Loblaw Companies Limited Third Quarter 2007 Report to Shareholders - 40 Weeks Ended October 6, 2007



    TORONTO, Nov. 15 /CNW/ -

    Forward-Looking Statements

    This Quarterly Report for Loblaw Companies Limited and its subsidiaries
(collectively, the "Company" or "Loblaw"), including the Management's
Discussion and Analysis ("MD&A"), contains forward-looking statements which
reflect management's expectations and are contained in discussions regarding
the Company's objectives, plans, goals, aspirations, strategies, potential
future growth, results of operations, performance and business prospects and
opportunities. Forward-looking statements are typically, though not always,
identified by words or phrases such as "anticipates", "expects", "believes",
"estimates", "intends" and other similar expressions.
    These forward-looking statements are not guarantees, but only
predictions. Although the Company believes that these statements are based on
information and assumptions which are current, reasonable and complete, these
statements are necessarily subject to a number of factors that could cause
actual results to vary significantly from the estimates, projections and
intentions. Such differences may be caused by factors which include, but are
not limited to, changes in consumer spending and preferences, heightened
competition including new competitors and expansion of current competitors,
changes in the Company's or its competitors' pricing strategies, the financial
performance of the Company's franchisees, the terms and conditions of
financing programs offered to the Company's franchisees, the ability to
realize anticipated cost savings and efficiencies, including those resulting
from the Company's major initiatives, inventory liquidation, information
technology and supply chain investments and other cost reduction and
simplification initiatives, the ability to execute the Company's major
initiatives, implement strategies and introduce innovative products
successfully and in a timely manner, changes in the markets for the inventory
intended for liquidation and changes in the expected realizable value and
costs associated with the liquidation, unanticipated, increased or decreased
costs associated with the announced initiatives, including those related to
compensation costs, the Company's relationship with its employees, results of
labour negotiations including the terms of future collective bargaining
agreements, changes to the regulatory environment in which the Company
operates now or in the future, the adoption of new accounting standards and
changes in the Company's use of accounting estimates including in relation to
inventory valuation, changes in the Company's tax liabilities, either through
changes in tax laws or future assessments, performance of third-party service
providers, public health events, the ability of the Company to attract and
retain key executives and supply and quality control issues with vendors. The
Company cautions that this list of factors is not exhaustive.
    The assumptions applied in making the forward-looking statements
contained in this Quarterly Report, including this MD&A include the following:
economic conditions do not materially change from those expected, patterns of
consumer spending are reasonably consistent with historical trends, no new
significant competitors enter our markets nor does any existing competitor
unexpectedly significantly increase its presence, neither the Company's nor
its competitors' pricing strategies change materially, the Company's
franchisees perform as expected, the Company successfully offers new and
innovative products and executes its strategies as planned, anticipated cost
savings and efficiencies are realized as planned, continuing and future
initiatives are effectively executed in a timely manner, the Company's
assumptions regarding average compensation costs and average years of service
for employees affected by the simplification initiatives are materially
correct, the Company does not significantly change its approach to its current
major initiatives, there is no material amount of excess inventory in the
Company's supply chain, there are no material work stoppages and the
performance of third-party service providers is in accordance with
expectations.
    These estimates and assumptions may change in the future due to uncertain
competitive and economic market conditions or changes in business strategies.
This list of factors and other risks and uncertainties are discussed in the
Company's materials filed with the Canadian securities regulatory authorities
from time to time, including the Risks and Risk Management section of the MD&A
included in the Company's 2006 Annual Report.
    Potential investors and other readers are urged to consider these factors
carefully in evaluating these forward-looking statements and are cautioned not
to place undue reliance on them. The forward-looking statements included in
this Quarterly Report, including this MD&A are made only as of the filing date
of this Quarterly Report and the Company disclaims any obligation or intention
to publicly update these forward-looking statements to reflect new
information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events contained in these
forward-looking statements may or may not occur. The Company cannot assure
that projected results or events will be achieved.

    Report to Shareholders

    
    Third Quarter Highlights

                                             ----------
    For the periods ended October 6, 2007
     and October 7, 2006

    ($ millions except where otherwise            2007       2006
     indicated)                              (16 weeks) (16 weeks)    Change
    -------------------------------------------------------------------------
    Sales                                     $  9,137   $  9,010       1.4%
    Operating income                               250        398     (37.2%)
    Basic net earnings per common share ($)       0.43       0.74     (41.9%)
    -------------------------------------------------------------------------
    Same-store sales change (%)                   1.6%       2.0%
    Adjusted EBITDA(1)                             456        611     (25.4%)
    Adjusted operating income(1)                   287        434     (33.9%)
    Adjusted operating margin(1)                  3.3%       5.2%
    Adjusted basic net earnings per
     common share(1) ($)                          0.56       0.90     (37.8%)
    Free cash flow(1)                              117        (34)    444.1%
    -------------------------------------------------------------------------

                                             ----------


                                             ----------
    For the periods ended October 6, 2007
     and October 7, 2006

    ($ millions except where otherwise            2007       2006
     indicated)                              (40 weeks) (40 weeks)    Change
    -------------------------------------------------------------------------
    Sales                                     $ 22,417   $ 21,856       2.6%
    Operating income                               602        984     (38.8%)
    Basic net earnings per common share ($)       1.06       1.96     (45.9%)
    -------------------------------------------------------------------------
    Same-store sales change (%)                   2.2%       0.6%
    Adjusted EBITDA(1)                           1,240      1,478     (16.1%)
    Adjusted operating income(1)                   813      1,040     (21.8%)
    Adjusted operating margin(1)                  3.8%       5.1%
    Adjusted basic net earnings per
     common share(1) ($)                          1.62       2.14     (24.3%)
    Free cash flow(1)                               67       (446)    115.0%
    -------------------------------------------------------------------------

                                             ----------

    -   Same-store sales increased 2.8% over last year, excluding the impact
        of decreased tobacco sales.

    -   Internal retail food price inflation is estimated at 0.5% and
        internal produce price deflation is estimated at 6.8% compared to
        last year.

    -   Sales volume based on retail units sold increased 1.9% from last
        year.

    -   Gross margin declined approximately $60 million from last year,
        representing 0.7% of sales, primarily due to targeted price
        reductions to provide value to customers and changes in sales mix.

    -   Free cash flow(1) year-to-date increased by $513 million or 115.0%
        from last year.
    

    Business Update
    ---------------
    We are focused on four major initiatives: Project Simplify, Fix the
Basics, Credit for Value and optimizing the Real Canadian Superstore ("RCSS")
banner. The third quarter saw significant advances towards these initiatives,
but at a cost of reduced profitability, much of which is an investment in our
future. We have improved our competitive price position in several critical
banners and geographies and our other initiatives are well under way.
Important new investments in supply chain and information systems
infrastructure are beginning. Cost savings initiatives designed to improve
margins over time have also begun. Free cash flow(1) generation is strong.
    Project Simplify is our plan to improve effectiveness through clearer
accountabilities and centralization where it counts. This reorganization is
well advanced. We are in the midst of the period of highest risk as new or
reassigned employees are performing new functions with redesigned systems and
processes. Some level of disruption has occurred and is expected to continue
at least through the first quarter of 2008. A significant amount was spent in
the third quarter on consulting engagements related to Project Simplify and
our other ongoing initiatives. Consulting costs are expected to remain high in
the fourth quarter and 2008, but should gradually decline from peak levels in
the third quarter of 2007.
    Fix the Basics is our strategy to be known once again as one of the
world's best retailers and to have industry-leading availability and a
world-class supply chain. Process enhancements in front-end customer
experience, on-shelf product availability, and freshness are being rolled out,
with priority on stores that will achieve the largest impact. 60 stores are
currently on the new availability program with approximately 220 targeted to
be on the program by year end. Stores that have fully implemented the new
availability program are achieving improvements in availability and are now
meeting our expectations. During the quarter, we initiated a new multi-year
plan to upgrade information technology and supply chain infrastructure
designed to substantially improve efficiency and capabilities as well as
support new business initiatives and increased sales volumes.
    Credit for Value is our strategy to proactively lower retail prices to
deliver excellent value to customers and to ensure customers recognize the
benefit of lower prices in our stores where it matters. At the end of the
third quarter of 2007, we have achieved retail price levels equal to or better
than those of our local benchmark competitors in Ontario, western Canada, and
Quebec hard discount and superstore formats. Additional investments in retail
prices were also made in the Company's conventional stores in Ontario and
Quebec. Retail price comparisons are based on regular surveys of more than
2,000 key consumer items for regular and promotional prices compared to
competition. Same-store sales and sales volumes in food and drugstore are
responding positively to our improved price position. Overall customer counts
and item counts increased. We commenced a cost reduction initiative in the
third quarter to reduce our cost of goods sold, shrink, store labour and
administrative expenses in order to support further investments in value for
customers.
    Same-store sales of the Ontario RCSS banner were strong in the third
quarter on top of solid comparables last year. We opened a new pilot RCSS in
Milton, Ontario at the end of August. Sales performance at this store is
consistent with expectations and we are satisfied with how the new design
elements at this store have performed, including great customer acceptance of
our "bagless" initiative. Certain of these design elements will be
incorporated in future remodels and new store construction.

    Results of Operations
    ---------------------
    Sales for the third quarter of 2007 increased 1.4% or $127 million to
$9.14 billion compared to the third quarter of 2006. Sales volume based on
retail units sold grew by 1.9% in the third quarter compared to the same
period last year. We estimate our internal retail food price inflation was
0.5% in the third quarter of 2007 and internal produce price deflation was
estimated at 6.8%. Food and produce retail prices were affected by the
pass-through of benefits to the customer from the stronger Canadian dollar.
Sales in food and drugstore were strong in the quarter. A delayed launch of
Joe Fresh Style children's apparel and intimates adversely affected general
merchandise sales in the quarter. General merchandise sales were also lower
because of the intentional restriction of inventory while we continued to work
on optimizing inventory controls, product mix and markdown strategies. New PC
signature products and campaigns significantly increased consumers' purchase
intentions which translated into solid sales increases of these products.
Total sales increases were realized across all regions of the country. In the
third quarter of 2006, a major tobacco supplier commenced shipping directly to
certain customers of our cash & carry and wholesale club network, adversely
impacting sales. This loss of sales will not affect comparisons to 2006 sales
after the third quarter of this year. Same-store sales, excluding the impact
of decreased tobacco sales, increased by 2.8%. Total sales excluding the
impact of tobacco sales and variable interest entities(1) increased by 3.1%.
    We earned operating income of $250 million in the third quarter of 2007
compared to $398 million during the same period in 2006. Sales increases in
the quarter were insufficient to offset margin declines and cost increases.
The reduction of $148 million in operating income versus the same period last
year was affected by the following items:
    
    -   we implemented targeted price reductions to provide value to
        customers and drive same-store sales and sales volumes which, in
        addition to sales mix changes, contributed to a gross margin decline
        of approximately $60 million from last year, representing 0.7% of
        sales;
    -   incremental consulting costs compared to the prior year, other than
        those in connection with Project Simplify, amounted to $45 million
        including expenses related to new supply chain and information
        technology improvement initiatives of $8 million;
    -   legislative changes introduced in 2006 by the Ontario government
        reduced pharmacy-related operating income by $8 million; and
    -   adjustments in estimates related to post-employment and long term
        disability benefits and deferred product development and information
        technology costs reduced operating income by $24 million in the
        quarter.
    Operating margin was 2.7% compared to 4.4% in the third quarter of 2006.

    In the third quarter, certain charges were recorded in connection with
initiatives previously disclosed, as follows:
    -   Part of Project Simplify involves the restructuring and streamlining
        of our merchandising and store operations. This initiative includes a
        reduction of approximately 1,000 employees in the National Head
        Office and Store Support Centre and regional offices and is
        well advanced. The total restructuring costs under this plan,
        comprised primarily of severance costs, are now anticipated to
        be approximately $185 million. In addition to the $145 million of
        restructuring costs resulting from this plan, which were recognized
        in the first half of the year, we have recognized an additional
        $23 million in the third quarter, comprised of $10 million for
        employee termination benefits including severance, additional pension
        costs resulting from the termination of employees and retention
        costs; and $13 million of other costs, primarily consulting.
    -   A charge of $1 million was recorded in connection with the previously
        announced plan to restructure the Company's supply chain network.
    -   Our efforts to liquidate excess inventory are nearing completion and
        an additional charge of $3 million was recorded in the third quarter.

