BRAMPTON, ON, Nov. 13 /CNW/ -2008 Third Quarter Summary(1)
For the periods ended
October 4, 2008 and
October 6, 2007
(unaudited)
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($ millions except 2008 2007 2008 2007
where otherwise
indicated) (16 weeks)(16 weeks) Change (40 weeks)(40 weeks) Change
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Sales $ 9,493 $ 9,137 3.9% $ 23,057 $ 22,417 2.9%
Operating expenses 9,182 8,887 3.3% 22,328 21,815 2.4%
Operating income 311 250 24.4% 729 602 21.1%
Net earnings 155 117 32.5% 357 290 23.1%
Basic net earnings
per common
share ($) 0.56 0.43 30.2% 1.30 1.06 22.6%
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Same-store sales
increase (%) 3.0% 1.6% 2.2% 2.2%
Operating margin 3.3% 2.7% 3.2% 2.7%
EBITDA(2) $ 501 $ 430 16.5% $ 1,190 $ 1,056 12.7%
EBITDA margin(2) 5.3% 4.7% 5.2% 4.7%
Free cash flow(2) $ 87 $ 117 (25.6%) $ (265) $ 67 (495.5%)
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--------- ---------Sales in the third quarter of 2008 were $9,493 million compared to $9,137
million in the same period in 2007, an increase of 3.9%. Net earnings were
$155 million, a 32.5% increase compared to $117 million in the same period
last year. EBITDA(2) of $501 million represented a 16.5% increase over last
year. Basic net earnings per common share were $0.56, compared to $0.43 in the
third quarter last year.
The following items influenced the Company's operating income in the
third quarter of 2008 compared to the same period in 2007:- Charges related to restructuring costs in 2008 of $3 million compared
to $24 million in 2007. The effect on basic net earnings per common
share was a charge of $0.01 (2007 - $0.05).
- Charges related to the net effect of stock-based compensation and the
associated equity forwards of $9 million in 2008 compared to a charge
of $19 million in 2007. The effect on basic net earnings per common
share was a charge of $0.04 (2007 - $0.08). The non-cash charge on
equity forwards resulted from a decrease in the Company's share price
during the third quarter of 2008.Excluding the above items, operating income, EBITDA(2) and basic net
earnings per common share in the third quarter of 2008 improved compared to
the third quarter of 2007.
Commenting on the Company's performance, Galen G. Weston, Loblaw
Companies Limited Executive Chairman said: "Third quarter performance showed
some signs of progress towards our goal of becoming an effective selling
organization. We also continued to realize benefits from our improved buying,
cost management and operating procedures. However, we are preparing for a
challenging close to the current year and start to the next, driven by the
uncertain economy and continued competitive pressures."(1) To be read in conjunction with "Forward-Looking Statements".
(2) See Non-GAAP Financial Measures.
Highlights of the Quarter
-------------------------
- The Company remains on track and is progressing well in all areas of
its five point plan to drive profitable sales momentum: Back-to-Best
great food renewal in Ontario, western Canada refurbishment, local
market merchandising, foundational infrastructure focus, and private
label innovation.
- Total sales were $9,493 million in the third quarter of 2008 compared
to $9,137 million in the same period last year, an increase of 3.9%.
Same-store sales in the quarter increased by 3.0%. Sales and same-
store sales growth in the third quarter of 2008 were negatively
impacted by approximately 0.7% as a result of a shift of the
Thanksgiving holiday into the fourth quarter of 2008. Total sales
growth in both food and drugstore were good in the quarter. General
merchandise sales declined compared to the third quarter of 2007 due
to unseasonable weather and the markdown of merchandise to sell
through seasonal inventory. Gas bar sales continued to be strong in
the third quarter as a result of fuel price inflation as well as
volume growth. Positive customer count growth was achieved in the
third quarter of 2008, while item count growth remained flat versus
the same period last year. The Company's analysis indicated that
moderate internal retail food price inflation was experienced in the
third quarter of 2008.
- Operating income increased by $61 million, or 24.4%, to $311 million
in the third quarter of 2008, compared to $250 million in the third
quarter of 2007. Operating margin was 3.3% for the third quarter of
2008 compared to 2.7% in 2007. Lower restructuring and net stock-
based compensation costs, higher sales and the impact of the
Company's cost reduction initiatives contributed to the increase in
operating income and operating margin.
- Basic net earnings per common share increased 13 cents or 30.2% to
$0.56 for the third quarter of 2008, compared to $0.43 in the same
quarter last year. EBITDA(1) for the quarter was $501 million,
representing an increase of 16.5% compared to $430 million in the
second quarter of 2007. EBITDA margin(1) increased to 5.3% from 4.7%
in 2007.
- Free cash flow(1) for the third quarter of 2008 was $87 million
compared to $117 million in the third quarter of 2007. The change was
primarily due to a decrease in cash flows from operating activities,
specifically working capital of $58 million and a decrease in capital
expenditures of $19 million compared to the third quarter of last
year. On a year-to-date basis, free cash flow(1) was negative
$265 million compared to $67 million in 2007. The year-to-date change
is primarily due to a decrease in cash flows from working capital of
$299 million, partially offset by a decrease in capital expenditures
of $43 million.
- During the third quarter of 2008, the Company completed two financing
transactions which generated $518 million. In June 2008, a preferred
share public offering for net proceeds of $218 million (net of
transaction costs) was closed and in September 2008, $300 million of
credit card receivables were securitized. The proceeds enabled the
Company to repay short term borrowings from its $800 million credit
facility. As at October 4, 2008, $273 million was drawn on this five
year committed credit facility.
- The Company's ongoing investment in lower food prices, to drive
customer value perceptions, continues to have a negative impact on
earnings. Reasonable progress was achieved in the third quarter of
2008 to help support these investments:
- The Company achieved improved year-over-year shrink and on-shelf
availability in the third quarter from the continued rollout and
training of enhanced "shop-keeping" procedures.
- Buying synergies and more disciplined vendor management are
resulting in lower purchase costs for both merchandise and
not-for-resale items.The Company remains focused on delivering profitable sales momentum,
driven by our efforts in food renewal, store enhancements, innovation,
infrastructure, and improving value for our customers. While continued
progress in cost and operating efficiencies are expected to support these
investments, it is anticipated that the unpredictable economy and aggressive
competitive environment will further challenge results for the remainder of
2008 and into 2009.
(1) See Non-GAAP Financial Measures.
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 and reformulated 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 which could lead to work
stoppages; 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; any requirement of the Company to make contributions to
its registered funded defined benefit pension plans in excess of those
currently contemplated; 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 Third 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 November 13, 2008, unless
otherwise noted.
Results of Operations
The Company continues to realize benefits from improved buying, cost
management and operating procedures and remained on track in all areas of its
five point plan to drive profitable sales momentum: Back-to-Best great food
renewal in Ontario; western Canada refurbishment; local market merchandising;
foundational infrastructure; and control label (private) innovation.
Growth in customer count contributed to the increase in total sales in
the third quarter of 2008, despite item count growth remaining flat versus the
same period last year. Same-store sales in the third quarter of 2008 increased
by 3.0% compared to 1.6% for the same period last year. The shift of the
Thanksgiving sales into the fourth quarter of 2008 resulted in approximately
0.7% lower growth in the third quarter of 2008. Moderate internal retail food
price inflation was experienced in the third quarter of 2008.
Operating income of $311 million for the third quarter of 2008 increased
by $61 million compared to the third quarter of 2007. The increase in
operating income was due to lower restructuring and net stock-based
compensation costs, higher sales and cost reduction initiatives. Operating
margin and EBITDA margin(1), excluding the impact of restructuring costs,
increased in the third quarter of 2008, compared to the third quarter of 2007,
as a result of the above factors.
