Loblaw Companies Limited Reports Second Quarter 2010 Results
BRAMPTON, July 22 /CNW/ -
2010 Second Quarter Summary(1)
- Basic net earnings per common share of $0.64, down 8.6%
- EBITDA(2) margin of 6.5%, an increase of 20 basis points from 6.3%
- Sales of $7,317 million, growth of 1.2%
- Same-store sales declined 0.3%
For the periods ended June 19, 2010
and June 20, 2009 (unaudited)
($ millions except where otherwise 2010 2009 %
indicated) (12 weeks) (12 weeks) Change
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Sales $ 7,317 $ 7,233 1.2%
Gross profit 1,793 1,689 6.2%
Operating income 330 324 1.9%
Net earnings 180 193 (6.7%)
Basic net earnings per common share ($) 0.64 0.70 (8.6%)
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Same-store sales growth (%) (0.3%) 2.5%
Operating margin 4.5% 4.5%
EBITDA(2) $ 479 $ 459 4.4%
EBITDA margin(2) 6.5% 6.3%
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2010 2009 %
(24 weeks) (24 weeks) Change
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Sales $ 14,243 $ 13,951 2.1%
Gross profit 3,513 3,303 6.4%
Operating income 590 550 7.3%
Net earnings 317 302 5.0%
Basic net earnings per common share ($) 1.14 1.10 3.6%
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Same-store sales growth (%) 0.1% 2.4%
Operating margin 4.1% 3.9%
EBITDA(2) $ 891 $ 817 9.1%
EBITDA margin(2) 6.3% 5.9%
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(1) This report contains forward-looking information. See Forward-
Looking Statements 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. This report must 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 www.sedar.com
and at www.loblaw.ca.
(2) See Non-GAAP Financial Measures.
"We continue to make progress on our overall renewal plan," said Galen G. Weston, Executive Chairman, Loblaw Companies Limited. "However, we are now in the critical period of heightened risk for the infrastructure and information technology components of the plan. As previously stated, we expect investments associated with this to continue to negatively impact our operating income during this period".
- Sales in the second quarter of 2010 were positively impacted by 1.9%
by the acquisition of T&T Supermarket Inc. ("T&T"), which was
completed in the third quarter of 2009.
- In the second quarter of 2010:
- sales growth in food was flat and in drugstore was modest;
- sales growth in apparel was strong while sales of other general
merchandise declined significantly;
- gas bar sales increased significantly as a result of higher retail
gas prices and strong volume growth; and
- the Company experienced internal retail food price deflation
compared to flat national food price inflation as measured by "The
Consumer Price Index for Food Purchased from Stores". The Company's
measure showed greater internal retail food price deflation in the
second quarter of 2010 than in the first quarter of 2010 and
compared to internal retail food price inflation in the second
quarter of 2009.
- Gross profit increased by $104 million, or 6.2%, to $1,793 million in
the second quarter of 2010 compared to the second quarter of 2009.
Gross profit as a percentage of sales in the second quarter of 2010
was 24.5% compared to 23.4% in the second quarter of 2009. The
increase was primarily attributable to continued buying synergies,
disciplined vendor management, improved control label profitability,
and inventory management and a stronger Canadian dollar, partially
offset by investments in pricing.
- Operating income in the second quarter of 2010 included a charge
related to the effect of stock-based compensation net of equity
forwards of $11 million in 2010 compared with income of $7 million in
2009. The effect on basic net earnings per common share was a charge
of $0.02 (2009 - income of $0.03).
- The Company incurred an incremental cost of $41 million in the second
quarter of 2010 related to its investment in information technology
and supply chain, which negatively impacted basic net earnings per
common share by $0.10. Included in these costs was $16 million related
to changes in the Company's distribution network in Quebec.
- In connection with the changes to the Company's distribution network,
a distribution centre was closed and an asset impairment charge of $23
million was recorded. Basic net earnings per share were negatively
impacted by $0.06.
- Operating income and operating margin were positively influenced by
improved gross profit, partially offset by the charge related to
stock-based compensation net of the equity forwards, the impairment
charge related to the closure of the distribution centre and
incremental costs related to the investment in information technology
and supply chain.
Forward-Looking Statements
This Quarterly Report 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. 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, are intended to identify forward-looking statements. These forward-looking statements are not historical facts but reflect the Company's current expectations concerning future results and events.
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:
- the possibility that the Company's plans and objectives will not be
achieved;
- changes in economic conditions including the rate of inflation or
deflation;
- changes in consumer spending and preferences; heightened competition,
whether from new competitors or current competitors;
- changes in the Company's or its competitors' pricing strategies;
- failure of the Company's franchised stores to perform as expected;
- risks associated with the terms and conditions of financing programs
offered to the Company's franchisees;
- failure of the Company to realize the anticipated benefits of business
acquisitions or divestitures;
- failure to realize sales growth, anticipated cost savings or operating
efficiencies from the Company's major initiatives, including
investments in the Company's information technology systems, supply
chain investments and other cost reduction initiatives, or
unanticipated results from these initiatives;
- increased costs relating to utilities, including electricity and fuel;
- the inability of the Company to successfully implement its
infrastructure and information technology components of its plan;
- the inability of the Company's information technology infrastructure
to support the requirements of the Company's business;
- the inability of the Company to manage inventory to minimize the
impact of obsolete or excess inventory and to control shrink;
- failure to execute successfully and in a timely manner the Company's
introduction of innovative and reformulated products or new and
renovated stores;
- the inability of the Company's supply chain to service the needs of
the Company's stores;
- failure to achieve desired results in labour negotiations, including
the terms of future collective bargaining agreements which could lead
to work stoppages;
- changes to the regulatory environment in which the Company operates;
- the adoption of new accounting standards and changes in the Company's
use of accounting estimates;
- fluctuations in the Company's earnings due to changes in the value of
stock-based compensation and equity forward contracts relating to its
Common Shares;
- changes in the Company's tax liabilities including changes in tax laws
or future assessments;
- detrimental reliance on the performance of third-party service
providers;
- public health events including those relating to food safety;
- changes in interest and currency exchange rates;
- the inability of the Company to collect on its credit card
receivables;
- any requirement of the Company to make contributions to its registered
funded defined benefit pension plans in excess of those currently
contemplated;
- the inability of the Company to attract and retain key executives; and
- supply and quality control issues with vendors.
These and other risks and uncertainties are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including the Enterprise Risks and Risk Management section of the Management's Discussion and Analysis ("MD&A") included in the Company's 2009 Annual Report - Financial Review. These forward-looking statements reflect management's current assumptions regarding these risks and uncertainties and their respective impact on the Company.
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. 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 Quarterly Report. 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.
Management's Discussion and Analysis
The following Management's Discussion and Analysis ("MD&A") for Loblaw Companies Limited and its subsidiaries (collectively, the "Company" or "Loblaw") should be read in conjunction with the Company's second quarter 2010 unaudited interim period consolidated financial statements and the accompanying notes included in this Quarterly Report and the audited annual consolidated financial statements and the accompanying notes for the year ended January 2, 2010 and the related annual MD&A included in the Company's 2009 Annual Report - Financial Review. The Company's 2010 unaudited interim period consolidated financial statements and the accompanying notes have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are reported in Canadian dollars. These interim period consolidated financial statements include the accounts of the Company and its variable interest entities ("VIEs") that the Company is required to consolidate in accordance with Accounting Guideline 15, "Consolidation of Variable Interest Entities".
A glossary of terms used throughout this Quarterly Report can be found on page 86 of the Company's 2009 Annual Report - Financial Review. In addition, this Quarterly Report includes the following terms: "rolling year net debt(1) to EBITDA(1)" which is defined as net debt(1) divided by cumulative EBITDA(1) for the latest four quarters; "rolling year return on average net assets(1)", which is defined as cumulative operating income for the latest four quarters divided by average net assets(1); "rolling year return on average shareholders' equity", which is defined as cumulative net earnings available to common shareholders for the latest four quarters divided by average total common shareholders' equity; and "operating working capital", which is defined as the sum of accounts receivable, inventories and prepaid expenses and other assets less accounts payable and accrued liabilities.
The information in this MD&A is current to July 21, 2010, unless otherwise noted.
(1) See Non-GAAP Financial Measures.
Results of Operations
Sales
Sales for the second quarter increased by 1.2% to $7,317 million compared to $7,233 million in the second quarter of 2009. The following factors explain the major components of the increase:
- T&T sales positively impacted the Company's sales by 1.9%;
- same-store sales decline of 0.3%;
- sales growth in food was flat and in drugstore was modest;
- sales growth in apparel was strong while sales of other general
merchandise declined significantly due to reductions in assortment
and square footage;
- gas bar sales increased significantly as a result of higher retail
gas prices and strong volume growth;
- the Company experienced internal retail food price deflation compared
to flat national food price inflation of 0.3% 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. The Company's measure showed greater
internal retail food price deflation in the second quarter of 2010
than in the first quarter of 2010 and compared to internal retail food
price inflation in the second quarter of 2009; and
- during the second quarter of 2010, net retail square footage remained
flat, as 3 stores opened and 6 stores closed. During the last four
quarters, 39 stores were opened, including 17 acquired T&T stores, and
32 stores were closed, resulting in a net increase of 0.7 million
square feet, or 1.4%.
For the first two quarters of the year, sales increased by 2.1%, or $292 million, to $14,243 million compared to the same period in 2009. The following factors, in addition to the quarterly factors mentioned above, further explain the increase:
- T&T sales positively impacted the Company's sales by 1.9%;
- same-store sales growth of 0.1%; and
- sales and same-store sales growth were positively impacted by
approximately 0.3% as a result of a labour disruption during the first
quarter of 2009 in certain Maxi stores in Quebec. These stores
reopened in the first quarter of 2009, except for two stores that were
permanently closed.
Gross Profit
Gross profit increased by $104 million to $1,793 million in the second quarter of 2010 compared to $1,689 million in the second quarter of 2009. Gross profit as a percentage of sales was 24.5% in the second quarter of 2010 compared to 23.4% in the second quarter of 2009. Year-to-date gross profit increased by $210 million to $3,513 million compared to $3,303 in the comparable period of 2009. Year-to-date gross profit as a percentage of sales was 24.7% compared to 23.7% in the comparable period of 2009. In the first two quarters of 2010, the increase in gross profit and gross profit as a percentage of sales was primarily attributable to continued buying synergies, disciplined vendor management, improved control label profitability and inventory management and a stronger Canadian dollar, partially offset by investments in pricing in the second quarter of 2010.
