Empire company reports first quarter earnings before capital gains of $60.4 million



    HALIFAX, Sept. 12 /CNW/ - Empire Company Limited (TSX: EMP.A) today
announced earnings before capital gains net of tax for its first quarter ended
August 4, 2007 of $60.4 million ($0.92 per share on a diluted basis) compared
to $53.3 million ($0.81 per share on a diluted basis) in the first quarter
last year, a 13.3 percent increase.
    The Company realized capital gains net of tax in the first quarter of
$81.9 million ($1.24 per share on a diluted basis) as a result of the sale of
investments. There were no capital gains recorded in the first quarter last
year.
    Net earnings amounted to $142.3 million ($2.16 per share on a diluted
basis) versus $53.3 million ($0.81 per share on a diluted basis) in the first
quarter last year.

    First Quarter Financial Highlights (versus the first quarter last year)

    
    - Revenue of $3.52 billion, up $138.5 million or 4.1 percent.
    - Sobeys Inc.'s ("Sobeys") same-store sales increased 3.5 percent.
    - Earnings before capital gains net of tax, of
      $60.4 million, up $7.1 million or 13.3 percent.
    - Earnings per share, before capital gains net of tax,
      of $0.92, an improvement of 11 cents or 13.6 percent.
    - Capital gains net of tax, of $81.9 million ($1.24 per
      share on a diluted basis).
    - Net earnings of $142.3 million ($2.16 per share on a diluted basis), an
      $89.0 million increase.
    - Funded debt to total capital of 43.1 percent compared to 30.0 percent
      at the start of the fiscal year and 32.2 percent a year earlier.

    Paul Sobey, President and Chief Executive Officer stated, "We are pleased
with our start to fiscal 2008. Earnings before capital gains of $60.4 million
is a record level for our first quarter, reflecting stronger performance from
each of our core food and real estate operating businesses. Sobeys continues
to generate solid same-store sales growth as a result of its merchandising and
productivity initiatives and our residential real estate operation continues
to perform above expectations.
    During the first quarter, on June 15th, we were pleased to announce the
completion of the privatization of Sobeys. Going forward we intend to
capitalize on the strengths in both our food retail and in our related real
estate businesses and are committed to enhancing the long-term value of each
of these core businesses."

    Financial Overview

    Revenue

    Consolidated revenue for the first quarter equalled $3.52 billion compared
to $3.38 billion last year, an increase of $138.5 million or 4.1 percent. As
disclosed in prior quarters, a major Canadian tobacco supplier began to sell
and distribute directly to some of Sobeys' customers resulting in a decline in
tobacco sales. This change in distribution along with lower market demand for
tobacco reduced sales on an annual basis by $123.9 million in fiscal 2007 and
by $51.6 million during the first quarter of fiscal 2008. Margins on tobacco
sales are significantly lower than on other products therefore the loss of
these sales does not have a material impact on earnings. After adjusting for
the impact of a decline in wholesale tobacco sales and the acquisition of
Achille de la Chevrotière Ltée and its associated companies ("ADL"),
consolidated revenue growth would have been $133.3 million or 3.9 percent.
    Food division revenue equalled $3.44 billion, an increase of
$134.9 million or 4.1 percent compared to the first quarter last fiscal year.
During the first quarter of fiscal 2008 Sobeys' same-store sales (sales from
stores in the same locations in both reporting periods) increased by 3.5
percent.
    The growth in retail food sales was a direct result of Sobeys continued
implementation of sales and merchandising initiatives across the country,
coupled with the increased retail selling square footage resulting from the
development of new stores, an ongoing program to enlarge and renovate existing
store assets, and by the acquisition of ADL. The retail sales growth was
partially offset by a decline in wholesale sales.
    During the first quarter, 13 corporate and franchised stores were opened,
acquired or relocated compared to 15 corporate and franchised stores opened or
relocated during the first quarter of last year. An additional 10 stores were
expanded during the first quarter compared to seven stores expanded during the
first quarter last year. A total of 16 stores were closed during the quarter
compared to 13 stores closed in the first quarter last year. There were 35
stores rebannered in the first quarter of fiscal 2008 compared to 14 stores
rebannered in the first quarter of last year.
    At the end of the first quarter Sobeys' square footage totalled
26.4 million, a 3.5 percent increase over the first quarter last year.
    Real estate division revenue (net of inter-segment) equalled
$35.4 million, an increase of $4.9 million or 16.1 percent over the
$30.5 million recorded in the first quarter last year. Commercial property
revenue increased by $0.1 million while revenue from residential operations
increased by $4.8 million. The increase in revenue from residential
operations, through a 35.7 percent interest in Genstar Development Partnership
("Genstar"), was primarily the result of strong lot sales, particularly in
Calgary and Edmonton, Alberta markets.
    Investments and other operations recorded revenues of $43.0 million in the
first quarter versus $44.3 million in the first quarter last year. The
decrease is primarily attributed to a change in fiscal year-end for Empire
Theatres which resulted in the typically strong month of July not being
included in first quarter fiscal 2008 revenue.

    Operating Income

    Consolidated operating income in the first quarter totalled
$127.5 million, an increase of $6.3 million or 5.2 percent over the
$121.2 million reported in the first quarter last year.
    The food division contributed operating income of $95.2 million, an
increase of $6.9 million or 7.8 percent from the $88.3 million recorded in the
first quarter last year. First quarter operating margin, which is operating
income divided by revenue, was 2.77 percent compared to 2.67 percent in the
first quarter last year. Included in the first quarter fiscal 2008 operating
income was a $5.4 million increase in food division depreciation and
amortization expense, reflecting Sobeys continued capital investments. Also
included in food division operating income are $5.0 million ($7.3 million in
the first quarter of fiscal 2007) of costs related to business process and
system implementation and business rationalization.
    The real estate division contributed operating income of $28.9 million, an
increase of $3.5 million from the $25.4 million recorded in the first quarter
last year. Operating income generated from commercial properties increased
$1.1 million while operating income from residential operations increased by
$2.4 million versus the first quarter last year. The increase in residential
operating income is attributed to the growth in revenues from higher lot
sales, primarily in Western Canada.
    Investments and other operations' operating income, net of corporate
expenses, equalled $3.4 million compared to $7.5 million in the first quarter
last year. The decrease was largely the result of lower investment income and
higher corporate expenses.

    Interest Expense

    Interest expense increased $6.5 million, to $20.8 million from
$14.3 million in the first quarter last year. Consolidated long-term debt,
including amounts due within one year and liabilities related to assets held
for sale increased $799.2 million from the beginning of the fiscal year
primarily as a result of indebtedness associated with the funding of Sobeys'
privatization which was finalized on June 15, 2007.

    Minority Interest

    In the first quarter of fiscal 2008, Empire recorded minority interest
expense of $11.7 million compared to $17.9 million in the first quarter last
year. The decrease in minority interest expense is primarily the result of
Empire increasing its ownership position in Sobeys to 100.0 percent on
June 15, 2007, resulting in a weighted average ownership position in the first
quarter of 87.6 percent. Empire's ownership position in Sobeys at the end of
the first quarter last year was 71.6 percent.

    Earnings Before Capital Gains

    Earnings before capital gains, net of tax, equalled $60.4 million in the
first quarter as compared to $53.3 million in the same quarter last year, a
13.3 percent increase. The growth in earnings before capital gains exceeds the
growth in first quarter operating income as a result of the $6.2 million
decrease in minority interest and a $1.1 million decrease in income tax
expense, partially offset by the $6.5 million increase in interest expense.

    Capital Gains

    Capital gains, net of tax, equalled $81.9 million in the first quarter as
a result of the sale of portfolio investments. The Company sold investments
during the quarter to assist in the funding of the privatization of Sobeys.
There were no capital gains recorded in the first quarter last year.

    Net Earnings

    Consolidated net earnings totalled $142.3 million ($2.16 per share on a
diluted basis) versus $53.3 million ($0.81 per share on a diluted basis) in
the first quarter last year.
    Net earnings contribution from Sobeys in the first quarter of fiscal 2008
was $44.9 million, an increase of 27.9 percent compared to $35.1 million last
year.  This reflects Empire's increased ownership of 100.0 percent on June 15,
2007 as previously discussed.
    Real estate division net earnings contribution in the first quarter
amounted to $16.7 million compared to $13.3 million last year, a $3.4 million
or 25.6 percent increase. The net earnings increase primarily reflects the
increase in operating income as discussed.

    The table below presents a summary of financial performance for the
13 weeks ended August 4, 2007 compared to the first quarter last fiscal year.

    ($ in millions, except per share data)               13 Weeks Ended
                                                    August 4,       August 5,
                                                        2007            2006
                                                  ----------      -----------
    Segmented Revenue (net of elimination
     entries)
      Food                                         $ 3,441.0       $ 3,306.1
      Real estate
        Commercial                                      10.2            10.1
        Residential                                     25.2            20.4
    Investment & other operations                       43.0            44.3
                                                  ----------      -----------
                                                   $ 3,519.4       $ 3,380.9
                                                  ----------      -----------
                                                  ----------      -----------
    Segmented Operating Income
      Food                                         $    95.2       $    88.3
      Real estate
        Commercial                                      12.9            11.8
        Residential                                     16.0            13.6
      Investments & other operations, net
       of Corporate expenses                             3.4             7.5
                                                  ----------      -----------
                                                   $   127.5       $   121.2
                                                  ----------      -----------
                                                  ----------      -----------

    Earnings before capital gains and other
     items                                              60.4            53.3

    Capital gains and other items, net of tax           81.9               -
                                                  ----------      -----------
    Net earnings                                   $   142.3       $    53.3
                                                  ----------      -----------
                                                  ----------      -----------

    Per Share, basic
    ----------------
    Earnings before capital gains and other
     items                                         $    0.92       $    0.81
    Capital gains and other items, net of tax           1.25               -
                                                  ----------      -----------
    Net earnings                                   $    2.17       $    0.81
                                                  ----------      -----------
                                                  ----------      -----------

    Per Share, diluted
    ------------------
    Earnings before capital gains and other
     items                                         $    0.92       $    0.81
    Capital gains and other items, net of tax           1.24               -
                                                  ----------      -----------
    Net earnings                                   $    2.16       $    0.81
                                                  ----------      -----------
                                                  ----------      -----------
    Weighted average number of shares
     outstanding (in millions), basic                   65.6            65.5
                                                  ----------      -----------
                                                  ----------      -----------
                                diluted                 65.7            65.7
                                                  ----------      -----------
                                                  ----------      -----------
    Actual shares outstanding (in millions)             65.7            65.7
                                                  ----------      -----------
                                                  ----------      -----------

