Empire Company reports record Q1 operating earnings - $70.3 million before capital gains



    HALIFAX, Sept. 11 /CNW/ - Empire Company Limited (TSX: EMP.A) today
announced earnings before capital gains, net of tax, for its first quarter
ended August 2, 2008 of $70.3 million ($1.07 per share) as compared to
$60.4 million ($0.92 per share) in the first quarter last year, a $9.9 million
or 16.4 percent increase.

    
    First Quarter Highlights

    - Revenue of $3.78 billion, up $258.8 million or 7.4 percent.
    - Sobeys Inc.'s ("Sobeys") same-store sales increased 3.0 percent.
    - Earnings before capital gains, net of tax, of $70.3 million, up
      $9.9 million or 16.4 percent.
    - Earnings per share, before capital gains, net of tax, of $1.07 versus
      $0.92 per share last year.
    - Capital gains, net of tax, of $4.8 million versus $81.9 million last
      year.
    - Net earnings of $75.1 million ($1.14 per share).
    - Funded debt to total capital of 38.5 percent, down from 39.8 percent at
      the end of the last fiscal year and 43.1 percent at the end of Q1 last
      year.
    

    Paul Sobey, President and Chief Executive Officer stated, "We are pleased
with our strong revenue growth and operating earnings performance in the first
quarter. Empire's earnings benefited from having 100 percent ownership of
Sobeys and the significant increase in year-over-year earnings contribution
from Sobeys which more than offset an expected lower earnings contribution
from our real estate division."
    "We will continue to grow the long-term sustainable value of Empire by
focusing our efforts and capital on our core food retail and related real
estate businesses driven by our commitment to operational excellence,
innovation and disciplined growth."

    Financial Overview

    Revenue

    Consolidated revenue for the first quarter equalled $3.78 billion
compared to $3.52 billion last year, an increase of $258.8 million or
7.4 percent. Sobeys' revenue equalled $3.71 billion, an increase of
$270.5 million or 7.9 percent compared to the first quarter last year. First
quarter same-store sales increased 3.0 percent. Sobeys' retail sales growth
resulted from the continued implementation of sales and merchandising
initiatives across the country, coupled with an increase in retail selling
square footage from new stores, store enlargements and the acquisition of
Thrifty Foods on September 12, 2007. Thrifty Foods sales in the first quarter
were $157.3 million. Adjusting for the impact of the Thrifty Foods
acquisition, first quarter sales growth for Sobeys and Empire consolidated
would have been 3.3 percent and 2.9 percent, respectively.
    Real estate division revenue (net of inter-segment transactions) in the
first quarter was $24.6 million, a decrease of $10.8 million from the
$35.4 million recorded in the first quarter last year. Commercial property
revenue declined by $5.6 million while residential property revenue declined
by $5.2 million from the first quarter last year. The decline in commercial
property revenue was primarily due to the sale of 61 properties to Crombie
REIT in the fourth quarter of last fiscal year. The decline in residential
property revenue was the result of an expected slowdown in lot sales activity
in Western Canada.
    Investments and other operations generated revenue of $42.1 million in
the first quarter versus $43.0 million in the first quarter last year.

    Operating Income

    Consolidated operating income in the first quarter was $127.5 million,
unchanged from last year. The $10.3 million increase in food retailing
division operating income was offset by a decline in real estate division
operating income of $9.4 million and a decline in operating income from
investments and other operations, net of corporate expenses, of $0.9 million.
    Sobeys' operating income contribution to Empire in the first quarter
totalled $105.5 million, an increase of $10.3 million or 10.8 percent from the
$95.2 million recorded in the first quarter last year. Sobeys' first quarter
operating margin, which is operating income divided by revenue, was
2.84 percent compared to 2.77 percent in the first quarter last year. Included
in Sobeys first quarter fiscal 2009 operating income was an $11.9 million
increase in depreciation and amortization expense, reflecting Sobeys continued
capital investments. Also impacting operating income in the first quarter of
fiscal 2009 were pre-tax costs totalling $5.6 million in connection with
rationalization and severance costs, as compared to pre-tax costs totalling
$5.0 million in the first quarter last year which were associated with
rationalization costs and business process and system initiative costs.
    First quarter real estate division operating income was $19.5 million
versus $28.9 million in the same quarter last year. The $9.4 million decline
in real estate division operating income is attributed to a $7.8 million
decrease in commercial property operating income and a $2.3 million reduction
in residential property operating income, partially offset by a $0.7 million
increase in equity accounted earnings from our 47.9 percent interest in
Crombie REIT. The decrease in commercial property operating income is
primarily attributed to the sale of 61 properties to Crombie REIT. The decline
in residential operating income was the result of lower residential lot sales
activity in Western Canada as mentioned.
    Investments and other operations' operating income, net of corporate
expenses, was $2.5 million compared to $3.4 million in the first quarter last
year. Equity accounted earnings generated from the Company's 27.6 percent
interest in Wajax Income Fund amounted to $5.5 million in the first quarter
versus $4.2 million last year. Operating income generated from other
operations, net of corporate expenses, declined to ($3.0) million from
($0.8) million in the first quarter last year, with the most significant
factor being reduced dividend income.

    Interest Expense

    Interest expense in the first quarter amounted to $21.1 million compared
to $20.8 million in the first quarter last year.

    Income Taxes

    The effective consolidated income tax rate for the first quarter of
fiscal 2009 was 30.1 percent compared to 32.4 percent last year. The decline
in the effective income tax rate in fiscal 2009 is largely attributed to a
reduction in the general federal corporate income tax rate as approved by the
Canadian government during the third quarter of fiscal 2008.

    Minority Interest

    In the first quarter of fiscal 2009, Empire recorded minority interest
expense of $4.1 million compared to minority interest expense of $11.7 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. Empire's weighted average ownership position
in Sobeys in the first quarter last year was 87.6 percent.

    Earnings before Capital Gains

    For the 13 weeks ended August 2, 2008, Empire recorded earnings before
capital gains, net of tax, of $70.3 million ($1.07 per share) versus
$60.4 million ($0.92 per share) last year, a $9.9 million or 16.4 percent
increase. The increase in earnings before capital gains, net of tax, reflects
a $7.6 million decline in minority interest and a $2.6 million decline in
income taxes, partially offset by a $0.3 million increase in interest expense.

    Capital Gains

    The Company reported capital gains, net of tax, of $4.8 million
($0.07 per share) in the first quarter as compared to capital gains, net of
tax, of $81.9 million ($1.24 per share) in the same quarter last year. Capital
gains in the first quarter of fiscal 2009 were the result of the sale of
non-core property. First quarter fiscal 2008 capital gains were primarily the
result of the sale of liquid portfolio investments to support the funding of
Sobeys privatization.

    Net Earnings

    Consolidated net earnings in the first quarter equalled $75.1 million
($1.14 per share) as compared to $142.3 million ($2.16 per share) last year.