Operating Income
Operating income was $330 million for the second quarter of 2010 compared to $324 million in the same period in 2009, an increase of 1.9%. Operating margin was 4.5% for the second quarter of 2010 and the second quarter of 2009. The increase in operating income was primarily due to the increase in gross profit, partially offset by an increase in depreciation and amortization of $14 million, a charge of $11 million (2009 - income of $7 million) related to stock-based compensation net of the equity forwards and incremental costs of $41 million related to the Company's investment in information technology and supply chain. Included in the incremental costs was $16 million of costs related to changes in the Company's distribution network in Quebec. In addition, in connection with the distribution network changes a $23 million asset impairment charge was recorded for the closure of a distribution centre. The second quarter of 2009 was positively impacted by a gain of $8 million from the sale of financial investments by President's Choice Bank ("PC Bank"), a wholly owned subsidiary of the Company.
EBITDA(1) increased by $20 million, or 4.4%, to $479 million in the second quarter of 2010 compared to $459 million in the second quarter of 2009. EBITDA margin(1) increased in the second quarter of 2010 to 6.5% from 6.3% in the comparable period of 2009. The increases in EBITDA(1) and EBITDA margin(1) were primarily due to the increases in gross profit and gross profit as a percentage of sales, partially offset by costs related to changes in the Company's distribution network including the $23 million asset impairment charge.
Year-to-date operating income for 2010 increased by $40 million, or 7.3%, to $590 million, and resulted in an operating margin of 4.1% compared to 3.9% in the comparable period in 2009. The year-to-date increases in operating income and operating margin were primarily due to the increases in gross profit and gross profit as a percentage of sales, partially offset by an increase in depreciation and amortization of $34 million, a charge of $20 million (2009 - $12 million) related to stock-based compensation net of the equity forwards, incremental costs of $69 million related to the Company's investment in information technology and supply chain and the $23 million asset impairment charge recorded in the second quarter of 2010. Year-to-date operating income in 2009 included a gain of $8 million from the sale of financial investments by PC Bank.
Year-to-date EBITDA(1) increased by $74 million, or 9.1% to $891 million compared to $817 million in the comparable period in 2009. EBITDA margin(1) improved to 6.3% compared to 5.9% for the same period last year. The year-to-date increases in EBITDA(1) and EBITDA margin(1) were primarily due to the improvements in gross profit and gross profit as a percentage of sales, partially offset by costs related to changes in the Company's distribution network including the $23 million asset impairment charge recorded in the second quarter of 2010.
(1) See Non-GAAP Financial Measures.
Interest Expense and Other Financing Charges
Interest expense and other financing charges increased to $64 million in the second quarter of 2010 compared to $60 million in the second quarter of 2009 primarily due to lower net short term interest income. Year-to-date interest expense and other financing charges increased to $132 million compared to $121 million in the comparable period of 2009 primarily due to an increase in interest on long term debt and lower net short term interest income.
Income Taxes
The effective income tax rate in the second quarter of 2010 was 29.3% (2009 - 25.8%) and 29.9% (2009 - 30.1%) year-to-date. The quarter over quarter increase in the effective income tax rate was primarily due to an increase in the current year income tax expense over the prior year income tax recoveries relating to certain prior year income tax matters and the change in the proportions of taxable income earned across different tax jurisdictions. The year over year decrease in the effective income tax rate was primarily due to the proportions of taxable income earned across different tax jurisdictions which was partially offset by an increase in income tax accruals relating to certain prior year income tax matters.
In March 2010, the federal budget proposed changes that impact the tax deductibility of cash-settled stock options. As at June 19, 2010, the Company has $10 million in current and future tax assets relating to outstanding employee stock options that will be expensed when the proposed changes are substantively enacted.
Net Earnings
Net earnings for the second quarter of 2010 decreased by $13 million, or 6.7%, to $180 million from $193 million in the second quarter of 2009 and year-to-date increased by $15 million, or 5.0%, to $317 million from $302 million in 2009. Basic net earnings per common share for the second quarter decreased by $0.06, or 8.6%, to $0.64 from $0.70 in the second quarter of 2009 and year-to-date increased by $0.04, or 3.6%, to $1.14 compared to $1.10 for the same period last year.
Basic net earnings per common share were affected in the second quarter of 2010 compared to the second quarter of 2009 by the following:
- a charge of $0.02 (2009 - income of $0.03) per common share for the
net effect of stock-based compensation net of equity forwards; and
- a charge of $0.06 (2009 - nil) per common share for the distribution
centre asset impairment.
Year-to-date basic net earnings per common share for 2010 compared to the same period in 2009 were affected by the following:
- a charge of $0.04 (2009 -$0.04) per common share for the net effect of
stock-based compensation net of equity forwards; and
- a charge of $0.06 (2009 - nil) per common share for the distribution
centre asset impairment.
Financial Condition
Financial Ratios
The Company's net debt(1) to equity(1) ratio continued to be within the Company's internal guideline of less than 1:1. The net debt(1) to equity(1) ratio was 0.40:1 at the end of the second quarter of 2010 compared to 0.43:1 at year end 2009. The decreases in these ratios at the end of the second quarter of 2010 compared to year end 2009 were primarily due to the decrease in net debt(1) and the increase in cumulative operating income for the latest four quarters. The rolling year net debt(1) to EBITDA(1) ratio was 1.4 times at the end of the second quarter of 2010 compared to 1.7 times at the end of the second quarter of 2009 and 1.6 times at year end 2009.
The interest coverage ratio was 4.2 times for the second quarters of 2010 and 2009. This ratio was unchanged compared to the prior year due to the improvement in year-to-date operating income which was offset by an increase in year-to-date interest expense.
The rolling year return on net assets(1) at the end of the second quarter of 2010 was 12.1%, compared to 11.8% at the end of the second quarter of 2009 and 12.0% at year end 2009. This ratio was positively impacted by the increase in cumulative operating income for the latest four quarters partially offset by the increase in net assets(1). The rolling year return on shareholders' equity at the end of the second quarter of 2010 was 10.8%, compared to 11.3% at the end of the second quarter of 2009 and 10.9% at year end 2009. This ratio decreased due to the increase in average shareholders' equity partially offset by the increase in cumulate net earnings over the latest four quarters.
(1) See Non-GAAP Financial Measures.
Capital Securities
12.0 million non-voting Second Preferred Shares, Series A, are authorized, 9.0 million of which were outstanding at the end of the second quarter of 2010.
First Preferred Shares
1.0 million non-voting First Preferred Shares are authorized, none of which was outstanding at the end of the second quarter of 2010.
Common Share Capital
An unlimited number of common shares is authorized, 277,308,711 of which were outstanding at the end of the second quarter of 2010.
Further information on the Company's outstanding share capital is provided in note 13 to the unaudited interim period consolidated financial statements.
Dividends
During the second quarter of 2010, the Company's Board of Directors declared a dividend of $0.21 per common share with a payment date of July 1, 2010 and $0.37 per Second Preferred Share, Series A payable on July 31, 2010. Subsequent to the end of the second quarter of 2010, the Board declared a quarterly dividend of $0.21 per common share payable on October 1, 2010 and a quarterly dividend of $0.37 per Second Preferred Share, Series A payable on October 31, 2010.
Dividend Reinvestment Plan ("DRIP")
During the second quarter of 2010, the Company issued 1,120,453 (2009 - nil) common shares from treasury under the DRIP at a three percent (3%) discount to market resulting in net cash savings and incremental common share equity to the Company of approximately $41 million (2009 - nil). Subsequent to the second quarter of 2010, the Company issued 1,122,833 (2009 - 1,163,201) common shares from treasury under the DRIP at a three percent (3%) discount to market resulting in net cash savings and incremental common share equity to the Company of approximately $42 million (2009 - $39 million).
Liquidity and Capital Resources
Cash flows from Operating Activities
Second quarter cash flows from operating activities were $614 million in 2010 compared to $831 million in the second quarter of 2009. On a year-to-date basis, cash flows from operating activities were $404 million compared to $475 million in the comparable period in 2009. The decreases in cash flows from operating activities were primarily due to the change in non-cash working capital. Also impacting 2009 cash flows from operating activities was a $38 million payment to a counterparty to extinguish a portion of the liability associated with equity forwards by Glenhuron Bank Limited ("Glenhuron"), a wholly owned subsidiary of the Company.
Cash flows used in Investing Activities
Second quarter cash flows used in investing activities were $270 million compared to $102 million in the second quarter of 2009. The increase in cash flows used in investing activities in the second quarter was primarily due to an increase in fixed asset purchases and the change in short term investments and security deposits included in other assets. On a year-to-date basis, cash flows used in investing activities were $127 million compared to $132 million in the comparable period in 2009. The year-to-date decrease in cash flows used in investing activities was primarily due to the change in short term investments and a decrease in credit card receivables, partially offset by an increase in fixed asset purchases, the change in security deposits included in other assets and PC Bank's repurchase of $90 million of co-ownership interest in securitized receivables from an independent trust in the first quarter of 2010. Capital investment for the second quarter amounted to $236 million (2009 - $199 million) and $384 million (2009 - $322 million) year-to-date including $19 million, which was financed through a capital lease in the second quarter of 2010. The Company expects to invest approximately $1.0 billion in capital expenditures in 2010.
Cash Flows from (used in) Financing Activities
Second quarter cash flows from financing activities were $31 million in 2010 compared to cash flows used in financing activities of $360 million in the second quarter of 2009. The change was primarily due to the issuance of $350 million of 5.22% Medium Term Notes in the second quarter of 2010, the repayment of the Company's short term debt and bank indebtedness in the second quarter of 2009 and the cash savings associated with the DRIP, partially offset by the repayment of the $300 million, 7.10% Medium Term Note in the second quarter of 2010 and the issuance of $350 million of 4.85% Medium Term Notes in the second quarter of 2009. On a year-to-date basis, cash flows from financing activities were $44 million compared to cash flows used in financing activities of $78 million in the comparable period in 2009. The year-to-date change was primarily due to the issuance of $350 million of 5.22% Medium Term Notes in the second quarter of 2010, the repayment of the Company's short term debt and bank indebtedness in the second quarter of 2009, the repayment of the $125 million, 5.75% Medium Term Note in the first quarter of 2009 and the cash savings associated with the DRIP, partially offset by the repayment of the $300 million, 7.10% Medium Term Note in the second quarter of 2010 and the issuance of $350 million at 4.85% Medium Term Notes in the second quarter of 2009.
