Sobeys announces fourth quarter results



    STELLARTON, NS, June 28 /CNW/ - Sobeys Inc. today announced quarterly
basic net earnings per share of $0.66 ($43.0 million) for its fourth quarter
ended May 5, 2007 compared to the $0.77 ($49.7 million) reported in the fourth
quarter last year. Included in the calculation of earnings for the fourth
quarter ended May 5, 2007 are $4.9 million ($5.3 million for the fourth
quarter of last year) of costs related to the business process and system
initiative outlined in the Company's fourth quarter 2006 news release. Also
included in the calculation of earnings for the fourth quarter of fiscal 2007
are $5.6 million of pre-tax costs related to the rationalization of the
Company's Quebec distribution network and $2.6 million of pre-tax costs
related to the privatization of the Company.
    Sales for the fourth quarter were $3.24 billion compared to $3.13 billion
for the same quarter last year, an increase of $117.9 million or 3.8 percent.
Same-store sales increased 2.3 percent in the quarter.

    
    Fourth Quarter Financial Highlights

    - Sales of $3.24 billion, up $117.9 million or 3.8 percent.

    - Same-store sales increased 2.3 percent.

    - Basic net earnings per share of $0.66 ($43.0 million) compared to
      $0.77 ($49.7 million) last year.

    - EBITDA margin of 3.99 percent versus 4.37 percent last year.

    - Net profit margin of 1.33 percent compared to 1.59 percent last year.

    Fiscal 2007 Financial Highlights

    - Sales of $13.0 billion, up $313.9 million or 2.5 percent.

    - Same-store sales increased 2.4 percent.

    - Basic net earnings per share of $2.67 ($173.4 million) compared to
      $2.93 ($189.4 million) last year.

    - EBITDA margin of 3.96 percent versus 4.15 percent last year.

    - Net profit margin of 1.33 percent compared to 1.49 percent last year.

    - Funded debt to total capital of 23.7 percent compared to 21.1 percent a
      year ago.

    - EBITDA to interest expense of 14.2 times versus 15.1 times last year.

    - Return on equity of 9.1 percent compared to 10.8 percent last year.

    Subsequent Event

    On April 26, 2007, Empire Company Limited ("Empire") and Sobeys Inc.
("Sobeys") jointly announced that they have entered into an arrangement
agreement ("the Arrangement") pursuant to which Empire will acquire common
shares of Sobeys, other than those owned by Empire or its subsidiaries, at a
price of $58.00 per share. The transaction valued the Sobeys shares not
currently owned by Empire at approximately $1.06 billion.
    The Arrangement required various approvals. The non-Empire related Sobeys
shareholders approved the Arrangement at a Special Shareholder's meeting held
on June 9, 2007. The Supreme Court of Nova Scotia gave its sanction to the
Arrangement on June 13, 2007.
    On June 15, 2007, Empire acquired all the outstanding common shares of
Sobeys Inc. that it did not previously own. The Sobeys Inc. common shares were
delisted from the Toronto Stock Exchange on June 18, 2007.
    On June 27 2007, pursuant to the terms of Empire's Credit Facilities,
Empire and Sobeys filed notice with the lenders requesting the establishment
of a new $300.0 five-year unsecured revolving credit facility in favour of
Sobeys. The Credit Facilities are subject to certain financial covenants.
Interest on the debt varies based on the designation of the loan, fluctuations
in the underlying rates, and in the case of BA rate loans, the margin
applicable to financial covenants.
    It is intended that on July 23, 2007, Sobeys will draw down $300.0 from
the new credit facility, the proceeds of which are to be used to pay a
dividend to Empire. On that date Empire also intends to transfer to Sobeys a
$200.0 five year fixed rate interest rate swap at a rate of 5.051%.

    About Sobeys

    Sobeys Inc. is a leading national grocery retailer and food distributor. A
wholly owned subsidiary of Empire Company Limited (TSX:EMP.A), Sobeys owns or
franchises more than 1,300 stores in all 10 provinces under retail banners
that include Sobeys, IGA, Foodland, Price Chopper food stores and Lawton's
Drug Stores. Sobeys Inc. is committed to providing the most worthwhile
experience for its customers, employees, franchisees, suppliers and
shareholders. More information on Sobeys Inc. can be found at www.sobeys.com.

    Forward Looking Statements

    This news release may contain forward-looking statements about future
performance of Sobeys Inc. These statements are based on Sobeys management's
assumptions and beliefs in light of the information currently available to
them. These forward-looking statements are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements. When relying on forward-looking statements to make decisions, the
Company cautions readers not to place undue reliance on these statements, as a
number of important factors could cause actual results to differ materially
from any estimates or intentions expressed in such forward-looking statements.
The Company does not undertake to update any forward-looking statements that
may be made from time to time by or on behalf of the Company.


    -------------------------------------------------------------------------
    Sobeys Inc.
    Consolidated Balance Sheets                          May 5         May 6
    (in millions)                                         2007          2006
    -------------------------------------------------------------------------

    ASSETS
    Current
      Cash and cash equivalents                     $    284.6    $    332.1
      Receivables                                        244.2         208.2
      Inventories                                        683.1         626.8
      Prepaid expenses                                    47.5          45.9
      Mortgages, loans and other receivables
       (Note 2)                                           14.5          15.9
      Income taxes receivable                             30.2           5.8
                                                    -----------   -----------

                                                       1,304.1       1,234.7

      Mortgages, loans and other receivables
       (Note 2)                                           64.7          68.4
      Other assets (Note 3)                              244.0         180.0
      Property and equipment (Note 4)                  1,754.6       1,612.2
      Assets held for realization (Note 1q)                8.5           8.5
      Intangibles (less accumulated amortization
       of $10.7; May 6/06 $7.2)                           33.2          21.5
      Goodwill                                           655.5         613.3
                                                    -----------   -----------

                                                    $  4,064.6    $  3,738.6
                                                    -----------   -----------
                                                    -----------   -----------
    LIABILITIES
    Current
      Accounts payable and accrued liabilities      $  1,187.6    $  1,158.8
      Future tax liabilities (Note 7)                     40.4          46.1
      Long-term debt due within one year (Note 6)         30.0          25.0
                                                    -----------   -----------

                                                       1,258.0       1,229.9

      Long-term debt (Note 6)                            582.7         465.0
      Long-term lease obligation                          36.9          20.8
      Employee future benefits obligation
       (Note 14)                                         100.6          96.0
      Future tax liabilities (Note 7)                     63.3          44.1
      Deferred revenue                                     6.5           3.3
      Minority interest                                   42.9          45.2
                                                    -----------   -----------

                                                       2,090.9       1,904.3
                                                    -----------   -----------
                                                    -----------   -----------

    SHAREHOLDERS' EQUITY
    Capital stock (Note 8)                               908.8         904.8
    Contributed surplus                                    1.6           0.9
    Retained earnings                                  1,063.3         928.6
                                                    -----------   -----------

                                                       1,973.7       1,834.3
                                                    -----------   -----------

                                                    $  4,064.6    $  3,738.6
                                                    -----------   -----------
                                                    -----------   -----------

    Contingent liabilities (see note 13)
    See accompanying notes to the consolidated financial statements.


