Loblaw Companies Limited reports second quarter 2008 results
TORONTO, July 25 /CNW/ -
2008 Second Quarter Summary(1)
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For the periods ended June 14, 2008 and
June 16, 2007 (unaudited)
($ millions except where otherwise 2008 2007
indicated) (12 weeks) (12 weeks) Change
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Sales $ 7,037 $ 6,933 1.5%
Operating expenses 6,774 6,715 0.9%
Operating income 263 218 20.6%
Net earnings 140 119 17.6%
Basic net earnings per common share ($) 0.51 0.43 18.6%
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Same-store sales increase (%) 0.7% 2.7%
Operating margin 3.7% 3.1%
EBITDA(2) $ 398 $ 356 11.8%
EBITDA margin(2) 5.7% 5.1%
Free cash flow(2) $ 141 $ 346 (59.2%)
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For the periods ended June 14, 2008 and
June 16, 2007 (unaudited)
($ millions except where otherwise 2008 2007
indicated) (24 weeks) (24 weeks) Change
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Sales $ 13,564 $ 13,280 2.1%
Operating expenses 13,146 12,928 1.7%
Operating income 418 352 18.8%
Net earnings 202 173 16.8%
Basic net earnings per common share ($) 0.74 0.63 17.5%
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Same-store sales increase (%) 1.6% 2.6%
Operating margin 3.1% 2.7%
EBITDA(2) $ 689 $ 626 10.1%
EBITDA margin(2) 5.1% 4.7%
Free cash flow(2) $ (352) $ (50) (604.0%)
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Sales in the second quarter of 2008 were $7,037 million compared to
$6,933 million in the same period in 2007, an increase of 1.5%. Net earnings
were $140 million, a 17.6% increase compared to $119 million in the same
period last year. EBITDA(2) of $398 million represented a 11.8% increase over
last year. Basic net earnings per common share were $0.51, compared to $0.43
in the second quarter last year.
The year-over-year change in the following items influenced the Company's
operating income in the second quarter of 2008 compared to the same period in
2007:
- Charges related to restructuring costs in 2008 of $1 million compared
to $73 million in 2007. The effect on basic net earnings per common
share was nil (2007 - charge of $0.18).
- Income related to the net effect of stock-based compensation and the
associated equity forwards of $10 million in 2008 compared to
$11 million in 2007. The effect on basic net earnings per common
share was an income of $0.03 (2007 - $0.04). The non-cash income on
equity forwards resulted from an increase in the Company's share
price during the second quarter of 2008.
Excluding the above items, operating income, EBITDA(2) and basic net
earnings per common share in the second quarter of 2008 were lower compared to
the second quarter of 2007.
Commenting on the Company's performance, Galen G. Weston, Loblaw
Companies Limited Executive Chairman said: "As stated during our last quarter,
we are behind in our plans for operating as an effective selling organization.
This is reflected in our second quarter sales performance. However, we remain
on track with our cost reduction efforts. We are also beginning to see
positive results from our recently-announced five areas of immediate focus of
our turnaround strategy. While we are satisfied with our margin performance,
we are continuing our investments in foundational infrastructure, offer
enhancement, and value for our customers."
(1) To be read in conjunction with "Forward-Looking Statements".
(2) See Non-GAAP Financial Measures below.
Highlights of the Quarter
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- As part of its overall turnaround strategy, the Company aggressively
pursued five areas of immediate focus: Back-to-Best great food
renewal in Ontario; western Canada refurbishment; local market
merchandising; foundational infrastructure; and control label
innovation. Progress is being made in all these areas.
- Same-store sales in the quarter increased by 0.7% over the second
quarter of 2007. Sales and same-store sales growth in the second
quarter of 2008 were negatively impacted by approximately 0.7% as a
result of a shift of Easter sales into the first quarter of 2008.
Total sales growth in food was positive and drugstore sales were
particularly strong, while general merchandise sales declined
compared to the second quarter of 2007. Gas bar sales were strong in
the second quarter as a result of fuel price inflation and volume
growth. Total sales increases in the second quarter of 2008 were
achieved by positive growth in both customer and item counts. Modest
internal retail food price deflation was experienced in the second
quarter of 2008.
- For the second quarter of 2008, operating income of $263 million
increased by $45 million, or 20.6%, compared to $218 million in the
second quarter of 2007. Operating margin in the quarter was 3.7%
compared to 3.1% in the same quarter last year. The increase in
operating income was due mainly to lower restructuring costs in the
second quarter of 2008 compared to the second quarter of 2007.
Operating income was also negatively affected by the Company's
continued investment in lower retail prices.
- Basic net earnings per common share were $0.51 for the second quarter
of 2008, compared to $0.43 in the same quarter last year. EBITDA(1)
for the quarter was $398 million, representing an increase of 11.8%
compared to $356 million in the second quarter of 2007. EBITDA
margin(1) increased to 5.7% from 5.1% in 2007.
- Free cash flow(1) for the second quarter of 2008 was $141 million
compared to $346 million in the second quarter of 2007. The change
was primarily due to a decrease in cash flows from working capital of
$216 million, driven by changes in cash flows related to inventories,
accounts receivable, and restructuring and other charges partially
offset by an improvement in net earnings and a decrease in capital
expenditures of $44 million compared to the second quarter of last
year. On a year-to-date basis, free cash flow(1) was negative
$352 million compared to negative $50 million in 2007. The year-to-
date change is primarily due to a decrease in cash flows from working
capital of $241 million, driven by changes in cash flows related to
inventories, accounts receivable, and restructuring and other charges
partially offset by an improvement in net earnings and a decrease in
capital expenditures of $24 million.
- The Company diversified its sources of liquidity through the
successful completion of a USD $300 million private placement of
unsecured notes and public offering of $225 million of second
preferred shares in the second quarter of 2008. Subsequent to the
second quarter, the offering of preferred shares closed for net
proceeds of $218 million.
For the balance of the year, the Company will direct its efforts towards
building profitable sales momentum while continuing to improve value for
customers. Focus on cost and operating efficiencies will continue as margins
are expected to remain under pressure.
Forward-Looking Statements
This Quarterly Report for Loblaw Companies Limited and its subsidiaries
(collectively, the "Company" or "Loblaw") including the Management's
Discussion and Analysis ("MD&A"), contains forward-looking statements about
the Company's objectives, plans, goals, aspirations, strategies, financial
condition, results of operations, cash flows, performance, prospects and
opportunities. Words such as "anticipate", "expect", "believe", "could",
"estimate", "goal", "intend", "plan", "seek", "strive", "will", "may" and
"should" and similar expressions, as they relate to the Company and its
management, are intended to identify forward-looking statements. These
forward-looking statements are not historical facts but reflect the Company's
current expectations concerning future results and events.
These forward-looking statements are subject to a number of risks and
uncertainties that could cause actual results or events to differ materially
from current expectations. These risks and uncertainties include, but are not
limited to: changes in economic conditions; changes in consumer spending and
preferences; heightened competition, whether from new competitors or current
competitors; changes in the Company's or its competitors' pricing strategies;
failure of the Company's franchised stores to perform as expected; risks
associated with the terms and conditions of financing programs offered to the
Company's franchisees; failure to realize sales growth, anticipated cost
savings or operating efficiencies from the Company's major initiatives,
including investments in the Company's information technology systems, supply
chain investments and other cost reduction and simplification initiatives;
increased costs relating to utilities, including electricity, and fuel; the
inability of the Company's information technology infrastructure to support
the requirements of the Company's business; the inability of the Company to
manage inventory to minimize the impact of obsolete or excess issues and to
control shrink; failure to execute successfully and in a timely manner the
Company's major initiatives, including the implementation of strategies and
introduction of innovative products; unanticipated costs associated with the
Company's strategic initiatives, including those related to compensation
costs; the inability of the Company's supply chain to service the needs of the
Company's stores; deterioration in the Company's relationship with its
employees, particularly through periods of change in the Company's business;
failure to achieve desired results in labour negotiations, including the terms
of future collective bargaining agreements; changes to the regulatory
environment in which the Company operates; the adoption of new accounting
standards and changes in the Company's use of accounting estimates including
in relation to inventory valuation; fluctuations in the Company's earnings due
to changes in the value of equity forward contracts relating to its common
shares; changes in the Company's tax liabilities resulting from changes in tax
laws or future assessments; detrimental reliance on the performance of
third-party service providers; public health events; the inability of the
Company to obtain external financing; the inability of the Company to attract
and retain key executives; and supply and quality control issues with vendors.
These and other risks and uncertainties are discussed in the Company's
materials filed with the Canadian securities regulatory authorities from time
to time, including the Risks and Risk Management section of the MD&A included
in the Company's 2007 Annual Report. Other risks and uncertainties not
presently known to the Company or that the Company presently believes are not
material could also cause actual results or events to differ materially from
those expressed in its forward-looking statements.
In addition to these risks and uncertainties, the material assumptions
used in making the forward looking statements contained herein and in
particular in the 2008 Second Quarter Summary and the section entitled
"Outlook" of this Quarterly Report, include: there is no material change in
economic conditions; patterns of consumer spending and preferences remain
reasonably consistent with historical trends; there is no significant change
in competitive conditions, whether related to new competitors or current
competitors; there are no unexpected changes in the Company's or its
competitors' current pricing strategies; the Company's franchised stores
perform as expected; anticipated cost savings and operating efficiencies are
achieved, including those from the Company's cost reduction and simplification
initiatives; there is no unexpected adverse change in the Company's access to
liquidity; and there are no significant regulatory, tax or accounting changes
or other significant events occurring outside the ordinary course of business.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect the Company's expectations only as
of the date of this Quarterly Report. The Company disclaims any intention or
obligation to update or revise these forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by
law.
Management's Discussion and Analysis
The following Management's Discussion and Analysis ("MD&A") for Loblaw
Companies Limited and its subsidiaries (collectively, the "Company" or
"Loblaw") should be read in conjunction with the Company's 2008 unaudited
interim period consolidated financial statements and the accompanying notes of
this Quarterly Report and the audited annual consolidated financial statements
and the accompanying notes for the year ended December 29, 2007 and the
related annual MD&A included in the Company's 2007 Annual Report. The
Company's 2008 unaudited interim period consolidated financial statements and
the accompanying notes have been prepared in accordance with Canadian
generally accepted accounting principles ("GAAP") and are reported in Canadian
dollars. These interim period consolidated financial statements include the
accounts of Loblaw Companies Limited and its subsidiaries and variable
interest entities ("VIEs") that the Company is required to consolidate in
accordance with Accounting Guideline 15, "Consolidation of Variable Interest
Entities", ("AcG 15"). A glossary of terms used throughout this Quarterly
Report can be found on page 85 of the Company's 2007 Annual Report. In
addition, this Quarterly Report includes the following terms: "rolling year
return on average total assets" which is defined as cumulative operating
income for the latest four quarters divided by average total assets excluding
cash and cash equivalents, short term investments, and security deposits; and
"rolling year return on average shareholders' equity" which is defined as
cumulative net earnings available to common shareholders for the latest four
quarters divided by average total common shareholders' equity.
The information in this MD&A is current to July 25, 2008, unless
otherwise noted.
Results of Operations
As part of its overall turnaround strategy, the Company aggressively
pursued five recently announced areas of immediate focus: Back-to-Best great
food renewal in Ontario; western Canada refurbishment; local market
merchandising; foundational infrastructure; and control label innovation. The
Company remains six to nine months behind in its plans for operating as an
effective selling organization but remains on track with its cost reduction
efforts.
Total sales increases in the second quarter of 2008 were achieved by
positive growth in both customer and item counts. Same-store sales in the
second quarter of 2008 increased by 0.7% compared to 2.7% for the same period
last year. The shift of Easter sales into the first quarter of 2008 resulted
in approximately 0.7% lower growth in the second quarter of 2008. Modest
internal retail food price deflation was experienced in the second quarter of
2008.
Operating income of $263 million for the second quarter of 2008 increased
by $45 million compared to the second quarter of 2007. The increase in
operating income was mainly due to lower restructuring costs in the second
quarter of 2008. Operating margin and EBITDA margin(1), excluding the impact
of restructuring costs, declined in the second quarter of 2008, compared to
the second quarter of 2007, as a result of the Company's continued investment
in lower retail prices which was initiated in the third quarter of 2007.
The effective income tax rate in the second quarter of 2008 increased to
30.1% compared to 27.5% in the second quarter of 2007, primarily due to an
increase in income tax accruals relating to certain income tax matters and a
change in the proportions of taxable income earned across different tax
jurisdictions, which were partially offset by lower Canadian federal and
certain provincial statutory income tax rates relative to the second quarter
of 2007.
Net earnings were $140 million in the second quarter of 2008, a 17.6%
increase compared to $119 million in the same period last year. For the second
quarter of 2008, basic net earnings per common share were $0.51 compared to
$0.43 in 2007, an increase of 18.6%, primarily as a result of lower
restructuring costs in the second quarter of 2008 compared to the second
quarter of 2007.