The effective income tax rate in the third quarter of 2008 decreased to
30.3% compared to 32.2% in the third quarter of 2007, primarily due to a
change in the proportions of taxable income earned across different tax
jurisdictions and lower Canadian federal and certain provincial statutory
income tax rates relative to the third quarter of 2007 which was partially
offset by an increase in income tax accruals relating to certain income tax
matters.
Net earnings were $155 million in the third quarter of 2008, a 32.5%
increase compared to $117 million in the same period last year. For the third
quarter of 2008, basic net earnings per common share were $0.56 compared to
$0.43 in 2007, an increase of 30.2%.
Sales
Sales for the third quarter increased by 3.9% to $9,493 million compared
to $9,137 million in the third quarter of 2007. Total sales growth in both
food and drugstore were good in the quarter while general merchandise sales
declined compared to the third quarter of 2007 due to unseasonable weather and
the markdown of merchandise to sell through seasonal inventory. Gas bar sales
continued to be strong in the third quarter as a result of fuel price
inflation and volume growth. Moderate internal retail food price inflation
contributed to the same-store sales increase of 3.0% in the quarter.
(1) See Non-GAAP Financial Measures.
The following factors explain the major components in the change in sales
for the third quarter of 2008 compared to same period in 2007:- same-store sales growth of 3.0%;
- a shift in Thanksgiving holiday sales into the fourth quarter of 2008
resulted in lower sales and same-store sales growth of approximately
0.7% during the third quarter of 2008;
- continued strong gas bar sales resulting from both fuel price
inflation and volume growth;
- the Company experienced moderate internal retail food price inflation
for the third quarter of 2008 although national food price inflation
as measured by "The Consumer Price Index for Food Purchased from
Stores" was 5.4% for the third quarter of 2008 compared to 2.2% in
the same period of 2007. This measure of inflation does not
necessarily reflect the effect of inflation on the specific mix of
goods sold in Loblaw stores; and
- during the third quarter of 2008, 8 new corporate and franchised
stores were opened and 15 were closed, resulting in a net decrease of
0.2 million square feet or 0.3%. During the latest four quarters, net
retail square footage remained flat despite the opening of 29 new
corporate and franchised stores, inclusive of stores that underwent
conversions and major expansions, and the closure of 35 stores.
For the first three quarters of the year, sales increased by 2.9%, or $640
million, to $23,057 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 2.2%; and
- in the first three quarters, 21 new corporate and franchised stores
were opened, including stores which underwent conversions and major
expansions, and 27 stores closed.Operating Income
Operating income of $311 million for the third quarter of 2008 compared
to $250 million in the same period of 2007, an increase of 24.4%. Operating
margin was 3.3% for the third quarter of 2008 compared to 2.7% in 2007. The
increase in operating income was mainly due to lower restructuring and net
stock-based compensation costs, higher sales and cost reduction initiatives
that have been implemented throughout the Company.
The year over year change in the following items influenced operating
income for the third quarter of 2008 compared to the third quarter of 2007:- charge of $3 million (2007 - $24 million) related to restructuring
costs; and
- charge of $9 million (2007 - charge of $19 million) related to the
net effect of stock-based compensation and the associated equity
forwards. A non-cash charge on equity forwards resulted from a
decrease in the Company's share price during the third quarter of
2008.Excluding the above items, operating income in the third quarter of 2008
improved compared to the third quarter of 2007.
After factoring in the above items, operating margin and EBITDA margin(1)
increased in the third quarter of 2008. The Company's focus on cost reduction,
including shrink initiatives has improved margins in the third quarter of 2008
compared to the third quarter of 2007. Buying synergies and more disciplined
vendor management are resulting in lower purchase costs for both merchandise
and not-for-resale items.
The Company experienced higher store labour costs in the third quarter of
2008 as a result of increased wage rates and investments in training compared
to the third quarter of 2007. Labour productivity decreased slightly in the
third quarter of 2008 compared to the same period last year but has remained
consistent on a year-to-date basis.
EBITDA(1) increased by $71 million, or 16.5%, to $501 million in the
third quarter of 2008 compared to $430 million in the third quarter of 2007.
EBITDA margin(1) increased in the third quarter of 2008 to 5.3% from 4.7% in
the comparable period of 2007. Lower restructuring and net stock-based
compensation costs, higher sales and the impact of the Company's cost
reduction initiatives have contributed to the increase in EBITDA and EBITDA
margin.
Year-to-date operating income for 2008 increased by $127 million, or
21.1%, to $729 million, and resulted in an operating margin of 3.2% as
compared to 2.7% in the corresponding period in 2007. During the first three
quarters of 2008, the Company recorded restructuring charges of $7 million
(2007 - $186 million) of which $3 million (2007 - $168 million) related to
Project Simplify, income of $1 million (2007 - charge of $16 million) related
to the store operations, and a charge of $5 million (2007 - $2 million)
related to the supply chain network. In addition, the Company recognized in
operating income a year-to-date charge of $24 million (2007 - $20 million) for
the net effect of stock-based compensation and the associated equity forwards.
Excluding the above items, year-to-date operating income for 2008 decreased
compared to the corresponding period in 2007.
Year-to-date EBITDA(1) increased by $134 million, or 12.7%, to $1,190
million compared to $1,056 million in the corresponding period in 2007. EBITDA
margin(1) increased to 5.2% 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 due
to lower restructuring charges, higher sales and cost reduction initiatives.
(1) See Non-GAAP Financial Measures.
Interest Expense and Other Financing Charges
Interest expense and other financing charges for the third quarter of
2008 was $80 million compared to $76 million in the same period of 2007. The
following items impacted interest expense:- interest on long term debt of $85 million (2007 - $87 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 $1 million (2007 - charge of
$5 million);
- net short term interest expense of nil (2007 - income of $5 million);
- interest income on security deposits of $2 million (2007 -
$5 million);
- interest expense of $6 million (2007 - $6 million) was capitalized to
fixed assets; and
- dividends on capital securities of $4 million (2007 - nil).Interest expense and other financing charges year-to-date was $198
million compared to $193 million in 2007.
Income Taxes
The effective income tax rate in the third quarter of 2008 decreased to
30.3%, compared to 32.2% in the third quarter of 2007, and the year-to-date
effective income tax rate increased to 31.5% in 2008 compared to 30.1% in
2007. The quarter over quarter reduction in the effective income tax rate is
primarily due to a change in the proportions of taxable income earned across
different tax jurisdictions and lower Canadian federal and certain provincial
statutory income tax rates relative to the third quarter of 2007 which was
partially offset by an increase in income tax accruals relating to certain
income tax matters. The year over year increase in the effective income tax
rate is primarily due to an increase in income tax accruals relating to
certain income tax matters which is partially offset by a change in the
proportions of taxable income earned across different tax jurisdictions and
lower Canadian federal and certain provincial statutory income tax rates
relative to the third quarter of 2007.
Net Earnings
Net earnings for the third quarter increased by $38 million, or 32.5%, to
$155 million from $117 million in the third quarter of 2007 and increased by
$67 million, or 23.1%, to $357 million year-to-date from $290 million in 2007.
Basic net earnings per common share for the third quarter increased by $0.13,
or 30.2%, to $0.56 from $0.43 in the third quarter of 2007 and increased by
$0.24, or 22.6%, to $1.30 year-to-date compared to $1.06 for the same period
last year.
Basic net earnings per common share were affected in the third quarter of
2008 compared to the third quarter of 2007 by the following:- charge of $0.01 (2007 - $0.05) per common share related to
restructuring costs; and
- charge of $0.04 (2007 - $0.08) per common share for the net effect of
stock-based compensation and the associated equity forwards.