    -------------------------------------------------------------------------
    Sobeys Inc.
    Consolidated Statements of Retained Earnings
    Year Ended                                           May 5         May 6
    (in millions)                                         2007          2006
    -------------------------------------------------------------------------

    Retained earnings, beginning of year            $    928.6    $    780.3

    Net earnings                                         173.4         189.4

    Adjustment to minority interest (Note 19)                -          (5.5)
                                                    -----------   -----------

                                                       1,102.0         964.2

    Dividends declared and paid                          (38.7)        (35.6)
                                                    -----------   -----------

    Balance, end of year                            $  1,063.3    $    928.6
                                                    -----------   -----------
                                                    -----------   -----------

    See accompanying notes to the consolidated financial statements.


    -------------------------------------------------------------------------
    Sobeys Inc.
    Consolidated Statements           13 Weeks Ended          52 Weeks Ended
    of Earnings               ----------------------  -----------------------
    (in millions except per        May 5       May 6       May 5       May 6
    share amounts)                  2007        2006        2007        2006
    -------------------------------------------------------------------------
                                            Restated                Restated
                                            (Note 1t)               (Note 1t)
    Sales
    Operating expenses        $  3,243.7  $  3,125.8  $ 13,032.0  $ 12,718.1
      Cost of sales, selling
       and administrative
       expenses                  3,114.3     2,989.1    12,516.5    12,189.9
      Depreciation                  53.9        50.8       211.7       192.8
      Amortization of
       intangibles                   1.3         0.7         3.6         3.8
                              ----------- ----------- ----------- -----------
    Earnings before interest,
     income taxes and
     minority interest              74.2        85.2       300.2       331.6
                              ----------- ----------- ----------- -----------

    Interest expense
      Long-term debt                 9.4         7.9        35.4        33.6
      Short-term debt                0.2           -         1.0         1.3
                              ----------- ----------- ----------- -----------
                                     9.6         7.9        36.4        34.9
                              ----------- ----------- ----------- -----------
    Earnings before income
     taxes and minority
     interest                       64.6        77.3       263.8       296.7

    Income taxes (Note 7)           19.8        24.1        82.9       100.1
                              ----------- ----------- ----------- -----------
    Earnings before minority
     interest                       44.8        53.2       180.9       196.6

    Minority interest                1.8         3.5         7.5         7.2
                              ----------- ----------- ----------- -----------

    Net earnings              $     43.0  $     49.7  $    173.4  $    189.4
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------
    Net earnings per share
     basic (Note 9)           $     0.66  $     0.77  $     2.67  $     2.93
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------
    Net earnings per share
     diluted (Note 9)         $     0.66  $     0.76  $     2.65  $     2.90
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

    Basic weighted average
     number of common shares
     outstanding, in millions       64.9        64.7        64.9        64.7

    Diluted weighted average
     number of common shares
     outstanding, in millions       65.5        65.4        65.5        65.4

    See accompanying notes to the consolidated financial statements.


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    Sobeys Inc.                       13 Weeks Ended          52 Weeks Ended
    Consolidated Statements   ----------------------- -----------------------
    of Cash Flows                  May 5       May 6       May 5       May 6
    (in millions)                   2007        2006        2007        2006
    -------------------------------------------------------------------------
    Operations
      Net earnings            $     43.0  $     49.7  $    173.4  $    189.4
      Items not affecting
       cash (Note 10)              110.7        87.9       322.6       260.4
                              ----------- ----------- ----------- -----------

                                   153.7       137.6       496.0       449.8
      Net change in non-cash
       working capital             112.3       161.7       (88.7)       45.5
                              ----------- ----------- ----------- -----------
    Cash flows from operating
       activities                  266.0       299.3       407.3       495.3
                              ----------- ----------- ----------- -----------

    Investment
      Property and equipment
       purchases                   (82.3)      (75.8)     (381.8)     (332.3)
      Proceeds on disposal of
       property and equipment       10.3         9.3        59.2        18.6
      Mortgages, loans and
       other receivables             2.1        (5.0)        5.1       (25.4)
      Decrease (increase) in
       restricted cash              (0.6)      (14.7)        9.0       (14.7)
      Increase in deferred
       costs and other assets      (61.8)      (21.6)     (118.1)      (50.5)
      Business acquisitions,
       net of cash acquired
       (Note 15)                    (5.6)       (5.3)      (95.9)       (5.3)
                              ----------- ----------- ----------- -----------
    Cash flows used in
     investing activities         (137.9)     (113.1)     (522.5)     (409.6)
                              ----------- ----------- ----------- -----------

    Financing
      Issue of long-term debt       14.6         7.5       153.5       203.0
      Repayment of long-term
       debt                        (13.8)       (3.8)      (39.0)     (199.8)
      Increase (decrease) in
       minority interest            (6.6)       (0.6)      (11.7)        2.9
      Increase in share
       purchase loan                (0.1)       (1.2)       (0.8)       (2.6)
      Issue of capital stock         0.2         0.9         4.4         5.7
      Dividends                     (9.8)       (9.1)      (38.7)      (35.6)
                              ----------- ----------- ----------- -----------
     Cash flows from (used in)
      financing activities         (15.5)       (6.3)       67.7       (26.4)
                              ----------- ----------- ----------- -----------
    Increase (decrease) in
     cash and cash
     equivalents                   112.6       179.9       (47.5)       59.3
    Cash and cash
     equivalents, beginning
     of year                       172.0       152.2       332.1       272.8
                              ----------- ----------- ----------- -----------
    Cash and cash
     equivalents, end of
     year                     $    284.6  $    332.1  $    284.6  $    332.1
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

    See accompanying notes to the consolidated financial statements.


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    Sobeys Inc.
    Notes to the Consolidated Financial Statements
    May 5, 2007
    In millions, except share capital
    -------------------------------------------------------------------------

    1. Summary of significant accounting policies

    These consolidated financial statements, have been prepared by management
in accordance with Canadian generally accepted accounting principles ("GAAP"),
and include the accounts of Sobeys Inc. (the Company), all subsidiary
companies, and certain enterprises considered variable interest entities
("VIEs") where control is achieved on a basis other than through ownership of
a majority of voting rights. All of the Company's subsidiaries are wholly
owned. The Company has four operating food distribution regions: Western
Canada, Ontario, Quebec and Atlantic Canada. These regions have been
aggregated into one reportable operating segment as they all share similar
economic characteristics.
    The Company's fiscal year ends on the first Saturday in May. As a result
of this, the fiscal year is usually 52 weeks but results in a duration of
53 weeks every five to six years.

    (a) Depreciation

    Property and equipment are recorded at cost.

    Depreciation is recorded on a straight line basis over the estimated
    useful lives of the assets as follows:

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

    (b) Cash and cash equivalents

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

    (c) Inventories

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

    (d) Leases

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

    (e) Goodwill

    Goodwill represents the excess of the purchase price of the business
acquired over the fair value of the underlying net tangible and intangible
assets acquired at the date of acquisition.
    Goodwill and intangible assets with indefinite useful lives are not
amortized but rather are subject to an annual impairment review or more
frequently if circumstances exist that might indicate their value is impaired.
Should the carrying value exceed the fair value of goodwill or intangible
assets (e.g. trademarks) the carrying value will be written down to the fair
value.

    (f) Intangibles

    Intangibles arise on the purchase of a new business, existing franchises,
and the acquisition of pharmacy prescription files. Amortization is recorded
on limited life intangibles on a straight-line basis, over 10 - 15 years.