    Adjusted operating income(1) in the third quarter of 2007 was $287 million
compared to $434 million in 2006, and adjusted operating margins(1) were 3.3%
and 5.2%, respectively.
    For the third quarter of 2007, basic net earnings per common share were 43
cents compared to 74 cents in 2006, a decline of 41.9%. Basic net earnings per
common share were affected in the third quarter of 2007 by the following:
    -   charge of 8 cents (2006 - 14 cents) per common share for the net
        effect of stock-based compensation and the associated equity
        forwards;
    -   charge of 5 cents (2006 - nil) per common share related to
        restructuring and other charges;
    -   charge of 1 cent (2006 - nil) per common share related to inventory
        liquidation;
    -   income of 1 cent (2006 - 1 cent) per common share related to the
        consolidation of VIEs; and
    -   nil (2006 - charge of 3 cents) per common share related to a
        departure entitlement charge.
    

    After adjusting for the above noted items, adjusted basic net earnings
per common share(1) were 56 cents for the third quarter of 2007 compared to
90 cents for the third quarter of 2006.
    Free cash flow(1) for the third quarter of 2007 was $117 million compared
to negative $34 million in the third quarter of 2006. The third quarter
improvement was due to an increase in cash flows from operating activities of
$54 million and a decrease in capital expenditures of $97 million compared to
last year. On a year-to-date basis, free cash flow(1) was $67 million compared
to negative $446 million in 2006 primarily due to an increase in cash flows
from operating activities of $334 million, substantially as a result of
reduced inventory levels, and a reduction in capital expenditures of
$236 million, partially offset by $57 million related to the timing of
dividend payments.
    We are investing in what we believe will be profitable expansions and
renovations of our existing store base, with the focus on improving same-store
sales. We anticipate a total of 80 renovations, expansions and conversions
during 2007, 22 of which are expected to be completed in the fourth quarter. A
total of 5 stores in 2007 are expected to benefit from the improved economics
of the Ontario labour deal reached last year. We expect to invest an estimated
$700 million to $800 million in capital expenditures net of any fixed asset
sales in 2008. The majority of these funds will be invested in remodeling
existing stores, intended to drive same-store sales, and in upgrading supply
chain and information technology infrastructure.
    This quarter was heavily affected by the costs of implementing our
initiatives for the future including our continued investment in pricing. Our
team is settling into their new functions and responsibilities. Our core
initiatives are on track and we are satisfied with progress so far, but our
three to five year turnaround effort will inevitably have bumps along the way.
We expect continued margin pressure and risk to earnings. In the short-term,
we expect solid sales volume growth in the fourth quarter but continued
reduced margins. Results in the first half of next year may be affected by
more difficult comparables. Our longer-term focus will be on increasing sales
momentum and cost reduction to improve our margins over time. We are
confindent in our turnaround strategy and we are resolved to Make Loblaw the
Best Again.

    (SIGNATURE)

    Galen G. Weston
    Executive Chairman

    Toronto, Canada
    November 14, 2007


    Management's Discussion and Analysis

    The following Management's Discussion and Analysis ("MD&A") for Loblaw
Companies Limited and its subsidiaries (collectively, the "Company" or
"Loblaw") should be read in conjunction with the Company's 2007 unaudited
interim period consolidated financial statements and the accompanying notes on
pages 15 to 28 of this Quarterly Report and the audited annual consolidated
financial statements and the accompanying notes for the year ended
December 30, 2006 and the related annual MD&A included in the Company's 2006
Annual Report. The Company's 2007 unaudited interim period consolidated
financial statements and the accompanying notes have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP") and
are reported in Canadian dollars. These interim period consolidated financial
statements include the accounts of Loblaw Companies Limited and its
subsidiaries and variable interest entities ("VIEs") that the Company is
required to consolidate in accordance with Accounting Guideline 15,
"Consolidation of Variable Interest Entities", ("AcG 15"). A glossary of terms
used throughout this Quarterly Report can be found on page 80 of the Company's
Financial Report contained in its 2006 Annual Report. In addition, this
Quarterly Report includes the following terms: "rolling year return on average
total assets" which is defined as cumulative operating income for the latest
four quarters divided by average total assets excluding cash, cash equivalents
and short term investments; and "rolling year return on average shareholders'
equity" which is defined as cumulative net earnings available to common
shareholders for the latest four quarters divided by average total common
shareholders' equity.
    The information in this MD&A is current to November 14, 2007, unless
otherwise noted.

    Results of Operations

    For the third quarter of 2007, basic net earnings per common share were
43 cents compared to 74 cents in 2006, a decline of 41.9%. Basic net earnings
per common share were affected in the third quarter of 2007 by the following:
    
    -   charge of 8 cents (2006 - 14 cents) per common share for the net
        effect of stock-based compensation and the associated equity
        forwards;
    -   charge of 5 cents (2006 - nil) per common share related to
        restructuring and other charges;
    -   charge of 1 cent (2006 - nil) per common share related to inventory
        liquidation;
    -   income of 1 cent (2006 - 1 cent) per common share related to the
        consolidation of VIEs; and
    -   nil (2006 - charge of 3 cents) per common share related to a
        departure entitlement charge.
    

    After adjusting for the above noted items, adjusted basic net earnings
per common share(1) were 56 cents for the third quarter of 2007 compared to
90 cents for the third quarter of 2006.

    Sales

    Sales for the third quarter increased by 1.4% or $127 million to
$9.14 billion compared to the third quarter of 2006. Total sales increases
were realized across all regions of the country. Sales in food and drugstore
were strong in the quarter. A delayed launch of Joe Fresh Style children's
apparel and intimates adversely affected general merchandise sales in the
quarter. Same-store sales excluding the impact of the continued decrease in
tobacco sales increased by 2.8%. Total sales excluding the impact of tobacco
sales and VIEs(1) increased by 3.1%. In the third quarter of 2006, a major
tobacco supplier commenced shipping directly to certain customers of the
Company's cash & carry and wholesale club network, adversely impacting sales.
This loss of sales will not affect comparisons to 2006 sales after this
quarter.

    
    Sales and Sales Growth Excluding the Impact of Tobacco Sales and VIEs(1)

                                  ----------            ----------
    For the periods ended
     October 6, 2007 and
     October 7, 2006
    ($ millions except where           2007       2006       2007       2006
     otherwise indicated)         (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Total sales                    $  9,137   $  9,010   $ 22,417   $ 21,856
    Less: Sales attributable to
           tobacco sales                341        487        794      1,181
          Sales attributable to
           the consolidation
           of VIEs                      133        121        348        291
    -------------------------------------------------------------------------
    Sales excluding the impact of
     tobacco sales and VIEs(1)     $  8,663   $  8,402   $ 21,275   $ 20,384
    -------------------------------------------------------------------------
    Total sales growth                 1.4%                  2.6%
    Less: Impact on sales growth
           attributable to tobacco
           sales                      (1.8%)                (2.1%)
          Impact on sales growth
           attributable to the
           consolidation of VIEs       0.1%                  0.3%
    ----------------------------------------            ----------
    Sales growth excluding the
     impact of tobacco sales and
     VIEs(1)                           3.1%                  4.4%
    ----------------------------------------            ----------

                                  ----------            ----------

    For the third quarter of 2007, the following factors explain the major
components in the change in sales over the prior year:
    -   same-store sales growth of 2.8% excluding the impact of decreased
        tobacco sales;
    -   continued sales growth in the Real Canadian Superstore banner in
        Ontario;
    -   national food price inflation as measured by "The Consumer Price
        Index for Food Purchased from Stores" ("CPI") was 2.2% for the third
        quarter of 2007 compared to approximately 2.5% in the same period of
        2006. This measure of inflation does not necessarily reflect the
        effect of inflation on the specific mix of goods offered in Loblaw
        stores. The Company's analysis indicates that its internal retail
        food price inflation is approximately 0.5% and internal produce price
        deflation is estimated at 6.8% compared to last year;
    -   the Company is experiencing positive volume growth of 1.9% based on
        retail units sold; and
    -   an increase in net retail square footage of 0.2 million square feet
        or 0.4% during the latest four quarters, due to the opening of 34 new
        corporate and franchised stores and the closure of 75 stores,
        inclusive of 47 stores that were closed as part of a previously
        announced store operations restructuring plan, and stores that have
        undergone conversions and major expansions. During the third quarter
        of 2007, 10 new corporate and franchised stores were opened and 10
        were closed resulting in a net increase of 0.3 million square feet or
        0.5%.

    For the first three quarters of the year, sales of $22.42 billion were
2.6% ahead of last year. Total sales excluding the impact of tobacco sales and
VIEs(1) increased by 4.4% year-to-date. The following factors in addition to
the quarterly factors mentioned above further explain the change in
year-to-date sales over the same period in the prior year:
    -   same-store sales growth excluding the impact of decreased tobacco
        sales of 3.6%; and
    -   an increase in net retail square footage during the latest four
        quarters as noted above. In the first three quarters, 26 new
        corporate and franchised stores were opened and 71 stores closed,
        including 46 stores that were closed as part of a previously
        announced store operations restructuring plan, and stores which have
        undergone conversions and major expansions resulting in a net
        decrease of 0.1 million square feet or 0.3% from year end 2006.

    Operating Income

    Operating income of $250 million for the third quarter of 2007 compares to
$398 million in 2006, a decrease of 37.2%. Operating margin was 2.7% for the
third quarter of 2007 compared to 4.4% in 2006.
    Project Simplify continues to be executed throughout the business. In the
third quarter of 2007, certain charges were recorded that reflected activities
in support of the Company's Formula for Growth, which have previously been
disclosed and are as follows:
    -   Part of Project Simplify involves the restructuring and streamlining
        of the Company's merchandising and store operations. This initiative
        includes a reduction of approximately 1,000 employees in the National
        Head Office and Store Support Centre and regional offices. The total
        restructuring costs under this plan, comprised primarily of severance
        costs, are now anticipated to be approximately $185 million which is
        within the previously disclosed range of $167 million to
        $187 million. In the third quarter of 2007, the Company recognized
        $23 million of restructuring costs resulting from this plan,
        comprised of $10 million for employee termination benefits including
        severance, additional pension costs resulting from the termination of
        employees and retention costs; and $13 million of other costs,
        primarily consulting. A substantial portion of the remaining expected
        cost in connection with this plan is anticipated to be recorded by
        the end of the fourth quarter of 2007.
    -   A charge of $1 million was recorded in connection with the previously
        announced plan to restructure the Company's supply chain network.

                                                Cost Recognized

                                    2007        2006        2007        2006
    ($ millions)               (16 weeks)  (16 weeks)  (40 weeks)  (40 weeks)
    -------------------------------------------------------------------------
    Project Simplify             $    23     $     -     $   168     $     -
    Store operations                   -           -          16           -
    Supply chain network               1           1           2           8
    Office move and
     reorganization of the
     operation support
     functions                         -           -           -           1
    -------------------------------------------------------------------------
    Total restructuring and
     other charges               $    24     $     1     $   186     $     9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                               Total
                                   Total    Expected
                                Expected       Costs
    ($ millions)                   Costs   Remaining
    -------------------------------------------------
    Project Simplify             $   185     $    17
    Store operations                  54           3
    Supply chain network              90          18
    Office move and
     reorganization of the
     operation support
     functions                        25           -
    -------------------------------------------------
    Total restructuring and
     other charges               $   354     $    38
    -------------------------------------------------
    -------------------------------------------------

    In the third quarter of 2007, the Company recognized the following in
operating income:
    -   charge of $19 million (2006 - $31 million) for the net effect of
        stock-based compensation and the associated equity forwards;
    -   a charge of $3 million, comprised primarily of storage and shipping
        costs from the previously announced liquidation of inventory
        determined to be excess in the fourth quarter of 2006. The Company's
        efforts to liquidate this inventory are proceeding as expected and
        will be complete in the fourth quarter of 2007;
    -   income of $9 million (2006 - $8 million) resulting from the
        consolidation of VIEs; and
    -   nil (2006 - charge of $12 million) for a departure entitlement
        charge.

