Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

ECONOMIC OUTLOOK The current economic environment has made consumers more cautious. This has led to reduced consumer spending, to consumers trading down to a less expensive mix of products and to consumers trading down to discounters for grocery items, all of which have affected Safeway's sales growth. Additionally, in this uncertain economy, it is difficult to forecast whether we are entering a period of inflation or deflation. In 2008, Safeway experienced overall inflation. Early indications suggest that there is deflation in certain product categories in 2009, leading to lower inflation compared to 2008. Food deflation has reduced sales growth, while food inflation, combined with reduced consumer spending, could reduce gross profit margins.

However, in a slowing economy, some customers may trade down from dining out in restaurants to shopping more at grocery stores such as Safeway and from purchasing national brand products to purchasing less expensive Safeway private label brands.

Net income was $144.2 million ($0.34 per diluted share) for the first quarter of 2009 compared to net income of $193.4 million ($0.44 per diluted share) in the first quarter of 2008.

SALES Same-store sales for the first quarters of 2009 and 2008 were as follows:

                                                 12 Weeks Ended
                                 March 28, 2009                   March 22, 2008
                          Comparable-      Identical-        Comparable-   Identical-
                          Store Sales     Store Sales        Store Sales   Store Sales
                          (Decreases)     (Decreases)*        Increases    Increases*
   As reported                  (4.2% )          (4.3% )            4.7%          4.5%
   Excluding fuel sales         (0.7% )          (0.7% )**          3.1%          2.9%

* Excludes replacement stores.

** Estimated to be positive 0.2% after excluding the weeks affected by the shift in Easter holiday sales.

Total sales declined 7.6% to $9.2 billion in the first quarter of 2009 compared to $10.0 billion in the first quarter of 2008. This decline was the result of a $332.1 million decrease in fuel sales (which was due primarily to lower fuel prices), an unfavorable change in the Canadian exchange rate of $301.5 million (in U.S. Dollars), a shift in holiday sales and deflation in produce and dairy. After excluding the weeks affected by the shift in Easter holiday sales, customer counts increased and average transaction size decreased during the quarter.

The following table presents sales revenue by type of similar product (dollars in millions):

                                                     12 Weeks Ended
                                          March 28, 2009        March 22, 2008
         Non-perishables (1)             $ 4,331.4    46.9     $ 4,504.4    45.0
         Perishables (2)                   3,524.8    38.2       3,759.4    37.6
         Fuel                                504.5     5.4         836.6     8.4
         Pharmacy                            875.7     9.5         898.5     9.0

         Total sales and other revenue   $ 9,236.4   100.0 %   $ 9,998.9   100.0 %

(1) Consists primarily of general merchandise, grocery, meal ingredients, soft drinks and other beverages, snacks and frozen foods.

(2) Consists primarily of produce, dairy, meat, bakery, deli, floral and seafood.

GROSS PROFIT Gross profit represents the portion of sales revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs of Safeway's distribution network. Advertising and promotional expenses are also a component of cost of goods sold. Additionally, all vendor allowances are classified as an element of cost of goods sold.

Gross profit declined seven basis points to 28.72% of sales in the first quarter of 2009 compared to 28.79% of sales in the first quarter of 2008. The decline in fuel sales improved gross margin 79 basis points. The offsetting 86 basis-point decline was primarily the result of investments in everyday prices, as well as an elevated level of promotional spending. Investments in everyday prices will continue, while promotional spending is expected to return to normal levels.

Vendor allowances totaled $629.8 million for the first quarter of 2009 and $622.1 million for the first quarter of 2008. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances.

Promotional allowances make up nearly three-quarters of all allowances. With promotional allowances, vendors pay Safeway to promote their product. The promotion may be any combination of a temporary price reduction, a feature in print ads, a feature in a Safeway circular or a preferred location in the store. The promotions are typically one to two weeks long.

Slotting allowances are a small portion of total allowances (typically less than 5% of all allowances). With slotting allowances, the vendor reimburses Safeway for the cost of placing new product on the shelf. Safeway has no obligation or commitment to keep the product on the shelf for a minimum period.

Contract allowances make up the remainder of all allowances. Under the typical contract allowance, a vendor pays Safeway to keep product on the shelf for a minimum period of time or when volume thresholds are achieved.

OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense declined approximately $100 million to $2.4 billion in the first quarter of 2009 from $2.5 billion in the first quarter of 2008. However, due to lower sales in 2009, operating and administrative expense increased 90 basis points to 25.67% of sales in the first quarter of 2009 from 24.77% of sales in the first quarter of 2008. Lower fuel sales in the first quarter of 2009 increased operating and administrative expense by 74 basis points. The remaining 16 basis-point increase was primarily the result of decreased sales leverage (partially due to the shift in holiday sales), increased occupancy costs as a percentage of sales and increased pension expense, partly offset by reduced labor costs.