    Consolidated Financial Condition

    Consolidated funded debt declined $57.6 million to $1,515.9 million at
the end of the first quarter of fiscal 2009 as compared to $1,573.5 million at
the end of fiscal 2008. The ratio of funded debt to capital declined to
38.5 percent from 39.8 percent at the end of fiscal 2008 and 43.1 percent at
the end of the first quarter last year.
    During the quarter, in July 2008, both Dominion Bond Rating Service and
Standard & Poor's Ratings Services revised their outlook on Sobeys Inc. to
stable from negative.
    At the end of the first quarter, August 2, 2008, Empire's investment
portfolio, including its 27.6 percent interest in Wajax Income Fund
(TSX: WJX.UN) and its 47.9 percent interest in Crombie REIT (TSX: CRR.UN),
carried a market value of $423.4 million on a cost base of $44.8 million,
resulting in an unrealized gain of $378.6 million. This compares to an
unrealized gain of $388.2 million at the end of fiscal 2008 and $278.5 million
at the end of the first quarter last year.
    The purchase of property and equipment in the first quarter equalled
$116.6 million as compared to $109.8 million in the same quarter last year.
Investment in food retailing division property and equipment accounted for
$102.3 million of the total capital investment in the first quarter. Capital
expenditures for the real estate division in the first quarter equalled
$13.0 million and for investments and other operations equalled $1.3 million.
    During the first quarter, Sobeys opened, acquired or relocated 11
corporate and franchised stores compared to 13 corporate and franchised stores
opened, acquired or relocated during the first quarter of last year. An
additional four stores were expanded during the first quarter compared to 10
stores expanded during the first quarter last year. A total of 10 stores were
closed during the quarter compared to 16 stores closed in the first quarter
last year. There were five stores rebannered in the first quarter of fiscal
2009 compared to 35 stores rebannered in the first quarter of last year.
    At the end of the first quarter Sobeys' square footage totalled
27.3 million, a 3.0 percent increase over last year.
    The table below presents a summary of financial performance for the 13
weeks ended August 2, 2008 compared to the 13 weeks ended August 4, 2007.


    
    Summary Table of Consolidated Financial Results

                                                           13 Weeks Ended
                                                     ------------------------
                                                      August 2,     August 4,
    ($ in millions, except per share information)         2008          2007
                                                     ----------    ----------
    Segmented Revenue (net of elimination entries)
      Food retailing                                 $ 3,711.5     $ 3,441.0
      Real estate
        Commercial                                         4.6          10.2
        Residential                                       20.0          25.2
      Investments and other operations                    42.1          43.0
                                                     ----------    ----------
                                                     $ 3,778.2     $ 3,519.4
                                                     ----------    ----------
                                                     ----------    ----------
    Segmented Operating Income
      Food retailing                                 $   105.5     $    95.2
      Real estate
        Commercial                                         1.2           9.0
        Equity accounted earnings                          4.6           3.9
        Residential                                       13.7          16.0
      Investments and other operations
        Equity accounted earnings                          5.5           4.2
        Other operations, net of corporate expenses       (3.0)         (0.8)
                                                     ----------    ----------
                                                     $   127.5     $   127.5
                                                     ----------    ----------
                                                     ----------    ----------
    Earnings before capital gains                         70.3          60.4
    Capital gains, net of tax                              4.8          81.9
                                                     ----------    ----------
      Net earnings                                   $    75.1     $   142.3
                                                     ----------    ----------
                                                     ----------    ----------
    Basic earnings per share
    Operating earnings                               $    1.07     $    0.92
    Capital gains, net of tax                             0.07          1.25
                                                     ----------    ----------
    Net earnings                                     $    1.14     $    2.17
                                                     ----------    ----------
                                                     ----------    ----------
    Basic weighted average number
    of shares outstanding (in millions)                   65.6          65.6
                                                     ----------    ----------
                                                     ----------    ----------
    Diluted earnings per share
    Operating earnings                               $    1.07     $    0.92
    Capital gains, net of tax                             0.07          1.24
                                                     ----------    ----------
    Net earnings                                     $    1.14     $    2.16
                                                     ----------    ----------
                                                     ----------    ----------
    Diluted weighted average number
    of shares outstanding (in millions)                   65.7          65.7
                                                     ----------    ----------
                                                     ----------    ----------
    Annualized dividends per share                   $    0.70     $    0.66
                                                     ----------    ----------
                                                     ----------    ----------
    


    Dividend Declaration

    The Board of Directors declared a quarterly dividend of $0.175 per share
on both the Non-Voting Class A shares and the Class B common shares that will
be payable on October 31, 2008 to shareholders of record on October 15, 2008.
The Board also 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 presented 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. Empire's definition of the non-GAAP terms are as
follows: (i) funded debt is all interest-bearing debt, and total capital is
calculated as funded debt plus shareholders' equity; (ii) operating earnings
is net earnings before after tax capital gains and other items;
(iii) operating income or EBIT is calculated as operating earnings before
minority interest, interest expense and income taxes; and (iv) same-store
sales are sales from stores in the same location in both reporting periods.

    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, 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, and include statements relating to future dividends which
are subject to future results and declaration by the Board of Directors. 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.
    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 other than as
required by Canadian security regulations.
    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 Annual Report.

    Conference Call Invitation

    The Company will hold an analyst call on Thursday, September 11, 2008
beginning at 3:30 p.m. ADT (2:30 p.m. Eastern Daylight Time) to discuss its
first quarter results. To join this conference call dial 1-800-733-7560
outside of the Toronto area or 416-644-3415 from within the Toronto area. You
may also listen to a live audiocast of the conference call by visiting the
Company's website located at www.empireco.ca. Replay will be available by
dialling 1-877-289-8525 or 1-416-640-1917 and entering passcode 2128155# until
midnight September 18, 2008, or on the Company's website for 90 days after the
meeting.

    About Empire

    Empire Company Limited (TSX symbol: EMP.A) is a Canadian company
headquartered in Stellarton, Nova Scotia. Empire's core businesses include
food retailing and related real estate. With over $14 billion in annual
revenue and approximately $5.7 billion in assets, Empire employs approximately
42,000 people directly and through its subsidiaries.



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


                                                      August 2         May 3
                                                          2008          2008
                                                     Unaudited       Audited
                                                     ----------    ----------
    ASSETS

    Current
      Cash and cash equivalents                      $   170.4     $   191.4
      Receivables                                        316.0         316.3
      Mortgages, loans and other receivables              17.3          18.7
      Inventories                                        815.6         820.2
      Prepaid expenses                                    69.9          62.0
                                                     ----------    ----------
                                                       1,389.2       1,408.6
    Investments (realizable value $1.6;
     May 3, 2008 $1.6)                                     1.6           1.6
    Investments, at equity (realizable value $421.8;
     May 3, 2008 $429.6) (Note 3)                         43.2          41.4
    Mortgages, loans and other receivables                60.9          56.3
    Other assets (Note 4)                                148.4         175.5
    Property and equipment                             2,512.8       2,457.3
    Assets held for sale                                  45.7          60.3
    Intangibles (less accumulated amortization
     of $24.2; May 3, 2008 $21.3)                        346.5         346.8
    Goodwill                                           1,159.9       1,159.1
                                                     ----------    ----------
                                                     $ 5,708.2     $ 5,706.9
                                                     ----------    ----------
                                                     ----------    ----------
    LIABILITIES

