Loblaw Companies Limited Reports Third Quarter 2009 Results
BRAMPTON, ON, Nov. 17 /CNW/ -
2009 Third Quarter Summary(1)
- Basic net earnings per common share of $0.69, up 21.1%
- EBITDA(2) margin of 5.9%
- Sales of $9,473 million, decline of 0.2%
- Same-store sales decline of 0.6%
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For the periods ended
October 10, 2009 and
October 4, 2008
(unaudited) 2009 2008 2009
($ millions except (16 weeks
where otherwise - re-
indicated) (16 weeks) stated(3)) % Change (40 weeks)
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Sales $ 9,473 $ 9,493 (0.2%) $ 23,424
Gross profit 2,165 2,097 3.2% 5,468
Operating income 378 312 21.2% 928
Net earnings 189 157 20.4% 491
Basic net earnings per
common share ($) 0.69 0.57 21.1% 1.79
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Same-store sales growth (%) (0.6%) 3.0% 1.1%
Operating margin 4.0% 3.3% 4.0%
EBITDA(2) $ 557 $ 490 13.7% $ 1,374
EBITDA margin(2) 5.9% 5.2% 5.9%
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For the periods ended
October 10, 2009 and
October 4, 2008
(unaudited) 2008
($ millions except (40 weeks
where otherwise - re-
indicated) stated(3)) % Change
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Sales $ 23,057 1.6%
Gross profit 5,171 5.7%
Operating income 732 26.8%
Net earnings 360 36.4%
Basic net earnings per
common share ($) 1.31 36.6%
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Same-store sales growth (%) 2.2%
Operating margin 3.2%
EBITDA(2) $ 1,168 17.6%
EBITDA margin(2) 5.1%
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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.
(3) See note 2 to the unaudited interim consolidated financial
statements.
- The Company continues to progress in its turnaround efforts, focusing
on food offering enhancements, product innovation, store renovations,
infrastructure improvements and increasing customer value.
- Sales and same-store sales were positively impacted in the quarter by
approximately 0.5% as a result of the shift of Thanksgiving holiday
sales into the third quarter of 2009 from the fourth quarter of 2008.
- Sales in the quarter were negatively impacted by 0.5% by the sale of
the Company's food service business in the fourth quarter of 2008 and
positively impacted by 0.2% by the acquisition of T&T Supermarket
Inc. ("T&T").
- In the third quarter of 2009:
- sales growth in food and drugstore was modest;
- sales growth in apparel was moderate while sales of other
general merchandise declined significantly;
- gas bar sales declined significantly as a result of lower
retail gas prices, despite moderate volume growth; and
- internal retail food price inflation was below food price
inflation as measured by "The Consumer Price Index for Food
Purchased from Stores" and significantly lower than the second
quarter of 2009.
- Gross profit as a percentage of sales in the third quarter of 2009
was 22.9%, an increase of 80 basis points compared to 22.1% in the
third quarter of the prior year. The improvement was primarily
attributable to improved buying synergies, more disciplined vendor
management, sales mix, lower fuel costs and the efficiency of
transportation operations. Increased investments in pricing partially
offset the improvement.
- Operating income in the third quarter of 2009 included a charge
related to the effect of stock-based compensation net of equity
forwards of $5 million in 2009 compared with $9 million in 2008. The
effect on basic net earnings per common share was a charge of $0.03
(2008 - $0.04).
- The Company incurred an incremental cost of $25 million in the third
quarter of 2009 related to its previously announced investment in
information technology and supply chain, which negatively impacted
basic net earnings per common share by $0.06.
- Operating income and operating margin were positively influenced by
improved gross profit, lower labour and supply chain costs and lower
net stock-based compensation charge, partially offset by the
previously announced incremental investment in information technology
and supply chain.
- On September 28, 2009 the Company finalized its acquisition of T&T,
Canada's largest Asian retailer, for $225 million. $191 million was
funded by cash and the remainder by $34 million of preferred shares
issued by T&T to a vendor prior to the acquisition, the value of
which will increase with favourable performance of the T&T business.
The results of T&T's operations included in the Company's third
quarter operating results were not significant.
"As we progressed through the third quarter, our sales were increasingly impacted by the significant decline in inflation and the ramp-up of our pricing investments. Earnings benefited from cost containment and supply chain efficiencies." said Galen G. Weston, Executive Chairman, Loblaw Companies Limited, "We expect that sales and margins will be challenged due to decreasing inflation, competitive intensity and our ongoing renovation and infrastructure programs."
Forward-Looking Statements
This Quarterly Report for Loblaw contains forward-looking statements about the Company's objectives, plans, goals, aspirations, strategies, financial condition, liquidity, obligations, 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 the possibility that the Company's plans and objectives will not be achieved. These risks and uncertainties include, but are not limited to: changes in economic conditions including the rate of inflation; 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; increased costs relating to utilities, including electricity, and fuel; 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 issues and to control shrink; failure to execute successfully and in a timely manner the Company's major initiatives, including the introduction of innovative and reformulated products or new and renovated stores; unanticipated results associated with the Company's strategic initiatives, including the inability of the Company's supply chain to service the needs of the Company's stores; deterioration in the Company's relationship with its employees, particularly through periods of change in the Company's business; 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 including in relation to inventory valuation; fluctuations in the Company's earnings due to changes in the value of stock-based compensation and equity forward contracts relating to 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; the inability of the Company to obtain external financing; 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 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 Risks and Risk Management section of the Management's Discussion and Analysis included in the Company's 2008 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 third quarter 2009 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 3, 2009 and the related annual MD&A included in the Company's 2008 Annual Report - Financial Review. The Company's 2009 unaudited interim period consolidated financial statements and the accompanying notes have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are reported in Canadian dollars. These interim period consolidated financial statements include the accounts of Loblaw Companies Limited and its subsidiaries and variable interest entities ("VIEs") that the Company is required to consolidate in accordance with Accounting Guideline 15, "Consolidation of Variable Interest Entities". A glossary of terms used throughout this Quarterly Report can be found on page 83 of the Company's 2008 Annual Report - Financial Review. In addition, this Quarterly Report includes the following terms: "rolling year return on net assets(1)", which is defined as cumulative operating income for the latest four quarters divided by average net assets(1), and "rolling year return on shareholders' equity", which is defined as cumulative net earnings available to common shareholders for the latest four quarters divided by average total common shareholders' equity. The information in this MD&A is current to November 16, 2009, unless otherwise noted.
Acquisition of T&T Supermarket Inc.
On September 28, 2009, the Company acquired T&T Supermarket Inc. ("T&T") for $225 million. $191 million was funded by cash and the remainder by $34 million of preferred shares issued by T&T to a vendor prior to the acquisition, the value of which will increase with favourable performance of the T&T business. T&T is Canada's largest Asian food retailer. Sales of the T&T business in the twelve months ending September 30, 2009 were approximately $520 million. The results of T&T's operations consolidated with the Company's results for the quarter ended October 10, 2009 were not significant.
Results of Operations
The Company continues to progress in its turnaround efforts, focusing on food offering enhancements, product innovation, store renovations, infrastructure improvements and increasing customer value.
Sales
Sales for the third quarter decreased by 0.2% to $9,473 million compared to $9,493 million in the third quarter of 2008.
The following factors explain the major components that influenced sales for the third quarter of 2009 compared to the same period in 2008:
- same-store sales declined by 0.6%;
- T&T sales positively impacted the Company's sales by 0.2%;
- the shift of Thanksgiving holiday sales in the third quarter of 2009
from the fourth quarter of 2008 resulted in higher sales and same-
store sales of approximately 0.5%;
- sales were negatively impacted by 0.5% by the sale of the Company's
food service business in the fourth quarter of 2008;
- sales growth in food and drugstore was modest;
- sales growth in apparel was moderate while sales of other general
merchandise declined significantly due to lower discretionary
consumer spending and reductions in assortment and square footage;
- gas bar sales declined significantly as a result of lower retail gas
prices, despite moderate volume growth;
- internal retail food price inflation was below the national food
price inflation of 4.2% as measured by "The Consumer Price Index for
Food Purchased from Stores" ("CPI") and significantly lower than the
second quarter of 2009. In the third quarter of 2008, the Company
experienced moderate internal retail food price inflation. CPI does
not necessarily reflect the effect of inflation on the specific mix
of goods sold in Loblaw stores; and
- during the third quarter of 2009, 27 corporate and franchised stores
were opened, including 17 acquired T&T stores, and 10 corporate and
franchised stores were closed, resulting in a net increase of
0.8 million square feet or 1.6%. During the last four quarters, 50
corporate and franchised stores were opened, including 17 acquired
T&T stores, and 33 corporate and franchised stores were closed,
resulting in a net increase of 1.0 million square feet, or 2.0%.
(1) See Non-GAAP Financial Measures.