During the second quarter of 2010, the Company issued $350 million principal amount of 10 year unsecured Medium Term Notes, Series 2-B pursuant to its Medium Term Notes, Series 2 program. Interest on the notes is payable semi-annually at a fixed rate of 5.22%. The notes are unsecured obligations and are redeemable at the option of the Company. In the second quarter of 2009, the Company issued $350 million principal amount of 5 year unsecured Medium Term Notes, Series 2-A which pay a fixed rate of interest of 4.85% payable semi-annually.
During the second quarter of 2010, the $300 million, 7.10% Medium Term Note due May 11, 2010 matured and was repaid. In the first quarter of 2009, the $125 million 5.75% Medium Term Note matured and was repaid.
Net Debt(1)
As at June 19, 2010, net debt(1) was $2,665 million compared to $2,783 million as at January 2, 2010. The decrease of $118 million was primarily due to positive cash flows from operating activities partially offset by fixed asset purchases.
(1) See Non-GAAP Financial Measures.
Sources of Liquidity
The Company expects that cash and cash equivalents, short term investments, future operating cash flows and the amounts available to be drawn against its credit facility will enable the Company to finance its capital investment program and fund its ongoing business requirements, including working capital, pension plan funding and financial obligations over the next twelve months. In addition, given reasonable access to capital markets, the Company does not foresee any impediments in securing financing to satisfy its long term obligations.
PC Bank participates in bank supported and term securitization programs which provide the primary source of funds for the operation of its business. Under these securitization programs, a portion of the total interest in the credit card receivables is sold to independent trusts. During the first quarter of 2010, PC Bank repurchased $90 million (2009 - nil) of co-ownership interest in securitized receivables from an independent trust. The independent trusts' recourse to PC Bank's assets is limited to PC Bank's excess collateral (June 19, 2010 - $114 million; June 20, 2009 - $124 million; January 2, 2010 - $121 million) as well as standby letters of credit issued (June 19, 2010 - $103 million; June 20, 2009 - $116 million; January 2, 2010 - $116 million) on a portion of the securitized amount. A portion of the securitized receivables that is held by an independent trust facility with a term of 364 days is subject to renewal during the third quarter of 2010. If the facility is not renewed, collections must be accumulated on behalf of the trust prior to the expiry. In the absence of renewal or other securitization, the Company would be required to use its cash and short term investments or raise alternative financing by issuing additional debt or equity instruments.
The Company has traditionally obtained its long term financing primarily through a Medium Term Notes program. The Company may refinance maturing long term debt with Medium Term Notes if market conditions are appropriate or it may consider other alternatives.
The following table sets out the current credit ratings of the Company:
Dominion Bond
Rating Service Standard & Poor's
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Credit Ratings Credit Credit
(Canadian Standards) Rating Trend Rating Outlook
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Commercial paper R-2 (middle) Stable A-2 Stable
Medium term notes BBB Stable BBB Stable
Preferred shares Pfd-3 Stable P-3 (high) Stable
Other notes and
debentures BBB Stable BBB Stable
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The rating organizations listed above base their credit ratings on quantitative and qualitative considerations. These credit ratings are forward-looking and intended to give an indication of the risk that the Company will not fulfill its obligations in a timely manner.
The Company's and PC Bank's ability to obtain funding from external sources may be restricted by downgrades in the Company's current credit ratings should the Company's financial performance and condition deteriorate. In addition, credit and capital markets are subject to inherent global risks that may negatively affect the Company's access and ability to fund its financial and other liabilities. The Company mitigates these risks by maintaining appropriate levels of cash and cash equivalents and short term investments, committed lines of credit and diversifying its sources of funding and the maturity profile of its debt and capital obligations.
During the second quarter of 2010, Loblaw renewed its Normal Course Issuer Bid to purchase on the Toronto Stock Exchange ("TSX"), or to enter into equity derivatives to purchase, up to 13,865,435 of the Company's common shares, representing approximately 5% of the common shares outstanding. In accordance with the requirements of the TSX, any purchases must be at the then market prices of such shares. The Company did not purchase any shares under its Normal Course Issuer Bid during the first two quarters of 2010.
Independent Funding Trusts
Certain independent franchisees of the Company obtain financing through a structure involving independent trusts, which were created to provide loans to the independent franchisees to facilitate their purchase of inventory and fixed assets, consisting mainly of fixtures and equipment. These trusts are administered by a major Canadian chartered bank.
The gross principal amount of loans issued to the Company's independent franchisees by the independent trusts as at June 19, 2010 was $390 million (June 20, 2009 - $387 million; January 2, 2010 - $390 million) including $178 million (June 20, 2009 - $149 million; January 2, 2010 - $163 million) of loans payable by VIEs consolidated by the Company. The Company has agreed to provide credit enhancement of $66 million (June 20, 2009 - $66 million; January 2, 2010 - $66 million) in the form of a standby letter of credit for the benefit of the independent funding trust representing not less than 15% of the principal amount of the loans outstanding. This standby letter of credit has never been drawn upon. This credit enhancement allows the independent funding trust to provide financing to the Company's independent franchisees. As well, each independent franchisee provides security to the independent funding trust for its obligations by way of a general security agreement. In the event that an independent franchisee defaults on its loan and the Company has not, within a specified time period, assumed the loan, or the default is not otherwise remedied, the independent funding trust would assign the loan to the Company and draw upon this standby letter of credit.
During the second quarter of 2010, the $475 million, 364-day revolving committed credit facility that is the source of funding to the independent trusts was renewed. The financing structure has been reviewed and the Company determined there were no additional VIEs to consolidate as a result of this financing.
Equity Forward Contracts
As at June 19, 2010, Glenhuron had equity forward contracts to buy 1.5 million (June 20, 2009 - 3.2 million; January 2, 2010 - 1.5 million) of the Company's common shares at an average forward price of $66.73 (June 20, 2009 - $53.82; January 2, 2010 - $66.25) including $10.51 (June 20, 2009 - $9.20; January 2, 2010 - $10.03) per common share of interest expense. As at June 19, 2010, the interest and unrealized market loss of $40 million (June 20, 2009 - $62 million; January 2, 2010 - $48 million) was included in accounts payable and accrued liabilities. In the second quarter of 2009, Glenhuron paid $38 million to a counterparty to terminate a portion of the equity forwards representing 1.6 million shares, which led to the extinguishment of a corresponding portion of the associated liability.
Employee Future Benefit Contributions
During the first two quarters of 2010, the Company contributed $42 million (2009 - $43 million) to its registered funded defined benefit pension plans. The Company expects to contribute $100 million to these plans during 2010. The actual amount paid may vary from the estimate based on actuarial valuations being completed, market performance and regulatory requirements. The Company regularly monitors and assesses plan experience and the impact of changes in participant demographics, changes in capital markets and other economic factors that may impact funding requirements, employee future benefit costs and actuarial assumptions.
Quarterly Results of Operations
Under an accounting convention common in the food distribution industry the Company follows a 52-week reporting cycle which periodically necessitates a fiscal year of 53 weeks. 2008 was a 53-week fiscal year. The 52-week reporting cycle is divided into four quarters of 12 weeks each except for the third quarter, which is 16 weeks in duration. The following is a summary of selected consolidated financial information derived from the Company's unaudited interim consolidated financial statements for each of the eight most recently completed quarters. This information was prepared in accordance with Canadian GAAP.
Summary of Quarterly Results
(unaudited)
Second Quarter First Quarter
($ millions except where 2010 2009 2010 2009
otherwise indicated) (12 weeks) (12 weeks) (12 weeks) (12 weeks)
-------------------------------------------------------------------------
Sales $ 7,317 $ 7,233 $ 6,926 $ 6,718
Net earnings $ 180 $ 193 $ 137 $ 109
-------------------------------------------------------------------------
Net earnings per
common share
Basic ($) $ 0.64 $ 0.70 $ 0.50 $ 0.40
Diluted ($) $ 0.64 $ 0.70 $ 0.49 $ 0.40
-------------------------------------------------------------------------
Fourth Quarter Third Quarter
2008 2008
2009 (13 weeks 2009 (16 weeks
(12 weeks) - restated) (16 weeks) - restated)
-------------------------------------------------------------------------
Sales $ 7,311 $ 7,745 $ 9,473 $ 9,493
Net earnings $ 165 $ 190 $ 189 $ 157
-------------------------------------------------------------------------
Net earnings per
common share
Basic ($) $ 0.60 $ 0.70 $ 0.69 $ 0.57
Diluted ($) $ 0.59 $ 0.70 $ 0.69 $ 0.57
-------------------------------------------------------------------------
Sales growth was positive in the second quarter of 2010 compared to the second quarter of 2009. Same-store sales decline in the second quarter of 2010 was 0.3%. Same-store sales growth in the first quarter of 2010 was 0.3%. Sales and same-store sales increased in the second quarter of 2009 and declined in the third and fourth quarters of 2009 compared to 2008. Quarterly same-store sales increases were 2.1% and 2.5% for the first two quarters of 2009 compared to 2008, respectively. Quarterly same-store sales declines were 0.6% and 7.8% for the third and fourth quarters of 2009 compared to 2008, respectively. The acquisition of T&T in the third quarter of 2009 positively impacted the Company's sales by 0.2% and 1.8% for the third and fourth quarters of 2009 compared to 2008, respectively. T&T sales positively impacted the Company's sales by 1.9% in the second quarter of 2010 and 2.0% in the first quarter of 2010 compared to the second and first quarters of 2009, respectively. The sale of the Company's food service business in the fourth quarter of 2008 negatively impacted sales in 2009 compared to 2008 by 0.5% for each of the first three quarters of 2009 and by 0.3% in the fourth quarter of 2009. The extra selling week in the fourth quarter of 2008 negatively impacted sales and same-store sales by approximately 7.0% in the fourth quarter of 2009 compared to 2008. Quarterly sales and same-store sales are also impacted by seasonality and the timing of holidays.
