Safeway Inc. In The Sweet Spot. Stock Price Performance. Source: Reuters All figures in US dollars, unless otherwise stated.

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1 Equity Research Earnings Update April 27, 2007 Stock Rating: Sector Performer Sector Weighting: Market Weight mo. Price Target $39.00 SWY-NYSE (4/27/07) $36.87 Key Indices: None 3-5-Yr. EPS Gr. Rate (E) NM 52-week Range $22.86-$38.31 Shares Outstanding 440.3M Float 440.3M Shrs Avg. Daily Trading Vol. 3,223,200 Market Capitalization $16,233.9M Dividend/Div Yield $0.23 / 0.6% Fiscal Year Ends December Book Value $13.65 per Shr 2007 ROE (E) 16.2% Net Debt $6,015.9M Preferred Nil Common Equity $6,009.9M Convertible Available No Earnings Per Share (FD) Prev Current 2006 $1.72A 2007 $1.98E $2.04E 2008 $2.27E $2.38E P/E (FD) x x 18.1x x 15.5x Merchandising Safeway Inc. In The Sweet Spot Safeway reported a strong quarter, two cents ahead of our forecast and 50 bps ahead on ID sales. There was disappointment that the company didn't raise guidance, but we are raising our 2007 EPS estimate above the guidance range anyway, from $1.98 to $2.04. Safeway is in the sweet spot, with an ability to invest in prices and efficiently mix back those investments with a greater penetration of perishables and private label, and better control of shrink and labor. The core business should produce $1.91 of EPS in 2007, which we believe should be valued at 16x, for $31. Blackhawk is worth, in our opinion, about $8 per share. These combine to give us our $39 price target, up from $38 previously. Our recommendation stays at Sector Performer. Stock Price Performance Company Description Safeway operates over 1,500 stores in the U.S. & over 200 stores in Canada. It is the No. 3 supermarket player in N. America. In addition, it has a 49% interest in a Mexican supermarket chain. Perry Caicco 1 (416) Perry.Caicco@cibc.ca Mark Petrie, CFA 1 (416) mark.petrie@cibc.ca Source: Reuters All figures in US dollars, unless otherwise stated CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures" section at the end of this report for important required disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Find CIBC research on Bloomberg, Reuters, firstcall.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, BCE Place, Toronto, Canada M5J 2S8 (416) and cibcwm.com CIBC World Markets Corp., 300 Madison Avenue, New York, NY (212) (800)

2 Overview Safeway (SWY SP) delivered a strong quarter, beating our earnings estimate by $0.02 and our ID sales forecast by 50 basis points (bps). However, there was some disappointment that the company did not raise guidance, maintaining its $1.90 to $2.00 range. We don t view that as any serious issue after all it s just the first quarter, and the company is right to be conservative. Regardless of company guidance, we are raising our 2007 EPS estimate from $1.98 to $2.04 to account for the raised outlook on sales and the solid trend on gross margins. A Comment On Guidance The company reiterated its earnings guidance for the year, leaving the range of $1.90 to $2.00 per share intact. At the same time, ID sales growth (ex fuel) guidance was raised from 3.3% to a range of 3.6% to 3.8%. In our view, management s commentary on the conference call struck a very bullish tone, and with good reason. Performance over the last year has been stellar, and the business is showing significant momentum on the top line. Gross margins had been under pressure in 2005 and most of 2006, but the company has made progress here and has been able to fund price investments with improvements elsewhere (mix, distribution, shrink). SG&A has been steadily declining despite pressure from store labor in the Lifestyle stores. Bottom line, we believe guidance is overly conservative and will likely be raised after a strong second quarter. New Forecast Our annual EPS estimate for Safeway rises from $1.98 to $2.04 based on new higher company guidance on ID sales and a nice outperformance on gross margin, which we believe is sustainable. The key to healthy gross margins is that further price investments (which are a fact of life) likely will be more than offset by improvements in mix, shrink and energy costs. Safeway has now achieved the great distinction of being able to pay for price investments from the profits made by selling more perishables and more private label. In the grocery industry, this is the sweet spot and Safeway has earned it. The $2.04 is above guidance, but we believe that a number like that if the company s Blackhawk gift care business delivers the $0.13 per share we are predicting is achievable. 2

