Loblaw Companies Annual Report 2005

FY2005 Annual Report · Loblaw Companies

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Loblaw Companies Limited 2005 Annual Summary

Store Formats

Loblaw Companies Limited (“Loblaw” or the “Company”)
is Canada’s largest food distributor and a leading provider of
general merchandise products, drugstore and financial products
and services. Through its various operating banners, Loblaw is
committed to providing Canadians with a one-stop destination
in meeting their food and everyday household needs. This goal is
pursued through a portfolio of store formats across the country.
Loblaw is known for the quality, innovation and value of its food
offering. It also offers Canada’s strongest control label program,
including the unique President’s Choice and no name brands.

While food remains at the heart of its offering, Loblaw seeks to
change Canadians’ perceptions of what a supermarket can be.
Loblaw stores provide a wide, growing and successful range
of products and services to meet the everyday household needs of
Canadian consumers. In addition, President’s Choice Financial
services offer core banking, a popular MasterCard®, PC Financial
auto, home, travel and pet insurance as well as the PC points
loyalty program.

Loblaw seeks to achieve its business objectives through stable,
sustainable and long term growth. Its willingness to assume prudent
operating risks is equaled by its commitment to the maintenance of
a strong balance sheet position. In executing its strategies, Loblaw
allocates the resources needed to invest in and expand its existing
markets. It also maintains an active product development program.
Loblaw is highly selective in its consideration of acquisitions and
other business opportunities. Given the competitive nature of its
industry, Loblaw also strives to make its operating environment
as stable and as cost effective as possible. It works to ensure
that its technology systems and logistics enhance the efficiency
of its operations.

Over 134,000 full-time and part-time employees execute its
business strategy in more than 1,000 corporate and franchised stores
from coast to coast. This makes Loblaw one of Canada’s largest
private sector employers. It strives to contribute to the communities
it serves and to exercise responsible corporate citizenship.

Many Strengths, One Vision

Contents

2005 Annual Summary

2 Financial Highlights

5 Report to Shareholders

7 Operational Directory

9 Operational Review

16 Community Support

17 Corporate Social Responsibility
18 Summary of Corporate Governance Practices
20 Board of Directors and Corporate Officers

The 2005 Annual Report consists

of this 2005 Annual Summary

and the 2005 Financial Report.

Customer Focus

Strategic Business Initiatives

...aligning for success.

Product Innovation

National Systems and Supply Chain

2005 Annual Summary Loblaw Companies Limited 1

Financial Highlights(1)

For the years ended December 31, 2005 and January 1, 2005
($ millions except where otherwise indicated)

Operating Results
Sales
Sales excluding impact of variable interest entities(2)
Adjusted EBITDA(2)
Operating income
Adjusted operating income(2)
Interest expense
Net earnings

2005
(52 weeks)

2004
(52 weeks)

$ 27,801
27,423
2,132
1,401
1,600
252
746

$ 26,209
26,209
2,125
1,652
1,652
239
968

Cash Flow
Cash flows from operating activities
Capital investment

Per Common Share ($)
Basic net earnings
Adjusted basic net earnings(2)
Dividend rate at year end
Cash flows from operating activities
Book value
Market price at year end

Financial Ratios
Adjusted EBITDA margin(2)
Operating margin
Adjusted operating margin(2)
Return on average total assets(2)
Return on average shareholders’ equity
Interest coverage
Net debt(2) to equity

Operating Statistics
Retail square footage (in millions)
Average corporate store size (square feet)
Corporate stores sales per average square foot ($)
Same-store sales growth
Number of corporate stores
Number of franchised stores

(1) For financial definitions and ratios refer to the Glossary of Terms on page 68 of the 2005 Financial Report.
(2) See Non-GAAP Financial Measures on page 33 of the 2005 Financial Report.

1,489
1,156

2.72
3.35
.84
5.43
21.48
56.37

7.8%
5.0%
5.8%
11.2%
13.2%
5.6:1
.66:1

48.5
56,100
579
0.2%
670
402

1,443
1,258

3.53
3.48
.76
5.26
19.74
72.02

8.1%
6.3%
6.3%
14.2%
19.2%
6.9:1
.71:1

45.7
53,600
592
1.5%
658
400

Forward-Looking Statements
This Annual Report, which consists of the Annual Summary and the Financial Report, contains forward-looking statements which reflect management’s expectations regarding
the Company’s objectives, plans, goals, strategies, future growth, results of operations, performance and business prospects and opportunities. These forward-looking statements
include expected sales and earnings prospects for 2006. Forward-looking statements are typically identified by words or phrases such as “anticipates”, “expects”, “believes”,
“estimates”, “intends” and other similar expressions.

These forward-looking statements are not guarantees, but only predictions. Although the Company believes that these statements are based on information and assumptions
which are current, reasonable and complete, these statements are necessarily subject to a number of factors that could cause actual results to vary significantly from the
estimates, projections and intentions. Such differences may be caused by factors which include, but are not limited to, changes in consumer spending and preferences, heightened
competition including new competitors and expansion of current competitors, the ability to realize anticipated cost savings, including those resulting from restructuring and other
cost reduction initiatives, the ability to execute restructuring plans effectively, the Company’s relationship with its employees, results of labour negotiations including the terms
of future collective bargaining agreements, changes to the regulatory environment in which the Company operates now or in the future, changes in the Company’s tax liabilities,
either through changes in tax laws or future assessments, performance of third-party service providers, public health events, the ability of the Company to attract and retain
key executives, and supply and quality control issues with vendors. The Company cautions that this list of factors is not exhaustive. These factors and other risks and uncertainties
are discussed in the Company’s materials filed with the Canadian securities regulatory authorities from time to time, including the Risks and Risk Management section of the
Company’s Management’s Discussion and Analysis in its Financial Report.

The assumptions applied in making the forward-looking statements contained in this Annual Report include the following: economic conditions in 2006 do not materially change
from those expected, patterns of consumer spending are reasonably consistent with historical trends, no new significant competitors enter our markets nor does any existing
competitor significantly increase its presence, anticipated cost savings from restructuring activities are realized as planned, continuing future restructuring activities are effectively
executed, there are no material work stoppages in 2006 and the performance of third-party service providers is in accordance with expectations in the upcoming year.

Potential investors and other readers are urged to consider these factors carefully in evaluating these forward-looking statements and are cautioned not to place undue reliance
on them. The forward-looking statements included in this Annual Report are made only as of the filing date of this Annual Report and the Company does not undertake to publicly
update these forward-looking statements to reflect new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events
contained in these forward-looking statements may or may not occur. The Company cannot assure that projected results or events will be achieved.

2 2005 Annual Summary Loblaw Companies Limited

Aligning for success involves...

• offering four distinct store formats while continuing to operate under

a multi-banner approach;

• relocating 132 employees and their families from Calgary to Toronto, and from Vancouver

to Calgary in order to focus operational efforts towards maximizing opportunities;

• a multi-year restructuring of the Company’s supply chain to a more efficient network

of fewer, yet larger facilities;

• consolidating seven administrative offices from across southern Ontario into one

national head office and Store Support Centre; and

• investing resources in repositioning the Company for the longer term in response

to today’s changing competitive landscape, and absorbing the short term costs

associated with that investment.

Return on Average
Shareholders’ Equity

Basic Net Earnings, Adjusted Basic
Net Earnings(1) and Dividend Rate
per Common Share ($)

Total Return on $100 Investment
(includes dividend reinvestment)

($)

20%

2001

2002

2003

2004

2005

Return on Average
Shareholders’ Equity
Five
Fivc Year Average Return

$3.60

2.70

1.80

.90

.00

2001
(2)

2002

2003
(3)

2004

2005

Dividend Rate per Common Share at Year End
Basic Net Earnings per Common Share
Adjusted Basic Net Earnings per Common Share
(1)

(1) See Non-GAAP Financial Measures
on page 33 of the 2005 Financial Report.
(2) Basic Earnings per Common Share before Goodwill Charges.
(3) 2003 was a 53 week year.

$200

150

100

2000

2001

2002

2003

2004

2005

Loblaw Companies Limited
TSX Food and Staples Retailing Sub Index
S&P/TSX Composite Index

2005 Annual Summary Loblaw Companies Limited 3

W. Galen Weston, Chairman and John A. Lederer, President

4 2005 Annual Summary Loblaw Companies Limited

Report to Shareholders

In 2005, Loblaw Companies Limited moved closer to completing one of the largest transformations

in its history. We were challenged by the size and impact of the short term costs associated

with executing certain elements of the transformation.

At the same time, we were confident that this initiative was
absolutely necessary to ensure that Loblaw can continue to
compete successfully, to grow and to generate meaningful value
over the longer term.

We had anticipated and disclosed that the impact of our
transformation would adversely affect sales and earnings during
the past year. We also indicated our willingness to incur these
consequences in order to complete the process and to realize
the long term benefits associated with it. Nonetheless, the
short term costs turned out to be greater and more prolonged
than expected, as evidenced by our results for 2005. Sales
excluding the impact of variable interest entities(1) rose by
4.6% to $27.4 billion. Adjusted operating income(1) decreased
3.1% to $1.6 billion. And adjusted basic net earnings per
common share(1) fell 3.7% to $3.35. On an unadjusted basis,
sales, operating income and basic net earnings per common
share were $27.8 billion, $1.4 billion and $2.72, respectively.

These execution-centred challenges are being addressed and

resolved. We expect that the negative impact of these changes
will be absorbed by the end of the second quarter of 2006.
We expect that adjusted basic net earnings per common share(1)
performance will improve during the second half of 2006.
And we are confident that Loblaw will emerge from this process
as a stronger and even more competitive company.

Acting on Our Strategic Imperatives

Even as the Company worked through this transformation
during the past year, it remained focused on the day-to-day
business of serving customers. These efforts were guided
by a number of strategic imperatives reflecting the Company’s
commitment to becoming more relevant in meeting the food
and everyday household needs of Canadians. Significant
progress was recorded in pursuit of this objective and against
these imperatives during the past year.

Anticipating a Changing Environment

Loblaw has long demonstrated an ability to anticipate change
in the marketplace and to act accordingly. The Company’s
transformation of recent years reflects a thorough analysis of the
fast-changing retail landscape and of our place in it. That landscape
is increasingly marked by such factors as an over-supply of
retail square footage, the consumer’s desire for a value-driven
shopping experience, and the presence of low-cost global retailers.

Based on this assessment, the Company developed a
comprehensive strategy designed to fortify its competitive
position, maintain its leadership role in meeting the food and
everyday household needs of Canadians, and generate long-term
value for shareholders.

In pursuit of this strategy, Loblaw implemented a number
of transformative changes to its structure and operations. These
changes were designed to align the different yet connected
parts of our business into a more unified, efficient, cost-effective
and nationally-focused organization.

We made significant progress in pursuit of these goals

in 2005. A number of office facilities were consolidated.
A number of functions were reorganized. A national general
merchandise organizational structure was established and
a new head office and Store Support Centre in Brampton,
Ontario that is now home to 2,000 employees was completed.
We have acknowledged on previous occasions that the
Company may have taken on too much, too quickly during the
past year. This was especially evident in the delays surrounding
the execution of planned changes to our national systems
platform and supply chain. These delays disrupted the flow of
inventory to our stores, which affected sales and earnings. We
concluded, however, that the long term interests of the business,
our shareholders and other stakeholders would be best served
by our completing these measures as quickly as practicable.

Strengthening Our Food Offering Food remains at the heart of our
business. In 2005, a number of steps were taken to strengthen
that offering and a renewed commitment was made to the
fresh component. New products and programs were introduced
in the produce, meat, bakery, seafood and deli departments
and other areas. Centralized food merchandising teams were
established to realize opportunities of scale and develop
common practices. And new collaborative initiatives were
undertaken with suppliers.

The Company also increased the number of food offerings
under two of Canada’s most trusted and recognized control label
brand names – President’s Choice and no name. These products
reinforced the qualities for which the brands are known –
innovation, quality, value and focus on the customer.

This focus was especially evident in the Company’s response
to the consumer’s interest in health and nutrition. Well-received
initiatives included the publication of the first Healthy Insider’s
Report, featuring PC Blue Menu, PC Mini Chefs and additional
PC Organics products.

Growing Our General Merchandise and Drugstore Business Loblaw has
demonstrated that an excellent food offering can generate general
merchandise and drugstore sales. In 2005, the Company moved
to grow these increasingly important elements of our business.
A national, integrated organizational structure was established and
was relocated to the new head office and Store Support Centre.
The general merchandise offering was focused on conveying
such qualities as product innovation, great value and differentiation
in the marketplace. The number of products and services
offered continued to increase. More than 1,000 of these items
are now offered under the President’s Choice brand. In addition,
we continued to build the scope and credibility of our everyday
household items to supplement our powerful seasonal offerings.

(1) See Non-GAAP Financial Measures on page 33 of the 2005 Financial Report.

2005 Annual Summary Loblaw Companies Limited 5

Report to Shareholders

We believe that the strategic transformation will fully align the elements of our business.

This will provide the concentration of focus and resources needed to achieve the desired levels

of growth going forward.