Sales
Sales for the second quarter increased by 1.5% to $7,037 million compared
to $6,933 million in the second quarter of 2007. Total sales growth in food
was positive and drugstore sales were particularly strong, while general
merchandise sales declined compared to the second quarter of 2007. Same-store
sales increased by 0.7% in the quarter during a period of modest internal
retail food price deflation.
The following factors explain the major components in the change in sales
for the second quarter of 2008 compared to same period in 2007:
- same-store sales growth of 0.7%;
- a shift in Easter sales into the first quarter of 2008 resulted in
lower sales and same-store sales growth of approximately 0.7% during
the second quarter of 2008;
- the Company experienced positive volume growth based on retail units
sold;
- strong gas bar sales resulting from both fuel price inflation and
volume growth;
- the Company experienced modest internal retail food price deflation
for the second quarter of 2008 although national food price inflation
as measured by "The Consumer Price Index for Food Purchased from
Stores" was 1.9% for the second quarter of 2008 compared to 4.0% in
the same period of 2007; and
- during the second quarter of 2008, 6 new corporate and franchised
stores were opened and 6 were closed, resulting in a net increase of
0.1 million square feet or 0.1%. During the latest four quarters, net
retail square footage increased by 0.5 million square feet, or 0.9%,
due to the opening of 30 new corporate and franchised stores,
inclusive of stores that underwent conversions and major expansions,
and the closure of 29 stores.
For the first two quarters of the year, sales increased by 2.1%, or
$284 million, to $13,564 million year-to-date. The following factors in
addition to the quarterly factors mentioned above further explained the change
in year-to-date sales over the same period in the prior year:
- same-store sales growth of 1.6%; and
- an increase in net retail square footage during the latest four
quarters as noted above. In the first two quarters, 12 new corporate
and franchised stores were opened, including stores which underwent
conversions and major expansions, and 11 stores closed, resulting in
a net increase of 0.2 million square feet or 0.3% from year end 2007.
Operating Income
Operating income of $263 million for the second quarter of 2008 compared
to $218 million in the same period of 2007, an increase of 20.6%. Operating
margin was 3.7% for the second quarter of 2008 compared to 3.1% in 2007. The
increase in operating income was mainly due to lower restructuring costs in
the second quarter of 2008 compared to the second quarter of 2007.
The year over year change in the following items influenced operating
income for the second quarter of 2008 compared to the second quarter of 2007:
- charge of $1 million (2007 - $73 million) related to restructuring
costs; and
- income of $10 million (2007 - $11 million) related to the net effect
of stock-based compensation and the associated equity forwards. A
non-cash income on equity forwards resulted from an increase in the
Company's share price during the second quarter of 2008.
After factoring in the above items, operating margin and EBITDA
margin (1) declined in the second quarter of 2008 as a result of the Company's
continued targeted investments in lower retail prices to drive sales growth.
The Company initiated significant pricing investments in the third quarter of
2007 and as a result, margins in the second quarter of 2008 were negatively
impacted compared to the second quarter of 2007. The Company continues to
focus on shrink and achieved improvements in shrink expense in the second
quarter of 2008 compared to the second quarter of 2007. Sales increases in the
quarter were insufficient to offset margin declines and cost increases.
The Company experienced higher store labour costs in the second quarter
of 2008 as a result of increased wage rates compared to the second quarter of
2007. Labour productivity remained consistent in the second quarter of 2008
compared to the same period last year but has improved on a year-to-date
basis.
A $14 million gain (2007 - nil) from the sale of financial investments by
President's Choice Bank ("PC Bank"), a wholly owned subsidiary of the Company,
was reported in operating income during the second quarter of 2008.
EBITDA(1) increased by $42 million, or 11.8%, to $398 million in the
second quarter of 2008 compared to $356 million in the second quarter of 2007.
EBITDA margin(1) increased in the second quarter of 2008 to 5.7% from 5.1% in
the comparable period of 2007. The increase in EBITDA(1) and EBITDA margin(1)
was mainly due to lower restructuring costs in the second quarter of 2008
compared to the second quarter of 2007.
Year-to-date operating income for 2008 increased by $66 million, or
18.8%, to $418 million, and resulted in an operating margin of 3.1% as
compared to 2.7% in the corresponding period in 2007. During the first two
quarters of 2008, the Company recorded restructuring and other charges of
$4 million (2007 - $162 million) of which $3 million (2007 - $145 million)
related to Project Simplify, income of $1 million (2007 - charge of
$16 million) related to the store operations restructuring, and a charge of
$2 million (2007 - $1 million) related to the supply chain network. In
addition, the Company recognized in operating income a year-to-date charge of
$15 million (2007 - $1 million) for the net effect of stock-based compensation
and the associated equity forwards and a $14 million gain (2007 - nil) from
the sale of financial investments by PC Bank.
Year-to-date EBITDA(1) increased by $63 million, or 10.1%, to
$689 million compared to $626 million in the corresponding period in 2007.
EBITDA margin(1) increased to 5.1% year-to-date compared to 4.7% for the same
period last year. The year-to-date increase in EBITDA(1) and EBITDA margin(1)
was mainly due to lower restructuring costs in 2008 compared to the same
period in 2007.
Interest Expense
Interest expense for the second quarter of 2008 was $60 million compared
to $58 million in the same period of 2007. The following items impacted
interest expense:
- interest on long term debt of $65 million (2007 - $66 million);
- interest income on financial derivative instruments, which includes
the effect of the Company's interest rate swaps, cross currency basis
swaps and equity forwards, of $2 million (2007 - charge of
$2 million);
- net short term interest expense of $3 million (2007 - income of
$1 million);
- interest income on security deposits of $2 million (2007 -
$4 million); and
- interest expense of $4 million (2007 - $5 million) was capitalized to
fixed assets.
Interest expense year-to-date was $118 million compared to $117 million
in 2007.
Income Taxes
The effective income tax rate in the second quarter of 2008 increased to
30.1%, compared to 27.5% in the second quarter of 2007, and the year-to-date
effective income tax rate increased to 32.3% in 2008 compared to 28.5% in
2007. The increases in effective income tax rates are primarily due to an
increase in income tax accruals relating to certain income tax matters and a
change in the proportions of taxable income earned across different tax
jurisdictions, which were partially offset by lower Canadian federal and
certain provincial statutory income tax rates relative to the second quarter
of 2007.
Net Earnings
Net earnings for the second quarter increased by $21 million, or 17.6%,
to $140 million from $119 million in the second quarter of 2007 and increased
by $29 million, or 16.8%, to $202 million year-to-date from $173 million in
2007. Basic net earnings per common share for the second quarter increased by
$0.08, or 18.6%, to $0.51 from $0.43 in the second quarter of 2007 and
increased by $0.11, or 17.5%, to $0.74 year-to-date compared to $0.63 for the
same period last year.
Basic net earnings per common share were affected in the second quarter
of 2008 compared to the second quarter of 2007 by the following:
- nil (2007 - charge of $0.18) per common share related to
restructuring costs; and
- income of $0.03 (2007 - $0.04) per common share for the net effect of
stock-based compensation and the associated equity forwards.
Financial Condition
Financial Ratios
The Company's net debt(1) to equity ratio continued to be within the
Company's internal guideline of less than 1:1. The net debt(1) to equity ratio
was 0.73:1 at the end of the second quarter of 2008 compared to 0.73:1 at the
end of the second quarter of 2007 and 0.67:1(2) at year end 2007. The increase
in the net debt(1) to equity ratio at the end of the second quarter of 2008
when compared to year end 2007 was due to an increase in short term debt
partially offset by a decrease in commercial paper. The interest coverage
ratio was 3.3 times for the second quarter of 2008 compared to 2.8 times in
2007. For further details on net debt(1) to equity ratio and interest coverage
ratio, see note 14 to the unaudited interim period consolidated financial
statements.
The rolling year return on average total assets(1) at the end of the
second quarter of 2008 increased to 6.4%, compared to 0.4% for the comparable
period in 2007, and to 5.8%(2) at year end 2007. The rolling year return on
average shareholders' equity at the end of the second quarter of 2008
increased to 6.5%, compared to (6.6)% for the comparable period of 2007, and
remained consistent with 6.0%(2) at year end 2007. The ratios in the second
quarter of 2007 were negatively impacted by the decline in cumulative
operating income for the latest four quarters including the negative impact of
the $800 million non-cash goodwill impairment charge recorded in the fourth
quarter of 2006.
Common Share Dividends
Loblaw's Board of Directors declared a quarterly dividend equal to
$0.21 per common share with a payment date of July 1, 2008.
Outstanding Share Capital
The Company's outstanding share capital is comprised of common shares. An
unlimited number of common shares is authorized and 274,173,564 common shares
were outstanding at quarter end. Further information on the Company's
outstanding share capital is provided in note 14 to the unaudited interim
period consolidated financial statements.
Liquidity and Capital Resources
Cash Flows from (used in) Operating Activities
Second quarter cash flows from operating activities were $285 million in
2008 compared to $534 million in the comparable period in 2007. On a
year-to-date basis, cash flows used in operating activities were $37 million
compared to cash flows from operating activities of $289 million in 2007. The
decreases in cash flows from operating activities for the second quarter and
year-to-date were mainly due to a decrease in operating income, excluding the
impact of restructuring costs, and changes in cash flows used in non-cash
working capital. The change in cash flows used in non-cash working capital was
primarily driven by changes in inventories, accounts receivable, and accounts
payable and accrued liabilities.
Cash Flows used in Investing Activities
Second quarter cash flows used in investing activities were $372 million
compared to $50 million in 2007. On a year-to-date basis, cash flows used in
investing activities were $271 million compared to $194 million in 2007. The
second quarter and year-to-date changes were primarily due to increases in
cash flows used in short term investments partially offset by a decrease in
capital expenditures and a change in cash flows used in credit card
receivables, after securitization. Capital investment for the second quarter
amounted to $87 million (2007 - $131 million) and $200 million (2007 -
$224 million) year-to-date.
During the second quarter of 2008, nil (2007 - $85 million) of credit
card receivables were securitized and nil (2007 - $125 million) year-to-date
by PC Bank through the sale of a portion of the total interest in these
receivables to an independent trust. The securitization yielded a nominal net
loss in 2007 based on the assumptions disclosed in note 10 of the consolidated
financial statements for the year ended December 29, 2007 included in the
Company's 2007 Annual Report. The independent trusts' recourse to PC Bank's
assets is limited to PC Bank's retained interests and is further supported by
the Company through a standby letter of credit for $89 million (2007 -
$80 million) on a portion of the securitized amount.
Cash Flows (used in) from Financing Activities
Second quarter cash flows used in financing activities were $139 million
in 2008 compared to $323 million in 2007. During the second quarter of 2008,
the change in cash flows used in commercial paper was $266 million as a result
of a reduction in commercial paper levels, the change in cash flows used to
retire long-term debt was $389 million, the change in cash flows from the
issuance of new long-term debt was $280 million, and the change in cash flows
from short term debt was $70 million as a result of an increase in short term
debt as described below. On a year-to-date basis, cash flows from financing
activities were $207 million compared to cash flows used in financing
activities of $180 million in 2007. On a year-to-date basis, the change in
cash flows used in commercial paper was $253 million, and the change in cash
flows used to retire long-term debt was $391 million, the change in cash flows
from the issuance of new long-term debt was $278 million, and the change in
cash flows from short term debt was $798 million.
In the first quarter of 2008, the Company entered into an $800 million,
5-year committed credit facility, provided by a syndicate of banks, which
contains certain financial covenants. This facility is the primary source of
the Company's short term funding requirements and permits borrowings having up
to a 180-day term that accrue interest based on short term floating interest
rates. This facility replaced a $500 million, 364-day committed credit
facility which had no financial covenants and permitted borrowings having up
to a 180-day term that accrued interest based on short term floating interest
rates. As at June 14, 2008, $798 million was drawn on the new 5-year committed
credit facility.
During the second quarter of 2008, the Company issued USD $300 million of
fixed-rate unsecured notes in a private placement debt financing which
contains certain financial covenants. The notes were issued in two equal
tranches of USD $150 million with 5 and 7 year maturities at interest rates of
6.48% and 6.86%, respectively. The Company entered into two fixed cross
currency swaps to manage the foreign exchange and US interest rate risk. These
cross currency swaps were designated as cash flow hedges as presented in note
13 to the unaudited interim period consolidated financial statements. The net
proceeds from the issue of the notes were used to repay maturing debt
obligations, including a portion of the $390 million of 6.00% Medium Term
Notes ("MTN") which matured in June 2008.
During the second quarter of 2008, the Company filed a Short Form Base
Shelf Prospectus allowing for the issue of up to $1 billion of unsecured
debentures and/or preferred shares. During the second quarter, the Company
offered by way of prospectus supplement under the 2008 Short Form Base Shelf
Prospectus, a Canadian public offering of 9 million cumulative redeemable
convertible Second Preferred Shares, Series A, at a price of $25.00 per share,
to yield 5.95% per annum, for an aggregate gross amount of $225 million.
