I would like to remind you that management will make statements during this conference that include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. We undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a list and description of those risks and uncertainties, please see our filings with the SEC.Steven A. Burd Somehow I was expecting a little more drama there, a drumroll or something maybe. Well, first of all, I want to walk you through our agenda here a little bit. I might start by saying that I've said this for years, probably never publicly, but this is absolutely my favorite meeting of the year. And the reason it is, is it's our opportunity to tell our story our way uninterrupted for, hang on, 4 hours, okay? We'll interrupt it with a break. In fact, if anybody needs to take a break, raise your hand, we'll turn up the lights, so you can find your way out of the room. We seized the opportunity this year to abandon the warm weather of California, hoping to get a taste of winter, but we're a little disappointed in that. I think it's in the 30s or 40s outside, right? And then the last thing, for those of you in the room, this is not a beetle climbing up my tie. This is, in fact, a microphone that will pick up any whisper that you even make in the back of the room. Well, in up front, it's even worse.
Okay, all right. So we're going to start with guidance. Some of you have already seen the guidance. I'm going to walk you through that in a minute, but I want to kind of give you a road map because I'm going to cover the guidance. And then I'm going to sit for a while and Robert's going to cover another piece of the agenda. So right after guidance, Robert will come up and review our performance for year 2011. And even though you've experienced 2011 in terms of our quarterly earnings reports, I think we'll be able to give you a lot more color about the year and it's important because that really sets the foundation for how we think we're going to perform in 2012 and beyond.After Robert goes through the 2011 performance, I'm going to come up. I've got 2 quick slides and I want to talk just a little bit about what I might call quality of earnings in 2011. After that, we'll cover our growth plans for 2012 and beyond and that really is the heart of this meeting. And we decided not to just talk about 2012, but we really believe in many respects that we've been coiling a spring here at Safeway, and so I want to give you some dimension really on the next 3 years. You're not going to see projections for 3 years, but you're going to get a sense for why we think that we're going to have a good, good performance over the next 3 years in terms of operating income, which also, of course, will translate into earnings per share growth. I'm going to talk about the elements that will drive core business performance. We're going to have Diane talk about some of the loyalty-building things that we're doing, but I'm personally going to take on just for U. And we may spend 45 minutes to an hour on just for U, and we think it deserves that kind of attention. I think you'll be impressed with the tool that we've created. We started that project more than 2 years ago. It's been in test for almost 2 years now, and we're ready to unveil it and roll it across the rest of our division.
In addition to that, part of that growth description here is going to involve Bill Tauscher, the CEO of Blackhawk, revealing for the first time something investors have long been wanting to see: the operating performance of Blackhawk. So we'll give you the operating income numbers for Blackhawk, and we'll give you in terms of pretax and we'll also give you the EBITDA. And Bill will give you a sense for why we think that's a real growth vehicle for us.And then a year ago, we unveiled for the first time another entity we had created that we call Property Development Centers, which is essentially a shopping center development company, for the most part, anchored by stores, Safeway stores. We described that process last year. I think right now, I would say we have about 32 shopping centers under development. We're going to speak to kind of the income potential from the first 27 of those, and we will give you a sense for how the Property Development Centers will generate income over the next 6 or 7 years. And we'll give you a sense for the reliability of that income, and we'll also talk about the level of capital that we will commit to that business. And in our view, it is a relatively modest amount of capital and a very strong income stream. And then I will also talk about the share repurchase strategy, how that plays into increasing shareholder value, and then we'll finish with a summary. The summary will be a bit different from years past. In the years past, I would pull some of what I thought would be the best slides of the conference and review those. We're not going to do that this year. My summary will be much shorter. I want to make sure we get to a Q&A period before we get to the lunch. So that kind of gives you a road map, 4 speakers this morning, and we're going to start with Robert.
