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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM 10-Q   Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 For the 13 Weeks Ended: July 29, 2004
    
    Commission File Number: 1-6187
 ALBERTSONS, INC. 
  Delaware
    
    82-0184434(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 250 Parkcenter Blvd., P.O. Box 20, Boise, Idaho
    
    83726(Address of principal executive offices)
    
    (Zip Code)
 (208) 395-6200(Registrants telephone number, including area code)
 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [  ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [x] No [  ] The number of shares of the registrants common stock, $1.00 par value,
outstanding at August 30, 2004 was 368,022,608.




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ALBERTSONS INC.
INDEX PART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Earnings Statements for the 13 weeks ended July 29, 2004 and July 31, 2003
    
    
    3Condensed Consolidated Earnings Statements for the 26 weeks ended July 29, 2004 and July 31, 2003
    
    
    4Condensed Consolidated Balance Sheets as of July 29, 2004 and January 29, 2004
    
    
    5Condensed Consolidated Cash Flow Statements for the 26 weeks ended July 29, 2004 and July 31, 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Report of Independent Registered Public Accounting Firm
    
    
    17Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II OTHER INFORMATIONCautionary Statement
    
    
    25Item 1. Legal Proceedings
    
    
    25Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    27Item 3. Defaults Upon Senior Securities
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28EXHIBIT 10.50EXHIBIT 10.51EXHIBIT 10.52EXHIBIT 10.53EXHIBIT 15EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements ALBERTSONS, INC. 
 CONDENSED CONSOLIDATED EARNINGS STATEMENTS
 (in millions, except per share data)
 (unaudited)
 13 weeks endedJuly 29,
    
    July 31,2004
    
    2003Sales
    
    $
    10,194
    
    
    $
    8,974Cost of sales
    
    
    7,315
    
    
    
    6,339Gross profit
    
    
    2,879

    
    
    
    2,635Selling, general and administrative expenses
    
    
    2,549
    
    
    
    2,273Restructuring credits
    
    
    (1
    )
    
    
    (7
    )Operating profit
    
    
    331
    
    
    
    369Other expenses (income):Interest, net
    
    
    132
    
    
    
    105Other, net
    
    
    (1
    )
    
    
    Earnings from continuing operations before income taxes
    
    
    200
    
    
    
    264Income tax expense
    
    
    75
    
    
    
    102Earnings from continuing operations
    
    
    125
    
    
    
    162Discontinued operations:Operating loss
    
    
    (9
    )
    
    
    Loss on disposal
    
    
    (25
    )
    
    
    Income tax benefit
    
    
    13
    
    
    
    Loss from discontinued operations
    
    
    (21
    )
    
    
    Net earnings
    
    $
    104
    
    
    $
    162Earnings (loss) per share:BasicContinuing operations
    
    $
    0.34
    
    
    $
    0.44Discontinued operations
    
    
    (0.06
    )
    
    
    Net earnings
    
    $
    0.28
    
    
    $
    0.44DilutedContinuing operations
    
    $
    0.34
    
    
    $
    0.44Discontinued operations
    
    
    (0.06
    )
    
    
    Net earnings
    
    $
    0.28
    
    
    $
    0.44Weighted average common shares outstanding:Basic
    
    
    369
    
    
    
    368Diluted
    
    
    371
    
    
    
    368
 See Notes to Condensed Consolidated Financial Statements 3




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ALBERTSONS, INC. 
 CONDENSED CONSOLIDATED EARNINGS STATEMENTS
 (in millions, except per share data)
 (unaudited)
 26 weeks endedJuly 29,
    
    July 31,2004
    
    2003Sales
    
    $
    18,831
    
    
    $
    17,832Cost of sales
    
    
    13,517
    
    
    
    12,672Gross profit
    
    
    5,314
    
    
    
    5,160Selling, general and administrative expenses
    
    
    4,791
    
    
    
    4,423Restructuring credits
    
    
    (1
    )
    
    
    (15
    )Operating profit
    
    
    524
    
    
    
    752Other expenses (income):Interest, net
    
    
    235
    
    
    
    208Other, net
    
    
    
    
    
    
    (1
    )Earnings from continuing operations before income taxes
    
    
    289
    
    
    
    545Income tax expense
    
    
    108
    
    
    
    210Earnings from continuing operations
    
    
    181
    
    
    
    335Discontinued operations:Operating loss
    
    
    (10
    )
    
    
    (2
    )Loss on disposal
    
    
    (55
    )
    
    
    Income tax benefit
    
    
    24
    
    
    
    1Loss from discontinued operations
    
    
    (41
    )
    
    
    (1
    )Net earnings
    
    $
    140
    
    
    $
    334Earnings (loss) per share:BasicContinuing operations
    
    $
    0.49
    
    
    $
    0.90Discontinued operations
    
    
    (0.11
    )
    
    
    Net earnings
    
    $
    0.38
    
    
    $
    0.90DilutedContinuing operations
    
    $
    0.49
    
    
    $
    0.90Discontinued operations
    
    
    (0.11
    )
    
    
    Net earnings
    
    $
    0.38
    
    
    $
    0.90Weighted average common shares outstanding:Basic
    
    
    369
    
    
    
    371Diluted
    
    
    371
    
    
    
    371
 See Notes to Condensed Consolidated Financial Statements 4




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ALBERTSONS, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in millions, except par value data)
 (unaudited)
 July 29,
    
    January 29,2004
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    20
    
    
    $
    289Accounts and notes receivable, net
    
    
    716
    
    
    
    683Inventories
    
    
    3,194
    
    
    
    3,035Assets held for sale
    
    
    86
    
    
    
    69Prepaid and other
    
    
    217
    
    
    
    343Total Current Assets
    
    
    4,233
    
    
    
    4,419Land, buildings and equipment (net of accumulated depreciation and
amortization of $7,268 and $6,845, respectively)
    
    
    10,418
    
    
    
    9,145Goodwill
    
    
    2,239
    
    
    
    1,400Intangibles, net
    
    
    884
    
    
    
    130Other assets
    
    
    341
    
    
    
    300Total Assets
    
    $
    18,115
    
    
    $
    15,394LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    2,068
    
    
    $
    1,774Salaries and related liabilities
    
    
    628
    
    
    
    659Self-insurance
    
    
    244
    
    
    
    262Current maturities of long-term debt and capital lease obligations
    
    
    535
    
    
    
    520Other current liabilities
    
    
    572
    
    
    
    470Total Current Liabilities
    
    
    4,047
    
    
    
    3,685Long-term debt
    
    
    5,752
    
    
    
    4,452Capital lease obligations
    
    
    811
    
    
    
    352Self-insurance
    
    
    627
    
    
    
    469Other long-term liabilities and deferred credits
    
    
    1,591
    
    
    
    1,055Commitments and contingencies
    
    
    
    
    
    
    Stockholders EquityPreferred
stock - $1.00 par value; authorized - 10 shares;
designated  3 shares
of Series A Junior Participating; issued  none
    
    
    
    
    
    
    Common stock
- $1.00 par value; authorized - 1,200 shares; issued
 368 shares
and 368 shares, respectively
    
    
    368
    
    
    
    368Capital in excess of par
    
    
    60
    
    
    
    155Accumulated other comprehensive loss
    
    
    (109
    )
    
    
    (109
    )Retained earnings
    
    
    4,968
    
    
    
    4,967Total Stockholders Equity
    
    
    5,287
    
    
    
    5,381Total Liabilities and Stockholders Equity
    
    $
    18,115
    
    
    $
    15,394
 See Notes to Condensed Consolidated Financial Statements 5




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ALBERTSONS, INC. 
 CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
 (in millions)
 (unaudited)
 26 weeks endedJuly 29,
    
    July 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    140
    
    
    $
    334Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation and amortization
    
    
    522
    
    
    
    484Net deferred income taxes
    
    
    68
    
    
    
    (5
    )Discontinued
operations non-cash charges
    
    
    66
    
    
    
    Other non-cash charges
    
    
    23
    
    
    
    20Stock-based compensation
    
    
    11
    
    
    
    12Net loss (gain) on asset disposals
    
    
    6
    
    
    
    (12
    )Restructuring credits
    
    
    
    
    
    
    (14
    )Changes in operating assets and liabilities:Receivables and prepaid expenses
    
    
    134
    
    
    
    71Inventories
    
    
    118
    
    
    
    (2
    )Accounts payable
    
    
    47
    
    
    
    (60
    )Other current liabilities
    
    
    (61
    )
    
    
    (36
    )Self-insurance
    
    
    55
    
    
    
    54Unearned income
    
    
    (10
    )
    
    
    (2
    )Other long-term liabilities
    
    
    17
    
    
    
    16Net cash provided by operating activities
    
    
    1,136
    
    
    
    860CASH FLOWS FROM INVESTING ACTIVITIES:Business acquisitions, net of cash acquired
    
    
    (2,080
    )
    
    
    Capital expenditures
    
    
    (467
    )
    
    
    (639
    )Proceeds from disposal of land, buildings and equipment
    
    
    54
    
    
    
    29Proceeds from disposal of assets held for sale
    
    
    27
    
    
    
    62Other
    
    
    (17
    )
    
    
    8Net cash used in investing activities
    
    
    (2,483
    )
    
    
    (540
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from Hybrid Income Term Security Units (HITS)
    
    
    1,150
    
    
    
    Commercial paper and short-term borrowings and repayments, net
    
    
    304
    
    
    
    Payments on long-term borrowings
    
    
    (213
    )
    
    
    (110
    )Cash dividends paid
    
    
    (140
    )
    
    
    (141
    )Hybrid Income Term Security Units (HITS) financing costs
    
    
    (33
    )
    
    
    Proceeds from stock options exercised
    
    
    10
    
    
    
    Stock purchases and retirements
    
    
    
    
    
    
    (108
    )Net cash provided by (used in) financing activities
    
    
    1,078
    
    
    
    (359
    )Net Decrease in Cash and Cash Equivalents
    
    
    (269
    )
    
    
    (39
    )Cash and Cash Equivalents at Beginning of Period
    
    
    289
    
    
    
