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A bold vision of transformation
ANNUAL REPORT 2017
Empire Company Limited
COMPANY PROFILE
Empire Company Limited (TSX: EMP.A) is a Canadian company headquartered in Stellarton,
Nova Scotia. Empire’s key businesses are food retailing and related real estate. With
approximately $23.8 billion in sales and $8.7 billion in assets, Empire and its subsidiaries,
franchisees and affiliates employ approximately 125,000 people.
Financial highlights
($ in millions, except per share amounts)
52 weeks ended
May 6, 2017
53 weeks ended
May 7, 2016
52 weeks ended
May 2, 2015(1)
Sales
EBITDA(2)
Adjusted EBITDA(2)
Operating income (loss)
Net earnings (loss)(3)
per share (fully diluted)(4)
Adjusted net earnings(2), (3)
per share (fully diluted)
Book value per share
Dividends per share
Sales
($ in billions)
CAGR(5)
5.9%
25
20
15
10
5
0
$23,806.2
$24,618.8
777.2
796.9
333.0
158.5
0.58
191.3
0.70
13.41
0.41
(1,944.7)
1,161.4
(2,418.5)
(2,131.0)
(7.78)
410.2
1.50
13.34
0.40
$23,928.8
1,224.9
1,321.9
742.4
419.0
1.51
511.0
1.84
21.61
0.36
Adjusted net earnings(2),(3)
($ in millions)
CAGR(5)
-0.4%
500
400
300
200
100
0
Dividends
($ per share)
CAGR(5)
7.4%
0.40
0.32
0.24
0.16
0.08
0.00
2007
2017
2007
2017
2007
2017
(1) Amounts have been reclassified to correspond to the current period presentation on the consolidated statement of earnings (loss).
(2) See “Non-GAAP Financial Measures & Financial Metrics” section of the Management’s Discussion and Analysis (“MD&A”).
(3) Net of non-controlling interest.
(4) The weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all potential common shares
would be anti-dilutive.
(5) Compound annual growth rate.
YEAR IN REVIEW
Message from the Chair
James M. Dickson
Chair
Strong governance, strategic focus and effective
leadership remain at the forefront of Empire’s approach
to good governance and will ensure that we continue
our proud history of 110 years in food retailing.
By any measure, fiscal 2017 was a difficult year for Empire and Sobeys. Our overall
financial results were disappointing. Our employees, franchisees and vendors
were increasingly frustrated and we have had to make many difficult decisions
that are affecting the lives of our employees and their families. However, I am
pleased to report that our Board observed positive and stabilizing trends as
we closed fiscal 2017.
Effective leadership
Last July, in response to a disappointing fiscal 2016, the Board instituted a
leadership change and appointed François Vimard, then Empire’s Chief Financial
and Administrative Officer, as Interim Chief Executive Officer. Under François’
leadership, we started the work to prioritize and advance the most critical
elements of our strategy to ensure that we meet the needs and expectations
of our customers and see the return of long-term profitable growth. We also
initiated an orderly succession process to identify a permanent leader, devoting
considerable time and energy to succession planning and recruiting the
necessary talent to make sure that we have the right team to lead our Company.
In January 2017, after an extensive international search, we announced the
appointment of Michael Medline as the new President & Chief Executive Officer
of Empire Company Limited and its wholly-owned subsidiary Sobeys Inc. The
Board was unanimous in its conclusion that Michael is the right choice to lead
our Company as we address the strategic, structural and operational changes
necessary to create long-term value for all of our stakeholders. Michael is an
outstanding Canadian retailer who brings a passion for the customer experience
and a proven ability to drive strong operating and financial performance within
national organizations and across multiple brands.
Strategic focus
Our Board of Directors is responsible for strong stewardship and ensuring
the successful execution of our strategy. Our CEO and his leadership team
recently laid out a comprehensive three-year plan to transform our Company.
The Board supports Michael’s bold vision and his priorities for fiscal 2018.
Michael has kept us apprised as he has made changes to his leadership team
and developed the plan for turning around our business, growing our bottom
line and outpacing our competition, while re-engaging our customers in
the process.
We look forward to working with Michael and his new leadership team over the
coming year. You can read about the development of our new strategic plan,
and Project Sunrise specifically, beginning on page 4.
1
Annual Report 2017 YEAR IN REVIEW
Strong governance
Empire’s board is highly engaged, qualified, experienced and
diverse, and a majority of our directors are independent. The
slate of directors proposed for election at this year’s annual
general meeting is made up of 13 directors with experience in
the food business, retail, finance, law and consumer businesses.
In addition, we are fortunate to have five Sobey family members
who have served in senior level positions within Empire or Sobeys
proposed for election as directors.
Your Board and our leadership team remain committed to
diversity and gender balance at all levels of our Company. We are
very pleased that 30% of our nominees for election as directors
for the upcoming year are women.
In January 2017, we welcomed another seasoned retailer to our
Board. Martine Reardon brings over 30 years of retail marketing
experience, including four years as Chief Marketing Officer at
Macy’s Inc. where she was responsible for macys.com, social,
mobile and digital media. Martine’s appointment increases our
Board’s diversity and deepens its skill and experience in retail
while recognizing the growing importance of a digital presence
in our business.
With thanks
This year we saw Empire’s long-serving director, Rob Dexter,
retire from the Board after 29 years of service, including the past
12 years as Chair. I would like to thank Rob for his outstanding
service, so appropriately captured by Donald R. Sobey, Chair
Emeritus of Empire: “Rob has played a pivotal role in some of the
most important decisions leading to the Company’s significant
growth. His outstanding contributions, wise counsel and
commitment to strong governance have been the foundation of
his service both as a director and as Chair of the Board.”
I would also like to extend our appreciation to Kevin Lynch who
is not standing for re-election in September. We thank him for his
guidance and insight over the past four years, particularly as
Chair of the Corporate Governance Committee.
Two long-serving executives are also retiring. François Vimard,
Executive Vice President, is retiring after a distinguished 22-year
career and serving as Interim President & CEO. François provided
strong leadership on enhancements to our distribution network,
and served as Chief Financial and Administrative Officer and
as a trustee of Crombie REIT. Yves Laverdière, President, Québec
business unit, is retiring following 21 years with the Company.
Yves helped build the IGA business in Québec into the province’s
leading food retailer. I would like to thank François and Yves for
their service and commitment throughout the years and wish
them every success in retirement.
Sobeys grew from the simple desire of J. W. Sobey in 1907 to
bring quality food to his neighbours. Built community by
community, Sobeys has thrived for five generations with great
people providing great service, and today we serve Canadians
in over 900 communities coast-to-coast. Strong governance,
strategic focus and effective leadership remain at the forefront of
Empire’s approach to good governance and will ensure that we
continue our proud history of 110 years in food retailing.
I would like to thank all of the people throughout Empire’s and
Sobeys’ operations, and our franchisees and affiliates, for all of
their hard work and dedication during these challenging times
as well as for their commitment to our future success.
I also extend my sincere appreciation to the Sobey family for
their support and to all of Empire’s shareholders for your trust
and confidence in this great organization 110 years strong.
Sincerely,
signed “James M. Dickson”
James M. Dickson
Chair
Empire Company Limited
June 28, 2017
Celebrating history
This year we celebrate our history – Sobeys 110 and Canada 150 – by honouring our fellow Canadians
at the Canadian Museum of Immigration at Pier 21 on the historic Halifax waterfront.
Through the support of the Sobey Foundation, the Sobey Wall of Honour features two storeys of
bricks inscribed with the names of families and individuals who passed through the halls at Pier 21
between 1928 and 1971 to enter Canada and start their new lives in this country. It is estimated that
one in five Canadians can trace their roots back through Pier 21. The Sobey Wall of Honour is just
one of the ways the Sobey legacy of giving back endures.
2
Empire Company Limited YEAR IN REVIEW
A Conversation with Michael Medline
Our challenges as a Company over the past
couple of years have been well documented
in the media and investment community,
as well as the subject of much internal
conversation at Empire. Michael Medline,
President & CEO of Empire Company
Limited and its wholly-owned subsidiary
Sobeys Inc., talks candidly about the
business and our bold plans to thrill our
customers, build our brands and excite
our shareholders.(1)
Michael Medline
President & Chief Executive Officer
Q Michael, let’s start with why you decided
to join Empire?
A
I always admired this Company from afar. In fact, in a
speech a couple of years back, I referred to Sobeys as
one of a small handful of ‘national champions’ of retail
in this country. This is a great Company that is proudly
Canadian, has a unique culture, a rich history of serving the
food needs of Canadians for 110 years, and is supported
by the Sobey family’s long-standing commitment to the
business. So when the opportunity to join the Empire team
presented itself, I considered it an honour and a privilege.
Q What were your initial impressions when you
started in your role?
A
Since I joined the Company in January, I’ve been travelling
the country, walking stores with our leadership teams,
talking to employees at town hall and other meetings,
and assessing our assets, strategy and opportunities. I
can tell you we have great locations throughout most of
the country, strong leaders, an engaged team, as well
as a Board and controlling shareholder who are truly
committed to creating long-term shareholder value.
These strengths provide a solid foundation for our
business. I’m very excited to embark on this journey,
and meet the challenge of thrilling our customers and
delivering growth for this Company.
Q When you think about the future for Empire and
Sobeys, what does it look like?
A
I think about what this Company can and will be most
every waking hour of my day. I want to be the best, most
innovative and customer-focused retailer in Canada. I
want customers to think of us first when they do their food
shopping. And I want our employees to feel the pride of
working for a Company that is making a difference in the
lives of its customers.
I’ve asked our employees on many occasions to think
about how it’s going to feel when we get some wind in
our sails, when we are delivering on that promise to our
customers and putting solid numbers up on the board.
I can tell you, there’s no feeling like it.
Are we there yet? Not at all, we have a lot of hard work in
front of us. But we have a proud history we can build upon,
a loyal and committed workforce who can make it happen
and a plan to get us there.
(1) This discussion contains forward-looking information. For more information see the section entitled “Forward-Looking Information” on page 9.
3
Annual Report 2017
YEAR IN REVIEW
Q You’ve said that the future requires nothing less than
the transformation of the business and to move forward
with confidence. Why is that?
Q How are you managing this transformation to ensure you
deliver on the commitments you have made?
A
Clearly our results have been extremely disappointing
and our employees and vendors have been frustrated
by both the complexity of our business and decision-
making processes. So when I speak about the need for
a transformation of our business what I mean is that
we must greatly simplify our structure, take costs out,
re-engage with customers, grow sales and gain market
share. There are so many opportunities to improve. It’s
going to also mean making a lot of tough decisions,
especially involving our employees, but it is absolutely
the right thing to do if we are to thrive in the future.
Q Are you going to get at this important work through
‘Project Sunrise’?
A
Sunrise is simply the moniker we’ve given to the important
work I just referred to in the previous question. It’s a
comprehensive roadmap and well-conceived plan of
attack that is going to allow us to create a focused,
high-performing organization where accountabilities are
defined, priorities are clear, and tools and core processes
are the same across the country. This is really about
eliminating from the business all of the complexity that
has slowed us down.
But in addition to the absolute necessity in eliminating
complexity from our business, we have also declared
war on costs. We are a high-cost competitor in the
marketplace and you don’t have to be the CEO to know
that is not the position you want to be in. We are laser-
focused on achieving $500 million in annualized cost
savings which will allow us to move quickly and efficiently,
reinvest savings into marketing to thrill our customers,
and importantly improve our bottom line. These are
tangible benefits for both our customers and our
shareholders. We will get at a lot of those costs by
operating like a $24 billion company instead of five
$5 billion companies, which is really how we have
gone to market over the past years.
Taking costs and complexity out of the business frees us
up to move from defence to offense. At every customer
touch point, in every way we choose to compete, we will
deliver value and communicate the compelling reasons
why Canadians should be shopping with us and that will
keep them coming back.
We’ll do this by investing in our brand and expanding the
impact of our marketing – especially digital – and finding
ways to maintain our ‘regional touch’ in communities
across the country. That’s one of the things that has made
Sobeys the iconic Canadian food retailer we are.
4
A
As you would expect regarding a change of this magnitude,
we have put in place a solid governance structure to
manage the transformation and deliver on the commitments
we made to our shareholders and our employees. We
have a fully staffed Transformation Management Office,
led by Clinton Keay, as well as a special committee of
the Board of Directors that provides Board oversight for
the transformation. Executing this transformation, while
ensuring we continue to run the existing business, remains
my main focus and that of my leadership team.
But just as importantly, I believe managing this transition
means ensuring our organization remains focused and
engaged. So while I am chomping at the bit to move
quickly on a number of other initiatives that will allow
us to innovate and better respond to the needs of
our customers, I know that I cannot overburden the
organization with a long list of other priorities that will
take our focus and resources away from our critical focus:
Project Sunrise.
Q How does the transformation affect store operations and
capital spending?
A
The transformation is actually designed to benefit our
stores so that they can better serve the needs of our
customers, but the organizational changes will not impact
the stores or distribution centres directly. If we simplify
our structure, operate more efficiently and make better
decisions faster, we’re ultimately helping our stores and
better serving our customers.
We’re also putting our capital expenditure plans under
the microscope because, frankly, we have not earned the
right to spend at the levels of the past few years. We’re
scrutinizing every dollar of shareholders’ capital that we
spend, and see plenty of opportunities in the square
footage we have today to generate superior returns.
Q You like to use the word ‘velocity’ in your communications.
Why is speed so important to you?
A
I talk about velocity because the retail landscape, and
food retailing in particular, is experiencing such immense
change. Disruptors are reshaping food retailing and the
risks are significant if we are unable to move with speed,
adapt to new concepts, innovate, or respond to the needs
of the customer and how they tell us they want to shop
with us.
In the context of Project Sunrise, velocity is even more
critical because the faster we can simplify our structure
and take $500 million in costs out of our business, the
sooner we can move from defence to offense – where
we are innovating, where we are playing a leading role
in shaping food retail and where we are winning in
the marketplace.
Empire Company Limited
Four strategic priorities
We’ve set four priorities for our fiscal 2018 game plan:
1.
Reset our structure and move
to a functionally led
organizational structure
We have talented and
experienced people at Sobeys
who want to do the right thing
and make a contribution to our
success. One of our greatest
frustrations internally stems
from the way we’re organized.
Setting a new, efficient
operating model that drives
our business on a national
basis, while acknowledging
differences across regions, will
help all of us to do just that.
2.
Execute quick wins to take
cost out
Some good work has been
done to identify a few areas
where we can quickly take
out costs – the low hanging
fruit. For example, we’re
streamlining and standardizing
our approach to payments and
store labour, and looking at
tools to better allocate hours
where it will make the biggest
difference for our customers.
We’re also advancing projects
on goods not for resale to
capture savings by making
smart choices about how and
what we buy, looking at
everything from grocery bags
to chicken domes to cleaning
products for our stores.
3.
4.
Understand our customer
Fix the West
It’s clear that we damaged
our relationship with
customers in the West.
We’re devising a strategy to
welcome our customers back
and address our top and
bottom line performance.
We’re also closely monitoring
progress and will expand
solutions nationally where we
are gaining traction. Realizing
operating savings is a key
objective as we make changes,
and all of the things we are
going to do over the coming
year will directly support
this priority.
Our ability to understand our
customers and communicate
effectively with them has
been sorely missing. We really
need to work on understanding
our customers to set the
foundation of our brand
strategy going forward.
Qualitative and quantitative
research, customer data
insights, competitive analysis
and valuable feedback from
our store teams are some
of the ways we’re building
our baseline understanding
of our customers. As part of
this priority, we surveyed
over 6,000 of our customers
from coast-to-coast this year,
and are using what we learned
to develop a customer-led
strategy for each banner
that differentiates us, covers
all touch points and tracks our
success on key customer metrics.
Q You’ve built an executive team that includes both
Company veterans and a couple of new faces. Was that
important to you?
A
Really important. First of all, Empire has some of the
best talent I have seen in Canadian retail – especially our
executive team. I also think it’s critical in any organization
to introduce new thinking and new approaches in order to
challenge the status quo, innovate and continually grow. I
cannot tell you how thrilled I was to have Mike Vels join us
as CFO in June. Mike is a highly accomplished executive,
one of the country’s most respected CFOs and a highly
results-oriented leader. I am confident that we will identify
and hire a great new head of marketing, which I consider
an incredibly important role as we work to connect and
communicate a compelling story to our customers that will
keep them coming back.
Q Do you see Sobeys culture changing?
A
There are certainly some aspects of our culture that need
to change if we are going to be nimble and adapt to the
ever-changing realities of food retailing. Having said that,
there is a lot about our culture that has served as a beacon
for our Company and our employees over the 110 years
we have been in business. It is our culture that will allow us
to navigate and ultimately succeed on the transformation
journey we are now on. Our culture is rooted in a
commitment to putting our customers first, providing
great service, and supporting the communities we serve.
I guarantee you those cultural attributes aren’t about to
change. They will remain foundational to everything we do.
Q Do you have any final comments?
A
We have scale, talent and a solid plan to return the
Company to long-term, profitable growth. We also have a
great Board of Directors and an outstanding Chair in
Jim Dickson. Our future is very bright. This year, Canada
is celebrating its 150th birthday and Sobeys is marking
110 years in the food retailing business. We cherish our
rich heritage and values, but it is more important than
ever that we move forward quickly and decisively to
ensure that Sobeys’ best days are still to come.
Sincerely,
signed “Michael Medline”
Michael Medline
President & Chief Executive Officer
Empire Company Limited
June 28, 2017
5
Annual Report 2017 THE SOBEY FOUNDATION
Sobeys is a proud Canadian family business with roots dating back 110 years to an immigrant family that
settled in rural Nova Scotia. In our nation’s 150th year, we’re proud to partner with the Canadian Museum
of Immigration at Pier 21 to celebrate the Canadians from all over the world who have helped build Canada
and our business. Through this philanthropic partnership, Sobeys’ employees are contributing personal
and family histories to the National Stories Archive at the Canadian Museum of Immigration, making their
families’ journeys accessible for future generations to share and learn from. To read these stories please
visit www.Sobeys110.com.
One such submission to the National Archives at Pier 21 came from Archel Imperial, the Deli Manager
at Winchester Foodland. Archel is featured on the cover of this Annual Report and her compelling
immigration story is also shared here.
“
I am Archel Imperial, I have two sisters and five younger
brothers. We grew up up in a countryside in the Philippines
province of Aklan in Malinao.
When I was 10 years old I started to worked in the farm, planting
rice manually under the heat of the sun from morning until
afternoon making P40 pesos/$1.25 Canadian dollar a day in
order to have money to buy clothes and school allowance.
Some days we woke up in the morning 4 o’clock am getting
ready to go to the corn field for harvesting, we walked about
15 kilometers to get there, while the other kids are still
sleeping. We never encounter playing barbies or any fancy
toys, we were content in what we have at home.
We also helped our parents carrying the harvested products
like rice and corn from the field to the house.
After my high school years, my dream was to become an
Engineer, but its because of poverty, my parents cannot afford
to send us to school. I decided to take Bachelor of Science in
Home Technology, its affordable and in public University with
the help of my sister, aunt and parents as well.
In 2005 I gave birth to my son. Everything did not go well,
my parents were so disappointed, they expected too high
from me. I felt I let them down.
Two years after (son 2 years old) I decided to work out of
country to give my son a good future. I worked in Hong Kong
for over two years taking care of new born twins and doing
household chores. I was working 18 hours a day and one 8 hours
day off per week making $500 Canadian/month. Every payday
I only saved allowance for my self, the rest will be sent home
to my family to support my brothers education as well as
my sons needs.
In 2009, I came to Canada to work as a Live in Caregiver (nanny).
I am blessed to have a very supportive employer. After my
contract, I started to work at Winchester Foodland in bakery
and deli department. One Year later, I was promoted to Deli
Manager. Everything was all so new to me, the only thing
I could think of, was how to look after my customers, the
inventory and all the other aspects of running the department
correctly. A few years after starting, I met my Deli Specialist
Team and the new store owner Dan Pettigrew, They helped me
become successful in my department. I worked really hard to
reach my goals.
In 2015, my son and I reunited. I was able to pick him up from
the Philippines and brought home in Canada. He is my life and
strength. Finally, after eight years of working all of my hardship
paid off, all my brothers finished all their degrees that they
wanted. Two of them finished Bachelor of Science in Electrical
Technology, Bachelor of Science in Electronic Technology,
Bachelor of Science in Civil Engineering (license) and Bachelor
of Science in Marine Transportation. I build duplex house for my
parents to keep them safe if there’s any floods and bought a van
for family use.
Lastly, above all I would like to thanks to our almighty father
for giving me strength and courage, to my parents, in-laws
and fiancee for looking after my son while I was away, co-workers
and friends for always there for me, To all Canadian Immigration
Team for giving me opportunity to work and live to this beautiful
country and most of all to Sobeys and Foodland Family for
giving me a chance to share my story. If its not for you, I wont
be able to reach my goals and dreams come true!
Happy 110th year Anniversary Sobeys and 150th Year
Anniversary Canada.
”
God bless you all!
6
Empire Company Limited Annual Report 2017
GOVERNANCE
Directors of Empire Company Limited
1
6
2
7
3
8
4
9
5
10
11
12
13
14
1 Cynthia Devine(2)(5)(7)
Toronto, Ontario
Director since 2013
Chief Financial Officer,
Maple Leaf Sports &
2 James M. Dickson(9)
Halifax, Nova Scotia
Director since 2015
Counsel, Stewart
McKelvey
Entertainment
3 Gregory Josefowicz(3)
Fennville, Michigan, USA
Director since 2016
Corporate director
4 Sue Lee(3)
Calgary, Alberta
Director since 2014
Corporate director
5 William Linton(4)(5)(7)
Toronto, Ontario
Director since 2015
Corporate director
6 Kevin Lynch(3)(6)(8)
Ottawa, Ontario
Director since 2013
Vice Chairman,
BMO Financial Group
7 Michael Medline
Toronto, Ontario
Director since 2017
President & Chief
Executive Officer,
Empire Company
Limited and Sobeys Inc.
8 Martine Reardon
New York,
New York, USA
Director since 2017
Corporate director
9 Frank C. Sobey(5)
Pictou County,
Nova Scotia
Director since 2007
Chairman,
Crombie REIT
10 John R. Sobey(1)
Pictou County,
Nova Scotia
Director since 1979
Corporate director
11 Karl R. Sobey(3)
Halifax, Nova Scotia
Director since 2001
Corporate director
12 Paul D. Sobey(5)
Pictou County,
Nova Scotia
Director since 1993
Corporate director
13 Robert G. C. Sobey(3)(5)
Stellarton, Nova Scotia
Director since 1998
Corporate director
14 Martine Turcotte(1)(5)(7)
Verdun, Québec
Director since 2012
Vice Chair, Québec,
BCE Inc. and
Bell Canada
(1) Audit Committee member
(2) Audit Committee Chair
(3) Human Resources Committee member
(4) Human Resources Committee Chair
(5) Corporate Governance Committee member
(6) Corporate Governance Committee Chair
(7) Nominating Committee member
(8) Nominating Committee Chair
(9) Chair of the Board
To learn more, please
visit www.empireco.ca/governance
7
MANAGEMENT’S DISCUSSION AND ANALYSIS
Table of Contents
Forward-Looking Information
Overview of the Business
Food Retailing
Investments and Other Operations
Strategic Direction
Summary Results – Fourth Quarter
Sales
Gross Profit
EBITDA
Operating Income
Finance Costs
Income Taxes
Net Earnings
Operating Results – Full Year
Sales
Gross Profit
EBITDA
Operating Income
Finance Costs
Income Taxes
Net Earnings
Financial Performance by Segment
Food Retailing
Investments and Other Operations
Quarterly Results of Operations
9
10
10
11
11
12
12
13
13
13
13
13
14
14
15
15
15
15
16
16
16
16
16
18
19
Liquidity and Capital Resources
Operating Activities
Free Cash Flow
Investing Activities
Financing Activities
Employee Future Benefit Obligations
Guarantees and Commitments
Consolidated Financial Condition
Key Financial Condition Measures
Shareholders’ Equity
Accounting Standards and Policies
Changes to Accounting Policies Adopted During Fiscal 2017
Future Standards
Critical Accounting Estimates
Disclosure Controls and Procedures
Internal Control over Financial Reporting
Related Party Transactions
Key Management Personnel Compensation
Indemnities
Contingencies
Risk Management
Subsequent Events
Designation for Eligible Dividends
Non-GAAP Financial Measures & Financial Metrics
Financial Measures
Financial Metrics
20
20
20
20
21
21
21
22
22
22
24
24
24
25
27
27
27
28
28
28
28
33
33
33
33
35
8
The following is Management’s Discussion and Analysis (“MD&A”) of the consolidated financial results of Empire Company Limited
(“Empire” or the “Company”) and its subsidiaries, including wholly-owned Sobeys Inc. (“Sobeys”) for the 13 and 52 weeks ended May 6,
2017 compared to the 14 and 53 weeks ended May 7, 2016. It should be read in conjunction with the Company’s audited consolidated
financial statements and notes thereto for the 52 weeks ended May 6, 2017, and the 53 weeks ended May 7, 2016. Additional information
about the Company, including the Company’s Annual Information Form, can be found on SEDAR at www.sedar.com or on the Company’s
website at www.empireco.ca.
The audited consolidated financial statements and the accompanying notes are prepared in accordance with International Financial
Reporting Standards (“IFRS” or “GAAP”) as issued by the International Accounting Standards Board (“IASB”) and are reported in Canadian
dollars (“CAD”). These consolidated financial statements include the accounts of Empire and its subsidiaries and structured entities
(“SEs”) which the Company is required to consolidate. The information contained in this MD&A is current to June 28, 2017, unless
otherwise noted.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements which are presented for the purpose of assisting the reader to contextualize the
Company’s financial position and understand management’s expectations regarding the Company’s strategic priorities, objectives and
plans. These forward-looking statements may not be appropriate for other purposes. Forward-looking statements are identified by words
or phrases such as “anticipates”, “expects”, “believes”, “estimates”, “intends”, “could”, “may”, “plans”, “predicts”, “projects”, “will”,
“would”, “foresees” and other similar expressions or the negative of these terms.
These forward-looking statements include, but are not limited to, the following items:
•
•
•
•
•
•
The Company’s expectations regarding the impact of Project Sunrise, including expected annualized cost savings, efficiencies
resulting from this transformation initiative, and the expected timing and amount of one-time costs, which could be impacted by
several factors, including the time required by the Company to complete the realignment as well as the factors identified under
the heading “Risk Management”;
The Company’s expectations relating to the effects of operational challenges primarily in Western Canada and sales erosion across the
store network, which may be impacted by a number of factors including the effectiveness of future mitigating strategies employed and
continued competitive intensity;
The Company’s expected contributions to its registered defined benefit plans, which could be impacted by fluctuations in market prices;
The Company’s assessment that its operational and capital structure is sufficient to meet its ongoing business requirements, which
could be impacted by changes in the current economic environment;
Management’s belief that a downgrade in its credit ratings will not impede liquidity required for current contractual obligations,
day-to-day operations or long-term outlook, which could be impacted by the necessity to re-finance existing debt, access to capital
markets and fluctuations in interest rates; and
The Company’s expectation that its cash and cash equivalents on hand, unutilized credit facilities and cash generated from operating
activities will enable the Company to fund future capital investments, pension plan contributions, working capital, current funded debt
obligations and ongoing business requirements, and its belief that it has sufficient funding in place to meet these requirements and
other short-term and long-term obligations, all of which could be impacted by changes in the economic environment.
By its nature, forward-looking information requires the Company to make assumptions and is subject to inherent risks, uncertainties and
other factors which may cause actual results to differ materially from forward-looking statements made. For more information on risks,
uncertainties and assumptions that may impact the Company’s forward-looking statements, please refer to the Company’s materials filed
with the Canadian securities regulatory authorities, including the “Risk Management” section of this MD&A.
Although the Company believes the predictions, forecasts, expectations or conclusions reflected in the forward-looking information are
reasonable, it can provide no assurance that such matters will prove correct. Readers are urged to consider the risks, uncertainties and
assumptions carefully in evaluating forward-looking information and are cautioned not to place undue reliance on such forward-looking
information. The forward-looking information in this document reflects the Company’s current expectations and is subject to change. The
Company does not undertake to update any forward-looking statements that may be made by or on behalf of the Company other than as
required by applicable securities laws.
9
Annual Report 2017 OVERVIEW OF THE BUSINESS
Empire’s key businesses and financial results are segmented into two separate reportable segments: (1) Food retailing and (2) Investments
and other operations. With approximately $23.8 billion in sales and $8.7 billion in assets, Empire and its subsidiaries, franchisees and
affiliates employ approximately 125,000 people.
FOOD RETAILING
Empire’s Food retailing segment is carried out through Sobeys, a wholly-owned subsidiary. Proudly Canadian, with headquarters in
Stellarton, Nova Scotia, Sobeys has been serving the food shopping needs of Canadians for 110 years, since 1907. Sobeys owns, affiliates
or franchises more than 1,500 stores in all 10 provinces under retail banners that include Sobeys, Safeway, IGA, Foodland, FreshCo., Thrifty
Foods and Lawton’s Drug Stores as well as more than 350 retail fuel locations. Sobeys’ purpose is to help Canadians Eat Better, Feel Better
and Do Better.
Strategic Imperatives(1)
In the fourth quarter of fiscal 2017, the Company launched Project Sunrise, a comprehensive three year transformation intended to simplify
the organizational structure and reduce costs. The transformation is expected to deliver approximately $500 million in annualized cost
savings by fiscal 2020 that will allow the Company to grow its earnings and re-invest in the business, growing both its sales and earnings.
The organizational structure changes will create a nationally managed company with the ability to leverage its $24 billion national scale.
Including the two Project Sunrise elements, the Company is focused on four primary initiatives:
(i) Organizational Structure
Changes in the Company’s organizational structure include collapsing multiple, independent regions into a largely national,
functionally-led structure. This will simplify the way the Company conducts business and will result in a reduced workforce.
Management has taken the first step in transitioning to the new organizational structure with the appointment of a new senior
leadership team. The intention of the transformation initiative is to address the complex organizational structure which has resulted
in significant duplication and lack of clear, defined accountabilities. These complexities add not only unnecessary costs, but prevent
nimble and responsive decision making to support the needs of the customers and capitalize on changes in the marketplace.
