'd say not materially.

Redino Russell - JPMorgan

Okay. Alright, and then in terms of O Organics, you touched on this a little bit, but I'm wondering, are we going to expect any formal announcements in terms of new distributors that you signed up or is it going to be more of a settled process with those progress of this monetization.

Robert Edwards

It's a big enough event that we will probably make a formal announcement as we take on major partners, at least here in North America.

Redino Russell - JPMorgan

Okay. And then one last thing some of your competitors have announced that conventional pricing versus organic pricing we have seen a narrowing of the gas. Have you all seen that or is that just something that's out there.

Steven Burd

I think it probably has been narrowing. I mean, it’s sort of paced by the organics players out there; in other words, we don't want our organic items to be any higher than the pure players out there on the organic side. And I think there is increasingly more organic price available, which helps on the cost side. So, those things could be narrowing.

Redino Russell - JPMorgan

All right and then just one last thing, in terms of your property gains, how have you built that into your 2008 guidance, is this the high gains? Is that something we should expect going forward or how's that built in?

Robert Edwards

We don't actually disclose line item detail, but it may be safe to say we have built some gains in for property because again, we do this every year. But we haven't given line items specific detail or something like that.

Redino Russell - JPMorgan

Okay. Thanks, guys.

Operator

Thank you. Our next question is from Karen Short. You may ask your question and please state your company name.

Karen Short - Friedman Billings

Hi, Friedman, Billings, thanks for taking my question. I just wanted to stay on Blackhawk for a second. Can you provide us with the Blackhawk contribution to your ID in the fourth quarter?

Steven Burd

We haven't done that. It's because of the way the income is input; it's not a big deal to IDs. So, I don't think you should worry that you're missing some major piece here.

Karen Short - Friedman Billings

Okay. And then, just turning to your non-remodel stores, I mean looking at where your comp is turning and obviously we know you're getting yourselves less from your remodel stores in your one and two and three. But from my math, it would appear that your non-model stores are counting negatively, excluding fuel, is that fair?

Steven Burd

No, the non-Lifestyle stores are positive.

Karen Short - Friedman Billings

Okay. And then could you provide us with an ending share count, actual ending as opposed to the weighted average? And then the next question is where your thoughts are on share buybacks throughout '08?

Robert Edwards

Let me answer the question while Melissa looks up the share. If you look at how we spend our free cash flow in 2007, I think it's a good guide to what you might expect in 2008, we spend our money on share buyback and we spend our money on a dividend and we had modest debt repayment. And the other thing I'd tell you is that you can expect us to take advantage if we see soft share prices. So, we can have a much stronger mix in '08 although we had a very strong mix return to shareholders in '07.

Karen Short - Friedman Billings

Okay. And then on the generics.

Steven Burd

That's your number.

Karen Short - Friedman Billings

Right.

Steven Burd

It’s 440.1.

Karen Short - Friedman Billings

Okay. And then on the generics; so the negative impact on the ID, we lapped that in the third quarter, then we also lapped the benefit on the gross margin, is that right?

Steven Burd

Repeat the question.

Karen Short - Friedman Billings

On the generic impact; on your IDs and on your gross margin, if the negative impact on the ID started in the third quarter of this year of '07.

Steven Burd

No, it started in the first quarter, but it basically grew. So, it was 0.2 in the first quarter followed by 0.3. We might not have talked about until the third quarter, which was 0.4 and then it was 0.5 in the fourth quarter and so you think we would be lapping, but the trend continued and we probably continue at a healthy pace. I believe Lipitor becomes generic in 2010, which was the blockbuster drug of all time.

So the first quarter of this year will also have a generic drug effect. And I don't know if we got a real beat on that, but it will be even though it lapsed at 20 from a year ago. It's going to be north of 20 again. And I have a number in my mind, but I'm not certain it is correct, I don't want to give it you, but the pace of acceleration to generic is discontinued.

Karen Short - Friedman Billings

Okay, great. Thanks.

Operator

Thank you. Our next question is from Meredith Adler. You may ask your question and please state your company name.

Meredith Adler - Lehman Brothers

This is Meredith from Lehman Brothers. Thanks for taking my question. It's been a long call. I'd like to follow-up on Karen's question about share buyback, you haven't done this in a while. Would you consider borrowing? You are certainly not overlevered to buy back shares. And do you think that's a good use of your cash.

Robert Edwards

I think my off the cuff toon that Meredith would be that we think that our free cash flow, in the range of $500 million to $700 million for '08 gives us, even at the low end of that number you would almost exhaust your authorization, where you should always get more authorization, but I think that my answer to that today would be we will use our free cash flow.

Meredith Adler - Lehman Brothers

Okay, great. And then maybe one relatively simple question in the guidance you’ve given us for the year 225 to 235. The specific items you called out for the first quarter related to Alberta (inaudible) the other one was, would that be included in that 225 to 235?

Steven Burd

Yes. So, we think, we contemplated that, but we didn't exactly know where the timing would be and it's one of the reasons why we talked about that at the Investor Conference, to kind of let you know that when you have a long-term contract like that and in Canada for some reason, it's not uncommon for those contracts to get settled well after the expiration, so you can get these earnings effects.

