2010
Annual Report
Empire Company Limited
Focused on being the best
…together
A Legacy of
Value Creation
Empire Company Limited is committed to creating sustainable value through cash flow and income
growth, and equity appreciation. Since becoming a public company in 1982, we have done that by
focusing on businesses that we know and understand. These businesses – food retailing, real estate
and corporate investments – will continue to be our foundation and focus.
2010 Financial Highlights
($ in millions, except per share amounts)
Operations
Revenue
Operating earnings(1)
Capital gains and other items, net of tax
Net earnings
Per Share Information
Operating earnings (fully diluted)
Capital gains and other items, net of tax
Net earnings (fully diluted)
Book value
Dividends
52 Weeks Ended
May 1, 2010
52 Weeks Ended
May 2, 2009
52 Weeks Ended
May 3, 2008
$ 15,516.2
284.5
17.4
301.9
$
4.15
0.25
4.40
43.07
0.74
$ 15,015.1
261.7
3.0
264.7
$
3.97
0.05
4.02
39.07
0.70
$ 14,065.0
$
242.8
73.0
315.8
3.69
1.11
4.80
36.08
0.66
Operating Earnings (�)
(� in millions)
Dividends
(� per share)
300
225
150
75
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Value of Investment of $100
made 10 years ago
(�)
■ EMPIRE ■ S&P/TSX INDEX
400
300
200
100
FY
00
01
02 03 04 05 06 07 08 09 10
FY
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00
01
02 03 04 05 06 07 08 09 10
10-Year Operating Earnings CAGR (2)
10-Year DPS CAGR (2)
10-Year Total Return CAGR (2)
12.9%
18.1%
14.0%
(1) Operating earnings is calculated as net earnings before capital gains (losses) and other items.
(2) Compound Annual Growth Rate.
Focused on being the best…together
Focused on being the best…together
Since the privatization of Sobeys Inc. three years ago, Empire’s focus and
Since the privatization of Sobeys Inc. three years ago, Empire’s focus and
capital resources have been squarely behind food retailing and related
capital resources have been squarely behind food retailing and related
real estate, as never before. Today, these businesses generate more than
real estate, as never before. Today, these businesses generate more than
91 percent of our cash flow and 94 percent of earnings. This annual report
91 percent of our cash flow and 94 percent of earnings. This annual report
explains how the management and employees of both our food retailing
explains how the management and employees of both our food retailing
and real estate divisions are working in collaboration to support Sobeys’ goal
and real estate divisions are working in collaboration to support Sobeys’ goal
of becoming widely recognized as the best food retailer in Canada.
of becoming widely recognized as the best food retailer in Canada.
We are focused on being the best...together
We are focused on being the best...together
2010 annual report
1
Letter to
Shareholders
Steady progress
Empire achieved another record performance in fiscal 2010. Revenues increased
3.3 percent to $15.5 billion and operating earnings were up 8.7 percent to
$284.5 million or $4.15 per share. Our ability to sustain growth in the midst of
a serious economic downturn was made possible by the important decisions
we took over the past few years to trim our investment portfolio and redeploy
capital to support our increased focus on food retailing and related real estate.
Despite the turbulence in the broader economy, our core businesses delivered
stable cash flow and earnings and they continue to represent our best prospects
for steady, long-term growth.
At the same time, we have strengthened our balance sheet
which had been leveraged to finance the privatization of
Sobeys and other strategic transactions. Over the years,
we have accessed credit markets when it made sense to do
so in support of compelling growth opportunities. Equally
important however, we have prudently retired debt with
discipline, when deemed appropriate, and this past year was
no exception. Aided by another year of strong cash flow in our
food retailing business, Empire improved its ratio of funded
debt to total capital from 32.7 percent to 29.3 percent by
fiscal year-end. Improvements in Sobeys’ financial condition
and strong operating performance during fiscal 2010 secured
credit rating upgrades from both Standard and Poor’s and
DBRS credit rating agencies, with each rating Sobeys as
investment grade. Sobeys is now well positioned to access
longer-term credit at more favourable costs going forward and
has done so with its $150 million Medium Term Note issue
completed in June 2010.
Focused on being the best…together
Sobeys posted another record operating performance this
past year as the company continues to work towards its
goal to be widely recognized as the best food retailer in
the country. Sales increased 3.2 percent to $15.2 billion
and net earnings increased 15.3 percent to $262.8 million.
For the fifth consecutive year, Sobeys also achieved strong
same-store sales growth.
These results reflect Sobeys’ ongoing progress in building a
healthy and sustainable retail food business and infrastructure
for the long term, including the continued modernization
and expansion of its retail store network. During fiscal 2010,
Sobeys invested $341.4 million to enhance its ability to
better serve the needs of its customers, opening or relocating
41 stores, expanding 13 stores and closing 52 stores for a net
increase of 0.6 million square feet across the country. Over the
last five years, Sobeys has invested more than $2.0 billion in its
store network and supporting infrastructure. Today a significant
majority of our stores are at a standard we consider current.
Consolidated
Operating Earnings
(� in millions)
���.�
300
225
150
75
FY
05
06
07
08
09
10
2
EMPIRE COMPANy LIMITED
Over the last five years, Empire
has its grown operating earnings
by more than $100 million.
“ Moving forward, we will
continue to focus our
energy and resources on
the businesses we know
best – food retailing and
related real estate.”
Paul D. Sobey
President and CEO
Empire Company Limited
Equally important are the investments Sobeys has made in
business process improvements and in the engagement
and training of employees. Several years ago, Sobeys began
the migration of several legacy information systems to an
enterprise wide, integrated SAP platform. This very significant
upgrade enabled the implementation of an advanced point-of-
sale information system that now serves as the foundation for
a growing range of customer information, sales applications
and productivity tools. These include Work Force Management,
which facilitates better control of the significant cost and
service delivery requirements of our business by scheduling
our people in closer alignment with customer shopping
patterns. Fresh Item Management, another important SAP-
enabled productivity tool, allows for better planning, ordering
and production of fresh products to reduce waste without
compromising quality or consistency. In addition, Computer
Automated Ordering, an advanced forecasting system that
has improved our ability to manage inventory more precisely
to minimize product out-of-stocks, is beginning to roll out
across the company.
The standardization of our business systems has also enabled
systematic upgrades in our supply chain which have lowered
distribution costs while allowing store personnel to spend less
time replenishing inventory and more time serving our
customers. Our newest distribution centre in Vaughan, Ontario
is the latest advancement along a journey of continuous
supply chain improvement. The first of its kind in Canada, it
incorporates an automated warehouse and picking system
that has markedly reduced order selection time, improved
selection accuracy and lowered overall distribution costs.
We are just beginning to realize the potential of this facility to
assemble and ship tailored assortments on a store-by-store
basis, thereby minimizing the need for individual store
deliveries by our suppliers.
Another example of Sobeys’ continued investment in
technology can be found in the Lawtons drugstore division
which has successfully implemented Parata Max in its newest
location, a next-generation robotic dispensing technology
which increases patient safety and decreases customer wait
times for prescriptions – the first of its kind in Atlantic Canada.
Lawtons also uses robotics for both packaging and content
verification to better serve our long-term care customers.
These technologies not only enhance efficiency and safety
mechanisms, but allow our pharmacy team to provide more
consulting and counseling services to our customers.
Over the past several years, Sobeys has begun to shift from
mass marketing to a more localized approach that considers
the unique characteristics of our customers across Canada.
Our business process and systems upgrades will enable
the important next stage in this process which is all about
customer individualization. Sobeys’ industry-leading Customer
Insight Solution (“CIS”) is at the heart of our efforts to
connect more directly with our customers.
Drawing upon millions of individual customer transactions
captured every day through the Club Sobeys, Club Thrifty
Foods and AIR MILES® rewards programs, CIS is providing
unprecedented insight into the behaviours, motivations and
unique shopping occasion requirements of our customers.
The combined learning is being used to refine our decision-
making processes in marketing, merchandising and throughout
the business to create a more intimate, relevant and efficient
offering and shopping experience for our customers.
2010 ANNuAL REPORT
3
Letter to Shareholders
“ Our progress and success
thus far in pursuit of our goal
to be widely recognized as the
best food retailer in the country
tells us we are on the right
course. We will continue to
build a healthy infrastructure
to support our long-term
sustainable growth.”
“ Empire’s real estate strategy has
increased its focus on supporting
the growth of our food retailing
business. Our strategy relies firmly
on Sobeys’ substantial in-house
expertise in site selection and
property development and
Crombie REIT’s excellence in
property management.”
Bill M cEwan
President and CEO
Sobeys Inc.
Frank C. Sobey
President
ECL Properties Limited
Sobeys’ customer insight capabilities have also enabled
implementation of leading sales productivity tools including
Retail Price Optimization and Market Basket Analytics.
Retail Price Optimization is an advanced retail modeling and
forecasting technology that allows better understanding of the
decisions shoppers are making and helps to create a product
and pricing mix that will optimize sales and profitability over
time. Market Basket Analytics is an associated sales tool that
provides the intelligence to more accurately analyze the
relationships between items that individual customers place
in their shopping baskets and allows improved predictability
about what other items they are most likely to purchase.
This information is helping our category managers make
more informed decisions on product assortment, placement,
pricing and promotional activity.
In addition, these new tools and information capabilities have
enabled the successful repositioning of our Compliments
private label program. Re-launched in October 2009 with
the benefit of the Club Sobeys, Club Thrifty Foods, and
AIR MILES® rewards programs, the support of Inspired
magazine and distinctive new packaging, our private label
program now more clearly communicates the qualities of
Sobeys’ value-oriented, national brand-equivalent and
affordable indulgence tiers. The significant enhancements to
our Compliments and Sensations by Compliments private label
brands as well as the conversion of our value tier to Signal are
well underway and the response from customers across the
country has been extremely positive.
While smart use of new technology is always important, the
efforts are not just about providing tools and processes. Equally
important is the ability to create a learning culture where
employees are afforded the development opportunities to
get the job done well, in line with our strategic objectives.
There is a powerful winning spirit that has taken root at Sobeys
and you can see it in the appearance of our stores, the
presentation of our offering, the energy of our employees
and most importantly, in the feedback from our customers.
There is no quick or easy path to sustainable success in the
food retailing business. Our ongoing success depends on
making steady progress along a continuum of change and
challenge while prioritizing investments and initiatives, paying
attention to details, and executing well and consistently.
4
EMPIRE COMPANy LIMITED
AIR MILES® is a registered trademark of AIR MILES International Trading B.V. used under license by LoyaltyOne, Inc.
We have more work to do in realizing Sobeys’ goal of becoming
widely recognized as the best food retailer in the country, but
our success to date tells us we are well on course.
We are also pleased with the continuing progress of Empire’s
real estate division. During the past year, wholly-owned
ECL Developments Limited worked hand-in-hand with Sobeys’
national and regional site selection teams to support the
growth of our food retailing operations. In fact, subsequent to
year-end, we took this important relationship one step further
by internalizing all site selection and development work for
our food retailing network within Sobeys itself. During fiscal
2010, eight shopping plazas were completed – representing
over 300,000 square feet of gross leasable area. Another
20 properties in our pipeline were in various stages of
development at fiscal year-end. Of these properties, 80 percent
are anchored by a Sobeys business.
Crombie REIT, in which Empire holds a 47.4 percent interest,
has first option on these developments and purchased eight
shopping plazas from Empire (75 percent of which are
anchored by a Sobeys business) during the fiscal year for
net cash proceeds of $56.7 million. Crombie REIT’s operating
income contribution to Empire was $18.6 million in fiscal
2010. We continue to be pleased with Crombie REIT’s
operating performance during their most recent fiscal year, as
they recorded higher total property revenue and occupancy
levels remained strong. We were also pleased to see the
market price of Crombie REIT units increase by approximately
69 percent in fiscal 2010.
Genstar’s operating income contribution to Empire was
$31.0 million compared to $33.6 million in fiscal 2009.
This contribution level was higher than expected, particularly
given the weakness in Western Canada’s housing market
during most of fiscal 2010. Despite being a cyclical business,
Genstar has provided attractive returns over time. Since
purchasing our initial 35.7 percent stake in Genstar for
$29 million in January 2001, this investment has returned
cash to date in excess of $300 million. During fiscal 2010, we
increased our investment interest in Genstar to 40.7 percent
from 35.7 percent.
Investments and other operations
Wholly-owned Empire Theatres continued to generate
same-theatre revenue growth in fiscal 2010 thanks to a
steady stream of high-quality movie releases and ongoing
efforts to improve our customers’ entertainment experiences.
Attendance was positively affected by the continuing roll-out
of digital cinema and RealD 3D, and the growing popularity
of 3D movie releases.
Wajax Income Fund reported that their financial performance
in calendar 2009 was impacted by reduced economic activity
which curtailed demand in the company’s mobile equipment,
industrial components and power systems businesses. We
continue to believe Wajax is well managed and is financially
well positioned to take advantage of growth opportunities as
the economy continues to recover.
The promising road ahead
Moving forward, we will continue to focus our energy and
resources on the businesses we know best – food retailing
and related real estate. Our significant investment in Sobeys
is evidence of not only our passion for food retailing but our
belief in its potential for growth.
Sobeys’ management team has skillfully directed the
modernization of its store and distribution networks. They
have continued to grow sales and profitability in a very
competitive market by engaging employees and providing
them the tools they need to deliver better value to the
customer. We are very pleased with Sobeys’ progress to date
and we are confident the best is yet to come.
A word of thanks
On behalf of our shareholders, management, and our Board,
we would like to pay special tribute to John Bragg, who will
be retiring from the Board at our September 10, 2010 Annual
General Meeting. John’s counsel and advice over the past
12 years to our Board, management and the Sobey family,
have been invaluable. We are deeply indebted to John for his
wise counsel; indeed he has been a mentor to many of us in
management and hopefully will continue to be in the future.
As always, the past year’s success was made possible through
the skill and dedication of our management teams, our
franchise partners and affiliates, and the everyday efforts of
approximately 90,000 people employed throughout our
combined operations. With their support, and the continued
loyalty of our suppliers, business partners and investors, I am
confident Empire will extend its record of long-term value
creation in the years ahead.
paul D. Sobey
President and CEO
Empire Company Limited
June 25, 2010
2010 ANNuAL REPORT
5
An Integrated
Strategy
for Growth
Food Retailing
Sobeys owns or franchises more than 1,300 stores located in every province of Canada under retail
banners that include Sobeys, IGA extra, Thrifty Foods, IGA, Foodland, FreshCo and Price Chopper, as
well as Lawtons Drug Stores. Our five core retail formats are designed to ensure that we have the right
offering in the right-sized stores for each individual market we serve – from our full-service format
to the convenience format, each tailored to satisfy the unique occasion-based needs of our customers.
Competitive strengths
Strategic priorities
• Our passionate “best in food” focus supported by our
fresh food expertise.
• Our customer focus and superior service delivery.
• Our committed and knowledgeable national, regional
and local management teams, franchisees, affiliates and
store operators.
• Our investment in innovation including our Compliments
private label brand.
• Our enhanced supply chain, back shop processes,
systems and tools that support our employees’ ability
to serve the needs of our customers.
• Our industry-leading customer insight capabilities that
are helping us build stronger, one-to-one relationships with
our customers.
We are determined to be widely recognized as the best food
retailer in Canada. Our focus in fiscal 2010 remained on three
key imperatives:
• Continued innovation and differentiation in our product and
service offering through our customer insight capabilities.
• Continued improvement in operational execution through
the engagement and development of our employees with
tools and processes to get the job done well.
• Reducing our cost base and improving sales
through the systematic implementation of
store and sales productivity initiatives.
Key performance indicators
Food Retailing
Revenue
(� in millions)
Food Retailing
Operating Income
(� in millions)
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400
300
200
100
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07
08
09
10
6
EMPIRE COMPANy LIMITED
1,334
stores
28.1
million square feet
836
communities
Real Estate
Empire’s real estate business is focused on the ownership of retail and office properties through a
47.4 percent ownership interest in Crombie REIT and residential land development through an ownership
interest in Genstar which operates principally in communities in Ontario and Western Canada.
Competitive strengths
Strategic priorities
• Our knowledge, experience and management strength
in real estate.
• The close working relationship between Sobeys and
Crombie REIT optimizes the development of food-anchored
shopping plazas across Canada.
• Crombie REIT has the first right to acquire properties from
Empire which reduces risk and enhances opportunities for
both businesses.
• Through a 40.7 percent interest in Genstar, our
residential property operation has attractive land holdings,
primarily in Western Canada, and a proven, experienced
management team.
Real estate development at Empire is focused on establishing
both certainty and a healthy pace of growth for Sobeys and
Crombie REIT. Our strategy relies firmly on Sobeys’ substantial
in-house expertise in site selection and property development
and Crombie REIT’s excellence in property management.
At all times, we are guided by criteria that exemplify Empire’s
investment discipline and tradition of building assets to own
for the long term.
Key performance indicators
Real Estate
Revenue (�)
(� in millions)
Real Estate
Funds from Operations (�)
(� in millions)
■ RESIDENTIAL ■ COMMERCIAL
■ RESIDENTIAL ■ COMMERCIAL
240
180
120
60
60
45
30
15
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FY
06
07
08
09
10
FY
06
07
08
09
10
Projects
in the pipeline
20 projects
1.7 million square feet
4 provinces
(1) Fiscal 2005-2008 have been restated to exclude Sobey Leased Properties which was sold on April 22, 2008.
2010 ANNuAL REPORT
7
Food
Retailing
At Sobeys, we know sustainable growth depends on building our business
one relationship at a time. We do this through a superior understanding of
our customers and by consistently meeting their needs.
understanding customers was easier before the dawn
of modern grocery retail chains. Small shopkeepers knew
their customers intimately – what they bought, how
much they spent and what mattered most when it came
to retaining their business. Such information allowed
merchants to confidently source the right products,
quickly recognize the impact of merchandizing decisions
and earn the continuing loyalty of their best customers.
In our stores – where excellence in fresh service is at the
heart of our distinctive banner and brand offerings – the
personal touch still makes a big difference. But as our
business continues to grow, an intimate understanding of
the preferences and expectations of our customers also
depends on the disciplined application of new technology.
Our superior capability in customer insight is one of the
best examples of our progress to date.
Four years ago, we established the technological foundation
for customer insight with the migration of most business
processes onto a single information system platform.
The next order of business was a common point-of-sale
transaction system and the subsequent development
and roll-out of data collection mechanisms in the form
of rewards programs. Since then, Club Sobeys and Club
Thrifty Foods rewards programs in Ontario and Western
Canada have proved to be enormously popular additions to
our AIR MILES® rewards program available in Québec and
Atlantic Canada. Today, the majority of our customers earn
valued points and rewards every time they shop with us.
While the rewards programs help attract and retain
customers, their real benefit lies in the rich transactional
information that informs our customer insight activities.
Over the past two years, we have worked closely with
industry partners to create a proprietary customer
insight capability that is the most advanced of its kind in
Canadian food retailing. Partnering with us is Clear Cell,
a customer intelligence consulting firm that is providing
valued expertise and training in the organization and
practical application of customer data into strategic action.
Today, every purchase made through our rewards
programs is anonymously captured in a virtual information
warehouse where sophisticated algorithms sift through
raw data to detect generic patterns and segment
customer shopping habits into actionable models. While
the insights yielded by this process do not dictate actions,
they are changing the way we are making decisions, with
a powerful new customer lens that allows us to better
understand customer needs and behaviour and predict
the outcome of our initiatives with a higher degree of
confidence. Customer insight has application across a wide
range of business functions from product development
to merchandizing and almost everything in between.
Knowing
our customers
2010 ANNuAL REPORT
9
Food Retailing Knowing our customers
We are harnessing the power of new technology to create
stronger, more valuable relationships with our customers.
The majority of our shoppers belong to the Club Sobeys, Club Thrifty Foods or AIr MILES®
programs because they are a great way to earn points that can be spent in-store or redeemed
online for valuable rewards. For Sobeys, the millions of transactions that take place through
these programs yield unprecedented insight into the needs and motivations of our customers.
Such insight is helping to drive our evolution from mass to individual marketing. Our rewards
program members receive tailored e-mail offers with store and vendor coupons that have
been automatically selected to match their interests.
Customer insight in action can be most readily seen in
our promotional activities where it is facilitating our move
from “one-to-many” to “one-to-one” relationships with
our customers. While the weekly flyer is still a promotional
centrepiece in the Canadian grocery business, we now
distribute unique e-mail offers to our rewards program
members with store and vendor coupons that are
systematically assigned to appeal to their particular
interests and requirements. For Sobeys, such customer-
specific promotions are a much more effective way
to increase basket size, stimulate purchases in relevant
categories and respond to competitive developments
with greater precision and effectiveness.
Customer insight also plays an increasingly important role
in other areas of our business. As a merchandising tool, it
is helping category managers better anticipate the impact
of pricing and assortment decisions on customer behaviour
before we make them. Based on sales volumes alone,
for example, we might have once been inclined to de-list
a low-selling product that actually had a high level of
engagement with our customers. Customer insight is
allowing us to focus more clearly on price and assortment
through the eyes of our customers, to better satisfy their
needs while optimizing overall sales and profitability.
While customer insight is already a strong core
competency and competitive advantage for Sobeys, we
have realized only a fraction of its full potential. We will
continue to refine our capabilities and extend what we
are learning into every facet of our business. We will
also continue to share this knowledge with qualified
vendors and partners though our Strategic Information
Exchange. They are excited by the discoveries we are
making and are committing their best resources to help
make the most of our opportunities.
10
EMPIRE COMPANy LIMITED
AIR MILES® is a registered trademark of AIR MILES International Trading B.V.
used under license by LoyaltyOne, Inc.
“We should…”
“I want…”
“We need...”
“I like…”
Getting
to know
our customers
helps drive
growth.
At Sobeys, there is no such thing as the average customer.
Understanding the unique needs of individual shoppers and
households is critical because it allows us to increase basket
size, stimulate purchasing in relevant categories and, most
importantly, build customer loyalty. Our superior capabilities
in customer insight are helping us realize these objectives.
2010 ANNuAL REPORT
11
Food Retailing
Sara Reynolds (right), Employee
Experience Coordinator/Customer
Service Representative, Rymal
Road Sobeys, Hamilton, Ontario
is a 2010 Sobeys & Empire Future
Leader Award recipient.
People
powering performance
We continue to invest in the foundation, tools, programs and systems
required to help our people managers make the most of Sobeys’ greatest
competitive advantage.
12
EMPIRE COMPANy LIMITED
Sobeys has earned a proud and enviable reputation as an employer
that, for more than 100 years, has recognized that the foundation for
our success is in the strength of our people.
But Sobeys is not immune to the shifting workforce
and economic dynamics impacting all employers today.
We know that providing our people managers with the
foundation, tools, programs and systems to manage
their teams more effectively than any other retailer is
a competitive advantage we cannot ignore.
Managing talent strategically
Sobeys has made significant investments in tools and
programs to better understand and develop our key
talent. The introduction of 360-degree employee
feedback surveys has helped us develop the competence
and leadership capabilities of our department and
store managers while driving employee and customer
engagement store by store. These surveys have also
allowed us to address succession planning more
strategically while ensuring a greater focus on people
initiatives that will have the greatest impact.
We also continue to invest in several programs to support
our talent management strategy, as summarized below.
The Sobeys scholarship program has been redesigned
and reintroduced across the organization as the Sobeys &
Empire Work Experience & Scholarship Program. A key
element of the program, which is open to all student
employees who attend an accredited university or college,
is the Future Leader Award which provides up to $10,000
over four years to recipients who are selected based on
their long-term career fit within the Company as well as
their commitment to our organization’s core values.
We are also introducing new ways to accelerate the
development of our employees who have demonstrated
leadership potential. Regional and functional leadership
potential programs were rolled out across the company
in fiscal 2010. The program was launched in our Atlantic
Region where all of the key employees identified have
been promoted to new roles or assigned to key projects
to accelerate their careers.
Each year Sobeys sends four key individuals to the
Consumer Goods Forum’s Future Leaders Congress.
This global congress is designed to help future leaders
develop their potential to become part of senior
management, and to enhance their personal contribution
to the business.
Leveraging technology, managing our talent
Sobeys also recognizes the role technology plays in
helping our managers make better people decisions and
plan for future talent needs.
• Our Applicant Tracking System database, which
contains over 100,000 names, allows us to track,
access and assess potential new hires based on the
core competencies of the role being filled.
• Our Learning Management System (“LMS”) is being
rolled out to offer on-going training in a timely and
consistent manner. The LMS is a cost effective way to
audit, report and deliver training needs to both new and
existing employees.
• Our Talent Management System (“TMS”) will provide
easy access to talent-related data, helping our managers
make better decisions and develop more robust people
development and succession plans. The TMS will
allow direct and easy access to career and development
planning for all employees and managers.
A holistic approach to talent management
Sobeys leaders review their talent bench strength,
succession plans and talent strategy on a regular basis as
part of talent forums that are integrated into our annual
business planning cycle. This is completed with all key
stakeholders in the same room – region by region,
function by function and across the country – to leverage
Sobeys’ entire talent pool.
2010 ANNuAL REPORT
13
Food Retailing
Redefining
discount shopping
FreshCo represents a distinctly different approach to ordinary discount
retailing that’s all about freshness and value, not what customers have to
give up in exchange for low prices.
14
EMPIRE COMPANy LIMITED
We recently launched the FreshCo brand and banner in Ontario. It is the
newest concept in discount retailing in North America, where customers
can expect everyday low prices without the traditional compromises
associated with ordinary discount stores. We are committed to gaining a
larger share of this business by delivering a superior and unconventionally
fresher and cheaper experience to our customers.
Our self-serve meat, deli and bakery departments are
similarly designed to eliminate traditional discount
trade-offs. These departments keep prices low by
minimizing in-store labour costs while offering superior
quality and choice. FreshCo features what we believe is
an unsurpassed assortment of fresh meat and poultry –
sourced from local Ontario farms whenever possible – that
includes a two-tiered beef program, air-chilled chicken
and premium pork. We also offer more than 100 varieties
of cheese, and fresh baked breads and pastries that are
delivered to our stores twice a day.
Our fresh approach to discount extends to the grocery
aisles where customers can find a streamlined assortment
that includes many major national brands, our popular
private label products and an impressive range of dietary
and health conscious choices as well as targeted multi-
cultural offerings that meet the specific needs of individual
communities. There are also warehouse “big value” aisles
where customers can expect to find even greater savings.
It all adds up to a shopping experience that is unconven-
tionally fresher and cheaper. And it’s why we believe
FreshCo will deliver a lot more than Ontario consumers
have come to expect from ordinary discount shopping
over the past two decades.
Welcome to Discount Done Right
In May 2010, we launched
the FreshCo brand and
banner in Ontario. It is the
newest concept in discount
retailing in North America,
where customers can
expect everyday low prices
without the traditional
compromises associated with
ordinary discount stores.
The first eight stores, located in Brampton and Mississauga,
Ontario, are the initial wave in the roll-out of dozens of
additional stores over the next 12–18 months.
The culmination of many months of extensive consumer
research and careful planning, FreshCo represents a
distinctly different approach to ordinary discount retailing.
It’s all about freshness and value, not what customers
have to give up in exchange for low prices.
Our customers are noticing the difference from the
moment they walk into stores that are as crisp and fresh
as the food on display. The layout is bright and inviting
with a compelling produce department that immediately
promises a better shopping experience. At FreshCo, the
emphasis is on having a limited, fast-turning assortment
of the freshest and highest quality produce in the market.
It’s an approach to everyday low pricing that depends on
greater operating efficiencies rather than sourcing
lower-cost, lower-quality product. That’s why FreshCo
customers can always expect the foods they are looking
for will be both fresher and cheaper.
2010 ANNuAL REPORT
15
Real Estate
From our beginnings, Empire and Sobeys have created a legacy of success
in commercial real estate development to support the growth of our
food retail, drug store and theatre operations. We continue to draw upon
this wealth of experience as we expand and improve Sobeys’ food retail
presence across the country.
Over the past several years, we have assembled some
of the best site selection and development people in
the business. They have been working closely with our
regional retail management teams to support Sobeys as
it takes advantage of the most promising opportunities
for growth. Last year, this talented group completed the
construction and development of eight shopping plazas
(six of which were anchored by a Sobeys business)
representing over 300,000 square feet of gross leasable
area. Empire’s real estate team ended the year with
another 20 projects in the property development pipeline.
Activity for fiscal 2011 is consistent with plans for more
than $100 million in development opportunities, primarily
in support of Sobeys’ growth. We see attractive opportu-
nities for new retail locations in all regions of the country.
Developing our own real estate assets provides significant
long-term benefits including the ability to control the
exact location of our stores as well as the quality and mix
of the surrounding retail environment. Sobeys’ various
banners are strong anchors in any shopping plaza
development, a fact that allows us to attract and retain
other high quality tenants who can help support mutually
beneficial levels of customer traffic. Properly designed
and located, food-anchored community shopping plazas
represent a reliable sector of the commercial real estate
market because they contain merchants whose everyday
products and services are always in demand.
The natural buyer for these high quality retail developments
is Crombie REIT, in which Empire Company Limited holds
a 47.4 percent interest. The unique relationship between
Empire, Sobeys and Crombie REIT provides a mutually
beneficial and distinct competitive advantage which
identifies, develops and delivers access to a steady stream
of high-quality property opportunities. Sobeys’ food
stores are typically the largest tenant in those properties.
In fact, Sobeys, an investment grade tenant, accounts for
more than 32 percent of annual minimum rent and
approximately 3.8 million square feet of gross leasable
area in Crombie REIT’s portfolio. We intend to continue
to grow together as we increase our focus on the
development of food-anchored shopping plazas in the
years ahead.
We see attractive
opportunities for
new retail locations
in all regions
of the country.
16
EMPIRE COMPANy LIMITED
Supporting
our growth
Developing our own real estate provides the ability to control the exact
location of our stores as well as the quality and mix of the surrounding
retail environment.
2010 ANNuAL REPORT
17
Long-term
Progress
A history of value creation
Empire’s ability to create value is based on investments in core businesses
we understand best – food retailing and related real estate. With a focus
on meeting the everyday needs of Canadian consumers, these businesses
have helped Empire achieve steady performance over years of economic
changes and challenges.
Fiscal 2001
Revenue
($ in millions)
$9,331.1
Book Value
($ per share)
$16.82
Operating
Earnings
($ in millions)
$88.5
the real estate
division purchases a
35.7% interest in
Genstar Development
partnership for
$29 million.
Sobeys sells its
Serca Foodservice
operation to SYSCo
for $411 million.
Sobeys’ sales surpass
$10 billion and
capital expenditures
exceed $400 million.
real estate
operations enjoy
another record year.
Sobeys acquires
Commisso’s Food
Markets for
$61 million and the
real estate division
acquires Commisso’s
real estate assets
for $42.5 million.
Wajax converts to
an income trust.
empire sells
2.875 million
units, for a
$25.6 million gain.
empire theatres
acquires 27 movie
theatres for
$83 million.
01 02 03 04 05
eMpire CoMpanY liMiteD
18
Fiscal 2010
Revenue
($ in millions)
$15,516.2
Operating
Earnings
($ in millions)
$284.5
Book Value
($ per share)
$43.07
Book Value
CAGR
17.3%
from 2000
to 2010
Crombie reit
completes its initial
public offering. empire
sells 44 properties
to the reit for
$468.5 million and
retains an initial 48.3%
ownership interest.
empire acquires the
outstanding common
shares of Sobeys that
it did not own for
$1.06 billion, achieving
100% ownership.
Sobeys acquires achille
de la Chevrotière ltée,
for $79.2 million.
Sobeys acquires
thrifty Foods for
$253.6 million.
empire sells
61 properties for
$428.5 million to
Crombie reit.
empire issues
2,713,000 non-Voting
Class a shares at
$49.75 per share
for total net proceeds
to empire of approxi-
mately $129 million.
proceeds from this
equity issue, coupled
with strong cash
generation from Sobeys,
reduce empire’s ratio
of debt to capital
to 32.7% from 39.8%
at the start of the
fiscal year.
Sobeys enjoys
another record year
and receives credit
rating upgrades from
Standard & poor’s
and DBrS, with both
ratings at investment
grade. empire reduces
ratio of debt to
capital to 29.3% from
32.7% at the start
of the fiscal year.
06 07 08 09 10
2010 annual report
19
Chair’s
Message
Guiding Empire’s growth
Our decision to concentrate Empire’s resources on food retailing and related
real estate continued to pay dividends – literally and figuratively – during
one of the most challenging economic periods in memory. Buoyed by a solid
operating performance in our core businesses, the Company posted a record
financial performance and delivered strong returns for our investors.
Our progress is a testament to the active stewardship of a
talented board of directors. A minority of our directors are
Sobey family representatives who have a distinctly patient and
proprietary interest in the business. They are complemented
by a majority of independent directors whose diverse skills and
experience help foster a challenging and dynamic atmosphere
for our deliberations. While the next quarter’s results are
always important, we firmly believe that good managers thrive
best in an environment that gives them the time and latitude
to do what’s right for the business over the long term. We are
also blessed with an outstanding senior management team
that knows how to make the most of that opportunity.
This year I would like to pay special tribute to John Bragg,
who is retiring from the Board. He has made a significant
contribution as a Director of both Empire and Sobeys for the
past 12 years. We are deeply indebted to John for his wise
counsel to both the Board and our management team.
On behalf of the entire Board, I would also like to extend
our sincere appreciation to the thousands of employees
throughout Empire’s operating companies, together with our
franchisees and affiliates. As always, their efforts have been
instrumental to our success.
robert p. Dexter
Chair
Empire Company Limited
June 25, 2010
The annual dividend payable on shares in Empire Company
Limited was increased to $0.74 in fiscal 2010. In addition,
the value of Empire shares climbed 8.1 percent to $52.98
in the 12 months ending May 1, 2010. Subsequent to fiscal
year-end, the Company announced an increase in the annual
dividend to $0.80 per share, representing the 15th consecutive
annual increase.
Much of our success is the result of the investments we have
made to support the expansion and improvement of Sobeys’
store and distribution networks, as well as the systems and
business process improvements that have been required to
realize the company’s potential. These investments have really
started to pay off as reflected in Sobeys’ growing earnings and
other performance metrics over the past few years. Equally
important, we have continued to reduce our leverage with
consolidated net funded debt of $825 million at the end of
fiscal 2010, down from a peak of $1.75 billion following the
privatization of Sobeys and the acquisition of Thrifty Foods
in fiscal 2007.
20
EMPIRE COMPANy LIMITED
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Empire Company Limited Board of Directors
1 Robert P. Dexter
5 David S. Ferguson
10 Mel Rhinelander
15 John R. Sobey
Chair
Halifax, Nova Scotia
Director since 1987.
Atlanta, Georgia
Director since 2007.
Toronto, Ontario
Director since 2007.
Pictou County, Nova Scotia
Director since 1979.
2 John L. Bragg
Woodbridge, Ontario
Calgary, Alberta
Collingwood, Nova Scotia
Director since 2003.
Director since 2004.
Halifax, Nova Scotia
Director since 2001.
6 Edward C. Harsant
11 Stephen J. Savidant
16 Karl R. Sobey
Director since 1999.
3 Marcel Côté
Montreal, Québec
Director since 2007.
7 David Leslie
12 David F. Sobey
17 Paul D. Sobey
Toronto, Ontario
Director since 2007.
New Glasgow, Nova Scotia
Pictou County, Nova Scotia
Director since 1963.
Director since 1993.
4 Christine Cross
New Glasgow, Nova Scotia
Pictou County, Nova Scotia
Stellarton, Nova Scotia
Thundridge, Hertfordshire,
Director since 2007.
Director since 1963.
Director since 1998.
8 Bill McEwan
13 Donald R. Sobey
18 Robert G. C. Sobey
united Kingdom
Director since 2007.
9 Malen Ng
14 Frank C. Sobey
Toronto, Ontario
Director since 2007.
Pictou County, Nova Scotia
Director since 2007.