(ii) Cost Reduction
Management has undertaken a detailed assessment of cost reduction opportunities available to the Company, including
benchmarking
its costs against other businesses, and is executing against a phased plan to permanently reduce its cost base. Early progress on the
cost initiatives is progressing well and it is expected that initial savings will be reflected in results in the third quarter of fiscal 2018.
Cost reductions will be sourced from reductions in headcount arising from organizational structure changes and process improvement,
targeting specific enterprise-wide efficiencies and productivity initiatives and simplifying how the Company collaborates with vendors
while leveraging its purchasing scale as a $24 billion nationally managed Company.
(iii) Customer Focus
Significant work is required to better understand Sobeys’ brands banner positioning, customers and marketing initiatives as these
are critical to the success of any retailer and recent approaches to customers have been disappointing. Management is undertaking
a comprehensive review of its customers, the relative positioning of its categories and store banners and will develop and implement
a strategy that will improve its proposition to Canadian grocery customers, allowing the Company to compete more effectively and
grow both its top line sales and margins.
(iv) West Business Unit
Challenges faced in the Western business unit have resulted in significant decreases in sales and profitability, arising from the
integration of the Canada Safeway acquisition. In the short term, management has been focused on improving store execution and
promotional mix and the results in the fourth quarter were more positive as comparative sales improved and were more consistent
with rates realized across the rest of the business.There is a significant amount of improvement still required to return this business
to acceptable levels of profitability.
The full redesign and execution of the organizational structure is expected to be completed by the end of calendar 2017. As a result of this
transformation initiative, the Company incurred costs of $15.8 million in the fourth quarter of fiscal 2017. In total, the Company expects to
incur approximately $200 million in one-time costs associated with severance, relocation, consulting and minor system developments, the
bulk of which will be incurred in the first half of fiscal 2018.
(1) The following represents forward looking information described under the “Forward-Looking Information” section of this MD&A.
10
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS
Other Significant Items
Real Estate Divestitures
On June 29, 2016, the Company and its wholly-owned subsidiaries completed an agreement with Crombie Real Estate Investment
Trust (“Crombie REIT”) to sell and leaseback a portfolio of 19 retail properties and a 50 percent interest in each of its three automated
distribution centres, as well as the sale of two parcels of development land. Crombie REIT also invested approximately $58.8 million in
renovations or expansions of ten Sobeys retail locations already in Crombie REIT’s portfolio. See the “Related Party Transactions Section”
of this MD&A for further detail.
Manufacturing Sales Adjustments
The Company disposed of certain manufacturing facilities in fiscal 2015 and entered into long-term supply agreements that contain
minimum purchase volume requirements that require adjustments in prices paid to vendors if these minimum commitments are not met.
As at May 6, 2017, the provision for adjustments related to these minimum purchase requirements is $12.0 million. The Company has so far
paid $55.2 million related to these long-term supply agreements where minimum purchase volume requirements for calendar 2016 were
not met.
Distribution Centre Restructuring
Costs of $4.3 million and $9.6 million were incurred for the 13 and 52 weeks ended May 6, 2017 (2016 – $2.2 million and $7.9 million) related
to distribution centre restructuring.
Impairments of Goodwill and Long-Lived Assets
In fiscal 2016, management determined there were indicators of impairment in the West business unit as the result of significant negative
trends in operating results of the Sobeys West operating segment and the overall challenging economic climate mainly in the Alberta
and Saskatchewan markets. In the fourth quarter of fiscal 2016, the Company recorded impairments of long-lived assets and goodwill of
$10.9 million and $1,430.5 million, respectively. Including impairments recorded earlier in fiscal 2016, total impairments of long-lived assets
and goodwill for fiscal 2016 was $3,027.1 million. At the end of fiscal 2016, there was no remaining goodwill within the West business unit.
INVESTMENTS AND OTHER OPERATIONS
Empire’s investments and other operations segment, as of May 6, 2017, included:
1. A 41.5 percent (40.3 percent fully diluted) equity accounted interest in Crombie REIT, an open-ended Canadian real estate
investment trust. Crombie REIT currently owns a portfolio of 281 income-producing properties across Canada, comprising
approximately 19.1 million square feet with a strategy to own, operate and develop a portfolio of high quality grocery and drug
store anchored shopping centres, freestanding stores and mixed use developments primarily in Canada’s top urban and suburban
markets; and
2. A 40.7 percent equity accounted interest in Genstar Development Partnership, a 48.6 percent equity accounted interest in Genstar
Development Partnership II, a 39.0 percent equity accounted interest in GDC Investments 4, L.P., a 42.1 percent equity accounted
interest in GDC Investments 6, L.P., a 39.0 percent equity accounted interest in GDC Investments 7, L.P., a 37.1 percent equity
accounted interest in GDC Investments 8, L.P., and a 49.0 percent equity accounted interest in The Fraipont Partnership (collectively
referred to as “Genstar”).
STRATEGIC DIRECTION
Management’s primary objective is to maximize the long-term sustainable value of Empire through enhancing the worth of the Company’s
net assets. This is accomplished through direct ownership and equity participation in businesses that management understands and
believes to have the potential for long-term sustainable growth and profitability, principally food retailing and related real estate.
The Company is focused on restoring core strengths in food retailing and related real estate by directing its energy and capital towards
growing long-term sustainable value through cash flow, income growth and cost reductions. While our core businesses are admired by
Canadians and well established, they also offer Empire geographical diversification across Canada, which is considered by management
to be a source of strength. Going forward, the Company intends to direct its resources towards the most promising opportunities such as
the transformation initiative, Project Sunrise, improving the Company’s proposition to customers and restoring profitability in the West
business unit.
11
Annual Report 2017
SUMMARY RESULTS – FOURTH QUARTER
($ in millions, except per share amounts)
13 Weeks Ended
May 6, 2017
14 Weeks Ended
May 7, 2016
Sales
Gross profit(1)(2)
EBITDA(2)
Adjusted EBITDA(2)
Operating income (loss)
Finance costs, net
Income tax expense (recovery)
Non-controlling interest
Net earnings (loss)(3)
Adjusted net earnings(2)(3)
Basic earnings per share
Net earnings (loss)(3)(4)
Adjusted net earnings(3)
Basic weighted average number
of shares outstanding (in millions)
Diluted earnings per share
Net earnings (loss)(3)(4)
Adjusted net earnings(3)
Diluted weighted average number of shares
outstanding (in millions)
Dividend per share
(% of sales)
Gross profit
EBITDA
Adjusted EBITDA
Operating income
Net earnings(3)
Adjusted net earnings(3)
%
Change
(7.7)%
(8.1)%
116.4%
(28.1)%
105.3%
(23.7)%
100.5 %
–
103.1%
(47.3)%
$
Change
(484.3)
(125.3)
1,218.9
(75.7)
1,221.6
(8.6)
258.1
–
972.1
(45.1)
3.58
(0.17)
3.58
(0.17)
$
$
$
$
$
5,798.9
1,420.9
171.7
193.9
61.4
27.7
1.4
2.8
29.5
50.2
0.11
0.18
271.7
0.11
0.18
$
$
$
$
$
6,283.2
1,546.2
(1,047.2)
269.6
(1,160.2)
36.3
(256.7)
2.8
(942.6)
95.3
(3.47)
0.35
271.7
(3.47)
0.35
$
$
$
$
$
271.7
0.1025
271.7
0.1000
13 Weeks Ended
May 6, 2017
14 Weeks Ended
May 7, 2016
24.5%
3.0%
3.3%
1.1%
0.5%
0.9%
24.6%
(16.7)%
4.3%
(18.5)%
(15.0)%
1.5%
(1) Gross profit amounts and corresponding ratios are calculated using Food retailing segment amounts.
(2) See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
(3) Net of non-controlling interest.
(4) The weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all potential common shares
would be anti-dilutive.
Sales
All sales are generated by the Food retailing segment.
The decrease in sales for the 13 weeks ended May 6, 2017 was primarily the result of:
• The additional week of operations in fiscal 2016 which accounted for approximately $461.2 million in sales;
• Retail food price deflation; and
• Price sensitivity by consumers and their continued shift to improved value.
During the 13 weeks ended May 6, 2017, same-store sales(1) decreased 1.1 percent and excluding the impact of fuel sales decreased
1.6 percent from the same period last year.
(1) See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
12
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS
Gross Profit
The decrease in gross profit during the 13 weeks ended May 6, 2017 was a result of the factors impacting sales. As a percentage of sales,
gross profit remained relatively flat compared to the same quarter last year, and increased by 80 basis points compared to the third quarter
in fiscal 2017. This is primarily the result of focused execution along with the positive impact of seasonality.
EBITDA
EBITDA increased in the 13 weeks ended May 6, 2017, largely due to impairments recorded for goodwill and long-lived assets in the prior year.
Adjusted EBITDA decreased in the 13 weeks ended May 6, 2017, mainly as a result of the previously mentioned factors affecting sales, as
well as increases in selling and administrative expenses, including increased labour costs and promotional spending. Selling and
administrative expenses as a percentage of sales increased due to the impact of the lower sales.
($ in millions)
EBITDA
Adjustments:
Costs related to Project Sunrise
Distribution centre restructuring
Network rationalization (reversals)
Historical organizational realignment reversals
Impairments of goodwill and long-lived assets
Loss on disposal of manufacturing facilities
Adjusted EBITDA
Operating Income
13 Weeks Ended
May 6, 2017
14 Weeks Ended
May 7, 2016
$
Change
$
171.7
$
(1,047.2)
$
1,218.9
15.8
4.3
3.0
(0.9)
–
–
22.2
–
2.2
(13.9)
(0.4)
1,296.8
32.1
1,316.8
(1,294.6)
$
193.9
$
269.6
$
(75.7)
For the 13 weeks ended May 6, 2017, Sobeys’ contribution to operating income increased primarily as a result of the impairments of
goodwill and long-lived assets recorded in the prior year. This was slightly offset by an increase in selling and administrative expenses
in the current year and an additional week of operations in fiscal 2016.
Operating income from the Investment and other operations segment decreased primarily as a result of a group of properties sold by
Crombie REIT in their first quarter of fiscal 2016 and the reversals of deferred gains in the prior year.
($ in millions)
Consolidated operating income (loss)
Sobeys contribution
Investment and other operations
Crombie REIT(1)
Real estate partnerships(2)
Other operations, net of corporate expenses
13 Weeks Ended
May 6, 2017
14 Weeks Ended
May 7, 2016
$
$
$
$
52.5
$
(1,184.9)
7.7
4.9
(3.7)
8.9
61.4
$
$
$
18.1
2.8
3.8
24.7
(1,160.2)
$
$
$
$
$
Change
1,237.4
(10.4)
2.1
(7.5)
(15.8)
1,221.6
(1) 41.5 percent equity accounted interest in Crombie REIT (May 7, 2016 – 41.5 percent interest).
(2) Interests in Genstar.
Finance Costs
For the fourth quarter of fiscal 2017, net finance costs decreased from the same period last year. Interest coverage(1) in the fourth quarter
increased to 2.4 times from (39.2) times in the fourth quarter of fiscal 2016, as a result of increased operating income. Excluding the
impairments of goodwill and long-lived assets, interest coverage would have been 4.6 times in the prior year.
Income Taxes
The Company’s effective income tax rate for the fourth quarter was 4.2 percent compared with 21.5 percent in the same period last year.
Excluding the impact of the fiscal 2016 impairments, the effective income tax rate would have been 23.0 percent in the same period last
year. The decrease is primarily attributed to the re-measurement of the Company’s deferred income tax provision completed during the
quarter and the impact of capital gain transactions undertaken.
(1) See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
13
Annual Report 2017
Net Earnings
For the 13 weeks ended May 6, 2017, the increase in net earnings was primarily a result of impairments of goodwill and long-lived assets
and a provision related to the previous sale of manufacturing facilities.
($ in millions, except per share amounts)
Net earnings (loss)(1)
EPS(2)(3) (fully diluted)
Adjustments(4):
Costs related to Project Sunrise
Intangible amortization associated with the Canada Safeway acquisition
Distribution centre restructuring
Network rationalization (reversals)
Historical organizational realignment reversals
Impairments of goodwill and long-lived assets
Loss on disposal of manufacturing facilities
Adjusted net earnings(1)
Adjusted EPS(2) (fully diluted)
Diluted weighted average number of shares outstanding (in millions)
13 Weeks Ended
May 6, 2017
14 Weeks Ended
May 7, 2016
$
$
29.5
0.11
$
$
(942.6)
(3.47)
$
$
$
Change
972.1
3.58
11.3
4.7
3.1
2.2
(0.6)
–
–
20.7
50.2
0.18
271.7
–
4.8
1.6
(10.1)
(0.3)
1,016.3
25.6
1,037.9
95.3
0.35
271.7
$
$
$
$
(1,017.2)
(45.1)
(0.17)
$
$
(1) Net of non-controlling interest.
(2) Earnings per share (“EPS”).
(3) The weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all potential common shares
would be anti-dilutive.
(4) All adjustments are net of income taxes.
OPERATING RESULTS – FULL YEAR
($ in millions, except per share amounts)
May 6, 2017
May 7, 2016
May 2, 2015(1)
$ Change
% Change
52 Weeks Ended
53 Weeks Ended
52 Weeks Ended
2017 Compared to 2016
Sales
Gross profit
EBITDA
Adjusted EBITDA
Operating income (loss)
Finance costs, net
Income tax expense (recovery)
Non-controlling interest
Net earnings (loss)(2)
Adjusted net earnings(2)
Basic earnings per share
Net earnings (loss)(2)(3)
Adjusted net earnings(2)
Basic weighted average
number of shares outstanding (in millions)
Diluted earnings per share
Net earnings (loss)(2)(3)
Adjusted net earnings(2)
Diluted weighted average
number of shares outstanding (in millions)
Dividend per share
$ 23,806.2
5,707.2
777.2
796.9
333.0
118.0
42.5
14.0
158.5
191.3
$ 24,618.8
5,957.6
(1,944.7)
1,161.4
(2,418.5)
137.4
(441.3)
16.4
(2,131.0)
410.2
$ 23,928.8
5,962.1
1,224.9
1,321.9
742.4
155.1
150.4
17.9
419.0
511.0
$
(812.6)
(250.4)
2,721.9
(364.5)
2,751.5
(19.4)
483.8
(2.4)
2,289.5
(218.9)
(3.3)%
(4.2)%
140.0%
(31.4)%
113.8%
(14.1)%
109.6%
(14.6)%
107.4%
(53.4)%
$
$
$
$
0.58
0.70
$
$
(7.78)
1.50
$
$
1.51
1.84
$
$
8.36
(0.80)
271.9
273.9
277.0
0.58
0.70
$
$
(7.78)
1.50
$
$
1.51
1.84
$
$
8.36
(0.80)
272.0
0.41
274.0
0.40
277.2
0.36
(1) Amounts have been reclassified to correspond to the current period presentation on the consolidated statement of earnings (loss).
(2) Net of non-controlling interest.
(3) The weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all potential common shares
would be anti-dilutive.
14
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS
(% of sales)
Gross profit
EBITDA
Adjusted EBITDA
Operating income (loss)
Net earnings (loss)(2)
Adjusted net earnings(2)
52 Weeks Ended
May 6, 2017
53 Weeks Ended
May 7, 2016
52 Weeks Ended
May 2, 2015
24.0%
3.3%
3.3%
1.4%
0.7%
0.8%
24.2%
(7.9)%
4.7%
(9.8)%
(8.7)%
1.7%
24.9%
5.1%
5.5%
3.1%
1.8%
2.1%
(1) Amounts have been reclassified to correspond to the current period presentation on the consolidated statement of earnings (loss).
(2) Net of non-controlling interest.
(3) The weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all potential common shares
would be anti-dilutive.
Sales
All sales are generated by the Food retailing segment.
The decrease in sales for the 52 weeks ended May 6, 2017 was primarily the result of:
• The additional week of operations in fiscal 2016 which accounted for approximately $461.2 million in sales;
• Retail food price deflation;
• Negative impact of merchandising and promotional strategies in Western Canada; and
• Price sensitivity by consumers and their continued shift to improved value.
During the 52 weeks ended May 6, 2017, same-store sales decreased 2.1 percent and excluding the impact of fuel sales decreased
2.2 percent from the same period last year. Excluding fuel and the retail West business unit, same-store sales decreased 1.2 percent.
Gross Profit
The decrease in gross profit during the 52 weeks ended May 6, 2017 continued to be the result of the factors impacting sales, as well as
significant investments made in pricing, particularly in the West business unit.
EBITDA
EBITDA increased in the 52 weeks ended May 6, 2017, largely due to impairments recorded for goodwill and long-lived assets in the prior year.
Adjusted EBITDA decreased in the 52 weeks ended May 6, 2017, mainly as a result of the previously mentioned factors affecting sales, as
well as increases in selling and administrative expenses, including increased labour costs and promotional spending. Selling and
administrative expenses as a percentage of sales has increased due to the impact of lower sales.
($ in millions)
EBITDA
Adjustments:
Costs related to Project Sunrise
Distribution centre restructuring
(Gain) loss on disposal of manufacturing facilities
Historical organizational realignment costs
Network rationalization reversals
Impairments of goodwill and long-lived assets
Adjusted EBITDA
Operating Income
52 Weeks Ended
May 6, 2017
53 Weeks Ended
May 7, 2016
$
Change
$
777.2
$
(1,944.7)
$
2,721.9
15.8
9.6
(7.5)
3.4
(1.6)
–
19.7
–
7.9
71.8
13.2
(13.9)
3,027.1
3,106.1
(3,086.4)
$
796.9
$
1,161.4
$
(364.5)
For the 52 weeks ended May 6, 2017, operating income increased primarily as a result of the impairments of goodwill and long-lived
assets recorded in the prior year. This was slightly offset by an increase in selling and administrative expenses in the current year and
an additional week of operations in fiscal 2016.
15
Annual Report 2017
Finance Costs
During fiscal 2017, net finance costs decreased primarily due to debt repayments in fiscal 2017. Interest coverage increased to 3.2 times
from (21.2) times in the prior year as a result of increased operating income. Excluding the impairments of goodwill and long-lived assets,
interest coverage for fiscal 2016 would have been 5.3 times.
Income Taxes
The effective income tax rate for the 52 weeks ended May 6, 2017 increased to 19.8 percent compared to 17.3 percent in the 53 weeks
ended May 7, 2016. Excluding the impact of the fiscal 2016 impairments, the effective income tax rate, would have been 27.0 percent in the
same period last year. The change is attributed to capital gain transactions, the sale and lease back of retail properties to Crombie REIT on
a tax deferred basis as well as changes in legislation related to eligible capital expenditures in the current year.
Net Earnings
For the 52 weeks ended May 6, 2017, net earnings, net of non-controlling interest, were primarily impacted by the reasons noted in the
EBITDA section.
($ in millions, except per share amounts)
Net earnings (loss)(1)
EPS(2) (fully diluted)
Adjustments(3):
Intangible amortization associated with the Canada Safeway acquisition
Costs related to Project Sunrise
Distribution centre restructuring
(Gain) loss on disposal of manufacturing facilities
Historical organizational realignment costs
Network rationalization reversals
Impairments of goodwill and long-lived assets
Adjusted net earnings(1)
Adjusted EPS (fully diluted)
Diluted weighted average number of shares outstanding (in millions)
52 Weeks Ended
May 6, 2017
53 Weeks Ended
May 7, 2016
$
Change
$
$
158.5
0.58
$
$
(2,131.0)
(7.78)
$
$
2,289.5
8.36
18.8
11.3
6.9
(5.5)
2.5
(1.2)
–
32.8
191.3
0.70
272.0
19.1
–
5.8
57.4
9.6
(10.1)
2,459.4
2,541.2
410.2
1.50
274.0
$
$
$
$
(2,508.4)
(218.9)
(0.80)
$
$
(1) Net of non-controlling interest.
(2) The weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all potential common shares
would be anti-dilutive.
(3) All adjustments are net of income taxes.
FINANCIAL PERFORMANCE BY SEGMENT
FOOD RETAILING
The following is a review of Empire’s Food retailing segment’s financial performance for the 52 weeks ended May 6, 2017 compared to the
53 weeks ended May 7, 2016 and 52 weeks ended May 2, 2015.
The following financial information is Sobeys’ contribution to Empire as the amounts are net of consolidation adjustments, which include
a purchase price allocation from the privatization of Sobeys.
52 Weeks Ended
May 6, 2017
53 Weeks Ended
May 7, 2016
52 Weeks Ended
May 2, 2015
2017 Compared to 2016
$ Change
% Change
$ 23,806.2
5,707.2
703.2
722.9
259.3
112.7
145.5
$ 24,618.8
5,957.6
(2,036.0)
1,070.1
(2,509.2)
(2,193.3)
347.9
$ 23,928.8
5,962.5
1,121.9
1,218.9
639.9
343.5
435.5
$
(812.6)
(250.4)
2,739.2
(347.2)
2,768.5
2,306.0
(202.4)
(3.3)%
(4.2)%
134.5%
(32.4)%
110.3%
105.1%
(58.2)%
($ in millions)
Sales
Gross profit
EBITDA
Adjusted EBITDA
Operating income (loss)
Net earnings (loss)(1)
Adjusted net earnings(1)
(1) Net of non-controlling interest.
16
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS
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 are set out below.
($ in millions)
Sales (decline) growth
Same store sales (decline) growth
Return on equity(2)
Funded debt to total capital(2)
Funded debt to adjusted EBITDA(2)
Property, equipment, and investment property purchases(3)
52 Weeks Ended
May 6, 2017
53 Weeks Ended
52 Weeks Ended
May 7, 2016(1)
May 2, 2015(1)
(3.3)%
(2.1)%
4.9%
39.5%
2.4x
$470.8
2.9%
(0.2)%
(55.4)%
46.0%
2.1x
$616.2
14.2%
1.4%
7.1%
31.5%
1.9x
$497.2
(1) Amounts have been reclassified to correspond to the current period presentation on the consolidated statement of cash flows and the consolidated
balance sheets.
(2) See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
(3) This amount reflects the property, equipment and investment property purchases by Sobeys, excluding amounts purchased from the Company and
its wholly-owned subsidiaries.
Excluding the impact of goodwill and long-lived asset impairments in fiscal 2016, return on equity would have been 5.4 percent.
Sales
The decrease in sales for the 52 weeks ended May 6, 2017 was primarily the result of:
• The additional week of operations in fiscal 2016 which accounted for approximately $461.2 million in sales;
• Retail food price deflation;
• Negative impact of merchandising and promotional strategies in Western Canada; and
• Price sensitivity by consumers and their continued shift to improved value.
During the 52 weeks ended May 6, 2017, same-store sales decreased 2.1 percent and excluding the impact of fuel sales decreased
2.2 percent from the same period last year. Excluding fuel and the retail West business unit, same-store sales decreased 1.2 percent.
Gross Profit
The decrease in gross profit during the 52 weeks ended May 6, 2017 continued to be the result of the factors impacting sales, as well
as significant investments made in pricing, particularly in the West business unit.
EBITDA
EBITDA increased in the 52 weeks ended May 6, 2017, largely due to impairments recorded for goodwill and long-lived assets in the prior year.
Adjusted EBITDA decreased in the 52 weeks ended May 6, 2017, mainly as a result of the previously mentioned factors affecting sales, as
well as increases in selling and administrative expenses, including increased labour costs and promotional spending. Selling and
administrative expenses as a percentage of sales has increased due to the impact of lower sales.
($ in millions)
EBITDA
Adjustments:
Costs related to Project Sunrise
Distribution centre restructuring
(Gain) loss on disposal of manufacturing facilities
Historical organizational realignment costs
Network rationalization reversals
Impairments of goodwill and long-lived assets
Adjusted EBITDA
Operating Income
52 Weeks Ended
May 6, 2017
53 Weeks Ended
May 7, 2016
$
Change
$
703.2
$
(2,036.0)
$
2,739.2
15.8
9.6
(7.5)
3.4
(1.6)
–
19.7
–
7.9
71.8
13.2
(13.9)
3,027.1
3,106.1
(3,086.4)
$
722.9
$
1,070.1
$
(347.2)
For the 52 weeks ended May 6, 2017, operating income increased primarily as a result of the impairments of goodwill and long-lived
assets recorded in the prior year. This was slightly offset by an increase in selling and administrative expenses in the current year and
an additional week of operations in fiscal 2016.
17
Annual Report 2017
Net Earnings
For the 52 weeks ended May 6, 2017, net earnings, net of non-controlling interest, were primarily impacted by the reasons noted in the
EBITDA section.
($ in millions, except per share amounts, net of tax)
Net earnings (loss)(1)
Adjustments(2):
Intangible amortization associated with the Canada Safeway acquisition
Costs related to Project Sunrise
Distribution centre restructuring
(Gain) loss on disposal of manufacturing facilities
Historical organizational realignment costs
Network rationalization reversals
Impairments of goodwill and long-lived assets
Adjusted net earnings(1)
(1) Net of non-controlling interest.
(2) All adjustments are net of income taxes.
INVESTMENTS AND OTHER OPERATIONS
($ in millions)
Operating income (loss)
Crombie REIT(1)
Real estate partnerships(2)
Other operations, net of corporate expenses
52 Weeks Ended
May 6, 2017
53 Weeks Ended
May 7, 2016
$
Change
$
112.7
$
(2,193.3)
$
2,306.0
18.8
11.3
6.9
(5.5)
2.5
(1.2)
–
32.8
19.1
–
5.8
57.4
9.6
(10.1)
2,459.4
2,541.2
(2,508.4)
$
145.5
$
347.9
$
(202.4)
52 Weeks Ended
May 6, 2017
53 Weeks Ended
May 7, 2016
$
Change
$
$
41.5
35.1
(2.9)
73.7
$
$
38.9
46.7
5.1
90.7
$
$
2.6
(11.6)
(8.0)
(17.0)
(1) 41.5 percent equity accounted interest in Crombie REIT (May 7, 2016 – 41.5 percent interest).
(2) Interests in Genstar.
Operating Income
For the 52 weeks ended May 6, 2017, the decrease in operating income from Investments and other operations is attributed to:
•
•
A decrease in operating income from Genstar primarily due to the sale of two real estate partnerships by Genstar Development
Partnership II in the third quarter of fiscal 2016; and
A decrease in operating income from other operations compared to the prior year due to property sales by Crombie REIT in fiscal
2016 that resulted in the realization of previously deferred gains.
Investment Portfolio
At May 6, 2017, Empire’s investment portfolio, including equity accounted investments in Crombie REIT and Genstar, consisted of:
($ in millions)
Investment in associates
Crombie REIT(1)
Canadian real estate partnerships(2)
U.S. real estate partnerships(2)
Investment in joint ventures
Canadian Digital
$
May 6, 2017
May 7, 2016
Fair
Value
883.6
143.0
36.8
Carrying
Value
Unrealized
Gain
$
$
459.1
143.0
36.8
424.5
–
–
$
Fair
Value
786.0
148.5
50.2
Carrying
Value
Unrealized
Gain
$
$
366.8
148.5
50.2
419.2
–
–
Cinema Partnership(2)
9.5
9.5
–
9.4
9.4
–
$
1,072.9
$
648.4
$
424.5
$
994.1
$
574.9
$
419.2
(1) Fair value is calculated based on the closing price of Crombie REIT units traded on the Toronto Stock Exchange as of May 5, 2017.
(2) Assumes fair value equals carrying value.
18
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS
QUARTERLY RESULTS OF OPERATIONS
The following table is a summary of selected financial information from the Company’s unaudited interim condensed consolidated
financial statements for each of the eight most recently completed quarters:
Fiscal 2017
Fiscal 2016
($ in millions, except
per share amounts)
Q4
(13 Weeks)
May 6, 2017
Q3
(13 Weeks)
Q4
(14 Weeks)
Feb. 4, 2017 Nov. 5, 2016 Aug. 6, 2016 May 7, 2016
Q1
(13 Weeks)
Q2
(13 Weeks)
Q3
(13 Weeks)
Q2
(13 Weeks)
Q1
(13 Weeks)
Jan. 30, 2016 Oct. 31, 2015 Aug. 1, 2015
Sales
EBITDA(1)
Operating income (loss)
Net earnings (loss)(2)
$
$
5,798.9 $
171.7
61.4
29.5 $
5,889.8 $
179.4
68.6
30.5 $
5,930.9 $
187.8
76.4
33.1 $
6,186.6 $
238.3
126.6
6,283.2 $
(1,047.2)
(1,160.2)
65.4 $
(942.6) $
6,027.2 $
(1,467.9)
(1,589.8)
(1,365.7) $
6,059.2 $
256.3
136.0
68.5 $
6,249.2
314.1
195.5
108.8
Per share information,
basic
Net earnings (loss)(2)(3)
$
0.11 $
0.11 $
0.12 $
0.24 $
(3.47) $
(5.03) $
0.25 $
0.39
Basic weighted average
number of shares
outstanding
(in millions)
Per share information,
diluted
271.7
271.1
271.6
271.7
271.7
271.7
275.2
277.0
Net earnings (loss)(2)(3)
$
0.11 $
0.11 $
0.12 $
0.24 $
(3.47) $
(5.03) $
0.25 $
0.39
Diluted weighted average
number of shares
outstanding
(in millions)
271.7
271.7
272.2
271.7
271.7
271.8
275.5
277.5
(1) EBITDA is reconciled to net earnings (loss) for the current and comparable period in the “Non-GAAP Financial Measures & Financial Metrics” section
of this MD&A.
(2) Net of non-controlling interest.
(3) The weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all potential common shares
would be anti-dilutive.
When reviewing financial results for comparable periods:
•
•
•
The results of the first and second quarter for fiscal 2017 compared to the same period in fiscal 2016 were lower due to a number of
factors including challenges faced in the West business unit and downward sales trends in most of the store network driven by price
sensitivity and customers’ continued shift to improved value.
The results of the third quarter of fiscal 2017 reflect decreased sales, but an increase in operating income and net earnings, net
of non-controlling interest, compared to the same quarter in fiscal 2016. This is due to goodwill and long-lived asset impairments
recorded in the third quarter of fiscal 2016, of $1,592.6 million and $137.7 million, respectively, as discussed in the “Overview of
the Business” section of this MD&A.
The results of the fourth quarter of fiscal 2017 reflect decreased sales, but an increase in operating income and net earnings, net of
non-controlling interest, compared to the same quarter in fiscal 2016. The decrease in sales in the fourth quarter primarily relates to
the additional week of operations in fiscal 2016. The increase in operating income and net earnings, net of non controlling interest,
was the result of the impairment charges the Company recorded in the fourth quarter in fiscal 2016, totaling $10.9 million for
long-lived assets and $1,285.9 million for goodwill, as previously discussed.