Here you go, Robert.Robert L. Edwards Thank you, and welcome to all of you. We appreciate you being here and hope you find the conference informative. So as Steve mentioned, I'll cover a review of 2011 results. Pardon me. Steven A. Burd Darn, I'm so wrapped up in my own momentum, I still look at guidance as my purview, all right? So just stand there in the wing as if you're a second of some kind, okay? All right. So let's talk about the earnings guidance. Again, you saw this, I'm sure, already this morning. Our guidance for earnings is between $1.90 and $2.10 a share. That's a bit higher. That range is a bit higher than what the current consensus is. In fact, I think even the low end of that is higher than the current consensus, but I think after today, you'll understand why we have that kind of a range. ID sales. We'll talk about that in some length. We've tempered this a little bit. We're very optimistic about what we can do with just for U, and I will show you some metrics. I mean, we've got -- while we've never fully marketed that vehicle, I will show you some metrics that I think will give you quite a bit of optimism for what we can do with just for U in driving core business ID sales. But for right now, we're going to give that a range of 1% to 2%. Operating profit margin. Last year, we thought it would be flat. We were actually down about 8 basis points. Now we're saying kind of in the plus or minus 5 basis point range, and then cash capital expenditures will be less than they were in 2011, and they'll run about $900 million. And then free cash flow will, again, be very strong, actually stronger than 2011 at $850 million to $950 million.
Again, I don't think this slide is news to anybody that got up early this morning because this has been posted, I think, Melissa, for a couple of hours. But -- so that's the guidance for 2012, and Robert, now you're ready to go. One more baton pass.Robert L. Edwards All right, thanks. So on the screen, we showed you the original guidance that we gave over a year ago and then our actual performance. So going down each of the line items, identical store sales, excluding fuel, on the right, you can see our actual performance was 1.0 at the low end of the guidance range that we had given. Inflation, as we measure as price per item in our stores, increased 3.2% or about 220 basis points higher than what our initial estimate was. Operating margin was down 8 basis points entirely due to LIFO charge that we mentioned on our recent earnings call and I'll cover in just a few moments, compared to the guidance of flat to slightly positive. CapEx. We spent about $1.1 billion. The original guidance we gave you was approximately $1 billion. Cash flow came in at $751 million, at the low end of the range that we had given. And then earnings per share, which is our reported -- $1.78 is our reported earnings per share of $1.49 plus the taxes associated with the Canadian dividend of $0.29 for a total of $1.78, which is in the middle of the range that you can see on that slide. Now we had a number of significant accomplishments or highlights during the year. As you, I think are well aware, we returned a significant amount of cash to shareholders totaling $1.74 billion. That included $1.55 billion of stock buyback and then a total cash dividend of $188 million.
As I just mentioned, we achieved our guidance range in terms of earnings per share and free cash flow. Nonfuel identical store sales improved 300 basis points from a negative 2.0 in 2010, again to 1.0 in 2011. And then we maintained price parity and I'll show you some information on that in just a moment.As Steve indicated, we've significantly enhanced our digital marketing capability with just for U and we'll cover that extensively during the presentation. 2011 was again a very good year for cost reduction and I'll give you some details on that in just a few moments. And then I think you're well aware the dividend that we made from Canada early last year of about $1.1 billion, also dividend some cash toward the end of the year as well. That was done in a very tax-efficient manner, and then Bill will cover later the very good year that we had in Blackhawk. Now traditionally at this conference, we've included some comments on the Consumer Confidence Index, and you can see that beginning late 2007, early 2008, the significant decline in the Consumer Confidence Index reaching a low of about 26.9 in the first quarter 2009. And although there has been some improvement recently in the last reported metric, it was 70.8, well below historical levels. Now on the graph now in red, we've shown our identical store sales relative to the CPI index. You can see that they are relatively correlated over this time period. We tracked -- our IDs track below the index up through about the beginning of 2005 and then as we began, if you recall, our Lifestyle store program, their ID sales moved above the index, stayed above that index until early in 2009 when we started to have deflation in the industry, continued below as deflation continued and then moved above the index in late 2010 and then '11 based on the success we were having and with identical store sales. So highly correlated with the Consumer Confidence Index.