As a result, the general merchandise and drugstore business

helped Loblaw become more important in more aspects of the
home. In 2005, we introduced the PC Bath and Body line of
products, issued the first PC Home Insider’s Report, and launched
the PC Mobile line of prepaid cellular phone services and
related accessories. Most recently, the Joe Fresh Style line
of apparel for adults has been introduced, offering unique style
at value-oriented prices in an easy shopping environment.

Tailoring Formats to Individual Markets In 2005, the Company continued
to execute its proven strategy of offering four distinct store
formats: superstores, hard discount stores, conventional stores
and warehouse clubs. This multi-format approach provides
us with the flexibility to serve the needs of specific markets
in each region of the country.

Our format strategy was supported by a capital investment

program exceeding $1 billion. Under this program, steps
were taken to increase our emphasis on value footage. This
reflected the consumer’s increasing preference for value and
a one-stop shopping experience. We continued the successful
expansion of The Real Canadian Superstore model into
Ontario. As well, discussions continued with organized labour
to explore competitive opportunities. These opportunities
include converting existing conventional stores into superstores
in response to local market conditions and where it makes
economic sense to do so. In addition, Loblaw will continue to
invest, where appropriate, in its strong conventional format.

Supporting Our Stores Steps were taken in 2005 to provide
consumers with a consistent and unique shopping experience
across the store network. New and re-formatted banner
identities were developed, store exteriors were remodeled, store
architecture and decor were updated, and new in-store signage
was introduced. As well, a 40,000 square foot facility was
established to provide opportunities to pre-test department
layouts and signage, as well as to conduct product education
and other training programs. These and other measures helped
to convey the selection, quality, service and value underlying
the Company’s offering to consumers.

Work also continued on the conversion to one national
systems platform across a number of functions, including store
ordering, purchasing, and inventory tracking. In addition, the
Company moved forward on the restructuring of its supply chain.
Upon completion, this measure is expected to improve the
movement of inventory, reduce wait times, improve service
levels to the stores, and lower costs. Measures were also taken
to simplify the Company’s distribution network. This entailed
the closure of several smaller facilities and the transfer of various
functions to larger and more cost-effective centres. The year
also saw the opening of a new, third-party owned and operated
general merchandise warehouse and distribution centre for
eastern Canada. In addition, the Company began a process that

6 2005 Annual Summary Loblaw Companies Limited

will examine how to simplify its business operations, including
the flow of goods from vendors to store shelves.

Developing Our Greatest Resource During the past year, we introduced
a number of measures designed to develop our greatest resource
– our employees. The Leadership Means Business program
continued to expand. This program is designed to enhance the
capabilities of managers in leading and engaging the men and
women on the Company’s front line. Its goal is to identify, train,
support and strengthen leadership at the store level.

The Store Managers’ Council completed its first full year of
operation in 2005. This group of twelve managers from different
regions focuses on such issues as improving communication,
leadership development and training programs for store personnel.
The Council also attended and reported to the Company’s
annual management conference in 2005. These actions reflected
the commitment made by senior management to consult with
and listen to people in the stores, and to act on their feedback
and recommendations.

Other leadership-related initiatives of the past year were
designed to encourage collaboration, alignment and leadership
across the store network. These measures included off-site
leadership sessions for store personnel as well as visits to and
tours of individual stores. The Company also took steps that will
provide a common approach to leadership coaching, program
execution and business development at the store level.

Aligning for Success

While the past year had its share of short term challenges,
it also saw a number of positive developments that bode
well for the future. We believe that the strategic transformation
will fully align the elements of our business. It will provide
the concentration of focus and resources needed to achieve
the desired levels of growth going forward. It also reflects
our commitment to manage the business for the longer term.
As we have done successfully in the past, we believe that
we are taking the significant steps required to ensure that Loblaw
continues to grow, to succeed and to provide sustainable value
in a changing landscape.

The Company’s achievements in any given year are

attributable to our employees, shareholders, customers, vendors
and other partners. We are especially appreciative of their efforts
and commitment during the past year, which was marked by
short term challenge and long term opportunity. We are
confident that the benefits of our transformation will reward the
confidence shown by all our valued stakeholders in this great
Canadian enterprise.

W. Galen Weston
Chairman

John A. Lederer
President

Operational Directory

(includes age and years of service)

John A. Lederer
(50 and 29 years)
President

Mark Butler
(45 and 30 years)
Atlantic Operations

Bernard J. McDonell
(51 and 12 years)
Quebec Operations

Carmen Fortino
(47 and 21 years)
Ontario Operations

R. Glen Gonder
(47 and 28 years)
Western Operations

Preston D. McLean
(44 and 20 years)
Atlantic Superstore
and Dominion*

*in Newfoundland and Labrador

Tom Cogswell
(56 and 39 years)
Atlantic SaveEasy
and Cash & Carry

Dave Mock
(46 and 23 years)
Quebec Merchandising

André Fortier
(48 and 5 years)
Maxi

Daniel Dufresne
(48 and 4 years)
Retail Operations

Jocyanne Bourdeau
(38 and 2 years)
Loblaws and Maxi & Cie.

Serge Racette
(47 and 3 years)
Provigo, L’intermarché, Axep

N. Deane Collinson
(51 and 21 years)
Loblaws

Vince Scorniaenchi
(47 and 33 years)
Zehrs Markets
and Fortinos

Robert Adams
(45 and 22 years)
No Frills

Tim R. Staffen
(47 and 17 years)
Your Independent Grocer
and Valu-mart

Raymond P. Daoust
(52 and 34 years)
The Real Canadian Superstore

David A. Berg
(44 and 28 years)
Extra Foods

Robert Pols
(47 and 7 years)
SuperValu, Shop Easy Foods
and Lucky Dollar Foods

Robert A. Balcom
(44 and 12 years)
General Counsel

David C. Boone
(36 and 13 years)
The Real Canadian Wholesale Club
and Cash & Carry

David K. Bragg
(57 and 22 years)
Real Estate

Roy R. Conliffe
(55 and 24 years)
Labour Relations

Joseph Jackman
(46 and 1 year)
Marketing

David R. Jeffs
(48 and 27 years)
General Merchandise Operations

Peter McMahon
(effective February 2006)
Supply Chain

Richard P. Mavrinac
(53 and 23 years)
Treasury, Tax, Risk Management
and Investor Relations

Paul D. Ormsby
(54 and 23 years)
Information Technology and
Food Sourcing and Procurement

Pietro Satriano
(43 and 4 years)
Control Label Development

Stephen A. Smith
(48 and 20 years)
Financial Control and Reporting,
Employee Development and
Services and Loss Prevention

Galen G. Weston
(33 and 8 years)
Corporate Development

National Head Office and Store Support Centre opened in 2005.

2005 Annual Summary Loblaw Companies Limited 7

Superstores
in Ontario
take on a fresh,
new look.

At The Real Canadian Superstore, customers enjoy an exciting shopping experience
where “Super never cost so little”.

8 2005 Annual Summary Loblaw Companies Limited

Operational Review

As the heart of its business, the Company took steps in 2005 to further strengthen its store

network and to make those stores more relevant to Canadian consumers.

This was pursued, in large part, through the Company’s
assortment of formats operating under a number of
banners. This multi-format approach ensures that the
Company can provide the store model and the product
offerings that best suit the consumer preferences
and business environment in any given market area.
Throughout 2005, the Company continued to

execute a significant capital investment program in
support of its stores and formats. A particular focus of
this program was the growth of the superstore format
in Ontario. This strategic initiative continued to be well
received and to generate positive results. In addition,
the Company continued its collaborative dialogue
with the representatives of its unionized employees.
This dialogue focused on such business opportunities
as expanding the superstore format by converting
conventional locations where it makes sense to do
so. This strategy helps to address the consumer’s
increasing preference for value and convenience.
It also reflects the Company’s stated commitment to
provide Canadians with a one-stop shopping destination
in meeting their food and everyday household needs.

In support of that commitment, Loblaw refreshed
the appearance of many of its stores during the past
year. These alterations were designed to reinforce
the stores’ position in the marketplace as destinations
for value, quality and selection. Store exteriors were
enhanced through remodeling and new signage. Interiors
featured new architecture, decor and in-store signage.
And several banners received new or re-formatted
identities as part of this multi-faceted process.

In 2005, the Company took other, less visible,

steps to support its store network. A number of
operational and administrative functions were brought
together so that they could work more effectively.
A new head office and Store Support Centre was
opened in Brampton, Ontario. And a testing facility
was opened, in which training programs can be
conducted and potential department layouts can
be examined before being introduced into the stores.
These measures were taken to ensure that the
Company’s many strengths support the vision of
a more aligned organization.

Over 48 million

square feet of retail space
from coast to coast.

Over 134,000

employees contribute to
Loblaw’s successes.

Over 1,700,000

customers enjoy the convenience
of shopping at our stores every day.

2005 Annual Summary Loblaw Companies Limited 9

PC products
deliver great taste
and real value
in every aisle.

Healthy eating never tasted so good! Our PC Blue Menu line of over 200 products
offers Canadians a healthier alternative.

10 2005 Annual Summary Loblaw Companies Limited

Operational Review

Loblaw has a proven ability to anticipate and respond to changing consumer preferences in an

increasingly competitive landscape and is committed to meeting more of the food and everyday

household needs of consumers from coast to coast.

The Company fulfills this commitment by providing
an increasing range of food, general merchandise
and drugstore offerings, many under the extremely
successful President’s Choice, no name and Exact
control label brand names.

Along with its store network, food remains at
the heart of the Company. In 2005, Loblaw continued
its focus on the fresh component of its food business
by introducing new products and programs and
implementing a number of operational measures.
These measures included the creation of a centralized
food merchandising function designed to achieve
opportunities of scale and to identify common practices.
In addition, the Company engaged its suppliers in
developing more effective ways of working together.

These measures were aimed at further reinforcing

consumer confidence in the Company’s food
offering and increasing customer loyalty to its stores.
This loyalty was earned by building on the proven
success of the President’s Choice brand, especially in
addressing the growing consumer interest in nutrition

and health. A number of measures initiated in 2005
demonstrated the continuing leadership role played by
the Company and by President’s Choice. The PC Blue
Menu line of healthier, nutritious foods was launched
and the PC Mini Chefs portfolio was expanded.
And the Company’s first Healthy Insider’s Report
was published. These actions further enhanced the
reputation of President’s Choice for innovative,
affordable and convenient products. In addition, the
PC points program offered through President’s Choice
Financial services continued to play an important
part in the Company’s consumer loyalty initiative.
To complement its excellent food offering,
the Company continued to add to its assortment of
general merchandise, drugstore and financial products
and services, a number of which were offered under
the President’s Choice brand. New offerings, like
the PC Mobile line of prepaid cellular phone services
and the Joe Fresh Style line of apparel for adults,
are helping the Company become more relevant to
its customers’ varied lifestyles.

Over 300

items featured in the
PC Home Insider’s Report.

Over 1,900

new control label products
introduced in 2005.

Over 500,000

President’s Choice Chicago
Deep Dish Pizzas sold at launch.

2005 Annual Summary Loblaw Companies Limited 11

Over 50,000
items delivered
to our stores
daily.

A wide variety of breads and rolls are baked fresh daily in-store.

12 2005 Annual Summary Loblaw Companies Limited

Operational Review

While many of the Company’s transformative changes are visible to the consumer, some

less visible but equally important initiatives were completed in 2005 while others will continue

into the first half of 2006.

These measures are designed to assist in the pursuit
of the Company’s strategic imperatives, making
Loblaw more streamlined, efficient and cost-effective
in everything it does.

These transformative changes include the
conversion to a national systems platform across a
number of functions, such as store ordering, purchasing,
and inventory tracking. The Company also moved
forward on the restructuring of its supply chain network.
Upon completion, this measure will improve the
movement of inventories, enhance efficiencies, and
lower costs. The Company also continued to simplify
its distribution network in 2005 with the closure
of a number of smaller facilities and the transfer of
their functions to larger, more cost-effective centres.
The past year also saw the opening of a third-party
owned and operated general merchandise warehouse
and distribution centre serving eastern Canada.
In addition, the Company began a process that will
examine how to simplify the flow of goods to stores.

Loblaw has also taken steps to strengthen the
leadership skills among its employees. An in-house,
tailored leadership program has been developed to
enhance the capabilities of managers. This program
is designed to identify, support and strengthen
leadership at the store level reflecting the commitment
of senior management to engage in dialogue with
store personnel, and to act on their feedback and
recommendations. An important aspect of this
leadership program is the Store Managers’ Council.
The Council’s rotating membership of twelve managers
meets to discuss and develop recommendations on
ways to improve and better serve the Company’s stores.
During 2005, these discussions covered issues such
as training programs, leadership development and
communication among employees.

Other store-focused leadership initiatives are equally

important in promoting leadership and cooperation.
A number of these measures were pursued during
the past year. In order to ensure consistency, common
approaches were developed in such areas as leadership
coaching, business development and program execution.

Number of Stores

53 Atlantic SaveEasy
51 Atlantic Superstore
14 Dominion*

(in Newfoundland and Labrador)

103 Extra Foods
21 Fortinos
95 Loblaws

67 Lucky Dollar Foods
97 Maxi
15 Maxi & Cie

130 No Frills
107 Provigo
88 The Real Canadian Superstore
37 The Real Canadian Wholesale Club

52 Shop Easy Foods
25 SuperValu
68 Valu-mart
51 Your Independent Grocer
52 Zehrs Markets
418 Cash & Carry and other banners

*Trademark used under license.

