Loblaw Companies Limited Reports 2012 First Quarter Results(1)

BRAMPTON, ON, May 2, 2012 /CNW/ - Loblaw Companies Limited (TSX: L) ("Loblaw" or the "Company") today announced its unaudited financial results for the first quarter ended March 24, 2012. The Company's first quarter report will be available in the Investor Centre section of the Company's website at loblaw.ca and will be filed with SEDAR and available at sedar.com.

2012 First Quarter Summary⁽¹⁾

• Basic net earnings per common share of $0.45, down 22.4% compared to the first quarter of 2011.
  
• EBITDA margin⁽²⁾ of 5.9% compared to 6.6% in the first quarter of 2011.
  
• Revenue of $6,937 million, an increase of 0.9% over the first quarter of 2011.
  
• Retail sales growth of 0.8% and a same-store sales decline of 0.7%, negatively impacted by one less day of store operations compared to the first quarter of 2011.

"In the first quarter, we executed on our plan," said Galen G. Weston, Executive Chairman, Loblaw Companies Limited. "Despite a decline in year-over-year earnings, store conditions are improved, we made steady progress on our IT implementation and we took a disciplined approach to improving our customer proposition. Our outlook for 2012 remains unchanged - we expect full-year net earnings to be down, with more pressure in the first half. We are confident that our ongoing investments in infrastructure will enable efficiencies and expense leverage, setting the stage for future earnings growth."

Consolidated Quarterly Results of Operations

For the periods ended March 24, 2012 and March 26, 2011 (unaudited) (millions of Canadian dollars except where otherwise indicated)			2012 (12 weeks)			2011 (12 weeks)			$ Change			% Change
Revenue		$	6,937		$	6,872		$	65			0.9%
Operating income			239			303			(64)			(21.1%)
Net earnings			126			162			(36)			(22.2%)
Basic net earnings per common share ($)			0.45			0.58			(0.13)			(22.4%)
Operating margin			3.4%			4.4%
EBITDA^(2)		$	409		$	455		$	(46)			(10.1%)
EBITDA margin^(2)			5.9%			6.6%

(1)

This News Release contains forward-looking information. See Forward-Looking Statements in this News Release for a discussion of material factors that could cause actual results to differ materially from the conclusions, forecasts and projections herein and of the material factors and assumptions that were used when making these statements. This News Release should be read in conjunction with Loblaw Companies Limited's filings with securities regulators made from time to time, all of which can be found at sedar.com and at loblaw.ca.

(2)

See Non-GAAP Financial Measures in this News Release.

• The $65 million increase in revenue compared to the first quarter of 2011 was driven by increases in the Company's Retail and Financial Services operating segments, as described below.
• As previously disclosed, for full-year 2012, the Company expects an incremental investment of $40 million in its customer proposition that is not expected to be covered by operations. In the first quarter of 2012, the Company invested an estimated $10 million entirely in gross profit related to its customer proposition.
• Operating income decreased by $64 million compared to the first quarter of 2011 as a result of a decrease in Retail operating income of $60 million and a decrease in Financial Services operating income of $4 million. Operating margin was 3.4% for the first quarter of 2012 compared to 4.4% in the same quarter in 2011. The $60 million decrease in Retail operating income was mainly driven by a decline in gross profit, the notable items as described below and changes in the value of the Company's investments in its franchise business.
• Consolidated operating income included the following notable items:
• A $12 million charge (2011 - income of $7 million) related to the effect of share-based compensation net of equity forwards;
• A $15 million charge (2011 - nil) related to the transition of certain Ontario conventional stores to the more cost effective and efficient operating terms under collective agreements ratified in the third quarter of 2010;
• Reduction in costs of $5 million related to investments in information technology ("IT") and supply chain, including the following charges:
• $71 million (2011 - $61 million) related to IT costs;
• $46 million (2011 - $36 million) related to depreciation and amortization;
• $3 million (2011 - $21 million) related to changes in the distribution network;
• $3 million (2011 - $10 million) related to other supply chain projects costs; and
• A nil charge (2011 - $8 million) related to an internal re-alignment of the Retail segment into a two division structure: conventional and discount.
• The decrease in net earnings of $36 million compared to the first quarter of 2011 was primarily due to the decrease in operating income partially offset by a decline in the Company's effective income tax rate.
• Basic net earnings per common share were impacted by the following notable items:
• A $0.04 charge (2011 - income of $0.01) related to the effect of share-based compensation net of equity forwards;
• A $0.04 charge (2011 - nil) related to the transition of certain Ontario conventional stores to the operating terms under collective agreements ratified in 2010;
• $0.01 reduction in costs related to incremental investments in IT and supply chain; and
• A nil charge (2011 - $0.02) related to the re-alignment of the Retail segment.
• In the first quarter of 2012, the Company invested $134 million in capital expenditures.