Subsequent to the second quarter, the offering closed and the net proceeds of
$218 million were added to the general funds of the Company. The preferred
shares have been listed and posted to trade on the Toronto Stock Exchange
("TSX") under the symbol "L.PR.A". Dominion Bond Rating Service ("DBRS")
assigned a rating of Pfd-3 with a Negative trend and Standard & Poor's ("S&P")
assigned a rating of P-3 (high) to the Company's preferred shares. The Company
has traditionally obtained its long term financing primarily through a MTN
program. The Company may refinance maturing long term debt, including
$125 million of 5.75% MTN maturing in 2009, with MTN if market conditions are
appropriate or it may consider other alternatives.
During the first two quarters of 2008, the Company's MTN, other notes and
debentures ratings and commercial paper ratings were downgraded twice by DBRS
and once by S&P. The following table sets out the current credit ratings of
the Company.
Dominion Bond Rating Service Standard & Poor's
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Credit Ratings Credit
(Canadian Standards) Credit Rating Trend Rating Outlook
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Commercial paper R-2 (middle) Negative A-2 Negative
Medium term notes BBB Negative BBB Negative
Preferred shares Pfd-3 Negative P-3 (high)
Other notes and debentures BBB Negative BBB Negative
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The rating organizations listed above base their credit ratings on
quantitative and qualitative considerations. These credit ratings are
forward-looking and intended to give an indication of the risk that the
Company will not fulfill its obligations in a timely manner.
As a result of the DBRS downgrade of the short term credit rating, the
Company has limited access to commercial paper. However, during the second
quarter of 2008, the Company secured short term funding from other sources,
primarily the $800 million, 5-year committed credit facility.
The Company's ability to obtain funding from external sources may be
restricted by further downgrades in the Company's credit ratings and should
the Company's financial performance and condition deteriorate. In addition,
credit and capital markets are subject to inherent global risks that may
negatively affect the Company's access and ability to fund its short term and
long term debt requirements. The Company mitigates these risks by maintaining
appropriate levels of cash and cash equivalents, short term investments and
security deposits, actively monitoring market conditions and diversifying its
sources of funding and maturity profile. The Company also employs risk
management strategies including forward-looking liquidity contingency plans.
Loblaw renewed its Normal Course Issuer Bid during the second quarter of
2008 to purchase on the TSX, or enter into equity derivatives to purchase, up
to 13,708,678 of the Company's common shares, representing 5% of the common
shares outstanding. In accordance with the requirements of the Toronto Stock
Exchange, Loblaw may purchase its shares at the then market prices of such
shares. The Company did not purchase any shares under its Normal Course Issuer
Bids during the first two quarters of 2008 or in 2007.
Free Cash Flow(1)
Free cash flow(1) for the second quarter of 2008 was $141 million
compared to $346 million in the second quarter of 2007. The change was
primarily due to a decrease in cash flows from working capital of
$216 million, driven by changes in cash flows related to inventories, accounts
receivable, and restructuring and other charges partially offset by an
improvement in net earnings and a decrease in capital expenditures of
$44 million compared to the second quarter of last year. On a year-to-date
basis, free cash flow(1) was negative $352 million compared to negative
$50 million in 2007. The year-to-date change is primarily due to a decrease in
cash flows from working capital of $241 million, driven by changes in cash
flows related to inventories, accounts receivable, and restructuring and other
charges partially offset by an improvement in net earnings and a decrease in
capital expenditures of $24 million.
Independent Funding Trusts
Certain independent franchisees of the Company obtain financing through a
structure involving independent trusts, which were created to provide loans to
the independent franchisees to facilitate their purchase of inventory and
fixed assets, consisting mainly of fixtures and equipment. These trusts are
administered by a major Canadian chartered bank.
During the first quarter of 2008, the Company was notified that an Event
of Termination of the independent funding trust agreement for the Company's
franchisees had occurred as a result of the credit rating downgrade by DBRS of
the Company's long term credit rating to "BBB (high)" from "A (low)". As a
result of the Event of Termination, during the second quarter of 2008, the
Company finalized an alternative financing arrangement for the independent
funding trust in the form of a $475 million, 364-day revolving committed
credit facility provided by a syndicate of banks.
The gross principal amount of loans issued to the Company's independent
franchisees outstanding at the end of the second quarter of 2008 was
$383 million (2007 - $417 million) including $159 million (2007 -
$154 million) of loans payable by VIEs consolidated by the Company. Based on a
formula, the Company has agreed to provide credit enhancement in the form of a
standby letter of credit for the benefit of the independent funding trust
equal to approximately 15% (2007 - 10%) of the principal amount of the loans
outstanding at any point in time, $66 million (2007 - $44 million) as of the
end of the second quarter of 2008. The standby letter of credit has not been
drawn upon. This credit enhancement allows the independent funding trust to
provide favourable financing terms to the Company's independent franchisees.
As well, each independent franchisee provides security to the independent
funding trust for its obligations by way of a general security agreement. In
the event that an independent franchisee defaults on its loan and the Company
has not, within a specified time period, assumed the loan, or the default is
not otherwise remedied, the independent funding trust would assign the loan to
the Company and draw upon this standby letter of credit. The Company has
agreed to reimburse the issuing bank for any amount drawn on the standby
letter of credit. This new alternative financing will result in a higher
financing cost to the franchisees, which in turn could adversely affect
operating results. The new financing structure has been reviewed and the
Company determined there were no material implications with respect to the
consolidation of VIEs.
Quarterly Results of Operations
The following is a summary of selected consolidated financial information
derived from the Company's unaudited interim period consolidated financial
statements for each of the eight most recently completed quarters. This
information was prepared in accordance with Canadian GAAP and is reported in
Canadian dollars. Each of the quarters presented is 12 weeks in duration
except for the third quarter, which is 16 weeks in duration.
Summary of Quarterly Results
(unaudited)
($ millions
except
where
otherwise Second Quarter First Quarter Fourth Quarter Third Quarter
indicated) 2008 2007 2008 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Sales $7,037 $6,933 $6,527 $6,347 $6,967 $6,784 $9,137 $9,010
Net
earnings
(loss) $ 140 $ 119 $ 62 $ 54 $ 40 $ (756) $ 117 $ 203
-------------------------------------------------------------------------
Net
earnings
(loss) per
common
share
Basic ($) $ 0.51 $ 0.43 $ 0.23 $ 0.20 $ 0.14 $(2.76) $ 0.43 $ 0.74
Diluted
($) $ 0.51 $ 0.43 $ 0.23 $ 0.20 $ 0.14 $(2.76) $ 0.43 $ 0.74
-------------------------------------------------------------------------
Sales continued to grow in the second quarter of 2008 compared to the
second quarter of 2007. Same-store sales growth during the second quarter of
2008 increased 0.7%. Sales and same-store sales growth in the second quarter
of 2008 were negatively impacted by the timing of Easter, which occurred two
weeks earlier in 2008, resulting in a shift in holiday sales into the first
quarter of 2008 compared to the second quarter of 2007. The negative impact of
sales growth for the second quarter of 2008 from the shift in Easter sales is
estimated to be approximately 0.7%. Sales increased in each quarter compared
to the prior year due to increases in same-store sales.
Fluctuations in quarterly net earnings reflect the impact of a number of
specific charges including restructuring and other charges, the net effect of
stock-based compensation and the associated equity forwards, an inventory
liquidation charge of $68 million in the fourth quarter of 2006, and a
non-cash goodwill impairment charge of $800 million in the fourth quarter of
2006. Earnings were pressured from investments in lower retail pricing,
particularly in the first and second quarters of 2008 and the third and fourth
quarters of 2007.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with Canadian GAAP.
There has been no change in the Company's internal control over financial
reporting that occurred during the twelve weeks ended June 14, 2008 that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Legal Proceedings
During the first quarter of 2007, the Company was one of 17 defendants
served with an action brought in the Superior Court of Ontario by certain
beneficiaries of a multi-employer pension plan in which the Company's
employees and those of its independent franchisees participate. In their claim
against the employers and the trustees of the multi-employer pension plan, the
plaintiffs claim that assets of the multi-employer pension plan have been
mismanaged and are seeking, among other demands, damages of $1 billion. The
action is framed as a representative action on behalf of all the beneficiaries
of the multi-employer pension plan. In the second quarter of 2008, the Company
received confirmation that the action against the Company has been dismissed,
but the action against the trustees is ongoing. One of the trustees, an
officer of the Company, may be entitled to indemnification from the Company.
In addition to the claim described above, the Company is the subject of
various legal proceedings and claims that arise in the ordinary course of
business. The outcome of all of these proceedings is uncertain. However, based
on information currently available, these claims, individually and in the
aggregate, are not expected to have a material impact on the Company.
Accounting Standards Implemented in 2008
Capital Disclosures and Financial Instruments - Disclosure and
Presentation
In December 2006, the Canadian Institute of Chartered Accountants
("CICA") issued three new accounting standards: Section 1535, "Capital
Disclosures" ("Section 1535"), Section 3862, "Financial Instruments -
Disclosures" ("Section 3862") and Section 3863, "Financial Instruments -
Presentation" ("Section 3863").
Section 1535 establishes guidelines for the disclosure of information
regarding a company's capital and how it is managed. Enhanced disclosures with
respect to the entity's objectives, policies and processes for managing
capital and quantitative disclosure about what the entity regards as capital
are required. For new disclosures refer to note 14 to the unaudited interim
period consolidated financial statements. The adoption of Section 1535 did not
have an impact on the Company's results of operations or financial condition.
Section 3862 and Section 3863 replaced Section 3861, "Financial
Instruments - Disclosure and Presentation". Section 3862 requires increased
disclosures regarding the risks associated with financial instruments and how
these risks are managed. Section 3863 carries forward standards for
presentation of financial instruments and non-financial derivative instruments
and provides additional guidance for the classification of financial
instruments, from the perspective of the issuer, between liabilities and
equity. For new disclosures refer to notes 16 and 18 to the unaudited interim
period consolidated financial statements. Comparative information about the
nature and extent of risks arising from financial instruments is not required
in the year Section 3862 is adopted. The adoption of Section 3862 and
Section 3863 did not have an impact on the Company's results of operations or
financial condition.
Inventories
During the first quarter of 2008, the Company also implemented
Section 3031, "Inventories" ("Section 3031"), which replaced Section 3030 of
the same title. Section 3031 provides guidance with respect to the
determination of cost and requires inventories to be measured at the lower of
cost and net realizable value. Costs such as storage costs and administrative
overhead that do not contribute to bringing inventories to their present
location and condition are specifically excluded from the cost of inventories
and expensed in the period incurred. Reversal of previous write-downs to net
realizable value when there is a subsequent increase in the value of
inventories is now required. The cost of the inventories should be based on a
first-in, first-out or a weighted average cost formula. Techniques used for
the measurement of cost of inventories, such as the retail method may be used
if the results approximate cost. The new standard also requires additional
disclosures including the accounting policies used in measuring inventories,
the carrying amount of the inventories, amounts recognized as an expense
during the period, write-downs and the amount of any reversal of any
write-downs recognized as a reduction in expenses.
Upon implementation of Section 3031, a decrease in opening inventories of
$65 million, an increase in current income taxes receivable of $24 million and
a decrease of $41 million to opening retained earnings were recorded on the
consolidated balance sheet resulting from the application of a consistent cost
formula for all inventories having a similar nature and use to the Company.
For further details of the specific accounting changes and related impacts,
see notes 2 and 10 to the unaudited interim period consolidated financial
statements.
Future Accounting Standards
Goodwill and Intangible Assets
In November 2007, the CICA issued amendments to Section 1000 "Financial
Statement Concepts", and AcG 11 "Enterprises in the Development Stage", issued
a new Handbook Section 3064 "Goodwill and Intangible Assets" ("Section 3064"),
to replace Section 3062 "Goodwill and Other Intangible Assets", withdrew
Section 3450 "Research and Development Costs" and amended EIC 27 "Revenues and
Expenditures During the Pre-operating Period" to not apply to entities that
have adopted Section 3064. These amendments provide guidance for the
recognition of internally developed intangible assets, including assets
developed from research and development activities, ensuring consistent
treatment of all intangible assets, whether separately acquired or internally
developed. The amendments are effective for annual and interim financial
statements relating to fiscal years beginning on or after October 1, 2008 and
therefore the Company will implement them in the first quarter of 2009,
retroactively with restatement of the comparative periods for the current and
prior year. The impact of implementing these amendments on the Company's
financial statements is currently being assessed.
International Financial Reporting Standards ("IFRS")
The Canadian Accounting Standards Board will require all public companies
to adopt IFRS for interim and annual financial statements relating to fiscal
years beginning on or after January 1, 2011. Companies will be required to
provide IFRS comparative information for the previous fiscal year. The
transition from Canadian GAAP to IFRS will be applicable for the Company for
the first quarter of 2011 when the Company will prepare both the current and
comparative financial information using IFRS. The Company expects the
transition to IFRS to impact financial reporting, business processes and
information systems. The Company has completed a diagnostic impact assessment
and has substantially completed planning activities for the initial assessment
phase of the implementation project. The Company will continue to invest in
training and resources throughout the transition period to facilitate a timely
conversion.