    Consolidated Financial Condition

    The ratio of funded debt to total capital at the end of the first quarter
equalled 43.1 percent versus 32.2 percent at the end of the first quarter last
year. The higher debt ratio is largely attributed to advances of
$787.7 million incurred under a revolving-term credit facility during the
first quarter which assisted in the funding of the privatization of Sobeys.
    Interest coverage in the first quarter was 6.1 times, down from the
7.3 times reported for the fiscal year ended May 5, 2007 and the 8.5 times
recorded for the first quarter last year.
    The privatization of Sobeys was also financed with proceeds of
$278.0 million generated from the sale of certain portfolio investments
completed in the first quarter of fiscal 2008. At August 4, 2007, Empire's
investment portfolio, including its 27.6 percent interest in Wajax Income Fund
(TSX: WJX.UN) and its 48.1 percent interest in Crombie REIT (TSX: CRR.UN),
carried a market value of $421.3 million on a cost base of $142.8 million,
resulting in an unrealized gain of $278.5 million. This compares to an
unrealized gain of $384.6 million at the beginning of the fiscal year and an
unrealized gain of $308.8 million at the end of the first quarter last fiscal
year.
    The purchase of property and equipment in the first quarter equalled
$109.1 million as compared to $141.2 million in the same quarter last year.
Investment in food retail division property and equipment accounted for
$76.3 million of the total capital investment in the first quarter. Capital
expenditures for the real estate division and investments and other operations
in the first quarter equalled $21.5 million and $11.3 million, respectively.

    Privatization of Sobeys

    On April 26, 2007, Empire and Sobeys jointly announced that they had
entered into an arrangement agreement (the "Arrangement") pursuant to which
Empire would acquire all of the outstanding common shares of Sobeys that it
did not then own at a price of $58.00 per share. The transaction valued the
Sobeys shares not then owned by Empire at approximately $1.06 billion.
    The Arrangement became effective upon registration of the final Court
order with the Nova Scotia Registry of Joint Stock Companies at the close of
business on June 15, 2007. Subsequently, the Sobeys common shares ceased
trading on the Toronto Stock Exchange, and were de-listed at the close of
business on June 18, 2007.
    The acquisition was financed by funds from sale of certain portfolio
investments for proceeds of $278.0 million and advances of $787.7 million
under new credit facilities (the "Credit Facilities"). The Credit Facilities
consist of a $950.0 million unsecured revolving credit facility maturing on
June 8, 2010 (subject to annual one-year extensions at the request of the
Company) and a $50.0 million unsecured non-revolving credit facility that
matured on June 30, 2007. The unsecured non-revolving credit facility was
repaid on June 30, 2007 with funds drawn from the unsecured credit facility.
    The Credit Facilities are subject to certain financial covenants. Interest
on the debt varies based on the designation of the loan (bankers' acceptances
("BA") rate loans, Canadian prime rate loans, U.S. base rate loans or LIBOR
loans), fluctuations in the underlying rates, and in the case of BA rate loans
or LIBOR loans, the margin applicable to the financial covenants.
    On June 18, 2007, Empire entered into two delayed fixed rate interest
swaps. The first swap, in an amount of $200.0 million, is for a period of
three years at a fixed interest rate of 4.998 percent. The second swap, in an
amount of $200.0 million, is for a period of five years at a fixed interest
rate of 5.051 percent. Both swaps became effective on July 23, 2007.
    On June 27, 2007, pursuant to the terms of the Credit Facilities, Empire
and Sobeys filed notice with the lenders requesting the establishment of a new
$300.0 million five-year credit facility in favour of Sobeys at the same
interest rate as and substantially on the same terms and conditions as
Empire's Credit Facilities. On July 23, 2007, Sobeys drew down $300.0 million
from the new credit facility, the proceeds of which were used to pay a
dividend to Empire. Empire used the proceeds from the $300.0 million dividend
to reduce its indebtedness under the Credit Facilities and the Empire credit
facility was reduced to $650.0 million accordingly. On that date, Empire
transferred the second swap to Sobeys.
    As of July 30, 2007, Sobeys exercised an option under the Credit Facility
to increase the size of the Credit Facility from $300.0 million to
$600.0 million. At the same time, Sobeys terminated its previously existing
$300.0 million operating credit facility which would have expired on
December 20, 2010.

    Acquisition of Thrifty Foods

    On July 16, 2007 Sobeys announced that it and Thrifty Foods ("Thrifty")
had entered into an agreement that will see Sobeys purchase the British
Columbia-based grocery retailer. The transaction was based on an enterprise
value of $260 million and was subject to adjustments for, among other items,
assumed liabilities and working capital at closing. Thrifty's business
includes 20 full-service supermarkets, a main distribution centre and a
wholesale division on Vancouver Island and the Lower mainland of British
Columbia. The deal closes September 12, 2007. The transaction will be financed
with cash and available banking facilities.

    Dividend Declaration

    The Board of Directors declared a quarterly dividend of $0.165 per share
on both the Non-Voting Class A shares and the Class B common shares that will
be payable on October 31, 2007 to shareholders of record on October 15, 2007.
In addition, the Board declared regular dividends on the Company's outstanding
preferred shares. The dividends are eligible dividends as defined for the
purposes of the Income Tax Act (Canada) and applicable provincial legislation
and, therefore, qualify for the favourable tax treatment applicable to such
dividends.

    Definition of Non-GAAP Measures

    Certain measures included in this news release do not have a standardized
meaning under Canadian Generally Accepted Accounting Principles and therefore
may not be comparable to similarly titled measures by other publicly traded
companies. The Company includes these measures because it believes certain
investors use these measures as a means of assessing Empire's financial
performance. Funded debt is all interest-bearing debt, and total capital is
calculated as funded debt plus shareholders' equity. Interest coverage is
calculated as operating income divided by interest expense.

    About Empire Company

    Empire Company Limited (TSX: EMP.A) is a Canadian company headquartered in
Stellarton, Nova Scotia. Empire's key businesses include food retailing and
related real estate. With approximately $5.6 billion in assets, Empire employs
approximately 40,000 people directly and through its subsidiaries. More
information about Empire Company can be found at www.empireco.ca.

    Forward-Looking Statements

    This news release contains forward-looking statements which reflect
management's expectations regarding the Company's objectives, plans, goals,
strategies, future growth, results of operations, performance and business
prospects and opportunities.
    Forward-looking statements are typically identified by words or phrases
such as "anticipates", "expects", "believes", "estimates", "intends" and other
similar expressions. These statements are based on management's assumptions
and beliefs in light of the information currently available to them. These
forward-looking statements are subject to inherent uncertainties, risks and
other factors that could cause actual results to differ materially from such
statements. These uncertainties and risks are discussed in the Company's
materials filed with the Canadian securities regulatory authorities from time
to time, including those in the Risk Management section of the annual
Management Discussion and Analysis included in the Company's 2007 Annual
Report.
    When relying on forward-looking statements to make decisions, the Company
cautions readers not to place undue reliance on these statements, as a number
of important factors could cause actual results to differ materially from any
estimates or intentions expressed in such forward-looking statements. The
Company does not undertake to update any forward-looking statements that may
be made from time to time by or on behalf of the Company.
    Additional financial information, including management's discussion and
analysis of first quarter fiscal 2008 results, will be filed electronically
with various securities commissions in Canada through SEDAR.

    Conference Call Invitation

    The Company will provide additional details concerning its first quarter
results on a conference call to be held on Wednesday, September 12, 2007
beginning at 3:00 p.m. ADT. To join this conference call dial 1-800-732-9303
or 1-416-644-3415. You may also listen to a live audio webcast of the
conference call by visiting the Company's web site located at www.empireco.ca.
Replay will be available by dialling 1-877-289-8525 or 1-416-640-1917 and
entering passcode 21245011 until midnight September 19, 2007, or on the
Company's website for 90 days after the meeting.


                           EMPIRE COMPANY LIMITED
                           ----------------------
                         CONSOLIDATED BALANCE SHEETS
                         ---------------------------
                                (in millions)

                                            August 4       May 5    August 5
                                                2007        2007        2006
                                           Unaudited     Audited   Unaudited
                                                        Restated
                                                         (Note 1)
                                          ----------  ----------  -----------
    ASSETS

    Current
      Cash and cash equivalents           $    322.0  $    294.9  $    319.2
      Receivables                              315.7       312.3       262.5
      Mortgages, loans and
       other receivables                        17.5        14.5        16.0
      Income taxes receivable                      -         3.6           -
      Inventories                              756.1       757.5       717.4
      Prepaid expenses                          74.1        51.4        58.1
                                          ----------  ----------  -----------
                                             1,485.4     1,434.2     1,373.2

    Investments, at cost
     (quoted market value $1.6;
      May 5, 2007 $283.1;
      August 5, 2006 $405.3)                     1.6       189.7       374.2
    Investments, at equity
     (realizable value $419.7;
      May 5, 2007 $434.0;
      August 5, 2006 $434.9) (Note 4)          141.2       142.8       157.2
    Mortgages, loans and other
     receivables (Note 5)                       59.1        65.1        70.4
    Other assets (Note 6)                      123.9       126.0        98.4
    Property and equipment (Note 7)          2,443.3     2,409.1     2,284.7
    Assets held for sale                        27.6        24.1        22.9
    Intangibles (less accumulated
     amortization of $13.5;
      May 5, 2007 $11.7;
      August 5, 2006 $8.4)                     376.4        38.2        29.7
    Goodwill                                   948.1       786.6       741.4
                                          ----------  ----------  -----------
                                          $  5,606.6  $  5,215.8  $  5,152.1
                                          ----------  ----------  -----------
                                          ----------  ----------  -----------
    LIABILITIES

    Current
      Bank indebtedness                   $     28.1  $     30.1  $    154.2
      Accounts payable and
       accrued liabilities                   1,246.6     1,260.3     1,264.1
      Income taxes payable                       4.9           -        39.2
      Future income taxes                       41.7        40.4        46.1
      Long-term debt due within
       one year                                 80.6        82.5       104.9
      Liabilities relating to
       assets held for sale                      6.7         6.8         7.0
                                          ----------  ----------  -----------
                                             1,408.6     1,420.1     1,615.5
    Long-term debt (Note 8)                  1,593.8       792.6       687.4
    Long-term lease obligation                  38.3        36.9        21.0
    Other liabilities (Note 9)                  14.2        14.0        18.6
    Employee future benefits
     obligation                                103.3       102.1        98.6
    Future income taxes                        142.9       130.4       130.6
    Minority interest                           45.1       588.6       573.5
                                          ----------  ----------  -----------
                                             3,346.2     3,084.7     3,145.2
                                          ----------  ----------  -----------
    SHAREHOLDERS' EQUITY

    Capital stock (Note 10)                    196.6       196.1       195.4
    Contributed surplus                          0.3         0.3         0.2
    Retained earnings                        2,066.8     1,935.3     1,812.7
    Accumulated other
     comprehensive loss                         (3.3)       (0.6)       (1.4)
                                          ----------  ----------  -----------
                                             2,260.4     2,131.1     2,006.9
                                          ----------  ----------  -----------
                                          $  5,606.6  $  5,215.8  $  5,152.1
                                          ----------  ----------  -----------
                                          ----------  ----------  -----------

    Contingent liabilities (Note 19)
    Other matters (Note 22)

    See accompanying notes to the unaudited interim period consolidated
    financial statements.