2005 Annual Summary Loblaw Companies Limited 13

Operational Review

Geographic Divisions and Banners

Corporate
Stores

Franchised
Stores

Associated
Stores

Independent
Accounts

Warehouses

41
1

3
67

34
24

169
252

22
36

5
16
670

British Columbia
Yukon

Northwest Territories
Alberta

Saskatchewan
Manitoba

Ontario
Quebec

New Brunswick
Nova Scotia

Prince Edward Island
Newfoundland and Labrador
Total

Corporate Stores

Corporate Stores
Beginning of year

Opened
Closed
Transferred from franchised stores

End of year

Average store size (in thousands)

Analysis by size:

More than 60,000 sq. ft.
40,000–60,000 sq. ft.
20,000–40,000 sq. ft.
Less than 20,000 sq. ft.

Sales by corporate stores ($ millions)

Sales per average square foot ($)

43
2

15
4

257
22

23
22

3
7
402

2005
Stores

658
47
(40)
5
670

234
167
165
104
670
$ 21,110
579
$

1
14

26
39

16
341

6
1

1
9
472

2005
Sq. Ft.
(in millions)

35.3
3.6
(1.4)
0.1
37.6
56.1

23.1
8.0
5.0
1.5
37.6

1
2,096

1,657
15

86
2,533

296
523

151
500
7,858

2004
Stores

646
53
(43)
2

658

217
164
168
109

658

$ 20,109

592

2
1

6
4

2
2

2
26

2004
Sq. Ft.
(in millions)

32.6
4.2
(1.5)

35.3

53.6

20.9
7.9
5.0
1.5

35.3

Corporate Stores Sales
per Average Square Foot

($)

Corporate Stores
Square Footage

(thousands of sq. ft.)

$610

585

560

535

510

2001

2002

2003

(1)

2004

2005

Corporate Stores Sales
per Average Square Foot

(1) 2003 was a 53 week year.

40,000

30,000

20,000

10,000

2001

2002

2003

2004

2005

> 60,000 sq. ft.
40,000–60,000 sq. ft.
< 40,000 sq. ft.

14 2005 Annual Summary Loblaw Companies Limited

Independent Stores and Accounts

Franchised Stores
Beginning of year

Opened
Closed
Transferred to corporate stores
Transferred from associated stores

and independent accounts

End of year

Average store size (in thousands)

Associated Stores

Independent Accounts

Warehouses

Sales(1) to independent stores

and accounts ($ millions)

(1) Includes sales of variable interest entities at retail.

2005
Stores

400
22
(17)
(5)

2
402

472
7,858
26

$ 6,691

2005
Sq. Ft.
(in millions)

10.4
0.9
(0.3)
(0.1)

10.9
27.1

2004
Sq. Ft.
(in millions)

9.7
1.3
(0.6)

10.4

26.0

2004
Stores

397
33
(28)
(2)

400

519

6,669

$ 6,100

Average Store Size
and Number of Stores

Retail Square Footage
and Percentage Increase

(thousands of sq. ft.)

60,000

45,000

30,000

15,000

.
t
f

.
q
s
–
e
z
i
S
e
r
o
t
S
e
g
a
r
e
v
A

700

525

350

175

s
e
r
o
t
S
f
o

r
e
b
m
u
N

2001

2002

2003

2004

2005

Average Franchised Store Size
Average Corporate Store Size
Number of Franchised Stores
Number of Corporate Stores

50,000

37,500

25,000

12,500

20%

2001

2002

2003

2004

2005

Franchised
Corporate
Percentage Increase

2005 Annual Summary Loblaw Companies Limited 15

Community Support

Loblaw Companies Limited endeavours to be an active participant in the various communities

which it serves and supports the philanthropic goals of the “IMAGINE” campaign.

Acting with its employees, the Company supports and
contributes to local organizations through its various operating
divisions by sponsoring numerous charitable fundraising

activities and initiating work experience programs for the
physically and developmently challenged. The following are
some examples of our community involvement in 2005.

A message from Peggy Hornell, Director, Fundraising and Administration, President’s Choice Children’s Charity:

President’s Choice Children’s Charity is dedicated to helping children who are physically or
developmentally challenged.

President’s Choice Children’s Charity had an outstanding year in 2005. Through the
President’s Choice Decadent cookie promotion, and other national and regional fundraising
activities, the President’s Choice Children’s Charity raised $6.6 million.

This money will be directed towards helping more than 725 children across Canada.

One of the children helped in the past year is 18-year-old Justin, who has cerebral palsy.
Confined to a wheelchair, he loves school and dreams of attending Northern Alberta Institute
of Technology so he can become a computer game developer. Justin is unable to speak
however, and finds himself separated from his classmates as a result.

President’s Choice Children’s Charity funded a computer communication device that allows
him to participate in conversations with his classmates and teachers. Justin’s Mom says that
it has “given Justin independence and a chance to say what he is thinking and not have
someone talk for him”.

Thanks to the support of Loblaw, its employees and customers, President’s Choice
Children’s Charity will continue to make difficult lives a little easier.

ROM Foundation
Contributions fund galleries,
curatorial research, and
programs for children and
ensure long term stability of
the Royal Ontario Museum.

United Way – Centraide
(Across Canada)
Committed to improving lives
and building community by
engaging individuals and
mobilizing collective action.

The W. Garfield Weston Foundation
is a Canadian charitable foundation
associated with the Company.
Its grants are directed primarily to
specific organizations in the fields
of education and environment.
These include the Canadian Merit
Scholarship Foundation, the
Children First: School Choice Trust,
the Royal Ontario Museum and the
Weston Family Innovation Centre
at the Ontario Science Centre. From
coast to coast, the Foundation also
works with the Nature Conservancy
of Canada to protect critical habitat.

Cambridge Memorial
Hospital Foundation
Supports the hospital in raising
funds for medical equipment,
infrastructure and education
priorities in order to meet the
healthcare needs of the community.

Canadian Red Cross
Tsunami Relief
Organizing disaster recovery efforts
for those affected by the tsunami
in Asia by providing basic needs of
food, clothing, shelter, and first
aid, and participating in long term
recovery programs, in union with
international Red Cross agencies.

Food Banks (Across Canada)
Supporting non-profit organizations
that procure, warehouse and
distribute food to member social
service agencies.

Grocery Industry Foundation...
Together (G.I.F.T.)
Provides funding to various Ontario
charities dedicated to assisting
children facing physical, intellectual
or economical challenges.

Heart and Stroke Foundation
of Canada
Dedicated to improving the health
of Canadians by preventing
and reducing disability and death
from heart disease and stroke
through research, health promotion
and advocacy.

16 2005 Annual Summary Loblaw Companies Limited

Corporate Social Responsibility

Loblaw Companies Limited and its subsidiaries are committed to responsible corporate

citizenship. This includes providing a safe workplace for employees, contributing to its local

communities, respecting the environment, and promoting health and food safety, while

offering products that provide meaningful choices to consumers.

These commitments are instilled throughout the organization
and are overseen by the Environmental, Health and Safety
Committee of the Board of Directors (the “Board”) of the Company,
and by the full Board itself. The Board reviews and monitors
policies, procedures, practices and compliance in these ﬁelds.
Initiatives in these areas are undertaken through any
combination of four approaches: by the Company itself,
in conjunction with other industry members, as part of
industry-government partnerships, and in direct cooperation
with governments.

Respecting the Environment in a Sustainable Way

The commitment to the environment is demonstrated
through measures in such areas as environmental awareness
and management, energy efﬁciency, waste management
and packaging.

Environmental Awareness Management Measures in this area are driven
by an Environmental Management System designed to achieve
the structured integration of environmental programs into the
Company’s operations. This system also focuses on ensuring the
control of high-risk activities, the management of hazardous
wastes, and the control and reduction of ozone-depleting
substances. Environmental risk assessments and audits of
ongoing and newly acquired or established operations are
conducted on a regular basis by in-house environmental staff
as well as by external parties. In addition, employees receive
education and training that enable them to recognize and
minimize environmental risks and to respond to any incidents
that might occur.

Energy Efficiency Ongoing efforts are directed towards improving
energy efﬁciency throughout Loblaw, including cooperating
with federal and provincial agencies. The areas in which these
efﬁciencies are pursued include the lighting used inside and
outside stores, energy-efﬁcient refrigeration, the use of energy
in corporate facilities, and the fuels used in the Company’s
transportation and other operations. In September 2005, Loblaw
opened its new, energy efficient head office and Store Support
Centre in Brampton, Ontario. Furthermore, Loblaw has
established partnerships and commitments with federal and
provincial agencies to achieve energy conservation at the retail
store level in a realistic and focused manner, including the
use of innovative refrigeration system technology.

Waste Management and Packaging Waste management programs
follow a three-stage process – source reduction, diversion
to re-use or recycling and, ﬁnally, disposal. Loblaw is a
long-standing supporter of, and ﬁnancial contributor to, such
industry-sponsored programs as Corporations Supporting
Recycling and the Composting Council of Canada. This
commitment is evident throughout the Company’s operations.
In-store photo labs recycle disposable cameras, processing ﬂuids
and even ﬁlm cuttings. Post-consumer recycled material is
used in private label packaging to the greatest extent possible
without compromising the safety or quality of the product.
Packaging of control label products is labelled as appropriate
with the symbols that help customers identify materials that

can be recycled through local municipal programs. As well,
customers are offered a choice in grocery checkout packaging,
including conventional plastic shopping bags, re-usable plastic
bags, recyclable corrugated containers and re-usable bins.
Also, this commitment extends to the administration, support
and corporate offices of the Company, where waste minimization
and recycling activities are actively employed. These programs
promote the diversion of plastics, metals, paper, corrugate
and organics from landfill.

Promoting Health and Food Safety

The commitment to health promotion and food safety is reﬂected
in the Company’s participation in standard-setting initiatives, in its
operations, in its dealings with suppliers, and in the information
provided to customers.

The Company supports national food initiatives designed

to promote health and food safety. It works to ensure that
products meet or exceed the food safety requirements of the
Canadian Food Inspection Agency. It also participates in national
joint industry-government initiatives in the development of
food safety programs for different parts of the food supply
system. Suppliers are informed of the standards to which they
must adhere and are expected to observe them. Manufacturing
and food handling procedures, employee education and training
programs, compliance systems and independent audits are
among the measures used to promote food safety within
the Company’s stores and other operations. Through packaging
and labelling of control label products, customers are informed
of ingredients and whether certain products may have come
in contact with one or more allergens. This allows consumers
to make more fully informed purchasing decisions.

Offering Products that Provide Meaningful Choices

The Company provides a wide range of product offerings to meet
an equally wide range of consumer preferences. This includes
the provision of alternative food products that provide customers
with meaningful choices.

The environmentally responsible collection of President’s
Choice GREEN products and the hundreds of President’s Choice
Organics products have been developed to satisfy customers’
environmental or health preferences. The organic products
are third-party certiﬁed as organic, are in packages containing
recycled materials, and are priced to be competitive with
similar national brands. The Natural Value department in many
stores is a one-stop source for health food needs, offering a
selection of healthy and nutritious alternative foods, vitamins
and herbal products.

The focus on healthy and nutritious food products is further

demonstrated by two recent product initiatives under the
President’s Choice label. The line of PC Mini Chefs products
has been designed to ﬁt into a healthy eating plan for young
children consistent with the federal government’s “Nutrition
Recommendations for Canadians”. These products have been
approved by a team consisting of prominent nutrition researchers
and registered dieticians. The PC Blue Menu line of products
offers adults a variety of alternatives lower in fat, calories
and sodium, and higher in fibre.

2005 Annual Summary Loblaw Companies Limited 17

Summary of Corporate Governance Practices

The Board of Directors (the “Board”) and management of the Company believe that sound

corporate governance practices will contribute to the effective management of the Company

and its achievement of strategic and operational plans, goals and objectives.

Individual directors may, with the approval of the lead director,

retain an outside advisor at the expense of the Company.

The Board requires that management seek directors’ review and

approval of:
• strategic corporate direction and corporate performance objectives;
• multi-year and annual business, capital and operating plans and

budgets;

• material capital expenditures, acquisitions, divestitures and

restructurings; and

• investment outside of the ordinary course of business.

These matters are in addition to those matters which are required by
law to receive Board consideration and approval.

The Board regularly receives reports on the operating results of

the Company, as well as timely reports on various matters, including
insurance, pensions, corporate governance, health and safety and
treasury matters.

Ethical Business Conduct

The Company’s Code of Business Conduct (the “Code”), sets out the
Company’s long-standing commitment of requiring adherence to high
standards of ethical conduct and business practices. The Code is
reviewed annually to ensure it is current and reflects best practices
in the area of ethical business conduct. Directors, officers and
employees of the Company are required to comply with the Code
and must acknowledge their commitment to abide by the Code on
a periodic basis. The Code is available on the Company’s website,
www.loblaw.ca.

The Code also deals with conflicts of interest. Should an officer,

director or employee have a conflict of interest with respect to any
matter, that individual is required to bring the conflict to the attention
of the Ethics and Conduct Committee and, if a director has a conflict
with respect to any matter, he or she may not participate in any
discussion or vote on the conflict matter. The Code also addresses
such issues as the protection of confidential information and the
protection and proper use of the Company’s assets.