    162Cash and Cash Equivalents at End of Period
    
    $
    20
    
    
    $
    123
 See Notes to Condensed Consolidated Financial Statements 6




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ALBERTSONS, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (dollars and shares in millions, except per share data)
(unaudited)
 NOTE 1  THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES Description of Business Albertsons, Inc. (Albertsons or the Company) is incorporated under the
laws of the State of Delaware and is the successor to a business founded by
J.A. Albertson in 1939. Based on sales, the Company is one of the largest
retail food and drug chains in the world. As of July 29, 2004, the Company operated 2,516 stores in 37 states. The
Company also operated 236 fuel centers near existing stores. Retail operations
are supported by 20 major Company distribution operations, strategically
located in the Companys operating markets. Basis of Presentation The accompanying unaudited condensed consolidated financial statements include
the results of operations, financial position and cash flows of the Company and
its subsidiaries. All material intercompany balances have been eliminated. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments necessary to present fairly, in
all material respects, the results of operations of the Company for the periods
presented. These condensed consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and accompanying notes included in the Companys Annual
Report on Form 10-K for the fiscal year ended January 29, 2004 filed with the
Securities and Exchange Commission. The results of operations for the 13 and
26 weeks ended July 29, 2004 are not necessarily indicative of results for a
full year. The Companys Condensed Consolidated Balance Sheet as of January 29, 2004 has
been derived from the audited Consolidated Balance Sheet as of that date. Use of Estimates The preparation of the Companys consolidated financial statements, in
conformity with accounting principles generally accepted in the United States,
requires management to make estimates and assumptions. Some of these estimates
require difficult, subjective or complex judgments about matters that are
inherently uncertain. As a result, actual results could differ from these
estimates. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Inventories Net earnings reflect the application of the LIFO method of valuing certain
inventories. Quarterly inventory determinations under LIFO are based on
assumptions as to projected inventory levels at the end of the year and the
rate of inflation for the year. Albertsons recorded pre-tax LIFO expense of $1
and $4 for the 13 week periods ended July 29, 2004 and July 31, 2003,
respectively, and $7 and $8 for the 26 week periods ended July 29, 2004 and
July 31, 2003, respectively. The amount of vendor funds reducing the Companys inventory (inventory
offset) as of July 29, 2004, including those resulting from the Shaws
acquisition (see Note 3 to the Condensed Consolidated Financial Statements 
Shaws Acquisition) was $143, an increase of $13 from the end of the first
quarter of 2004 and a decrease of $12 from the beginning of 2004. The vendor
funds inventory offset as of July 31, 2003 was $131, a decrease of $15 from the
end of the first quarter of 2003 and a decrease of $21 from the beginning of
2003. The inventory offset was determined by estimating the average inventory
turnover rates by product category for the Companys grocery, general
merchandise and lobby departments (these departments received over
three-quarters of the Companys vendor funds in 2003) and by average inventory
turnover rates by department for the Companys remaining inventory. 7




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Stock-Based Compensation The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees and related Interpretations.
Accordingly, expense associated with stock-based compensation is measured as
the excess, if any, of the quoted market price of the Companys stock at the
date of the grant over the option exercise price and is charged to operations
over the vesting period. Income tax benefits attributable to stock options
exercised are credited to capital in excess of par value. Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  An Amendment to FASB Statement No.
123, encourages, but does not require, companies to record compensation cost
for stock-based employee compensation plans at fair value. If the fair
value-based accounting method was utilized for stock-based compensation, the
Companys pro forma net earnings and earnings per share for the periods
presented below would have been as follows: 13 weeks ended
    
    26 weeks endedJuly 29,
    
    July 31,
    
    July 29,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Net Earnings as reported
    
    $
    104
    
    
    $
    162
    
    
    $
    140
    
    
    $
    334Add: Stock-based
compensation expense
included in reported net
earnings, net of related
tax effects
    
    
    4
    
    
    
    4
    
    
    
    6
    
    
    
    8Deduct: Total stock-based
compensation expense
determined under fair
value-based method for all
awards, net of related
tax effects
    
    
    (11
    )
    
    
    (12
    )
    
    
    (21
    )
    
    
    (23
    )Pro Forma Net Earnings
    
    $
    97
    
    
    $
    154
    
    
    $
    125
    
    
    $
    319Basic Earnings Per Share:As Reported
    
    $
    0.28
    
    
    $
    0.44
    
    
    $
    0.38
    
    
    $
    0.90Pro Forma
    
    
    0.26
    
    
    
    0.42
    
    
    
    0.34
    
    
    
    0.86Diluted Earnings Per Share:As Reported
    
    $
    0.28
    
    
    $
    0.44
    
    
    $
    0.38
    
    
    $
    0.90Pro Forma
    
    
    0.26
    
    
    
    0.42
    
    
    
    0.34
    
    
    
    0.86
 The pro forma net earnings resulted from reported net earnings less pro forma
after-tax compensation expense. The pro forma effect on net earnings is not
representative of the pro forma effect on net earnings in future years. To
calculate pro forma stock-based compensation expense under SFAS No. 123, the
Company estimated the fair value of each option grant on the date of grant,
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2004 and 2003: risk-free interest rate
of 3.93% and 2.27%, respectively, expected dividend yield of 3.29% and 3.92%,
respectively, expected lives of 6.0 and 5.0 years, respectively, and expected
stock price volatility of 38.33% and 40.07%, respectively. Reclassifications Certain reclassifications have been made in prior periods financial statements
to conform to classifications used in the current year. NOTE 2  NEW AND RECENTLY ADOPTED ACCOUNTING STANDARDS In November 2003 the Emerging Issues Task Force (EITF) confirmed as a
consensus EITF Issue No. 03-10, Application of EITF Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor, by Resellers to Sales Incentives Offered to Consumers
by Manufacturers (EITF 03-10). EITF 03-10 did not impact the Companys
existing accounting and reporting policies for manufacturers coupons that can
be presented at any retailer that accepts coupons. Under EITF 03-10, vendor
coupons that provide for direct reimbursement, are negotiated between the
retailer and the vendor and which can only be redeemed at a specific retailers
store are recorded as a reduction of cost of sales (instead of sales). This
modification to the Companys accounting and reporting policies, adopted in
Companys first quarter of 2004, did not have a material impact on sales or
cost of sales. 8




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In
December 2003 the Financial Accounting Standards Board
(FASB) issued SFAS No. 132 (Revised 2003),
Employers Disclosure about Pensions and Other Postretirement Benefits  An
Amendment of FASB Statements No. 87, 88 and 106
(SFAS No. 132(R)). This
statement increases the existing disclosure requirements by requiring more
details about pension plan assets, benefit obligations, cash flows, benefit
costs and related information. The Company adopted SFAS No. 132(R) in January
2004. The newly required quarterly disclosures are included in Note 7 to the
Condensed Consolidated Financial Statements  Employee Benefit Plans. In May 2004 the FASB issued Staff Position No. FAS 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (SFAS No. 106-2). SFAS No. 106-2 supersedes
SFAS No. 106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 and provides
guidance on the accounting and disclosure related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Act), which was signed
into law in December 2003. SFAS No. 106-2 is effective beginning in the third
fiscal quarter of 2005. The Company is in the process of evaluating the
impact, if any, of the Act and SFAS No. 106-2 on the Company. NOTE 3  SHAWS ACQUISITION On April 30, 2004, the Company acquired all of the outstanding capital stock of
the entity which conducted J Sainsbury plcs U.S. retail grocery store business
(Shaws). The results of Shaws operations have been included in the
Companys consolidated financial statements since that date. The operations
acquired consist of 206 grocery stores in the New England area operated under
the banners of Shaws and Star Market. The Company acquired Shaws for a
variety of reasons, including attractive market share positions, attractive
real estate, the opportunity to realize numerous synergies and strong
historical financial performance. The aggregate purchase price was $2,578, which included $2,134 of cash, $441 of
assumed debt and $3 of transaction costs. The Company used a combination of
cash-on-hand and the proceeds of the issuance of $1,603 of commercial paper to
finance the acquisition. The Company used the proceeds from a subsequent HITS
offering (see Note 8 to the Condensed Consolidated Financial Statements -
Indebtedness) to repay $1,117 of such commercial paper. The remaining
commercial paper outstanding is currently backed by the Companys existing
credit facilities. The following table summarizes the preliminary estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition. These
preliminary purchase price allocations are based on a combination of third
party valuations and internal analysis and may be adjusted during the
allocation period as defined in SFAS No. 141, Business Combinations. April 30,2004Current assets
    
    $
    444Land, buildings and equipment
    
    
    1,378Goodwill
    
    
    840Intangible assets
    
    
    766Other assets
    
    
    23Total assets acquired
    
    
    3,451Current liabilities
    
    
    417Long-term debt
    
    
    441Other liabilities
    
    
    456Total liabilities assumed
    
    
    1,314Net assets acquired
    
    $
    2,137
 9




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Acquired intangible assets include $399 assigned to trade names not subject to
amortization, $325 assigned to favorable operating leases (13-year weighted
average useful life), $36 assigned to a customer loyalty program (7-year useful
life), $5 assigned to pharmacy prescriptions (7-year useful life), and other
assets of $1 (18-year useful life). With the exception of trade names, the
remaining intangible assets are amortized on a straight-line basis over their
expected useful lives. As part of the purchase price allocation, the fair values of operating leases
were calculated, a portion of which represents favorable operating leases
compared with current market conditions and a portion of which represent
unfavorable operating leases compared with current market conditions. The
favorable leases totaled $325 and are included in Intangible assets. The
unfavorable leases totaled $246, have an estimated weighted average life of 18
years and are included in Other liabilities. The excess of the purchase price over the fair value of assets acquired and
liabilities assumed was allocated to goodwill. Of the $840 recorded in
goodwill, $95 is expected to be deductible for tax purposes. The following unaudited pro forma financial information presents the combined
results of operations of the Company and Shaws as if the acquisition had
occurred on January 30, 2004 and January 31, 2003. Shaws fiscal year ended on
the Saturday closest to February 28. The unaudited pro forma financial
information uses Shaws data for the periods corresponding to the Companys
fiscal year end. This unaudited pro forma financial information is not
intended to represent or be indicative of what would have occurred if the
transaction had taken place on the dates presented and should not be taken as
representative of the Companys future consolidated results of operations or
financial position. The pro forma information does not reflect any potential
synergies expected from the combined operations or potential integration costs. 13 weeks ended
    
    26 weeks endedJuly 31,
    
    July 29,
    
    July 31,2003
    
    2004
    
    2003Sales
    
    $
    10,123
    
    
    $
    19,954
    
    
    $
    20,061Net earnings
    
    
    189
    
    
    
    162
    
    
    
    381Earnings per share:Basic
    
    $
    0.51
    
    
    $
    0.44
    
    
    $
    1.03Diluted
    
    
    0.51
    
    
    
    0.44
    
    
    