    After adjusting for the above-noted items, adjusted operating income(1)
was $287 million in the third quarter of 2007 compared to $434 million in the
comparable period in 2006. Adjusted operating margin(1) was 3.3% in the third
quarter of 2007 compared to 5.2% in 2006. Adjusted EBITDA margin(1) decreased
to 5.3% from 7.3% in 2006.
    In addition, the following items influenced adjusted operating income(1)
for the third quarter of 2007:
    -   gross margin declined approximately $60 million from last year,
        representing 0.7% of sales, primarily due to targeted price
        reductions, to provide value to customers and drive same-store sales
        and sales volumes, and changes in sales mix;
    -   incremental consulting costs compared to the prior year, other than
        those in connection with Project Simplify, amounted to $45 million
        including expenses related to new supply chain and information
        technology improvement initiatives of $8 million;
    -   legislative changes introduced in 2006 by the Ontario government
        reduced pharmacy-related operating income by $8 million; and
    -   adjustments in estimates related to post-employment and long term
        disability benefits and deferred product development and information
        technology costs reduced operating income by $24 million in the
        quarter.
    

    Aggregate gross margin percentage continued to decline in the third
quarter of 2007 as a result of the Company's continued investment in lower
prices, as part of its Credit for Value initiative, to drive same-store sales
growth in a targeted manner across the country. Sales increases in the quarter
were insufficient to offset margin declines and cost increases. The Company
continues to experience higher store operating costs including store labour
costs compared to the third quarter of 2006.
    Operating income for the first three quarters of 2007 decreased by
$382 million, or 38.8%, to $602 million, and resulted in an operating margin
of 2.7% as compared to 4.5% in the corresponding period in 2006. During the
first three quarters of 2007, the Company recorded restructuring and other
charges of $186 million (2006 - $9 million) of which $168 million (2006 - nil)
related to Project Simplify, $16 million (2006 - nil) related to the store
operations restructuring, and $2 million (2006 - $8 million) related to the
supply chain network, and no impact (2006 - $1 million) related to the office
move and reorganization of the operation support functions. In addition, the
Company recognized a year-to-date charge in operating income of $20 million
(2006 - $43 million) for the net effect of stock-based compensation and the
associated equity forwards; $12 million (2006 - nil) relating to the
liquidation of inventory determined to be excess in the fourth quarter of
2006; income of $7 million (2006 - $8 million) from the consolidation of VIEs
and nil (2006 - $12 million) for a departure entitlement charge.
    Adjusted operating income(1) for the first three quarters of 2007 was
$813 million compared to $1.04 billion for the same period of 2006.
Year-to-date adjusted operating margin(1) was 3.8% compared to 5.1% in 2006.
Adjusted EBITDA margin(1) decreased to 5.8% from 7.3% in 2006.
    The 2007 year-to-date results were also influenced by the additional
following items:
    
    -   incremental consulting costs compared to the prior year, other than
        those in connection with Project Simplify, amounted to $63 million
        including expenses related to new supply chain and information
        technology improvement initiatives of $10 million;
    -   pharmacy-related operating income was reduced by $25 million due to
        legislative changes introduced in 2006 by the Ontario government;
    -   adjustments in estimates related to post-employment and long term
        disability benefits and deferred product development and information
        technology costs reduced operating income by $24 million;
    -   costs associated with the change in the Company's executive bonus
        plan were $11 million; and
    -   the aggregate gross margin percentage decreased as described
        previously.

    In the second quarter of 2007, the Company completed its work in
connection with the non-cash goodwill impairment charge and finalized the
$800 million recorded in the Company's audited annual consolidated financial
statements for the year ended December 30, 2006.

    Interest Expense

    Interest expense for the third quarter of 2007 was $76 million compared to
$78 million in 2006. The following items impacted interest expense:
    -   interest on long term debt was $87 million (2006 - $86 million);
    -   interest on financial derivative instruments, which includes the
        effect of the Company's interest rate swaps, cross currency basis
        swaps and equity forwards, was $5 million (2006 - $3 million);
    -   net short term interest income of $10 million (2006 - $5 million);
        and
    -   interest expense of $6 million (2006 - $6 million) was capitalized to
        fixed assets.
    

    Interest expense year-to-date was $193 million compared to $199 million
in 2006.

    Income Taxes

    The effective income tax rate for the third quarter in 2007 decreased to
32.2% compared to 35.3% in the third quarter of 2006 primarily due to the
change in the proportion of taxable income earned across different tax
jurisdictions in 2007. The year-to-date effective income tax rate in 2007 was
30.1% compared to 31.3% in 2006.

    Net Earnings

    Net earnings for the third quarter decreased $86 million, or 42.4%, to
$117 million from $203 million in the third quarter of 2006 and decreased
$247 million, or 46.0%, to $290 million year-to-date from $537 million in
2006. Basic net earnings per common share for the third quarter decreased
31 cents or 41.9% to 43 cents from 74 cents in the third quarter of 2006 and
decreased 90 cents, or 45.9%, to 1.06 cents year-to-date compared to $1.96 for
the same period last year. Adjusted basic net earnings per common share(1) for
the third quarter decreased 34 cents, or 37.8%, to 56 cents compared to
90 cents in 2006 and decreased 52 cents, or 24.3%, to $1.62 year-to-date
compared to $2.14 in 2006.

    Financial Condition

    Financial Ratios

    The net debt(1) to equity ratio was 0.71:1 at the end of the third
quarter of 2007 compared to 0.68:1 in the same period in 2006 and to 0.72:1 at
year end 2006. The increase in the net debt(1) to equity ratio at the end of
the third quarter of 2007 when compared to the end of the third quarter last
year was due to the decrease in shareholders' equity, primarily the result of
the negative impact of the $800 million non-cash goodwill impairment charge
recorded in the fourth quarter of 2006 partially offset by a decline in net
debt(1).
    As a result of the decline in operating income, the interest coverage
ratio was 2.9 times for the first three quarters of 2007 compared to 4.6 times
in 2006.
    The rolling year return on average total assets(1) at the end of the
third quarter of 2007 decreased to (0.7%), compared to 10.7% for the
comparable period in 2006, and to 2.3% at year end 2006. The rolling year
return on average shareholders' equity(1) at the end of the third quarter
decreased to (7.9%), compared to 12.3% for the comparable period of 2006, and
to (3.9%) at year end 2006. Both ratios continue to be negatively impacted by
the decline in cumulative operating income for the latest four quarters
including the negative impact of the $800 million non-cash goodwill impairment
charge recorded in the fourth quarter of 2006.

    Common Share Dividends

    Loblaw's Board of Directors declared quarterly dividends equal to
21 cents per common share with a payment date of October 1, 2007.

    Outstanding Share Capital

    The Company's outstanding share capital is comprised of common shares. An
unlimited number of common shares is authorized and 274,173,564 common shares
were outstanding at quarter end. Further information on the Company's
outstanding share capital is provided in note 11 to the unaudited interim
period consolidated financial statements.

    Liquidity and Capital Resources

    Cash Flows from Operating Activities

    Third quarter cash flows from operating activities were $448 million in
2007 compared to $394 million in the comparable period in 2006. The
improvement in cash flows from operating activities for the third quarter was
mainly due to the change in non-cash working capital, primarily driven by the
change in accounts payable and accrued liabilities, partially offset by lower
net earnings. On a year-to-date basis, cash flows from operating activities
were $737 million compared to $403 million in 2006. The improvement in cash
flows from operating activities year-to-date was mainly due to the change in
non-cash working capital primarily driven by the change in inventory.

    Cash Flows used in Investing Activities

    Third quarter cash flows used in investing activities were $286 million
in 2007 compared to $229 million in 2006. The primary reason for this change
was the result of an increase in credit card receivables after securitization.
Capital investment for the third quarter amounted to $216 million (2006 -
$313 million). On a year-to-date basis, cash flows used in investing
activities were $441 million compared to $899 million in 2006. On a
year-to-date basis, the majority of the change in cash flows used in investing
activities was the result of a decline in capital investment of $236 million
in addition to less movement in short term investments from cash and cash
equivalents relative to year end, when compared to the prior year, due to the
change in the term to maturity profile of the Company's short term
investments. Capital investment amounted to $440 million (2006 - $676 million)
year-to-date. Loblaw continues its commitment to maintain and renew its asset
base and invest for growth across Canada albeit at a slower pace than in prior
years. The Company's investments are primarily targeted to generate same-store
sales growth rather than expansion in square footage.
    During the third quarter of 2007 $100 million (2006 - $125 million) of
credit card receivables were securitized and $225 million (2006 -
$240 million) year-to-date, by President's Choice Bank ("PC Bank"), a wholly
owned subsidiary of the Company, through the sale of a portion of the total
interest in these receivables to independent trusts. The securitization
yielded a nominal net loss (2006 - nominal net loss) based on the assumptions
disclosed in note 11 of the consolidated financial statements for the year
ended December 30, 2006 included in the Company's 2006 Annual Report. The
independent trusts' recourse to PC Bank's assets is limited to PC Bank's
retained interests and is further supported by the Company through a standby
letter of credit for 9% (2006 - 9%) on a portion of the securitized amount.

    Cash Flows (used in) from Financing Activities

    Third quarter cash flows used in financing activities were $126 million
in 2007 compared to $143 million in 2006. During the third quarter of 2007,
the change in cash flows used in commercial paper was $262 million and the
change in cash flows from short term debt was $306 million. On a year-to-date
basis, cash flows used in financing activities were $306 million compared to
cash flows from financing activities of $147 million in 2006 primarily driven
by a decrease in commercial paper levels partially offset by an increase in
short term debt. For the first three quarters of 2007, the change in cash
flows used in commercial paper was $836 million and the change in cash flows
from short term debt was $306 million.
    During the second quarter of 2007, Dominion Bond Rating Service ("DBRS")
downgraded the Company's Medium Term Notes and debentures to "A (low)" from
"A" and confirmed the Company's commercial paper rating at "R-1 (low)", both
with a "negative" trend. Also, during the second quarter, Standard & Poor's
("S&P") downgraded the Company's long term corporate credit to "BBB+" from
"A-" and confirmed the Company's commercial paper rating at "A-1 (low)". S&P
removed the Company from CreditWatch with negative implications and the
outlook was changed to "stable".
    In the first quarter of 2007, the Company entered into a 364-day
revolving committed credit facility of $500 million, extended by several banks
for general corporate purposes, which matures in March 2008 and has no
financial covenants. At the end of the third quarter, $296 million was drawn
on this facility at short term floating interest rates. During the third
quarter of 2007, the Company reduced its use of commercial paper due to global
credit market conditions, however, by the end of the quarter the commercial
paper market conditions for the Company had improved. The Company continues to
draw on committed and uncommitted facilities marginally increasing its cost of
financing.
    A downgrade in the Company's short term credit ratings would impact its
ability to access short term financing through its commercial paper program
which would increase borrowing costs. The Company anticipates it will continue
to be able to obtain external financing.
    In the event of a further downgrade of the Company's long term credit
rating issued by DBRS and a possible termination of the independent funding
trust agreement, the Company's franchisees' access to financing through the
structure involving independent funding trusts would be affected and the
standby letter of credit in the amount of $44 million provided to the
independent funding trust by Loblaw would be drawn upon. The principal amount
of the franchisee loans outstanding at the end of the third quarter of 2007
was $418 million. The Company is exploring alternative financing arrangements
for the benefit of its franchisees to address this issue. In the event the
Company restructures the independent funding trust, any new alternative
financing structure which may be implemented would need to be reviewed to
determine if there are any implications with respect to the consolidation of
VIEs.
    During the first quarter of 2007, Loblaw renewed its Normal Course Issuer
Bid to purchase on the Toronto Stock Exchange, or enter into equity
derivatives to purchase up to 13,708,678 of the Company's common shares,
representing approximately 5% of the common shares outstanding. In accordance
with the rules and by-laws of the Toronto Stock Exchange, Loblaw may purchase
its shares at the then market prices of such shares. The Company has not
purchased any shares under its Normal Course Issuer Bid during 2007
year-to-date.