    (g) Revenue recognition

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

    (h) Interest capitalization

    Interest related to the period of construction is capitalized as part of
the cost of the related property and equipment. The amount of interest
capitalized to construction in progress in the current year was $1.5 (May 6,
2006 - $0.5).

    (i) Deferred revenue

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

    (j) Deferred costs

    Deferred costs consist of deferred store marketing, deferred financing and
deferred purchase agreements and are included in other assets.
    Deferred costs are amortized on a straight line basis as follows:

      Deferred store marketing - up to 7 years
      Deferred financing - over the term of the debt
      Deferred purchase agreements - over the term of the purchase agreement

    (k) Store opening expenses

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

    (l) Financial instruments

    The Company uses various derivative financial instruments to hedge its
exposure to interest and foreign exchange rate risks. If documentation and
effectiveness requirements are met, gains and losses on these instruments are
deferred and recognized in earnings in the same period the related hedged risk
is realized (settlement accounting). If effectiveness requirements are not
met, gains and losses on these instruments are recognized in earnings as the
fair value of the instrument changes. Amounts received or paid, including any
gains and losses on instruments used to hedge these risks are recognized over
the term of the hedged item. The derivatives are not recorded on the balance
sheet.

    (m) Future income taxes

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

    (n) Earnings per share

    Earnings per share is calculated by dividing the earnings available to
common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is determined based
on the treasury stock method which assumes that all outstanding stock options
with an exercise price below the average market price are exercised and the
assumed proceeds are used to purchase the Company's common shares at the
average market price during the year.

    (o) Foreign currency translation

    Assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at the foreign currency exchange rate in effect at each
period end date. Exchange gains or losses arising from the translation of
these balances denominated in foreign currencies are recognized in operating
income. Revenues and expenses denominated in foreign currencies are translated
into Canadian dollars at the average foreign currency exchange rate for the
period.

    (p) Pension benefit plans and other benefit plans

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

    (q) Assets held for realization

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

    (r) Use of estimates

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

    (s) Long-lived assets

    Long-lived assets are reviewed for impairment on an annual basis or upon
the occurrence of events or changes in circumstances indicating that the book
value of the assets may not be recoverable, as measured by comparing their net
book value to the estimated discounted future cash flows generated by their
use. Impaired assets are recorded at fair value, determined principally using
discounted future cash flows expected from their use and eventual disposition
with the impairment loss charged to cost of sales, selling and administrative
expenses.

    (t) Accounting standards adopted during fiscal 2007

      (i) Vendor consideration

      During the first quarter of fiscal 2007, the Company implemented, on a
      retroactive basis, Emerging Issues Committee Abstract 156 ("EIC-156")
      "Accounting by a vendor for consideration given to a customer
      (including a reseller of the vendor's products)". This abstract
      requires a vendor to generally record cash consideration given to a
      customer as a reduction to the selling price of the vendor's products
      or services and reflect it as a reduction of revenue when recognized in
      the statement of earnings.

      Prior to the implementation of EIC-156, the Company recorded certain
      sales incentives paid to independent franchisees, associates and
      independent accounts in cost of sales, selling and administrative
      expenses on the statement of earnings. Accordingly, the implementation
      of EIC-156 on a retroactive basis, resulted in a reduction in both
      sales and cost of sales, selling and administrative expenses during the
      fourth quarter and year to date of fiscal 2007 of $34.4 (May 6, 2006 -
      $36.8) and $141.2 (May 6, 2006 - $135.2) respectively. As
      reclassifications, these changes did not impact net earnings or
      earnings per share.

    (u) Accounting standards adopted during fiscal 2006

      (i) Vendor allowances

      During the first quarter of fiscal 2006 the Company adopted the
      amendment to EIC-144 issued in January 2005. The amendment requires
      disclosure of the amount of any vendor allowances that have been
      recognized in income but for which the full requirements for
      entitlement have not yet been met (see Note 18).

    (v) Future changes in accounting policies

    Accounting changes

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

    Financial instruments

    In January 2005, the CICA issued section 3855 of the CICA Handbook,
"Financial Instruments - Recognition and Measurement", which describes the
standards for recognizing and measuring financial assets, financial
liabilities and derivatives. This section requires that all financial assets
be measured at fair value, with some exceptions for loans and investments that
are classified as held-to-maturity, and that all financial liabilities be
measured at fair value if they are derivatives or classified as held for
trading purposes. Other financial liabilities are measured at their amortized
cost, and all derivative financial instruments are measured at fair value,
even when they are part of a hedging relationship.
    The CICA has also reissued section 3860 of the CICA Handbook as section
3861, "Financial Instruments - Disclosure and Presentation", which establishes
standards for presentation of financial instruments and non-financial
derivatives, and identifies the information that should be disclosed about
them.
    These changes are applicable to the Company for the first quarter of
fiscal 2008. The effect of adopting this section is not expected to be
significant.

    Hedges

    In January 2005, the CICA issued section 3865 of the CICA Handbook,
"Hedges", which describes how and when hedge accounting can be used.
    Hedging is an activity used to change an exposure to one or more risks by
creating an offset between changes in the fair value of a hedged item and a
hedging item, changes in the cash flows attributable to a hedged item and a
hedging item, or changes resulting from a risk exposure related to a hedged
item and a hedging item.
    Under hedge accounting, all gains, losses, revenues and expenses from the
derivative and the item it hedges are recorded in the statement of earnings or
the other comprehensive income statement in the same period.
    These changes are applicable to the Company for the first quarter of
fiscal 2008. The effect of adopting this section is not expected to be
significant.

    Comprehensive income

    In January 2005, the CICA issued section 1530 of the CICA Handbook,
"Comprehensive Income". The section describes how to report and disclose
comprehensive income and its components. The main components of other
comprehensive income include unrealized gains and losses on available-for-sale
investments, and gains and losses on cash flow hedges.
    These changes are applicable to the Company for the first quarter of
fiscal 2008. The effect of adopting this section is not expected to be
significant.

    Inventories

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


    2. Mortgages, loans and other receivables

    -------------------------------------------------------------------------
                                                         May 5         May 6
                                                          2007          2006
    -------------------------------------------------------------------------
    Loans receivable                                $     62.7    $     66.5
    Mortgages receivable                                   0.2           0.3
    Other                                                 16.3          17.5
    -------------------------------------------------------------------------
                                                          79.2          84.3
    Less amount due within one year                       14.5          15.9
    -------------------------------------------------------------------------
                                                    $     64.7    $     68.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Loans receivable

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


    3. Other assets

                                                              Net Book Value
                                                    -------------------------
                                                         May 5,        May 6,
                                                          2007          2006
    -------------------------------------------------------------------------
    Deferred store marketing costs                  $    106.2    $     68.7
    Deferred financing costs                               6.5           6.2
    Deferred purchase agreements                          31.1          25.9
    Accrued benefit asset (Note 14)                       45.9          39.1
    Restricted cash                                        5.7          14.7
    Other                                                 48.6          25.4
    -------------------------------------------------------------------------
    Total                                           $    244.0    $    180.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    4. Property and equipment