Sales include fluctuations in quarter-to-quarter inflationary and deflationary market pressures. The Company experiences some
seasonality, as evidenced in the results presented above, in particular during the summer months and over the holidays. The sales,
EBITDA, operating income (loss) and net earnings (loss), net of non-controlling interest, have been influenced by impairments recorded,
one-time adjustments, other investing activities, the competitive environment, cost management initiatives, food price and general
industry trends.
19
Annual Report 2017
LIQUIDITY AND CAPITAL RESOURCES
The table below highlights the major cash flow components for the Company for the relevant periods.
($ in millions)
13 Weeks Ended
May 6, 2017
14 Weeks Ended
May 7, 2016(1)
$ 52 Weeks Ended
May 6, 2017
Change
53 Weeks Ended
May 7, 2016
Cash flows from operating activities
Cash flows used in investing activities
Cash flows used in financing activities
225.8
(73.3)
(148.5)
242.4
(174.4)
(97.3)
(16.6)
101.1
(51.2)
708.5
(35.7)
(730.2)
896.8
(622.6)
(305.4)
$
Change
(188.3)
586.9
(424.8)
Increase (decrease) in cash
and cash equivalents
$
4.0
$
(29.3)
$
33.3
$
(57.4)
$
(31.2)
$
(26.2)
(1) Amounts have been reclassified to correspond to the current period presentation on the consolidated statement of cash flows.
Operating Activities
The decrease in cash flows from operating activities for the 13 and 52 weeks ended May 6, 2017 was primarily the result of an increase in
net earnings, offset by fluctuations in non-cash working capital.
Free Cash Flow
Management uses free cash flow(1) as a measure to assess the amount of cash available for debt repayment, dividend payments and other
investing and financing activities.
($ in millions)
13 Weeks Ended
May 6, 2017
14 Weeks Ended
May 7, 2016(2)
$ 52 Weeks Ended
May 6, 2017
Change
53 Weeks Ended
May 7, 2016
$
Change
225.8
$
242.4
$
(16.6)
$
708.5
$
896.8
$
(188.3)
Cash flows from operating activities $
Add: proceeds on disposal of
property, equipment, and
investment property
Less: property, equipment, and
36.8
11.6
investment property purchases
(91.8)
(173.9)
Free cash flow
$
170.8
$
80.1
$
25.2
82.1
90.7
425.7
142.5
(460.7)
(616.5)
$
673.5
$
422.8
$
283.2
155.8
250.7
(1) See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
(2) Amounts have been reclassified to correspond to the current period presentation on the consolidated statement of cash flows.
Free cash flow for the 13 weeks ended May 6, 2017 increased from the same period last year primarily as a result of the following factors:
•
Increased proceeds from real estate transactions; and
• Decreased purchases of property, equipment and investment property, due to planned reduction of capital expenditures.
The increase in free cash flow for the 52 weeks ended May 6, 2017 was mainly the result of the following factors:
•
Increased proceeds on disposal of property, equipment and investment property primarily due to the aforementioned agreement
entered into with Crombie REIT;
• Decreased purchases of property, equipment and investment property; partially offset by
• Decreased operating activities as previously discussed.
Investing Activities
The decrease in cash used in investing activities during the 13 weeks ended May 6, 2017 was primarily due to:
• Decreased purchases of property, equipment and investment property;
• Decreased loans and other receivables;
• Decreased business acquisitions; and
•
Increased proceeds on disposal of property, equipment and investment property.
The decrease in cash used in investing activities during the 52 weeks ended May 6, 2017 was mainly due to a sale and leaseback
agreement entered into with Crombie REIT as previously discussed. This transaction increased cash proceeds on disposal of property,
equipment and tenant inducements from Crombie REIT.
20
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS
The table below outlines the number of stores Sobeys invested in during the 13 and 52 weeks ended May 6, 2017 compared to the 14 and
53 weeks ended May 7, 2016.
# of stores
Opened/relocated/acquired
Expanded
Rebannered/redeveloped
Closed – normal course of operations
Closed – network rationalization
13 Weeks Ended
May 6, 2017
14 Weeks Ended 52 Weeks Ended
May 6, 2017
May 7, 2016
53 Weeks Ended
May 7, 2016
16
–
7
11
–
20
3
1
15
1
66
8
25
40
–
102
18
22
37
3
The following table shows Sobeys’ square footage changes for the 13 and 52 weeks ended May 6, 2017, by type:
Square feet (in thousands)
Opened
Relocated
Acquired
Expanded
Closed – normal course of operations
Net change
13 Weeks Ended
May 6, 2017
52 Weeks Ended
May 6, 2017
262
98
–
–
(104)
256
677
248
43
22
(468)
522
At May 6, 2017, Sobeys’ square footage totaled 39.2 million, a 1.3 percent increase compared to 38.7 million square feet operated at
May 7, 2016.
Financing Activities
The cash used in financing activities increased during the 13 weeks ended May 6, 2017 from the same period of fiscal 2016, primarily due
to repayments, net of advances, on the Company’s credit facilities.
The cash used in financing activities increased during the 52 weeks ended May 6, 2017, from the same period of fiscal 2016, due to repayments
made, net of advances, on the Company’s credit facilities and the repayment of $300.0 million on Sobeys’ senior unsecured notes.
Employee Future Benefit Obligations
For the 52 weeks ended May 6, 2017, the Company contributed $9.9 million (2016 – $8.9 million) to its registered defined benefit pension
plans. As a result of actuarial valuations completed in fiscal 2017, contributions in fiscal 2018 are expected to increase to $23.3 million.
Guarantees and Commitments
The following table presents the Company’s commitments and other obligations that will come due over the next five fiscal years as at
May 6, 2017.
($ in millions)
2018
2019
2020
2021
2022
Thereafter
Total
Commitments
Long-term debt(1)
Finance lease liabilities(2)
Third-party operating leases, as lessee(3)
Related party operating leases, as lessee(3)
$
Contractual obligations
Operating leases, as lessor
118.2 $
15.8
257.7
148.0
539.7
(20.6)
512.6 $
7.3
240.6
143.7
904.2
(19.3)
23.1 $
6.2
222.5
142.5
394.3
(17.2)
133.4 $
4.1
200.9
142.9
481.3
(15.3)
6.5 $
2.6
176.7
142.7
328.5
(14.1)
1,033.5 $
16.0
986.3
1,645.6
3,681.4
(95.6)
1,827.3
52.0
2,084.7
2,365.4
6,329.4
(182.1)
Contractual obligations, net
$
519.1 $
884.9 $
377.1 $
466.0 $
314.4 $
3,585.8 $
6,147.3
(1) Principal debt repayments.
(2) Present value of minimum lease payments (future minimum lease payments less interest).
(3) Net of sub-lease income.
For further information on guarantees and commitments, please see Note 15 and Note 24 of the audited consolidated financial statements
for the 52 weeks ended May 6, 2017.
21
Annual Report 2017
CONSOLIDATED FINANCIAL CONDITION
Key Financial Condition Measures
($ in millions, except per share and ratio calculations)
May 6, 2017
May 7, 2016(1)(2) May 2, 2015(1)(2)
Shareholders’ equity, net of non-controlling interest
Book value per common share(3)
Long-term debt, including current portion
Funded debt to total capital(3)
Net funded debt to net total capital(3)
Funded debt to adjusted EBITDA(3)
Adjusted EBITDA to interest expense(3)
Current assets to current liabilities
Total assets
Total non-current financial liabilities
$
$
$
$
$
3,644.2
13.41
1,870.8
33.9%
31.3%
2.3x
7.7x
0.9x
8,695.5
2,502.1
$
$
$
$
$
3,623.9
13.34
2,367.4
39.5%
36.7%
2.0x
10.2x
1.0x
9,138.5
2,735.9
$
$
$
5,986.7
21.61
2,284.1
27.6%
24.9%
1.7x
9.6x
0.9x
$ 11,497.2
2,942.0
$
(1) Amounts have been reclassified to correspond to the current period presentation on the consolidated balance sheets.
(2) Amounts have been restated. See “Changes to Accounting Policies Adopted During Fiscal 2017” section of this MD&A for further detail.
(3) See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
The funded debt to adjusted EBITDA ratio increased to 2.3 times compared to 2.0 times at May 7, 2016. The decrease in the adjusted
EBITDA to interest expense coverage ratio (7.7 times versus 10.2 times at May 7, 2016) was the result of a lower trailing 12-month
adjusted EBITDA ($796.9 million versus $1,161.4 million at May 7, 2016) and a lower trailing 12-month interest expense ($103.1 million
versus $114.0 million at May 7, 2016).
The Company’s ratio of current assets to current liabilities decreased to 0.9 times from 1.0 times at May 7, 2016.
During the 13 weeks ended May 6, 2017, Dominion Bond Rating Service (“DBRS”) downgraded Sobeys’ credit rating from BBB (low)
with a negative trend to BB (high) with a negative trend, while Standard and Poor’s (“S&P”) remained unchanged at BB+ with a stable
outlook. Management does not believe these credit rating changes will materially impact the ability to finance the normal operations
of the Company.
The Company believes that its cash and cash equivalents on hand, unutilized bank credit facilities and cash generated from operating
activities will enable the Company to fund future capital investments, pension plan contributions, working capital, current funded debt
obligations and ongoing business requirements. The Company also believes it has sufficient funding in place to meet these requirements
and other short and long-term financial obligations. The Company mitigates potential liquidity risk by ensuring various sources of funds are
diversified by term to maturity and source of credit. Subsequent to year end, Sobeys entered into a new, senior, unsecured non-revolving
credit facility for $500.0 million that is intended to be used to repay long-term debt due in calendar 2018.
The Company has provided covenants to its lenders in support of various financing facilities. The Company was in compliance with all
covenants for the 13 and 52 weeks ended May 6, 2017.
For additional information on Empire’s long-term debt, see Note 15 of the Company’s audited annual consolidated financial statements
for the 52 weeks ended May 6, 2017.
Shareholders’ Equity
The Company’s share capital was comprised of the following on May 6, 2017:
Authorized
2002 Preferred shares, par value of $25 each, issuable in series
Non-Voting Class A shares, without par value
Class B common shares, without par value, voting
Number of Shares
May 6, 2017
May 7, 2016
991,980,000
768,105,849
122,400,000
991,980,000
768,105,849
122,400,000
Issued and outstanding ($ in millions)
Number of Shares
May 6, 2017
May 7, 2016
Non-Voting Class A
Class B common
Shares held in trust
Total
173,537,901
98,138,079
(555,409)
$
2,037.8
7.3
(10.7)
$
2,037.8
7.3
–
$
2,034.4
$
2,045.1
The increase in shareholders’ equity, net of non-controlling interest, of $20.3 million in fiscal 2017 primarily reflects the increase in retained
earnings. Book value per common share was $13.41 at May 6, 2017 compared to $13.34 at May 7, 2016.
22
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS
The Company’s share capital on May 6, 2017 compared to the same period in the last fiscal year is shown in the table below.
(Number of Shares)
Non-Voting Class A shares
Issued and outstanding, beginning of year
Issued during year
Repurchase of capital stock
Issued and outstanding, end of year
Shares held in trust, beginning of year
Purchased for future settlement of equity settled plans
Shares held in trust, end of year
52 Weeks Ended
May 6, 2017
53 Weeks Ended
May 7, 2016
173,537,901
–
–
178,862,211
41,442
(5,365,752)
173,537,901
173,537,901
–
(555,409)
(555,409)
–
–
–
Issued and outstanding, net of shares held in trust, end of year
172,982,492
173,537,901
Class B common shares
Issued and outstanding, beginning of year
Issued during year
Total Issued and outstanding, end of year
98,138,079
–
98,138,079
–
98,138,079
98,138,079
The outstanding options at May 6, 2017 were granted at prices between $15.60 and $30.87 and expire between May 2018 and June 2024
with a weighted average remaining contractual life of 5.59 years. Stock option transactions during fiscal 2017 and 2016 were as follows:
Balance, beginning of year
Granted
Exercised
Forfeited
Balance, end of year
Stock options exercisable, end of year
2017
2016
Weighted
Average
Exercise
Price
25.94
20.40
–
23.51
24.27
Number of
Options
3,655,322
1,642,700
–
(348,159)
$
4,949,863
$
3,334,369
Weighted
Average
Exercise
Price
24.86
30.13
20.09
26.90
25.94
Number of
Options
3,364,995
753,845
(135,712)
(327,806)
$
3,655,322
$
2,206,342
The 4,949,863 stock options outstanding as at the fiscal year ended May 6, 2017 (May 7, 2016 – 3,655,322) represents 1.8 percent
(May 7, 2016 – 1.3 percent) of the outstanding Non-Voting Class A and Class B common shares.
During fiscal 2017, the Company paid common dividends of $111.3 million (2016 – $109.4 million) to its equity holders. This represents a
payment of $0.41 per share (2016 – $0.40 per share) for common share holders.
During the second quarter of fiscal 2017, the Company established a trust fund to facilitate the purchase of Non-Voting Class A shares for
the future settlement of vested units under the Company’s equity settled stock-based compensation plans. Contributions to the trust fund
and the Non-Voting Class A shares purchased are held by CST Trust Company as trustee. The trust fund is an SE and as such the accounts
of the trust fund are included in the consolidated financial statements of the Company. During fiscal 2017, the trust fund purchased 555,409
Non-Voting Class A shares for $10.7 million. These Non-Voting Class A shares have been recorded as a reduction to both capital stock and
the weighted average number of common shares outstanding.
As at June 26, 2017 the Company had Non-Voting Class A and Class B common shares outstanding of 173,537,901 and 98,138,079,
respectively, as well as 4,923,911 options to acquire in aggregate 4,923,911 Non-Voting Class A shares.
Share Split
On September 28, 2015, the Company effected a three-for-one share split by delivering two additional shares for each share held by
Non-Voting Class A and Class B shareholders of record as of the close of business on September 21, 2015. Non-Voting Class A shares
commenced trading on a split basis as of September 29, 2015. All number of share and per share amounts have been restated in this MD&A.
23
Annual Report 2017
Normal Course Issuer Bid (“NCIB”)
The Board of Directors and senior management of Empire are of the opinion that from time to time the purchase of Non-Voting Class A
shares at the prevailing market prices is a worthwhile use of funds and in the best interests of Empire and its shareholders.
Accordingly, on March 12, 2015, the Company filed a notice of intent with the Toronto Stock Exchange (“TSX”) to purchase for cancellation
up to 1,788,584 Non-Voting Class A shares, or 5,365,752 Non-Voting Class A shares post-share split, representing approximately three
percent of those outstanding. Purchases commenced on March 17, 2015, and terminated by March 16, 2016. During the second quarter of
fiscal 2016, the Company purchased for cancellation 5,365,752 Non-Voting Class A shares which fulfilled the normal course issuer bid. The
purchase price was $148.1 million of which $64.8 million of the purchase price was accounted for as a reduction to share capital and the
remainder as a reduction to retained earnings.
On March 14, 2016, the Company filed a notice of intent with the TSX to purchase for cancellation up to 5,206,137 Non-Voting Class A
shares, representing approximately three percent of those outstanding. Purchases were to commence on March 17, 2016, and terminate
on March 16, 2017. Empire did not repurchase any Non-Voting Class A shares since the date of notice.
ACCOUNTING STANDARDS AND POLICIES
The audited consolidated financial statements were prepared using the same accounting policies as disclosed in the Company’s annual
consolidated financial statements for the year ended May 7, 2016 with the exception of the following:
Changes to Accounting Policies Adopted During Fiscal 2017
(i) Presentation of Financial Statements
In December 2014, the IASB amended IAS 1, “Presentation of Financial Statements”, providing clarifying guidance on materiality and
aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The amendments
became effective during the first quarter of fiscal 2017 and had no material impact on the Company’s consolidated financial statements.
(ii) Income Taxes
In November 2016, the IFRS Interpretations Committee (“IFRIC”) issued its agenda decision addressing the expected manner of recovery
of an intangible asset with an indefinite useful life for the purposes of measuring deferred tax in accordance with IAS 12, “Income Taxes”.
IFRIC noted that an intangible asset with an indefinite useful life does not mean infinite life, nor does it mean the expected manner of
recovery of the carrying amount would result solely through sale. Therefore, in applying IAS 12, an entity must determine its expected
manner of recovery of the carrying value of the intangible asset with an indefinite life and should reflect the tax consequences that follow
from that expected manner of recovery. Previously, Empire measured deferred taxes on temporary differences arising from indefinite life
intangible assets using capital gains rates on the basis that the assets will be recovered through its disposition. As a result of the IFRIC
agenda decision, the Company has changed its accounting policy to measure deferred taxes at the income tax rate applicable to ordinary
taxable income expected to apply in the years in which the temporary differences are expected to be recovered or settled. The Company
adopted this change on a retrospective basis as an accounting policy change in accordance with IAS 8, “Accounting Policies, Changes to
Accounting Estimates and Errors” and the impact on the consolidated financial statements for the 52 weeks ended May 6, 2017 was an
increase to deferred tax liabilities of $33.6 million (2016 – $33.6 million), an increase to retained earnings of $2.9 million (2016 – $2.9 million),
with a corresponding adjustment to goodwill of $36.5 million (2016 – $36.5 million).
Future Standards
(i) Statement of Cash Flows
In January 2016, the IASB issued Disclosure Initiative Amendments to IAS 7 “Statement of Cash Flows”. These amendments require entities
to provide additional disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities,
including changes arising from cash and non-cash-flow changes. These amendments are effective for annual periods beginning on or after
January 1, 2017. The implementation of these amendments will occur in fiscal 2018 and is not expected to have a significant impact on
current disclosures of the Company.
(ii) Financial Instruments
In July 2014, the IASB issued IFRS 9, “Financial Instruments”, which replaces IAS 39, “Financial Instruments: Recognition and Measurement”.
IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities, IFRS 9 further establishes an
expected credit loss impairment model where it is no longer necessary for a triggering event to have occurred before credit losses are
recognized. IFRS 9 also introduces a new hedge accounting model that aligns with corresponding risk management activities. The standard
is effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively, with the exception of the hedging
component which is applied prospectively. IFRS 9 allows for early adoption, but the Company does not intend to do so at this time.
24
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS (iii) Revenue
In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”. IFRS 15 replaces IAS 18, “Revenue”, IAS 11, “Construction
Contracts”, and some revenue related Interpretations. IFRS 15 establishes a new control-based revenue recognition model and provides a
comprehensive framework for recognition, measurement and disclosure of revenue from contracts with customers, excluding contracts
within the scope of the standards on leases, insurance contracts and financial instruments. The new standard is effective for annual periods
beginning on or after January 1, 2018 and is to be applied retrospectively. The standard allows for early adoption, but the Company does
not intend to do so at this time.
In April 2016, the IASB published clarifications to IFRS 15 which addresses three topics (identifying performance obligations, principle
versus agent considerations and licensing) as well as providing some transition relief for modified and completed contracts. The
implementation timelines for these clarifications are consistent with IFRS 15.
(iv) Leases
In January 2016, the IASB issued IFRS 16, “Leases”, which replaces IAS 17, “Leases” and related interpretations. IFRS 16 introduces
a balance sheet recognition and measurement model for lessees, eliminating the distinction between operating and finance leases.
Lessors will continue to classify leases as operating and finance leases. The standard is effective for annual periods beginning on or
after January 1, 2019. IFRS 16 allows for early adoption for companies that apply IFRS 15 “Revenue from Contracts with Customers”,
but the Company does not intend to early adopt IFRS 16. For leases where the Company is the lessee it has the option of adopting
a full retrospective approach or a modified retrospective approach with various optional practical expedients available.
The Company expects the adoption of IFRS 16 will have a significant impact on its consolidated financial statements. New assets and
liabilities will be recognized for the Company’s operating property and equipment leases. Additional changes due to the nature and
timing of expenses related to the operating leases will be incurred as the Company will recognize depreciation for right-of-use assets
and finance expense on lease liabilities replacing straight-line lease expense. No significant impacts are expected where the Company
is a lessor or sublessor.
The Company is currently evaluating the impact of these standards on its consolidated financial statements. The Company will disclose
additional information including transition methods and estimated qualitative financial impacts during fiscal 2018.
Critical Accounting Estimates
The preparation of consolidated financial statements, in conformity with GAAP, requires management to make estimates, judgments
and assumptions that affect the amounts reported 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 the valuation
of inventories, goodwill, employee future benefits, stock-based compensation, estimates of provisions, impairments, customer loyalty
programs, useful lives of property, equipment, investment property and intangibles for purposes of depreciation and amortization, 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 the Company may undertake in the future. Management regularly evaluates the estimates
and assumptions it uses. Actual results could differ from these estimates.
Impairments of Goodwill and Long-Lived Assets
Management assesses impairment of non-financial assets such as investments in associates and joint ventures, goodwill, intangible assets,
property and equipment, and investment property. In assessing impairment, management estimates the recoverable amount of each
asset or cash-generating unit (“CGU”) based on expected future cash flows. When measuring expected future cash flows, management
makes assumptions about future growth of profits which relate to future events and circumstances. Actual results could vary from these
estimated future cash flows. Estimation uncertainty relates to assumptions about future operating results and the application of an
appropriate discount rate.
Goodwill is subject to impairment testing on an annual basis. The Company performed its annual assessment of goodwill impairment
during its third quarter. However, if indicators of impairment are present, the Company will review goodwill for impairment when such
indicators arise. In addition, at each reporting period, the Company reviews whether there are indicators that the recoverable amount
of long-lived assets may be less than their carrying amount.
Goodwill and long-lived assets were reviewed for impairment by determining the recoverable amount of each CGU or groups of CGUs
to which the goodwill or long-lived assets relate. Management estimated the recoverable amount of the CGUs based on the higher of
value-in-use (“VIU”) and fair value less costs of disposal (“FVLCD”). The VIU calculations are based on expected future cash flows. When
measuring expected future cash flows, management makes key assumptions about future growth of profits which relate to future events
and circumstances. Estimation uncertainty relates to assumptions about future operating results and the application of an appropriate
discount rate. Actual results could vary from these estimates which may cause significant adjustments to the Company’s goodwill or
long-lived assets in subsequent reporting periods.
25
Annual Report 2017 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 unit credit method pro-rated on service and management’s best estimate of 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.
To the extent that plan amendments increase the obligation related to past service, the Company will recognize a past service cost
immediately as an expense.
In measuring its defined benefit liability the Company will recognize all of its actuarial gains and losses immediately into other
comprehensive income. The key assumptions are disclosed in Note 17 of the Company’s financial statements.
Income Taxes
Deferred 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. Deferred 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 calculation of current and deferred 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 deferred 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 deferred income tax balances on the
consolidated balance sheets.
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) estimated inventory provisions associated with vendor allowances and internal charges; (ii) estimated inventory
provisions due to spoilage and shrinkage occurring between the last physical inventory count and the balance sheet dates; and
(iii) inventories valued at retail and adjusted to cost. Changes or differences in any of these estimates may result in changes to
inventories on the consolidated balance sheets and a charge or credit to operating income in the consolidated statements of earnings.
Provisions
Provisions are recognized when there is a present legal or constructive obligation as a result of a past event, for which it is probable that
a transfer of economic benefits will be required to settle the obligation, and where a reliable estimate can be made of the amount of the
obligation. Provisions are discounted using a pre-tax discount rate that reflects the current market assessments of the time value of money
and the risks specific to the liability, if material.
Business Acquisitions
For business acquisitions, the Company applies judgment on the recognition and measurement of assets and liabilities assumed and
estimates are utilized to calculate and measure such adjustments. In measuring the fair value of an acquiree’s assets and liabilities
management uses estimates about future cash flows and discount rates. Any measurement changes upon initial recognition would
affect the measurement of goodwill, except for deferred taxes.
Supply Agreements
The Company has various long-term supply agreements for products, some of which contain minimum volume purchases. Significant
estimation and judgment is required in the determination of (i) future operating results; and (ii) forecasted purchase volumes. When
measuring whether a provision is required based on the expected future cash flows associated with fulfilling the contract, management
makes assumptions which relate to future events and circumstances. Actual results could vary from these estimated future cash flows.
26
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS Disclosure Controls and Procedures
Management of the Company, which includes the President & Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), is
responsible for establishing and maintaining Disclosure Controls and Procedures (“DC&P”) to provide reasonable assurance that material
information relating to the Company 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 based on that evaluation, the CEO
and CFO have concluded that the Company’s DC&P was effective as at May 6, 2017 and that there were no material weaknesses relating to
the design or operation of the DC&P.
Internal Control over Financial Reporting
Management of the Company, which includes the CEO and CFO, is responsible for establishing and maintaining Internal Control over
Financial Reporting (“ICFR”), as that term is defined in National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and
Interim Filings”. The control framework management used to design and assess the effectiveness of ICFR is “Internal Control Integrated
Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission. The CEO and CFO have
evaluated the effectiveness of the Company’s ICFR and based on that evaluation, the CEO and CFO have concluded that the Company’s
ICFR was effective as at May 6, 2017 and that there were no material weaknesses relating to the design or operation of the ICFR.
There have been no changes in the Company’s ICFR during the period beginning February 5, 2017 and ended May 6, 2017 that have
materially affected, or are reasonably likely to materially affect, the Company’s ICFR.
RELATED PARTY TRANSACTIONS
The Company has related party transactions with Crombie REIT and key management personnel. The Company holds a 41.5 percent
ownership interest in Crombie REIT and accounts for its investment using the equity method.
The Company leased certain real property from Crombie REIT during the year at amounts which in management’s opinion approximate
fair market value that would be incurred if leased from a third party. Management has determined these amounts to be fair value based on
the significant number of leases negotiated with third parties in each market it operates. The aggregate net payments under these leases,
which are measured at exchange amounts, totaled approximately $195.8 million (2016 – $164.9 million).
Crombie REIT provides administrative and management services to the Company on a fee for service basis pursuant to a Management
Agreement effective January 1, 2016. The Management Agreement replaces the previous arrangement where charges incurred were on
a cost recovery basis.
At May 6, 2017, investments included $25.1 million (2016 – $24.7 million) of Crombie REIT convertible unsecured subordinated debentures.
The Company received interest from Crombie REIT of $1.2 million for the year ended May 6, 2017 (2016 – $1.2 million).
On June 29, 2016, Sobeys and its wholly-owned subsidiaries closed an agreement with Crombie REIT to sell and leaseback a portfolio
of 19 retail properties and a 50 percent interest in each of its three automated distribution centres, as well as the sale of two parcels of
development land which were previously owned by Empire. Crombie REIT also invested approximately $58.8 million in renovations or
expansions of ten Sobeys retail locations already in Crombie REIT’s portfolio. In addition to cash, Crombie REIT issued to a subsidiary
of Sobeys $93.4 million in value of Class B LP units and attached special voting units of Crombie REIT at a price of $14.70 per unit. The
subsidiary of Sobeys subsequently sold its Class B LP units to Empire on a tax deferred basis. Total net cash proceeds to the Company
and its wholly-owned subsidiaries from these transactions with Crombie REIT were $323.8 million, resulting in a pre-tax loss of $0.8 million.
Proceeds from the transactions were used to repay the senior unsecured notes.
On July 29, 2016, Sobeys, through a wholly-owned subsidiary, sold and leased back an additional property from Crombie REIT for cash
consideration of $26.4 million. This resulted in a pre-tax gain of $2.1 million. Sobeys also purchased one property from Crombie REIT
for $9.1 million.
During fiscal 2014, Sobeys entered into a loan agreement with Crombie REIT to partially finance Sobeys’ acquisition of a property in British
Columbia. The $11.9 million loan bore interest at a rate of 6.0 percent and had no principal repayments. On May 5, 2017, the Company
sold the property to Crombie REIT for cash consideration of $31.1 million, resulting in a pre-tax gain of $1.0 million. Proceeds from the
transaction were used to repay the loan.
During the year ended May 7, 2016, Crombie REIT and a wholly-owned subsidiary of the Company negotiated an extension of a rental
income guarantee and put option on a property Crombie REIT acquired from the Company’s subsidiary in 2006. The rental income
guarantee and put option were originally scheduled to mature in March 2016 and have been extended for a period of five years with either
party having the ability to terminate the agreements with written notice.
During the year ended May 7, 2016, Sobeys through its wholly-owned subsidiaries, sold and leased back six properties from Crombie REIT.
Cash consideration received for the properties sold was $60.7 million, resulting in a pre-tax gain of $6.5 million.
27
Annual Report 2017 Key Management Personnel Compensation
Key management personnel include the Board of Directors and members of the Company’s executive team that have authority and
responsibility for planning, directing and controlling the activities of the Company.
Key management personnel compensation is comprised of:
($ in millions)
Salaries, bonus and other short-term employment benefits
Post-employment benefits
Termination benefits
Share-based payments
52 Weeks Ended
May 6, 2017
53 Weeks Ended
May 7, 2016
$
$
9.7
1.6
8.7
14.8
34.8
$
9.6
1.9
1.5
6.1
$
19.1
Indemnities
The Company has agreed to indemnify its directors, officers and particular employees in accordance with the Company’s policies.
The Company maintains insurance policies that may provide coverage against certain claims.
CONTINGENCIES
There are various claims and litigation, with which the Company is involved, 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.
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.
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 adopted an annual enterprise risk management
assessment which is overseen by the Company’s Executive Committee and reported to the Board of Directors and Committees of the
Board. The enterprise risk management framework sets out principles and tools for identifying, evaluating, prioritizing and managing risk
effectively and consistently across the Company.
Project Sunrise
On May 4, 2017, the Company announced a major transformation initiative to streamline the organization and enhance the efficiency of its
operations. Failure to execute change management during this transition could result in disruptions to the operations of the business or
the ability of the Company to implement and achieve its long-term strategic objectives. The implementation of a major transformation
initiative has the ability to create labor unrest, negative publicity and business disruption.
There is the risk that the Company will not realize the $500 million in annualized savings when the independent regions are collapsed,
when collaborations with vendors are simplified and efficiency and productivity initiatives are complete by the end of fiscal 2020.
Competition
Empire’s food retailing business, Sobeys, operates in a dynamic and competitive market. Other national and regional food distribution
companies, along with non-traditional competitors, such as mass merchandisers, warehouse clubs, and online retailers, 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, operating in over 900 communities
in Canada. The most significant risk to Sobeys is the potential for reduced revenues and profit margins as a result of increased competition.