Outlook(3)
For the balance of the year, the Company will direct its efforts towards
building profitable sales momentum while continuing to improve value for
customers. Focus on cost and operating efficiencies will continue as margins
are expected to remain under pressure.
Additional Information
Additional information about the Company has been filed electronically
with various securities regulators in Canada through the System for Electronic
Document Analysis and Retrieval (SEDAR) and is available online at
www.sedar.com and with the Office of the Superintendent of Financial
Institutions (OSFI) as the primary regulator of the Company's subsidiary,
President's Choice Bank.
(1) See Non-GAAP Financial Measures below.
(2) See page 12 of the Company's 2007 Annual Report.
(3) To be read in conjunction with "Forward-Looking Statements" of this
News Release.
Non-GAAP Financial Measures
The Company reports its financial results in accordance with Canadian
GAAP. It has historically also included in its Quarterly and Annual Reports
certain non-GAAP financial measures and ratios. Over the past year, the
Company has reviewed its practices with respect to the disclosure of non-GAAP
financial measures. The Company considered the separate presentation of
non-GAAP financial measures taking into account the discussion in the MD&A of
the results of operations and the impact of specific events on these results
of operations, the disclosure practices of its industry peers and best
practices.
Based on this review, the Company decided that effective the first
quarter of 2008 it would discontinue its use of the following non-GAAP
financial measures: sales and sales growth excluding the impact of tobacco
sales and VIEs, adjusted operating income and adjusted operating margin,
adjusted EBITDA and adjusted EBITDA margin and adjusted basic net earnings per
common share. The Company will continue to discuss the impact of individual
specific items that are important in understanding the ongoing operations
including those that relate to sales, operating income and basic earnings per
common share.
The Company will continue to use the following non-GAAP financial
measures: EBITDA and EBITDA margin, net debt, return on average total assets
and free cash flow. The Company believes these non-GAAP financial measures
provide useful information to both management and investors in measuring the
financial performance and financial condition of the Company for the reasons
outlined below. These measures do not have a standardized meaning prescribed
by Canadian GAAP and, therefore, may not be comparable to similarly titled
measures presented by other publicly traded companies, nor should they be
construed as an alternative to other financial measures determined in
accordance with Canadian GAAP.
EBITDA and EBITDA Margin
The following table reconciles earnings before minority interest, income
taxes, interest expense, depreciation and amortization ("EBITDA") to operating
income which is reconciled to Canadian GAAP net earnings measures reported in
the unaudited interim period consolidated statements of earnings, in the table
below, for the twelve and twenty-four week periods ended June 14, 2008 and
June 16, 2007. EBITDA is useful to management in assessing the Company's
performance of its ongoing operations and its ability to generate cash flows
to fund its cash requirements, including the Company's capital investment
program.
EBITDA margin is calculated as EBITDA divided by sales.
---------- ----------
2008 2007 2008 2007
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Net earnings $ 140 $ 119 $ 202 $ 173
Add (deduct) impact of the
following:
Minority interest 2 (3) 1 (5)
Income taxes 61 44 97 67
Interest expense 60 58 118 117
-------------------------------------------------------------------------
Operating income 263 218 418 352
Add impact of the following:
Depreciation and amortization 135 138 271 274
-------------------------------------------------------------------------
EBITDA $ 398 $ 356 $ 689 $ 626
-------------------------------------------------------------------------
---------- ----------
Net Debt
The following table reconciles net debt used in the net debt to equity
ratio to Canadian GAAP measures reported in the unaudited interim period
consolidated balance sheets as at June 14, 2008 and June 16, 2007. The Company
calculates net debt as the sum of long term debt and short term debt less cash
and cash equivalents, short term investments and security deposits which are
included in other assets and believes this measure is useful in assessing the
amount of leverage employed.
----------
($ millions) 2008 2007
-------------------------------------------------------------------------
Bank indebtedness $ 55 $ 98
Commercial paper - 482
Short term debt 798 -
Long term debt due within one year 165 434
Long term debt 4,033 3,860
Less: Cash and cash equivalents 345 441
Short term investments 296 111
Security deposits included in other assets 352 329
-------------------------------------------------------------------------
Net debt $ 4,058 $ 3,993
-------------------------------------------------------------------------
----------
Free Cash Flow
The following table reconciles free cash flow to Canadian GAAP cash flows
used in operating activities reported in the unaudited interim period
consolidated cash flow statements for the twelve and twenty-four week periods
ended June 14, 2008 and June 16, 2007. The Company calculates free cash flow
as cash flows from operating activities less fixed asset purchases and
dividends. The Company believes free cash flow is a useful measure of the
change in the Company's cash available for additional funding requirements.
---------- ----------
2008 2007 2008 2007
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Cash flows from (used) in
operating activities $ 285 $ 534 $ (37) $ 289
Less: Fixed asset purchases 87 131 200 224
Dividends 57 57 115 115
-------------------------------------------------------------------------
Free cash flow $ 141 $ 346 $ (352) $ (50)
-------------------------------------------------------------------------
---------- ----------
Total Assets
The following table reconciles total assets used in the return on average
total assets to Canadian GAAP total assets reported in the unaudited interim
period consolidated balance sheets as at June 14, 2008 and June 16, 2007. The
Company believes the return on average total assets ratio is useful in
assessing the performance of its operating assets and therefore excludes cash
and cash equivalents, short term investments and security deposits which are
included in other assets from the total assets used in the ratio. Rolling year
return on average total assets is calculated as cumulative operating income
for the latest four quarters divided by average total assets excluding cash
and cash equivalents, short term investments and security deposits which are
included in other assets.
----------
($ millions) 2008 2007
-------------------------------------------------------------------------
Total assets $ 13,641 $ 13,256
Less: Cash and cash equivalents 345 441
Short term investments 296 111
Security deposits included in other assets 352 329
-------------------------------------------------------------------------
Total assets $ 12,648 $ 12,375
-------------------------------------------------------------------------
----------
Consolidated Statements of Earnings
(unaudited)
---------- ----------
For the periods ended June 14,
2008 and June 16, 2007
($ millions except where 2008 2007 2008 2007
otherwise indicated) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Sales $ 7,037 $ 6,933 $ 13,564 $ 13,280
Operating Expenses
Cost of sales, selling and
administrative expenses 6,638 6,504 12,871 12,492
Depreciation and amortization 135 138 271 274
Restructuring charges (note 3) 1 73 4 162
-------------------------------------------------------------------------
6,774 6,715 13,146 12,928
-------------------------------------------------------------------------
Operating Income 263 218 418 352
Interest Expense (note 4) 60 58 118 117
-------------------------------------------------------------------------
Earnings before Income Taxes
and Minority Interest 203 160 300 235
Income Taxes (note 5) 61 44 97 67
-------------------------------------------------------------------------
Net Earnings before Minority
Interest 142 116 203 168
Minority Interest 2 (3) 1 (5)
-------------------------------------------------------------------------
Net Earnings $ 140 $ 119 $ 202 $ 173
-------------------------------------------------------------------------
Net Earnings Per Common Share
($) (note 6)
Basic and Diluted $ 0.51 $ 0.43 $ 0.74 $ 0.63
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
----------
For the periods ended June 14, 2008
and June 16, 2007 2008 2007
($ millions except where otherwise indicated) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Common Share Capital, Beginning and End of Period $ 1,196 $ 1,196
-------------------------------------------------------------------------
Retained Earnings, Beginning of Period $ 4,330 $ 4,245
Cumulative impact of implementing new
accounting standards (note 2) (41) (15)
Net earnings 202 173
Dividends declared per common share - 42cents
(2007 - 42cents) (115) (115)
-------------------------------------------------------------------------
Retained Earnings, End of Period $ 4,376 $ 4,288
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income,
Beginning of Period $ 19 $ -
Cumulative impact of implementing new
accounting standards (note 2) - 16
Other comprehensive loss (12) (4)
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income,
End of Period (note 15) $ 7 $ 12
-------------------------------------------------------------------------
Total Shareholders' Equity $ 5,579 $ 5,496
-------------------------------------------------------------------------
----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Statements of Comprehensive Income
(unaudited)
---------- ----------
For the periods ended June 14,
2008 and June 16, 2007 2008 2007 2008 2007
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Net earnings $ 140 $ 119 $ 202 $ 173
Other comprehensive income,
net of income taxes
Net unrealized gain (loss)
on available-for-sale
financial assets 13 (26) 22 (29)
Reclassification of (gain)
loss on available-for-sale
financial assets to net
earnings (13) (2) (1) (13)
-------------------------------------------------------------------------
- (28) 21 (42)
-------------------------------------------------------------------------
Net (loss) gain on derivatives
designated as cash flow hedges (6) 21 (15) 25
Reclassification of (gain)
loss on derivatives designated
as cash flow hedges to
net earnings (5) 2 (18) 13
-------------------------------------------------------------------------
(11) 23 (33) 38
-------------------------------------------------------------------------
Other comprehensive loss (11) (5) (12) (4)
-------------------------------------------------------------------------
Total Comprehensive Income $ 129 $ 114 $ 190 $ 169
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Balance Sheets
----------
As at As at As at
June 14, June 16, December 29,
2008 2007 2007
($ millions) (unaudited) (unaudited) (audited)
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents
(notes 7 and 20) $ 345 $ 441 $ 430
Short term investments (note 20) 296 111 225
Accounts receivable (notes 8 and 9) 891 623 885
Inventories (notes 2 and 10) 2,019 1,866 2,032
Income taxes 135 97 111
Future income taxes 50 107 56
Prepaid expenses and other assets 58 69 32
-------------------------------------------------------------------------
Total Current Assets 3,794 3,314 3,771
Fixed Assets 7,898 8,051 7,953
Goodwill 807 805 806
Other Assets (note 20) 1,142 1,086 1,144
-------------------------------------------------------------------------
Total Assets $ 13,641 $ 13,256 $ 13,674
-------------------------------------------------------------------------
Liabilities
Current Liabilities
Bank indebtedness $ 55 $ 98 $ 3
Commercial paper - 482 418
Short term debt (note 12) 798 - -
Accounts payable and accrued
liabilities 2,360 2,296 2,769
Long term debt due within one year
(note 13) 165 434 432
-------------------------------------------------------------------------
Total Current Liabilities 3,378 3,310 3,622
Long Term Debt (note 13) 4,033 3,860 3,852
Future Income Taxes 164 226 180
Other Liabilities 471 356 459
Minority Interest 16 8 16
-------------------------------------------------------------------------
Total Liabilities 8,062 7,760 8,129
-------------------------------------------------------------------------
Shareholders' Equity
Common Share Capital (note 14) 1,196 1,196 1,196
Retained Earnings 4,376 4,288 4,330
Accumulated Other Comprehensive Income
(note 15) 7 12 19
-------------------------------------------------------------------------
Total Shareholders' Equity 5,579 5,496 5,545
-------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 13,641 $ 13,256 $ 13,674
-------------------------------------------------------------------------
----------
Contingencies, commitments and guarantees (note 19).
Subsequent event (note 21).
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Cash Flow Statements
(unaudited)
For the periods ended
June 14, 2008 and ---------- ----------
June 16, 2007 2008 2007 2008 2007
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Operating Activities
Net earnings before minority
interest $ 142 $ 116 $ 203 $ 168
Depreciation and amortization 135 138 271 274
Restructuring charges (note 3) 1 73 4 162
Future income taxes 1 (6) (8) (25)
Change in non-cash working
capital (11) 205 (571) (330)
Other 17 8 64 40
-------------------------------------------------------------------------
Cash Flows from (used in)
Operating Activities 285 534 (37) 289
-------------------------------------------------------------------------
Investing Activities
Fixed asset purchases (87) (131) (200) (224)
Short term investments (250) 153 (61) (13)
Proceeds from fixed asset
sales 3 12 13 19
Credit card receivables,
after securitization (note 8) (42) (52) 32 92
Franchise investments and
other receivables (1) 9 (19) 3
Other 5 (41) (36) (71)
-------------------------------------------------------------------------
Cash Flows used in Investing
Activities (372) (50) (271) (194)
-------------------------------------------------------------------------
Financing Activities
Bank indebtedness (42) 1 52 97
Commercial paper (8) (274) (418) (165)
Short term debt (note 12) 70 - 798 -
Long term debt (note 13)
Issued 296 16 301 23
Retired (398) (9) (411) (20)
Dividends (57) (57) (115) (115)
-------------------------------------------------------------------------
Cash Flows (used in) from
Financing Activities (139) (323) 207 (180)
-------------------------------------------------------------------------
Effect of foreign currency
exchange rate changes on
cash and cash equivalents (3) (42) 16 (42)
-------------------------------------------------------------------------
Change in Cash and Cash
Equivalents (229) 119 (85) (127)
Cash and Cash Equivalents,
Beginning of Period 574 322 430 568
-------------------------------------------------------------------------
Cash and Cash Equivalents,
End of Period $ 345 $ 441 $ 345 $ 441
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Notes to the Unaudited Interim Period Consolidated Financial Statements
($ millions except where otherwise indicated)
Note 1. Summary of Significant Accounting Principles
Basis of Presentation The unaudited interim period consolidated financial
statements were prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") and follow the same accounting policies
and methods of application as those used in the preparation of the
audited annual consolidated financial statements for the year ended
December 29, 2007 ("Annual Report") except as described in note 2. Under
Canadian GAAP, additional disclosure is required in annual financial
statements and accordingly the unaudited interim period consolidated
financial statements should be read together with the audited annual
consolidated financial statements and the accompanying notes included in
the Loblaw Companies Limited 2007 Annual Report.