The Company has established an Ethics and Conduct Committee

which reviews all material breaches of the Code. The Ethics and
Conduct Committee also oversees implementation of the Code,
educating employees regarding the Code and reviews the Code
annually to determine if it requires revision.

The Company encourages the reporting of unethical behaviour
and has established an Ethics Response Line, a toll-free number that
any employee or director may use to report conduct which he or she
feels violates the Code or otherwise constitutes fraud or unethical
conduct. A fraud reporting protocol has also been implemented to
ensure that fraud is reported to senior management in a timely manner.
In addition, the Audit Committee has endorsed procedures for the
receipt, retention and handling of complaints regarding accounting,
internal control or auditing matters. These procedures are available
at www.loblaw.ca.

The Company has adopted a Vendor Code of Conduct that sets
out the Company’s expectations of its vendor community with respect
to ethical conduct and social responsibilities. The Vendor Code deals
with such matters as labour practices, respect for the environment
and compliance with various laws.

The Company seeks to attain high standards of corporate governance
and when appropriate adopts “best practices” in developing its
approach to corporate governance. The Company’s approach to
corporate governance is consistent with National Policy 58-201 –
Corporate Governance Guidelines (the “Guidelines”). The Governance,
Employee Development, Nominating and Compensation Committee
(“Governance Committee”) regularly reviews its corporate governance
practices and considers any changes necessary to maintain the
Company’s high standards of corporate governance.

Director Independence

The Board is comprised of a majority of independent directors. The
Governance Committee has reviewed each director’s factual
circumstances and relationships with the Company to determine
whether he or she is independent within the meaning of the
Guidelines. The Guidelines provide that a director is independent if he
or she has no material relationship with the Company or its affiliates
that would reasonably be expected to interfere with the director’s
independent judgment.

Board Leadership

Mr. W. Galen Weston is Chairman of the Board. Mr. Weston has a
significant common interest with other shareholders with respect to
value creation, the well being of the Company, and the performance
of its publicly listed securities. The Board has established a position
description for the Chairman of the Board. The Board has also
appointed an independent director, Anthony S. Fell, to serve as lead
director. The lead director provides leadership to the Board and
particularly to the independent directors. He ensures that the Board
operates independently of management and that directors have
an independent leadership contact. As part of his responsibilities,
the lead director meets periodically with the other directors
to obtain insight as to areas where the Board and its Committees
can operate more effectively and to ensure the Board is able
to discharge its responsibilities independently of management.
The Board has developed a position description for the lead director.

Board Responsibilities and Duties

The Board, directly and through its Committees, supervises the
management of the business and affairs of the Company with the
goal of enhancing long-term shareholder value. The Board reviews
the Company’s direction, assigns responsibility to management for
achievement of that direction, develops and approves major policy
decisions, delegates to management the authority and responsibility
in day-to-day affairs and reviews management’s performance and
effectiveness. The Board’s expectations of management are
communicated to management directly and through Committees of
the Board.

The Board approves the Company’s corporate goals and

objectives, operating budgets and strategies, which take into account
the opportunities and risks of the business. Members of the Board
attend an annual all-day strategy session with management to
discuss and review the Company’s strategic plans and opportunities.
In addition, management’s strengths and weaknesses are discussed.
Through the Audit Committee, the Board oversees the Company’s
risk management framework and assesses and evaluates the integrity
of the Company’s internal controls and management information
systems. Through the Governance Committee, the Board oversees
succession planning and compensation for senior management as
well as Board nominees.

18 2005 Annual Summary Loblaw Companies Limited

Board Committees

There are five committees of the Board: Audit; Governance,
Employee Development, Nominating and Compensation; Pension
and Benefits; Environmental, Health and Safety and Executive.
The Audit Committee is comprised solely of independent
directors. All Committees are comprised solely of non-management
directors, in each case, with a majority of members being
independent directors except for the Executive Committee. The
Board believes that the composition of its committees other than

the Executive Committee allows them to operate independently from
management such that shareholders’ interests are protected.
Each Committee has a formal mandate and a position
description for the Chair established by the Board. Both the
mandate and position description are reviewed annually. Copies
of the Committees’ mandates are available on the Company’s
website, www.loblaw.ca.

The following is a brief summary of some of the responsibilities

of each Committee.

Audit Committee

All members of the Audit Committee must be independent and
financially literate as required under applicable rules. The Audit
Committee is also responsible for supporting the Board in overseeing
the integrity of the Company’s financial reporting and internal controls
over financial reporting, disclosure controls, internal audit function
and its compliance with legal and regulatory requirements. The Audit
Committee’s responsibilities include:
• recommending the appointment of the external auditor;
• reviewing the arrangements for and scope of the audit by the

external auditor;

• reviewing the independence of the external auditor;
• reviewing and approving the Company’s hiring policies regarding
partners and professional employees of the present and former
external auditor of the Company;

• considering and evaluating with management the adequacy and
effectiveness of internal controls over financial reporting and
disclosure controls and procedures and reviewing any proposed
corrective actions;

governance practices consistent with high standards of corporate
governance. As part of its mandate, the Governance Committee
identifies and recommends candidates for nomination to the Board
as directors, monitors the orientation program for new directors and
maintains a process for assessing the performance of the Board and
its Committees as well as the performance of individual directors
and discharging the Board’s responsibilities relating to compensation
and succession planning for the Company’s senior employees. The
Governance Committee’s specific responsibilities include:
• identifying candidates for membership on the Board and evaluating

the independence of the directors;

• assisting in directors’ orientation and assessing their performance

on an on-going basis;

• shaping the Company’s approach to corporate governance and

recommending to the Board corporate governance principles to be
followed by the Company;

• discharging the Board’s responsibilities relating to compensation

and succession planning for the Company’s senior employees; and

• determining the process for the compensation of directors and

• reviewing and monitoring the Company’s policies relating to ethics

executive officers.

and conflicts of interests;

• overseeing procedures for the receipt, retention and follow up of

complaints regarding the Company’s accounting, internal controls
and auditing matters and the confidential anonymous submission
by employees of concerns regarding such matters;

• reviewing and monitoring the internal audit function of the

Company;

• reviewing the integrity of the Company’s management and

information systems;

• reviewing and approving the audit fees paid to the external auditor
and pre-approval of non-audit related fees to the external auditor;

• discussing and reviewing with management and the external

auditor the Company’s annual and interim consolidated financial
statements, key reporting matters and Management’s Discussion
and Analysis and Annual Information Form;

• reviewing disclosure containing financial information based on the

Company’s financial statements; and

• reviewing with management the principal risks of the Company’s
business and the systems and processes implemented to manage
these risks.

Governance, Employee Development, Nominating and Compensation Committee

The Governance Committee is responsible for overseeing the
compensation of directors and executive officers. The Governance
Committee is also responsible for developing and maintaining

The Board appointed the Chairman of the Governance Committee,
who is an independent director, to serve as lead director.

Pension and Benefits Committee

The Pension and Benefits Committee is responsible for:
• reviewing the performance of the Company’s and its subsidiaries’

pension plans and pension funds;

• reviewing and recommending managers for the fund’s portfolio;
• reviewing the performance of pension fund managers;
• reviewing and approving the assumptions used, the funded status
and amendments to the Company’s and its subsidiaries’ pension
plans; and

• receiving reports regarding level, types and costs of the Company’s

employee benefit plans.

Environmental, Health and Safety Committee

The Environmental, Health and Safety Committee is responsible for
reviewing and monitoring environmental, food safety and workplace
health and safety policies, procedures, practices and compliance.

Executive Committee

The Executive Committee possesses all of the powers of the Board
except the power to declare common dividends and certain other
powers specifically reserved by applicable law to the Board. The
Executive Committee acts only when it is not practicable for the full
Board to meet.

Other Corporate Governance Matters
Disclosure Policy The Board has reviewed and adopted a corporate
Disclosure Policy to deal with the timely dissemination of all material
information. A copy of the Disclosure Policy is available on the
Company’s website, www.loblaw.ca. The Disclosure Policy, which is
reviewed annually, establishes consistent guidance for determining
what information is material and how it is to be disclosed to avoid
selective disclosure and to ensure wide dissemination. The Board,
directly and through its Committees, reviews and approves the
contents of major disclosure documents, including unaudited interim
and audited annual consolidated financial statements, Management’s
Discussion and Analysis, the Annual Information Form, and the Proxy
Circular. The Company seeks to communicate to its shareholders

through these documents as well as by means of news releases, its
website and investor relations meetings.

Disclosure Committee A Disclosure Committee comprised of senior
management of the Company oversees the Company’s disclosure
process as outlined in the Disclosure Policy. The Disclosure
Committee’s mandate includes ensuring that effective disclosure
controls and procedures are in place to allow the Company to satisfy
all of its continuous disclosure obligations including certification
requirements. The Disclosure Committee is also responsible for
ensuring that the policies and procedures contained in the Company’s
Disclosure Policy are in compliance with regulatory requirements.

2005 Annual Summary Loblaw Companies Limited 19

Board of Directors and Corporate Officers

Directors

W. Galen Weston, O.C., B.A., LL.D.1*
Chairman, Loblaw Companies Limited;
Chairman and President, George
Weston Limited; Chairman, Holt,
Renfrew & Co., Limited, Brown Thomas
Group Limited, Selfridges & Co. Ltd.;
President, The W. Garfield Weston
Foundation; Director, Associated British
Foods plc; Member, Advisory Board,
Columbia University.

Paul M. Beeston, C.M., B.A., F.C.A.2,5
Former President and Chief Executive
Officer, Major League Baseball;
Former President, Toronto Blue Jays
Baseball Team; Director, President’s
Choice Bank.

Gordon A.M. Currie, B.A., LL.B.
Executive Vice President, Secretary
and General Counsel, George Weston
Limited; Former Senior Vice President
and General Counsel, Centrica
North America; Former Partner,
Blake, Cassels & Graydon LLP.

Camilla H. Dalglish, B.A.5
Director, The W. Garfield Weston
Foundation, The Nature Conservancy
of Canada; Former President,
The Civic Garden Centre.

Anthony S. Fell, O.C.3*,4
Chairman, RBC Capital Markets Inc.;
Former Chairman and Chief Executive
Officer, RBC Dominion Securities;
Former Deputy Chairman, Royal Bank
of Canada; Chairman, Munich
Reinsurance Group of Companies;
Director, CAE Inc., BCE Inc.;
Chairman of the Board of Trustees,
University Health Network.

Anthony R. Graham 1,3,4
President and Director, Wittington
Investments, Limited; President and
Chief Executive Officer, Sumarria Inc.;
Former Vice Chairman, National Bank
Financial; Chairman and Director,
President’s Choice Bank, Graymont
Ltd.; Director, George Weston Limited,
Holt, Renfrew & Co., Limited,
Brown Thomas Group Limited,
Power Corporation of Canada, Power
Financial Corporation, Provigo Inc.,
Selfridges & Co. Ltd.

John A. Lederer, B.A.1
President, Loblaw Companies Limited;
Former Executive Vice President,
Loblaw Companies Limited; Director,
Food Marketing Institute; Founder,
President’s Choice Children’s Charity.

Nancy H.O. Lockhart 5
Chief Administrative Officer, Frum
Development Group; Former Vice
President, Shoppers Drug Mart
Corporation; Former Chair of the Board
of Trustees, Ontario Science Centre;
Former President, Canadian Club;
Former Chair, Canadian Film Centre.

Pierre Michaud, C.M.5*
Chairman and Director, Provigo Inc.;
Vice Chairman, Laurentian Bank
of Canada; Director, Bombardier
Recreational Products Inc.,
Gaz Métro Inc., Old Port of Montreal
Corporation Inc.

Thomas C. O’Neill, B. COMM., F.C.A.2
Retired Chairman and former
Chief Executive Officer,
PricewaterhouseCoopers Consulting;
Director, President’s Choice Bank,
Nexen Inc., BCE Inc., OTPP
(Ontario Teachers Pension Plan),
St. Michael’s Hospital, Adecco S.A.;
Vice Chairman, Board of Governors,
Queen’s University.

G. Joseph Reddington, B.A., J.D.3
Retired Chairman, Director and
Chief Executive Officer, Breuners
Home Furnishings Corporation;
Former Chairman and Chief Executive
Officer, The Signature Group;
Former President and Chief Executive
Officer, Sears Canada; Director,
Ansett Worldwide.

T. Iain Ronald, M.B.A., B. LAW., F.C.A.2*,4*
Chairman, TransAlta Power Ltd.,
TransAlta Cogeneration Ltd., BFI
Canada Inc.; Former Vice Chairman,
Canadian Imperial Bank of Commerce;
Director, President’s Choice Bank,
Holt, Renfrew & Co., Limited, Leon’s
Furniture Limited, Strongco Inc.,
Allied Properties REIT.

Joseph H. Wright, B.A.2,3,4
Managing Partner, Barnagain Capital;
Former President and Chief Executive
Officer, Swiss Bank Corporation
(Canada); Chairman and Trustee,
BFI Canada Income Fund; Chairman,
Hollinger Inc.; Director, President’s
Choice Bank.