A failure to maintain geographic diversification to reduce the effects of localized competition could have an adverse impact on Sobeys’
operating margins and results of operations. To successfully compete, Sobeys believes it must be customer and market-driven be focused
on superior execution and have efficient, cost-effective operations. It also believes it must invest in its existing store network, as well as its
merchandising, marketing and operational execution to evolve its strategic platform to better meet the needs of consumers looking for
more affordable, better food options. The Company further believes it must invest in merchandising initiatives to better forecast and
respond to changing consumer trends. Any failure to successfully execute in these areas could have a material adverse impact on Sobeys’
financial results.
28
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS
Empire’s real estate operations, through its investment in Crombie REIT, compete with numerous other managers and owners of real
estate properties in seeking tenants and new properties to acquire. The existence of competing managers and owners could affect
their ability to: (i) acquire property in compliance with their investment criteria; (ii) lease space in their 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 the Company’s financial results and cash flows. A failure by Crombie REIT to maintain
strategic relationships with developers to ensure an adequate supply of prospective attractive properties or to maintain strategic
relationships with existing and potential tenants to help achieve high occupancy levels at each of its properties could adversely affect
the Company.
Genstar faces competition from other residential land developers in securing attractive sites for new residential lot development.
Although Genstar holds land for future development, it faces significant competition when looking to acquire new land for future
development. To mitigate this risk, Genstar maintains a geographically diverse inventory of well located land for development to alleviate
periods of intense competition for the acquisition of new land. In addition, Genstar management has intimate knowledge of the residential
markets where Genstar operates and in markets where it seeks new land investments.
Product 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, including pharmaceuticals. 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.
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
Sobeys’ financial performance. Procedures are in place to manage food crises, should they occur. These procedures are intended to
identify risks, provide clear communication to employees and consumers and ensure that potentially harmful products are removed from
sale immediately. Food safety related liability exposures are insured by the Company’s insurance program. In addition, Sobeys has food
safety procedures and programs which address safe food handling and preparation standards. However, there can be no assurance that
such measures will prevent the occurrence of any such contamination, and insurance may not be sufficient to cover any resulting financial
liability or reputational harm.
Loyalty Program
The Company utilizes a third-party loyalty program to provide additional value to customers. The decisions made by the third-party can
adversely affect the reputation and financial operations of the Company. Promotional and other activities related to possible changes
in the loyalty programs must be effectively managed and coordinated to ensure a positive customer perception. Failure to effectively
manage and communicate changes to the loyalty program may negatively impact the Company’s reputation.
Human Resources
A significant percentage of the Company’s store and distribution centre workforce, particularly in Western Canada, is unionized.
While overall the Company has and works to maintain good relationships with its employees and unions, the renegotiation of collective
agreements always presents the risk of labour disruption. The Company has consistently stated it will accept the short-term costs of
labour disruption to support a commitment to building and sustaining a competitive cost structure for the long term. Any prolonged
or widespread work stoppages or other labour disputes could have an adverse impact on the Company’s financial results.
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; these plans are overseen by the Human Resources Committee and
reviewed at least annually by the Board of Directors.
Workplace health and safety is a top priority for the Company, which has robust programs and reporting mechanisms in place designed
to ensure regulatory compliance and mitigate the risks associated with workplace injury and illness.
Recent announcements of minimum wage increases in several provinces will have an impact on labour costs and the labour force of
the Company.
Operations
The success of Empire is closely tied to the performance of Sobeys’ network of retail stores. Franchisees and affiliates operate approximately
52 percent of Sobeys’ retail stores. Sobeys relies on its franchisees affiliates and corporate store management to successfully execute retail
strategies and programs.
29
Annual Report 2017 To maintain controls over Sobeys’ brands and the quality and range of products and services offered at its stores, franchisees and affiliates
agree 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 and operating agreements which expire at various times
for individual franchisees and affiliates. Despite these franchise and operating agreements, Sobeys may have limited ability to control a
franchisees’ and affiliates’ business operations. A breach of these franchise and operating agreement or operational failures by a significant
number of franchisees and affiliates may adversely affect Sobeys’ reputation and financial performance.
Technology
The Company operates extensive and complex information technology systems that are vital to the successful operation of its business
and marketing strategies. Any interruption to these systems or the information collected by them would have a significant adverse
impact on the Company, its operations and its financial results. The Company is committed to improving its 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 functionality.
Information Management
The integrity, reliability and security of information in all its forms is critical to the Company’s daily and strategic operations. Inaccurate,
incomplete or unavailable information or inappropriate access to information could lead to incorrect financial and/or operational
reporting, poor decisions, privacy breaches or inappropriate disclosure or leaks of sensitive information. Gathering and analyzing
information regarding customers’ purchasing preferences is an important part of the Company’s strategy to attract and retain customers
and effectively compete. Any failure to maintain privacy of customer information or to comply with applicable privacy laws or regulations
could adversely affect the Company’s reputation, competitive position and results of operations.
The Company recognizes that information is a critical enterprise asset. Currently, the information management risk is 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.
Supply Chain
The Company is exposed to potential supply chain disruptions and errors that could result in obsolete merchandise or an excess or
shortage of merchandise in its retail store network. A failure to implement and maintain effective supplier selection and procurement
practices could adversely affect Sobeys’ ability to deliver desired products to customers and adversely affect the Company’s ability to
attract and retain customers. A failure to maintain an efficient supply and logistics chain may adversely affect Sobeys’ ability to sustain
and meet growth objectives and maintain margins.
Product Costs
Sobeys is a significant purchaser of food product which is at risk of cost inflation given rising commodity prices and other costs of
production to food manufacturers. Should rising costs of product materialize in excess of expectations and should Sobeys not be
able to offset such cost inflation through higher retail prices or other cost savings, there could be a negative impact on sales and
margin performance.
Economic Environment
Management continues to closely monitor economic conditions, including foreign exchange rates, 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.
Liquidity Risk
The Company’s business is dependent in part on having access to sufficient capital and financial resources to fund its growth activities
and investment in operations. Any failure to maintain adequate financial resources could impair the Company’s growth or ability 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. The Company monitors capital markets and the related economic
conditions and maintains access to debt capital markets for long-term debt issuances as deemed prudent in order to minimize risk and
optimize pricing. However, there can be no assurance that adequate capital resources will be available in the future on acceptable terms
or at all.
Interest Rate Fluctuation
The Company’s long-term debt objective is to maintain the majority of its debt at fixed interest rates. Any increase in the applicable
interest rates could increase interest expense and have a material adverse effect on the Company’s cash flow and results of operations.
There can be no assurance that risk management strategies, if any, undertaken by the Company will be effective.
30
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS Business Continuity
The Company may be subject to unexpected events and natural hazards, including severe weather events, interruption of utilities and
infrastructure or occurrence of pandemics, which could cause sudden or complete cessation of its day to day operations. The Company
has worked with industry and government sources to develop preparedness plans. However, no such plan can eliminate the risks
associated with events of this magnitude. Any failure to respond effectively or appropriately to such events could adversely affect the
Company’s operations, reputation and financial results.
Insurance
The Company and its subsidiaries are self insured on a limited basis with respect to certain operational risks and also purchase excess
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. Such programs may not be
effective to limit the Company’s exposure to these risks, and to the extent that the Company is self insured or liability exceeds applicable
insurance limits, the Company’s financial position could be adversely affected.
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 the Company maintains an anonymous, confidential whistle blowing
hotline. There can be no assurance that these measures will be effective to prevent violations of law or ethical business practices.
Environmental
The Company operates its business locations across the country, including numerous fuel stations. Each of these sites has the potential to
experience environmental contamination or other issues as a result of the Company’s operations or the activities of third parties, including
neighbouring properties.
When environmental issues are identified, any required environmental site remediation is completed using appropriate, qualified internal
and external resources. The Company may be required to absorb all costs associated with such remediation, which may be substantial.
Sobeys’ retail fuel locations operate underground storage tanks. Environmental contamination resulting from leaks or damages to these
tanks is possible. To mitigate this environmental risk, Sobeys engages in several monitoring procedures, as well as risk assessment
activities, to minimize potential environmental hazards.
These activities mitigate but do not eliminate the Company’s environmental risk, and as such, along with the risk of changes to existing
environmental protection regulatory requirements, there remains exposure for negative financial and operational impacts to the Company
in future years.
Occupational Health and Safety
The Company has 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 its stores, distribution centres and offices. These policies and programs
are reviewed regularly by the Human Resources Committee of the Board of Directors.
Real Estate
The Company utilizes a capital allocation process which is focused on obtaining the most attractive real estate locations for its retail
stores, as well as for its commercial property and residential development operations, with direct or indirect Company ownership being
an important, but not overriding, consideration. The Company 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
the ability to expand existing stores are therefore in large part contingent upon the successful negotiation of operating leases with
these developers and the Company’s ability to purchase high potential 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 and rules and regulations may expose the Company to proceedings which may materially affect its performance.
31
Annual Report 2017 Similarly, income tax regulations and/or accounting pronouncements 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 and rules and regulations by monitoring for newly adopted
activities, 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.
Utility and Fuel Prices
The Company is a significant consumer of electricity, other utilities and fuel. The costs of these items have been subject to significant
volatility. Unanticipated cost increases in these items could negatively affect the Company’s financial performance. A failure to maintain
effective consumption and procurement programs could adversely affect the Company’s financial results. In addition, Sobeys operates a
large number of fuel stations. Significant increases in wholesale prices or availability could adversely affect operations and financial results
of the fuel retailing business.
Credit Rating
There can be no assurance that the credit ratings assigned to the various debt instruments issued by Sobeys will remain in effect for any
given period of time or that the rating will not be lowered, withdrawn or revised by DBRS or S&P at any time. Real or anticipated changes
in credit ratings can affect the cost at which Sobeys can access the capital markets. The likelihood that Sobeys’ creditors will receive
payments owing to them will depend on the Sobeys’ financial health and creditworthiness. Credit ratings assigned by a ratings agency
provide an opinion of that ratings agency on the risk that an issuer will fail to satisfy its financial obligations in accordance with the terms
under which an obligation has been issued. Receipt of a credit rating provides no guarantee of Sobeys’ future creditworthiness.
Foreign Currency
The Company conducts the majority of its operating business in CAD and its foreign exchange risk is mainly limited to currency
fluctuations between the CAD, the Euro and the USD. USD purchases of products represent approximately 5.8 percent of Sobeys’ total
annual purchases, and Euro purchases are primarily limited to specific contracts for capital expenditures. A failure to adequately manage
the risk of exchange rate changes could adversely affect the Company’s financial results.
Capital Allocation
It is important that 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 of Directors’ review of significant capital allocation decisions.
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.
Foreign Operations
The Company has certain foreign operations. The Company’s foreign operations are limited to a produce sourcing operation and
residential real estate partnerships based in the United States.
Drug Regulation and Legislation
The Company currently operates 353 in-store pharmacies and 74 freestanding pharmacies that are subject to risks associated with changes
to federal and provincial legislation governing the sale of prescription drugs. Legislated changes to generic prescription drug prices and
dispensing fees, which vary province by province, continued to impact the Company in fiscal 2017. In addition to provincial plan changes,
third-parties continue to advocate for changes to generic drug legislation in order to reduce drug plan costs. Changes to regulations and
legislation affecting generic prescription drug prices, reimbursement rates for generic drugs, manufacturer allowance funding, customer
inducements and dispensing fees are expected to continue the downward pressure on prescription drug sales. The Company has and will
continue to identify opportunities to mitigate the negative impact these changes have on financial performance.
Pension Plans
The Company has certain retirement benefit obligations under its registered defined benefit plans. New regulations and market driven
changes may result in the Company being required to make contributions that differ from estimates, which could have an adverse affect
on the financial performance of the Company.
32
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS The Company participates in various multi-employer pension plans, providing pension benefits to unionized employees pursuant to
provisions in collective bargaining agreements. Approximately 17 percent of the employees of Sobeys and its franchisees and affiliates
participate in these plans. The responsibility of Sobeys, its franchisees, and affiliates to make contributions to these plans is limited to the
amounts established in the collective bargaining agreements; and other associated agreements, however poor performance of these
plans could have a negative effect on the participating employees or could result in changes to the terms and conditions of participation
in these plans, which in turn could negatively affect the financial performance of the Company.
Leverage Risk
The Company’s degree of leverage, particularly since the increases to long-term debt facilities to complete the Canada Safeway
acquisition, could have adverse consequences for the Company. These include limiting the Company’s ability to obtain additional
financing for working capital and activities such as capital expenditures, product development, debt service requirements, and
acquisitions. Higher leveraging restricts the Company’s flexibility and discretion to operate its business by limiting the Company’s
ability to declare dividends due to having to dedicate a portion of the Company’s cash flows from operations to the payment of interest
on its existing indebtedness. Utilizing cash flows for interest payments also limits capital available for other purposes including operations,
capital expenditures and future business opportunities. Increased levels of debt expose the Company to increased interest expense on
borrowings at variable rates thereby limiting the Company’s ability to adjust to changing market conditions. This could place the Company
at a competitive disadvantage compared to its competitors that have less debt, by making the Company vulnerable during downturns in
general economic conditions and limiting the Company’s ability to make capital expenditures that are important to its growth and strategies.
SUBSEQUENT EVENTS
On May 11, 2017, the unitholders of Crombie REIT approved a tax reorganization that will eliminate wholly-owned corporate subsidiaries
being subject to corporate income taxes. This tax reorganization is not expected to have a significant impact on the financial position of
the Company.
On June 2, 2017, Crombie REIT announced that it had exercised its right to redeem its 5.00% Series D Convertible Unsecured
Subordinated Debentures. The redemption will be effective on July 4, 2017. Upon redemption, Crombie REIT will pay to the holders of
debentures the redemption price equal to the outstanding principal amount and all accrued and unpaid interest. Empire currently holds
a $25.1 million investment in the Series D convertible debentures.
DESIGNATION FOR ELIGIBLE DIVIDENDS
“Eligible dividends” receive favourable treatment for income tax purposes. To be considered an eligible dividend, a dividend must be
designated as such at the time of payment.
Empire has, in accordance with the administrative position of CRA, included the appropriate language on its website to designate the
dividends paid by Empire as eligible dividends unless otherwise designated.
NON-GAAP FINANCIAL MEASURES & FINANCIAL METRICS
There are measures and metrics included in this MD&A that do not have a standardized meaning under generally accepted accounting
principles (“GAAP”) and therefore may not be comparable to similarly titled measures and metrics presented by other publicly traded
companies. Management believes that certain of these measures and metrics, including gross profit and EBITDA, are important indicators
of Empire’s ability to generate liquidity through operating cash flow to fund future working capital requirements, service outstanding debt
and fund future capital expenditures and uses these metrics for these purposes.
In addition, management adjusts measures and metrics, including EBITDA and net earnings (loss) in an effort to provide investors and
analysts with a more comparable year-over-year performance metric than the basic measure, by excluding certain items. These items may
impact the analysis of trends in performance and affect the comparability of the Company’s core financial results. By excluding these
items, management is not implying they are non-recurring.
Financial Measures
The intent of Non-GAAP Financial Measures used by the Company is to provide additional useful information to investors and analysts.
Non-GAAP Financial Measures should not be considered in isolation or used as a substitute for measures of liquidity and performance
prepared in accordance with GAAP. The Company’s definitions of the non-GAAP terms included in this MD&A are as follows:
• Gross profit is calculated as sales less cost of sales.
•
Earnings before interest, taxes, depreciation and amortization (“EBITDA”), is calculated as net earnings (loss), before finance costs
(net of finance income), income tax expense (recovery), depreciation, and amortization of intangibles. The exclusion of depreciation
and amortization of intangibles partially eliminates the non-cash impact from operating income (loss).
33
Annual Report 2017
The following table reconciles net earnings (loss) to EBITDA:
($ in millions)
Net earnings (loss)
Income tax expense (recovery)
Finance costs, net
Operating income (loss)
Depreciation
Amortization of intangibles
EBITDA
13 Weeks Ended
May 6, 2017
14 Weeks Ended 52 Weeks Ended
May 6, 2017
May 7, 2016
53 Weeks Ended
May 7, 2016
$
$
32.3
1.4
27.7
61.4
88.6
21.7
$
(939.8)
(256.7)
36.3
(1,160.2)
90.9
22.1
$
171.7
$
(1,047.2)
$
172.5
42.5
118.0
333.0
355.5
88.7
777.2
$
(2,114.6)
(441.3)
137.4
(2,418.5)
384.8
89.0
$
(1,944.7)
•
•
Adjusted EBITDA is EBITDA excluding certain items to better analyze trends in performance. These adjustments result in a truer
economic representation on a comparative basis. The Company no longer adjusts for items that are insignificant to current period
results or the comparative period. Adjusted EBITDA is reconciled to EBITDA in its respective subsection of the “Management’s
Explanation of Consolidated Operating Results”, and “Food Retailing” sections of this MD&A.
Management calculates interest expense as interest expense on financial liabilities measured at amortized cost plus losses on cash
flow hedges reclassified from other comprehensive income. Management believes that this alternative measure of interest expense
represents a better measure of the Company’s debt service expense, without the offsetting total finance income, or amounts
relating to pension costs and accretion on provisions, as presented in Note 21 to the audited consolidated financial statements.
The following table reconciles finance costs, net to interest expense:
($ in millions)
Finance costs, net
Plus: finance income
Less: net pension finance costs
Less: accretion expense on provisions
Interest expense
Interest expense on financial liabilities measured at amortized cost
Losses on cash flow hedges reclassified
from other comprehensive (loss) income
13 Weeks Ended
May 6, 2017
14 Weeks Ended 52 Weeks Ended
May 6, 2017
May 7, 2016
53 Weeks Ended
May 7, 2016
$
$
$
$
$
$
27.7
1.0
(2.9)
(0.3)
25.5
25.5
–
$
$
$
36.3
1.0
(3.0)
(4.7)
29.6
29.6
–
$
$
$
118.0
6.1
(11.5)
(9.5)
103.1
103.1
–
137.4
3.1
(12.4)
(14.1)
114.0
113.8
0.2
Interest expense
$
25.5
$
29.6
$
103.1
$
114.0
•
•
•
•
Adjusted net earnings are net earnings (loss), net of non-controlling interest, excluding certain items to better analyze trends in
performance and financial results. These adjustments result in a truer economic representation of the underlying business on a
comparative basis. The Company no longer adjusts for items that are insignificant to current period results or the comparative
period. Adjusted net earnings is reconciled in its respective subsection of the “Management’s Explanation of Consolidated
Operating Results”, “Food Retailing” sections of this MD&A.
Free cash flow is calculated as cash flows from operating activities, plus proceeds on disposal of property, equipment and
investment property, less property, equipment and investment property purchases. Management uses free cash flow as a measure
to assess the amount of cash available for debt repayment, dividend payments and other investing and financing activities. Free
cash flow is reconciled to cash flows from operating activities as reported on the consolidated statements of cash flows, and is
presented in the “Free Cash Flow” section of this MD&A.
Funded debt is all interest bearing debt, which includes bank loans, bankers’ acceptances and long-term debt. Management
believes that funded debt represents a better measure of the Company’s total financial obligations on which interest payments
are made.
Net funded debt is calculated as funded debt less cash and cash equivalents. Management believes that the deduction of cash and
cash equivalents from funded debt represents a more accurate measure of the Company’s financial obligations after 100 percent of
cash and cash equivalents are applied against the total obligation.
• Total capital is calculated as funded debt plus shareholders’ equity, net of non-controlling interest.
• Net total capital is total capital less cash and cash equivalents.
34
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS
The following tables reconcile the Company’s funded debt, net funded debt, net total capital and total capital to GAAP measures as
reported on the balance sheets as at May 6, 2017, May 7, 2016 and May 2, 2015, respectively:
($ in millions)
Long-term debt due within one year
Long-term debt
Funded debt
Less: cash and cash equivalents
Net funded debt
Total shareholders’ equity, net of non-controlling interest
Net total capital
($ in millions)
Funded debt
Total shareholders’ equity, net of non-controlling interest
Total capital
May 6, 2017
May 7, 2016(1)(2) May 2, 2015(1)(2)
$
134.0
1,736.8
1,870.8
(207.3)
1,663.5
3,644.2
$
350.4
2,017.0
2,367.4
(264.7)
2,102.7
3,623.9
$
53.9
2,230.2
2,284.1
(295.9)
1,988.2
5,986.7
$
5,307.7
$
5,726.6
$
7,974.9
May 6, 2017
May 7, 2016
May 2, 2015
$
1,870.8
3,644.2
5,515.0
$
2,367.4
3,623.9
$
2,284.1
5,986.7
$
5,991.3
$
8,270.8
(1) Amounts have been reclassified to correspond to the current period presentation on the consolidated balance sheets.
(2) Amounts have been restated. See “Changes to Accounting Policies Adopted During Fiscal 2017” section of this MD&A for further detail.
Financial Metrics
The intent of the following Non-GAAP Financial Metrics is to provide additional useful information to investors and analysts. Management
uses financial metrics for decision making, internal reporting, budgeting and forecasting. The Company’s definitions of the metrics
included in this MD&A are as follows:
• Same-store sales are sales from stores in the same location in both reporting periods.
•
•
•
Gross margin is gross profit divided by sales. Management believes that gross margin is an important indicator of cost control
and can help management, analysts and investors assess the competitive landscape and promotional environment of the industry
in which the Company operates. An increasing percentage indicates lower cost of sales as a percentage of sales.
Interest coverage is calculated as operating income divided by interest expense.
Return on equity, as reported by Sobeys, is net earnings for the year attributable to owners of the parent, divided by average
shareholder’s equity.
• Funded debt to total capital ratio is funded debt divided by total capital.
•
•
•
Net funded debt to net total capital ratio is net funded debt divided by net total capital. Management believes that funded debt
to total capital and net funded debt to net total capital ratios represent measures upon which the Company’s changing capital
structure can be analyzed over time. Increasing ratios would indicate that the Company is using an increasing amount of debt
in its capital structure to fund its operations.
Funded debt to adjusted EBITDA ratio is funded debt divided by trailing four-quarter adjusted EBITDA. Management uses this ratio
to partially assess the financial condition of the Company. An increasing ratio would indicate that the Company is utilizing more
debt per dollar of adjusted EBITDA generated.
Adjusted EBITDA to interest expense ratio is trailing four-quarter adjusted EBITDA divided by trailing four-quarter interest expense.
Management uses this ratio to partially assess the coverage of its interest expense on financial obligations. An increasing ratio would
indicate that the Company is generating more adjusted EBITDA per dollar of interest expense, resulting in greater interest coverage.
• Book value per common share is shareholders’ equity, net of non-controlling interest, divided by total common shares outstanding.
35
Annual Report 2017
The following table shows the calculation of Empire’s book value per common share as at May 6, 2017, May 7, 2016 and May 2, 2015.
($ in millions, except per share information)
Shareholders’ equity, net of minority interest
Shares outstanding (basic)
Book value per common share
May 6, 2017
May 7, 2016(1)
May 2, 2015(1)
$
$
3,644.2
271.7
13.41
$
$
3,623.9
271.7
13.34
$
$
5,986.7
277.0
21.61
(1) Amounts have been restated. See “Changes to Accounting Policies Adopted During Fiscal 2017” section of this MD&A for further detail.
Additional financial information relating to Empire, including the Company’s Annual Information Form, can be found on the Company’s
website www.empireco.ca or on the SEDAR website for Canadian regulatory filings at www.sedar.com.
Approved by Board of Directors: June 28, 2017
Stellarton, Nova Scotia, Canada
36
Empire Company LimitedMANAGEMENT’S DISCUSSION AND ANALYSIS
CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Management’s Statement of Responsibility
for Financial Reporting
Independent Auditor’s Report
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Earnings (Loss)
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes
in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
38
39
40
41
42
43
44
45
37
Annual Report 2017
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 International
Financial Reporting Standards or Generally Accepted Accounting Principles and reflect management’s best estimates and judgments.
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.
signed “Michael Medline”
signed “Michael Vels”
Michael Medline
President and Chief Executive Officer
June 28, 2017
Michael Vels
Chief Financial Officer
June 28, 2017
38
Empire Company Limited INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Empire Company Limited
We have audited the accompanying consolidated financial statements of Empire Company Limited, which comprise the consolidated
balance sheets as at May 6, 2017 and May 7, 2016 and the consolidated statements of earnings (loss), comprehensive income (loss),
changes in shareholders’ equity, and cash flows for the 52-week period ended May 6, 2017 and the 53-week period ended May 7, 2016,
and the related notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Empire Company
Limited as at May 6, 2017 and May 7, 2016 and its financial performance and its cash flows for the 52-week period ended May 6, 2017
and the 53-week period ended May 7, 2016 in accordance with International Financial Reporting Standards.
signed “PricewaterhouseCoopers LLP”
Chartered Professional Accountants,
Licensed Public Accountants
Halifax, Canada
June 28, 2017
39
Annual Report 2017
CONSOLIDATED BALANCE SHEETS
As At
(in millions of Canadian dollars)
ASSETS
Current
Cash and cash equivalents
Receivables
Inventories (Note 4)
Prepaid expenses
Loans and other receivables (Note 5)
Income taxes receivable
Assets held for sale (Note 6)
Loans and other receivables (Note 5)
Investments
Investments, at equity (Note 7)
Other assets (Note 8)
Property and equipment (Note 9)
Investment property (Note 10)
Intangibles (Note 11)
Goodwill (Note 12)
Deferred tax assets (Note 13)
LIABILITIES
Current
Accounts payable and accrued liabilities
Income taxes payable
Provisions (Note 14)
Long-term debt due within one year (Note 15)
Provisions (Note 14)
Long-term debt (Note 15)
Other long-term liabilities (Note 16)
Employee future benefits (Note 17)
Deferred tax liabilities (Note 13)
SHAREHOLDERS’ EQUITY
Capital stock (Note 18)
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Non-controlling interest
See accompanying notes to the consolidated financial statements.
On Behalf of the Board
signed “James Dickson”
signed “Michael Medline”
James Dickson
Director
Michael Medline
Director
40
May 6, 2017
May 7, 2016
$
207.3
413.6
1,322.2
117.5
25.5
31.9
48.5
2,166.5
82.1
25.1
648.4
43.3
3,033.3
103.0
880.5
1,003.4
709.9
$
264.7
489.4
1,287.3
117.3
26.4
11.9
407.1
2,604.1
93.5
24.7
574.9
57.3
3,144.7
82.9
911.5
998.7
646.2
$
8,695.5
$
9,138.5
$
2,230.2
38.4
88.1
134.0
2,490.7
105.8
1,736.8
141.7
374.0
143.8
4,992.8
2,034.4
25.3
1,572.8
11.7
3,644.2
58.5
3,702.7
$
2,173.1
21.2
174.9
350.4
2,719.6
131.7
2,017.0
108.7
336.8
141.7
5,455.5
2,045.1
22.5
1,546.4
9.9
3,623.9
59.1
3,683.0
$
8,695.5
$
9,138.5
Empire Company Limited
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
52 and 53 Weeks Ended
(in millions of Canadian dollars, except share and per share amounts)
Sales
Other income (loss) (Note 19)
Share of earnings from investments, at equity (Note 7)
Operating expenses
Cost of sales
Selling and administrative expenses
Impairments of goodwill and long-lived assets (Notes 9 and 12)
Operating income (loss)
Finance costs, net (Note 21)
Earnings (loss) before income taxes
Income tax expense (recovery) (Note 13)
Net earnings (loss)
Earnings (loss) for the year attributable to:
Non-controlling interest
Owners of the Company
Earnings (loss) per share (Note 22)
Basic
Diluted
Weighted average number of common shares outstanding, in millions (Note 22)
Basic
Diluted
See accompanying notes to the consolidated financial statements.
May 6, 2017
May 7, 2016
$ 23,806.2
48.2
77.5
$ 24,618.8
(10.9)
86.1
18,099.0
5,499.9
–
333.0
118.0
215.0
42.5
172.5
14.0
158.5
172.5
18,661.2
5,424.2
3,027.1
(2,418.5)
137.4
(2,555.9)
(441.3)
$
(2,114.6)
$
16.4
(2,131.0)
$
(2,114.6)
0.58
0.58
$
$
271.9
272.0
(7.78)
(7.78)
273.9
274.0
$
$
$
$
$
41
Annual Report 2017
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
52 and 53 Weeks Ended
(in millions of Canadian dollars)
Net earnings (loss)
Other comprehensive (loss) income
Items that will be reclassified subsequently to net earnings (loss)
Unrealized (losses) gains on derivatives designated
as cash flow hedges (net of taxes of $0.2 (2016 – $(1.5)))
Reclassification of losses on derivatives designated
as cash flow hedges to earnings (loss) (net of taxes of $0.1 (2016 – $(0.1)))
Unrealized gains (losses) on available for sale financial assets (net of taxes of $(0.1) (2016 – $0.1))
Share of other comprehensive income of investments, at equity (net of taxes of $(0.2) (2016 – $(0.4)))
Exchange differences on translation of foreign operations (net of taxes of $0.6 (2016 – $(2.4)))
Items that will not be reclassified subsequently to net earnings (loss)
Actuarial (losses) gains on defined benefit plans (net of taxes of $7.9 (2016 – $(2.8))) (Note 17)
Total comprehensive income (loss)
Total comprehensive income (loss) for the year attributable to:
Non-controlling interest
Owners of the Company
See accompanying notes to the consolidated financial statements.