    Free Cash Flow(1)

    Free cash flow(1) for the third quarter of 2007 was $117 million compared
to negative $34 million in the third quarter of 2006. The third quarter
improvement was due to an increase in cash flows from operating activities of
$54 million and a decrease in capital expenditures of $97 million compared to
last year. On a year-to-date basis, free cash flow(1) was $67 million compared
to negative $446 million in 2006 primarily due to an increase in cash flows
from operating activities of $334 million, substantially as a result of
reduced inventory levels, and a reduction in capital expenditures of
$236 million, partially offset by $57 million related to the timing of
dividend payments.

    Quarterly Results of Operations

    The following is a summary of selected consolidated financial information
derived from the Company's unaudited interim period consolidated financial
statements for each of the eight most recently completed quarters. This
information was prepared in accordance with Canadian GAAP and is reported in
Canadian dollars. Each of the quarters presented is 12 weeks in duration
except for the third quarter, which is 16 weeks in duration.

    
    Summary of Quarterly Results
    (unaudited)

    ($ millions
     except
     where
     otherwise  Third Quarter  Second Quarter   First Quarter  Fourth Quarter
     indicated)  2007    2006    2007    2006    2007    2006    2006    2005
    -------------------------------------------------------------------------
    Sales      $9,137  $9,010  $6,933  $6,699  $6,347  $6,147  $6,784  $6,552
    Net
     earnings
     (loss)    $  117  $  203  $  119  $  194  $   54  $  140  $ (756) $  201
    -------------------------------------------------------------------------
    Net earnings
     (loss) per
     common
     share
    Basic ($)  $ 0.43  $ 0.74  $ 0.43  $ 0.71  $ 0.20  $ 0.51  $(2.76) $ 0.73
    Diluted
     ($)       $ 0.43  $ 0.74  $ 0.43  $ 0.71  $ 0.20  $ 0.51  $(2.76) $ 0.73
    -------------------------------------------------------------------------
    

    Sales continued to grow in the third quarter of 2007 compared to 2006.
Same-store sales growth during the current quarter increased 1.6% including
the negative impact from the decline in tobacco sales. Sales and same-store
sales growth during the last two quarters of 2006 and the first three quarters
of 2007 were negatively impacted by the loss in tobacco sales. Tobacco is not
a significant earnings contributor.
    Fluctuations in quarterly net earnings for 2006 and into 2007 reflect the
impact of a number of specific charges resulting from ongoing initiatives and
a non-cash goodwill impairment charge of $800 million in the fourth quarter of
2006 and restructuring and other charges in late 2006 and the first three
quarters of 2007.

    Internal Control Over Financial Reporting

    Management is responsible for establishing and maintaining adequate
internal control over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with Canadian GAAP.
    Management has concluded that, as of October 6, 2007, a weakness existed
in the design of the Company's internal control over financial reporting in
the area of inventory controls, principally related to general merchandise
inventory valuation. This design weakness was caused primarily by the lack of
sufficient compensating controls in the absence of a perpetual inventory
system. This weakness has existed since the end of the first quarter of 2007.
    While it is possible that this design weakness, if left unaddressed,
could result in a material misstatement of the Company's inventory balances
now or in the future, management has concluded that the consolidated financial
statements included in this quarterly report fairly present the Company's
financial position, consolidated results of operations and cash flows for the
sixteen and forty weeks ended October 6, 2007. Management has reached this
conclusion based on the aggregate effect of a number of factors including the
performance of a significant number of inventory counts at the Company's
stores during the first three quarters of 2007, and further substantive
procedures performed by management to validate the recorded value of inventory
using its current method of estimating cost.
    The Company has made progress in remediating this design weakness by
developing a sustainable control framework for inventory valuation and a
detailed control implementation plan, including conducting inventory counts
required to reach a level at which the Company can be confident of the
statistical validity of extrapolating the results of those counts. In
addition, the Company has developed and is implementing revised policies and
procedures for identifying excess inventory. The Company is in the process of
implementing a perpetual inventory system and is exploring the role such a
system might have in the Company's valuation of its inventory.
    There has been no change in the Company's internal control over financial
reporting that occurred during the sixteen weeks ended October 6, 2007 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.

    Legal Proceedings

    During the first quarter of 2007, the Company was one of 17 defendants
served with an action brought in the Superior Court of Ontario by certain
beneficiaries of a multi-employer pension plan in which the Company's
employees and those of its independent franchisees participate. In their claim
against the employers and the trustees of the multi-employer pension plan, the
plaintiffs claim that assets of the multi-employer pension plan have been
mismanaged and are seeking, among other demands, damages of $1 billion. The
action is framed as a representative action on behalf of all the beneficiaries
of the multi-employer pension plan. The Company has recently received notice
from counsel for the plaintiffs indicating that he has received instructions
from his client to discontinue the action against the employers including the
Company. The action against the trustees is ongoing and one of the trustees,
an officer of the Company, may be entitled to indemnification from the
Company.
    In addition to the claim described above, the Company is the subject of
various legal proceedings and claims that arise in the ordinary course of
business. The outcome of all of these proceedings is uncertain. However, based
on information currently available, these claims, individually and in the
aggregate, are not expected to have a material impact on the Company.

    Accounting Standards Implemented in 2007

    On December 31, 2006, the Company implemented the Canadian Institute of
Chartered Accountants ("CICA") new Handbook sections 3855 "Financial
Instruments - Recognition and Measurement", 3865 "Hedges", 1530 "Comprehensive
Income", 3251 "Equity" and 3861 "Financial Instruments - Disclosure and
Presentation". These standards have been applied without restatement of prior
periods. The transitional adjustments resulting from these standards are
recognized in the opening balances of retained earnings and accumulated other
comprehensive income.
    The new accounting standards require that all financial instruments be
classified into a defined category, namely, held-for-trading financial assets
or financial liabilities, held-to-maturity investments, loans and receivables,
available-for-sale financial assets, or other financial liabilities. The
financial instruments within scope, including derivatives, are included on the
Company's balance sheet and measured at fair value except for loans and
receivables, held-to-maturity financial assets and other financial liabilities
which are measured at cost or amortized cost. Held-for-trading financial
assets and financial liabilities are measured at fair value with gains and
losses recognized in net earnings in the period in which they arise.
Available-for-sale financial assets are measured at fair value, with
unrealized gains and losses, including changes in foreign exchange rates,
recognized in other comprehensive income until the financial asset is
derecognized or impaired, at which time any unrealized gains or losses are
recorded in net earnings. In cash flow hedges, the effective portion of the
change in fair value of the hedging item is recorded in other comprehensive
income. To the extent the change in fair value of the derivative is not
completely offset by the change in fair value of the hedged item, the
ineffective portion of the hedging relationship is recorded immediately in net
earnings.
    Upon implementation of these standards, the Company has recorded the
following transitional adjustments:

    
                                                                Transitional
    ($ millions)                                                 Adjustments
    -------------------------------------------------------------------------
    Consolidated Balance Sheet
    Other assets                                                    $     35
    Future income taxes                                                   (7)
    Other liabilities                                                     41
    Retained earnings                                                    (15)
    Accumulated other comprehensive income                                16
    -------------------------------------------------------------------------
    

    For further details of the specific accounting changes and related
impacts, see note 2 to the unaudited interim period consolidated financial
statements.

    Future Accounting Standards

    Capital Disclosures and Financial Instruments - Disclosure and
    Presentation

    In December 2006, the CICA issued three new accounting standards: Section
1535, "Capital Disclosures", Section 3862, "Financial Instruments Disclosure"
and Section 3863, "Financial Instruments Presentation".
    Section 1535 establishes guidelines for the disclosure of information
regarding a company's capital and how it is managed. Enhanced disclosure with
respect to the objectives, policies and processes for managing capital and
quantitative disclosure about what a company regards as capital are required.
    Section 3862 and Section 3863 replace Section 3861, "Financial
Instruments - Disclosure and Presentation". Section 3862 requires increased
disclosures regarding the risks associated with financial instruments and how
these risks are managed. Section 3863 carries forward standards for
presentation of financial instruments and non-financial derivatives and
provides additional guidance for the classification of financial instruments,
from the perspective of the issuer, between liabilities and equity.
    These standards are effective for fiscal years beginning on or after
October 1, 2007 and therefore the Company will implement them in the first
quarter of 2008.

    Inventories

    In June 2007, the CICA issued a new Section 3031, "Inventories", which
will replace existing Section 3030 of the same title. The new standard
provides guidance on the determination of cost and requires inventories to be
measured at the lower of cost and net realizable value with more specific
guidance of costs to include in the cost of inventory. Costs such as storage
costs and administrative overhead that do not contribute to bringing
inventories to their present location and condition are specifically excluded
from the cost of inventories and expensed in the period incurred. This
standard is effective for fiscal years beginning on or after January 1, 2008
and will be implemented by the Company in the first quarter of 2008 to the
opening inventory for the period with an adjustment to opening retained
earnings, net of income taxes, for the difference in measurement of the
opening inventory with no prior periods restated. The Company is currently
assessing the implications of the new requirements and expects to record an
adjustment upon implementation of this standard. Based on a preliminary
analysis to date using inventory on hand at the third quarter of 2007, the
Company expects to record, upon implementation of this standard, a decrease in
the measurement of opening inventory of less than 4% of the inventory value
with a corresponding decrease to opening retained earnings of less than
$50 million net of income taxes.
    For further details on the above future accounting standards see note 1
to the unaudited interim period consolidated financial statements.

    Outlook

    This quarter was heavily affected by the costs of implementing the
Company's initiatives for the future including continued investment in
pricing. Employees are settling into their new functions and responsibilities.
The core initiatives are on track and the Company is satisfied with progress
so far, but the three to five year turnaround effort will inevitably have
bumps along the way. The Company expects continued margin pressure and risk to
earnings. In the short-term the Company expects solid sales volume growth in
the fourth quarter but continued reduced margins. Results in the first half of
next year may be affected by more difficult comparables. The Company is
confident in its turnaround strategy and is resolved to Make Loblaw the Best
Again.

    Additional Information

    Additional information about the Company has been filed electronically
with various securities regulators in Canada through the System for Electronic
Document Analysis and Retrieval (SEDAR) and is available online at
www.sedar.com and with the Office of the Superintendent of Financial
Institutions (OSFI) as the primary regulator of the Company's subsidiary,
President's Choice Bank.

    (1) See Non-GAAP Financial Measures below.

    Non-GAAP Financial Measures

    The Company reports its financial results in accordance with Canadian
GAAP. However, the Company has included certain non-GAAP financial measures
and ratios which it believes provide useful information to both management and
readers of this Quarterly Report in measuring the financial performance and
financial condition of the Company for the reasons set out below. These
measures do not have a standardized meaning prescribed by Canadian GAAP and,
therefore, may not be comparable to similarly titled measures presented by
other publicly traded companies. They should not be construed as an
alternative to other financial measures determined in accordance with Canadian
GAAP.

    Sales and Sales Growth Excluding the Impact of Tobacco Sales and VIEs

    These financial measures exclude the impact on sales from the decrease in
tobacco sales and from the consolidation by the Company of certain independent
franchisees which resulted from the implementation of AcG 15. Tobacco sales
continue to decrease as a result of a major tobacco supplier shipping directly
to certain customers of the Company's cash & carry and wholesale club network
commencing in the third quarter of 2006. These impacts on sales are excluded
because the Company believes this allows for a more effective analysis of the
operating performance of the Company. A reconciliation of the financial
measures to the Canadian GAAP financial measures is included in the table
"Sales and Sales Growth Excluding the Impact of Tobacco Sales and VIEs" on
page 5 of this MD&A.

