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. In 2009, the Company has experienced deflation in certain product categories and expects this may continue in the fourth quarter of 2009. With continued deflation and investments in lower prices, the Company anticipates negative identical-store sales, excluding fuel, for the remainder of 2009.

Net income was $128.8 million ($0.31 per diluted share) for the third quarter of 2009 compared to net income of $199.7 million ($0.46 per diluted share) for the third quarter of 2008.

SALES AND OTHER REVENUE Same-store sales (decreases) increases for the third quarters of 2009 and 2008 were as follows:

                                                                      12 Weeks Ended
                                           September 12, 2009                                 September 6, 2008
                                Comparable-Store          Identical-Store          Comparable-Store         Identical-Store
                                     Sales                     Sales                    Sales                    Sales
                                   Decreases                Decreases*                Increases               Increases*
As reported                                 (6.3 )%                  (6.4 )%                    2.9 %                   2.8 %
Excluding fuel sales                        (3.0 )%                  (3.0 )%                    0.6 %                   0.5 %

* Excludes replacement stores.

Total sales declined 7.0% to $9.5 billion in the third quarter of 2009 compared to $10.2 billion in the third quarter of 2008. This decline was the result of a $365.5 million decrease in fuel sales (which was due primarily to lower fuel prices), a 3.0% decline in identical-store sales for the quarter, excluding fuel (driven largely by deflation in certain product categories), and an unfavorable change in the Canadian exchange rate of $96.6 million. The number of transactions increased, and average transaction size decreased during the quarter.

At the end of the third quarter of 2009, Safeway had 1,345 Lifestyle stores compared to 1,151 at the end of the third quarter of 2008.

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

                                                     12 Weeks Ended
                                      September 12, 2009         September 6, 2008
     Non-perishables (1)             $      4,347.6     46 %    $      4,449.3    44 %
     Perishables (2)                        3,525.9     37 %           3,784.4    37 %
     Fuel                                     712.4      8 %           1,077.9    11 %
     Pharmacy                                 872.4      9 %             857.7     8 %

Total sales and other revenue $ 9,458.3 100 % $ 10,169.3 100 %

(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 increased 78 basis points to 28.27% of sales in the third quarter of 2009 compared to 27.49% of sales in the third quarter of 2008. The impact from fuel sales increased gross profit 84 basis points. The offsetting six basis-point decline was largely the result of investments in everyday price and increased advertising, partly offset by lower LIFO expense and lower energy expense.

Vendor allowances totaled $588.8 million for the third quarter of 2009 and $566.4 million for the third quarter of 2008. Vendor allowances totaled $1.8 billion for the first 36 weeks of 2009 and 2008. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances.

Promotional allowances make up approximately 90% 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 $13.3 million to $2,396.0 million in the third quarter of 2009 from $2,409.3 million in the third quarter of 2008. However, due to lower sales, operating and administrative expense margin increased 164 basis points to 25.33% of sales in the third quarter of 2009 from 23.69% of sales in the third quarter of 2008. Lower fuel sales in the third quarter of 2009 increased operating and administrative expense margin by 75 basis points. The remaining 89 basis-point increase was primarily the result of decreased sales leverage, increased charges from property impairments and retirements and increased pension expense.

INTEREST EXPENSE Interest expense declined to $78.3 million in the third quarter of 2009 from $80.0 million in the third quarter of 2008 due to lower average borrowings, partly offset by higher average interest rates.

INCOME TAXES Income tax expense was 36.0% of pre-tax income in both the third quarters of 2009 and 2008.

36-WEEKS ENDED SEPTEMBER 12, 2009 COMPARED WITH 36-WEEKS ENDED SEPTEMBER 6, 2008

Net income for the first 36 weeks of 2009 was $511.6 million ($1.21 per diluted share) compared to $627.4 million ($1.43 per diluted share) in the first 36 weeks of 2008.

The gross profit margin was 28.62% in the first 36 weeks of 2009 compared to 28.19% for the first 36 weeks of 2008. Operating and administrative expense margin was 25.36% in the first 36 weeks of 2009 compared to 24.10% in the first 36 weeks of 2008.

Income tax expense was 25.8% of pre-tax income for the first 36 weeks of 2009 compared to 37.3% of pre-tax income in the first 36 weeks of 2008. The decline in the tax rate was due primarily to a benefit of $73.9 million from the favorable resolution of tax matters.

                         SAFEWAY INC. AND SUBSIDIARIES

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Same-store sales (decreases) increases through the third quarters of 2009 and
2008 were as follows:



                                                                      36 Weeks Ended
                                           September 12, 2009                                 September 6, 2008
                                Comparable-Store          Identical-Store          Comparable-Store         Identical-Store
                                     Sales                     Sales                    Sales                    Sales
                                   Decreases                Decreases*                Increases               Increases*
As reported                                 (5.3 )%                  (5.4 )%                    2.8 %                   2.7 %
Excluding fuel sales                        (1.7 )%                  (1.7 )%                    1.2 %                   1.0 %

* Excludes replacement stores.