                           EMPIRE COMPANY LIMITED
                           ----------------------
                 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
                 --------------------------------------------
                               13 WEEKS ENDED
                               --------------
                           (Unaudited, in millions)


                                                    August 4        August 5
                                                        2007            2006
                                                  ----------      -----------

    Balance, beginning of period as
     previously reported                          $  1,939.6      $  1,771.0

    Adjustment due to change in accounting
     policy (Note 1)                                    (4.3)              -
                                                  ----------      -----------
    Balance, beginning of period as restated         1,935.3         1,771.0

    Net earnings                                       142.3            53.3

    Dividends
      Preferred shares                                  (0.1)           (0.1)
      Common shares                                    (10.7)           (9.9)

    Premium on common shares purchased for
     cancellation                                          -            (1.6)
                                                  ----------      -----------
    Balance, end of period                        $  2,066.8      $  1,812.7
                                                  ----------      -----------
                                                  ----------      -----------


                           EMPIRE COMPANY LIMITED
                           ----------------------
       CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
       ---------------------------------------------------------------
                               13 WEEKS ENDED
                               --------------
                           (Unaudited, in millions)


                                                    August 4        August 5
                                                        2007            2006
                                                  ----------      -----------
    Balance, beginning of period (Note 1)         $     (0.6)     $     (1.1)

    Transition adjustment as of May 6, 2007
     (Note 1)                                           77.2               -
                                                  ----------       ----------
    Adjusted balance, beginning of period               76.6            (1.1)

    Acquired comprehensive income (loss) from
     purchase of minority interest in Sobeys Inc.       (0.6)              -

    Other comprehensive income (loss) for the
     period                                            (79.3)           (0.3)
                                                  ----------       ----------
    Balance, end of period                        $     (3.3)     $     (1.4)
                                                  ----------      -----------
                                                  ----------      -----------

    See accompanying notes to the unaudited interim period consolidated
    financial statements.


                           EMPIRE COMPANY LIMITED
                           ----------------------
                     CONSOLIDATED STATEMENTS OF EARNINGS
                     -----------------------------------
                               13 WEEKS ENDED
                               --------------
             (Unaudited, in millions, except per share amounts)


                                                    August 4        August 5
                                                        2007            2006
                                                  ----------      -----------

    Revenue                                       $  3,519.4      $  3,380.9
    Operating expenses
      Cost of sales, selling and
       administrative expenses                       3,331.1         3,208.1
      Depreciation and amortization                     69.8            62.9
                                                  ----------      -----------
                                                       118.5           109.9
    Investment income (Note 11)                          9.0            11.3
                                                  ----------      -----------
    Operating income                                   127.5           121.2
                                                  ----------      -----------
    Interest expense
      Long-term debt                                    19.8            12.9
      Short-term debt                                    1.0             1.4
                                                  ----------      -----------
                                                        20.8            14.3
                                                  ----------      -----------
                                                       106.7           106.9
    Capital gains and other items (Note 12)            100.9               -
                                                  ----------      -----------
    Earnings before income taxes and minority
     interest                                          207.6           106.9
                                                  ----------      -----------
    Income taxes
      Current                                           52.8            36.9
      Future                                             0.8            (1.2)
                                                  ----------      -----------
                                                        53.6            35.7
                                                  ----------      -----------
    Earnings before minority interest                  154.0            71.2
    Minority interest                                   11.7            17.9
                                                  ----------      -----------
    Net earnings                                  $    142.3      $     53.3
                                                  ----------      -----------
                                                  ----------      -----------


    Earnings per share (Note 3)

       Basic                                      $     2.17      $     0.81
                                                  ----------      -----------
                                                  ----------      -----------
       Diluted                                    $     2.16      $     0.81
                                                  ----------      -----------
                                                  ----------      -----------

    Weighted average number of common
     shares outstanding, in millions

       Basic                                            65.6            65.5

       Diluted                                          65.7            65.7


    See accompanying notes to the unaudited interim period consolidated
    financial statements.


                           EMPIRE COMPANY LIMITED
                           ----------------------
               CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
               -----------------------------------------------
                               13 WEEKS ENDED
                               --------------
                           (Unaudited, in millions)


                                                    August 4        August 5
                                                        2007            2006
                                                  ----------      -----------

    Net earnings                                  $    142.3      $     53.3
                                                  ----------      -----------
    Other comprehensive income (loss)

      Reclassification of gains on
       available-for-sale financial
       assets to net earnings, net of tax
       of $(18.2)                                      (78.7)              -

      Gains on interest rate derivative
       instruments designed as cash flow
       hedges, net of tax of $0.8                        1.4               -

      Gains on foreign exchange derivative
       instruments designed as cash flow
       hedges, net of tax of $(0.9)                     (1.7)              -

      Share of comprehensive income (loss)
       of entities accounted using the equity
       method, net of tax of $(0.1)                     (0.3)              -

      Exchange losses on translation of
      self-sustaining foreign operations                   -            (0.3)
                                                  ----------      -----------
                                                       (79.3)           (0.3)
                                                  ----------      -----------
    Comprehensive income                          $     63.0      $     53.0
                                                  ----------      -----------
                                                  ----------      -----------

    See accompanying notes to the unaudited interim period consolidated
    financial statements.


                           EMPIRE COMPANY LIMITED
                           ----------------------
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                    -------------------------------------
                               13 WEEKS ENDED
                               --------------
                           (Unaudited, in millions)

                                                    August 4        August 5
                                                        2007            2006
                                                  ----------      -----------

    Operating Activities
      Net earnings                                $    142.3      $     53.3
      Items not affecting cash (Note 13)                90.3            84.5
      Preferred dividends                               (0.1)           (0.1)
                                                  ----------      -----------
                                                       232.5           137.7
      Net change in non-cash working capital           (30.0)           (7.2)
                                                  ----------      -----------
    Cash flows from operating activities               202.5           130.5
                                                  ----------      -----------
    Investing Activities
      Net decrease (increase) in investments           189.3           (12.8)
      Purchase of shares in subsidiary,
       Sobeys Inc.                                  (1,065.7)          (36.5)
      Purchase of property and equipment              (109.1)         (141.2)
      Proceeds on disposal of property and
       equipment                                         5.7             3.6
      Mortgages, loans and other receivables             3.0            (2.1)
      (Increase) decrease in other assets               (2.6)           10.4
      Business acquisitions, net of cash
       acquired (Note 16)                               (0.7)           (5.5)
                                                  ----------      -----------
    Cash flows used in investing activities           (980.1)         (184.1)
                                                  ----------      -----------
    Financing Activities
      (Decrease) increase in bank indebtedness          (2.0)           55.6
      (Decrease) increase in construction loans         (1.1)            2.4
      Issue of long-term debt                          813.6             0.6
      Repayment of long-term debt                      (15.2)          (15.7)
      Minority interest                                 19.7            (0.3)
      Issue of Non-Voting Class A shares                 0.4             0.9
      Repurchase of Non-Voting Class A shares              -            (1.9)
      Common dividends                                 (10.7)           (9.9)
                                                  ----------      -----------
    Cash flows from financing activities               804.7            31.7
                                                  ----------      -----------
    Increase (decrease) in cash and cash
     equivalents                                        27.1           (21.9)
    Cash and cash equivalents, beginning
     of period                                         294.9           341.1
                                                  ----------      -----------
    Cash and cash equivalents, end of period      $    322.0       $   319.2
                                                  ----------      -----------
                                                  ----------      -----------

    See accompanying notes to the unaudited interim period consolidated
    financial statements.


                           EMPIRE COMPANY LIMITED
                           ----------------------
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               ----------------------------------------------
                               AUGUST 4, 2007
                               --------------
             (Unaudited, in millions, except per share amounts)


    1. Summary of Significant Accounting Policies

    Interim financial statements

    The unaudited interim period consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles
("GAAP"). These interim consolidated financial statements do not include all
of the disclosures included in the Company's annual consolidated financial
statements. Accordingly, these interim consolidated financial statements
should be read in conjunction with the consolidated financial statements for
the year ended May 5, 2007, as set out in the 2007 Annual Report.

    Generally accepted accounting principles

    The accounting policies used in the preparation of these interim
consolidated financial statements conform with those used in the Company's
2007 annual consolidated financial statements except as noted below:

    Adopted during fiscal 2008

    Accounting changes

    In July 2006, the Canadian Institute of Chartered Accountants ("CICA")
issued section 1506 of the CICA Handbook, "Accounting Changes", which
describes the criteria for changing accounting  policies, along with the
accounting and disclosure for changes in accounting policies, changes in
accounting estimates and correction of errors. These changes came into effect
as of January 1, 2007 and are applicable for the Company's first quarter of
fiscal 2008.