May 6, 2017
May 7, 2016
$
172.5
$
(2,114.6)
(0.7)
–
0.3
0.5
1.7
1.8
(20.8)
3.8
0.1
(0.3)
1.1
(1.1)
3.6
7.3
$
$
$
153.5
$
(2,103.7)
14.0
139.5
153.5
$
16.4
(2,120.1)
$
(2,103.7)
42
Empire Company Limited
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated
Other
Compre-
hensive
Income
Contributed
Surplus
Capital
Stock
Total
Attributable
to Owners
of the
Company
Retained
Earnings
Non-
controlling
Interest
(in millions of Canadian dollars)
$
Balance at May 2, 2015
Dividends declared on common shares
Equity based compensation, net
Redemption of capital stock (Note 18)
Capital transactions
with structured entities
Transactions with owners
Net loss
Other comprehensive income
Total comprehensive loss for the year
2,109.4 $
–
0.5
(64.8)
–
(64.3)
–
–
–
8.2 $
–
14.3
–
–
14.3
–
–
–
6.3 $
–
–
–
3,862.8 $
(109.4)
–
(83.3)
5,986.7 $
(109.4)
14.8
(148.1)
–
–
(192.7)
(242.7)
(2,131.0)
7.3
(2,131.0)
10.9
–
–
–
3.6
3.6
Total
Equity
6,039.8
(109.4)
14.8
(148.1)
(10.4)
(253.1)
(2,114.6)
10.9
53.1 $
–
–
–
(10.4)
(10.4)
16.4
–
(2,123.7)
(2,120.1)
16.4
(2,103.7)
Balance at May 7, 2016
$
2,045.1 $
22.5 $
9.9 $
1,546.4 $
3,623.9 $
59.1 $
3,683.0
Dividends declared on common shares
Equity based compensation, net
Acquisition of shares held
in trust (Note 18)
Capital transactions
with structured entities
Transactions with owners
Net earnings
Other comprehensive loss
Total comprehensive income
for the year
–
–
–
2.8
(10.7)
–
–
(10.7)
–
–
–
–
2.8
–
–
–
–
–
–
–
–
(111.3)
–
(111.3)
2.8
–
–
(10.7)
–
(111.3)
(119.2)
–
1.8
158.5
(20.8)
158.5
(19.0)
–
–
–
(14.6)
(14.6)
14.0
–
(111.3)
2.8
(10.7)
(14.6)
(133.8)
172.5
(19.0)
1.8
137.7
139.5
14.0
153.5
Balance at May 6, 2017
$
2,034.4 $
25.3 $
11.7 $
1,572.8 $
3,644.2 $
58.5 $
3,702.7
See accompanying notes to the consolidated financial statements.
43
Annual Report 2017
CONSOLIDATED STATEMENTS OF CASH FLOWS
52 and 53 Weeks Ended
(in millions of Canadian dollars)
Operations
Net earnings (loss)
Adjustments for:
Depreciation
Income tax expense (recovery)
Finance costs, net (Note 21)
Amortization of intangibles
Net (gain) loss on disposal of assets
Impairment of non-financial assets, net
Impairments of goodwill and long-lived assets (Notes 9 and 12)
Amortization of deferred items
Equity in earnings of other entities, net of distributions received
Employee future benefits
Increase in long-term lease obligation
Decrease in long-term provisions
Equity based compensation, net
Net change in non-cash working capital
Income taxes paid, net
Cash flows from operating activities
Investment
Increase in investments
Property, equipment and investment property purchases
Proceeds on disposal of property, equipment and investment property
Additions to intangibles
Loans and other receivables
Tenant inducements
Other assets and other long-term liabilities
Business acquisitions (Note 23)
Interest received
Cash flows used in investing activities
Financing
Issue of long-term debt
Debt financing costs
Repayment of long-term debt
Net (repayment) advance of credit facilities
Interest paid
Repurchase of Non-Voting Class A shares (Note 18)
Acquisition of shares held in trust (Note 18)
Dividends paid, common shares
Non-controlling interest
Cash flows used in financing activities
Decrease 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.
44
May 6, 2017
May 7, 2016
$
172.5
$
(2,114.6)
355.5
42.5
118.0
88.7
(21.3)
27.5
–
12.8
19.9
8.5
13.9
(35.4)
3.3
0.5
(98.4)
708.5
(0.4)
(460.7)
425.7
(53.8)
12.3
58.8
2.7
(21.9)
1.6
(35.7)
55.6
–
(397.2)
(165.0)
(87.0)
–
(10.7)
(111.3)
(14.6)
(730.2)
(57.4)
264.7
$
207.3
$
384.8
(441.3)
137.4
89.0
42.6
17.6
3,027.1
12.8
9.9
(4.2)
6.7
(25.8)
3.6
(132.2)
(116.6)
896.8
(4.0)
(616.5)
142.5
(55.5)
(6.6)
–
5.6
(90.7)
2.6
(622.6)
82.7
(1.4)
(94.5)
68.1
(92.4)
(148.1)
–
(109.4)
(10.4)
(305.4)
(31.2)
295.9
264.7
Empire Company Limited
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 6, 2017 (in millions of Canadian dollars, except share and per share amounts)
1. REPORTING ENTITY
Empire Company Limited (“Empire” or the “Company”) is a Canadian company whose key businesses are food retailing and related real
estate. The Company is incorporated in Canada and the address of its registered office of business is 115 King Street, Stellarton, Nova
Scotia, B0K 1S0, Canada. The consolidated financial statements for the period ended May 6, 2017 include the accounts of Empire, all
subsidiary companies, including 100 percent owned Sobeys Inc. (“Sobeys”), and certain enterprises considered structured entities (“SEs”),
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 and its joint ventures are accounted for using the equity method. As at May 6, 2017 the Company’s business
operations were conducted through its two reportable segments: Food retailing and Investments and other operations, as further
described in Note 26, Segmented Information. The Company’s Food retailing business is affected by seasonality and the timing of
holidays. Retail sales are traditionally higher in the Company’s first quarter. 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. The years ended May 6, 2017
and May 7, 2016 were 52 and 53 weeks respectively.
2. BASIS OF PREPARATION
Statement of compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS” or
“GAAP”) as issued by the International Accounting Standards Board (“IASB”).
The consolidated financial statements were authorized for issue by the Board of Directors on June 28, 2017.
Basis of measurement
The consolidated financial statements are prepared on the historical cost basis, except the following assets and liabilities which are stated
at their fair value: financial instruments (including derivatives) at fair value through profit and loss (“FVTPL”), financial instruments classified
as available for sale and cash settled stock-based compensation plans. Assets held for sale are stated at the lower of their carrying amount
and fair value less costs to sell.
Use of estimates and judgments
The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. The use of estimates, judgments and
assumptions are interrelated. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
are recognized in the period in which the estimates are revised and in any future periods affected.
The Company has applied judgment in its assessment of the appropriateness of consolidation of SEs, the appropriateness of equity
accounting for its investments in associates and joint ventures, the classification of leases and financial instruments, the level of
componentization of property and equipment, the determination of cash generating units, the identification of indicators of impairment
for property and equipment, investment property, intangible assets and goodwill, the recognition and measurement of assets acquired
and liabilities assumed, and the recognition of provisions.
Estimates, judgments and assumptions that could have a significant impact on the amounts recognized in the consolidated financial
statements are summarized below. Estimates are based on management’s best knowledge of current events and actions the Company
may undertake in the future. Actual results could differ from these estimates.
(a) 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) estimated inventory provisions associated with vendor allowances and internal charges; (ii) estimated inventory
provisions due to spoilage and shrinkage occurring between the last physical inventory count and the balance sheet dates; and
(iii) inventories valued at retail and adjusted to cost.
(b) Impairment
Management assesses impairment of non-financial assets such as investments in associates and joint ventures, goodwill, intangible assets,
property and equipment, and investment property. In assessing impairment, management estimates the recoverable amount of each
asset or cash-generating unit (“CGU”) based on expected future cash flows. When measuring expected future cash flows, management
makes assumptions about future growth of profits which relate to future events and circumstances. Actual results could vary from these
estimated future cash flows. Estimation uncertainty relates to assumptions about future operating results and the application of an
appropriate discount rate. Impairment losses and reversals are disclosed in the consolidated financial statements in Notes 9, 10, 11, and 12.
45
Annual Report 2017 Goodwill is subject to impairment testing on an annual basis. The Company performed its annual assessment of goodwill impairment
during its third quarter. However, if indicators of impairment are present, the Company will review goodwill for impairment when such
indicators arise. In addition, at each reporting period, the Company reviews whether there are indicators that the recoverable amount
of long-lived assets may be less than their carrying amount.
Goodwill and long-lived assets were reviewed for impairment by determining the recoverable amount of each CGU or groups of CGUs
to which the goodwill or long-lived assets relate. Management estimated the recoverable amount of the CGUs based on the higher of
value-in-use (“VIU”) and fair value less costs of disposal (“FVLCD”). The VIU calculations are based on expected future cash flows. When
measuring expected future cash flows, management makes key assumptions about future growth of profits which relate to future events
and circumstances. Estimation uncertainty relates to assumptions about future operating results and the application of an appropriate
discount rate. Actual results could vary from these estimates which may cause significant adjustments to the Company’s goodwill or
long-lived assets in subsequent reporting periods.
(c) Employee future benefits
Accounting for the costs of defined benefit pension plans and other post-employment benefits requires the use of a number of
assumptions. Pension obligations are based on current market conditions and actuarial determined data such as medical cost trends,
mortality rates, and future salary increases. A sensitivity analysis and more detail of key assumptions used in measuring the pension
and post-employment benefit obligations are disclosed in Note 17.
(d) Income taxes
Assumptions are applied when management assesses the timing and reversal of temporary differences and estimates the Company’s
future earnings to determine the recognition of current and deferred income taxes. Judgments are also made by management when
interpreting the tax rules in jurisdictions where the Company operates. Note 13 details the current and deferred income tax expense
and deferred tax assets and liabilities.
(e) Business acquisitions
For business acquisitions, the Company applies judgment on the recognition and measurement of assets acquired and liabilities assumed,
and estimates are utilized to calculate and measure such adjustments. In measuring the fair value of an acquiree’s assets and liabilities
management uses estimates about future cash flows and discount rates. Any measurement changes after initial recognition would affect
the measurement of goodwill.
(f) Provisions
Estimates and assumptions are used to calculate provisions when the Company estimates the expected future cash flows relating to the
obligation and applies an appropriate discount rate.
(g) Supply agreements
The Company has various long-term supply agreements for products, some of which contain minimum volume purchases. Significant
estimation and judgment is required in the determination of (i) future operating results; and (ii) forecasted purchase volumes. When
measuring whether a provision is required based on the expected future cash flows associated with fulfilling the contract, management
makes assumptions which relate to future events and circumstances. Actual results could vary from these estimated future cash flows.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of consolidation
The financial statements for the Company include the accounts of the Company and all of its subsidiary undertakings up to the reporting
date. Subsidiaries, including SEs, are all entities the Company controls. All subsidiaries have a reporting date within six weeks of the
Company’s reporting date. Where necessary, adjustments have been made to reflect transactions between the reporting dates of the
Company and its subsidiaries.
Control exists when the Company has existing rights that give it the current ability to direct the activities that significantly affect the
entity’s returns. The Company reassesses control on an ongoing basis.
SEs are entities controlled by the Company which were designed so that voting or similar rights are not the dominant factor in deciding
who controls the entity. SEs are consolidated if, based on an evaluation of the substance of its relationship with the Company, the
Company concludes that it controls the SE. SEs controlled by the Company were established under terms that impose strict limitations
on the decision making powers of the SEs management and that results in the Company receiving the majority of the benefits related to
the SEs operations and net assets, being exposed to the majority of risks incident to the SEs activities, and retaining the majority of the
residual or ownership risks related to the SEs or their assets.
46
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS All intercompany transactions, balances, income and expenses are eliminated in preparing the consolidated financial statements.
Earnings or losses and other comprehensive income of subsidiaries acquired or disposed of during the period are recognized from
the effective date of acquisition, or up to the effective date of disposal, as applicable.
Non-controlling interest represents the portion of a subsidiary’s earnings and losses and net assets that is not held by the Company. If
losses in a subsidiary applicable to a non-controlling interest exceed the non-controlling interest in the subsidiary’s equity, the excess is
allocated to the non-controlling interest except to the extent that the majority has a binding obligation and is able to cover the losses.
(b) Business acquisitions
Business acquisitions are accounted for by applying the acquisition method. The acquisition method involves the recognition of the
acquiree’s identifiable assets and liabilities, including contingent liabilities, regardless of whether they were recorded in the financial
statements prior to acquisition. The acquiree’s identifiable assets, liabilities, and contingent liabilities that meet the conditions for
recognition under IFRS 3, “Business Combinations”, are recognized at their fair value at the acquisition date, except for: (i) deferred tax
assets or liabilities and liabilities or assets related to employee benefit arrangements which are recognized and measured in accordance
with International Accounting Standard (“IAS”) 12, “Income Taxes”, and IAS 19, “Employee Benefits”, respectively; and (ii) assets (or
disposal groups) that are classified as held for sale in accordance with IFRS 5, “Non-current Assets Held for Sale and Discontinued
Operations”, which are measured and recognized at fair value less costs to sell. Goodwill arising on acquisition is recognized as an asset
and represents the excess of acquisition cost over the fair value of the Company’s share of the identifiable net assets of the acquiree at
the date of the acquisition. Any excess of identifiable net assets over the acquisition cost is recognized in net earnings or loss immediately
after acquisition. Transaction costs related to the acquisition are expensed as they are incurred.
(c) Foreign currency translation
Assets and liabilities of foreign operations with a different functional currency than the Company are translated at exchange rates in effect
at each reporting period end date. The revenues and expenses are translated at average exchange rates for the period. Cumulative gains
and losses on translation are shown in accumulated other comprehensive income or loss.
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the foreign currency exchange
rate in effect at each reporting period end date. Non-monetary items are translated at the historical exchange rate at the date of
transaction. Exchange gains or losses arising from the translation of these balances denominated in foreign currencies are recognized
in operating income or loss. Revenues and expenses denominated in foreign currencies are translated into Canadian dollars at the
average foreign currency exchange rate for the period.
(d) Cash and cash equivalents
Cash and cash equivalents are defined as cash and guaranteed investments with a maturity less than 90 days at date of acquisition.
(e) 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 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 not estimated to 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.
(f) Income taxes
Tax expense recognized in net earnings or loss comprises the sum of deferred income tax and current income tax not recognized in other
comprehensive income or loss.
Current income tax assets and liabilities are comprised of claims from, or obligations to, fiscal authorities relating to the current or prior
reporting periods, that are unpaid at the reporting date. Current tax is payable on taxable earnings, which differs from net earnings or loss
in the consolidated financial statements. The calculation of current income tax is based on tax rates and tax laws that have been enacted
or substantively enacted at the end of the reporting period.
47
Annual Report 2017 Deferred income taxes are calculated using the asset and liability method on temporary differences between the carrying amounts of
assets and liabilities and their related tax bases. However, deferred tax is not provided on the initial recognition of goodwill or on the initial
recognition of an asset or liability unless the related transaction is a business acquisition or affects tax or accounting profit. The deferred
tax assets and liabilities have been measured using substantively enacted tax rates that will be in effect when the amounts are expected to
settle. Deferred tax assets are only recognized to the extent that it is probable that they will be able to be utilized against future taxable
income. The assessment of the probability of future taxable income in which deferred tax assets can be utilized is based on the Company’s
latest approved forecast, which is adjusted for significant non-taxable income and expenses and specific limits to the use of any unused
tax loss or credit. If a positive forecast of taxable income indicates the probable use of a deferred tax asset, especially when it can be used
without a time limit, that deferred tax asset is usually recognized in full. The recognition of deferred tax assets that are subject to certain
legal or economic limits or uncertainties are assessed individually by management based on the specific facts and circumstances.
Deferred tax assets and liabilities are offset only when the Company has a right and intention to offset current tax assets and liabilities
from the same taxation authority. Changes in deferred tax assets or liabilities are recognized as a component of income or expense in net
earnings or loss, except where they relate to items that are recognized in other comprehensive income or loss (such as the unrealized gains
and losses on cash flow hedges) or directly in equity.
(g) Assets held for sale
Certain property and equipment have been listed for sale and reclassified as assets held for sale on the consolidated balance sheets.
These assets are expected to be sold within a twelve month period. Assets held for sale are valued at the lower of carrying value and fair
value less costs to sell.
(h) Investments in associates
Associates are those entities over which the Company is able to exert significant influence but which it does not control and which are
not interests in a joint venture. Control is reassessed on an ongoing basis. Investments in associates are initially recognized at cost and
subsequently accounted for using the equity method.
Acquired investments in associates are also subject to the acquisition method as explained above. However, any goodwill or fair value
adjustment attributable to the Company’s share in the associate is included in the amount recognized as investments in associates.
All subsequent changes to the Company’s share of interest in the equity of the associate are recognized in the carrying amount of the
investment. Changes resulting from the earnings or losses generated by the associate are reported within share of earnings from
investments, at equity on the Company’s consolidated statements of earnings or loss. These changes include subsequent depreciation,
amortization or impairment of the fair value adjustments of assets and liabilities.
Changes resulting from earnings of the associate or items recognized directly in the associate’s equity are recognized in earnings or
losses or equity of the Company, as applicable. However, when the Company’s share of losses in an associate equals or exceeds its
interest in the associate, including any unsecured receivables, the Company does not recognize further losses, unless it has incurred
legal or constructive obligations or made payments on behalf of the associate. If the associate subsequently reports earnings, the
Company resumes recognizing its share of those earnings only after its share of the earnings exceeds the accumulated share of losses
that had previously not been recognized.
Unrealized gains and losses on transactions between the Company and its associates are eliminated to the extent of the Company’s
interest in those entities. Where unrealized losses are eliminated, the underlying asset is also tested for impairment losses from a
Company perspective.
At each reporting period end date, the Company assesses whether there are any indicators of impairment in its investment in associates.
For investments in publicly traded entities, carrying value of the investment is compared to the current market value of the investment
based on its quoted price at the balance sheet date. For entities which are not publicly traded, value-in-use of the investment is
determined by estimating the Company’s share of the present value of the estimated cash flows expected to be generated by the
investee. If impaired, the carrying value of the Company’s investment is written down to its estimated recoverable amount, being the
higher of fair value less cost to sell and value-in-use.
In the process of measuring future cash flows, management makes assumptions about future growth of profits. These assumptions relate
to future events and circumstances. The actual results may vary and may cause significant adjustments to the Company’s investments in
associates in the subsequent financial years.
Each of the associates identified by the Company has a reporting year end of December 31. For purposes of the Company’s consolidated
year end financial statements, each of the associates’ results are included based on financial statements prepared as at March 31, with
any changes occurring between March 31 and the Company’s year end that would materially affect the results being taken into account.
48
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (i) Investments in joint ventures
Investments in joint ventures are joint arrangements whereby the Company and the other parties to the arrangements have joint
control and therefore have rights to the net assets of the arrangement. Investments in joint ventures are initially recognized at cost
and subsequently accounted for using the equity method.
(j) Financial instruments
Financial instruments are recognized on the consolidated balance sheets when the Company becomes a party to the contractual
provisions of a financial instrument. The Company is required to initially recognize 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 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 purpose of ongoing measurements. Classification choices for financial assets include: i) FVTPL – measured at fair value with
changes in fair value recorded in net earnings or loss; ii) held to maturity – recorded at amortized cost with gains and losses recognized
in net earnings or loss in the period that the asset is derecognized or impaired; iii) available for sale – measured at fair value with changes
in fair value recognized in other comprehensive income or loss for the current period until realized through disposal or impairment; and
iv) loans and receivables – recorded at amortized cost with gains and losses recognized in net earnings or loss in the period that the asset
is no longer recognized or impaired. Classification choices for financial liabilities include: i) FVTPL – measured at fair value with changes
in fair value recorded in net earnings or loss; and ii) other liabilities – measured at amortized cost with gains and losses recognized in net
earnings or loss in the period that the liability is derecognized.
The Company’s financial assets and liabilities are generally classified and measured as follows:
Asset/Liability
Cash and cash equivalents
Receivables
Loans and other receivables
Investments
Derivative financial assets and liabilities
Non-derivative other assets
Accounts payable and accrued liabilities
Long-term debt
Classification
Measurement
Loans and receivables
Loans and receivables
Loans and receivables
Available for sale
FVTPL
FVTPL
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Fair value
Fair value
Fair value
Amortized cost
Amortized cost
All financial assets are reviewed for impairment at each reporting date, except those classified as FVTPL. Loans and receivables are
reviewed for past due balances from independent accounts and based on an evaluation of recoverability net of security assigned for
franchisee or affiliate locations.
Transaction costs other than those related to financial instruments classified as FVTPL, which are expensed as incurred, are added to
or deducted from the fair value of the financial asset or financial liability, as appropriate, on initial recognition and amortized using the
effective interest method.
Fair value determination is classified within a three-level hierarchy, based on observability of significant inputs, as follows: Level 1 – quoted
prices (unadjusted) in active markets for identical assets or liabilities; Level 2 – inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or indirectly; or Level 3 – unobservable inputs for the asset or liability. Inputs into the
determination of the fair value require 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 to valuation methods may result in transfers into or out of
an investment’s assigned level.
A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or if the Company transfers
the financial asset to another party without retaining control or substantially all the risks and rewards of ownership of the financial asset.
A financial liability is derecognized when its contractual obligations are discharged, cancelled or expire.
49
Annual Report 2017
(k) Hedges
The Company has cash flow hedges which are used to manage exposure to fluctuations in foreign currency exchange 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 or
loss. To the extent the change in fair value of the derivative does not completely offset the change in fair value of the hedged item, the
ineffective portion of the hedging relationship is recorded in net earnings or loss. Amounts accumulated in other comprehensive income
or loss are reclassified to net earnings or loss when the hedged item is recognized in net earnings or loss. 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 or loss relating to the hedge is carried forward until the hedged item is recognized in net
earnings or loss. 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 or loss is immediately reclassified to net
earnings or loss.
Financial derivatives assigned as part of a cash flow hedging relationship are classified as either an other asset or other long-term liability
as required based on their fair value determination.
Significant derivatives include the following:
(1) Foreign currency forward contracts and foreign currency swaps for the primary purpose of limiting exposure to exchange rate
fluctuations relating to the purchase of goods or expenditures denominated in foreign currencies. Certain of these contracts are
designated as hedging instruments for accounting purposes. Accordingly, the effective portion of the change in the fair value of
the contracts is accumulated in other comprehensive income or loss until the variability in cash flows being hedged is recognized
in earnings or loss in future accounting periods.
(2) Electricity forward contracts for the primary purpose of limiting exposure to fluctuations in the market prices of electricity. These
contracts are designated as hedging instruments for accounting purposes. Accordingly, the effective portion of the change in fair
value of the contracts is accumulated in other comprehensive income or loss until the variability in cash flows being hedged is
recognized in earnings or loss in future accounting periods.
(l) Property and equipment
Owner-occupied land, buildings, equipment, leasehold improvements, and assets under construction are carried at acquisition cost less
accumulated depreciation and impairment losses.
Buildings that are leasehold property are also included in property and equipment if they are classified as a finance lease. Such assets
are depreciated over their expected useful lives (determined by reference to comparable owned assets) or over the term of the lease,
if shorter.
When significant parts of property and equipment have different useful lives, they are accounted for as separate components. Depreciation
is recorded on a straight-line basis from the time the asset is available or when assets under construction become available for use over
the estimated useful lives of the assets as follows:
Buildings
Equipment
Leasehold improvements
10 – 40 years
3 – 20 years
Lesser of lease term and 7 – 20 years
Depreciation has been included within selling and administrative expenses in the consolidated statements of earnings (loss). Material
residual value estimates and estimates of useful life are reviewed and updated as required, or annually at a minimum.
Gains or losses arising on the disposal of property and equipment are determined as the difference between the disposal proceeds
and the carrying amount of the assets and are recognized in net earnings or loss within other income (loss). If the sale is to a Company’s
investment, at equity, a portion of the gain or loss is deferred and reduces the carrying value of the investment.
(m) Investment property
Investment properties are properties which are held either to earn rental income or for capital appreciation or for both, rather than for the
principal purpose of the Company’s operating activities. Investment properties are accounted for using the cost model. The depreciation
policies for investment property are consistent with those described for property and equipment.
Any gain or loss arising from the sale of an investment property is immediately recognized in net earnings or loss, unless the sale is to
an investment, at equity, in which case a portion of the gain or loss is deferred and would reduce the carrying value of the Company’s
investment. Rental income and operating expenses from investment property are reported within other income (loss) and selling and
administrative expenses, respectively, in the consolidated statements of earnings (loss).
50
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(n) Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the
lessee. All other leases are classified as operating leases.
(i) The Company as lessor
Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in
negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis
over the lease term.
(ii) The Company as lessee
Assets held under finance leases are initially recognized as assets of the Company at their fair value at the inception of the lease or, if
lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated
balance sheets as a finance lease obligation in long-term debt.
Lease payments are apportioned between finance charges and reduction of the lease obligation to achieve a constant rate of interest
on the remaining balance of the liability. Finance charges are recognized in net earnings or loss immediately. Contingent rentals are
recognized as expenses in the periods in which they are incurred.
Lease allowances and incentives are recognized as other long-term liabilities. The aggregate benefit of incentives is recognized as
a reduction of rental expense on a straight-line basis over the term of the lease.
Real estate lease expense is amortized on a straight-line basis over the entire term of the lease.
(iii) Sale and leaseback transactions
A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. If a sale and leaseback transaction
results in a finance lease for the Company, any excess of sales proceeds over the carrying amount is recognized as deferred revenue
and amortized over the term of the new lease. Any profit or loss in a sale and leaseback transaction resulting in an operating lease that is
transacted at fair value is recognized immediately. If the sale price is above fair value, the excess over fair value is deferred and amortized
over the term of the new lease.
(o) Intangibles
Intangibles arise on the purchase of a new business, existing franchises, software, and the acquisition of pharmacy prescription files. They
are accounted for using the cost model whereby capitalized costs are amortized on a straight-line basis over their estimated useful lives,
as these assets are considered finite. Useful lives are reviewed annually and intangibles are subject to impairment testing. The following
useful lives are applied:
Deferred purchase agreements
Franchise rights/agreements
Lease rights
Off market leases
Prescription files
Software
Other
5 – 10 years
10 years
5 – 10 years
Lesser of lease term and 40 years
15 years
3 – 7 years
5 – 10 years
Amortization has been included within selling and administrative expenses in the consolidated statements of earnings (loss). Subsequent
expenditures made by the Company relating to intangible assets that do not meet the capitalization criteria are expensed in the
period incurred.
Included in intangibles are brand names, loyalty programs, and private labels, the majority of which have indefinite useful lives. Intangibles
with indefinite useful lives are measured at cost less any accumulated impairment losses. These intangibles are tested for impairment on
an annual basis or more frequently if there are indicators that intangibles may be impaired.
(p) Goodwill
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.
(q) Impairment of non-financial assets
Goodwill and indefinite life intangibles are reviewed for impairment at least annually by assessing the recoverable amount of each CGU or
groups of CGUs to which the goodwill or indefinite life intangible relates. The recoverable amount is the higher of FVLCD and VIU. When
the recoverable amount of the CGU(s) is less than the carrying amount, an impairment loss is recognized immediately in net earnings or
loss. Impairment losses related to goodwill cannot be reversed.
51
Annual Report 2017
Long-lived tangible and intangible assets are reviewed each reporting period for impairment when events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. If such an indication exists, the recoverable amount of the asset is
estimated in order to determine the extent of the impairment loss (if any). The recoverable amount is the higher of FVLCD and VIU. Where
the asset does not generate cash flows that are independent from other assets, the Company estimates the recoverable amount of the
CGU(s) to which the asset belongs. The Company has determined a CGU to be primarily an individual store. Corporate assets such as head
offices and distribution centres do not individually generate separate cash inflows and are therefore aggregated for testing with the stores
they service. When the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of
the asset (or CGU) is reduced to the recoverable amount. An impairment loss is recognized immediately in selling and administrative
expenses in the consolidated statements of earnings (loss).
Where an impairment loss subsequently reverses, other than related to goodwill, the carrying amount of the asset (or CGU) is increased to
the revised estimate, but is limited to the carrying amount that would have been determined if no impairment loss had been recognized in
prior years. A reversal of impairment loss is recognized immediately in net earnings or loss.
(r) Customer loyalty programs
The AIR MILES® loyalty program is used by the Company. AIR MILES® are earned by Sobeys customers based on purchases in stores.
The Company pays a per point fee under the terms of the agreement with AIR MILES®.
(s) Provisions
Provisions are recognized when there is a present legal or constructive obligation as a result of a past event, for which it is probable that
a transfer of economic benefits will be required to settle the obligation, and where a reliable estimate can be made of the amount of the
obligation. Provisions are discounted using a pre-tax discount rate that reflects the current market assessments of the time value of money
and the risks specific to the liability, if material. Where discounting is used, the increase in the provision due to passage of time
(“unwinding of the discount”) is recognized within finance costs, net in the consolidated statements of earnings (loss).
(t) Borrowing costs
Borrowing costs are primarily comprised of interest on the Company’s debts. Borrowing costs directly attributable to the acquisition,
construction or production of a qualifying asset are capitalized as a component of the cost of the asset to which it is related. All other
borrowing costs are expensed in the period in which they are incurred and are reported within finance costs.
(u) Deferred revenue
Deferred revenue consists of long-term supplier purchase agreements and gains on sale and leaseback transactions relating to certain
finance leases. Deferred revenue is included in other long-term liabilities and is taken into income on a straight-line basis over the term
of the related agreements.
(v) Employee benefits
(i) Short-term employment benefits
Short-term employee benefits include wages, salaries, compensated absences, profit-sharing and bonuses expected to be settled within
12 months from the end of the reporting period. Short-term employee benefits are measured on an undiscounted basis and are recorded
as selling and administrative expenses as the related service is provided.
(ii) Post-employment benefits
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 unit credit method pro-rated on service and management’s best estimate of salary escalation, and retirement ages.
The liability recognized on the consolidated balance sheets for defined benefit plans is the present value of the defined benefit obligation
at the reporting date less the fair market value of plan assets. 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.
Re-measurements, comprising of actuarial gains and losses and the return on plan assets (excluding amounts in net interest), are
recognized immediately on the consolidated balance sheets with a corresponding charge to retained earnings through other
comprehensive income or loss in the period in which they occur. Re-measurements are not reclassified to net earnings or loss in
subsequent periods.
Past service costs are recognized in net earnings or loss on the earlier of the date of the plan amendment or curtailment, and the date
that the Company recognizes restructuring-related costs.
52
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Service cost on the net defined benefit liability, comprising current service costs, past-service costs, gains and losses on curtailments
and non-routine settlements, is included in selling and administrative expenses. Net interest expense on the net defined benefit liability
is included in finance costs, net.
(iii) Termination benefits
Termination benefits are recognized as an expense at the earlier of when the Company recognizes related restructuring costs and when
the Company can no longer withdraw the offer of those benefits.
(w) Revenue recognition
Sales are recognized at the point-of-sale. Sales include revenues from customers through corporate stores operated by the Company and
consolidated SEs, and revenue from sales to non-SE franchised stores, affiliated stores and independent accounts. Revenue received
from non-SE 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 contractually 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.
(x) 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 and related inventories. Certain allowances are contingent on the Company achieving minimum purchase
levels and these allowances are recognized when it is probable that the minimum purchase level will be met, and the amount of allowance
can be estimated.