    -------------------------------------------------------------------------
    May 5, 2007                                    Accumulated           Net
                                            Cost  Depreciation    Book Value
    -------------------------------------------------------------------------
    Land                              $    152.8    $        -    $    152.8
    Land held for development              129.0             -         129.0
    Buildings                              673.2         161.7         511.5
    Equipment and vehicles               1,819.5       1,170.1         649.4
    Leasehold improvements                 397.9         243.9         154.0
    Construction in progress               109.3             -         109.3
    Assets under capital leases             83.1          34.5          48.6
    -------------------------------------------------------------------------
                                      $  3,364.8    $  1,610.2    $  1,754.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    May 6, 2006                                    Accumulated           Net
                                            Cost  Depreciation    Book Value
    -------------------------------------------------------------------------
    Land                              $    138.6    $        -    $    138.6
    Land held for development               89.5             -          89.5
    Buildings                              577.4         135.7         441.7
    Equipment and vehicles               1,707.4       1,062.7         644.7
    Leasehold improvements                 361.0         218.2         142.8
    Construction in progress               103.7             -         103.7
    Assets under capital leases             78.9          27.7          51.2
    -------------------------------------------------------------------------
                                      $  3,056.5    $  1,444.3    $  1,612.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    5. Bank loans and bankers' acceptances

    Under the terms of a credit agreement entered into between the Company and
a banking syndicate arranged by the Bank of Nova Scotia, a revolving term
credit facility of $300.0 was established. During the third quarter of fiscal
2006, the expiry date of the revolving unsecured credit facility was extended
from June 22, 2006 to December 20, 2010. All indebtedness and obligations
under the agreement shall be payable in full on December 20, 2010.
    Interest payable on this facility fluctuates with changes in the prime
interest rate.


    6. Long-term debt

    -------------------------------------------------------------------------
                                                         May 5         May 6
                                                          2007          2006
    -------------------------------------------------------------------------
    First mortgage loans, average interest
     rate 9.5%, due 2008 - 2021                     $     25.2    $     25.8
    Medium Term Notes, interest rate 5.8%, due
     October 6, 2036                                     125.0             -
    Medium Term Notes, interest rate 6.1%, due
     October 29, 2035                                    175.0         175.0
    Medium Term Notes, interest rate 7.2%, due
     February 26, 2018                                   100.0         100.0
    Sinking fund debentures, average interest
     rate 10.7%, due 2008 - 2013                          58.1          63.1
    Notes payable and other debt at interest rates
     fluctuating with the prime rate                      79.7          76.9
    -------------------------------------------------------------------------
                                                         563.0         440.8
    Capital lease obligations, net of imputed
     interest                                             49.7          49.2
    -------------------------------------------------------------------------
                                                         612.7         490.0


    Less amount due within one year                       30.0          25.0
    -------------------------------------------------------------------------
                                                    $    582.7    $    465.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    First mortgage loans are secured by land, buildings and specific charges
on certain assets. Capital lease obligations are secured by the related
capital lease asset.
    Sobeys Group Inc., an indirect subsidiary of Sobeys Inc., has provided the
debenture holders with a floating charge over all its assets, subject to
permitted encumbrances, a general assignment of book debts, and the assignment
of proceeds of insurance policies.
    Sinking fund debenture payments are required on an annual basis. The
proportionate share of related debt is retired with these repayments.
    On October 21, 2005, the Company filed a short form base shelf prospectus
providing for the issuance of up to $500.0 of unsecured Medium Term Notes. On
October 28, 2005, the Company issued new Medium Term Notes of $175.0, maturing
on October 29, 2035. On November 1, 2005, Medium Term Notes of $175.0 were
repaid according to the terms of the agreement. On October 6, 2006, the
Company issued new Medium Term Notes of $125.0, maturing on October 6, 2036.
    During the year the Company increased its capital lease obligation by $5.6
(May 6, 2006 - $29.0) with a similar increase in assets under capital lease.
    Debt retirement payments and capital lease obligations in each of the next
five fiscal years are:

    -------------------------------------------------------------------------
                                                     Long-term       Capital
                                                          Debt        Leases
    -------------------------------------------------------------------------
    2008                                                  19.8          10.2
    2009                                                  17.3           7.7
    2010                                                  18.3           7.2
    2011                                                  15.2           6.5
    2012                                                  12.5           5.6
    Thereafter                                           479.9          12.5
    -------------------------------------------------------------------------

    Operating leases

    The total net, annual, minimum rent payable under the Company's operating
leases for fiscal 2008 is approximately $191.7. This reflects a gross lease
obligation of $262.7 reduced by expected sub-lease income of $71.0. The net
commitments over the next five fiscal years are:

    -------------------------------------------------------------------------
                                                     Net Lease   Gross Lease
                                                    Obligation    Obligation
    -------------------------------------------------------------------------
    2008                                                 191.7         262.7
    2009                                                 175.9         241.8
    2010                                                 166.6         228.6
    2011                                                 161.0         217.1
    2012                                                 154.1         205.9
    Thereafter                                         1,134.6       1,453.2
    -------------------------------------------------------------------------


    7. Income taxes

    Income tax expense varies from the amount that would be computed by
applying the combined federal and provincial statutory tax rate as a result of
the following:

                                                              52 Weeks Ended
                                                    -------------------------
                                                         May 5         May 6
                                                          2007          2006
    Income tax expense according to combined
     statutory rate of 32.2% (2006 - 34.2%)         $     84.9    $    101.6

    Decrease in income taxes resulting from:
      Rate changes effect on timing differences           (2.0)         (2.0)

    Increase in income taxes resulting from:
      Large corporation tax                                  -           0.5
                                                    -------------------------
    Total income taxes                              $     82.9    $    100.1
                                                    -------------------------
                                                    -------------------------


    Current year income tax expense attributable to net income consists of:

                                                              52 Weeks Ended
                                                    -------------------------
                                                         May 5         May 6
                                                          2007          2006
                                                    -------------------------
    Current                                         $     69.4    $     95.4
    Future                                                13.5           4.7
                                                    -------------------------
    Total                                           $     82.9    $    100.1
                                                    -------------------------
                                                    -------------------------


    The tax effect of temporary differences that give rise to significant
portions of the future tax liability are presented below.

                                                         May 5         May 6
                                                          2007          2006
                                                    -------------------------
    Employee future benefit obligation              $     33.7    $     33.6
    Restructuring provisions                              11.6           5.0
    Pension contributions                                (18.6)        (17.4)
    Deferred costs                                       (41.0)        (28.4)
    Deferred credits                                     (54.8)        (54.6)
    Goodwill                                             (10.2)         (8.6)
    Fixed assets                                         (37.7)        (33.2)
    Other                                                 13.3          13.4
                                                    -------------------------
                                                    $   (103.7)   $    (90.2)
                                                    -------------------------
                                                    -------------------------

    Current future tax liabilities                  $    (40.4)   $    (46.1)
    Non-current future tax liabilities                   (63.3)        (44.1)
                                                    -------------------------
                                                    $   (103.7)   $    (90.2)
                                                    -------------------------
                                                    -------------------------


    8. Capital stock

                                                            Number of Shares
                                                   --------------------------
    Authorized                                           May 5         May 6
                                                          2007          2006
                                                   --------------------------
    Preferred shares, par value of $25 each,
     issuable in series as a class                 471,000,000   471,000,000
    Preferred shares, without par value, issuable
     in series                                     500,000,000   500,000,000
    Common shares, without par value               498,674,959   498,682,931
                                                   --------------------------
                                                   --------------------------