    Financial instruments

    On May 6, 2007, the Company implemented the CICA Handbook Sections 3855,
"Financial Instruments - Recognition and Measurement", 3865, "Hedges", 1530,
"Comprehensive Income", 3251, "Equity", and 3861, "Financial Instruments -
Disclosure and Presentation". These standards have been applied without
restatement of prior periods. The transitional adjustments resulting from
these standards are  recognized in the opening balances of retained earnings
and accumulated other comprehensive income.
    This new standard, Section 3855, "Financial Instruments - Recognition and
Measurement", requires the Company to revalue all of its financial assets and
liabilities, including derivatives and embedded derivatives in certain
contracts, at fair value on the initial date of implementation and at each
subsequent financial reporting date. Non-financial derivatives must be
recorded at fair value on the consolidated balance sheet unless they are
exempt from derivative treatment based upon expected purchase, sale or usage
requirements.
    This standard also requires the Company to classify financial assets and
liabilities according to their characteristics and management's choices and
intentions related thereto for the purposes of ongoing measurements.
Classification choices for financial assets include: a) held for trading -
measured at fair value with changes in fair value recorded in net earnings;
b) held to maturity - recorded at amortized cost with gains and losses
recognized in net earnings in the period that the asset is no longer
recognized or impaired; c) available for sale - measured at fair value with
changes in fair value recognized in other comprehensive income for the current
period until realized through disposal or impairment; and d) loans and
receivables - recorded at amortized cost with gains and losses recognized in
net earnings in the period that the asset is is no longer recognized or
impaired. Classification choices for financial liabilities include: a) held
for trading - measured at fair value with changes in fair value recorded in
net earnings and b) other - measured at amortized cost with gains and losses
recognized in net earnings in the period that the liability is no longer
recognized. Subsequent measurement for these assets and liabilities are based
on either fair value or amortized cost using the effective interest method,
depending upon their classification. Any financial asset or liability can be
classified as held for trading as long as its fair value is reliably
determinable.
    In accordance with the new standard, the Company's financial assets and
liabilities are generally classified and measured as follows:

    Asset/ Liability                  Classification          Measurement
    ----------------------------     ----------------         --------------
    Cash                              Available for sale      Fair value
    Cash equivalents                  Held to maturity        Amortized cost
    Receivables                       Loans and receivables   Amortized cost
    Mortgages, loans and other
     receivables                      Loans and receivables   Amortized cost
    Investments, at cost              Available for sale      Fair value
    Bank indebtedness                 Other liabilities       Amortized cost
    Accounts payable and accrued
     liabilities                      Other liabilities       Amortized cost
    Long-term debt                    Other liabilities       Amortized cost

    Other balance sheet accounts, such as inventories, prepaid expenses,
investments (at equity), other assets, property and equipment, intangibles,
goodwill, current and long-term future income taxes, long-term lease
obligation, other liabilities, and minority interest are not within the scope
of the new accounting standards as they are not financial instruments.
    Transaction costs other than those related to financial instruments
classified as held-for-trading, which are expensed as incurred, are added to
the fair value of the financial asset or financial liability on initial
recognition and amortized using the effective interest method.
    Embedded derivatives are required to be separated and measured at fair
values if certain criteria are met.  Under an election permitted by the new
standard, management reviewed contracts entered into or modified subsequent to
May 3, 2003 and determined that the Company does not currently have any
significant embedded derivatives in its contracts that require separate
accounting treatment.
    Section 3855 also requires that obligations undertaken issuing a guarantee
that meets the definition of a guarantee pursuant to Accounting Guideline 14,
"Disclosure of Guarantees", be recognized at fair value at inception. No
subsequent re-measurement at fair value is required unless the financial
guarantee qualifies as a derivative.
    The fair value of a financial instrument is the estimated amount that the
Company would receive or pay to terminate the instrument agreement at the
reporting date. To estimate the fair value of each type of financial
instrument various market value data and other valuation techniques were used
as appropriate. The fair values of cash approximated its carrying value. The
fair value of currency basis swaps was estimated based on the market spot
exchange rates. The fair value of interest rate swaps was estimated by
discounting net cash flows of the swaps at market and forward interest rates
for swaps of the same remaining maturities. The fair value of energy contracts
was estimated based on the market variable rate and forward variable rate.

    Hedges

    Section 3865, "Hedges", replaces Accounting Guideline 13, "Hedging
Relationships".  The requirements for identification, designation,
documentation and assessment of effectiveness of hedging relationships remain
substantially unchanged.  Section 3865 addresses the accounting treatment of
qualifying hedging relationships and the necessary disclosures and also
requires all derivatives in hedging relationships to be recorded at fair
value.
    The Company has cash flow hedges which are used to manage exposure to
fluctuations in foreign currency exchange rates and variable interest and
energy rates on variable rate assets and liabilities. For cash flow hedges,
the effective portion of the change in fair value of the hedging item is
recorded in other comprehensive income. To the extent the change in fair value
of the derivative is not completely offset by the change in fair value of the
hedged item, the ineffective portion of the hedging relationship is recorded
immediately in net earnings. Amounts accumulated in other comprehensive income
are reclassified to net earnings when the hedged item is recognized in net
earnings. When a hedging instrument in a cash flow hedge expires or is sold,
or when a hedge no longer meets the criteria for hedge accounting, any
cumulative gain or loss in accumulated other comprehensive income relating to
the hedge is carried forward until the hedged item is recognized in net
earnings. When the hedged item ceases to exist as a result of its expiry or
sale, or if an anticipated transaction is no longer expected to occur, the
cumulative gain or loss in accumulated other comprehensive income is
immediately reclassified to net earnings.

      Comprehensive income

      In accordance with Section 1530, "Comprehensive Income", the Company has
chosen to report a new financial statement entitled "Consolidated Statements
of Comprehensive Income", which is comprised of net earnings and other
comprehensive income. Other comprehensive income represents the change in
shareholders' equity from transactions and other events from non-owner sources
and includes unrealized gains and losses on financial assets that are
classified as available-for-sale, and changes in the fair value of the
effective portion of cash flow hedging instruments. The accumulated other
comprehensive income (i.e. the portion of comprehensive income not already
included in net earnings) is being presented as a separate line in
shareholders' equity. In accordance with the new standard, $(0.6) relating to
unrealized losses resulting from translation of self-sustaining operations
which had previously been classified as cumulative translation adjustment
within shareholders equity is now presented within accumulated other
comprehensive income.

      Equity

      Section 3251, "Equity", which replaced Section 3250, "Surplus",
establishes standards for the presentation of equity and changes in equity
during the reporting period and requires the Company to present separately
equity components and changes in equity arising from i) net earnings;
ii) other comprehensive income; iii) other changes in retained earnings;
iv) changes in contributed surplus; v) changes in share capital; and
vi) changes in reserves.  New consolidated statements of changes in
shareholders' equity are included in the unaudited interim period consolidated
financial statements.

      Financial instruments - disclosure and presentation

      Section 3861, "Financial Instruments - Disclosure and Presentation",
which replaces 3860, of the same title, establishes standards for the
presentation of financial instruments and non-financial derivatives, and
identifies the information that should be disclosed about them.
      The following table summarizes the transition adjustments recorded upon
implementation:
                                                                  Transition
                                                                 Adjustments
    -------------------------------------------------------------------------
    Consolidated Balance Sheet
    Investments, at cost                                             $  94.4
    Other assets                                                        (4.5)
    Other liabilities                                                    2.5
    Long-term debt                                                       2.7
    Future income taxes                                                (18.5)
    Minority interest                                                    0.6
    Accumulated other comprehensive income                             (77.2)
    -------------------------------------------------------------------------

      Deferred charges

      The Company adopted CICA Section 3855, "Financial Instruments -
Recognition and Measurement", effective for the first quarter of fiscal 2008. 
As a consequence of adopting this section, Section 3070 - "Deferred Charges"
was withdrawn. As a result, the Company reviewed its Deferred Costs
classifications included with Other Assets and determined the following
changes were necessary:

    Deferred store marketing

    Deferred store marketing costs, primarily comprised of store renovation
    and expansion costs, were reclassified and included with equipment,
    fixtures and vehicles as part of the Company's property and equipment
    balance sheet group. Prior year balances were reclassified which resulted
    in an increase in property and equipment and decrease in other assets of
    $106.2 at May 5, 2007 and $68.0 at August 5, 2006 as well as an increase
    in depreciation expense and decrease in cost of sales, selling and
    administrative expenses of $25.3 for the year ended May 5, 2007 and $5.2
    for the quarter ended August 5, 2006. There is no impact on net earnings
    or earnings per share as a result of this change.

    Deferred repositioning costs

    Effective for the first quarter of fiscal 2008, the Company changed its
    accounting policy for the treatment of certain deferred costs associated
    with major repositioning or branding efforts of the Company. Due to the
    withdrawal of the primary source of GAAP, Section 3070 - "Deferred
    Charges", the Company looked to other sources of existing and proposed
    GAAP for guidance in determining its future policy for such costs. Based
    on this review, the Company determined, in setting the new policy, that
    it would be more appropriate to expense these types of costs in the
    period incurred as it provides more relevant information on expenditures
    associated with repositioning and branding efforts.
    This change in accounting policy was applied retrospectively resulting in
    a $9.1 decrease in other assets, a $3.2 decrease in long-term future tax
    liabilities, and a $4.3 decrease in earnings (net of minority interest of
    $1.6) at May 5, 2007. For the year ended May 5, 2007, earnings per share
    basic and diluted would decrease by $0.06 per share. The effect for the
    quarter ended August 4, 2007 is a $0.9 decrease in cost of sales, selling
    and administrative expenses, a $0.3 increase in income taxes and an
    increase in basic and diluted earnings of $0.01 per share. There was no
    impact on the August 5, 2006 results.

    Adopted during fiscal 2007

    Vendor consideration

    During the first quarter of fiscal 2007, the Company implemented, on a
retroactive basis, Emerging Issues Committee Abstract 156 ("EIC-156")
"Accounting by a Vendor for Consideration Given to a Customer (including a
Reseller of the Vendor's Products)". This abstract requires a vendor to
generally record cash consideration given to a customer as a reduction to the
selling price of the vendor's products or services and reflect it as a
reduction of revenue when recognized in the statement of earnings.
    Prior to the implementation of EIC-156, the Company recorded certain sales
incentives paid to independent franchisees, associates and independent
accounts in cost of sales, selling and administrative expenses on the
statement of earnings. Accordingly, the implementation of EIC-156 on a
retroactive basis, resulted in a reduction in both sales and cost of sales,
selling and administrative expenses. As reclassifications, these changes did
not impact net earnings or earnings per share.