Year-to-date basic net earnings per common share
for 2008 as compared to the same period in 2007 was affected by the
following:
- charge of $0.02 (2007 - $0.44) per common share related to
restructuring costs; and
- charge of $0.11 (2007 - $0.09) 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 0.59:1 at the end of the third quarter of 2008 compared to 0.71:1 at the
end of the third quarter of 2007 and 0.67:1(2) at year end 2007. Equity for
the purpose of calculating the net debt to equity ratio is defined by the
Company as capital securities and shareholders' equity. The decrease in the
net debt(1) to equity ratio at the end of the third quarter of 2008 when
compared to 2007 was due to a decrease in commercial paper and short term debt
and an increase in cash and cash equivalents, short term investments, security
deposits and the issuance of capital securities. The change in this ratio from
year end 2007 is due to a decrease in commercial paper, offset by the increase
in short term debt and the issuance of capital securities. The interest
coverage ratio was 3.4 times for the third quarter of 2008 compared to 2.9
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
third quarter of 2008 increased to 6.9%, compared to (0.7)% 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 third quarter of 2008 increased
to 7.1%, compared to (7.9)% for the comparable period of 2007, and remained
consistent with 6.0%(2) at year end 2007. The ratios in the third 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.(1) See Non-GAAP Financial Measures.
(2) See page 12 of the Company's 2007 Annual Report.Dividends
Loblaw's Board of Directors declared a dividend equal to $0.21 per common
share with a payment date of October 1, 2008 and $0.5394 per preferred share
Series A with a payment date of October 31, 2008.
Dividends on the second preferred share Series A are reported as a
component of interest expense and other financing charges in the statement of
earnings commencing in the third quarter of 2008.
Outstanding Share Capital
The Company's outstanding share capital is comprised of common shares and
preferred shares. An unlimited number of common shares is authorized and
274,173,564 common shares were outstanding at quarter end. In addition, 12.0
million second preferred shares Series A is authorized and 9.0 million of
these shares were outstanding at the end of the third quarter of 2008. The
preferred shares are classified as capital securities and are included in
liabilities. 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 Operating Activities
Third quarter cash flows from operating activities were $399 million in
2008 compared to $448 million in the comparable period in 2007. The decreases
in cash flows from operating activities for the third quarter were mainly due
to the change in non-cash working capital as a result of changes in
inventories and accounts payable and accrued liabilities; which were partially
offset by the increase in operating income, excluding the impact of
restructuring costs. On a year-to-date basis, cash flows from operating
activities were $362 million compared to $737 million in 2007. The
year-to-date decreases in cash flows from operating activities were mainly due
to the change in non-cash working capital as a result of changes in
inventories, accounts receivable, accounts payable and accrued liabilities and
income taxes and a decrease in operating income, excluding the impact of
restructuring costs.
Cash Flows from (used in) Investing Activities
Third quarter cash flows from investing activities were $91 million
compared to $351 million used in 2007. On a year-to-date basis, cash flows
used in investing activities were $180 million compared to $545 million in
2007. The third quarter and year-to-date changes were primarily due to
decreases in cash flows used in short term investments, capital expenditures
and by a change in cash flows from credit card receivables, after
securitization. Capital investment for the third quarter amounted to $197
million (2007 - $216 million) and $397 million (2007 - $440 million)
year-to-date.
During the third quarter of 2008, $300 million (2007 - $100 million) of
credit card receivables were securitized and $300 million (2007 - $225
million) year-to-date by President's Choice Bank ("PC Bank") through the sale
of a portion of the total interest in these receivables to an independent
trust. The securitization yielded a net gain of $1 million in 2008 (2007 -
nominal net loss) 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 $116 million
(2007 - $89 million) on a portion of the securitized amount.
Cash Flows used in Financing Activities
Third quarter cash flows used in financing activities were $417 million
in 2008 compared to $126 million in 2007. During the third quarter of 2008,
the change in cash flows from commercial paper was $252 million as a result of
a reduction in commercial paper levels, the change in cash flows from the
issuance of capital securities was $218 million, and the change in cash flows
used in short term debt was $831 million as a result of an increase in short
term debt as described below. On a year-to-date basis, cash flows used in
financing activities were $210 million compared to cash flows used in
financing activities of $306 million in 2007. On a year-to-date basis, the
change in cash flows used in commercial paper was $1 million, the change in
cash flows used to retire long term debt was $394 million, the change in cash
flows used in short term debt was $33 million, the change in cash flows from
the issuance of new long term debt was $276 million, and the change in cash
flow from the issuance of capital securities was $218 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 October 4, 2008, $273 million was drawn on the new 5-year
committed credit facility.
(1) See Non-GAAP Financial Measures.
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 (see 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 third quarter, the Company closed its 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 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.
From time to time, PC Bank, a wholly owned subsidiary of the Company,
securitizes credit card receivables through the sale of a portion of the total
interest in these receivables to independent trusts. During the third quarter,
$300 million of credit card receivables were securitized by PC Bank, through
the sale of a portion of the total interest in these receivables to an
independent trust. A portion of the securitized receivables are in an
independent trust facility with a term of 364 days, subject to annual renewal.
If the term of this facility is not renewed, collections will be accumulated
prior to the expiry and the amount of that portion of the securitized
receivables will be repaid to the trust.
The financing transactions completed earlier in the year, existing cash
and cash equivalents, short term investments and security deposits included in
other assets, future operating cash flow and the amounts available to be drawn
against its credit facility are expected to enable the Company to repay its
2009 5.75% MTN debt maturities of $125 million, finance its capital investment
program and fund its ongoing business requirements including working capital
and pension plan funding. The Company believes it has sufficient funding
available to meet these requirements over the next twelve months. Given
reasonable access to capital markets, the Company does not forsee any
difficulty in securing financing to satisfy its long term obligations.
With respect to the capital investment program, we are continuing to
invest in renovations to our existing store base, with a focus on generating
profitable same-store sales growth, and in upgrading our information
technology and supply chain infrastructure. Our estimate of capital
expenditures for the remainder of 2008 is approximately $300 million.
During the first three 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
---------------------------------------------
Credit Ratings Credit Credit
(Canadian Standards) Rating Trend Rating Outlook
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------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.
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 three quarters of 2008 or in 2007.
Free Cash Flow(1)
Free cash flow(1) for the third quarter of 2008 was $87 million compared
to $117 million in the third quarter of 2007. The change was primarily due to
a decrease in cash flows from operating activities, specifically working
capital of $58 million and a decrease in capital expenditures of $19 million
compared to the third quarter of last year. On a year-to-date basis, free cash
flow(1) was negative $265 million compared to $67 million in 2007. The
year-to-date change is primarily due to a decrease in cash flows from working
capital of $299 million, partially offset by a decrease in capital
expenditures of $43 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 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 third quarter of 2008 was $380
million (2007 - $418 million) including $151 million (2007 - $148 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 - $44 million) as of the
end of the third quarter of 2008. The standby letter of credit has never been
drawn upon. This credit enhancement allows the independent funding trust to
provide favourable financing terms to the Company's independent franchisees.
As well, each independent franchisee provides security to the independent
funding trust for its obligations by way of a general security agreement. In
the event that an independent franchisee defaults on its loan and the Company
has not, within a specified time period, assumed the loan, or the default is
not otherwise remedied, the independent funding trust would assign the loan to
the Company and draw upon this standby letter of credit. The Company has
agreed to reimburse the issuing bank for any amount drawn on the standby
letter of credit. This new alternative financing will result in a higher
relative financing cost to the franchisees, which in turn could adversely
affect operating results. The new financing structure has been reviewed and
the Company determined there were no material implications with respect to the
consolidation of VIEs.