Learn more
Empireco.ca/governance
2010 ANNuAL REPORT
21
Commit ted
to our Communit ies
Embracing our responsibilities
Proudly serving our communities is more than a statement of what we do
at Empire; it reflects one of our most important values. In fiscal 2010, the
management, employees, franchisees and affiliates within Empire’s operations
supported hundreds of charitable causes across Canada at a corporate,
regional and personal level.
Our reach is broad, extending to hundreds of Canadian
communities from coast to coast. Many of these initiatives are
directly related to our businesses, including dozens of health
and food-related programs, such as food banks. Here are just a
few of the ways we’ve made a difference over the past year in
the communities we serve.
Feeding the hungry
Our passion for food extends beyond our stores and into the
communities in which we operate. Every year we help feed
the hungry by raising hundreds of thousands of dollars and
donating millions of pounds of food. For example, in 2009,
Sobeys stores in Western Canada raised more than $175,000
for regional food banks through Hampers of Hope, an in-store
program that encourages our customers to help the less
fortunate families in our communities. A similar Food for
Families program at Thrifty Foods raised more than $200,000
for 17 food banks in British Columbia.
Protecting the environment
Sobeys Ontario and Earth Day Canada announced the
first grant recipients of the Earth Day Canada Community
Environment Fund in November 2009. Twenty-two
organizations, ranging from grass roots community groups
to local schools, received $378,000 in funding to support
important environmental initiatives.
22
EMPIRE COMPANy LIMITED
Sobey Art Award 2009 Gala
Empire Board members Donald Sobey
(centre) and Rob Sobey (fourth from left),
with (from left to right) Laura Regan
(Gala co-host); Atlantic finalist Graeme
Patterson; Prairies & the North finalist
Marcel Dzama; David Lee (2008 winner);
David Altmejd (2009 winner); Ontario
finalist Shary Boyle; West Coast &
yukon finalist Luanne Martineau; and
Seamus O’Regan (Gala co-host).
• The Frank H. Sobey Award for Excellence in Business Studies
presents six $10,000 awards to full-time business school
students attending schools in Atlantic Canada. Since its
inception in 1989, more than $760,000 has been awarded.
Celebrating Canada’s young artists
The Sobey Art Award is Canada’s premier art award for
contemporary young artists. Created in 2002 by the Sobey
Art Foundation and with prize money totaling $70,000
($50,000 to the winner and $5,000 to each of the four
finalists), the Sobey Art Award was created as a means
to showcase Canada’s emerging artists and the works
they produce. The Sobey Art Award is organized and
administered by the Art Gallery of Nova Scotia.
To learn more about all we are doing to promote the health
and well-being of our communities, including our commitment to
environmentally sound business practices, please visit us at:
www.sobeyscorporate.com – Click on the Social Responsibility tab.
www.empireco.ca/en/home/corporateresponsibility/default.aspx
2010 ANNuAL REPORT
23
Seeking cures
Sobeys and its employees are dedicated to improving the quality
of life in hundreds of communities. During the past year, we
contributed our time and resources in support of the Canadian
Cancer Society, the Canadian Breast Cancer Foundation
and the Juvenile Diabetes Research Foundation to name a
few. We also helped fund important research at some of
Canada’s leading hospitals. For example, in Québec, IGA stores
teamed up with their suppliers to raise $350,000 during
their Straight to Heart Campaign in support of the Montreal
Heart Institute Foundation.
Promoting healthier lifestyles
We are also doing our best to help children, youth and athletes
reach their full potential through the promotion of healthier
lifestyles. This includes Sobeys’ partnership in Atlantic Canada
with Breakfast for Learning – an important school-based
nutrition program that helps more than 50,000 kids get off
to a better start every day.
Building better futures
Funding from Sobeys and contributions from the various
Sobey Foundations support several scholarship programs
designed to help young people attain the education necessary
for their success.
• The Sobeys & Empire Work Experience & Scholarship
Program awards numerous scholarships each year to our
employees across Canada, including the Future Leader
Awards which includes financial support and summer
internship employment opportunities. In total, these
scholarships support over 75 employees with financial
awards of more than $120,000 annually.
• The D&R Sobey Scholarship annually awards $60,000, over
the course of four years’ study, to six outstanding students
from Atlantic Canada pursuing a commerce degree at
Queen’s university.
Corporate
Officers
Officers of Empire Company Limited
Robert P. Dexter
Chair
paul D. Sobey
President and
Chief Executive
Officer
paul V. Beesley
Executive
Vice President
and Chief
Financial Officer
Frank C. Sobey
Vice President,
Real Estate
Stewart H. Mahoney
Vice President,
Treasury and
Investor Relations
Carol a. Campbell
Vice President,
Risk Management
John G. Morrow
Vice President
and Comptroller
Karin McCaskill
Corporate Secretary
Officers of Operating Companies
Sobeys Inc.
robert p. Dexter
Chair
Bill Mcewan
President and
Chief Executive
Officer
François Vimard
Chief Financial
Officer
Jason potter
President
Operations,
Sobeys Atlantic
Marc poulin
President
Operations,
Sobeys Québec
David Jeffs
President
Operations,
Sobeys Ontario
Dennis Folz
Chief Human
Resources Officer
Belinda Youngs
Chief Marketing
Officer
Karin McCaskill
Senior
Vice President,
General Counsel
and Secretary
paul a. Jewer
Senior
Vice President,
Finance and
Treasurer
l. Jane McDow
Assistant Secretary
ECL Properties Limited
Empire Theatres Limited
Frank C. Sobey
President
24
EMPIRE COMPANy LIMITED
Stuart G. Fraser
President and
Chief Executive
Officer
paul W. Wigginton
Vice President,
Finance and Chief
Financial Officer
Management’s
Discussion
and Analysis
Forward-Looking Information
Empire’s Strategic Direction
Overview
Fiscal 2010 Financial HigHligHts
OutlOOk
sHareHOlder return
nOn-gaaP Financial Measures
Management’s Explanation of Fiscal 2010 Annual Consolidated Results
revenue
OPerating incOMe
interest exPense
incOMe taxes
earnings beFOre caPital gains (lOsses) and OtHer iteMs
caPital gains (lOsses) and OtHer iteMs
net earnings
Fiscal 2010 Financial Performance by Division
FOOd retailing
real estate
investMents and OtHer OPeratiOns
Quarterly Results of Operations
Consolidated Financial Condition
caPital structure and key Financial cOnditiOn Measures
sHareHOlders’ equity
liabilities
Financial instruMents
Liquidity and Capital Resources
OPerating activities
investing activities
Financing activities
guarantees and cOMMitMents
Free casH FlOw
Controls and Accounting Policies
cHanges in accOunting POlicies
transitiOn tO internatiOnal Financial rePOrting s tandards
critical accOunting estiMates
cOntrOls and PrOcedures
related-Party transactiOns
Subsequent Events
Other Matters
Designation for Eligible Dividends
Contingencies
Risk Management
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2010 annual report
25
Management’s Discussion and Analysis
the following Management’s Discussion and analysis (“MD&a”)
contains commentary from management on the consolidated
financial condition and results of operations of empire Company
limited (“empire” or the “Company”) for the 52 weeks ended
May 1, 2010, compared to the 52 weeks ended May 2, 2009.
Management also provides an explanation of the Company’s
fourth quarter results, changes in accounting policies, critical
accounting estimates and factors that the Company believes
may affect its prospective financial condition, cash flows and
results of operations. this MD&a also provides analysis of the
operating performance of the Company’s divisions as well as
a discussion of cash flows, the impact of risks and the outlook
for the business. additional information about the Company,
including the Company’s annual Information Form, can be
found on SeDar at www.sedar.com.
this discussion and analysis is the responsibility of
management. the Board of Directors carries out its responsibility
for review of this disclosure principally through its audit
Committee, comprised exclusively of independent directors.
the audit Committee has reviewed and approved this disclosure
and it has also been approved by the Board of Directors.
this discussion and analysis should be read in conjunction
with the audited annual consolidated financial statements of the
Company and the accompanying notes for the 52 weeks ended
May 1, 2010, compared to the 52 weeks ended May 2, 2009.
the consolidated financial statements and accompanying notes
have been prepared in accordance with Canadian generally
accepted accounting principles (“Gaap”) and are reported in
Canadian dollars.
these consolidated financial statements include the accounts
of empire and its subsidiaries and variable interest entities
(“VIes”) which the Company is required to consolidate. the
information contained in this MD&a is current to June 25, 2010,
unless otherwise noted.
Forward-looking information
this discussion contains forward-looking statements which
reflect management’s expectations regarding the Company’s
objectives, plans, goals, strategies, future growth, financial
condition, results of operations, cash flows, performance,
business prospects, and opportunities. all statements other
than statements of historical facts included in this MD&a,
including statements regarding the Company’s objectives, plans,
goals, strategies, future growth, financial condition, results
of opera tions, cash flows, performance, business prospects
and opportunities may constitute forward-looking information.
expressions such as “anticipates”, “expects”, “believes”,
“estimates”, “intends”, “could”, “may”, “plans”, “predicts”, “projects”,
“will”, “would”, “foresees”, “remain confident that” and other
similar expressions or the negative of these terms are generally
indicative of forward-looking statements.
these statements are based on empire management’s
reasonable assumptions and beliefs in light of the information
currently available to them. the forward-looking information
contained in this MD&a is presented for the purpose of
assisting the Company’s security holders in understanding its
financial position and results of operations as at and for the
periods ended on the dates presented and the Company’s
strategic priorities and objectives and may not be appropriate
for other purposes. By its very nature, forward-looking
information requires the Company to make assumptions and
is subject to inherent risks and uncertainties which give rise to
the possibility that the Company’s predictions, forecasts,
expectations or conclusions will not prove to be accurate, that
the Company’s assumptions may not be correct and that the
Company’s objectives, strategic goals and priorities will not be
achieved. although the Company believes that the predictions,
forecasts, expectations or conclusions reflected in the forward-
looking information are reasonable, it can give no assurance
that such matters will prove to have been correct. Such
forward-looking information is not fact but only reflections
of management’s estimates and expectations. these
forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially
from such statements. these factors include but are not
limited to: changes in general industry, market and economic
conditions, competition from existing and new competitors,
energy prices, supply issues, inventory management, changes
in demand due to seasonality of the business, interest rates,
changes in laws and regulations, operating efficiencies and
cost saving initiatives. In addition, these uncertainties and risks
are discussed in the Company’s materials filed with the
Canadian securities regulatory authorities from time to time,
including the risk Management section of this MD&a.
empire cautions that the list of important factors is not
exhaustive and other factors could also adversely affect its
results. readers are urged to consider the risks, uncertainties
and assumptions carefully in evaluating the forward-looking
information and are cautioned not to place undue reliance
on such forward-looking information. Forward-looking
statements may not take into account the effect on the
Company’s business of transactions occurring after such
statements have been made. For example, dispositions,
acquisitions, asset write-downs or other changes announced
or occurring after such statements are made may not be
reflected in forward-looking statements. the forward-looking
information in this MD&a reflects the Company’s expectations
as of June 25, 2010, and is subject to change after this date.
the Company does not undertake to update any forward-
looking statements that may be made from time to time by
or on behalf of the Company other than as required by
applicable securities laws.
26
eMpIre CoMpany lIMIteD
these forward looking statements include the following items:
• Sobeys’ expectations that administrative and business
• The Company’s belief that it has sufficient unused capacity
under its credit facilities to satisfy its financial obligations as
they come due and its expectation that there will not be a
material adverse impact on its business as a result of the
global disruption in the market for third-party asset-backed
commercial paper (“aBCp”) liquidity, both of which could
be impacted by the challenging economic environment;
• The Company’s expectation that its operational and capital
structure are sufficient to meet its ongoing business
requirements in the current economic environment in Canada;
• The Company’s belief that its cash and cash equivalents,
future operating cash flows and available credit facilities
will enable the Company to fund future capital investments,
pension plan contributions, working capital and ongoing
business requirements, and its belief that it has sufficient
funding in place to meet these requirements and other
long-term obligations, all of which could be impacted by
uncertainty in the economy;
• The Company’s anticipation that its in place sources of
liquidity will adequately meet its short-term and long-term
financial requirements which may be impacted by uncertainty
in the economy;
• The Company’s expectation regarding the purchase
of additional Series 2 preferred Shares for cancellation
by the end of calendar 2010 could be impacted by market
conditions and availability of sellers;
• The Company’s expectations relating to pending tax matters
with Canada revenue agency (“Cra”), which could be
determined differently by Cra. this could cause the
Company’s effective tax rate and its earnings to be affected
positively or negatively in the period the matter is resolved;
• Sobeys’ expectations that the new distribution centre
opened in Vaughan, ontario will continue to reduce overall
distribution costs;
empire’s strategic direction
rationalization activities as well as system process initiatives
in prior years and upcoming quarters will reduce costs
as expected and will provide, thereafter, annualized cost
reductions, both of which could be impacted by the final
scope and scale of these activities;
• The Company’s expected contributions to its registered
defined benefit plans, which could be impacted by
fluctuations in asset values due to market uncertainties;
• The Company’s expected use and estimated fair values of
financial instruments which could be impacted by, among
other things, changes in interest rates, foreign exchange
rates and commodity prices;
• Sobeys’ expectations of continued sales growth in
fiscal 2011;
• Sobeys’ expectation that there will be no material labour
disruptions in fiscal 2011;
• The Company’s expectations relating to the impact of the
transition to International Financial reporting Standards
(“IFrS”), which is subject to ongoing assessment by
the Company;
• The Company’s expectations relating to the sale of
11 properties to Crombie reIt pursuant to a non-binding
letter of intent between Sobeys and Crombie reIt
announced on July 8, 2010;
• The Company’s expectations relating to the public offering
of units by Crombie reIt and the concurrent issue of limited
partnership units of Crombie limited partnership to eCl
Developments limited, all of which is subject to conditions
of closing, including regulatory approval; and
• The Company’s expectation that existing environmental
protection requirements will not have a material financial
or operational effect on capital expenditures, earnings or
competitive position of empire during the current fiscal year
or in future years.
Management’s primary objective is to maximize the long-term
sustainable value of empire through enhancing the worth
of the Company’s net assets and in turn, having that value
reflected in empire’s share price. this is accomplished through
direct ownership and equity participation in businesses that
management knows and understands and believes have the
potential for long-term growth and profitability, specifically
food retailing, real estate and corporate investments.
the Company continues to focus on its core strengths in
food retailing and related real estate by continuing to direct its
energy and capital towards growing long-term sustainable value
through cash flow and income growth. While our core businesses
are well established and profitable in their own right, they also
offer empire geographical diversification across Canada which is
considered by management to be an additional source of strength.
together, our core businesses reduce risk and volatility, thereby
contributing to greater consistency in consolidated earnings
growth over the long-term. Going forward, the Company
intends to continue to direct its resources towards the most
promising opportunities within these core businesses in order
to maximize long-term shareholder value.
In carrying out the Company’s strategic direction, empire’s
management defines its role as having four fundamental
responsibilities: first, to support the development and execution
of sound strategic plans for each of its operating companies;
second, to regularly monitor the development and the execution
of business plans within each operating company; third, to
ensure that empire is well governed as a public company; and
fourth, to prudently manage its capital in order to augment
the growth in its core operating businesses.
2010 annual report
27
Management’s Discussion and Analysis
Overview
empire’s key businesses include food retailing, real estate, and
investments and other operations. Food retailing is carried out
through wholly-owned Sobeys Inc. (“Sobeys”). the real estate
business is carried out through a wholly-owned operating
subsidiary eCl properties limited (“eCl”), which at fiscal year
end on May 1, 2010 included a wholly-owned subsidiary
eCl Developments limited (“eCl Developments”), as well
as a 40.7 percent ownership interest in Genstar Development
partnership and a 44.8 percent interest in Genstar Development II
partnership (collectively referred to as “Genstar”) and a
47.4 percent ownership interest in Crombie reIt. Corporate
investment activities and other operations includes wholly-
owned etl Canada Holdings limited (“empire theatres”);
Kepec resources limited (“Kepec”), a party to a joint venture
with apl oil and Gas limited which has ownership interests
in various oil and gas properties in alberta; and a 27.6 percent
ownership position in Wajax Income Fund (“Wajax”), a leading
Canadian distributor and service support provider of mobile
equipment, industrial components and power systems.
With over $15 billion in annual revenue and approximately
$6.2 billion in assets, empire and its related companies employ
over 90,000 people, including franchisees and affiliates.
Food Retailing
Sobeys, a wholly-owned subsidiary, conducts business
through more than 1,300 retail stores (corporately owned and
franchised) which operate in all 10 provinces across Canada.
Sobeys’ strategy is focused on delivering the best food
shopping experience to its customers in the right format,
right-sized stores, supported by superior customer service.
the five distinct store formats deployed by Sobeys to satisfy
its customers’ principal shopping requirements are the full
service, fresh service, convenience service, community service
and price service formats. Sobeys remains focused on improving
the product, service and merchandising offerings within each
format by expanding and renovating its current store base,
while continuing to build new stores. Sobeys’ seven major
banners: Sobeys, IGa extra, thrifty Foods, IGa, Foodland,
FreshCo and price Chopper are the primary focus of these
format development efforts.
During the year, Sobeys opened, replaced, expanded,
redeveloped, acquired and/or converted the banners
in 76 stores (2009 – 74). In fiscal 2010, Sobeys continued
to execute a number of programs in support of its food-focused
strategy including product and service innovations, productivity
initiatives and business process, supply chain and
system upgrades.
one example of these initiatives is the opening of eight
FreshCo discount stores in ontario at the beginning of fiscal
2011. these FreshCo discount stores are designed to offer low
prices without compromising service which would typically be
experienced at discount grocery retailers. FreshCo shoppers
enjoy fresh merchandise at low prices and an expanded selection
of meats and produce, including high quality choices and seasonal,
locally-produced products. During the fourth quarter of fiscal
2010, Sobeys incurred approximately $5.0 million in start up
costs and fixed asset write-offs related to this initiative.
Real Estate
empire’s real estate operations are primarily focused on (i) the
ownership of retail and office properties through an ownership
interest in Crombie reIt, and (ii) residential land development
through an ownership interest in Genstar, which operates
principally in communities in ontario and Western Canada.
Investments and Other Operations
the third component of empire’s business is its investments
and other operations, consisting primarily of a 27.6 percent
ownership interest in Wajax, wholly-owned empire theatres
and Kepec.
the market value of empire’s equity accounted investment
in Wajax at the end of fiscal 2010 was $117.9 million
(2009 – $71.3 million), representing an unrealized gain
of $87.1 million (2009 – $40.3 million).
other operations include empire theatres and Kepec.
empire theatres is the second largest movie exhibitor in Canada
which, as of May 1, 2010, owned 51 locations representing
380 screens.
Fiscal 2010 Financial HigHligHts
Highlights
• Revenue of $15.52 billion, up $501.1 million or 3.3 percent.
• Sobeys’ same-store sales increased 1.9 percent.
• Earnings before capital gains (losses) and other items of
$284.5 million, up $22.8 million or 8.7 percent.
• Net earnings of $301.9 million ($4.40 per share),
a $37.2 million or 14.1 percent increase.
• Sobeys opened, acquired or replaced 41 corporate and
franchised stores, opened its new automated Vaughan
distribution centre, expanded 13 stores, rebannered/
redeveloped 22 stores and closed 52 stores.
• Sobeys’ free cash flow of $340.7 million versus
$280.9 million last year.
• Funded debt to total capital of 29.3 percent, down
3.4 percentage points from the 32.7 percent recorded at
the end of last fiscal year.
• Net debt to net total capital of 21.8 percent versus
28.6 percent at the end of fiscal 2009.
• Annual dividend per Non-Voting Class A share and Class B
common share increased to $0.74 from $0.70 last year.
28
eMpIre CoMpany lIMIteD
the consolidated financial overview provided below reports on the financial performance for fiscal 2010 relative to the last
two fiscal years.
Summary Table of Consolidated Financial Results
($ in millions,
except per share information)
revenue
operating income
operating earnings
Capital gains (losses) and
other items, net of tax
Basic earnings per share
operating earnings
Capital gains (losses) and
other items, net of tax
52 Weeks ended
May 1,
2010
% of
Revenue
May 2,
2009(1)
% of
revenue
May 3,
2008(1)
% of
revenue
$ 15,516.2
100.00%
$ 15,015.1
100.00%
$ 14,065.0
100.00%
479.7
284.5
3.09%
1.83%
466.2
261.7
3.10%
1.74%
472.6
242.8
17.4
0.11%
3.0
0.02%
73.0
3.36%
1.73%
0.52%
2.25%
net earnings
$
301.9
1.95%
$
264.7
1.76%
$
315.8
$
4.16
$
3.98
$
3.69
net earnings
$
Basic weighted average number
of shares outstanding (in millions)(2)
0.25
4.41
68.4
$
0.05
4.03
65.7
$
1.11
4.80
65.6
Diluted earnings per share
operating earnings
Capital gains (losses) and
other items, net of tax
net earnings
Diluted weighted average number
of shares outstanding (in millions)(2)
Dividends per share
$
4.15
$
3.97
$
3.69
0.25
4.40
68.5
0.74
$
$
0.05
4.02
65.8
0.70
$
$
1.11
4.80
65.7
0.66
$
$
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
(2) the increase in the weighted average number of shares outstanding reflects an equity issue completed on april 24, 2009 which resulted
in a total of 2,713,000 shares being issued.
OutlOOk
Management’s primary objective will continue to be to
maximize the long-term sustainable value of empire through
enhancing the worth of the Company’s net assets and in turn,
having that value reflected in empire’s share price.
Management is clearly focused on directing its energy
and capital towards growing the long-term sustainable
value of its food retailing, real estate and related businesses.
In doing so, we remain committed to: a) supporting Sobeys
in its goal to be widely recognized as the best food retailer
in Canada; b) the profitable growth of our real estate
business as it develops new properties that are congruent
with growing our food retailing business and which upon
completion will be offered for sale to Crombie reIt; and
c) capitalizing on opportunities afforded as a result of the
existing strong relationships between our food retailing and
real estate businesses.
Finally, we remain committed to continued strengthening
of our financial condition through the prudent management of
working capital and free cash flow in each operating company.
Food Retailing Division
Sobeys will continue to invest in infrastructure and productivity
improvements in a manner consistent with the expressed
intention to build a healthy and sustainable retail business
and infrastructure for the long term. this includes continuing
to build a strong management team and progressing on the
transformation process while improving the customers’ in-store
experience and our productivity.
2010 annual report
29
Management’s Discussion and Analysis
Sobeys also plans to focus on its workforce management
and in-store programs in fiscal 2011 that will further improve
store productivity. these key customer driven initiatives will
assist Sobeys’ retail store network in delivering the best food
shopping experience, building on the strong foundation that
has already been put in place.
Real Estate Division
With respect to residential real estate, empire remains committed
to its investment in Genstar and is very supportive of its
management and strategy. Genstar, in our view, continues to
be well capitalized and, with a very capable management team,
is favourably positioned to take advantage of new profitable
growth opportunities. Genstar continues to seek out compelling
acquisition opportunities in select regional markets. We will
continue to maintain representation on the Genstar Board.
With regard to the commercial real estate, subsequent to
fiscal year end, our internal property development function was
reorganized under Sobeys, with Sobeys acquiring 12 properties
from eCl properties. this reorganization will better align our
real estate development function with the interest of Sobeys
and help to streamline operations. as a result of this transfer,
our commercial real estate operations consist largely of our
47.4 percent interest in Crombie reIt.
sHaReHOldeR RetuRn
empire’s real estate business continues to benefit
from Sobeys’ substantial in-house expertise in selecting
commercial locations and its development expertise gained
from the recent transfer of eCl Development’s team to
Sobeys and from Crombie reIt which has decades of
property management expertise.
as a result of our combined real estate knowledge and
expertise, we are confident in our ability to steer our investment
capital to locations with the greatest opportunity for economic
profit and in doing so will adhere to a set of disciplined
investment criteria.
In summary, management is confident that the strength
of Sobeys’ relationship with Crombie reIt, combined with
our strict investment discipline, will prove to be a sustainable
competitive advantage and contribute to the enhancement of
empire’s shareholder value.
Investments and Other Operations
With respect to Wajax, it is our view that Wajax continues
to be well capitalized and, with a very capable management
team, is favourably positioned to capitalize on new profitable
growth opportunities.
the Company delivered a total shareholder return of
9.9 percent in fiscal 2010 as shown in the table below. the
compound annual return on the Company’s shares over the past
five years has averaged 9.3 percent and over the past ten years
has averaged 14.0 percent. this exceeded the compound
annual return of the S&p/tSX Composite Index over the past
five and ten years of 7.9 percent and 5.0 percent, respectively.
In fiscal 2010, the Company increased its dividend by
5.7 percent to $0.74 per share. on June 25, 2010, the Board
approved a further dividend increase of 8.1 percent to
$0.80 per share. this was the 15th consecutive year of dividend
increases. empire’s dividends are declared quarterly at the
discretion of the Board.
For the fiscal years ended:
May 1, 2010 May 2, 2009 May 3, 2008 May 5, 2007 May 6, 2006 5 year CaGr(1)
Closing market price per share ($)
Dividend paid ($ per share)
Dividend yield on prior year closing price (%)
Increase (decrease) in share price (%)
total annual shareholder return (%)(2)
(1) Compound annual growth rate.
52.98
0.74
1.5%
8.1%
9.9%
49.00
0.70
1.8%
24.8%
26.8%
39.25
0.66
1.6%
(7.3%)
(5.9%)
42.33
0.60
1.4%
(2.2%)
(0.8%)
43.29
0.56
1.5%
18.1%
19.8%
7.6%
9.0%
9.3%
(2) total annual shareholder return assumes reinvestment of quarterly dividends, and therefore may not equal the sum of dividend and share price
returns in the table.
30
eMpIre CoMpany lIMIteD
nOn-gaaP Financial MeasuRes
there are measures included in this MD&a that do not
have a standardized meaning under Gaap and therefore may
not be comparable to similarly titled measures presented
by other publicly traded companies. the Company includes
these measures because it believes certain investors use these
measures as a means of assessing financial performance.
empire’s definition of the non-Gaap terms are
as follows:
• Operating income or earnings before interest and taxes
(“eBIt”) is calculated as operating earnings before minority
interest, interest expense and income taxes.
• Earnings before interest, taxes, depreciation and
amortization (“eBItDa”) is calculated as eBIt plus
depreciation and amortization.
• Operating earnings is calculated as net earnings before
capital gains (losses) and other items.
• Return on equity is calculated as net earnings payable for
common shareholders divided by average common share-
holders’ equity for the reporting period.
• Funds from operations is calculated as operating earnings
plus depreciation and amortization.
• Funded debt is all interest bearing debt, which includes bank
loans, bankers’ acceptances, long-term debt and debt related
to assets held for sale.
• Net debt is calculated as funded debt less cash and
cash equivalents.
• Total capital is calculated as funded debt plus
shareholders’ equity.
• Net total capital is total capital less cash and cash equivalents.
• Same-store sales are sales from stores in the same locations
in both reporting periods.
• Free cash flow is calculated as cash flows from operating
activities, less property and equipment purchases.
the following tables reconcile empire’s funded debt and total capital to Gaap measures reported on the balance sheets
as at May 1, 2010, May 2, 2009 and May 3, 2008.
($ in millions)
May 1, 2010
May 2, 2009(1)
May 3, 2008(1)
Bank indebtedness
long-term debt due within one year
liabilities relating to assets held for sale
long-term debt
Funded debt
less: cash and cash equivalents
net funded debt
Shareholders’ equity
net total capital
$
17.8
379.4
–
829.0
1,226.2
(401.0)
825.2
2,952.4
$
45.9
133.0
–
1,124.0
1,302.9
(231.6)
1,071.3
2,678.8
$
92.6
60.4
6.4
1,414.1
1,573.5
(191.4)
1,382.1
2,378.8
$ 3,777.6
$ 3,750.1
$ 3,760.9
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
($ in millions)
Funded debt
total shareholders’ equity
total capital
May 1, 2010
May 2, 2009(1)
May 3, 2008(1)
1,226.2
2,952.4
1,302.9
2,678.8
1,573.5
2,378.8
$ 4,178.6
$ 3,981.7
$ 3,952.3
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
2010 annual report
31
Management’s Discussion and Analysis
Management’s explanation of Fiscal 2010 annual consolidated results
the following is a review of empire’s consolidated financial
performance for the 52-week period ended May 1, 2010
compared to May 2, 2009.
revenue and financial performance of each of the Company’s
businesses (food retailing, real estate and investments and
other operations) are discussed in detail in the section entitled
“Fiscal 2010 Financial performance by Division” in this MD&a.
Revenue
Consolidated revenue for fiscal 2010 was $15.52 billion,
an increase of $501.1 million or 3.3 percent compared to
fiscal 2009. Sobeys’ sales increased by $478.2 million,
real estate division revenue increased by $6.7 million and
revenue from investments and other operations increased
by $22.9 million over the prior fiscal year.
please refer to the section entitled “Fiscal 2010 Financial
performance by Division” for an explanation of the change
in revenue by division.
OPeRating incOMe
For the full fiscal year, empire recorded operating income of
$479.7 million, an increase of $13.5 million or 2.9 percent from
the prior year.
the contributors to the change in consolidated operating
income from last fiscal year are as follows:
• Sobeys’ operating income contribution to Empire in fiscal
2010 totalled $425.3 million, an increase of $25.8 million
or 6.5 percent from the $399.5 million recorded last year.
• Residential property operating income contribution in fiscal
2010 was $31.0 million, a decrease of $2.6 million from the
$33.6 million recorded last year.
• Commercial property (including Crombie REIT) operating
income in fiscal 2010 was $19.8 million compared to
$22.3 million last year, a decrease of $2.5 million. Crombie
reIt contributed $18.6 million to operating income in fiscal
2010 versus a $19.8 million contribution last year.
Consolidated
Operating Earnings
(� in millions)
���.�
300
225
150
75
FY
05
06
07
08
09
10
32
eMpIre CoMpany lIMIteD
• Investments and other operations (net of corporate
expenses) contributed operating income of $3.6 million
in fiscal 2010 compared to $10.8 million last fiscal year.
equity accounted earnings generated from the Company’s
27.6 percent interest in Wajax was $9.2 million versus
$18.5 million last year. operating income from other
operations (net of corporate expenses) amounted to
$(5.6) million compared to $(7.7) million last year.
please refer to the section entitled “Fiscal 2010 Financial
performance by Division” for an explanation of the change
in operating income for each division.
inteRest exPense
For the 52 weeks ended May 1, 2010, consolidated interest
expense equalled $72.5 million versus $80.6 million in the prior
year. the $8.1 million decrease in fiscal 2010 interest expense
compared to last fiscal year is primarily due to lower funded
debt levels which are principally related to free cash flow
generation by Sobeys and empire’s $135 million equity issuance
which was completed on april 24, 2009. this equity issue did
reduce empire’s funded debt levels prior to the end of fiscal
2009; however, it had little impact on reducing interest expense
in fiscal 2009 due to the issuance occurring only eight days
prior to fiscal year-end.
Consolidated funded debt was $1,226.2 million at the end
of fiscal 2010 compared to $1,302.9 million at the end of fiscal
2009, a $76.7 million or 5.9 percent decrease.
incOMe taxes
the effective tax rate for the year ended May 1, 2010 of
24.4 percent differs from the combined statutory rate of
30.9 percent due primarily to the settlement negotiated with
Cra relating to the tax treatment of gains realized on the
fiscal 2001 sale of shares in Hannaford Bros. Co. Income tax
expense was reduced in the first quarter by $17.0 as a result
of this settlement. excluding the impact of capital gains (losses)
and other items, the effective income tax rate for fiscal 2010
was 28.8 percent versus 30.0 percent last year.
During fiscal 2010, there was a $4.7 million reduction
in the net future tax liabilities and income tax expense as a
result of the substantive enactment of ontario’s 2009 budget
announcement in november 2009. the budget provides for
incremental reductions in the ontario corporate income
tax rate from the current rate of 14 percent to 10 percent
between July 1, 2010 and July 1, 2013. In the absence of this
substantively enacted incremental rate reduction, empire’s
effective tax rate for fiscal 2010 (excluding the impact of capital
gains (losses) and other items) would have been 29.9 percent.
eaRnings beFORe caPital gains (lOsses) and OtHeR iteMs
For the 52 weeks ended May 1, 2010, earnings before capital
gains (losses) and other items amounted to $284.5 million
($4.15 per share) compared to $261.7 million ($3.97 per
share) in the prior fiscal year. the $22.8 million or 8.7 percent
increase is the result of the $13.5 million increase in operating
income, the $8.1 million decrease in interest expense, and the
$2.7 million decrease in minority interest, partially offset by a
$1.5 million increase in income taxes.
the table below presents empire’s segmented earnings before capital gains (losses) and items by division for the 52 weeks ended
May 1, 2010, compared to the 52 weeks ended May 2, 2009.
52 Weeks ended
($ in millions)
May 1, 2010
May 2, 2009 (1)
($) Change
(%) Change
Food retailing(2)
real estate
Investments & other operations
$
256.1
34.4
(6.0)
$
227.9
36.7
(2.9)
$
28.2
(2.3)
(3.1)
Consolidated
$
284.5
$
261.7
$
22.8
12.4%
(6.3%)
(106.9%)
8.7%
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
(2) adjusted for the impact of depreciation and amortization related to the privatization of Sobeys in June 2007.
caPital gains (lOsses) and OtHeR iteMs
In fiscal 2010, the Company recorded capital gains (losses)
and other items, net of tax, of $17.4 million compared to
$3.0 million last year. Capital gains (losses) and other items, net
of tax, in fiscal 2010 was primarily the result of a $17.0 million
tax settlement related to the fiscal 2001 sale of shares in
Hannaford Bros. Co. and a $2.9 million positive fair value
adjustment on aBCp, partially offset by empire recording
$3.1 million for its equity share of an interest rate swap
agreement which was settled by Crombie reIt during empire’s
fiscal year. Capital gains (losses) and other items, net of tax,
in fiscal 2009 were largely the result of the sale of non-core
properties for gains of $6.9 million, net of tax, offset by
an increase in the provision on aBCp equal to $3.1 million,
net of tax.
the table below presents capital gains (losses) and other items, net of tax, for the 52 weeks ended May 1, 2010, compared to the
52 weeks ended May 2, 2009.
52 Weeks ended
($ in millions)
May 1, 2010
May 2, 2009
($) Change
equity share of
Crombie reIt’s other expenses
Increase (decrease) in fair value of
Canadian third-party asset-backed commercial paper
Gain (loss) on sale of investments
Gain (loss) on sale of properties
Foreign exchange gains (losses)
tax recovery related to sale of shares in Hannaford Bros. Co.
$
(3.1)
$
–
$
(3.1)
2.9
(0.2)
0.1
0.7
17.0
$
17.4
$
(3.1)
–
6.9
(0.8)
–
3.0
6.0
(0.2)
(6.8)
1.5
17.0
14.4
$
2010 annual report
33
Management’s Discussion and Analysis
net eaRnings
net earnings for the 52 weeks ended May 1, 2010 totalled
$301.9 million ($4.40 per share) compared to $264.7 million
($4.02 per share) recorded last fiscal year, an increase of
$37.2 million or 14.1 percent. the increase in net earnings in
fiscal 2010 over the prior year reflects the increase in earnings
before capital gains (losses) and other items of $22.8 million
and the increase in capital gains (losses) and other items of
$14.4 million, as previously discussed.
52 Weeks ended
($ in millions)
May 1, 2010
May 2, 2009 (1)
($) Change
(%) Change
Food retailing(2)
real estate
Investments & other operations
$
259.0
31.3
11.6
$
224.8
42.6
(2.7)
$
34.2
(11.3)
14.3
Consolidated
$
301.9
$
264.7
$
37.2
15.2%
(26.5%)
529.6%
14.1%
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
(2) adjusted for the impact of depreciation and amortization related to the privatization of Sobeys in June 2007.