Internal retail food price inflation decreased throughout each of the last six quarters and was lower than national food price inflation as measured by CPI throughout each of the last eight quarters. In the fourth quarter of 2009 and the first and second quarters of 2010, the Company experienced internal retail food price deflation. CPI decreased to 0.3% in the second quarter of 2010 from 7.4% in the second quarter of 2009 and increased to 9.0% in the first quarter of 2009 from 5.4% in the third quarter of 2008. This measure of inflation does not necessarily reflect the effect of inflation on the specific mix of goods sold in Loblaw stores.
Fluctuations in quarterly net earnings reflect the underlying operations of the Company as well as the impact of a number of specific charges including the impact of stock-based compensation including the equity forwards and costs related to the incremental investment in information technology and supply chain. Since the third quarter of 2008, quarterly net earnings have benefited from the Company's cost reduction initiatives. Earnings in the third and fourth quarters of 2009 and the second quarter of 2010 were pressured by investments in pricing. Quarterly net earnings are also affected by seasonality and the timing of holidays. The impact of seasonality is greatest in the fourth quarter and least in the first quarter.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company and its subsidiaries is gathered and reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure.
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.
In designing such controls, it should be recognized that due to inherent limitations, any controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and may not prevent or detect misstatements. Additionally, management is necessarily required to use judgement in evaluating controls and procedures.
Management has evaluated whether there were changes in the Company's internal controls over financial reporting that occurred during the period beginning March 28, 2010 and ended June 19, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Management has determined that no material changes occurred during this period.
Enterprise Risks and Risk Management
Detailed descriptions of the operating and financial risks and risk management strategies are included in the Enterprise Risks and Risk Management Section on page 19 of the MD&A as well as note 26 to the Consolidated Financial Statements included in the Company's 2009 Annual Report - Financial Review. The following is an update to those risks and risk management strategies:
Labour Relations
A majority of the Company's store level and distribution centre workforce is unionized. Renegotiating collective agreements may result in work stoppages or slowdowns, which could negatively affect the Company's financial performance, depending on their nature and duration. In 2010, 73 collective agreements affecting approximately 35,000 colleagues will expire including the Company's single largest agreement covering approximately 13,700 colleagues in Ontario which expired in July, 2010. The Company has commenced negotiations for the renewal of the Ontario agreements. During the second quarter a provincial conciliator was appointed to assist the Company and its unions to reach an agreement in Ontario. No agreement was reached and subsequent to the end of the quarter the unions received strike mandates from their members. The Company and union continue to negotiate with the assistance of a provincial mediator. No strike deadlines have been communicated. The negotiations are expected to continue through the third quarter of 2010. There can be no assurance as to the outcome of these negotiations or the timing of their completion. The Company will also continue to negotiate the 66 collective agreements carried over from prior years. Although the Company attempts to mitigate work stoppages and disputes through early negotiations, work stoppages or slowdowns remain possible.
Regulatory
Recently, the provincial governments of Ontario, Alberta, Nova Scotia and British Columbia introduced amendments to the regulation of generic prescription drug prices paid by provincial governments pursuant to their public drug benefit plans. Under these amendments, manufacturer costs of generic drugs paid by the provincial drug plans will be reduced and in Ontario the current system of drug manufacturers paying professional allowances to pharmacies will be eliminated. The amendments also reduce the manufacturer costs of generic drugs purchased out-of-pocket or through private employer drug plans. The Company is assessing the potential impact of these amendments and is exploring opportunities throughout the business to mitigate their impact. These changes could have a material impact on the financial results of the Company if it is not able to effectively mitigate the negative impact of the current amendments.
Future Accounting Standards
Business Combinations
In January 2009, the Canadian Institute of Chartered Accountants ("CICA") issued Section 1582, "Business Combinations," which will replace Section 1581 of the same title and issued Sections 1601 "Consolidated Financial Statements" and 1602 "Non-Controlling Interests". These standards will harmonize Canadian GAAP with International Financial Reporting Standards ("IFRS"). The amendments establish principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including non-controlling interests, contingent consideration, and certain acquired contingencies. The amendments also require that acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. The impact of implementing these amendments is currently being assessed.
International Financial Reporting Standards
The Canadian Accounting Standards Board will require all public companies to adopt IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011.
Project Status
A detailed description of the Company's IFRS project structure and status is included in section 13.3 "International Financial Reporting Standards" on page 33 of the 2009 annual MD&A included in the Company's 2009 Annual Report - Financial Review.
The IFRS conversion project continues to progress. Targeted training regarding anticipated changes resulting from IFRS implementation continues to be provided to appropriate business units and finance colleagues. In addition, the Company will continue its quarterly and additional IFRS information sessions for the Board of Directors which provide updates on the changes to IFRS standards in 2010, transitional adjustments (including policy choices), implications of IFRS standards to the business, and their impact on the financial statements. The Company also intends to provide an information session to key external stakeholders regarding the impacts of IFRS.
The IFRS conversion project is integrated with the Company's enterprise resource planning system (ERP) implementation. As ERP phases are deployed, the Company is ensuring that the requirements of IFRS adoption are incorporated.
The Company has commenced integration of IFRS into certain business processes to ensure that it will be ready to address the broader impact of IFRS on its business. For instance, the implementation of IFRS is expected to have an impact on financial metrics that are used in calculating the Company's financial covenants under certain of its debt agreements. These debt agreements provide for adjustments to the covenants to neutralize the impact of the transition to IFRS. The Company will be working with the lenders under these debt agreements to formalize the required adjustments in conjunction with the implementation of IFRS. To the extent that the Company and its lenders under these agreements are unable to agree upon the covenant adjustments, the existing covenants will continue to apply and will be calculated on the basis of Canadian GAAP as it exists immediately prior to the conversion to IFRS. The Company has also commenced the education process to enable the integration of IFRS adjustments into its budgeting and internal reporting processes.
Key milestones for the remainder of the year which are in line with our original plan include: completion of the opening transitional balance sheet, compilation of the quarterly financial statements and changes to the Company's internal controls over financial reporting, which may include enhancement of existing controls or the design and implementation of new controls. The Company continues to progress on its IFRS transition plan as expected except for the finalization of the documentation of internal controls related to accounting policy changes which is now expected to be completed in the fourth quarter of 2010.
The information below is provided as an update to allow investors and others to obtain a better understanding of the possible effects on the Company's consolidated financial statements and operating performance measures. Readers are cautioned, however, that it may not be appropriate to use such information for any other purpose and the information is subject to change.
Changes in Accounting Policies and First-Time Adoption of IFRS
The Company continues to assess the aggregate effect of adopting IFRS, and the relevant changes in accounting policies. The changes identified below should not be regarded as a complete list of changes that will result from the transition to IFRS as it is intended to highlight those areas where significant progress has been made and that are believed to be most significant at this point in the project. The International Accounting Standards Board has significant ongoing projects that could affect the ultimate differences between Canadian GAAP and IFRS and their impact on the Company's consolidated financial statements. Therefore, the Company's analysis of changes and accounting policy decisions have been made based on the accounting standards that are currently effective.
The adoption of IFRS will require the application of IFRS 1, "First Time Adoption of IFRS" ("IFRS 1"), which provides guidance for an entity's initial adoption of IFRS. IFRS 1 generally requires retrospective application of all IFRS effective at the reporting date, with the exception of certain mandatory exceptions and limited optional exemptions provided in the standard.
The Company is currently assessing the quantitative impact of the transitional adjustments on the consolidated financial statements as a result of changes in accounting policies as well as the certain IFRS 1 elections and exemptions, and has provided preliminary indication as to the impact of certain standards, elections and exemptions in the 2009 annual MD&A. The impacts provided below represent updates to those provided in the 2009 annual MD&A. As further impacts are determined throughout 2010, additional updates will be provided:
Securitization of Receivables
International Accounting Standard ("IAS") 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"), contains criteria that are different from Canadian GAAP for the derecognition of financial assets and requires an evaluation of the extent to which an entity retains the risks and rewards of ownership. Under Canadian GAAP these financial assets qualify for sale treatment. The Company has determined that under IFRS certain securitized credit card receivables will not qualify for derecognition. The Company expects to record, upon implementation of IFRS, an increase in credit card receivables of approximately $1.2 billion before the provision for loan losses. The quantification of the provision for the loan loss has commenced during the second quarter of 2010.
Under IAS 27, "Consolidated and Separate Financial Statements" and Standing Interpretations Committee 12, "Consolidation - Special Purpose Entities" consolidation is assessed using a control model. Under IFRS, Eagle Credit Card Trust, the independent trust that funds the purchase of asset interests from PC Bank through the issuance of notes, will be consolidated resulting in an increase of approximately $500 million of credit card receivables before the provision for loan losses. The quantification of the provision for the loan loss has commenced during the second quarter of 2010.
Employee Benefits
IAS 19 "Employee Benefits" provides a policy choice regarding recognition of actuarial gains and losses for defined benefit pension plans and post retirement benefit plans, permitting deferred recognition using the corridor method or immediate recognition in either other comprehensive income within equity or through earnings. Under Canadian GAAP the Company applies the corridor method. Upon adoption of IFRS the Company currently intends to recognize actuarial gains and losses immediately through other comprehensive income within equity for defined benefit pension plans and post retirement benefit plans and through earnings for post employment and long term disability benefit plans.
In addition, IFRS 1 provides an optional election, which the Company expects to apply, that will result in the recognition of all cumulative actuarial gains and losses through retained earnings on transition to IFRS. The Company's choice must be applied to all defined benefit pension plans and other benefit plans consistently. As a result of this election the Company has engaged its external actuaries to quantify this amount and will reclassify the unamortized net actuarial loss to retained earnings on transition to IFRS.
Hedging Relationships
IAS 39 requires the incorporation of credit value adjustments in the measurement of effectiveness and ineffectiveness of a hedging relationship. Glenhuron has entered into cross-currency and interest rate swaps which were designated as effective cash flow hedging relationships under Canadian GAAP. Certain tranches of the swaps that were part of the hedging relationship have expired in 2010 and will continue to expire up to mid-2011. For this hedging relationship, the Company has concluded to not assess hedge effectiveness under IFRS which will result in de-recognition at the date of transition to IFRS. A transitional adjustment of approximately $17 million from accumulated other comprehensive income to retained earnings will be recorded.