    1.02
 NOTE 4  DISCONTINUED OPERATIONS In April 2004 the Company announced its plan to sell, close or otherwise
dispose of its operations in the New Orleans, Louisiana market, which consisted
of seven operating stores and three non-operating properties. Results of
operations for those stores and properties have been reclassified and presented
as discontinued operations for the 13 and 26 week periods ended July 29, 2004
and July 31, 2003. In June 2004 the Company announced its plan to sell, close or otherwise dispose
of its operations in the Omaha, Nebraska market, which consisted of 21
stores. Results of operations for those stores have been reclassified and
presented as discontinued operations for the 13 and 26 week periods ended July
29, 2004 and July 31, 2003. The discontinued operations stores generated sales of $56 and $79 for the 13
week periods ended July 29, 2004 and July 31, 2003, respectively, and $131 and
$158 for the 26 week periods ended July 29, 2004 and July 31, 2003,
respectively. The loss from discontinued operations of $21 for the 13 week
period ended July 29, 2004 consisted of a loss from operations of $9, a write
down of fixed assets and lease settlements of $30, gain on disposal of $5 and
an income tax benefit of $13. The loss from discontinued operations of $41 for
the 26 week period ended July 29, 2004 consisted of a loss from operations of
$10, a write down of fixed assets and lease settlements of $60, gain on
disposal of $5 and an income tax benefit of $24. The loss from discontinued
operations of $1 for the 26 week period ended July 31, 2003 consisted of a loss
from operations of $2 and an income tax benefit of $1. A reserve balance of $8
as of July 29, 2004 is included in Other current liabilities in the
accompanying Condensed Consolidated Balance Sheet related to lease liability
adjustments. Assets related to discontinued operations are recorded at their estimated fair
value, less selling costs, of $44 as of July 29, 2004 and are reported in
Assets held for sale in the accompanying Condensed Consolidated Balance
Sheet. These assets include 11 operating properties and one non-operating
property for which definitive agreements for sale have been entered into and
thirteen operating properties and two non-operating properties that are being
actively marketed. 10




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##### Table of Contents



NOTE 5  RESERVES FOR 2001 RESTRUCTURING ACTIVITIES, 2002 MARKET EXITS AND
CLOSED STORES In 2001 the Company recorded a pre-tax charge to earnings of $107 primarily for
lease settlements and severance costs in connection with the closure of 165
stores and the reduction of overhead functions. As of January 29, 2004, an
accrual of $19 remained for these settlements and costs. During the 13 and 26
week periods ended July 29, 2004, the Company paid $1 and $2, respectively,
leaving a balance of $17 as of July 29, 2004. In 2002 the Company recorded a pre-tax charge to earnings of $51 primarily for
lease settlements and severance costs in connection with the exit from four
underperforming markets. As of January 29, 2004, an accrual of $8 remained for
these settlements and costs. During the 13 and 26 week periods ended July 29,
2004, the Company recorded additional reserves of $1 and $1 and paid $0 and $2,
respectively, leaving a balance of $7 as of July 29, 2004. As of January 29, 2004, the Company had an accrual of $20 for closed store
lease termination costs. During the 13 and 26 week periods ended July 29,
2004, the Company recorded additional reserves of $2 and $6, had favorable
lease termination settlements of $0 and $3 and paid $2 and $3, respectively,
leaving a balance of $20 as of July 29, 2004. NOTE 6  INTANGIBLES The carrying amount of intangibles was as follows: July 29,
    
    January 29,2004
    
    2004Amortizing:Favorable acquired operating leases
    
    $
    539
    
    
    $
    221Customer lists, loyalty cards and other
contracts
    
    
    106
    
    
    
    56645
    
    
    
    277Accumulated amortization
    
    
    (199
    )
    
    
    (186
    )446
    
    
    
    91Non-Amortizing:Trade names
    
    
    399
    
    
    
    Liquor licenses438
    
    
    
    39$
    884
    
    
    $
    130
 Amortizing intangible assets have remaining useful lives from 2 to 38 years.
Projected amortization expense for existing intangible assets is $38, $38, $32,
$31, and $31 for 2004, 2005, 2006, 2007, and 2008,
respectively. NOTE 7  EMPLOYEE BENEFIT PLANS The following represents the components of net periodic pension and
postretirement benefit costs in accordance with SFAS No. 132(R) (see Note 2 to
the Condensed Consolidated Financial Statements  New and Recently Adopted
Accounting Standards): Pension Benefits
    
    Other Benefits13 weeks ended
    
    13 weeks endedJuly 29,
    
    July 31,
    
    July 29,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Service cost  benefits earned during the
period
    
    $
    7
    
    
    $
    3
    
    
    $
    
    
    
    $
    1Interest cost on projected benefit obligations
    
    
    15
    
    
    
    10
    
    
    
    
    
    
    
    1Expected return on assets
    
    
    (15
    )
    
    
    (8
    )
    
    
    
    
    
    
    Amortization of prior service cost (credit)
    
    
    (2
    )
    
    
    (2
    )
    
    
    
    
    
    
    Recognized net actuarial loss
    
    
    4
    
    
    
    6
    
    
    
    
    
    
    
    Curtailment gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit expense
    
    $
    9
    
    
    $
    9
    
    
    $
    
    
    
    $
    2
 11




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##### Table of Contents



Pension Benefits
    
    Other Benefits26 weeks ended
    
    26 weeks endedJuly 29,
    
    July 31,
    
    July 29,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Service cost  benefits earned during the
period
    
    $
    11
    
    
    $
    7
    
    
    $
    
    
    
    $
    1Interest cost on projected benefit obligations
    
    
    26
    
    
    
    20
    
    
    
    1
    
    
    
    2Expected return on assets
    
    
    (26
    )
    
    
    (16
    )
    
    
    
    
    
    
    Amortization of prior service cost (credit)
    
    
    (3
    )
    
    
    (3
    )
    
    
    
    
    
    
    1Recognized net actuarial loss
    
    
    8
    
    
    
    11
    
    
    
    
    
    
    
    Curtailment gain
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    Net periodic benefit expense
    
    $
    16
    
    
    $
    12
    
    
    $
    1
    
    
    $
    4
 In April 2004 the President of the United States signed new pension relief
legislation that allows companies to use a corporate bond index rate specified
by the U.S. Treasury Department for purposes of calculating required minimum
contributions. Under the new legislation, the Companys estimated required
minimum contributions for 2004 remained unchanged from January 29, 2004, at
$65, excluding the defined benefit plans at Shaws. The Company expects to
contribute this amount during the remainder of 2004. The Companys required
minimum contributions for the Shaws defined benefit plans are expected to be
$21 during the remainder of 2004. NOTE 8  INDEBTEDNESS Revolving Credit Facilities At July 29, 2004, the Company had three revolving credit facilities totaling
$1,400. The first agreement, a 364-Day revolving credit facility with total
availability of $400, will expire in June 2005. The second agreement, a
five-year facility for $900, expires in June 2009. The third agreement, a
five-year facility for $100, expires in July 2009. The 364-Day credit agreement
contains an option which would allow the Company, upon due notice, to convert
any outstanding amount at the expiration date to a term loan. The Companys
commercial paper program is backed by these credit facilities. All of the
agreements contain two financial covenants: 1) a minimum fixed charge coverage
ratio and 2) a maximum consolidated leverage ratio, as defined in the credit
facilities. Under these facilities, the fixed charge coverage ratio shall not
be less than 2.5 to 1 through April 30, 2005, 2.6 to 1 through April 30, 2006
and 2.7 to 1 thereafter and the consolidated leverage ratio shall not exceed
4.5 to 1 through April 30, 2006, 4.25 to 1 through April 30, 2007 and 4.0 to 1
thereafter. As of July 29, 2004, the Company was in compliance with these
requirements. The Company had $304 in commercial paper borrowings outstanding
at July 29, 2004, and no outstanding commercial paper borrowings outstanding at
January 29, 2004. Hybrid Income Term Security Units (HITS) Offering In May 2004 the Company completed a public offering of 40,000,000 of 7.25%
Hybrid Income Term Security Units (HITS or Corporate Units), yielding net
proceeds of $971. In June 2004 the underwriters purchased an additional
6,000,000 Corporate Units pursuant to an overallotment option, yielding net
proceeds of $146. Each Corporate Unit consists of a purchase contract and,
initially, a 2.5% ownership interest in one of the Companys senior notes with
a principal amount of one thousand dollars, which corresponds to a twenty-five
dollar principal amount of the Companys senior notes. The ownership interest
in the senior notes is initially pledged to secure the Corporate Unit holders
obligation to purchase Company common stock under the related purchase
contract. The senior notes are scheduled to mature in February 2009 and bear
interest at a rate of 3.75% per year. The purchase contracts yield 3.5% per
year on the stated amount of twenty-five dollars. Each purchase contract obligates the holder to purchase, and the Company to
sell, at a purchase price of twenty-five dollars in cash, shares of the
Companys common stock on or before May 16, 2007 (the Purchase Contract
Settlement Date). Generally, the number of shares each holder of the
Corporate Units is obligated to purchase depends on the average closing price
per share of Companys common stock over a 20-day trading period ending on the
third trading day immediately preceding the Purchase Contract Settlement Date,
subject to anti-dilution adjustments. If the average closing price is equal to
or greater than $28.82 per share, the settlement rate will be 0.8675 shares of
common stock. If the average closing price is less than $28.82 per share but
greater than $23.06 per share, the settlement rate is equal to twenty-five
dollars divided by the average closing price of the Companys common stock. If
the average closing price is less than $23.06 per share, the settlement rate
will be 1.0841 shares of common stock. The holders of Corporate Units have the
option to settle their obligations under the purchase contracts at any time on
or prior to the fifth business day immediately preceding the Purchase Contract
Settlement Date. Prior to the Purchase Contract Settlement Date, the senior
notes will be remarketed. If the remarketing is successful, the interest rate
on the senior notes will increase to a rate selected by the remarketing agent,
and the maturity of the senior notes will be extended to a date selected by the
Company that is either two or three years from the date such interest rate is
increased. If the remarketing of the senior notes is not successful, the
maturity and interest rate of the senior notes will not change and holders of
the Corporate Units will have the option of putting their senior notes to the
Company to satisfy their obligations under the purchase contracts. 12