INTEREST EXPENSE Interest expense declined to $78.2 million in the first quarter of 2009 from $84.5 million in the first quarter of 2008 due to a combination of lower average borrowings and lower interest rates.

INCOME TAX EXPENSE Income tax expense was $60.3 million, or 29.5% of pre-tax income, in the first quarter of 2009. Income tax expense in the first quarter of 2008 was $123.6 million, or 39.0% of pre-tax income. The decline in the tax rate was due primarily to benefits of $16.1 million from the favorable resolution of tax matters.

Critical Accounting Policies

Critical accounting policies are those accounting policies that management believes are important to the portrayal of Safeway's financial condition and results and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company's 2008 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to workers' compensation, store closures, employee benefit plans, stock-based employee compensation, goodwill and income tax contingencies.

New Accounting Standards

In December 2008, the FASB issued FSP 132(R)-1 "Employers' Disclosure about Postretirement Benefit Plan Assets." FSP 132(R)-1 provides additional guidance on employers' disclosures about the plan assets of defined benefit pension or other postretirement plans. FSP 132(R)-1 requires disclosures about how investment allocation decisions are made, the fair value of each major category of plan assets, valuation techniques used to develop fair value measurements of plan assets, the impact of measurements on changes in plan assets when using significant unobservable inputs and significant concentrations of risk in the plan assets. These disclosures are required for fiscal years ending after December 15, 2009. Safeway is currently assessing the impact of FSP 132(R)-1 on its financial statements.

In April 2009, the FASB issued FSP 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments." This FSP amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," and requires disclosures about fair value of financial instruments for interim reporting periods as well as for annual financial statements. Additionally, this FSP amends APB Opinion No. 28, "Interim Financial Reporting," and requires those disclosures in summarized financial information at interim reporting periods. These disclosures are required for interim reporting periods ending after June 15, 2009. Safeway is currently assessing the impact of FSP 107-1 and APB 28-1 on its financial statements.

Liquidity and Financial Resources

Net cash flow used by operating activities was $151.0 million in the first quarter of 2009 compared to $41.2 million in the first quarter of 2008. This was primarily due to an increase in cash used by working capital which was the result of a shift in holiday shopping.

Net cash flow used by investing activities declined to $252.8 million in the first quarter of 2009 from $370.7 million in the first quarter of 2008 because of reduced capital expenditures.

Net cash flow provided by financing activities was $131.0 million in the first quarter of 2009 compared to $352.9 million in the first quarter of 2008. Borrowings were less in the first quarter of 2009 compared to the first quarter of 2008 due to reduced capital expenditures.

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway's commercial paper program and its Credit Agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments and stock repurchases and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway's business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the commercial paper program and Credit Agreement.

CREDIT AGREEMENT The Company has a $1,600.0 million credit agreement (as amended, the "Credit Agreement") with a syndicate of banks which has a termination date of June 1, 2012 and provides for two additional one-year extensions of the termination date. There are approximately 30 banks in the syndicate with individual commitments to lend ranging from approximately $20 million to approximately $115 million. The Credit Agreement provides (i) to Safeway a $1,350.0 million revolving credit facility (the "Domestic Facility"),
(ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, at the option of the lenders and subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA, as defined in the Credit Agreement, to interest expense ratio of 2.0 to 1 and is required to not exceed an Adjusted Debt (total consolidated debt less cash and cash

equivalents in excess of $75.0 million) to Adjusted EBITDA ratio of 3.5 to 1. As of March 28, 2009, the Company was in compliance with these covenant requirements. As of March 28, 2009, there were borrowings of $7.9 million, and letters of credit totaled $34.1 million under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,558.0 million as of March 28, 2009.

SHELF REGISTRATION On December 8, 2008, the Company filed a shelf registration statement (the "Shelf") with the SEC which enables Safeway to issue an unlimited amount of debt securities and/or common stock. The Shelf expires on December 8, 2011. The Safeway Board of Directors has authorized issuance of up to $2.0 billion of securities under the Shelf. As of March 28, 2009, $1.5 billion of securities were available for issuance under the board's authorization.

INCOME TAXES On April 29, 2009, the Company was notified by the Internal Revenue Service that it approved a settlement of a disputed income tax matter. The result will be a reduction in income tax expense by an estimated $50 million during the second quarter of 2009.

Additionally, the resolution of the other income tax matters reported in the first quarter combined with this second quarter event will result in tax refunds of approximately $160 million that the Company expects to collect in the second quarter of 2009.

DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $35.6 million and $30.4 million for the first quarters of 2009 and 2008, respectively. Note J to the Company's condensed consolidated financial statements in this report provides additional information on dividends declared and dividends paid on Safeway common stock.