                                                            Number of Shares
                                                    -------------------------
    Issued and outstanding                               May 5         May 6
                                                          2007          2006
                                                    -------------------------

    Common shares, without par value                65,534,898    65,426,282


                                                               Capital Stock
                                                                (in millions)
                                                    -------------------------
                                                         May 5         May 6
                                                          2007          2006
                                                    -------------------------
    Common shares, without par value                $    931.5    $    926.7

    Loans receivable from officers and employees
     under Share Purchase Plan                           (22.7)        (21.9)
                                                    -------------------------
    Total capital stock                             $    908.8    $    904.8
                                                    -------------------------
                                                    -------------------------

    During the year 108,616 (May 6, 2006 - 145,867) common shares of
Sobeys Inc. were issued under the Company's Share Purchase Plan to certain
officers and employees for $4.4 (May 6, 2006 - $5.7). The common share balance
increased by $0.4 (May 6, 2006 - $0.3) in relation to shares issued under the
Share Purchase Plan that became fully vested with the employee during fiscal
2007.
    Loans receivable from officers and employees of $22.7 (May 6, 2006 -
$21.9) under the Company's Share Purchase Plan are classified as a reduction
of capital stock. Loan repayments will result in a corresponding increase in
capital stock. The individual loans are non-interest bearing, non-recourse and
are secured by the individual's common shares of Sobeys Inc. (combined total
May 5, 2007 - 643,067; May 6, 2006 - 652,517).


    9. Basic and diluted net earnings per share

                                      13 Weeks Ended          52 Weeks Ended
                              ----------------------- -----------------------
                                   May 5       May 6       May 5       May 6
                                    2007        2006        2007        2006
                              ----------------------- -----------------------
    Net earnings              $     43.0  $     49.7  $    173.4  $    189.4
                              ----------------------- -----------------------
    Weighted average common
     shares outstanding             64.9        64.7        64.9        64.7
    Dilutive effect of Share
     Purchase Loans                  0.6         0.7         0.6         0.7
                              ----------------------- -----------------------
    Weighted average common
     shares outstanding for
     diluted earnings per
     share calculation              65.5        65.4        65.5        65.4
                              ----------------------- -----------------------

    Basic net earnings per
     common share             $     0.66  $     0.77  $     2.67  $     2.93
    Dilutive effect of Share
     Purchase Loans                    -       (0.01)      (0.02)      (0.03)
                              ----------------------- -----------------------
    Diluted net earnings per
     common share             $     0.66  $     0.76  $     2.65  $     2.90
                              ----------------------- -----------------------
                              ----------------------- -----------------------


    10. Supplementary cash flow information

                                      13 Weeks Ended          52 Weeks Ended
                              ----------------------- -----------------------
                                   May 5       May 6       May 5       May 6
                                    2007        2006        2007        2006
                              ----------------------- -----------------------
    a) Items not affecting
     cash:
      Depreciation            $     53.9  $     50.8  $    211.7  $    192.8
      Future tax provision          13.7        10.9        13.5         4.7
      Loss (gain) on disposal
       of assets                     1.7         1.6         4.5         3.0
      Amortization of
       intangibles                   1.3         0.7         3.6         3.8
      Stock-based compensation       0.5         0.2         1.2         0.8
      Amortization of deferred
       items                        23.0        13.6        44.4        35.8
      Employee future benefit
       obligation                   (0.6)       (1.1)        4.6         3.8
      Increase (decrease) in
       long-term lease
       obligation                   13.1         7.7        16.1         8.5
      Minority interest              1.8         3.5         7.5         7.2
      Rationalization costs
       (Note 17)                     2.3           -        15.5           -
                              ----------------------- -----------------------

                              $    110.7  $     87.9  $    322.6  $    260.4
                              ----------------------- -----------------------
                              ----------------------- -----------------------


    b) Cash items
      Interest paid           $     16.1  $     12.6  $     33.7  $     31.9
      Taxes paid              $     16.6  $      2.9  $     95.9  $     83.6


    11. Related party transactions

    The Company leased certain real property from related parties during the
year at amounts in management's opinion which approximate fair market value.
The aggregate net payments under these leases amounted to approximately
$51.8 (2006 - $54.2). The Company was charged expenses of $0.8 (2006 - $1.3)
by related parties.
    At May 5, 2007, current receivables of $0.2 (2006 - $6.5) and mortgages
receivables of $ nil (2006 - $ nil) were owing from related parties. In the
current year, the Company sold real property to a related party for a purchase
price of $21.5, which management believes is equal to the fair market value of
the property. The property was subsequently leased to the Company and the
related gain on the sale was charged to deferred revenue and is being
amortized over the term of the related lease. The Company purchased real
property from related parties for $0.3 (2006 - $1.4), an amount equal to fair
market value in management's opinion.
    Related party transactions are with the parent company Empire Company
Limited and any of its subsidiaries or related parties. Empire Company Limited
is a majority shareholder of Sobeys Inc., holding 72.1% of the common shares
at May 5, 2007 (Note 21).


    12. Financial instruments

    Credit risk

    There is no significant concentration of credit risk. The credit risk
exposure is considered normal for the business.

    Fair value of financial instruments

    The book value of cash and cash equivalents, receivables, mortgages, loans
and other receivables, and accounts payable and accrued liabilities
approximate fair values at the balance sheet date.
    The total fair value of long-term debt is estimated to be $610.0 (2006 -
$517.7). The fair value of variable rate long term-debt is assumed to
approximate its carrying amount. The fair value of other long-term debt has
been estimated by discounting future cash flows at a rate offered for debt of
similar maturities and credit quality.

    Interest rate risk

    Interest rate risk is the potential for financial loss arising from
changes in interest rates. The majority of the Company's long-term debt is at
a fixed interest rate, and therefore, the Company's exposure to interest rate
cash flow risk during the term of the debt is minimal.

    Foreign exchange risk

    The Company also uses forward contracts to fix the exchange rate on some
of its expected requirements for Euros and US dollars. Amounts received or
paid related to instruments used to hedge foreign exchange, including any
gains and losses, are recognized in the cost of purchases. The fair value of
these contracts at year-end was $0.9.


    13. Contingent liabilities

    Guarantees and commitments

    Sobey Leased Properties Limited
    -------------------------------

    The Company has undertaken to provide cash to meet any obligations which
Sobey Leased Properties Limited (a wholly owned subsidiary of Empire Company
Limited) is unable to or fails to meet until all of its debentures have been
paid in full in accordance with their terms. Any deficiency payment made by
the Company will be by purchase of fully-paid non-assessable 5% redeemable,
non-voting preference shares of that company. The aggregated outstanding
principal amounts of these debentures at May 5, 2007 is $30.7 (2006 - $32.6).
Sobey Leased Properties Limited's principal business relates to leasing real
estate locations to Sobeys Capital Incorporated (a subsidiary of Sobeys Inc.)
and its subsidiary companies.
    The equity holder in Sobey Leased Properties Limited ("SLP"), Empire
Company Limited, retains full ability to make all decisions respecting SLP
with respect to the operations of its business. The current lease between
Sobeys Capital Incorporated and its subsidiary companies and SLP is at an
amount in management's opinion which approximates market value and is
reflective of market rates at the time the lease was entered into. SLP does
not have a guaranteed return to Empire Company Limited, and SLP retains full
ownership of the leased property at expiration of the leases.