For the first three quarters of the year, sales increased by 1.6%, or $367 million, to $23,424 million over the same period in the prior year. The following factors, in addition to the quarterly factors mentioned above, further explain the change in year-to-date sales over the same period in 2008:
- same-store sales growth of 1.1%;
- sales growth was negatively impacted by 0.5% due to the sale of the
Company's food service business in the fourth quarter of 2008;
- an additional selling day in the first week of 2009, due to New
Year's Day occurring in the fourth quarter of 2008, resulted in
higher sales and same-store sales growth of approximately 0.1%; and
- sales and same-store sales growth were negatively impacted by 0.2%
due to a strike 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 $68 million to $2,165 million in the third quarter of 2009 compared to $2,097 million in 2008. Gross profit as a percentage of sales was 22.9% in the third quarter of 2009 compared to 22.1% in 2008. Year-to-date gross profit increased by $297 million to $5,468 million compared to $5,171 in 2008. Year-to-date gross profit as a percentage of sales was 23.3% compared to 22.4% in 2008. In the first three quarters of 2009, improved buying synergies, more disciplined vendor management, sales mix and the efficiency of transportation operations contributed to the increase in gross profit and gross profit as a percentage of sales. Lower fuel costs also contributed to the improvement in the third quarter of 2009, partially offset by increased investments in pricing.
Operating Income
Operating income was $378 million for the third quarter of 2009 compared to $312 million in the same period in 2008, an increase of 21.2%. Operating margin was 4.0% for the third quarter of 2009 compared to 3.3% in 2008. The increases in operating income and operating margin were primarily due to the increases in gross profit and gross profit as a percentage of sales. Included in operating income was a charge of $5 million (2008 - $9 million) related to stock-based compensation net of the equity forwards. Partially offsetting the improvement in operating income were incremental costs of $25 million related to the Company's previously announced investment in information technology and supply chain.
Cost reduction initiatives throughout the business contributed to the improvement in operating income in the first three quarters of 2009 compared to the prior year. Specifically, labour and supply chain costs decreased as a result of continued labour productivity improvements and efficiency enhancements at distribution centres.
EBITDA(1) increased by $67 million, or 13.7%, to $557 million in the third quarter of 2009 compared to $490 million in the third quarter of 2008. EBITDA margin(1) increased in the third quarter of 2009 to 5.9% from 5.2% in the comparable period of 2008. The increases in EBITDA(1) and EBITDA margin(1) were primarily due to the increases in operating income and operating margin.
Year-to-date operating income for 2009 increased by $196 million, or 26.8%, to $928 million, and resulted in an operating margin of 4.0% compared to 3.2% in the comparable period in 2008. Included in 2009 year-to-date operating income is a charge of $17 million (2008 - $24 million) related to stock-based compensation net of the equity forwards. The year-to-date increases in operating income and operating margin were primarily due to higher sales, the improvement in gross profit and lower stock-based compensation costs, partially offset by incremental costs of $61 million related to the Company's previously announced investment in information technology and supply chain and a lower gain on the sale of financial investments by President's Choice Bank ("PC Bank"), a wholly owned subsidiary of the Company, of $8 million (2008 - $14 million).
Year-to-date EBITDA(1) increased by $206 million, or 17.6%, to $1,374 million compared to $1,168 million in the comparable period in 2008. Year-to-date EBITDA margin(1) in 2009 increased to 5.9% compared to 5.1% in the comparable period of 2008. The year-to-date increases in EBITDA(1) and EBITDA margin(1) were primarily due to the year-to-date increases in operating income and operating margin.
(1) See Non-GAAP Financial Measures.
Interest Expense and Other Financing Charges
Interest expense and other financing charges for the third quarter of 2009 were $84 million, compared to $80 million in the same period of 2008. The following items impacted interest expense and other financing charges:
- interest on long term debt of $88 million (2008 - $85 million);
- interest expense on financial derivative instruments, which includes
the effect of the Company's interest rate swaps, cross currency swaps
and equity forwards, of $1 million (2008 - income of $1 million);
- net short term interest income of $2 million (2008 - nil);
- interest income on security deposits of $1 million (2008 -
$2 million);
- dividends on capital securities of $4 million (2008 - $4 million);
and
- interest expense of $6 million (2008 - $6 million) was capitalized to
fixed assets.
Interest expense and other financing charges year-to-date were $205 million compared to $198 million in 2008.
Income Taxes
The effective income tax rate in the third quarter of 2009 was 34.4% (2008 - 29.7%) and 31.8% (2008 - 31.3%) year-to-date. The quarter over quarter increase in the effective income tax rate was primarily due to an increase in the net impact of non-deductible and non-taxable amounts and the current year income tax expense relating to certain prior year income tax matters, partially offset by a change in the proportions of taxable income earned across different tax jurisdictions. The year over year increase in the effective income tax rate was primarily due to the net impact of non-deductible and non-taxable amounts and a change in the proportions of taxable income earned across different tax jurisdictions which was partially offset by a reduction in the current year income tax expense relating to certain prior year income tax matters.
Net Earnings
Net earnings for the third quarter increased by $32 million, or 20.4%, to $189 million from $157 million in the third quarter of 2008 and year-to-date increased by $131 million, or 36.4%, to $491 million from $360 million in 2008. Basic net earnings per common share for the third quarter increased by $0.12, or 21.1%, to $0.69 from $0.57 in the third quarter of 2008 and year-to-date increased by $0.48, or 36.6%, to $1.79 compared to $1.31 for the same period last year.
Basic net earnings per common share were impacted in the third quarter of 2009 by a charge of $0.03 (2008 - charge of $0.04) and a year-to-date charge of $0.07 (2008 - $0.11) per common share for the net effect of stock-based compensation net of equity forwards.
Financial Condition
Financial Ratios
The Company's net debt(1) to equity ratio continued to be within the Company's internal guideline of less than 1:1. The net debt(1) to equity ratio was 0.42:1 at the end of the third quarter of 2009 compared to 0.60:1 at the end of the third quarter of 2008 and 0.55:1 at year end 2008. Equity for the purpose of calculating the net debt(1) to equity ratio is defined by the Company as capital securities and shareholders' equity. The decrease in the net debt(1) to equity ratio at the end of the third quarter of 2009 was primarily due to improvements in working capital and an increase in shareholders' equity. The interest coverage ratio was 4.2 times for the third quarter of 2009 compared to 3.4 times in 2008.
The rolling year return on net assets(1) at the end of the third quarter of 2009 increased to 12.6%, compared to 8.7% at the end of the comparable period in 2008 and 10.7% at year end 2008. The rolling year return on shareholders' equity at the end of the third quarter of 2009 increased to 11.5%, compared to 7.2% at the end of the third quarter of 2008, and to 9.7% at year end 2008. The ratios in the third quarter of 2009 were positively impacted by the increase in cumulative operating income for the last four quarters.
Dividends
On July 24, 2009, the Company's Board of Directors declared a dividend of $0.21 per common share with a payment date of October 1, 2009 and $0.37 per second preferred share Series A with a payment date of October 31, 2009.
On May 6, 2009, the Company commenced a Dividend Reinvestment Plan ("DRIP"). Under the terms of the DRIP, eligible holders of common shares may elect to automatically reinvest their regular quarterly dividends in additional common shares of the Company without incurring any commissions, service charges or brokerage fees. The common shares issued to shareholders under the DRIP will be, at the Company's option, either issued from treasury or purchased on the open market. The Board of Directors may from time to time approve a discount on the issuance of common shares from treasury under the DRIP. On October 1, 2009 and July 1, 2009, the Company issued 1,298,568 and 1,163,201 common shares, respectively, from treasury at a three percent (3%) discount to market, resulting in net cash savings to the Company of approximately $79 million year-to-date.
Subsequent to the end of the quarter, the Board declared a quarterly dividend of $0.21 per common share payable on December 30, 2009 and a quarterly dividend of $0.37 per second preferred share Series A payable on January 31, 2010.
(1) See Non-GAAP Financial Measures.
Outstanding Share Capital
The Company's outstanding share capital is comprised of common shares and preferred shares. An unlimited number of common shares is authorized. After taking into account the issuance of common shares under the DRIP, 276,635,333 common shares are currently outstanding. In addition, 12 million second preferred shares Series A are authorized and 9 million of these shares were outstanding at the end of the third quarter of 2009. The second preferred shares Series A are classified as capital securities and are included in long term liabilities. Further information on the Company's outstanding share capital is provided in note 14 to the unaudited interim period consolidated financial statements.
Liquidity and Capital Resources
Cash flows from Operating Activities
Third quarter cash flows from operating activities were $855 million in 2009 compared to $389 million in the comparable period in 2008. On a year-to-date basis, cash flows from operating activities were $1,330 million compared to $341 million in 2008. The increases in cash flows from operating activities were primarily due to the increase in operating income and the change in non-cash working capital as a result of changes in inventory and accounts payable and accrued liabilities.
Cash flows used in (from) Investing Activities
Third quarter cash flows used in investing activities were $363 million compared to $101 million cash flows from investing activities in the comparable period in 2008. The increase in cash flows used in investing activities in the third quarter was primarily due to the acquisition of T&T, an increase in fixed asset purchases and a decrease in cash flows from credit card receivables, after securitization. On a year-to-date basis, cash flows used in investing activities were $495 million compared to $159 million in 2008. The year-to-date increase in cash flows used in investing activities was primarily due to the acquisition of T&T and the increase in fixed asset purchases. Capital investment for the third quarter amounted to $284 million (2008 - $197 million) and $606 million (2008 - $397 million) year-to-date. The Company estimates its capital investment in the fourth quarter of 2009 will be approximately $400 million.
Cash Flows used in Financing Activities
Third quarter cash flows used in financing activities were $44 million in 2009 compared to $417 million in the comparable period in 2008. The decrease in cash flows used in financing activities was primarily due to the decrease in cash dividend payments as a result of the DRIP and repayment of short term debt in the third quarter of 2008, partially offset by the issuance of capital securities in the third quarter of 2008. On a year-to-date basis, cash flows used in financing activities were $122 million compared to $210 million in 2008. The year-to-date decrease in cash flows used in financing activities was primarily due to the decrease in cash dividend payments as a result of the DRIP, the timing of common share dividends and the refinancing of debt in 2008, partially offset by the issuance of capital securities in the third quarter of 2008.
During the second quarter of 2009, the Company issued $350 million principal amount of 5 year unsecured Medium Term Notes, Series 2-A pursuant to its Medium Term Notes, Series 2 Program. Interest on the notes is payable semi-annually at a fixed rate of 4.85%. The notes are unsecured obligations and are redeemable at the option of the Company.
In the first quarter of 2009, $125 million of 5.75% medium term notes due January 22, 2009 matured and were repaid.
Net Debt(1)
In the first quarter of 2009, the Company revised its definition of net debt(1) to include the fair value of financial derivative assets and liabilities as the Company believes the measure should contain all interest bearing financing arrangements.
Net debt(1) was $2,681 million at the end of the third quarter of 2009 compared to $3,463 million at the end of the third quarter of 2008. The decrease of $782 million was primarily due to an improvement in working capital and the cash savings associated with the DRIP, partially offset by the acquisition of T&T. During the first three quarters of 2009, net debt(1) decreased by $612 million due to an improvement in working capital and cash savings associated with the DRIP, partially offset by the acquisition of T&T. In the first three quarters of 2008, net debt(1) decreased by $106 million due to the issuance of capital securities, PC Bank securitization and an improvement in working capital during this period.
(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 the Company's existing $800 million credit facility will enable the Company to finance its capital investment program and fund its ongoing business requirements, including working capital and pension plan funding, over the next twelve months. Given reasonable access to capital markets, the Company does not foresee any impediments in securing financing to satisfy its long term obligations.
From time to time, PC Bank, a wholly owned subsidiary of the Company, securitizes credit card receivables through the sale of a portion of the total interest in these receivables to independent trusts. The independent trusts' recourse to PC Bank's assets is limited to PC Bank's retained interests and is further supported by the Company through a standby letter of credit (2009 - $116 million; 2008 - $116 million) on a portion of the securitized amount. A portion of the securitized receivables held by an independent trust facility was renewed for a 364 day term in the third quarter of 2009. In the absence of renewal or other securitization, the Company would be required to raise alternative financing by issuing additional debt or equity instruments. During the first quarter of 2009, one of these independent trusts filed a base shelf prospectus which permits it to issue up to $1.5 billion of notes over a 25 month period. Any issuance of notes is subject to the availability of credit markets.
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.
On August 5, 2009, DBRS revised the trend on the Company's long term ratings to stable from negative. On October 21, 2009, S&P revised the outlook to stable from negative. 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)
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 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 impact the Company's access and ability to fund its short term and long term debt requirements. The Company mitigates these risks by maintaining appropriate levels of cash and cash equivalents and short term investments, actively monitoring market conditions and diversifying its sources of funding and the maturity profile of its funding sources.
Loblaw renewed its Normal Course Issuer Bid during the second quarter of 2009 to purchase on the Toronto Stock Exchange ("TSX"), or to enter into equity derivatives to purchase, up to 13,708,678 of the Company's common shares, representing 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 Bids during the first three quarters of 2009.
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 at the end of the third quarter of 2009 was $377 million (2008 - $380 million) including $143 million (2008 - $151 million) of loans payable by VIEs consolidated by the Company. The Company has agreed to provide credit enhancement in the form of a standby letter of credit for the benefit of the independent funding trust equal to approximately 15% (2008 - 15%) of the principal amount of the loans outstanding at any time. At the end of the third quarter of 2009, $66 million (2008 - $66 million) was outstanding as a standby letter of credit. This standby letter of credit has never been drawn upon.
During the second quarter of 2009, the $475 million, 364-day revolving committed credit facility was renewed. This facility has a further 12 month repayment term on its maturity date and is the source of funding to the independent trusts. The Company determined there were no additional VIEs to consolidate as a result of this financing.
Equity Forward Contracts
At the end of the third quarter, the Company had equity forwards to buy 3.2 million (2008 - 4.8 million) of its common shares at an average forward price of $53.76 (2008 - $54.22) including $9.14 (2008 - $9.35) per common share of interest expense, net of dividends. At the end of the third quarter of 2009 the interest and unrealized market loss of $71 million (2008 - $117 million) was included in accounts payable and accrued liabilities. During the second quarter of 2009, the Company 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
In the first three quarters of 2009, the Company contributed $75 million (2008 - $59 million) to its registered funded defined benefit pension plans. The Company expects to contribute $25 million to these plans in the fourth quarter of 2009. The actual amount paid may vary from the estimate based on actuarial valuations being completed, market performance and regulatory requirements. The Company regularly monitors and assesses plan experience and the impact of changes in participant demographics, changes in capital markets and other economic factors that may impact funding requirements, employee future benefit costs and actuarial assumptions.
Quarterly Results of Operations
The 52 week reporting cycle followed by the Company is divided into four quarters of 12 weeks each except for the third quarter, which is 16 weeks in duration. Every 5 years the fourth quarter is 13 weeks in duration which occurred in fiscal 2008 and will reoccur in fiscal 2013. The following is a summary of selected consolidated financial information derived from the Company's unaudited interim consolidated financial statements for each of the eight most recently completed quarters.
Summary of Quarterly Results
(unaudited)
Third Quarter Second Quarter
2009 2008 2009 2008
(16 weeks (12 weeks
($ millions except where - re- - re-
otherwise indicated) (16 weeks) stated(1)) (12 weeks) stated(1))
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Sales $ 9,473 $ 9,493 $ 7,233 $ 7,037
Net earnings $ 189 $ 157 $ 193 $ 140
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Net earnings per
common share
Basic and diluted ($) $ 0.69 $ 0.57 $ 0.70 $ 0.51
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First Quarter Fourth Quarter
2009 2008 2008 2007
(12 weeks (13 weeks (12 weeks
($ millions except where - re- - re- - re-
otherwise indicated) (12 weeks) stated(1)) stated (1)) stated(1))
-------------------------------------------------------------------------
Sales $ 6,718 $ 6,527 $ 7,745 $ 6,967
Net earnings $ 109 $ 63 $ 190 $ 43
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Net earnings per
common share
Basic and diluted ($) $ 0.40 $ 0.23 $ 0.69 $ 0.16
-------------------------------------------------------------------------
Sales and same-store sales in the third quarter of 2009 declined by 0.2% and 0.6%, respectively, compared to the third quarter of 2008. Sales and same-store sales in the third quarter of 2009 relative to 2008 were positively impacted by approximately 0.5% as a result of the shift of Thanksgiving holiday sales into the third quarter of 2009 from the fourth quarter of 2008. Sales in the third quarter of 2009 relative to the third quarter of 2008 were positively impacted by 0.2% due to the acquisition of T&T. Sales growth in the first, second and third quarters of 2009 were each negatively impacted by 0.5% due to the sale of the Company's food service business in the last quarter of 2008. Quarterly same-store sales growth for the previous three quarters was 10.6% in the fourth quarter of 2008, 2.1% in the first quarter of 2009 and 2.5% in the second quarter of 2009. The extra selling week in the fourth quarter of 2008 positively impacted sales and same-store sales growth by 7.9%.
Fluctuations in quarterly net earnings reflect the underlying operations of the Company as well as the impact of a number of specific charges including restructuring and other charges, the impact of stock-based compensation net of the equity forwards and costs related to the incremental investment in information technology and supply chain. Earnings in the third quarter of 2009, the first and second quarters of 2008 and the fourth quarter of 2007 were pressured by investments in lower retail pricing. Quarterly net earnings are also impacted 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 June 21, 2009 and ended on October 10, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Management has considered the acquired T&T business in its scoping and testing for the quarter. Management has determined that no material changes occurred during this period.
Risks and Risk Management
Detailed descriptions of the operating and financial risks and risk management strategies are included in the Risks and Risk Management Section on page 18 of the MD&A as well as note 26 to the Consolidated Financial Statements included in the Company's 2008 Annual Report - Financial Review. The following is an update to those risks and risk management strategies:
(1) See note 2 to the unaudited interim consolidated financial
statements.
Economic Environment
Although the economic conditions in Canada and the United States have improved since the beginning of the year, the Company remains cautious that the economic factors that impact consumer spending patterns could deteriorate. These factors include continued high levels of unemployment, changes in interest rates, reduced disposable income and access to credit and changes in inflation. One or more of these factors could negatively affect the Company's sales and margins. Inflationary trends are unpredictable and changes in the rate of inflation will affect consumer prices, which in turn could have a negative impact on the results of the Company. Management regularly monitors economic conditions and estimates their impact on the Company's operations and incorporates these estimates in short term operating and longer term strategic decisions.
Accounting Standards Implemented in 2009
Goodwill and Intangible Assets
In November 2007, the Canadian Institute of Chartered Accountants ("CICA") issued amendments to Section 1000 "Financial Statement Concepts", and Accounting Guideline 11, "Enterprises in the Development Stage" ("AcG 11"), 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") Abstract 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 for the first quarter of 2009, retroactively with restatement of the comparative periods for the prior year. Restatement of the quarter comparative period resulted in an increase in selling and administrative expenses of $11 million ($22 million year-to-date), a decrease in depreciation and amortization of $12 million ($25 million year-to-date) and a decrease to future tax expense of $1 million (nil year-to-date). Restatement of the comparative period also resulted in a decrease to other assets of $51 million, a decrease to retained earnings of $34 million and a decrease to the future income taxes liability of $17 million. Upon implementation of these requirements a decrease in other assets of $42 million, a decrease in the future income tax liability of $15 million and a decrease to opening retained earnings of $27 million were recorded on the consolidated balance sheet as at January 3, 2009.
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
On January 20, 2009 EIC Abstract No.173 "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities" ("EIC 173") was issued. The EIC 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 resulting from the implementation of EIC 173 require the abstract to be applied retrospectively without restatement of prior periods. The Company has remeasured its financial assets and financial liabilities, including derivative instruments, as at January 4, 2009 to take into account its own credit risk and counterparty credit risk. As a result, a decrease in other assets of $12 million, a decrease in other liabilities of $4 million, a decrease net of income taxes in accumulated other comprehensive income of $2 million and a decrease in retained earnings of $6 million were recorded in the consolidated balance sheet.
Future Accounting Standards
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, therefore the Company will implement these additional disclosures in its 2009 annual audited financial statements. The impact of implementing these amendments on the Company's financial statement disclosures is currently being assessed.
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 ("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. These amendments are effective for business combinations with an acquisition date on or after January 1, 2011 and early adoption is permitted. The impact of implementing these amendments on the Company's financial statements 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. The Company's transition from Canadian GAAP to IFRS will take place in the first quarter of 2011 at which time the Company will report both the current and comparative financial information using IFRS.
The Company has established a project structure including an IFRS team led by the Chief Financial Officer to ensure the timely and appropriate implementation of IFRS. The IFRS team consists of dedicated resources as well as consultants and other employees on an as needed basis. This team reports regularly to a steering committee comprised of senior management, as well as to the audit committee.
The Company has developed an IFRS conversion project plan consisting of three main phases:
Phase One: Diagnostic Impact Assessment
This phase consists of a high-level impact assessment that identified the key areas of accounting differences between Canadian GAAP and IFRS that are likely to impact the Company. The diagnostic impact assessment was completed in 2008 and resulted in the ranking of accounting differences as high, medium, or low priority for further analysis.
Phase Two: Detailed Assessment
This phase involves a comprehensive assessment of the differences between IFRS and the Company's current accounting policies, and included reviews of the differences with the various finance groups and business process owners to further understand the impact of these differences. The detailed assessment was completed in April 2009 at which time the potential changes to existing accounting policies, business processes and information systems were identified. Further analysis continues to finalize these impacts.
Phase Three: Implementation
This phase includes two components: implementation development and implementation transition.
The implementation development phase is currently in progress and involves an analysis of policy alternatives under IFRS, including certain exemptions and elections available on transition. In addition, during this phase the design and development of the required changes to supporting information systems and business activities, including the budget and planning process, financial covenants, key performance indicators, compensation arrangements that rely on financial statement indicators and contractual agreements, are being examined.
The implementation transition phase will involve the final approval of accounting policies, including transitional elections, the execution of changes to business processes and supporting information systems, and the training of finance, operational and other staff. For all accounting policy changes identified, an assessment of the design and effectiveness implications on Internal Controls over Financial Reporting and Disclosure Controls and Procedures will be completed. This phase will result in the compilation of IFRS transitional adjustments, as required, as well as IFRS financial statements with required reconciliations to Canadian GAAP.
The International Accounting Standards Board work plan anticipates the completion of several projects during 2010 and 2011 that could affect the differences between Canadian GAAP and IFRS and the impact on the Company's financial statements in future years. At this time, the Company cannot quantify the impact that the future adoption of IFRS will have on the Company's financial statements and operating performance measures.
Outlook(1)
As the Company progressed through its third quarter, sales were increasingly impacted by the significant decline in inflation and the ramp-up of pricing investments. Earnings benefited from cost containment and supply chain efficiencies. The Company expects that sales and margins will be challenged due to decreasing inflation, competitive intensity and ongoing renovation and infrastructure programs.
(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, net debt to equity and rolling year return on net assets. Historically, the Company utilized free cash flow and return on average total assets as non-GAAP financial measures. Management believes the rolling year return on net assets is a more complete measure of the return on productive 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, nor should they 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 sixteen and forty week periods ended October 10, 2009 and October 4, 2008. 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.
---------- ----------
2009 2008 2009 2008
(16 weeks (40 weeks
- restated - restated
($ millions) (16 weeks) (1)) (40 weeks) (1))
-------------------------------------------------------------------------
Net earnings $ 189 $ 157 $ 491 $ 360
Add (deduct) impact of
the following:
Minority interest 4 6 2 7
Income taxes 101 69 230 167
Interest expense and other
financing charges 84 80 205 198
-------------------------------------------------------------------------
Operating income 378 312 928 732
Add impact of the following:
Depreciation and
amortization 179 178 446 436
-------------------------------------------------------------------------
EBITDA $ 557 $ 490 $ 1,374 $ 1,168
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------- ----------
Net Debt
The following table reconciles net debt used in the net debt to equity ratio to Canadian GAAP measures reported as at the periods ended as indicated. In the first quarter of 2009, the Company revised its definition of net debt to include the fair value of financial derivative assets and liabilities as the Company believes that the measure should include all interest bearing financing arrangements.
(1) See note 2 to the unaudited interim consolidated financial
statements.
The Company calculates net debt as the sum of long term debt, short term debt and the fair value of financial derivative liabilities less cash and cash equivalents, short-term investments, security deposits and fair value of financial derivative assets. The Company believes that this measure is useful in assessing the amount of financial leverage employed.
----------
As at As at As at As at
October October January December
($ millions) 10, 2009 4, 2008 3, 2009 29, 2007
-------------------------------------------------------------------------
Bank indebtedness $ 1 $ 64 $ 52 $ 3
Short term debt - 282 190 418
Long term debt due within
one year 342 163 165 432
Long term debt 4,056 4,040 4,070 3,852
Other liabilities 36 - - -
Fair value of financial
derivative liabilities
(assets) (108) (40) 6 (159)
-------------------------------------------------------------------------
4,327 4,509 4,483 4,546
-------------------------------------------------------------------------
Less: Cash and cash
equivalents 1,164 439 528 430
Short term investments 206 251 225 225
Security deposits 276 356 437 322
-------------------------------------------------------------------------
Net debt $ 2,681 $ 3,463 $ 3,293 $ 3,569
-------------------------------------------------------------------------
The second preferred shares Series A are classified as capital securities and are excluded from the calculation of net debt. Fair value of financial derivatives is not credit value adjusted in accordance with EIC 173. See note 2 to the unaudited interim consolidated financial statements.
Net Assets
The following table reconciles net assets used in the rolling year return on net assets ratio to Canadian GAAP measures reported as at the periods ended as indicated. Historically, the Company utilized return on average total net assets as a non-GAAP financial measure. Management believes that the rolling year return on net assets is a more complete measure of the return on productive assets.
Net assets is calculated as total assets less cash and cash equivalents, short term investments, security deposits and accounts payable and accrued liabilities. Rolling year return on net assets is calculated as cumulative operating income for the last four quarters divided by average net assets.
----------
As at As at
October 4, January 3,
As at 2008 2009
October 10, (restated (restated
($ millions) 2009 (1)) (1))
-------------------------------------------------------------------------
Canadian GAAP total assets $ 14,672 $ 13,523 $ 13,943
Less: Cash and cash equivalents 1,164 439 528
Short term investments 206 251 225
Security deposits 276 356 437
Accounts payable and accrued
liabilities 3,147 2,579 2,823
-------------------------------------------------------------------------
Net assets $ 9,879 $ 9,898 $ 9,930
-------------------------------------------------------------------------
----------
(1) See note 2 to the unaudited interim consolidated financial statements
Consolidated Statements of Earnings
(unaudited)
For the periods ended
October 10, 2009 and
October 4, 2008
---------- ----------
2009 2008 2009 2008
($ millions except (16 weeks (40 weeks
where otherwise - restated - restated
indicated) (16 weeks) (1)) (40 weeks) (1))
-------------------------------------------------------------------------
Sales $ 9,473 $ 9,493 $ 23,424 $ 23,057
Cost of Merchandise
Inventories Sold (note 10) 7,308 7,396 17,956 17,886
-------------------------------------------------------------------------
Gross Profit 2,165 2,097 5,468 5,171
-------------------------------------------------------------------------
Operating Expenses
Selling and
administrative expenses 1,608 1,607 4,094 4,003
Depreciation and
amortization 179 178 446 436
-------------------------------------------------------------------------
1,787 1,785 4,540 4,439
-------------------------------------------------------------------------
Operating Income 378 312 928 732
Interest expense and other
financing charges (note 4) 84 80 205 198
-------------------------------------------------------------------------
Earnings before Income
Taxes and Minority
Interest 294 232 723 534
Income taxes (note 5) 101 69 230 167
-------------------------------------------------------------------------
Net Earnings before
Minority Interest 193 163 493 367
Minority interest 4 6 2 7
-------------------------------------------------------------------------
Net Earnings $ 189 $ 157 $ 491 $ 360
-------------------------------------------------------------------------
Net Earnings Per Common
Share ($) (note 6)
Basic and diluted $ 0.69 $ 0.57 $ 1.79 $ 1.31
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
(1) See note 2 to the unaudited interim consolidated financial
statements.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
For the periods ended October 10, 2009
and October 4, 2008
----------
2009 2008
(40 weeks
- restated
($ millions except where otherwise indicated) (40 weeks) (1))
-------------------------------------------------------------------------
Common Share Capital, Beginning of Period $ 1,196 $ 1,196
Common shares issued (note 14) 79 -
-------------------------------------------------------------------------
Common Share Capital, End of Period $ 1,275 $ 1,196
-------------------------------------------------------------------------
Retained Earnings, Beginning of Period
(restated(1)) $ 4,577 $ 4,289
Cumulative impact of implementing new
accounting standards (note 2) (6) (37)
Net earnings 491 360
Dividends declared per common share - 63 cents
(2008 - 63 cents) (173) (173)
-------------------------------------------------------------------------
Retained Earnings, End of Period $ 4,889 $ 4,439
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income,
Beginning of Period $ 30 $ 19
Cumulative impact of implementing new
accounting standards (note 2) (2) -
Other comprehensive loss (13) (7)
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income,
End of Period (note 15) $ 15 $ 12
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Shareholders' Equity $ 6,179 $ 5,647
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
Consolidated Statements of Comprehensive Income
(unaudited)
For the periods ended
October 10, 2009 and
October 4, 2009
---------- ----------
2009 2008 2009 2008
(16 weeks (40 weeks
- restated - restated
($ millions) (16 weeks) (1)) (40 weeks) (1))
-------------------------------------------------------------------------
Net earnings $ 189 $ 157 $ 491 $ 360
Other comprehensive income,
net of income taxes
Net unrealized (loss)
gain on available-for-
sale financial assets (12) 11 (23) 33
Reclassification of net
(gain) loss on available-
for-sale financial assets
to net earnings 16 (8) (8) (9)
-------------------------------------------------------------------------
4 3 (31) 24
-------------------------------------------------------------------------
Net gain (loss) on
derivatives designated
as cash flow hedges (2) 6 4 (9)
Reclassification of net
loss (gain) on derivatives
designated as cash flow
hedges to net earnings (2) (4) 14 (22)
-------------------------------------------------------------------------
(4) 2 18 (31)
-------------------------------------------------------------------------
Other comprehensive
(loss) income - 5 (13) (7)
-------------------------------------------------------------------------
Total Comprehensive Income $ 189 $ 162 $ 478 $ 353
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
(1) See note 2 to the unaudited interim consolidated financial
statements.
Consolidated Balance Sheets
----------
As at As at
October 4, January 3,
As at 2008 2009
October 10, (restated (restated
2009 (1)) (1))
($ millions) (unaudited) (unaudited) (audited)
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents
(note 7) $ 1,164 $ 439 $ 528
Short term investments 206 251 225
Accounts receivable
(notes 8 and 9) 583 688 867
Inventories (notes 2 and 10) 2,163 2,217 2,188
Income taxes 23 52 40
Future income taxes 34 49 41
Prepaid expenses and other
assets 97 59 71
-------------------------------------------------------------------------
Total Current Assets 4,270 3,755 3,960
Fixed Assets 8,283 7,877 8,045
Goodwill and other indefinite
life intangible assets (note 3) 994 807 807
Other Assets 1,125 1,084 1,131
-------------------------------------------------------------------------
Total Assets $ 14,672 $ 13,523 $ 13,943
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current Liabilities
Bank indebtedness $ 1 $ 64 $ 52
Short term debt (note 12) - 282 190
Accounts payable and accrued
liabilities 3,147 2,579 2,823
Long term debt due within
one year 342 163 165
-------------------------------------------------------------------------
Total Current Liabilities 3,490 3,088 3,230
Long Term Debt (note 13) 4,056 4,040 4,070
Other Liabilities (note 3) 513 364 445
Future Income Taxes 193 146 156
Capital Securities 219 219 219
Minority Interest 22 19 20
-------------------------------------------------------------------------
Total Liabilities 8,493 7,876 8,140
-------------------------------------------------------------------------
Shareholders' Equity
Common Share Capital 1,275 1,196 1,196
Retained Earnings 4,889 4,439 4,577
Accumulated Other
Comprehensive Income (note 15) 15 12 30
-------------------------------------------------------------------------
Total Shareholders' Equity 6,179 5,647 5,803
-------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 14,672 $ 13,523 $ 13,943
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------
Contingencies, commitments and guarantees (note 17).
See accompanying notes to the unaudited interim period consolidated
financial statements.
(1) See note 2 to the unaudited interim consolidated financial
statements.
Consolidated Cash Flow Statements
(unaudited)
For the periods ended
October 10, 2009 and
October 4, 2008
---------- ----------
2009 2008 2009 2008
(16 weeks (40 weeks
- restated - restated
($ millions) (16 weeks) (1)) (40 weeks) (1))
-------------------------------------------------------------------------
Operating Activities
Net earnings before
minority interest $ 193 $ 163 $ 493 $ 367
Depreciation and
amortization 179 178 446 436
Future income taxes 1 6 4 (2)
Settlement of equity
forward contracts
(note 16) - - (38) -
Change in non-cash
working capital 467 20 409 (535)
Other 15 22 16 75
-------------------------------------------------------------------------
Cash Flows from Operating
Activities 855 389 1,330 341
-------------------------------------------------------------------------
Investing Activities
Fixed asset purchases (284) (197) (606) (397)
Short term investments 91 58 (13) (3)
Proceeds from fixed
asset sales 4 48 10 61
Credit card receivables,
after securitization
(note 8) 28 200 236 232
Business acquisitions -
net of cash acquired
(note 3) (194) - (194) -
Franchise investments
and other receivables 5 (2) (4) (21)
Security deposits and other (13) (6) 76 (31)
-------------------------------------------------------------------------
Cash Flows (used in) from
Investing Activities (363) 101 (495) (159)
-------------------------------------------------------------------------
Financing Activities
Bank indebtedness - 9 (51) 61
Short term debt (note 12) - (516) (190) (136)
Long term debt
Issued (note 13) 10 - 370 301
Retired (note 13) (18) (13) (157) (424)
Capital securities issued - 218 - 218
Dividends (36) (115) (94) (230)
-------------------------------------------------------------------------
Cash Flows used in
Financing Activities (44) (417) (122) (210)
-------------------------------------------------------------------------
Effect of foreign currency
exchange rate changes on
cash and cash equivalents (54) 21 (77) 37
-------------------------------------------------------------------------
Change in Cash and Cash
Equivalents 394 94 636 9
Cash and Cash Equivalents,
Beginning of Period 770 345 528 430
-------------------------------------------------------------------------
Cash and Cash Equivalents,
End of Period $ 1,164 $ 439 $ 1,164 $ 439
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------- ----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
(1) See note 2 to the unaudited interim 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 2008 audited
annual consolidated financial statements and related notes for the year
ended January 3, 2009 contained in the Annual Report - Financial Review
("2008 Annual Report") except as described in note 2. Under Canadian
GAAP, additional disclosure is required in annual financial statements
and accordingly the unaudited interim period consolidated financial
statements should be read together with the audited annual consolidated
financial statements and the accompanying notes included in the Loblaw
Companies Limited 2008 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" or "Loblaw". 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.
Inventories
The Company values merchandise inventories at the lower of cost and net
realizable value. Costs include the costs of purchase net of vendor
allowances plus other costs, such as transportation and shrink that are
directly incurred to bring inventories to their present location and
condition.
Use of Estimates and Assumptions
The preparation of the unaudited interim period consolidated financial
statements requires management to make estimates and assumptions that
affect the reported amounts and disclosures made in the unaudited interim
period consolidated financial statements and accompanying notes. These
estimates and assumptions are based on management's historical
experience, best knowledge of current events and conditions and
activities that may be undertaken in the future. Actual results could
differ from these estimates.
Certain estimates, such as those related to valuation of inventories,
goodwill, income taxes, Goods and Services Tax and provincial sales
taxes, fixed 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
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, therefore the
Company will implement these additional disclosures in its 2009 annual
audited financial statements. The impact of implementing these amendments
on the Company's financial statement disclosures is currently being
assessed.
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 ("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. These amendments are effective for
business combinations with an acquisition date on or after January 1,
2011 and early adoption is permitted. The impact of implementing these
amendments on the Company's financial statements 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 AcG 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") Abstract 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 for the first quarter of 2009,
retroactively with restatement of the comparative periods for the prior
year. Restatement of the quarter comparative period resulted in an
increase in selling and administrative expenses of $11 ($22 year-to-
date), a decrease in depreciation and amortization of $12 ($25 year-to-
date) and a decrease to future tax expense of $1 (nil year-to-date).
Restatement of the comparative period also resulted in a decrease to
other assets of $51, a decrease to retained earnings of $34 and a
decrease to the future income taxes liability of $17. Upon implementation
of these requirements a decrease in other assets of $42, a decrease in
the future income tax liability of $15 and a decrease to opening retained
earnings of $27 were recorded on the consolidated balance sheet as at
January 3, 2009.
Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
On January 20, 2009 EIC Abstract No. 173 "Credit Risk and the Fair Value
of Financial Assets and Financial Liabilities" ("EIC 173") 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 resulting
from the implementation of EIC 173 require the abstract to be applied
retrospectively without restatement of prior periods. The Company has
remeasured the financial assets and financial liabilities, including
derivative instruments, as at January 4, 2009 to take into account its
own 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.
Accounting Standards Implemented in 2008
Capital Disclosures and Financial Instruments - Disclosure and
Presentation
In December 2006, the CICA issued three new accounting standards: Section
1535, "Capital Disclosures", Section 3862, "Financial Instruments -
Disclosures" and Section 3863, "Financial Instruments - Presentation".
The adoption of these sections did not have an impact on the Company's
results of operations or financial condition.
Inventories
Effective January 1, 2008, the Company implemented Section 3031,
"Inventories" ("Section 3031"), issued by the CICA in June 2007, which
replaced Section 3030 of the same title. The transitional adjustments
resulting from the implementation of Section 3031 were recognized in the
2008 opening balance of retained earnings. Upon implementation of these
requirements, a decrease in opening inventories of $65, an increase in
current taxes receivable of $24 and a decrease of $41 to opening retained
earnings as at December 30, 2007 were recorded on the consolidated
balance sheet resulting mainly from the application of a consistent cost
formula for all inventories having a similar nature and use.
See note 2 of the 2008 Annual Report for further information.
Note 3. Business Acquisitions
On September 28, 2009, the Company acquired all of the outstanding common
shares of T&T Supermarket Inc. ("T&T"), for cash consideration of $191.
The Company also assumed a liability of $34 associated with the preferred
shares issued by T&T to a vendor prior to the acquisition. The liability
will increase with favourable performance of the T&T business, and the
increase in the liability will be expensed as incurred. $3 of acquisition
costs were incurred in connection with the acquisition. The acquisition
was accounted for using the purchase method of accounting and
accordingly, the consolidated financial statements include the results of
operations since the date of the acquisition.
The preferred shares are classified as Other Liabilities on the
Consolidated Balance Sheet as at October 10, 2009. Redemption or purchase
of the preferred shares may take place upon the occurrence of certain
events, including the expiry of 5 years from the closing date of the
acquisition. The preferred shareholder may increase this period up to a
further 5 years if certain conditions are met. The preferred share
liability may be satisfied in cash, the Company's common shares, or a
combination thereof, at the option of the Company.
Management expects to finalize the purchase price allocation prior to the
end of fiscal 2009. As a result, the actual amount allocated to each of
the identifiable net assets may vary from preliminary amounts.
The preliminary purchase price allocation, based on management's current
assessment of fair value is as follows:
Net assets acquired:
Inventory $ 39
Other current assets 11
Fixed assets 70
Goodwill and other indefinite life intangible assets 180
Other long term assets 14
Current liabilities (69)
Other liabilities (36)
Future income taxes (18)
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Cash consideration $ 191
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----------
In connection with the acquisition of T&T, the Company also acquired
certain net assets for $5.
Note 4. Interest Expense and Other Financing Charges
---------- ----------
2009 2008 2009 2008
($ millions) (16 weeks) (16 weeks) (40 weeks) (40 weeks)
-------------------------------------------------------------------------
Interest on long term debt $ 88 $ 85 $ 215 $ 216
Interest expense (income)
on financial derivative
instruments 1 (1) 2 (4)
Net short term interest
(income) expense (2) - (5) 4
Interest income on security
deposits (1) (2) (2) (7)
Dividends on capital
securities 4 4 11 4
Capitalized to fixed assets (6) (6) (16) (15)
-------------------------------------------------------------------------
Interest Expense $ 84 $ 80 $ 205 $ 198
-------------------------------------------------------------------------
---------- ----------
In the third quarter of 2009, net interest expense of $81 (2008 - $89)
and $200 (2008 - $215) year-to-date was recorded related to the financial
assets and financial liabilities not classified as held-for-trading.
Interest and dividends on capital securities paid in the third quarter of
2009 was $75 (2008 - $99), and interest received was $13 (2008 - $35).
Interest and dividends on capital securities paid year-to-date was $265
(2008 - $304) and interest received year-to-date was $57 (2008 - $103).
Note 5. Income Taxes
The effective income tax rate in the third quarter of 2009 was 34.4%
(2008 restated(1) - 29.7%) and 31.8% (2008 restated(1) - 31.3%) year-to-
date. The quarter over quarter increase in the effective income tax rate
was primarily due to an increase in the net impact of non-deductible and
non-taxable amounts and the current year income tax expense relating to
certain prior year income tax matters, partially offset by a change in
the proportions of taxable income earned across different tax
jurisdictions. The year over year increase in the effective income tax
rate was primarily due to the net impact of non-deductible and non-
taxable amounts and a change in the proportions of taxable income earned
across different tax jurisdictions which was partially offset by a
reduction in the current year income tax expense relating to certain
prior year income tax matters.
Net income taxes paid in the third quarter were $60 (2008 - taxes
refunded $17), and $184 (2008 - $88) year-to-date.
Note 6. Basic and Diluted Net Earnings per Common Share ($, except where
otherwise indicated)
---------- ----------
2009 2008 2009 2008
(16 weeks (40 weeks
- re- - re-
(16 weeks) stated(1)) (40 weeks) stated(1))
-------------------------------------------------------------------------
Net earnings for basic
earnings per share
($ millions) $ 189 $ 157 $ 491 $ 360
Dividends on capital
securities ($ millions)
(note 14) 4 4 11 4
-------------------------------------------------------------------------
Net earnings for diluted
earnings per share
($ millions) $ 193 $ 161 $ 502 $ 364
-------------------------------------------------------------------------
Weighted average common
shares outstanding
(in millions) 275.3 274.2 274.6 274.2
Dilutive effect of capital
securities (in millions) 6.2 7.9 6.2 3.0
Dilutive effect of stock-
based compensation
(in millions) 0.2 - 0.2 -
-------------------------------------------------------------------------
Diluted weighted average
common shares outstanding
(in millions) 281.7 282.1 281.0 277.2
-------------------------------------------------------------------------
Basic and diluted net
earnings per common share $ 0.69 $ 0.57 $ 1.79 $ 1.31
-------------------------------------------------------------------------
---------- ----------
Stock options outstanding with an exercise price greater than the market
price of the Company's common shares at the end of the third quarter were
not recognized in the computation of diluted net earnings per common
share. Accordingly, in the third quarter of 2009, 4,223,744 (2008 -
4,863,725) stock options, with a weighted average exercise price of
$52.26 (2008 - $52.57) per common share, were excluded from the
computation of diluted net earnings per common share.
(1) See note 2.
Note 7. Cash and Cash Equivalents
The components of cash and cash equivalents as at October 10, 2009,
October 4, 2008 and January 3, 2009 were as follows:
----------
As at As at As at
October 10, October 4, January 3,
2009 2008 2009
-------------------------------------------------------------------------
Cash $ 107 $ 46 $ 42
Cash equivalents - short term
investments with a maturity of
90 days or less:
Bank term deposits 548 - -
Government treasury bills 232 144 219
Government-sponsored debt securities 102 116 58
Corporate commercial paper 175 133 209
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Cash and cash equivalents $ 1,164 $ 439 $ 528
-------------------------------------------------------------------------
----------
As at October 10, 2009, USD $955 (October 4, 2008 - USD $930 and
January 3, 2009 - USD $961) was included in cash and cash equivalents,
short term investments and security deposits which were included in other
assets. In the third quarter of 2009, the Company recognized an
unrealized foreign currency exchange loss of $93 (2008 - gain of $52) and
$156 (2008 - gain of $94) 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 $54 (2008 - gain of
$21) in the quarter and $77 (2008 - gain of $37) year-to-date related to
cash and cash equivalents. The resulting loss on cash and cash
equivalents, short term investments and security deposits is offset in
operating income and other comprehensive income by the unrealized foreign
currency exchange gain of $93 (2008 - loss of $51) quarter-to-date and a
gain of $155 (2008 - loss of $93) year-to-date on the cross currency
swaps.
Note 8. Accounts Receivable
From time to time, President's Choice Bank ("PC Bank"), a wholly owned
subsidiary of the Company, securitizes credit card receivables through
the sale of a portion of the total interest in these receivables to
independent trusts. A portion of the securitized receivables held by an
independent trust facility was renewed for a 364 day term during the
third quarter of 2009. The independent trusts' recourse to PC Bank's
assets is limited to PC Bank's retained interests and is further
supported by the Company through a standby letter of credit for $116
(2008 - $116) on a portion of the securitized amount. Other receivables
consist mainly of receivables from independent franchisees, associated
stores and independent accounts.
----------
As at As at As at
October 10, October 4, January 3,
($ millions) 2009 2008 2009
-------------------------------------------------------------------------
Credit card receivables $ 1,955 $ 2,065 $ 2,206
Amount securitized (1,775) (1,775) (1,775)
-------------------------------------------------------------------------
Net credit card receivables 180 290 431
Other receivables 403 398 436
-------------------------------------------------------------------------
Accounts receivable $ 583 $ 688 $ 867
-------------------------------------------------------------------------
----------
Credit card receivables that were past due of $4 (2008 - $6) as at
October 10, 2009 were not classified as impaired as they were less than
90 days past due and most receivables were reasonably expected to remedy
the past due status. Any credit card receivable balances with a payment
that is contractually 180 days in arrears or where the likelihood of
collection is considered remote are written-off. Concentration of credit
risk with respect to receivables is limited due to the diversity of the
Company's customer base. Credit risk on the credit card receivables is
managed as described in note 26 to the Company's 2008 Annual Report.
Other receivables that are past due but not impaired totalled $34 (2008 -
$61) as at October 10, 2009.
Note 9. Allowances for Receivables
The allowance for credit card receivables recorded in the consolidated
balance sheets is maintained at a level which is considered adequate to
absorb credit related losses on credit card receivables. The allowance
for credit card losses is recorded in accounts receivable on the
consolidated balance sheets. The allowance for accounts receivable from
independent franchisees is recorded in accounts payable and accrued
liabilities on the consolidated balance sheets. The allowance for other
receivables from associated stores and independent accounts is recorded
in accounts receivable on the consolidated balance sheets. A continuity
of the Company's allowances for losses is as follows:
Credit Card Receivables
53 weeks
16 weeks ended 40 weeks ended ended
--------- ---------
October October October October January
($ millions) 10, 2009 4, 2008 10, 2009 4, 2008 3, 2009
-------------------------------------------------------------------------
Allowance at beginning
of period $ (15) $ (13) $ (15) $ (13) $ (13)
Provision for losses (7) (14) (15) (26) (35)
Recoveries (4) (5) (7) (9) (14)
Write-offs 11 19 22 35 47
-------------------------------------------------------------------------
Allowance at end of
period $ (15) $ (13) $ (15) $ (13) $ (15)
-------------------------------------------------------------------------
--------- ---------
Other Receivables
53 weeks
16 weeks ended 40 weeks ended ended
--------- ---------
October October October October January
($ millions) 10, 2009 4, 2008 10, 2009 4, 2008 3, 2009
-------------------------------------------------------------------------
Allowance at beginning
of period $ (27) $ (35) $ (24) $ (35) $ (35)
Provision for losses (40) (29) (74) (56) (81)
Write-offs 37 37 68 64 92
-------------------------------------------------------------------------
Allowance at end of
period $ (30) $ (27) $ (30) $ (27) $ (24)
-------------------------------------------------------------------------
--------- ---------
Note 10. Inventories
For inventories recorded as at October 10, 2009, the Company recorded $15
(October 4, 2008 - $10) 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 $56 (2008 - $49) for the third quarter and $141 (2008 - $126) 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. Short Term Debt
As described in note 15 of the 2008 Annual Report, the Company's $800
committed credit facility expiring in March of 2013 provided by a
syndicate of banks contains certain financial covenants. Interest is
based on a floating rate, primarily the bankers' acceptance rate, and an
applicable margin based on the Company's credit rating. As at October 10,
2009, nil (October 4, 2008 - $273, January 3, 2009 - $190) was drawn on
the committed credit facility.
Note 13. Long Term Debt
During the second quarter, the Company issued $350 principal amount of
unsecured Medium Term Notes, Series 2-A pursuant to its Medium Term
Notes, Series 2 program. The Series 2-A notes will pay a fixed rate of
interest of 4.85% payable semi-annually commencing on November 8, 2009
until maturity on May 8, 2014 and are subject to certain covenants. The
notes are unsecured obligations of Loblaw and rank equally with all other
unsecured indebtedness that has not been subordinated. The Series 2-A
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.
As at October 10, 2009, $313 (USD $300) of fixed rate notes was recorded
in long term debt on the consolidated balance sheet. For further
information on the Company's policies with respect to managing debt and
foreign exchange rate risk, refer to notes 1 and 26 of the Company's 2008
Annual Report.
In the first quarter of 2009, $125 of 5.75% medium term notes due
January 22, 2009 matured and were repaid.
Note 14. Share Capital ($, except where otherwise indicated)
At the end of the third quarter of 2009, the Company's outstanding common
share capital was comprised of common shares, an unlimited number of
which were authorized and 276,635,333 (2008 - 274,173,564) were issued
and outstanding.
Dividends
During the third quarter of 2009, the Board of Directors declared
dividends of $0.21 (2008 - $0.21) and $0.63 (2008 - $0.63) year-to-date
per common share. In addition during the third quarter of 2009, dividends
of $0.37 (2008 - $0.54) and $1.12 (2008 - $0.54) year-to-date per second
preferred share were declared. For financial statement presentation
purposes, second preferred share dividends of $4 million (2008 -
$4 million) and $11 million (2008 - $4 million) are included for the
sixteen and forty weeks ended October 10, 2009, respectively, on the
Consolidated Statement of Earnings as a component of interest expense and
other financing charges (see note 4).
Dividend Reinvestment Plan
During the second quarter of 2009, the Company commenced a Dividend
Reinvestment Plan ("DRIP"). Under the terms of the DRIP, eligible holders
of common shares may elect to automatically reinvest their regular
quarterly dividends in additional common shares of the Company without
incurring any commissions, service charges or brokerage fees. The common
shares issued to shareholders under the DRIP will be, at the Company's
option, either issued from treasury or purchased on the open market. The
Board of Directors may from time to time approve a discount on the
issuance of common shares from treasury under the DRIP. During the third
quarter, the Company issued 2,461,769 common shares from treasury under
the DRIP at a three percent (3%) discount to market resulting in an
increase in common share capital of $79.
Normal Course Issuer Bid
During the second quarter of 2009, Loblaw renewed its Normal Course
Issuer Bid ("NCIB") to purchase on the Toronto Stock Exchange, or enter
into equity derivatives to purchase, up to 13,708,678 of the Company's
common shares, representing approximately 5% of the common shares
outstanding. In accordance with the rules and by-laws of the Toronto
Stock Exchange, Loblaw may purchase its shares at the then market price
of such shares. The Company did not purchase any shares under its NCIB
during the first three quarters of 2009 or 2008.
Note 15. Accumulated Other Comprehensive Income
The following table provides further detail regarding the composition of
accumulated other comprehensive income for the 40 week periods ended
October 10, 2009 and October 4, 2008:
40 weeks ended
-------------------------
October 10, 2009 October 4, 2008
-------------------------------------------------------------------------
Avail- Avail-
Cash able- Cash able-
Flow for-sale Flow for-sale
($ millions) Hedges Assets Total Hedges Assets Total
-------------------------------------------------------------------------
Balance, beginning
of period $ 14 $ 16 $ 30 $ 22 $ (3) $ 19
Cumulative impact of
implementing new
accounting standards
(net of income taxes
recovered of $1
(2008 - nil))
(see note 2) (2) - (2) - - -
Net unrealized (loss)
gain on available-
for-sale financial
assets (net of
income taxes of $1
(2008 - $1)) - (23) (23) - 33 33
Reclassification of
gain on available-
for-sale financial
assets (net of
income taxes
recovered of $3
(2008 - $5)) - (8) (8) - (9) (9)
Net gain (loss)
on derivatives
designated as cash
flow hedges (net
of income taxes
recovered of $8
(2008 - income
taxes of $9)) 4 - 4 (9) - (9)
Reclassification of
loss (gain) on
derivatives
designated as cash
flow hedges (net
of income taxes
recovered of $6
(2008 - nil)) 14 - 14 (22) - (22)
-------------------------------------------------------------------------
Balance, end of
period $ 30 $ (15) $ 15 $ (9) $ 21 $ 12
-------------------------------------------------------------------------
-------------------------
See note 23 of the Company's 2008 Annual Report for further details
regarding the composition of accumulated other comprehensive income for
the year ended January 3, 2009.
An estimated gain of $8 (2008 - $6) on interest rate swaps is expected to
be reclassified to net earnings during the next 12 months. Remaining
amounts on the interest rate swaps will be reclassified to net earnings
over periods of up to 2 years. A gain of $16 (2008 - loss of $17) on
cross currency swaps will be reclassified to net earnings over the next
12 months but will be partially offset by the losses reclassified from
accumulated other comprehensive income to net earnings on available-for-
sale assets. Remaining amounts on the cross currency swaps will be
reclassified to net earnings over periods up to 4 years.
Note 16. Stock-Based Compensation ($, except where otherwise indicated)
The compensation cost recognized in operating income related to the
Company's stock option plan and the associated equity forwards and the
restricted share unit plan was as follows:
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2009 2008 2009 2008
($ millions) (16 weeks) (16 weeks) (40 weeks) (40 weeks)
-------------------------------------------------------------------------
Stock option plan
(income) expense $ (5) $ (1) $ (2) $ 1
Equity forwards loss 8 8 13 18
Restricted share unit
plan expense 2 2 6 5
-------------------------------------------------------------------------
Net stock-based
compensation expense $ 5 $ 9 $ 17 $ 24
-------------------------------------------------------------------------
---------- ----------
Stock Option Plan
The Company's stock option plan allows for the settlement in shares or in
the share appreciation value in cash at the option of the employee.
During the third quarter of 2009, the Company granted 44,032 (2008 -
82,204) stock options with an exercise price of $34.31 (2008 - $29.30)
per common share. During the second quarter of 2009, the Company granted
24,769 (2008 - 8,800) stock options with an exercise price of $36.17
(2008 - $33.10) per common share. During the first quarter of 2009, the
Company granted 2,640,846 (2008 - 3,303,557) stock options with an
exercise price of $30.99 (2008 - $28.95) per common share. During the
first three quarters of 2009, the Company paid the share appreciation
value of $1 million (2008 - nil) on the exercise of 116,358 (2008 - nil)
stock options. In addition, 1,224,404 (2008 - 1,914,555) stock options
were forfeited or cancelled during the first three quarters of 2009.
At the end of the third quarter of 2009, a total of 9,261,545 (2008 -
8,012,762) stock options were outstanding and represented approximately
3.3% (2008 - 2.9%) of the Company's issued and outstanding common shares,
which was within the Company's guideline of 5%. The Company's market
price per common share at the end of the third quarter was $31.54 (2008 -
$29.75).
Restricted Share Unit ("RSU") Plan
Under its existing RSU plan, the Company granted 13,373 RSUs (2008 -
13,526) in the third quarter of 2009, 3,994 RSUs (2008 - 45,321) in the
second quarter and 425,093 RSUs (2008 - 352,268) in the first quarter of
2009. During the third quarter of 2009, 20,537 RSUs (2008 - 32,889) and
94,070 RSUs (2008 - 87,995) year-to-date were cancelled. In addition,
during the third quarter of 2009, 12,585 (2008 - 13,130) and 199,920
(2008 - 246,785) year-to-date RSUs were settled in cash for $1 million
(2008 - a nominal amount) and $7 million (2008 - $8 million),
respectively. At the end of the third quarter 977,869 (2008 - 845,022)
RSUs remained outstanding.
Equity Forwards
At the end of the third quarter, the Company had cumulative equity
forwards to buy 3.2 million (2008 - 4.8 million) of its common shares at
a cumulative average forward price of $53.76 (2008 - $54.22) including
$9.14 (2008 - $9.35) per common share of interest expense, net of
dividends. During the second quarter of 2009, the Company and the
counterparty agreed to terminate a portion of the equity forwards
representing 1.6 million shares for $38 million.
Note 17. 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.
These trusts are administered by a major Canadian chartered bank.
The gross principal amount of loans issued to the Company's independent
franchisees outstanding as of October 10, 2009 was $377 (2008 - $380)
including $143 (2008 - $151) of loans payable by VIEs consolidated by the
Company. Based on a formula, the Company has agreed to provide credit
enhancement in the form of a standby letter of credit for the benefit of
the independent funding trust equal to approximately 15% (2008 - 15%) of
the principal amount of the loans outstanding at any point in time, $66
(2008 - $66) as of October 10, 2009. The standby letter of credit has not
been drawn upon.
During the second quarter of 2009, the $475, 364-day revolving committed
credit facility was renewed. This facility has a further 12 month
repayment term and is the source of funding to the independent trusts.
The new financing structure has been reviewed and the Company determined
there were no additional VIEs to consolidate as a result of this
financing. In accordance with Canadian GAAP, the financial statements of
the independent funding trust are not consolidated with those of the
Company.
Legal Proceedings
In 2008, the trustees of a multi-employer pension plan in which the
Company's employees and those of its independent franchises participate,
became involved in proceedings brought by the Financial Services
Commission of Ontario whereby it has been alleged that the trustees
violated certain provisions of the Pensions Benefits Act (Ontario) in
their management of the plan's funds. One of the trustees, an officer of
Loblaw, is entitled to indemnification from the Company. The trustees
each pled not guilty to the charges. A decision by the court is expected
by the end of the year.
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
53 week period ended October 10, 2009 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) 4.18 times
-------------------------------------------------------------------------
The earnings coverage ratio on long term debt (including any current
portion) and capital securities is equal to net earnings(2) 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.
(1) Preferred shares are classified as capital securities and are
included in liabilities on the consolidated balance sheet.
(2) Adjusted for the effect of the change in accounting policy described
in note 2 of the Company's unaudited interim consolidated financial
statements as at October 10, 2009.
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 139,000 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 Style brands. In
addition, through its subsidiaries, the Company makes available to
consumers President's Choice Financial services and offers the PC points
loyalty program.
Loblaw is committed to a strategy developed under three core themes:
Simplify, Innovate and Grow. The Company strives to be consumer focused,
cost effective and agile, with the goal of achieving long term growth for
its many stakeholders. Loblaw believes that a strong balance sheet is
critical to achieving its potential. It is highly selective in its
consideration of acquisitions and other business opportunities. The
Company maintains an active product program to support its control label
program. It works to ensure that its technology and systems logistics
enhance the efficiency of its operations.
Trademarks
Loblaw Companies Limited and its subsidiaries own a number of trademarks.
Several subsidiaries are licensees of additional trademarks. These
trademarks are the exclusive property of Loblaw Companies Limited or the
licensor and where used in this report are in italics.
Shareholder Information
Registrar and Transfer Agent
Computershare Investor Services Inc. Tel: (416) 263-9200
100 University Avenue Toll free: 1-800-564-6253
Toronto, Canada Fax: (416) 263-9394
M5J 2Y1 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 Inge van den Berg, Senior Vice President,
Corporate Affairs at the Company's National Head Office or by e-mail at
[email protected].
Additional information has been filed electronically with various
securities regulators in Canada through the System for Electronic
Document Analysis and Retrieval (SEDAR) and with the Office of the
Superintendent of Financial Institutions (OSFI) as the primary regulator
for the Company's subsidiary, President's Choice Bank. 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.
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 2009 fourth quarter, which
is the close of business on December 10, 2009:
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.
Ce rapport est disponible en français.
For further information: Inge van den Berg, Senior Vice President, Corporate Affairs, (905) 459-2500, [email protected]
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