The consolidated quarterly results by reportable operating segments were as follows:

Retail Results of Operations

For the periods ended March 24, 2012 and March 26, 2011 (unaudited)			2012			2011
(millions of Canadian dollars except where otherwise indicated)			(12 weeks)			(12 weeks)			$ Change			% Change
Sales		$	6,808		$	6,757		$	51			0.8%
Gross profit			1,529			1,554			(25)			(1.6%)
Operating income			225			285			(60)			(21.1%)
Same-store sales decline			(0.7%)			(0.1%)
Gross profit percentage			22.5%			23.0%
Operating margin			3.3%			4.2%

• In the first quarter of 2012, the increase of $51 million, or 0.8%, in Retail sales over the same period in the prior year was impacted by the following factors:
• One less day of store operations estimated to have a negative effect of 0.8% to 1.0% on sales and same-store sales;
• Same-store sales declined by 0.7% (2011 - 0.1%);
• Sales in food were flat;
• Sales in drugstore were flat;
• Gas bar sales growth was strong as a result of higher retail gas prices, partially offset by a marginal volume decline;
• Sales in general merchandise, excluding apparel, were flat;
• Sales growth in apparel was strong, partially driven by increased apparel square footage;
• The Company experienced modest average quarterly internal food price inflation during the first quarters of 2012 and 2011, which was lower than the average quarterly national food price inflation of 3.7% (2011 - 2.5%) as measured by "The Consumer Price Index for Food Purchased from Stores" ("CPI"). CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in Loblaw stores; and
• 25 corporate and franchise stores were opened and five corporate and franchise stores were closed since the first quarter of 2011, resulting in a net increase of 0.6 million square feet, or 1.2%.
• In the first quarter of 2012, gross profit decreased by $25 million compared to the first quarter of 2011 and gross profit percentage was 22.5%, a decline from 23.0% in the first quarter of 2011. These declines were primarily driven by increased transportation costs and higher input costs outpacing internal food price inflation, partially offset by improved shrink. Higher input costs that were not entirely passed on to the consumer included an estimated $10 million incremental investment in the Company's customer proposition. The decline in gross profit percentage was also attributable to a higher proportion of lower margin gas bar sales.
• Operating income decreased by $60 million compared to the first quarter of 2011 and operating margin was 3.3% for the first quarter of 2012 compared to 4.2% in the same period in 2011. In addition to the notable items described in the Consolidated Quarterly Results of Operations above, operating income and operating margin were negatively impacted by the decrease in gross profit and changes in the value of the Company's investments in its franchise business, partially offset by other operating cost efficiencies.

Financial Services Results of Operations

For the periods ended March 24, 2012 and March 26, 2011 (unaudited) (millions of Canadian dollars except where otherwise indicated)			2012 (12 weeks)			2011 (12 weeks)			$ Change			% Change
Revenue		$	129		$	115		$	14			12.2%
Operating income			14			18			(4)			(22.2%)
Earnings before income taxes			4			5			(1)			(20.0%)
			As at			At as
(millions of Canadian dollars except where otherwise indicated) (unaudited)			March 24, 2012			March 26, 2011			$ Change			% Change
Average quarterly net credit card receivables		$	2,004		$	1,942		$	62			3.2%
Credit card receivables			1,987			1,887			100			5.3%
Allowance for credit card receivables			37			33			4			12.1%
Annualized yield on average quarterly gross credit card receivables			13.1%			12.6%
Annualized credit loss rate on average quarterly gross credit card receivables			4.5%			4.6%