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

    The Company has guaranteed certain bank loans contracted by franchise
affiliates. As at May 5, 2007, these loans amounted to approximately $2.9
(2006 - $1.3).
    The Company has guaranteed certain equipment leases of its franchise
affiliates. Under the terms of the guarantee should a franchise affiliate be
unable to fulfill their lease obligation the Company would be required to fund
the difference of the lease commitments up to a maximum of $100.0 on a
cumulative basis. The Company approves each of the contracts.
    The aggregate, annual, minimum rent payable under the guaranteed operating
equipment leases for fiscal 2008 is approximately $29.4. The guaranteed lease
commitments over the next five fiscal years are:


    -------------------------------------------------------------------------
                                                Guaranteed lease commitments
    -------------------------------------------------------------------------
    2008                                                                29.4
    2009                                                                25.5
    2010                                                                21.7
    2011                                                                17.0
    2012                                                                 6.4
    Thereafter                                                             -
    -------------------------------------------------------------------------


    Other
    -----

    At May 5, 2007, the Company was contingently liable for letters of credit
issued in the aggregate amount of $28.4 (2006 - $30.2).
    Upon entering into the lease of its new Mississauga distribution centre,
in March 2000, Sobeys Capital Incorporated guaranteed to the landlord the
performance, by SERCA Foodservice Inc., of all its obligations under the
lease. The remaining term of the lease is 13 years with an aggregate
obligation of $40.4 (2006 - $43.3). At the time of the sale of assets of SERCA
Foodservice Inc. to Sysco Corp., the lease of the Mississauga distribution
centre was assigned to and assumed by the purchaser and Sysco Corp. agreed to
indemnify and hold Sobeys Capital Incorporated harmless from any liability it
may incur pursuant to its guarantee.

    Contingencies

    On June 21, 2005, the Company received a notice of reassessment from
Canada Revenue Agency ("CRA") for fiscal years 1999 and 2000 related to
Lumsden Brothers Limited (a wholesale subsidiary of the Company) and the Goods
and Service Tax ("GST"). The reassessment related to GST on sales of tobacco
products to status Indians. CRA asserts that Lumsden was obliged to collect
GST on sales of tobacco products to status Indians. The total tax, interest
and penalties in the reassessment was $13.6. Lumsden has reviewed this matter,
has received legal advice, and believes it was not required to collect GST.
During the second quarter of fiscal 2006, the Company filed a Notice of
Objection with CRA. Accordingly, the Company has not recorded in its statement
of earnings any of the tax, interest or penalties in the notice of
reassessment. The Company has deposited with CRA funds to cover the total tax,
interest and penalties in the reassessment and has recorded this amount as an
other long term receivable from CRA pending resolution of the matter.
    In the third quarter of fiscal 2007, the Company was named as a defendant
in a lawsuit brought by beneficiaries of a multi-employer pension plan. The
lawsuit alleges mismanagement of certain pension plan investments by the
trustees of the pension plan and seeks, among other remedies, payment of
$1 billion in damages from the trustees and the contributing employers, of
which the Company is one of approximately 440. The Company played no role in
the management of the pension plan and intends to contest the lawsuit.
Accordingly, the Company has not recorded in its statement of earnings any
amount related to this lawsuit.
    There are various claims and litigation, which the Company is involved
with, arising out of the ordinary course of business operations. The Company's
management does not consider the exposure to such litigation to be material,
although this cannot be predicted with certainty.


    14. Employee future benefits

    The Company has a number of defined benefit and defined contribution plans
providing pension and other retirement benefits to most of its employees.

    Defined contribution pension plans
    ----------------------------------

    The contributions required by the employee and the employer are specified.
The employee's pension depends on what level of retirement income (for
example, annuity purchase) that can be achieved with the combined total of
employee and employer contributions and investment income over the period of
plan membership, and the annuity purchase rates at the time of the employee's
retirement.

    Defined benefit pension plans
    -----------------------------

    The ultimate retirement benefit is defined by a formula that provides a
unit of benefit for each year of service. Employee contributions, if required,
pay for part of the cost of the benefit, but the employer contributions fund
the balance. The employer contributions are not specified or defined within
the plan text, they are based on the result of actuarial valuations which
determine the level of funding required to meet the total obligation as
estimated at the time of the valuation.
    The Company uses December 31 as an actuarial valuation date, and April 30
as a measurement date for accounting purposes, for its defined benefit pension
plans.

                                              Most recent      Next required
                                           valuation date     valuation date
    -------------------------------------------------------------------------
    Retirement Pension Plan             December 31, 2004  December 31, 2007
    Senior Management Pension Plan      December 31, 2004  December 31, 2007


    Defined contribution plans

    The total expense, and cash contributions, for the Company's defined
contribution plans is as follows:

                                                          2007          2006
                                                    -----------   -----------
                                                    $     14.2    $     13.9

    Defined benefit plans

    Information about the Company's defined benefit plans, in aggregate, is as
follows:

                               Pension Benefit Plans     Other Benefit Plans
                              ----------------------- -----------------------
                                    2007        2006        2007        2006
                              ----------------------- -----------------------
    Accrued benefit
     obligation
      Balance at beginning
       of year                $    265.5  $    262.4  $    112.1  $    105.1
      Current service cost,
       net of employee
       contributions                 2.2         2.3         2.5         2.7
      Interest cost                 14.7        14.2         5.8         5.9
      Employee contributions         0.3         0.4           -           -
      Benefits paid                (18.5)      (19.8)       (3.8)       (3.7)
      Actuarial gains
       (losses)                     20.0         5.9        (2.4)        2.1
                              ----------------------- -----------------------
      Balance at end of year  $    284.2  $    265.4  $    114.2  $    112.1
                              ----------------------- -----------------------

    Plan assets
      Market value at
       beginning of year      $    267.2  $    244.4  $        -  $        -
      Actual return on plan
       assets                       27.9        33.0           -           -
      Employer contributions         6.4         9.2         3.8         3.7
      Employee contributions         0.3         0.4           -           -
      Benefits paid                (18.5)      (19.8)       (3.8)       (3.7)
                              ----------------------- -----------------------
      Market value at end
       of year                $    283.3  $    267.2  $        -  $        -
                              ----------------------- -----------------------

    Funded status
      Surplus (deficit)       $     (0.9) $      1.8  $   (114.2) $   (112.1)
      Unamortized past
       service cost                  0.5         0.6         1.0         1.1
      Unamortized actuarial
       gains (losses)               46.3        36.7        12.6        15.0
                              ----------------------- -----------------------
      Accrued benefit asset
       (liability)            $     45.9  $     39.1  $   (100.6) $    (96.0)
                              ----------------------- -----------------------

    Expense
      Current service cost,
       net of employee
       contributions          $      2.2  $      2.3  $      2.5  $      2.7
      Interest cost                 14.7        14.2         5.8         5.9
      Actual return on plan
       assets                      (27.9)      (33.0)          -           -
      Actuarial gains (losses)      20.0         5.9        (2.4)        2.1
                              ----------------------- -----------------------
      Income (expense) before
       adjustments                   9.0       (10.6)        5.9        10.7