Now as you're well aware, unemployment has fallen to a 3-year low at 8.3%. I'm sure you're aware that the underemployment index or rate is north of that as well and so some slight improvement in the unemployment level.Now on this chart, we have listed identical store sales on an annual basis for the last 3 years, and on the right, we'd broken out our quarterly IDs for 2011. So as you recall in 2009 and 2010, we had significant deflation that affected the IDs, and then we achieved 1.0 in 2011. On a quarterly basis, you'll see that we improved from 0.4 to 0.5 in the second quarter and then the second half much stronger at 1.5% IDs excluding fuel, both for Q3 and Q4. Now for the last couple of meetings, we've showed you our change in price per item. And the history there, as you recall, we looked over quite a long period of time when we think the average inflation in our stores measured as price per item is about 3%. You see in the 2007-2008 period, prices were moving up ahead of that and then we had almost unprecedented deflation, and particularly the change from 2008 to 2009, let's say, 550 basis points was really unprecedented in our industry and then deflation got worse in 2010. And then as we reported earlier, price per item increased in our stores about 3.2% in 2011. Now on this chart, we've broken out price per item changes on a quarterly basis. I'll just focus you on the right portion of the chart where we've broken out each quarter in 2011. So you can see that in Q1, price per item improved by 1.2%, 2.7% in Q3 and then finally reaching 4.7% inflation price per item in the fourth quarter 2011.
I mentioned earlier that we had maintained price parity. We've had charts the last couple of meetings covering this topic. Basic conclusion on the left is we measure ourselves against our primary competitors on a shelf-to-shelf basis or prices our customers actually pay were essentially equal to our primary competitors. And there are 3 price checks indicated on the screen: late in 2009, Q1 of last year and then toward the end of 2011. And then on the right, we've compared or shown you the comparison or our price advantage relative to our secondary competitors. So the key takeaway from the chart is, is that we believe that we've maintained price parity during 2011.Now the next several charts, about 8 charts, talk about our margins in historical terms, but primarily in 2011. So you can see that there is quite a bit of correlation here between the changes in price per item and our operating margin. So in the early years, positive operating margins and then based on the deflation that we saw in both 2009 and 2010, the reductions in operating margin. And then you'll see in 2011, our reported operating margin declined about 8 basis points. But when you include -- or exclude the effect of the 16 basis point LIFO charge that we took recognizing inflation during the year, operating profit margins were actually up 8 basis points. Now the components of the change in operating margin. The reported operating margin are a 13-point decline in gross margin and then a 5 basis point improvement in operating and administrative margin. I'll cover both of those. So again, our reported decline in gross margin during the year was 13 basis points. But again, if you look just -- if you exclude the LIFO charge that we took, which was equal to 16 basis points, gross margin rate was, in effect, up 3 basis points.
Now I thought you'd be interested in this chart. And this chart, we've compared the change in our gross margins for each of the last 6 years relative to one of our key competitors. And the change in our FIFO gross margin, yet excluding LIFO charges, is shown in red and then a key competitor is shown in blue. And then if you look -- excuse me, if you look down at the bottom of the chart, you can see that we have indicated the differential in the 2 numbers.So let's just focus on 2011 here. So our FIFO gross margin up 3 basis points, a key competitor down 33 basis points for a total differential better or worse in our favor of 36 basis points. And if you add the -- look at the average of these numbers across the bottom of the chart, you'll see that over the 6-year period, on average, our gross margins were positive 24 basis points relative to a key competitor. Now I think one of the key takeaways from this chart is, and we'll cover this in more detail later, it's a demonstration of the benefits of our focus on shrink. We think that we are the best in class in our industry focusing on shrink, and so you look at the change in our gross margins compared to a key competitor, it is a demonstration of the evidence of the benefits that we derived from our focus on shrink, so very good performance on gross margins. Now this next chart focuses on our O&A expense margin, and this is calculated by taking our operating and administrative expenses and dividing those by sales. So if you look over this period again, very positive performance in the early years, deflation affecting 2009 and 2010. And as you look on the right, our O&A expense margin was positive or improved by 5 basis points in 2011.
And here are the components of the breakdown of the O&A expense margin for the year. You'll see on the left that property gains contributed 10 basis points to the improvement. But again, 7 of those 10 basis points were included in our plan and included in the guidance that we gave you about a year ago. Depreciation as a percent of sales contributed 10 basis points. And then looking on the right, you'll see in the red colors, we made significant investments during the year to support future revenue growth, first at Blackhawk, and Bill will talk about that, I think, a bit in his presentation. And then you can see the 10 basis points negative impact from additional spending on information technology at Safeway and is primarily for the just for U platform that Steve will talk about in a few minutes. So very good control of operating expenses and an improvement of 5 basis points during the year.Now let me talk briefly about some of the headwinds that we faced during the year and then we'll look at our cost reductions. There were a number of significant headwinds that we had to overcome during the year, the first being labor costs is always an item that we face; the LIFO charge that we talked about a moment ago; increased spending for information technology again, that's both at core Safeway as well as at Blackhawk; debit and credit fees were higher during the year, primarily due to increased usage and particularly, say, in our fuel stations based on the increase in fuel prices; distribution expenses were up and that's driven by energy costs; and then additional cost for utilities and repairs. And so if you add up these headwinds that are shown on the page, they come to about $360 million.