Impairment of Assets
IAS 36 requires that assets be tested for impairment at the level of cash generating units (CGU), which are defined as the lowest level of assets that generate largely independent cash inflows. The Company has completed its analysis and concluded that the cash generating unit will predominantly be an individual store compared to Canadian GAAP where store net cash flows are grouped together by primary market areas, where they are largely dependent on each other. The Company has also completed the assessment of the events triggering potential impairments (including potential reversals of impairments) and is in the process of determining the fair value and value in use of these CGUs.
Enterprise Resource Planning System Implementation
On July 18, 2010, the Company implemented the second phase of its enterprise resource planning system which involved integrating its general ledger and related reporting for finance across the business and launching additional functionality including its Corporate Administrative function's accounts payable and marketing procurement processes.
Outlook(1)
The Company continues to make progress on its overall renewal plan. As it has just entered the critical period of heightened risk for the infrastructure and information technology components of the plan, the Company continues to expect associated investments to negatively impact operating income during this period. For the remainder of 2010, the Company expects sales and margins will remain challenged by deflation and increased competitive intensity.
(1)To be read in conjunction with "Forward-Looking Statements".
Additional Information
Additional information about the Company has been filed electronically with various securities regulators in Canada through the System for Electronic Document Analysis and Retrieval (SEDAR) and is available online at www.sedar.com and with the Office of the Superintendent of Financial Institutions (OSFI) as the primary regulator of the Company's subsidiary, PC Bank.
Non-GAAP Financial Measures
The Company uses the following non-GAAP financial measures: EBITDA and EBITDA margin, net debt, rolling year net debt to EBITDA, net debt to equity and rolling year return on average net assets. The Company believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the Company for the reasons outlined below. These measures do not have a standardized meaning prescribed by Canadian 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 Canadian GAAP.
EBITDA and EBITDA Margin
The following table reconciles earnings before minority interest, income taxes, interest expense, depreciation and amortization ("EBITDA") to operating income, which is reconciled to Canadian GAAP net earnings measures reported in the unaudited interim period consolidated statements of earnings for the twelve and twenty-four week periods ended June 19, 2010 and June 20, 2009. EBITDA is useful to management in assessing the performance of the Company's ongoing operations and its ability to generate cash flows to fund cash requirements, including the Company's capital investment program.
EBITDA margin is calculated as EBITDA divided by sales.
---------- ----------
2010 2009 2010 2009
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Net earnings $ 180 $ 193 $ 317 $ 302
Add (deduct) impact of
the following:
Minority interest 8 3 4 (2)
Income taxes 78 68 137 129
Interest expense and
other financing charges 64 60 132 121
-------------------------------------------------------------------------
Operating income 330 324 590 550
Add impact of the following:
Depreciation and
amortization 149 135 301 267
-------------------------------------------------------------------------
EBITDA $ 479 $ 459 $ 891 $ 817
-------------------------------------------------------------------------
---------- ----------
Net Debt
The following table reconciles net debt used in the net debt to equity and the rolling year net debt to EBITDA ratios to Canadian GAAP measures reported as at the periods ended as indicated. The Company calculates net debt as the sum of bank indebtedness, short term debt, long term debt, certain other liabilities and the fair value of financial derivatives less cash and cash equivalents, short term investments, security deposits included in other assets and the fair value of financial derivatives. The Company believes that this measure is useful in assessing the amount of financial leverage employed.
----------
As at As at As at
June 19, June 20, January 2,
($ millions) 2010 2009 2010
-------------------------------------------------------------------------
Bank indebtedness $ 8 $ 1 $ 2
Long term debt due within one year 403 340 343
Long term debt 4,169 4,091 4,162
Other liabilities 37 - 36
Fair value of financial derivatives
related to the above 49 56 58
-------------------------------------------------------------------------
4,666 4,488 4,601
-------------------------------------------------------------------------
Less: Cash and cash equivalents 1,301 770 993
Short term investments 324 308 397
Security deposits included in
other assets 194 308 250
Fair value of financial derivatives
related to the above 182 112 178
-------------------------------------------------------------------------
2,001 1,498 1,818
-------------------------------------------------------------------------
Net debt $ 2,665 $ 2,990 $ 2,783
-------------------------------------------------------------------------
----------
The Second Preferred Shares, Series A are classified as capital securities and are excluded from the calculation of net debt. For the purpose of calculating net debt, fair value of financial derivatives is not credit value adjusted in accordance with Emerging Issues Committee ("EIC") 173. As at June 19, 2010, the credit value adjustment was a loss of $5 million (June 20, 2009 - $7 million; January 2, 2010 - $4 million).
Net Assets
The following table reconciles net assets used in the rolling year return on average net assets ratio to Canadian GAAP measures reported as at the periods ended as indicated. The Company believes that the rolling year return on average net assets is useful in assessing the return on productive assets.
Net assets is calculated as total assets less cash and cash equivalents, short term investments, security deposits included in other assets and accounts payable and accrued liabilities.
----------
As at As at As at
June 19, June 20, January 2,
($ millions) 2010 2009 2010
-------------------------------------------------------------------------
Canadian GAAP total assets $ 15,128 $ 13,974 $ 14,991
Less: Cash and cash equivalents 1,301 770 993
Short term investments 324 308 397
Security deposits included in
other assets 194 308 250
Accounts payable and accrued
liabilities 3,106 2,740 3,279
-------------------------------------------------------------------------
Net assets $ 10,203 $ 9,848 $ 10,072
-------------------------------------------------------------------------
----------
Equity
The following table reconciles equity used in the net debt to equity ratio to Canadian GAAP measures reported as at the periods ended.
Equity is calculated as the sum of capital securities and shareholder's equity.
----------
As at As at As at
June 19, June 20, January 2,
($ millions) 2010 2009 2010
-------------------------------------------------------------------------
Capital securities $ 220 $ 219 $ 220
Shareholders' equity 6,510 5,969 6,273
-------------------------------------------------------------------------
Equity $ 6,730 $ 6,188 $ 6,493
-------------------------------------------------------------------------
----------
Consolidated Statements of Earnings
(unaudited)
For the periods ended
June 19, 2010 and June 20,
2009 ---------- ----------
($ millions except where 2010 2009 2010 2009
otherwise indicated) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Sales $ 7,317 $ 7,233 $ 14,243 $ 13,951
Cost of Merchandise
Inventories Sold (note 10) 5,524 5,544 10,730 10,648
-------------------------------------------------------------------------
Gross Profit 1,793 1,689 3,513 3,303
-------------------------------------------------------------------------
Operating Expenses
Selling and administrative
expenses (note 4) 1,314 1,230 2,622 2,486
Depreciation and
amortization 149 135 301 267
-------------------------------------------------------------------------
1,463 1,365 2,923 2,753
-------------------------------------------------------------------------
Operating Income 330 324 590 550
Interest expense and other
financing charges (note 5) 64 60 132 121
-------------------------------------------------------------------------
Earnings before Income Taxes
and Minority Interest 266 264 458 429
Income taxes (note 6) 78 68 137 129
-------------------------------------------------------------------------
Net Earnings before Minority
Interest 188 196 321 300
Minority interest 8 3 4 (2)
-------------------------------------------------------------------------
Net Earnings $ 180 $ 193 $ 317 $ 302
-------------------------------------------------------------------------
Net Earnings Per Common
Share ($) (note 7)
Basic and diluted $ 0.64 $ 0.70 $ 1.14 $ 1.10
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
For the periods ended June 19, 2010
and June 20, 2009 ----------
($ millions except where otherwise 2010 2009
indicated) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Common Share Capital, Beginning of Period $ 1,308 $ 1,196
Common shares issued (note 13) 41 -
-------------------------------------------------------------------------
Common Share Capital, End of Period $ 1,349 $ 1,196
-------------------------------------------------------------------------
Retained Earnings, Beginning of Period $ 4,948 $ 4,577
Cumulative impact of implementing new
accounting standards (note 2) - (6)
Net earnings 317 302
Dividends declared per common share - 42 cents
(2009 - 42 cents) (116) (115)
-------------------------------------------------------------------------
Retained Earnings, End of Period $ 5,149 $ 4,758
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income,
Beginning of Period $ 17 $ 30
Cumulative impact of implementing new accounting
standards (note 2) - (2)
Other comprehensive loss (5) (13)
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income, End of
Period (note 15) $ 12 $ 15
-------------------------------------------------------------------------
Total Shareholders' Equity $ 6,510 $ 5,969
-------------------------------------------------------------------------
----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Statements of Comprehensive Income
(unaudited)
For the periods ended
June 19, 2010 and
June 20, 2009 ---------- ----------
2010 2009 2010 2009
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Net earnings $ 180 $ 193 $ 317 $ 302
Other comprehensive income,
net of income taxes
Net unrealized loss on
available-for-sale
financial assets (1) (18) (5) (11)
Reclassification of net
loss (gain) on available-
for-sale financial assets
to net earnings 4 (10) 8 (24)
-------------------------------------------------------------------------
3 (28) 3 (35)
-------------------------------------------------------------------------
Net (loss) gain on
derivatives designated as
cash flow hedges - 9 (2) 6
Reclassification of net
(gain) loss on derivatives
designated as cash flow
hedges to net earnings (3) 11 (6) 16
-------------------------------------------------------------------------
(3) 20 (8) 22
-------------------------------------------------------------------------
Other comprehensive loss - (8) (5) (13)
-------------------------------------------------------------------------
Total Comprehensive Income $ 180 $ 185 $ 312 $ 289
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Balance Sheets
----------
As at As at As at
June 19, June 20, January 2,
2010 2009 2010
($ millions) (unaudited) (unaudited) (audited)
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents (note 8) $ 1,301 $ 770 $ 993
Short term investments 324 308 397
Accounts receivable (note 9) 643 644 774
Inventories (note 10) 2,085 2,115 2,112
Income taxes - 49 -
Future income taxes 45 34 38
Prepaid expenses and other assets 127 122 92
-------------------------------------------------------------------------
Total Current Assets 4,525 4,042 4,406
Fixed Assets 8,599 8,103 8,559
Goodwill and Intangible Assets 1,024 819 1,026
Other Assets 980 1,010 1,000
-------------------------------------------------------------------------
Total Assets $ 15,128 $ 13,974 $ 14,991
-------------------------------------------------------------------------
Liabilities
Current Liabilities
Bank indebtedness $ 8 $ 1 $ 2
Accounts payable and accrued
liabilities 3,106 2,740 3,279
Income taxes payable 28 - 41
Long term debt due within one year 403 340 343
-------------------------------------------------------------------------
Total Current Liabilities 3,545 3,081 3,665
Long Term Debt (note 12) 4,169 4,091 4,162
Other Liabilities 520 441 497
Future Income Taxes 138 155 143
Capital Securities 220 219 220
Minority Interest 26 18 31
-------------------------------------------------------------------------
Total Liabilities 8,618 8,005 8,718
-------------------------------------------------------------------------
Shareholders' Equity
Common Share Capital 1,349 1,196 1,308
Retained Earnings 5,149 4,758 4,948
Accumulated Other Comprehensive
Income (note 15) 12 15 17
-------------------------------------------------------------------------
Total Shareholders' Equity 6,510 5,969 6,273
-------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 15,128 $ 13,974 $ 14,991
-------------------------------------------------------------------------
----------
Contingencies, commitments and guarantees (note 16).