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##### Table of Contents



The purchase contracts are forward transactions in the Companys common stock.
Upon issuance, a liability for the present value of the purchase contract
adjustment payments of $114 was recorded as a reduction (charge) to
stockholders equity, with an offsetting increase (credit) to other long-term
liabilities and current liabilities. Subsequent contract adjustment payments
will reduce this liability. Upon settlement of each purchase contract, the
Company will receive the stated amount of twenty-five dollars on the purchase
contract and will issue the requisite number of shares of common stock. The
stated amount received will be recorded as an increase (credit) to
stockholders equity. Before the issuance of common stock upon settlement of the purchase contracts,
the Corporate Units will be reflected in diluted earnings per share
calculations using the treasury stock method. Under this method, the number of
shares of common stock used in calculating diluted earnings per share (based on
the settlement formula applied at the end of the reporting period) is deemed to
be increased by the excess, if any, of the number of shares that would be
issued upon settlement of the purchase contracts less the number of shares that
could be purchased by the Company in the market (at the average market price
during the period) using the proceeds receivable upon settlement. NOTE 9  CONTINGENCIES Lawsuits, Claims and Other Legal Matters The Company is subject to various lawsuits, claims and other legal matters that
arise in the ordinary course of conducting business. In March 2000 a class action complaint was filed against Albertsons as well as
American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Gardner, et al. v.
Albertsons, Inc., et al.) by bonus-eligible managers seeking recovery of
additional bonus compensation based upon plaintiffs allegation that the
calculation of profits on which their bonuses were based improperly included
expenses for workers compensation costs, cash shortages, premises liability
and shrink losses in violation of California law. In August 2001 a class
action complaint with very similar claims, also involving bonus-eligible
managers, was filed against Albertsons as well as Lucky Stores, Inc. and
American Stores Company, wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Petersen, et al. v.
Lucky Stores, Inc., et al.). In June 2002 the cases were consolidated
(Gardner/Petersen case) and in August 2002 a class action with respect to the
consolidated case was certified by the court. On May 26, 2004 Albertsons and
the plaintiffs entered into an agreement in principle to settle the
consolidated Gardner/Petersen case. The Company is now working to resolve
disagreements with the plaintiffs incident to arriving at a definitive
settlement agreement. The final settlement agreement will need the approval of
the court. Based on the information presently available to the Company,
management does not expect that the payments under this settlement will have a
material adverse effect on the Companys financial condition, results of
operations or cash flows. In April 2000 a class action complaint was filed against Albertsons as well as
American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Gardner, et al. v.
American Stores Company, et al.) by assistant managers seeking recovery of
overtime pay based upon plaintiffs allegation that they were improperly
classified as exempt under California law. In May 2001 a class action with
respect to Sav-on Drug Stores assistant managers was certified by the court. A
case with very similar claims, involving the Sav-on Drug Stores assistant
managers and operating managers, was also filed in April 2000 against the
Companys subsidiary Sav-on Drug Stores, Inc. in the Superior Court for the
County of Los Angeles, California (Rocher, Dahlin, et al. v. Sav-on Drug
Stores, Inc.) and was also certified as a class action. In April 2002 the
Court of Appeal of the State of California Second Appellate District reversed
the Rocher class certification, leaving only two plaintiffs. The California
Supreme Court on August 26, 2004, reversed the appellate courts decision. The
Company continues to believe it has strong defenses against these lawsuits and
is vigorously defending them. Although these lawsuits are subject to the
uncertainties inherent in the litigation process, based on the information
presently available to the Company, management does not expect that the
ultimate resolution of these lawsuits will have a material adverse effect on
the Companys financial condition, results of operations or cash flows. 13




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##### Table of Contents



In September 2000 an agreement was reached and court approval granted to settle
eight purported class and/or collective actions which were consolidated in the
United States District Court in Boise, Idaho and which raised various issues
including off-the-clock work allegations and allegations regarding certain
salaried grocery managers exempt status. Under the settlement agreement,
current and former employees who met eligibility criteria have been allowed to
present their off-the-clock work claims to a settlement administrator.
Additionally, current and former grocery managers employed in the State of
California have been allowed to present their exempt status claims to a
settlement administrator. The Company mailed notices of the settlement and
claims forms to approximately 70,500 associates and former associates.
Approximately 6,000 claim forms had been returned, of which approximately 5,000
were deemed by the settlement administrator to be incapable of valuation,
presumed untimely, or both. The claims administrator was able to assign a value
to approximately 1,000 claims, which amount to a total of approximately $14,
although the value of many of those claims is still subject to challenge by the
Company. During the quarter ended July 29, 2004, there was a supplemental
mailing and in-store posting directed toward a narrow subset of these current
and former associates. At quarter-end, the Company had not been advised by the
settlement administrator of the number of claims returned by these individuals.
Prior to the second quarter of 2004, and distinct from this supplemental
claims process, a second claim process was ordered by the Court, but the
Company is still waiting for final instructions from the Court. The Company is
presently unable to determine the number of individuals who may ultimately
submit valid claims or the amounts that it may ultimately be required to pay
with respect to such claims. Based on the information presently available to
it, management does not expect that the satisfaction of valid claims submitted
pursuant to the settlement will have a material adverse effect on the Companys
financial condition, results of operations or cash flows. In March 2004 a lawsuit seeking class action status was filed against
Albertsons in the Superior Court of the State of California in and for the
County of Alameda, California (Dunbar, et al. v. Albertsons, Inc.) by grocery
managers seeking recovery including overtime pay based upon plaintiffs
allegation that they were improperly classified as exempt under California law.
In July 2004 a similar case was filed against Albertsons in the same court
(Victoria A. Moore, et al. v. Albertsons, Inc.). These cases are currently in
discovery; however the Company has strong defenses against these lawsuits and
is vigorously defending them. Although these lawsuits are subject to the
uncertainties inherent in the litigation process, based on the information
presently available to the Company, management does not expect that the
ultimate resolution of these lawsuits will have a material adverse effect on
the Companys financial condition, results of operations or cash flows. The Company is also involved in routine legal proceedings incidental to its
operations. Management does not expect that the ultimate resolution of these
legal proceedings will have a material adverse effect on the Companys
financial condition, results of operations or cash flows. The statements above reflect managements current expectations based on the
information presently available to the Company. However, predicting the
outcomes of claims and litigation and estimating related costs and exposures
involve substantial uncertainties that could cause actual outcomes, costs and
exposures to vary materially from current expectations. In addition, the
Company regularly monitors its exposure to the loss contingencies associated
with these matters and may from time to time change its predictions with
respect to outcomes and its estimates with respect to related costs and
exposures. It is possible that material differences in actual outcomes, costs
and exposures relative to current predictions and estimates, or material
changes in such predictions or estimates, could have a material adverse effect
on the Companys financial condition, results of operations or cash flows. 14




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##### Table of Contents



NOTE 10  COMPUTATION OF EARNINGS PER SHARE 13 weeks endedJuly 29, 2004
    
    July 31, 2003Basic
    
    Diluted
    
    Basic
    
    DilutedEarnings (loss) from:Continuing operations
    
    $
    125
    
    
    $
    125
    
    
    $
    162
    
    
    $
    162Discontinued operations
    
    
    (21
    )
    
    
    (21
    )
    
    
    
    
    
    
    Net earnings
    
    $
    104
    
    
    $
    104
    
    
    $
    162
    
    
    $
    162Weighted average common shares outstanding
    
    
    369
    
    
    
    369
    
    
    
    368
    
    
    
    368Potential common share equivalents
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Weighted average shares outstanding
    
    
    
    
    
    
    371
    
    
    
    
    
    
    
    368Earnings (loss) per common share and common
share equivalents:Continuing operations
    
    $
    0.34
    
    
    $
    0.34
    
    
    $
    0.44
    
    
    $
    0.44Discontinued operations
    
    
    (0.06
    )
    
    
    (0.06
    )
    
    
    
    
    
    
    Net earnings
    
    $
    0.28
    
    
    $
    0.28
    
    
    $
    0.44
    
    
    $
    0.44Calculation of potential common share
equivalents:Options to purchase potential common shares
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    3Potential common shares assumed purchased
with potential proceeds
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    (3
    )Potential common share equivalents
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Calculation of potential common shares
assumed purchased with potential proceeds:Potential proceeds from exercise of
options
to purchase common shares
    
    
    
    
    
    $
    418
    
    
    
    
    
    
    $
    48Common stock price used under treasury
stock method
    
    
    
    
    
    $
    24.30
    
    
    
    
    
    
    $
    19.84Potential common shares assumed
purchased with potential proceeds
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    3
 15




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##### Table of Contents



26 weeks endedJuly 29, 2004
    
    July 31, 2003Basic
    
    Diluted
    
    Basic
    
    DilutedEarnings (loss) from:Continuing operations
    
    $
    181
    
    
    $
    181
    
    
    $
    335
    
    
    $
    335Discontinued operations
    
    
    (41
    )
    
    
    (41
    )
    
    
    (1
    )
    
    
    (1
    )Net earnings
    
    $
    140
    
    
    $
    140
    
    
    $
    334
    
    
    $
    334Weighted average common shares outstanding
    
    
    369
    
    
    
    369
    
    
    
    371
    
    
    
    371Potential common share equivalents
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Weighted average shares outstanding
    
    
    
    
    
    
    371
    
    
    
    
    
    
    
    371Earnings (loss) per common share and common
share equivalents:Continuing operations
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    0.90
    
    
    $
    0.90Discontinued operations
    
    
    (0.11
    )
    
    
    (0.11
    )
    
    
    
    
    
    
    Net earnings
    
    $
    0.38
    
    
    $
    0.38
    
    
    $
    0.90
    
    
    $
    0.90Calculation of potential common share
equivalents:Options to purchase potential common
shares
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    3Potential common shares assumed purchased
with potential proceeds
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    (3
    )Potential common share equivalents
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Calculation of potential common shares
assumed purchased with potential proceeds:Potential proceeds from exercise of
options
to purchase common shares
    
    
    
    
    
    $
    419
    
    
    
    
    
    
    $
    48Common stock price used under treasury
stock method
    
    
    
    
    
    $
    23.74
    
    
    
    
    
    
    $
    19.58Potential common shares assumed
purchased with potential proceeds
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    3
 Outstanding options excluded for the 13 week periods ended July 29, 2004 and
July 31, 2003, because the option price exceeded the average market price
during the period, amounted to 17.2 million shares and 29.7 million shares,
respectively. Outstanding options excluded for the 26 week periods ended July
29, 2004 and July 31, 2003 amounted to 17.5 million shares and 29.9 million
shares, respectively. Forward contracts to purchase 46.6 million shares of
common stock were outstanding during the 13 and 26 week periods ended July 29,
2004, but were excluded because the securities were not dilutive under the
treasury stock method. These forward contracts are related to the Companys
HITS (see Note 8 to the Condensed Consolidated Financial Statements -
Indebtedness). 16




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Albertsons, Inc.
Boise, Idaho We have reviewed the accompanying condensed consolidated balance sheet of
Albertsons, Inc. and subsidiaries (Albertsons) as of July 29, 2004, and the
related condensed consolidated earnings statements and cash flow statements for
the thirteen and twenty-six week periods ended July 29, 2004 and July 31, 2003.
These interim financial statements are the responsibility of Albertsons
management. We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America. We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Albertsons as of January 29, 2004, and the related consolidated statements of
earnings, stockholders equity, and cash flow for the year then ended (not
presented herein); and in our report dated March 25, 2004, we expressed an
unqualified opinion and included explanatory paragraphs related to changes in
the methods of accounting for goodwill, closed stores and vendor funds, and to
the agreement to purchase all of the outstanding capital stock of JS USA
Holdings Inc. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of January 29, 2004, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived. /S/ DELOITTE & TOUCHE LLP 
 Boise, Idaho
August 30, 2004 17