    Future changes in accounting policies

    Inventories

    In March 2007, the CICA issued Section 3031, "Inventories", which will
replace existing Section 3030 with the same title.  The new Section
establishes that inventories should be measured at the lower of cost and net
realizable value, with guidance on the determination of cost.  This standard
is effective for interim and annual financial statements relating to fiscal
years beginning on or after January 1, 2008 and is applicable for the
Company's first quarter of fiscal 2009.  The Company is currently evaluating
the impact of this new standard.

      Capital disclosures

      In October 2006, the CICA issued section 1535 of the CICA Handbook
      "Capital Disclosures".  This section establishes standards for
      disclosing information about an entity's capital and how it is managed.
      The standard is effective for interim and annual financial statements
      relating to fiscal years beginning on or after October 1, 2007 and is
      applicable for the Company's first quarter of fiscal 2009.  The Company
      does not expect that the adoption of this standard will have a
      significant impact on its financial statements.

      Financial instruments - disclosure and financial instruments -
      presentation

      Section 3862 "Financial Instruments - Disclosure" and Section 3863
      "Financial Instruments - Presentation" replace 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.  These
      standards are effective for interim and annual financial statements
      relating to fiscal years beginning on or after October 1, 2007 and are
      applicable for the Company's first quarter of fiscal 2009.  The Company
      does not expect the adoption of these standards to have a significant
      impact on its financial disclosure and results of operations.

    Cash and cash equivalents

    Cash and cash equivalents are defined as cash, treasury bills and
guaranteed investments with a maturity less than 90 days at date of
acquisition.

    Inventories

    Warehouse inventories are valued at the lower of cost and net realizable
value with cost being determined on a first-in,first-out ("FIFO") or a moving
average basis. Retail inventories are valued at the lower of cost and net
realizable value. Cost is determined using FIFO or the retail method. The
retail method uses the anticipated selling price less normal profit margins,
substantially on an average cost basis. Real estate inventory of residential
properties is carried at the lower of cost and net realizable value.

    Portfolio investments

    Portfolio investments are accounted for under the cost method. Investment
income is recognized on an accrual basis. Portfolio investments are written
down when the inherent loss is determined to be other than temporary. Gains
and losses on sale of investments are recorded in earnings as realized.

    Property and equipment

    Property and equipment is recorded at net book value, being original cost
less accumulated depreciation and any writedowns for impairment.
    Depreciation on real estate buildings is calculated using the
straight-line method with reference to each property's book value, its
estimated useful life (not exceeding 40 years) and its residual value.
Deferred leasing costs are amortized over the terms of the related leases.
    Depreciation of other property and equipment is recorded on a
straight-line basis over the estimated useful lives of the assets as follows:

    Equipment, fixtures and vehicles   3 - 20 years
    Buildings                          10 - 40 years
    Leasehold improvements             Lesser of lease term and 7 - 10 years

    Property and equipment is reviewed for impairment annually. The carrying
value of the property and equipment is also reviewed whenever events or
changes in circumstances indicate that the carrying value of property and
equipment may not be recoverable. The assets are impaired when the carrying
value exceeds the sum of the undiscounted future cash flows expected from use
and eventual disposal. If property and equipment is determined to be impaired,
the impairment loss is measured at the excess of the carrying value over fair
value.
    Assets to be disposed are classified as held for sale and are no longer
depreciated.  Assets held for sale are recognized at the lower of book value
and fair value less cost of disposal.
    The Company follows the full cost method of accounting for its exploration
and development of petroleum and natural gas reserves. Costs initially
capitalized are depleted and depreciated using the unit-of-production method
based on production volumes, before royalties, in relation to the Company's
share of estimated proved petroleum and natural gas reserves.

    Capitalization of costs

      Construction projects

      Certain subsidiary companies and joint ventures capitalize interest
      during the construction period until the project opening date. The
      amount of interest capitalized to construction in progress in the
      current period was $0.2 (2006 - $0.5).

      Commercial properties

      Certain subsidiaries and joint ventures capitalize the direct carrying
      and operating costs applicable to the unleased areas of each new
      project for a reasonable period from the project opening date until a
      certain level of occupancy is reached. No amounts were capitalized
      in fiscal 2007 or 2008.

      Development properties and land held for future development

      A subsidiary company capitalizes interest, real estate taxes and other
      expenses to the extent that they relate to properties for immediate
      development. To the extent that the resulting carrying value exceeds
      its fair market value, the excess is charged against income. The
      carrying costs on the balance of properties held for future development
      are capitalized as incurred. An amount of $0.2 (2006 - $Nil) was
      capitalized during the period.

    Leases

    Leases meeting certain criteria are accounted for as capital leases. The
imputed interest is charged against income. If the lease contains a term that
allows ownership to pass to the Company or there is a bargain purchase option
the capitalized value is depreciated over the estimated useful life of the
related asset. Otherwise the capitalized value is depreciated on a
straight-line basis over the lesser of the lease term and its estimated useful
life. Capital lease obligations are reduced by rental payments net of imputed
interest. All other leases are accounted for as operating leases.
    Lease allowances and incentives received are recorded as a deferred credit
and amortized as a reduction of lease expense over the term of the leases.
Real estate lease expense is amortized straight-line over the entire term of
the lease including free rent periods related to store fixturing. A store
fixturing period varies by store but is generally considered to be one month
prior to the store opening.

    Goodwill

    Goodwill represents the excess of the purchase price of the business
acquired over the fair value of the underlying net tangible and intangible
assets acquired at the date of acquisition. Goodwill is not amortized but
rather is subject to an annual impairment review or more frequently if
circumstances exist that might indicate the value is impaired. Should the
carrying value exceed the fair value, the carrying value will be written down
to the fair value.

    Intangibles

    Intangibles arise on the purchase of a new business, existing franchises
and the acquisition of pharmacy prescription files. Amortization on limited
life intangibles is recorded on a straight-line basis over 10-15 years.
Intangible assets with indefinite useful lives are not amortized but rather
are subject to an annual impairment review or more frequently if circumstances
exist that might indicate their value is impaired. Should the carrying value
exceed the fair value of intangible assets (e.g. trademarks), the carrying
value will be written down to the fair value.

    Assets held for sale

    Certain land and buildings have been listed for sale and reclassified as
"Assets held for sale" in accordance with CICA Handbook Section 3475,
"Disposal of Long-lived Assets and Discontinued Operations". These assets are
expected to be sold within a twelve month period, are no longer productive
assets and there is no longer an intent to develop for future use. Assets held
for sale are valued at the lower of book value and fair value less cost of
disposal.

    Store opening expenses

    Opening expenses of new stores and store conversions are written off on a
straight-line basis during the first year of operation.

    Future income taxes

    The Company accounts for income taxes under the liability method. The
difference between the tax basis of assets and liabilities and their carrying
value on the balance sheet is used to calculate future tax assets and
liabilities.  The future tax assets and liabilities have been measured using
substantively enacted tax rates that will be in effect when the differences
are expected to reverse.

    Deferred revenue

    Deferred revenue consists of long-term supplier purchase agreements,
rental revenue arising from the sale of subsidiaries and gains on sale
leaseback transactions.  Deferred revenue is being taken into income on a
straight-line basis over the term of the related agreements.

    Foreign currency translation

    Assets and liabilities of self-sustaining foreign investments are
translated at exchange rates in effect at the balance sheet date. The revenues
and expenses are translated at average exchange rates for the year. Cumulative
gains and losses on translation are shown in accumulated other comprehensive
income.
    Other assets and liabilities are translated at the exchange rate in effect
at the balance sheet date. These exchange gains or losses are recognized in
operating income.  Revenues and expenses denominated in foreign currencies are
translated into Canadian dollars at the average exchange rate for the period.

    Revenue recognition

    Food sales are recognized at the point-of-sale. Sales include revenues
from customers through corporate stores operated by the Company and
consolidated VIEs, and revenue from sales to non-VIE franchised stores,
affiliated stores and independent accounts. Revenue received from non-VIE 
franchised stores, affiliated stores and independent accounts is mainly
derived from the sale of product. The Company also collects franchise fees
under two types of arrangements. Franchise fees contractually due based on the
dollar value of product shipped are recorded as revenue when the product is
shipped. Franchise fees contractually due based on the franchisee's retail
sales are recorded as revenue weekly upon invoicing based on the franchisee's
retail sales. Real estate revenue is recognized in accordance with the lease
agreements with tenants on a straight-line basis.

    Pension benefit plans and other benefit plans

    The cost of the Company's pension benefits for defined contribution plans
are expensed at the time active employees are compensated. The cost of defined
benefit pension plans and other benefit plans is accrued based on actuarial
valuations, which are determined using the projected benefit method pro-rated
on service and management's best estimate of the expected long-term rate of
return on plan assets, salary escalation, retirement ages and expected growth
rate of health care costs.
    Current market values are used to value benefit plan assets. The
obligation related to employee future benefits is measured using current
market interest rates, assuming a portfolio of Corporate AA bonds with terms
to maturity that, on average, match the terms of the obligation.
    The impact of changes in plan amendments is amortized on a straight-line
basis over the expected average remaining service life ("EARSL") of active
members. For pension benefit plans, the actuarial gains and losses and the
impact of changes in the actuarial basis in excess of 10 percent of the
greater of the projected benefit obligation and the market value of assets are
amortized on a straight-line basis over the EARSL of the active members. For
the Company's Supplemental Executive Retirement Plan, the impact of changes in
the plan provisions are amortized over five years. For other benefit plans,
actuarial gains and losses are recognized immediately.

    Use of estimates

    The preparation of consolidated financial statements in conformity with
Canadian GAAP, requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Certain of these estimates require subjective or complex
judgments by management that may be uncertain. Some of these items include the
valuation of inventories, goodwill, employee future benefits and income taxes.
Changes to these estimates could materially impact the financial statements.
These estimates are based on management's best knowledge of current events and
actions that the Company may undertake in the future. Actual results could
differ materially from these estimates.

    Earnings per share

    Earnings per share is calculated by dividing the earnings available to
common shareholders by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is calculated using
the treasury stock method.