3 Exhibit 1. Current And Prior Forecasts 2007e 2008e Grocery business only Current Prior Current Prior IDs excl fuel 3.83% 3.25% 3.00% 3.00% Total sales $ 41,691 $ 41,405 $ 43,258 $ 42,863 Gross profit, reported 11,952 11,830 12,383 12,227 % of sales 28.67% 28.57% 28.63% 28.53% O&A 9,168 9,094 9,379 9,286 % of sales 21.99% 21.96% 21.68% 21.67% (incl rent and stock options, excl D&A) EBITDA, reported 2,785 2,735 3,005 2,941 % of sales 6.68% 6.61% 6.95% 6.86% Tax rate 37.9% 38.0% 38.0% 38.0% EPS, grocery only $ 1.91 $ 1.85 $ 2.16 $ 2.05 Blackhawk $ 0.13 $ 0.13 $ 0.22 $ 0.22 EPS, consolidated $ 2.04 $ 1.98 $ 2.38 $ 2.27 Source: Company reports and CIBC World Markets Inc. Summary Of Results Overall, Safeway s numbers were in line or better than our expectations. We summarize the quarter as follows: Sales of $9,322 mln., better than our expectation of $9.253 mln. The strong performance was driven by ID sales growth (ex fuel) of +4.5%; we had forecast +4.0%. The quarter included New Year s Eve this year, which provided a lift of about 50 bps to the ID number; we had forecast 30 bps. Gross profit (LIFO) of $2,731 mln., or 29.29% of sales. This was 20 bps ahead of our forecast and 19 bps above last year s, driven by lower advertising costs, efficiency improvements in warehousing and distribution and improvements in shrink. Fuel had a negligible impact. O&A was reported at $2,370 mln., or 25.42% of sales, in line with our forecast on a margin basis and down 11 bps from last year. The improvement was driven by lower labor and workers comp costs. Fuel accounted for about 7 bps of the decline. The company also commented that a hiring blitz caused a dramatic rise in training costs for the quarter. This, along with some one-time merchandising costs in the meat department, bumped the O&A margin by about 24 bps. EBITDA (LIFO) of $597 mln., or 6.40% of sales, better than our forecast of $577 mln. (6.24% margin) and well above last year s $536 mln. (6.03% margin). EPS of $0.39, better than our forecast of $0.37 and up from $0.32 last year. 3

4 Price Target Calculation With our view of Safeway as two businesses the high-growth Blackhawk and the well-run, but steadier core Safeway business we value Safeway in two parts. As mentioned, we believe that, based on its 2007 prospects, Blackhawk is worth about $8 per share. We believe the 50x we apply to Blackhawk is justified given it is an early growth stage business that is growing EPS at a rate of about 80%. The core business, at a 16x multiple, is worth about $31 per share. We value the core business at the upper end of the typical range for supermarkets (14x-16x) due to its successful Lifestyle store format and continued remodeling capacity, strong and building private label and improving sales mix. The combination of these sets our price target at $39. With modest upside from here, Safeway remains rated at Sector Performer, although investors should be intrigued by the potential long-term value of Blackhawk, and excited by the company s ability to manage gross margins upward while still investing in price. Exhibit 2. Price Target Calculation Value per 2007e EPS P/E multiple SWY share Core Safeway operations $ x $ Blackhawk P/E basis $ x $ 6.44 DCF $ 9.60 Average $ 8.02 Total SWY value $ Source: Company reports and CIBC World Markets Inc. At this point, with a limited history on Blackhawk (and our limited understanding of the gift card sector), it is difficult to boost the Blackhawk valuation, or to speculate how it might be valued by a private equity player. However, we have no doubt that its prospects will be put under a microscope over the next few months as potential purchasers try to figure out the risks and rewards of this business after an LBO. Safeway stays at Sector Performer, and we adjust our price target to $39 (previously $38). Key Risks To Price Target Key risks to our price target include an increase in competitive activity beyond our forecasted levels, the inability for management to generate top-line growth, an inappropriate pricing spread between other conventionals and the growth of alternative channels. Key risks to our price target also include risks to the growth and earnings prospects for Blackhawk. These could include increased competition, reductions in commission rates, increased fraud, or lower growth than expected. 4

5 Our EPS estimates are shown below: 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2006 Current $0.32A $0.42A $0.39A $0.61A $1.72A 2007 Prior $0.37E $0.47E $0.45E $0.70E $1.98E 2007 Current $0.39A $0.49E $0.45E $0.71E $2.04E 2008 Prior $2.27E 2008 Current $2.38E 5

6 IMPORTANT DISCLOSURES: Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department within the Corporate and Leveraged Finance Division. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. Important Disclosure Footnotes for Safeway Inc. (SWY) 6

7 CIBC World Markets Price Chart HISTORICAL PERFORMANCE OF CIBC WORLD MARKETS' RECOMMENDATIONS FOR SAFEWAY INC. (SWY) Date Change Type Closing Price Rating Price Target Coverage 11/01/ SP None Perry Caicco 11/01/ SP Perry Caicco 12/08/ SP Perry Caicco 02/24/ SP Perry Caicco 07/26/ SO Perry Caicco 07/21/ SO Perry Caicco 10/13/ SP Perry Caicco 12/18/ SP Perry Caicco 02/23/ SP Perry Caicco 7

8 CIBC World Markets' Stock Rating System Abbreviation Rating Description Stock Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next months. SP Sector Performer Stock is expected to perform in line with the sector during the next months. SU Sector Underperformer Stock is expected to underperform the sector during the next months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted*** from rating the stock. Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest. Ratings Distribution*: CIBC World Markets' Coverage Universe (as of 27 Apr 2007) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Restricted % Restricted % Ratings Distribution: Merchandising Coverage Universe (as of 27 Apr 2007) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Restricted 0 0.0% Restricted 0 0.0% Merchandising Sector includes the following tickers: CTC.A, DL, EMP.A, FGL, GAP, KR, L, LNF, MRU.A, PJC.A, PTMK, RON, SBY, SC, SCC, SVU, SWY, WN. *Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting. Important disclosures required by IDA Policy 11, including potential conflicts of interest information, our system for rating investment opportunities and our dissemination policy can be obtained by visiting CIBC World Markets on the web at or by writing to CIBC World Markets Inc., BCE Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request. 8

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