    Adjusted Operating Income and Margin

    The following table reconciles adjusted operating income to Canadian GAAP
operating income reported in the unaudited interim period consolidated
statements of earnings for the sixteen and forty week periods ended October 6,
2007 and October 7, 2006. Items listed in the reconciliation below are
excluded because the Company believes this allows for a more effective
analysis of the operating performance of the Company. In addition, the
excluded items affect the comparability of the financial results and could
potentially distort the analysis of trends. The exclusion of these items does
not imply they are non-recurring. Adjusted operating income and margin are
useful to management in assessing the Company's performance and in making
decisions regarding the ongoing operations of its business.

    
                                  ----------            ----------
                                       2007       2006       2007       2006
    ($ millions)                  (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Operating income               $    250   $    398   $    602   $    984
    Add (deduct) impact of the
     following:
      Net effect of stock-based
       compensation and the
       associated equity forwards        19         31         20         43
      Restructuring and other
       charges                           24          1        186          9
      Inventory liquidation               3          -         12          -
      VIEs                               (9)        (8)        (7)        (8)
      Departure entitlement charge        -         12          -         12
    -------------------------------------------------------------------------
    Adjusted operating income      $    287   $    434   $    813   $  1,040
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  ----------            ----------
    

    Adjusted operating margin is calculated as adjusted operating income
divided by sales excluding the impact of tobacco sales and VIEs.

    Adjusted EBITDA and Margin

    The following table reconciles adjusted earnings before interest, income
taxes, depreciation and amortization ("EBITDA") to adjusted operating income
which is reconciled to Canadian GAAP measures reported in the unaudited
interim period consolidated statements of earnings, in the table above, for
the sixteen and forty week periods ended October 6, 2007 and October 7, 2006.
Adjusted EBITDA is useful to management in assessing the Company's performance
of its ongoing operations and its ability to generate cash flows to fund its
cash requirements, including the Company's capital investment program.

    
                                  ----------            ----------
                                       2007       2006       2007       2006
    ($ millions)                  (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Adjusted operating income      $    287   $    434   $    813   $  1,040
    Add (deduct) impact of the
     following:
      Depreciation and
       amortization                     180        184        454        457
      VIEs depreciation and
       amortization                     (11)        (7)       (27)       (19)
    -------------------------------------------------------------------------
    Adjusted EBITDA                $    456   $    611   $  1,240   $  1,478
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  ----------            ----------
    

    Adjusted EBITDA margin is calculated as adjusted EBITDA divided by sales
excluding the impact of tobacco sales and VIEs.

    Adjusted Basic Net Earnings per Common Share

    The following table reconciles adjusted basic net earnings per common
share to Canadian GAAP basic net earnings per common share measures reported
in the unaudited interim period consolidated statements of earnings for the
sixteen and forty week periods ended October 6, 2007 and October 7, 2006.
Items listed in the reconciliation below are excluded because the Company
believes this allows for a more effective analysis of the operating
performance of the Company. In addition, the excluded items affect the
comparability of the financial results and could potentially distort the
analysis of trends. The exclusion of these items does not imply they are
non-recurring. Adjusted basic net earnings per common share is useful to
management in assessing the Company's performance and in making decisions
regarding the ongoing operations of its business.

    
                                  ----------            ----------
                                       2007       2006       2007       2006
                                  (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Basic net earnings per
     common share                  $   0.43   $   0.74   $   1.06   $   1.96
    Add (deduct) impact of the
     following:
      Net effect of stock-based
       compensation and the
       associated equity forwards      0.08       0.14       0.09       0.19
      Restructuring and other
       charges                         0.05          -       0.44       0.02
      Inventory liquidation            0.01          -       0.03          -
      VIEs                            (0.01)     (0.01)         -          -
      Departure entitlement charge        -       0.03          -       0.03
      Changes in statutory income
       tax rates                          -          -          -      (0.06)
    -------------------------------------------------------------------------
    Adjusted basic net earnings
     per common share              $   0.56   $   0.90   $   1.62   $   2.14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  ----------            ----------

    Net Debt

    The following table reconciles net debt used in the net debt to equity
ratio to Canadian GAAP measures reported in the unaudited interim period
consolidated balance sheets as at October 6, 2007 and October 7, 2006. The
Company calculates net debt as the sum of long term debt and short term debt
less cash, cash equivalents and short term investments. The net debt to equity
ratio is useful in assessing the amount of leverage employed.

                                                        ----------
    ($ millions)                                             2007       2006
    -------------------------------------------------------------------------
    Bank indebtedness                                    $     32   $     58
    Commercial paper                                          239        864
    Short term debt                                           306          -
    Long term debt due within one year                        432         29
    Long term debt                                          3,856      4,208
    Less: Cash and cash equivalents                           570        550
          Short term investments                              333        342
    -------------------------------------------------------------------------
    Net debt                                             $  3,962   $  4,267
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                        ----------

    Free Cash Flow

    The following table reconciles free cash flow to Canadian GAAP measures
reported in the unaudited interim period consolidated cash flow statements for
the sixteen and forty week periods ended October 6, 2007 and October 7, 2006.
The Company calculates free cash flow as cash flows from operating activities
less fixed asset purchases and dividends. The Company believes free cash flow
is a useful measure of the change in the Company's cash available for
additional funding requirements.

                                  ----------            ----------
                                       2007       2006       2007       2006
    ($ millions)                  (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Cash flows from operating
     activities                    $    448   $    394   $    737   $    403
    Less: Fixed asset purchases         216        313        440        676
          Dividends                     115        115        230        173
    -------------------------------------------------------------------------
    Free cash flow                 $    117   $    (34)  $     67   $   (446)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  ----------            ----------

    Total Assets

    The following table reconciles total assets used in the return on average
total assets to Canadian GAAP measures reported in the unaudited interim
period consolidated balance sheets as at October 6, 2007 and October 7, 2006.
The Company believes the return on average total assets ratio is useful in
assessing the performance of its operating assets and therefore excludes cash,
cash equivalents and short term investments from the total assets used in the
ratio.

                                                        ----------
    ($ millions)                                             2007       2006
    -------------------------------------------------------------------------
    Total assets                                         $ 13,357   $ 14,031
    Less: Cash and cash equivalents                           570        550
          Short term investments                              333        342
    -------------------------------------------------------------------------
    Total assets                                         $ 12,454   $ 13,139
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                        ----------


    Consolidated Statements of Earnings
    (unaudited)

                                  ----------            ----------
    For the periods ended
     October 6, 2007 and
     October 7, 2006
    ($ millions except where           2007       2006       2007       2006
     otherwise indicated)         (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Sales                          $  9,137   $  9,010   $ 22,417   $ 21,856
    Operating Expenses
      Cost of sales, selling and
       administrative expenses        8,683      8,427     21,175     20,406
      Depreciation and amortization     180        184        454        457
      Restructuring and other
       charges (note 4)                  24          1        186          9
    -------------------------------------------------------------------------
                                      8,887      8,612     21,815     20,872
    -------------------------------------------------------------------------
    Operating Income                    250        398        602        984
    Interest Expense (note 5)            76         78        193        199
    -------------------------------------------------------------------------
    Earnings Before Income Taxes        174        320        409        785
    Income Taxes (note 6)                56        113        123        246
    -------------------------------------------------------------------------
    Net Earnings Before Minority
     Interest                           118        207        286        539
    Minority Interest                     1          4         (4)         2
    -------------------------------------------------------------------------
    Net Earnings                   $    117   $    203   $    290   $    537
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net Earnings Per Common
     Share ($) (note 7)
    Basic and Diluted              $   0.43   $   0.74   $   1.06   $   1.96
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  ----------            ----------

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



    Consolidated Statements of Changes in Shareholders' Equity
    (unaudited)
                                                        ----------
    For the periods ended October 6,
     2007 and October 7, 2006
    ($ millions except where                                 2007       2006
     otherwise indicated)                               (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Common Share Capital, Beginning and End of Period    $  1,196   $  1,192
    -------------------------------------------------------------------------
    Retained Earnings, Beginning of Period               $  4,245   $  4,694
    Cumulative impact of implementing new accounting
     standards (note 2)                                       (15)         -
    Net earnings                                              290        537
    Dividends declared per common share - 63 cents
     (2006 - 63 cents)                                       (173)      (173)
    -------------------------------------------------------------------------
    Retained Earnings, End of Period                     $  4,347   $  5,058
    -------------------------------------------------------------------------
    Accumulated Other Comprehensive Income,
     Beginning of Period                                 $      -
    Cumulative impact of implementing new accounting
     standards (note 2)                                        16
    Other comprehensive income                                 (3)
    --------------------------------------------------------------
    Accumulated Other Comprehensive Income,
     End of Period (note 12)                             $     13
    -------------------------------------------------------------------------
    Total Shareholders' Equity                           $  5,556   $  6,250
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                        ----------

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


    Consolidated Statement of Comprehensive Income
    (unaudited)
                                                        ---------- ----------
    For the period ended October 6, 2007                     2007       2007
    ($ millions)                                        (16 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Net earnings                                         $    117   $    290
    Other comprehensive income, net of income taxes
      Net unrealized loss on available-for-sale
       financial assets                                       (32)       (61)
      Reclassification of loss on available-for-sale
       financial assets to net earnings                        27         14
    -------------------------------------------------------------------------
                                                               (5)       (47)
    -------------------------------------------------------------------------
      Net gain on derivatives designated as cash flow
       hedges                                                  31         56
      Reclassification of gain on derivatives designated
       as cash flow hedges to net earnings                    (25)       (12)
    -------------------------------------------------------------------------
                                                                6         44
    -------------------------------------------------------------------------
    Other comprehensive income                                  1         (3)
    -------------------------------------------------------------------------
    Total Comprehensive Income                           $    118   $    287
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                        ---------- ----------

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



    Consolidated Balance Sheets
                                         ----------
                                             As at        As at        As at
                                         October 6,   October 7, December 30,
                                              2007         2006         2006
    ($ millions)                        (unaudited)  (unaudited)
    -------------------------------------------------------------------------
    Assets
    Current Assets
      Cash and cash equivalents           $    570     $    550     $    669
      Short term investments                   333          342          327
      Accounts receivable (note 8)             656          585          728
      Inventories                            1,904        2,155        2,037
      Income taxes (note 6)                     67           20           63
      Future income taxes                       94           53           85
      Prepaid expenses and other assets         61           72           39
    -------------------------------------------------------------------------
    Total Current Assets                     3,685        3,777        3,948
    Fixed Assets                             8,078        7,987        8,055
    Goodwill (note 3)                          804        1,589          794
    Other Assets                               790          678          689
    -------------------------------------------------------------------------
    Total Assets                          $ 13,357     $ 14,031     $ 13,486
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities
    Current Liabilities
      Bank indebtedness                   $     32     $     58     $      1
      Commercial paper                         239          864          647
      Short term debt (note 10)                306            -            -
      Accounts payable and accrued
       liabilities                           2,329        2,062        2,598
      Long term debt due within one year       432           29           27
    -------------------------------------------------------------------------
    Total Current Liabilities                3,338        3,013        3,273
    Long Term Debt                           3,856        4,208        4,212
    Future Income Taxes                        212          233          234
    Other Liabilities                          387          314          314
    Minority Interest                            8           13           12
    -------------------------------------------------------------------------
    Total Liabilities                        7,801        7,781        8,045
    -------------------------------------------------------------------------
    Shareholders' Equity
    Common Share Capital (note 11)           1,196        1,192        1,196
    Retained Earnings                        4,347        5,058        4,245
    Accumulated Other Comprehensive
     Income (notes 2 and 12)                    13            -            -
    -------------------------------------------------------------------------
    Total Shareholders' Equity               5,556        6,250        5,441
    -------------------------------------------------------------------------
    Total Liabilities and Shareholders'
     Equity                               $ 13,357     $ 14,031     $ 13,486
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                         ----------

    Contingencies, commitments and guarantees (note 15).