(y) Interest and dividend income
Interest income and expenses are reported on an accrual basis using the effective interest method. Dividend income is recognized when
the right to receive payment has been established.
(z) Earnings per share
Basic earnings per share is calculated by dividing the earnings available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is calculated by adjusting the weighted average number of
common shares outstanding for the dilutive effect of employee stock options and performance share units. When a loss is recorded,
the weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all potential
common shares would be anti-dilutive.
(aa) Stock-based compensation
The Company operates both equity and cash settled stock-based compensation plans for certain employees.
All goods and services received in exchange for the grant of any stock-based payments are measured at their fair values. Where
employees are rewarded using stock-based payments, the fair values of employees’ services are determined indirectly by reference to
the fair value of the equity instruments granted (Note 27).
(bb) Changes to accounting policies adopted during fiscal 2017
(i) Presentation of financial statements
In December 2014, the IASB amended IAS 1, “Presentation of Financial Statements”, providing clarifying guidance on materiality
and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The
amendments became effective during the first quarter of fiscal 2017 and had no material impact on the Company’s consolidated
financial statements.
(ii) Income taxes
In November 2016, the IFRS Interpretations Committee (“IFRIC”) issued its agenda decision addressing the expected manner of recovery
of an intangible asset with an indefinite useful life for the purposes of measuring deferred tax in accordance with IAS 12, “Income Taxes”.
IFRIC noted that an intangible asset with an indefinite useful life does not mean infinite life, nor does it mean the expected manner of
recovery of the carrying amount would result solely through sale. Therefore, in applying IAS 12, an entity must determine its expected
manner of recovery of the carrying value of the intangible asset with an indefinite life and should reflect the tax consequences that follow
from that expected manner of recovery. Previously, Empire measured deferred taxes on temporary differences arising from indefinite life
53
Annual Report 2017 intangible assets using capital gains rates on the basis that the assets will be recovered through its disposition. As a result of the IFRIC
agenda decision, the Company has changed its accounting policy to measure deferred taxes at the income tax rate applicable to ordinary
taxable income expected to apply in the years in which the temporary differences are expected to be recovered or settled. The Company
adopted this change on a retrospective basis as an accounting policy change in accordance with IAS 8, “Accounting Policies, Changes
to Accounting Estimates and Errors” and the impact on the consolidated financial statements for the 52 weeks ended May 6, 2017 was
an increase to deferred tax liabilities of $33.6 (2016 – $33.6), an increase to retained earnings of $2.9 (2016 – $2.9), with a corresponding
adjustment to goodwill of $36.5 (2016 – $36.5).
(cc) Future standards
(i) Statement of cash flows
In January 2016, the IASB issued Disclosure Initiative Amendments to IAS 7, “Statement of Cash Flows”. These amendments require
entities to provide additional disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing
activities, including changes arising from cash and non-cash-flow changes. These amendments are effective for annual periods beginning
on or after January 1, 2017. The implementation of these amendments will occur in fiscal 2018 and is not expected to have a significant
impact on current disclosures of the Company.
(ii) Financial instruments
In July 2014, the IASB issued IFRS 9, “Financial Instruments”, which replaces IAS 39, “Financial Instruments: Recognition and
Measurement”. IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities, IFRS 9 further
establishes an expected credit loss impairment model where it is no longer necessary for a triggering event to have occurred before credit
losses are recognized. IFRS 9 also introduces a new hedge accounting model that aligns with corresponding risk management activities.
The standard is effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively, with the exception
of the hedging component which is applied prospectively. IFRS 9 allows for early adoption, but the Company does not intend to do so at
this time.
(iii) Revenue
In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”. IFRS 15 replaces IAS 18, “Revenue”, IAS 11, “Construction
Contracts”, and some revenue related Interpretations. IFRS 15 establishes a new control-based revenue recognition model and provides
a comprehensive framework for recognition, measurement and disclosure of revenue from contracts with customers, excluding contracts
within the scope of the standards on leases, insurance contracts and financial instruments. The new standard is effective for annual periods
beginning on or after January 1, 2018 and is to be applied retrospectively. The standard allows for early adoption, but the Company does
not intend to do so at this time.
In April 2016, the IASB published clarifications to IFRS 15 which addresses three topics (identifying performance obligations, principle
versus agent considerations and licensing) as well as providing some transition relief for modified and completed contracts. The
implementation timelines for these clarifications are consistent with IFRS 15.
(iv) Leases
In January 2016, the IASB issued IFRS 16, “Leases”, which replaces IAS 17, “Leases” and related interpretations. IFRS 16 introduces
a balance sheet recognition and measurement model for lessees, eliminating the distinction between operating and finance leases.
Lessors will continue to classify leases as operating and finance leases. The standard is effective for annual periods beginning on or
after January 1, 2019. IFRS 16 allows for early adoption for companies that apply IFRS 15 “Revenue from Contracts with Customers”,
but the Company does not intend to early adopt IFRS 16. For leases where the Company is the lessee it has the option of adopting
a full retrospective approach or a modified retrospective approach with various optional practical expedients available.
The Company expects the adoption of IFRS 16 will have a significant impact on its consolidated financial statements. New assets and
liabilities will be recognized for the Company’s operating property and equipment leases. Additional changes due to the nature and
timing of expenses related to the operating leases will be incurred as the Company will recognize depreciation for right-of-use assets
and finance expense on lease liabilities replacing straight-line lease expense. No significant impacts are expected where the Company
is a lessor or sublessor.
The Company is currently evaluating the impact of these standards on its consolidated financial statements. The Company will disclose
additional information including transition methods and estimated qualitative financial impacts during fiscal 2018.
54
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4. INVENTORIES
The cost of inventories recognized as an expense during the year was $18,099.0 (2016 – $18,661.2). The Company recorded $3.5 (2016 –
$1.2) as an expense for the write-down of inventories below cost to net realizable value for inventories on hand as at May 6, 2017. There
were no reversals of inventories written down previously (2016 – $ nil).
5. LOANS AND OTHER RECEIVABLES
Loans receivable
Notes receivable and other
Less amount due within one year
May 6, 2017
May 7, 2016
$
$
64.8
42.8
107.6
25.5
$
82.1
$
76.6
43.3
119.9
26.4
93.5
Loans receivable represent long-term financing to certain retail associates. These loans are primarily secured by inventory, fixtures
and equipment; bear various interest rates, and have repayment terms up to 10 years. The carrying amount of the loans receivable
approximates fair value based on the variable interest rates charged on the loans.
Included in notes receivable and other as at May 6, 2017, is $13.2 (2016 – $14.5) due from a third party related to equipment sales.
Loans receivable from officers and employees of $ nil (2016 – $0.5) under the Company’s share purchase plan were classified as notes
receivable and other. Loan repayments resulted in a corresponding decrease in notes receivable and other. The loans were non-interest
bearing and non-recourse. The outstanding loan balance at May 7, 2016 was secured by 20,810 Non-Voting Class A shares. The market
value of the shares was $0.4.
6. ASSETS HELD FOR SALE
On June 29, 2016, Sobeys and its wholly-owned subsidiaries closed an agreement with Crombie Real Estate Investment Trust (“Crombie
REIT”), an entity in which the Company has a 41.5 percent ownership, to sell and leaseback a portfolio of 19 retail properties and a
50 percent interest in each of its three automated distribution centres, as well as the sale of two parcels of development land which were
previously owned by Empire. Assets related to this transaction of $358.0 were included in assets held for sale as at May 7, 2016 (Note 28).
During fiscal 2017, Sobeys sold 13 properties and leased back four from third parties. Total proceeds from these transactions were $66.9,
resulting in a pre-tax gain of $4.5 which has been recognized in the consolidated statements of earnings (loss).
During fiscal 2016, Sobeys sold nine properties and leased back six and also sold equipment. All properties, excluding one, and
equipment were classified as assets held for sale. Total proceeds from these transactions were $115.7, resulting in a pre-tax gain of
$23.3 which has been recognized in the consolidated statements of earnings (loss).
As at May 6, 2017, assets held for sale relates to land, buildings and equipment expected to be sold in the next twelve months.
7. INVESTMENTS, AT EQUITY
Investment in associates
Crombie REIT
Canadian real estate partnerships
U.S. real estate partnerships
Investment in joint ventures
Canadian Digital Cinema Partnership (“CDCP”)
Total
The fair values of the investments based on a stock exchange are as follows:
Crombie REIT
May 6, 2017
May 7, 2016
$
$
459.1
143.0
36.8
9.5
366.8
148.5
50.2
9.4
$
648.4
$
574.9
May 6, 2017
May 7, 2016
$
883.6
$
786.0
The Canadian and U.S. real estate partnerships and CDCP are not publicly listed on a stock exchange and hence published price quotes
are not available.
55
Annual Report 2017
The Company owns 61,008,700 Class B LP units and attached special voting units of Crombie REIT, along with 909,090 REIT units,
representing a 41.5% (2016 – 41.5%) economic and voting interest in Crombie REIT.
Crombie REIT has instituted a distribution reinvestment plan (“DRIP”) whereby Canadian resident REIT unitholders may elect to have their
distributions automatically reinvested in additional REIT units. The Company has enrolled in the DRIP to maintain its economic and voting
interest in Crombie REIT.
The Company’s carrying value of its investment in Crombie REIT is as follows:
Balance, beginning of year
Equity earnings
Share of comprehensive income
Distributions, net of DRIP
Deferral of gains on sale of property
Reversal of deferred gain on sale of property to unrelated party
Interest acquired in Crombie REIT
Balance, end of year
The Company’s carrying value of its investment in Canadian real estate partnerships is as follows:
Balance, beginning of year
Equity earnings
Distributions
Investment
Balance, end of year
The Company’s carrying value of its investment in U.S. real estate partnerships is as follows:
Balance, beginning of year
Equity earnings
Distributions
Foreign currency translation adjustment
Investment
Dilution loss (Note 19)
Balance, end of year
The Company’s carrying value of its investment in CDCP is as follows:
Balance, beginning of year
Equity earnings
Share of comprehensive income
Distributions
Balance, end of year
May 6, 2017
May 7, 2016
$
$
366.8
41.5
0.7
(42.8)
(2.2)
1.7
93.4
$
459.1
$
365.6
38.9
1.4
(42.3)
(4.0)
7.2
–
366.8
May 6, 2017
May 7, 2016
$
$
148.5
28.2
(33.7)
–
$
143.0
$
143.4
38.5
(35.6)
2.2
148.5
May 6, 2017
May 7, 2016
$
$
50.2
6.9
(20.1)
1.1
0.4
(1.7)
$
36.8
$
59.3
8.2
(17.4)
1.3
1.8
(3.0)
50.2
May 6, 2017
May 7, 2016
$
$
9.4
0.9
–
(0.8)
9.5
$
$
9.5
0.5
0.1
(0.7)
9.4
The following amounts represent the revenues, expenses, assets, and liabilities of Crombie REIT as at and for the 12 months ended
March 31, 2017, as well as a reconciliation of the carrying amount of the Company’s investment in Crombie REIT to the net assets
attributable to unitholders of Crombie REIT:
Revenues
Expenses
Earnings before income taxes
Loss from continuing operations
Other comprehensive income
Total comprehensive loss
56
March 31, 2017 March 31, 2016
$
$
$
$
407.2
305.7
101.5
(28.3)
1.3
(27.0)
$
$
$
$
372.3
279.1
93.2
(24.2)
2.9
(21.3)
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Assets
Current
Non-current
Total
Liabilities
Current
Non-current
Total
Unitholders’ net assets
REIT Units
Class B LP Units
Less REIT Units
Cumulative changes since acquisition of Crombie REIT
Variances in timing of distributions
Issue costs related to Class B LP Units
Deferred gains (net of depreciation addback)
Dilution gains
Write off of portion of AOCI on dilution of interest in Crombie REIT
Carrying amount attributable to investment in Class B LP Units
REIT Units owned by Empire
Cumulative equity earnings on REIT Units
Cumulative distributions on REIT Units
Carrying amount of investment in Crombie REIT
March 31, 2017 March 31, 2016
$
35.7
3,916.6
$
59.8
3,301.2
$
3,952.3
$
3,361.0
$
205.1
2,363.2
$
165.9
2,028.5
$
2,568.3
$
2,194.4
$
830.5
553.5
1,384.0
(830.5)
$
705.9
460.7
1,166.6
(705.9)
4.5
12.6
(163.4)
38.6
0.7
446.5
13.8
2.4
(3.6)
$
459.1
$
4.0
12.6
(162.6)
38.6
0.7
354.0
13.8
1.8
(2.8)
366.8
The Company has interests in various Canadian real estate partnerships ranging from 40.7% to 49.0% which are involved in residential
property developments in Ontario and Western Canada.
The following amounts represent the revenues, expenses, assets, and liabilities of the Canadian real estate partnerships as at and for
the 12 months ended March 31, 2017:
Revenues
Expenses
Net earnings from continuing operations
Net earnings (loss) from discontinued operations
Net earnings
Current assets
Current liabilities
Net assets
Carrying amount of investment
March 31, 2017 March 31, 2016
$
$
$
131.6
77.9
53.7
15.4
69.1
$
$
$
150.6
62.5
88.1
(0.4)
87.7
March 31, 2017 March 31, 2016
$
$
$
330.4
36.1
294.3
143.0
$
$
$
334.2
29.9
304.3
148.5
The Company has interests in various U.S. real estate partnerships ranging from 37.1% to 42.1% which are involved in residential property
developments in the United States.
57
Annual Report 2017
The following amounts represent the revenues, expenses, assets, and liabilities of the U.S. real estate partnerships as at and for the
12 months ended March 31, 2017:
Revenues
Expenses
Net earnings
Current assets
Current liabilities
Net assets
Carrying amount of investment
8. OTHER ASSETS
Deferred lease assets
Derivative assets
Deferred financing costs
Other
Total
March 31, 2017 March 31, 2016
$
$
51.9
34.3
17.6
$
$
59.2
39.9
19.3
March 31, 2017 March 31, 2016
$
$
$
104.7
6.0
98.7
36.8
$
$
$
144.5
16.3
128.2
50.2
May 6, 2017
May 7, 2016
$
$
20.3
1.1
5.5
16.4
43.3
$
$
$
23.6
2.1
14.6
17.0
57.3
Total
5,420.6
481.0
5.6
(236.2)
(344.2)
9. PROPERTY AND EQUIPMENT
May 6, 2017
Land
Buildings
Equipment
Leasehold
Improvements
Assets Under
Construction
Cost
Opening balance
Additions
Additions from business acquisitions
Transfers
Disposals and write downs
$
625.1
10.6
–
(45.8)
(52.1)
$
1,295.5
10.6
–
32.4
(25.2)
$
2,499.3
125.6
5.6
20.3
(223.5)
$
703.9
34.6
–
3.3
(41.5)
$
296.8
299.6
–
(246.4)
(1.9)
Closing balance
$
537.8
$
1,313.3
$
2,427.3
$
700.3
$
348.1
$
5,326.8
Accumulated depreciation
and impairment losses
Opening balance
Disposals and write downs
Transfers
Depreciation
Impairment losses
Impairment reversals
Closing balance
Net carrying value
as at May 6, 2017
$
$
$
–
–
–
–
–
–
–
537.8
$
$
$
403.5
(11.5)
(7.7)
61.3
3.3
–
$
1,438.0
(214.8)
(66.2)
240.5
14.1
(0.3)
448.9
$
1,411.3
864.4
$
1,016.0
$
$
$
434.4
(40.3)
(15.3)
53.0
1.6
(0.1)
433.3
267.0
$
$
$
–
–
–
–
–
–
–
$
2,275.9
(266.6)
(89.2)
354.8
19.0
(0.4)
$
2,293.5
348.1
$
3,033.3
58
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 7, 2016
Land
Buildings
Equipment
Leasehold
Improvements
Assets Under
Construction
Cost
Opening balance
Additions
Additions from business acquisitions
Transfers
Disposals and write downs
$
712.9
68.2
2.3
(157.5)
(0.8)
$
1,491.9
55.7
3.5
(250.4)
(5.2)
$
2,472.6
159.4
13.5
87.7
(233.9)
$
691.6
32.6
0.8
13.1
(34.2)
$
211.8
326.3
0.1
(241.4)
–
$
Total
5,580.8
642.2
20.2
(548.5)
(274.1)
Closing balance
$
625.1
$
1,295.5
$
2,499.3
$
703.9
$
296.8
$
5,420.6
Accumulated depreciation
and impairment losses
Opening balance
Disposals and write downs
Transfers
Depreciation
Impairment losses
Impairment reversals
Closing balance
Net carrying value
as at May 7, 2016
Finance leases
$
$
$
–
–
–
–
–
–
–
625.1
$
$
$
368.4
(3.5)
(48.3)
69.9
17.4
(0.4)
$
1,387.4
(225.1)
(42.1)
250.8
68.6
(1.6)
403.5
$
1,438.0
892.0
$
1,061.3
$
$
$
324.6
(30.7)
(5.2)
63.5
82.4
(0.2)
434.4
269.5
$
$
$
–
–
–
–
–
–
–
$
2,080.4
(259.3)
(95.6)
384.2
168.4
(2.2)
$
2,275.9
296.8
$
3,144.7
The Company has various property leases for store locations classified as finance leases with a net carrying value of $11.3 as at May 6, 2017
(2016 – $5.0). These leases are included in buildings.
The Company has equipment leases classified as finance leases with a net carrying value of $15.8 as at May 6, 2017 (2016 – $30.8). These
leases are included in equipment.
Assets under construction
During the year, the Company capitalized borrowing costs of $2.2 (2016 – $1.9) on indebtedness related to property and equipment under
construction. The Company used a capitalization rate of 4.8 percent (2016 – 4.2 percent).
Security
As at May 6, 2017, the net carrying value of property pledged as security for borrowings is $62.2 (2016 – $67.5).
Impairment of property and equipment
The Company performed the impairment test for property and equipment and determined recoverable amounts based on VIU
calculations using cash flow projections from the Company’s latest internal forecasts. Key assumptions used in determining VIU include
discount rates, growth rates, and expected changes in cash flows. Management estimates discount rates using pre-tax rates that reflect
current market assessments of the time value of money and risks specific to the CGUs. Forecasts are projected beyond three years based on
long-term growth rates ranging from 3.0 to 5.0 percent. Discount rates are calculated on a pre-tax basis and range from 7.0 to 10.0 percent.
Impairment losses of $19.0 and reversals of $0.4 were recorded during the year ended May 6, 2017 (2016 – $168.4 and $2.2). During fiscal
2016, an impairment loss of $148.6 was recorded for property and equipment in the Sobeys West operating segment and was recognized
within impairment of goodwill and long-lived assets in the consolidated statements of earnings (loss).
All impairment losses and reversals relate to the food retailing segment.
59
Annual Report 2017
10. INVESTMENT PROPERTY
Investment property is primarily comprised of commercial properties owned by the Company held for income generating purposes, rather
than for the principal purpose of the Company’s operating activities.
Cost
Opening balance
Additions
Transfers
Disposals and write downs
Closing balance
Accumulated depreciation and impairment losses
Opening balance
Depreciation
Impairment expense
Transfers
Disposals and write downs
Closing balance
Net carrying value
Fair value
May 6, 2017
May 7, 2016
$
$
91.4
0.2
29.5
(2.1)
$
119.0
$
$
$
$
$
8.5
0.7
2.3
5.0
(0.5)
16.0
103.0
145.7
$
$
$
$
115.1
7.9
(26.3)
(5.3)
91.4
10.9
0.6
–
(3.2)
0.2
8.5
82.9
114.6
The fair value of investment property is classified as Level 3 on the fair value hierarchy. The fair value represents the price that would be
received to sell the assets in an orderly transaction between market participants at the measurement date.
An external, independent valuation company, having appropriate recognized professional qualifications and experience assisted in
determining the fair value of investment property at May 6, 2017 and May 7, 2016. Additions to investment property through acquisition
are transacted at fair value and therefore carrying value equals fair value at the time of acquisition. Properties reclassified from property
and equipment are valued for disclosure purposes using comparable market information or the use of an external independent
valuation company.
Rental income from investment property included in the consolidated statements of earnings (loss) amounted to $3.6 for the year ended
May 6, 2017 (2016 – $4.6).
Direct operating expenses (including repairs and maintenance but excluding depreciation expense) arising from investment property that
generated rental income amounted to $2.3 for the year ended May 6, 2017 (2016 – $2.3). Direct operating expenses (including repairs and
maintenance but excluding depreciation expense) arising from non-income producing investment property amounted to $1.0 for the year
ended May 6, 2017 (2016 – $1.0). All direct operating expenses for investment properties are included in selling and administrative
expenses on the consolidated statements of earnings (loss).
Impairment of investment property follows the same methodology as property and equipment (Note 3(q)). Impairment losses of $2.3 and
reversals of $ nil were recorded during the year ended May 6, 2017 (2016 – $ nil and $ nil).
60
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. INTANGIBLES
May 6, 2017
Cost
Opening balance
Additions, separately acquired
Additions from business acquisitions
Transfers
Disposals and write downs
Deferred
Brand
Purchase
Names Agreements
Prescription
Files
Software
Off
Market
Leases
Other
Total
$
201.0 $
–
–
–
–
143.0 $
10.5
–
0.7
(3.0)
305.2 $
–
0.5
(1.9)
(0.5)
258.8 $
1.1
–
35.5
(17.8)
179.8 $
–
–
0.5
(7.2)
199.5 $
12.5
3.0
0.3
(6.1)
1,287.3
24.1
3.5
35.1
(34.6)
Closing balance
$
201.0 $
151.2 $
303.3 $
277.6 $
173.1 $
209.2 $
1,315.4
Accumulated amortization
and impairment losses
Opening balance
Amortization
Impairment reversals
Transfers
Disposals and write downs
Closing balance
$
$
26.1 $
2.0
–
–
–
28.1 $
58.9 $
16.3
–
0.1
(2.8)
72.5 $
68.7 $
20.5
(0.4)
(1.7)
(0.5)
128.8 $
35.1
–
(0.1)
(17.6)
86.6 $
146.2 $
18.9 $
7.0
–
0.5
(1.2)
25.2 $
74.4 $
7.8
–
0.1
(6.0)
375.8
88.7
(0.4)
(1.1)
(28.1)
76.3 $
434.9
Net carrying value as at May 6, 2017 $
172.9 $
78.7 $
216.7 $
131.4 $
147.9 $
132.9 $
880.5
May 7, 2016
Cost
Opening balance
Additions, separately acquired
Additions from business acquisitions
Transfers
Disposals and write downs
Brand
Names
Deferred
Purchase
Agreements
Prescription
Files
Software
Off
Market
Leases
Other
Total
$
201.0 $
–
–
–
–
115.2 $
31.0
2.9
(2.7)
(3.4)
306.9 $
0.5
–
(2.2)
–
276.2 $
180.5 $
–
–
25.9
(43.3)
–
–
(0.7)
–
200.3 $
5.5
4.1
(0.3)
(10.1)
1,280.1
37.0
7.0
20.0
(56.8)
Closing balance
$
201.0 $
143.0 $
305.2 $
258.8 $
179.8 $
199.5 $
1,287.3
Accumulated amortization
and impairment losses
Opening balance
Amortization
Transfers
Disposals and write downs
Closing balance
$
$
23.1 $
3.0
–
–
26.1 $
46.9 $
15.5
(0.1)
(3.4)
58.9 $
49.0 $
20.6
(0.9)
–
68.7 $
137.8 $
33.9
0.4
(43.3)
128.8 $
11.4 $
7.4
0.1
–
18.9 $
73.9 $
8.6
1.0
(9.1)
74.4 $
342.1
89.0
0.5
(55.8)
375.8
Net carrying value as at May 7, 2016 $
174.9 $
84.1 $
236.5 $
130.0 $
160.9 $
125.1 $
911.5
In addition to development costs capitalized related to software, the Company included in selling and administrative expenses $3.4 of
research and development costs (2016 – $7.5).
Impairment of intangibles follows the same methodology as property and equipment (Note 3(q)). For the year ended May 6, 2017,
impairment losses of $ nil (2016 – $ nil) and reversals of $0.4 were recorded (2016 – $ nil).
Included in other intangibles at May 6, 2017 are liquor licenses of $7.8 (2016 – $4.1). These licenses have options to renew and it is the
Company’s intention to renew these licenses at each renewal date indefinitely. Therefore, there is no limit to which cash inflows will be
generated at each store location for which the license is valid, and these assets are considered to have indefinite useful lives. Also included
in other intangibles as at May 6, 2017 and May 7, 2016 are the following amounts with indefinite useful lives: Loyalty programs – $11.4
(2016 – $11.4) and Private labels – $59.5 (2016 – $59.5). The Company has also determined that Brand names with a net carrying value of
$172.8 (2016 – $172.8) have indefinite useful lives. All intangibles with indefinite useful lives relate to the food retailing segment. Impairment
of these intangibles is assessed at least annually on the same basis as goodwill (Note 12).
61
Annual Report 2017
12. GOODWILL
Opening balance
Additions from business acquisitions
Impairments
Other adjustments
Closing balance
May 6, 2017
May 7, 2016
$
998.7
5.8
(0.9)
(0.2)
$
3,835.7
39.8
(2,878.5)
1.7
$
1,003.4
$
998.7
Goodwill arising from business acquisitions is allocated at the lowest level within the organization at which it is monitored by management
to make business decisions and should not be larger than an operating segment before aggregation. Therefore, goodwill has been
allocated to the following five food retailing operating segments:
Atlantic
Lawtons
Ontario
Quebec
West
Total
Impairment of goodwill
May 6, 2017
May 7, 2016
$
$
193.8
17.1
172.6
617.5
2.4
$
1,003.4
$
193.8
17.1
172.2
615.6
–
998.7
Goodwill arising on business acquisitions is not amortized but is reviewed for impairment on an annual basis, or more frequently, if
indicators that goodwill may be impaired exist. The Company’s annual review of goodwill was performed during the third quarter of fiscal
2017, and resulted in an impairment of $0.9 being recorded (2016 – $2,878.5). In performing the review, the Company determined the
recoverable amount of the CGU to which goodwill relates based on FVLCD. The key assumptions used by management to determine the
fair value of the CGU includes industry earnings multiples in a range from 7.0 to 12.5 and is classified as Level 2 on the fair value hierarchy.
During fiscal 2016, management determined there were indicators of impairment in the West business unit as a result of the significant
operational challenges the Company has experienced under the Safeway banner, the outcome of the property and equipment impairment
test (Note 9), and the overall challenging economic climate mainly in the Alberta and Saskatchewan markets. For its impairment reviews,
management determined the recoverable amount of the CGUs based on VIU calculations which require the use of certain key
assumptions. VIU was calculated from cash flow projections for five years using financial data from the Company’s most up-to-date internal
forecasts and budgets that were formally approved by management. Given the risks related to expected variations in the cash flows and
the uncertainty the Company is experiencing in the West business unit the present value of the expected future cash flows used in the VIU
calculation reflects the weighted average of the most probable outcomes. Cash flows beyond the five-year period are extrapolated using
the estimated growth rates for the retail grocery industry in the particular market and the long-term economic growth of the country.
Management estimates its pre-tax discount rate based on the current market assessment of the time value of money and the risks specific
to the CGU. The pre-tax discount rate used ranged from 12.5 percent to 16.5 percent which is derived from the Company’s post-tax
weighted average cost of capital. The post-tax discount rate used was 10.0 percent. The Company’s operating margins are based on past
performance and management’s expectations for the future. Growth rates used to estimate future performance are generally consistent
with forecasts included in industry reports in the relevant market and is in line with market data. The Company has assumed a 3.0 percent
annual growth rate for its operating cash flows. A terminal growth rate of 3.0 percent was used to project cash flow beyond five years,
which is consistent with forecasts included in industry reports.
62
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES
Income tax expense (recovery) varies from the amount that would be computed by applying the combined federal and provincial statutory
tax rate as a result of the following:
Earnings (loss) before income taxes
Effective combined statutory income tax rate
Income tax expense (recovery) according to combined statutory income tax rate
Income taxes resulting from:
Non-deductible items
Impairments of goodwill and long-lived assets
Non-taxable items
Change in tax rates and rate differential
Change in tax legislation
Other
May 6, 2017
May 7, 2016
$
215.0
27.0%
58.1
$
(2,555.9)
26.6%
(679.9)
1.3
–
(4.0)
(1.8)
(7.7)
(3.4)
7.3
239.5
(3.1)
(3.8)
–
(1.3)
Total income tax expense (recovery), combined effective tax rate of 19.8% (2016 – 17.3%)
$
42.5
$
(441.3)
Current year income tax expense (recovery) attributable to net earnings (loss) consists of:
Current tax expense
Deferred tax recovery:
Origination and reversal of temporary differences
Change in tax rates
Total
Deferred taxes arising from temporary differences and unused tax losses can be summarized as follows:
May 6, 2017
May 7, 2016
$
96.3
$
104.2
(52.0)
(1.8)
$
42.5
$
(541.7)
(3.8)
(441.3)
May 6, 2017
Accounts payable and accrued liabilities
Employee future benefits
Equity
Goodwill and intangibles
Inventory
Investments
Long-term debt
Other assets
Other long-term liabilities
Property, equipment, and investment property
Provisions
Partnership deferral reserve
Losses
Other
Recognized as:
Deferred tax assets
Deferred tax liabilities
Recognized in:
Other
Comprehensive
Income and
Equity
Opening
Balance
Business
Acquisitions
Net
Earnings
Closing
Balance
$
$
$
$
3.6
91.9
12.3
293.6
4.9
(33.1)
14.2
(0.6)
20.6
(58.4)
86.9
(8.2)
76.6
0.2
504.5
646.2
(141.7)
$
$
$
$
–
8.2
–
–
–
(0.2)
–
–
–
–
–
–
–
–
8.0
8.2
(0.2)
$
$
$
$
–
–
–
(0.2)
–
–
–
–
–
–
–
–
–
–
(0.2)
–
(0.2)
$
$
$
$
(7.3)
4.5
(4.4)
(45.4)
0.2
(0.7)
(3.5)
0.2
6.6
20.3
(26.9)
16.4
93.9
(0.1)
53.8
55.5
(1.7)
$
$
$
$
(3.7)
104.6
7.9
248.0
5.1
(34.0)
10.7
(0.4)
27.2
(38.1)
60.0
8.2
170.5
0.1
566.1
709.9
(143.8)
63
Annual Report 2017
May 7, 2016
Accounts payable and accrued liabilities
Employee future benefits
Equity
Goodwill and intangibles
Inventory
Investments
Long-term debt
Other assets
Other long-term liabilities
Property, equipment, and investment property
Provisions
Partnership deferral reserve
Losses
Other
Recognized as:
Deferred tax assets
Deferred tax liabilities
Other
Comprehensive
Income and
Equity
Opening
Balance
Recognized in:
Business
Acquisitions
$
$
$
$
3.8
96.9
11.3
(199.7)
5.2
(19.8)
15.6
(0.5)
16.8
(93.6)
75.6
2.9
52.3
(0.4)
(33.6)
110.9
(144.5)
$
$
$
$
–
(4.3)
–
–
–
(2.8)
–
–
–
–
–
–
–
–
(7.1)
(4.3)
(2.8)
$
$
$
$
–
–
–
(0.5)
–
–
0.5
–
–
(0.3)
–
–
–
–
(0.3)
–
(0.3)
$
$
$
$
Net
Loss
(0.2)
(0.7)
1.0
493.8
(0.3)
(10.5)
(1.9)
(0.1)
3.8
35.5
11.3
(11.1)
24.3
0.6
545.5
539.6
5.9
$
$
$
$
Closing
Balance
3.6
91.9
12.3
293.6
4.9
(33.1)
14.2
(0.6)
20.6
(58.4)
86.9
(8.2)
76.6
0.2
504.5
646.2
(141.7)
As at May 6, 2017, the Company had approximately $615.0 of Canadian non-capital tax loss carry forwards, which expire between fiscal
2033 and 2037. The remaining deductable temporary differences do not expire under current income tax legislation. All deferred tax
assets (including tax losses and other tax credits) have been recognized in the consolidated balance sheets as it is probable that future
taxable income will be available to the company to utilize the benefits of those assets. The amount of deferred tax assets and deferred
tax liabilities that are expected to be recovered or settled beyond the next 12 months is $421.1.