1. Executive Committee
2. Audit Committee
3. Governance, Employee Development,

Nominating and Compensation Committee

4. Pension and Benefits Committee
5. Environmental, Health and Safety Committee
* Chairman of the Committee

Officers
(includes age and years of service)

W. Galen Weston, O.C. (65 and 34 years)
Chairman of the Board

John A. Lederer (50 and 29 years)
President

David K. Bragg (57 and 22 years)
Executive Vice President

David R. Jeffs (48 and 27 years)
Executive Vice President

Richard P. Mavrinac (53 and 23 years)
Executive Vice President

Peter McMahon (effective February 2006)
Executive Vice President

Paul D. Ormsby (54 and 23 years)
Executive Vice President

Stephen A. Smith (48 and 20 years)
Executive Vice President

Robert A. Balcom (44 and 12 years)
Senior Vice President, Secretary
and General Counsel

Roy R. Conliffe (55 and 24 years)
Senior Vice President,
Labour Relations

Louise M. Lacchin (48 and 22 years)
Senior Vice President, Finance

Franca Smith (42 and 17 years)
Senior Vice President,
Financial Control

Galen G. Weston (33 and 8 years)
Senior Vice President,
Corporate Development

Geoffrey H. Wilson (50 and 19 years)
Senior Vice President, Investor
Relations and Public Affairs

Manny DiFilippo (46 and 14 years)
Vice President, Risk Management
and Strategic Initiatives

David G. Gore (35 and 4 years)
Vice President, Legal Counsel,
Compliance and Regulatory Affairs,
Privacy and Ethics Officer

J. Bradley Holland (42 and 12 years)
Vice President, Taxation

Michael N. Kimber (50 and 21 years)
Vice President, Legal Counsel

Joyce C. Lee (34 and 9 years)
Vice President, Financial Reporting

Lucy J. Paglione (46 and 22 years)
Vice President, Pension and Benefits

Mark A. Rodrigues (48 and 19 years)
Vice President, Internal
Control Compliance

George D. Seslija (50 and 26 years)
Vice President, Real Estate
Development

Lisa R. Swartzman (35 and 12 years)
Vice President, Treasurer

Ann Weir (43 and 12 years)
Vice President, Internal Audit Services
and Systems Audit

Laurel MacKay-Lee (36 and 6 years)
Controller, Financial Projects

Irene Pinheiro (38 and 13 years)
Controller, Financial Analysis

Marian M. Burrows (51 and 27 years)
Assistant Secretary

Swavek A. Czapinski (31 and 7 years)
Assistant Treasurer

M. Darryl Hanstead (31 and 7 years)
Assistant Treasurer

Walter H. Kraus (43 and 17 years)
Senior Director, Environmental Affairs

20 2005 Annual Summary Loblaw Companies Limited

Shareholder and Corporate Information

Independent Auditors
KPMG LLP
Chartered Accountants
Toronto, Canada

Annual Meeting
Loblaw Companies Limited Annual
Meeting of Shareholders will be held on
Thursday, May 4, 2006 at 11:00 a.m.
at the Metro Toronto Convention Centre,
Constitution Hall, Toronto, Canada.

Common Dividend Policy
It is the Company’s policy to
maintain a dividend payment equal
to approximately 20% to 25% of
the prior year’s adjusted basic
net earnings per common share.(1)

Common Dividend Dates
The declaration and payment of
quarterly dividends are made
subject to approval by the Board
of Directors. The anticipated record
and payment dates for 2006 are:

Record Date

Payment Date

March 15
June 15
Sept. 15
Dec. 15

April 1
July 1
Oct. 1
Dec. 30

Normal Course Issuer Bid
The Company has a Normal
Course Issuer Bid on the
Toronto Stock Exchange.

Value of Common Shares
For capital gains purposes, the
valuation day (December 22, 1971)
cost base for the Company
is $0.958 per common share.
The value on February 22, 1994
was $7.67 per common share.

Registrar and Transfer Agent
Computershare Investor Services Inc.
100 University Avenue
Toronto, Canada
M5J 2Y1
Tel: (416) 263-9200
Toll free: 1-800-663-9097
Fax: (416) 263-9394
Toll free fax: 1-888-453-0330

To change your address, eliminate
multiple mailings, or for other
shareholder account inquiries,
please contact Computershare
Investor Services Inc.

National Head Office
and Store Support Centre
Loblaw Companies Limited
1 President’s Choice Circle
Brampton, Canada
L6Y 5S5
Tel: (905) 459-2500
Fax: (905) 861-2206
Internet: www.loblaw.ca

Registered Office
22 St. Clair Avenue East
Toronto, Canada
M4T 2S7
Tel: (416) 922-8500
Fax: (416) 922-7791

Stock Exchange Listing
and Symbol
The Company’s common shares are
listed on the Toronto Stock Exchange
and trade under the symbol “L”.

Common Shares
63% of the Company’s common
shares are owned beneficially
by W. Galen Weston and
George Weston Limited.

At year end 2005 there were
274,054,814 common shares
outstanding, 5,124 registered
common shareholders and
100,737,979 common shares
available for public trading.

The average daily trading volume
of the Company’s common shares for
2005 was 322,169.

Trademarks
Loblaw Companies Limited and
its subsidiaries own a number of
trademarks. Several subsidiaries are
licensees of additional trademarks.
These trademarks are the exclusive
property of Loblaw Companies Limited
or the licensor and where used in
this report are in italics.

Investor Relations
Shareholders, security analysts and
investment professionals should direct
their requests to Geoffrey H. Wilson,
Senior Vice President, Investor
Relations and Public Affairs at the
Company’s National Head Office
or by e-mail at investor@loblaw.ca

Ce rapport est disponible
en français.

This Annual Summary was printed in Canada
on Cougar Opaque, manufactured totally
chlorine-free with 10% post-consumer fibre,
at a mill independently certified as meeting
the procurement provisions of the Sustainable
Forestry Initiative® (SFI) standard.

Additional financial information has
been filed electronically with various
securities regulators in Canada
through the System for Electronic
Document Analysis and Retrieval
(SEDAR) and with the Office of the
Superintendent of Financial
Institutions (OSFI) as the primary
regulator for the Company’s
subsidiary, President’s Choice Bank.
The Company holds an analyst call
shortly following the release of its
quarterly results. These calls are
archived in the Investor Zone section
of the Company’s website.

(1) See Non-GAAP Financial Measures on page 33 of the 2005 Financial Report.

Loblaw Companies Limited
1 President’s Choice Circle
Brampton, Canada
L6Y 5S5

Tel: (905) 459-2500
Fax: (905) 861-2206

loblaw.ca

...aligning for success.

Loblaw Companies Limited 2005 Financial Report

Financial Highlights(1)

For the years ended December 31, 2005 and January 1, 2005
($ millions except where otherwise indicated)

Operating Results
Sales
Sales excluding impact of variable interest entities(2)
Adjusted EBITDA(2)
Operating income
Adjusted operating income(2)
Interest expense
Net earnings

Cash Flow
Cash flows from operating activities
Capital investment

Per Common Share ($)
Basic net earnings
Adjusted basic net earnings(2)
Dividend rate at year end
Cash flows from operating activities
Book value
Market price at year end

(1) For financial definitions and ratios refer to the Glossary of Terms on page 68.
(2) See Non-GAAP Financial Measures on page 33.

Contents

2005 Financial Report

1 Management’s Discussion and Analysis

The 2005 Annual Report consists

36 Financial Results

68 Glossary of Terms

of the 2005 Annual Summary and

this 2005 Financial Report.

2005
(52 weeks)

2004
(52 weeks)

$ 27,801
27,423
2,132
1,401
1,600
252
746

$ 26,209
26,209
2,125
1,652
1,652
239
968

1,489
1,156

2.72
3.35
.84
5.43
21.48
56.37

7.8%
5.0%
5.8%
11.2%
13.2%
5.6:1
.66:1

48.5
56,100
579
0.2%
670
402

1,443
1,258

3.53
3.48
.76
5.26
19.74
72.02

8.1%
6.3%
6.3%
14.2%
19.2%
6.9:1
.71:1

45.7
53,600
592
1.5%
658
400

Management’s Discussion and Analysis

5
6

12
12

13
14
15

18
18
19

1. Forward-Looking Statements

2. Overview

3. Vision and Strategies

4. Key Performance Indicators

5. Financial Performance
5.1 Results of Operations
Sales
Operating Income
Interest Expense
Income Taxes
Net Earnings

5.2 Financial Condition
Financial Ratios
Common Share Dividends
Outstanding Share Capital

6. Liquidity and Capital Resources

6.1 Cash Flows

Cash Flows from Operating Activities
Cash Flows used in Investing Activities
Cash Flows used in Financing Activities

6.2 Sources of Liquidity
6.3 Contractual Obligations
6.4 Off-Balance Sheet Arrangements

Guarantees
Securitization of Credit Card Receivables
Independent Funding Trust
Financial Derivative Instruments

7. Selected Consolidated Annual Information

8. Quarterly Results of Operations

8.1 Results by Quarter
8.2 Fourth Quarter Results

9. Disclosure Controls and Procedures

21
21

10. Risks and Risk Management

10.1 Operating Risks and Risk Management

Industry
Competitive Environment
Food Safety and Public Health
Labour
Employee Future Benefit Contributions
Third-Party Service Providers
Real Estate
Seasonality
Leadership Development and
Employee Retention

Utility and Fuel Prices
Insurance
Environmental, Health and Safety
Ethical Business Conduct
Legal, Taxation and Accounting
Holding Company Structure

10.2 Financial Risks and Risk Management
Financial Derivative Instruments
Foreign Currency Exchange Rate
Interest Rate
Common Share Market Price
Counterparty
Credit

11. Related Party Transactions

26
27
27
28
28
29

29
29
31

12. Critical Accounting Estimates
12.1 Valuation of Inventories
12.2 Employee Future Benefits
12.3 Goodwill
12.4 Income Taxes
12.5 Goods and Services Tax and

Provincial Sales Taxes

13. Accounting Standards

13.1 Accounting Standards Implemented in 2005
13.2 Future Accounting Standards

14. Outlook

15. Non-GAAP Financial Measures

16. Additional Information

2005 Financial Report Loblaw Companies Limited 1

Management’s Discussion and Analysis

The following Management’s Discussion and Analysis
(“MD&A”) for Loblaw Companies Limited and its
subsidiaries (collectively, the “Company” or “Loblaw”)
should be read in conjunction with the consolidated
financial statements and the accompanying notes on
pages 37 to 65 of this Financial Report. The consolidated
financial statements and the accompanying notes have
been prepared in accordance with Canadian generally
accepted accounting principles (“GAAP”) and are
reported in Canadian dollars. As a result of implementing
Accounting Guideline 15, “Consolidation of Variable
Interest Entities”, (“AcG 15”) effective January 2, 2005,
these consolidated financial statements include the
accounts of Loblaw Companies Limited and its
subsidiaries and variable interest entities (“VIEs”)
that the Company is required to consolidate. A more
comprehensive discussion regarding the implementation
of AcG 15 is included in the section Accounting
Standards below. A glossary of terms used throughout
this Financial Report can be found on page 68. The
information in this MD&A is current to March 7, 2006,
unless otherwise noted.

1. Forward-Looking Statements

This Annual Report, including this MD&A, contains
forward-looking statements which reflect management’s
expectations regarding the Company’s objectives, plans,
goals, strategies, future growth, results of operations,
performance and business prospects and opportunities.
These forward-looking statements include expected
sales and earnings prospects for 2006. Forward-looking
statements are typically identified by words or phrases
such as “anticipates”, “expects”, “believes”, “estimates”,
“intends” and other similar expressions.

2 2005 Financial Report Loblaw Companies Limited

of current competitors, the ability to realize anticipated
cost savings, including those resulting from restructuring
and other cost reduction initiatives, the ability to
execute restructuring plans effectively, the Company’s
relationship with its employees, results of labour
negotiations including the terms of future collective
bargaining agreements, changes to the regulatory
environment in which the Company operates now
or in the future, changes in the Company’s tax liabilities,
either through changes in tax laws or future assessments,
performance of third-party service providers, public
health events, the ability of the Company to attract
and retain key executives and supply and quality control
issues with vendors. The Company cautions that this
list of factors is not exhaustive. These factors and other
risks and uncertainties are discussed in the Company’s
materials filed with the Canadian securities regulatory
authorities from time to time, including in the Risks and
Risk Management section of this MD&A.

The assumptions applied in making the forward-looking
statements contained in this Annual Report, including
this MD&A include the following: economic conditions in
2006 do not materially change from those expected,
patterns of consumer spending are reasonably consistent
with historical trends, no new significant competitors
enter our market nor does any existing competitor
significantly increase its presence, anticipated cost
savings from restructuring activities are realized
as planned, continuing future restructuring activities
are effectively executed, there are no material work
stoppages in 2006 and the performance of third-party
service providers is in accordance with expectations
in the upcoming year.

Potential investors and other readers are urged to
consider these factors carefully in evaluating these
forward-looking statements and are cautioned not
to place undue reliance on them. The forward-looking
statements included in this Annual Report, including
this MD&A are made only as of the filing date of this
Annual Report and the Company does not undertake
to publicly update these forward-looking statements to
reflect new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the
forward-looking events contained in these forward-looking
statements may or may not occur. The Company cannot
assure that projected results or events will be achieved.