Fiscal 2010 Financial Performance by division
FOOd Retailing
Highlights
• Fiscal 2010 sales growth of $478.2 million or 3.2 percent and
same-store sales growth of 1.9 percent.
• Operating cash flow of $682.1 million versus $635.0 million
in fiscal 2009.
• Total capital expenditures equalled $341.4 million in fiscal
2010, down $12.7 million from fiscal 2009.
• Free cash flow of $340.7 million versus $280.9 million in
fiscal 2009.
• Opened, acquired or replaced 41 corporate and franchised
stores, opened a new automated distribution centre in
Vaughan, ontario, expanded 13 stores, rebannered/redeveloped
22 stores and closed 52 stores.
• Funded debt to total capital improved to 27.1 percent at the
end of fiscal 2010 compared to the 31.3 percent reported at
the end of fiscal 2009.
to assess its financial performance and condition, Sobeys’ management monitors a set of financial measures, which evaluate
sales growth, profitability and financial condition. the primary financial performance and condition measures for Sobeys are
set out below.
52 Weeks ended
Sales growth
Same-store sales growth
return on equity
Funded debt to total capital
Funded debt to eBItDa
property and equipment purchases (in millions)
May 1, 2010
May 2, 2009(1)
May 3, 2008(1)
3.2%
1.9%
11.9%
27.1%
1.2x
341
$
7.2%
5.2%
11.3%
31.3%
1.3x
354
$
5.6%
2.8%
10.0%
35.6%
1.7x
479
$
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
34
eMpIre CoMpany lIMIteD
the table below presents Sobeys’ contribution to empire’s consolidated revenue, operating income, capital gains (losses) and other
items, net of tax, and net earnings.
52 Weeks ended
year-over-year
($ in millions)
May 1, 2010
May 2, 2009(1)
($) Change
(%) Change
Sales
operating income(2)
Capital gains (losses) and other items, net of tax
net earnings(2)
$ 15,243.0
425.3
2.9
259.0
$ 14,764.8
399.5
(3.1)
224.8
$
$
478.2
25.8
6.0
34.2
3.2%
6.5%
193.5%
15.2%
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
(2) adjusted for the impact of depreciation and amortization related to the privatization of Sobeys in June 2007.
Sales
In fiscal 2010, Sobeys achieved sales of $15.2 billion, an
increase of $478.2 million or 3.2 percent over fiscal 2009.
During the fiscal year, same-store sales increased by 1.9 percent.
the growth in sales continues to be a direct result of the
increased retail selling square footage from new stores and
enlargements, coupled with the continued implementation
of sales and merchandising initiatives, improved store level
execution and product and service innovation.
Sobeys expects sales growth to continue in fiscal 2011 as a
result of continued capital investment in its retail store network
and offering, merchandising, pricing and operational execution
improvements across the country.
total store square footage increased by 2.2 percent in fiscal
2010 as a result of the opening of 41 new or replacement
stores and the expansion of 13 stores. there were 52 stores
closed in fiscal 2010.
Business Process and Information Systems
Transformation and Rationalization Costs
Sobeys continues to make significant progress in the
implementation of system-wide business process optimization
and rationalization initiatives that are designed to reduce
complexity and improve processes and efficiency throughout
Sobeys. these system-wide business process and rationalization
initiatives support all aspects of the business including
operations, merchandising, distribution, human resources
and administration. they are an important enabler of further
initiatives such as the new distribution facility in ontario.
Food Retailing
Revenue
(� in millions)
Food Retailing
Operating Income
(� in millions)
Sobeys completed this implementation in ontario during the
third quarter of fiscal 2007. a business process and information
system transformation plan, similar to that deployed in ontario,
began in Western Canada during fiscal 2007 and was completed
during the second quarter of fiscal 2008.
the business process and information systems implementation
began in Québec in the first quarter of fiscal 2010. the business
process and system initiative costs primarily include labour,
implementation and training costs associated with these
initiatives. During the 52-week period ended May 1, 2010,
$11.3 million (2009 – $nil) of pre-tax costs were incurred
related to these initiatives.
the new distribution centre, in Vaughan, ontario, utilizes
automation technology and equipment which has significantly
increased Sobeys’ warehouse and distribution capacity and is
expected to reduce overall distribution costs while improving
service to its store network and customers. During fiscal 2010,
Sobeys recognized $nil (2009 – $6.9 million) in severance
costs related to the development of this automated facility.
amounts in fiscal 2009 also included the severance costs
associated with a resulting rationalization of certain administrative
functions in ontario. the new distribution centre is expected
to provide annual distribution savings in excess of these costs
incurred in fiscal 2009. In the second quarter of fiscal 2010,
the distribution centre became fully operational and continues
to meet expectations.
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400
300
200
100
FY
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06
07
08
09
10
2010 annual report
35
Management’s Discussion and Analysis
During fiscal 2008 and 2009, Sobeys also performed a
rationalization of administrative functions in its national and
other regional departments. no additional rationalization costs
were incurred in fiscal 2010 (2009 – $3.8 million).
Operating Income
For the 52 weeks ended May 1, 2010, Sobeys reported
operating income of $430.8 million, a $26.6 million or 6.6 percent
increase from the prior fiscal year. operating income margin
for fiscal 2010 equalled 2.83 percent compared to 2.74 percent
in fiscal 2009. Included in Sobeys’ operating income in fiscal
2010 was approximately $5.0 million in costs related to the
launch of the FreshCo discount banner and the rebannering of
eight stores in Mississauga and Brampton, ontario.
after adjusting for the impact of the depreciation and
amortization related to the privatization, Sobeys’ operating
income contribution to empire for fiscal 2010 was $425.3 million
(2009 – $399.5 million). Sobeys’ operating income margin for
fiscal 2010, after adjusting for the above items, equalled
2.79 percent compared to 2.71 percent in fiscal 2009.
Sobeys will continue to focus on disciplined cost management
initiatives, supply chain and retail productivity improvements and
migration of best practices across its four regions to continue to
fuel and fund investments to drive sales and improve margins
over time.
Real estate
Net Earnings
Sobeys reported net earnings of $262.8 million in fiscal 2010
compared to $228.0 million last year, a $34.8 million or
15.3 percent increase. the earnings increase is largely a result
of the $26.6 million increase in operating income and an
increase in capital gains (losses) and other items, net of tax,
of $6.0 million. Sobeys reported operating earnings, which
excludes the changes to the fair value of aBCp, of
$259.9 million, an increase of $28.8 million or 12.5 percent
from the $231.1 million recorded in fiscal 2009. For additional
discussion of aBCp, please see the section titled “other
Matters” in this MD&a.
after adjusting for the impact of the depreciation and
amortization related to the privatization and the related tax
impact, the food retailing division contributed net earnings
of $259.0 million to empire for fiscal 2010, an increase of
$34.2 million or 15.2 percent over the $224.8 million recorded
in fiscal 2009.
Highlights
• Increased ownership interest in Genstar Development
partnership from 35.7 percent to 40.7 percent and
in Genstar Development II partnership from 43.4 percent
to 44.8 percent.
• Acquired an additional $30.0 million in Crombie REIT Class B
units along with $10.0 million in Crombie reIt convertible
unsecured subordinated debentures.
• Completed the sale of eight properties to Crombie REIT.
• Operating income from Crombie REIT of $18.6 million versus
$19.8 million last year.
• Market price of Crombie REIT units increased approximately
69 percent in fiscal 2010.
• Operating income from Genstar of $31.0 million compared
to $33.6 million in fiscal 2009.
real estate management assesses its financial performance and condition through monitoring of key financial measures. the primary
financial performance and condition measures are set out below.
52 Weeks ended
Funds from operations ($ in millions)
return on equity
Funded debt to total capital
Development pipeline (in millions of square feet)
May 1, 2010
May 2, 2009
May 3, 2008
$
35.7
12.1%
15.0%
1.7
$
38.5
17.8%
25.6%
1.7
$
64.3
17.7%
22.4%
1.2
36
eMpIre CoMpany lIMIteD
the table below presents revenue, operating income, capital gains (losses) and other items, net of tax, net earnings and funds from
operations for the real estate division’s commercial operations and residential operations.
52 Weeks ended
May 1, 2010
May 2, 2009
($) Change
(%) Change
($ in millions)
revenue
residential
Commercial
operating income
residential
Crombie reIt(1)
Commercial
net earnings
residential operating earnings
Commercial operating earnings
Capital gains (losses), net of tax
Funds from operations
residential
Commercial
$
$
$
$
$
63.3
17.3
80.6
31.0
18.6
1.2
50.8
21.8
12.6
(3.1)
$
31.3
$
$
21.8
13.9
35.7
$
$
$
$
$
$
$
$
54.6
19.3
73.9
33.6
19.8
2.5
55.9
23.3
13.4
5.9
42.6
23.2
15.3
38.5
$
$
$
$
$
8.7
(2.0)
6.7
(2.6)
(1.2)
(1.3)
(5.1)
(1.5)
(0.8)
(9.0)
$
(11.3)
$
$
(1.4)
(1.4)
(2.8)
15.9%
(10.4%)
9.1%
(7.7%)
(6.1%)
(52.0%)
(9.1%)
(6.4%)
(6.0%)
(152.5%)
(26.5%)
(6.0%)
(9.2%)
(7.3%)
(1) equity accounted earnings in Crombie reIt during the period.
Revenue
real estate division revenues amounted to $80.6 million in
fiscal 2010 compared to $73.9 million in the prior year. the
$6.7 million increase in revenue from the real estate division was
the result of higher revenue from residential operations.
revenue from residential operations was $63.3 million in
fiscal 2010 compared to $54.6 million last year, an $8.7 million
or 15.9 percent increase. Commercial property revenues for
fiscal 2010 equalled $17.3 million, a decrease of $2.0 million or
10.4 percent compared to revenues of $19.3 million reported
last year primarily as a result of the sale of properties that
occurred part-way through fiscal 2009.
Operating Income
For the 52 weeks ended May 1, 2010, real estate division
operating income was $50.8 million versus $55.9 million in the
prior fiscal year. the $5.1 million decrease in real estate division
operating income was largely the result of a $2.6 million decline
in residential operating income due primarily to lower margin
on residential lot sales and a $1.2 million decline in operating
income contribution from empire’s investment in Crombie reIt.
other commercial operating income decreased by $1.3 million
in fiscal 2010 compared to the prior fiscal year primarily as a
result of the properties sales mentioned above.
Real Estate
Revenue (�)
(� in millions)
Real Estate
Funds from Operations (�)
(� in millions)
■ RESIDENTIAL ■ COMMERCIAL
■ RESIDENTIAL ■ COMMERCIAL
240
180
120
60
60
45
30
15
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FY
06
07
08
09
10
FY
06
07
08
09
10
(1) Fiscal 2005-2008 have been restated to exclude Sobey leased properties which was sold on april 22, 2008.
2010 annual report
37
Management’s Discussion and Analysis
Capital Gains (Losses) and Other Items
Capital gains (losses) and other items, net of tax, for the real
estate division totalled $(3.1) million in fiscal 2010 (2009 –
$5.9 million). the capital losses recorded in the current fiscal
year are related to empire’s equity share of an interest rate
swap agreement settled by Crombie reIt which it deemed
was no longer an effective hedge. the capital gains recorded
in fiscal 2009 related primarily to the sale of several
non-core properties.
Net Earnings
In fiscal 2010, real estate division net earnings contribution
to empire was $31.3 million compared to $42.6 million last year,
an $11.3 million decrease. the earnings decline is largely the
result of a $5.1 million decrease in operating income and a
$9.0 million decrease in net capital gains (losses) as mentioned,
partially offset by a $2.6 million reduction in income tax expense.
Funds from Operations
Funds from real estate operations in fiscal 2010 of $35.7 million
decreased $2.8 million compared to $38.5 million in the prior
fiscal year primarily as a result of a decline in operating earnings.
investMents and OtHeR OPeR atiOns
Highlights
• Empire Theatres’ revenue in fiscal 2010 increased by
17.4 percent compared to fiscal 2009.
• Maintained a 27.6 percent interest in Wajax which
contributed $9.2 million in equity earnings in fiscal 2010.
• Capital gains (losses) and other items, net of tax, of
$17.6 million in fiscal 2010.
Investment Value
at the end of fiscal 2010, empire’s total investments,
including its investment in Genstar u.S. investments and
in Crombie reIt, carried a market value of $487.7 million
(May 2, 2009 – $255.5 million) on a cost base of $67.7 million
(May 2, 2009 – $19.9 million), resulting in an unrealized gain
of $420.0 million (2009 – $235.6 million).
at fiscal year end, May 1, 2010, empire’s investments including equity accounted investments in Crombie reIt and Genstar u.S.,
consisted of:
($ in millions)
Investment in Crombie reIt units
Investment in Wajax
Investment in Genstar u.S.(1)
other investments(1)(2)
May 1, 2010
May 2, 2009
Market
value
carrying
value
unrealized
gain
$
$
341.3
117.9
17.6
10.9
$
8.4
30.8
17.6
10.9
$
332.9
87.1
–
–
Market
Value
175.6
71.3
7.5
1.1
Carrying
Value
unrealized
Gain
$
$
(19.7)
31.0
7.5
1.1
195.3
40.3
–
–
$
487.7
$
67.7
$
420.0
$
255.5
$
19.9
$
235.6
(1) assumes market value equals book value.
(2) Fiscal 2010 other investments includes a $10.7 million Crombie reIt convertible unsecured subordinated debenture.
38
eMpIre CoMpany lIMIteD
the table below presents investments and other operations’ (net of corporate expenses) financial highlights, excluding equity
earnings from Crombie reIt and Genstar u.S., for the 52 weeks ended May 1, 2010 compared to last fiscal year.
52 Weeks ended
($ in millions)
revenue
operating income
Wajax
other operations, net of corporate expenses
total operating income
operating earnings
Capital gains (losses) and other items, net of tax(1)
May 1, 2010
May 2, 2009
($) Change
$
202.2
$
179.3
$
22.9
9.2
(5.6)
3.6
(6.0)
17.6
18.5
(7.7)
10.8
(2.9)
0.2
(2.7)
(9.3)
2.1
(7.2)
(3.1)
17.4
14.3
$
net earnings
$
11.6
$
(1) Fiscal 2010 capital gains (losses) and other items, net of tax, includes $17.0 million reflecting the settlement of a Cra tax reassessment
relating to the fiscal 2001 sale of Hannaford Bros. Co. shares.
Revenue
Investments and other operations’ revenue, primarily generated
by empire theatres, equalled $202.2 million for fiscal 2010
versus $179.3 million last year, an increase of $22.9 million or
12.8 percent. this largely reflects higher box office attendance
versus last year as a result of strong product offering (including
increased 3D content) and the fact that empire theatres had an
additional week in fiscal 2010.
Operating Income
Investment and other operations (net of corporate expenses)
contributed operating income of $3.6 million compared to
$10.8 million in the prior fiscal year. the decrease is primarily
the result of lower equity accounted earnings generated from
the Company’s 27.6 percent interest in Wajax. the $9.3 million
reduction in Wajax equity accounted earnings ($9.2 million
versus $18.5 million in fiscal 2009) was due to decreased
market demand in all three of Wajax’s operating segments
as a result of the weakened economy.
operating income from other operations (net of corporate
expenses) improved from $(7.7) million to $(5.6) million in
fiscal 2010. the improvement is largely related to the stronger
performance by empire theatres in the recent fiscal year as a
result of the strong box office attendance and the additional
week of results as discussed.
Capital Gains (Losses) and Other Items
Capital gains (losses) and other items, net of tax, in fiscal 2010
amounted to $17.6 million compared to $0.2 million last
year. Fiscal 2010 capital gains (losses) and other items, net
of tax, includes $17.0 million reflecting the settlement of
a Cra tax reassessment relating to the fiscal 2001 sale of
Hannaford Bros. Co. shares.
Net Earnings
Investments and other operations (net of corporate expenses)
contributed $11.6 million to empire’s consolidated fiscal 2010
net earnings compared to a $(2.7) million net earnings
contri bution last year. the increase is primarily the result of
the settlement of the Cra tax reassessment related to the
fiscal 2001 sale of the shares in Hannaford Bros. Co. as discussed.
2010 annual report
39
Management’s Discussion and Analysis
quarterly results of Operations
the following table is a summary of selected financial information from the Company’s consolidated financial statements
(unaudited) for each of the eight most recently completed quarters.
Results by Quarter
($ in millions, except
per share information)
revenue
operating income
operating earnings(2)
Capital gains (losses) and
other items, net of tax
Fiscal 2010
Fiscal 2009(1)
Q3
Q4
Q1
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks)
aug. 1,
2009
Oct. 31,
2009
Jan. 30,
2010
May 1,
2010
Q2
Q4
(13 Weeks)
May 2,
2009
Q3
(13 Weeks)
Jan. 31,
2009
Q2
(13 Weeks)
nov. 1,
2008
Q1
(13 Weeks)
aug. 2,
2008
$ 3,836.8 $ 3,836.2 $ 3,874.7 $ 3,968.5
130.2
72.2
120.7
72.1
118.5
71.9
110.3
68.3
$ 3,709.0 $ 3,800.0 $ 3,727.9 $ 3,778.2
128.3
70.9
113.3
63.1
115.3
64.8
109.3
62.9
1.6
–
(1.7)
17.5
(0.8)
(3.5)
2.5
4.8
net earnings
$
73.5 $
68.3 $
70.4 $
89.7
$
62.1 $
61.3 $
65.6 $
75.7
Per share information,
basic
operating earnings
Capital gains (losses) and
other items, net of tax
$
1.05 $
1.00 $
1.06 $
1.05
$
0.96 $
0.99 $
0.96 $
1.08
0.02
–
(0.03)
0.26
(0.01)
(0.05)
0.04
0.07
net earnings
$
1.07 $
1.00 $
1.03 $
1.31
$
0.95 $
0.94 $
1.00 $
1.15
Basic weighted average
number of shares
outstanding
(in millions)(3)
Per share information,
diluted
operating earnings
Capital gains (losses) and
other items, net of tax
68.4
68.4
68.4
68.4
65.9
65.6
65.6
65.6
$
1.05 $
0.99 $
1.06 $
1.05
$
0.95 $
0.98 $
0.96 $
1.08
0.02
–
(0.03)
0.26
(0.01)
(0.05)
0.04
0.07
net earnings
$
1.07 $
0.99 $
1.03 $
1.31
$
0.94 $
0.93 $
1.00 $
1.15
Diluted weighted average
number of shares
outstanding
(in millions)(3)
68.5
68.5
68.5
68.5
66.0
65.7
65.7
65.7
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
(2) operating earnings is earnings before capital gains (losses) and other items.
(3) the increase in the weighted average number of shares outstanding reflects an equity issue completed on april 24, 2009 which resulted
in a total of 2,713,000 shares being issued.
Consolidated sales and operating earnings growth have
been influenced by the Company’s investing activities, the
competitive environment, food price and general industry
trends, the cyclicality of both residential and commercial real
estate and by other risk factors as outlined in this MD&a.
the Company does experience some seasonality, as
evidenced in the results presented above, particularly during
the summer months and over holidays.
40
eMpIre CoMpany lIMIteD
Summary Table of Consolidated Financial Results for the Fourth Quarter
($ in millions, except per share information)
13 Weeks ended
May 1, 2010
% of
Revenue
13 Weeks ended
May 2, 2009(1)
% of
revenue
$ 3,836.8
100.00%
$ 3,709.0
100.00%
revenue
operating income
operating earnings
Capital gains (losses) and
other items, net of tax
net earnings
Basic earnings per share
operating earnings
Capital gains (losses) and
other items, net of tax
net earnings
Basic weighted average number of
shares outstanding (in millions)(2)
Diluted earnings per share
operating earnings
Capital gains (losses) and
other items, net of tax
net earnings
Diluted weighted average number of
shares outstanding (in millions)(2)
118.5
71.9
1.6
73.5
1.05
0.02
1.07
68.4
$
$
$
$
1.05
$
0.02
1.07
68.5
2.95
1.69
(0.02)
1.67%
3.09
1.87
0.04
1.92%
109.3
62.9
(0.8)
62.1
0.96
(0.01)
$
$
$
0.95
65.9
$
0.95
(0.01)
$
0.94
66.0
$
0.175
Dividends per share
$
0.185
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
(2) the increase in the weighted average number of shares outstanding reflects an equity issue completed on april 24, 2009 which resulted in a
total of 2,713,000 shares being issued.
the following is a review of financial performance for the 13 weeks ended May 1, 2010 compared to the 13 weeks ended
May 2, 2009.
Revenue
revenue for the fourth quarter of fiscal 2010 was $3.84 billion
compared to $3.71 billion last year, a $127.8 million or
3.4 percent increase. revenues for the food retailing division
increased by $103.5 million or 2.8 percent compared to
the fourth quarter of fiscal 2009. Sobeys’ same-store sales
increased 0.5 percent over the same quarter last year. the
growth in Sobeys’ sales was a direct result of increased retail
selling square footage from new stores and enlargements,
coupled with the continued implementation of sales and
merchandising initiatives, improved consistency of store level
execution and product and services innovation. also, during the
fourth quarter of fiscal 2010, Sobeys experienced retail food
price deflation, which partially offset the growth associated
with the above initiatives.
real estate revenue in the fourth quarter was $32.8 million,
an increase of $21.1 million from the $11.7 million recorded
in the fourth quarter last year. residential property revenue
increased by $20.9 million while commercial property revenue
increased by $0.2 million from the fourth quarter last year.
the increase in residential property revenue was largely due to
higher lot sales activity in Western Canada relative to the same
quarter last year.
revenue from investments and other operations in the
fourth quarter of fiscal 2010 equalled $52.3 million, an increase
of $5.2 million or 11.0 percent over the fourth quarter last year.
this is primarily related to stronger box office attendance and
increased 3D product exhibited by empire theatres.
2010 annual report
41
Management’s Discussion and Analysis
Operating Income
Consolidated operating income in the fourth quarter was
$118.5 million, an increase of $9.2 million or 8.4 percent from
the $109.3 million recorded in the fourth quarter last year.
the contributors to the change in consolidated operating
income from the fourth quarter last year are as follows:
• Sobeys’ operating income contribution to Empire
in the fourth quarter totalled $98.4 million, a decrease of
$1.9 million or 1.9 percent from the $100.3 million recorded
in the fourth quarter last year. Included in Sobeys’ operating
income for the fourth quarter was approximately $5.0 million
in costs related to the launch of the FreshCo discount
banner and the rebannering of eight stores in Mississauga
and Brampton, ontario.
• Residential property operating income contribution in the
fourth quarter was $14.8 million, an increase of $11.0 million
from the $3.8 million recorded in the fourth quarter last year
as a result of higher residential lot sales activity.
• Commercial property (including Crombie REIT) operating
income for the quarter was $4.0 million compared to
$4.9 million in the fourth quarter last fiscal year, a decrease
of $0.9 million. Crombie reIt contributed $4.4 million to
operating income in the fourth quarter versus a $4.9 million
contribution in the fourth quarter last year.
• Investments and other operations (net of corporate
expenses) contributed operating income of $1.3 million in
the fourth quarter compared to $0.3 million in the fourth
quarter last year. equity accounted earnings generated from
the Company’s 27.6 percent interest in Wajax amounted
to $2.3 million in the fourth quarter versus $2.6 million
in the fourth quarter last year. operating income from other
operations (net of corporate expenses) amounted to
$(1.0) million compared to $(2.3) million in the fourth
quarter last year.
Interest Expense
Interest expense in the fourth quarter amounted to
$18.2 million, a decrease of $0.6 million or 3.2 percent from
the $18.8 million recorded in the same quarter last year.
the decrease in interest expense is primarily due to the lower
funded debt for the reasons previously discussed.
Income Taxes
the effective income tax rate for the fourth quarter (excluding
the impact of capital gains (losses) and other items) was
28.0 percent versus 29.6 percent in the fourth quarter last
year. Statutory enacted future income tax rate reductions have
lowered the overall effective income tax rate compared to the
fourth quarter of 2009.
Earnings before Capital Gains (Losses)
and Other Items
For the 13 weeks ended May 1, 2010, empire recorded
earnings before capital gains (losses) and other items of
$71.9 million ($1.05 per share) versus $62.9 million ($0.95 per
share) last year, a $9.0 million or 14.3 percent increase. the
increase in earnings before capital gains (losses) and other
items is the result of a $9.2 million increase in operating income,
a $0.6 million reduction in interest expense and a decrease in
minority interest of $0.5 million, partially offset by an increase
in income taxes of $1.3 million.
Capital Gains (Losses) and Other Items
the Company reported capital gains (losses) and other
items, net of tax, of $1.6 million in the fourth quarter compared
to capital gains (losses) and other items, net of tax, of
$(0.8) million last year. Capital gains (losses) and other items
in the fourth quarter of fiscal 2010 primarily relate to a
positive fair value adjustment to aBCp. Capital gains (losses)
and other items in the fourth quarter of last year primarily
relate to a loss on the sale of non-core property.
Net Earnings
Consolidated net earnings in the fourth quarter of fiscal 2010
equalled $73.5 million ($1.07 per share) compared to
$62.1 million ($0.94 per share) in the fourth quarter last year,
an increase of $11.4 million or 18.4 percent. the increase in net
earnings is due to the $9.0 million increase in earnings before
capital losses and other items and an increase in capital gains
(losses) and other items, net of tax, of $2.4 million.
42
eMpIre CoMpany lIMIteD
consolidated Financial condition
caPital stRuctuRe and key Financial cOnditiOn MeasuRes
the Company’s financial condition improved in fiscal 2010 as evidenced by the capital structure and key financial condition
measures in the table below.
($ in millions, except per share and ratio calculations)
May 1, 2010
May 2, 2009(1)
May 3, 2008(1)
Shareholders’ equity
Book value per share
Bank indebtedness
long-term debt, including current portion(2)
Funded debt to total capital
net debt to net total capital ratio
Debt to eBItDa(3)
eBItDa to interest expense(3)
total assets
$ 2,952.4
43.07
$
$
17.8
$ 1,208.4
29.3%
21.8%
1.50x
11.30x
$ 6,248.3
$ 2,678.8
39.07
$
$
45.9
$ 1,257.0
32.7%
28.6%
1.62x
9.95x
$ 5,891.1
$ 2,378.8
36.08
$
$
92.6
$ 1,480.9
39.8%
36.7%
2.02x
7.35x
$ 5,729.4
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
(2) Includes liabilities related to assets held for sale.
(3) Calculation uses trailing 12-month eBItDa and interest expense.
sHaReHOldeRs’ eQuity
Book value per common share was $43.07 at May 1, 2010 compared to $39.07 at May 2, 2009 and $36.08 at May 3, 2008.
the increase in book value in the current fiscal year reflects the Company’s earnings growth as discussed.
the Company’s share capital on May 1, 2010 consisted of:
preferred shares, par value $25 each, issuable in series
series 2, cumulative, redeemable, rate of 75% prime
2002 preferred shares par value $25 each, issuable in series
non-Voting Class a shares, without par value
Class B common shares, without par value, voting
employees’ Share purchase plan
authorized
number of Shares
Issued and
outstanding
number of Shares
2,682,100
992,000,000
259,107,435
40,800,000
168,000
–
34,197,498
34,260,763
$ in Millions
$
4.2
316.2
7.6
328.0
(2.9)
$
325.1
total non-Voting Class a and Class B common shares
outstanding at May 1, 2010 equalled 68,458,261, unchanged
from the previous fiscal year-end. there were 34,197,498
non-Voting Class a and 34,260,763 Class B common shares
outstanding at May 1, 2010.
on april 24, 2009, the Company closed a bought-deal public
offering of non-Voting Class a shares at a price of $49.75 per
share. the underwriters elected to exercise their over-allotment
option in full, resulting in a total of 2,713,000 shares being
issued for net proceeds of $129.1 million.
During fiscal 2010, 162,399 options (2009 – 189,967
options) were issued under empire’s long-term incentive plan.
the options issued in fiscal 2010 allow the holder to purchase
non-Voting Class a shares at $46.04 per share (2009 –
$40.26 per share). empire had 433,209 options outstanding
at May 1, 2010 compared to 282,733 options outstanding
at May 2, 2009. there were no options exercised during
fiscal 2010 or fiscal 2009. During fiscal 2010, 11,923 options
(2009 – nil) were forfeited.
2010 annual report
43
Management’s Discussion and Analysis
the table below presents the number of outstanding options and weighted average exercise price over the last two fiscal years.
Balance, beginning of year
Granted
Forfeited
Balance, end of year
May 1, 2010
May 2, 2009
number of Weighted average
exercise Price
Options
number of Weighted average
exercise price
options
282,733
162,399
(11,923)
$
41.47
46.04
40.26
92,766
189,967
–
$
43.96
40.26
–
433,209
$
43.22
282,733
$
41.47
Stock options exercisable, end of year
90,894
23,192
the 433,209 stock options outstanding as at the fiscal year
ended May 1, 2010 represents 0.6 percent (2009 – 0.4 percent)
of the outstanding non-Voting Class a shares and Class B
common shares.
During fiscal 2010, there were no Series 2 preferred shares
purchased for cancellation compared to 90,200 Series 2
preferred shares purchased for $2.3 million in fiscal 2009.
the Company plans to purchase on a best efforts basis for
cancellation additional Series 2 preferred shares by the end
of calendar 2010.
liabilities
as at June 25, 2010, the Company had total non-Voting
Class a and Class B common shares outstanding of 34,197,498
and 34,260,763, respectively, as well as 433,209 options to
acquire in aggregate 433,209 non-Voting Class a shares.
Dividends paid to non-Voting Class a and Class B common
shareholders amounted to $50.7 million in fiscal 2010
($0.74 per share) versus $46.1 million ($0.70 per share)
in fiscal 2009.
Historically, empire has financed a significant portion of its
assets through the use of long-term debt. longer-term assets
are generally financed with fixed rate, long-term debt, thereby
reducing both interest rate and refinancing risk. at the end
of fiscal 2010, the Company’s total long-term debt (including
the current portion long-term debt) was $1,208.4 million
(2009 – $1,257.0 million), representing 98.5 percent
(2009 – 96.5 percent) of empire’s total funded debt
of $1,226.2 million (2009 – $1,302.9 million).
Consolidated funded debt decreased by $76.7 million
from the $1,302.9 million reported at the end of fiscal 2009.
the decrease in funded debt over the end of the previous
fiscal year is primarily the result the free cash flow generated
by Sobeys being used to reduce its funded debt. the ratio of
funded debt to total capital improved to 29.3 percent from
32.7 percent at the end of fiscal 2009. the 3.4 percentage
point improvement is the result of lower funded debt levels and
higher equity levels due to growth in retained earnings.
Share Price
(� per share)
��.��
48
36
24
12
Book Value
Per Share
(� per share)
48
36
24
12
Common Dividends
Per Share
(� per share)
�.��
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�.��
�.��
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06
07
08
09
10
FY
06
07
08
09
10
FY
��
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44
eMpIre CoMpany lIMIteD
the long-term debt is segmented by division as follows:
long-term debt (including current portion)
($ in millions)
Food retailing
real estate
Investments & other operations
total
$
May 1,
2010
858.7
35.3
314.4
$
May 2,
2009
954.0
39.6
263.4
May 3,
2008
$ 1,010.2
50.1
420.6
$ 1,208.4
$ 1,257.0
$ 1,480.9
For additional disclosure on empire’s bank indebtedness
and long-term debt, see notes 9 and 10 to the Company’s
annual audited consolidated financials statements for fiscal
2010 as detailed on page 84 and 85 of the Company’s
2010 annual report.
on July 23, 2008, DBrS changed its trend on Sobeys’
credit rating from BBB (low) with a negative trend to BBB (low)
with a stable trend. on July 30, 2008, Standard & poor’s
(“S&p”) changed its trend on Sobeys’ credit rating from
BB+ with a negative trend to BB+ with a stable trend. on
June 26, 2009, DBrS confirmed its long-term debt rating of
Sobeys at BBB (low) and revised the trend to positive from
stable. on July 6, 2009, S&p confirmed its long-term debt
rating of Sobeys at BB+ and revised the trend to positive
from stable.
During the second quarter of fiscal 2010, on
September 14, 2009, DBrS upgraded Sobeys’ credit rating to
BBB with a stable trend. During the third quarter of fiscal 2010,
on January 12, 2010, S&p upgraded its credit rating on Sobeys
from BB+ with a positive trend to BBB- with a stable trend.
on May 25, 2010 Sobeys filed a short form prospectus
providing for the issuance of up to $500.0 million of unsecured
Medium term notes. on June 7, 2010, Sobeys issued new
Medium term notes of $150.0 million, maturing on June 7, 2040.
empire’s eBItDa to interest expense ratio in fiscal 2010
was 11.3 times, an improvement from the 10.0 times recorded
in fiscal 2009. the increase in the eBItDa to interest expense
ratio compared to fiscal 2009 was the result of the decline in
interest expense related to the reduction of funded debt and
an increase in trailing 12-month eBItDa to $819.4 million from
$802.3 million a year earlier.
empire and its subsidiaries have provided covenants to
lenders in support of various financing facilities. all covenants
were complied with during fiscal 2010 and for fiscal 2009.
Financial instRuMents
as part of empire’s risk management strategy, the Company
actively monitors its exposures to various financial risks
including interest rate risk, foreign exchange price risk and
commodity price risk. From time to time, empire or one of its
subsidiaries will use a financial instrument for the purpose of
mitigating its exposure to one or more types of financial risk.
empire and its subsidiaries do not use financial instruments for
speculative purposes. the Company’s use of these instruments
has not had a material impact on consolidated net earnings for
the 52 weeks ended May 1, 2010 or fiscal 2009.
When empire or its subsidiaries enter into a financial instrument
contract, the Company is exposed to potential credit risk
associated with the counterparty of the contract defaulting. to
mitigate this risk exposure, empire monitors the credit worthi-
ness of the various contract counterparties on an ongoing basis
and will take corrective actions as deemed appropriate should
a counterparty’s credit profile change dramatically.
Funded Debt
to Capital
(�)
EBITDA to
Interest Expense
(times)
40
30
20
10
��.�
12
9
6
3
��.�
FY
06
07
08
09
10
FY
06
07
08
09
10
2010 annual report
45
Management’s Discussion and Analysis
In-Place Financial Instruments
empire utilizes interest rate instruments from time to time
to prudently manage its exposure to interest rate volatility and
also to fix future long-term debt maturities that are expected
to be refinanced. at May 1, 2010, there were four interest rate
hedges in place with a fair value of $(15.6) million. Sensitivity
analysis has been prepared to determine the impact of a change
in the underlying forward rate curves on the fair values reported
as of May 1, 2010. a parallel shift up/(down) in the underlying
forward rate curve of 0.25 percent would impact in the fair
value of the swaps by plus or minus $1.3 million and impact
other comprehensive income by plus or minus $0.9 million.
In July 2008, Sobeys entered into a floating-for-floating
currency swap with a fixed rate of $1.015 Canadian Dollar
(“CaD”)/united States Dollar (“uSD”) to mitigate the currency
risk associated with a uSD denominated variable rate lease. the
terms of the swap match the lease terms. as of May 1, 2010,
Sobeys recognized a liability of $0.2 million relating to this
instrument. Sobeys estimates that a 10.0 percent increase/
(decrease) in applicable foreign currency exchange rates would
impact the fair value of the swap by plus or minus $1.2 million
and would impact other comprehensive income by plus or
minus $0.9 million.
to mitigate the risk of changes in the market price of
electricity, Sobeys uses financial derivative swap contracts
with varying maturities as hedges against the rising costs.
as of May 1, 2010, Sobeys recognized a liability of $1.3 million
relating to these instruments. Sobeys estimates that a
10.0 percent increase/(decrease) in applicable energy prices
would impact the fair value of the swaps by plus or minus
$0.1 million.
In october 2009, Sobeys entered into heating oil swaps to
mitigate the price volatility of a portion of its future diesel fuel
purchases. as diesel fuel derivative contracts are not actively
traded on any organized futures exchange, there are limited
opportunities to hedge diesel fuel prices directly; however,
Sobeys uses heating oil derivatives due to the historically high
correlations between changes in diesel fuel prices and heating
oil prices. as of May 1, 2010, the contracts had expired and no
asset or liability was recorded.