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Cash Flow Statements
(unaudited)
For the periods ended
June 19, 2010 and ---------- ----------
June 20, 2009 2010 2009 2010 2009
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Operating Activities
Net earnings before
minority interest $ 188 $ 196 $ 321 $ 300
Depreciation and
amortization 149 135 301 267
Future income taxes 22 (3) (12) 3
Settlement of equity
forward contracts (note 14) - (38) - (38)
Change in non-cash working
capital 196 526 (274) (58)
Other 59 15 68 1
-------------------------------------------------------------------------
Cash Flows from Operating
Activities 614 831 404 475
-------------------------------------------------------------------------
Investing Activities
Fixed asset purchases (217) (199) (365) (322)
Short term investments (52) (15) 62 (104)
Proceeds from fixed asset
sales 3 1 16 6
Credit card receivables,
after securitization (note 9) (9) (21) 124 208
Franchise investments and
other receivables 6 8 7 (9)
Other (1) 124 29 89
-------------------------------------------------------------------------
Cash Flows used in Investing
Activities (270) (102) (127) (132)
-------------------------------------------------------------------------
Financing Activities
Bank indebtedness 7 (76) 6 (51)
Short term debt - (574) - (190)
Long term debt
Issued (note 12) 352 352 377 360
Retired (note 12) (311) (4) (322) (139)
Dividends (17) (58) (17) (58)
-------------------------------------------------------------------------
Cash Flows from (used in)
Financing Activities 31 (360) 44 (78)
-------------------------------------------------------------------------
Effect of foreign currency
exchange rate changes on cash
and cash equivalents (2) (37) (13) (23)
-------------------------------------------------------------------------
Change in Cash and Cash
Equivalents 373 332 308 242
Cash and Cash Equivalents,
Beginning of Period 928 438 993 528
-------------------------------------------------------------------------
Cash and Cash Equivalents,
End of Period $ 1,301 $ 770 $ 1,301 $ 770
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Notes to the Unaudited Interim Period Consolidated Financial Statements
($ millions except where otherwise indicated)
Note 1. Summary of Significant Accounting Principles
Basis of Presentation
The unaudited interim period consolidated financial statements were
prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") and follow the same accounting policies and methods
of application as those used in the preparation of the 2009 audited
annual consolidated financial statements and related notes for the year
ended January 2, 2010 contained in the Annual Report - Financial Review
("2009 Annual Report"). Under Canadian GAAP, additional disclosure is
required in annual financial statements and accordingly the unaudited
interim period consolidated financial statements should be read together
with the audited annual consolidated financial statements and the
accompanying notes included in the Loblaw Companies Limited 2009 Annual
Report.
Basis of Consolidation
The unaudited consolidated interim financial statements include the
accounts of Loblaw Companies Limited and its subsidiaries, collectively
referred to as the "Company". The Company's interest in the voting share
capital of its subsidiaries is 100%.
The Company also consolidates variable interest entities ("VIEs")
pursuant to Canadian Institute of Chartered Accountants ("CICA")
Accounting Guideline 15, "Consolidation of Variable Interest Entities"
("AcG 15"), that are subject to control by Loblaw on a basis other than
through ownership of a majority of voting interest. AcG 15 defines a
variable interest entity as an entity that either does not have
sufficient equity at risk to finance its activities without subordinated
financial support or where the holders of the equity at risk lack the
characteristics of a controlling financial interest. AcG 15 requires the
primary beneficiary to consolidate VIEs and considers an entity to be the
primary beneficiary of a VIE if it holds variable interests that expose
it to a majority of the VIEs' expected losses or that entitle it to
receive a majority of the VIEs' expected residual returns or both.
Presentation
Certain prior year information has been reclassified to conform with
current year presentation.
Use of Estimates and Assumptions
The preparation of the unaudited interim period consolidated financial
statements requires management to make estimates and assumptions that
affect the reported amounts and disclosures made in the unaudited interim
period consolidated financial statements and accompanying notes. These
estimates and assumptions are based on management's historical
experience, best knowledge of current events and conditions and
activities that may be undertaken in the future. Actual results could
differ from these estimates.
Certain estimates, such as those related to valuation of inventories,
goodwill and intangible assets, income taxes, fixed asset impairment and
employee future benefits, depend upon subjective or complex judgments
about matters that may be uncertain, and changes in those estimates could
materially impact the consolidated financial statements. Illiquid credit
markets, volatile equity, foreign currency, energy markets and declines
in consumer spending have combined to increase the uncertainty inherent
in such estimates and assumptions. As future events and their effects
cannot be determined with precision, actual results could differ
significantly from these estimates. Changes in those estimates resulting
from continuing changes in the economic environment will be reflected in
the financial statements in future periods.
Future Accounting Standards
Business Combinations
In January 2009, the CICA issued Section 1582, "Business Combinations,"
which will replace Section 1581 of the same title and issued Sections
1601 "Consolidated Financial Statements" and 1602 "Non-Controlling
Interests". These standards will harmonize Canadian GAAP with
International Financial Reporting Standards. The amendments establish
principles and requirements for determining how an enterprise recognizes
and measures the fair value of certain assets and liabilities acquired in
a business combination, including non-controlling interests, contingent
consideration, and certain acquired contingencies. The amendments also
require that acquisition-related transaction expenses and restructuring
costs be expensed as incurred rather than capitalized as a component of
the business combination. The impact of implementing these amendments is
currently being assessed.
Note 2. Implementation of New Accounting Standards
Accounting Standards Implemented in 2009
Goodwill and Intangible Assets
In November 2007, the CICA issued amendments to Section 1000 "Financial
Statement Concepts", and Accounting Guideline 11 "Enterprises in the
Development Stage", issued a new Handbook Section 3064 "Goodwill and
Intangible Assets" ("Section 3064") to replace Section 3062 "Goodwill and
Other Intangible Assets", withdrew Section 3450 "Research and Development
Costs" and amended Emerging Issues Committee ("EIC") 27 "Revenues and
Expenditures During the Pre-operating Period" to not apply to entities
that have adopted Section 3064. These amendments, in conjunction with
Section 3064, provide guidance for the recognition of intangible assets,
including internally developed assets from research and development
activities, ensuring consistent treatment of all intangible assets,
whether separately acquired or internally developed. The Company
implemented these requirements effective 2009, retroactively with
restatement of comparative periods.
Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
On January 20, 2009 EIC 173 "Credit Risk and the Fair Value of Financial
Assets and Financial Liabilities" was issued. The committee reached a
consensus that a company's credit risk and the credit risk of its
counterparties should be considered when determining the fair value of
its financial assets and financial liabilities, including derivative
instruments. The transitional provisions require the abstract to be
applied retrospectively without restatement of prior periods. Financial
assets and financial liabilities, including derivative instruments, have
been remeasured as at January 4, 2009 to take into account the
appropriate Company's credit risk and counterparty credit risk. As a
result, a decrease in other assets of $12, a decrease in other
liabilities of $4, a decrease net of income taxes in accumulated other
comprehensive income of $2 and a decrease in retained earnings of $6 were
recorded in the consolidated balance sheet.
Financial Instruments - Disclosures
In June 2009, the CICA amended Section 3862, "Financial Instruments -
Disclosures," to include additional disclosure relating to the
measurement of fair value for financial instruments and liquidity risk.
The amendment establishes a three level hierarchy that reflects the
significance of the inputs used in fair value measurements on financial
instruments. The amendment is effective for annual financial statements
relating to fiscal years ending after September 30, 2009, and was
implemented by the Company as part of the 2009 annual report. See note 2
of the 2009 Annual Report for more information.
Note 3. Business Acquisitions
In the first quarter of 2010, the Company finalized the purchase price
allocation related to the acquisition of T&T Supermarket Inc. acquired in
2009 which resulted in a reduction of goodwill of $2.
Note 4. Distribution Network Costs
On April 27, 2010, the Company announced changes to its distribution
network in Quebec. In connection with these changes a certain
distribution centre was closed and an asset impairment charge of $23 was
recorded as the carrying value of the facility exceeded the fair value.
In addition, employee termination charges and other costs of $16 were
incurred. As at June 19, 2010, $12 was recorded on the consolidated
balance sheet in accounts payable and accrued liabilities related to
these charges.
Note 5. Interest Expense and Other Financing Charges
---------- ----------
2010 2009 2010 2009
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Interest on long term debt $ 64 $ 64 $ 133 $ 127
Interest expense on
financial derivative
instruments 1 - 3 1
Net short term interest
income - (3) (1) (3)
Interest income on security
deposits - - - (1)
Dividends on capital
securities 4 4 7 7
Capitalized to fixed assets (5) (5) (10) (10)
-------------------------------------------------------------------------
Interest expense $ 64 $ 60 $ 132 $ 121
-------------------------------------------------------------------------
---------- ----------
Interest and dividends on capital securities paid in the second quarter
of 2010 was $110 (2009 - $106), and interest received was $14 (2009 -
$23). Interest and dividends on capital securities paid year-to-date was
$181 (2009 - $190) and interest received year-to-date was $23 (2009 -
$44).