      Expected vs. actual
       return on plan assets         9.4        16.0           -           -
      Recognized vs. actual
       past service costs            0.2         0.2         0.1         0.1
      Recognized vs.
       actuarial
       losses (gains)              (19.0)       (4.0)        2.4        (3.4)
                              ----------------------- -----------------------
      Net expenses            $     (0.4) $      1.6  $      8.4  $      7.4
                              ----------------------- -----------------------

    Classification of accrued
     benefit asset (liability)
      Other assets            $     68.4  $     60.8  $        -  $        -
      Other liabilities            (22.5)      (21.7)     (100.6)      (96.0)
                              ----------------------- -----------------------
      Accrued benefit asset
       (liability)            $     45.9  $     39.1  $   (100.6) $    (96.0)
                              ----------------------- -----------------------

    Included in the above accrued benefit obligation at year-end are the
following amounts in respect of plans that are not funded:

                               Pension Benefit Plans     Other Benefit Plans
                              ----------------------- -----------------------
                                    2007        2006        2007        2006
                              ----------------------- -----------------------
    Accrued benefit
     obligation               $     17.7  $     17.0  $    100.6  $     96.0
                              ----------------------- -----------------------

    The significant actuarial assumptions adopted in measuring the Company's
accrued benefit obligations are as follows (weighted-average assumptions as of
May 5, 2007):

                               Pension Benefit Plans     Other Benefit Plans
                              ----------------------- -----------------------
                                    2007        2006        2007        2006
                              ----------------------- -----------------------
    Discount rate                   5.00%       5.50%       5.25%       5.50%
    Expected long-term rate of
     return on plan assets          7.00%       7.00%
    Rate of compensation increase   4.00%       4.00%

    For measurement purposes, a 10% fiscal 2007 annual rate of increase in the
per capita cost of covered health care benefits was assumed. The cumulative
rate expectation to 2016 is 5%. The expected average remaining service period
of the active employees covered by the pension benefit pension plans ranges
from 11 to 13 years with a weighted average of 11 years at year- end. The
expected average remaining service period of the active employees covered by
the other benefit plans ranges from 12 to 16 years with a weighted average of
16 years at year-end.
    The table below outlines the sensitivity of the fiscal 2007 key economic
assumptions used in measuring the accrued benefit plan obligations and related
expenses of the Company's pension and other benefit plans. The sensitivity of
each key assumption has been calculated independently. Changes to more than
one assumption simultaneously many amplify or reduce impact on the accrued
benefit obligations or benefit plan expenses.

                               Pension Benefit Plans     Other Benefit Plans
                              ----------------------- -----------------------
                                 Benefit     Benefit     Benefit     Benefit
                             Obligations     Cost(1)  Obligation     Cost(1)
                              ----------------------- -----------------------
    Expected long term rate
     of return on plan
     assets                                     7.00%
    Impact of: 1% increase                $     (2.8)
    Impact of: 1% decrease                $      2.8
    Discount rate                   5.00%       5.00%       5.25%       5.25%
    Impact of: 1% increase    $    (31.9) $      0.4  $    (16.9) $     (0.6)
    Impact of: 1% decrease    $     35.9  $     (0.8) $     20.3  $      0.7
    Growth rate of health
     care costs (2)                                        10.00%      10.00%
    Impact of: 1% increase                            $     17.1  $      1.7
    Impact of: 1% decrease                            $    (13.4) $     (1.3)

    (1) Reflects the impact on the current service cost, the interest cost
        and the expected return on assets.
    (2) Gradually decreasing to 5.0% in 2016 and remaining at that level
        thereafter.

    The asset mix of the defined benefit pension plans as at year-end is as
follows:

                                                          2007          2006
                                                    -------------------------
    Cash and short term investments                       2.43%         3.32%
    Bonds, debentures, fixed income pooled funds
     and real estate funds                               18.20%        17.92%
    Equities and pooled equities fund                    78.55%        77.91%
    Accrued interest and dividends                        0.22%         0.20%
    Foreign currency hedges                               0.60%         0.65%
                                                    -------------------------
    Total investments                                   100.00%       100.00%
                                                    -------------------------
                                                    -------------------------

    Within these securities are investments in a related party, Empire Company
Limited. The market value of these shares at year-end is as follows:

                                           % of plan               % of plan
                                    2007      assets        2006      assets
                              ----------------------- -----------------------
    Empire Company Limited
     shares                   $     92.2         9.3% $     93.4        10.2%


    15. Business acquisitions

    The Company acquires franchisee stores and prescription files. The results
of these acquisitions have been included in the consolidated financial results
of the Company, and were accounted for through the use of the purchase method.
As illustrated in the table below the acquisition of certain franchise stores
resulted in the acquisition of intangible assets. The method of amortization
of limited life intangibles is on a straight-line basis over 10 - 15 years.

                                      13 Weeks Ended          52 Weeks Ended
                              ----------------------- -----------------------
                                   May 5       May 6       May 5       May 6
                                    2007        2006        2007        2006
                              ----------------------- -----------------------
    Franchisees
    -----------
    Inventory                 $      1.6  $      3.0  $      4.9  $      3.0
    Property and equipment           0.4         0.7         2.4         0.7
    Intangibles                        -           -         3.3           -
    Goodwill                         0.8         0.3         0.9         0.3
    Other assets                     0.1         0.1         0.3         0.1
                              ----------------------- -----------------------
    Cash consideration        $      2.9  $      4.1  $     11.8  $      4.1
                              ----------------------- -----------------------
                              ----------------------- -----------------------

    Prescription files
    ------------------
    Intangibles               $      2.5  $      1.2  $      4.9  $      1.2
                              ----------------------- -----------------------
    Cash consideration        $      2.5  $      1.2  $      4.9  $      1.2
                              ----------------------- -----------------------
                              ----------------------- -----------------------

    On August 27, 2006, the Company acquired substantially all of the food
distribution assets of Achille de la Chevrotière Ltée and its associated
companies ("ADL") for an amount of $79.2. The assets acquired include 25 owned
or franchised retail store operations and other wholesale supply agreements
and distribution facilities in Rouyn-Noranda, Quebec. Sixteen of the
franchised retail store operations are considered VIEs under the Company's
policy (see Note 19). They have been included in the consolidated results of
the Company. The acquisition was accounted for using the purchase method with
the results of ADL being consolidated as of the acquisition date. Management
carried out a detailed analysis and changes were made to the preliminary
allocation of the excess of consideration paid over the net assets acquired as
disclosed in the second quarter of fiscal 2007. The measurement and allocation
of intangible assets was also completed in the third quarter of fiscal 2007.
During the third quarter there was an amendment to adjust the allocation to
intangibles from $21.5 to $6.8 and goodwill from $21.7 to $41.3 to reflect the
finalized valuation of ADL. The final purchase price allocation, which has
incorporated management's assessment of fair value, is as follows:

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

    Net assets acquired as at August 27, 2006:
      Total current assets                                        $     28.0
      Total long-term assets                                            27.7
      Total current liabilities assumed                                (20.0)
      Total long-term liabilities assumed                               (4.6)
                                                                  -----------
      Total net assets acquired                                   $     31.1
                                                                  -----------
                                                                  -----------

    Excess consideration paid over net assets acquired            $     48.1
                                                                  -----------
                                                                  -----------
    Allocation of excess of consideration paid over net assets
      Intangible assets - Agreements                              $      6.3
                          Other                                          0.5
      Goodwill                                                          41.3
                                                                  -----------
                                                                  $     48.1
                                                                  -----------
                                                                  -----------


    16. Stock-based compensation

    Deferred Share Units
    --------------------

    Members of the Board of Directors may elect to receive all or any portion
of their fees in Deferred Share Units ("DSUs") in lieu of cash. The number of
DSUs received is determined by the market value of Sobeys Inc. common shares
on each director's fee payment date. Additional DSUs are received as dividend
equivalents. DSUs cannot be redeemed for cash until the holder is no longer a
director of the Company. The redemption value of a DSU equals the market value
of a Sobeys Inc. common share at the time of redemption. At each interim or
annual period that the Company prepares its financial statements, it revalues
this liability. At May 5, 2007, there were 68,547 (May 6, 2006 - 49,251) DSUs
outstanding. During the year, the stock-based compensation expense was $1.8
(2006 - $0.7).