Fair Value Methodology
When a financial instrument is designated as a hedge for
financial accounting purposes, it is classified as “Held for trading”
on the balance sheet and recorded at fair value. the estimated
fair values of the financial instruments as at May 1, 2010 were
based on relevant market prices and information available at the
reporting date. the Company determines fair value of each
financial instrument by reference to external and third-party
quoted bid, ask, and mean prices, as appropriate, in an active
market. In inactive markets, fair values are based on internal and
external valuation models, such as discounted cash flows using
market observed inputs. Fair values determined using valuation
models require the use of assumptions to determine the
amount and timing of forecasted future cash flows and discount
rates. the Company primarily uses external market inputs,
including factors such as interest yield curves and forward
exchange rates. Changes in interest rates and exchange rates,
along with other factors, may cause the fair value amounts to
change in subsequent periods. the fair value of these financial
instruments reflects the amount the Company would pay or
receive if it were to settle the contracts at the reporting date.
For additional disclosure on empire’s use of financial
instruments, see notes 1 and 21 to the Company’s annual
audited financial statements for fiscal 2010 as detailed on
pages 74 and 93 of the Company’s 2010 annual report.
liquidity and capital resources
empire’s liquidity remained strong at May 1, 2010 as a result of
the following sources:
• Cash and cash equivalents on hand;
• Unutilized bank credit facilities; and
• Cash generated from operating activities.
at May 1, 2010, consolidated cash and cash equivalents were
$401.0 million versus $231.6 million at the prior fiscal year end
on May 2, 2009.
at the end of fiscal 2010, on a non-consolidated basis,
empire maintained an authorized bank line for operating,
general and corporate purposes of $650.0 million, of which
approximately $298.5 million or 45.9 percent was utilized.
on a consolidated basis, empire’s authorized bank credit
facilities exceeded borrowings by approximately $840.1 million
at May 1, 2010.
46
eMpIre CoMpany lIMIteD
empire’s non-consolidated credit facility of $650.0 million
matured on June 8, 2010. Subsequent to fiscal year end, on
June 4, 2010, empire renewed its credit facility for an additional
three-year term, to expire on June 30, 2013. the size of the
facility was reduced to $450.0 million from $650.0 million
reflecting both strong cash generation and lower debt levels.
the Company anticipates that the above mentioned in-place
sources of liquidity will adequately meet its short-term and
long-term financial requirements. the Company mitigates
potential liquidity risk by ensuring its various sources of funds
are diversified by term to maturity and source of credit.
the following table highlights major cash flow components for the 13 and 52 weeks ended May 1, 2010 compared to the 13 and
52 weeks ended May 2, 2009.
($ in millions)
May 1, 2010
May 2, 2009(1)
May 1, 2010
May 2, 2009(1)
13 Weeks ended
52 Weeks ended
earnings for common shareholders
Items not affecting cash
$
net change in non-cash working capital
Cash flows from operating activities
Cash flows used in investing activities
Cash flows used in financing activities
73.5
72.8
146.3
174.5
320.8
(92.8)
(83.5)
$
62.1
103.0
165.1
40.1
205.2
(139.9)
(58.0)
$
301.8
358.0
659.8
124.3
784.1
(466.1)
(148.6)
$
264.6
352.9
617.5
50.5
668.0
(413.9)
(213.9)
Increase in cash and cash equivalents
$
144.5
$
7.3
$
169.4
$
40.2
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
OPeRating activities
Fourth quarter cash flows from operating activities equalled
$320.8 million compared to $205.2 million in the comparable
period last year. the increase of $115.6 million is due to an
increase in the net change in non-cash working capital of
$134.4 million and an increase in earnings available for common
shareholders of $11.4 million, partially offset by a decrease in
items not affecting cash of $30.2 million.
In fiscal 2010, cash flows from operating activities equalled
$784.1 million compared to $668.0 million in the prior year.
the increase of $116.1 million is attributed to an increase in
the net change in non-cash working capital of $73.8 million,
an increase in net earnings available for common shareholders
of $37.2 million and an increase in items not affecting cash
of $5.1 million.
the following tables present non-cash working capital changes on a quarter-over-quarter basis and also on a year-over-year basis.
Non-Cash Working Capital (Quarter-over-Quarter)
($ in millions)
May 1, 2010
Jan. 30, 2010
receivables
Inventories
prepaid expenses
accounts payable and accrued liabilities
Income taxes receivable (payable)
Impact of reclassifications on working capital(2)
$
336.9
880.3
70.1
(1,621.6)
(19.5)
(25.5)
$
291.0
924.0
51.1
(1,463.6)
(7.3)
–
13 Weeks ended
May 1, 2010
Increase
(Decrease) in
Cash Flows
May 2, 2009(1)
Increase
(Decrease) in
Cash Flows
$
(45.9)
43.7
(19.0)
158.0
12.2
25.5
$
(19.4)
17.9
(31.5)
95.4
(17.1)
(5.2)
total
$
(379.3)
$
(204.8)
$
174.5
$
40.1
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
(2) reclassifications primarily relate to business acquisitions and rationalization costs and the adoption of the new goodwill and intangibles policy
further explained in note 1 to the financial statements.
2010 annual report
47
Management’s Discussion and Analysis
Non-Cash Working Capital (Year-over-Year)
52 Weeks ended
May 1, 2010
Increase (Decrease)
($ in millions)
May 1, 2010
May 2, 2009(1)
in Cash Flows
receivables
Inventories
prepaid expenses
accounts payable and accrued liabilities
Income taxes receivable (payable)
Impact of reclassifications on working capital(2)
total
$
336.9
880.3
70.1
(1,621.6)
(19.5)
(37.1)
$
308.9
842.8
63.9
(1,487.1)
4.9
–
$
(28.0)
(37.5)
(6.2)
134.5
24.4
37.1
$
(390.9)
$
(266.6)
$
124.3
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
(2) reclassifications primarily relate to business acquisitions and rationalization costs and the adoption of the new goodwill and intangibles policy
further explained in note 1 to the financial statements.
the net change in non-cash working capital of $174.5 million
in the fourth quarter was largely due to a $158.0 million
increase in payables, a $43.7 million decrease in inventories, a
$12.2 million increase in income taxes payable and the impact
of reclassifications on working capital of $25.5 million, partially
offset by an increase in receivables of $45.9 million and an
increase in prepaid expenses of $19.0 million. the increased
accounts payable and accrued liabilities largely reflects Sobeys’
focus on managing working capital as evidenced by increased
levels of cash at fiscal year end. the decrease in inventories
compared to the third quarter reflects the seasonality typically
experienced by Sobeys over these quarters. the increase in
receivables of $45.9 million at Sobeys is primarily as a result of
rent receivables being recorded prior to the end of the period
compared to the third quarter.
investing activities
Cash used in investing activities of $92.8 million in the
fourth quarter is down from cash used in investing activities
of $139.9 million in the fourth quarter last fiscal year. the
decrease in cash used in investing activities of $47.1 million
was largely the result of an increase in proceeds on disposal of
property and equipment of $52.4 million primarily from the
sale of eight properties to Crombie reIt in the fourth quarter
of fiscal 2010.
For the 52 weeks ended May 1, 2010, cash used in investing
activities of $466.1 million was $52.2 million higher than last
fiscal year. the increase in cash used in investing activities was
largely the result of an increase in the cash used for investments
in fiscal 2010 of $48.6 million, an increase of $33.4 million in
property and equipment purchases and an increase cash used in
loans and other receivables of $29.4 million, partially offset by
an increase in proceeds on disposal of property and equipment
of $59.1 million.
year-over-year non-cash working capital increased
$124.3 million. this is primarily the result of a $134.5 million
increase in accounts payable and accrued liabilities, an increase
in income taxes payable of $24.4 million, a $37.1 million impact
of reclassifications on working capital partially offset by a
$37.5 million increase in inventories, a $28.0 million increase
in receivables and a $6.2 million increase in prepaid expenses
compared to the prior year. the increase in receivables,
inventories and related accounts payable and accrued liabilities
is necessary to support Sobeys’ higher sales volumes due
to the increased amount of square footage in its expanded
store network.
Consolidated purchases of property and equipment totalled
$128.0 million in the fourth quarter of fiscal 2010 compared
to $112.0 million in the fourth quarter last year. Consolidated
purchases of property and equipment totalled $434.0 million
in fiscal 2010 compared to $400.6 million in the same period
last year.
proceeds on disposal of property and equipment increased
$52.4 million from the fourth quarter last year to $65.6 million
in the fourth quarter of fiscal 2010. proceeds on disposal of
property and equipment in the fourth quarter of fiscal 2010
were largely related to the sale of eight properties to Crombie
reIt for cash proceeds of $56.7 million as discussed in the
“related-party transactions” section of this MD&a. proceeds
on disposal of property and equipment for the fourth quarter
of last year of $13.2 million were largely related to the sale
of several non-core properties.
48
eMpIre CoMpany lIMIteD
For the fiscal 2010, proceeds on disposal of property
and equipment equalled $137.1 million compared to
$78.0 million last year, a $59.1 million increase. proceeds
on disposal of property and equipment in fiscal 2010 are
largely related to:
• The sale leaseback of a distribution centre located in
Milton, ontario to a third party. proceeds on the sale
were $51.0 million resulting in a pre-tax gain of $5.6 million
which will be amortized over the life of the long-term
lease agreement which has been entered into for the use
of this facility; and
• The sale of eight properties to Crombie REIT as discussed.
proceeds on disposal of property and equipment last
year of $78.0 million were primarily related to the sale of
several non-core properties.
In fiscal 2010, eCl increased its ownership of Genstar
for cash consideration of $17.2 million. this acquisition was
accounted for using the purchase method with net identifiable
assets, primarily land inventory, recorded at $22.6 million and
future income taxes recorded at $5.4 million.
Included in cash used in investing activities for fiscal 2010 is
an additional investment of $30.0 million in Crombie reIt Class
B units along with an investment of $10.0 million in Crombie
reIt convertible unsecured subordinated debentures as
discussed in the “related-party transactions” section of
this MD&a.
the table below outlines the number of stores Sobeys invested in during the fourth quarter of fiscal 2010 compared to the same
quarter of fiscal 2009, as well as for the 52 weeks ended May 1, 2010 compared to the 52 weeks ended May 2, 2009.
Sobeys’ Corporate and Franchised Store Construction Activity
# of Stores
May 1, 2010
May 2, 2009
May 1, 2010
May 2, 2009
13 Weeks ended
52 Weeks ended
opened/acquired/relocated
expanded
rebannered/redeveloped
Closed
11
4
14
17
13
3
2
20
41
13
22
52
47
11
16
52
the following table shows Sobeys’ square footage changes for the 13 and 52 weeks ended May 1, 2010 by type.
Sobeys’ Square Footage Changes
Square Feet
(in thousands)
opened
relocated
acquired
expanded
Closed
net Change
May 1, 2010
vs. Jan. 30, 2010
May 1, 2010
vs. May 2, 2009
222
63
3
38
(193)
133
856
115
8
140
(554)
565
at May 1, 2010, Sobeys’ square footage totalled 28.1 million
square feet, a 2.2 percent increase over the 27.5 million square
feet in operation at the end of the fourth quarter of last year.
Capital expenditures for the food retailing division in
fiscal 2010 equalled $341.4 million compared to $354.1 million
in fiscal 2009. Capital expenditures for the real estate division
equalled $68.1 million in fiscal 2010 ($36.9 million in fiscal 2009)
as a result of ongoing property developments and land additions.
Capital spending by investments and other operations equalled
$24.5 million in fiscal 2010 ($9.6 million in fiscal 2009).
Food Retailing
Capital Expenditures
(� in millions)
Real Estate
Capital Expenditures
(� in millions)
400
300
200
100
���.�
80
60
40
20
��.�
FY
06
07
08
09
10
FY
06
07
08
09
10
2010 annual report
49
Management’s Discussion and Analysis
Financing activities
Financing activities during the fourth quarter of fiscal 2010
used $83.5 million of cash compared to $58.0 million of cash
used in the same quarter last year. the increase of $25.5 million
in cash flows used in financing activities when compared to the
same quarter last year is primarily the result of an increase in
cash flow used to repay bank indebtedness.
Financing activities during the 52 weeks ended May 1, 2010
used $148.6 million of cash compared to $213.9 million of
cash used in financing activities in the same period last year.
the decrease in cash flows used in financing activities of
$65.3 million in the 52 weeks ended May 1, 2010 when
compared to the same period last year is primarily the result
of: (i) a decrease in long-term debt repayment of $149.1 million;
(ii) an increase in issuance of long-term debt of $30.9 million;
and (iii) a decrease in cash flow used to reduce bank indebtedness
of $18.6 million; partially offset by a decrease in cash flow from
the issue of non-Voting Class a shares of $129.1 million.
as previously discussed, on april 24, 2009 empire issued
2,713,000 non-Voting Class a shares at a price of $49.75 per
share. the total net proceeds raised of $129.1 million (gross
proceeds of $135 million) were used to repay a portion of
empire’s non-consolidated bank facility.
the Company believes that its cash and cash equivalents,
future operating cash flows and available credit facilities will enable
the Company to fund its future capital investments, pension plan
contributions, working capital and ongoing business requirements.
the Company believes it has sufficient funding in place to meet
these requirements and other long-term obligations.
guaRantees and cOMMitMents
the following illustrates the Company’s significant contractual obligations, over the next five fiscal years and thereafter.
Gross Obligations Excluding Lease Income
($ in millions)
long-term debt
Capital leases
operating leases
third-parties
related-parties
total operating leases
2011
$ 364.2
17.6
$
281.3
45.2
326.5
2012
23.8
14.1
268.0
37.2
305.2
2013
$ 218.0
9.7
$
250.5
37.2
287.7
2014
32.6
6.4
232.9
38.1
271.0
2015
thereafter
total
$
25.1
5.1
$ 494.5
6.2
$ 1,158.2
59.1
216.7
38.2
1,432.7
440.2
2,682.1
636.1
254.9
1,872.9
3,318.2
total contractual obligations
$ 708.3
$ 343.1
$ 515.4
$ 310.0
$ 285.1
$ 2,373.6
$ 4,535.5
Operating Leases, Net of Expected Lease Income Received by the Company
($ in millions)
third-parties
related-parties
2011
2012
2013
2014
2015
thereafter
total
$ 187.9
45.2
$ 180.0
37.2
$ 170.8
37.2
$ 161.9
38.1
$ 153.3
38.2
$ 1,013.0
440.2
$ 1,866.9
636.1
$ 233.1
$ 217.2
$ 208.0
$ 200.0
$ 191.5
$ 1,453.2
$ 2,503.0
Franchise affiliates
Sobeys has guaranteed certain bank loans contracted by
franchise affiliates. as at May 1, 2010, these loans amounted
to $0.2 million (2009 – $0.5 million).
During fiscal 2008, Sobeys entered into an additional
guarantee contract. under the terms of the guarantee, should
franchise affiliates be unable to fulfill their lease obligations,
Sobeys would be required to fund the greater of $7.0 million
or 9.9 percent (2009 – $6.0 million or 9.9 percent) of the
unfulfilled obligation balance. the terms of the guarantee
contract are reviewed annually each august. as at May 1, 2010
the amount of the guarantee was $7.0 million (May 2, 2009 –
$6.0 million).
Sobeys has guaranteed certain equipment leases of its
franchise affiliates. under the terms of the guarantee, should
franchise affiliates be unable to fulfill its lease obligations,
Sobeys would be required to fund the difference of the
lease commitments up to a maximum of $70.0 million on
a cumulative basis. Sobeys approves each of the contracts.
During fiscal 2009, Sobeys entered into an additional credit
enhancement contract in the form of a standby letter of credit
for certain independent franchisees for the purchase and
installation of equipment. under the terms of the contract, should
franchisee affiliates be unable to fulfill their lease obligations or
other remedy, Sobeys would be required to fund the greater of
$4.0 million or 10.0 percent (2009 – $4.0 million or 10.0 percent)
of the authorized and outstanding obligation annually.
50
eMpIre CoMpany lIMIteD
Other
at May 1, 2010, the Company was contingently liable for
letters of credit issued in the aggregate amount of $50.1 million
(2009 – $55.3 million).
upon entering into the lease of its Mississauga distribution
centre in March 2000, Sobeys Capital Incorporated, a direct
subsidiary of Sobeys, guaranteed to the landlord the performance
by Serca Foodservice Inc., of all of its obligations under the
lease. the remaining term of the lease is 10 years with an
aggregate obligation of $31.6 million (2009 – $34.6 million).
at the time of the sale of assets of Serca Foodservice Inc.
to SySCo Corp., the lease of the Mississauga distribution
centre was assigned to and assumed by a subsidiary of the
purchaser and SySCo Corp. agreed to indemnify and hold
Sobeys Capital Incorporated harmless from any liability
it may incur pursuant to its guarantee.
under the terms of the agreement, Sobeys is required to obtain
a letter of credit in the amount of the outstanding guarantee,
to be revisited each calendar year. this credit enhancement
allows Sobeys to provide favorable financing terms to certain
independent franchisees. the contract terms have been
reviewed and Sobeys has determined that there were no
material implications with respect to the consolidation
of VIes. as of May 1, 2010, the amount of the guarantee was
$4.0 million (2009 – $4.0 million).
the aggregate, annual, minimum rent payable under the
guaranteed operating equipment leases for fiscal 2011 is
approximately $22.1 million. the guaranteed lease commitments
over the next five fiscal years are:
($ in millions)
2011
2012
2013
2014
2015
thereafter
FRee casH FlOW
third parties
$
22.1
16.2
10.2
3.3
0.4
1.2
Free cash flow (see non-Gaap measures section) is used to measure the change in the Company’s cash available for additional
investing, dividends and/or debt reduction. the following table reconciles free cash flow to Gaap cash flows used in operating
activities for the 13 and 52 week periods ended May 1, 2010 and May 2, 2009.
13 Weeks ended
52 Weeks ended
($ in millions)
May 1, 2010
May 2, 2009(1)
May 1, 2010
May 2, 2009(1)
Cash flow from operating activities
less: property and equipment purchases
Free cash flow
$
320.8
128.0
$
192.8
$
$
205.2
112.0
93.2
$
784.1
434.0
$
668.0
400.6
$
350.1
$
267.4
(1) amounts have been restated as a result of a change in accounting policy and a reclassification with respect to goodwill and intangible assets.
please see the section entitled “Changes in accounting policies” in this MD&a.
Free cash flow generation in the fourth quarter of fiscal 2010
was $192.8 million compared to free cash flow of $93.2 million
in the fourth quarter last year. the $99.6 million increase
in free cash flow from the fourth quarter last fiscal year was
due to a $115.6 million increase in cash flow from operations,
partially offset by a $16.0 million increase in property and
equipment purchases.
For the 52 weeks ended May 1, 2010, free cash flow
equalled $350.1 million, an increase of $82.7 million over
the $267.4 million in free cash flow recorded for the same
period last year. the improvement is due to a $116.1 million
increase in cash flow from operating activities, partially
offset by an increase of $33.4 million in property and
equipment purchases.
2010 annual report
51
Management’s Discussion and Analysis
controls and accounting Policies
cHanges in accOunting POlicies
Accounting standards adopted during fiscal 2010:
Future Changes in Accounting Policies:
Goodwill and Intangible Assets
In February 2008, the Canadian Institute of Chartered
accountants (“CICa”) issued Section 3064, “Goodwill and
Intangible Assets”, which replaced existing Section 3062,
“Goodwill and Other Intangible Assets”, and Section 3450,
“Research and Development”. the new standard provides
guidance on the recognition, measurement, presentation and
disclosure of goodwill and intangible assets. as a result of
adopting Section 3064, emerging Issues Committee abstract 27,
“Revenues and Expenditures During the Pre-operating Period”,
no longer applies. the Company has implemented these
requirements, in compliance with transitional provisions,
effective for the first quarter of fiscal 2010 with a retroactive
restatement of the comparative periods. the initial impact
under the new standard as at May 2, 2009 was a decrease
to prepaid expenses of $6.9 million, a decrease to other assets
of $62.4 million, a decrease in property and equipment of
$33.7 million, an increase to intangibles of $96.1 million,
a decrease of future tax liabilities of $2.2 million as well as a
reduction of retained earnings of $4.7 million. For the 52 weeks
ended May 2, 2009, cost of sales, selling and administration
expenses decreased $9.4 million, depreciation and amortization
expense increased $11.3 million, and income taxes decreased
$0.7 million.
Financial Instruments – Disclosures
In June 2009, the CICa issued amendments to the existing
Section 3862, “Financial Instruments – Disclosures”, to more
closely align the section with those required under IFrS. the
amendments include enhanced disclosure requirements relating
to fair value measurements of financial instruments and liquidity
risks. these amendments apply to annual financial statements
with fiscal years ending after September 30, 2009. the
Company has implemented these enhanced disclosure
requirements in compliance with transitional provisions.
the new disclosures did not have a material impact.
Business Combinations, Consolidated Financial
Statements and Non-Controlling Interests
In January 2009, the CICa issued three new accounting
standards which are based on the International accounting
Standards Board’s IFrS 3, “Business Combinations”. Section
1582, “Business Combinations”, which replaces Section 1581
with the same title, aims to improve the relevance, reliability
and comparability of the information provided in financial
statements about business combinations. this section is to be
applied prospectively to business combinations for which the
acquisition date is on or after January 1, 2011 and assets and
liabilities that arose from business combinations that preceded
the adoption of this standard should not be adjusted upon
adoption. Section 1601, “Consolidated Financial Statements”,
and Section 1602, “Non-controlling Interests”, replace
Section 1600, “Consolidated Financial Statements”, and
establish standards for the preparation of consolidated financial
statements and for accounting for a non-controlling interest
in a subsidiary in consolidated financial statements subsequent
to a business combination. these standards apply to interim
and annual consolidated financial statements beginning on or
after January 1, 2011. earlier adoption of all three standards
is permitted as of the beginning of a fiscal year, however if
an entity chooses to early adopt, all three standards must be
adopted concurrently. the Company is currently evaluating
the impact of these new standards.
Multiple Deliverable Revenue Arrangements
In December 2009, the CICa issued eIC 175, “Multiple
Deliverable Revenue Arrangements”. eIC 175, which replaces
eIC 142, “Revenue Arrangements with Multiple Deliverables”,
addresses some aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-
generating activities. this new standard is effective for
annual consolidated financial statements commencing on
January 1, 2011, with earlier adoption permitted as of the
beginning of a fiscal year. the Company is assessing the impact
of the new standard on its financial statements.
52
eMpIre CoMpany lIMIteD
tRansitiOn tO inteRnatiOnal Financial RePORting standaRds
on February 13, 2008, the accounting Standards Board of
Canada announced that Canadian Gaap for publicly accountable
enterprises will be replaced by IFrS. IFrS must be adopted for
interim and annual financial statements related to fiscal years
beginning on or after January 1, 2011, with restatement of
comparative periods. accordingly, the conversion from Canadian
Gaap to IFrS will be applicable to the Company’s reporting
for the first quarter of fiscal 2012 specifically august 6, 2011,
for which the current and comparative infor mation will be
prepared under IFrS. the Company has developed a three
phase changeover plan for the IFrS conversion. the following
timeline captures the key dates for the Company:
IFRS Implementation Timeline
PRELIMINARY
RISK ASSESSMENT
IFRS Transition Date
First Reporting
under IFRS
ANALYSIS AND
SOLUTION DEVELOPMENT
IMPLEMENTATION
MAY �,
����
MAY �,
����
MAY �,
����
MAY �,
����
MAY �,
����
AUG �,
����
MAY �,
����
CANADIAN GAAP REPORTING
IFRS
COMPARATIVE PERIOD
FIRST YEAR OF REPORTING
UNDER IFRS
Project Status
the Company is currently evaluating the potential impact of the conversion to IFrS on its financial statements. a formal project
governance structure has been developed to ensure regular progress reports are provided to senior management, a structured
Steering Committee, as well as the audit Committee and Board of Directors. the Company’s IFrS changeover plan is summarized
below which details the Company’s progress towards completion of selected key activities.
Key activities
Milestones/Deadlines
progress to Date
Financial statement
preparation
• Identify differences in
Canadian Gaap/IFrS
accounting policies.
• Evaluate and select IFRS
policies & IFrS 1 choices.
• Develop financial statement
format and disclosure.
• Quantify effects of
changeover in initial IFrS 1
disclosures and fiscal 2011
financial statements.
• Steering Committee and
• Completed diagnostic
audit Committee approval
for all key IFrS accounting
policy choices to occur
during fiscal 2010.
• Draft skeleton IFRS annual
and interim financial
statements by the end
of fiscal 2010.
• Final quantification of
conversion effects on
fiscal 2011 comparative
period by fiscal 2012.
impact assessment during
fiscal 2009, which involved
a high level review of major
differences between IFrS
and Canadian Gaap.
• Completed approval of key
IFrS accounting policy
choices in fiscal 2010;
quantification of transition
opening balance sheet
impacts is underway.
• Obtained approval of key
IFrS 1 exemptions
applicable to the entity in
fiscal 2010; quantification
of transition impact is
underway.
• Obtained approval
for drafted skeleton
annual and interim IFrS
financial statements.
2010 annual report
53
Management’s Discussion and Analysis
Key activities
Milestones/Deadlines
progress to Date
training and
communication
• Educate the Board of
Directors, audit Committee,
management, key
employees and other
stakeholders.
• Communicate progress of
changeover plan to internal
and external stakeholders.
• Monitor ongoing IFRS
accounting standards
developments.
• Ongoing training provided
to all groups to align with
changeover.
• Additional training will
occur as needed during
the changeover year.
• Communicate project
status updates regularly
until completion of IFrS
implementation.
• Ongoing monitoring of
future developments of
standards and interpreta-
tions to occur until
completion of IFrS
implementation.
information systems
• Determine if business
• IT implementation
processes require change
to be IFrS compliant.
• Determine if software
requires upgrades,
changes, or additions
to support IFrS
reporting requirements.
approach to be completed
in fiscal 2010.
• Changes to systems
and dual record-keeping
process to be completed
at the beginning of
fiscal 2011.
• Preparation of quarterly
financial information
during fiscal 2011 to
produce comparative
information required in
the Company’s fiscal 2012
IFrS financial statements.
54
eMpIre CoMpany lIMIteD
• Completed training for
general awareness of
IFrS to broad group of
finance employees,
Steering Committee,
Board of Directors and
audit Committee.
• Completed IFRS Implemen-
tation training for finance
personnel across the
organization on key
impacts of transition for
the Company, changes
in accounting policy
and dual reporting
year requirements.
• Frequent project status
communications have been
provided to internal and
external stakeholders.
• Frequent attendance by
key personnel at relevant
seminars, participation
in industry peer groups
and utilization of key
technical resources.
• Ongoing monitoring of
future developments of
standards and interpreta-
tions through review
of the International
accounting Standards
Board (“IaSB”) work plan
and projects underway.
• Assessment of business
processes is underway in
conjunction with work on
accounting policies.
• Completed IT implementa-
tion plan in fiscal 2010 to
address new information
requirements under IFrS
particularly related to a
significant increase in
note disclosures.
• Changes to information
systems required to
prepare the opening
balance sheet and gather
appropriate information
for dual reporting for fiscal
2011 have been completed.
contractual arrangements
and compensation
Key activities
Milestones/Deadlines
progress to Date
• Assess the affect
• Complete necessary
• Preliminary analysis is
of IFrS on:
– Financial covenants;
– Compensation
arrangements;
– Budgeting and planning.
• Make any required changes
to plans and arrangements.
covenant negotiations
during fiscal 2011.
• Complete review of
compensation arrange-
ments during fiscal 2011.
• Complete budgeting
plan during fiscal 2011.
underway in conjunction
with work on accounting
policies. additionally, key
performance indicators
(“KpI”) and budgeting
IFrS project groups have
been formed to assess
transition impacts.
control environment
• Assess, design, and
implement internal controls
over financial reporting
(“ICFr”) for all accounting
policy changes.
• Assess, design, and
implement disclosure
controls and procedures
(“DC&p”) for all identified
accounting policy changes.
• Changes to ICFR and DC&P
to be completed during
fiscal 2011.
• Test and evaluate revised
controls throughout
fiscal 2011.
• Update Chief Executive
officer/Chief Financial
officer certification process
by the end of fiscal 2011.
• Analysis of control issues
is underway in conjunction
with the review of
IFrS accounting issues
and policies.
• MD&A disclosures are
regularly reviewed and
updated with changes in
the project status.
• IFRS Communications
Committee, which includes
Investor relations, has been
assembled and is engaged.
Significant Changes in Accounting Policies
the Company continues to assess the effect of the adoption of IFrS and the resulting changes in accounting policies. any significant
accounting policy changes that have been identified to date are detailed below. the list is for significant accounting policy changes
identified only, and should not be considered a complete list of all IFrS accounting policy differences for the Company. the Company
will continue to assess the impact of the transition to IFrS and to review all of the proposed and ongoing projects of the IaSB to
determine their impact on the Company.
at this time, the Company is assessing the quantitative impact of the opening balance sheet transitional adjustments and
expects to report quantified IFrS results later in fiscal 2011. as IFrS results are quantified throughout the changeover year, the
results will be reported on a timely basis.
Key accounting policy
Property, Plant
& equipment
Key Difference Between IFrS and
Canadian Gaap for the Company
potential Key Impacts for the Company
• IFRS allows the measurement of fixed assets
using a cost model or a revaluation model.
Canadian Gaap only permits the use of a
cost model. the Company has selected to
continue using the cost model approach
under IFrS.
• Opening balance sheet: The impact is currently
being evaluated by the Company.
• Subsequent to transition: No significant impact
is expected because the Company has selected
the same measurement model under IFrS as is
utilized under Canadian Gaap.
• IFRS requires separate amortization of
major components of an asset. under
Canadian Gaap this requirement exists,
however is less explicit.
• Opening balance sheet: No significant impact
is expected. Significant components of assets
have been reviewed to determine that the
Company separates major components of
assets under Canadian Gaap, therefore no
change is required.
• Subsequent to transition: No significant impact
is expected. assets will be reviewed to identify
separate components at each reporting date.
2010 annual report
55
Management’s Discussion and Analysis
Key accounting policy
investment property
Key Difference Between IFrS and
Canadian Gaap for the Company
• Investment property is a new concept under
IFrS that does not exist under Canadian
Gaap. Investment properties are defined as
properties that are held to earn rentals and/
or held for capital appreciation. Investment
properties are separately recorded and
disclosed under IFrS, while they are
recorded with property, plant, and
equipment under Canadian Gaap.
impairment of
long-lived assets
• IFRS tests asset groups for impairment at
the independent cash-generating unit
(“CGu”) level based on generation of cash
inflows. under Canadian Gaap, asset groups
are defined based on net cash flows.
potential Key Impacts for the Company
• Opening balance sheet: Investment
properties will be identified at the date of
transition to IFrS and will be separately
recorded and disclosed from property, plant
and equipment in the opening IFrS balance
sheet. the impact is currently being
evaluated by the Company.
• Subsequent to transition: No significant
impact is expected. the Company has
selected the cost model for the measure-
ment of investment properties. therefore,
the investment properties identified will
continue to be measured as they were under
Canadian Gaap when classified as property,
plant, and equipment. Investment properties
will be assessed at each reporting date.
• When utilizing the cost model, the Company
must disclose the aggregated fair value of all
investment properties. the Company is in
the process of obtaining information for
this disclosure.
• Grouping of assets for impairment
purposes will be at a lower level than
under Canadian Gaap.
• Opening balance sheet: Impairment testing
for CGus where an indicator of impairment
exists will be conducted on the Company’s
transition date. the Company has not yet
completed the assessment of the impact.
• Subsequent to transition: New monitoring
of indicators of impairment will have to be
conducted at the CGu level, which repre-
sents an individual retail store outlet or
theatre for the Company. Increased
impairment testing may need to be
conducted if indicators exist.
• IFRS has guidelines surrounding the highest
asset group that goodwill and indefinite-life
intangible assets can be allocated to for
impairment testing purposes that may differ
from Canadian Gaap for certain entities.
• Opening balance sheet: No significant
impact is expected. Goodwill and indefinite-
life impairment testing from previous
acquisitions will be at a level consistent
with Canadian Gaap.
• Subsequent to transition: Goodwill arising
from future business acquisitions will be
allocated to asset groups based on the
synergies expected from the transaction.
56
eMpIre CoMpany lIMIteD
Key accounting policy
impairment of
long-lived assets
(continued)
Key Difference Between IFrS and
Canadian Gaap for the Company
• IFRS requires a single-step impairment test
for long-lived assets based on discounted
cash flows. under Canadian Gaap, a
two-step approach is used which first
compares undiscounted cash flows to the
carrying amount and only measures an
impairment based on fair value if the
undiscounted cash flow is less than its
carrying value.
potential Key Impacts for the Company
• Opening balance sheet: No significant
impact is expected.
• Subsequent to transition: The one step
impairment test under IFrS may result
in more frequent write-downs of assets.
• Under IFRS previously recognized impair-
• Opening balance sheet: No significant
ment losses must be considered for reversal
when a change in circumstances indicates
impairment has been reduced for long-lived
assets other than goodwill or indefinite life
intangible assets. reversals of impairment
are prohibited under Canadian Gaap.
impact is expected.
• Subsequent to transition: No significant
impact is expected. additional monitoring
surrounding indicators of impairment
reversal will need to be conducted. reversal
of previous impairments may be required.
leases
• IFRS does not provide the same quantitative
guidelines as Canadian Gaap, but rather has
additional qualitative considerations for
classification of leases between ‘operating’
and ‘finance’ (‘capital’ under Canadian
Gaap) leases.
• IFRS has different recognition principles
surrounding sale leaseback transactions
where the lease is classified as an ‘operating’
lease and the transaction occurs at fair
market value.
• IFRS permits recognition of the realized
portion of gains on transactions between
related parties to the extent of ownership
by non-related parties.
• Opening balance sheet: No significant
impact is expected as the Company had
already applied a classification approach
which included both quantitative and
qualitative considerations.
• Subsequent to transition: All new leases
will continue to be assessed as ‘operating’
or ‘finance’ leases. no significant impact
is expected.
• Opening balance sheet: Certain gains related
to historical sale leaseback transactions will
be recognized on transition to IFrS. realized
portions of historical gains related to sale
leaseback transactions with related parties
will be recognized on transition to IFrS.
• Subsequent to transition: Gains on sale
leaseback transactions where the lease is an
‘operating’ lease and the transaction occurs
at fair market value will result in the
immediate recognition of any gain rather
than deferral over the lease term as under
Canadian Gaap. transactions between
related parties will result in the recognition
of gains for the realized portion if certain
criteria are met.
2010 annual report
57
Management’s Discussion and Analysis
Key accounting policy
Provisions
customer
loyalty programs
Key Difference Between IFrS and
Canadian Gaap for the Company
• IFRS uses different terminology than
Canadian Gaap and provides more
extensive guidance on recognition of
provisions defined as liabilities with
uncertain timing and/or amount, including
the following:
– provisions are recognized when it is
probable (more likely than not) that an
outflow of resources will be required to
settle the obligation, while a higher
threshold is used under Canadian Gaap;
– provisions will be separately classified
from other liabilities (current and
non-current) on the face of the balance
sheet and subject to additional disclosure
requirements;
– provisions are recognized if either a legal
obligation or constructive obligation
exists, while only legal obligation is
considered under Canadian Gaap;
– a provision must be recognized if a
contract becomes onerous where the
unavoidable costs of meeting the
obligations under the contract exceed the
economic benefits expected to be
received from it; and
– provisions are discounted when impact
is material.