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##### Table of Contents



ALBERTSONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except per share data) 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview Results of operations for the 13 and 26 week periods ended July 29, 2004 were
favorably impacted by the acquisition of J Sainsbury plcs U.S. retail grocery
store business (Shaws) on April 30, 2004. Sales for the 13 and 26 week
periods ended July 29, 2004 increased due to the addition of 206 stores
acquired in the transaction. The results of operations for the 13 and 26 week
periods ended July 29, 2004 have been concurrently unfavorably impacted by the
continuing effect of the recent labor dispute in southern California (the
Labor Dispute). Although the Labor Dispute ended with the ratification of
new collective bargaining agreements on February 28, 2004, the impact on
operating results extended through the second quarter of 2004 and continues to
impact operating results. Sales and margins in the Companys southern
California combination food and drug and conventional food stores decreased for
the 13 and 26 week periods ended July 29, 2004 as compared to the 13 and 26
week periods ended July 31, 2003. The Company also incurred additional costs
as part of the Labor Dispute settlement and is continuing to make significant
investments to win back and acquire customers in southern California in the
form of pricing promotions and advertising. These impacts were partially
offset by reduced labor expenses in the affected stores during the Labor
Dispute and the benefit from certain multi-employer bargaining agreements, all
of which are discussed more fully below. Shaws Acquisition On April 30, 2004, the Company acquired all of the outstanding capital stock of
Shaws. The operations acquired consist of 206 grocery stores in the New
England area operated under the banners of Shaws and Star Market. The Company
acquired Shaws for a variety of reasons, including attractive market share
positions, attractive real estate, the opportunity to realize numerous
synergies and strong historical financial performance. The aggregate purchase price was $2,578, which included $2,134 of cash, $441 of
assumed debt and $3 of transaction costs. The Company used a combination of
cash-on-hand and the proceeds of the issuance of $1,603 of commercial paper to
finance the acquisition. The Company used the proceeds from a subsequent
Hybrid Income Term Security Units (HITS) offering (see Note 8 to the
Condensed Consolidated Financial Statements  Indebtedness) to repay $1,117 of
such commercial paper. The commercial paper remaining outstanding is currently
backed by the Companys existing credit facilities. Southern California Labor Dispute As previously disclosed, in connection with the decision of the Company, The
Kroger Co. and Safeway Inc. (the Retailers) to engage in multi-employer
bargaining with the United Food and Commercial Workers in connection with the
Labor Dispute, the Retailers entered into agreements (Labor Dispute
Agreements) which, among other things, were designed to prevent the union from
placing disproportionate pressure on one or more Retailer. The Labor Dispute
Agreements provided for payments from any of the Retailers who gained from such
disproportionate pressure to any of the Retailers who suffered from such
disproportionate pressure. Amounts earned by the Company under the terms of
the Labor Dispute Agreements totaled $17, $43 and $3 in the 13 week periods
ended April 29, 2004, January 29, 2004 and October 30, 2003, respectively.
Amounts earned were recorded as a reduction to selling, general and
administrative costs in each of the respective periods and all amounts were
collected during the 13 week period ended July 29, 2004. Results of Operations 13 Week Period Ended July 29, 2004 As noted above, results of operations for the 13 week period ended July 29,
2004 were favorably impacted as a result of the Shaws acquisition and
unfavorably impacted by the continued effects of the recent Labor Dispute. 18




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##### Table of Contents



Sales were $10,194 and $8,974 for the 13 week periods ended July 29, 2004 and
July 31, 2003, respectively. The increase in sales was primarily due to sales
from the 206 Shaws stores acquired on April 30, 2004 and was partially offset
by decreased sales in southern California as a result of the continuing impact
of the recent Labor Dispute. Identical store sales decreased 1.5% for the 13
week period ended July 29, 2004 compared to the 13 week period ended July 31,
2003. Identical stores are defined as stores that have been in operation for
both full fiscal periods. Comparable store sales, which uses the same store
base as the identical store sales computation except it includes sales at
replacement stores, decreased 1.3%. Due to these computation methodologies,
the 206 Shaws stores are not included in the identical or comparable store
sales computation until the second quarter of 2005. Excluding food stores in
the Companys Southern California Division for the 13 week periods ended July
29, 2004 and July 31, 2003, identical store sales were flat and comparable
store sales increased 0.2%. Management estimates that overall inflation in
products the Company sells was approximately 0.7% in the twelve months ended
July 29, 2004 and July 31, 2003, respectively. The following table reconciles actual identical store sales and comparable
store sales to adjusted identical store sales and comparable store sales as
presented herein. The Company presents these non-GAAP financial measures
because it believes a comparison of actual to adjusted store sales data is
useful to investors to communicate managements belief of the impact of the
recent Labor Dispute on trends in sales experienced during the 13 weeks ended
July 29, 2004. Actual
    
    Labor
    
    AdjustedIdentical
    
    Dispute
    
    IdenticalStore Sales
    
    Adjustment
    
    Store Sales13 weeks ended July 29, 2004
    
    $
    8,649
    
    
    $
    (1,215
    )(a)
    
    $
    7,43413 weeks ended July 31, 2003
    
    
    8,783
    
    
    
    (1,349
    )(b)
    
    
    7,434Year to year change
    
    
    (134
    )
    
    
    
    
    
    
    13 weeks ended July 31, 2003
    
    
    8,783
    
    
    
    
    
    
    
    7,434Identical store sales percentage change
    
    
    (1.5
    )%
    
    
    
    
    
    
    0.0
    %
 Actual
    
    Labor
    
    AdjustedComparable
    
    Dispute
    
    ComparableStore Sales
    
    Adjustment
    
    Store Sales13 weeks ended July 29, 2004
    
    $
    8,751
    
    
    $
    (1,227
    )(c)
    
    $
    7,52413 weeks ended July 31, 2003
    
    
    8,867
    
    
    
    (1,361
    )(d)
    
    
    7,506Year to year change
    
    
    (116
    )
    
    
    
    
    
    
    1813 weeks ended July 31, 2003
    
    
    8,867
    
    
    
    
    
    
    
    7,506Comparable store sales percentage change
    
    
    (1.3
    )%
    
    
    
    
    
    
    0.2
    %
  (a)
    
    Represents the identical Southern California Division food store sales during the 13 weeks ended July 29, 2004.(b)
    
    Represents the identical Southern California Division food store sales during the 13 weeks ended July 31, 2003.(c)
    
    Represents the comparable Southern California Division food store sales during the 13 weeks ended July 29, 2004.(d)
    
    Represents the comparable Southern California Division food store sales during the 13 weeks ended July 31, 2003. During the 13 week period ended July 29, 2004, the Company acquired 172
combination food and drug stores, 33 conventional stores and one warehouse
store as part of the Shaws acquisition. It also opened 13 combination food and
drug stores, five stand-alone drugstores, one conventional store and six fuel
centers, while closing 10 combination food and drug stores, four conventional
stores, two stand-alone drugstores and two fuel centers. Gross profit, as a percentage of sales, for the 13 week period ended July 29,
2004 decreased to 28.3% from 29.4% for the 13 week period ended July 31, 2003.
This was a result of decreased sales leverage as a result of the Labor Dispute
and continued planned investments in pricing and promotion in key markets and
categories to drive sales growth and market share. These investments were
partially offset by savings generated from strategic sourcing initiatives,
increased pharmacy gross margins as a result of benefits from a supply contract
and higher Company-sourced generic substitution and increased sales growth in
Our Own Brands (formerly called private label) sales growth. 19




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##### Table of Contents



Selling, general and administrative expenses, as a percent of sales, decreased
to 25.0% for the 13 week period ended July 29, 2004, as compared to 25.3% for
the 13 week period ended July 31, 2003. This decrease was primarily
attributable to increased sales leverage as a result of the Shaws acquisition.
Excluding the operating results of the recently acquired Shaws stores,
selling, general and administrative expenses as a percent of sales declined for
the 13 week period ended July 29, 2004 as compared to the prior year due to
decreasing employee benefit costs and workers compensation costs. These
decreases were partially offset by increasing depreciation and amortization.
Declines in employee benefit costs were the result of a reduction in
Company-sponsored health and welfare costs due to the restructuring of the
Companys benefit plans in June 2004 allowing employees the ability to customize
their benefit packages which resulted in lower expense,
partially offset by unanticipated payments to two northern
California UFCW multi-employer health and welfare plans for funding deficits.
Additional payments to those health and welfare plans are expected in the third
quarter of 2004. Declines in workers compensation costs over the prior year were
a result of Company managed initiatives to lower accident frequencies and
increased expense in the prior year as a result of a State of California
audit of our third party administrator. Earnings from continuing operations were $125 for the 13 week period ended July
29, 2004 compared to $162 for the 13 week period ended July 31, 2003. This
decrease was primarily due to a reduction in identical store sales of 1.5% and
a decrease in gross margin as a result of the continuing effects of the Labor
Dispute and planned pricing investments. The Companys effective tax rate from continuing operations for the 13 week
period ended July 29, 2004 was 37.5% as compared to 38.4% for the 13 week
period ended July 31, 2003. This decrease was a result of the implementation of
tax saving initiatives which resulted in lower estimated federal and state income
tax. Net loss from discontinued operations was $21 for the 13 week period ended July
29, 2004. This loss resulted primarily from the Companys decision announced
in June 2004 to sell, close or otherwise dispose of 21 operating stores in
Omaha, Nebraska and partially due to the Companys announcement to sell, close
or otherwise dispose of seven operating stores and three non-operating
properties in New Orleans, Louisiana. The loss from discontinued operations of
$21 for the 13 week period ended July 29, 2004 consisted of a loss from
operations of $9, a non-cash write down of fixed assets and lease settlements
of $30 and a gain on disposal of $5, net of an income tax benefit of $13. Net earnings were $104 or $0.28 per diluted share for the 13 week period ended
July 29, 2004, compared to net earnings of $162 or $0.44 per diluted share for
the 13 week period ended July 31, 2003. This decline was the result of the
decrease in earnings from continuing operations and the loss from discontinued
operations as a result of the Companys decision to exit the New Orleans and
Omaha markets. 26 Week Period Ended July 29, 2004 Results of operations for the 26 week period ended July 29, 2004 were favorably
impacted as a result of the Shaws acquisition and unfavorably impacted by the
continued effects of the recent Labor Dispute. Sales for the 26 week period
ended July 29, 2004 increased due to the addition of 206 stores acquired in the
Shaws acquisition, while the residual effects of the recent Labor Dispute
resulted in decreased sales in the Companys southern California combination
food and drug and conventional stores and decreased gross margin as a result of
decreased volume, increased inventory shrink, sales mix changes and increased
distribution costs. Additional costs incurred in connection with the terms of
the new collective bargaining agreements included funding a one-time
contribution to the union health and welfare fund of $36 and strike
ratification bonus payments of $10. These amounts were charged to earnings in
the 13 week period ended April 29, 2004. Sales were $18,831 and $17,832 for the 26 week periods ended July 29, 2004 and
July 31, 2003, respectively. The increase in sales was due to the Shaws
acquisition, partially offset by decreased sales in southern California as a
result of the continuing impact of the recent Labor Dispute. Identical store
sales decreased 2.7% for the 26 week period ended July 29, 2004 compared to the
26 week period ended July 31, 2003. Comparable store sales decreased 2.4%.
The 206 stores acquired from Shaws are not included in the year-to-date
identical or comparable store sales computations and will not be included in
the annual computation until fiscal year 2006. Excluding food stores in the
Companys Southern California Division for the 26 week periods ended July 29,
2004 and July 31, 2003, identical store sales increased 0.1% and comparable
store sales increased 0.5%. Management estimates that overall inflation in
products the Company sells was approximately 0.7% in the twelve months ended
July 29, 2004 and July 31, 2003, respectively. The following table reconciles actual identical store sales and comparable
store sales to adjusted identical store sales and comparable store sales as
presented herein. The Company presents these non-GAAP financial measures
because it believes a comparison of actual to adjusted store sales data is
useful to investors to communicate managements belief of the impact of the
Labor Dispute on trends in sales experienced during the 26 weeks ended July 29,
2004, including the portion of the period the Labor Dispute was ongoing and the
weeks following its resolution. 20