So this is a chart that we've showed you in prior meetings and we've updated this again. So just focusing on the top portion of the chart for a moment. We put together an ambitious plan for either cost reduction or profit improvement for 2011, which totaled $463 million. If you look at the upper right portion of the chart, you'll see that we exceeded the plan by about $10 million or a total of $473 million.Now moving clockwise around the pie chart, you'll see that the biggest piece of our cost reduction or profit improvement program was gross margin-enhancing activities and the key initiatives in that area are shrink, and we had the best year in the history of the company on shrink performance, and we'll cover that in just a moment. Second, category optimization work that Diane and her team worked on a number of individual measures there that contributed. And then third would be the improvement in our consumer brands portfolio, and Diane will cover that later. We have a very strong portfolio, and they contributed to cost reduction and profit improvement during the year. And as you move clockwise around the pie chart, you'll see that sales initiatives accounted for 10%, and then cost reductions in supply chain and in the stores contributed. Those can be energy efficiency programs, improvement in the utilization of our warehouses, a number of different measures there. And then finally, finishing up with general and administrative expenses were primarily driven by the improvements we've made in workers' compensation, and we'll cover those in detail in just a moment. Now some may wonder based on our focus on cost reduction, how has that affected our customers' experience in the store? And so we regularly monitor a number of key performance indicators to make sure that we're providing a good experience for our customers. So if you'll look on the upper portion of the chart, you can see that our overall service score was 7.97. Again, this is on a scale of 1 to 10, so on the upper end of the performance we've had over the last 5 years. Check-out success was on target at 87%. And out-of-stock conditions are really best in class at 190 per store, and we monitor this very closely and I think we're best in class in this category. And then perishable presentation at 98%. And so our focus on cost reduction has not hurt the customer experience. In fact, I think on any of these measures, we would be first or best in class in the industry.
Now the next section of the presentation, we'd like to focus on areas where we think that we have a competitive advantage and there are 6 areas here: labor, health care, workers' compensation, energy, shrink and real estate. And our basic message to you is we believe that in each of the 6 areas that we're best in class at either reducing costs or implementing profit improvement initiatives.Let's first look at labor. So on this chart, we have graphed our labor costs divided by sales. And then we've used 2004 as an index and so 2004 would be 0. Again, total labor costs divided by sales, and you can see that in 2005, '06, '07, 2008, our labor costs as a percentage of sales by 2008 had declined by 10% and that's based on contract negotiations. That's based on achieving efficiencies in those agreements, removal of unnecessary work, employee buyouts occasionally. And so very good progress on that. And then you can see that the index has moved up somewhat. And I'll remind you that 2009 and 2010, we had significant deflation, which affected the denominator in this calculation. And so that by 2011, you can see that we were still well below the index in 2004. And so although higher than 2008, very good progress in managing labor costs. I think we are leader in the industry in this regard and best-in-class performance here. And you can see the compound average growth rate over this time period, it's indicated on the slides, so very good performance in managing our labor costs. Now a second look at the change in labor costs here, and this is based on cost per hour from 2004 to 2011. On the left portion of the chart, we've listed the major cost categories and you can see those wages, health care, pension and other. And the key column is -- the key information is shown in the middle of the column. We've shown that compound average growth rate in each of these individual expenses and then what the relative weighting is to arrive at the total. So you can see on wages a very attractive compound average growth rate. Health care, and if you look at this health care number relative to national numbers on the increase in health care, is very impressive there. Pension costs, probably the highest compound average growth rate on the chart. And again, if you just think about the downdraft of the stock markets that's happened that's affected all pension plans, we're really in the same situation as many of the companies. And so as you focus on the bottom at the combined compound average growth rate, we've been very effective at managing our labor costs over this time period. And again, we believe that we are leader in the industry in managing our health care costs, and this is best-in-class performance. Read the rest of this transcript for free on seekingalpha.com