• IFRS requires a deferred revenue recognition
approach for customer loyalty programs
with the fair value of the award credits to be
recognized as a separate component of the
sales transaction. under Canadian Gaap an
entity can use a deferred revenue approach
or account for the program as an expense.
the Company uses the latter approach
under Canadian Gaap.
potential Key Impacts for the Company
• Opening balance sheet and subsequent
to transition: the Company has not yet
finalized the assessment of the impact on
its opening IFrS balance sheet. It is possible
that additional provisions will be recognized
under IFrS and/or measurement or timing
of recognition of existing liabilities
may differ.
• Opening balance sheet impact: There will
be a one-time adjustment related to the
deferral of revenue recognized under
Canadian Gaap. While the amount is
currently being assessed, the Company
expects this will not have a significant impact
on transition.
• Subsequent to transition: No significant
impact is expected. the Company will
account for its customer loyalty programs
using the deferred revenue approach.
58
eMpIre CoMpany lIMIteD
Key accounting policy
Key Difference Between IFrS and
Canadian Gaap for the Company
employee benefits
• IFRS requires vested past service costs of
defined benefit pension plans to be
expensed immediately and unvested past
service costs to be recognized on a
straight-line basis until the benefits become
vested. under Canadian Gaap, all past
service costs are generally amortized on a
straight-line basis over the average remain-
ing service period of employees active at the
date of the amendment, or a shorter period.
• IFRS requires an entity to make an account-
ing policy choice regarding the recognition
of actuarial gains and losses. the three
options that are available are as follows:
– deferred recognition using a “corridor”
approach;
– immediate recognition through the
income statement; or
– immediate recognition through other
comprehensive income.
• The Company has chosen to recognize
actuarial gains and losses immediately
through other comprehensive income.
this policy was not available to the
Company under Canadian Gaap. previously
the Company delayed recognition of
actuarial gains and losses by utilizing a
“corridor” approach.
potential Key Impacts for the Company
• Opening balance sheet impact: There will
be a one-time adjustment to recognize any
vested past service costs at the date of
transition to IFrS. While the amount is
currently being assessed, the Company
expects this will not have a significant impact
on transition.
• Subsequent to transition: The Company
will recognize vested past service costs
immediately at the date of a plan amend-
ment rather than amortizing those costs
on a straight-line basis.
• Opening balance sheet impact: No signifi-
cant impact is expected as a result of this
policy choice; however an adjustment to
retained earnings is expected as a result of
the Company opting to utilize an IFrS 1
exemption to recognize all unamortized
actuarial gains and losses through retained
earnings upon transition to IFrS.
• Subsequent to transition: The Company will
recognize actuarial gains and losses into
other comprehensive income immediately as
they are incurred rather than delaying their
recognition and amortizing those gains and
losses over time.
consolidation – special
Purpose entities (“sPes”)
• IFRS uses a more principles-based control
model for consolidation of Spes. entities are
to be consolidated if the Company has the
majority of the risks and rewards of
ownership over the subject entity. the
control factors considered include:
– a majority share ownership;
– ability to control the Board;
– power to govern financial and operating
policies; and
– contracted arrangements conferring
effective control.
• Under Canadian GAAP, VIEs are consolidated
based on their equity investment at risk.
• Opening balance sheet impact: The control
factors under IFrS for consolidation will be
considered as at the transition date to IFrS,
specifically related to consolidation of
certain franchises. no significant impact is
expected as a result of preliminary assess-
ments as most VIes under Canadian Gaap
will continue to be consolidated as Spes
under IFrS.
• Subsequent to transition: At each reporting
date the Company will continue to assess
whether entities must be consolidated by
using the IFrS control model.
2010 annual report
59
Management’s Discussion and Analysis
Key accounting policy
Key Difference Between IFrS and
Canadian Gaap for the Company
consolidation –
subsidiaries and
investments in associates
• IFRS requires the use of consistent group
accounting policies which is not explicitly
required under Canadian Gaap.
potential Key Impacts for the Company
• Opening balance sheet impact and subse-
quent to transition: no significant changes
are expected, however, the Company is
working closely with all of its investments to
ensure that IFrS transition impacts are
appropriately captured.
Joint ventures
• Existing IAS 31, Interests in Joint Ventures,
• Opening balance sheet impact and subsequent
to transition: Certain investments in joint
ventures will be accounted for using the
equity method rather than proportionate
consolidation method used for Canadian Gaap.
allows an entity to account for jointly
controlled operations using proportionate
consolidation or the equity method. the
IaSB has a current project underway that
will require joint ventures to be accounted
for using the equity method, which is
expected to be issued in June 2010.
under Canadian Gaap these type of
investments are accounted for using
proportionate consolidation.
First-Time Adoption of IFRS
IFrS 1, “First-time Adoption of International Financial Reporting
Standards”, provides guidance for an entity’s initial year of IFrS
adoption. the Company must apply this standard in fiscal 2012.
IFrS 1 generally requires retrospective application of all IFrSs
at the reporting date, with the exception of limited optional
exemptions and certain mandatory exceptions that are detailed
in the standard. the most significant optional IFrS 1 exemptions
that the Company expects to apply in its opening IFrS balance
sheet are summarized as follows:
business combinations
the Company expects to apply IFrS 3, “Business Combinations”,
prospectively from the date of transition to IFrS. IFrS 3 will
only be applied to business combinations that occur after the
date of transition, however specific requirements must be met
for historical business combinations, such as: maintaining the
classification of the acquirer and the acquiree, recognizing or
derecognizing certain acquired assets or liabilities as required
under IFrSs and re-measuring certain assets and liabilities
at fair value. there is no expected impact to the Company’s
opening IFrS balance sheet as a result of this election.
Fair value as deemed cost
the Company expects to elect to report certain items of
property, plant and equipment, investment property, and/or
intangible assets in its opening IFrS balance sheet at a deemed
cost instead of the actual cost that would be determined under
IFrSs. the deemed cost of an item may be either its fair value
at the date of transition to IFrSs or an amount determined by
a previous revaluation under Canadian Gaap (as long as that
amount was close to either its fair value, cost or adjusted cost).
the exemption can be applied on an asset-by-asset basis, and
the Company is currently evaluating individual assets for which
the election may apply. the impact on the Company’s opening
IFrS balance sheet is not currently known as the assessment
is currently in progress.
employee benefits
the Company expects to make the election to recognize all
cumulative actuarial gains and losses through retained earnings
at the date of transition to IFrSs. actuarial gains and losses
would have to be recalculated under IFrSs from the inception
of each of the Company’s defined benefit plans if the exemption
was not taken. this election must be applied to all defined
benefit plans consistently. the quantified amount of this
adjustment is currently being assessed to determine its impact
on the opening IFrS balance sheet.
cumulative translation differences
the Company expects to elect not to calculate the currency
translation difference in accordance with IaS 21, The Effects
of Changes in Foreign Exchange Rates, from the date a foreign
subsidiary or associate was formed or acquired. Instead, the
cumulative translation balance for all foreign operations will
be set to zero at the date of transition to IFrS.
assets and liabilities of subsidiaries
the Company has subsidiaries that will adopt IFrS at an earlier
date than the Company. the Company expects to elect to
measure in its financial statements, the assets and liabilities of
these subsidiaries by using the carrying amounts included in
the subsidiaries’ own financial statements.
60
eMpIre CoMpany lIMIteD
cRitical accOunting estiMates
the preparation of financial statements in accordance with
Canadian Gaap requires management to make estimates and
assumptions that affect the reported amounts and disclosures
made in the consolidated financial statements and accompanying
notes. Certain of these estimates require subjective or complex
judgments by management that may be uncertain. Some of
these items include inventories, carrying value of commercial
properties, goodwill, employee future benefits, stock based
compensation, valuation of aBCp, customer loyalty programs
and income taxes. Changes to these estimates could materially
impact the financial statements. these estimates are based on
management’s best knowledge of current events and actions
that the Company may undertake in the future. actual results
could differ from these estimates.
Pension, Post-Retirement and Post-Employment Benefits
Certain estimates and assumptions are used in actuarially
determining the Company’s defined pension and employee
future benefits obligation.
Significant assumptions used to calculate the pension and
employee future benefits obligation are the discount rate, the
expected long-term rate of return on plan assets and expected
growth rate of health care costs. these assumptions depend on
various underlying factors such as economic conditions,
investment performance, employee demographics and mortality
rates. these assumptions may change in the future and may
result in material changes in the pension and employee benefit
plans expense. the magnitude of any immediate impact,
however, is mitigated by the fact that net actuarial gains and
losses in excess of ten percent of the greater of the accrued
benefit plan obligation and the market value of the benefit plan
assets are amortized on a straight-line basis over the average
remaining service period of the active employees. Changes in
financial market returns and interest rates could also result in
changes in funding requirements for the Company’s defined
benefit pension plans.
the discount rate is based on current market interest
rates assuming a portfolio of corporate aa bonds with
terms to maturity that, on average, match the terms of the
obligation. the appropriate discount rates are determined on
april 30th every year. For fiscal 2010, the discount rate used
for calculation of pension and other benefit plan expense was
5.50 percent and 5.75 percent, respectively (fiscal 2009 –
6.25 percent and 6.00 percent). the expected long-term rate
of return on plan assets for pension benefit plans for fiscal 2010
was 7.0 percent (fiscal 2009 – 7.0 percent). the expected
growth rate in health care costs was 9.0 percent for fiscal 2009,
fiscal 2010 and fiscal 2011 then grading down by 0.5 percent
per annum to an ultimate rate of 5.0 percent in fiscal 2019.
the expected future growth rate is evaluated on an annual basis.
the table below outlines the sensitivity of the 2010 key economic assumptions used in measuring the accrued benefit plan
obligations and related expenses of the Company’s pension and other benefit plans. the sensitivity of each key assumption has
been calculated independently. Changes to more than one assumption simultaneously may amplify or reduce the impact on the
accrued benefit obligation or benefit plan expenses.
($ in millions)
expected long-term rate of return on plan assets
Impact of: 1% increase
Impact of: 1% decrease
Discount rate(2)
Impact of: 1% increase
Impact of: 1% decrease
Growth rate of health care costs(3)
Impact of: 1% increase
Impact of: 1% decrease
pension plans
other Benefit plans
Benefit
obligations
5.50%
(28.1)
31.8
$
$
Benefit
Cost(1)
7.00%
(2.2)
2.2
5.50%
0.4
(0.7)
$
$
$
$
Benefit
obligations
Benefit
Cost(1)
5.75%
(20.1)
24.2
9.00%
23.7
(18.4)
$
$
$
$
6.75%
(0.8)
1.0
9.00%
2.2
(1.6)
$
$
$
$
(1) reflects the impact on the current service cost, the interest cost and the expected return on assets.
(2) 5.25 percent for the Senior Management plan and oshawa Serp and post-retirement Benefits, 5.75 percent for Sobeys post-retirement
Benefit plan and 4.50 percent for post-employment plan.
(3) Gradually decreasing to 5.00 percent in 2019 and remaining at that level thereafter.
2010 annual report
61
Management’s Discussion and Analysis
Goodwill and Long-Lived Assets
Goodwill is not amortized and is assessed for impairment at
the reporting unit level. this is done annually at a minimum.
any potential goodwill impairment is identified by comparing
the fair value of a reporting unit to its carrying value. If the fair
value of the reporting unit exceeds its carrying value, goodwill
is considered not to be impaired. If the carrying value of the
reporting unit exceeds its fair value, potential goodwill impair-
ment has been identified and must be quantified by comparing
the estimated fair value of the reporting unit’s goodwill to its
carrying value. any goodwill impairment will result in a reduction
in the carrying value of goodwill on the consolidated balance
sheet and in the recognition of a non-cash impairment charge
in operating income.
the Company periodically assesses the recoverability
of long-lived assets when there are indications of potential
impairment. In performing these analyses, the Company
considers such factors as current results, trends and future
prospects, current market value and other economic factors.
a substantial change in estimated undiscounted future cash
flows for these assets could materially change their estimated
fair values, possibly resulting in additional impairment. Changes
which may impact future cash flows include, but are not limited
to, competition and general economic conditions and
unrecoverable increases in operating costs.
Income Taxes
Future income tax assets and liabilities are recognized for
the future income tax consequences attributable to temporary
differences between the financial statement carrying values
of assets and liabilities and their respective income tax bases.
Future income tax assets or liabilities are measured using
enacted or substantively enacted income tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. the
cOntROls and PROceduRes
Management is responsible for establishing and maintaining
DC&p to provide reasonable assurance that material information
relating to empire is made known to management by others,
particularly during the period in which the annual filings are
being prepared, and that information required to be disclosed by
the Company and its annual filings, interim filings and other
reports filed or submitted by it under securities legislation is
recorded, processed, summarized and reported within the time
periods specified in securities legislation. the Ceo and CFo
have evaluated the effectiveness of the Company’s DC&p and
have concluded as at May 1, 2010 that empire’s DC&p were
designed and operating effectively, and that there were no
material weaknesses relating to the design or operation of
the DC&p.
calculation of current and future income taxes requires
management to make estimates and assumptions and to
exercise a certain amount of judgment. the financial statement
carrying values of assets and liabilities are subject to accounting
estimates inherent in those balances. the income tax bases
of assets and liabilities are based upon the interpretation of
income tax legislation across various jurisdictions. the current
and future income tax assets and liabilities are also impacted
by expectations about future operating results and the timing
of reversal of temporary differences as well as possible audits
of tax filings by the regulatory authorities. Management believes
it has adequately provided for income taxes based on current
available information.
Changes or differences in these estimates or assumptions
may result in changes to the current or future income tax
balances on the consolidated balance sheet.
Valuation of Inventories
Inventories are valued at the lower of cost and estimated net
realizable value. Significant estimation or judgment is required
in the determination of (i) inventories counted at retail and
adjusted to cost and (ii) estimated inventory reductions due
to spoilage and shrinkage occurring between the last physical
inventory count and the balance sheet date, and (iii) estimated
inventory provisions associated with vendor allowances and
internal charges. Changes or differences in any of these
estimates may result in changes to inventories on the consoli-
dated balance sheet and a charge or credit to operating income
in the consolidated statement of earnings.
Inventory shrinkage, which is calculated as a percentage
of the related inventory, is evaluated throughout the year
and provides for estimated inventory shortages from the
last physical count to the balance sheet date. to the extent
that actual losses experienced vary from those estimated,
inventories, operating income and consolidated earnings
may be impacted.
Management is also responsible for establishing and
maintaining adequate ICFr to provide reasonable assurance
regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance
with Gaap. the control framework management used to design
and assess the effectiveness of ICFr is the Internal Control
Integrated Framework published by the Committee of Sponsoring
organization of the treadway Commission (“CoSo”). the Ceo
and CFo have evaluated the effectiveness of empire’s ICFr
and have concluded as at May 1, 2010 that empire’s ICFr was
designed and operating effectively, and that there were no
material weaknesses relating to the design or operations of the
ICFr. there have been no changes in the Company’s ICFr
during the period beginning on January 31, 2010 and ended on
May 1, 2010 that have materially affected, or are reasonably
likely to materially affect, empire’s ICFr.
62
eMpIre CoMpany lIMIteD
Related-PaRty tRansactiOns
the Company rents premises from Crombie reIt. In addition, for
a period of five years commencing March 23, 2006, Crombie reIt
provides administrative and management services to the Company
pursuant to a management cost sharing agreement dated
March 23, 2006, between a subsidiary of Crombie reIt and eCl.
the rental payments are at exchange amount which represents
the amount negotiated between the parties as part of the lease
agreement. the charges incurred for administrative and manage-
ment services are on a cost recovery basis (billed at the cost
incurred by the invoicing party). For the 52 weeks ended
May 1, 2010, the aggregate rental payments to Crombie reIt
were $57.3 million (2009 – $46.4 million). For the 52 weeks ended
May 1, 2010, charges incurred for administrative and management
services were $2.1 million (2009 – $2.9 million). the Company has
non-interest bearing notes payable to Crombie reIt in the amount
of $7.7 million related to the subsidy payments to Crombie reIt
pursuant to an omnibus subsidy agreement dated March 23, 2006
between certain subsidiaries of Crombie reIt and eCl.
on December 30, 2008, the Company entered into an
agreement to provide Crombie reIt with additional financing
through a $20.0 million demand loan facility with substantially the
same terms and conditions that govern Crombie reIt’s floating
rate revolving credit facility. on December 30, 2008, the Company
had advanced $10.0 million to Crombie reIt under this facility.
on January 29, 2009, the $10.0 million advance was repaid in full.
During empire’s second quarter, as a result of the improved
financial market conditions, this facility was cancelled.
the Company has provided Crombie reIt with fixed rate
second mortgage in the amount of $5.9 million (2009 –
$6.2 million). the second mortgages have a weighted average
interest rate of 5.38 percent with a maturity date of March 2014.
subsequent events
Concurrent with placing the $6.2 million in mortgage financing
in fiscal 2009, the authorized amount of the demand loan
facility between empire and Crombie reIt was reduced from
$20.0 million to $13.8 million prior to its cancellation in the
second quarter as discussed.
on June 25, 2009, Crombie reIt closed a bought-deal public
offering of units at a price of $7.80 per unit. In satisfaction
of its pre-emptive right with respect to the public offering, the
Company subscribed for approximately $30.0 million of Class B
units (which are convertible on a one-for-one basis into units
of Crombie reIt). Consequently the Company’s interest in
Crombie reIt was reduced from 47.9 percent to 47.4 percent.
on September 30, 2009, the Company purchased $10.0 million
of convertible unsecured subordinated debentures (the “Deben-
tures”) from Crombie reIt, pursuant to a bought-deal prospectus
offering of a total of $85.0 million. the Debentures have a
maturity date of June 30, 2015. the Debentures have a coupon
of 6.25 percent per annum and each $1,000 principal amount of
Debenture is convertible into approximately 90.9091 units of
Crombie reIt, at any time, at the option of the holder, based on a
conversion price of $11.00 per unit. the Debentures have been
classified as available-for-sale and are included in investments, at
realizable value.
During fiscal 2010, the Company sold eight commercial
properties to Crombie reIt for net cash proceeds of $56.7 million,
which was fair market value. Since the sale was to an equity
accounted investment, no gain was recorded on the sale.
on a fully diluted basis (assuming conversion of all outstanding
convertible securities of Crombie reIt), the Company’s interest in
Crombie reIt would be approximately 40.3 percent.
on May 25, 2010, Sobeys filed a short form prospectus
providing for the issuance of up to $500.0 million of unsecured
Medium term notes. on June 7, 2010, Sobeys issued new
Medium term notes of $150.0 million, bearing an interest rate
of 6.64 percent, maturing on June 7, 2040.
on June 4, 2010, the Company renewed its non-consolidated
$650.0 million credit facility that matured on that date for an
additional three-year term to expire on June 30, 2013. When
completing the credit renewal, empire’s management determined
that the Company’s credit requirements had decreased and,
as a result, the size of the facility was reduced to $450.0 million
from $650.0 million.
on July 8, 2010, it was announced that Sobeys has entered
into a non-binding letter of intent for the sale of $102 million
of Canadian retail properties to Crombie reIt comprising a
portfolio of 11 retail properties (the “portfolio”). the portfolio
totals approximately 496,630 square feet and consists of
eight properties located in Western Canada, two in ontario and
one in atlantic Canada. the sale price represents a going in
capitalization rate of approximately 7.7 percent.
Crombie reIt has also entered into an agreement with a
syndicate of underwriters to issue, on a bought-deal basis,
2,670,000 units (the “units”) at a price of $11.05 per unit for
gross proceeds of approximately $29.5 million. Concurrently,
eCl Developments, in satisfaction of its pre-emptive right
with respect to the public unit offering, will subscribe for
1,855,000 exchangeable lp units at a price of $11.05 per unit
for additional gross proceeds of $20.5 million. Consequently,
the Company’s interest in Crombie reIt is expected to decrease
from 47.4 percent to 47.0 percent. the total $50 million
offering is subject to regulatory approval. the terms of the
offering will be described in a short form prospectus to be filed
with Canadian securities regulators. the offering of units is
expected to close on or about august 4, 2010 and is not
conditional upon completion of Crombie reIt’s acquisition of
the portfolio.
2010 annual report
63
Management’s Discussion and Analysis
Other Matters
Asset Backed Commercial Paper
as of May 1, 2010, the Company included in other long-term
assets is $30.0 million (2009 – $30.0 million) of third-party
aBCp which the Company estimates the fair value to be
$21.2 million (2009 – $17.8 million), approximately 71 percent
(2009 – 59 percent) of the face value. on January 21, 2009,
the Company derecognized the existing held to maturity assets
and received restructured aBCp MaV II notes: a1 – $7.8 million,
a2 – $17.5 million, B – $3.2 million, C – $0.9 million and
$0.6 million of tracking notes (collectively the “restructured
notes”) as designated in the Montreal accord as well as accrued
interest. the a1 and a2 notes received an a rating from DBrS.
the remaining notes have not yet been rated. the restructured
notes are floating rate notes with expected payouts in
January 2017. the Company has classified these notes as held
for trading and as a result are fair valued at each reporting
period. During fiscal 2009, the Company received $1.0 million
of interest and recorded a $4.7 million pre-tax provision.
the Company updated its analysis of the fair value of the
restructured notes, including factors such as estimated cash
flow scenarios and risk adjusted discount rates, and a pre-tax
gain of $3.4 million was recorded in the year ended May 1, 2010.
Discount rates vary depending upon the credit rating of
the restructured long-term floating rate notes. Discount rates
have been estimated using Government of Canada benchmark
rates plus expected spreads for similarly rated instruments
with similar maturities and structure. the Company has
performed a sensitivity analysis on estimated discount rates
used in the fair value analysis and determined that a change
of one percent would result in a pre-tax change in the fair
value of these investments of approximately $1.6 million
(2009 – $1.3 million).
on august 11, 2009, DBrS downgraded the a2 notes from
a to BBB (low) under a negative watch. the downgrade did not
have a material change in the fair value of the notes. Continuing
uncertainties regarding the value of assets which underlie the
aBCp, the amount and timing of cash flows and the outcome
of the restructuring process could give rise to a further material
change in the value of the Company’s investment in aBCp
which could impact the Company’s future earnings. the
Company believes it has sufficient credit facilities to satisfy
its financial obligations as they come due and does not expect
there will be a material adverse impact on its business as a
result of this current third party aBCp liquidity issue.
Employee Future Benefit Obligations
For the 52 weeks ended May 1, 2010, the Company contributed
$6.0 million (2009 – $5.8 million) to its registered defined
benefit plans. the Company expects to contribute approximately
$6.1 million in fiscal 2011 to these plans. the Company
continues to assess the impact of the capital markets on its
funding requirement.
designation for eligible dividends
“eligible dividends” receive favorable treatment for income tax
purposes. to be an eligible dividend, a dividend must be
designated as such at the time of payment.
empire has, in accordance with the administrative position
of the Cra, included the appropriate language on its website
to designate the dividends paid by empire as eligible dividends
unless otherwise designated.
contingencies
In the ordinary course of business, the Company is subject to
ongoing audits by tax authorities. While the Company believes
that its tax filing positions are appropriate and supportable,
from time to time certain matters are reviewed and challenged
by tax authorities.
on June 21, 2005 Sobeys received a notice of reassessment
from Cra for fiscal years 1999 and 2000 related to lumsden
Brothers limited (“lumsden”), a wholesale subsidiary of
Sobeys, and the Goods and Service tax (“GSt”). the reassess-
ment related to GSt on sales of tobacco products to status
Indians. Cra asserts that lumsden was obliged to collect GSt
on the sales of these tobacco products to status Indians. the
total tax, interest and penalties in the reassessment amounts to
$13.6 million. lumsden has reviewed this matter, has received
legal advice, and believes it was not required to collect GSt.
During the second quarter of fiscal 2006, Sobeys filed a notice
64
eMpIre CoMpany lIMIteD
of objection with Cra. accordingly, Sobeys has not recorded
in its statements of earnings any of the tax, interest or penalties
in the notice of reassessment. Sobeys has deposited with
Cra funds to cover the total tax, interest and penalties in the
reassessment and has recorded this amount as an other
long-term receivable from Cra pending resolution of the matter.
there are various claims and litigation, which the Company
is involved with, arising out of the ordinary course of business
operations. the Company’s management does not consider the
exposure to such litigation to be material, although this cannot
be predicted with certainty.
risk Management
through its operating companies and its equity-accounted
investments, empire is exposed to a number of risks in the
normal course of business that have the potential to affect
operating performance. the Company has operating and risk
management strategies and insurance programs to help
minimize these operating risks.
empire has adopted an annual enterprise risk management
assessment which is overseen by the Company’s senior
management and reported to the Board of Directors and the
audit Committee. the enterprise risk management framework
sets out principles and tools for identifying, evaluating,
prioritizing and managing risk effectively and consistently
across empire.
Competition
empire’s food retailing business, through Sobeys, operates in
a dynamic and competitive market. other national and regional
food distribution companies along with non-traditional
competitors, such as mass merchandisers and warehouse
clubs, represent a competitive risk to Sobeys’ ability to attract
customers and operate profitably in its markets.
Sobeys maintains a strong national presence in the Canadian
retail food and food distribution industry through regionally
managed operations. the most significant risk to Sobeys is the
potential for reduced revenues and profit margins as a result of
increased competition. to mitigate this risk, Sobeys’ strategy is
to be geographically diversified with the benefits of national
scale and regional management deployment, to be customer
and market-driven, to be focused on superior execution, and
to have efficient, cost effective operations. Sobeys reduces
its exposure to competitive or economic pressures in any one
region of the country by operating in each region of Canada
through a network of corporate, franchised, and affiliated
stores, and through servicing the needs of thousands of
independent, wholesale accounts. Sobeys approaches the
market with five distinct formats, with a variety of banners
and store sizes to meet anticipated needs of its customers in
order to enhance profitability by region and by target market.
empire’s real estate operations, through eCl, compete
with numerous other developers, managers, and owners of
real estate properties in seeking tenants and new properties
for future development. the existence of competing develop-
ers, managers and owners could affect our real estate group’s
ability to: (i) acquire a prospective property in compliance with
our investment criteria; (ii) lease space in its properties and
(iii) maximize rents charged and minimize concessions granted.
Commercial property revenue is also dependent on the renewal
of lease arrangements by key tenants. these factors could
adversely affect revenues and cash flows.
Continued growth of rental income is dependant on
renewing expiring leases and finding new tenants to fill
vacancies at market rental rates, thereby ensuring an attractive
return on our investment. the success of the real estate
portfolio is also subject to general economic conditions, the
supply and demand for rental property in key markets served,
and the availability of attractive financing to expand the real
estate portfolio where deemed prudent.
Genstar faces competition from other residential land
developers in securing attractive sites for new residential
lot development. although Genstar does hold land for future
development, it faces significant competition when looking
to acquire new land for future development.
Financial
empire and its operating companies have adopted a number
of key financial policies to manage financial risk. risks can
also arise from changes in the rules or standards governing
accounting or financial reporting. the Company employs
numerous professionally accredited accountants throughout
its finance group.
In the ordinary course of managing its debt, the Company
utilizes financial instruments from time to time to manage the
volatility of borrowing costs. Financial instruments are not used
for speculative purposes. the majority of the Company’s debt is
at fixed rates; accordingly, there is a limited exposure to interest
rate risk.
2010 annual report
65
Management’s Discussion and Analysis
Liquidity Risk
liquidity risk is the risk that the Company may not have
cash available to satisfy financial obligations as they come
due. the Company actively maintains committed credit facilities
to ensure that it has sufficient available funds to meet current
and foreseeable future financial requirements at a reasonable
cost. the Company monitors capital markets and the related
economic conditions. Market conditions allowing, the Company
will access debt capital markets for various long-term debt
maturities and as other liabilities come due or as assessed to
be appropriate in order to minimize risk and optimize pricing.
Interest Rate Risk
Interest rate risk is the potential for financial loss arising
from changes in interest rates. the majority of the Company’s
long-term debt is at fixed interest rates or hedged with interest
rate swaps. Bank indebtedness and approximately 17 percent
of the Company’s long-term debt is exposed to interest rate
risk due to floating rates.
Insurance
empire and its subsidiaries are self-insured on a limited basis
with respect to certain operational risks and also purchase
insurance coverage from financially stable third-party insurance
companies. In addition to maintaining comprehensive loss
prevention programs, the Company maintains management
programs to mitigate the financial impact of operational risks.
Human Resources
empire is exposed to the risk of labour disruption in its
operating companies. labour disruptions pose a moderate
operational risk, as Sobeys operates an integrated network of
24 distribution centres across the country for the food retailing
division. Sobeys has good relations with its employees and
unions and does not anticipate any material labour disruptions
in fiscal 2011. However, Sobeys has stated that it will accept
the short-term costs of a labour disruption to support a
commitment to building and sustaining a competitive cost
structure for the long-term.
effective leadership is very important to the growth and
continued success of the Company. the Company develops
and delivers training programs at all levels across its various
operating regions in order to improve employee knowledge
and to better serve its customers. the ability of the Company
to properly develop, train and retain its employees with
the appropriate skill set could affect the Company’s
future performance.
there is always a risk associated with the loss of key
personnel. Succession plans have been identified for key
roles including the depth of management talent throughout
the Company and its subsidiaries which is reviewed annually
by the Human resources Committee of the Board.
Business Continuity
the Company is subject to unexpected events and natural
hazards which could cause sudden or complete cessation of its
day to day operations. one such unexpected and natural hazard
is the risk of a pandemic. Sobeys has worked with industry
and government sources to develop a pandemic preparedness
plan. responsibility for business continuity planning has been
designated to the Human resources Committee of the Board.
Environmental, Health and Safety
the Company is continually enhancing its programs in areas
of environmental, health and safety and is in compliance with
relevant legislation. employee awareness and training programs
are conducted and environmental, health and safety risks are
reviewed on a regular basis.
any environmental site remediation is completed using
appropriate, qualified internal and external resources and health
and safety issues are proactively dealt with. the Board of
Directors receives regular reports which review outstanding
matters, identify new legislation and outline new programs
being implemented across the Company to positively impact
the environment and employee health and safety. existing
environmental protection regulatory requirements are not
expected to have a material financial or operational effect on
the capital expenditures, earnings or competitive position of
the Company during the current fiscal year or in future years.
Occupational Health and Safety
empire and Sobeys have developed programs to promote a
healthy and safe workplace, as well as progressive employment
policies focused on the well-being of the thousands of employees
who work in stores, distribution centres and offices. these
policies and programs are reviewed regularly by the Human
resources Committee of the Board.
each operating business conducts an ongoing, comprehensive
environmental monitoring process and the Company is unaware
of any material environmental liabilities in any of its operating
companies. empire’s Board of Directors receives quarterly
reports that review any outstanding issues including plans to
resolve them.
Food Safety and Security
Sobeys is subject to potential liabilities connected with its
business operations, including potential liabilities and expenses
associated with product defects, food safety and product
handling. Such liabilities may arise in relation to the storage,
distribution and display of products and, with respect to Sobeys’
private label products, in relation to the production, packaging
and design of products.
66
eMpIre CoMpany lIMIteD
a large majority of Sobeys’ sales are generated from food
products and Sobeys could be vulnerable in the event of a
significant outbreak of food-borne illness or increased public
health concerns in connection with certain food products.
Such an event could materially affect financial performance.
procedures are in place to manage food crises, should they occur.
these procedures identify risks, provide clear communication
to employees and consumers and ensure that potentially
harmful products are removed from inventory immediately.
Food safety related liability exposures are insured by the
Company. In addition, Sobeys has food safety procedures and
programs, which address safe food handling and preparation
standards. Sobeys employs best practices for the storage and
distribution of its food products.
Technology
the Company and each of its operating companies are
committed to improving their respective operating systems,
tools and procedures in order to become more efficient and
effective. the implementation of major information technology
projects carries with it various risks, including the risk of
realization of benefits, that must be mitigated by disciplined
change management and governance processes. Sobeys has a
business process optimization team staffed with knowledgeable
internal and external resources that is responsible for
implementing the various initiatives. the Company’s Board of
Directors have also created an oversight Committee to
ensure appropriate governance of these change initiatives
is in place and this committee receives regular reports from
the Company’s management.
Real Estate
the Company utilizes a capital allocation process which is
focused on obtaining the most attractive real estate locations
for its retail grocery stores as well as for its commercial property
and residential development operations, with direct Company
ownership being an important, but not overriding, consideration.
Sobeys develops certain retail store locations on owned sites;
however, the majority of its store development is done in
conjunction with external developers. the availability of high
potential new store sites and/or the ability to expand existing
stores is therefore in large part contingent upon successful
negotiation of operating leases with these developers and
Sobeys ability to purchase these sites.
Legal, Taxation and Accounting
Changes to any of the various federal and provincial laws, rules
and regulations related to the Company’s business could have
a material impact on its financial results. Compliance with any
proposed changes could also result in significant cost to the
Company. Failure to fully comply with various laws, rules and
regulations may expose the Company to proceedings which
may materially affect its performance.
Similarly, income tax regulations and/or accounting pro-
nouncements may be changed in ways which could negatively
affect the Company. the Company mitigates the risk of not being
in compliance with the various laws, rules and regulations by
monitoring for newly adopted regulations, improving technology
systems and controls, improving internal controls to detect
and prevent errors and overall, application of more scrutiny to
ensure compliance. In the ordinary course of business, the
Company is subject to ongoing audits by tax authorities. While
the Company believes that its tax filing positions are appropriate
and supportable, from time to time certain matters are reviewed
and challenged by the tax authorities.
Operations
the success of empire is closely tied to the performance of
Sobeys’ network of retail stores. Franchise affiliates operate
approximately 53 percent of Sobeys‘ retail stores. Sobeys relies
on the franchise affiliates and corporate store management to
successfully execute retail strategies and programs.
to maintain control over Sobeys’ brands and the quality
and range of products and services offered at its stores,
each franchisee agrees to purchase merchandise from Sobeys.
In addition, each store agrees to comply with the policies,
marketing plans and operating standards prescribed by Sobeys.
these obligations are specified under franchise agreements
which expire at various times for individual franchisees. as well,
Sobeys maintains head lease control or has long-term buying
agreements to control the vast majority of its retail locations.
Supply Chain
Sobeys is exposed to potential supply chain disruptions that
could result in shortages of merchandise in its retail store
network. Sobeys mitigates this risk through effective supplier
selection and procurement practices along with a reliance on
the efficient maintenance and evolution of its supply and
logistics chain to sustain and meet growth objectives.
Seasonality
the Company’s operations as they relate to food, specifically
inventory levels, sales volume and product mix, are impacted
to some degree by certain holiday periods in the year.
Product Costs
Sobeys is a significant purchaser of food product which may be
at risk of cost inflation given rising commodity prices and other
costs of production to food manufacturers. Should rising cost
of product materialize in excess of expectations and should
Sobeys not be able to offset such cost inflation through higher
retail prices and/or other cost savings, there could be a negative
impact on sales and margin performance. Sobeys has various
procurement and merchandising programs in place to mitigate
this risk.
2010 annual report
67
Management’s Discussion and Analysis
Utility and Fuel Prices
the Company is a significant consumer of electricity, other
utilities and fuel. unanticipated cost increases in these items
could negatively affect the Company’s financial performance.
the Company has various consumption and procurement
programs in place to minimize utility risk.
Foreign Operations
empire does not directly carry out foreign operations; however,
Sobeys does have certain foreign operations. Sobeys’ foreign
operations are limited to a small number of produce brokerage
operations based in the united States. these foreign operations
are relatively small and are not considered material to empire on
a consolidated basis; as such, the Company does not have any
material risks associated with foreign operations.
Foreign Currency
the Company conducts the majority of its operating business
in Canadian dollars and its foreign exchange risk is limited to
currency fluctuations between the Canadian dollar, the euro,
and the u.S. dollar. u.S. dollar purchases of product by the
food division represent approximately three percent of Sobeys’
total annual purchases with euro purchases limited to specific
contracts for capital expenditures. Sobeys has processes in
place to use forward contracts with high quality counter-parties
to fix the exchange rate on some of its expected requirements
for euros and u.S. dollars.