STOCK REPURCHASE PROGRAM From the initiation of the Company's stock repurchase program in 1999 through the end of the first quarter of 2009, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $3.9 billion, leaving an authorized amount for repurchases of approximately $1.1 billion. This includes an increase in the total authorized level of the repurchase program by $1.0 billion to $5.0 billion approved by the Board of Directors in May 2008. During the first quarter of 2009, Safeway repurchased 3.5 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $64.5 million. The average price per share, excluding commissions, was $18.40. The Company will evaluate the timing and volume of future repurchases based on several factors, including market conditions, and may repurchase stock in the near- or long-term as circumstances warrant.

CREDIT RATINGSThe senior long-term and short-term debt ratings and outlooks currently assigned to unsecured Safeway public debt securities by the rating agencies are as follows:

                                          Senior
                                         Long-Term   Short-Term   Outlook
            Fitch Ratings                   BBB          F2       Stable
            Moody's Investors Services     Baa2         P-2       Stable
            Standard & Poor's               BBB         A-2       Stable

Investors should note that a credit rating is not a recommendation to buy, sell or hold securities and may be subject to withdrawal by the rating agency.

Capital Expenditure Program

Safeway invested $243.5 million in capital expenditures in the first quarter of 2009. The Company opened one new Lifestyle store, completed 10 Lifestyle remodels and closed three stores. Safeway has reduced planned capital expenditures in 2009 from $1.2 billion to approximately $1.0 billion and now plans to open approximately 10 new Lifestyle stores and complete approximately 100 Lifestyle remodels.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). Forward-looking statements contain information about our future operating or financial performance. Forward-looking statements are based on our current expectations and involve risks and uncertainties, which may be beyond our control, as well as assumptions. If assumptions prove to be incorrect or if known or unknown risks and uncertainties materialize into actual events or circumstances, actual results could differ materially from those included in or contemplated or implied by these statements. Forward-looking statements do not strictly relate to historic or current facts. Forward-looking statements are indicated by words or phrases such as "will," "may," "continuing," "ongoing," "expects," "estimates," "anticipates," "believes," "guidance" and similar words or phrases and the negative of such words or phrases.

This Quarterly Report on Form 10-Q includes forward-looking statements, including forward-looking statements relating to pension plan contributions; unrecognized tax benefits; income tax expense; income tax refunds; sufficiency of liquidity for the foreseeable future; price investments; promotional spending; capital expenditures; and Lifestyle stores. The following are among the principal factors that could cause actual results to differ materially from those included in or contemplated or implied by the forward-looking statements:

• General business and economic conditions in our operating regions, including the rate of inflation, consumer spending levels, currency valuations, population, employment and job growth in our markets;

• Pricing pressures and competitive factors, which could include pricing strategies, store openings, remodels or acquisitions by our competitors;

• Results of our programs to control or reduce costs, improve buying practices and control shrink;

• Results of our programs to increase sales;

• Results of our continuing efforts to expand corporate brands;

• Results of our programs to improve our perishables departments;

• Results of our promotional programs;

• Results of our capital program;

• Results of our efforts to improve working capital;

• Results of any ongoing litigation in which we are involved or any litigation in which we may become involved;

• The resolution of uncertain tax positions;

• The ability to achieve satisfactory operating results in all geographic areas where we operate;

• Changes in the financial performance of our equity investments;

• Labor costs, including benefit plan costs and severance payments, or labor disputes that may arise from time to time and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future;

• Failure to fully realize or delay in realizing growth prospects for new business ventures, including Blackhawk Network Holdings, Inc. ("Blackhawk");

• Legislative, regulatory, tax, accounting or judicial developments, including with respect to Blackhawk;

• The cost and stability of fuel, energy and other power sources;

• The impact of the cost of fuel on gross margin and identical-store sales;

• Discount rates used in actuarial calculations for pension obligations and self-insurance reserves;

• The rate of return on our pension assets;

• The availability and terms of financing, including interest rates and our ability to issue commercial paper or issue public debt or to borrow under our lines of credit as a result of current financial market conditions;

• Adverse developments with regard to food and drug safety and quality issues or concerns that may arise;

• Loss of a key member of senior management;

• Data security or other information technology issues that may arise;

• Unanticipated events or changes in real estate matters, including acquisitions, dispositions and impairments;

• Adverse weather conditions;

• Performance in new business ventures or other opportunities that we pursue, including Blackhawk; and

• The capital investment in and financial results from our Lifestyle stores.

We undertake no obligation to update forward-looking statements to reflect new information, events or developments after the date hereof. Please refer to our most recent Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q and subsequent Current Reports on Form 8-K for more information regarding these risks and uncertainties. These reports are not intended to be a discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.