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

                                                     36 Weeks Ended
                                      September 12, 2009         September 6, 2008
     Non-perishables (1)             $      13,038.6    46 %    $     13,385.0    44 %
     Perishables (2)                        10,656.1    38 %          11,324.5    37 %
     Fuel                                    1,837.6     7 %           2,940.0    10 %
     Pharmacy                                2,624.5     9 %           2,638.6     9 %

Total sales and other revenue $ 28,156.8 100 % $ 30,288.1 100 %

(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.

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. FSP 132(R)-1 does not change the measurement or recognition of pension plans or other post-retirement benefit plans. Safeway is currently assessing the impact of FSP 132(R)-1 on its financial statement disclosures.

In June 2009, the FASB approved the "FASB Accounting Standards Codification" ("Codification"), as the single source of authoritative US GAAP for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which launched July 1, 2009, changes the referencing and organization of accounting guidance and is effective for interim and annual periods ending after September 15, 2009. Since it is not intended to change or alter existing US GAAP, the Codification is not expected to have any impact on Safeway's financial condition or results of operations. Beginning after the third quarter of 2009, the Company's financial statements will refer to the Codification.

In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets." SFAS No. 166 is a revision to SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and amends the guidance on transfers of financial assets, including securitization transactions where entities have continued exposure to risks related to transferred financial assets. SFAS No. 166 also expands the disclosure requirements for such transactions. This statement will become effective for Safeway on January 3, 2010. The Company is currently evaluating the impact of this standard on its consolidated financial statements. However, the Company does not expect that SFAS No. 166 will have a material impact on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)." SFAS No. 167 is a revision to FIN No. 46(R), "Consolidation of Variable Interest Entities," and amends the consolidation guidance for variable interest entities under FIN No. 46(R). This statement will become effective for Safeway on January 3, 2010. The Company is currently evaluating the impact of this standard on its consolidated financial statements. However, the Company does not expect that SFAS No. 167 will have a material impact on its consolidated financial statements.

Liquidity and Financial Resources

Net cash flow provided by operating activities was $1,287.3 million in the first 36 weeks of 2009. This was essentially flat compared to $1,284.8 million of net cash flow provided by operating activities in the first 36 weeks of 2008.

Net cash flow used by investing activities declined to $627.5 million in the first 36 weeks of 2009 from $980.1 million in the first 36 weeks of 2008 because of reduced capital expenditures, partly offset by lower proceeds from the sale of property.

Net cash flow used by financing activities increased to $677.4 million in the first 36 weeks of 2009 compared to $209.4 million in the first 36 weeks of 2008 due primarily to a net reduction in borrowings and increased stock repurchases.

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 its commercial paper program and Credit Agreement (described below).

INCOME TAXES The Company accelerated certain tax deductions for its 2008 income tax returns. As a result, in the fourth quarter of 2009, the Company received approximately $223 million of tax refunds, of which $107 million were received in cash and $116 million were applied to estimated fourth quarter income tax payments.

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 25 banks in the syndicate with individual commitments to lend ranging from approximately $20 million to approximately $170 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 September 12, 2009, the Company was in compliance with these covenant requirements. As of September 12, 2009, there were no borrowings and $47.2 million in letters of credit under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,552.8 million as of September 12, 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 September 12, 2009, $1.0 billion of securities were available for issuance under the board's authorization.

Pursuant to the Shelf, Safeway issued $500.0 million of 5.0% Notes (the "Notes") on July 31, 2009. The Notes mature on August 15, 2019. The Company will pay interest on the Notes on February 15 and August 15 of each year commencing on February 15, 2010. The Notes can be redeemed, in whole or in part, at any time, at the Company's option, at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed discounted to the date of redemption on a semiannual basis at the then current United States Treasury Rate, plus 30 basis points. The Notes refinanced $500 million of 7.5% Notes that came due on September 15, 2009.

DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $41.6 million and $36.0 million for the third quarters of 2009 and 2008, respectively. Year-to-date dividends paid on common stock totaled $112.5 million and $96.6 million through the third quarters of 2009 and 2008, respectively. Note I 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 third quarter of fiscal 2009, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $4.3 billion, leaving an authorized amount for repurchases of approximately $0.7 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 third quarter of 2009, Safeway repurchased approximately 10.2 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $191.6 million. The average price per share, excluding commissions, was $18.84. The timing and volume of future repurchases will depend on several factors, including market conditions.

CREDIT RATINGS The 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 $157.2 million in capital expenditures in the third quarter of 2009. The Company opened five new Lifestyle stores, completed 16 Lifestyle remodels and closed 10 stores. During the first 36 weeks of 2009, Safeway invested $602.8 million in capital expenditures, opened seven new Lifestyle stores, completed 62 Lifestyle remodels and closed 16 stores. For the year, the Company expects to spend approximately $1.0 billion in capital expenditures, open about 10 new Lifestyle stores and complete approximately 85 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; sufficiency of liquidity for the foreseeable future; capital expenditures; new accounting standards; deflation in certain product categories; identical-store sales; price investments; 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 or deflation, consumer spending levels, currency valuations, population, employment and job growth and /or losses 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 public debt or 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.