Ethical Business Conduct
any failure of the Company to adhere to its policies, the law or
ethical business practices could significantly affect its reputation
and brands and could therefore negatively impact the Company’s
financial performance. the Company’s framework for managing
ethical business conduct includes the adoption of a Code of
Business Conduct and ethics which directors and employees of
the Company are required to acknowledge and agree to on a
regular basis and, as part of an independent audit and security
function, maintenance of a whistle-blowing hotline.
Information Management
the integrity, reliability and security of information in all its forms
are critical to the Company’s daily and strategic operations.
Inaccurate, incomplete or unavailable information and/or
inappropriate access to information could lead to incorrect
financial and/or operational reporting, poor decisions,
privacy breaches and/or inappropriate disclosure or leaks
of sensitive information.
Information management is identified as a risk in its own
right, separate from the technology risk. the Company
recognizes that information is a critical enterprise asset.
Currently, the information management risk is being managed
at the regional and national levels through the development
of policies and procedures pertaining to security access, system
development, change management and problem and incident
management. With a view to enhancing and standardizing the
controls to manage the information management risk, the
Company is developing corporate operating policies which
establish minimum standards for the usage, security and
appropriate destruction of information. Furthermore, enterprise
metrics are being identified to assist in monitoring significant
information management risks.
Capital Allocation
the risk associated with capital allocation is high for a holding
company, especially due to the amount of capital invested
in the operating companies. It is important to ensure the capital
allocation decisions result in an appropriate return on capital. the
Company has a number of strong mitigation strategies in place
regarding the allocation of capital, including the Board review
of capital allocation decisions. the Company has established
prudent hurdle rates for capital investments that are evaluated
through a strong due diligence process.
Access to Capital
access to capital risk refers to empire being unable to obtain
required capital at reasonable terms, given the prevailing market
conditions. there are several factors that impact the level of
inherent risk: the state of the capital markets; the level of capital
required; the credit rating assigned by the rating agencies and
the availability of credit from the banks. empire mitigates these
risks by maintaining strong relationships with its banks and
access to the capital markets.
Economic Environment
economic conditions have shown some improvement from
fiscal 2009 to the end of fiscal 2010; however, management
continues to regard conditions as unfavourable which could result
in a potential risk to the Company. Management continues to
closely monitor economic conditions, including interest rates,
inflation, employment rates and capital markets. Management
believes that although a weakening economy has an impact on
all businesses and industries, the Company has an operational
and capital structure that is sufficient to meet its ongoing
business requirements.
additional financial information relating to empire, including
the Company’s annual Information Form, can be found on the
Company’s website or on the SeDar website for Canadian
regulatory filings at www.sedar.com.
Stellarton, nova Scotia, Canada
June 25, 2010
68
eMpIre CoMpany lIMIteD
Management’s statement of responsibility for Financial reporting
preparation of the consolidated financial statements accompanying this annual report and the presentation of all other information
in the report is the responsibility of management. the consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles and reflect management’s best estimates and judgements. all other financial
information in the report is consistent with that contained in the consolidated financial statements.
Management of the Company has established and maintains a system of internal control that provides reasonable assurance
as to the integrity of the consolidated financial statements, the safeguarding of Company assets, and the prevention and detection
of fraudulent financial reporting.
the Board of Directors, through its audit Committee, oversees management in carrying out its responsibilities for financial
reporting and systems of internal control. the audit Committee, which is chaired by and composed solely of directors who are
unrelated to, and independent of, the Company, meet regularly with financial management and external auditors to satisfy itself
as to reliability and integrity of financial information and the safeguarding of assets. the audit Committee reports its findings
to the Board of Directors for consideration in approving the annual consolidated financial statements to be issued to shareholders.
the external auditors have full and free access to the audit Committee.
Paul D. Sobey
president and
Chief executive officer
June 25, 2010
auditors’ report
Paul V. Beesley
executive Vice president and
Chief Financial officer
June 25, 2010
to the shareholders of empire Company limited
We have audited the consolidated balance sheets of empire Company limited as at May 1, 2010 and May 2, 2009, and the
consolidated statements of retained earnings, comprehensive income, earnings and cash flows for the 52 week fiscal years then
ended. these consolidated financial statements are the responsibility of the Company’s management. our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. those standards require that
we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material
misstatement. an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. an audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the
Company as at May 1, 2010 and May 2, 2009, and the results of its operations and its cash flows for the fiscal years then ended
in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
new Glasgow, Canada
June 15, 2010 (except for note 29(c) which is at July 8, 2010)
2010 annual report
69
Consolidated
Financial
Statements
Consolidated Balance Sheets
($ in millions)
Assets
Current
Cash and cash equivalents
Receivables
Loans and other receivables (Note 5)
Income taxes receivable
Inventories (Note 3)
Prepaid expenses
Investments at realizable value
Investments, at equity (realizable value $476.8; 2009 – $254.4) (Note 4)
Loans and other receivables (Note 5)
Other assets (Note 6)
Property and equipment (Note 7)
Assets held for sale
Intangibles (Note 8)
Goodwill
Liabilities
Current
Bank indebtedness (Note 9)
Accounts payable and accrued liabilities
Income taxes payable
Future income taxes (Note 17)
Long-term debt due within one year (Note 10)
Long-term debt (Note 10)
Employee future benefits obligation (Note 24)
Future income taxes (Note 17)
Other long-term liabilities (Note 11)
Minority interest
Shareholders’ equity
Capital stock (Note 12)
Contributed surplus
Retained earnings
Accumulated other comprehensive loss (Note 13)
Guarantees, commitments and contingent liabilities (Note 22)
Subsequent events (Note 29)
Approved on behalf of the Board
Director
See accompanying notes to the consolidated financial statements
Director
70
EMPIRE COMPANy LIMItED
May 1, 2010
May 2, 2009
Restated (Note 1)
$
401.0
336.9
105.8
–
880.3
70.1
1,794.1
10.9
56.8
79.2
94.5
2,548.7
36.5
455.0
1,172.6
$
231.6
308.9
65.6
4.9
842.8
63.9
1,517.7
1.1
18.8
75.3
89.0
2,567.8
8.5
441.5
1,171.4
$ 6,248.3
$ 5,891.1
$
17.8
1,621.6
19.5
50.9
379.4
2,089.2
829.0
125.1
86.4
130.6
35.6
3,295.9
325.1
3.2
2,652.2
(28.1)
2,952.4
$
45.9
1,487.1
–
40.5
133.0
1,706.5
1,124.0
118.4
89.5
135.0
38.9
3,212.3
324.5
1.7
2,401.1
(48.5)
2,678.8
$ 6,248.3
$ 5,891.1
Consolidated Statements of Retained Earnings
52 Weeks Ended
($ in millions)
Balance, beginning of year as previously reported
Adjustment due to implementation of new accounting standard (Note 1)
Balance, beginning of year as restated
Net earnings
Dividends
Preferred shares
Common shares
Balance, end of year
See accompanying notes to the consolidated financial statements
Consolidated Statements of Comprehensive Income
52 Weeks Ended
($ in millions)
Net earnings
Other comprehensive income (loss)
Unrealized gains (losses) on available-for-sale financial assets,
net of income taxes of $0.2 (2009 – $(0.1))
Reclassification of loss on available-for-sale financial assets
to earnings, net of income taxes of $nil
Unrealized gains (losses) on derivatives designated as cash flow hedges
to earnings, net of income taxes of $4.1 (2009 – $(7.3))
Reclassification of loss on derivative instruments designated as cash flow hedges
to earnings, net of income taxes of $2.9 (2009 – $1.5)
Share of comprehensive income (loss) of entities accounted for using
the equity method, net of income taxes of $4.0 (2009 – $(7.3))
Foreign currency translation adjustment
May 1, 2010
May 2, 2009
Restated (Note 1)
$ 2,405.8
(4.7)
$ 2,207.6
(25.0)
2,401.1
301.9
(0.1)
(50.7)
2,182.6
264.7
(0.1)
(46.1)
$ 2,652.2
$ 2,401.1
May 1, 2010
May 2, 2009
Restated (Note 1)
$
301.9
$
264.7
0.8
0.2
7.6
6.4
7.6
(2.2)
20.4
(0.4)
–
(16.2)
3.5
(14.1)
0.2
(27.0)
Comprehensive income
$
322.3
$
237.7
See accompanying notes to the consolidated financial statements
2010 ANNUAL REPORt
71
Consolidated Financial Statements
Consolidated Statements of Earnings
52 Weeks Ended
($ in millions except per share amounts)
Revenue
Operating expenses
Cost of sales, selling and administrative expenses
Depreciation and amortization
Investment income (Note 15)
Operating income
Interest expense
Long-term debt
Short-term debt
Capital (losses) gains and other items (Note 16)
Earnings before income taxes and minority interest
Income taxes (Note 17)
Current
Future
Earnings before minority interest
Minority interest
Net earnings
Earnings per share (Note 2)
Basic
Diluted
Weighted average number of common
shares outstanding, in millions
Basic
Diluted
See accompanying notes to the consolidated financial statements
72
EMPIRE COMPANy LIMItED
May 1, 2010
May 2, 2009
Restated (Note 1)
$ 15,516.2
$ 15,015.1
14,728.2
339.7
14,251.7
336.1
448.3
31.4
479.7
67.9
4.6
72.5
407.2
(0.6)
406.6
109.2
(10.1)
99.1
307.5
5.6
427.3
38.9
466.2
75.9
4.7
80.6
385.6
2.8
388.4
122.1
(6.7)
115.4
273.0
8.3
$
301.9
$
264.7
$
$
4.41
4.40
$
$
4.03
4.02
68.4
68.5
65.7
65.8
Consolidated Statements of Cash Flows
52 Weeks Ended
($ in millions)
Operating Activities
Net earnings
Items not affecting cash (Note 18)
Preferred dividends
Net change in non-cash working capital
Cash flows from operating activities
Investing Activities
Net increase in investments
Purchase of property and equipment
Proceeds on disposal of property and equipment
Additions to intangibles
Loans and other receivables
(Increase) decrease in other assets
Business acquisitions (Note 25)
Cash flows used in investing activities
Financing Activities
Decrease in bank indebtedness
Issue of long-term debt
Repayment of long-term debt
Minority interest
Repurchase of preferred shares
Issue of Non-Voting Class A shares (Note 12)
Common dividends
Cash flows used in financing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to the consolidated financial statements
May 1, 2010
May 2, 2009
Restated (Note 1)
$
301.9
358.0
(0.1)
659.8
124.3
784.1
(50.5)
(434.0)
137.1
(34.7)
(44.1)
(5.9)
(34.0)
(466.1)
(28.1)
97.7
(158.6)
(8.9)
–
–
(50.7)
(148.6)
169.4
231.6
$
264.7
352.9
(0.1)
617.5
50.5
668.0
(1.9)
(400.6)
78.0
(41.7)
(14.7)
8.4
(41.4)
(413.9)
(46.7)
66.8
(307.7)
(7.0)
(2.3)
129.1
(46.1)
(213.9)
40.2
191.4
$
401.0
$
231.6
2010 ANNUAL REPORt
73
Notes
to the
Consolidated
Financial Statements
1 Summary of significant accounting policies
Basis of consolidation
Empire Company Limited (the “Company”) is a diversified
Canadian company whose key businesses include food
retailing, real estate and corporate investment activities. these
consolidated financial statements have been prepared by
management in accordance with Canadian generally accepted
accounting principles (“GAAP”), and include the accounts of
the Company, all subsidiary companies, including 100 percent
owned Sobeys Inc. (“Sobeys”), and certain enterprises
considered variable interest entities (“VIEs”) where control is
achieved on a basis other than through ownership of a majority
of voting rights. Investments in which the Company has
significant influence are accounted for using the equity method.
Investments in significant joint ventures are consolidated on
a proportionate basis.
the Company’s fiscal year ends on the first Saturday in May.
As a result, the fiscal year is usually 52 weeks but results in a
duration of 53 weeks every five to six years.
Changes in accounting policies
Adopted during fiscal 2010
Goodwill and intangible assets
In February 2008, the Canadian Institute of Chartered
Accountants (“CICA”) issued Section 3064, “Goodwill and
Intangible Assets”, which replaced existing Section 3062,
“Goodwill and Other Intangible Assets” and Section 3450,
“Research and Development”. the new standard provides
guidance on the recognition, measurement, presentation
and disclosure of goodwill and intangible assets. As a result
of adopting Section 3064, Emerging Issues Committee (“EIC”)
Abstract 27, “Revenues and Expenditures During the Pre-
Operating Period”, no longer applies. the Company has
implemented these requirements, in compliance with transitional
provisions, effective for the first quarter of fiscal 2010
retrospectively with restatement of the comparative periods.
the initial impact under the new standard as at May 2, 2009
was a decrease to prepaid expenses of $6.9, a decrease to
other assets of $62.4, a decrease in property and equipment of
$33.7, an increase to intangibles of $96.1, a decrease of future
tax liabilities of $2.2 as well as a reduction of retained earnings
of $4.7. For the year ended May 2, 2009, cost of sales, selling
and administrative expenses decreased $9.4, depreciation
and amortization expense increased $11.3 and income taxes
decreased $0.7.
Financial instruments – disclosures
In June 2009, the CICA issued amendments to the existing
Section 3862, “Financial Instruments – Disclosures”, to more
closely align the section with those required under International
Financial Reporting Standards (“IFRS”). the amendments include
May 1, 2010
($ in millions except per share amounts)
enhanced disclosure requirements relating to fair value
measurements of financial instruments and liquidity risks.
these amendments apply for annual financial statements with
fiscal years ending after September 30, 2009. the Company
has implemented these enhanced disclosure requirements in
compliance with transitional provisions. the new disclosures
did not have a material impact.
Adopted during fiscal 2009
Inventories
In June 2007, the CICA issued Section 3031, “Inventories”,
which replaced Section 3030 with the same title. the
Company, in accordance with transitional provisions, applied
the standard prospectively to opening inventory and retained
earnings for fiscal 2009. the initial impact of measuring
inventories under the new standard using a consistent cost
formula for inventories with a similar nature and use was
a decrease to the carrying amount of opening inventories of
$27.9 and a decrease to income taxes payable of $6.4.
Opening retained earnings was reduced by $21.5, equal to
the change in opening inventories, net of tax.
Capital disclosures
In October 2006, the CICA issued Section 1535, “Capital
Disclosures”. this section established standards for disclosing
information about an entity’s capital and how it is managed. the
standard was effective for interim and annual financial statements
relating to fiscal years beginning on or after October 1, 2007
and was applicable for the Company’s first quarter of fiscal 2009.
the adoption of Section 1535 did not have an impact on the
Company’s financial results or position.
Financial instruments – disclosure and
financial instruments – presentation
Section 3862, “Financial Instruments – Disclosure”, and
Section 3863, “Financial Instruments – Presentation”, replaced
Section 3861, “Financial Instruments – Disclosure and
Presentation”. these standards were effective for interim and
annual financial statements relating to fiscal years beginning on
or after October 1, 2007 and were applicable for the Company’s
first quarter of fiscal 2009. Section 3862 requires increased
disclosures regarding the risks associated with financial
instruments such as credit risk, liquidity risk and market
risk and the techniques used to identify, monitor and manage
these risks. In accordance with the transitional provision
of Section 3862, comparative information about the nature
and extent of risks arising from financial instruments was not
required in the year of adoption. Section 3863 carries forward
standards for presentation of financial instruments and
non-financial derivatives and provides additional guidance
for the classification of financial instruments between liabilities
and equity and had no significant impact on the Company’s
financial statements.
74
EMPIRE COMPANy LIMItED
Financial instruments – recognition and measurement
In January 2009, the CICA issued EIC 173, “Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities”. EIC 173
requires that a company take into account its own credit risk
and the credit risk of its counterparty in determining the fair
value of financial assets and financial liabilities. this abstract
must be applied retrospectively without restatement of prior
periods to all financial assets and liabilities measured at fair
value in interim and annual financial statements for periods
ending on or after January 20, 2009. the adoption of EIC 173
did not have a material impact on the Company’s financial
results, financial position or disclosures.
Future changes in accounting policies
Business combinations, consolidated financial statements
and non-controlling interests
In January 2009, the CICA issued three new accounting
standards which are based on the International Accounting
Standards Board’s IFRS 3, “Business Combinations”. Section 1582,
“Business Combinations”, which replaces Section 1581 with
the same title, aims to improve the relevance, reliability and
comparability of the information provided in financial statements
about business combinations. this section is to be applied
prospectively to business combinations for which the acquisition
date is on or after January 1, 2011 and assets and liabilities that
arose from business combinations that preceded the adoption
of this standard should not be adjusted upon adoption. Section
1601, “Consolidated Financial Statements”, and Section 1602,
“Non-Controlling Interests”, replace Section 1600, “Consolidated
Financial Statements”, and establish standards for the preparation
of consolidated financial statements and accounting for a
non-controlling interest in a subsidiary in consolidated financial
statements subsequent to a business combination. these
standards apply to interim and annual consolidated financial
statements beginning on or after January 1, 2011. Earlier
adoption of all three standards is permitted as of the beginning
of a fiscal year, however if an entity chooses to early adopt, all
three standards must be adopted concurrently. the Company is
currently evaluating the impact of these new standards.
Multiple deliverable revenue arrangements
In December 2009, the CICA issued EIC 175, “Multiple
Deliverable Revenue Arrangements”. EIC 175, which replaces
EIC 142, “Revenue Arrangements with Multiple Deliverables”,
addresses some aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-
generating activities. this new standard is effective for the
Company’s annual consolidated financial statements commencing
on January 1, 2011 with earlier adoption permitted as of the
beginning of a fiscal year. the Company is assessing the impact
of the new standard on its financial statements.
Cash and cash equivalents
Cash and cash equivalents are defined as cash, treasury bills
and guaranteed investments with a maturity less than 90 days
at date of acquisition.
Inventories
Warehouse inventories are valued at the lower of cost and
net realizable value with cost being determined on a weighted
average cost basis. Retail inventories are valued at the lower
of cost and net realizable value. Cost is determined using a
weighted average cost using either the standard cost method
or a retail method. the retail method uses the anticipated
selling price less normal profit margins, on a weighted average
cost basis.
the cost of inventories is comprised of directly attributable
costs and includes the purchase price plus other costs incurred
in bringing the inventories to their present location and
condition, such as freight. the cost is reduced by the value of
rebates and allowances received from vendors. the Company
estimates net realizable value as the amount that inventories
are expected to be sold taking into consideration fluctuations
of retail price due to seasonality less estimated costs necessary
to make the sale. Inventories are written down to net realizable
value when the cost of inventories is estimated to not be
recoverable due to obsolescence, damage or permanent
declines in selling prices. When circumstances that previously
caused inventories to be written down below cost no longer
exist or when there is clear evidence of an increase in retail
selling price, the amount of the write-down previously recorded
is reversed. Costs that do not contribute to bringing inventories
to their present location and condition, such as storage and
administrative overheads, are specifically excluded from the
cost of inventories and are expensed in the period incurred.
Real estate inventory of residential properties are carried
at the lower of cost or net realizable value. Estimated net
realizable value is based upon the net sales proceeds anticipated
in the normal course of business, less estimated costs to
complete or improve the property to the condition used in
determining the estimated selling price. Capitalized costs
include the cost of land and the cost of services, such as roads,
sewerage and water systems on land under development,
carrying and other costs, net of any rental income. Carrying
costs include an allocation of interest on debt and property
taxes, but do not include any allocation of administrative
overhead. Interest cost generally is not allocated to raw land
holdings until development commences. the cost of land
is generally pro-rated to each phase of a project on an acreage
basis. Cost of land sold, including development costs, is
allocated within each phase to saleable lots in proportion
to anticipated revenues.
2010 ANNUAL REPORt
75
Notes to the Consolidated Financial Statements
Long-lived assets
Long-lived assets are reviewed for impairment when events
or changes in circumstances indicate that the book value of
the assets may not be recoverable, as measured by comparing
their net book value to the estimated undiscounted future cash
flows generated by their use. Impaired assets are recorded
at the lower of carrying and fair value, determined principally
using discounted future cash flows expected from their use and
eventual disposition, with the impairment loss charged to cost
of sales, selling and administrative expenses.
Property and equipment
Property and equipment is recorded at net book value, being
original cost less accumulated depreciation and any writedowns
for impairment.
Depreciation on real estate buildings is calculated using the
straight-line method with reference to each property’s book
value, its estimated useful life (not exceeding 40 years) and its
residual value. Deferred leasing costs are amortized over the
terms of the related leases.
Depreciation of other property and equipment is recorded
on a straight-line basis over the estimated useful lives of the
assets as follows:
Equipment, fixtures and vehicles
Buildings
Leasehold improvements
3 – 20 years
10 – 40 years
Lesser of lease term
and 7 – 20 years
Assets to be disposed are classified as held for sale and are no
longer depreciated. Assets held for sale are recognized at the
lower of book value and fair value less cost of disposal.
the Company follows the full cost method of accounting for
its exploration and development of petroleum and natural gas
reserves. Costs initially capitalized are depleted and depreciated
using the unit-of-production method based on production
volumes, before royalties, in relation to the Company’s share
of estimated proved petroleum and natural gas reserves.
Capitalization of costs
(a) Construction projects
Certain subsidiary companies capitalize interest during the
construction period until the project opening date. the amount
of interest capitalized to construction in progress in the current
year was $0.6 (2009 – $3.1).
(b) Development properties and land held for
future development
Interest, real estate taxes and other expenses are expensed,
with the exception of property taxes which are capitalized
during the construction period. Capitalization of all costs ceases
when the development property is substantially complete
and ready for productive use, at which time the properties are
classified as commercial properties. No amounts were capitalized
in fiscal 2010 ($nil in fiscal 2009).
Deferred charges
Deferred store marketing costs, primarily comprised of major
store renovation and expansion costs, are included with
equipment, fixtures and vehicles as part of the Company’s
property and equipment balance sheet group.
Leases
Leases meeting certain criteria are accounted for as capital
leases. the imputed interest is charged against income. If the
lease contains a term that allows ownership to pass to the
Company, or there is a bargain purchase option, the capitalized
value is depreciated over the estimated useful life of the related
asset. Otherwise, the capitalized value is depreciated on a
straight-line basis over the lesser of the lease term and its
estimated useful life. Capital lease obligations are included in
the long-term debt of the Company and are reduced by rental
payments net of imputed interest. All other leases are
accounted for as operating leases.
Lease allowances and incentives are recorded as other
long-term liabilities and amortized as a reduction of lease
expense over the term of the lease. Real estate lease expense
is amortized straight-line over the entire term of the lease
including free rent periods related to store fixturing. A store
fixturing period varies by store but is generally considered
to be one month prior to the store opening.
Assets held for sale
Certain land and buildings have been listed for sale and
reclassified as “Assets held for sale” in accordance with CICA
Handbook Section 3475, “Disposal of Long-lived Assets and
Discontinued Operations”. these assets are expected to be sold
within a twelve-month period and are no longer productive
assets with no interest to develop them for future use. Assets
held for sale are valued at the lower of book value and fair value
less cost of disposal. Liabilities assumed upon sale of assets or
debts to be repaid as part of a sale transaction are also
classified as “Liabilities relating to assets held for sale”.
Intangibles
Intangibles arise on the purchase of a new business, existing
franchises, software and the acquisition of pharmacy prescription
files. Amortization is recorded on limited life intangibles
on a straight-line basis over the estimated useful life of the
intangible as follows:
Brand names
Deferred purchase agreements
Franchise rights/agreements
Patient files
Software
Other
10 years
5 – 10 years
10 years
15 years
3 – 7 years
5 – 10 years
76
EMPIRE COMPANy LIMItED
Goodwill and intangibles with indefinite useful lives
Goodwill represents the excess of the purchase price of the
business acquired over the fair value of the underlying net
tangible and intangible assets acquired at the date of acquisition.
Goodwill and intangible assets with indefinite useful lives are
not amortized but rather are subject to an annual impairment
review or more frequently if circumstances exist that might
indicate its value is impaired. Should the carrying value exceed
the fair value of goodwill or intangible assets (e.g. trademarks),
the carrying value will be written down to the fair value.
Financial instruments
the Company is required to recognize and measure all of its
financial assets and liabilities, including derivatives and embedded
derivatives in certain contracts, at fair value. Loans and
receivables, held to maturity financial assets and other financial
liabilities are subsequently measured at cost or amortized cost.
Derivatives and non-financial derivatives must be recorded
at fair value on the consolidated balance sheets unless they are
exempt from derivative treatment based upon expected
purchase, sale or usage requirements.
the Company classifies financial assets and liabilities
according to their characteristics and management’s choices
and intentions related thereto for the purposes of ongoing
measurements. Classification choices for financial assets
include: a) held for trading – measured at fair value with
changes in fair value recorded in net earnings; b) held to
maturity – recorded at amortized cost with gains and losses
recognized in net earnings in the period that the asset is
derecognized or impaired; c) available-for-sale – measured
at fair value with changes in fair value recognized in other
comprehensive income for the current period until realized
through disposal or impairment; and d) loans and receivables –
recorded at amortized cost with gains and losses recognized in
net earnings in the period that the asset is no longer recognized
or impaired. Classification choices for financial liabilities include:
a) held for trading – measured at fair value with changes in
fair value recorded in net earnings; and b) other – measured at
amortized cost with gains and losses recognized in net earnings
in the period that the liability is no longer recognized. Any
financial asset or liability can be classified as held for trading
as long as its fair value is reliably determinable.
the Company’s financial assets and liabilities are generally classified and measured as follows:
Asset/Liability
Classification
Measurement
Cash and cash equivalents
Receivables
Loans and other receivables
Investments
Derivative other assets and liabilities
Non-derivative other assets
Bank indebtedness
Accounts payable and accrued liabilities
Long-term debt
Held for trading
Loans and receivables
Loans and receivables
Available-for-sale
Held for trading
Held for trading
Other liabilities
Other liabilities
Other liabilities
Fair value
Amortized cost
Amortized cost
Fair value
Fair value
Fair value
Amortized cost
Amortized cost
Amortized cost
transaction costs other than those related to financial
instruments classified as held for trading, which are expensed
as incurred, are added to the fair value of the financial asset
or financial liability on initial recognition and amortized using
the effective interest method.
In fiscal 2010, the Company adopted the recent amendments
to Section 3862, “Financial Instruments – Disclosures”, which
more closely aligns the section with those required under IFRS.
the amendments include enhanced disclosures about inputs to
the fair value measurements, including classification within a
hierarchy that prioritizes the inputs to fair value measurement.
the hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. the three levels of the
fair value hierarchy are: level 1 – inputs that reflect unadjusted
quoted prices in active markets for identical assets or liabilities;
level 2 – inputs, other than quoted prices, that are observable
for the asset or liability either directly or indirectly, including
inputs in markets that are not considered to be active; or
level 3 – inputs that are not based on observable market data.
Inputs into the determination of fair value require significant
management judgment or estimation.
If different levels of inputs are used to measure a financial
instrument’s fair value, the classification within the hierarchy
is based on the lowest level of input that is significant to the fair
value measurement. Changes in valuation methods may result
in transfers into or out of an investment’s assigned level. these
amendments do not have any impact on the valuation of the
Company’s financial instruments and comparative information
is not required in the first year of application. Refer to Note 21
for the classification of the Company’s financial instruments.
Guarantees
Obligations undertaken through issuance of a guarantee that
meets the definition of a guarantee pursuant to Accounting
Guideline (“AcG”) 14, “Disclosure Guarantees”, are recognized
at fair value at inception with no subsequent re-measurement
at fair value required unless the financial guarantee qualifies
as a derivative.
2010 ANNUAL REPORt
77
Notes to the Consolidated Financial Statements
Hedges
the Company has cash flow hedges which are used to manage
exposure to fluctuations in foreign currency exchange rates,
variable interest rates and energy prices. For cash flow hedges,
the effective portion of the change in fair value of the hedging
item is recorded in other comprehensive income. to the extent
the change in fair value of the derivative is not completely offset
by the change in fair value of the hedged item, the ineffective
portion of the hedging relationship is recorded immediately
in net earnings. Amounts accumulated in other comprehensive
income are reclassified to net earnings when the hedged item
is recognized in net earnings. When a hedging instrument in
a cash flow hedge expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain
or loss in accumulated other comprehensive income relating to
the hedge is carried forward until the hedged item is recognized
in net earnings. When the hedged item ceases to exist as a
result of its expiry or sale, or if an anticipated transaction is
no longer expected to occur, the cumulative gain or loss in
accumulated other comprehensive income is immediately
reclassified to net earnings.
Financial derivatives assigned as part of a cash flow
hedging relationship are classified as either an other asset
or other liability as required based on their fair market
value determination.
Significant derivatives include the following:
(1) Foreign currency forward contracts for the primary purpose
of limiting exposure to exchange rate fluctuations relating
to expenditures denominated in foreign currencies. these
contracts are designated as hedging instruments for
accounting purposes. Accordingly, the effective portion
of the change in the fair value of the forward contracts
are accumulated in other comprehensive income until
the variability in cash flows being hedged is recognized
in earnings in future accounting periods.
(2) Electricity contracts to manage the cost of electricity
designated as cash flow hedges of anticipated transactions.
the portion of gain or loss on derivative instruments
designated as cash flow hedges that are deferred in
accumulated other comprehensive income is reclassified
into other income/expense when the product containing
the hedged item impacts earnings.
(3) Interest rate swaps designated as cash flow hedges to
manage variable interest rates associated with some of
the Company’s debt portfolio. Hedge accounting treatment
results in interest expense on the related debt being
reflected at hedged rates rather than variable interest rates.
for discounts on future grocery purchases, purchase products
or services or elect to convert the points into Aeroplan miles
which is a loyalty program run by a third party. When points are
earned by Program members, the Company records an expense
in its consolidated statements of earnings and establishes a
liability for future redemptions by multiplying the number of
points issued by the estimated cost per point. the Program
liability is included in accounts payable and accrued liabilities on
the Company’s consolidated balance sheets. the actual cost of
Program redemptions is charged against the liability account.
During fiscal 2010, a loyalty card program, Club thrifty Foods,
was launched. It follows a similar point earning and redemption
structure as the Club Sobeys loyalty card program.
the estimated cost per point is determined based on many
factors, primarily related to the expected future redemption
patterns and associated costs. the Company monitors, on an
ongoing basis, trends in redemption rates (points redeemed as
a percentage of points issued) and net cost per point redeemed
and adjusts the estimated cost per point based upon expected
future activity. Any difference in the cost per point is recognized
in cost of sales, selling and administrative expenses in the
Company’s consolidated statements of earnings. to the extent
that estimates differ from actual experience, the Program
expense could be higher or lower. the Company continues to
evaluate and revise certain assumptions used to calculate the
Program liability, based on redemption experience and expected
future activity.
An AIR MILES® reward program is also used by the Company.
AIR MILES® are earned by certain Sobeys customers based on
purchases in stores. the Company pays a per point fee under the
terms of the agreement with AIR MILES®. the cost of this program
is expensed as incurred as cost of sales, selling and administrative
expenses in the consolidated statements of earnings.
Future income taxes
the Company uses the asset and liability method of accounting
for income taxes, under which future tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.
Future tax assets and liabilities are measured using enacted
or substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences
are expected to be recovered or settled. Future tax assets are
recognized to the extent that it is more likely than not that they
will be recovered. the effect on future tax assets and liabilities
of a change in tax rates is recognized in income in the year that
includes the date of enactment or substantive enactment.
Customer loyalty programs
A Club Sobeys loyalty card program (the “Program”) was
launched during fiscal 2009. the Program allows members to
earn points on their purchases in certain Sobeys stores. As well,
a Club Sobeys credit card entitles the customer to earn points
for their purchases on the credit card. Members can redeem
these points, in accordance with the Program rewards schedule,
Deferred revenue
Deferred revenue consists of long-term supplier purchase
agreements, rental revenue arising from the sale of subsidiaries
and gains on sale leaseback transactions. Deferred revenue
is being taken into income on a straight-line basis over the
term of the related agreements and is included in other
long-term liabilities.
78
EMPIRE COMPANy LIMItED
Foreign currency translation
Assets and liabilities of self-sustaining foreign investments are
translated at exchange rates in effect at the balance sheet date.
the revenues and expenses are translated at average exchange
rates for the year. Cumulative gains and losses on translation
are shown in accumulated other comprehensive income.
Other assets and liabilities denominated in foreign currencies
are translated into Canadian dollars at the foreign currency
exchange rate in effect at each period end date. Exchange
gains or losses arising from the translation of these balances
denominated in foreign currencies are recognized in operating
income. Revenues and expenses denominated in foreign
currencies are translated into Canadian dollars at the average
exchange rate for the period.
Revenue recognition
Food sales are recognized at the point-of-sale. Sales include
revenues from customers through corporate stores operated
by the Company and consolidated VIEs, and revenue from sales
to non-VIE franchised stores, affiliated stores and independent
accounts. Revenue received from non-VIE franchised stores,
affiliated stores and independent accounts is mainly derived
from the sale of product. the Company also collects franchise fees
under two types of arrangements. Franchise fees contract ually
due based on the dollar value of product shipped are recorded
as revenue when the product is shipped. Franchise fees
contractually due based on the franchisee’s retail sales are
recorded as revenue weekly upon invoicing based on the
franchisee’s retail sales.
Revenue from the sale of residential lots and development
properties is recognized in the period in which the transaction
occurs, provided the earnings process is completed and the
collection of the proceeds is reasonably assured. As required
under GAAP, any gains on sale of properties to Crombie REIt,
which is accounted for using the equity method, are not
included in net earnings. Gains are applied to reduce the carrying
value of the Company’s equity investment in Crombie REIt.
Commercial real estate revenue is recognized in accordance
with the lease agreements with tenants on a straight-line basis.
Pension benefit plans and other benefit plans
the cost of the Company’s pension benefits for defined
contribution plans are expensed at the time active employees
are compensated. the cost of defined benefit pension plans
and other benefit plans is accrued based on actuarial valuations,
which are determined using the projected benefit method
pro-rated on service and management’s best estimate of
the expected long-term rate of return on plan assets, salary
escalation, retirement ages and expected growth rate of health
care costs.
Current market values are used to value benefit plan assets.
the obligation related to employee future benefits is measured
using current market interest rates, assuming a portfolio of
Corporate AA bonds with terms to maturity that, on average,
match the terms of the obligation.
the impact of changes in plan amendments is amortized
on a straight-line basis over the expected average remaining
service life (“EARSL”) of active members. For pension benefit
plans, the actuarial gains and losses and the impact of changes
in the actuarial basis in excess of 10 percent of the greater of
the projected benefit obligation and the market value of assets
are amortized on a straight-line basis over the EARSL of the
active members. For the Company’s Supplemental Executive
Retirement Plan (“SERP”), the impact of changes in the plan
provisions are amortized over five years.
Vendor allowances
the Company receives allowances from certain vendors whose
products are purchased for resale. Included in these vendor
programs are allowances for volume purchases, exclusivity
allowances, listing fees and other allowances. the Company
recognizes these allowances as a reduction of cost of sales,
selling and administrative expenses and related inventories in
accordance with EIC 144, “Accounting by a Customer (including
a Reseller) for Certain Consideration Received from a Vendor”.
Certain allowances from vendors are contingent on the Company
achieving minimum purchase levels. these allowances are
recognized when it is probable that the minimum purchase level
will be met and the amount of allowance can be estimated.
As of the year ended May 1, 2010, the Company has recognized
$4.8 (2009 – $5.7) of allowances in income where it is probable
that the minimum purchase level will be met and the amount
of allowance can be estimated.
Use of estimates
the preparation of consolidated financial statements, in
conformity with GAAP, requires management to make estimates
and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes.
Certain of these estimates require subjective or complex
judgements by management that may be uncertain. Some
of these items include the valuation of inventories, goodwill,
employee future benefits, stock-based compensation, valuation
of asset-backed commercial paper, loyalty programs and income
taxes. Changes to these estimates could materially impact the
financial statements. these estimates are based on management’s
best knowledge of current events and actions that the Company
may undertake in the future. Actual results could differ from
these estimates.