    Current
      Bank indebtedness                              $    53.5     $    92.1
      Accounts payable and accrued liabilities         1,347.6       1,322.4
      Income taxes payable                                 9.2          15.5
      Future income taxes                                 35.5          32.9
      Long-term debt due within one year                  55.5          60.4
      Liabilities relating to assets held for sale         6.3           6.4
                                                     ----------    ----------
                                                       1,507.6       1,529.7
    Long-term debt (Note 5)                            1,400.6       1,414.6
    Employee future benefits obligation                  112.3         110.7
    Future income taxes                                  118.7         125.5
    Other long-term liabilities                          106.4         106.5
    Minority interest                                     37.6          37.6
                                                     ----------    ----------
                                                       3,283.2       3,324.6
                                                     ----------    ----------
    SHAREHOLDERS' EQUITY

    Capital stock                                        194.4         195.7
    Contributed surplus                                    1.1           0.5
    Retained earnings                                  2,249.6       2,207.6
    Accumulated other comprehensive loss                 (20.1)        (21.5)
                                                     ----------    ----------
                                                       2,425.0       2,382.3
                                                     ----------    ----------
                                                     $ 5,708.2     $ 5,706.9
                                                     ----------    ----------
                                                     ----------    ----------
    Contingent liabilities (Note 14)

    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 2      August 4
                                                          2008          2007
                                                     ----------    ----------

    Balance, beginning of period as
     previously reported                             $ 2,207.6     $ 1,939.6
    Adjustment due to implementation
     of new accounting standard (Note 1)                 (21.5)            -
    Adjustment due to change in accounting policy            -          (4.3)
                                                     ----------    ----------
    Balance, beginning of period as restated           2,186.1       1,935.3

    Net earnings                                          75.1         142.3

    Dividends
      Preferred shares                                    (0.1)         (0.1)
      Common shares                                      (11.5)        (10.7)
                                                     ----------    ----------
    Balance, end of period                           $ 2,249.6     $ 2,066.8
                                                     ----------    ----------
                                                     ----------    ----------



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


                                                      August 2      August 4
                                                          2008          2007
                                                     ----------    ----------
    Balance, beginning of period                     $   (21.5)    $    (0.6)
    Transition adjustment as of May 6, 2007                  -          77.2
                                                     ----------    ----------
    Adjusted balance, beginning of period                (21.5)         76.6
    Acquired comprehensive loss from purchase of
     minority interest in Sobeys Inc.                        -          (0.6)
    Other comprehensive income (loss) for the
     period                                                1.4         (79.3)
                                                     ----------    ----------
    Balance, end of period                           $   (20.1)    $    (3.3)
                                                     ----------    ----------
                                                     ----------    ----------



    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 2      August 4
                                                          2008          2007
                                                     ----------    ----------

    Revenue                                          $ 3,778.2     $ 3,519.4
    Operating expenses
      Cost of sales, selling and administrative
       expenses                                        3,580.8       3,331.1
      Depreciation and amortization                       80.0          69.8
                                                     ----------    ----------
                                                         117.4         118.5
    Investment income (Note 7)                            10.1           9.0
                                                     ----------    ----------
    Operating income                                     127.5         127.5
                                                     ----------    ----------
    Interest expense
      Long-term debt                                      20.1          19.8
      Short-term debt                                      1.0           1.0
                                                     ----------    ----------
                                                          21.1          20.8
                                                     ----------    ----------
                                                         106.4         106.7
    Capital gains and other items (Note 8)                 6.1         100.9
                                                     ----------    ----------
    Earnings before income taxes
     and minority interest                               112.5         207.6
                                                     ----------    ----------
    Income taxes
      Current                                             35.7          52.8
      Future                                              (2.4)          0.8
                                                     ----------    ----------
                                                          33.3          53.6
                                                     ----------    ----------
    Earnings before minority interest                     79.2         154.0
    Minority interest                                      4.1          11.7
                                                     ----------    ----------
    Net earnings                                     $    75.1     $   142.3
                                                     ----------    ----------
                                                     ----------    ----------
    Earnings per share (Note 2)
      Basic                                          $    1.14     $    2.17
                                                     ----------    ----------
                                                     ----------    ----------
      Diluted                                        $    1.14     $    2.16
                                                     ----------    ----------
                                                     ----------    ----------
    Weighted average number of common
     shares outstanding, in millions

      Basic                                               65.6          65.6
      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 2      August 4
                                                          2008          2007
                                                     ----------    ----------
    Net earnings                                     $    75.1     $   142.3
                                                     ----------    ----------
    Other comprehensive income,
     net of income taxes
      Reclassification of gains
       on available-for-sale
       financial assets to earnings                          -         (78.7)
      Unrealized losses on derivatives designated
       as cash flow hedges                                (0.1)         (0.3)
      Reclassification of loss on derivative
       instruments designated as cash
       flow hedges to earnings                             0.6             -
      Share of comprehensive income (loss)
       of entities accounted using the equity
       method                                              0.9          (0.3)
                                                     ----------    ----------
                                                           1.4         (79.3)
                                                     ----------    ----------
    Comprehensive income                             $    76.5     $    63.0
                                                     ----------    ----------
                                                     ----------    ----------


    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 2      August 4
                                                          2008          2007
                                                     ----------    ----------

    Operating Activities
      Net earnings                                   $    75.1     $   142.3
      Items not affecting cash (Note 9)                   86.5          91.0
      Preferred dividends                                 (0.1)         (0.1)
                                                     ----------    ----------
                                                         161.5         233.2
      Net change in non-cash working capital             (11.9)        (30.0)
                                                     ----------    ----------
    Cash flows from operating activities                 149.6         203.2
                                                     ----------    ----------
    Investing Activities
      Net decrease in investments                            -         189.3
      Purchase of shares in subsidiary, Sobeys Inc.          -      (1,065.7)
      Purchase of property and equipment                (116.6)       (109.8)
      Proceeds on disposal of property and equipment      29.0           5.7
      Mortgages, loans and other receivables              (3.2)          3.0
      Decrease (Increase) in other assets                  1.1          (2.6)
      Business acquisitions (Note 13)                     (6.4)         (0.7)
                                                     ----------    ----------
    Cash flows used in investing activities              (96.1)       (980.8)
                                                     ----------    ----------

    Financing Activities
      Decrease in bank indebtedness                      (38.6)         (2.0)
      Decrease in construction loans                         -          (1.1)
      Issue of long-term debt                              5.4         813.6
      Repayment of long-term debt                        (25.0)        (15.2)
      Minority interest                                   (3.4)         19.7
      Repurchase of preferred shares                      (1.4)            -
      Issue of Non-Voting Class A shares                     -           0.4
      Common dividends                                   (11.5)        (10.7)
                                                     ----------    ----------
    Cash flows (used in) from financing
     activities                                          (74.5)        804.7
                                                     ----------    ----------
    (Decrease) increase in cash and cash
     equivalents                                         (21.0)         27.1
    Cash and cash equivalents, beginning of
     period                                              191.4         294.9
                                                     ----------    ----------
    Cash and cash equivalents, end of period         $   170.4     $   322.0
                                                     ----------    ----------
                                                     ----------    ----------

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


                           EMPIRE COMPANY LIMITED
                           ----------------------
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               ----------------------------------------------
                               AUGUST 2, 2008
                               --------------
             (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 3, 2008, as set out in the 2008 Annual Report.