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



    Consolidated Cash Flow Statements
    (unaudited)
                                  ----------            ----------
    For the periods ended
     October 6, 2007 and
     October 7, 2006                   2007       2006       2007       2006
    ($ millions)                  (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Operating Activities
      Net earnings before
       minority interest           $    118   $    207   $    286   $    539
      Depreciation and
       amortization                     180        184        454        457
      Restructuring and other
       charges (note 4)                  24          1        186          9
      Future income taxes                 -         29        (25)        13
      Change in non-cash working
       capital                           68        (63)      (262)      (679)
      Other                              58         36         98         64
    -------------------------------------------------------------------------
    Cash Flows from Operating
     Activities                         448        394        737        403
    -------------------------------------------------------------------------
    Investing Activities
      Fixed asset purchases            (216)      (313)      (440)      (676)
      Short term investments            (56)        (2)       (65)      (350)
      Proceeds from fixed asset
       sales                             29         71         48         81
      Credit card receivables,
       after securitization
       (note 8)                         (47)        32         45         84
      Franchise investments and
       other receivables                 12         (5)        15         (5)
      Other                              (8)       (12)       (44)       (33)
    -------------------------------------------------------------------------
    Cash Flows used in Investing
     Activities                        (286)      (229)      (441)      (899)
    -------------------------------------------------------------------------
    Financing Activities
      Bank indebtedness                 (66)       (45)        31         28
      Commercial paper                 (243)        19       (408)       428
      Short term debt (note 10)         306          -        306          -
      Long term debt
        Issued                            2         14         25         18
        Retired                         (10)       (16)       (30)      (154)
      Dividends                        (115)      (115)      (230)      (173)
    -------------------------------------------------------------------------
    Cash Flows (used in) from
     Financing Activities              (126)      (143)      (306)       147
    -------------------------------------------------------------------------
    Effect of foreign currency
     exchange rate changes on
     cash and cash equivalents          (38)         -        (89)       (17)
    -------------------------------------------------------------------------
    Change in Cash and Cash
     Equivalents                         (2)        22        (99)      (366)
    Cash and Cash Equivalents,
     Beginning of Period                572        528        669        916
    -------------------------------------------------------------------------
    Cash and Cash Equivalents,
     End of Period                 $    570   $    550   $    570   $    550
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  ----------            ----------

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


    Notes to the Unaudited Interim Period
    Consolidated Financial Statements

    Note 1. Summary of Significant Accounting Principles

    Basis of Presentation

    The unaudited interim period consolidated financial statements were
    prepared in accordance with Canadian generally accepted accounting
    principles ("GAAP") and follow the same accounting policies and methods
    of application as those used in the preparation of the audited annual
    consolidated financial statements for the year ended December 30, 2006
    except as described in note 2. Under Canadian GAAP, additional disclosure
    is required in annual financial statements and accordingly the unaudited
    interim period consolidated financial statements should be read together
    with the audited annual consolidated financial statements and the
    accompanying notes included in the Loblaw Companies Limited 2006 Annual
    Report.

    Basis of Consolidation

    The consolidated financial statements include the accounts of Loblaw
    Companies Limited and its subsidiaries collectively referred to as the
    "Company" or "Loblaw". The Company's interest in the voting share capital
    of its subsidiaries is 100%. The Company also consolidates variable
    interest entities ("VIEs") that are subject to control on a basis other
    than through ownership of a majority of voting interest.

    Use of Estimates and Assumptions

    The preparation of the unaudited interim period consolidated financial
    statements requires management to make estimates and assumptions that
    affect the reported amounts and disclosures made in the unaudited interim
    period consolidated financial statements and accompanying notes. These
    estimates and assumptions are based on management's historical
    experience, best knowledge of current events and conditions and
    activities that may be undertaken in the future. Actual results could
    differ from these estimates.

    Certain estimates, such as those related to valuation of inventories,
    goodwill, income taxes, Goods and Services Tax and provincial sales
    taxes, fixed assets and employee future benefits, depend upon subjective
    or complex judgments about matters that may be uncertain, and changes in
    those estimates could materially impact the consolidated financial
    statements.

    Future Accounting Standards

    Capital Disclosures and Financial Instruments - Disclosure and
    Presentation

    In December 2006, the Canadian Institute of Chartered Accountants
    ("CICA") issued three new accounting standards: Section 1535, "Capital
    Disclosures", Section 3862, "Financial Instruments Disclosure" and
    Section 3863, "Financial Instruments Presentation".

    Section 1535 establishes guidelines for the disclosure of information
    regarding a company's capital and how it is managed. The standard
    requires enhanced disclosures with respect to (i) an entity's objectives,
    policies and processes for managing capital; (ii) quantitative data about
    what the entity regards as capital; and (iii) whether the entity has
    complied with any capital requirements, and if it has not complied, the
    consequences of such non-compliance.

    Section 3862 and Section 3863 replace Section 3861, "Financial
    Instruments - Disclosure and Presentation". Section 3862 requires
    increased disclosures regarding the risks associated with financial
    instruments such as credit risk, liquidity risk and market risks and the
    techniques used to identify, monitor and manage these risks. Section 3863
    carries forward standards for presentation of financial instruments and
    non-financial derivatives and provides additional guidance for the
    classification of financial instruments, from the perspective of the
    issuer, between liabilities and equity.

    These standards are effective for fiscal years beginning on or after
    October 1, 2007 and therefore the Company will implement them in the
    first quarter of 2008.

    Inventories

    The new Section 3031, "Inventories", was issued in June 2007 and will
    replace existing Section 3030 of the same title. The new standard
    provides guidance with respect to the determination of cost and requires
    inventories to be measured at the lower of cost and net realizable value
    with more specific guidance of costs to include in the cost of inventory.
    Costs such as storage costs and administrative overhead that do not
    contribute to bringing inventories to their present location and
    condition are specifically excluded from the cost of inventories and
    expensed in the period incurred. Reversal of previous write-downs to net
    realizable value when there is a subsequent increase in the value of
    inventories is now required. The cost of the inventories should be based
    on a first-in, first-out or a weighted average cost formula. Techniques
    used for the measurement of cost of inventories, such as the retail
    method, may be used for convenience if the results approximate cost. The
    new standard also requires additional disclosures including the
    accounting policies used in measuring inventories, the carrying amount of
    the inventories, amounts recognized as an expense during the period,
    write-downs and the amount of any reversal of any write-downs recognized
    as a reduction in expenses.

    This standard is effective for fiscal years beginning on or after
    January 1, 2008 and the Company will be implementing the standard in the
    first quarter of 2008 to the opening inventory for the period with an
    adjustment to opening retained earnings, net of income taxes, for the
    difference in measurement of the opening inventory with no prior periods
    restated. The Company is currently assessing the implications of the new
    requirements. As a result, based on a preliminary analysis to date using
    inventory on hand at the third quarter of 2007, the Company expects to
    record, upon implementation of this standard, a decrease in the
    measurement of opening inventory of less than 4% of the inventory value
    with a corresponding decrease to opening retained earnings of less than
    $50 million net of income taxes.

    In addition to the changes in the cost of inventory, the Company is
    reviewing the additional presentation and disclosure requirements which
    will be required in the consolidated financial statements and/or in the
    accompanying notes.

    Note 2. Accounting Standards Implemented in 2007

    On December 31, 2006, the Company implemented the CICA new Handbook
    Sections 3855 "Financial Instruments - Recognition and Measurement", 3865
    "Hedges", 1530 "Comprehensive Income", 3251 "Equity" and 3861 "Financial
    Instruments - Disclosure and Presentation". These standards have been
    applied without restatement of prior periods. The transitional
    adjustments resulting from these standards are recognized in the opening
    balances of retained earnings and accumulated other comprehensive income.

    Section 3855, "Financial Instruments - Recognition and Measurement"
    ("Section 3855") establishes guidance for recognizing and measuring
    financial assets, financial liabilities and non-financial derivatives.
    All financial instruments must be classified into a defined category,
    namely, held-for-trading financial assets or financial liabilities, held-
    to-maturity investments, loans and receivables, available-for-sale
    financial assets, or other financial liabilities. The standard requires
    that financial instruments within scope, including derivatives, be
    included on the Company's balance sheet and measured at fair value,
    except for loans and receivables, held-to-maturity financial assets and
    other financial liabilities which are measured at cost or amortized cost.
    Gains and losses on held-for-trading financial assets and financial
    liabilities are recognized in net earnings in the period in which they
    arise. Unrealized gains and losses, including changes in foreign exchange
    rates on available-for-sale financial assets are recognized in other
    comprehensive income until the financial asset is derecognized or
    impaired, at which time any unrealized gains or losses are recorded in
    net earnings. Transaction costs other than those related to financial
    instruments classified as held-for-trading, which are expensed as
    incurred, are added to the fair value of the financial asset or financial
    liability on initial recognition and amortized using the effective
    interest method.

    Fair values are based on quoted market prices where available from active
    markets, otherwise fair values are estimated using a variety of valuation
    techniques and models as more fully described in note 20 of the
    consolidated financial statements for the year ended December 30, 2006.

    As a result of the implementation of Section 3855, the Company has
    classified cash and cash equivalents and short term investments as held-
    for-trading with the exception of certain United States dollar
    denominated short term investments designated in a hedging relationship,
    which are classified as available-for-sale financial assets. Accounts
    receivable are classified as loans and receivables; and investments in
    equity instruments are classified as available-for-sale. Bank
    indebtedness, accounts payable and certain accrued liabilities, long term
    debt and capital lease obligations have been classified as other
    financial liabilities. The Company has not classified any financial
    assets as held-to-maturity. The impact of re-measuring financial assets
    classified as available-for-sale at fair value resulted in an increase in
    other assets of $9 million with a corresponding increase in accumulated
    other comprehensive income of $6 million net of income taxes.

    In addition, as a result of classifying the United States dollar
    denominated short term investments designated in a hedging relationship
    as available-for-sale, the net unrealized gain previously recorded in
    retained earnings was reclassified to accumulated other comprehensive
    income for an amount of $14 million net of income taxes. The retained
    interest held by President's Choice Bank, a wholly owned subsidiary of
    the Company, in securitized receivables has been classified as held-for
    trading and has resulted in an increase in other assets of $2 million
    with a corresponding increase in opening retained earnings of $1 million
    net of income taxes. The re-measurement of financial assets classified as
    loans and receivables and financial liabilities classified as other
    liabilities at amortized cost was insignificant.

    Non-financial derivatives must be recorded at fair value on the
    consolidated balance sheet unless they are exempt from derivative
    treatment based upon expected purchase, sale or usage requirements. All
    changes in their fair value are recorded in net earnings unless cash flow
    hedge accounting is applied, in which case changes in fair value are
    recorded in other comprehensive income. As a result of re-measuring a
    non-financial derivative at fair value an increase in other assets of
    $7 million and an increase in opening retained earnings of $5 million net
    of income taxes was recognized. The standard requires embedded
    derivatives to be separated and fair valued if certain criteria are met.
    Under an election provided for by the standard, December 29, 2002 was
    elected as the transition date to apply this accounting treatment to
    embedded derivatives. The impact of this change in accounting treatment
    related to embedded derivatives was not significant.

    During the third quarter and year-to-date 2007, the change in fair value
    of held-for-trading financial assets and liabilities, including non-
    financial derivatives, recognized in net earnings was a loss of
    $18 million and $11 million respectively, and was mainly comprised of the
    change in fair value of the equity forwards.

    Section 3855 also requires that obligations undertaken in issuing a
    guarantee that meets the definition of a guarantee pursuant to Accounting
    Guideline 14, "Disclosure of Guarantees" be recognized at fair value at
    inception. No subsequent re-measurement at fair value is required unless
    the financial guarantee qualifies as a derivative. As a result, a
    liability of $7 million related to the fair value of the standby letter
    of credit issued by a major Canadian chartered bank for the benefit of an
    independent funding trust which provides loans to the Company's
    independent franchisees was recognized, with a corresponding decrease of
    $6 million net of income taxes to opening retained earnings.