Quarterly Results of Operations
The following is a summary of selected consolidated financial information
derived from the Company's unaudited interim period consolidated financial
statements for each of the eight most recently completed quarters. This
information was prepared in accordance with Canadian GAAP and is reported in
Canadian dollars. Each of the quarters presented is 12 weeks in duration
except for the third quarter, which is 16 weeks in duration. Every 5 years the
fourth quarter is 13 weeks in duration and this will occur in fiscal 2008.Summary of Quarterly Results
(unaudited)
Third Quarter Second Quarter
($ millions except where
otherwise indicated) 2008 2007 2008 2007
-------------------------------------------------------------------------
Sales $ 9,493 $ 9,137 $ 7,037 $ 6,933
Net earnings (loss) $ 155 $ 117 $ 140 $ 119
-------------------------------------------------------------------------
Net earnings (loss) per
common share
Basic ($) $ 0.56 $ 0.43 $ 0.51 $ 0.43
Diluted ($) $ 0.56 $ 0.43 $ 0.51 $ 0.43
-------------------------------------------------------------------------
Summary of Quarterly Results
(unaudited)
First Quarter Fourth Quarter
($ millions except where
otherwise indicated) 2008 2007 2007 2006
-------------------------------------------------------------------------
Sales $ 6,527 $ 6,347 $ 6,967 $ 6,784
Net earnings (loss) $ 62 $ 54 $ 40 $ (756)
-------------------------------------------------------------------------
Net earnings (loss) per
common share
Basic ($) $ 0.23 $ 0.20 $ 0.14 $ (2.76)
Diluted ($) $ 0.23 $ 0.20 $ 0.14 $ (2.76)
-------------------------------------------------------------------------Sales continued to grow in the third quarter of 2008 compared to the
third quarter of 2007. Same-store sales growth during the third quarter of
2008 increased 3.0%. Sales and same-store sales growth in the third quarter of
2008 were negatively impacted by approximately 0.7% due to timing of the
Thanksgiving holiday, which occurred one week later in 2008, resulting in a
shift in holiday sales into the fourth quarter of 2008 compared to the third
quarter of 2007. Sales increased in each quarter compared to the prior year
due to increases in same-store sales.
(1) See Non-GAAP Financial Measures.
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 in the third quarter of 2008 benefited from the Company's cost
reduction initiatives, whereas earnings in the first and second quarters of
2008 and the fourth quarter of 2007 were pressured from investments in lower
retail pricing.
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 sixteen weeks ended October 4, 2008 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Risks and Risk Management
Employee Future Benefit Contributions
Although the Company's registered funded defined benefit plans as of the
last filed actuarial valuations were adequately funded and historical returns
on defined pension plan assets are in line with long term expectations, there
is no assurance that these trends will continue. If the capital markets do not
recover some of the recent significant losses in the near term, the Company
may experience a significant increase in pension expense for its defined
benefit plans and it is possible that future pension plan contributions may be
significantly greater than the current projected contributions. The Company
continues to assess the impact of capital markets on its funding requirements.
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 claimed that assets of the multi-employer pension plan had been
mismanaged and are seeking, among other demands, damages of $1 billion. The
action was 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 and in the third quarter the Company also received
confirmation that the action against the plan trustees has been dismissed.
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 2008Capital Disclosures and Financial Instruments - Disclosure and
PresentationIn 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 has completed a diagnostic impact assessment, has completed
planning activities, including the establishment of a steering committee
comprised of senior management, and is currently progressing through the
detailed assessment and design of the overall implementation strategy.
The Company expects the transition to IFRS to impact financial reporting,
business processes and information systems. The Company will continue to
review all proposed and continuing projects of the International Accounting
Standards Board to determine their impact on the Company, and will continue to
invest in training and resources throughout the transition period to
facilitate a timely conversion.
Outlook(1)
The Company remains focused on delivering profitable sales momentum,
driven by our efforts in food renewal, store enhancements, innovation,
infrastructure, and improving value for our customers. While continued
progress in cost and operating efficiencies are expected to support these
investments, it is anticipated that the unpredictable economy and aggressive
competitive environment will further challenge results for the remainder of
2008.(1) To be read in conjunction with "Forward-Looking Statements".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.
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, for the
sixteen and forty week periods ended October 4, 2008 and October 6, 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) (16 weeks) (16 weeks) (40 weeks) (40 weeks)
-------------------------------------------------------------------------
Net earnings $ 155 $ 117 $ 357 $ 290
Add (deduct) impact of the
following:
Minority interest 6 1 7 (4)
Income taxes 70 56 167 123
Interest expense and
other financing charges 80 76 198 193
-------------------------------------------------------------------------
Operating income 311 250 729 602
Add impact of the following:
Depreciation and
amortization 190 180 461 454
-------------------------------------------------------------------------
EBITDA $ 501 $ 430 $ 1,190 $ 1,056
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------- ----------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 October 4, 2008 and October 6, 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 $ 64 $ 32
Commercial paper 9 239
Short term debt 273 306
Long term debt due within one year 163 432
Long term debt 4,040 3,856
Less: Cash and cash equivalents 439 393
Short term investments 251 193
Security deposits included in other assets 356 317
-------------------------------------------------------------------------
Net debt $ 3,503 $ 3,962
-------------------------------------------------------------------------
----------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 sixteen and forty week periods ended
October 4, 2008 and October 6, 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) (16 weeks) (16 weeks) (40 weeks) (40 weeks)
-------------------------------------------------------------------------
Cash flows from operating
activities $ 399 $ 448 $ 362 $ 737
Less: Fixed asset purchases 197 216 397 440
Dividends 115 115 230 230
-------------------------------------------------------------------------
Free cash flow $ 87 $ 117 $ (265) $ 67
-------------------------------------------------------------------------
---------- ----------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 October 4, 2008 and October 6, 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
-------------------------------------------------------------------------
Canadian GAAP total assets $ 13,574 $ 13,357
Less: Cash and cash equivalents 439 393
Short term investments 251 193
Security deposits included in other assets 356 317
-------------------------------------------------------------------------
Total assets $ 12,528 $ 12,454
-------------------------------------------------------------------------
----------
Consolidated Statements of Earnings
(unaudited)
For the periods ended
October 4, 2008 and ---------- ----------
October 6, 2007 2008 2007 2008 2007
($ millions except where
otherwise indicated) (16 weeks) (16 weeks) (40 weeks) (40 weeks)
-------------------------------------------------------------------------
Sales $ 9,493 $ 9,137 $ 23,057 $ 22,417
Operating Expenses
Cost of sales, selling
and administrative
expenses 8,989 8,683 21,860 21,175
Depreciation and
amortization 190 180 461 454
Restructuring charges
(note 3) 3 24 7 186
-------------------------------------------------------------------------
9,182 8,887 22,328 21,815
-------------------------------------------------------------------------
Operating Income 311 250 729 602
Interest expense and other
financing charges (note 4) 80 76 198 193
-------------------------------------------------------------------------
Earnings before Income
Taxes and Minority Interest 231 174 531 409
Income Taxes (note 5) 70 56 167 123
-------------------------------------------------------------------------
Net Earnings before
Minority Interest 161 118 364 286
Minority Interest 6 1 7 (4)
-------------------------------------------------------------------------