14. PROVISIONS
May 6, 2017
Opening balance
Provisions made
Provisions used
Provisions reversed
Change due to discounting
Closing balance
Current
Non-current
Total
Lease contracts
Lease
Contracts
Legal
Environmental
Restructuring
Sales Price
Adjustment
$
$
$
$
24.8
16.3
(10.2)
(2.3)
1.3
29.9
13.5
16.4
29.9
$
$
$
$
7.7
5.8
(4.9)
(1.9)
–
6.7
6.7
–
6.7
$
$
$
$
51.4
1.6
(2.6)
(2.9)
1.5
49.0
2.6
46.4
49.0
$
$
$
$
150.5
22.3
(64.7)
(16.0)
4.2
96.3
53.3
43.0
96.3
$
$
$
$
72.2
–
(55.2)
(7.5)
2.5
12.0
12.0
–
12.0
$
$
$
$
Total
306.6
46.0
(137.6)
(30.6)
9.5
193.9
88.1
105.8
193.9
Lease contract provisions are recorded when the expected benefits to be derived by the Company from a contract are lower than the
unavoidable costs of meeting the obligations under the contract. The Company records onerous contract provisions for closed store
locations where it has entered into a lease contract. The provision is measured at the lower of the expected cost to terminate the lease
and the expected net cost of continuing the contract. The net cost is derived by considering both the lease payment and sublease income
received. Once the store is closed, a liability is recorded to reflect the present value of the expected liability associated with any lease
contract and other contractually obligated costs. Onerous contract provisions for planned store or distribution centre closures as part
of the Company’s rationalization activities are classified as restructuring provisions and are measured and recorded using the same
methodology. Discounting of provisions resulting from lease contracts has been calculated using pre-tax discount rates ranging between
7.0 and 9.0 percent.
64
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Legal costs
Legal provisions relate to claims of $6.7 that are outstanding as at May 6, 2017 (2016 – $7.7) that arose in the ordinary course of business.
Environmental costs
In accordance with legal and environmental policy requirements, the Company has recorded provisions for locations requiring
environmental restoration. These provisions relate to decommissioning liabilities recorded for gas station locations owned by the
Company and other sites where restoration will be incurred at the net present value of the estimated future remediation costs.
Discounting of environmental related provisions has been calculated using pre-tax discount rates ranging between 4.0 and 6.0 percent.
Restructuring
Restructuring provisions include onerous leases and severance amounts related to the Company’s initiatives to lower operating costs
and improve financial performance, which include store network rationalization, distribution centre restructuring and the organizational
realignment in the West. Discounting of restructuring related provisions has been calculated using a pre-tax discount rate of 7.0 percent.
Sales price adjustment
The Company disposed of certain manufacturing facilities in fiscal 2015 and as part of the asset purchase agreement, long-term supply
agreements were entered into that contain minimum purchase volume requirements. Under the terms of this asset purchase agreement,
should actual purchases for the calendar year ending 2016 differ from minimum volume requirements, the sales price is adjusted up or
down based on a volume-driven formula. During the year ended May 6, 2017, the Company paid $55.2 related to these long-term supply
agreements where minimum purchase volume requirements for calendar 2016 were not met. Management continues to negotiate final
settlement of these amounts. Discounting of the sales price adjustment provision has been calculated using a pre-tax discount rate of
7.0 percent.
15. LONG-TERM DEBT
First mortgage loans, weighted average interest rate 5.13%, due 2021 – 2033
Medium term notes, Series C, interest rate 7.16%, due February 26, 2018
Medium term notes, Series D, interest rate 6.06%, due October 29, 2035
Medium term notes, Series E, interest rate 5.79%, due October 6, 2036
Medium term notes, Series F, interest rate 6.64%, due June 7, 2040
Sinking fund debenture, weighted average interest rate 11.63%, due 2016
Series 2013-1 Notes, interest rate 3.52%, due August 8, 2018
Series 2013-2 Notes, interest rate 4.70%, due August 8, 2023
Senior unsecured notes, floating interest rate tied to bankers’ acceptance rate, due July 14, 2016
Notes payable and other debt primarily at interest rates fluctuating with the prime rate
Credit facilities due November 4, 2020, floating interest rate tied to bankers’ acceptance rates
Unamortized transaction costs
Finance lease obligations, weighted average interest rate 5.12%, due 2017 – 2040
Less amount due within one year
May 6, 2017
May 7, 2016
$
13.3
100.0
175.0
125.0
150.0
–
500.0
500.0
–
139.0
125.0
1,827.3
(8.5)
52.0
1,870.8
134.0
$
14.8
100.0
175.0
125.0
150.0
5.6
500.0
500.0
300.0
159.6
290.0
2,320.0
(10.7)
58.1
2,367.4
350.4
$
1,736.8
$
2,017.0
First mortgage loans are secured by land, buildings, and specific charges on certain assets. Finance lease obligations are secured by
the related finance lease asset. Medium term notes and Series 2013-1 and 2013-2 Notes are unsecured.
Sobeys completed a private placement of $300.0 aggregate principal amount of floating rate senior unsecured notes in fiscal 2015 that
matured on July 14, 2016 and were repaid.
On April 22, 2016, the Company extended the term of its $250.0 credit facility to a maturity date of November 4, 2020. As of May 6, 2017,
the outstanding amount of the credit facility was $125.0 (2016 – $90.0). Interest payable fluctuates with changes in the bankers’ acceptance
rate, Canadian prime rate, or the London Interbank Offered Rate (“LIBOR”).
Pursuant to an agreement dated April 29, 2016, Sobeys amended and restated its revolving term credit facility (“RT Facility”). The principal
amount was increased from $450.0 to $650.0 and Sobeys’ previous non-revolving, amortizing term credit facility was fully repaid and
cancelled. As of May 6, 2017, the outstanding amount of the RT Facility was $ nil (2016 – $200.0), and Sobeys issued $46.3 in letters of credit
against the RT Facility (2016 – $54.5). Interest payable on the RT Facility fluctuates with changes in the bankers’ acceptance rate, Canadian
prime rate, or LIBOR, and the facility matures on November 4, 2020.
65
Annual Report 2017
Principal debt retirement in each of the next five fiscal years is as follows:
2018
2019
2020
2021
2022
Thereafter
Finance lease liabilities
Finance lease liabilities are payable in each of the next five fiscal years as follows:
2018
2019
2020
2021
2022
Thereafter
Total
$
118.2
512.6
23.1
133.4
6.5
1,033.5
Future Minimum
Lease Payments
Present Value of
Minimum Lease
Payments
Interest
$
$
18.3
9.3
7.8
5.4
3.7
21.9
66.4
$
$
2.5
2.0
1.6
1.3
1.1
5.9
$
14.4
$
15.8
7.3
6.2
4.1
2.6
16.0
52.0
During fiscal 2017 the Company increased its finance lease obligation by $7.5 (2016 – $3.7) with a similar increase in assets under finance
leases. These additions are non-cash in nature, therefore have been excluded from the statements of cash flows.
16. OTHER LONG-TERM LIABILITIES
Deferred lease obligation
Deferred revenue
Other
Total
May 6, 2017
May 7, 2016
$
$
127.2
9.1
5.4
141.7
$
97.6
5.5
5.6
$
108.7
17. EMPLOYEE FUTURE BENEFITS
The Company has a number of defined contribution, defined benefit, and multi-employer plans providing pension and other post-
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.
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, and employer contributions fund the balance. The employer contributions are not
specified or defined within the plan text, but 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 defined benefit plan typically exposes the Company to actuarial risks such as interest rate risk, mortality risk and salary risk.
Interest rate risk
The present value of the defined benefit liability is calculated using a discount rate that reflects the average yield, as at the measurement
date, on high quality corporate bonds of similar duration to the plans’ liabilities. A decrease in the market yield on high quality corporate
bonds will increase the Company’s defined benefit liability.
66
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Mortality risk
The present value of the defined benefit plan is calculated by reference to the best estimate of the mortality of plan participants both
during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability.
Salary risk
The present value of the defined benefit plan liability is calculated by reference to the future salary of the plan participants. As such,
an increase in the salary of plan participants will increase the plan’s liability.
The Company uses either January 1 or December 31 as an actuarial valuation date and May 1 as a measurement date for accounting
purposes, for its defined benefit pension plans.
Retirement Pension Plans
Senior Management Pension Plans
Other Benefit Plans
Multi-employer plans
Most Recent Valuation Date
Next Required Valuation Date
December 31, 2016
December 31, 2016
January 1, 2016
December 31, 2019
December 31, 2019
January 1, 2019
The Company participates in various multi-employer pension plans which are administered by independent boards of trustees generally
consisting of an equal number of union and employer representatives. Approximately 17 percent of employees in the Company and
of its franchisees and affiliates participate in these plans. Defined benefit multi-employer pension plans are accounted for as defined
contribution plans as adequate information to account for the Company’s participation in the plans is not available due to the size and
number of contributing employers in the plans. The Company’s responsibility to make contributions to these plans is limited by amounts
established pursuant to its collective agreements. The contributions made by the Company to multi-employer plans are expensed as
contributions are due.
During the year ended May 6, 2017, the Company recognized an expense of $45.1 (2016 – $44.4) in operating income (loss), which
represents the contributions made in connection with multi-employer pension plans. During fiscal 2018, the Company expects to continue
to make contributions into these multi-employer pension plans.
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 contribution plans
The total expense, and cash contributions, for the Company’s defined contribution plans was $32.1 for the year ended May 6, 2017
(2016 – $30.3).
Defined benefit plans
Information about the Company’s defined benefit plans, in aggregate, is as follows:
Pension Benefit Plans
Other Benefit Plans
May 6, 2017
May 7, 2016
May 6, 2017
May 7, 2016
Defined benefit obligation
Balance, beginning of year
Current service cost, net of employee contributions
Interest cost
Benefits paid
Past service costs – curtailments
Settlements
Termination benefits
Remeasurement – actuarial losses (gains)
included in other comprehensive (loss) income
$
$
871.2
2.3
29.4
(57.7)
1.5
1.0
2.8
39.8
$
904.8
4.4
30.7
(59.7)
(9.1)
(2.2)
–
$
152.6
3.2
5.2
(5.2)
–
–
–
2.3
8.5
Balance, end of year
$
890.3
$
871.2
$
164.3
$
180.7
3.8
6.4
(6.8)
(1.3)
–
–
(30.2)
152.6
67
Annual Report 2017
Pension Benefit Plans
Other Benefit Plans
May 6, 2017
May 7, 2016
May 6, 2017
May 7, 2016
Plan assets
Fair value, beginning of year
Interest income on plan assets
Remeasurement return on plan assets (excluding amount in net interest)
Employer contributions
Benefits paid
Settlements
Administrative costs
$
$
687.0
23.1
19.6
9.8
(57.7)
–
(1.2)
Fair value, end of year
$
680.6
$
734.4
24.7
(17.8)
9.3
(59.7)
(2.2)
(1.7)
687.0
$
$
–
–
–
5.2
(5.2)
–
–
$
–
$
–
–
–
6.8
(6.8)
–
–
–
Funded status
Total fair value of plan assets
Present value of unfunded obligations
Present value of partially funded obligations
Accrued benefit liabilities
Pension Benefit Plans
Other Benefit Plans
May 6, 2017
May 7, 2016
May 6, 2017
May 7, 2016
$
$
680.6
(95.7)
(794.6)
687.0
(93.6)
(777.6)
$
$
–
(164.3)
–
$
(209.7)
$
(184.2)
$
(164.3)
$
–
(152.6)
–
(152.6)
Pension Benefit Plans
Other Benefit Plans
May 6, 2017
May 7, 2016
May 6, 2017
May 7, 2016
Expenses
Current service cost, net of employee contributions
Net interest on net defined benefit liability
Administrative costs
Past service costs – curtailments
Termination benefits
Settlement loss
$
$
2.3
6.3
1.2
1.5
2.8
1.0
Costs
$
15.1
$
4.4
6.0
1.7
(9.1)
–
–
3.0
$
$
3.2
5.2
–
–
–
–
8.4
$
$
3.8
6.4
–
(1.3)
–
–
8.9
Current and past service costs have been recognized within selling and administrative expenses, whereas interest costs and return on
plan assets (excluding amounts in net interest costs) have been recognized within finance costs, net in the consolidated statements of
earnings (loss).
Actuarial gains and losses recognized directly in other comprehensive (loss) income:
Remeasurement effects recognized
in other comprehensive (loss) income
Return on plan assets (excluding amounts in net interest)
Actuarial (gain) loss – experience changes
Actuarial loss – demographic assumptions
Actuarial loss – financial assumptions
Remeasurement effects recognized
in other comprehensive (loss) income
Pension Benefit Plans
Other Benefit Plans
May 6, 2017
May 7, 2016
May 6, 2017
May 7, 2016
$
$
(19.6)
(1.2)
2.4
38.6
$
17.8
0.8
–
1.5
$
–
(0.1)
–
8.6
–
(34.6)
–
4.4
$
(20.2)
$
(20.1)
$
(8.5)
$
30.2
The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations are as follows (weighted-average
assumptions as of May 6, 2017):
Discount rate
Rate of compensation increase
68
Pension Benefit Plans
Other Benefit Plans
May 6, 2017
May 7, 2016
May 6, 2017
May 7, 2016
3.25%
3.50%
3.50%
3.50%
3.25%
3.50%
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For measurement purposes, a 5.75 percent fiscal 2017 annual rate of increase in the per capita cost of covered health care benefits was
assumed (2016 – 6.00 percent). The cumulative rate expectation to 2020 and thereafter is 5.00 percent.
These assumptions were developed by management under consideration of expert advice provided by independent actuarial appraisers.
These assumptions have led to the amounts determined as the Company’s defined benefit obligations and should be regarded as
management’s best estimate. However, the actual outcome may vary. Estimation uncertainties exist especially in regard to medical cost
trends, which may vary significantly in future appraisals of the Company’s defined benefit and other benefit obligations.
The table below outlines the sensitivity of the fiscal 2017 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 impact on the accrued benefit
obligations or benefit plan expenses.
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 Benefit Plans
Other Benefit Plans
Benefit
Obligations
3.25%
(111.4)
139.8
$
$
$
$
Benefit
Cost(1)
3.25%
(3.5)
2.1
Benefit
Obligations
3.25%
(20.6)
25.5
5.75%
19.2
(15.9)
$
$
$
$
$
$
$
$
Benefit
Cost(1)
3.25%
0.2
(0.4)
5.75%
1.2
(1.0)
(1) Reflects the impact on the current service cost, interest cost, and net interest on defined benefit liability (asset).
(2) Based on weighted average of discount rates related to all plans.
(3) Gradually decreasing to 5.00 percent in 2020 and remaining at that level thereafter.
The asset mix of the defined benefit pension plans as at year end is as follows:
Canadian equity funds
Foreign equity funds
Fixed income funds
Net working capital
Total investments
May 6, 2017
May 7, 2016
8.8%
11.7%
79.2%
0.3%
10.3%
8.6%
80.9%
0.2%
100.0%
100.0%
Within these securities are investments in Empire Non-Voting Class A shares. The pro-rata market value of these shares at year end is
as follows:
Empire Company Limited Non-Voting Class A shares
May 6, 2017
$
8.9
% of Plan
Assets
May 7, 2016
1.3%
$
10.8
% of Plan
Assets
1.6%
All of the securities are valued based on quoted prices (unadjusted) in active markets for identical assets or liabilities or based on
inputs other than quoted prices in active markets that are observable for the asset or liability, either directly (i.e. as prices) or indirectly
(i.e. derived from prices).
The actual return on plan assets was $41.5 for the year ended May 6, 2017 (2016 – $5.2).
Management’s best estimate of contributions expected to be paid to the defined benefit pension plans during the annual period
beginning on May 7, 2017 and ending on May 5, 2018 is $23.3.
18. CAPITAL STOCK
Authorized
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
Number of Shares
May 6, 2017
May 7, 2016
991,980,000
768,105,849
122,400,000
991,980,000
768,105,849
122,400,000
69
Annual Report 2017
Issued and outstanding
Non-Voting Class A
Class B common
Shares held in trust
Total
Number of Shares
May 6, 2017
May 7, 2016
173,537,901
98,138,079
(555,409)
$
2,037.8
7.3
(10.7)
$
2,037.8
7.3
–
$
2,034.4
$
2,045.1
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.
During fiscal 2017, the Company paid common dividends of $111.3 (2016 – $109.4) to its equity holders. This represents a payment of
$0.41 per share (2016 – $0.40 per share) for common share holders.
During the second quarter of fiscal 2017, the Company established a trust fund to facilitate the purchase of Non-Voting Class A shares for
the future settlement of vested units under the Company’s equity settled stock-based compensation plans. Contributions to the trust fund
and the Non-Voting Class A shares purchased are held by CST Trust Company as trustee. The trust fund is an SE and as such the accounts
of the trust fund are included in the consolidated financial statements of the Company. During fiscal 2017, the trust fund purchased 555,409
Non-Voting Class A shares for $10.7. These Non-Voting Class A shares have been recorded as a reduction to both capital stock and the
weighted average number of common shares outstanding.
Share split
On September 28, 2015, the Company effected a three-for-one share split by delivering two additional shares for each share held by
Non-Voting Class A and Class B shareholders of record as of the close of business on September 21, 2015. Non-Voting Class A shares
commenced trading on a split basis as of September 29, 2015. All number of share and per share amounts have been restated in these
consolidated financial statements to reflect the share split.
Normal course issuer bid
On March 12, 2015, the Company filed a notice of intent with the Toronto Stock Exchange (“TSX”) to purchase for cancellation up to
1,788,584 Non-Voting Class A shares, or 5,365,752 Non-Voting Class A shares post-share split, representing approximately three percent of
those outstanding. Purchases commenced on March 17, 2015, and terminated by March 16, 2016. During the second quarter of fiscal 2016,
the Company purchased for cancellation 5,365,752 Non-Voting Class A shares which fulfilled the normal course issuer bid. The purchase
price was $148.1 of which $64.8 of the purchase price was accounted for as a reduction to share capital and the remainder as a reduction
to retained earnings.
On March 14, 2016, the Company filed a notice of intent with the TSX to purchase for cancellation up to 5,206,137 Non-Voting Class A
shares, representing approximately three percent of those outstanding. Purchases were to commence on March 17, 2016, and terminate
on March 16, 2017. Empire did not repurchase any Non-Voting Class A shares since the date of notice.
19. OTHER INCOME (LOSS)
Net gain (loss) on disposal of assets
Lease revenue from owned property
Dilution losses
Total
May 6, 2017
May 7, 2016
$
$
23.0
26.9
(1.7)
48.2
$
$
(39.6)
31.7
(3.0)
(10.9)
During fiscal 2016 management recognized a loss on sale of $70.9 related to disposed assets based on the sales price adjustment under
the terms of the asset purchase agreement (Note 14).
20. EMPLOYEE BENEFITS EXPENSE
Wages, salaries and other short-term employment benefits
Post-employment benefits
Termination benefits
Total
70
May 6, 2017
May 7, 2016
$
3,078.3
44.2
14.9
$
3,058.0
29.8
3.6
$
3,137.4
$
3,091.4
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21. FINANCE COSTS, NET
Finance income
Interest income from cash and cash equivalents
Fair value gains (losses) on forward contracts
Investment income
Accretion income on loans and other receivables
Total finance income
Finance costs
Interest expense on financial liabilities measured at amortized cost
Losses on cash flow hedges reclassified from other comprehensive (loss) income
Net pension finance costs
Accretion expense on provisions
Total finance costs
Finance costs, net
22. EARNINGS PER SHARE
Weighted average number of shares – basic (Note 18)
Shares deemed to be issued for no consideration in respect of stock-based payments
Weighted average number of shares – diluted
May 6, 2017
May 7, 2016
$
$
0.4
3.3
1.2
1.2
6.1
103.1
–
11.5
9.5
124.1
118.0
$
$
1.4
(0.2)
1.2
0.7
3.1
113.8
0.2
12.4
14.1
140.5
137.4
May 6, 2017
May 7, 2016
271,948,133
3,374
273,851,466
195,738
271,951,507
274,047,204
Due to the Company’s reported net loss for the 53 weeks ended May 7, 2016, an equal weighted average number of shares was used for
the purpose of basic and diluted loss per share, as the impact of all potential common shares would have been anti-dilutive.
23. BUSINESS ACQUISITIONS
The Company acquires franchise and non-franchise stores, retail gas locations 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 acquisition method. Goodwill recorded on the acquisitions of franchise and non-franchise stores and retail gas locations relate to
the acquired work force and customer base of the existing store location, along with the synergies expected from combining the efforts
of the acquired stores with existing stores.
The following table represents the amounts of identifiable assets and liabilities from resulting acquisitions for the year ended May 6, 2017
and May 7, 2016:
Stores and retail gas locations
Receivables
Inventories
Property and equipment
Intangibles
Goodwill
Provisions
Other liabilities
Prescription files
Intangibles
Cash consideration
May 6, 2017
May 7, 2016
$
$
–
7.0
5.6
3.0
5.8
–
–
21.4
0.5
21.9
$
$
12.0
17.5
20.2
7.0
39.8
(0.5)
(5.3)
90.7
–
90.7
From the date of acquisition, the businesses acquired contributed sales of $104.3 and net earnings of $ nil for the year ended May 6, 2017.
71
Annual Report 2017
Co-op Atlantic acquisition
On May 12, 2015 an agreement to purchase certain assets and assume select liabilities of Co-op Atlantic’s food and fuel business for $24.5
plus standard working capital adjustments and holdbacks was approved by Co-op Atlantic’s member-owners. The agreement provides for
the purchase of five full service grocery stores, five fuel stations (two co-located with grocery stores), other real estate assets, and other
assets and select liabilities. On June 12, 2015, regulatory clearance was obtained from the Competition Bureau and the transaction closed
effective June 21, 2015.
During fiscal 2016, management finalized the purchase price allocation related to the Co-op Atlantic acquisition. As a result, the
consolidated balance sheet as at May 6, 2017 includes the following fair value of the identifiable assets acquired and liabilities assumed:
Receivables
Inventories
Property and equipment
Intangibles
Provisions
Other liabilities
Total identifiable net assets
Excess consideration paid over identifiable net assets acquired allocated to goodwill
$
$
$
11.8
9.4
7.8
0.9
(0.5)
(4.8)
24.6
16.8
The goodwill recognized is attributable mainly to the expected synergies from integration and the expected future growth potential
in wholesale operations. Goodwill of $12.6 is deductible for income tax purposes.
If the acquisition had occurred on May 3, 2015, management estimates that pro forma consolidated sales would have been $24,637.2
and pro forma consolidated net loss would have been $(2,113.5) for the 53 weeks ended May 7, 2016. In determining these amounts,
management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the
acquisitions had occurred on May 3, 2015.
Acquisition costs of $0.6 relating to external legal and other costs were incurred during the 53 weeks ended May 7, 2016 and have been
included in selling and administrative expenses in the consolidated statements of earnings (loss).
24. GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES
Guarantees
Franchisees and affiliates
Sobeys is party to a number of franchise and operating agreements as part of its business model. These agreements contain clauses which
require the Company to provide support to franchisee and affiliate operators to offset or mitigate retail store losses, reduce store rental
payments, minimize the impact of promotional pricing, and assist in covering other store related operating expenses. Not all of the
financial support noted above will apply in each instance as the provisions of the agreements vary. The Company will continue to provide
financial support pursuant to the franchise and operating agreements in future years.
Sobeys had a guarantee contract under the terms of which, should certain franchisees and affiliates be unable to fulfill their lease
obligations, Sobeys would be required to fund the greater of $7.0 or 9.9 percent (2016 – $7.0 or 9.9 percent) of the authorized and
outstanding obligation. During the year ended May 6, 2017, the guarantee contract expired.
Sobeys had guaranteed certain equipment leases of its franchisees and affiliates. Under the terms of the guarantee should franchisees and
affiliates be unable to fulfill their equipment lease obligations, Sobeys would be required to fund the difference of the lease commitments
up to a maximum of $145.0 on a cumulative basis. During the year ended May 6, 2017, the guarantee contract expired.
During fiscal 2009, Sobeys entered into an additional credit enhancement contract in the form of a standby letter of credit for certain
franchisees and affiliates for the purchase and installation of equipment. Under the terms of the contract, should franchisees and affiliates
be unable to fulfill their lease obligations or provide an acceptable remedy, Sobeys would be required to fund the greater of $6.0 or
10.0 percent (2016 – $6.0 or 10.0 percent) of the authorized and outstanding obligation annually. Under the terms of the contract, Sobeys
is required to provide a letter of credit in the amount of the outstanding guarantee, to be revisited each calendar year. This credit
enhancement allows Sobeys to provide favourable financing terms to certain franchisees and affiliates. The contract terms have been
reviewed and Sobeys determined that there were no material implications with respect to the consolidation of SEs. As at May 6, 2017,
the amount of the guarantee was $6.0 (2016 – $6.0).
72
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Other
At May 6, 2017, the Company was contingently liable for letters of credit issued in the aggregate amount of $62.2 (2016 – $66.6).
Sobeys, through its subsidiaries, has guaranteed the payment of obligations under certain commercial development agreements.
As at May 6, 2017, Sobeys has guaranteed $43.5 (2016 – $43.5) in obligations related to these agreements.
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 its obligations under the lease. The remaining term of the lease is three years with an aggregate obligation
of $10.4 (2016 – $13.4). 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.
Commitments
Operating leases, as lessee
The Company leases various retail stores, distribution centres, offices, and equipment under non-cancellable operating leases. These
leases have varying terms, escalation clauses, renewal options, and bases on which contingent rent is payable.
The total net, future minimum rent payable under the Company’s operating leases as of May 6, 2017 is approximately $4,450.1. This reflects a
gross lease obligation of $5,330.5 reduced by expected sub-lease income of $880.4. The net commitments over the next five fiscal years are:
2018
2019
2020
2021
2022
Thereafter
Third Parties
Related Parties
Net Lease
Obligation
Gross Lease
Obligation
Net Lease
Obligation
Gross Lease
Obligation
$
257.7
240.6
222.5
200.9
176.7
986.3
$
359.6
332.6
308.1
280.2
248.7
1,435.9
$
148.0
143.7
142.5
142.9
142.7
1,645.6
$
148.0
143.7
142.5
142.9
142.7
1,645.6
The Company recorded $566.1 (2016 – $542.3) as an expense for minimum lease payments for the year ended May 6, 2017 in the
consolidated statements of earnings (loss). The expense was offset by sub-lease income of $104.9 (2016 – $115.8), and a further $13.1
(2016 – $12.3) of expense was recognized for contingent rent.
Operating leases, as lessor
The Company also leases most investment properties under operating leases. These leases have varying terms, escalation clauses,
renewal options and bases on which contingent rent is receivable.
Rental income for the year ended May 6, 2017 was $26.2 (2016 – $31.4) and was recognized within other income (loss) in the consolidated
statements of earnings (loss). In addition, the Company recognized $0.3 of contingent rent for the year ended May 6, 2017 (2016 – $0.3).
The lease payments expected to be received over the next five fiscal years are:
2018
2019
2020
2021
2022
Thereafter
Contingent liabilities
Third Parties
$
20.6
19.3
17.2
15.3
14.1
95.6
On June 21, 2005, Sobeys received a notice of reassessment from Canada Revenue Agency (“CRA”) for fiscal years 1999 and 2000 related
to Lumsden Brothers Limited, a wholesale subsidiary of Sobeys, and the Goods and Service Tax (“GST”). The reassessment related to GST
on sales of tobacco products to status Indians. 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 (2016 – $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. The matter is still under dispute and Sobeys has filed a Notice of Appeal with the Tax Court of Canada. Accordingly, Sobeys has
not recorded in its statements of earnings (loss) 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.
73
Annual Report 2017
There are various claims and litigation, with which the Company is involved, 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.
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.
25. 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 cash and cash equivalents, receivables,
loans and other receivables, derivative contracts and guarantees.
The Company’s maximum exposure to credit risk corresponds to the carrying amount for all cash and cash equivalents, loans and
receivables, and guarantee contracts for franchisees and affiliates (Note 24).
The Company mitigates credit risk associated with its trade receivables, and loans 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 receivables and 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 counterparties that are dual rated by recognized credit rating agencies and have a credit rating of “A” or better
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 credit losses
Less: allowance for credit losses
Receivables
May 6, 2017
May 7, 2016
$
$
342.7
23.3
75.2
441.2
(27.6)
$
413.6
$
410.7
31.5
73.1
515.3
(25.9)
489.4
Interest earned on past due accounts is recorded as a reduction to selling and administrative expenses in the consolidated statements of
earnings (loss). Receivables are classified as current on the consolidated balance sheet as of May 6, 2017.