2. Overview

Loblaw, a subsidiary of George Weston Limited, is
Canada’s largest food distributor and a leading provider
of general merchandise, drugstore, and financial
products and services. Through its various operating
banners, it is committed to providing Canadians across
the country with a one-stop destination in meeting
their food and everyday household needs. For over
45 years, the Company has supplied the Canadian
market with innovative products and services through
corporate, franchised and associated stores. Corporate
owned store banners include Atlantic Superstore,
Dominion (in Newfoundland and Labrador), Extra Foods,
Loblaws, Maxi, Maxi & Cie, Provigo, The Real Canadian
Superstore and Zehrs Markets and a number of
wholesale outlets operating as Cash & Carry, Presto and
The Real Canadian Wholesale Club. The Company’s
franchised and associated stores operate under the
trade names Atlantic SaveEasy, Fortinos, Lucky Dollar
Foods, no frills, Shop Easy Foods, SuperValu, Valu-mart
and Your Independent Grocer. The store network is
supported by 26 Company owned and 2 third-party
warehouse facilities located across Canada.

The Company also offers a strong control label program,
including the President’s Choice and no name brands.
In addition, the Company makes available to consumers
President’s Choice Financial services and products,
including the President’s Choice Financial MasterCard®,
and PC Financial auto, home, travel and pet insurance,
PC Mobile phone service, as well as a loyalty program
known as PC points.

The Company competes in the retail industry in
Canada, which is a changing and competitive market.
Consumer needs drive industry changes, which are
impacted by changing demographic and economic
trends such as changes in disposable income, increasing
ethnic diversity, nutritional awareness and time
availability. Over the past several years, consumers
have demanded more choice, value and convenience.

The Company competes with non-traditional competitors
as well as traditional supermarkets. Recent industry
changes have been characterized by the expansion of
non-traditional competitors, such as mass merchandisers,
warehouse clubs, limited assortment stores, discount
stores, convenience stores, drugstores and specialty stores,

which continue to increase their offerings of products
typically associated with traditional supermarkets. Over
the past several years, there has been an increase in
the number of retail outlets that traditionally exclusively
featured food, general merchandise or drugstore items,
that now offer a selection of these items, resulting in what
is commonly referred to in the industry as “channel
blurring”. This evolution of the retail landscape presents
a number of issues for traditional grocers: the need
to re-position conventional supermarkets to either
expand or, conversely, better focus their offerings; the
reality of lower prices offered by discount models and
the obvious need to reduce operating and labour costs
in order to maintain earnings in light of lower prices
and increased competition.

3. Vision and Strategies

Loblaw’s vision has been, and continues to be, centred
on three main principles: growth, innovation and
flexibility. While accepting prudent operating risks, Loblaw
seeks long term, stable growth supported by a strong
balance sheet, with the goal of providing sustainable
superior returns to its shareholders through a combination
of common share price appreciation and dividends.
It encourages innovation based on the belief that
providing consumers with new products and convenient
services at competitive prices and exciting shopping
environments is critical to its success. Loblaw strives
for flexibility in its operations in order to grow its
market share across the country.

On a long term basis, Loblaw’s goal is to be known for:
• offering the highest quality fresh foods;
• a compelling value proposition and food assortment;
• leading in the development of unique, high quality

control label products and services;

• a powerful and compelling general merchandise and

drugstore offering;

• delivering sustainable growth through distinct but
integrated approaches to the marketplace; and

• providing a great place to work and grow.

In support of its vision, the Company employs various
operating and financial strategies. These strategies
guide the Company over the long term and represent
a philosophy for the way in which it conducts
its business.

2005 Financial Report Loblaw Companies Limited 3

Management’s Discussion and Analysis

The Company’s long term operating strategies are:
• using the cash flow generated in the business to

• constantly striving to improve the Company’s

value proposition.

invest in its future;

• owning its real estate, where possible, to maximize
flexibility for product and business opportunities in
the future;

• using a multi-format approach to maximize market

share over the longer term;

• focusing on food but serving the consumer’s everyday

household needs;

• creating customer loyalty and enhancing price
competitiveness through a superior control
label program;

• implementing and executing plans and programs

flawlessly; and

The Company’s long term financial strategies are:
• maintaining a strong balance sheet;
• minimizing the risks and costs of its operating and

financing activities; and

• maintaining liquidity and access to capital markets.

The Company’s Board of Directors (the “Board”)
and senior management meet annually to review
the strategic imperatives. These strategic imperatives,
which generally span a three to five year time frame,
target specific issues in response to changes in
consumer needs and the competitive retail landscape.

The table below summarizes the Company’s strategic imperatives and the activities undertaken in 2005 to progress
these imperatives.

Strategic Imperative

Progress in 2005

Continue to focus on food

• New products and programs were introduced in the produce, meat, bakery, seafood, deli

Continue to drive general merchandise
and drugstore programs as a vital and
integral component of the business

Leverage the equity of the President’s
Choice brand across all product lines
while ensuring consistent quality
is maintained

Intensify leadership programs with
a focus on store operations, increasing
the frequency of sessions and taking
a more interactive, collaborative
approach to training

Execute on imperatives
as a cost effective and fully
integrated operation

and other areas

• Centralized food merchandising teams were established to realize opportunities of scale and

develop common practices

• Increased number of President’s Choice and no name food offerings
• Published first Healthy Insider’s Report featuring PC Blue Menu, PC Mini Chefs

and additional PC Organics products

• Established a national and integrated organizational structure located at the Store Support

Centre in Brampton, Ontario

• Focused general merchandise offering on conveying qualities of product innovation,

great value and differentiation in the marketplace

• Increased number of products and services including the introduction of the PC Bath and Body

line of products

• Developed the Joe Fresh Style apparel for adults which was introduced in early 2006

• Launched the PC Mobile line of prepaid cellular phone services and related accessories
• Continued to grow the President’s Choice Financial MasterCard® and PC Financial

insurance programs

• Launch of the first PC Home Insider’s Report

• Store Managers’ Council completed first full year of operation
• Conducted off-site leadership sessions for store personnel
• Developed common approach to leadership coaching, program execution and business

development at the store level

• Continued development of four distinct store formats: superstores, hard discount stores,

conventional stores and warehouse clubs

• Continued discussions with organized labour to explore competitive opportunities
• Work continued on the conversion to one national systems platform across a number of functions
• Simplified distribution network by closing several smaller facilities and transferring various

functions to larger, more cost-effective centres

• Focused on simplification of business operations including the examination of the flow

of goods from vendors to store shelves

4 2005 Financial Report Loblaw Companies Limited

Management has identified specific critical success factors
which are key enablers of the long term strategies. These
critical success factors involve systems and technology,
logistics, food safety, working capital management
and labour partnerships. Targets have been set across
the Company that will enable management to assess
progress made on each imperative as well as the
effectiveness of implementation. The Company believes
that if it successfully implements and executes its
various strategic imperatives in support of its long term
operating and financial strategies, it will be well
positioned to pursue its vision of providing sustainable
superior returns to its shareholders.

4. Key Performance Indicators

The Company continuously reviews and monitors its
activities and performance indicators, which it believes
are important to measuring the success of the
implementation of its operating and financial strategies.
Some of the Company’s key performance indicators
are set out below:

Key Performance Indicators

Sales growth(2)
Sales growth excluding
impact of VIEs(1)
Basic net earnings per

common share growth
Adjusted basic net earnings

per common share(1) growth

Net debt (1) to equity ratio
Return on average

shareholders’ equity

2005
(52 weeks)

2004
(52 weeks)

6.1%

3.9%

4.6%

3.9%

(22.9)%

15.0%

(3.7)%
.66:1

12.3%
.71:1

13.2%

19.2%

(1) See Non-GAAP Financial Measures on page 33.
(2) Sales growth in 2004 calculated on a 53 week year base in 2003.

The extra week in 2003 had a negative impact of approximately 2%
on the 2004 sales growth shown in the table above.

Other performance indicators include, but are not
limited to: same-store sales growth, operating and
administrative cost management, development of new
control label products and market share.

5. Financial Performance

Basic net earnings per common share for 2005 were
$2.72, a 23% reduction when compared to $3.53
last year. Basic net earnings per common share were
negatively impacted in 2005 by the following:
• 22 cents per common share for the net effect

of stock-based compensation and the associated
equity forwards;

• 20 cents per common share related to restructuring

and other charges;

• 10 cents per common share related to the estimate
of Goods and Services Tax (“GST”) and provincial
sales taxes (“PST”) charges;

• 7 cents per common share related to the estimated
impact of direct costs associated with supply chain
disruptions;

• 1 cent per common share related to the adjustment
to future income tax balances due to the changes in
statutory income tax rates in certain provinces; and
• 3 cents per common share related to the consolidation

of variable interest entities.

After adjusting for the above noted items, adjusted
basic net earnings per common share(1) were $3.35
for the year. These results compare to adjusted basic
net earnings per common share(1) of $3.48 in 2004,
which were adjusted for the successful resolution
of certain income tax matters from a previous year of
$14 million. The net effect of stock-based compensation
and the associated equity forwards did not have an
impact on basic net earnings per common share in 2004.

Results for 2005 were adversely affected by the
short term costs associated with one of the largest
transformations in the Company’s history. The need for
this transformative process was driven by the Company’s
assessment of a fast-changing retail environment
marked by increased consumer choice, low-cost
global retailers, and the addition of an increasingly
unsustainable amount of industry square footage.

Based on this assessment, the Company developed a
comprehensive strategy designed to fortify its competitive
position and to maintain its leadership role in meeting
the food and everyday household needs of Canadian
consumers. In pursuit of this strategy, the Company

(1) See Non-GAAP Financial Measures on page 33.

2005 Financial Report Loblaw Companies Limited 5

Management’s Discussion and Analysis

implemented a number of transformative changes to
its organization during 2005.

These changes included the restructuring of its supply
chain network and the reorganizations involving its
merchandising, procurement and operations groups, the
establishment of a new national head office and Store
Support Centre in Brampton, Ontario, which opened in
the third quarter of 2005, and the relocation of general
merchandise operations from Calgary, Alberta to the
new office. A charge of 20 cents per common share was
recorded in 2005 consisting of employee termination
benefits resulting from planned involuntary terminations,
site closing costs and fixed asset impairment and
accelerated depreciation charges associated with
these activities.

The Company encountered challenges during the
execution of planned changes to its systems, supply
chain and general merchandise areas including certain
supply chain systems conversions which were initiated
as part of the creation of a national information
technology platform and the startup of a new third-party
owned and operated general merchandise warehouse and
distribution centre for eastern Canada. These challenges
disrupted the flow of inventory to the Company’s stores
and caused the Company to incur additional operating
costs. Additional incremental direct costs incurred in the
handling, storage and movement of inventory resulting
from these disruptions amounted to approximately
7 cents per common share for the year.

Also in 2005, a charge was recorded relating to an
audit and proposed assessment by the Canada Revenue
Agency relative to GST on certain products sold during
prior fiscal periods on which GST was not appropriately
charged and remitted. In light of this proposed
assessment, the Company assessed and estimated the
potential liabilities for GST and PST in other areas of
its operations. Accordingly, a charge of 10 cents per
common share was recorded to reflect the best estimate
of such potential tax liabilities of which management
is currently aware.

Further charges in 2005 related to the net effect of
stock-based compensation and the associated equity
forwards, the adjustment to future income tax balances
due to the changes in statutory income tax rates
in certain provinces and to the consolidation of variable

6 2005 Financial Report Loblaw Companies Limited

interest entities, also contributed to the reduction
in basic net earnings per common share by 22 cents,
1 cent and 3 cents per common share, respectively.

5.1 Results of Operations
Sales and Sales Growth Excluding Impact of VIEs(1)

($ millions except
where otherwise indicated)

Total sales
Less: Sales attributable to
the consolidation of VIEs
pursuant to AcG 15

2005
(52 weeks)

2004
(52 weeks)

$ 27,801

$ 26,209

378

Sales excluding impact of VIEs(1)

$ 27,423

$ 26,209

Total sales growth(2)
Less: Positive impact on sales
growth attributable to the
consolidation of VIEs
pursuant to AcG 15

Sales growth excluding impact of VIEs(1)

6.1%

3.9%

1.5%

4.6%

3.9%

(1) See Non-GAAP Financial Measures on page 33.
(2) Sales growth in 2004 calculated on a 53 week year base in 2003.

The extra week in 2003 had a negative impact of approximately 2%
on the 2004 sales growth shown in the table above.

Sales Full year sales in 2005 increased 6.1% to
$27.8 billion from $26.2 billion last year, including 1.5%
or $378 million in sales relating to the consolidation of
certain independent franchisees as required by AcG 15.
Excluding the impact of the VIEs, 2005 sales increased
4.6% or $1.2 billion over last year.