    Generally accepted accounting principles

    The accounting standards and policies used in the preparation of these
interim consolidated financial statements conform with those used in the
Company's 2008 annual consolidated financial statements except as noted below:

    Adopted during fiscal 2009

      Inventories

      During the first quarter of fiscal 2009, the Company implemented
      Canadian Institute of Chartered Accountants ("CICA") Section 3031,
      "Inventories", which was issued in June 2007 and has replaced 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, including allocation
      of overheads and other costs incurred in bringing the inventories to
      their present location and condition. Costs such as storage costs are
      specifically excluded from the cost of inventories and are expensed in
      the period incurred. The standard also requires the use of either first
      in, first out or weighted average cost formula to measure the cost of
      inventories of similar nature and use. Techniques, such as the retail
      method, used to measure the cost of inventory may be used if the
      results approximate cost. This standard is effective for interim and
      annual financial statements relating to fiscal years beginning on or
      after January 1, 2008. The Company applied the standard to the opening
      inventory for the period and adjusted retained earnings by the
      difference in the measurement of cost in opening inventory of a similar
      nature and use (prior periods were not restated).

      Following adoption of Section 3031, warehouse inventories are valued at
      the lower of cost and net realizable value with cost being determined
      on a weighted average cost basis. Retail inventories are valued at the
      lower of cost and net realizable value. Cost is determined using a
      weighted average cost using either the standard cost method or a retail
      method. The retail method uses the anticipated selling price less
      normal profit margins, on a weighted average cost basis. Real estate
      inventory of residential properties is valued at the lower of cost and
      net realizable value.

      The cost of inventories is comprised of directly attributable costs and
      includes the purchase price plus other costs incurred in bringing the
      inventories to their present location and condition, such as freight.
      The cost is reduced by the value of rebates and allowances received
      from vendors. The Company estimates net realizable value as the amount
      that inventories are expected to be sold taking into consideration
      fluctuations of retail price due to seasonality less estimated costs
      necessary to make the sale. Inventories are written down to net
      realizable value when the cost of inventories is not estimated to be
      recoverable due to obsolescence, damage or declining selling prices.
      When circumstances that previously caused inventories to be written
      down below cost no longer exist or when there is clear evidence of an
      increase in retail selling price, the amount of the write-down
      previously recorded is reversed. Costs that do not contribute to
      bringing inventories to their present location and condition, such as
      storage and administrative overheads, are specifically excluded from
      the cost of inventories and are expensed in the period incurred.

      The initial impact of measuring inventories under the new standard is a
      decrease to the carrying amount of opening inventories as at May 3,
      2008 of $27.9 and a decrease in income taxes payable of $6.4. Opening
      retained earnings has been adjusted by $21.5, equal to the change in
      opening inventories net of tax.

      The cost of inventory recognized as an expense during the first quarter
      of fiscal 2009 was $2,839.0. The cost of inventories recognized as an
      expense during the first quarter of 2009 includes $10.9 year to date
      for the write-down of inventories below cost to net realizable value.
      There were no reversals of inventories written down previously that are
      no longer estimated to sell below cost.

      Capital disclosures

      In October 2006, the CICA issued Section 1535, "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 (see Note 6). The adoption of
      Section 1535 did not have an impact on the Company's financial results
      or position.

      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". 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 (see Note 11). 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. In accordance with the transitional provision of Section 3862,
      comparative information about the nature and extent of risks arising
      from financial instruments is not required in the year of adoption.
      Section 3863 carries forward standards for presentation of financial
      instruments and non-financial derivatives and provides additional
      guidance for the classification of financial instruments between
      liabilities and equity and has no significant impact on the Company's
      financial statements.

    Future changes in accounting policies

      Goodwill and intangible assets

      In February 2008, the CICA issued Section 3064, "Goodwill and
      Intangible Assets", which replaced existing Section 3062, "Goodwill and
      Other Intangible Assets", and Section 3450, "Research and Development".
      The new standard provides guidance on the recognition, measurement,
      presentation and disclosure of goodwill and intangible assets. This
      standard is effective for interim and annual financial statements
      relating to fiscal years beginning on or after October 1, 2008 and is
      applicable for the Company's first quarter of fiscal 2010. The Company
      is currently evaluating the impact of this new standard.

    2. Earnings Per Share

    Earnings applicable to common shares is comprised of the following:

                                                          2008          2007
                                                     (13 weeks)    (13 weeks)
                                                     ----------    ----------
    Operating earnings                               $    70.3     $    60.4
    Capital gains and other items, net of income
     taxes of $1.3; (2007 - $19.0)                         4.8          81.9
                                                     ----------    ----------
    Net earnings                                          75.1         142.3
    Preferred share dividends                             (0.1)         (0.1)
                                                     ----------    ----------
    Earnings applicable to common shares             $    75.0     $   142.2
                                                     ----------    ----------
                                                     ----------    ----------

    Earnings per share is comprised of the following:

    Operating earnings                               $    1.07     $    0.92
    Net capital gains and other items                     0.07          1.25
                                                     ----------    ----------
    Basic earnings per share                         $    1.14     $    2.17
                                                     ----------    ----------
                                                     ----------    ----------

    Operating earnings                               $    1.07     $    0.92
    Net capital gains and other items                     0.07          1.24
                                                     ----------    ----------
    Diluted earnings per share                       $    1.14     $    2.16
                                                     ----------    ----------
                                                     ----------    ----------

    3. Investments, at Equity
                                                      August 2         May 3
                                                          2008          2008
                                                     ----------    ----------
    Wajax Income Fund (27.6% interest)               $    32.4     $    31.6
    Crombie REIT (47.9% interest)                         10.5           9.5
    U.S. residential real estate partnerships              0.3           0.3
                                                     ----------    ----------
                                                     $    43.2     $    41.4
                                                     ----------    ----------
                                                     ----------    ----------

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

                                                      August 2
                                                          2008
                                                     ----------
      Balance, beginning of period                   $    31.6
      Equity earnings                                      5.5
      Share of comprehensive income                          -
      Distributions received                              (4.7)
                                                     ----------
      Balance, end of period                         $    32.4
                                                     ----------
                                                     ----------

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

                                                      August 2
                                                          2008
                                                     ----------
      Balance, beginning of period                   $     9.5
      Equity earnings                                      4.6
      Share of comprehensive income                        1.4
      Distributions received                              (5.0)
                                                     ----------
      Balance, end of period                         $    10.5
                                                     ----------
                                                     ----------
    