Basis of Consolidation The consolidated financial statements include the
accounts of Loblaw Companies Limited and its subsidiaries, collectively
referred to as the "Company" or "Loblaw". The Company's interest in the
voting share capital of its subsidiaries is 100%.
The Company also consolidates variable interest entities ("VIEs")
pursuant to Canadian Institute of Chartered Accountants ("CICA")
Accounting Guideline 15, "Consolidation of Variable Interest Entities"
("AcG 15"), that are subject to control by Loblaw on a basis other than
through ownership of a majority of voting interest. AcG 15 defines a
variable interest entity as an entity that either does not have
sufficient equity at risk to finance its activities without subordinated
financial support or where the holders of the equity at risk lack the
characteristics of a controlling financial interest. AcG 15 requires the
primary beneficiary to consolidate VIEs and considers an entity to be the
primary beneficiary of a VIE if it holds variable interests that expose
it to a majority of the VIE's expected losses or that entitle it to
receive a majority of the VIE's expected residual returns or both.
Use of Estimates and Assumptions The preparation of the unaudited interim
period consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts and
disclosures made in the unaudited interim period consolidated financial
statements and accompanying notes. These estimates and assumptions are
based on management's historical experience, best knowledge of current
events and conditions and activities that may be undertaken in the
future. Actual results could differ from these estimates.
Certain estimates, such as those related to valuation of inventories,
goodwill, income taxes, Goods and Services Tax and provincial sales
taxes, fixed assets and employee future benefits, depend upon subjective
or complex judgments about matters that may be uncertain, and changes in
those estimates could materially impact the consolidated financial
statements.
Future Accounting Standards
Goodwill and Intangible Assets In November 2007, the CICA issued
amendments to Section 1000 "Financial Statement Concepts", and AcG 11
"Enterprises in the Development Stage", issued a new Handbook Section
3064 "Goodwill and Intangible Assets" ("Section 3064") to replace
Section 3062 "Goodwill and Other Intangible Assets", withdrew
Section 3450 "Research and Development Costs" and amended Emerging Issues
Committee Abstract 27 "Revenues and Expenditures During the Pre-operating
Period" to not apply to entities that have adopted Section 3064. These
amendments provide guidance for the recognition of internally developed
intangible assets, including assets developed from research and
development activities, ensuring consistent treatment of all intangible
assets, whether separately acquired or internally developed. The
amendments are effective for annual and interim financial statements
relating to fical years beginning on or after October 1, 2008 and
therefore the Company will implement them in the first quarter of 2009,
retroactively with restatement of the comparative periods for the current
and prior year. The impact of implementing these amendments on the
Company's financial statements is currently being assessed.
International Financial Reporting Standards ("IFRS") The Canadian
Accounting Standards Board will require all public companies to adopt
IFRS for interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2011. Companies will be required to
provide IFRS comparative information for the previous fiscal year. The
transition from Canadian GAAP to IFRS will be applicable for the Company
for the first quarter of 2011 when the Company will prepare both the
current and comparative financial information using IFRS. The Company
expects the transition to IFRS to impact financial reporting, business
processes and information systems. The Company has completed a diagnostic
impact assessment and has substantially completed planning activities for
the initial assessment phase of the implementation project. The Company
will continue to invest in training and resources throughout the
transition period to facilitate a timely conversion.
Note 2. Implementation of New Accounting Standards
Accounting Standards Implemented in 2008
Capital Disclosures and Financial Instruments - Disclosure and
Presentation In December 2006, the CICA issued three new accounting
standards: Section 1535 "Capital Disclosures" ("Section 1535"), Section
3862 "Financial Instruments - Disclosures" ("Section 3862") and Section
3863 "Financial Instruments - Presentation" ("Section 3863").
Section 1535 establishes guidelines for the disclosure of information
regarding a company's capital and how it is managed. The standard
requires enhanced disclosures with respect to (i) an entity's objectives,
policies and processes for managing capital; (ii) quantitative data about
what the entity regards as capital; and (iii) whether the entity has
complied with any external capital requirements, and if it has not
complied, the consequences of such non-compliance. For new disclosures
refer to note 14. The adoption of Section 1535 did not have an impact on
the Company's financial results or position.
Section 3862 and Section 3863 replaced Section 3861, "Financial
Instruments - Disclosure and Presentation". Section 3862 requires
increased disclosures regarding the risks associated with financial
instruments such as credit risk, liquidity risk and market risks and the
techniques used to identify, monitor and manage these risks. Section 3863
carries forward standards for presentation of financial instruments and
non-financial derivatives and provides additional guidance for the
classification of financial instruments, from the perspective of the
issuer, between liabilities and equity. For new disclosures refer to
notes 16 and 18. Comparative information about the nature and extent of
risks arising from financial instruments is not required in the year
Section 3862 is adopted. The adoption of Section 3862 and Section 3863
did not have an impact on the Company's financial results or position.
Inventories Effective January 1, 2008, the Company implemented
Section 3031 "Inventories" ("Section 3031"), issued by the CICA in June
2007, which replaces Section 3030 of the same title. Section 3031
requires inventories to be measured at the lower of cost and net
realizable value. Costs such as storage costs and administrative overhead
that do not contribute to bringing inventories to their present location
and condition are specifically excluded from the cost of inventories and
expensed in the period incurred. Reversal of previous write-downs to net
realizable value when there is a subsequent increase in the value of
inventories is now required. The cost of inventories should be based on a
first-in, first-out or weighted average cost formula. Techniques used for
the measurement of cost of inventories, such as the retail method, may be
used if the results approximate cost. The new standard also requires
additional disclosures including the accounting policies used in
measuring inventories, the carrying amounts of the inventories, amounts
recognized as an expense during the period, write-downs and the amount of
any reversal of any write-downs recognized as a reduction in expenses.
The Company values merchandise inventories at the lower of cost and net
realizable value. Costs include the cost of purchase net of vendor
allowances and other costs, such as transportation, that are directly
incurred to bring inventories to their present location and condition.
Seasonal general merchandise and inventories at the distribution centres
are measured at weighted average cost. The Company uses the retail method
to measure the cost of certain retail store inventories. The Company
estimates net realizable value as the amount that inventories are
expected to be sold taking into consideration fluctuations of retail
price due to seasonality less estimated costs necessary to make the sale.
Inventories are written down to net realizable value when the cost of
inventories is not estimated to be recoverable due to obsolescence,
damage or declining selling prices. When circumstances that previously
caused inventories to be written down below cost no longer exist or when
there is clear evidence of an increase in retail selling price, the
amount of the write-down previously recorded is reversed. Storage costs,
indirect administrative overhead and certain selling costs related to
inventories are expensed in the period these costs are incurred.
The transitional adjustments resulting from the implementation of
Section 3031 are recognized in the 2008 opening balance of retained
earnings and prior periods have not been restated. Upon implementation of
these requirements, a decrease in opening inventories of $65, an increase
in current income taxes receivable of $24 and a decrease of $41 to
opening retained earnings were recorded on the consolidated balance sheet
resulting from the application of a consistent cost formula for all
inventories having a similar nature and use to the Company.
In addition to the disclosure of accounting policies used in measuring
inventories, Section 3031 also requires additional disclosures. See
note 10 for the amount of merchandise inventories recognized as an
expense in the period, the amount of inventories written down below cost
and the amount of any reversal of any previously recognized write-downs.
Accounting Standards Implemented in 2007
On December 31, 2006, the Company implemented the CICA Handbook Section
3855, "Financial Instruments - Recognition and Measurement" ("Section
3855"), Section 3865, "Hedges", Section 1530, "Comprehensive Income",
Section 3251, "Equity" and Section 3861, "Financial Instruments -
Disclosure and Presentation". These standards were applied without
restatement of prior periods. All transitional adjustments resulting from
these standards resulted in a decrease in retained earnings, net of
income taxes and minority interest of $15 million and an increase in
accumulated other comprehensive loss, net of income taxes and minority
interest of $16 million in 2007 as more fully described in note 2 of the
audited annual consolidated financial statements for the year ended
December 29, 2007.
Note 3. Restructuring Charges
Project Simplify
During 2007, the Company approved and announced the restructuring of its
merchandising and store operations into more streamlined functions as
part of Project Simplify. In the second quarter of 2008, the Company
recognized nil (2007 - $70) of restructuring costs resulting from this
plan. The year-to-date charge of $3 (2007 - $145) is comprised of
$2 (2007 - $110) for employee termination benefits including severance,
additional pension costs resulting from the termination of employees and
retention costs; and $1 (2007 - $35) of other costs, primarily consulting
directly associated with the restructuring. Cash payments in the second
quarter of 2008 were $13 (2007 - $46) and $30 (2007 - $76) year-to-date.
As at the end of the second quarter of 2008, a remaining liability of $7
(2007 - $62) was recorded on the consolidated balance sheets in respect
of this initiative.
Store Operations
During 2007, the Company completed the previously announced restructuring
of its store operations. In the second quarter of 2008, the Company
recognized nil (2007 - charge of $2) and income of $1 (2007 - charge of
$16) year-to-date related to this plan. Cash payments in the second
quarter of 2008 were $1 (2007 - $9) and $1 (2007 - $18) year-to-date. As
at the end of the second quarter of 2008, a remaining liability of $2
(2007 - $7) was recorded on the consolidated balance sheets in respect of
this initiative.
Supply Chain Network
During 2005, the Company approved a comprehensive plan to restructure its
supply chain operations nationally. The restructuring plan is expected to
be completed in 2009 and the total restructuring costs under this plan
are estimated to be approximately $90. Of this total, approximately $57
is attributable to employee termination benefits, which include severance
and additional pension costs resulting from the termination of employees,
$13 is attributable to fixed asset impairment and accelerated
depreciation of assets relating to this restructuring activity and $20 is
attributable to site closing and other costs directly related to the
restructuring plan. In the second quarter of 2008, the Company recognized
$1 (2007 - $1) and $2 (2007 - $1) year-to-date of restructuring costs
resulting from this plan which is composed of $2 (2007 - nil) for
employee termination benefits resulting from planned involuntary
terminations and nil (2007 - $1) for site closing and other costs. At the
end of the second quarter of 2008, $9 in estimated costs remained to be
incurred and will be recognized as appropriate criteria are met. Cash
payments in the second quarter of 2008 were $7 (2007 - $3) and $8 (2007 -
$4) year-to-date. As at the end of the second quarter of 2008, a
remaining liability of $27 (2007 - $26) was recorded on the consolidated
balance sheets in respect of this initiative.
Note 4. Interest Expense
---------- ----------
2008 2007 2008 2007
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Interest on long term debt $ 65 $ 66 $ 131 $ 132
Interest (income) expense on
financial derivative
instruments (2) 2 (3) 5
Net short term interest
expense (income) 3 (1) 4 (1)
Interest income on security
deposits (2) (4) (5) (8)
Capitalized to fixed assets (4) (5) (9) (11)
-------------------------------------------------------------------------
Interest expense $ 60 $ 58 $ 118 $ 117
-------------------------------------------------------------------------
---------- ----------
In the second quarter of 2008, net interest expense of $65 and $126
year-to-date were recorded related to the financial assets and financial
liabilities not classified as held-for-trading.
Interest paid in the second quarter of 2008 was $102 (2007 - $107), and
interest received was $23 (2007 - $31). Interest paid year-to-date was
$205 (2007 - $202) and interest received year-to-date was $68 (2007 -
$62).
Note 5. Income Taxes
The effective income tax rate in the second quarter of 2008 was 30.1%
(2007 - 27.5%) and 32.3% (2007 - 28.5%) year-to-date. The increases in
effective income tax rates are primarily due to an increase in income tax
accruals relating to certain income tax matters and a change in the
proportions of taxable income earned across different tax jurisdictions,
which were partially offset by lower Canadian federal and certain
provincial statutory income tax rates relative to the second quarter of
2007.
Net income taxes paid in the second quarter were $21 (2007 - $60), and
$105 (2007 - $127) year-to-date.
Note 6. Basic and Diluted Net Earnings per Common Share
---------- ----------
2008 2007 2008 2007
(12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Net earnings ($ millions) $ 140 $ 119 $ 202 $ 173
-------------------------------------------------------------------------
Weighted average common
shares outstanding (in
millions) 274.2 274.2 274.2 274.2
Dilutive effect of stock-based
compensation (in millions) - - - -
-------------------------------------------------------------------------
Diluted weighted average
common shares outstanding
(in millions) 274.2 274.2 274.2 274.2
-------------------------------------------------------------------------
Basic and diluted net earnings
per common share ($) $ 0.51 $ 0.43 $ 0.74 $ 0.63
-------------------------------------------------------------------------
---------- ----------
Stock options outstanding with an exercise price greater than the market
price of the Company's common shares at the end of the second quarter
were not recognized in the computation of diluted net earnings per common
share. Accordingly, for the second quarter of 2008, 5,066,041 (2007 -
3,364,638) stock options, with a weighted average exercise price of
$52.71 (2007 - $61.30) per common share, were excluded from the
computation of diluted net earnings per common share.