Note 6. Income Taxes
The effective income tax rate in the second quarter of 2010 was 29.3%
(2009 - 25.8%) and 29.9% (2009 - 30.1%) year-to-date. The quarter over
quarter increase in the effective income tax rate was primarily due to an
increase in the current year income tax expense over the prior year
income tax recoveries relating to certain prior year income tax matters
and the change in the proportions of taxable income earned across
different tax jurisdictions. The year over year decrease in the effective
income tax rate was primarily due to the proportions of taxable income
earned across different tax jurisdictions which was partially offset by
an increase in income tax accruals relating to certain prior year income
tax matters.
Net income taxes paid in the second quarter were $56 (2009 - $24), and
$156 (2009 - $124) year-to-date.
Note 7. Basic and Diluted Net Earnings per Common Share ($, except where
otherwise indicated)
---------- ----------
2010 2009 2010 2009
(12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Net earnings ($ millions) $ 180 $ 193 $ 317 $ 302
Dividends on capital
securities ($ millions) 4 4 7 7
-------------------------------------------------------------------------
Net earnings for diluted
earnings per share
($ millions) 184 197 324 309
-------------------------------------------------------------------------
Weighted average common
shares outstanding
(in millions) 277.2 274.2 276.9 274.2
Dilutive effect of stock-
based compensation (in
millions) 0.7 0.2 0.5 0.2
Dilutive effect of capital
securities (in millions) 5.9 6.9 5.9 6.9
Dilutive effect of dividend
reinvestment plan (in
millions) 0.6 0.7 0.3 0.3
Dilutive effect of certain
other liabilities (in
millions) 0.9 - 0.9 -
-------------------------------------------------------------------------
Diluted weighted average
common shares outstanding
(in millions) 285.3 282.0 284.5 281.6
-------------------------------------------------------------------------
Basic and diluted net
earnings per common
share ($) $ 0.64 $ 0.70 $ 1.14 $ 1.10
-------------------------------------------------------------------------
---------- ----------
Stock options outstanding with an exercise price greater than the market
price of the Company's common shares at the end of the second quarter
were not recognized in the computation of diluted net earnings per common
share. Accordingly, in the second quarter of 2010, 2,782,578 (2009 -
4,259,475) stock options, with a weighted average exercise price of
$52.81 (2009 - $52.86) per common share, were excluded from the
computation of diluted net earnings per common share.
Note 8. Cash and Cash Equivalents
The components of cash and cash equivalents were as follows:
----------
As at As at As at
June 19, June 20, January 2,
2010 2009 2010
-------------------------------------------------------------------------
Cash $ 71 $ 136 $ 219
Cash equivalents - short term
investments with a maturity of 90
days or less:
Bank term deposits 751 185 385
Government treasury bills 138 256 168
Government-sponsored debt securities 114 89 40
Corporate commercial paper 227 104 181
-------------------------------------------------------------------------
Cash and cash equivalents $ 1,301 $ 770 $ 993
-------------------------------------------------------------------------
----------
In the second quarter of 2010, the Company recognized an unrealized
foreign currency exchange loss of $4 (2009 - $92) and $29 (2009 - $63)
year-to-date as a result of translating United States dollar denominated
cash and cash equivalents, short term investments and security deposits,
of which a loss of $2 (2009 - $37) in the quarter and $13 (2009 - $23)
year-to-date related to cash and cash equivalents. The resulting quarter
and year-to-date loss on cash and cash equivalents, short term
investments and security deposits was partially offset in operating
income and other comprehensive income by the unrealized foreign currency
exchange gains of $4 (2009 - $90) in the quarter and $29 (2009 - $62)
year-to-date on the cross currency swaps.
Note 9. Accounts Receivable
The components of accounts receivable were as follows:
----------
As at As at As at
June 19, June 20, January 2,
($ millions) 2010 2009 2010
-------------------------------------------------------------------------
Credit card receivables $ 1,906 $ 1,991 $ 2,128
Amount securitized (1,635) (1,775) (1,725)
-------------------------------------------------------------------------
Net credit card receivables 271 216 403
Other receivables 372 428 371
-------------------------------------------------------------------------
Accounts receivable $ 643 $ 644 $ 774
-------------------------------------------------------------------------
----------
Credit Card Receivables
From time to time, President's Choice Bank ("PC Bank"), a wholly owned
subsidiary of the Company, securitizes certain credit card receivables by
selling them to independent trusts that issue interest bearing
securities. During the second quarter of 2010, PC Bank repurchased nil
(2009 - nil) and $90 (2009 - nil) year-to-date of co-ownership interest
in securitized receivables from an independent trust. The independent
trusts' recourse to PC Bank's assets is limited to PC Bank's excess
collateral of $114 (June 20, 2009 - $124; January 2, 2010 - $121) as well
as standby letters of credit issued of $103 (June 20, 2009 - $116;
January 2, 2010 - $116) on a portion of the securitized amount. A portion
of the securitized receivables that is held by an independent trust
facility with a term of 364 days is subject to renewal during the third
quarter of 2010.
Other Receivables
Other receivables consist mainly of receivables from independent
franchisees, associated stores and independent accounts.
Note 10. Inventories
For inventories recorded as at June 19, 2010, the Company recorded $16
(June 20, 2009 - $32) as an expense for the write-down of inventories
below cost to net realizable value.
Note 11. Employee Future Benefits
The Company's total net benefit plan cost recognized in operating income
was $42 (2009 - $41) for the second quarter and $87 (2009 - $85) year-to-
date. The total net benefit plan cost included costs for the Company's
defined benefit pension and other benefit plans, defined contribution
pension plans and multi-employer pension plans.
Note 12. Long Term Debt
During the second quarter of 2010, the Company issued $350 principal
amount of unsecured Medium Term Notes, Series 2-B pursuant to its Medium
Term Notes, Series 2 program. The Series 2-B notes pay a fixed rate of
interest of 5.22% payable semi-annually commencing on December 18, 2010
until maturity on June 18, 2020. During the second quarter of 2009, the
Company issued $350 principal amount of unsecured Medium Term Notes,
Series 2-A which pay a fixed rate of interest of 4.85% payable semi-
annually. The Series 2-A and 2-B notes are subject to certain covenants
and are unsecured obligations of Loblaw and rank equally with all the
unsecured indebtedness that has not been subordinated. The Series 2-A and
2-B notes may be redeemed at the option of the Company, in whole at any
time or in part from time to time, upon not less than 30 days and not
more than 60 days notice to the holders of the notes.
During the second quarter of 2010, the $300 7.10% Medium Term Note
matured and was repaid. In the first quarter of 2009, the $125 5.75%
Medium Term Note matured and was repaid.
As at June 19, 2010, $307 (USD $300) of fixed rate notes was recorded in
long term debt on the consolidated balance sheet.
Note 13. Share Capital ($, except where otherwise indicated)
Common Share Capital
At the end of the second quarter of 2010, the Company's outstanding
common share capital was comprised of common shares, an unlimited number
of which were authorized and 277,308,711 (June 20, 2009 - 274,173,564;
January 2, 2010 - 276,188,258) were issued and outstanding.
Dividends
During the second quarter of 2010, the Board of Directors declared
dividends of $0.21 (2009 - $0.21) with a payment date of July 1, 2010,
and $0.42 (2009 - $0.42) year-to-date per common share. In addition,
during the second quarter of 2010 dividends of $0.37 (2009 - $0.37) and
$0.74 (2009 - $0.74) year-to-date per Second Preferred Share, Series A
were declared with a payment date of July 31, 2010. For financial
statement presentation purposes, second preferred share dividends of $4
million (2009 - $4 million) and $7 million (2009 - $7 million) are
included for the twelve and twenty-four weeks ended June 19, 2010,
respectively, as a component of interest expense and other financing
charges on the Consolidated Statement of Earnings (see note 5).
Subsequent to the end of the second quarter of 2010, the Board of
Directors declared a quarterly dividend of $0.21 per common share
payable October 1, 2010, and a quarterly dividend of $0.37 per Second
Preferred Share, Series A, payable October 31, 2010.
Dividend Reinvestment Plan ("DRIP")
During the second quarter of 2010, the Company issued 1,120,453 (2009 -
nil) common shares from treasury under the DRIP at a three percent (3%)
discount to market resulting in an increase in common share capital of
$41 million (2009 - nil). Subsequent to the second quarter of 2010, the
Company issued 1,122,833 (2009 - 1,163,201) common shares from treasury
under the DRIP at a three percent (3%) discount to market resulting in
an increase in common share capital of $42 million (2009 - $39 million).
Normal Course Issuer Bid ("NCIB")
During the second quarter of 2010, the Company renewed its NCIB to
purchase on the Toronto Stock Exchange, or enter into equity derivatives
to purchase, up to 13,865,435 of the Company's common shares,
representing approximately 5% of the common shares outstanding. In
accordance with the rules and by-laws of the Toronto Stock Exchange, the
Company may purchase its shares at the then market price of such shares.
The Company did not purchase any shares under its NCIB during the first
two quarters of 2010.
Note 14. Stock-Based Compensation ($, except where otherwise indicated)
The Company's net stock-based compensation cost recognized in operating
income related to its stock option and restricted share unit plans,
including Glenhuron Bank Limited's ("Glenhuron") equity forwards, was:
---------- ----------
June 19, June 20, June 19, June 20,
2010 2009 2010 2009
($ millions) (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Stock option plan expense
(income) $ 10 $ 4 $ 23 $ 3
Equity forwards (income)
loss (4) (14) (10) 5
Restricted share unit plan
expense 5 3 7 4
-------------------------------------------------------------------------
Net stock-based compensation
(income) expense $ 11 $ (7) $ 20 $ 12
-------------------------------------------------------------------------
---------- ----------
Stock Option Plan
The following is a summary of the Company's stock option plan activity:
---------- ----------
June 19, June 20, June 19, June 20,
2010 2009 2010 2009
Number of options (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
Outstanding options,
beginning of period 9,835,263 10,199,254 9,207,816 7,892,660
Granted 10,525 24,769 2,489,095 2,665,615
Exercised (125,195) (71,756) (424,975) (81,408)
Forfeited/cancelled (135,587) (591,586) (1,686,930) (916,186)
-------------------------------------------------------------------------
Outstanding options, end
of period 9,585,006 9,560,681 9,585,006 9,560,681
-------------------------------------------------------------------------
Share appreciation value
paid ($ millions) $ 1 $ 0 $ 3 $ 0
-------------------------------------------------------------------------
---------- ----------
Stock options were granted in the second quarter of 2010 at an exercise
price of $37.92 (2009 - $36.17).