Allowance for credit losses is reviewed at each balance sheet date. An allowance is taken on receivables from independent accounts,
as well as receivables, loans and other receivables from franchisee or affiliate locations and is recorded as a reduction to its respective
receivable account on the consolidated balance sheets. The Company updates its estimate for credit losses based on past due balances
from independent accounts and based on an evaluation of recoverability net of security assigned for franchisee or affiliate locations.
Current and long-term receivables, loans and other receivables are reviewed on a regular basis and are written-off when collection is
considered unlikely. The change in allowance for credit losses is recorded as selling and administrative expenses in the consolidated
statements of earnings (loss) and is presented as follows:
Allowance, beginning of year
Provision for losses
Recoveries
Write-offs
Allowance, end of year
74
May 6, 2017
May 7, 2016
$
$
25.9
5.4
(0.4)
(3.3)
27.6
$
$
21.8
9.9
(0.8)
(5.0)
25.9
Empire Company LimitedNOTES 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 a committed credit facility 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, and monitors its cash flows in order to assist in optimizing its cash
position and evaluate longer term cash and funding requirements. 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 amount and the contractual maturities of both the interest and principal portion of significant financial
liabilities on an undiscounted basis as at May 6, 2017:
2018
2019
2020
2021
2022
Thereafter
Total
Derivative financial liabilities
Foreign currency swaps
Non-derivative financial liabilities
Accounts payable
and accrued liabilities
Long-term debt
$
2.4 $
2.4 $
12.9 $
– $
– $
– $
17.7
2,230.2
219.7
–
585.9
–
89.5
–
195.0
–
64.7
–
1,476.6
2,230.2
2,631.4
Total
$
2,452.3 $
588.3 $
102.4 $
195.0 $
64.7 $
1,476.6 $
4,879.3
Fair value of financial instruments
The fair value of a financial instrument is the estimated amount that the Company would receive to sell financial assets or pay to transfer
financial liabilities in an orderly transaction between market participants at the measurement date.
The book value of cash and cash equivalents, receivables, current portion of loans and other receivables, and accounts payable and
accrued liabilities approximate fair values at the balance sheet dates due to the short term maturity of these instruments.
The book value of the long-term portion of loans and other receivables, and investments approximate fair values at the balance sheet
dates due to the current market rates associated with these instruments.
The fair value of the variable rate long-term debt is assumed to approximate its carrying amount based on current market rates and
consistency of credit spread. The fair value of long-term debt has been estimated by discounting future cash flows at a rate offered for
borrowings of similar maturities and credit quality.
The fair value of derivative financial assets and liabilities, classified as Level 2, is estimated using valuation models that utilize market based
observable inputs. Management believes that its valuation technique is appropriate.
There were no transfers between classes of the fair value hierarchy during the year ended May 6, 2017.
The carrying amount of the Company’s financial instruments approximates their fair values with the following exception:
Long-term debt
Total carrying amount
Total fair value
May 6, 2017
May 7, 2016
$
$
1,870.8
1,893.0
$
$
2,367.4
2,489.4
As at May 6, 2017, the fair value hierarchy includes financial assets at fair value through profit or loss of $ nil, $1.1, and $ nil for Levels 1, 2
and 3 respectively (2016 – $ nil, $2.1, and $ nil).
As at May 6, 2017, the fair value hierarchy includes financial assets at available for sale of $25.1 in Level 1 (2016 – $24.7).
As at May 6, 2017, the fair value hierarchy includes financial liabilities at fair value through profit or loss of $ nil, $0.9, and $ nil for Levels 1, 2
and 3 respectively (2016 – $ nil, $0.9, and $ nil).
Derivative financial instruments
Derivative financial instruments are recorded on the consolidated balance sheets 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 net earnings or loss
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 other long-term liabilities with the effective portion
recorded in other comprehensive income or loss.
75
Annual Report 2017
Cash flow hedges
The Company’s cash flow hedges consist principally of foreign currency swaps and electricity sales agreements. Foreign exchange contracts
are used to hedge future purchases or expenditures of foreign currency denominated goods or services. Electricity sales agreements are
used to mitigate the risk of changes in market prices of electricity. Gains and losses are initially recognized directly in other comprehensive
income or loss and are transferred to net earnings or loss when the forecast cash flows affect income or expense for the year.
As of May 6, 2017, the fair values of the outstanding derivatives designated as cash flow hedges of forecast transactions were assets of $1.1
(2016 – $2.1) and liabilities of $0.9 (2016 – $0.9).
Cash flows from cash flow hedges are expected to flow over the next three years until fiscal 2020, and are expected to be recognized in net
earnings or loss over this period, and, in the case of foreign currency swaps, over the life of the related debt in which a portion of the initial
cost is being hedged.
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 Company manages interest rate risk by monitoring market conditions and the impact of interest rate fluctuations on its debt. The
majority of the Company’s long-term debt is at fixed interest rates. Approximately 23.1 percent (2016 – 29.5 percent) of the Company’s
long-term debt is exposed to interest rate risk due to floating rates.
Net earnings or loss is sensitive to the impact of a change in interest rates on the average balance of interest bearing financial liabilities
during the year. For the year ending May 6, 2017, the Company’s average outstanding unhedged floating rate debt was $493.1 (2016 –
$689.1). An increase (decrease) of 25 basis points would have impacted net earnings (loss) by $0.9 ($0.9) (2016 – $1.2 ($1.2)) as a result of
the Company’s exposure to interest rate fluctuations on its unhedged floating rate debt.
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 foreign currencies. Amounts received or paid related to instruments used to hedge foreign exchange,
including any gains and losses, are recognized in the cost of purchases. The Company does not consider its exposure to foreign currency
exchange risk to be material.
The Company has entered into foreign currency forward contracts and foreign currency swaps 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 or loss until the variability in cash flows being hedged is recognized in net earnings or
loss in future accounting periods.
The Company estimates that a 10 percent increase (decrease) in applicable foreign currency exchange rates would impact net earnings
(loss) by $ nil ($ nil) (2016 – $ nil ($ nil)) and other comprehensive (loss) income by $1.3 ($1.3) (2016 – $6.0 ($6.0)) for foreign currency
derivatives in place at year end.
During the year ended May 7, 2016, Sobeys entered into seven Euro/Canadian dollar forward contracts at an approximate Canadian dollar
value at inception of $68.6. The forward contracts were entered into to hedge and limit exposure to exchange rate fluctuations relating to
future expenditures in Euros. The forward contracts matured on March 1, 2017.
Market risk
Market risk is the risk that the fair value of investments will fluctuate as a result of changes in the price of the investment. The Company
estimates that a 10 percent change in the market value of its investments that trade on a recognized stock exchange would impact net
earnings (loss) by $ nil (2016 – $ nil) and other comprehensive (loss) income by $2.2 (2016 – $2.1).
26. SEGMENTED INFORMATION
The Company’s reportable segments are Food retailing and Investments and other operations, which is based on the Company’s
management and internal reporting structure. The Food retailing segment is comprised of five operating segments: Sobeys West,
Sobeys Ontario, Sobeys Quebec, Sobeys Atlantic, and Sobeys Pharmacy Group. These operating segments have been aggregated
into one reportable segment, “Food retailing”, as they all share similar economic characteristics such as: product offerings, customer
base and distribution methods. The Investments and other operations segment principally consists of investments, at equity, in Crombie
REIT, real estate partnerships, and various other corporate operations.
76
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Segment results and assets include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Each of these operating segments is managed separately as each of these segments requires different technologies and other resources
as well as marketing approaches. All inter-segment transfers are carried out at arm’s length prices. The measurement policies the Company
uses for segment reporting under IFRS 8, “Operating Segments”, are the same as those used in its consolidated financial statements.
No asymmetrical allocations of income, expense or assets have been applied between segments.
All sales are generated by the Food retailing segment. Operating income (loss) generated by each of the Company’s business segments is
summarized as follows:
Segmented operating income (loss)
Food retailing
Investments and other operations
Crombie REIT
Real estate partnerships
Other operations, net of corporate expenses
Total
May 6, 2017
May 7, 2016
$
259.3
$
(2,509.2)
41.5
35.1
(2.9)
73.7
38.9
46.7
5.1
90.7
$
333.0
$
(2,418.5)
Segment operating income (loss) can be reconciled to the Company’s earnings (loss) before income taxes as follows:
Total operating income (loss)
Finance costs, net
Total
Total assets by segment
Food retailing
Investments and other operations
Total
May 6, 2017
May 7, 2016
$
$
333.0
118.0
215.0
$
(2,418.5)
137.4
$
(2,555.9)
May 6, 2017
May 7, 2016
$
7,949.9
745.6
$
8,463.3
675.2
$
8,695.5
$
9,138.5
27. STOCK-BASED COMPENSATION
Performance share unit plan
The Company awarded certain employees a target number of performance share units (“PSUs”) that track the Company’s Non-Voting
Class A share prices over a three-year period. The number of PSUs that vest under an award, for the most part, is dependent on time and
the achievement of specific performance measures. Upon vesting, each employee is entitled to receive Non-Voting Class A shares equal
to the number of their vested PSUs. The weighted average fair value of $19.23 per PSU issued in the current year was determined using
the Black Scholes model with the following weighted average assumptions:
Share price
Expected life
Risk-free interest rate
Expected volatility
Dividend yield
$20.16
2.27 years
0.73%
19.48%
2.07%
At May 6, 2017, there were 861,933 (2016 – 939,555) PSUs outstanding. The compensation expense for the year ended May 6, 2017 was $ nil
(2016 – $1.2).
77
Annual Report 2017
Stock option plan
During fiscal 2017, the Company granted 1,642,700 options under the stock option plan for employees of the Company whereby options
are granted to purchase Non-Voting Class A shares. On September 28, 2015, the Company completed a three-for-one share split. The
number of outstanding options, weighted average fair value of options, and share price have been restated to reflect the three-for-one
share split. The weighted average fair value of $2.92 per option issued during the year was determined using the Black Scholes model
with the following weighted average assumptions:
Share price
Expected life
Risk-free interest rate
Expected volatility
Dividend yield
$20.40
7.92 years
0.68%
19.17%
2.02%
The compensation cost for the year ended May 6, 2017 was $3.3 (2016 – $3.6) with amortization of the cost over the vesting period of four
years. The total increase in contributed surplus in relation to the stock option compensation cost was $3.3 (2016 – $3.6).
The outstanding options at May 6, 2017 were granted at prices between $15.60 and $30.87 and expire between May 2018 and June 2024
with a weighted average remaining contractual life of 5.46 years. Stock option transactions during fiscal 2017 and 2016 were as follows:
Balance, beginning of year
Granted
Exercised
Forfeited
Balance, end of year
Stock options exercisable, end of year
2017
2016
Weighted
Average
Exercise
Price
25.94
20.40
–
23.51
24.27
Number of
Options
3,655,322
1,642,700
–
(348,159)
$
4,949,863
$
3,334,369
Number of
Options
3,364,995
753,845
(135,712)
(327,806)
$
3,655,322
$
2,206,342
The following table summarizes information about stock options outstanding at May 6, 2017:
Year Granted
2011
2012
2013
2014
2015
2016
2017
Total
Options Outstanding
Options Exercisable
Number of
Outstanding
Options
14,418
10,392
14,262
1,992,568
844,957
602,778
1,470,488
4,949,863
Weighted
Average
Remaining
Contractual
Life(1)
1.15
2.16
3.16
4.16
5.17
6.17
7.18
5.46
Weighted
Average
Exercise
Price
17.33
18.13
17.98
26.30
22.43
30.10
20.36
24.27
$
$
$
Number
Exercisable
at May 6,
2017
14,418
10,392
14,262
1,992,568
633,717
301,390
367,622
3,334,369
$
Weighted
Average
Exercise
Price
24.86
30.13
20.09
26.90
25.94
Weighted
Average
Exercise
Price
17.33
18.13
17.98
26.30
22.43
30.10
20.36
25.15
(1) Weighted average remaining contractual life is expressed in years.
Deferred stock unit plan
In the first quarter of fiscal 2017, the Company implemented a new employee deferred stock unit (“DSU”) plan. The number of DSUs that
vest is dependent on time and the achievement of specific performance measures. At May 6, 2017 there were 578,444 (2016 – nil) DSUs
outstanding related to this plan and the total carrying amount of the liability was $1.9 (2016 – $ nil). The compensation expense during
the year ended May 6, 2017 was $1.9 (2016 – $ nil) with the amortization of the cost over the vesting period of three years.
Members of the Board of Directors may elect to receive all or any portion of their fees in 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 directors’ fee payment date. Additional
DSUs are received as dividend equivalents. At May 6, 2017 there were 263,199 (2016 – 426,792) DSUs outstanding and the total carrying
amount of the liability was $5.7 (2016 – $9.0). During the year ended May 6, 2017, the compensation expense (reversal) was $1.5 (2016 – $(2.1)).
78
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Under both plans, vested DSUs cannot be redeemed until the holder is no longer a director of the Company or the employee has retired
or leaves the Company. The redemption value of a DSU equals the market value of an Empire Non-Voting Class A share at the time of
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 or decrease in the DSU obligation as selling and administrative expenses on the
consolidated statements of earnings (loss).
Phantom performance option plan
Prior to fiscal 2014, Sobeys’ executives participated in the Sobeys phantom performance option plan (“PPOP”) which provided for the
issuance of phantom performance options (“PPOs”). The PPOs are subject to a performance period or term of five years. Sobeys PPOs
were granted to officers and senior management of Sobeys as approved by the Human Resource (“HR”) Committee. Grants vest over a
four-year period at a rate of 25 percent per year. The PPOP contains a liquidity provision which allows for partial payouts of the ‘in-the-
money’ position during the performance period. During fiscal 2014, the plan was converted to a cash settled share based payment with the
growth calculation based on the five day average Empire Non-Voting Class A share value following the announcement of the Company’s
fiscal financial performance compared to the five day average following the announcement of the Company’s fiscal financial performance
of the preceding year. At May 6, 2017, there were 683,652 options (2016 – 1,497,393) outstanding and the carrying amount of the liability
associated with these options was $ nil (2016 – $ nil).
Share Purchase Plan
The Company has a share purchase plan for employees of the Company whereby loans may be granted to purchase Non-Voting Class A
shares. The Company’s current practice is to use only the performance share unit plan and the stock option plan to provide medium-term
and long-term incentive for employees. At May 6, 2017, the outstanding loan balance was $ nil (2016 – $0.5).
28. RELATED PARTY TRANSACTIONS
The Company has related party transactions with Crombie REIT and key management personnel. The Company holds a 41.5 percent
ownership interest in Crombie REIT and accounts for its investment using the equity method.
The Company leased certain real property from Crombie REIT during the year at amounts which in management’s opinion approximate
fair market value that would be incurred if leased from a third party. Management has determined these amounts to be fair value based on
the significant number of leases negotiated with third parties in each market it operates. The aggregate net payments under these leases,
which are measured at exchange amounts, totaled approximately $195.8 (2016 – $164.9).
Crombie REIT provides administrative and management services to the Company on a fee for service basis pursuant to a Management
Agreement effective January 1, 2016. The Management Agreement replaces the previous arrangement where charges incurred were on
a cost recovery basis.
At May 6, 2017, investments included $25.1 (2016 – $24.7) of Crombie REIT convertible unsecured subordinated debentures. The Company
received interest from Crombie REIT of $1.2 for the year ended May 6, 2017 (2016 – $1.2). These amounts are included in finance costs, net
in the consolidated statements of earnings (loss).
On June 29, 2016, Sobeys and its wholly-owned subsidiaries closed an agreement with Crombie REIT to sell and leaseback a portfolio
of 19 retail properties and a 50 percent interest in each of its three automated distribution centres, as well as the sale of two parcels of
development land which were previously owned by Empire. Crombie REIT also invested approximately $58.8 in renovations or expansions
of ten Sobeys retail locations already in Crombie REIT’s portfolio. In addition to cash, Crombie REIT issued to a subsidiary of Sobeys $93.4
in value of Class B LP units and attached special voting units of Crombie REIT at a price of $14.70 per unit. The subsidiary of Sobeys
subsequently sold its Class B LP units to Empire on a tax deferred basis. Total net cash proceeds to the Company and its wholly-owned
subsidiaries from these transactions with Crombie REIT were $323.8, resulting in a pre-tax loss of $0.8 which has been recognized in the
consolidated statements of earnings (loss). Proceeds from the transactions were used to repay the senior unsecured notes.
On July 29, 2016, Sobeys, through a wholly-owned subsidiary, sold and leased back an additional property from Crombie REIT for cash
consideration of $26.4. This resulted in a pre-tax gain of $2.1, which has been recognized in the consolidated statements of earnings (loss).
Sobeys also purchased one property from Crombie REIT for $9.1.
During fiscal 2014, Sobeys entered into a loan agreement with Crombie REIT to partially finance Sobeys’ acquisition of a property in British
Columbia. The $11.9 loan bore interest at a rate of 6.0 percent and had no principal repayments. On May 5, 2017, the Company sold the
property to Crombie REIT for cash consideration of $31.1, resulting in a pre-tax gain of $1.0, which has been recognized in the consolidated
statements of of earnings (loss). Proceeds from the transaction were used to repay the loan.
During the year ended May 7, 2016, Crombie REIT and a wholly-owned subsidiary of the Company negotiated an extension of a rental
income guarantee and put option on a property Crombie REIT acquired from the Company’s subsidiary in 2006. The rental income
79
Annual Report 2017 guarantee and put option were originally scheduled to mature in March 2016 and have been extended for a period of five years with
either party having the ability to terminate the agreements with written notice.
During the year ended May 7, 2016, Sobeys through its wholly-owned subsidiaries, sold and leased back six properties from Crombie REIT.
Cash consideration received for the properties sold was $60.7, resulting in a pre-tax gain of $6.5, which has been recognized in the
consolidated statements of earnings (loss).
Key management personnel compensation
Key management personnel include the Board of Directors and members of the Company’s executive team that have authority and
responsibility for planning, directing and controlling the activities of the Company.
Key management personnel compensation is comprised of:
Salary, bonus and other short-term employee benefits
Post-employment benefits
Termination benefits
Share-based payments
Total
Indemnities
May 6, 2017
May 7, 2016
$
$
9.7
1.6
8.7
14.8
34.8
$
9.6
1.9
1.5
6.1
$
19.1
The Company has agreed to indemnify its directors, officers and particular employees in accordance with the Company’s policies.
The Company maintains insurance policies that may provide coverage against certain claims.
29. CAPITAL MANAGEMENT
The Company’s objectives when managing capital are: i) 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 the Company. There have been no changes to the Company’s objectives during the year ended May 6, 2017.
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, long-term debt (including the
current portion thereof) and shareholders’ equity, net of cash and cash equivalents. The calculation is set out in the following table:
Long-term debt due within one year
Long-term debt
Funded debt
Less cash and cash equivalents
Net funded debt
Shareholders’ equity, net of non-controlling interest
Capital under management
May 6, 2017
May 7, 2016
$
134.0
1,736.8
1,870.8
(207.3)
1,663.5
3,644.2
$
350.4
2,017.0
2,367.4
(264.7)
2,102.7
3,623.9
$
5,307.7
$
5,726.6
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 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 investments and other operations.
The Company largely relies on its cash flow from operations to fund its capital investment program and dividend distributions to its
80
Empire Company LimitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
shareholders. The cash flow is supplemented, when necessary, through the incurrence of additional debt or the issuance of additional
capital stock. No changes were made to these objectives in the current year.
Management monitors certain key ratios to effectively manage capital:
Funded debt to total capital(1)
Funded debt to EBITDA(2)
EBITDA to interest expense(2)
May 6, 2017
May 7, 2016
33.9%
2.4 x
7.5 x
39.5%
(1.2)x
(17.1)x
(1) Total capital is funded debt plus shareholders’ equity, net of non-controlling interest.
(2) EBITDA and interest expense are comprised of EBITDA and interest expense for each of the 52 and 53 week periods then ended. EBITDA consists of
operating income plus depreciation and amortization of intangibles, while interest expense consists of interest expense on financial liabilities measured
at amortized cost plus losses on cash flow hedges reclassified from other comprehensive income or loss.
Under the terms of existing debt agreements, three financial covenants are monitored and communicated on a quarterly basis by
management to ensure compliance with the agreements. The covenants are: i) adjusted total debt/EBITDA – calculated as net funded
debt plus letters of credit, guarantees and commitments divided by EBITDA (as defined by the credit agreements and for the previous
52 and 53 weeks); ii) lease adjusted debt/EBITDAR – calculated as adjusted total debt plus eight times rent divided by EBITDAR (as
defined by the credit agreements and for the previous 52 and 53 weeks); and iii) debt service coverage ratio – calculated as EBITDA
divided by interest expense plus repayments of long-term debt (as defined by the credit agreements and for the previous 52 and
53 weeks). The Company was in compliance with these covenants during the year.
30. SUBSEQUENT EVENTS
On May 11, 2017, the unitholders of Crombie REIT approved a tax reorganization that will eliminate wholly-owned corporate subsidiaries
being subject to corporate income taxes. This tax reorganization is not expected to have a significant impact on the financial position of
the Company.
On June 2, 2017, Sobeys entered a new, senior, unsecured non-revolving credit facility for $500.0. The facility bears floating interest tied
to Canadian prime rate or bankers’ acceptance rates. The financing is intended to be used to repay long-term debt due in calendar 2018.
On June 2, 2017, Crombie REIT announced that it had exercised its right to redeem its 5.00% Series D Convertible Unsecured
Subordinated Debentures. The redemption will be effective on July 4, 2017. Upon redemption, Crombie REIT will pay to the holders of
debentures the redemption price equal to the outstanding principal amount and all accrued and unpaid interest. Empire currently holds
a $25.1 investment in the Series D convertible debentures.
81
Annual Report 2017
ELEVEN-YEAR FINANCIAL REVIEW
Year Ended(1)
2017
2016(2)(3)
2015(2)(3)(4)
2014
Financial Results ($ in millions)
Sales
Operating income (loss)
Finance costs, net
Income tax expense (recovery)
Non-controlling interest
Net earnings (loss)(6)
Adjusted net earnings from continuing operations(6)(7)
Financial Position ($ in millions)
Total assets
Long-term debt (excluding current portion)
Shareholders’ equity(6)
Per Share Data on a Fully Diluted Basis ($ per share)
Net earnings (loss)(6)(8)
Adjusted net earnings from continuing operations(6)
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)
$ 23,806.2
333.0
118.0
42.5
14.0
158.5
191.3
$ 24,618.8
(2,418.5)
137.4
(441.3)
16.4
(2,131.0)
410.2
$ 23,928.8
742.4
155.1
150.4
17.9
419.0
511.0
$ 20,957.8
326.7
131.4
36.3
8.0
235.4
390.6
8,695.5
1,870.8
3,644.2
9,138.5
2,367.4
3,623.9
11,497.2
2,284.1
5,986.7
12,236.6
3,275.8
5,700.5
0.58
0.70
0.410
0.410
13.41
22.56
15.00
21.50
272.0
(7.78)
1.50
0.400
0.400
13.34
30.79
20.23
21.09
274.0
1.51
1.84
0.360
0.360
21.61
31.60
21.67
29.15
277.2
0.98
1.62
0.347
0.347
20.59
27.75
21.68
22.88
240.6
(1) Fiscal years end the first Saturday in May, consistent with the fiscal year-end of Sobeys Inc. Financial data for fiscal 2007 to 2010, with the exception
of the balances noted for financial position for fiscal 2010, were prepared using CGAAP and have not been restated to IFRS. Fiscal 2011 and 2016 are
53-week years.
(2) Amounts have been reclassified to correspond to the current period presentation on the consolidated balance sheets.
(3) Amounts have been restated. See “Changes to Accounting Policies Adopted During Fiscal 2017” section of the MD&A for further detail.
(4) Amounts have been reclassified to correspond to the current period presentation on the consolidated statement of earnings (loss).
(5) Certain balances have been reclassified for changes to comparative figures for fiscal 2011. See Note 32 to the Company’s fiscal 2012 audited annual
consolidated financial statements.
(6) Net of non-controlling interest.
(7) See “Non-GAAP Financial Measures & Financial Metrics” section of the MD&A.
(8) The weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all potential common shares
would be anti-diluted.
82
Empire Company Limited
2017
2016(2)(3)
2015(2)(3)(4)
2014
2013
2012
2011(5)
2010
2009
2008
2007
$ 17,343.9
573.2
55.4
136.4
9.1
379.5
390.7
$ 16,249.1
534.3
59.9
122.3
12.7
339.4
322.7
$ 15,956.8
525.7
75.4
122.0
9.0
400.6
303.2
$ 15,516.2
479.7
72.5
99.1
5.6
301.9
284.5
$ 15,015.1
466.2
80.6
115.4
8.3
264.7
261.7
$ 14,065.0
472.6
105.8
125.9
12.8
315.8
242.8
$ 13,366.7
431.1
60.1
116.9
55.4
205.8
200.1
11,497.2
2,284.1
5,986.7
12,236.6
3,275.8
5,700.5
7,140.4
915.9
3,724.8
6,913.1
889.1
3,396.3
6,518.6
1,090.3
3,162.1
6,248.3
821.6
2,952.4
5,891.1
1,124.0
2,678.8
5,729.4
1,414.1
2,378.8
5,241.5
792.6
2,131.1
1.86
1.91
0.320
0.320
18.27
22.88
17.85
22.86
204.2
1.66
1.58
0.300
0.300
16.66
21.00
17.57
19.21
204.2
1.96
1.48
0.267
0.267
15.49
19.71
17.02
18.05
204.6
1.47
1.39
0.247
0.247
14.36
17.98
13.23
17.66
205.4
1.34
1.33
0.233
0.233
13.02
18.26
12.21
16.33
197.4
1.60
1.23
0.220
0.220
12.03
18.40
11.80
13.08
197.2
1.04
1.01
0.200
0.200
10.77
15.08
13.16
14.11
197.2
Year Ended(1)
Sales
Financial Results ($ in millions)
Operating income (loss)
Finance costs, net
Income tax expense (recovery)
Non-controlling interest
Net earnings (loss)(6)
Adjusted net earnings from continuing operations(6)(7)
Financial Position ($ in millions)
Total assets
Long-term debt (excluding current portion)
Shareholders’ equity(6)
Per Share Data on a Fully Diluted Basis ($ per share)
Net earnings (loss)(6)(8)
Adjusted net earnings from continuing operations(6)
Dividends
Non-Voting Class A shares
Class B common shares
Book value
Share Price, Non-Voting Class A Shares ($ per share)
High
Low
Close
53-week years.
$ 23,806.2
$ 24,618.8
$ 23,928.8
$ 20,957.8
333.0
118.0
42.5
14.0
158.5
191.3
8,695.5
1,870.8
3,644.2
0.58
0.70
0.410
0.410
13.41
22.56
15.00
21.50
272.0
(2,418.5)
137.4
(441.3)
16.4
(2,131.0)
410.2
9,138.5
2,367.4
3,623.9
(7.78)
1.50
0.400
0.400
13.34
30.79
20.23
21.09
274.0
742.4
155.1
150.4
17.9
419.0
511.0
1.51
1.84
0.360
0.360
21.61
31.60
21.67
29.15
277.2
326.7
131.4
36.3
8.0
235.4
390.6
0.98
1.62
0.347
0.347
20.59
27.75
21.68
22.88
240.6
Diluted weighted average number of shares outstanding (in millions)
(1) Fiscal years end the first Saturday in May, consistent with the fiscal year-end of Sobeys Inc. Financial data for fiscal 2007 to 2010, with the exception
of the balances noted for financial position for fiscal 2010, were prepared using CGAAP and have not been restated to IFRS. Fiscal 2011 and 2016 are
(2) Amounts have been reclassified to correspond to the current period presentation on the consolidated balance sheets.
(3) Amounts have been restated. See “Changes to Accounting Policies Adopted During Fiscal 2017” section of the MD&A for further detail.
(4) Amounts have been reclassified to correspond to the current period presentation on the consolidated statement of earnings (loss).
(5) Certain balances have been reclassified for changes to comparative figures for fiscal 2011. See Note 32 to the Company’s fiscal 2012 audited annual
consolidated financial statements.
(6) Net of non-controlling interest.
would be anti-diluted.
(7) See “Non-GAAP Financial Measures & Financial Metrics” section of the MD&A.
(8) The weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all potential common shares
83
Annual Report 2017
SHAREHOLDER AND INVESTOR INFORMATION
Empire Company Limited
115 King Street
Stellarton, Nova Scotia
B0K 1S0
Telephone: (902) 752-8371
Fax: (902) 755-6477
www.empireco.ca
Dividend Record and Payment Dates for Fiscal 2018
Record Date
July 14, 2017
October 13, 2017*
January 15, 2018*
April 13, 2018*
Payment Date
July 31, 2017
October 31, 2017*
January 31, 2018*
April 30, 2018*
* Subject to approval by the Board of Directors.
Investor Relations and Inquiries
Shareholders, analysts and investors should direct their financial
inquiries or requests to:
Outstanding Shares
As at June 26, 2017
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,
AST Trust Company (Canada).
Affiliated Company Web Address
www.sobeyscorporate.com
Transfer Agent
AST Trust Company (Canada)
Investor Correspondence
P.O. Box 700, Station B
Montreal, Québec
H3B 3K3
Telephone: 1-800-387-0825
E-mail: inquiries@canstockta.com
Multiple Mailings
If you have more than one account, you may receive a separate
mailing for each. If this occurs, please contact AST Trust Company
(Canada) at 1-800-387-0825 to eliminate the multiple mailings.
Shareholders’ Annual General Meeting
September 14, 2017 at 11:00 a.m. (ADT)
Cineplex Cinemas
612 East River Road
New Glasgow, Nova Scotia
Non-Voting Class A shares
Class B common shares, voting
173,537,901
98,138,079
Stock Exchange Listing
The Toronto Stock Exchange
Stock Symbol
Non-Voting Class A shares – EMP.A
52-Week Average Daily Trading Volume (TSX: EMP.A)
738,967
Bankers
The Bank of Nova Scotia
Bank of Montreal
Bank of Tokyo Mitsubishi UFJ (Canada)
Canadian Imperial Bank of Commerce
National Bank of Canada
Rabobank Nederland
Royal Bank of Canada
The Toronto-Dominion Bank
Caisse Centrale Desjardins
Solicitors
Stewart McKelvey
Halifax, Nova Scotia
Auditors
PricewaterhouseCoopers, LLP
Halifax, Nova Scotia
84
Empire Company Limited a
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EMPIRECO.CA