• The 12.2% increase in Financial Services revenue compared to the first quarter of 2011 was primarily driven by increased credit card transaction values and receivable balances, resulting in higher interchange fee and interest income. Higher PC Telecom revenues resulting from the 2011 launch of the new Mobile Shop kiosks also contributed to the increase.
• Operating income decreased by $4 million in the first quarter of 2012 compared to the first quarter of 2011. Increases in revenue were offset by higher customer acquisition costs and operational costs, which ramped up in the latter half of 2011, consistent with the Company's continued investment in the growth of its Financial Services segment. Increased PC Points loyalty costs and investments in the launch of the Mobile Shop kiosks also contributed to the decrease in operating income.
• Earnings before income taxes decreased by $1 million in the first quarter of 2012 compared to the first quarter of 2011, primarily driven by the decline in operating income, partially offset by lower net interest expense.

Outlook⁽¹⁾

     For fiscal 2012, the Company continues to expect:

• Capital expenditures to be approximately $1.1 billion, with approximately 40% to be dedicated to investing in the IT infrastructure and supply chain projects and the remaining 60% to be spent on retail operations;
• Costs associated with the transition of certain Ontario conventional stores under collective agreements ratified in 2010 to range from $30 million to $40 million;
• Incremental costs related to investments in IT and supply chain to be approximately $70 million;
• Incremental investments in its customer proposition to be approximately $40 million; and
• Net earnings per share to be down year-over-year, with more pressure in the first half of the year, as a result of the Company's expectation that operations will not cover the incremental costs related to the investments in IT and supply chain and its customer proposition.

(1)	See Forward-Looking Statements in this News Release.

Forward-Looking Statements

This News Release for Loblaw Companies Limited contains forward-looking statements about the Company's objectives, plans, goals, aspirations, strategies, financial condition, results of operations, cash flows, performance, prospects and opportunities. These forward-looking statements are typically identified by words such as "anticipate", "expect", "believe", "foresee", "could", "estimate", "goal", "intend", "plan", "seek", "strive", "will", "may" and "should" and similar expressions, as they relate to the Company and its management. In this News Release, forward looking statements include the Company's continued expectation that for fiscal 2012:

• its capital expenditures will be approximately $1.1 billion;
• costs associated with the transition of certain Ontario conventional stores under collective agreements ratified in 2010 will range from $30 million to $40 million;
• incremental costs related to investments in information technology ("IT") and supply chain will be approximately $70 million;
• incremental costs associated with strengthening its customer proposition will be approximately $40 million; and
• net earnings per share to be down year-over-year, with more pressure in the first half of the year, as a result of the Company's expectation that operations will not cover the incremental costs related to the investments in IT and supply chain and its customer proposition.

These forward-looking statements are not historical facts but reflect the Company's current expectations concerning future results and events. They also reflect management's current assumptions regarding the risks and uncertainties referred to below and their respective impact on the Company. In addition, the Company's expectation with regard to its net earnings in 2012 is based in part on the assumptions that tax rates will be similar to those in 2011, the Company achieves its plan to increase net retail square footage by 1% and there are no unexpected adverse events or costs related to the Company's investments in IT and supply chain.

These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including, but not limited to:

• failure to realize revenue growth, anticipated cost savings or operating efficiencies from the Company's major initiatives, including investments in the Company's IT systems, including the Company's IT systems implementation, or unanticipated results from these initiatives;
• the inability of the Company's IT infrastructure to support the requirements of the Company's business;
• heightened competition, whether from current competitors or new entrants to the marketplace;
• changes in economic conditions including the rate of inflation or deflation, changes in interest and currency exchange rates and derivative and commodity prices;
• public health events including those related to food safety;
• failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements, which could lead to work stoppages;
• the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink;
• failure by the Company to maintain appropriate records to support its compliance with accounting, tax or legal rules, regulations and policies;
• failure of the Company's franchise stores to perform as expected;
• reliance on the performance and retention of third-party service providers including those associated with the Company's supply chain and apparel business;
• supply and quality control issues with vendors;
• changes to or failure to comply with laws and regulations affecting the Company and its business, including changes to the regulation of generic prescription drug prices and the reduction of reimbursement under public drug benefit plans and the elimination or reduction of professional allowances paid by drug manufacturers;
• changes in the Company's income, commodity, other tax and regulatory liabilities including changes in tax laws, regulations or future assessments;
• any requirement of the Company to make contributions to its registered funded defined benefit pension plans or the multi-employer pension plans in which it participates in excess of those currently contemplated;
• the risk that the Company would experience a financial loss if its counterparties fail to meet their obligations in accordance with the terms and conditions of their contracts with the Company; and
• the inability of the Company to collect on its credit card receivables.