    4. Other Assets

    Asset-backed commercial paper

    As of August 2, 2008, the Company held third-party asset-backed
commercial paper ("ABCP") with an original cost of $30.0 that was in default.
The ABCP was rated by the Dominion Bond Rating Service ("DBRS") as R-1 (high),
the highest credit rating for commercial paper since the ABCP are backed by
AAA (high) rated assets. The $30.0 of ABCP held by the Company is entirely
made up of collateralized debt obligations. Collateralized debt obligations
are a type of asset-backed security that is created by a portfolio of
fixed-income assets which may include pools of bonds, credit card debt,
commercial mortgage-backed securities and other loans.
    In the second quarter of fiscal 2008, a global disruption in the market
for such commercial paper resulted in a constraint on the liquidity of ABCP.
DBRS placed certain of the ABCP "under Review with Developing Implications"
following an announcement on August 16, 2007 that a consortium representing
banks, asset providers and major investors had agreed in principle to a
long-term proposal and interim agreement regarding the ABCP (commonly referred
to as "the Montreal Proposal"). On September 6, 2007 a pan-Canadian committee
("the Committee") consisting of major investors was formed to oversee the
proposed restructuring process of the ABCP. As of August 2, 2008, all of the
ABCP held by the Company were part of the Montreal Proposal. Under this
proposal, the affected ABCP would be converted into term floating rate notes
maturing no earlier than the scheduled termination dates of the underlying
assets. The Montreal Proposal called for the investors to continue to roll
their ABCP during the standstill period.
    On December 23, 2007, a formal restructuring proposal was established to
address the global disruption experienced with third-party ABCP. On
April 25, 2008, note holders voted in favour of the restructuring proposal,
which will provide investors with new long-term notes that will more closely
match the maturity dates of the underlying assets and the cash flows they are
expected to generate and was approved on June 5, 2008 by the Ontario Superior
Court of Justice.
    On March 20, 2008, the Committee issued an Information Statement
containing details about the proposed restructuring. Based on this and other
public information it is estimated that the $30.0 of ABCP in which the Company
has invested in is represented by a combination of leveraged collateralized
debt, synthetic assets and traditional securitized assets and the Company
will, on restructuring, receive replacement senior Class A-1 and Class A-2 and
subordinate Class B and Class C long-term floating rate notes with maturities
of approximately eight years and nine months.
    The Company expects to receive replacement notes with par values as
follows:

    
      Class A-1                                                    $     8.2
      Class A-2                                                         17.8
      Class B                                                            3.1
      Class C                                                            0.9
                                                                   ----------
                                                                   $    30.0
                                                                   ----------
                                                                   ----------
    

    The replacement senior notes are expected to obtain an AA rating while
the replacement subordinate notes are likely to be unrated.
    The valuation technique used by the Company to estimate the fair value of
its investment in ABCP at August 2, 2008, incorporates probability weighted
discounted cash flows considering the best available public information
regarding market conditions, prevailing yields, credit spreads and other
factors that a market participant would consider for such investments. The
assumptions used in determining the estimated fair value reflect the details
included in the Information Statement issued by the Committee and the risks
associated with the long-term floating rate notes.
    Interest rates and credit losses vary by each of the different
replacement long-term floating rate notes to be issued as each has different
credit ratings and risks. Interest rates and credit losses also vary by the
different probable cash flow scenarios that have been modeled.
    Discount rates vary dependent upon the credit rating of the replacement
long-term floating rate notes. Discount rates have been estimated using
Government of Canada benchmark rates plus expected spreads for similarly rated
instruments with similar maturities and structure. An increase in the
estimated discount rates of 1 percent would reduce the estimated fair value of
the Company's investment in ABCP by approximately $2.0.
    Maturities vary by different replacement long-term floating rate notes as
a result of the expected maturity of the underlying assets.
    These investments were initially and continue to be classified as
held-to-maturity instruments by the Company and are carried at amortized cost.
Due to the lack of liquidity and a yield on these instruments, a pre-tax
impairment loss of $7.5 (25 percent of the original cost) was recorded during
fiscal 2008 and remains unchanged at the first quarter of fiscal 2009. It is
possible that the amount ultimately recovered may differ from the estimate.
The Company continues to investigate the implications of the default and the
remedies available. In addition, these investments have been reclassified as
long-term other assets due to the uncertainty as to the timing of collection.
    Continuing uncertainties regarding the value of assets which underlie the
ABCP, the amount and timing of cash flows and the outcome of the restructuring
process could give rise to a further material change in the value of the
Company's investment in ABCP which could impact the Company's future earnings.
    The Company believes it has sufficient credit facilities to satisfy its
financial obligations as they come due and does not expect there will be a
material adverse impact on its business as a result of this current
third-party ABCP liquidity issue.

    5. Long-Term Debt

    During the first quarter of the previous fiscal year, in relation to the
privatization of Sobeys Inc. (Sobeys), the Company entered into new credit
facilities (the "Credit Facilities") consisting 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 June 27, 2007, pursuant to the terms of the Credit Facilities, the
Company and Sobeys filed notice with the lenders requesting the establishment
of a new $300.0 five-year credit in favour of Sobeys at the same interest rate
and substantially on the same terms and conditions as the Credit Facilities.
At July 23, 2007, Sobeys drew down $300.0 from its new credit facility, 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 to $650.0 accordingly. On
that date, the Company also transferred the second swap to Sobeys. At
August 2, 2008, $385.0 (May 3, 2008 - $395.0) of the Credit Facilities have
been drawn down.
    On July 30, 2007, Sobeys exercised an option under its new credit
facility to increase the size of the credit from $300.0 to $600.0. At the same
time, Sobeys terminated its previously existing $300.0 operating credit which
would have expired on December 20, 2010. At August 2, 2008, $250.0
(May 3, 2008 - $250.0) of this facility has been drawn down and classified as
long-term debt and $0.0 (May 3, 2008 - $25.0) has been classified as bank
indebtedness. Sobeys has also issued $41.9 in letters of credit against the
facility at August 2, 2008 (May 3, 2008 - $41.7).
    On November 8, 2007, Sobeys established and drew down on a new unsecured
revolving credit facility of $75.0. The maturity date is November 8, 2010. The
interest rate is floating and may be tied to the bankers' acceptance rate,
Canadian prime rate or LIBOR.

    6. Capital Management

    The Company's objectives when managing capital are: i) ensure sufficient
liquidity to support its financial obligations and execute its operating and
strategic plans, ii) to minimize the cost of capital while taking into
consideration current and future industry, market and economic risks and
conditions, iii) to maintain an optimal capital structure that provides
necessary financial flexibility while also ensuring compliance with any
financial covenants, and; iv) to maintain an investment grade credit rating
with each rating agency that assesses the credit worthiness of the Company.
    The Company monitors and makes adjustments to its capital structure, when
necessary, in light of changes in economic conditions, the objectives of its
shareholders, the cash requirements of the business and the condition of
capital markets.
    The Company considers its total capitalization to include all interest
bearing debt, including bank loans, bankers' acceptances, long-term debt
(including the current portion thereof) and shareholders' equity, net of cash.
The calculation is set out in the following table:

    
                                                      August 2         May 3
                                                          2008          2008
                                                     ----------    ----------
    Bank indebtedness                                $    53.5     $    92.1
    Long-term debt due within one year                    55.5          60.4
    Liabilities relating to assets held for sale           6.3           6.4
    Long-term debt                                     1,400.6       1,414.6
                                                     ----------    ----------
    Funded debt                                        1,515.9       1,573.5
    Less: cash and cash equivalents                     (170.4)       (191.4)
                                                     ----------    ----------
    Net funded debt                                    1,345.5       1,382.1
    Shareholders' equity                               2,425.0       2,382.3
                                                     ----------    ----------
    Capital under management                         $ 3,770.5     $ 3,764.4
                                                     ----------    ----------
                                                     ----------    ----------

    Although the Company does not include operating leases in its definition
of capital, the Company does give consideration to its obligations under
operating leases when assessing its total capitalization.
    The primary investments undertaken by the Company include additions to the
selling square footage of its store network via the construction of new,
relocated and expanded stores, including related leasehold improvements and
features and the purchase of land bank sites for future store construction. 
The Company makes capital investments in information technology and its
distribution capabilities to support an expanding store network. In addition,
the Company makes capital expenditures in support of its real estate and other
operations. The Company largely relies on its cash flow from operations to
fund its capital investment program and dividend distributions to its
shareholders. This cash flow is supplemented, when necessary, through the
borrowing of additional debt. No changes were made to these objectives in the
current period.