Note 7. Cash and Cash Equivalents
The components of cash and cash equivalents as at June 14, 2008, June 16,
2007 and December 29, 2007 were as follows:
-----------
2008 2007 2007
(as at (as at (as at
June 14, June 16, December 29,
2008) 2007) 2007)
-------------------------------------------------------------------------
Cash $ 55 $ 30 $ 61
Cash equivalents - short term
investments with a maturity of
90 days or less:
Bank term deposits 8 1 77
Government treasury bills 84 142 109
Government-sponsored debt securities 93 120 59
Corporate commercial paper 105 81 124
Bank-sponsored asset-backed
commercial paper - 67 -
-------------------------------------------------------------------------
Cash and cash equivalents $ 345 $ 441 $ 430
-------------------------------------------------------------------------
-----------
In the second quarter of 2008, the Company recognized an unrealized
foreign currency exchange gain of $9 (2007 - loss of $79) and $42 (2007 -
loss of $79) year-to-date as a result of translating its United States
dollar denominated cash and cash equivalents, short term investments and
security deposits which are included in other assets, of which a loss of
$3 (2007 - $42) and a gain of $16 (2007 - loss of $42) year-to-date
related to cash and cash equivalents. The resulting gain or loss on cash
and cash equivalents, short term investments and security deposits which
are included in other assets is partially offset in operating income and
accumulated other comprehensive income by the unrealized foreign currency
exchange loss or gain on the cross currency basis swaps.
Note 8. Accounts Receivable
During the second quarter of 2008, nil (2007 - $85) of credit card
receivables were securitized, nil (2007 - $125) year-to-date, by
President's Choice Bank ("PC Bank"), a wholly owned subsidiary of the
Company, through the sale of a portion of the total interest in these
receivables to an independent trust. The securitization yielded a nominal
net loss in 2007 based on the assumptions disclosed in note 10 of the
consolidated financial statements for the year ended December 29, 2007.
The independent trusts' recourse to PC Bank's assets is limited to PC
Bank's retained interests and is further supported by the Company through
a standby letter of credit for $89 (2007 - $80) on a portion of the
securitized amount. Other receivables consist mainly of receivables from
independent franchisees, associated stores and independent accounts.
-----------
2008 2007 2007
(as at (as at (as at
June 14, June 16, December 29,
($ millions) 2008) 2007) 2007)
-------------------------------------------------------------------------
Credit card receivables $ 1,980 $ 1,599 $ 2,023
Amount securitized (1,475) (1,375) (1,475)
-------------------------------------------------------------------------
Net credit card receivables 505 224 548
Other receivables 386 399 337
-------------------------------------------------------------------------
Accounts receivable $ 891 $ 623 $ 885
-------------------------------------------------------------------------
-----------
Credit card receivables that are past due of $10 as at June 14, 2008 are
not classified as impaired as they are less than 90 days past due and
most receivables are reasonably expected to remedy the past due status.
Any credit card receivable balances with a payment that is contractually
180 days in arrears or where the likelihood of collection is considered
remote are written-off. Concentration of credit risk with respect to
receivables is limited due to the Company's customer base being diverse.
Credit risk on the credit card receivables is managed as described in
note 22 of the Company's 2007 Annual Report. Other receivables that are
past due but not impaired totaled $56 as at June 14, 2008, of which a
nominal amount were more than 60 days past due.
Note 9. Allowances for Receivables
The allowance for credit card receivables recorded in the consolidated
balance sheets is maintained at a level which is considered adequate to
absorb credit related losses on credit card receivables. The allowance
for credit card losses is recorded in accounts receivables in the
consolidated balance sheets. The allowance for accounts receivables from
independent franchisees is recorded in accounts payable and accrued
liabilities on the consolidated balance sheets. The allowance for other
receivables from associated stores and independent accounts is recorded
in accounts receivable on the consolidated balance sheets. A continuity
of the Company's allowances for losses is as follows:
Credit Card Receivables
-------- --------
2008 2007 2008 2007 2007
(12 (12 (24 (24 (52
weeks weeks weeks weeks weeks
ended ended ended ended ended
June 14, June 16, June 14, June 16, December
($ millions) 2008) 2007) 2008) 2007) 29, 2007)
-------------------------------------------------------------------------
Allowance at beginning
of period $ (13) $ (12) $ (13) $ (11) $ (11)
Provision for losses (10) (2) (12) (5) (11)
Recoveries (2) (1) (4) (3) (7)
Write-offs 12 2 16 6 16
-------------------------------------------------------------------------
Allowance at end of
period $ (13) $ (13) $ (13) $ (13) $ (13)
-------------------------------------------------------------------------
-------- --------
Other Receivables
-------- --------
2008 2007 2008 2007 2007
(12 (12 (24 (24 (52
weeks weeks weeks weeks weeks
ended ended ended ended ended
June 14, June 16, June 14, June 16, December
($ millions) 2008) 2007) 2008) 2007) 29, 2007)
-------------------------------------------------------------------------
Allowance at beginning
of period $ (31) $ (39) $ (35) $ (37) $ (37)
Provision for losses (19) (27) (27) (43) (79)
Recoveries - - - - -
Write-offs 15 24 27 38 81
-------------------------------------------------------------------------
Allowance at end of
period $ (35) $ (42) $ (35) $ (42) $ (35)
-------------------------------------------------------------------------
-------- --------
Note 10. Inventories
The cost of merchandise inventories recognized as an expense during the
second quarter of 2008 was $5,453 and $10,490 year-to-date. The cost of
merchandise inventories recognized as an expense during the second
quarter of 2008 includes $22 and $33 year-to-date for the write-down of
inventories below cost to net realizable value. There was no reversal of
inventories written down previously that are no longer estimated to sell
below cost.
Note 11. Employee Future Benefits
The Company's total net benefit plan cost recognized in operating income
was $38 (2007 - $40) and $77 (2007 - $81) for the second quarter of 2008
and year-to-date, respectively. The total net benefit plan cost included
costs for the Company's defined benefit pension and other benefit plans,
defined contribution pension plans and multi-employer pension plans.
Note 12. Short Term Debt
In the first quarter of 2008, the Company entered into an $800, 5-year
committed credit facility, provided by a syndicate of banks, which
contains certain financial covenants (see note 14). This facility is the
primary source of the Company's short term funding requirements and
permits borrowings having up to a 180-day term that accrue interest based
on short term floating interest rates. This facility replaced a $500,
364-day committed credit facility which had no financial covenants and
permitted borrowings having up to a 180-day term that accrued interest
based on short term floating interest rates. As at June 14, 2008, $798
was drawn on the new 5-year committed credit facility.
Note 13. Long Term Debt
During the second quarter of 2008, the Company issued USD $300 of fixed-
rate unsecured notes in a private placement debt financing which contains
certain financial covenants (see note 14). The notes were issued in two
equal tranches of USD $150 with 5 and 7 year maturities at interest rates
of 6.48% and 6.86%, respectively. The Company entered into two fixed
cross currency swaps designated as cash flow hedges to manage the foreign
exchange risk. The ineffective portion of the gains or losses on the
derivatives within these hedging relationships was insignificant. For
further information on the Company's policies with respect to cash flow
hedges, refer to note 1 of the Company's 2007 Annual Report.
During the second quarter of 2008, the $390 6.00% medium term note due
June 2, 2008 matured and was repaid.
Note 14. Capital Management
The Company defines capital as net debt and shareholders' equity. The
Company's objectives when managing capital are to:
- ensure sufficient liquidity to support its financial obligations and
execute its operating and strategic plans;
- maintain financial capacity and access to capital to support future
development of the business;
- minimize the cost of its capital while taking into consideration
current and future industry, market and economic risks and
conditions; and
- utilize short term funding sources to manage its working capital
requirements and long term funding sources to match the long term
nature of the fixed assets of the business.
The following ratios are used by the Company to monitor its capital:
-----------
2008 2007 2007
(as at (as at (as at
June 14, June 16, December 29,
2008) 2007) 2007)
-------------------------------------------------------------------------
Interest coverage 3.3:1 2.8:1 2.7:1
Net debt to equity .73:1 .73:1 .67:1
-------------------------------------------------------------------------
-----------
Interest coverage is calculated as operating income divided by interest
expense adding back interest capitalized to fixed assets. The interest
coverage ratio is calculated for the 24 week periods ended June 14, 2008
and June 16, 2007, and for the 52 week period ended December 29, 2007.
The Company manages debt on a net basis as outlined below. The net debt
to equity ratio continued to be within the Company's internal guideline
of less than 1:1. This ratio is useful in assessing the amount of
leverage employed. These ratios are also calculated from time-to-time on
an alternative basis by management to approximate the methodology of debt
rating agencies and other market participants.
Debt
The following table details the net debt calculation used in the net debt
to equity ratio as at the periods ended as indicated:
-----------
2008 2007 2007
(as at (as at (as at
June 14, June 16, December 29,
($ millions) 2008) 2007) 2007)
-------------------------------------------------------------------------
Bank indebtedness $ 55 $ 98 $ 3
Commercial paper - 482 418
Short term debt 798 - -
Long term debt due within one year 165 434 432
Long term debt 4,033 3,860 3,852
Less: Cash and cash equivalents 345 441 430
Short term investments 296 111 225
Security deposits included in
other assets 352 329 322
-------------------------------------------------------------------------
Net debt $ 4,058 $ 3,993 $ 3,728
-------------------------------------------------------------------------
-----------
Security deposits represent short term investments in government
securities which Glenhuron Bank Limited ("Glenhuron"), a wholly owned
subsidiary of the Company, is required to place with counterparties as
collateral to enter into and maintain outstanding swaps and equity
forwards. The amount of the required security deposits will fluctuate
primarily as a result of market value volatility of the derivatives.
The Company monitors its credit ratings as part of its goal to maintain
access to capital markets for its liquidity requirements. The Company's
ability to obtain funding from external sources may be restricted by
downgrades in the Company's credit rating and should the Company's
financial performance and condition deteriorate. In addition, credit and
capital markets are subject to inherent global risks that may negatively
affect the Company's access and ability to fund its short term and long
term debt requirements. The Company mitigates these risks by maintaining
appropriate levels of cash and cash equivalents, short term investments
and security deposits included in other assets, actively monitoring
market conditions and diversifying its capital sources and maturity
profile. The Company also employs risk management strategies including
forward-looking liquidity contingency plans.
During the second quarter of 2008, the Company filed a Short Form Base
Shelf Prospectus ("Prospectus") allowing for the issue of up to
$1 billion of unsecured debentures and/or preferred shares. Subsequent to
the second quarter of 2008, the Company issued preferred shares under the
Prospectus (see note 21).
Share capital
At the end of the second quarter of 2008, the Company's outstanding share
capital was comprised of common shares, an unlimited number of which were
authorized and 274,173,564 (2007 - 274,173,564) were issued and
outstanding. Approximately 62% of the common shares are owned by George
Weston Limited; the remaining shares are widely held. Further information
on the Company's outstanding share capital is provided in note 19 to the
consolidated financial statements for the year ended December 29, 2007.
At quarter end, a total of 8,253,169 stock options were outstanding and
represented 3.0% of the Company's issued and outstanding share capital.
Pursuant to guidelines set by the Company, stock option compensation is
limited to 5% of the issued and outstanding common shares outstanding.
The Company is currently in compliance with this internal guideline.
In the second quarter of 2008, Loblaw renewed its Normal Course Issuer
Bid ("NCIB") to purchase on the Toronto Stock Exchange, or enter into
equity derivatives to purchase, up to 13,708,678 of Company's common
shares, representing approximately 5% of the common shares outstanding.
In accordance with the rules and by-laws of the Toronto Stock Exchange,
Loblaw may purchase its shares at the then market price of such shares.
The Company did not purchase any shares under its NCIB during the first
or second quarter of 2008 or fiscal 2007.
Dividends ($)
The declaration and payment of dividends and the amount thereof are at
the discretion of the Board. Over the long term, the Company's objective
is for its common dividend payment ratio to be in the range of 20% to 25%
of the prior year's basic net earnings per common share adjusted as
appropriate for items which are not regarded to be reflective of ongoing
operations giving consideration to the year end cash position, future
cash flow requirements and investment opportunities. During the second
quarter of 2008, the Board declared dividends of $0.21 (2007- $0.21) and
$0.42 (2007 - $0.42) year-to-date per common share.
Covenants and Regulatory Requirements
The committed credit facility which the Company entered into during the
first quarter of 2008 (see note 12) and the USD $300 fixed-rate private
placement notes which the Company issued during the second quarter of
2008 (see note 13) both contain certain financial covenants. The
covenants under both agreements include maintaining an interest coverage
ratio as well as a leverage ratio, as defined in the respective credit
agreements, which the Company measures on a quarterly basis. As at the
end of the second quarter of 2008, the Company was in compliance with
these covenants.