Net Earnings $ 155 $ 117 $ 357 $ 290
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net Earnings Per Common
Share ($) (note 6)
Basic and Diluted $ 0.56 $ 0.43 $ 1.30 $ 1.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
For the periods ended October 4, 2008 ----------
and October 6, 2007 2008 2007
($ millions except where otherwise indicated) (40 weeks) (40 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 357 290
Dividends declared per common share - 63 cents
(2007 - 63 cents) (173) (173)
-------------------------------------------------------------------------
Retained Earnings, End of Period $ 4,473 $ 4,347
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income, Beginning
of Period $ 19 $ -
Cumulative impact of implementing new accounting
standards (note 2) - 16
Other comprehensive loss (7) (3)
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income, End of
Period (note 15) $ 12 $ 13
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Shareholders' Equity $ 5,681 $ 5,556
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Statements of Comprehensive Income
(unaudited)
For the periods ended
October 4, 2008 and ---------- ----------
October 6, 2007 2008 2007 2008 2007
($ millions) (16 weeks) (16 weeks) (40 weeks) (40 weeks)
-------------------------------------------------------------------------
Net earnings $ 155 $ 117 $ 357 $ 290
Other comprehensive income,
net of income taxes
Net unrealized gain (loss)
on available-for-sale
financial assets 11 (32) 33 (61)
Reclassification of (gain)
loss on available-for-sale
financial assets to net
earnings (8) 27 (9) 14
-------------------------------------------------------------------------
3 (5) 24 (47)
-------------------------------------------------------------------------
Net gain (loss) on
derivatives designated as
cash flow hedges 6 31 (9) 56
Reclassification of gain
on derivatives designated
as cash flow hedges to net
earnings (4) (25) (22) (12)
-------------------------------------------------------------------------
2 6 (31) 44
-------------------------------------------------------------------------
Other comprehensive income
(loss) 5 1 (7) (3)
-------------------------------------------------------------------------
Total Comprehensive Income $ 160 $ 118 $ 350 $ 287
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Balance Sheets
----------
As at As at As at
October 4, October 6, December
2008 2007 29, 2007
($ millions) (unaudited) (unaudited) (audited)
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents (notes 7
and 20) $ 439 $ 393 $ 430
Short term investments (note 20) 251 193 225
Accounts receivable (notes 8 and 9) 688 656 885
Inventories (notes 2 and 10) 2,217 1,904 2,032
Income taxes 52 67 111
Future income taxes 49 94 56
Prepaid expenses and other assets 59 61 32
-------------------------------------------------------------------------
Total Current Assets 3,755 3,368 3,771
Fixed Assets 7,877 8,078 7,953
Goodwill 807 804 806
Other Assets (note 20) 1,135 1,107 1,144
-------------------------------------------------------------------------
Total Assets $ 13,574 $ 13,357 $ 13,674
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current Liabilities
Bank indebtedness $ 64 $ 32 $ 3
Commercial paper 9 239 418
Short term debt (note 12) 273 306 -
Accounts payable and accrued
liabilities 2,462 2,329 2,769
Long term debt due within one year
(note 13) 163 432 432
-------------------------------------------------------------------------
Total Current Liabilities 2,971 3,338 3,622
Long Term Debt (note 13) 4,040 3,856 3,852
Future Income Taxes 163 212 180
Other Liabilities 481 387 459
Capital Securities (note 14) 219 - -
Minority Interest 19 8 16
-------------------------------------------------------------------------
Total Liabilities 7,893 7,801 8,129
-------------------------------------------------------------------------
Shareholders' Equity
Common Share Capital (note 14) 1,196 1,196 1,196
Retained Earnings 4,473 4,347 4,330
Accumulated Other Comprehensive
Income (note 15) 12 13 19
-------------------------------------------------------------------------
Total Shareholders' Equity 5,681 5,556 5,545
-------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 13,574 $ 13,357 $ 13,674
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------
Contingencies, commitments and guarantees (note 19).
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Cash Flow Statements
(unaudited)
For the periods ended
October 4, 2008 and ---------- ----------
October 6, 2007 2008 2007 2008 2007
($ millions) (16 weeks) (16 weeks) (40 weeks) (40 weeks)
-------------------------------------------------------------------------
Operating Activities
Net earnings before
minority interest $ 161 $ 118 $ 364 $ 286
Depreciation and
amortization 190 180 461 454
Restructuring charges
(note 3) 3 24 7 186
Future income taxes 6 - (2) (25)
Change in non-cash working
capital 10 68 (561) (262)
Other 29 58 93 98
-------------------------------------------------------------------------
Cash Flows from Operating
Activities 399 448 362 737
-------------------------------------------------------------------------
Investing Activities
Fixed asset purchases (197) (216) (397) (440)
Short term investments 58 (105) (3) (118)
Proceeds from fixed asset
sales 48 29 61 48
Credit card receivables,
after securitization
(note 8) 200 (47) 232 45
Franchise investments and
other receivables (2) 12 (21) 15
Other (16) (24) (52) (95)
-------------------------------------------------------------------------
Cash Flows from (used in)
Investing Activities 91 (351) (180) (545)
-------------------------------------------------------------------------
Financing Activities
Bank indebtedness 9 (66) 61 31
Commercial paper 9 (243) (409) (408)
Short term debt (note 12) (525) 306 273 306
Long term debt (note 13)
Issued - 2 301 25
Retired (13) (10) (424) (30)
Capital securities issued
(note 14) 218 - 218 -
Dividends (115) (115) (230) (230)
-------------------------------------------------------------------------
Cash Flows used in Financing
Activities (417) (126) (210) (306)
-------------------------------------------------------------------------
Effect of foreign currency
exchange rate changes on
cash and cash equivalents 21 (19) 37 (61)
-------------------------------------------------------------------------
Change in Cash and Cash
Equivalents 94 (48) 9 (175)
Cash and Cash Equivalents,
Beginning of Period 345 441 430 568
-------------------------------------------------------------------------
Cash and Cash Equivalents,
End of Period $ 439 $ 393 $ 439 $ 393
-------------------------------------------------------------------------
---------- ----------
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 and related notes 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 VIEs' expected losses or that entitle it to
receive a majority of the VIEs' 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 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.
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 that these costs are incurred.
The transitional adjustments resulting from the implementation of Section
3031 are recognized in the 2008 opening balance of retained earnings.
Prior period balances 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 third quarter of 2008, the Company
recognized nil (2007 - $23) of restructuring costs resulting from this
plan. The year-to-date charge of $3 (2007 - $168) is comprised of $2
(2007 - $120) for employee termination costs including severance,
additional pension costs resulting from the termination of employees and
retention costs; and $1 (2007 - $48) of other costs, primarily consulting
directly associated with the restructuring. Cash payments in the third
quarter of 2008 were $4 (2007 - $54) and $34 (2007 - $130) year-to-date.
As at the end of the third quarter of 2008, a remaining liability of $3
(2007 - $29) 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 third quarter of 2008, the Company
recognized nil (2007 - nil) and income of $1 (2007 - charge of $16) year-
to-date related to this plan. Cash payments in the third quarter of 2008
were nil (2007 - $2) and $1 (2007 - $20) year-to-date. As at the end of
the third quarter of 2008, a remaining liability of $2 (2007 - $5) 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 costs, 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 third quarter of 2008, the Company recognized
$3 (2007 - $1) of restructuring costs resulting from this plan. The year-
to-date charge of $5 (2007 - $2) is composed of $4 (2007 - $1) for
employee termination costs resulting from planned involuntary
terminations and $1 (2007 - $1) for site closing and other costs. At the
end of the third quarter of 2008, $6 in estimated costs remained to be
incurred and will be recognized as appropriate criteria are met. Cash
payments in the third quarter of 2008 were $13 (2007 - nil) and $21
(2007 - $4) year-to-date. As at the end of the third quarter of 2008, a
remaining liability of $17 (2007 - $27) was recorded on the consolidated
balance sheets in respect of this initiative.