At the end of the second quarter of 2010, the outstanding stock options
represented approximately 3.5% (2009 - 3.5%) of the Company's issued and
outstanding common shares, which was within the Company's guideline of
5%. The Company's market price per common share at the end of the second
quarter was $40.21 (2009 - $34.50).
Equity Forward Contracts
As at June 19, 2010, Glenhuron had equity forward contracts to buy 1.5
million (June 20, 2009 - 3.2 million; January 2, 2010 - 1.5 million) of
the Company's common shares at an average forward price of $66.73 (June
20, 2009 - $53.82; January 2, 2010 - $66.25) including $10.51 (June 20,
2009 - $9.20; January 2, 2010 - $10.03) per common share of interest
expense. As at June 19, 2010, the interest and unrealized market loss of
$40 million (June 20, 2009 - $62 million; January 2, 2010 - $48 million)
was included in accounts payable and accrued liabilities. In the second
quarter of 2009, Glenhuron paid $38 million to terminate equity forwards
representing 1.6 million shares which led to the extinguishment of a
corresponding portion of the associated liability.
Restricted Share Unit ("RSU") Plan
The following is a summary of the Company's RSU activity:
---------- ----------
June 19, June 20, June 19, June 20,
2010 2009 2010 2009
Number of Awards (12 weeks) (12 weeks) (24 weeks) (24 weeks)
-------------------------------------------------------------------------
RSUs, beginning of period 1,097,910 1,054,156 973,351 829,399
Granted 1,469 3,994 372,725 429,087
Cancelled (9,398) (55,511) (92,403) (73,533)
Cash settled (8,072) (5,021) (171,764) (187,335)
-------------------------------------------------------------------------
RSUs, end of period 1,081,909 997,618 1,081,909 997,618
-------------------------------------------------------------------------
RSUs Cash Settled
($ millions) $ - $ - $ 6 $ 6
-------------------------------------------------------------------------
---------- ----------
Note 15. Accumulated Other Comprehensive Income
The following table provides further detail regarding the composition of
accumulated other comprehensive income:
24 weeks ended
--------------------------
June 19, June 20,
2010 2009
-------------------------------------------------------------------------
Avail- Avail-
Cash able- Cash able-
Flow for-sale Flow for-sale
($ millions) Hedges Assets Total Hedges Assets Total
-------------------------------------------------------------------------
Balance, beginning of
period $ 22 $ (5) $ 17 $ 14 $ 16 $ 30
Cumulative impact of
implementing new
accounting standards
(net of income taxes
recovered of nil
(2009 - $1)) (see
note 2) - - - (2) - (2)
Net unrealized loss on
available-for-sale
financial assets (net
of income taxes of nil
(2009 - nil)) - (5) (5) - (11) (11)
Reclassification of
net loss (gain) on
available-for-sale
financial assets (net
of income taxes of nil
(2009 - $2)) - 8 8 - (24) (24)
Net (loss) gain on
derivatives designated
as cash flow hedges
(net of income taxes
recovered of nil
(2009 - $4)) (2) - (2) 6 - 6
Reclassification of
net (gain) loss on
derivatives designated
as cash flow hedges
(net of income taxes
recovered of $1 (2009
- $2)) (6) - (6) 16 - 16
-------------------------------------------------------------------------
Balance, end of
period $ 14 $ (2) $ 12 $ 34 $ (19) $ 15
-------------------------------------------------------------------------
---------------------------
Note 16. Contingencies, Commitments and Guarantees
Guarantees - Independent Funding Trusts
Certain independent franchisees of the Company obtain financing through a
structure involving independent trusts, which were created to provide
loans to the independent franchisees to facilitate their purchase of
inventory and fixed assets, consisting mainly of fixtures and equipment.
The trusts are administered by a major Canadian chartered bank.
The gross principal amount of loans issued to the Company's independent
franchisees outstanding as at June 19, 2010 was $390 (June 20, 2009 -
$387; January 2, 2010 - $390) including $178 (June 20, 2009 - $149;
January 2, 2010 - $163) of loans payable by VIEs consolidated by the
Company. The Company has agreed to provide credit enhancement of $66
(June 20, 2009 - $66; January 2, 2010 - $66) in the form of a standby
letter of credit for the benefit of the independent funding trust
representing not less than 15% of the principal amount of the loans
outstanding. The standby letter of credit has never been drawn upon.
During the second quarter of 2010, the $475 million, 364-day revolving
committed credit facility that is the source of funding to the
independent trusts was renewed. The financing structure has been reviewed
and the Company determined there were no additional VIEs to consolidate
as a result of this financing.
Standby Letters of Credit
Standby letters of credit for the benefit of independent trusts with
respect to the credit card receivables securitization program of PC Bank
have been issued by major Canadian chartered banks. These standby letters
of credit could be drawn upon in the event of a major decline in the
income flow from or in the value of the securitized credit card
receivables. The Company has agreed to reimburse the issuing banks for
any amount drawn on the standby letters of credit. The aggregate gross
potential liability under these arrangements, which represents 9% (June
20, 2009 - 9%; January 2, 2010 - 9%) on a portion of the securitized
credit card receivables amount, is approximately $103 (June 20, 2009 -
$116; January 2, 2010 - $116) (see note 9).
Legal Proceedings
The Company is the subject of various legal proceedings and claims that
arise in the ordinary course of business. The outcome of all of these
proceedings and claims is uncertain. However, based on information
currently available, these proceedings and claims, individually and in
the aggregate, are not expected to have a material impact on the Company.
Earnings Coverage Exhibit to the Unaudited Interim Consolidated Financial
Statements
The following is the Company's updated earnings coverage ratio for the
rolling 52 week period ended June 19, 2010 in connection with the
Company's Short Form Base Shelf Prospectus dated June 5, 2008.
-------------------------------------------------------------------------
Earnings Coverage on long term debt obligations
and capital securities(1) 4.12 times
-------------------------------------------------------------------------
(1) Preferred shares are classified as capital securities and are
included in liabilities on the consolidated balance sheet.
The earnings coverage ratio on long term debt (including any current
portion) and capital securities is equal to net earnings before interest
on long term debt, dividends on capital securities, income taxes and
minority interest divided by interest on long term debt and dividends on
capital securities as shown in the notes to the consolidated financial
statements of the Company for the period.
Corporate Profile
Loblaw Companies Limited, a subsidiary of George Weston Limited, is
Canada's largest food distributor and a leading provider of drugstore,
general merchandise and financial products and services. Loblaw is one of
the largest private sector employers in Canada, with over 138,000 full-
time and part-time employees executing its business strategy in more than
1,000 corporate and franchised stores from coast to coast. Through its
portfolio of store formats, Loblaw is committed to providing Canadians
with a wide, growing and successful range of products and services to
meet the everyday household demands of Canadian consumers. Loblaw is
known for the quality, innovation and value of its food offering. It
offers Canada's strongest control (private) label program, including the
unique President's Choice, no name and Joe Fresh brands. In addition,
through its subsidiaries, the Company makes available to consumers
President's Choice Financial services and offers the PC points loyalty
program.
The Company's mission is to be Canada's best food, health and home
retailer by exceeding customer expectations through innovative products
at great prices. The Company initiated renewal plans three years ago to
achieve its mission by transforming into a centralized marketing-led
organization focused on customers, value, innovative and fresh products
and stores, while leveraging its scale and asset base to drive profitable
growth.
Trademarks
Loblaw Companies Limited and its subsidiaries own a number of trademarks.
Several subsidiaries are licensees of additional trademarks. These
trademarks are the exclusive property of Loblaw Companies Limited or the
licensor and where used in this report are in italics.
Shareholder Information
Registrar and Transfer Agent
Computershare Investor Services Inc. Toll free: 1-800-564-6253
100 University Avenue (Canada and US)
Toronto, Canada International direct dial:
M5J 2Y1 (514) 982-7555
Fax: (416) 263-9394
Toll free fax: 1-888-453-0330
To change your address or eliminate multiple mailings or for other
shareholder account inquiries, please contact Computershare Investor
Services Inc.
Investor Relations
Shareholders, security analysts and investment professionals should
direct their requests to Kim Lee, Senior Director, Investor Relations at
the Company's National Head Office or by e-mail at [email protected].
Additional financial information has been filed electronically with
various securities regulators in Canada through the System for Electronic
Document Analysis and Retrieval (SEDAR) and with the Office of the
Superintendent of Financial Institutions (OSFI) as the primary regulator
for the Company's subsidiary, President's Choice Bank. The Company holds
an analyst call shortly following the release of its quarterly results.
These calls are archived in the Investor Zone section of the Company's
website (www.loblaw.ca).
Dividend Reinvestment Program
Loblaw Companies Limited offers a Dividend Reinvestment Plan ("DRIP")
that enables eligible shareholders of common shares to automatically
reinvest their regular quarterly dividends in additional common shares of
the Company.
The full text of the DRIP and an enrolment form are available on the
website of the Company's Transfer Agent, Computershare Trust Company of
Canada, at www.computershare.com/loblaw.
Shareholders wishing to participate in the DRIP must obtain and sign an
enrolment form and return it to the Company's Transfer Agent at the
following address prior to the cut-off for the 2010 third quarter, which
is the close of business on September 10, 2010.
Computershare Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, Ontario
M5J 2Y1
1-800-564-6253
Beneficial shareholders who hold their shares through a nominee, such as
a broker or investment dealer, and who wish to participate in the DRIP
should contact their nominee to enquire about enrolment.
Before participating, shareholders are advised to read the complete text
of the DRIP and to consult their advisors regarding potential tax
implications. At present, only Canadian residents may participate.
Conference Call and Webcast
Loblaw Companies Limited will host a conference call as well as an audio
webcast on July 22, 2010 at 11:00am (EST).
To access via tele-conference, please dial (647) 427-7450. The playback
will be made available two hours after the event at (416) 849-0833,
passcode: 79834676. To access via audio webcast please visit the
"Investor Zone" section of www.loblaw.ca. Pre-registration will be
available. Full details are available on the Loblaw Companies Limited
website at www.loblaw.ca.
Ce rapport est disponible en français.
For further information: Kim Lee, Senior Director, Investor Relations at the Company's National Head Office or by e-mail at [email protected]
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