-- Long-Term Issuer Default Rating (IDR) at 'BBB'; -- Senior unsecured notes at 'BBB'; -- $1.6 billion bank credit facilities at 'BBB'; -- Short-Term IDR at 'F2'; -- Commercial paper at 'F2'.

The Rating Outlook is Stable. As of Sept. 12, 2009, Safeway had about $5.4 billion of debt outstanding, including capital leases.

The ratings reflect Safeway's broad geographic presence and strong market positions in its key markets, updated store base and merchandise offerings, significant free cash flow generation and willingness to reduce debt over time. Also considered is the significant level of competition in the sector and the economic environment, which has pressured revenues and profits.

Safeway is one of the largest supermarket operators in the U.S. with 1,730 stores located across a broad geography primarily in the West, Chicago and mid-Atlantic regions as well as western Canada. The company has No. 1 or No. 2 market shares in many of its largest markets and has made significant investments in its store base since 2005 with 78% of the stores under the 'Lifestyle' format at the end of the third quarter of 2009. Safeway has also invested in merchandising initiatives to improve its perishables and private label brands.

Economic pressures on consumers and significant competition in food retail combined with deflationary pressures in many key product categories have pressured sales, and non-fuel identical store (ID) sales have turned negative in 2009. For the most recent quarter Safeway reported that 250 basis points of the 300 basis point decline in non-fuel ID sales was due to deflation, trading down and price investments. As the company has invested in price, gross margin, excluding fuel, has also been pressured. Lower sales have resulted in a deleveraging of operating, general and administrative costs, despite successful cost reduction efforts. As a result, year to date EBIT margins were down 84 basis points versus the first three quarters of 2008.

Fitch expects sales levels to improve as deflationary pressures abate going into 2010. However, of concern remains the ongoing pressure on consumers and competitive pricing activity, which are expected to hinder sales growth and could continue to pressure operating profit margins. Regarding employee related costs, Fitch expects Safeway to manage total expenses - which include multi-employer pension plans, health benefits, and wages - so that overall increases are in line with historical growth rates.

Safeway is expected to continue to generate strong free cash flow (operating cash flow less capital expenditures and dividends) of over $1 billion in 2009 in part due to lower capital expenditures from fewer 'Lifestyle' store conversions as most of the stores have already been remodeled and significant tax benefits in 2009. Cash flow generation is expected to be used for a combination of debt reduction, shareholder returns and potential acquisition activity over time. Debt levels are expected to decline through the end of 2009 and upcoming debt maturities are manageable with $500 million maturing in 2010, $500 million in 2011, and $800 million in 2012. Fitch expects these maturities will be repaid or refinanced with long-term debt or commercial paper borrowings and that the company will manage its debt levels to maintain stable credit metrics. For the latest 12 months ended Sept. 12, 2009, Safeway's leverage (total adjusted debt/operating EBITDAR) and EBITDAR coverage of interest and rents were 2.9 times (x) and 3.7x, respectively.

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