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##### Table of Contents



Actual
    
    Labor
    
    AdjustedIdentical
    
    Dispute
    
    IdenticalStore Sales
    
    Adjustment
    
    Store Sales26 weeks ended July 29, 2004
    
    $
    16,787
    
    
    $
    (2,152
    )(a)
    
    $
    14,63526 weeks ended July 31, 2003
    
    
    17,254
    
    
    
    (2,634
    )(b)
    
    
    14,620Year to year change
    
    
    (467
    )
    
    
    
    
    
    
    1526 weeks ended July 31, 2003
    
    
    17,254
    
    
    
    
    
    
    
    14,620Identical store sales percentage change
    
    
    (2.7
    )%
    
    
    
    
    
    
    0.1
    %Actual
    
    Labor
    
    AdjustedComparable
    
    Dispute
    
    ComparableStore Sales
    
    Adjustment
    
    Store Sales26 weeks ended July 29, 2004
    
    $
    17,023
    
    
    $
    (2,169
    )(c)
    
    $
    14,85426 weeks ended July 31, 2003
    
    
    17,439
    
    
    
    (2,656
    )(d)
    
    
    14,783Year to year change
    
    
    (416
    )
    
    
    
    
    
    
    7126 weeks ended July 31, 2003
    
    
    17,439
    
    
    
    
    
    
    
    14,783Comparable store sales percentage change
    
    
    (2.4
    )%
    
    
    
    
    
    
    0.5
    %
  (a)
    
    Represents the identical Southern California Division food store sales during the 26 weeks ended July 29, 2004.(b)
    
    Represents the identical Southern California Division food store sales during the 26 weeks ended July 31, 2003.(c)
    
    Represents the comparable Southern California Division food store sales during the 26 weeks ended July 29, 2004.(d)
    
    Represents the comparable Southern California Division food store sales during the 26 weeks ended July 31, 2003. During the 26 week period ended July 29, 2004, the Company acquired 172
combination food and drug stores, 33 conventional stores and one warehouse
store as part of the Shaws acquisition. It also opened 32 combination food and
drug stores, eight stand-alone drugstores, one conventional store and 10 fuel
centers, while closing 16 combination food and drug stores, 10 conventional
stores, eight stand-alone drugstores, two warehouse stores and two fuel
centers. Gross profit, as a percentage of sales, for the 26 week period ended July 29,
2004 decreased to 28.2% from 28.9% for the 26 week period ended July 31, 2003.
This was a result of decreased sales leverage as a result of the Labor Dispute
and continued planned investments in pricing and promotion in key markets and
categories to drive sales growth and market share. These investments were
partially offset by savings generated from strategic sourcing initiatives,
increased pharmacy gross margins as a result of benefits from a supply contract
and higher Company-sourced generic substitution and increased sales growth in
Our Own Brands (formerly called private label). Selling, general and administrative expenses, as a percent of sales, increased
to 25.4% for the 26 week period ended July 29, 2004, as compared to 24.8% for
the 26 week period ended July 31, 2003. This increase was primarily
attributable to lack of sales leverage as a result of the Labor Dispute, higher
depreciation costs associated with continued investment in infrastructure,
particularly in information technology, increased employee compensation and
benefits costs primarily as the result of a one-time contribution to the union
health and welfare fund of $36 and strike ratification bonus payments of $10
paid under the terms of the new collective bargaining agreements in southern
California, and increased legal costs related to pending litigation in
California but unrelated to the Labor Dispute. These amounts were partially
offset by amounts earned under the Labor Dispute Agreements and increased sales
leverage from the acquisition of Shaws. Restructuring credits during the 26 week period ended July 31, 2003 of $15 were
primarily related to gains on disposition of assets and an adjustment for a
pension curtailment related to the Companys restructuring activities in 2001. Earnings from continuing operations were $181 for the 26 week period ended July
29, 2004 compared to $335 for the 26 week period ended July 31, 2003. This
decrease was primarily due to a reduction in identical store sales of 2.7% and
a decrease in gross margin as a result of the Labor Dispute, higher
depreciation, increased employee salaries and benefits costs primarily as the
result of a one-time contribution to the union health and welfare fund of $36
and strike ratification bonus payments of $10 paid under the terms of the new
collective bargaining agreements in southern California and increased legal
costs related to California but unrelated to the Labor Dispute. The Companys effective tax rate from continuing operations for the 26 week
period ended July 29, 2004 was 37.5% as compared to 38.4% for the 26 week
period ended July 31, 2003. This decrease was a result of the implementation of
tax saving initiatives which resulted in lower estimated federal and state income
tax. 21




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##### Table of Contents



Net loss from discontinued operations was $41 for the 26 week period ended July
29, 2004. This loss resulted from the Companys decision announced in June
2004 and April 2004 to sell, close or otherwise dispose of 28 operating stores
and three non-operating properties in the Omaha, Nebraska and New Orleans,
Louisiana markets. The loss from discontinued operations of $41 for the 26
week period ended July 29, 2004 consisted of a loss from operations of $10, a
write down of fixed assets and lease settlements of $60, and a gain on disposal
of $5, net of an income tax benefit of $24. Net earnings were $140 or $0.38 per diluted share for the 26 week period ended
July 29, 2004, compared to net earnings of $334 or $0.90 per diluted share for
the 26 week period ended July 31, 2003. This decline was the result of the
decrease in earnings from continuing operations and the loss from discontinued
operations as a result of the Companys decision to exit the New Orleans and
Omaha markets. Critical Accounting Policies The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. The
accompanying condensed consolidated financial statements are prepared using the
same critical accounting policies discussed in the Companys Annual Report on
Form 10-K for the fiscal year ended January 29, 2004. Liquidity and Capital Resources Cash provided by operating activities during the 26 week period ended July 29,
2004 was $1,136, compared to $860 for the same period in the prior year. The
increase in cash provided by operations in the first two quarters of 2004 as
compared to 2003 was due primarily to implementation of strategic initiatives
to lower inventories, higher levels of accounts payable due to increased
purchases in southern California as a result of resolution of the Labor
Dispute, collection of amounts earned under the Labor Dispute Agreements and a
reduction in the Company tax accounts due to lower earnings and implementation
of tax planning initiatives in 2003 and 2004. Cash flow used in investing activities during the 26 week period ended July 29,
2004 increased to $2,483 compared to $540 for the 26 week period ended July 31,
2003. This increase was primarily the result of the $2,080 paid to acquire
Shaws, partially offset by lower capital expenditures in 2004. The Company is
continuing to implement its 2004 capital expenditure plan, which includes
outlays for new stores, store remodels and information technology. The
Companys capital expenditure budget for 2004 is approximately $1,600,
including $300 for the recently acquired Shaws operations, and includes
approximately $165 in new capital and operating leases. Cash flows provided by financing activities during the 26 week period ended
July 29, 2004 were $1,078 as compared to cash flows used in financing
activities of $359 during the 26 week period ended July 31, 2003. The change
is due to proceeds from the HITS and short-term borrowings during the 26 week
period ended July 29, 2004 in connection with the acquisition of Shaws on
April 30, 2004 as compared to cash used for the purchase and retirement of the
Companys common stock in the 26 week period ended July 31, 2003. The Company utilizes its commercial paper and bank line programs primarily to
supplement cash requirements for seasonal fluctuations in working capital and
to fund its capital expenditure program. Accordingly, commercial paper and
bank line borrowings will fluctuate between reporting periods. At July 29, 2004, the Company had three revolving credit facilities totaling
$1,400. The first agreement, a 364-Day revolving credit facility with total
availability of $400, will expire in June 2005. The second agreement, a
five-year facility for $900, expires in June 2009. The third agreement, a
five-year facility for $100, expires in July 2009. The 364-Day credit agreement
contains an option which would allow the Company, upon due notice, to convert
any outstanding amount at the expiration date to a term loan. The Companys
commercial paper program is backed by these credit facilities. All of the
agreements contain two financial covenants: 1) a minimum fixed charge coverage
ratio and 2) a maximum consolidated leverage ratio, as defined in the credit
facilities. Under these facilities, the fixed charge coverage ratio shall not
be less than 2.5 to 1 through April 30, 2005, 2.6 to 1 through April 30, 2006
and 2.7 to 1 thereafter and the consolidated leverage ratio shall not exceed
4.5 to 1 through April 30, 2006, 4.25 to 1 through April 30, 2007 and 4.0 to 1
thereafter. As of July 29, 2004, the Company was in compliance with these
requirements. The Company had $304 in commercial paper borrowings outstanding
at July 29, 2004, and no outstanding commercial paper borrowings outstanding at
January 29, 2004. 22