This is not an exhaustive list of the factors that may affect the Company's forward-looking statements. Other risks and uncertainties not presently known to the Company or that the Company presently believes are not material could also cause actual results or events to differ materially from those expressed in its forward-looking statements. Additional risks and uncertainties are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including the Enterprise Risks and Risk Management section of the Management's Discussion and Analysis ("MD&A") and the MD&A included in the Company's 2011 Annual Report - Financial Review. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect the Company's expectations only as of the date of this News Release. The Company disclaims any intention or obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Non-GAAP Financial Measures

The Company uses the following non-GAAP financial measures: EBITDA and EBITDA margin. The Company believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial performance of the Company for the reasons outlined below. These measures do not have a standardized meaning prescribed by GAAP and therefore they may not be comparable to similarly titled measures presented by other publicly traded companies, and should not be construed as an alternative to other financial measures determined in accordance with GAAP.

EBITDA and EBITDA Margin The following table reconciles earnings before income taxes, net interest expense and other financing charges and depreciation and amortization ("EBITDA") to operating income which is reconciled to GAAP net earnings measures reported in the consolidated statements of earnings for the 12 week periods ended March 24, 2012 and March 26, 2011. EBITDA is useful to management in assessing performance of its ongoing operations and its ability to generate cash flows to fund its cash requirements, including the Company's capital investment program.

EBITDA margin is calculated as EBITDA divided by revenue.

				2012			2011
(millions of Canadian dollars) (unaudited)				(12 weeks)			(12 weeks)
Net earnings			$	126		$	162
Add impact of the following:
	Income taxes			39			68
	Net interest expense and other financing charges			74			73
Operating income				239			303
Add impact of the following:
	Depreciation and amortization			170			152
EBITDA			$	409		$	455

Selected Financial Information

The following includes selected quarterly financial information, which is prepared by management in accordance with International Financial Reporting Standards ("IFRS") and is based on the Company's 2012 First Quarter Report to Shareholders. This financial information does not contain all interim period disclosures required by IFRS, and accordingly, should be read in conjunction with the Company's 2011 Annual Report - Financial Review and 2012 First Quarter Report to Shareholders which are available in the Investor Centre section of the Company's website at www.loblaw.ca.

Condensed Consolidated Statements of Earnings

			March 24, 2012				March 26, 2011
(millions of Canadian dollars except where otherwise indicated) (unaudited)			(12 Weeks)				(12 Weeks)
Revenue		$	6,937			$	6,872
Cost of Merchandise Inventories Sold			5,284				5,203
Selling, General and Administrative Expenses			1,414				1,366
Operating Income			239				303
Net interest expense and other financing charges			74				73
Earnings Before Income Taxes			165				230
Income taxes			39				68
Net Earnings		$	126			$	162
Net Earnings per Common Share ($)
Basic		$	0.45			$	0.58
Diluted		$	0.45			$	0.56