    Section 3865, "Hedges" replaces Accounting Guideline 13, "Hedging
    Relationships". The requirements for identification, designation,
    documentation and assessment of effectiveness of hedging relationships
    remain substantially unchanged. Section 3865 addresses the accounting
    treatment of qualifying hedging relationships and the necessary
    disclosures and also requires all derivatives in hedging relationships to
    be recorded at fair value.

    As described in notes 1 and 20 of the consolidated financial statements
    for the year ended December 30, 2006, the Company has cash flow hedges
    which are used to manage exposure to fluctuations in foreign currency
    exchange rates and variable interest rates on variable rate assets and
    liabilities. For cash flow hedges, the effective portion of the change in
    fair value of the hedging item is recorded in other comprehensive income.
    To the extent the change in fair value of the derivative is not
    completely offset by the change in fair value of the hedged item, the
    ineffective portion of the hedging relationship is recorded immediately
    in net earnings. Amounts accumulated in other comprehensive income are
    reclassified to net earnings when the hedged item is recognized in net
    earnings. When a hedging instrument in a cash flow hedge expires or is
    sold, or when a hedge no longer meets the criteria for hedge accounting,
    any cumulative gain or loss in accumulated other comprehensive income
    relating to the hedge is carried forward until the hedged item is
    recognized in net earnings. When the hedged item ceases to exist as a
    result of its expiry or sale, or if an anticipated transaction is no
    longer expected to occur, the cumulative gain or loss in accumulated
    other comprehensive income is immediately reclassified to net earnings.

    Upon implementation of these requirements with respect to cash flow
    hedges, an increase in other assets of $17 million and an increase in
    other liabilities of $34 million related to the fair value of the
    interest rate swaps not previously recognized on the consolidated balance
    sheet and an increase in accumulated other comprehensive income of
    $10 million net of income taxes were recorded. A decrease in opening
    retained earnings of $15 million net of income taxes resulting from the
    financing element of off-market interest rate swaps was also recorded. In
    addition, a decrease in accumulated other comprehensive income of
    $14 million net of income taxes was recorded related to the effective
    portion of the unrealized gains and losses on the cross currency basis
    swaps previously recognized in retained earnings. The ineffective portion
    of the gains or losses on the derivatives within the hedging
    relationships was insignificant.

    Section 1530, "Comprehensive Income" introduces a statement of
    comprehensive income, which is comprised of net earnings and other
    comprehensive income. Other comprehensive income represents the change in
    shareholders' equity from transactions and other events from non-owner
    sources and includes unrealized gains and losses on financial assets that
    are classified as available-for-sale, and changes in the fair value of
    the effective portion of cash flow hedging instruments. The Company has
    included in the unaudited interim period consolidated financial
    statements a new consolidated statement of comprehensive income for the
    changes in these items, while the cumulative changes in other
    comprehensive income are included in accumulated other comprehensive
    income, which is presented as a new category of shareholders' equity on
    the consolidated balance sheet. See note 12 for further details of the
    accumulated other comprehensive income balance.

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

    Section 3861, "Financial Instruments - Disclosure and Presentation",
    which replaces Section 3860, of the same title, establishes standards for
    presentation of financial instruments and non-financial derivatives, and
    identifies the information that should be disclosed about them.

    The following tables summarize the transitional adjustments recorded upon
    implementation:

    
                                                                Transitional
    ($ millions)                                                 Adjustments
    -------------------------------------------------------------------------
    Consolidated Balance Sheet
    Other assets                                                    $     35
    Future income taxes                                                   (7)
    Other liabilities                                                     41
    Retained earnings                                                    (15)
    Accumulated other comprehensive income                                16
    -------------------------------------------------------------------------


                                                           Accumulated Other
                                     Retained Earnings  Comprehensive Income
                                  -------------------------------------------
                                                Net of                Net of
                                                Income                Income
    ($ millions)                      Gross      Taxes      Gross      Taxes
    -------------------------------------------------------------------------
    Classification of financial
     assets as available-for-sale  $    (14)  $    (14)  $     23   $     20
    Classification of financial
     assets as held-for-trading           2          1          -          -
    Non-financial derivative              7          5          -          -
    Guarantees                           (7)        (6)         -          -
    Cash flow hedges                     (9)        (1)        (8)        (4)
    -------------------------------------------------------------------------
                                   $    (21)  $    (15)  $     15   $     16
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Note 3. Goodwill

    The Company has completed its work in connection with the non-cash
    goodwill impairment charge of $800 million recorded in the Company's
    audited annual consolidated financial statements for the year ended
    December 30, 2006. This charge was finalized in the second quarter of
    2007.

    Note 4. Restructuring and Other Charges

    Project Simplify

    During the first quarter, the Company approved and announced the
    restructuring of its merchandising and store operations into more
    streamlined functions as part of Project Simplify. The total
    restructuring costs under this plan, comprised primarily of severance
    costs, are now estimated to be approximately $185 million. In the third
    quarter of 2007, the Company recognized $23 million of restructuring
    costs resulting from this plan. The year-to-date charge of $168 million
    is comprised of $120 million for employee termination benefits including
    severance, additional pension costs resulting from the termination of
    employees and retention costs; and $48 million of other costs, primarily
    consulting. At the end of the third quarter, $17 million in estimated
    costs remain to be incurred and will be recognized as appropriate
    criteria are met.

    Store Operations

    During 2006, management of the Company approved and communicated a plan
    to close 19 underperforming Quebec stores, mainly within the Provigo
    banner, and 8 stores in the Atlantic region. In addition, as a result of
    the loss of tobacco sales following the decision by a major tobacco
    supplier to sell directly to certain customers of the Company, a review
    of the impact on the cash & carry and wholesale club network was
    undertaken. In 2006, management approved and communicated a formal plan
    to close 24 wholesale outlets which were impacted most significantly by
    this change. The total restructuring cost under these plans is estimated
    to be approximately $54 million. Of the $54 million, approximately
    $10 million is attributable to employee termination benefits, which
    include severance resulting from the termination of employees,
    $25 million to fixed asset impairment and accelerated depreciation
    relating to these restructuring activities and $19 million to site
    closing and other costs including lease obligations. The year-to-date
    charge of $16 million relates to site closing and other costs including
    lease obligations. At the end of the third quarter, $3 million in
    estimated costs remain to be incurred and will be recognized as
    appropriate criteria are met.

    Supply Chain Network

    During 2005, management of the Company approved a comprehensive plan to
    restructure its supply chain operations nationally. The restructuring
    plan is expected to be completed by the first quarter of 2009 and the
    total restructuring cost under this plan is estimated to be approximately
    $90 million. Of the $90 million, approximately $57 million is
    attributable to employee termination benefits, which include severance
    and additional pension costs resulting from the termination of employees,
    $13 million to fixed asset impairment and accelerated depreciation
    relating to this restructuring activity and $20 million to site closing
    and other costs directly attributable to the restructuring plan. In the
    third quarter of 2007, the Company recognized $1 million of restructuring
    costs from this plan. The Company recognized $2 million (2006 -
    $8 million) year-to-date of restructuring costs resulting from this plan.
    At the end of the third quarter, $18 million in estimated costs remain to
    be incurred and will be recognized as appropriate criteria are met.

    Office Move and Reorganization of the Operation Support Functions

    In 2005, the Company consolidated several administrative and operating
    offices from across southern Ontario into a new National Head Office and
    Store Support Centre in Brampton, Ontario and reorganized the
    merchandising, procurement and operations groups which included the
    transfer of the general merchandise operations from Calgary, Alberta to
    the new office. All of the expected $25 million of costs related to these
    initiatives had been recognized by the end of 2006.

    The costs recognized in operating income and cash payments made by the
    Company are as follows:

    
                                  --------------------------------
                                                  Site
                                   Employee    Closing
                                     Termin-       and       2007       2006
                                      ation      Other  (40 weeks) (40 weeks)
    ($ millions)                   Benefits      Costs      Total      Total
    -------------------------------------------------------------------------
    Net liability,
     beginning of period           $     40   $      -   $     40   $     41
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Costs recognized during
     the period:
      Project Simplify             $    120   $     48   $    168   $      -
      Store operations                    -         16         16          -
      Supply chain network                1          1          2          8
      Office move and
       reorganization of the
       operation support
       functions                          -          -          -          1
    -------------------------------------------------------------------------
                                   $    121   $     65   $    186   $      9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash payments during the
     period:
      Project Simplify             $     82   $     48   $    130   $      -
      Store operations                    7         13         20          -
      Supply chain network                3          1          4          5
      Office move and
       reorganization of the
       operation support
       functions                          -          -          -          3
    -------------------------------------------------------------------------
                                   $     92   $     62   $    154   $      8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Charges against fixed assets   $      -   $      -   $      -   $      2
    Charges against other
     assets(1)                            9          -          9          -
    -------------------------------------------------------------------------
    Net liability, end of period   $     60   $      3   $     63   $     40
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Recorded in the consolidated
     balance sheet as follows:
      Other assets                 $      -   $      -   $      -   $      9
      Accounts payable and
       accrued liabilities               39          3         42         10
      Other liabilities                  21          -         21         21
    -------------------------------------------------------------------------
    Net liability, end of period   $     60   $      3   $     63   $     40
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  --------------------------------

    (1) Charges against other assets relates to contractual termination
        benefits cost recognized which reduced the accrued benefit plan
        asset.


    Note 5. Interest Expense
                                  ----------            ----------
                                       2007       2006       2007       2006
    ($ millions)                  (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Interest on long term debt     $     87   $     86   $    219   $    219
    Interest on financial
     derivative instruments               5          3         10          5
    Net short term interest             (10)        (5)       (19)        (9)
    Capitalized to fixed assets          (6)        (6)       (17)       (16)
    -------------------------------------------------------------------------
    Interest expense               $     76   $     78   $    193   $    199
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  ----------            ----------

    Net interest paid in the third quarter and year-to-date was $60 million
    and $200 million (2006 - $65 million and $211 million), respectively.

    Note 6. Income Taxes

    Net income taxes paid in the third quarter and year-to-date were
    $27 million and $154 million (2006 - $50 million and $248 million),
    respectively.

    Note 7. Basic and Diluted Net Earnings per Common Share

                                  ----------            ----------
                                       2007       2006       2007       2006
                                  (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Net earnings ($ millions)      $    117   $    203   $    290   $    537
    -------------------------------------------------------------------------
    Weighted average common shares
     outstanding (in millions)        274.2      274.1      274.2      274.1
    Dilutive effect of stock-based
     compensation (in millions)           -        0.2          -        0.2
    -------------------------------------------------------------------------
    Diluted weighted average
     common shares outstanding
     (in millions)                    274.2      274.3      274.2      274.3
    -------------------------------------------------------------------------
    Basic and diluted net earnings
     per common share ($)          $   0.43   $   0.74   $   1.06   $   1.96
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  ----------            ----------
    

    Stock options outstanding with an exercise price greater than the market
    price of the Company's common shares at the end of the third quarter were
    not recognized in the computation of diluted net earnings per common
    share. Accordingly, for the third quarter, 6,757,541 (2006 - 4,047,049)
    stock options, with a weighted average exercise price of $53.03 (2006 -
    $61.52) per common share were excluded from the computation of diluted
    net earnings per common share.

    Note 8. Credit Card Receivables

    During the third quarter $100 million (2006 - $125 million) of credit
    card receivables were securitized, $225 million (2006 - $240 million)
    year-to-date, by President's Choice Bank ("PC Bank"), a wholly owned
    subsidiary of the Company, through the sale of a portion of the total
    interest in these receivables to independent trusts. The securitization
    yielded a nominal net loss (2006 - nominal net loss) based on the
    assumptions disclosed in note 11 of the consolidated financial statements
    for the year ended December 30, 2006. The independent trusts' recourse to
    PC Bank's assets is limited to PC Bank's retained interests and is
    further supported by the Company through a standby letter of credit for
    9% (2006 - 9%) on a portion of the securitized amount.