    Management monitors certain key ratios to effectively manage capital:
                                                      August 2         May 3
                                                          2008          2008
                                                     ----------    ----------
    Funded debt to total capital(1)                       38.5%         39.8%
    Funded debt to EBITDA(2)                              1.93x         2.02x
    EBITDA to interest expense                            7.42x         7.35x

    (1) Total capital is funded debt plus shareholders' equity.
    (2) EBITDA is comprised of EBITDA for each of the 52 week periods then
        ended. EBITDA (operating income plus depreciation and amortization)
        is a non-GAAP financial measure.  Non-GAAP financial measures do not
        have standardized meanings prescribed by GAAP and therefore may not
        be comparable to similar measures presented by other reporting
        issuers.

    As part of existing debt agreements, two financial covenants are monitored
and communicated, as required by the terms of credit agreements, on a
quarterly basis by management to ensure compliance with the agreements. The
covenants are: i) adjusted total debt/EBITDA - calculated as funded debt plus
letters of credit, guarantees and commitments divided by EBITDA (for previous
52 weeks); and ii) debt service coverage ratio - calculated as EBITDA divided
by interest expense plus repayments of long-term debt (all amounts are based
on previous 52 weeks).
    The Company was in compliance with these covenants during the period.

    7. Investment Income

                                                          2008          2007
                                                     (13 weeks)    (13 weeks)
                                                     ----------    ----------
    Dividend and interest income                     $       -     $     0.9
    Share of earnings of entities accounted
     using the equity method                              10.1           8.1
                                                     ----------    ----------
                                                     $    10.1     $     9.0
                                                     ----------    ----------
                                                     ----------    ----------

    8. Capital Gains and Other Items
                                                          2008          2007
                                                     (13 weeks)    (13 weeks)
                                                     ----------    ----------
    Gain on sale of investments                      $       -     $   100.9
    Gain on sale of property                               6.1             -
                                                     ----------    ----------
                                                     $     6.1     $   100.9
                                                     ----------    ----------
                                                     ----------    ----------

    9. Supplementary Cash Flow Information
                                                          2008          2007
                                                     (13 weeks)    (13 weeks)
                                                     ----------    ----------
      a) Items not affecting cash

      Depreciation and amortization                  $    80.0      $   69.8
      Future income taxes                                 (2.4)          0.8
      (Gain) loss on disposal of assets                   (4.4)          0.7
      Amortization of other assets                         1.1           2.6
      Equity in earnings of other entities,
       net of dividends received                          (0.4)            -
      Minority interest                                    4.1          11.7
      Stock-based compensation                             0.6           2.2
      Long-term lease obligation                           1.6           1.4
      Employee future benefits obligation                  1.6           1.2
      Rationalization costs (Note 16)                      4.7           0.6
                                                     ----------    ----------
                                                     $    86.5     $    91.0
                                                     ----------    ----------
                                                     ----------    ----------
      b) Other cash flow information

      Net interest paid                             $     12.0     $    15.1
                                                     ----------    ----------
                                                     ----------    ----------
      Net income taxes paid                         $     37.2     $    44.1
                                                     ----------    ----------
                                                     ----------    ----------

    10. Segmented Information

                                                          2008          2007
                                                     (13 weeks)    (13 weeks)
                                                     ----------    ----------
    Segmented revenue
    Food retailing                                   $ 3,711.5     $ 3,441.0
                                                     ----------    ----------
    Real estate
      Commercial                                           4.6          10.2
      Inter-segment                                        0.3           8.0
      Residential                                         20.0          25.2
                                                     ----------    ----------
                                                          24.9          43.4
                                                     ----------    ----------
    Investment and other operations                       42.1          43.0
                                                     ----------    ----------
                                                       3,778.5       3,527.4
    Elimination                                           (0.3)         (8.0)
                                                     ----------    ----------
                                                     $ 3,778.2     $ 3,519.4
                                                     ----------    ----------
                                                     ----------    ----------

                                                          2008          2007
                                                     (13 weeks)    (13 weeks)
                                                     ----------    ----------
    Segmented operating income
    Food retailing                                   $   105.5     $    95.2
    Real estate
      Commercial                                           1.2           9.0
      Equity accounted earnings                            4.6           3.9
      Residential                                         13.7          16.0
    Investment and other operations
      Equity accounted earnings                            5.5           4.2
      Other operations, net of corporate expenses         (3.0)         (0.8)
                                                     ----------    ----------
                                                     $   127.5     $   127.5
                                                     ----------    ----------
                                                     ----------    ----------

                                                      August 2         May 3
                                                          2008          2008
                                                     ----------    ----------
    Identifiable assets
    Food retailing                                   $ 4,057.7     $ 4,026.7
    Goodwill                                           1,119.8       1,119.0
                                                     ----------    ----------
                                                       5,177.5       5,145.7
    Real estate                                          269.6         282.0
    Investment and other operations (including
     goodwill of $40.1; May 3, 2008 $40.1)               261.1         279.2
                                                     ----------    ----------
                                                     $  5,708.2    $ 5,706.9
                                                     ----------    ----------
                                                     ----------    ----------

                                                          2008          2007
                                                     (13 weeks)    (13 weeks)
                                                     ----------    ----------
    Depreciation and amortization
    Food retailing                                   $    73.7     $    61.8
    Real estate                                              -           1.7
    Investment and other operations                        6.3           6.3
                                                     ----------    ----------
                                                     $    80.0     $    69.8
                                                     ----------    ----------
                                                     ----------    ----------

                                                          2008          2007
                                                     (13 weeks)    (13 weeks)
                                                     ----------    ----------
    Capital expenditures
    Food retailing                                   $   102.3     $    76.3
    Real estate                                           13.0          21.5
    Investment and other operations                        1.3          12.0
                                                     ----------    ----------
                                                     $   116.6     $   109.8
                                                     ----------    ----------
                                                     ----------    ----------

    11. Financial Instruments

    Credit risk

    Credit risk is the risk of an unexpected loss if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations. The Company's financial instruments that are exposed to
concentrations of credit risk are primarily ABCP, accounts receivable,
mortgages, loans and other receivables, derivative contracts and guarantees.
    The Company's maximum exposure to credit risk corresponds to the carrying
amount for all loans and receivables, the fair market value of derivative
contracts represented on the balance sheet and guarantee contracts for
franchise affiliates.
    The Company mitigates credit risk associated with its trade accounts
receivable, mortgages and loans receivable through an established credit
approval and monitoring process. The Company generally considers the credit
quality of its financial assets that are neither past due or impaired to be
sold. The Company regularly monitors collection performance and pledged
security for all of its accounts receivable, mortgages and loans receivable to
ensure adequate payments are being received and adequate security is
available. The Company only enters into derivative contracts with Canadian
chartered banks to minimize credit risk.