The following factors further explain the change in sales
over the prior year:
• as described earlier, certain initiatives resulted in

supply chain disruptions and a drop in service levels
and in-stock positions causing an estimated reduction
in expected sales growth of approximately 0.5% to
0.7% versus last year;

• retail sales growth in general merchandise and

drugstore categories continued to exceed that of
food in all regions except in western Canada;
general merchandise and drugstore sales in western
Canada were most profoundly impacted by the
supply chain disruptions;

• The Real Canadian Superstore program was

positively received in Ontario and has enjoyed
significant sales growth;

• strong gas bar sales were partially offset by a decline

in tobacco sales;

• same-store sales growth of approximately 0.2%;
• national food price inflation as measured by

“The Consumer Price Index for Food Purchased from
Stores” (“CPI”) was approximately 2% for the year, with
variances by region; the Company’s calculation of
food price inflation, which considers Company-specific
product mix and pricing strategy, was reasonably
consistent with that of CPI;

• an increase in net retail square footage of 2.8 million
square feet or 6.1% due to the opening of 69 new
corporate and franchise stores and the closure
of 57 stores including stores which have undergone
conversions and major expansions;

• sales per corporate store increased to $32 million
in 2005 from $31 million in 2004 reflecting the
introduction of larger stores which are expected to
become ultimately more productive; and

• sales per average square foot of corporate stores of
$579 in 2005 decreased from $592 in 2004 as a
result of increases in net retail square footage which
outpaced the increase in sales.

Sales of control label products for 2005 amounted
to $5.9 billion compared to $5.6 billion in 2004.
Control label penetration, which is measured as control
label retail sales as a percentage of total retail sales,
was 22.4% for 2005, and approximately equal to that
of 2004. The Company introduced approximately

2,000 new control label products in 2005, including
1,600 new general merchandise products. The
Company’s control label program, which includes
President’s Choice, PC, President’s Choice Organics,
PC Blue Menu, PC Mini Chefs, no name, Club Pack,
GREEN, EXACT, Teddy’s Choice and Life@Home,
provides additional sales growth potential.

Loblaw expects that the following initiatives, coupled
with continued investment in pricing, promotions and
advertising where appropriate, will generate continued
sales growth over the next few years:
• capital investment in its store network including
the planned opening, expansion or renovation
of approximately 123 corporate and franchise stores
across Canada in 2006;

• additional emphasis on food offerings of great quality

and value;

• expansion of general merchandise offerings, including
the launch of Joe Fresh Style apparel for adults in
early 2006, and continued improvement in the
execution of its general merchandise and drugstore
programs; and

• continued focus on control label products including

the development of new products in strategic
categories, increased marketing and shortened
time to market.

Sales and Sales Growth
($ millions)

Same-Store Sales Growth

$28,000

21,000

14,000

7,000

20%

2001

2002

2003
(2)

2004

2005

Sales
Sales Growth
Sales Growth Excluding Impact of VIEs(1)

(1) See Non-GAAP Financial Measures on page 33.
(2) 2003 was a 53 week year.

6.0%

4.5

3.0

1.5

2001

2002

2003

(1)

2004

2005

Same-Store Sales Growth

(1) 2003 was a 53 week year.

2005 Financial Report Loblaw Companies Limited 7

Management’s Discussion and Analysis

Operating Income, Adjusted Operating Income, Adjusted EBITDA and Margins(1)

($ millions except
where otherwise indicated)

2005

2004

(52 weeks)

Change

Operating income
Adjusted operating

income(1)

Operating margin
Adjusted operating

margin(1)

Adjusted EBITDA(1)
Adjusted EBITDA

margin(1)

$ 1,401

$ 1,652

(15.2)%

$ 1,600
5.0%

$ 1,652
6.3%

(3.1)%

5.8%
$ 2,132

6.3%
$ 2,125

0.3%

7.8%

8.1%

(1) See Non-GAAP Financial Measures on page 33.

Operating Income Operating income for 2005 decreased
$251 million, or 15.2%, to $1.4 billion. Operating
margin declined to 5.0% in 2005 from 6.3% in 2004.
Adjusted EBITDA(1) increased marginally in 2005.
Adjusted EBITDA margin(1) was 7.8% in 2005 compared
to 8.1% in 2004. In 2005, operating income was
adversely impacted by the factors described below.

During the first quarter of 2005, after completion of
a detailed assessment of its supply chain network,
management of the Company approved a comprehensive
plan to restructure its supply chain operations nationally.

This plan, which is anticipated to be fully implemented
by the end of 2007 or early 2008, is expected
to reduce future operating costs, provide a smoother
flow of products and better service levels to stores
and further enable the Company to achieve its targeted
operating efficiencies. The plan involves the closure of
six distribution centres and the relocation of certain
activities to new distribution centres. Costs accrued thus
far relate primarily to employee termination benefits
resulting from planned involuntary terminations. Further
costs related to fixed asset impairment and accelerated
depreciation and site closure costs as well as additional
employee costs will be recognized as appropriate
criteria are met. Total costs are expected to approximate
$90 million of which $62 million was recognized
in 2005.

In addition to the restructuring of its supply
chain network, the Company also reorganized its
merchandising, procurement and operations groups,
established a new national head office and Store
Support Centre in Brampton, Ontario, which opened
in the third quarter of 2005, and relocated its general
merchandise operations from Calgary, Alberta to the
new office. Of the total estimated $25 million cost
associated with these initiatives, $24 million was
recognized in 2005 resulting in total restructuring
and other charges of $86 million in 2005.

Operating Income and Margins
($ millions)

Analysis of Adjusted EBITDA and Margin(1)
($ millions)

$2,000

1,500

1,000

500

12%

2001

2002

2003
(2)

2004

2005

Operating Margin
Adjusted Operating Margin(1)
Adjusted EBITDA Margin(1)
Operating Income
Adjusted Operating Income(1)

(1) See Non-GAAP Financial Measures on page 33.
(2) 2003 was a 53 week year.

$2,200

1,650

1,100

550

12%

2001

2002

2003
(2)

2004

2005

Net Earnings before Minority Interest
Goodwill Charges
Income Taxes
Interest Expense
Depreciation and Amortization
Impact of Adjusted Items
Adjusted EBITDA Margin(1)

(1) See Non-GAAP Financial Measures on page 33.
(2) 2003 was a 53 week year.

8 2005 Financial Report Loblaw Companies Limited

(1) See Non-GAAP Financial Measures on page 33.

($ millions)

Supply chain network
Office move and reorganization

of the operation support functions

Total restructuring and other charges

Costs
Recognized
in 2005
(52 weeks)

Total
Expected
Costs

$ 62

$ 90

$ 86

$ 115

In 2005, operations were also disrupted by certain
systems conversions and the startup of a new third-party
owned and operated general merchandise warehouse
and distribution centre serving eastern Canada.

As part of the plan to consolidate the Company’s
supply chain operations nationally and to implement a
national information technology platform, a number of
warehouse systems conversions in western Canada
commenced late in the second quarter of 2005 and
were scheduled to be completed by year end 2005.
Implementation challenges arising from these initiatives
were encountered, particularly during the conversion
of the Calgary, Alberta general merchandise distribution
centre. Service levels, a measure of distribution
centre operating efficiency, fell below normal running
rates, resulting in recurring out-of-stock positions at
retail. This resulted in lost sales and the associated
operating income. Given the challenges encountered
in the Calgary general merchandise distribution centre,
all other planned system conversions for 2005 were
delayed and resumed in early 2006.

In Ontario, the general merchandise warehouse and
distribution activities were transitioned to a new facility
owned and operated by a third party. Complexities were
experienced during the start-up phase and as a result,
service levels were below expectations in the second half
of the year. This resulted in some out-of-stock positions
in Ontario and a delay in the transition of volume into
the third-party facility from existing Company distribution
centres, which in turn, placed additional pressure on
existing Company distribution centres. Productivity
declined in certain Company distribution centres during
2005 as a result of the announced restructuring.

Higher direct and indirect operating costs resulting from
the supply chain disruptions were significant during the
last two quarters of 2005. While it was possible to
quantify the direct costs at approximately $30 million
for the year, the indirect cost of lost sales, poor service
levels and resultant higher operating costs was difficult
to quantify.

During the third quarter of 2005, the Company also
recorded a charge relating to an audit and proposed
assessment by the Canada Revenue Agency relating
to GST on certain products sold between 2000 and
2002 on which GST was not appropriately charged and
remitted. In light of this proposed assessment, the
Company assessed and estimated the potential liabilities
for GST and PST in other areas of its operations for
various periods up to the end of 2004. Accordingly, a
charge of $40 million was recorded in operating income
to reflect management’s best estimate of such potential
tax liabilities of which management is currently aware.
Approximately $15 million of this amount was settled
during the fourth quarter of 2005. The ultimate remaining
amount paid will depend on the outcome of audits
performed by, or settlements reached with the various tax
authorities and therefore may differ from this estimate.
Management will continue to assess the remaining accrual
as progress towards resolution with the various tax
authorities is made and will adjust the remaining accrual
accordingly. An internal review of the procedures and
controls surrounding the process of charging and
remitting these taxes has been substantially completed
and recommendations are in the process of being
implemented to avoid the recurrence of similar charges
subsequent to the periods currently accounted for.

An incremental charge of $43 million over last year was
also recorded in operating income in 2005 for the net
effect of stock-based compensation and the associated
equity forwards.

After adjusting for the above-noted items, adjusted
operating income(1) was $1.6 billion in 2005 compared
to $1.7 billion in 2004. Adjusted operating margin(1)
was 5.8% in 2005 compared to 6.3% in 2004.

(1) See Non-GAAP Financial Measures on page 33.

2005 Financial Report Loblaw Companies Limited 9

Management’s Discussion and Analysis

Inventory shrink in the general merchandise categories
was higher than normal throughout 2005 and showed
some progress back to more normal levels in the
fourth quarter. Improved buying synergies and product
mix offset this increase in shrink, resulting in gross
margin in 2005 that was approximately equal to that
of 2004. Softening sales from product supply issues
and deliberate delays in program activity in 2005
resulted in lost leverage on the fixed components of
operating and administrative expenses.

The Company expects to see improvement in adjusted
operating income(1) on a year-over-year basis during the
second half of 2006. The emphasis in the early part
of 2006 will be on improving service levels, particularly
in the general merchandise and drugstore areas, and
ensuring that product is available at the store level to
support merchandising programs. The Company expects
some lowering of prices in certain formats to encourage
more customer traffic and build sales.

Interest Expense Interest expense consists primarily of
interest on short and long term debt, the amortization
of deferred financing costs net of interest on financial
derivative instruments, interest income earned on short
term investments and interest capitalized to fixed assets.
In 2005, total interest expense increased $13 million,
or 5.4%, to $252 million from $239 million in 2004.

In 2006, interest expense is expected to be relatively
consistent with that of 2005.

Interest on long term debt in 2005 was consistent with
last year’s level, at $290 million. The 2005 weighted
average fixed interest rate on long term debt (excluding
capital lease obligations) was 6.7% (2004 – 6.8%) and
the weighted average term to maturity was 17 years
(2004 – 17 years).

Interest on financial derivative instruments includes the
net positive effect of the Company’s interest rate swaps,
cross currency basis swaps and equity forwards, and
amounted to income of $6 million in 2005 (2004 –
$30 million). The decrease in net interest income was
due mainly to the maturity of interest rate swaps during
the year and an increase in United States short term
interest rates.

Net short term interest income of $11 million was realized
in 2005 (2004 – nil). This increase in income resulted
primarily from higher interest rates on United States
dollar denominated cash, cash equivalents and short
term investments partially offset by an increase in
Canadian short term interest rates.

During 2005, $21 million (2004 – $21 million) of
interest incurred on debt related to real estate properties
under development was capitalized to fixed assets.

Net Debt(1) to Equity and Interest Coverage

Total Assets and Return on Average Total Assets(1)
($ millions)

y
t
i
u
q
E

o
t

t
b
e
D

t
e
N

10.0

7.5

5.0

2.5

s
e
m
T
–
e
g
a
r
e
v
o
C
t
s
e
r
e
t
n
I

2001

2002

2003

2004

2005

Net Debt to Equity
(1)
Interest Coverage

(1) See Non-GAAP Financial Measures on page 33.

$14,000

10,500

7,000

3,500

16%

2001

2002

2003
(2)

2004

2005

Total Assets
Return on Average Total Assets
(1)

(1) See Non-GAAP Financial Measures on page 33.
(2) 2003 was a 53 week year.

10 2005 Financial Report Loblaw Companies Limited

(1) See Non-GAAP Financial Measures on page 33.

Analysis of Long Term Financing Costs

($ millions except
where otherwise indicated)

2005
(52 weeks)

2004
(52 weeks)

Total long term debt at

year end (including portion
due within one year)
Interest on long term debt
Weighted average fixed interest

rate on long term debt (excluding
capital lease obligations)

$ 4,355
$ 290

$ 4,151
$ 290

6.7%

6.8%

Income Taxes The effective income tax rate in 2005
increased to 34.8% from 31.5% in 2004, mainly
as a result of the change in the income tax impact
related to stock-based compensation and the associated
equity forwards and the successful resolution in 2004
of certain income tax matters from a previous year.

The effective income tax rate for 2006 is expected to
be approximately 33%, however, this rate may change
with variances in the proportion of taxable income
across different tax jurisdictions or if there is any change
in tax legislation.

Net Earnings In 2005, net earnings decreased
$222 million, or 22.9%, to $746 million from
$968 million in 2004 and basic net earnings per
common share decreased 81 cents, or 22.9%,
to $2.72 from $3.53 in 2004 due to the factors
described in the preceding sections.