    2. Privatization of Sobeys Inc.

    On April 26, 2007, the Company and Sobeys Inc. ("Sobeys") jointly
announced that they had entered into an arrangement agreement ("the
Arrangement") pursuant to which the Company would acquire all of the
outstanding common shares of Sobeys that it did not then own at a price of
$58.00 per share.
    The Arrangement required various approvals to  comply with applicable
corporate and securities laws. The Sobeys shareholders approved the
Arrangement at a special shareholders' meeting held on June 9, 2007 by the
requisite majority; the Supreme Court of Nova Scotia gave its sanction to the
Arrangement on June 13, 2007; the Arrangement became effective upon
registration of the final Court order with the Nova Scotia Registry of Joint
Stock Companies at the close of business on June 15, 2007, at which time the
Company acquired all the outstanding shares of Sobeys that it did not
previously own. Subsequently, the Sobeys common shares ceased trading on the
Toronto Stock Exchange, and were de-listed at the close of business on June
18, 2007.
    The acquisition was accounted for using the purchase method with operating
results being included in the consolidated financial statements as of the
acquisition date. The preliminary purchase price allocation is as follows:

      Consideration
        Cash                                                      $  1,061.7
        Acquisition costs                                                4.0
                                                                  -----------
      Total consideration paid                                       1,065.7

      Carrying amount of net assets acquired                           576.5
                                                                  -----------
      Excess consideration paid over net assets acquired          $    489.2
                                                                  -----------
                                                                  -----------
      Preliminary allocation of excess consideration
       paid over net assets acquired

        Amortizable intangible assets                             $     40.0
        Indefinite-life intangible assets                              300.0
        Goodwill                                                       161.6
        Future income taxes                                            (13.0)
        Accumulated other comprehensive loss                             0.6
                                                                  ----------
                                                                  $    489.2
                                                                  ----------
                                                                  ----------

    The acquisition was financed by funds of $278.0, received primarily from
sale of certain portfolio investments, and by advances of $787.7 under new
credit facilities (see Note 8).
    Management is currently carrying out a detailed analysis and changes will
be made to the allocation of the excess consideration paid over net assets
acquired as information becomes available. For example, since the measurement
of the fair value of property and equipment had not been completed at the time
of the preliminary allocation, property and equipment has been recorded at
book value. The measurement and allocation of finite and infinite intangible
assets is also underway. At this point, indefinite-life intangible assets have
been identified as intangible assets acquired as part of the purchase and are
not subject to amortization for accounting purposes. As the valuation is
finalized, this assumption may change which may impact intangible amortization
and future income taxes. Management expects to finalize the purchase price
allocation in fiscal 2008. As a result, the actual amounts allocated to the
identifiable assets acquired and liabilities assumed and the related operating
results will vary from the preliminary amounts, and such differences could be
material.

    3. Earnings Per Share

    Earnings per share amounts are calculated by dividing the earnings
available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is calculated
using the treasury method and assumes that all the outstanding stock options
were exercised and share purchase loans were repaid at the beginning of the
period.
    Earnings applicable to common shares is comprised of the following:

                                                        2007            2006
                                                   (13 weeks)      (13 weeks)
                                                  ----------      -----------
    Operating earnings                            $     60.4      $     53.3
    Capital gains and other items, net of tax
     of $19.0; (2006 - $Nil)                            81.9               -
                                                  ----------      -----------
    Net earnings                                       142.3            53.3
    Preferred share dividends                           (0.1)           (0.1)
                                                  ----------      -----------
    Earnings applicable to common shares          $    142.2      $     53.2
                                                  ----------      -----------
                                                  ----------      -----------

    Earnings per share is comprised of the following:

    Operating earnings                            $     0.92      $     0.81
    Capital gains and other items                       1.25               -
                                                  ----------      -----------
    Basic earnings per share                      $     2.17      $     0.81
                                                  ----------      -----------
                                                  ----------      -----------
    Operating earnings                            $     0.92      $     0.81
    Capital gains and other items                       1.24               -
                                                  ----------      -----------
    Diluted earnings per share                    $     2.16      $     0.81
                                                  ----------      -----------
                                                  ----------      -----------


    4. Investments, at Equity
                                            August 4       May 5    August 5
                                                2007        2007        2006
                                          ----------  ----------  -----------
    Wajax Income Fund (27.6% interest)    $     32.1  $     32.2  $     34.5
    Crombie REIT (48.1% interest)              108.5       109.3       112.7
    U.S. residential real estate
     partnerships                                0.6         1.3        10.0
                                          ----------  ----------  -----------
                                          $    141.2  $    142.8  $    157.2
                                          ----------  ----------  -----------
                                          ----------  ----------  -----------

    The Company's carrying value of its investment in Wajax Income Fund is as
    follows:

                                                    August 4        August 5
                                                        2007            2006
                                                  ----------      -----------
      Balance, beginning of period                $     32.2        $   33.1
      Equity earnings                                    4.2             5.0
      Share of comprehensive income                      0.1               -
      Distributions received                            (4.4)           (3.6)
                                                  ----------      -----------
      Balance, end of period                      $     32.1        $   34.5
                                                  ----------      -----------
                                                  ----------      -----------

    The Company's carrying value of its investment in Crombie REIT is as
    follows:

                                                    August 4        August 5
                                                        2007            2006
                                                  ----------      -----------
      Balance, beginning of period                $    109.3      $    112.8
      Equity earnings                                    3.9             3.0
      Share of comprehensive income (loss)              (0.5)              -
      Distributions received                            (4.2)           (3.1)
                                                  ----------      -----------
      Balance, end of period                      $    108.5      $    112.7
                                                  ----------      -----------
                                                  ----------      -----------

    5. Mortgages, Loans and Other Receivables

                                            August 4       May 5    August 5
                                                2007        2007        2006
                                          ----------  ----------  -----------
    Loans receivable                      $     59.6  $     62.7  $     69.1
    Mortgages receivable                         0.6         0.6         0.3
    Other                                       16.4        16.3        17.0
                                          ----------  ----------  -----------
                                                76.6        79.6        86.4
    Less amount due within one year             17.5        14.5        16.0
                                          ----------  ----------  -----------
                                          $     59.1  $     65.1  $     70.4
                                          ----------  ----------  -----------
                                          ----------  ----------  -----------
    Loans receivable

    Loans receivable represent long-term financing to certain retail
associates. These loans are primarily secured by inventory, fixtures and
equipment, bear various interest rates and have repayment terms up to ten
years. The carrying amount of the loans receivable approximates fair value
based on the variable interest rates charged on the loans and the operating
relationship of the associates with the Company.

    6. Other Assets

    Other assets include restricted cash of $4.4 (May 5, 2007 - $5.7; August
5, 2006 - $4.5) held by VIEs as security for third party loans and interest
rate and foreign currency financial derivatives at fair value.

    7. Property and Equipment
                                                                    August 4,
                                                     Accumulated        2007
                                                           Depre-   Net Book
                                                Cost     ciation       Value
                                          ----------  ----------  -----------
    Food segment
      Land                                $    155.6  $        -  $    155.6
      Land held for future development         133.6           -       133.6
      Buildings                                673.1       165.3       507.8
      Equipment, fixtures and vehicles       2,043.8     1,295.7       748.1
      Leasehold improvements                   407.2       253.3       153.9
      Construction in progress                 121.6           -       121.6
      Assets under capital leases               89.4        37.2        52.2
                                          ----------  ----------  -----------
                                             3,624.3     1,751.5     1,872.8
                                          ----------  ----------  -----------
    Real estate & other segments
      Land                                      77.6           -        77.6
      Land held for future development          36.5           -        36.5
      Buildings                                385.7       103.6       282.1
      Equipment                                 71.3        32.5        38.8
      Leasehold improvements                    51.5        12.4        39.1
      Construction in progress                  33.5           -        33.5
      Petroleum and natural gas costs           79.2        16.3        62.9
                                          ----------  ----------  -----------
                                               735.3       164.8       570.5
                                          ----------  ----------  -----------
    Total                                 $  4,359.6  $  1,916.3  $  2,443.3
                                          ----------  ----------  -----------
                                          ----------  ----------  -----------

                                                                       May 5,
                                                     Accumulated        2007
                                                           Depre-   Net Book
                                                Cost     ciation       Value
                                          ----------  ----------  -----------
    Food segment
      Land                                $    152.8  $        -  $    152.8
      Land held for future development         129.0           -       129.0
      Buildings                                673.2       161.7       511.5
      Equipment, fixtures and vehicles       2,012.3     1,256.7       755.6
      Leasehold improvements                   397.9       243.9       154.0
      Construction in progress                 109.3           -       109.3
      Assets under capital leases               83.1        34.5        48.6
                                          ----------  ----------  -----------
                                             3,557.6     1,696.8     1,860.8
                                          ----------  ----------  -----------
    Real estate & other segments
      Land                                      78.8           -        78.8
      Land held for future development          26.8           -        26.8
      Buildings                                377.3       102.2       275.1
      Equipment                                 72.7        32.6        40.1
      Leasehold improvements                    52.4        12.1        40.3
      Construction in progress                  21.8           -        21.8
      Petroleum and natural gas costs           78.7        13.3        65.4
                                          ----------  ----------  -----------
                                               708.5       160.2       548.3
                                          ----------  ----------  -----------
    Total                                 $  4,266.1  $  1,857.0  $  2,409.1
                                          ----------  ----------  -----------
                                          ----------  ----------  -----------

                                                                    August 5,
                                                     Accumulated        2006
                                                          Depre-    Net Book
                                                Cost     ciation       Value
                                          ----------  ----------  -----------
    Food segment
      Land                                $    142.3  $        -  $    142.3
      Land held for future development         122.3           -       122.3
      Buildings                                595.0       141.8       453.2
      Equipment, fixtures and vehicles       1,845.5     1,150.5       695.0
      Leasehold improvements                   359.9       223.7       136.2
      Construction in progress                 148.2           -       148.2
      Assets under capital leases               80.3        28.1        52.2
                                          ----------  ----------  -----------
                                             3,293.5     1,544.1     1,749.4
                                          ----------  ----------  -----------
    Real estate & other segments
      Land                                      81.2           -        81.2
      Land held for future development          23.6           -        23.6
      Buildings                                375.7        96.3       279.4
      Equipment                                 70.9        28.4        42.5
      Leasehold improvements                    51.9         9.3        42.6
      Construction in progress                  12.6           -        12.6
      Petroleum and natural gas costs           58.1         4.7        53.4
                                          ----------  ----------  -----------
                                               674.0       138.7       535.3
                                          ----------  ----------  -----------
    Total                                 $  3,967.5  $  1,682.8  $  2,284.7
                                          ----------  ----------  -----------
                                          ----------  ----------  -----------