    Liquidity risk

    Liquidity risk is the risk that the Company may not have cash available to
satisfy financial liabilities as they come due. The Company actively maintains
a committed credit facility to ensure that it has sufficient available funds
to meet current and foreseeable future financial requirements at a reasonable
cost.
    The Company monitors capital markets and the related conditions. Market
conditions allowing, the Company will access debt capital markets for various
long-term debt maturities and as other liabilities come due or as assessed to
be appropriate in order to minimize risk and optimize pricing.
    The following table summarizes the carrying amount and the contractual
maturities of both the interest and principal portion of significant financial
liabilities as at August 2, 2008:

                                 2009         2010         2011         2012
                            -------------------------------------------------
    Accounts payable        $ 1,347.6    $       -    $       -    $       -
    Bank indebtedness            53.5            -            -            -
    Interest rate swaps
     payable(1)                  15.7         20.9         13.4         10.7
    Long-term debt              119.7        117.1        595.3         78.3
                            -------------------------------------------------

                                              2013   Thereafter        Total
                            -------------------------------------------------
    Accounts payable                     $       -    $       -    $ 1,347.6
    Bank indebtedness                            -            -         53.5
    Interest rate swaps
     payable(1)                                2.5            -         63.2
    Long-term debt                           307.1      1,108.3      2,325.8
                            -------------------------------------------------
    (1) Represents the pay fixed interest (will be partially offset by the
        floating interest received).


    Fair value of financial instruments

    The fair value of a financial instrument is the estimated amount that the
Company would receive or pay to settle the financial assets and financial
liabilities as at the reporting date.
    The book value of cash and cash equivalents, receivables, mortgages, loans
and other receivables, and accounts payable and accrued liabilities
approximate fair values at the balance sheet date.
    The fair value of the variable rate long-term debt is assumed to
approximate its carrying amount. The fair value of other long-term liabilities
has been estimated by discounting future cash flows at a rate offered for debt
of similar maturities and credit quality.
    The following table summarized the classification of the Company's
financial instruments, as well as their carrying amounts and fair values:

                             Held for      Held for
                              Trading       Trading   Available    Loans and
    August 2, 2008          (Required)  (Designated)   for Sale  Receivables
    -------------------------------------------------------------------------
    Financial Assets
      Cash and cash
       equivalents          $       -    $   170.4    $       -    $       -
      Receivables                   -            -            -        316.0
      Mortgages, loans and
       other receivables            -            -            -         78.2
      Investments                   -            -          1.6            -
      Other assets(1)             2.3         26.3            -            -
    -------------------------------------------------------------------------
    Total financial assets  $     2.3    $   196.7    $     1.6    $   394.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financial Liabilities
      Bank indebtedness     $       -    $       -    $       -    $       -
      Accounts payable and
       accrued liabilities          -            -            -            -
      Long-term debt                -            -            -            -
      Other long-term
       liabilities(2)            20.8            -            -            -
    -------------------------------------------------------------------------
    Total financial
     liabilities            $    20.8    $       -    $       -    $       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                             Other        Total
                                         Financial     Carrying         Fair
    August 2, 2008                     Liabilities       Amount        Value
    -------------------------------------------------------------------------
    Financial Assets
      Cash and cash
       equivalents                       $       -    $   170.4    $   170.4
      Receivables                                -        316.0        316.0
      Mortgages, loans and
       other receivables                         -         78.2         78.2
      Investments                                -          1.6          1.6
      Other assets(1)                            -         28.6         28.6
    -------------------------------------------------------------------------
    Total financial assets               $       -    $   594.8    $   594.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financial Liabilities
      Bank indebtedness                  $    53.5    $    53.5    $    53.5
      Accounts payable and
       accrued liabilities                 1,347.6      1,347.6      1,347.6
      Long-term debt                       1,462.4      1,462.4      1,375.1
      Other long-term
       liabilities(2)                            -         20.8         20.8
    -------------------------------------------------------------------------
    Total financial
     liabilities                         $ 2,863.5    $ 2,884.3    $ 2,797.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) The total carrying value of financial assets included in other assets
        is $28.6.
    (2) Only the derivative liability portion is presented here.


                             Held for     Held for
                              Trading      Trading    Available    Loans and
    May 3, 2008             (Required) (Designated)    for Sale  Receivables
    -------------------------------------------------------------------------
    Financial Assets
      Cash and cash
       equivalents          $       -    $   191.4    $       -    $       -
      Receivables                   -            -            -        316.3
      Mortgages, loans and
       other receivables            -            -            -         75.0
      Investments                   -            -          1.6            -
      Other assets(1)             2.3         26.4            -            -
    -------------------------------------------------------------------------
    Total financial assets  $     2.3    $   217.8    $     1.6    $   391.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financial Liabilities
      Bank indebtedness     $       -    $       -    $       -    $       -
      Accounts payable and
       accrued liabilities          -            -            -            -
      Long-term debt                -            -            -            -
      Other long-term
       liabilities(2)            21.7            -            -            -
    -------------------------------------------------------------------------
    Total financial
     liabilities            $    21.7    $       -    $       -    $       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



                                             Other        Total
                                         Financial     Carrying         Fair
    May 3, 2008                        Liabilities       Amount        Value
    -------------------------------------------------------------------------
    Financial Assets
      Cash and cash
       equivalents                       $       -    $   191.4    $   191.4
      Receivables                                -        316.3        316.3
      Mortgages, loans and
       other receivables                         -         75.0         75.0
      Investments                                -          1.6          1.6
      Other assets(1)                            -         28.7         28.7
    -------------------------------------------------------------------------
    Total financial assets               $       -    $   613.0    $   613.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financial Liabilities
      Bank indebtedness                  $    92.1    $    92.1    $    92.1
      Accounts payable and
       accrued liabilities                 1,322.4      1,322.4      1,322.4
      Long-term debt                       1,481.4      1,481.4      1,415.5
      Other long-term
       liabilities(2)                            -         21.7         21.7
    -------------------------------------------------------------------------
    Total financial
     liabilities                         $ 2,895.9    $ 2,917.6    $ 2,851.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) The total carrying value of financial assets included in other assets
        is $28.7.
    (2) Only the derivative liability portion is presented here.

    Derivative financial instruments

    Derivative financial instruments are recorded on the consolidated balance
sheet at fair value unless the derivative instrument is a contract to buy or
sell a non-financial item in accordance with the Company's expected purchase,
sale or usage requirements, referred to as a "normal purchase or normal sale".
Changes in the fair values of derivative financial instruments are recognized
in earnings unless it qualifies and is designated as an effective cash flow
hedge or a normal purchase or normal sale. Normal purchases and normal sales
are exempt from the application of the standard and are accounted for as
executory contracts. Changes in fair value of a derivative financial
instrument designated as a cash flow hedge are recorded in other assets and
liabilities with the effective portion recorded in accumulated other
comprehensive income.