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##### Table of Contents



The Company filed a shelf registration statement with the Securities and
Exchange Commission, which became effective on February 13, 2001 (2001
Registration Statement), to authorize the issuance of up to $3,000 in debt
securities. The Company intends to use the net proceeds of any securities sold
pursuant to the 2001 Registration Statement for retirement of debt and general
corporate purposes, including the potential purchase of outstanding shares of
Albertsons common stock. As of July 29, 2004, $2,400 of debt securities remain
available for issuance under the 2001 Registration Statement; however there can
be no assurance that the Company will be able to issue debt securities under
this registration statement at terms acceptable to the Company. The Company filed a registration statement with the Securities and Exchange
Commission, which became effective on March 29, 2004 (2004 Registration
Statement), to authorize the issuance of $1,150 in Hybrid Income Term Security
Units (HITS) (see Note 8 to the Condensed Consolidated Financial Statements 
Indebtedness). On May 7, 2004, the Company issued $1,000 of HITS under the
2004 Registration Statement and used the net proceeds of $971 to reduce a
portion of the outstanding commercial paper borrowings incurred in connection
with the Shaws acquisition. On June 2, 2004, the underwriters purchased an
additional $150 of HITS, pursuant to an overallotment option, yielding net
proceeds of $146, which were used to further reduce outstanding commercial
paper borrowings. In the first quarter of 2003, the Company repurchased 5.3 million shares of its
common stock for a total expenditure of $108 at an average price of $20.26 per
share. On December 5, 2003, the Board of Directors reauthorized a program
authorizing management, at its discretion, to purchase and retire up to $500 of
the Companys common stock through December 31, 2004. No shares of common
stock were repurchased during the 26 weeks ended July 29, 2004. The Company
may continue, or from time to time suspend, purchasing shares under its stock
purchase program. Contractual Obligations, Commercial Commitments and Guarantees Contractual Obligations The Company enters into a variety of legally binding obligations and
commitments in the normal course of its business. The table below presents the
Companys long-term contractual obligations and commitments which are
considered to represent known future cash payments that the Company will be
required to make under existing contractual arrangements. Some amounts are
based on managements estimates and assumptions and amounts actually paid may
vary from those reflected in the table. Contractual Obligation
    
    Payments Due By Period2004
    
    
    
    
    
    
    
    
    
    2009 andTotal
    
    Remaining
    
    2005 - 2006
    
    2007 - 2008
    
    ThereafterLong-term debt, including current
portion (1)
    
    $
    6,264
    
    
    $
    307
    
    
    $
    232
    
    
    $
    75
    
    
    $
    5,650Capital lease obligations (2)
    
    
    1,909
    
    
    
    89
    
    
    
    211
    
    
    
    210
    
    
    
    1,399Operating leases (2)
    
    
    4,754
    
    
    
    423
    
    
    
    778
    
    
    
    668
    
    
    
    2,885Purchase obligations (3)Utilities
(4)
    
    
    194
    
    
    
    94
    
    
    
    100
    
    
    
    
    
    
    
    Contracts for purchase of
property and construction of
buildings
    
    
    150
    
    
    
    109
    
    
    
    41
    
    
    
    
    
    
    
    Transportation contracts
    
    
    492
    
    
    
    101
    
    
    
    216
    
    
    
    175
    
    
    
    OtherSelf insurance liability
    
    
    871
    
    
    
    246
    
    
    
    353
    
    
    
    123
    
    
    
    149Compensation and benefits
    
    
    551
    
    
    
    50
    
    
    
    99
    
    
    
    30
    
    
    
    372Other long-term liabilities
    
    
    5
    
    
    
    4
    
    
    
    1
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    15,190
    
    
    $
    1,423
    
    
    $
    2,031
    
    
    $
    1,281
    
    
    $
    10,455
  (1)
    
    The Company has medium-term notes and debentures that contain put options
that would require the Company to repay borrowed amounts prior to
maturity. Medium-term notes of $30 and $50 mature in July 2027 and April
2028, respectively, and have put options exercisable in July 2007 and
April 2008, respectively. Debentures in the amount of $200 mature in May
2037 and have a put option exercisable in May 2009. For the purpose of the
table above, payments of these obligations are assumed to occur at
maturity.  (2)
    
    Represents the minimum rents payable and includes leases associated with
closed stores accrued for under the Companys restructuring and closed
store reserves. Amounts are not offset by expected sublease income.  (3)
    
    In addition to the contracts noted in this table, the Company enters into
supply contracts to purchase products for resale in the ordinary course of
business. This category of contracts covers a broad spectrum of products
and sometimes includes specific merchandising obligations relative to
those products. These supply contracts typically include either a volume
commitment or a fixed expiration date; pricing terms based on the vendors
published list price; termination provisions; and other standard
contractual considerations. Although there are a significant number of
these contracts, they are typically cancelable upon return of unearned
allowances and therefore no amounts have been included above.  (4)
    
    The Company has entered into supply contracts to purchase specified
quantities of electricity and natural gas that have terms through 2006.
The amounts included in the table reflect projected purchases based on
historical usage and contracted rates. 23




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##### Table of Contents



Commercial Commitments The Company had outstanding letters of credit of $110 as of July 29, 2004, all
of which were issued under separate agreements with multiple financial
institutions. These agreements are not associated with the Companys credit
facilities. Of the $110 outstanding at July 29, 2004, $91 were standby letters
of credit covering primarily workers compensation or performance obligations.
The remaining $19 were commercial letters of credit supporting the Companys
merchandise import program. The Company paid issuance fees that varied,
depending on type, up to 0.90% of the outstanding balance of the letter of
credit. Guarantees The Company provides guarantees, indemnification and assurances to others in
the ordinary course of its business. The Company has evaluated its agreements
that contain guarantees and indemnification clauses in accordance with the
guidance of FASB Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. The Company is contingently liable for certain operating leases that were
assigned to third parties in connection with various store closures and
dispositions. If any of these third parties fails to perform its obligations
under the lease, the Company could be responsible for the lease obligations.
In 2003, the Company was notified that certain of these third parties had
become insolvent and were seeking bankruptcy protection. At January 29, 2004,
approximately 26 store leases for which the Company is contingently liable were
subject to the bankruptcy proceedings of such third parties and 22 of those had
been rejected by the applicable third party. The Company recorded pre-tax
charges of $20 in fiscal year 2003, which represents the remaining minimum
lease payments and other payment obligations under the 22 rejected leases, less
estimated sublease income and discounted at the Companys credit-adjusted
risk-free interest rate. As of July 29, 2004, approximately 23 store leases
remained for which the Company is contingently liable. Of those 23, 17 have
been rejected by the applicable third party and there has been no material
change in the estimated contingent liability. As of July 29, 2004, the Company
had remaining guarantees on approximately 198 stores with leases extending
through 2027. Assuming that each respective purchaser became insolvent, an
event the Company believes to be remote because of the wide dispersion among
third parties and the variety of remedies available, the minimum future
undiscounted payments, exclusive of any potential sublease income, are $249. The Company enters into a wide range of indemnification arrangements in the
ordinary course of business. These include tort indemnities, tax indemnities,
indemnities against third party claims arising out of arrangements to provide
services to Albertsons and indemnities in merger and acquisition agreements.
It is difficult to quantify the maximum potential liability under these
indemnification arrangements; however, at July 29, 2004 the Company was not
aware of any material liabilities arising from these indemnification
arrangements. Off-Balance Sheet Arrangements At July 29, 2004, the Company had no significant investments that were
accounted for under the equity method in accordance with accounting principles
generally accepted in the United States. Investments that were accounted for
under the equity method at July 29, 2004, had no liabilities associated with
them that were guaranteed by or that would be considered material to
Albertsons. Accordingly, the Company does not have any off-balance sheet
arrangements with unconsolidated entities. Related Party Transactions There were no material related party transactions during the 13 or 26 week
periods ended July 29, 2004. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes regarding the Companys market risk
position from the information provided under the caption Quantitative and
Qualitative Disclosures About Market Risk in the Companys Annual Report on
Form 10-K for the fiscal year ended January 29, 2004. 
 Item 4. Controls and Procedures Management of the Company, including the Chief Executive Officer and the Chief
Financial Officer of the Company, have evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e) of
the Securities Exchange Act of 1934) as of July 29, 2004. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Company
in the reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commissions rules and forms. On April 30, 2004 the Company completed the Shaws acquisition. Based on
managements evaluation, this acquisition and the integration of the Shaws
system of internal controls with that of the Company will not negatively affect
the design or operation of the Companys overall internal control over
financial reporting. Other than as described above, there were no changes in the Companys internal
control over financial reporting that occurred during the Companys most
recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting. 24




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PART II. OTHER INFORMATION 
 Cautionary Statement for Purposes of Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995 All statements other than statements of historical fact contained in this and
other documents disseminated by the Company, including statements regarding the
Companys expected financial performance, are forward-looking information as
defined in the Private Securities Litigation Reform Act of 1995. In reviewing
such information about the future performance of the Company, it should be kept
in mind that actual results may differ materially from those projected or
suggested in such forward-looking information since predictions regarding
future results of operations and other future events are subject to inherent
uncertainties. These statements may relate to, among other things: non-GAAP
financial measures included in this report; statements of expectation regarding
the results of operations had the Labor Dispute not occurred; investing to
increase sales; changes in cash flow; increases in general liability costs,
workers compensation costs and employee benefit costs; attainment of cost
reduction goals; impacts of the Labor Dispute; impacts of the completion of the
acquisition of Shaws; achieving sales increases and increases in comparable
and identical sales; opening and remodeling stores; and the Companys five
strategic imperatives. These statements are indicated by words or phrases such
as expects, plans, believes, estimate, and goal. In reviewing such
information about the future performance of the Company, it should be kept in
mind that actual results may differ materially from those projected or
suggested in such forward-looking information. Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in consumer spending; actions taken by new or
existing competitors (including nontraditional competitors), particularly those
intended to improve their market share (such as pricing and promotional
activities); labor negotiations; adverse determinations with respect to
litigation or other claims (including environmental matters); employee benefit
costs; the Companys ability to recruit, retain and develop employees; the
Companys ability to develop new stores or complete remodels as rapidly as
planned; the Companys ability to implement new technology successfully;
stability of product costs; the Companys ability to integrate the operations
of and realize synergies from acquired or merged companies, including Shaws;
the Companys ability to execute its restructuring plans; the Companys ability
to achieve its five strategic imperatives; and other factors affecting the
Companys business in or beyond the Companys control. These other factors
include changes in the rate of inflation; changes in state or federal
legislation or regulation; the cost and stability of energy sources; the
continued safety of the products the Company sells; changes in the general
economy; and changes in interest rates. Other factors and assumptions not identified above could also cause the actual
results to differ materially from those projected or suggested in the
forward-looking information. The Company does not undertake to update
forward-looking information contained herein or elsewhere to reflect actual
results, changes in predictions, assumptions, estimates or changes in other
factors affecting such forward-looking information. 
 Item 1. Legal Proceedings The Company is subject to various lawsuits, claims and other legal matters that
arise in the ordinary course of conducting business. The following significant
matters, each of which was previously reported in the Companys Annual Report
on Form 10-K for the fiscal year ended January 29, 2004, saw developments
during the second quarter of 2004. In March 2000 a class action complaint was filed against Albertsons as well as
American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Gardner, et al. v.
Albertsons, Inc., et al.) by bonus-eligible managers seeking recovery of
additional bonus compensation based upon plaintiffs allegation that the
calculation of profits on which their bonuses were based improperly included
expenses for workers compensation costs, cash shortages, premises liability
and shrink losses in violation of California law. In August 2001 a class
action complaint with very similar claims, also involving bonus-eligible
managers, was filed against Albertsons as well as Lucky Stores, Inc. and
American Stores Company, wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Petersen, et al. v.
Lucky Stores, Inc., et al.). In June 2002 the cases were consolidated
(Gardner/Petersen case) and in August 2002 a class action with respect to the
consolidated case was certified by the court. On May 26, 2004 Albertsons and
the plaintiffs entered into an agreement in principle to settle the
consolidated Gardner/Petersen case. The Company is now working to resolve
disagreements with the plaintiffs incident to arriving at a definitive
settlement agreement. The final settlement agreement will need the approval of
the court. Based on the information presently available to the Company,
management does not expect that the payments under this settlement will have a
material adverse effect on the Companys financial condition, results of
operations or cash flows. 25