    8. Long-Term Debt

                                                August 4     May 5  August 5
                                                    2007      2007      2006
                            ----------------------------- --------- ---------
                                          Real
                                        Estate
                                           and
                                Food     other
                             Segment  Segments     Total     Total     Total
                            --------- --------- --------- --------- ---------
    First mortgage loans,
     average interest
     rate 9.3%,
     due 2008-2026          $   25.0  $  129.0  $  154.0  $  155.6  $  166.2
    Medium Term Notes,
     interest rate 5.8%,
     due October 6, 2036       125.0         -     125.0     125.0         -
    Medium Term Notes,
     interest rate 6.1%,
     due October 29, 2035      175.0         -     175.0     175.0     175.0
    Medium Term Notes,
     interest rate 7.2%,
     due February 26, 2018     100.0         -     100.0     100.0     100.0
    Debentures, average
     interest rate 10.4%,
     due 2008-2016              57.3      30.7      88.0      88.8      94.9
    Notes payable and other
     debt primarily at
     interest rates
     fluctuating with the
     prime rate                 78.9      94.9     173.8     179.4     202.6
    Credit facility, floating
     interest rate tied to
     bankers acceptance rates,
     due June 8, 2010              -     510.0     510.0         -         -
    Credit facility, floating
     interest rate tied to
     bankers acceptance rates,
     due July 23, 2012         300.0         -     300.0         -         -
    Construction loans,
     interest rates
     fluctuating with the
     prime rate                    -       0.5       0.5       1.6       2.7
    Unamortized financing
     costs                      (2.1)     (2.8)     (4.9)        -         -
    Capital lease obligations,
     net of imputed interest    53.0         -      53.0      49.7      50.9
                            --------- --------- --------- --------- ---------
                               912.1     762.3   1,674.4     875.1     792.3
    Less amount due within
     one year                   28.6      52.0      80.6      82.5     104.9
                            --------- --------- --------- --------- ---------
                            $  883.5  $  710.3  $1,593.8  $  792.6  $  687.4
                            --------- --------- --------- --------- ---------
                            --------- --------- --------- --------- ---------


    The new credit facilities (the "Credit Facilities") consisted of a $950.0
unsecured revolving term credit maturing June 8, 2010 (subject to annual
one-year extensions at the request of the Company) and a $50.0 unsecured
non-revolving credit that matured on June 30, 2007. The Credit Facilities are
subject to certain financial covenants. Interest on the debt varies based on
the designation of the loan (bankers' acceptances ("BA") rate loans, Canadian
prime rate loans, U.S. base rate loans or LIBOR loans), fluctuations in the
underlying rates, and in the case of the BA rate loans or LIBOR loans, the
margin applicable to the financial covenants. On June 18, 2007, the Company
entered into two delayed fixed rate interest swaps. The first swap in an
amount of $200.0 is for a period of three years at a fixed interest rate of
5.00%. The second swap in an amount of $200.0 is for a period of five years at
a fixed interest rate of 5.05%. Both swaps became effective on July 23, 2007.
    On July 23, 2007, pursuant to the terms of the Credit Facilities, the
Company and Sobeys established a new unsecured revolving term credit maturing
July 23, 2012. Under the terms of the credit agreement entered into between
Sobeys and a banking syndicate, a revolving term credit facility of $300.0 was
established that can be increased by an aggregate amount of up to an
additional $300.0. At August 4, 2007, $300.0 of this facility has been drawn
down, the proceeds of which were used to pay a dividend to the Company. The
Company used the proceeds from the dividend to reduce its indebtedness under
the Credit Facilities and the Credit Facilities were reduced accordingly. On
July 23, 2007, the Company also transferred the second swap to Sobeys.

    9. Other Liabilities
                                            August 4       May 5    August 5
                                                2007        2007        2006
                                          ----------  ----------  -----------
    Deferred revenue                      $      7.0  $      6.5  $      3.2
    Financial instruments                        2.3         2.5        10.2
    Above market leases from
     acquisitions                                4.3         4.4         4.8
    Asset retirement obligations                 0.6         0.6         0.4
                                          ----------  ----------  -----------
                                          $     14.2  $     14.0  $     18.6
                                          ----------  ----------  -----------
                                          ----------  ----------  -----------


    10. Capital Stock

    Authorized

    Preferred shares, par value of $25 each, issuable in series.
     Series 2 cumulative, redeemable, rate of 75% of prime.        2,814,100
    2002 Preferred Shares, par value of $25 each,
     issuable in series.                                         992,000,000
    Non-Voting Class A shares, without par value.                259,107,435
    Class B common shares, without par value, voting.             40,800,000


                                      No.   August 4       May 5    August 5
                               of Shares        2007        2007        2006
                              ----------- ----------- ----------- -----------
    Issued and outstanding

    Preferred shares,
     Series 2                    300,000  $      7.5  $      7.5  $      8.3
    Non-Voting Class A        31,184,498       184.9       184.5       184.3
    Class B common            34,560,763         7.7         7.7         7.7
                                          ----------- ----------- -----------
                                               200.1       199.7       200.3
    Employees share
     purchase plan                              (3.5)       (3.6)       (4.9)
                                          ----------- ----------- -----------
                                          $    196.6  $    196.1  $    195.4
                                          ----------- ----------- -----------
                                          ----------- ----------- -----------


    During the period 10,461 (2006 - 30,792) Non-Voting Class A shares were
issued under the Company's share purchase plan to certain officers and
employees for $0.4 (2006 - $0.9).

    11. Investment Income
                                                        2007            2006
                                                   (13 weeks)      (13 weeks)
                                                  -----------     -----------
    Dividend and interest income                  $      0.9      $      2.4
    Share of earnings of entities
     accounted using the equity method                   8.1             8.9
                                                  -----------     -----------
                                                  $      9.0      $     11.3
                                                  -----------     -----------
                                                  -----------     -----------


    12. Capital Gains and Other Items
                                                        2007            2006
                                                   (13 weeks)      (13 weeks)
                                                  -----------     -----------

    Gain on sale of investments                   $    100.9               -
                                                  -----------     -----------
                                                  -----------     -----------


    13. Supplementary Cash Flow Information
                                                        2007            2006
                                                   (13 weeks)      (13 weeks)
                                                  -----------     -----------
      a) Items not affecting cash

      Depreciation and amortization               $     69.8      $     62.9
      Future income taxes                                0.8            (1.2)
      Amortization of other assets                       2.6             7.4
      Equity in earnings of other entities,
        net of dividends received                          -            (1.5)
      Minority interest                                 11.7            15.2
      Stock-based compensation                           2.2             0.2
      Long-term lease obligation                         1.4             0.2
      Employee future benefits obligation                1.2             1.3
      Rationalization costs (Note 21)                    0.6               -
                                                  -----------     -----------
                                                  $     90.3      $     84.5
                                                  -----------     -----------
                                                  -----------     -----------

      b) Other cash flow information

      Net interest paid                           $     15.1      $      8.4
                                                  -----------     -----------
                                                  -----------     -----------
      Net income taxes paid                       $     44.1      $     30.9
                                                  -----------     -----------
                                                  -----------     -----------


    14. Segmented Information
                                                        2007            2006
                                                   (13 weeks)      (13 weeks)
                                                  ---------------------------
    Revenue
    Food                                          $  3,441.0      $  3,306.1
                                                  -----------     -----------
    Real estate
      Commercial                                        10.2            10.1
      Inter-segment                                      8.0             8.2
      Residential                                       25.2            20.4
                                                  -----------     -----------
                                                        43.4            38.7
                                                  -----------     -----------
    Investment and other operations                     43.0            44.3
                                                  -----------     -----------
                                                     3,527.4         3,389.1
    Elimination                                         (8.0)           (8.2)
                                                  -----------     -----------
                                                  $  3,519.4      $  3,380.9
                                                  -----------     -----------
                                                  -----------     -----------


                                                        2007            2006
                                                   (13 weeks)      (13 weeks)
                                                  ---------------------------
    Operating income
    Food                                          $     95.2      $     88.3
    Real estate
      Commercial                                        12.9            11.8
      Residential                                       16.0            13.6
    Investment and other operations                      6.6            10.0
    Corporate expenses                                  (3.2)           (2.5)
                                                  -----------     -----------
                                                  $    127.5      $    121.2
                                                  -----------     -----------
                                                  -----------     -----------


                                            August 4       May 5    August 5
                                                2007        2007        2006
                                          ----------  ----------  -----------
    Identifiable assets
    Food                                  $  3,757.6  $  3,399.9  $  3,172.8
    Goodwill                                   908.0       746.5       701.3
                                          ----------  ----------  -----------
                                             4,665.6     4,146.4     3,874.1
    Real estate                                658.8       609.4       642.3
    Investment and other operations
     (including goodwill of $40.1;
     May 5, 2007 $40.1;
     August 5, 2006 $40.1)                     282.2       460.0       635.7
                                          ----------  ----------  -----------
                                          $  5,606.6  $  5,215.8  $  5,152.1
                                          ----------  ----------  -----------
                                          ----------  ----------  -----------


                                                        2007            2006
                                                   (13 weeks)      (13 weeks)
                                                  ---------------------------
    Depreciation and amortization
    Food                                          $     61.8      $     56.4
    Real estate                                          1.7             2.0
    Investment and other operations                      6.3             4.5
                                                  -----------     -----------
                                                  $     69.8      $     62.9
                                                  -----------     -----------
                                                  -----------     -----------


                                                        2007            2006
                                                   (13 weeks)      (13 weeks)
                                                  ---------------------------
    Capital expenditures
    Food                                          $     76.3      $    126.7
    Real estate                                         21.5             3.6
    Investment and other operations                     11.3            10.9
                                                  -----------     -----------
                                                  $    109.1      $    141.2
                                                  -----------     -----------
                                                  -----------     -----------


    15. Employee Future Benefits

    During the Company's first quarter, the net employee future benefit
expense was $5.8 (2006 - $6.1). The expense included costs for the Company's
defined contribution pension plans, defined benefit pension plans,
post-retirement benefit plans and post-employment benefit plans.