Note 4. Interest Expense and Other Financing Charges
16 weeks ended 40 weeks ended
---------- ----------
October 4, October 6, October 4, October 6,
2008 2007 2008 2007
-------------------------------------------------------------------------
Interest on long term debt $ 85 $ 87 $ 216 $ 219
Interest (income) expense on
financial derivative
instruments (1) 5 (4) 10
Net short term interest
expense (income) - (5) 4 (6)
Interest income on security
deposits (2) (5) (7) (13)
Dividends on capital securities 4 - 4 -
Capitalized to fixed assets (6) (6) (15) (17)
-------------------------------------------------------------------------
Interest expense and other
financing charges $ 80 $ 76 $ 198 $ 193
-------------------------------------------------------------------------
---------- ----------
In the third quarter of 2008, net interest expense of $89 and $215 year-
to-date were recorded related to the financial assets and financial
liabilities not classified as held-for-trading.
Interest paid in the third quarter of 2008 was $99 (2007 - $105), and
interest received was $35 (2007 - $45). Interest paid year-to-date was
$304 (2007 - $307) and interest received year-to-date was $103 (2007 -
$107).
Note 5. Income Taxes
The effective income tax rate in the third quarter of 2008 was 30.3%
(2007 - 32.2%) and 31.5% (2007 - 30.1%) year-to-date. The quarter over
quarter reduction in the effective income tax rate is primarily due to a
change in the proportions of taxable income earned across different tax
jurisdictions and lower Canadian federal and certain provincial statutory
income tax rates relative to the third quarter of 2007 which was
partially offset by an increase in income tax accruals relating to
certain income tax matters. The year over year increase in the effective
income tax rate is primarily due to an increase in income tax accruals
relating to certain income tax matters which is partially offset by a
change in the proportions of taxable income earned across different tax
jurisdictions and lower Canadian federal and certain provincial statutory
income tax rates relative to the third quarter of 2007.
Net income taxes refunded in the third quarter was $17 (2007 - taxes paid
$27), and year-to-date taxes paid were $88 (2007 - $154).
Note 6. Basic and Diluted Net Earnings per Common Share
16 weeks ended 40 weeks ended
---------- ----------
October 4, October 6, October 4, October 6,
2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings for basic earnings
per share ($ millions) $ 155 $ 117 $ 357 $ 290
Dividends on capital
securities ($ millions) 4 - 4 -
-------------------------------------------------------------------------
Net earnings for diluted
earnings per share
($ millions) $ 159 $ 117 $ 361 $ 290
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average common shares
outstanding (in millions) 274.2 274.2 274.2 274.2
Dilutive effect of stock-based
compensation (in millions) - - - -
Dilutive effect of capital
securities (in millions) 7.9 - 3.0 -
-------------------------------------------------------------------------
Diluted weighted average
common shares outstanding
(in millions) 282.1 274.2 277.2 274.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net earnings
per common share ($) $ 0.56 $ 0.43 $ 1.30 $ 1.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------- ----------
Stock options outstanding with an exercise price greater than the market
price of the Company's common shares at the end of the third quarter were
not recognized in the computation of diluted net earnings per common
share. Accordingly, for the third quarter of 2008, 4,863,725 (2007 -
6,757,541) stock options, with a weighted average exercise price of
$52.57 (2007 - $53.03) 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 October 4, 2008,
October 6, 2007 and December 29, 2007 were as follows:
----------
As at As at As at
October 4, October 6, December 29,
2008 2007 2007
-------------------------------------------------------------------------
Cash $ 46 $ 39 $ 61
Cash equivalents - short term
investments with a maturity of
90 days or less:
Bank term deposits - 63 77
Government treasury bills 144 55 109
Government-sponsored debt securities 116 115 59
Corporate commercial paper 133 121 124
-------------------------------------------------------------------------
Cash and cash equivalents $ 439 $ 393 $ 430
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------
In the third quarter of 2008, the Company recognized an unrealized
foreign currency exchange gain of $52 (2007 - loss of $71) and $94
(2007 - loss of $150) 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 gain of $21 (2007 - loss of $19) and a gain of $37 (2007 - loss
of $61) 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
From time to time, President's Choice Bank ("PC Bank"), a wholly owned
subsidiary of the Company, securitizes credit card receivables through
the sale of a portion of the total interest in these receivables to
independent trusts. During the third quarter of 2008, $300 (2007 - $100)
of credit card receivables were securitized, $300 (2007 - $225) year-to-
date to an independent trust. A portion of the securitized receivables
are in an independent trust facility with a term of 364 days, subject to
annual renewal. If the term of this facility is not renewed, collections
will be accumulated prior to the expiry and the amount of the portion of
the securitized receivables will be repaid to the trust. The
securitization yielded a $1 gain (2007 - nominal net loss) 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
$116 (2007 - $89) on a portion of the securitized amount. Other
receivables consist mainly of receivables from independent franchisees,
associated stores and independent accounts.
----------
As at As at As at
October 4, October 6, December 29,
2008 2007 2007
-------------------------------------------------------------------------
Credit card receivables $ 2,065 $ 1,744 $ 2,023
Amount securitized (1,775) (1,475) (1,475)
-------------------------------------------------------------------------
Net credit card receivables 290 269 548
Other receivables 398 387 337
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts receivable $ 688 $ 656 $ 885
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------
Credit card receivables that are past due of $6 as at October 4, 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 $61 as at October 4, 2008, of which a
nominal amount were more than 60 days past due.
Note 9. Allowances for Receivables
The allowance for credit card receivables recorded in the consolidated
balance sheets is maintained at a level which is considered adequate to
absorb credit related losses on credit card receivables. The allowance
for credit card losses is recorded in accounts receivables in the
consolidated balance sheets. The allowance for accounts receivables from
independent franchisees is recorded in accounts payable and accrued
liabilities on the consolidated balance sheets. The allowance for other
receivables from associated stores and independent accounts is recorded
in accounts receivable on the consolidated balance sheets. A continuity
of the Company's allowances for losses is as follows:
Credit Card Receivables
52 weeks
16 weeks ended 40 weeks ended ended
--------- ---------
October October October October December
($ millions) 4, 2008 6, 2007 4, 2008 6, 2007 29, 2007
-------------------------------------------------------------------------
Allowance at beginning
of period $ (13) $ (13) $ (13) $ (11) $ (11)
Provision for losses (14) (3) (26) (8) (11)
Recoveries (5) (3) (9) (6) (7)
Write-offs 19 6 35 12 16
-------------------------------------------------------------------------
Allowance at end of
period $ (13) $ (13) $ (13) $ (13) $ (13)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
--------- ---------
Other Receivables
52 weeks
16 weeks ended 40 weeks ended ended
--------- ---------
October October October October December
($ millions) 4, 2008 6, 2007 4, 2008 6, 2007 29, 2007
-------------------------------------------------------------------------
Allowance at beginning
of period $ (35) $ (42) $ (35) $ (37) $ (37)
Provision for losses (29) (19) (56) (62) (79)
Recoveries - - - - -
Write-offs 37 17 64 55 81
-------------------------------------------------------------------------
Allowance at end of
period $ (27) $ (44) $ (27) $ (44) $ (35)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
--------- ---------
Note 10. Inventories
The cost of merchandise inventories recognized as an expense during the
third quarter of 2008 was $7,396 and $17,886 year-to-date. The cost of
merchandise inventories recognized as an expense during the third quarter
of 2008 includes $10 and $43 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 $49 (2007 - $63) and $126 (2007 - $144) for the third 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 October 4, 2008, $273
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. As at
October 4, 2008 $326 was recorded in long term debt on the consolidated
balance sheet. 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, capital securities and
shareholders' equity. Equity for the purpose of calculating the net debt
to equity ratio is defined by the Company as capital securities 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:
----------
As at As at As at
October 4, October 6, December 29,
2008 2007 2007
-------------------------------------------------------------------------
Interest coverage 3.4:1 2.9:1 2.7:1
Net debt to equity .59:1 .71:1 .67:1
-------------------------------------------------------------------------
----------
Interest coverage is calculated as operating income divided by interest
expense and other financing charges adding back interest capitalized to
fixed assets. The interest coverage ratio is calculated for the 40 week
periods ended October 4, 2008 and October 6, 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:
----------
As at As at As at
October 4, October 6, December 29,
($ millions) 2008 2007 2007
-------------------------------------------------------------------------
Bank indebtedness $ 64 $ 32 $ 3
Commercial paper 9 239 418
Short term debt 273 306 -
Long term debt due within one year 163 432 432
Long term debt 4,040 3,856 3,852
Less: Cash and cash equivalents 439 393 430
Short term investments 251 193 225
Security deposits included in
other assets 356 317 322
-------------------------------------------------------------------------
Net debt $ 3,503 $ 3,962 $ 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 potential issue of up to
$1 billion of unsecured debentures and/or preferred shares subject to the
availability of funding by capital markets. During the third quarter of
2008, the Company issued preferred shares under the Prospectus as
described below.