Earnings per share
Earnings per share is calculated by dividing the earnings
available to common shareholders by the weighted average
number of common shares outstanding during the year. Diluted
earnings per share is determined based on the treasury stock
method which assumes that all outstanding stock options with
an exercise price below the average market price are exercised
and the assumed proceeds are used to purchase the Company’s
common shares at the average market price during the year.
2010 ANNUAL REPORt
79
Notes to the Consolidated Financial Statements
2 Earnings per share
Earnings applicable to common shares is comprised of the following:
Operating earnings
Capital gains and other items, net of income taxes of $(18.0) (2009 – $(0.2))
Net earnings
Preferred share dividends
Earnings applicable to common shares
2010
2009
Restated (Note 1)
$
284.5
17.4
301.9
(0.1)
$
261.7
3.0
264.7
(0.1)
$
301.8
$
264.6
Included in income taxes of $(18.0) for the year ended May 1, 2010 is an income tax recovery of $17.0 (refer to Note 17).
Earnings per share is comprised of the following:
Operating earnings
Net capital gains and other items
Basic earnings per share
Operating earnings
Net capital gains and other items
Diluted earnings per share
3 Inventories
$
$
$
$
4.16
0.25
4.41
4.15
0.25
4.40
$
$
$
$
3.98
0.05
4.03
3.97
0.05
4.02
the cost of inventories recognized as an expense during the year was $11,616.1 (2009 – $11,232.5). the cost of inventories
recognized as an expense during the year included $36.2 (2009 – $45.5) for the write-down of inventories below cost to net
realizable value. there were no reversals of inventories written down previously (2009 – $nil).
4 Investments, at equity
Wajax Income Fund (27.6% interest)
Crombie REIt (47.4% interest)
U.S. residential real estate partnerships
the Company’s carrying value of its investment in Wajax Income Fund is as follows:
Balance, beginning of year
Equity earnings
Share of comprehensive loss
Distributions received
Balance, end of year
80
EMPIRE COMPANy LIMItED
May 1, 2010
May 2, 2009
$
$
30.8
8.4
17.6
56.8
$
31.0
(19.7)
7.5
$
18.8
May 1, 2010
May 2, 2009
$
31.0
9.2
(0.2)
(9.2)
$
31.6
18.5
(0.5)
(18.6)
$
30.8
$
31.0
the Company’s carrying value of its investment in Crombie REIt is as follows:
Balance, beginning of year
Equity earnings
Continuing operations
Other expenses
Share of comprehensive income (loss)
Distributions received
Deferral of gains on sale of property
Interest acquired in Crombie REIt
Balance, end of year
May 1, 2010
May 2, 2009
$
(19.7)
$
9.5
18.6
(4.7)
11.8
(24.9)
(2.7)
30.0
19.8
–
(20.8)
(21.8)
(6.4)
–
$
8.4
$
(19.7)
On June 25, 2009, Crombie REIt closed a bought-deal public offering of units at a price of $7.80 per unit. In satisfaction of its
pre-emptive right with respect to the public offering, the Company subscribed for $30.0 of Class B Units (which are convertible
on a one-for-one basis into units of Crombie REIt). Consequently the Company’s interest in Crombie REIt was reduced from
47.9% to 47.4%.
5 Loans and other receivables
Loans and mortgages receivable
Notes receivable and other
Less amount due within one year
May 1, 2010
May 2, 2009
$
110.5
74.5
185.0
105.8
$
86.9
54.0
140.9
65.6
$
79.2
$
75.3
Loans and mortgages receivable
Loans and mortgages receivable represent long-term financing to certain retail associates. these loans and mortgages are primarily
secured by inventory, fixtures and equipment, bear various interest rates and have repayment terms up to ten years. the carrying
amount of the loans and mortgages receivable approximates fair value based on the variable interest rates charged on the loans
and the operating relationship of the associates with the Company.
6 Other assets
Accrued benefit asset (Note 24)
Asset-backed commercial paper
Restricted cash
Derivative assets
Other
May 1, 2010
May 2, 2009
Restated (Note 1)
$
$
60.4
21.2
10.6
–
2.3
94.5
$
$
63.1
17.8
3.6
1.7
2.8
89.0
2010 ANNUAL REPORt
81
Notes to the Consolidated Financial Statements
Asset-backed commercial paper
Included in other assets is $30.0 (2009 – $30.0) of third-party
asset-backed commercial paper (“ABCP”) which the
Company estimates the fair value to be $21.2 (2009 – $17.8),
approximately 71 percent (2009 – 59 percent) of the face
value. On January 21, 2009, the Company derecognized the
existing held to maturity assets and received restructured ABCP
MAV II notes: A1 – $7.8, A2 – $17.5, B – $3.2, C – $0.9 and
$0.6 of tracking notes (the “restructured notes”) as designated
in the Montreal Accord as well as accrued interest. the A1 and
A2 notes received an A rating from the Dominion Bond Rating
Service (“DBRS”). the remaining notes have not yet been rated.
the restructured notes are floating rate notes with expected
payouts in January 2017.
On August 11, 2009, DBRS downgraded the A2 notes from
A to BBB (low) under a negative watch. the downgrade did not
have a material change in the fair value of the notes. Continuing
uncertainties regarding the value of assets which underlie the
ABCP, the amount and timing of cash flows and the outcome
of the restructuring process could give rise to a further material
change in the value of the Company’s investment in ABCP
which could impact the Company’s future earnings. the
Company believes it has sufficient credit facilities to satisfy
its financial obligations as they come due and does not expect
there will be a material adverse impact on its business as a
result of this current third party ABCP liquidity issue.
the Company has classified these notes as held for trading
and as a result are fair valued at each reporting period. During
fiscal 2009, the Company received $1.0 of interest and recorded
a $4.7 pre-tax provision. the Company updated its analysis of
the fair value of the restructured notes, including factors such
as estimated cash flow scenarios and risk adjusted discount
rates, and a pre-tax gain of $3.4 was recorded in the year ended
May 1, 2010. Discount rates vary depending upon the credit
rating of the restructured long-term floating rate notes. Discount
rates have been estimated using Government of Canada
benchmark rates plus expected spreads for similarly rated
instruments with similar maturities and structure. the Company
has performed a sensitivity analysis on estimated discount rates
used in the fair value analysis and determined that a change
of one percent would result in a pre-tax change in the fair value
of these investments of approximately $1.6 (2009 – $1.3).
7 Property and equipment
Food segment
Land
Land held for development
Buildings
Equipment, fixtures and vehicles
Leasehold improvements
Construction in progress
Assets under capital leases
Real estate and other segments
Land
Land held for development
Buildings
Equipment
Leasehold improvements
Construction in progress
Petroleum and natural gas costs
total
82
EMPIRE COMPANy LIMItED
Cost
Accumulated
Depreciation
$
263.4
60.8
959.9
2,304.6
530.5
91.0
119.0
4,329.2
6.5
57.6
73.7
84.7
78.7
69.5
84.6
$
–
–
260.0
1,463.8
312.0
–
65.1
2,100.9
–
–
27.9
47.3
24.2
–
35.5
May 1, 2010
Net
Book Value
$
263.4
60.8
699.9
840.8
218.5
91.0
53.9
2,228.3
6.5
57.6
45.8
37.4
54.5
69.5
49.1
455.3
134.9
320.4
$ 4,784.5
$ 2,235.8
$ 2,548.7
Food segment
Land
Land held for development
Buildings
Equipment, fixtures and vehicles
Leasehold improvements
Construction in progress
Assets under capital leases
Real estate and other segments
Land
Land held for development
Buildings
Equipment
Leasehold improvements
Construction in progress
Petroleum and natural gas costs
total
8 Intangibles
Brand names
Deferred purchase agreements
Franchise rights/agreements
Loyalty programs
Patient files
Private labels
Software
Other
May 2, 2009
Restated (Note 1)
Accumulated
Depreciation
Net
Book Value
$
–
–
238.0
1,409.2
288.2
–
52.1
1,987.5
–
–
25.1
41.6
19.7
–
29.8
$
270.7
57.2
671.8
783.4
200.0
227.1
61.7
2,271.9
6.5
57.5
47.8
36.5
39.4
54.1
54.1
$
Cost
270.7
57.2
909.8
2,192.6
488.2
227.1
113.8
4,259.4
6.5
57.5
72.9
78.1
59.1
54.1
83.9
412.1
116.2
295.9
$ 4,671.5
$ 2,103.7
$ 2,567.8
Accumulated
Amortization
May 1, 2010
Net
Book Value
$
8.2
18.4
18.6
–
8.3
–
74.9
33.4
$
192.8
38.0
39.3
11.4
24.8
59.5
51.0
38.2
$
Cost
201.0
56.4
57.9
11.4
33.1
59.5
125.9
71.6
$
616.8
$
161.8
$
455.0
2010 ANNUAL REPORt
83
Notes to the Consolidated Financial Statements
Brand names
Deferred purchase agreements
Franchise rights/agreements
Loyalty programs
Patient files
Private labels
Software
Other
May 2, 2009
Restated (Note 1)
Accumulated
Amortization
Net
Book Value
$
5.3
12.1
13.4
–
6.6
–
62.9
30.2
$
195.7
37.2
39.4
11.4
20.0
59.5
33.7
44.6
$
Cost
201.0
49.3
52.8
11.4
26.6
59.5
96.6
74.8
$
572.0
$
130.5
$
441.5
Included in intangibles as at May 1, 2010 and May 2, 2009 are the following amounts with indefinite useful lives: Brand names –
$172.8; Loyalty programs $11.4; and Private Labels $59.5.
9 Bank indebtedness
As security for certain bank loans, the Company has provided an assignment of certain marketable securities and, in certain
subsidiaries and joint ventures, general assignments of receivables and leases, first floating charge debentures on assets
and the assignment of proceeds of fire insurance policies.
10 Long-term debt
First mortgage loans, average interest rate 9.0%, due 2011 – 2021
Medium term Notes, interest rate 5.8%, due October 6, 2036
Medium term Notes, interest rate 6.1%, due October 29, 2035
Medium term Notes, interest rate 7.2%, due February 26, 2018
Debentures, average interest rate 9.9%, due 2011 – 2016
Notes payable and other debt primarily at interest rates fluctuating with the prime rate
Credit facility, floating interest rate tied to bankers’ acceptance rates, due June 8, 2010
Credit facility, floating interest rate tied to bankers’ acceptance rates, due July 23, 2012
Credit facility, floating interest rate tied to bankers’ acceptance rates, due November 8, 2010
Unamortized financing costs
Capital lease obligations, weighted average interest rate 5.38%, due 2010 – 2040
Less amount due within one year
May 1, 2010
May 2, 2009
$
Total
65.7
125.0
175.0
100.0
48.2
149.8
294.5
200.0
–
(2.0)
52.2
$
total
71.5
125.0
175.0
100.0
62.6
146.2
244.0
200.0
75.0
(3.0)
60.7
1,208.4
379.4
1,257.0
133.0
$
829.0
$ 1,124.0
84
EMPIRE COMPANy LIMItED
Long-term debt is secured by land and buildings, specific
charges on certain assets and additional security as described
in Note 9. Capital lease obligations are secured by the related
capital lease asset.
During fiscal 2008, in relation to the privatization of Sobeys,
the Company entered into new credit facilities (the “Credit
Facilities”) consisting of a $950.0 unsecured revolving term
credit maturing June 8, 2010 (subject to annual one-year
extensions at the request of the Company). the Credit Facilities
are subject to certain financial covenants. Interest on the debt
varies based on the designation of the loan (bankers’ acceptances
(“BA”) rate loans, Canadian prime rate loans, U.S. base rate loans
or LIBOR loans), fluctuations in the underlying rates, and in the
case of the BA rate loans or LIBOR loans, the margin applicable
to the financial covenants. On June 18, 2007, the Company
entered into two delayed fixed rate interest swaps. the first
swap, in an amount of $200.0, is for a period of three years at a
fixed interest rate of 4.998%. the second swap, in an amount of
$200.0, is for a period of five years at a fixed interest rate of
5.051%. Both swaps became effective on July 23, 2007.
On June 27, 2007, pursuant to the terms of the Credit
Facilities, the Company and Sobeys filed notice with the lenders
requesting the establishment of a new $300.0 five-year credit
in favour of Sobeys at the same interest rate and substantially
on the same terms and conditions as the Credit Facilities. At
July 23, 2007, Sobeys drew down $300.0 from its new credit
facility, the proceeds of which were used to pay a dividend to
the Company. the Company used the proceeds from the
dividend to reduce its indebtedness under the Credit Facilities
and the Credit Facilities were reduced to $650.0 accordingly.
On that date, the Company also transferred the second swap
to Sobeys. At May 1, 2010, the Credit Facilities have a balance
outstanding of $294.5 (May 2, 2009 – $244.0). Subsequent to
year-end, the Credit Facilities were renewed (refer to Note 29).
On July 30, 2007, Sobeys exercised an option under its new
credit facility to increase the size of the credit from $300.0 to
$600.0. At the same time, Sobeys terminated its previously
existing $300.0 operating credit which would have expired on
December 20, 2010. At May 1, 2010, $200.0 (May 2, 2009 –
$200.0) of this new credit facility has been drawn down and
classified as long-term debt. Sobeys has also issued $36.8 in
letters of credit against the facility at May 1, 2010 ($40.1 at
May 2, 2009).
On November 8, 2007, Sobeys established a revolving
credit facility of $75.0 that is currently unutilized. the maturity
date is November 8, 2010. the interest rate is floating and
fluctuates with changes in the bankers’ acceptance rate,
Canadian prime rate or LIBOR. On June 12, 2009, Sobeys
repaid, although did not cancel, this facility.
During fiscal 2010, Sobeys increased its capital lease
obligation by $7.1 (2009 – $12.6) with a similar increase in
assets under capital leases. these additions are non-cash
in nature, therefore have been excluded from the statements
of cash flows.
Debt retirement payments and capital lease obligations in each of the next five fiscal years and thereafter are:
2011
2012
2013
2014
2015
thereafter
total minimum lease payments
Financial expenses included in minimum lease payments
Long-term Debt
Capital Leases
$
364.2
23.8
218.0
32.6
25.1
494.5
$
$
17.6
14.1
9.7
6.4
5.1
6.2
59.1
6.9
52.2
2010 ANNUAL REPORt
85
Notes to the Consolidated Financial Statements
11 Other long-term liabilities
Deferred lease obligation
Deferred revenue
Accrued benefit liability (Note 24)
Derivative liabilities
Other
12 Capital stock
Authorized
May 1, 2010
May 2, 2009
$
66.8
13.3
25.4
17.2
7.9
$
54.4
7.8
24.3
39.8
8.7
$
130.6
$
135.0
No. of Shares
May 1, 2010
May 2, 2009
Preferred shares, par value of $25 each, issuable in series.
Series 2 cumulative, redeemable, rate of 75% of prime.
2002 preferred shares, par value of $25 each, issuable in series.
Non-Voting Class A shares, without par value.
Class B common shares, without par value, voting.
Issued and outstanding:
Preferred shares, Series 2
Non-Voting Class A
Class B common
Employees’ share purchase plan
2,682,100
992,000,000
259,107,435
40,800,000
168,000
34,197,498
34,260,763
$
4.2
316.2
7.6
328.0
(2.9)
$
4.2
316.1
7.6
327.9
(3.4)
$
325.1
$
324.5
the Series 2 preferred shares are redeemable at par. During
the year, the Company purchased for cancellation nil (2009 –
90,200) Series 2 preferred shares for $nil (2009 – $2.3).
Loans receivable from officers and employees of $2.9
(2009 – $3.4) under the Company’s share purchase plan are
classified as a reduction of Shareholders’ Equity. Loan repayments
will result in a corresponding increase in share capital. the loans
are non-interest bearing and non-recourse, secured by 101,510
(2009 – 110,148) Non-Voting Class A shares. the market value
of the shares at May 1, 2010 was $5.4 (May 2, 2009 – $5.5).
On April 24, 2009, the Company closed a bought-deal public
offering of Non-Voting Class A shares at a price of $49.75 per
share. the underwriters elected to exercise their over-allotment
option in full resulting in a total of 2,713,000 shares being
issued for net proceeds of $129.1.
Under certain circumstances, where an offer (as defined in
the share conditions) is made to purchase Class B common
shares, the holders of the Non-Voting Class A shares shall be
entitled to receive a follow-up offer at the highest price per share
paid, pursuant to such offer to purchase Class B common shares.
86
EMPIRE COMPANy LIMItED
13 Accumulated other comprehensive loss
the following table provides further detail regarding the composition of accumulated other comprehensive loss:
Balance, beginning of year
Other comprehensive income (loss) for the year
Balance, end of year
May 1, 2010
May 2, 2009
$
(48.5)
20.4
$
(28.1)
$
$
(21.5)
(27.0)
(48.5)
An estimated net loss of $6.0 recorded in accumulated other comprehensive loss related to the cash flow hedges as at May 1, 2010
(May 2, 2009 – $4.6), is expected to be reclassified to net earnings during the next 12 months. Remaining amounts will be
reclassified to net earnings over periods up to nine years.
14 Capital management
the Company’s objectives when managing capital are: (i) to
ensure sufficient liquidity to support its financial obligations
and execute its operating and strategic plans, (ii) to minimize
the cost of capital while taking into consideration current and
future industry, market and economic risks and conditions,
(iii) to maintain an optimal capital structure that provides
necessary financial flexibility while also ensuring compliance
with any financial covenants, and; (iv) to maintain an investment
grade credit rating with each rating agency that assesses the
credit worthiness of Sobeys Inc. No changes were made to
these objectives in the current year.
the Company monitors and makes adjustments to its
capital structure, when necessary, in light of changes in
economic conditions, the objectives of its shareholders,
the cash requirements of the business and the condition of
capital markets.
the Company considers its total capitalization to include all interest bearing debt, including bank loans, bankers’ acceptances,
long-term debt (including the current portion thereof) and shareholders’ equity, net of cash. the calculation is set out in the
following table:
Bank indebtedness
Long-term debt due within one year
Long-term debt
Funded debt
Less cash and cash equivalents
Net funded debt
Shareholders’ equity
Capital under management
May 1, 2010
May 2, 2009
Restated (Note 1)
$
17.8
379.4
829.0
1,226.2
(401.0)
825.2
2,952.4
$
45.9
133.0
1,124.0
1,302.9
(231.6)
1,071.3
2,678.8
$ 3,777.6
$ 3,750.1
Although the Company does not include operating leases
in its definition of capital, the Company does give consideration
to its obligations under operating leases when assessing its
total capitalization.
the primary investments undertaken by the Company
include additions to the selling square footage of its store
network via the construction of new, relocated and expanded
stores, including related leasehold improvements and features
and the purchase of land bank sites for future store construction.
the Company makes capital investments in information
technology and its distribution capabilities to support an
expanding store network. In addition, the Company makes capital
expenditures in support of its real estate and other operations.
the Company largely relies on its cash flow from operations
to fund its capital investment program and dividend distributions
to its shareholders. this cash flow is supplemented, when
necessary, through the borrowing of additional debt or the
issuance of additional capital stock.
2010 ANNUAL REPORt
87
Notes to the Consolidated Financial Statements
Management monitors certain key ratios to effectively manage capital:
Funded debt to total capital(1)
Funded debt to EBItDA (2)
EBItDA to interest expense
(1) total capital is funded debt plus shareholders’ equity.
May 1, 2010
May 2, 2009
Restated (Note 1)
29.3%
1.50x
11.30x
32.7%
1.62x
9.95x
(2) EBItDA and interest expense are comprised of EBItDA and interest expense for each of the 52 week periods then ended. EBItDA (operating
income plus depreciation and amortization) is a non-GAAP financial measure. Non-GAAP financial measures do not have standardized meanings
prescribed by GAAP and therefore may not be comparable to similar measures presented by other reporting issuers.
As part of existing debt agreements, two financial covenants
are monitored and communicated, as required by the terms
of credit agreements, on a quarterly basis by management
to ensure compliance with the agreements. the covenants are:
(i) adjusted total debt/EBItDA – calculated as funded debt plus
letters of credit, guarantees and commitments divided by
EBItDA (for previous 52 weeks); and (ii) debt service coverage
ratio – calculated as EBItDA divided by interest expense
plus repayments of long-term debt (all amounts are based on
previous 52 weeks).
the Company was in compliance with these covenants as at
May 1, 2010.
15 Investment income
Dividend and interest income
Share of earnings of entities accounted using the equity method
16 Capital (losses) gains and other items
Equity share of Crombie REIt’s other expenses
Change in fair value of Canadian third-party asset-backed commercial paper (Note 6)
Loss on sale of investments
Gain on sale of property
Foreign exchange gains (losses)
2010
3.3
28.1
31.4
2009
0.5
38.4
38.9
$
$
2010
2009
(4.7)
3.4
(0.3)
0.1
0.9
(0.6)
$
$
–
(3.7)
–
7.5
(1.0)
2.8
$
$
$
$
88
EMPIRE COMPANy LIMItED
17 Income taxes
Income tax expense varies from the amount that would be computed by applying the combined federal and provincial statutory
income tax rate as a result of the following:
Income tax expense according to combined statutory rate of 30.9% (2009 – 31.1%)
Income taxes resulting from:
Non-deductible amounts
Capital gains and other items
Hannaford tax settlement
Impact of statutory income tax rate changes
Other
2010
2009
Restated (Note 1)
$
126.0
$
120.0
1.1
(1.0)
(17.0)
(4.7)
(5.3)
1.2
(0.2)
–
0.3
(5.9)
total income taxes, combined effective tax rate of 24.4% (2009 – 29.7%)
$
99.1
$
115.4
the Company had been reassessed in respect to the tax treatment of gains on the sale of shares in Hannaford Bros. Co.
(“Hannaford”) in fiscal 2001. the Company had appealed the reassessments in respect of the sale of Hannaford shares. During
the first quarter of fiscal 2010, the Company and Canada Revenue Agency (“CRA”) concluded negotiations and settled
the matter. Income tax expense was reduced by $17.0 as a result of this settlement.
May 1, 2010 income tax expense attributable to net earnings consists of:
Operations
Capital gains and other items
May 2, 2009 income tax expense attributable to net earnings consists of:
Operations
Capital gains and other items
Current
Future
$
123.6
(14.4)
$
(6.5)
(3.6)
$
109.2
$
(10.1)
$
Current
121.4
0.7
$
122.1
Future
(5.8)
(0.9)
(6.7)
$
$
$
$
$
Total
117.1
(18.0)
99.1
total
115.6
(0.2)
$
115.4
2010 ANNUAL REPORt
89
Notes to the Consolidated Financial Statements
the tax effect of temporary differences that give rise to significant portions of future income taxes is presented below:
Investments
Other assets
Property and equipment
Goodwill and intangibles
Accounts payable and accrued liabilities
Long-term debt
Employee future benefits obligation
Other long-term liabilities
Other
Future income taxes – current liabilities
Future income taxes – non-current liabilities
May 1, 2010
May 2, 2009
Restated (Note 1)
$
$
$
(3.5)
18.2
104.0
36.9
(10.8)
(2.2)
(33.7)
(36.5)
64.9
137.3
50.9
86.4
$
$
$
6.5
19.4
119.6
37.5
(14.9)
(2.3)
(33.3)
(50.6)
48.1
130.0
40.5
89.5
$
137.3
$
130.0
In the ordinary course of business, the Company is subject to ongoing audits by tax authorities. While the Company believes
that its tax filing positions are appropriate and supportable, from time to time certain matters are reviewed and challenged
by the tax authorities.
18 Supplementary cash flow information
a) Items not affecting cash
Depreciation
Amortization of intangibles
Future income taxes
Loss (gain) on disposal of assets
Amortization of other assets
Provision on asset-backed commercial paper
Equity in earnings of other entities, net of dividends received
Minority interest
Stock-based compensation
Long-term lease obligation
Employee future benefits obligation
Rationalization costs (Note 27)
b) Other cash flow information
Net interest paid
Net income taxes paid
90
EMPIRE COMPANy LIMItED
2010
2009
Restated (Note 1)
$
307.8
31.9
(10.1)
2.2
3.3
(3.4)
10.7
5.6
1.6
12.4
6.7
(10.7)
$
303.4
32.7
(6.7)
(5.1)
(8.1)
3.7
2.4
8.3
1.2
7.1
7.7
6.3
$
358.0
$
352.9
$
$
69.9
91.6
$
$
80.5
117.2
19 Joint ventures
the financial statements include the Company’s proportionate share of the accounts of incorporated and unincorporated joint
ventures. A summary of these amounts is as follows:
Assets
Current
Non-current
Liabilities
Current
Non-current
Equity and advances
Revenues
Expenses
Income before income taxes
Cash provided (used)
Operating activities
Investing activities
Financing activities
20 Segmented information
Revenue
Food retailing
Real estate
Residential
Commercial
Investment and other operations
Elimination of inter-segment
May 1, 2010
May 2, 2009
$
137.9
6.0
$
116.1
0.6
$
143.9
$
116.7
$
30.3
3.4
110.2
$
14.0
3.3
99.4
$
143.9
$
116.7
$
$
$
2010
66.2
34.9
31.3
18.8
(11.6)
13.2
$
20.4
2009
58.3
23.9
34.4
35.4
(5.3)
(9.7)
20.4
$
$
$
$
2010
2009
$ 15,243.0
$ 14,764.8
63.3
17.3
80.6
202.2
54.6
19.3
73.9
179.3
15,525.8
(9.6)
15,018.0
(2.9)
$ 15,516.2
$ 15,015.1
2010 ANNUAL REPORt
91
Notes to the Consolidated Financial Statements
Operating income
Food retailing
Real estate
Residential
Crombie REIt
Commercial
Investment and other operations
Wajax Income Fund
Other operations, net of corporate expenses
Identifiable assets
Food retailing (excluding goodwill)
Goodwill
Food retailing
Real estate
Investment and other operations (including goodwill of $40.8; May 2, 2009 – $40.8)
Inventories
Food retailing
Real estate – residential
Other operations
Depreciation and amortization
Food retailing
Real estate
Investment and other operations
Capital expenditures
Food retailing
Real estate
Investment and other operations
92
EMPIRE COMPANy LIMItED
2010
2009
Restated (Note 1)
$
425.3
$
399.5
31.0
18.6
1.2
9.2
(5.6)
33.6
19.8
2.5
18.5
(7.7)
$
479.7
$
466.2
May 1, 2010
May 2, 2009
Restated (Note 1)
$ 4,524.0
1,131.8
$ 4,272.1
1,130.6
5,655.8
315.5
277.0
5,402.7
223.1
265.3
$ 6,248.3
$ 5,891.1
May 1, 2010
May 2, 2009
$
780.4
98.9
1.0
$
750.7
90.4
1.7
$
880.3
$
842.8
$
2010
318.3
1.3
20.1
2009
Restated (Note 1)
$
313.1
1.8
21.2
$
339.7
$
336.1
$
2010
341.4
68.1
24.5
2009
Restated (Note 1)
$
354.1
36.9
9.6
$
434.0
$
400.6
the Company operates principally in two business segments: food retailing and real estate. the food retailing segment consists
of distribution of food products in Canada. the real estate segment consists of development and ownership of both commercial
and residential properties. Commercial real estate is mainly land held for the development of food-anchored retail strip plazas.
Residential real estate is the development of housing lots for resale. Inter-segment transactions are recorded at amounts equivalent
to transactions with outside parties.
21 Financial instruments
Credit risk
Credit risk is the risk of an unexpected loss if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations. the Company’s financial instruments that are
exposed to concentrations of credit risk are primarily ABCP
(Note 6), accounts receivable, loans and other receivables,
derivative contracts and guarantees.
the Company’s maximum exposure to credit risk corresponds
to the carrying amount for all loans and receivables, the fair
market value of derivative contracts represented on the balance
sheet and guarantee contracts for franchise affiliates.
the Company mitigates credit risk associated with its
trade accounts receivable, loans and other receivables
through established credit approvals, limits and a regular
monitoring process. the Company generally considers the
credit quality of its financial assets that are neither past due
or impaired to be solid. the Company regularly monitors
collection performance and pledged security for all of its
accounts receivable, loans and other receivables to ensure
adequate payments are being received and adequate security
is available. Pledged security can vary by agreement, but
generally includes inventory, fixed assets including land and/or
building, as well as personal guarantees. Credit risk is further
mitigated due to the large number of customers and their
dispersion across geographic areas. the Company only enters
into derivative contracts with Canadian chartered banks to
minimize credit risk.
Receivables are substantially comprised of balances due from independent accounts, franchisee or affiliate locations as well as
rebates and allowances from vendors. the due date of these amounts can vary by agreement but in general balances over 30 days
are considered past due. the aging of the receivables is as follows:
0 – 30 days
31 – 90 days
Greater than 90 days
total receivables before allowance for doubtful accounts
Less: allowance for doubtful accounts
Receivables
May 1, 2010
May 2, 2009
$
280.7
28.9
47.4
357.0
(20.1)
$
239.1
32.5
68.5
340.1
(31.2)
$
336.9
$
308.9
Interest earned on past due accounts is recorded as a reduction to cost of sales, selling and administrative expenses in the
statements of earnings. Loans and other receivables are all current as of May 1, 2010.
Allowance for doubtful accounts is reviewed at each balance sheet date. An allowance is taken on accounts receivable from
independent accounts, as well as accounts receivable, loans and other receivables from franchise or affiliate locations, and is
recorded as a reduction to its respective receivable account on the balance sheet. the Company updates its estimate of allowance
for doubtful accounts based on past due balances from independent accounts and based on an evaluation of recoverability net of
security assigned for franchise or affiliate locations. Current and long-term accounts receivable, loans and other receivables are
reviewed on a regular basis and are written-off when collection is considered unlikely. the change in allowance for doubtful
accounts is recorded as cost of sales, selling and administrative expenses in the statements of earnings and is presented as follows:
Allowance, beginning of year
Provision for losses
Recoveries
Write-offs
Allowance, end of year
May 1, 2010
May 2, 2009
$
$
31.2
8.9
(7.0)
(13.0)
$
20.1
$
28.7
11.6
(2.4)
(6.7)
31.2
2010 ANNUAL REPORt
93
Notes to the Consolidated Financial Statements
Liquidity risk
Liquidity risk is the risk that the Company may not have cash
available to satisfy financial liabilities as they come due. the
Company actively maintains committed credit facilities to
ensure that it has sufficient available funds to meet current and
foreseeable future financial requirements at a reasonable cost.
the Company monitors capital markets and the related
conditions. Market conditions allowing, the Company will access
debt capital markets for various long-term debt maturities and
as other liabilities come due or as assessed to be appropriate
in order to minimize risk and optimize pricing.
the following table summarizes the carrying amount and the contractual maturities of both the interest and principal portion
of significant financial liabilities on an undiscounted basis as at May 1, 2010:
Derivative financial liabilities
Interest rate swaps payable(1)
$
Energy hedge contracts(2)
Non-derivative financial liabilities
Accounts payable
2011
2012
2013
2014
2015
thereafter
total
$
13.5
1.3
$
10.7
–
$
2.5
–
$
–
–
$
–
–
$
–
–
26.7
1.3
and accrued liabilities
Long-term debt
1,621.6
429.4
–
82.2
–
262.3
–
69.4
–
59.1
–
1,051.0
1,621.6
1,953.4
total
$ 2,065.8
$
92.9
$ 264.8
$
69.4
$
59.1
$ 1,051.0
$ 3,603.0
(1) Represents the payable fixed interest (will be partially offset by the floating interest received).
(2) Based on market values as of May 1, 2010.
Fair value of financial instruments
the fair value of a financial instrument is the estimated amount that the Company would receive or pay to settle the financial
assets and financial liabilities as at the reporting date.
the book value of cash and cash equivalents, receivables, loans and other receivables, and accounts payable and accrued
liabilities approximate fair values at the balance sheet dates.
the fair value of the variable rate long-term debt is assumed to approximate its carrying amount. the fair value of other long-term
liabilities has been estimated by discounting future cash flows at a rate offered for debt of similar maturities and credit quality.
94
EMPIRE COMPANy LIMItED
the following table summarizes the classification of the Company’s financial instruments, as well as their carrying amounts
and fair values:
May 1, 2010
Financial assets
Cash and cash equivalents
Receivables
Loans and other receivables
Investments
Other assets(1)
total financial assets
Fair value level 1
Fair value level 2
Fair value level 3
total fair value
Financial liabilities
Bank indebtedness
Accounts payable
and accrued liabilities
Long-term debt
Other long-term liabilities(2)
total financial liabilities
Fair value level 1
Fair value level 2
Fair value level 3
total fair value
Held for
Trading
Held for
Trading
(Required) (Designated)
Available- Loans and
for-Sale Receivables
Other
Financial
Liabilities
Total
Carry
Amount
Fair Value
$
$
$
$
$
– $ 401.0 $
–
–
–
–
–
–
–
31.8
– $
–
–
10.9
–
– $
336.9
185.0
–
–
– $ 401.0 $ 401.0
336.9
–
185.0
–
10.9
–
31.8
–
336.9
185.0
10.9
31.8
– $ 432.8 $
10.9 $ 521.9 $
– $ 965.6 $ 965.6
– $ 411.6 $
–
–
–
21.2
10.9
–
–
– $ 432.8 $
10.9
$ 422.5
–
21.2
$ 443.7
– $
– $
– $
– $
17.8 $
17.8 $
17.8
–
–
17.2
$
$
17.2 $
– $
17.2
–
$
17.2 $
–
–
–
– $
– $
–
–
– $
–
–
–
–
–
–
1,621.6
1,208.4
–
1,621.6
1,208.4
17.2
1,621.6
1,231.1
17.2
– $
– $ 2,847.8 $ 2,865.0 $ 2,887.7
–
–
–
–
$
–
17.2
–
$
17.2
(1) the total carrying value of financial assets included in other assets is $31.8.
(2) Only the derivative liability portion is presented here.
May 2, 2009
Financial assets
Cash and cash equivalents
Receivables
Loans and other receivables
Investments
Other assets(1)
total financial assets
Financial liabilities
Bank indebtedness
Accounts payable
and accrued liabilities
Long-term debt
Other long-term liabilities(2)
Held for
trading
Held for
trading
(Required) (Designated)
Available-
Loans and
for-Sale Receivables
Other
Financial
Liabilities
total
Carry
Amount
Fair Value
$
$
$
$
–
–
–
–
1.7
$ 231.6
–
–
–
21.4
$
–
–
–
1.1
–
$
–
308.9
140.9
–
–
1.7
$ 253.0
$
1.1
$ 449.8
$
–
–
–
–
–
–
$ 231.6
308.9
140.9
1.1
23.1
$ 231.6
308.9
140.9
1.1
23.1
$ 705.6
$ 705.6
–
$
–
$
–
$
–
$
45.9
$
45.9
$
45.9
–
–
39.8
–
–
–
–
–
–
–
–
–
1,487.1
1,257.0
–
1,487.1
1,257.0
39.8
1,487.1
1,168.8
39.8
total financial liabilities
$
39.8
$
– $
– $
– $ 2,790.0
$ 2,829.8
$ 2,741.6
(1) the total carrying value of financial assets included in other assets is $23.1.
(2) Only the derivative liability portion is presented here.
2010 ANNUAL REPORt
95
Notes to the Consolidated Financial Statements
Derivative financial instruments
Derivative financial instruments are recorded on the
consolidated balance sheet at fair value unless the derivative
instrument is a contract to buy or sell a non-financial item
in accordance with the Company’s expected purchase, sale
or usage requirements, referred to as a “normal purchase
or normal sale”. Changes in the fair values of derivative financial
instruments are recognized in earnings unless it qualifies and
is designated as an effective cash flow hedge or a normal
purchase or normal sale. Normal purchases and normal sales are
exempt from the application of the standard and are accounted
for as executory contracts. Changes in fair value of a derivative
financial instrument designated as a cash flow hedge are
recorded in other assets and liabilities with the effective portion
recorded in accumulated other comprehensive income.