    
                                      -------------
                                              2007         2006         2006
                                            (as at       (as at       (as at
                                         October 6,   October 7, December 30,
    ($ millions)                              2007)        2006)        2006)
    -------------------------------------------------------------------------
    Credit card receivables            $     1,744  $     1,407  $     1,571
    Amount securitized                      (1,475)      (1,250)      (1,250)
    -------------------------------------------------------------------------
    Net credit card receivables        $       269  $       157  $       321
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                      -------------
    

    Note 9. Employee Future Benefits

    The Company's total net benefit plan cost recognized in operating income
    was $63 million and $144 million (2006 - $45 million and $111 million)
    for the third quarter and year-to-date respectively. The total net
    benefit plan cost included costs for the Company's defined benefit
    pension and other benefit plans, defined contribution pension plans and
    multi-employer pension plans.

    Note 10. Short Term Debt

    In the first quarter of 2007, the Company entered into a 364-day
    revolving committed credit facility of $500 million, which matures in
    March 2008 and has no financial covenants. At October 6, 2007,
    $296 million was drawn on this facility, and $10 million was drawn on an
    uncommitted credit facility. Borrowings are based on short term floating
    interest rates.

    Note 11. Common Share Capital

    
                                  ----------            ----------
                                       2007       2006       2007       2006
    (in millions)                 (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Actual common shares
     outstanding                      274.2      274.1      274.2      274.1
    Weighted average common
     shares outstanding               274.2      274.1      274.2      274.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  ----------            ----------
    

    During the first quarter of 2007, Loblaw renewed its Normal Course Issuer
    Bid to purchase on the Toronto Stock Exchange, or enter into equity
    derivatives to purchase up to 13,708,678 of the Company's common shares,
    representing approximately 5% of the common shares outstanding. In
    accordance with the rules and by-laws of the Toronto Stock Exchange,
    Loblaw may purchase its shares at the then market prices of such shares.

    Note 12. Accumulated Other Comprehensive Income

    The following table provides further detail regarding the composition of
    accumulated other comprehensive income for the forty week period ended
    October 6, 2007:

    
                                                      Available-
                                         Cash Flow     for-sale
    ($ millions)                            Hedges       Assets        Total
    -------------------------------------------------------------------------
    Balance, beginning of period       $         -  $         -  $         -
    Cumulative impact of implementing
     new accounting standards
     (net of income taxes of $1)                (4)          20           16
    Net unrealized loss on
     available-for-sale financial assets
     (net of income taxes of nil)                -          (61)         (61)
    Reclassification of loss on
     available-for-sale financial assets
     (net of income taxes of nil)                -           14           14
    Net gain on derivatives designated
     as cash flow hedges (net of
     income taxes of $2)                        56            -           56
    Reclassification of gain on
     derivatives designated as cash
     flow hedges (net of income
     taxes of $1)                              (12)           -          (12)
    -------------------------------------------------------------------------
    Balance, end of period             $        40  $       (27) $        13
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    An estimated net gain of $36 million recorded in accumulated other
    comprehensive income related to the cash flow hedges as at October 6,
    2007, is expected to be reclassified to net earnings during the next 12
    months. This will be offset by the foreign currency fluctuation and
    interest income on the available-for-sale financial assets and the
    interest expense on the financial liabilities that are hedged. Remaining
    amounts will be reclassified to net earnings over periods up to 4 years.

    Note 13. Financial Instruments

    During the third quarter, the Company terminated hedge accounting for
    interest rate swaps as a cash flow hedge of the variable interest rate
    exposure on commercial paper. As a result of this termination, the
    cumulative loss of $2 million, net of income taxes, in accumulated other
    comprehensive income was reclassified to net earnings.

    Note 14. Stock-Based Compensation

    The Company's compensation cost recognized in operating income related to
    its stock option plan and the associated equity forwards and the
    restricted share unit plan was as follows:

    
                                  ----------            ----------
                                       2007       2006       2007       2006
    ($ millions)                  (16 weeks) (16 weeks) (40 weeks) (40 weeks)
    -------------------------------------------------------------------------
    Stock option plan income       $     (2)  $     (5)  $      -   $    (11)
    Equity forwards loss                 19         32         12         42
    Restricted share unit
     plan expense                         2          4          8         12
    -------------------------------------------------------------------------
    Net stock-based
     compensation cost             $     19   $     31   $     20   $     43
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                  ----------            ----------
    

    Stock Option Plan

    During the first three quarters of 2007, the Company paid the share
    appreciation value of $0.2 million (2006 - $6 million) on the exercise of
    108,000 (2006 - 486,413) stock options. In addition, 1,445,788 (2006 -
    463,394) stock options were forfeited or cancelled. Under its existing
    stock option plan, which allows for settlement in shares or in the share
    appreciation value in cash at the option of the employee, the Company
    granted 194,559 (2006 - nil) stock options with an exercise price of
    $49.11 per common share during the third quarter; 38,938 (2006 - 140,612)
    stock options with an exercise price of $46.01 (2006 - $55.50) per common
    share and 148,987 stock options with an exercise price of $50.80 per
    common share during the second quarter and 3,885,439 (2006 - 48,742)
    stock options with an exercise price of $47.44 (2006 - $54.71) per common
    share during the first quarter.

    At the end of the third quarter, a total of 6,798,781 (2006 - 4,544,969)
    stock options were outstanding and represented approximately 2.5% (2006 -
    1.7%) of the Company's issued and outstanding common shares, which was
    within the Company's guideline of 5%. The Company's market price per
    common share at the end of the third quarter was $45.67 (2006 - $47.00).

    Restricted Share Unit ("RSU") Plan

    Under its existing RSU plan, the Company granted 23,425 (2006 -nil) RSUs
    in the third quarter; 10,925 (2006 - 46,289) RSUs in the second quarter
    and 281,818 (2006 - 644,712) in the first quarter. In addition, 142,322
    (2006 - 209,997) RSUs were cancelled and 134,882 (2006 - 111,470) were
    paid out in the amount of $7 million (2006 - $6 million) in the first
    three quarters of 2007. At the end of the third quarter, 788,916 (2006 -
    752,718) RSUs remain outstanding.

    Note 15. Contingencies, Commitments and Guarantees

    Guarantees - Independent Funding Trust

    Independent franchisees of the Company may obtain financing through a
    structure involving independent trusts which were created to provide
    loans to the independent franchisees to facilitate their purchase of
    inventory and fixed assets, consisting mainly of fixturing and equipment.
    Based on a formula, the Company has agreed to provide credit enhancement,
    in the form of a standby letter of credit for the benefit of the
    independent funding trusts equal to approximately 10% of the principal
    amount of the loans outstanding at any point in time. This credit
    enhancement allows the independent funding trust to provide favorable
    financing terms to the Company's independent franchisees. In the event
    that an independent franchisee defaults on its loan and the Company has
    not, within a specified time period, assumed the loan or the default is
    not otherwise remedied, the independent funding trust may assign the loan
    to the Company and draw upon this standby letter of credit. The Company
    has agreed to reimburse the issuing bank for any amount drawn on the
    standby letter of credit. No amount has ever been drawn on the standby
    letter of credit. At the end of the third quarter of 2007, the principal
    amount of the franchisee loans outstanding was $418 million, and the
    standby letter of credit was $44 million.

    Neither the independent funding trust nor the Company can voluntarily
    terminate the agreement prior to December 2009, and following that date
    only upon six months' prior notice. Automatic termination of the
    agreement can only occur if specific, predetermined events occur and are
    not remedied within the time periods required including a credit rating
    downgrade of the Company below a long term credit rating of "A (low)"
    issued by DBRS. If the arrangement is terminated, the independent funding
    trust would have no obligation to make further loans to the Company's
    franchisees and it would demand payment of all outstanding loans and the
    standby letter of credit provided to the independent funding trust by
    Loblaw would be drawn upon. As a result, if such an event were to occur,
    long term debt in the amount of $126 million would need to be
    reclassified to short term liabilities. This amount relates to certain
    franchisees that are variable interest entities that the Company
    currently consolidates. In the event the Company restructures the
    independent funding trusts, any new alternative financing structure which
    may be implemented would need to be reviewed to determine if there are
    any implications with respect to the consolidation of VIEs. In accordance
    with Canadian GAAP, the financial statements of the independent funding
    trust are not consolidated with those of the Company.

    Legal Proceedings

    During the first quarter of 2007, the Company was one of 17 defendants
    served with an action brought in the Superior Court of Ontario by certain
    beneficiaries of a multi-employer pension plan in which the Company's
    employees and those of its independent franchisees participate. In their
    claim against the employers and the trustees of the multi-employer
    pension plan, the plaintiffs claim that assets of the multi-employer
    pension plan have been mismanaged and are seeking, among other demands,
    damages of $1 billion. The action is framed as a representative action on
    behalf of all the beneficiaries of the multi-employer pension plan. The
    Company has recently received notice from counsel for the plaintiffs
    indicating that he has received instructions from his client to
    discontinue the action against the employers including the Company. The
    action against the trustees is ongoing and one of the trustees, an
    officer of the Company, may be entitled to indemnification from the
    Company.

    In addition to the claim described above, the Company is the subject of
    various legal proceedings and claims that arise in the ordinary course of
    business. The outcome of all of these proceedings is uncertain. However,
    based on information currently available, these claims, individually and
    in the aggregate, are not expected to have a material impact on the
    Company.

    Corporate Profile

    Loblaw Companies Limited ("Loblaw" or the "Company") is Canada's largest
    food distributor and a leading provider of general merchandise products,
    drugstore and financial products and services. Through its various
    operating banners, Loblaw is committed to providing Canadians with a one-
    stop destination in meeting their food and household needs. This goal is
    pursued through a portfolio of store formats across the country. Loblaw
    is known for the quality, innovation and value of its food offering. It
    also offers Canada's strongest control label program, including the
    unique President's Choice, no name and Joe Fresh Style brands.

    Food is at the heart of its offering. Loblaw stores provide a wide,
    growing and successful range of products and services to meet the
    everyday household demands of Canadian consumers. In addition,
    President's Choice Financial services offer core banking, a popular
    MasterCard(R), PC Financial auto, home, travel and pet insurance, PC
    Mobile phone services as well as the PC points loyalty program.

    Loblaw is committed to a strategy developed under three core themes:
    Simplify, Innovate and Grow. The Company strives to be consumer focused,
    cost effective and agile, with the goal of achieving long term growth for
    its many stakeholders. Loblaw believes that a strong balance sheet is
    critical to achieving its potential. It is highly selective in its
    consideration of acquisitions and other business opportunities. The
    Company maintains an active product development program to support its
    control label program. It works to ensure that its technology and systems
    logistics enhance the efficiency of its operations.

    Trademarks

    Loblaw Companies Limited and its subsidiaries own a number of trademarks.
    Several subsidiaries are licensees of additional trademarks. These
    trademarks are the exclusive property of Loblaw Companies Limited or the
    licensor and where used in this report are in italics.

    Investor Relations

    Shareholders, security analysts and investment professionals should
    direct their requests to Inge van den Berg, Vice President, Investor
    Relations at the Company's National Head Office or by e-mail at
    investor@loblaw.ca.

    Additional information has been filed electronically with various
    securities regulators in Canada through the System for Electronic
    Document Analysis and Retrieval (SEDAR) and with the Office of the
    Superintendent of Financial Institutions (OSFI) as the primary regulator
    for the Company's subsidiary, President's Choice Bank. The Company holds
    an analyst call shortly following the release of its quarterly results.
    These calls are archived in the Investor Zone section of the Company's
    website.

    Ce rapport est disponible en français.

    Loblaw Companies Limited will be releasing its third quarter 2007 results
November 15th, 2007. This release will be followed by a conference call at
11:00 am (EST), as well as an Audio Webcast.

    To access via webcast please visit www.loblaw.ca, pre-registration will
be available. To access via Tele-conference please dial (416) 644-3415. The
playback will be made available one hour after the event at (416) 640-1917,
passcode 21249287 followed by the number sign.

    For full details please visit our website at www.loblaw.ca.





For further information:

For further information: Inge van den Berg, Vice President, Investor
Relations, (905) 459-2500, inge.vandenberg@loblaw.ca


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