Our longest open contract was seven years. But that was actually a pretty flat number from seven years. But no, we contemplated that this would get settled at some point. There would be some retro activities, so it doesn't affect our range at all.

Meredith Adler - Lehman Brothers

And then a question about packaged goods inflation, first, there is at least one food retailer who feels like it can be a tailwind; customers aren't as sensitive to increases in packaged goods inflation. I was wondering if you see a difference, but also you don't have a huge amount of discount competition but where you do, do you feel like they are also being very rational about passing along higher prices?

Steven Burd

Yeah. I think the market is pretty rational about this. People might differ in the timings but I don't think they differ in what they do about it.

Meredith Adler - Lehman Brothers

And then my final question is just about your sales guidance. I have had some people question me already today about that it seems like you were being optimistic given the slowing economy and now, I thought maybe generics would go the other way. This coming year there will be fewer generics probably in '08, but you're still talking about that as being a drag. So I was wondering if there was anything else that you see happening or that's a change year-over-year that would let you keep that sales guidance. I understand the earnings part of it perfectly.

Steven Burd

Yeah. Okay. You're talking our sales guidance on the ID's excluding fuel is 3 to 3.2.

Meredith Adler - Lehman Brothers

Right and that hasn't changed. I'm just wondering.

Steven Burd

That hasn't changed. I think it's too early to think of about changing that. And we have some initiatives underway that add to our confidence, so we can grow sales between now and end of the year. I mentioned the meals program, again, I don't know where we'll be in the rollout days, but we're just meeting our own internal numbers. I think I said earlier by factor three, so that could be very additive to ID sales.

And then some of the cost reduction effort gets invested back into price, which should have a positive effect on sales. So I think it's too early in the game and we are seven weeks into it, and we don't really know what's going to happen in 2008. But we know enough that we're confidence on the earnings guidance and see no reason to change any other component at this point.

Meredith Adler - Lehman Brothers

Got it. That makes sense to me. Thank you very much.

Melissa Plaisance

And we have time for two more questions. And sorry for length of the call but I hope it's helpful.

Operator

Thank you. Our next question is from Mark Cohodes. You may ask your question and please state your company name.

Mark Cohodes - Copper River

Copper River. Thanks for taking my call. Steve, no one can accuse you of being a stock promoter, but your shares have executed quite well in a very, very, very difficult environment and it just kind of blows my mind, the kind of questions you are getting in this environment. Meredith brings up a really good point about the stock buyback with the cash flow, if you really look at the company now versus a couple of years ago; you have the base grocery business. You have Blackhawk and you're probably going to have something that could be stand-alone in O Organics. How do you look at the portfolios of your business, your base business, the cash flow and the things going forward with the stock here?

Steven Burd

Yeah. Well, I think that you are correct to think that this is some thing you constantly evaluate. My answer is a question about whether or not we would borrow money to buyback stock, I think it’s the right answer today but obviously the stock is down today. But typically, what we've learned in our earnings reports is that there is overreaction to the news initially and we don't know how the price would settle out. But we will watch the share price and if the share price is soft, we'll take advantage of it, as you would expect us to do.

Mark Cohodes - Copper River

Thanks.

Melissa Plaisance

And one last question.

Operator

Thank you. Our final question today is from Todd Duvick. You may ask your question and please state your company name.

Unidentified Analyst

Actually this is a Tom (inaudible) standing in for Todd Duvick from Banc of America Securities. I appreciate your comments on your free cash flow priorities towards the back end of this call. I was just wondering if you could provide a little bit of comment on the acquisition environment and your stands in that. You haven't mentioned that at all in free cash flow and I just wanted to make sure that you guys are comfortable doing your store remodels and not really looking into the acquisition market.

Steven Burd

Yeah. I would tell you that acquisition market has been relatively quiet over the last several years. We like the idea that it’s been quiet because it has allowed us to get something done that we thought was very important. I've always described a Lifestyle strategy as both a great defense and a great offense, and so, we're well down that path. We've got two years remaining.

I think I mentioned this in our Investor Conference, we continue to find ways to grow earnings and build businesses that require little capital. And as you know, the supermarket industry itself is relatively capital intensive. Although we will, at the end of the Lifestyle program, all other things beneath, but we will really spike not only our earnings but we'll spike our free cash flow. It's just a great position to be in. And the Blackhawk has not required any infusions of capital; since the beginning of time, it cost less than building a store to start that company.

The healthcare company we are forming has a very modest capital investment. And so, we've got other ideas for businesses that require very little capital size. So I think that when we get confronted with the great asset, we're going to have to trade off the merits of doing that against the merits of creating other businesses that require a lot less capital. And so, we'll do that when confronted with an opportunity that we think looks particularly good.

But I think the industry will, over time, continue to consolidate. So I think those opportunities will surface. But we feel somewhat blessed that we haven't been confronted with an asset that we just couldn't resist. And so, I think it is fair to say that if people have ideas, we listen to them. If assets become available, we're on the list of people. They come and shop those assets. So I don't think that our busyness has prevented us from looking at assets over the time. But I think it has been a pretty slow market for them.

Unidentified Analyst

Okay. Great. Thanks.

Melissa Plaisance

Okay. Thank you very much. And appreciate your time and attention on this call. Julie Hong and I will be available for the balance of the day to clarify any thoughts you might have. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Safeway Inc., Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts