BRAMPTON, ON, Nov. 13 /CNW/ -
2008 Third Quarter Summary(1)
For the periods ended
October 4, 2008 and
October 6, 2007
(unaudited)
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($ millions except 2008 2007 2008 2007
where otherwise
indicated) (16 weeks)(16 weeks) Change (40 weeks)(40 weeks) Change
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Sales $ 9,493 $ 9,137 3.9% $ 23,057 $ 22,417 2.9%
Operating expenses 9,182 8,887 3.3% 22,328 21,815 2.4%
Operating income 311 250 24.4% 729 602 21.1%
Net earnings 155 117 32.5% 357 290 23.1%
Basic net earnings
per common
share ($) 0.56 0.43 30.2% 1.30 1.06 22.6%
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Same-store sales
increase (%) 3.0% 1.6% 2.2% 2.2%
Operating margin 3.3% 2.7% 3.2% 2.7%
EBITDA(2) $ 501 $ 430 16.5% $ 1,190 $ 1,056 12.7%
EBITDA margin(2) 5.3% 4.7% 5.2% 4.7%
Free cash flow(2) $ 87 $ 117 (25.6%) $ (265) $ 67 (495.5%)
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Sales in the third quarter of 2008 were $9,493 million compared to $9,137
million in the same period in 2007, an increase of 3.9%. Net earnings were
$155 million, a 32.5% increase compared to $117 million in the same period
last year. EBITDA(2) of $501 million represented a 16.5% increase over last
year. Basic net earnings per common share were $0.56, compared to $0.43 in the
third quarter last year.
The following items influenced the Company's operating income in the
third quarter of 2008 compared to the same period in 2007:
- Charges related to restructuring costs in 2008 of $3 million compared
to $24 million in 2007. The effect on basic net earnings per common
share was a charge of $0.01 (2007 - $0.05).
- Charges related to the net effect of stock-based compensation and the
associated equity forwards of $9 million in 2008 compared to a charge
of $19 million in 2007. The effect on basic net earnings per common
share was a charge of $0.04 (2007 - $0.08). The non-cash charge on
equity forwards resulted from a decrease in the Company's share price
during the third quarter of 2008.
Excluding the above items, operating income, EBITDA(2) and basic net
earnings per common share in the third quarter of 2008 improved compared to
the third quarter of 2007.
Commenting on the Company's performance, Galen G. Weston, Loblaw
Companies Limited Executive Chairman said: "Third quarter performance showed
some signs of progress towards our goal of becoming an effective selling
organization. We also continued to realize benefits from our improved buying,
cost management and operating procedures. However, we are preparing for a
challenging close to the current year and start to the next, driven by the
uncertain economy and continued competitive pressures."
(1) To be read in conjunction with "Forward-Looking Statements".
(2) See Non-GAAP Financial Measures.
Highlights of the Quarter
-------------------------
- The Company remains on track and is progressing well in all areas of
its five point plan to drive profitable sales momentum: Back-to-Best
great food renewal in Ontario, western Canada refurbishment, local
market merchandising, foundational infrastructure focus, and private
label innovation.
- Total sales were $9,493 million in the third quarter of 2008 compared
to $9,137 million in the same period last year, an increase of 3.9%.
Same-store sales in the quarter increased by 3.0%. Sales and same-
store sales growth in the third quarter of 2008 were negatively
impacted by approximately 0.7% as a result of a shift of the
Thanksgiving holiday into the fourth quarter of 2008. Total sales
growth in both food and drugstore were good in the quarter. General
merchandise sales declined compared to the third quarter of 2007 due
to unseasonable weather and the markdown of merchandise to sell
through seasonal inventory. Gas bar sales continued to be strong in
the third quarter as a result of fuel price inflation as well as
volume growth. Positive customer count growth was achieved in the
third quarter of 2008, while item count growth remained flat versus
the same period last year. The Company's analysis indicated that
moderate internal retail food price inflation was experienced in the
third quarter of 2008.
- Operating income increased by $61 million, or 24.4%, to $311 million
in the third quarter of 2008, compared to $250 million in the third
quarter of 2007. Operating margin was 3.3% for the third quarter of
2008 compared to 2.7% in 2007. Lower restructuring and net stock-
based compensation costs, higher sales and the impact of the
Company's cost reduction initiatives contributed to the increase in
operating income and operating margin.
- Basic net earnings per common share increased 13 cents or 30.2% to
$0.56 for the third quarter of 2008, compared to $0.43 in the same
quarter last year. EBITDA(1) for the quarter was $501 million,
representing an increase of 16.5% compared to $430 million in the
second quarter of 2007. EBITDA margin(1) increased to 5.3% from 4.7%
in 2007.
- Free cash flow(1) for the third quarter of 2008 was $87 million
compared to $117 million in the third quarter of 2007. The change was
primarily due to a decrease in cash flows from operating activities,
specifically working capital of $58 million and a decrease in capital
expenditures of $19 million compared to the third quarter of last
year. On a year-to-date basis, free cash flow(1) was negative
$265 million compared to $67 million in 2007. The year-to-date change
is primarily due to a decrease in cash flows from working capital of
$299 million, partially offset by a decrease in capital expenditures
of $43 million.
- During the third quarter of 2008, the Company completed two financing
transactions which generated $518 million. In June 2008, a preferred
share public offering for net proceeds of $218 million (net of
transaction costs) was closed and in September 2008, $300 million of
credit card receivables were securitized. The proceeds enabled the
Company to repay short term borrowings from its $800 million credit
facility. As at October 4, 2008, $273 million was drawn on this five
year committed credit facility.
- The Company's ongoing investment in lower food prices, to drive
customer value perceptions, continues to have a negative impact on
earnings. Reasonable progress was achieved in the third quarter of
2008 to help support these investments:
- The Company achieved improved year-over-year shrink and on-shelf
availability in the third quarter from the continued rollout and
training of enhanced "shop-keeping" procedures.
- Buying synergies and more disciplined vendor management are
resulting in lower purchase costs for both merchandise and
not-for-resale items.
The Company remains focused on delivering profitable sales momentum,
driven by our efforts in food renewal, store enhancements, innovation,
infrastructure, and improving value for our customers. While continued
progress in cost and operating efficiencies are expected to support these
investments, it is anticipated that the unpredictable economy and aggressive
competitive environment will further challenge results for the remainder of
2008 and into 2009.
(1) See Non-GAAP Financial Measures.
Forward-Looking Statements
This Quarterly Report for Loblaw Companies Limited and its subsidiaries
(collectively, the "Company" or "Loblaw") including the Management's
Discussion and Analysis ("MD&A"), contains forward-looking statements about
the Company's objectives, plans, goals, aspirations, strategies, financial
condition, results of operations, cash flows, performance, prospects and
opportunities. Words such as "anticipate", "expect", "believe", "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. These risks and uncertainties include, but are not
limited to: changes in economic conditions; 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 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 and simplification 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 implementation of strategies and
introduction of innovative and reformulated products; unanticipated costs
associated with the Company's strategic initiatives, including those related
to compensation costs; 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 equity forward contracts relating to its common shares; changes in the
Company's tax liabilities resulting from 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; any requirement of the Company to make contributions to
its registered funded defined benefit pension plans in excess of those
currently contemplated; the inability of the Company to attract and retain key
executives; and supply and quality control issues with vendors. These and
other risks and uncertainties are discussed in the Company's materials filed
with the Canadian securities regulatory authorities from time to time,
including the Risks and Risk Management section of the MD&A included in the
Company's 2007 Annual Report. 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.
In addition to these risks and uncertainties, the material assumptions
used in making the forward looking statements contained herein and in
particular in the 2008 Third Quarter Summary and the section entitled
"Outlook" of this Quarterly Report, include: there is no material change in
economic conditions; patterns of consumer spending and preferences remain
reasonably consistent with historical trends; there is no significant change
in competitive conditions, whether related to new competitors or current
competitors; there are no unexpected changes in the Company's or its
competitors' current pricing strategies; the Company's franchised stores
perform as expected; anticipated cost savings and operating efficiencies are
achieved, including those from the Company's cost reduction and simplification
initiatives; there is no unexpected adverse change in the Company's access to
liquidity; and there are no significant regulatory, tax or accounting changes
or other significant events occurring outside the ordinary course of business.
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 2008 unaudited
interim period consolidated financial statements and the accompanying notes of
this Quarterly Report and the audited annual consolidated financial statements
and the accompanying notes for the year ended December 29, 2007 and the
related annual MD&A included in the Company's 2007 Annual Report. The
Company's 2008 unaudited interim period consolidated financial statements and
the accompanying notes have been prepared in accordance with Canadian
generally accepted accounting principles ("GAAP") and are reported in Canadian
dollars. These interim period consolidated financial statements include the
accounts of Loblaw Companies Limited and its subsidiaries and variable
interest entities ("VIEs") that the Company is required to consolidate in
accordance with Accounting Guideline 15, "Consolidation of Variable Interest
Entities", ("AcG 15"). A glossary of terms used throughout this Quarterly
Report can be found on page 85 of the Company's 2007 Annual Report. In
addition, this Quarterly Report includes the following terms: "rolling year
return on average total assets" which is defined as cumulative operating
income for the latest four quarters divided by average total assets excluding
cash and cash equivalents, short term investments, and security deposits; and
"rolling year return on average shareholders' equity" which is defined as
cumulative net earnings available to common shareholders for the latest four
quarters divided by average total common shareholders' equity.
The information in this MD&A is current to November 13, 2008, unless
otherwise noted.
Results of Operations
The Company continues to realize benefits from improved buying, cost
management and operating procedures and remained on track in all areas of its
five point plan to drive profitable sales momentum: Back-to-Best great food
renewal in Ontario; western Canada refurbishment; local market merchandising;
foundational infrastructure; and control label (private) innovation.
Growth in customer count contributed to the increase in total sales in
the third quarter of 2008, despite item count growth remaining flat versus the
same period last year. Same-store sales in the third quarter of 2008 increased
by 3.0% compared to 1.6% for the same period last year. The shift of the
Thanksgiving sales into the fourth quarter of 2008 resulted in approximately
0.7% lower growth in the third quarter of 2008. Moderate internal retail food
price inflation was experienced in the third quarter of 2008.
Operating income of $311 million for the third quarter of 2008 increased
by $61 million compared to the third quarter of 2007. The increase in
operating income was due to lower restructuring and net stock-based
compensation costs, higher sales and cost reduction initiatives. Operating
margin and EBITDA margin(1), excluding the impact of restructuring costs,
increased in the third quarter of 2008, compared to the third quarter of 2007,
as a result of the above factors.
The effective income tax rate in the third quarter of 2008 decreased to
30.3% compared to 32.2% in the third quarter of 2007, primarily due to a
change in the proportions of taxable income earned across different tax
jurisdictions and lower Canadian federal and certain provincial statutory
income tax rates relative to the third quarter of 2007 which was partially
offset by an increase in income tax accruals relating to certain income tax
matters.
Net earnings were $155 million in the third quarter of 2008, a 32.5%
increase compared to $117 million in the same period last year. For the third
quarter of 2008, basic net earnings per common share were $0.56 compared to
$0.43 in 2007, an increase of 30.2%.
Sales
Sales for the third quarter increased by 3.9% to $9,493 million compared
to $9,137 million in the third quarter of 2007. Total sales growth in both
food and drugstore were good in the quarter while general merchandise sales
declined compared to the third quarter of 2007 due to unseasonable weather and
the markdown of merchandise to sell through seasonal inventory. Gas bar sales
continued to be strong in the third quarter as a result of fuel price
inflation and volume growth. Moderate internal retail food price inflation
contributed to the same-store sales increase of 3.0% in the quarter.
(1) See Non-GAAP Financial Measures.
The following factors explain the major components in the change in sales
for the third quarter of 2008 compared to same period in 2007:
- same-store sales growth of 3.0%;
- a shift in Thanksgiving holiday sales into the fourth quarter of 2008
resulted in lower sales and same-store sales growth of approximately
0.7% during the third quarter of 2008;
- continued strong gas bar sales resulting from both fuel price
inflation and volume growth;
- the Company experienced moderate internal retail food price inflation
for the third quarter of 2008 although national food price inflation
as measured by "The Consumer Price Index for Food Purchased from
Stores" was 5.4% for the third quarter of 2008 compared to 2.2% in
the same period of 2007. This measure of inflation does not
necessarily reflect the effect of inflation on the specific mix of
goods sold in Loblaw stores; and
- during the third quarter of 2008, 8 new corporate and franchised
stores were opened and 15 were closed, resulting in a net decrease of
0.2 million square feet or 0.3%. During the latest four quarters, net
retail square footage remained flat despite the opening of 29 new
corporate and franchised stores, inclusive of stores that underwent
conversions and major expansions, and the closure of 35 stores.
For the first three quarters of the year, sales increased by 2.9%, or $640
million, to $23,057 million year-to-date. The following factors in addition to
the quarterly factors mentioned above further explained the change in
year-to-date sales over the same period in the prior year:
- same-store sales growth of 2.2%; and
- in the first three quarters, 21 new corporate and franchised stores
were opened, including stores which underwent conversions and major
expansions, and 27 stores closed.
Operating Income
Operating income of $311 million for the third quarter of 2008 compared
to $250 million in the same period of 2007, an increase of 24.4%. Operating
margin was 3.3% for the third quarter of 2008 compared to 2.7% in 2007. The
increase in operating income was mainly due to lower restructuring and net
stock-based compensation costs, higher sales and cost reduction initiatives
that have been implemented throughout the Company.
The year over year change in the following items influenced operating
income for the third quarter of 2008 compared to the third quarter of 2007:
- charge of $3 million (2007 - $24 million) related to restructuring
costs; and
- charge of $9 million (2007 - charge of $19 million) related to the
net effect of stock-based compensation and the associated equity
forwards. A non-cash charge on equity forwards resulted from a
decrease in the Company's share price during the third quarter of
2008.
Excluding the above items, operating income in the third quarter of 2008
improved compared to the third quarter of 2007.
After factoring in the above items, operating margin and EBITDA margin(1)
increased in the third quarter of 2008. The Company's focus on cost reduction,
including shrink initiatives has improved margins in the third quarter of 2008
compared to the third quarter of 2007. Buying synergies and more disciplined
vendor management are resulting in lower purchase costs for both merchandise
and not-for-resale items.
The Company experienced higher store labour costs in the third quarter of
2008 as a result of increased wage rates and investments in training compared
to the third quarter of 2007. Labour productivity decreased slightly in the
third quarter of 2008 compared to the same period last year but has remained
consistent on a year-to-date basis.
EBITDA(1) increased by $71 million, or 16.5%, to $501 million in the
third quarter of 2008 compared to $430 million in the third quarter of 2007.
EBITDA margin(1) increased in the third quarter of 2008 to 5.3% from 4.7% in
the comparable period of 2007. Lower restructuring and net stock-based
compensation costs, higher sales and the impact of the Company's cost
reduction initiatives have contributed to the increase in EBITDA and EBITDA
margin.
Year-to-date operating income for 2008 increased by $127 million, or
21.1%, to $729 million, and resulted in an operating margin of 3.2% as
compared to 2.7% in the corresponding period in 2007. During the first three
quarters of 2008, the Company recorded restructuring charges of $7 million
(2007 - $186 million) of which $3 million (2007 - $168 million) related to
Project Simplify, income of $1 million (2007 - charge of $16 million) related
to the store operations, and a charge of $5 million (2007 - $2 million)
related to the supply chain network. In addition, the Company recognized in
operating income a year-to-date charge of $24 million (2007 - $20 million) for
the net effect of stock-based compensation and the associated equity forwards.
Excluding the above items, year-to-date operating income for 2008 decreased
compared to the corresponding period in 2007.
Year-to-date EBITDA(1) increased by $134 million, or 12.7%, to $1,190
million compared to $1,056 million in the corresponding period in 2007. EBITDA
margin(1) increased to 5.2% year-to-date compared to 4.7% for the same period
last year. The year-to-date increase in EBITDA(1) and EBITDA margin(1) was due
to lower restructuring charges, higher sales and cost reduction initiatives.
(1) See Non-GAAP Financial Measures.
Interest Expense and Other Financing Charges
Interest expense and other financing charges for the third quarter of
2008 was $80 million compared to $76 million in the same period of 2007. The
following items impacted interest expense:
- interest on long term debt of $85 million (2007 - $87 million);
- interest income on financial derivative instruments, which includes
the effect of the Company's interest rate swaps, cross currency basis
swaps and equity forwards, of $1 million (2007 - charge of
$5 million);
- net short term interest expense of nil (2007 - income of $5 million);
- interest income on security deposits of $2 million (2007 -
$5 million);
- interest expense of $6 million (2007 - $6 million) was capitalized to
fixed assets; and
- dividends on capital securities of $4 million (2007 - nil).
Interest expense and other financing charges year-to-date was $198
million compared to $193 million in 2007.
Income Taxes
The effective income tax rate in the third quarter of 2008 decreased to
30.3%, compared to 32.2% in the third quarter of 2007, and the year-to-date
effective income tax rate increased to 31.5% in 2008 compared to 30.1% in
2007. The quarter over quarter reduction in the effective income tax rate is
primarily due to a change in the proportions of taxable income earned across
different tax jurisdictions and lower Canadian federal and certain provincial
statutory income tax rates relative to the third quarter of 2007 which was
partially offset by an increase in income tax accruals relating to certain
income tax matters. The year over year increase in the effective income tax
rate is primarily due to an increase in income tax accruals relating to
certain income tax matters which is partially offset by a change in the
proportions of taxable income earned across different tax jurisdictions and
lower Canadian federal and certain provincial statutory income tax rates
relative to the third quarter of 2007.
Net Earnings
Net earnings for the third quarter increased by $38 million, or 32.5%, to
$155 million from $117 million in the third quarter of 2007 and increased by
$67 million, or 23.1%, to $357 million year-to-date from $290 million in 2007.
Basic net earnings per common share for the third quarter increased by $0.13,
or 30.2%, to $0.56 from $0.43 in the third quarter of 2007 and increased by
$0.24, or 22.6%, to $1.30 year-to-date compared to $1.06 for the same period
last year.
Basic net earnings per common share were affected in the third quarter of
2008 compared to the third quarter of 2007 by the following:
- charge of $0.01 (2007 - $0.05) per common share related to
restructuring costs; and
- charge of $0.04 (2007 - $0.08) per common share for the net effect of
stock-based compensation and the associated equity forwards.
Year-to-date basic net earnings per common share
for 2008 as compared to the same period in 2007 was affected by the
following:
- charge of $0.02 (2007 - $0.44) per common share related to
restructuring costs; and
- charge of $0.11 (2007 - $0.09) per common share for the net effect of
stock-based compensation and the associated 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 0.59:1 at the end of the third quarter of 2008 compared to 0.71:1 at the
end of the third quarter of 2007 and 0.67:1(2) at year end 2007. Equity for
the purpose of calculating the net debt 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 2008 when
compared to 2007 was due to a decrease in commercial paper and short term debt
and an increase in cash and cash equivalents, short term investments, security
deposits and the issuance of capital securities. The change in this ratio from
year end 2007 is due to a decrease in commercial paper, offset by the increase
in short term debt and the issuance of capital securities. The interest
coverage ratio was 3.4 times for the third quarter of 2008 compared to 2.9
times in 2007. For further details on net debt(1) to equity ratio and interest
coverage ratio, see note 14 to the unaudited interim period consolidated
financial statements.
The rolling year return on average total assets(1) at the end of the
third quarter of 2008 increased to 6.9%, compared to (0.7)% for the comparable
period in 2007, and to 5.8%(2) at year end 2007. The rolling year return on
average shareholders' equity at the end of the third quarter of 2008 increased
to 7.1%, compared to (7.9)% for the comparable period of 2007, and remained
consistent with 6.0%(2) at year end 2007. The ratios in the third quarter of
2007 were negatively impacted by the decline in cumulative operating income
for the latest four quarters including the negative impact of the $800 million
non-cash goodwill impairment charge recorded in the fourth quarter of 2006.
(1) See Non-GAAP Financial Measures.
(2) See page 12 of the Company's 2007 Annual Report.
Dividends
Loblaw's Board of Directors declared a dividend equal to $0.21 per common
share with a payment date of October 1, 2008 and $0.5394 per preferred share
Series A with a payment date of October 31, 2008.
Dividends on the second preferred share Series A are reported as a
component of interest expense and other financing charges in the statement of
earnings commencing in the third quarter of 2008.
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 and
274,173,564 common shares were outstanding at quarter end. In addition, 12.0
million second preferred shares Series A is authorized and 9.0 million of
these shares were outstanding at the end of the third quarter of 2008. The
preferred shares are classified as capital securities and are included in
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 $399 million in
2008 compared to $448 million in the comparable period in 2007. The decreases
in cash flows from operating activities for the third quarter were mainly due
to the change in non-cash working capital as a result of changes in
inventories and accounts payable and accrued liabilities; which were partially
offset by the increase in operating income, excluding the impact of
restructuring costs. On a year-to-date basis, cash flows from operating
activities were $362 million compared to $737 million in 2007. The
year-to-date decreases in cash flows from operating activities were mainly due
to the change in non-cash working capital as a result of changes in
inventories, accounts receivable, accounts payable and accrued liabilities and
income taxes and a decrease in operating income, excluding the impact of
restructuring costs.
Cash Flows from (used in) Investing Activities
Third quarter cash flows from investing activities were $91 million
compared to $351 million used in 2007. On a year-to-date basis, cash flows
used in investing activities were $180 million compared to $545 million in
2007. The third quarter and year-to-date changes were primarily due to
decreases in cash flows used in short term investments, capital expenditures
and by a change in cash flows from credit card receivables, after
securitization. Capital investment for the third quarter amounted to $197
million (2007 - $216 million) and $397 million (2007 - $440 million)
year-to-date.
During the third quarter of 2008, $300 million (2007 - $100 million) of
credit card receivables were securitized and $300 million (2007 - $225
million) year-to-date by President's Choice Bank ("PC Bank") through the sale
of a portion of the total interest in these receivables to an independent
trust. The securitization yielded a net gain of $1 million in 2008 (2007 -
nominal net loss) based on the assumptions disclosed in note 10 of the
consolidated financial statements for the year ended December 29, 2007
included in the Company's 2007 Annual Report. The independent trusts' recourse
to PC Bank's assets is limited to PC Bank's retained interests and is further
supported by the Company through a standby letter of credit for $116 million
(2007 - $89 million) on a portion of the securitized amount.
Cash Flows used in Financing Activities
Third quarter cash flows used in financing activities were $417 million
in 2008 compared to $126 million in 2007. During the third quarter of 2008,
the change in cash flows from commercial paper was $252 million as a result of
a reduction in commercial paper levels, the change in cash flows from the
issuance of capital securities was $218 million, and the change in cash flows
used in short term debt was $831 million as a result of an increase in short
term debt as described below. On a year-to-date basis, cash flows used in
financing activities were $210 million compared to cash flows used in
financing activities of $306 million in 2007. On a year-to-date basis, the
change in cash flows used in commercial paper was $1 million, the change in
cash flows used to retire long term debt was $394 million, the change in cash
flows used in short term debt was $33 million, the change in cash flows from
the issuance of new long term debt was $276 million, and the change in cash
flow from the issuance of capital securities was $218 million.
In the first quarter of 2008, the Company entered into an $800 million,
5-year committed credit facility, provided by a syndicate of banks, which
contains certain financial covenants. This facility is the primary source of
the Company's short term funding requirements and permits borrowings having up
to a 180-day term that accrue interest based on short term floating interest
rates. This facility replaced a $500 million, 364-day committed credit
facility which had no financial covenants and permitted borrowings having up
to a 180-day term that accrued interest based on short term floating interest
rates. As at October 4, 2008, $273 million was drawn on the new 5-year
committed credit facility.
(1) See Non-GAAP Financial Measures.
During the second quarter of 2008, the Company issued USD $300 million of
fixed-rate unsecured notes in a private placement debt financing which
contains certain financial covenants. The notes were issued in two equal
tranches of USD $150 million with 5 and 7 year maturities at interest rates of
6.48% and 6.86%, respectively. The Company entered into two fixed cross
currency swaps to manage the foreign exchange and US interest rate risk. These
cross currency swaps were designated as cash flow hedges (see note 13 to the
unaudited interim period consolidated financial statements). The net proceeds
from the issue of the notes were used to repay maturing debt obligations,
including a portion of the $390 million of 6.00% Medium Term Notes ("MTN")
which matured in June 2008.
During the third quarter, the Company closed its Canadian public offering
of 9 million cumulative redeemable convertible Second Preferred Shares, Series
A, at a price of $25.00 per share, to yield 5.95% per annum, for an aggregate
gross amount of $225 million and the net proceeds of $218 million were added
to the general funds of the Company. The preferred shares have been listed and
posted to trade on the Toronto Stock Exchange ("TSX") under the symbol
"L.PR.A". Dominion Bond Rating Service ("DBRS") assigned a rating of Pfd-3
with a Negative trend and Standard & Poor's ("S&P") assigned a rating of P-3
(high) to the Company's preferred shares.
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. During the third quarter,
$300 million of credit card receivables were securitized by PC Bank, through
the sale of a portion of the total interest in these receivables to an
independent trust. A portion of the securitized receivables are in an
independent trust facility with a term of 364 days, subject to annual renewal.
If the term of this facility is not renewed, collections will be accumulated
prior to the expiry and the amount of that portion of the securitized
receivables will be repaid to the trust.
The financing transactions completed earlier in the year, existing cash
and cash equivalents, short term investments and security deposits included in
other assets, future operating cash flow and the amounts available to be drawn
against its credit facility are expected to enable the Company to repay its
2009 5.75% MTN debt maturities of $125 million, finance its capital investment
program and fund its ongoing business requirements including working capital
and pension plan funding. The Company believes it has sufficient funding
available to meet these requirements over the next twelve months. Given
reasonable access to capital markets, the Company does not forsee any
difficulty in securing financing to satisfy its long term obligations.
With respect to the capital investment program, we are continuing to
invest in renovations to our existing store base, with a focus on generating
profitable same-store sales growth, and in upgrading our information
technology and supply chain infrastructure. Our estimate of capital
expenditures for the remainder of 2008 is approximately $300 million.
During the first three quarters of 2008, the Company's MTN, other notes
and debentures ratings and commercial paper ratings were downgraded twice by
DBRS and once by S&P. The following table sets out the current credit ratings
of the Company.
Dominion Bond
Rating Service Standard & Poor's
---------------------------------------------
Credit Ratings Credit Credit
(Canadian Standards) Rating Trend Rating Outlook
-------------------------------------------------------------------------
Commercial paper R-2 (middle) Negative A-2 Negative
Medium term notes BBB Negative BBB Negative
Preferred shares Pfd-3 Negative P-3 (high)
Other notes and debentures BBB Negative BBB Negative
-------------------------------------------------------------------------
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. As a result of
the DBRS downgrade of the short term credit rating, the Company has limited
access to commercial paper.
The Company's ability to obtain funding from external sources may be
restricted by further downgrades in the Company's credit ratings and should
the Company's financial performance and condition deteriorate. In addition,
credit and capital markets are subject to inherent global risks that may
negatively affect the Company's access and ability to fund its short term and
long term debt requirements. The Company mitigates these risks by maintaining
appropriate levels of cash and cash equivalents, short term investments and
security deposits, actively monitoring market conditions and diversifying its
sources of funding and maturity profile. The Company also employs risk
management strategies including forward-looking liquidity contingency plans.
Loblaw renewed its Normal Course Issuer Bid during the second quarter of
2008 to purchase on the TSX, or 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 Toronto Stock
Exchange, Loblaw may purchase its shares 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 2008 or in 2007.
Free Cash Flow(1)
Free cash flow(1) for the third quarter of 2008 was $87 million compared
to $117 million in the third quarter of 2007. The change was primarily due to
a decrease in cash flows from operating activities, specifically working
capital of $58 million and a decrease in capital expenditures of $19 million
compared to the third quarter of last year. On a year-to-date basis, free cash
flow(1) was negative $265 million compared to $67 million in 2007. The
year-to-date change is primarily due to a decrease in cash flows from working
capital of $299 million, partially offset by a decrease in capital
expenditures of $43 million.
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.
During the first quarter of 2008, the Company was notified that an Event
of Termination of the independent funding trust agreement for the Company's
franchisees had occurred as a result of the credit rating downgrade by DBRS of
the long term credit rating to "BBB (high)" from "A (low)". As a result of the
Event of Termination, during the second quarter of 2008, the Company finalized
an alternative financing arrangement for the independent funding trust in the
form of a $475 million, 364-day revolving committed credit facility provided
by a syndicate of banks.
The gross principal amount of loans issued to the Company's independent
franchisees outstanding at the end of the third quarter of 2008 was $380
million (2007 - $418 million) including $151 million (2007 - $148 million) 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% (2007 - 10%) of the principal amount of the loans
outstanding at any point in time, $66 million (2007 - $44 million) as of the
end of the third quarter of 2008. The standby letter of credit has never been
drawn upon. This credit enhancement allows the independent funding trust to
provide favourable financing terms to the Company's independent franchisees.
As well, each independent franchisee provides security to the independent
funding trust for its obligations by way of a general security agreement. In
the event that an independent franchisee defaults on its loan and the Company
has not, within a specified time period, assumed the loan, or the default is
not otherwise remedied, the independent funding trust would assign the loan to
the Company and draw upon this standby letter of credit. The Company has
agreed to reimburse the issuing bank for any amount drawn on the standby
letter of credit. This new alternative financing will result in a higher
relative financing cost to the franchisees, which in turn could adversely
affect operating results. The new financing structure has been reviewed and
the Company determined there were no material implications with respect to the
consolidation of VIEs.
Quarterly Results of Operations
The following is a summary of selected consolidated financial information
derived from the Company's unaudited interim period consolidated financial
statements for each of the eight most recently completed quarters. This
information was prepared in accordance with Canadian GAAP and is reported in
Canadian dollars. Each of the quarters presented is 12 weeks in duration
except for the third quarter, which is 16 weeks in duration. Every 5 years the
fourth quarter is 13 weeks in duration and this will occur in fiscal 2008.
Summary of Quarterly Results
(unaudited)
Third Quarter Second Quarter
($ millions except where
otherwise indicated) 2008 2007 2008 2007
-------------------------------------------------------------------------
Sales $ 9,493 $ 9,137 $ 7,037 $ 6,933
Net earnings (loss) $ 155 $ 117 $ 140 $ 119
-------------------------------------------------------------------------
Net earnings (loss) per
common share
Basic ($) $ 0.56 $ 0.43 $ 0.51 $ 0.43
Diluted ($) $ 0.56 $ 0.43 $ 0.51 $ 0.43
-------------------------------------------------------------------------
Summary of Quarterly Results
(unaudited)
First Quarter Fourth Quarter
($ millions except where
otherwise indicated) 2008 2007 2007 2006
-------------------------------------------------------------------------
Sales $ 6,527 $ 6,347 $ 6,967 $ 6,784
Net earnings (loss) $ 62 $ 54 $ 40 $ (756)
-------------------------------------------------------------------------
Net earnings (loss) per
common share
Basic ($) $ 0.23 $ 0.20 $ 0.14 $ (2.76)
Diluted ($) $ 0.23 $ 0.20 $ 0.14 $ (2.76)
-------------------------------------------------------------------------
Sales continued to grow in the third quarter of 2008 compared to the
third quarter of 2007. Same-store sales growth during the third quarter of
2008 increased 3.0%. Sales and same-store sales growth in the third quarter of
2008 were negatively impacted by approximately 0.7% due to timing of the
Thanksgiving holiday, which occurred one week later in 2008, resulting in a
shift in holiday sales into the fourth quarter of 2008 compared to the third
quarter of 2007. Sales increased in each quarter compared to the prior year
due to increases in same-store sales.
(1) See Non-GAAP Financial Measures.
Fluctuations in quarterly net earnings reflect the impact of a number of
specific charges including restructuring and other charges, the net effect of
stock-based compensation and the associated equity forwards, an inventory
liquidation charge of $68 million in the fourth quarter of 2006, and a
non-cash goodwill impairment charge of $800 million in the fourth quarter of
2006. Earnings in the third quarter of 2008 benefited from the Company's cost
reduction initiatives, whereas earnings in the first and second quarters of
2008 and the fourth quarter of 2007 were pressured from investments in lower
retail pricing.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with Canadian GAAP.
There has been no change in the Company's internal control over financial
reporting that occurred during the sixteen weeks ended October 4, 2008 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Risks and Risk Management
Employee Future Benefit Contributions
Although the Company's registered funded defined benefit plans as of the
last filed actuarial valuations were adequately funded and historical returns
on defined pension plan assets are in line with long term expectations, there
is no assurance that these trends will continue. If the capital markets do not
recover some of the recent significant losses in the near term, the Company
may experience a significant increase in pension expense for its defined
benefit plans and it is possible that future pension plan contributions may be
significantly greater than the current projected contributions. The Company
continues to assess the impact of capital markets on its funding requirements.
Legal Proceedings
During the first quarter of 2007, the Company was one of 17 defendants
served with an action brought in the Superior Court of Ontario by certain
beneficiaries of a multi-employer pension plan in which the Company's
employees and those of its independent franchisees participate. In their claim
against the employers and the trustees of the multi-employer pension plan, the
plaintiffs claimed that assets of the multi-employer pension plan had been
mismanaged and are seeking, among other demands, damages of $1 billion. The
action was framed as a representative action on behalf of all the
beneficiaries of the multi-employer pension plan. In the second quarter of
2008, the Company received confirmation that the action against the Company
has been dismissed and in the third quarter the Company also received
confirmation that the action against the plan trustees has been dismissed.
The Company is the subject of various legal proceedings and claims that
arise in the ordinary course of business. The outcome of all of these
proceedings is uncertain. However, based on information currently available,
these claims, individually and in the aggregate, are not expected to have a
material impact on the Company.
Accounting Standards Implemented in 2008
Capital Disclosures and Financial Instruments - Disclosure and
Presentation
In December 2006, the Canadian Institute of Chartered Accountants
("CICA") issued three new accounting standards: Section 1535, "Capital
Disclosures" ("Section 1535"), Section 3862, "Financial Instruments -
Disclosures" ("Section 3862") and Section 3863, "Financial Instruments -
Presentation" ("Section 3863").
Section 1535 establishes guidelines for the disclosure of information
regarding a company's capital and how it is managed. Enhanced disclosures with
respect to the entity's objectives, policies and processes for managing
capital and quantitative disclosure about what the entity regards as capital
are required. For new disclosures refer to note 14 to the unaudited interim
period consolidated financial statements. The adoption of Section 1535 did not
have an impact on the Company's results of operations or financial condition.
Section 3862 and Section 3863 replaced Section 3861, "Financial
Instruments - Disclosure and Presentation". Section 3862 requires increased
disclosures regarding the risks associated with financial instruments and how
these risks are managed. Section 3863 carries forward standards for
presentation of financial instruments and non-financial derivative instruments
and provides additional guidance for the classification of financial
instruments, from the perspective of the issuer, between liabilities and
equity. For new disclosures refer to notes 16 and 18 to the unaudited interim
period consolidated financial statements.