Capital Securities ($, except where otherwise indicated)
Second Preferred Shares, Series A (authorized - 12.0 million shares)
On June 20, 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; and
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 $2.00 and 95% of the then current market
price of the common shares. This option is subject to the Company's right
to redeem the preferred shares for cash or arrange for their sale to
substitute purchasers. These preferred shares which are presented as
Capital Securities on the Consolidated Balance Sheet are classified as
other financial liabilities, and measured using the effective interest
method.
Common Share Capital
At the end of the third quarter of 2008, the Company's outstanding common
share capital was comprised of common shares, an unlimited number of
which were authorized and 274,173,564 (2007 - 274,173,564) were issued
and outstanding. Approximately 62% of the common shares are owned by
George Weston Limited; the remaining shares are widely held. Further
information on the Company's outstanding share capital is provided in
note 19 to the 2007 Annual Report.
At quarter end, a total of 8,012,762 stock options were outstanding and
represented 2.9% of the Company's issued and outstanding common share
capital. Pursuant to guidelines set by the Company, stock option
compensation is limited to 5% of the issued and outstanding common shares
outstanding. The Company is currently in compliance with this internal
guideline.
In the second quarter of 2008, Loblaw renewed its Normal Course Issuer
Bid ("NCIB") to purchase on the Toronto Stock Exchange, or enter into
equity derivatives to purchase, up to 13,708,678 of Company's common
shares, representing approximately 5% of the common shares outstanding.
In accordance with the rules and by-laws of the Toronto Stock Exchange,
Loblaw may purchase its shares at the then market price of such shares.
The Company did not purchase any shares under its NCIB during the first
three quarters of 2008 or fiscal 2007.
Dividends ($)
The declaration and payment of dividends and the amount thereof are at
the discretion of the Board of Directors. 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 third quarter of 2008, the Board of Directors
declared common share dividends of $0.21 (2007 - $0.21) and $0.63
(2007 -$0.63) year-to-date per common share. During the third quarter of
2008, the Board of Directors declared dividends of $0.5394 per second
preferred share. For financial statement presentation purposes,
preferred share dividends of $4 are included as a component of interest
expense and other financing charges on the Consolidated Statement of
Earnings (see note 4).
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 $300 fixed-rate private
placement notes which the Company issued during the second quarter of
2008 (see note 13) both contain certain financial covenants. The
covenants under both agreements include maintaining an interest coverage
ratio as well as a leverage ratio, as defined in the respective credit
agreements, which the Company measures on a quarterly basis. As at the
end of the third quarter of 2008, the Company was in compliance with
these covenants.
The Company is also subject to externally imposed capital requirements
from the Office of the Superintendent of Financial Institutions ("OSFI"),
as the primary regulator of PC Bank, and the Central Bank of Barbados, as
the primary regulator of Glenhuron, both wholly-owned subsidiaries of the
Company. PC Bank's capital management objectives are to maintain a
consistently strong capital position while considering the Bank's
economic risks and to meet all regulatory capital requirements as defined
by OSFI. A new regulatory capital management framework, Basel II, has
been implemented in Canada that establishes regulatory capital
requirements that are more sensitive to a bank's risk profile. PC Bank
met all applicable capital targets as at the end of the third quarter of
2008. Glenhuron is currently regulated under Basel I. Under Basel I,
Glenhuron's assets are risk weighted and the minimum ratio of capital to
risk weighted assets is 8.0%. Glenhuron's ratio of capital to risk
weighted assets met the minimum requirements under Basel I as at the end
of the third quarter of 2008.
Note 15. Accumulated Other Comprehensive Income
The following table provides further detail regarding the composition of
accumulated other comprehensive income for the forty week periods ended
October 4, 2008 and October 6, 2007:
40 weeks ended
-------------------------
October 4, 2008 October 6, 2007
-------------------------------------------------------------------------
Avail- Avail-
able- able-
for- Cash for- Cash
sale Flow sale Flow
($ 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 $1
(2007 - nil)) 33 - 33 (61) - (61)
Reclassification of
loss (gain) on
available-for-sale
financial assets
(net of income taxes
recovered of $5
(2007 - nil)) (9) - (9) 14 - 14
Net (loss) gain on
derivatives
designated as cash
flow hedges (net of
income taxes of $9
(2007 - $2)) - (9) (9) - 56 56
Reclassification of
(gain) loss on
derivatives
designated as cash
flow hedges (net of
income taxes of nil
(2007 - $1)) - (22) (22) - (12) (12)
-------------------------------------------------------------------------
Balance, end of
period $ 21 $ (9) $ 12 $ (27) $ 40 $ 13
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------
See note 20 of the Company's 2007 Annual Report for further details
regarding the composition of accumulated other comprehensive income for
the year ended December 29, 2007.
An estimated net loss of $11 recorded in accumulated other comprehensive
income related to the cash flow hedges as at October 4, 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 tables provide a comparison of carrying and fair values for
each classification of financial instruments as at October 4, 2008,
October 6, 2007 and December 29, 2007:
As at October 4, 2008
-------------------------------------------------------------------------
Financial
instruments
Financial required Financial Available-
derivatives to be instruments for-sale
designated in a classified designated instruments
cash flow as held-for- as held- measured at
hedge trading for-trading fair value
-------------------------------------------------------------------------
Cash and cash equivalents,
short term investments
and security deposits $ - $ - $ 792 $ 254
Accounts receivable - - - -
Other financial assets - - - -
Available for sale
securities - - - 6
Derivatives 114 80 - -
-------------------------------------------------------------------------
Total financial assets $ 114 $ 80 $ 792 $ 260
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Short term borrowings $ - $ - $ - $ -
Accounts payable and
accrued liabilities - - - -
Long term debt - - - -
Capital Securities - - - -
Derivatives - 153 - -
-------------------------------------------------------------------------
Total financial
liabilities $ - $ 153 $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at October 4, 2008
-------------------------------------------------------------------------
Loans Other Total
and financial carrying Total fair
receivables liabilities amount value
-------------------------------------------------------------------------
Cash and cash equivalents,
short term investments
and security deposits $ - $ - $ 1,046 $ 1,046
Accounts receivable 688 - 688 688
Other financial assets 80 - 80 80
Available for sale
securities - - 6 6
Derivatives - - 194 194
-------------------------------------------------------------------------
Total financial assets $ 768 $ - $ 2,014 $ 2,014
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Short term borrowings $ - $ 346 $ 346 $ 346
Accounts payable and
accrued liabilities - 2,462 2,462 2,462
Long term debt - 4,203 4,203 3,692
Capital Securities - 219 219 203
Derivatives - - 153 153
-------------------------------------------------------------------------
Total financial
liabilities $ - $ 7,230 $ 7,383 $ 6,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The equity investment in franchises is measured at a cost of $71 because
quoted market prices in an active market are not available. These
investments are classified as available-for-sale, and the Company has no
intention of disposing of these equity investments.