    Share Purchase Loans
    --------------------

    The Company has a Share Purchase Loan plan for employees of the Company
whereby loans are granted to purchase common stock. These loans have been
treated as stock-based compensation in accordance with Emerging Issues
Committee Abstract 132.
    The compensation cost relating to the fiscal 2007 Share Purchase Loans was
determined to be $ 1.2 (2006 - $1.3) with amortization of the cost over 5
years. The total increase in contributed surplus in relation to the Share
Purchase Loan compensation cost for fiscal 2007 is $1.0 (2006 - $0.8). The
contributed surplus balance was reduced by $0.4 (2006 - $0.3) in relation to
shares issued under the Share Purchase Loan that have been treated as stock-
based compensation that became fully vested with the employee during fiscal
2007. Shares become vested when the employees' outstanding loan balance is
reduced. The compensation cost was calculated using the Black-Scholes model
with the following assumptions:

                                                   May 5, 2007   May 6, 2006
                                                   --------------------------
    Expected life                                      5 years       5 years
    Risk-free interest rate                                4.1%          3.7%
    Expected volatility                                   27.3%         21.6%
    Dividend yield                                         1.5%          1.4%


    17. Business rationalization costs

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

                 Beginning              Paid /    Ending
                     Liabi-            Written     Liabi-   Antici-
                      lity  Incurred       off      lity     pated     Total
                   ----------------------------------------------------------
    Severance
      Atlantic     $     -   $   4.7   $   1.5   $   3.2   $     -  $    4.7
      Ontario            -       5.3       0.7       4.6         -       5.3
      Quebec             -       4.3         -       4.3         -       4.3
    Other costs          -       1.1       1.1         -         -       1.1
                   ----------------------------------------------------------
                         -      15.4       3.3      12.1         -      15.4

    Asset write-
     offs                -       3.4       3.4         -         -       3.4
                   ----------------------------------------------------------
                   $     -   $  18.8   $   6.7  $   12.1   $     -  $   18.8
                   ----------------------------------------------------------
                   ----------------------------------------------------------

    18. Vendor allowances

    The Company receives allowances from certain vendors, whose products are
purchased for resale. Included in these vendor programs are allowances for
volume purchases, exclusivity allowances, listing fees, and other allowances.
The Company recognizes these allowances as a reduction of cost of sales,
selling and administrative expenses and related inventories in accordance with
EIC-144. Certain allowances from vendors are contingent on the Company
achieving minimum purchase levels. These allowances are recognized when it is
probable that the minimum purchase level will be met, and the amount of
allowance can be estimated. As of the year ended May 5, 2007 the Company has
recognized $2.4 (2006 - $3.5) of allowances in income where it is probable
that the minimum purchase level will be met and the amount of allowance can be
estimated.


    19. Variable interest entities

    Variable interest entities are defined under Accounting Guideline 15
"Consolidation of Variable Interest Entities" (AcG-15) as entities that do not
have sufficient equity at risk to finance their activities without additional
subordinated financial support, or where the equity holders lack the overall
characteristics of a controlling financial interest. The guideline requires
that the VIE be consolidated with the financial results of the entity deemed
to be the primary beneficiary of the VIE's expected losses and its expected
residual returns.
    The Company implemented AcG-15 on May 7, 2005 retroactively without
restatement of prior periods. Entities that have been identified as meeting
the characteristics of a VIE were consolidated in the Company's results
effective for the fourth quarter of fiscal 2005.
    The Company has identified the following entities as VIEs:

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

    The Company has identified 271 (May 6, 2006 - 300) franchise affiliate
stores whose franchise agreements result in the Company being deemed the
primary beneficiary of the entity according to AcG-15. The results for these
entities were consolidated with the results of the Company.

    Warehouse and Distribution Agreement
    ------------------------------------
    The Company has an agreement with an independent entity to provide
warehouse and distribution services for one of its distribution centres. The
terms of the agreement with this entity require the Company to consolidate its
results with those of the Company pursuant to AcG-15.
    The Company has consolidated the results of these franchise affiliates and
the entity providing warehouse and distribution services effective at the
fourth quarter of fiscal 2005.
    In the prior year a charge of $5.5 to retained earnings was required to
reflect additional minority interest in the VIEs.


    20. Indemnities

    The Company has agreed to indemnify its directors and officers, and
particular employees in accordance with the Company's policies. The Company
maintains insurance policies that may provide coverage against certain claims.


    21. Subsequent event(s)

    On April 26, 2007, Empire Company Limited ("Empire") and Sobeys Inc.
("Sobeys") jointly announced that they had entered into an arrangement
agreement ("the Arrangement") pursuant to which Empire will acquire common
shares of Sobeys, other than those owned by Empire or its subsidiaries, at a
price of $58.00 per share. The transaction valued the Sobeys shares not
currently owned by Empire at approximately $1.06 billion.
    The Arrangement required various approvals. The non-Empire related Sobeys
shareholders approved the Arrangement at a Special Shareholder's meeting held
on June 9, 2007. The Supreme Court of Nova Scotia gave its sanction to the
Arrangement on June 13, 2007.
    On June 15, 2007, Empire acquired all the outstanding common shares of
Sobeys Inc. that it did not previously own. The Sobeys Inc. common shares were
delisted from the Toronto Stock Exchange on June 18, 2007.
    On June 27 2007, pursuant to the terms of Empire's Credit Facilities,
Empire and Sobeys filed notice with the lenders requesting the establishment
of a new $300.0 five-year unsecured revolving credit facility in favour of
Sobeys. The Credit Facilities are subject to certain financial covenants.
Interest on the debt varies based on the designation of the loan, fluctuations
in the underlying rates, and in the case of BA rate loans, the margin
applicable to financial covenants.
    It is intended that on July 23, 2007, Sobeys will draw down $300.0 from
the new credit facility, the proceeds of which are to be used to pay a
dividend to Empire. On that date Empire also intends to transfer to Sobeys a
$200.0 five year fixed rate interest rate swap at a rate of 5.051%.


    22. Comparative figures

    Comparative figures have been reclassified, where necessary, to reflect
the current year's presentation and to record the effects of retroactive
application of certain new accounting standards.

    




For further information:

For further information: Sobeys Inc. Investor Contact: Paul A. Jewer,
CA, Vice President, Finance & Treasurer, (902) 752-8371 ext. 2220,
investor.relations@sobeys.com; Sobeys Inc. Media Contact: Andrew Walker, Vice
President, Communications & Corporate Affairs, (905) 293-6711

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