    16. Business Acquisitions

    During the first quarter, Sobeys acquired franchisee stores and
prescription files as part of its normal course of operations for total cash
consideration of $0.7. The acquisitions were accounted for using the purchase
method with net identifiable assets recorded at $0.7. During the first quarter
of fiscal 2007, Sobeys acquired franchisee stores and prescription files for
total cash consideration of $8.7. The acquisitions were accounted for using
the purchase method with net identifiable assets recorded at $8.6 (including
intangible assets of $3.5) and goodwill recorded at $0.1.
    During the first quarter of fiscal 2007, the Company increased its
ownership interest in Sobeys from 70.3% to 71.6% by way of purchase of shares
on the open market. The acquisition was accounted for using the purchase
method with operating results being included in the consolidated financial
statements from the date of each share acquisition. The cash consideration
paid was $36.5, goodwill increased by $9.9 and minority interest decreased by
$26.6.
    On August 27, 2006, Sobeys acquired substantially all of the food
distribution assets of Achille de la Chevrotière Ltée and its associated
companies ("ADL") for an amount of $79.2. The assets acquired include 25 owned
or franchised retail store operations, other wholesale supply agreements and
distribution facilities in Rouyn-Noranda, Quebec. Sixteen of the franchised
retail store operations are considered VIEs under the Company's policy (see
Note 18). They have been included in the consolidated results of the Company.
The acquisition was accounted for using the purchase method with the results
of ADL being consolidated since the acquisition date. During the third quarter
of fiscal 2007, management carried out a detailed analysis and changes were
made to the preliminary allocation of the excess consideration paid over net
assets acquired as disclosed in the second quarter of fiscal 2007. The
measurement and allocation of intangible assets was also completed and amended
from $21.5 to $6.8. As a result goodwill was adjusted from $21.7 to $41.3 to
reflect the finalized valuation of ADL. The final purchase price allocation,
which has incorporated management's assessment of fair value, is as follows:

    Consideration
      Cash                                                            $ 75.8
      Acquisition costs                                                  3.4
                                                                      -------
      Total consideration paid                                          79.2
                                                                      -------

    Net assets acquired
      Current assets                                                    28.0
      Long-term assets                                                  27.7
      Current liabilities assumed                                      (20.0)
      Long-term liabilities assumed                                     (4.6)
                                                                      -------
      Total net assets acquired                                         31.1
                                                                      -------

    Excess consideration paid over net assets acquired                $ 48.1
                                                                      -------
                                                                      -------


    Allocation of excess consideration paid over net assets
     acquired
      Intangible assets                                               $  6.8
      Goodwill                                                          41.3
                                                                      -------
                                                                      $ 48.1
                                                                      -------
                                                                      -------


    17. Vendor Allowances

    The Company receives allowances from certain vendors whose products are
purchased for resale. Included in these vendor programs are allowances for
volume purchases, exclusivity allowances, listing fees, and other allowances.
The Company recognizes these allowances as a reduction of cost of sales,
selling and administrative expenses and related inventories in accordance with
EIC-144. Certain allowances from vendors are contingent on the Company
achieving minimum purchase levels. These allowances are recognized when it is
probable that the minimum purchase level will be met and the amount of
allowance can be estimated. As of the first quarter of fiscal 2008, the
Company has recognized $1.7 (2006 - $1.7) of allowance in income where it is
probable that the minimum purchase level will be met and the amount of
allowance can be estimated.

    18. Variable Interest Entities

    Variable interest entities are defined under Accounting Guideline 15
"Consolidation of Variable Interest Entities" (AcG-15) as entities that do not
have sufficient equity at risk to finance their activities without additional
subordinated financial support, or where the equity holders lack the overall
characteristics of a controlling financial interest. The guideline requires
that the VIE be consolidated with the financial results of the entity deemed
to be the primary beneficiary of the VIE's expected losses and its expected
residual returns.
    The Company has identified the following entities as VIEs:

    Franchise Affiliates
    --------------------

    The Company has identified 272 (May 5, 2007 - 271) franchise affiliate
stores whose franchise agreements result in the Company being deemed the
primary beneficiary of the entity according to AcG-15. The results for these
entities were consolidated with the results of the Company.

    Warehouse and Distribution Agreement
    ------------------------------------

    The Company has an agreement with an independent entity to provide
warehouse and distribution services for one of its distribution centres. The
terms of the agreement with this entity require the Company to consolidate its
results with those of the Company pursuant to AcG-15.

    19. Contingent Liabilities

    In the ordinary course of business, the Company is subject to ongoing
audits by tax authorities. While the Company believes that its tax filing
positions are appropriate and supportable, from time to time certain matters
are reviewed and challenged by tax authorities.
    On June 21, 2005, Sobeys received a notice of reassessment from Canada
Revenue Agency ("CRA") for fiscal years 1999 and 2000 related to the Goods and
Service Tax ("GST"). CRA asserts that Sobeys was obliged to collect GST on
sales of tobacco products to status Indians. The total tax, interest and
penalties in the reassessment was $13.6. Sobeys has reviewed this matter, has
received legal advice, and believes it was not required to collect GST. During
the second quarter of fiscal 2006, Sobeys filed a Notice of Objection with
CRA. Accordingly, the Company has not recorded in its statement of earnings
any of the tax, interest or penalties in the notice of reassessment. Sobeys
has deposited with CRA funds to cover the total tax, interest and penalties in
the reassessment and has recorded this amount as a long-term receivable from
CRA pending resolution of the matter.
    The Company and certain subsidiaries are presently under audit by CRA and
certain provincial taxing authorities for fiscal years 2001 through 2006. The
principal matters under audit are:

    a) The tax treatment of gains realized on the sale of shares in
       Hannaford Bros. Co. ("Hannaford") in fiscal 2001;
    b) The tax treatment of gains realized on the sale of shares in
       Delhaize America Inc. in fiscal years 2001 and 2002; and
    c) The taxation of income from certain of the Company's real estate
       investments for fiscal years 2003 to 2006.

    Reassessments have been received in respect of the sale of shares of
Hannaford. In the event that the tax authorities are successful in respect of
the Hannaford transaction, which the Company believes is unlikely, the maximum
potential exposure in excess of provisions taken is approximately $30.0.
    The Company has appealed the reassessments in respect of the sale of
Hannaford shares. The Company expects that it will be substantially successful
on its appeals of each of these reassessments. The Company also believes that
the ultimate resolution of these matters will not, in any event, have a
material impact on earnings because it has made adequate provisions for each
of these matters. Should the ultimate outcome materially differ from the
provisions established, the effective tax rate and earnings of the Company
could be materially affected, negatively or positively, in the period in which
the matters are resolved.
    In the third quarter of fiscal 2007, Sobeys was named as a defendant in a
lawsuit brought by beneficiaries of a multi-employer pension plan. The lawsuit
alleges mismanagement of certain pension plan investments by the trustees of
the pension plan and seeks, among other remedies, payment of $1 billion in
damages from the trustees and the contributing employers, of which Sobeys is
one of approximately 440. Sobeys played no role in the management of the
pension plan and intends to contest the lawsuit. Accordingly, the Company has
not recorded in its statement of earnings any amount related to this lawsuit.
    There are various claims and litigation, which the Company is involved
with, arising out of the ordinary course of business operations. The Company's
management does not consider the exposure to such litigation to be material,
although this cannot be predicted with certainty.

    20. Related Party Transactions

    The Company rents premises from Crombie REIT. In addition, Crombie REIT
provides administrative and management services to the Company. The rental
payments are at fair value and the charges incurred for administrative and
management services are on a cost recovery basis. The Company has non-interest
bearing notes payable to Crombie REIT in the amount of $28.5.

    21. Business Rationalization Costs

    During the third quarter of fiscal 2007, Sobeys completed a
rationalization of administrative functions in Atlantic Canada. Sobeys also
began to incur costs associated with the development of a new grocery
distribution centre in Vaughan, Ontario. These costs primarily relate to
severance in both the Atlantic and Ontario regions along with fixed asset and
inventory write-offs. In the fourth quarter of fiscal 2007, Sobeys also
recorded rationalization costs related to its Quebec distribution network.
During the first quarter of fiscal 2008, Sobeys incurred additional
administrative rationalization costs. Sobeys expects to incur additional
administrative rationalization costs in fiscal 2008 enabled by its continuing
business process and system initiative. The dollar value of these additional
costs will be quantified and disclosed in fiscal 2008. The costs associated
with the organizational change are recorded as incurred as cost of sales,
selling and administrative expenses in the statement of earnings as follows:


                                                       Incur-          Total
                         Lia-                    Lia-    red           incur-
                      bility                  bility  Fiscal             red
                          at                      at    2007             and
                       May 5,  Incur-       August 4,    (52  Antici- antici-
                        2007     red    Paid    2007   weeks)  pated   pated
                      -------------------------------------------------------
    Severance
      National         $   -   $ 1.2   $   -   $ 1.2   $   -   $   -   $ 1.2
      Atlantic           3.2       -     0.6     2.6     4.7       -     4.7
      Ontario            4.6       -       -     4.6     5.3       -     5.3
      Quebec             4.3       -       -     4.3     4.3       -     4.3
    Other costs            -       -       -       -     1.1       -     1.1
                      -------------------------------------------------------
                        12.1     1.2     0.6    12.7    15.4       -    16.6

    Asset write-offs       -       -       -       -     3.4       -     3.4
                      -------------------------------------------------------
                       $12.1   $ 1.2   $ 0.6   $12.7   $18.8   $   -   $20.0
                      -------------------------------------------------------
                      -------------------------------------------------------


    22.  Other Matters

    On July 16, 2007, the Company announced that Sobeys and Thrifty Foods
("Thrifty") have entered into an agreement that will see Sobeys purchase the
British Columbia-based grocery retailer. The transaction is based on an
enterprise value of $260.0 and is subject to adjustments for, among other
items assumed liabilities and working capital at closing. Thrifty's business
includes 20 full-service supermarkets, a main distribution centre and a
wholesale division on Vancouver Island and the Lower mainland of British
Columbia. The deal is expected to close during the Company's second quarter
following receipt of regulatory approval and completion of due diligence. The
transaction is expected to be financed with cash and available banking
facilities.

    23. Comparative Figures

    Comparative figures have been reclassified, where necessary, to reflect
the current period's presentation.
    




For further information:

For further information: Paul V. Beesley, Executive Vice President and
Chief Financial Officer, (902) 755-4440


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