As at October 6, 2007
-------------------------------------------------------------------------
Financial
instruments
Financial required Financial Available-
derivatives to be instruments for-sale
designated in a classified designated instruments
cash flow as held-for- as held- measured at
hedge trading for-trading fair value
-------------------------------------------------------------------------
Cash and cash equivalents,
short term investments
and security deposits $ - $ - $ 438 $ 465
Accounts receivable - - - -
Other financial assets - - - -
Available for sale
securities - - - 11
Derivatives 161 86 - -
-------------------------------------------------------------------------
Total financial assets $ 161 $ 86 $ 438 $ 476
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Short term borrowings $ - $ - $ - $ -
Accounts payable and
accrued liabilities - - - -
Long term debt - - - -
Derivatives - 34 - -
-------------------------------------------------------------------------
Total financial
liabilities $ - $ 34 $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at October 6, 2007
-------------------------------------------------------------------------
Loans Other Total
and financial carrying Total fair
receivables liabilities amount value
-------------------------------------------------------------------------
Cash and cash equivalents,
short term investments
and security deposits $ - $ - $ 903 $ 903
Accounts receivable 656 - 656 656
Other financial assets 44 - 44 44
Available for sale
securities - - 11 11
Derivatives - - 247 247
-------------------------------------------------------------------------
Total financial assets $ 700 $ - $ 1,861 $ 1,861
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Short term borrowings $ - $ 577 $ 577 $ 577
Accounts payable and
accrued liabilities - 2,329 2,329 2,329
Long term debt - 4,288 4,288 4,439
Derivatives - - 34 34
-------------------------------------------------------------------------
Total financial
liabilities $ - $ 7,194 $ 7,228 $ 7,379
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The equity investment in franchises is measured at a cost of $73 because
quoted market prices in an active market are not available. These
investments are classified as available-for-sale, and the Company has no
intention of disposing of these equity investments.
As at December 29, 2007
-------------------------------------------------------------------------
Financial
instruments
Financial required Financial Available-
derivatives to be instruments for-sale
designated in a classified designated instruments
cash flow as held-for- as held- measured at
hedge trading for-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 a cost of $75 because
quoted market prices in an active market are not available. These
investments are classified as available-for-sale, and the Company has no
intention of disposing of these equity investments.
During the third quarter and year-to-date 2008, the net unrealized and
realized gain on held-for-trading financial assets designated as
held-for-trading, recognized in net earnings before income taxes and
minority interest was $52 and $81 (2007 - loss of $32 and $68),
respectively. In addition, the net unrealized and realized loss on held-
for-trading financial assets and financial liabilities, including non-
financial derivatives, required to be classified as held-for-trading,
recognized in net earnings before income taxes and minority interest was
$71 and $114 (2007 - gain of $9 and $48), respectively.
Note 17. Stock-Based Compensation ($, 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:
16 weeks ended 40 weeks ended
---------- ----------
October 4, October 6, October 4, October 6,
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Stock option plan (income)
expense $ (1) $ (2) $ 1 $ -
Equity forwards loss 8 19 18 12
Restricted share unit
plan expense 2 2 5 8
-------------------------------------------------------------------------
Net stock-based
compensation expense $ 9 $ 19 $ 24 $ 20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------- ----------
Stock Option Plan
During the first three quarters of 2008, the Company paid the share
appreciation value of nil (2007 - $0.2 million) on the exercise of nil
(2007 - 108,000) stock options. In addition, 1,914,555 (2007 - 1,445,788)
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 82,204 (2007 - 194,559) stock options with an exercise price of
$29.30 (2007 - $49.11) per common share during the third quarter of 2008.
During the second quarter of 2008, 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 first quarter of
2008, the Company granted 3,303,557 (2007 - 3,885,439) stock options with
an exercise price of $28.95 (2007 - $47.44) per common share.
At the end of the third quarter of 2008, a total of 8,012,762 (2007 -
6,798,781) stock options were outstanding and represented approximately
2.9% (2007 - 2.5%) 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 third quarter was $29.75 (2007 -
$45.67).
Restricted Share Unit ("RSU") Plan
Under its existing RSU plan, the Company granted 13,526 (2007 - 23,425)
RSUs in the third quarter; 45,321 (2007 - 10,925) RSUs in the second
quarter and 352,268 (2007 - 281,818) in the first quarter of 2008. In
addition, 87,995 (2007 - 142,322) RSUs were cancelled year-to-date and
246,785 (2007 - 134,882) were settled in cash in the amount of $8 million
(2007 - $7 million) in the first three quarters of 2008. At the end of
the third quarter, 845,022 (2007 - 788,916) 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 $9 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 USD 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 not have a 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
$27 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 $5 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 exercise 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,
their vesting schedules relative to the number of underlying common
shares on the equity forwards, and the level of 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, and by 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 October 4, 2008:
2008 There-
Remaining 2009 2010 2011 2012 after(4) Total
-------------------------------------------------------------------------
Interest rate
swaps payable(1) $ 6 $ 13 $ 13 $ 13 $ 13 $ 5 $ 63
Equity forward
contracts(2) - - 126 36 26 72 260
Long term debt
including fixed
interest
payments(3) 84 433 589 615 222 6,743 8,686
-------------------------------------------------------------------------
$ 90 $ 446 $ 728 $ 664 $ 261 $6,820 $9,009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 October 4, 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.
(4) Capital securities and their related dividends have been excluded as
the Company is not contractually obligated to pay these amounts.
The Company's bank indebtedness, commercial paper, short term debt, and
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 Company's long term
credit rating downgrade by Dominion Bond Rating Service ("DBRS") 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 October 4, 2008 was $380 (2007 - $418)
including $151 (2007 - $148) 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 October 4, 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 claimed that assets of the multi-employer
pension plan had been mismanaged and are seeking, among other demands,
damages of $1 billion. The action was 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 and in the third quarter
the Company also received confirmation that the action against the plan
trustees has been dismissed.
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 $356 as at October 4, 2008
(October 6, 2007 - $317; December 29, 2007 - $322).
Corporate Profile
Loblaw Companies Limited, a subsidiary of George Weston Limited, is
Canada's largest food distributor and a leading provider of drugstore,
general merchandise and financial products and services. Loblaw is one of
the largest private sector employers in Canada, with over 140,000 full-
time and part-time employees executing its business strategy in more than
1,000 corporate and franchised stores from coast to coast. Through its
portfolio of store formats, Loblaw is committed to providing Canadians
with a wide, growing and successful range of products and services to
meet the everyday household demands of Canadian consumers. Loblaw is
known for the quality, innovation and value of its food offering. It
offers Canada's strongest control (private) label program, including the
unique President's Choice(R), no name(R) and Joe Fresh Style(R) brands.
In addition, the Company makes available to consumers President's Choice
Financial services and offers 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 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, November 13th, 2008 - Loblaw Companies Limited will be releasing
its third quarter results on Thursday, November 13, 2008 at 8:00am (EST). This
release will be followed by a conference call at 11:00am (EST), 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: 21266054 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