The Company is also subject to externally imposed capital requirements
from the Office of the Superintendent of Financial Institutions ("OSFI"),
as the primary regulator of PC Bank, and the Central Bank of Barbados, as
the primary regulator of Glenhuron, both wholly-owned subsidiaries of the
Company. PC Bank's capital management objectives are to maintain a
consistently strong capital position while considering the Bank's
economic risks and to meet all regulatory capital requirements as defined
by OSFI. A new regulatory capital management framework, Basel II, has
been implemented in Canada that establishes regulatory capital
requirements that are more sensitive to a bank's risk profile. PC Bank
met all applicable capital targets as at the end of the second quarter of
2008. Glenhuron is currently regulated under Basel I. Under Basel I,
Glenhuron's assets are risk weighted and the minimum ratio of capital to
risk weighted assets is 8.0%. Glenhuron's ratio of capital to risk
weighted assets met the minimum requirements under Basel I as at the end
of the second quarter of 2008.
Note 15. Accumulated Other Comprehensive Income
The following table provides further detail regarding the composition of
accumulated other comprehensive income for the twenty-four week periods
ended June 14, 2008 and June 16, 2007:
--------------------------
2008 2007
(as at June 14, (as at June 16,
2008) 2007)
-------------------------------------------------------------------------
Avail- Avail-
able- able-
for- Cash for- Cash
sale Flow sale Flow
($ millions) Assets Hedges Total Assets Hedges Total
-------------------------------------------------------------------------
Balance, beginning
of period $ (3) $ 22 $ 19 $ - $ - $ -
Cumulative impact of
implementing new
accounting
standards (net of
income taxes of nil
(2007 - $1)) - - - 20 (4) 16
Net unrealized gain
(loss) on available-
for-sale financial
assets (net of
income taxes of $3
(2007 - $1)) 22 - 22 (29) - (29)
Reclassification of
loss (gain) on
available-for-sale
financial assets
(net of income
taxes recovered of
$5 (2007 - nil)) (1) - (1) (13) - (13)
Net (loss) gain on
derivatives
designated as cash
flow hedges (net of
income taxes of $2
(2007 - $2)) - (15) (15) - 25 25
Reclassification of
(gain) loss on
derivatives designated
as cash flow hedges
(net of income taxes
of nil (2007 - nil)) - (18) (18) - 13 13
-------------------------------------------------------------------------
Balance, end of
period $ 18 $ (11) $ 7 $ (22) $ 34 $ 12
-------------------------------------------------------------------------
--------------------------
See note 20 of the Company's 2007 Annual Report for futher details
regarding the composition of accumulated other comprehensive income for
the year ended December 29, 2007.
An estimated net loss of $7 recorded in accumulated other comprehensive
income related to the cash flow hedges as at June 14, 2008, is expected
to be reclassified to net earnings during the next 12 months. This will
be offset by the available-for-sale financial assets that are hedged.
Remaining amounts will be reclassified to net earnings over periods up to
7 years.
Note 16. Fair Values of Financial Instruments
The following table provides a comparison of carrying and fair values for
each classification of financial instruments as at June 14, 2008,
June 16, 2007 and December 29, 2007:
As at June 14, 2008
-------------------------------------------------------------------------
Financial
instruments Financial
Financial required instruments Available-
derivatives to be designated for-sale
designated in a classified as instruments
cash flow as held-for- held-for- measured at
hedge trading trading fair value
-------------------------------------------------------------------------
Cash and cash equivalents,
short term investments
and security deposits $ - $ - $ 616 $ 377
Accounts receivable - - - -
Other financial assets - - - -
Available for sale
securities - - - 11
Derivatives 110 113 - -
-------------------------------------------------------------------------
Total financial assets $ 110 $ 113 $ 616 $ 388
-------------------------------------------------------------------------
Short term borrowings $ - $ - $ - $ -
Accounts payable and
accrued liabilities - - - -
Long term debt - - - -
Derivatives - 137 - -
-------------------------------------------------------------------------
Total financial
liabilities $ - $ 137 $ - $ -
-------------------------------------------------------------------------
As at June 14, 2008
-------------------------------------------------------------------------
Loans Other Total
and financial carrying Total fair
receivables liabilities amount value
-------------------------------------------------------------------------
Cash and cash equivalents,
short term investments
and security deposits $ - $ - $ 993 $ 993
Accounts receivable 891 - 891 891
Other financial assets 81 - 81 81
Available for sale
securities - - 11 11
Derivatives - - 223 223
-------------------------------------------------------------------------
Total financial assets $ 972 $ - $ 2,199 $ 2,199
-------------------------------------------------------------------------
Short term borrowings $ - $ 853 $ 853 $ 853
Accounts payable and
accrued liabilities - 2,360 2,360 2,360
Long term debt - 4,198 4,198 3,802
Derivatives - - 137 137
-------------------------------------------------------------------------
Total financial
liabilities $ - $ 7,411 $ 7,548 $ 7,152
-------------------------------------------------------------------------
The equity investment in franchises is measured at cost of $71 because
there is no quoted market prices in an active market and these
investments are classified as available-for-sale. The Company has no
intention of disposing of these equity investments.
As at June 16, 2007
-------------------------------------------------------------------------
Financial
instruments Financial
Financial required instruments Available-
derivatives to be designated for-sale
designated in a classified as instruments
cash flow as held-for- held-for- measured at
hedge trading trading fair value
-------------------------------------------------------------------------
Cash and cash equivalents,
short term investments
and security deposits $ - $ - $ 403 $ 478
Accounts receivable - - - -
Other financial assets - - - -
Available for sale
securities - - - 13
Derivatives 140 85 - -
-------------------------------------------------------------------------
Total financial assets $ 140 $ 85 $ 403 $ 491
-------------------------------------------------------------------------
Short term borrowings $ - $ - $ - $ -
Accounts payable and
accrued liabilities - - - -
Long term debt - - - -
Derivatives - 11 - -
-------------------------------------------------------------------------
Total financial
liabilities $ - $ 11 $ - $ -
-------------------------------------------------------------------------
As at June 16, 2007
-------------------------------------------------------------------------
Loans Other Total
and financial carrying Total fair
receivables liabilities amount value
-------------------------------------------------------------------------
Cash and cash equivalents,
short term investments
and security deposits $ - $ - $ 881 $ 881
Accounts receivable 623 - 623 623
Other financial assets 44 - 44 44
Available for sale
securities - - 13 13
Derivatives - - 225 225
-------------------------------------------------------------------------
Total financial assets $ 667 $ - $ 1,786 $ 1,786
-------------------------------------------------------------------------
Short term borrowings $ - $ 580 $ 580 $ 580
Accounts payable and
accrued liabilities - 2,296 2,296 2,296
Long term debt - 4,294 4,294 4,511
Derivatives - - 11 11
-------------------------------------------------------------------------
Total financial
liabilities $ - $ 7,170 $ 7,181 $ 7,398
-------------------------------------------------------------------------
The equity investment in franchises is measured at cost of $78 because
there is no quoted market prices in an active market and these
investments are classified as available-for-sale. The Company has no
intention of disposing these equity investments.
As at December 29, 2007
-------------------------------------------------------------------------
Financial
instruments Financial
Financial required instruments Available-
derivatives to be designated for-sale
designated in a classified as instruments
cash flow as held-for- held-for- measured at
hedge trading trading fair value
-------------------------------------------------------------------------
Cash and cash equivalents,
short term investments
and security deposits $ - $ - $ 533 $ 444
Accounts receivable - - - -
Other financial assets - - - -
Available for sale
securities - - - 16
Derivatives 184 101 - -
-------------------------------------------------------------------------
Total financial assets $ 184 $ 101 $ 533 $ 460
-------------------------------------------------------------------------
Short term borrowings $ - $ - $ - $ -
Accounts payable and
accrued liabilities - - - -
Long term debt - - - -
Derivatives - 120 - -
-------------------------------------------------------------------------
Total financial
liabilities $ - $ 120 $ - $ -
-------------------------------------------------------------------------
As at December 29, 2007
-------------------------------------------------------------------------
Loans Other Total
and financial carrying Total fair
receivables liabilities amount value
-------------------------------------------------------------------------
Cash and cash equivalents,
short term investments
and security deposits $ - $ - $ 977 $ 977
Accounts receivable 885 - 885 885
Other financial assets 75 - 75 75
Available for sale
securities - - 16 16
Derivatives - - 285 285
-------------------------------------------------------------------------
Total financial assets $ 960 $ - $ 2,238 $ 2,238
-------------------------------------------------------------------------
Short term borrowings $ - $ 421 $ 421 $ 421
Accounts payable and
accrued liabilities - 2,769 2,769 2,769
Long term debt - 4,284 4,284 4,216
Derivatives - - 120 120
-------------------------------------------------------------------------
Total financial
liabilities $ - $ 7,474 $ 7,594 $ 7,526
-------------------------------------------------------------------------
The equity investment in franchises is measured at cost of $75 because
there is no quoted market prices in an active market and these
investments are classified as available-for-sale. The Company has no
intention of disposing these equity investments.
The following table summarized the change in fair value of financial
assets and financial liabilities, including non-financial derivatives,
classified as held-for-trading, recognized in net earnings.
-------------------------
June 14, 2008 June 16, 2007
(24 weeks) (24 weeks)
-------------------------------------------------------------------------
Required Required
to be to be
Designated classified Designated classified
as as as as
held-for- held-for held-for- held-for
trading -trading trading -trading
-------------------------------------------------------------------------
Cash equivalents, short
term investments and
security deposits $ (28) $ - $ 35 $ -
Retained interest (1) - 1 -
Electricity forward - (3) - (5)
Interest rate swaps - 2 - -
Cross currency basis
swaps - 30 - (33)
Equity forwards
associated with
stock-based
compensation - 15 - (1)
Embedded currency and
commodity derivatives - - - -
-------------------------------------------------------------------------
Fair value loss (gain) $ (29) $ 44 $ 36 $ (39)
-------------------------------------------------------------------------
-------------------------
Note 17. Stock-Based Compensation ($, except where otherwise indicated)
The Company's compensation cost recognized in operating income related to
its stock option plan and the associated equity forwards and the
restricted share unit plan was as follows:
------------- -------------
2008 2007 2008 2007
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Stock option plan
expense $ 2 $ 2 $ 2 $ 2
Equity forwards loss
(gain) (15) (17) 10 (7)
Restricted share unit
plan expense 3 4 3 6
-------------------------------------------------------------------------
Net stock-based
compensation (income)
expense $ (10) $ (11) $ 15 $ 1
-------------------------------------------------------------------------
------------- -------------
Stock Option Plan
During the first half of 2008, the Company paid nil (2007 - a nominal
amount) on the exercise of nil (2007 - 108,000) stock options. In
addition, 1,591,944 (2007 - 752,024) stock options were forfeited or
cancelled. Under its existing stock option plan, which allows for
settlement in shares or in the share appreciation value in cash at the
option of the employee, the Company granted 8,800 (2007 - 38,938 and
148,987) stock options with an exercise price of $33.10 (2007 - $46.01
and $50.80) per common share during the second quarter of 2008 and
3,303,557 (2007 - 3,885,439) stock options with an exercise price of
$28.95 (2007 - $47.44) per common share during the first quarter of 2008.
At the end of the second quarter, a total of 8,253,169 (2007 - 7,297,986)
stock options were outstanding and represented approximately 3.0%
(2007 - 2.7%) of the Company's issued and outstanding common shares,
which was within the Company's guideline of 5%. The Company's market
price per common share at the end of the second quarter was $31.64 (2007
- $50.10).
Restricted Share Unit ("RSU") Plan
Under its existing RSU plan, the Company granted 45,321 (2007 -
10,925) RSUs in the second quarter of 2008, and 352,268 (2007 - 281,818)
RSUs in the first quarter of 2008. In addition, 55,106 (2007 - 83,605)
RSUs were cancelled and 233,655 (2007 - 86,316) were settled in cash in
the amount of $8 million (2007 - $4 million) in the first half of 2008.
At the end of the second quarter, 877,515 (2007 - 872,774) RSUs remained
outstanding.
Note 18. Financial Risk Management
The Company is exposed to the following risks as a result of holding
financial instruments: credit risk, market risk and liquidity risk. The
following is a description of those risks and how the exposures are
managed:
Credit Risk
The Company is exposed to credit risk resulting from the possibility that
counterparties may default on their financial obligations, or if there is
a concentration of transactions carried out with the same counterparty or
of financial obligations which have similar economic characteristics such
that they could be similarly affected by changes in economic conditions.
Exposure to credit risk relates to derivative instruments, cash
equivalents, short term investments, security deposits included in other
assets, PC Bank's credit card receivables and accounts receivables from
independent franchisees, associated stores and independent accounts.
The Company may be exposed to losses if a counterparty to the Company's
financial or non-financial derivative agreements fails to fulfill its
obligations. The Company's risk management practices are more fully
described in note 22 of the Company's 2007 Annual Report.