Interest rate risk
Interest rate risk is the potential for financial loss arising from
changes in interest rates. Financial instruments that potentially
subject the Company to interest rate risk include financial
liabilities with floating interest rates. the majority of the
Company’s long-term debt is at a fixed interest rate or hedged
with interest rate swaps. Bank indebtedness and approximately
17 percent (2009 – 20 percent) of the Company’s long-term
debt is exposed to interest rate risk due to floating rates.
Net earnings is sensitive to the impact of a change in interest
rates on the average balance of interest bearing financial
liabilities during the period. During the year, the Company
recognized $3.8 (2009 – $nil) directly into income as the result
of ineffective hedging contracts. Accordingly, a difference of
0.25 percent in the applicable interest rate would impact net
earnings by $0.3 (2009 – $0.6) and other comprehensive
income by $0.9 (2009 – $1.5).
Foreign currency exchange risk
the Company conducts the vast majority of its business in
Canadian dollars. the Company’s foreign currency exchange risk
principally relates to purchases made in U.S. dollars. In addition,
the Company also uses forward contracts to fix the exchange
rate on some of its expected requirements for Euros and U.S.
dollars. Amounts received or paid related to instruments used
to hedge foreign exchange, including any gains and losses,
are recognized in the cost of purchases. During the year, the
Company recognized $nil (2009 – $nil) directly into income
as the result of ineffective hedging contracts. those contracts
outstanding as of May 1, 2010 will expire on or before
August 16, 2010. the Company estimates that a 10 percent
change in applicable foreign currency exchange rates would
impact net earnings by $5.2 (2009 – $6.1) and other compre-
hensive income by $0.9 (2009– $1.6).
Commodity price risk
Commodity price risk is the risk that the fair value of certain
financial instruments or the Company’s future cash flows
will fluctuate as a result of changes in the market price of
commodities. the Company has attempted to mitigate
commodity price risk to electricity prices through the use of
financial derivative swap contracts while closely monitoring
other commodity prices to determine the appropriate course
of action. During the year, the Company recognized $nil
(2009 – $nil) directly into income as the result of ineffective
hedging contracts. the Company estimates that a 10 percent
change in applicable commodity prices would impact other
comprehensive income by $0.1 (2009 – $0.6).
22 Guarantees, commitments and contingent liabilities
Guarantees and commitments
At May 1, 2010, the Company was contingently liable for
letters of credit issued in the aggregate amount of $50.1
(May 2, 2009 – $55.3).
Sobeys has guaranteed certain bank loans contracted by
franchise affiliates. As at May 1, 2010, these loans amounted
to approximately $0.2 (May 2, 2009 – $0.5).
During fiscal 2008, Sobeys entered into an additional
guarantee contract. Under the terms of the guarantee should
franchise affiliates be unable to fulfil their lease obligations,
Sobeys would be required to fund the greater of $7.0 or
9.9 percent (2009 – $6.0 or 9.9 percent) of the authorized and
outstanding obligation. the terms of the guarantee contract are
reviewed annually each August. As at May 1, 2010, the amount
of the guarantee was $7.0 (May 2, 2009 – $6.0).
Sobeys has guaranteed certain equipment leases of its
franchise affiliates. Under the terms of the guarantee should
franchise affiliates be unable to fulfil their lease obligation,
Sobeys would be required to fund the difference of the lease
commitments up to a maximum of $70.0 on a cumulative basis.
Sobeys approves each of the contracts.
During fiscal 2009, Sobeys entered into an additional credit
enhancement contract in the form of a standby letter of
credit for certain independent franchisees for the purchase
and installation of equipment. Under the terms of the contract
96
EMPIRE COMPANy LIMItED
should franchisee affiliates be unable to fulfill their lease
obligations or other remedy, Sobeys would be required to fund
the greater of $4.0 or 10 percent (2009 – $4.0 or 10.0 percent)
of the authorized and outstanding obligation annually. Under
the terms of the agreement, Sobeys is required to obtain a
letter of credit in the amount of the outstanding guarantee,
to be revisited each calendar year. this credit enhancement
allows Sobeys to provide favorable financing terms to certain
independent franchisees. the contract terms have been
reviewed and Sobeys determined that there were no material
implications with respect to the consolidation of VIEs.
As at May 1, 2010, the amount of the guarantee was $4.0
(May 2, 2009 – $4.0).
the aggregate, annual, minimum rent payable under the
guaranteed operating equipment leases for fiscal 2011 is
approximately $22.1. the guaranteed lease commitments
over the next five years are:
2011
2012
2013
2014
2015
thereafter
third Parties
$
22.1
16.2
10.2
3.3
0.4
1.2
the net aggregate, annual, minimum rent payable under operating leases for fiscal 2011 is approximately $233.1 ($326.5 gross less
expected sub-lease income of $93.4). the net commitments over the next five fiscal years are:
2011
2012
2013
2014
2015
thereafter
third Parties
Related Parties
Net Lease
Obligation
Gross Lease
Obligation
Net Lease
Obligation
Gross Lease
Obligation
$
187.9
180.0
170.8
161.9
153.3
1,013.0
$
281.3
268.0
250.5
232.9
216.7
1,432.7
$
45.2
37.2
37.2
38.1
38.2
440.2
$
45.2
37.2
37.2
38.1
38.2
440.2
Upon entering into the lease of its Mississauga distribution
centre in March 2000, Sobeys guaranteed to the landlord the
performance, by Serca Foodservice Inc., of all of its obligations
under the lease. the remaining term of the lease is 10 years
with an aggregate obligation of $31.6 (2009 – $34.6). At the
time of the sale of assets of Serca Foodservice Inc. to SySCO
Corp., the lease of the Mississauga distribution centre was
assigned to and assumed by the purchaser, and SySCO Corp.
agreed to indemnify and hold Sobeys harmless from any liability
it may incur pursuant to its guarantee.
Contingencies
On June 21, 2005, Sobeys received a notice of reassessment
from CRA for fiscal years 1999 and 2000 related to the Goods
and Services tax (“GSt”). CRA asserts that Sobeys was obliged
to collect GSt on sales of tobacco products to status Indians.
the total tax, interest and penalties in the reassessment was
$13.6. Sobeys has reviewed this matter, has received legal
advice, and believes it was not required to collect GSt. During
the second quarter of fiscal 2006, Sobeys filed a Notice of
Objection with CRA. Accordingly, Sobeys has not recorded in its
statement of earnings any of the tax, interest or penalties in the
notice of reassessment. Sobeys has deposited with CRA funds
to cover the total tax, interest and penalties in the reassessment
and has recorded this amount as a long-term receivable from
CRA pending resolution of the matter.
the Company has agreed to indemnify its directors and
officers and particular employees in accordance with the
Company’s policies. the Company maintains insurance policies
that may provide coverage against certain claims.
there are various claims and litigation, which the Company
is involved with, arising out of the ordinary course of business
operations. the Company’s management does not consider the
exposure to such litigation to be material, although this cannot
be predicted with certainty.
2010 ANNUAL REPORt
97
Notes to the Consolidated Financial Statements
23 Related-party transactions
Related party transactions are with Crombie REIt. the Company
holds a 47.4 percent ownership interest and accounts for its
investment using the equity method.
the Company rents premises from Crombie REIt, at
amounts in management’s opinion which approximate fair
market value. Managment has determined these amounts to
be fair value due to the significant number of leases negotiated
with third parties in each market it operates. During fiscal year
2010, the aggregate net payments under these leases, which
are measured at exchange amounts, were $57.3 (2009 – $46.4).
In addition, Crombie REIt provides administrative and
management services to the Company. the charges incurred for
administrative and management services are on a cost recovery
basis. the Company has provided Crombie REIt with fixed rate
second mortgages in the amount of $5.9 (May 2, 2009 – $6.2).
the second mortgages have a weighted average interest rate
of 5.38% with a maturity date of March 2014.
24 Employee future benefits
the Company has a number of defined benefit and defined
contribution plans providing pension and other retirement
benefits to most of its employees.
Defined contribution pension plans
the contributions required by the employee and the employer
are specified. the employee’s pension depends on what level of
retirement income (for example, annuity purchase) that can be
achieved with the combined total of employee and employer
contributions and investment income over the period of plan
membership, and the annuity purchase rates at the time of the
employee’s retirement.
On September 30, 2009, the Company purchased $10.0
of convertible unsecured subordinated debentures (the
“Debentures”) from Crombie REIt, pursuant to a bought-deal
prospectus offering for a total of $85.0. the Debentures have a
maturity date of June 30, 2015. the Debentures have a coupon
of 6.25% per annum and each $1,000 principal amount of
Debenture is convertible into approximately 90.9091 units
of Crombie REIt, at any time, at the option of the holder, based
on a conversion price of $11.00 per unit. the Debentures have
been classified as available-for-sale and are included in
investments, at realizable value.
During fiscal 2010, the Company sold eight commercial
properties to Crombie REIt for net cash proceeds of $56.7,
which was fair market value. Since the sale was to an equity
accounted investment, no gain was recorded on the sale.
Other benefit plans
the Company also offers certain employee post-retirement
and post-employment benefit plans which are not funded and
include health care, life insurance and dental benefits.
Defined benefit pension plans
the ultimate retirement benefit is defined by a formula that
provides a unit of benefit for each year of service. Employee
contributions, if required, pay for part of the cost of the benefit,
but the employer contributions fund the balance. the employer
contributions are not specified or defined within the plan
text; they are based on the result of actuarial valuations which
determine the level of funding required to meet the total
obligation as estimated at the time of the valuation.
the Company uses April 30th as an actuarial valuation date and May 1st as a measurement date for accounting purposes for its
defined benefit pension plans.
Retirement Pension Plan
Senior Management Pension Plan
Other Benefit Plans
Most Recent
Valuation Date
Next Required
Valuation Date
May 1, 2008
May 1, 2008
May 1, 2008
May 1, 2011
May 1, 2011
May 1, 2011
Defined contribution plans
the total expense and cash contributions for the Company’s defined contribution plans are as follows:
2010
2009
98
EMPIRE COMPANy LIMItED
$
$
20.5
19.1
Defined benefit plans
Information about the Company’s defined benefits plans, in aggregate, is as follows:
Accrued benefit obligation
Balance, beginning of year
Current service cost,
net of employee contributions
Interest cost
Employee contributions
Benefits paid
Past service costs
Actuarial losses (gains)
Balance, end of year
Pension
Benefit Plans
2010
Pension
Benefit Plans
2009
Other
Benefit Plans
2010
Other
Benefit Plans
2009
$
249.8
$
269.1
$
108.5
$
116.4
1.9
14.9
0.2
(24.9)
1.5
21.3
1.8
14.3
0.3
(20.2)
0.2
(15.7)
3.0
7.0
–
(3.3)
–
18.5
3.8
6.7
–
(3.3)
–
(15.1)
$
264.7
$
249.8
$
133.7
$
108.5
Pension
Benefit Plans
2010
Pension
Benefit Plans
2009
Other
Benefit Plans
2010
Other
Benefit Plans
2009
Plan assets
Market value, beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Benefits paid
Surplus payments to members
$
202.1
38.5
6.0
0.2
(25.0)
–
$
252.5
(36.4)
5.8
0.3
(20.1)
–
Market value, end of year
$
221.8
$
202.1
Funded status
Deficit
Unamortized past service cost
Unamortized actuarial losses (gains)
$
(42.9)
1.5
76.4
$
(47.7)
0.4
86.1
$
$
$
–
–
3.3
–
(3.3)
–
–
(133.7)
0.5
8.1
$
$
$
–
–
3.3
–
(3.3)
–
–
(108.5)
0.6
(10.5)
Accrued benefit asset (liability)
$
35.0
$
38.8
$
(125.1)
$
(118.4)
2010 ANNUAL REPORt
99
$
$
$
3.8
6.6
–
(15.0)
–
–
(4.6)
–
0.1
15.5
11.0
–
(118.4)
Notes to the Consolidated Financial Statements
Pension
Benefit Plans
2010
Pension
Benefit Plans
2009
Other
Benefit Plans
2010
Other
Benefit Plans
2009
Expense
Current service cost,
net of employee contributions
$
Interest cost
Actual return on plan assets
Actuarial losses (gains)
Past service costs
Surplus payments to members
Expense (income) before adjustments
Expected vs. actual return on plan assets
Recognized vs. actual past service costs
Recognized vs. actuarial losses (gains)
2.0
14.9
(38.5)
21.3
1.5
–
1.2
25.0
(1.1)
(15.2)
$
1.8
14.3
36.4
(15.6)
0.1
–
37.0
(53.4)
0.1
18.0
$
3.0
7.0
–
18.4
–
–
28.4
–
0.1
(18.5)
Net expense
$
9.9
$
1.7
$
10.0
Classification of
accrued benefit asset (liability)
Other asset
Other liability
Accrued benefit asset (liability)
$
$
60.4
(25.4)
35.0
$
$
63.1
(24.3)
38.8
$
–
(125.1)
$
(125.1)
$
(118.4)
Included in the accrued benefit obligation at year-end are the following amounts in respect of plans that are not funded:
Accrued benefit obligation
$
25.4
$
24.3
$
125.1
$
118.4
Pension
Benefit Plans
2010
Pension
Benefit Plans
2009
Other
Benefit Plans
2010
Other
Benefit Plans
2009
the significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligation are as follows (weighted-
average assumptions as of May 1, 2010):
Pension
Benefit Plans
2010
Pension
Benefit Plans
2009
Other
Benefit Plans
2010
Other
Benefit Plans
2009
Discount rate
Expected long-term rate of
return on plan assets
Rate of compensation increase
5.50%
7.00%
4.00%
6.25%
7.00%
4.00%
6.25%
6.00%
For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for
fiscal 2010 and 2011, with the rate reducing by 0.5% per annum for an ultimate rate of 5% in fiscal 2019. the EARSL of the active
employees covered by the pension benefit plans ranges from 10 to 12 years with a weighted average of 10 years at year end.
the EARSL of the active employees covered by the other benefit plans range from 11 to 15 years with a weighted average of
14 years at year end.
100
EMPIRE COMPANy LIMItED
the table below outlines the sensitivity of the fiscal 2010 key economic assumptions used in measuring the accrued benefit plan
obligation and related expense of the Company’s pension and other benefit plans. the sensitivity of each key assumption has been
calculated independently. Changes to more than one assumption simultaneously may amplify or reduce impact on the accrued
benefit obligation or benefit plan expense.
Expected long-term rate of return on plan assets
Impact of: 1% increase
1% decrease
Discount rate(2)
Impact of: 1% increase
1% decrease
Growth rate of health costs(3)
Impact of: 1% increase
1% decrease
Pension Plans
Other Benefit Plans
Benefit
Obligation
5.50%
(28.1)
31.8
$
$
Benefit
Cost(1)
7.00%
(2.2)
2.2
5.50%
0.4
(0.7)
$
$
$
$
Benefit
Obligation
Benefit
Cost(1)
5.75%
(20.1)
24.2
9.00%
23.7
(18.4)
$
$
$
$
6.75%
(0.8)
1.0
9.00%
2.2
(1.6)
$
$
$
$
(1) Reflects the impact on the current service cost, the interest cost and the expected return on assets.
(2) 5.25% for the Senior Management Plan, Oshawa SERP and Post-Retirement Benefits, 5.75% for the Empire Post-Retirement Benefit Plan and
4.50% for the Post-Employment Plan.
(3) Gradually decreasing to 5.00% in 2019 and remaining at that level thereafter.
the asset mix of the defined benefit pension plans as at year end is as follows:
Cash and short-term investments
Bonds, debentures, fixed income pooled funds
and real estate funds
Equities and pooled equities fund
Accrued interest and dividends
Foreign currency hedges
total investments
2010
1.78%
35.52%
61.38%
0.21%
1.11%
2009
3.43%
36.09%
60.52%
0.21%
(0.25%)
100.00%
100.00%
Within these securities are investments in Empire Company Limited Non-Voting Class A shares. the market value of these shares
at year end are as follows:
2010
% of Plan
Assets
2009
$
115.5
12.7%
$
104.4
% of Plan
Assets
13.7%
2010 ANNUAL REPORt
101
Notes to the Consolidated Financial Statements
25 Business acquisitions
Sobeys acquires franchisee and non-franchisee stores and prescription files. the results of these acquisitions have been included
in the consolidated financial results of the Company since their acquisition dates, and were accounted for through the use of the
purchase method. As illustrated in the table below, the acquisition of certain franchisee stores and non-franchisee stores resulted
in the acquisition of intangible assets. the method of amortization of limited life intangibles is on a straight-line basis over its
estimated useful life.
Franchisees
Inventory
Property and equipment
Intangibles
Goodwill
Other (liabilities) assets
Prescription files
Intangibles
Net assets acquired
Less promissory note issued
Cash consideration
2010
2009
$
$
6.0
7.1
3.9
1.2
(8.3)
9.9
6.9
16.8
–
16.8
$
$
8.7
5.9
7.6
14.3
0.9
37.4
3.2
40.6
(3.5)
37.1
ECL Properties Limited (a subsidiary of the Company) acquired
additional units of two residential partnerships already co-
owned by the Company for cash consideration of $17.2. the
acquisitions were accounted for using the purchase method
with net identifiable assets, primarily land inventory, recorded
at $22.6 and future income taxes recorded at $5.4.
During fiscal 2009, EtL Canada Holdings Limited (a
subsidiary of the Company) acquired all of the outstanding
shares of an incorporated joint venture already co-owned by
the Company for cash consideration of $4.3. the acquisition
was accounted for using the purchase method with net
identifiable assets recorded at $3.6 (including intangible
assets of $0.2) and goodwill at $0.7.
26 Stock-based compensation
Deferred share units
Members of the Board of Directors may elect to receive all or
any portion of their fees in deferred share units (“DSUs”) in lieu
of cash. the number of DSUs received is determined by the
market value of the Company’s Non-Voting Class A shares on
each director’s fee payment date. Additional DSUs are received
as dividend equivalents. DSUs cannot be redeemed for
cash until the holder is no longer a director of the Company.
the redemption value of a DSU equals the market value of an
Empire Company Limited Non-Voting Class A share at the time
of the redemption. On an ongoing basis, the Company values the
DSU obligation at the current market value of a corresponding
number of Non-Voting Class A shares and records any increase
in the DSU obligation as an operating expense. At May 1, 2010,
there were 104,527 (May 2, 2009 – 84,195) DSUs outstanding.
During the year, the compensation expense was $1.3 (2009 – $1.8).
102
EMPIRE COMPANy LIMItED
Stock option plan
During fiscal 2010, the Company granted an additional 162,389
options under the stock option plan for employees of the
Company whereby options are granted to purchase Non-Voting
Class A Shares. these options allow holders to purchase
Non-Voting Class A Shares at $46.04 per share and expire in
June 2017. the options vest over four years with 50 percent of
the options vesting only if certain financial targets are attained
in a given fiscal year. these options have been treated as
stock-based compensation.
the compensation expense relating to the year was
determined to be $1.6 (2009 – $1.2) with amortization of the
expense over the vesting period. the total increase in contrib-
uted surplus in relation to the stock option compensation
expense was $1.6 (2009 – $1.2). the compensation expense
was calculated using the Black-Scholes model with the
following assumptions:
Expected life
Risk-free interest rate
Expected volatility
Dividend yield
5.25 years
2.625%
22.8%
1.60%
the outstanding options at May 1, 2010 were granted at prices between $40.26 and $46.04 and expire between June 2015 and
June 2017. Stock option transactions during 2010 and 2009 were as follows:
Balance, beginning of year
Granted
Forfeited
Balance, end of year
2010
2009
Number
of Options
282,733
162,399
(11,923)
Weighted
Average
Exercise
Price
$
41.47
46.04
40.26
Number
of Options
92,766
189,967
–
Weighted
Average
Exercise
Price
$
43.96
40.26
–
433,209
$
43.22
282,733
$
41.47
Stock options exercisable, end of year
90,894
23,192
the following table summarizes information about stock options outstanding at May 1, 2010:
Options Outstanding
Options Exercisable
Number
of
Outstanding
Options
92,766
178,044
162,399
433,209
Weighted
Average
Remaining
Contractual
Life(1)
5.17
6.17
7.17
6.33
Weighted
Average
Exercise
Price
$
43.96
40.26
46.04
$
43.22
Number
Exercisable
at May 1,
2010
46,383
44,511
–
90,894
Weighted
Average
Exercise
Price
$
43.96
40.26
–
$
42.15
(1) Weighted average remaining contractual life is expressed in years.
2010 ANNUAL REPORt
103
Notes to the Consolidated Financial Statements
Share purchase plan
the Company has a share purchase plan for employees of the
Company whereby loans are granted to purchase Non-Voting
Class A Shares. these loans have been treated as stock-based
compensation in accordance with EIC Abstract 132.
the Company’s current practice is to use only the stock
option plan to provide long-term incentive for employees. As a
result, outstanding loans under the stock purchase plan will be
repaid at the employees’ option, but no later than the expiry
date of the loans which were originally set for 10 years.
Phantom performance option plan
Sobeys has a Phantom Performance Option Plan for eligible
employees of Sobeys. Under the plan, units are granted at the
discretion of the Board based on a notional equity value of
Sobeys tied to a specified formula. Upon implementation, the
units had a three year vesting period with 33.3 percent of the
units vesting each year. Subsequent issuances have a four year
vesting period with 25.0 percent of the units vesting each year.
As the notional fair value of Sobeys changes, the employees
are entitled to the incremental increase in the notional equity
value over a five year period. the Company recognizes a
compensation expense equal to the change in notional value over
the original grant value on a straight-line basis over the vesting
period. After the vesting period, any change in incremental
notional equity value is recognized as a compensation expense
immediately. this is recorded as an accrued liability until
settlement and is remeasured at each interim and annual
reporting period of the Company. As at May 1, 2010, 1,379,175
(May 2, 2009 – 1,069,413) units were outstanding. For the year
ended May 1, 2010, the Company recognized $11.5 (2009 –
$6.1) of compensation expense associated with this plan.
27 Business rationalization costs
For the year ended May 1, 2010, severance costs of $nil have been incurred and recognized (2009 – $10.7). the costs associated
with the organizational change are recorded as incurred as cost of sales, selling and administrative expenses in the statement
of earnings. the liability as of May 1, 2010 is $1.5 (2009 – $12.2). total costs incurred as a result of this change to May 1, 2010
were $24.9.
28 Variable interest entities
Variable interest entities are defined under AcG 15, “Consolidation
of Variable Interest Entities” as entities that do not have sufficient
equity at risk to finance their activities without additional
subordinated financial support, or where the equity holders
lack the overall characteristics of a controlling financial interest.
the guideline requires that the VIE be consolidated with
the financial results of the entity deemed to be the primary
beneficiary of the VIEs expected losses and its expected
residual returns.
the Company has identified the following entities as VIEs:
Franchise affiliates
the Company has identified 273 (May 2, 2009 – 271) franchise
affiliate stores whose franchise agreements result in the
Company being deemed the primary beneficiary of the entity
according to AcG 15. the results for these entities were
consolidated with the results of the Company.
Warehouse and distribution agreement
the Company has an agreement with an independent entity
to provide warehouse and distribution services for one of its
distribution centres. the terms of the agreement with this
entity require the Company to consolidate its results with those
of the Company pursuant to AcG 15.
104
EMPIRE COMPANy LIMItED
29 Subsequent events
(a) On May 25, 2010, Sobeys filed a short form prospectus providing for the issuance of up to $500.0 of unsecured Medium
term Notes. On June 7, 2010, Sobeys issued new Medium term Notes of $150.0, bearing an interest rate of 6.64%, maturing
on June 7, 2040.
(b) On June 4, 2010, the Company renewed its Credit Facilities which were reduced from $650.0 to $450.0, maturing on
June 30, 2013.
(c) On July 8, 2010, it was announced that Sobeys entered into a non-binding letter of intent to sell 11 retail properties to
Crombie REIt for proceeds of approximately $102.0. Crombie REIt also agreed to issue, on a bought-deal basis, additional units
at a price of $11.05 per unit. In satisfaction of its pre-emptive right with respect to the public offering, the Company will
subscribe for approximately $20.5 of Class B units. the Company’s interest in Crombie REIt will reduce from 47.4% to 47.0%.
30 Comparative figures
Comparative figures have been reclassified, where necessary, to reflect the current year’s presentation.
2010 ANNUAL REPORt
105
Eleven-year
Financial
Review
years Ended (1)
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Financial Results ($ in millions; except ROE)
Revenue
Operating income
Interest expense
Income taxes
Minority interest
Earnings from continuing operations
before net capital gains and other items
Earnings from discontinued operations(2)
Operating earnings(3)
Capital gains (losses) and other items, net of tax
Net earnings
Return on equity
Financial Position ($ in millions)
total assets
Long-term debt (excluding current portion)
Shareholders’ equity
Per Share Data on a
Fully Diluted Basis ($ per share)
Operating earnings
Capital gains (losses) and other items, net of tax
Net earnings
Dividends
Non-Voting Class A shares
Class B common shares
Book value
Share Price, Non-Voting
Class A Shares ($ per share)
High
Low
Close
Diluted weighted average number
of shares outstanding (in millions)
$ 15,516.2
479.7
72.5
99.1
5.6
$ 15,015.1
466.2
80.6
115.4
8.3
$ 14,065.0
472.6
105.8
125.9
12.8
$ 13,366.7
431.1
60.1
116.9
55.4
284.5
–
284.5
17.4
301.9
10.7%
6,248.3
829.0
2,952.4
4.15
0.25
4.40
0.740
0.740
43.07
53.95
39.70
52.98
68.5
261.7
–
261.7
3.0
264.7
10.5%
5,891.1
1,124.0
2,678.8
3.97
0.05
4.02
0.700
0.700
39.07
55.05
35.00
49.00
242.8
–
242.8
73.0
315.8
14.0%
5,732.9
1,414.1
2,382.3
3.69
1.11
4.80
0.660
0.660
36.08
55.19
35.40
39.25
200.1
–
200.1
5.7
205.8
10.1%
5,241.5
792.6
2,131.1
3.04
0.09
3.13
0.600
0.600
32.31
45.25
39.49
42.33
65.8
65.7
65.7
65.7
65.7
65.8
65.8
65.7
65.6
$ 13,063.6
$ 12,435.2
$ 11,284.0
$ 10,624.2
$ 9,926.5
$ 9,331.1
$ 9,100.1
491.4
83.8
153.1
67.1
202.0
–
202.0
94.8
296.8
16.2%
5,051.5
707.3
1,965.2
3.07
1.44
4.51
0.560
0.560
29.77
44.35
33.37
43.29
463.7
86.7
131.2
63.6
182.9
–
182.9
3.7
186.6
11.4%
4,929.2
727.4
1,709.0
2.78
0.05
2.83
0.480
0.480
25.87
38.00
24.25
36.66
422.8
92.4
111.0
58.5
163.3
–
163.3
9.2
172.5
11.6%
4,679.7
913.0
1,567.6
2.47
0.14
2.61
0.400
0.400
23.67
29.50
23.10
26.65
444.4
93.7
120.0
67.5
159.3
–
159.3
(6.0)
153.3
11.4%
4,519.3
923.1
1,418.5
2.42
(0.09)
2.33
0.330
0.330
21.41
33.25
23.70
23.85
416.2
111.6
104.8
50.0
123.5
8.7
132.2
63.7
195.9
16.4%
2.00
0.97
2.97
0.214
0.214
19.47
33.30
15.75
28.88
341.1
145.8
131.9
34.3
78.5
10.0
88.5
491.5
580.0
69.1%
1.33
7.49
8.82
0.170
0.170
16.82
18.25
13.88
17.00
4,318.0
975.0
1,290.6
4,254.3
1,107.2
1,115.0
4,171.0
1,332.0
602.8
309.7
159.6
68.1
32.9
78.8
5.9
84.7
2.1
86.8
13.3%
1.10
0.03
1.13
0.140
0.140
8.73
16.98
12.33
16.05
75.6
(1) Fiscal years ended April 30th except fiscal 2005, which ended May 7, 2005, fiscal 2006, which ended May 6, 2006, fiscal 2007, which ended
May 5, 2007, fiscal 2008, which ended May 3, 2008, fiscal 2009, which ended May 2, 2009 and fiscal 2010, which ended May 1, 2010, reflecting
a change in fiscal year end to the first Saturday in May, consistent with the fiscal year-end of Sobeys Inc.
(2) Discontinued operations reflect the financial contribution of SERCA Foodservice operations, which was sold at the end of 2002.
(3) Operating earnings equals net earnings before capital gains (losses) and other items.
106
EMPIRE COMPANy LIMItED
Financial Results ($ in millions; except ROE)
$ 15,516.2
$ 15,015.1
$ 14,065.0
$ 13,366.7
years Ended (1)
Revenue
Operating income
Interest expense
Income taxes
Minority interest
Earnings from continuing operations
before net capital gains and other items
Earnings from discontinued operations(2)
Operating earnings(3)
Capital gains (losses) and other items, net of tax
Net earnings
Return on equity
Financial Position ($ in millions)
total assets
Long-term debt (excluding current portion)
Shareholders’ equity
Per Share Data on a
Fully Diluted Basis ($ per share)
Operating earnings
Capital gains (losses) and other items, net of tax
Net earnings
Dividends
Non-Voting Class A shares
Class B common shares
Book value
Share Price, Non-Voting
Class A Shares ($ per share)
High
Low
Close
Diluted weighted average number
of shares outstanding (in millions)
6,248.3
829.0
2,952.4
5,891.1
1,124.0
2,678.8
5,732.9
1,414.1
2,382.3
466.2
80.6
115.4
8.3
261.7
–
261.7
3.0
264.7
10.5%
3.97
0.05
4.02
0.700
0.700
39.07
55.05
35.00
49.00
472.6
105.8
125.9
12.8
242.8
–
242.8
73.0
315.8
14.0%
3.69
1.11
4.80
0.660
0.660
36.08
55.19
35.40
39.25
431.1
60.1
116.9
55.4
200.1
–
200.1
5.7
205.8
10.1%
5,241.5
792.6
2,131.1
3.04
0.09
3.13
0.600
0.600
32.31
45.25
39.49
42.33
479.7
72.5
99.1
5.6
284.5
–
284.5
17.4
301.9
10.7%
4.15
0.25
4.40
0.740
0.740
43.07
53.95
39.70
52.98
68.5
(1) Fiscal years ended April 30th except fiscal 2005, which ended May 7, 2005, fiscal 2006, which ended May 6, 2006, fiscal 2007, which ended
May 5, 2007, fiscal 2008, which ended May 3, 2008, fiscal 2009, which ended May 2, 2009 and fiscal 2010, which ended May 1, 2010, reflecting
a change in fiscal year end to the first Saturday in May, consistent with the fiscal year-end of Sobeys Inc.
(2) Discontinued operations reflect the financial contribution of SERCA Foodservice operations, which was sold at the end of 2002.
(3) Operating earnings equals net earnings before capital gains (losses) and other items.
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
$ 13,063.6
491.4
83.8
153.1
67.1
$ 12,435.2
463.7
86.7
131.2
63.6
$ 11,284.0
422.8
92.4
111.0
58.5
$ 10,624.2
444.4
93.7
120.0
67.5
$ 9,926.5
416.2
111.6
104.8
50.0
$ 9,331.1
341.1
145.8
131.9
34.3
$ 9,100.1
309.7
159.6
68.1
32.9
202.0
–
202.0
94.8
296.8
16.2%
5,051.5
707.3
1,965.2
3.07
1.44
4.51
0.560
0.560
29.77
44.35
33.37
43.29
182.9
–
182.9
3.7
186.6
11.4%
4,929.2
727.4
1,709.0
2.78
0.05
2.83
0.480
0.480
25.87
38.00
24.25
36.66
163.3
–
163.3
9.2
172.5
11.6%
4,679.7
913.0
1,567.6
2.47
0.14
2.61
0.400
0.400
23.67
29.50
23.10
26.65
159.3
–
159.3
(6.0)
153.3
11.4%
4,519.3
923.1
1,418.5
2.42
(0.09)
2.33
0.330
0.330
21.41
33.25
23.70
23.85
123.5
8.7
132.2
63.7
195.9
16.4%
4,318.0
975.0
1,290.6
2.00
0.97
2.97
0.214
0.214
19.47
33.30
15.75
28.88
78.5
10.0
88.5
491.5
580.0
69.1%
4,254.3
1,107.2
1,115.0
1.33
7.49
8.82
0.170
0.170
16.82
18.25
13.88
17.00
65.8
65.7
65.7
65.7
65.7
65.8
65.8
65.7
65.6
78.8
5.9
84.7
2.1
86.8
13.3%
4,171.0
1,332.0
602.8
1.10
0.03
1.13
0.140
0.140
8.73
16.98
12.33
16.05
75.6
2010 ANNUAL REPORt
107
Outstanding Shares
As of June 25, 2010
Non-Voting Class A shares
Class B common shares, voting
34,197,498
34,260,763
Transfer Agent
CIBC Mellon trust Company
Investor Correspondence
P.O. Box 7010
Adelaide Street Postal Station
toronto, Ontario
M5C 2W9
telephone: (800) 387-0825
Email: inquires@cibcmellon.com
Bankers
Bank of Montreal
Bank of Nova Scotia
Bank of tokyo-Mitsubishi
Canadian Imperial Bank of Commerce
National Bank of Canada
Rabobank
Royal Bank of Canada
tD Bank Financial Group
Solicitors
Stewart McKelvey
Halifax, Nova Scotia
Auditors
Grant thornton, LLP
New Glasgow, Nova Scotia
Multiple Mailings
If you have more than one account, you may receive a separate
mailing for each. If this occurs, please contact CIBC Mellon trust
Company at (800) 387-0825 to eliminate the multiple mailings.
Shareholder
and Investor
Information
Empire Company Limited
Head Office:
115 King St.
Stellarton, Nova Scotia
B0K 1S0
telephone: (902) 755-4440
Fax: (902) 755-6477
www.empireco.ca
Investor Relations and Inquiries
Shareholders, analysts, and investors should direct their
financial inquiries or requests to:
Stewart H. Mahoney, cfa
Vice President, treasury & Investor Relations
E-mail: investor.relations@empireco.ca
Communication regarding investor records including changes
of address or ownership, lost certificates or tax forms, should
be directed to the Company’s transfer agent and registrar,
CIBC Mellon trust Company.
Affiliated Company Web Addresses
www.sobeyscorporate.com
www.empiretheatres.com
Shareholders’ Annual General Meeting
September 10, 2010, at 11:00 a.m. (ADt)
Empire Studio 7 Cinemas
610 East River Road
New Glasgow, Nova Scotia
Stock Exchange Listing
the toronto Stock Exchange
Stock Symbols
Non-Voting Class A shares – EMP.A
Preferred shares: Series 2 – EMP.PR.B
Average Daily Trading Volume (TSX:EMP.A)
115,813
Dividend Record and Payment Dates for Fiscal 2011
Record Date
July 15, 2010
October 15, 2010*
January 14, 2011*
April 15, 2011*
Payment Date
July 30, 2010
October 29, 2010*
January 31, 2011*
April 29, 2011*
*Subject to approval by Board of Directors
108
EMPIRE COMPANy LIMItED
Delivering the Future
Sobeys’ Ontario retail network. But what is truly
and encompassing 500,000 square feet of space,
dry grocery requirements for most of the stores in
Eight times the size of a football field, 65 feet high
our Vaughan, Ontario distribution centre meets the
Sobeys’ newest distribution centre
represents a quantum leap in
distribution and store efficiency.
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
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➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
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➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜
To learn more, watch the video at:
http://www.sobeyscorporate.com/en/video.aspx
remarkable about this facility is not the massive scale.
savings in per case distribution costs and far less time
spent receiving and restocking inventory in our stores.
flexibility of our deliveries. The results are significant
storage and picking technology that is allowing us to
It is the exclusive, completely automated warehouse
dramatically improve the timeliness, accuracy and
We are committed to promoting the well-being of our customers, communities and
company without compromising the ability of future generations to prosper on the
precious planet that sustains us. To learn more about what we are doing to minimize
the impact of our operations on the environment, please visit us at:
http://www.sobeyscorporate.com/sustainability
www.empireco.ca