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In April 2000 a class action complaint was filed against Albertsons as well as
American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Gardner, et al. v.
American Stores Company, et al.) by assistant managers seeking recovery of
overtime pay based upon plaintiffs allegation that they were improperly
classified as exempt under California law. In May 2001 a class action with
respect to Sav-on Drug Stores assistant managers was certified by the court. A
case with very similar claims, involving the Sav-on Drug Stores assistant
managers and operating managers, was also filed in April 2000 against the
Companys subsidiary Sav-on Drug Stores, Inc. in the Superior Court for the
County of Los Angeles, California (Rocher, Dahlin, et al. v. Sav-on Drug
Stores, Inc.) and was also certified as a class action. In April 2002 the
Court of Appeal of the State of California Second Appellate District reversed
the Rocher class certification, leaving only two plaintiffs. The California
Supreme Court on August 26, 2004, reversed the appellate courts decision. The
Company continues to believe it has strong defenses against these lawsuits and
is vigorously defending them. Although these lawsuits are subject to the
uncertainties inherent in the litigation process, based on the information
presently available to the Company, management does not expect that the
ultimate resolution of these lawsuits will have a material adverse effect on
the Companys financial condition, results of operations or cash flows. In September 2000 an agreement was reached and court approval granted to settle
eight purported class and/or collective actions which were consolidated in the
United States District Court in Boise, Idaho and which raised various issues
including off-the-clock work allegations and allegations regarding certain
salaried grocery managers exempt status. Under the settlement agreement,
current and former employees who met eligibility criteria have been allowed to
present their off-the-clock work claims to a settlement administrator.
Additionally, current and former grocery managers employed in the State of
California have been allowed to present their exempt status claims to a
settlement administrator. The Company mailed notices of the settlement and
claims forms to approximately 70,500 associates and former associates.
Approximately 6,000 claim forms had been returned, of which approximately 5,000
were deemed by the settlement administrator to be incapable of valuation,
presumed untimely, or both. The claims administrator was able to assign a value
to approximately 1,000 claims, which amount to a total of approximately $14,
although the value of many of those claims is still subject to challenge by the
Company. During the quarter ended July 29, 2004, there was a supplemental
mailing and in-store posting directed toward a narrow subset of these current
and former associates. At quarter-end, the Company had not been advised by the
settlement administrator of the number of claims returned by these individuals.
Prior to the second quarter of 2004, and distinct from this supplemental
claims process, a second claim process was ordered by the Court, but the
Company is still waiting for final instructions from the Court. The Company is
presently unable to determine the number of individuals who may ultimately
submit valid claims or the amounts that it may ultimately be required to pay
with respect to such claims. Based on the information presently available to
it, management does not expect that the satisfaction of valid claims submitted
pursuant to the settlement will have a material adverse effect on the Companys
financial condition, results of operations or cash flows. In March 2004 a lawsuit seeking class action status was filed against
Albertsons in the Superior Court of the State of California in and for the
County of Alameda, California (Dunbar, et al. v. Albertson's, Inc.) by grocery
managers seeking recovery including overtime pay based upon plaintiffs
allegation that they were improperly classified as exempt under California law.
In July 2004 a similar case was filed against Albertsons in the same court
(Victoria A. Moore, et al. v. Albertson's, Inc.). These cases are currently in
discovery; however the Company has strong defenses against these lawsuits and
is vigorously defending them. Although these lawsuits are subject to the
uncertainties inherent in the litigation process, based on the information
presently available to the Company, management does not expect that the
ultimate resolution of these lawsuits will have a material adverse effect on
the Companys financial condition, results of operations or cash flows. The Company is also involved in routine legal proceedings incidental to its
operations. Management does not expect that the ultimate resolution of these
legal proceedings will have a material adverse effect on the Companys
financial condition, results of operations or cash flows. The statements above reflect managements current expectations based on the
information presently available to the Company. However, predicting the
outcomes of claims and litigation and estimating related costs and exposures
involve substantial uncertainties that could cause actual outcomes, costs and
exposures to vary materially from current expectations. In addition, the
Company regularly monitors its exposure to the loss contingencies associated
with these matters and may from time to time change its predictions with
respect to outcomes and its estimates with respect to related costs and
exposures. It is possible that material differences in actual outcomes, costs
and exposures relative to current predictions and estimates, or material
changes in such predictions or estimates, could have a material adverse effect
on the Companys financial condition, results of operations or cash flows. 26




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##### Table of Contents



Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Information concerning our stock repurchases during the 26 weeks ended July 29,
2004 (dollars in millions except per share data): Issuer Purchases of Equity Securities (d)(c)
    
    Maximum NumberTotal Number Of
    
    (Or ApproximateShares (Or
    
    Dollar Value) Of(a)
    
    
    
    
    
    Units) Purchased
    
    Shares (Or Units)Total Number
    
    (b)
    
    As Part Of
    
    That May Yet Beof Shares (Or
    
    Average Price
    
    Publicly
    
    Purchased UnderUnits)
    
    Paid Per Share
    
    Announced Plans
    
    The Plans OrPeriod
    
    Purchased
    
    (Or Unit)
    
    Or Programs (1)
    
    ProgramsFebruary 1  February 29, 2004
    
    
    265
    (2)
    
    $
    23.13
    
    
    
    
    
    
    $
    500March 1  March 31, 2004
    
    
    4,120
    (2)
    
    
    24.34
    
    
    
    
    
    
    
    500April 1  April 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500May 1  May 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500June 1  June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500July 1  July 29, 2004
    
    
    212
    (2)
    
    
    25.76
    
    
    
    
    
    
    
    500
   (1)
    
    On December 5, 2003, the Board of Directors reauthorized a program
authorizing management, at its discretion, to purchase and retire up to
$500 of the Companys common stock through December 31, 2004. No shares
of common stock have been repurchased through July 29, 2004 under this
program.(2)
    
    Represents shares surrendered or deemed surrendered to the Company to
satisfy tax withholding obligations in connection with the vesting of
stock units under employee stock based compensation plans. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on June 10, 2004, and
transacted the following business:  1)
    
    Election of Class III Directors (term expiring in 2007): Nominee
    
    Votes For
    
    Votes WithheldPamela G. Bailey
    
    
    302,929,091
    
    
    
    32,212,534Teresa Beck
    
    
    271,680,974
    
    
    
    63,460,651Beth M. Pritchard
    
    
    317,389,905
    
    
    
    17,751,721
 Continuing Class I Directors (term expiring in 2005):
Henry I. Bryant
Bonnie G. Hill
Lawrence R. Johnston Continuing Class II Directors (term expiring in 2006):
A. Gary Ames
Paul I. Corddry
Jon C. Madonna
Beatriz Rivera  2)
    
    Ratification of Appointment of Independent Auditors: Votes For
    
    Votes Against
    
    Abstentions331,097,966
    
    
    2,058,461
    
    
    
    1,985,198
 27




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3)
    
    Approval of the Albertsons, Inc. 2004 Equity and Performance Incentive
Plan: Votes For
    
    Votes Against
    
    Abstentions245,531,180
    
    
    42,758,678
    
    
    
    2,687,183
  4)
    
    Shareholder proposal recommending a majority vote for Director elections: Votes For
    
    Votes Against
    
    Abstentions51,192,540
    
    
    236,145,942
    
    
    
    3,640,559
  5)
    
    Shareholder proposal for simple majority voting requirements: Votes For
    
    Votes Against
    
    Abstentions195,690,044
    
    
    91,969,815
    
    
    
    3,317,482
  6)
    
    Shareholder proposal regarding shareholder approval of certain executive
severance agreements: Votes For
    
    Votes Against
    
    Abstentions161,260,268
    
    
    126,360,154
    
    
    
    3,356,919
  7)
    
    Shareholder proposal to recommend declassifying the Board: Votes For
    
    Votes Against
    
    Abstentions194,039,427
    
    
    93,052,299
    
    
    
    3,885,615
 
 Item 5. Other Information None. 
 Item 6. Exhibits 4.4
    
    Form of Corporate Unit is incorporated herein by reference to
Exhibit 4.3 of Registration Statement on Form S-3/A (Reg. No.
333-113995) filed with the Commission on April 28, 20044.5
    
    Form of Treasury Unit is incorporated herein by reference to Exhibit
4.4 of Registration Statement on Form S-3/A (Reg. No. 333-113995)
filed with the Commission on April 28, 20044.6
    
    Form of Senior Note is incorporated herein by reference to Exhibit
4.5 of Registration Statement on Form S-3/A (Reg. No. 333-113995)
filed with the Commission on April 28, 20044.7
    
    Form of Supplemental Indenture is incorporated herein by reference
to Exhibit 4.6 of Registration Statement on Form S-3/A (Reg. No.
333-113995) filed with the Commission on April 28, 20044.8
    
    Form of Purchase Contract Agreement is incorporated herein by
reference to Exhibit 4.7 of Registration Statement on Form S-3/A
(Reg. No. 333-113995) filed with the Commission on April 28, 20044.9
    
    Form of Pledge Agreement is incorporated herein by reference to
Exhibit 4.8 of Registration Statement on Form S-3/A (Reg. No.
333-113995) filed with the Commission on April 28, 2004
 28




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4.10
    
    Form of Remarketing Agreement is incorporated herein by reference to Exhibit
4.9 of Registration Statement on Form S-3/A (Reg. No. 333-113995) filed with
the Commission on April 28, 200410.50
    
    Albertsons, Inc. 2004 Equity and Performance Incentive Plan*10.51
    
    Credit Agreement (364-day) (dated June 17, 2004)10.52
    
    Credit Agreement (5-year) (dated June 17, 2004)10.53
    
    Credit Agreement (5-year) (dated July 8, 2004)15
    
    Letter re: Unaudited Interim Financial Statements31.1
    
    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Identifies management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto. 29




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. ALBERTSONS, INC.(Registrant)Date: September 2, 2004
    
    /S/ Felicia D. ThorntonFelicia D. ThorntonExecutive Vice Presidentand Chief Financial Officer
 30