The Company's maximum exposure to credit risk as it relates to derivative
instruments is represented by the positive fair market value of the
derivatives on the balance sheet (see note 16).
Refer to note 9 for additional information on the credit quality
performance of credit card and accounts receivable from independent
franchisees, associated stores and independent accounts.
Market Risk
Market risk is the loss that may arise from changes in market factors
such as interest rates, foreign currency exchange rates, commodity prices
and common share price.
Interest Rate Risk
The Company is exposed to interest rate risk which it manages through the
use of interest rate swaps. Loblaw's interest rate risk arises from the
issuance of medium term notes and US private placement notes included in
long term debt, short term debt, and commercial paper net of its cash and
cash equivalents, short term investments and security deposits included
in other assets. The Company manages fluctuations in its interest expense
through its exposure to a mix of fixed and variable interest rates. The
Company estimates that a 100 basis point increase (decrease) in interest
rates, with all other variables held constant, would result in an
increase (decrease) of $11 to interest expense.
Foreign Currency Exchange Rate Risk
The Company is exposed to foreign currency exchange rate variability,
primarily on its United States dollar denominated cash and cash
equivalents, short term investments, security deposits included in other
assets, and private placement notes included in long-term debt. To manage
its foreign currency exchange rate exposure, the Company enters into
cross currency basis swaps. As a result, a significant strengthening
(weakening) of the Canadian dollar against the US dollar, with all other
variables held constant, would have no significant impact on earnings
before income taxes and minority interest.
Commodity Price Risk
The Company is exposed to increases in the prices of commodities
indirectly linked with its consumer products. To manage this exposure,
the Company uses purchase commitments for a portion of its needs for
certain consumer products that may be commodities based and the Company
expects to take delivery of these consumer products in the normal course
of business. A non-financial derivative contract with a notional value of
$29 is used to hedge electricity price risk for a portion of the
Company's expected electricity consumption in Alberta. In addition, the
Company uses an insignificant amount of exchange traded futures and
options. The Company estimates that a 10% increase (decrease) in relevant
commodity prices, with all other variables held constant, would result in
a gain (loss) of $4 on earnings before income taxes and minority
interest.
Common Share Price Risk
The Company enters into equity forwards to manage its exposure to
fluctuations in its stock-based compensation cost as a result of changes
in the market price of its common shares. The equity forwards allow for
settlement in cash, common shares or net settlement. These forwards
change in value as the market price of the Company's common shares
changes and provide a partial offset to fluctuations in Loblaw's stock-
based compensation cost, including RSU plan expense. The partial offset
between the Company's stock-based compensation costs, including RSU plan
expense, and the equity forwards is effective when the market price
of the Company's common shares exceeds the exercise price of the related
employee stock options. When the market price of the common shares is
lower than the excise price of the related employee stock options, only
RSUs will provide a partial offset to these equity forwards. The amount
of net stock-based compensation cost recorded in operating income is
mainly dependent upon the number of unexercised stock options and RSUs
and their vesting schedules relative to the number of underlying common
shares on the equity forwards and the level of and fluctuations in the
market price of the underlying common shares. The impact on the equity
forwards of a one dollar increase (decrease) of the market value in the
Company's underlying common shares, with all other variables held
constant, would result in a gain (loss) of $5 in earnings before income
taxes and minority interest.
Liquidity Risk
Liquidity risk is the risk that the Company cannot meet a demand for cash
or fund its obligations as they come due. Liquidity risk also includes
the risk of not being able to liquidate assets in a timely manner at a
reasonable price. The Company meets liquidity requirements by holding
assets that can be readily converted into cash, and by managing cash
flows.
The Company's ability to obtain funding from external sources may be
restricted by further downgrades in the Company's credit ratings and
should the Company's financial performance and condition deteriorate. In
addition, credit and capital markets are subject to inherent global risks
that may negatively affect the Company's access and ability to fund its
short term and long term debt requirements. The Company mitigates these
risks by maintaining appropriate levels of cash and cash equivalents,
short term investments and security deposits, actively monitoring market
conditions and diversifying its sources of funding and maturity profile.
The Company also employs risk management strategies including forward-
looking liquidity contingency plans.
Maturity Analysis
The following are the undiscounted contractual maturities of significant
financial liabilities as at June 14, 2008:
2008 There-
Remaining 2009 2010 2011 2012 after Total
-------------------------------------------------------------------------
Interest rate
swaps payable(1) $ 8 $ 13 $ 13 $ 13 $ 13 $ 5 $ 65
Equity forward
contracts(2) - - 126 36 26 71 259
Long term debt
including fixed
interest
payments(3) 158 433 589 605 230 6,746 8,761
-------------------------------------------------------------------------
$ 166 $ 446 $ 728 $ 654 $ 269 $6,822 $9,085
-------------------------------------------------------------------------
(1) Based on the pay fixed interest which will be partially offset by the
floating interest received.
(2) Based on the average cost base as at June 14, 2008.
(3) Based on the maturing face values and annual interest for each
instrument as well as annual payment obligations for VIEs, mortgages,
and capital leases.
The Company's bank indebtedness, commercial paper, short term debt,
accounts payable and accrued liabilities are short term in nature,
which are due within the next 12 months, and thus not included above.
Note 19. Contingencies, Commitments and Guarantees
Guarantees - Independent Funding Trusts
Certain independent franchisees of the Company obtain financing through a
structure involving independent trusts, which were created to provide
loans to the independent franchisees to facilitate their purchase of
inventory and fixed assets, consisting mainly of fixtures and equipment.
These trusts are administered by a major Canadian chartered bank.
During the first quarter of 2008, the Company was notified that an Event
of Termination of the independent funding trust agreement for the
Company's franchisees had occurred as a result of the credit rating
downgrade by Dominion Bond Rating Service ("DBRS") of the Company's long
term credit rating to "BBB (high)" from "A (low)". As a result of the
Event of Termination, during the second quarter of 2008, the Company
finalized an alternative financing arrangement for the independent
funding trust in the form of a $475, 364-day revolving committed credit
facility provided by a syndicate of banks.
The gross principal amount of loans issued to the Company's independent
franchisees outstanding as of June 14, 2008 was $383 (2007 - $417)
including $159 (2007 - $154) of loans payable by VIEs consolidated by the
Company. Based on a formula, the Company has agreed to provide credit
enhancement in the form of a standby letter of credit for the benefit of
the independent funding trust equal to approximately 15% (2007 - 10%) of
the principal amount of the loans outstanding at any point in time, $66
(2007 - $44) as of June 14, 2008. The standby letter of credit has not
been drawn upon. This credit enhancement allows the independent funding
trust to provide favorable financing terms to the Company's independent
franchisees. As well, each independent franchisee provides security to
the independent funding trust for its obligations by way of a general
security agreement. In the event that an independent franchisee defaults
on its loan and the Company has not, within a specified time period,
assumed the loan, or the default is not otherwise remedied, the
independent funding trust would assign the loan to the Company and draw
upon this standby letter of credit. The Company has agreed to reimburse
the issuing bank for any amount drawn on the standby letter of credit.
This new alternative financing structure has been reviewed and the
Company determined there were no material implications with respect to
the consolidation of VIEs. In accordance with Canadian GAAP, the
financial statements of the independent funding trust are not
consolidated with those of the Company.
Legal Proceedings
During the first quarter of 2007, the Company was one of 17 defendants
served with an action brought in the Superior Court of Ontario by certain
beneficiaries of a multi-employer pension plan in which the Company's
employees and those of its independent franchisees participate. In their
claim against the employers and the trustees of the multi-employer
pension plan, the plaintiffs claim that assets of the multi-employer
pension plan have been mismanaged and are seeking, among other demands,
damages of $1 billion. The action is framed as a representative action on
behalf of all the beneficiaries of the multi-employer pension plan. In
the second quarter of 2008, the Company received confirmation that the
action against the Company has been dismissed, but the action against the
trustees is ongoing. One of the trustees, an officer of the Company, may
be entitled to indemnification from the Company.
In addition to the claim described above, the Company is the subject of
various legal proceedings and claims that arise in the ordinary course of
business. The outcome of all of these proceedings is uncertain. However,
based on information currently available, these claims, individually and
in the aggregate, are not expected to have a material impact on the
Company.
Note 20. Presentation
Certain prior year information has been reclassified to conform with
current year presentation. Security deposits, which were previously
presented as cash and cash equivalents and short term investments on the
consolidated balance sheets, are now included in other assets on the
consolidated balance sheets and totaled $352 as at June 14, 2008 (June
16, 2007 - $329; December 29, 2007 - $322).
Note 21. Subsequent Event ($, except where otherwise indicated)
Second Preferred Shares, Series A (authorized - 12.0 million)
Subsequent to June 14, 2008, the Company issued 9.0 million 5.95% non-
voting Second Preferred Shares, Series A, with a face value of
$225 million for net proceeds of $218 million, which entitle the holder
to a fixed cumulative preferred cash dividend of $1.4875 per share per
annum which will, if declared, be payable quarterly. On and after
July 31, 2013, the Company may, at its option, redeem for cash, in whole
or in part, these outstanding preferred shares as follows:
On or after July 31, 2013 at $25.75 per share, together with all accrued
and unpaid dividends to but not including the redemption date
On or after July 31, 2014 at $25.50 per share, together with all accrued
and unpaid dividends to but not including the redemption date
On or after July 31, 2015 at $25.00 per share, together with all accrued
and unpaid dividends to but not including the redemption date
On and after July 31, 2013, the Company may, at its option, convert these
preferred shares into that number of common shares of the Company
determined by dividing the then applicable redemption price, together
with all accrued and unpaid dividends to but excluding the date of
conversion, by the greater of $2.00 and 95% of the then current market
price of the common shares. On and after July 31, 2015, these outstanding
preferred shares are convertible, at the option of the holder, into that
number of common shares of the Company determined by dividing $25.00,
together with accrued and unpaid dividends to but excluding the date of
conversion, by the greater of $2.00 and 95% of the then current market
price of the common shares. This option is subject to the Company's right
to redeem the preferred shares for cash or arrange for their sale to
substitute purchasers. These preferred shares will be classified as other
financial liabilities, in accordance with Section 3855, and measured
using the effective interest method.
Corporate Profile
Loblaw Companies Limited ("Loblaw" or the "Company") is Canada's largest
food distributor and a leading provider of general merchandise products,
drugstore and financial products and services. Through its various
operating banners, Loblaw is committed to providing Canadians with a one-
stop destination in meeting their food and household needs. This goal is
pursued through a portfolio of store formats across the country. Loblaw
is known for the quality, innovation and value of its food offering. It
also offers Canada's strongest control label program, including the
unique President's Choice, no name and Joe Fresh Style brands.
Food is at the heart of its offering. Loblaw stores provide a wide,
growing and successful range of products and services to meet the
everyday household demands of Canadian consumers. In addition,
President's Choice Financial services offer core banking, a popular
MasterCard(R), PC Financial auto, home, travel and pet insurance, PC
Mobile phone services as well as the PC points loyalty program.
Loblaw is committed to a strategy developed under three core themes:
Simplify, Innovate and Grow. The Company strives to be consumer focused,
cost effective and agile, with the goal of achieving long term growth for
its many stakeholders. Loblaw believes that a strong balance sheet is
critical to achieving its potential. It is highly selective in its
consideration of acquisitions and other business opportunities. The
Company maintains an active product development program to support its
control label program. It works to ensure that its technology and systems
logistics enhance the efficiency of its operations.
Trademarks
Loblaw Companies Limited and its subsidiaries own a number of trademarks.
Several subsidiaries are licensees of additional trademarks. These
trademarks are the exclusive property of Loblaw Companies Limited or the
licensor and where used in this report are in italics.
Investor Relations
Shareholders, security analysts and investment professionals should
direct their requests to Inge van den Berg, Vice President, Public
Affairs & Investor Relations at the Company's National Head Office or by
e-mail at investor@loblaw.ca.
Additional information has been filed electronically with various
securities regulators in Canada through the System for Electronic
Document Analysis and Retrieval (SEDAR) and with the Office of the
Superintendent of Financial Institutions (OSFI) as the primary regulator
for the Company's subsidiary, President's Choice Bank. The Company holds
an analyst call shortly following the release of its quarterly results.
These calls are archived in the Investor Zone section of the Company's
website.
Ce rapport est disponible en français.
TORONTO, July 25 /CNW/ - Loblaw Companies Limited will be releasing its
second quarter results on Friday, July 25, 2008 at 8:00am (EST). This release
will be followed by a conference call at 11:00am as well as an Audio Webcast.
To access via Tele-conference please dial 416-644-3423. The playback will
be made available one hour after the event at (416) 640-1917, passcode:
21266051 followed by the number sign. To access via webcast please visit
www.loblaw.ca, pre-registration will be available.
For full details please visit our website at www.loblaw.ca.
For further information: Inge van den Berg, Vice President, Public
Affairs & Investor Relations, (905) 459-2500, inge.vandenberg@loblaw.ca
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