    Interest rate risk

    Interest rate risk is the potential for financial loss arising from
changes in interest rates. Financial instruments that potentially subject the
Company to interest rate risk include financial liabilities with floating
interest rates. The majority of the Company's long-term debt is at a fixed
interest rate or hedged with interest rate swaps. Bank indebtedness and
approximately 30 percent of the Company's long-term debt is exposed to
interest rate risk due to floating rates.
    During the current period, only the interest rate swaps resulted in an
earnings impact. A loss in value of $0.9 was recorded in interest expense.
    Net earnings is sensitive to the impact of a change in interest rates on
the average balance of interest bearing financial liabilities during the
period. For the three month period ending August 2, 2008, the Company's
average floating rate indebtedness was $820.2 of which $420.0 has been hedged
with interest rate swaps. Accordingly, a difference of 0.25 percent in the
applicable interest rate would have impacted net earnings by $0.2 and other
comprehensive income by $1.9.

    Foreign currency exchange risk

    The Company conducts the vast majority of its business in Canadian
dollars. The Company's foreign currency exchange risk principally relates to
purchases made in U.S. dollars. In addition, the Company also uses forward
contracts to fix the exchange rate on some of its expected requirements for
Euros and U.S. dollars. Amounts received or paid related to instruments used
to hedge foreign exchange, including any gains and losses, are recognized in
the cost of purchases. The Company does not consider its exposure to foreign
currency exchange risk to be material.

    Commodity price risk

    Commodity price risk is the risk that the fair value of certain financial
instruments or the Company's future cash flows will fluctuate as a result of
changes in the market price of commodities. The Company has attempted to
mitigate commodity price risk to electricity prices through the use of
financial derivative swap contracts while closely monitoring other commodity
prices to determine the appropriate course of action. The Company estimates
that a 10% increase (decrease) in applicable commodity prices would have
impacted net earnings by $1.5 and other comprehensive income by $0.4.

    12. Employee Future Benefits

    During the Company's first quarter, the net employee future benefit
expense was $8.1 (2007 - $5.8). 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.

    13. Business Acquisitions

    Sobeys acquired franchisee stores during the period. The results of these
acquisitions have been included in the consolidated financial results of the
Company, and were accounted for through the use of the purchase method. As
illustrated in the table below, the acquisition of certain franchise stores
resulted in the acquisition of intangible assets. The method of amortization
of limited life intangibles is on a straight-line basis over the estimated
useful life of the intangible.

                                                          2008          2007
                                                     (13 weeks)    (13 weeks)
                                                     ----------    ----------
    Franchisees
    -----------
    Inventory                                        $     1.7       $   0.5
    Property and equipment                                 1.1           0.2
    Intangibles                                            2.4             -
    Goodwill                                               0.9             -
    Other assets                                           0.3             -
                                                     ----------    ----------
    Cash consideration                               $     6.4     $     0.7
                                                     ----------    ----------
                                                     ----------    ----------

    14. Contingent Liabilities

    Contingencies

    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 the tax authorities.
    The Company and a subsidiary have been reassessed in respect to the tax
treatment of gains realized on the sale of shares in Hannaford Bros. Co.
("Hannaford') in fiscal 2001. 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 $23.3. 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.
    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.

    15. Stock-Based Compensation

    Deferred share units

    Members of the Board of Directors may elect to receive all or any portion
of their fees in Deferred Share Units ("DSUs") in lieu of cash. The number of
DSUs received is determined by the market value of the Company's Non-Voting
Class A shares on each director's fee payment date. Additional DSUs are
received as dividend equivalents. DSUs cannot be redeemed for cash until the
holder is no longer a director of the Company. The redemption value of a DSU
equals the market value of an Empire Company Limited Non-Voting Class A share
at the time of the redemption. On an ongoing basis, the Company values the DSU
obligation at the current market value of a corresponding number of Non-Voting
Class A shares and records any increase in the DSU obligation as an operating
expense. At August 2, 2008, there were 69,626 (May 3, 2008 - 64,877) DSUs
outstanding. During the first quarter, the compensation expense was $0.7
(2007 - $0.7).

    Stock option plan

    During the first quarter of fiscal 2009, the Company granted an additional
189,967 options under the Stock Option plan for employees of the Company
whereby options are granted to purchase Non-Voting Class A Shares. These
options allow holders to purchase Non-Voting Class A Shares at $40.26 per
share and expire in July 2016. The options vest over 4 years with 50 percent
of the options vesting only if certain financial targets are attained in a
given fiscal year. These options have been treated as stock-based
compensation.
    The compensation cost relating to the period was determined to be $0.6
(2007 - $0.0) with amortization of the cost over the vesting period. The total
increase in contributed surplus in relation to the Stock Option compensation
cost was $0.6. The compensation cost was calculated using the Black-Scholes
model with the following assumptions:

      Expected life                                                  8 years
      Risk-free interest rate                                           3.50%
      Expected volatility                                               20.1%
      Dividend yield                                                    1.75%

    Phantom performance option plan

    In June 2007, the Board of Directors approved a Phantom Performance Option
Plan for eligible employees of Sobeys. Under the plan, units are granted at
the discretion of the Board based on a notional equity value of Sobeys tied to
a specified formula. The units have a three-year vesting period with a third
of the units vesting each year. As the notional fair value of Sobeys changes,
the employees are entitled to the incremental increase in the notional equity
value over a five-year period. The Company recognizes a compensation expense
equal to the change in notional value over the original grant value on a
straight-line basis over the vesting period. After the vesting period, any
change in incremental notional equity value is recognized as a compensation
expense immediately. This is recorded as a liability until settlement and is
re-measured at each interim and annual reporting period of the Company. At the
end of the first quarter of fiscal 2009, 1,027,729 units were outstanding and
the Company recognized $0.7 (2007 - $0.1) of compensation expense associated
with this Plan during the period.

    16. Business Rationalization Costs

    During the first quarter of fiscal 2009 severance costs of approximately
$5.6 have been incurred and recognized. Additional rationalization costs are
anticipated and will be quantified and disclosed throughout fiscal 2009 as
they are available. The costs associated with the organizational change are
recorded as incurred as cost of sales, selling and administrative expenses in
the statement of earnings. The liability as of May 3, 2008 was $5.9 and is
$10.6 as of August 2, 2008. Costs incurred and anticipated as of May 3, 2008
were $22.6, which includes those incurred in the 13 weeks ended August 2,
2008. The total combined incurred and anticipated amount at August 2, 2008 is
$22.6.

    17. Subsequent Events

    On November 15, 2007, Sobeys established and utilized a new unsecured
non-revolving credit facility of $30.0 which matured on May 15, 2008 and
subsequently extended to August 15, 2008. Subsequent to August 2, 2008 the
credit facility was extended to October 14, 2008. The interest rate is
floating and may be tied to the bankers' acceptance rate, Canadian prime rate
or LIBOR. This balance has been classified as bank indebtedness.

    18. 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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