Condensed Consolidated Balance Sheets

		As at		As at		As at
(millions of Canadian dollars) (unaudited)		March 24, 2012		March 26, 2011		December 31, 2011
Assets
Current Assets
	Cash and cash equivalents	$	657	$	427	$	966
	Short term investments		780		678		754
	Accounts receivable		432		367		467
	Credit card receivables		1,987		1,887		2,101
	Inventories		1,926		1,928		2,025
	Income taxes recoverable		5		-		-
	Prepaid expenses and other assets		123		90		117
	Assets held for sale		18		68		32
Total Current Assets			5,928		5,445		6,462
Fixed Assets			8,694		8,384		8,725
Investment Properties			95		74		82
Goodwill & Intangible Assets			1,026		1,026		1,029
Deferred Income Taxes			241		207		232
Security Deposits			249		184		266
Franchise Loans Receivable			352		315		331
Other Assets			293		400		301
Total Assets		$	16,878	$	16,035	$	17,428
Liabilities
Current Liabilities
	Trade payables and other liabilities		3,079		3,048		3,677
	Provisions		37		63		35
	Income taxes payable		-		2		14
	Short term debt		905		905		905
	Long term debt due within one year		82		52		87
Total Current Liabilities			4,103		4,070		4,718
Provisions			50		43		50
Long Term Debt			5,489		5,249		5,493
Deferred Income Taxes			27		36		21
Capital Securities			222		221		222
Other Liabilities			885		660		917
Total Liabilities			10,776		10,279		11,421
Shareholders' Equity
Common Share Capital			1,542		1,478		1,540
Retained Earnings			4,504		4,229		4,414
Contributed Surplus			51		44		48
Accumulated Other Comprehensive Income			5		5		5
Total Shareholders' Equity			6,102		5,756		6,007
Total Liabilities and Shareholders' Equity		$	16,878	$	16,035	$	17,428

Condensed Consolidated Statements of Cash Flow

(millions of Canadian dollars) (unaudited)					March 24, 2012 (12 weeks)			March 26, 2011 (12 weeks)
Operating Activities
	Net earnings			$	126		$	162
	Income taxes				39			68
	Net interest expense and other financing charges				74			73
	Depreciation and amortization				170			152
	Income taxes paid				(69)			(41)
	Interest received				7			10
	Net decrease in credit card receivables				114			110
	Change in non-cash working capital				(533)			(502)
	Fixed assets and other related impairments				3			4
	Other				12			(17)
Cash Flows (used in) from Operating Activities					(57)			19
Investing Activities
	Fixed asset purchases				(134)			(155)
	Change in short term investments				(43)			64
	Proceeds from fixed asset sales				1			5
	Change in franchise investments and other receivables				(17)			(1)
	Change in security deposits				14			167
	Other				-			(7)
Cash Flows (used in) from Investing Activities					(179)			73
Financing Activities
	Change in bank indebtedness				-			(10)
	Change in short term debt				-			370
	Long term debt:
	Issued				23			57
	Retired				(29)			(858)
	Interest paid				(63)			(82)
	Common shares:
	Issued				2			3
	Purchased for cancellation				(2)			-
Cash Flows used in Financing Activities					(69)			(520)
Effect of foreign currency exchange rate changes on cash and cash equivalents					(4)			(2)
Change in Cash and Cash Equivalents					(309)			(430)
Cash and Cash Equivalents, Beginning of Period					966			857
Cash and Cash Equivalents, End of Period				$	657		$	427

2011 Annual Report and 2012 First Quarter Report to Shareholders

The Company's 2011 Annual Report and 2012 First Quarter Report to Shareholders are available in the Investor Centre section of the Company's website at www.loblaw.ca or at www.sedar.com.

Investor Relations

Shareholders, security analysts and investment professionals should direct their requests to Kim Lee, Vice President, Investor Relations at the Company's National Head Office or by e-mail at [email protected].

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.

Conference Call and Webcast

Loblaw Companies Limited will host a conference call as well as an audio webcast on May 2, 2012 at 11:00 a.m. (EST).

To access via tele-conference please dial [phone]. The playback will be made available two hours after the event at [phone], access code: 65409659. To access via audio webcast please visit www.loblaw.ca, go to Investor Centre and click on webcast. Pre-registration will be available.

Full details are available on the Loblaw Companies Limited website at www.loblaw.ca.

Annual and Special Meeting of Shareholders

The 2012 Annual and Special Meeting of Shareholders of Loblaw Companies Limited will be held on Thursday, May 3, 2012 at 11:00 a.m. (EST) at the Metro Toronto Convention Centre, South Building, Meeting Room 701, 222 Bremner Boulevard, Toronto, Ontario, Canada.

To access via tele-conference, please dial [phone]. The playback will be available two hours after the event at [phone], access code: 65429438. To access via audio webcast please visit the Investor Centre section of www.loblaw.ca.  Pre-registration will be available.

Kim Lee, Vice President, Investor Relations at the Company's National Head Office or by e-mail at [email protected]