5.2 Financial Condition
Financial Ratios The net debt(1) to equity ratio continued
to be within the Company’s internal guideline of less
than 1:1. The 2005 net debt(1) to equity ratio was .66:1
compared to the 2004 ratio of .71:1.

Pursuant to the requirements of AcG 15, the consolidated
balance sheet as at December 31, 2005 includes
$126 million of loans payable of VIEs consolidated by
the Company, $23 million of which is due within one
year. The loans payable represent financing obtained
by eligible independent franchisees through a structure
involving independent trusts to facilitate the purchase
of the majority of their inventory and fixed assets,
consisting mainly of fixturing and equipment. These
loans payable, which have an average term to maturity
of 7 years, are due and payable on demand under

certain predetermined circumstances and are secured
through a general security agreement made by the
independent franchisees in favour of the independent
funding trust. Interest is charged on a floating rate basis
and prepayment of the loans may be made without
penalty. The independent funding trust within the
structure finances its activities through the issuance of
short term asset-backed notes to third-party investors.

As disclosed in Note 19 to the consolidated financial
statements for the year ended December 31, 2005,
a standby letter of credit has been provided by a major
Canadian bank for the benefit of the independent
funding trust equal to approximately 10% of the total
principal amount of the loans outstanding at any point
in time. The Company has agreed to reimburse the
issuing bank for any amount drawn on the standby letter
of credit. In the event of a default by an independent
franchisee, the independent funding trust may assign
the loan to the Company and draw upon the standby
letter of credit. No amount has ever been drawn on
the standby letter of credit.

Cash flows from operating activities cover a large
portion of the Company’s funding requirements and
in 2005, exceeded the capital investment program
of $1.2 billion. In 2005, funding requirements resulted
primarily from the capital investment program and
dividends paid on the Company’s common shares.

In 2005, shareholders’ equity increased $472 million,
or 8.7%, to $5.9 billion. The 2006 net debt to equity
ratio is expected to improve slightly as retained
earnings growth is expected to exceed debt financing
requirements. The interest coverage ratio declined to
5.6 times in 2005 compared to 6.9 times in 2004,
as a result of the decline in operating income as
outlined previously.

At year end, the working capital position improved over
the prior year. The 2005 return on average total assets (1)
was 11.2% compared to 14.2% in 2004. The 2005
return on average shareholders’ equity was 13.2%
compared to the 2004 return of 19.2%. Both 2005
returns were negatively impacted by the incremental
costs and charges incurred in 2005 as outlined
previously. The five year average return on shareholders’
equity was 17.3% (2004 – 18.2%).

(1) See Non-GAAP Financial Measures on page 33.

2005 Financial Report Loblaw Companies Limited 11

Management’s Discussion and Analysis

Common Share Dividends The Company’s dividend policy is
to maintain a dividend payment equal to approximately
20% to 25% of the prior year’s adjusted basic net
earnings per common share, giving consideration to the
year end cash position, future cash flow requirements
and investment opportunities. During 2005, the Board
declared quarterly dividends of 21 cents per common
share. The annualized dividend per common share of
84 cents is equal to 24.1% of the 2004 adjusted basic
net earnings per common share (1), which is consistent
with the Company’s dividend policy. Subsequent to
year end, the Board declared a quarterly dividend of
21 cents per common share, payable April 1, 2006.

Outstanding Share Capital The Company’s outstanding
share capital is comprised of common shares. An
unlimited number of common shares is authorized and
274,054,814 common shares were outstanding at year
end. Further information on the Company’s outstanding
share capital is provided in Note 16 to the consolidated
financial statements.

6. Liquidity and Capital Resources

6.1 Cash Flows
Major Cash Flow Components

2005
(52 weeks)

2004
(52 weeks)

Change

($ millions)

Cash flows from

(used in):

Operating activities

$ 1,489

$ 1,443

Investing activities

Financing activities

$ (903)

$ (208)

$ (1,177)

$ (290)

$ 46

$ 274

$ 82

Cash Flows from Operating Activities 2005 cash flows
from operating activities increased to $1.5 billion from
$1.4 billion in 2004. The 2006 cash flows from
operating activities are expected to increase at a rate
consistent with net earnings growth and are expected
to fund a large portion of the anticipated 2006
funding requirements, including planned capital
investment activity.

Cash Flows used in Investing Activities 2005 cash flows
used in investing activities were $903 million compared
to $1.2 billion in 2004. During 2005, proceeds were
received from the sale of a portfolio of third-party

long term loans receivable as described in the Related
Party Transactions section of this MD&A. In addition,
the shortening term to maturity profile of the Company’s
short term investments portfolio resulted in a shift from
short term investments to cash and cash equivalents.

Capital investment amounted to $1.2 billion (2004 –
$1.3 billion), reflecting a continuing commitment
to maintain and renew the asset base and invest for
growth. Approximately 82% (2004 – 83%) of the
capital investment was for new stores, renovations
or expansions. The continued capital investment activity
benefited all regions in varying degrees and strengthened
the existing store base. Some of the new, larger stores
replaced older, smaller, less efficient stores that did not
offer the broad range of products and services demanded
by today’s consumer. The remaining 18% (2004 – 17%)
of the capital investment was for the warehouse and
distribution network, information systems and other
infrastructure required to support store growth.

The 2005 corporate and franchised store capital
investment program, which includes the impact of store
openings and closures, resulted in an increase in net
retail square footage of 6.1% over 2004. During 2005,
69 (2004 – 86) new corporate and franchised
stores were opened and 77 (2004 – 82) underwent
renovation or minor expansion. The 69 new stores, net

Cash Flows from Operating Activities
and Capital Investment ($ millions)

$1,500

1,125

750

375

2001

2002

2003
(1)

2004

2005

Cash Flows from Operating Activities
Capital Investment
(1) 2003 was a 53 week year.

12 2005 Financial Report Loblaw Companies Limited

(1) See Non-GAAP Financial Measures on page 33.

of 57 (2004 – 71) store closures, added 2.8 million
square feet of retail space (2004 – 3.4 million). The
2005 average corporate store size increased 4.7% to
56,100 square feet (2004 – 53,600) and the average
franchised store size increased 4.2% to 27,100 square
feet (2004 – 26,000).

Capital investment is estimated at $1 billion for 2006.
At year end, the Company had committed approximately
$264 million (2004 – $354 million) with respect to
capital investment projects and the purchase of real
property. In 2006, the Company plans to open, expand or
renovate more than 123 corporate and franchised stores
throughout Canada in a geographic investment pattern
similar to that of last year. This is expected to result in
a net increase of approximately 1.8 million square feet,
which should generate additional sales growth.

The Company also generated $109 million (2004 –
$110 million) from fixed asset sales.

Capital Investment and Store Activity

2005
(52 weeks)

2004

(52 weeks)

Change

Capital

investment ($ millions)

$ 1,156

$ 1,258

Retail square

footage (in millions)
Average store size (sq. ft.)

Corporate
Franchised

48.5

45.7

6.1%

56,100
27,100

53,600
26,000

4.7%
4.2%

Cash Flows used in Financing Activities Cash flows used in
financing activities decreased to $208 million in 2005
compared to $290 million in 2004 mainly due to the
relative change in commercial paper when compared to
the same period last year.

During the first quarter of 2005, Loblaw issued
$300 million of 5.90% Medium Term Notes (“MTN”)
due 2036, under its 2003 Base Shelf Prospectus,
to refinance the $100 million of 6.35% Provigo Inc.
Debenture that matured in the fourth quarter of 2004
and the $200 million of 6.95% MTN that matured
in the first quarter of 2005. During the second quarter
of 2005, the Company’s 2003 Base Shelf Prospectus
expired and a new base shelf prospectus allowing
the issue of up to $1 billion of aggregate MTN

was filed. Net change in VIE long term debt issued
and retired during 2005 was not material. In 2006,
the $125 million of 8.70% Provigo Inc. Debenture
will mature.

The Company intends to renew its Normal Course Issuer
Bid (“NCIB”) to purchase on the Toronto Stock Exchange
or enter into equity forwards to purchase up to 5% of
its common shares outstanding. During 2005, the
Company purchased for cancellation 226,100 (2004 –
576,100) of its common shares for $16 million (2004 –
$35 million), pursuant to its NCIB.

6.2 Sources of Liquidity

The Company can obtain its short term financing
through a combination of cash generated from operating
activities, cash, cash equivalents, short term investments,
bank indebtedness and its commercial paper program.
The Company’s cash, cash equivalents and short term
investments, as well as $845 million in uncommitted
operating lines of credit extended by several banks,
support its $1.2 billion commercial paper program.
The Company’s commercial paper borrowings generally
mature less than three months from the date of
issuance although the terms can be up to 364 days.

Securitization of credit card receivables provides
President’s Choice Bank (“PC Bank”), a wholly owned
subsidiary of the Company, with an additional source of
funds for the operation of its business. Under PC Bank’s
securitization program, a portion of the total interest
in the credit card receivables is sold to an independent
trust. PC Bank securitized $225 million of credit card
receivables during 2005 (2004 – $227 million).
In 2006, PC Bank finalized the restructuring of its
securitization program which was undertaken in part
to accommodate growth in the credit card program.
Information on PC Bank’s credit card receivables and
securitization is provided in Notes 8 and 19 to the
consolidated financial statements and in the Off-Balance
Sheet Arrangements section of this MD&A.

The Company obtains its long term financing through
its MTN program. The Company plans to refinance
existing long term debt as it matures.

In the normal course of business, the Company
enters into certain arrangements, such as providing
comfort letters to third-party lenders in connection

2005 Financial Report Loblaw Companies Limited 13

Management’s Discussion and Analysis

with financing activities of certain franchisees, with
no recourse liability to the Company. In addition, the
Company establishes standby letters of credit used
in connection with certain obligations related to the
financing program for its franchisees, securitization of
PC Bank’s credit card receivables, real estate transactions
and benefit programs. At year end, the aggregate
gross potential liability related to the Company’s standby
letters of credit was approximately $276 million
(2004 – $264 million) against which the Company had
$316 million (2004 – $311 million) in credit facilities
available to draw on.

The Company has the following sources from which
it can fund its 2006 cash requirements: cash flows
generated from operating activities, cash, cash
equivalents, short term investments, commercial paper
program, MTN program and additional credit card
receivable securitizations from future growth in the
PC Bank credit card operations.

In 2006, the Company anticipates no difficulty in
obtaining external financing in view of its current credit
ratings, its past experience in the capital markets and
general market conditions.

The Company’s credit ratings are outlined in the
table below:

Credit Ratings (Canadian Standards)

Commercial paper
Medium term notes
Other notes and debentures

Dominion Bond
Rating Service

Standard
& Poor’s

R-1 (low)
A (high)
A (high)

A-1 (mid)
A
A

The rating organizations listed above base their credit
ratings on quantitative and qualitative considerations.
In January 2006, Dominion Bond Rating Service
and Standard & Poor’s changed their outlook on the
trend of the Company’s long term debt from “stable”
to “negative”.

These credit ratings are intended to give an indication
of the risk that the Company will not fulfill its obligations
in a timely manner.

6.3 Contractual Obligations

The following illustrates certain of the Company’s
significant contractual obligations and discusses other
obligations as at December 31, 2005:

Summary of Contractual Obligations

($ millions)

Long term debt
Operating leases(1)
Contracts for purchases of real property and

capital investment projects(2)

Purchase obligations(3)

2006

2007

2008

Payments due by year
2009

2010

Thereafter

Total

$ 161
192

24
184

$ 406
166

$ 140
146

$ 314
126

$ 3,310 $ 4,355
1,637

823

255
693

811

9
758

717

656

1,320

264
4,955

Total contractual obligations

$ 1,301

$ 1,019

$ 1,339

$ 1,003

$ 1,096

$ 5,453 $ 11,211

(1) Represents the minimum or base rents payable. Amounts are not offset by any expected sub-lease income.
(2) These obligations include agreements for the purchase of real property. These agreements may contain conditions that may or may not be satisfied. If the conditions
are not satisfied, it is possible the Company will no longer have the obligation to proceed with the transaction. These obligations also include commitments with
respect to capital investment projects, such as the construction, expansion and renovation of buildings.

(3) These include material contractual obligations to purchase goods or services where the contract prescribes fixed or minimum volumes to be purchased or payments

to be made within a fixed period of time for a set or variable price. While estimates of anticipated financial commitments were made for the purpose of this disclosure,
the amount of actual payments may vary.

The purchase obligations presented in the above table do
not include purchase orders issued in the ordinary course
of business for goods which are meant for resale, nor
do they include any contracts which may be terminated
on relatively short notice with insignificant cost or

liability to the Company. Also excluded are purchase
obligations related to commodities or commodity-like
goods for which a market for resale exists. The Company
believes such excluded contracts do not have a material
impact on its liquidity.

14 2005 Financial Report Loblaw Companies Limited

At year end, the Company had other long term liabilities
which included accrued benefit plan liability, future
income taxes liability and stock-based compensation
liability. These long term liabilities have not been
included in the table above for the following reasons:
• future payments of accrued benefit plan liability,

principally post-retirement benefits, depend on when
and if retirees submit claims;

• future payments of income taxes depend on the levels

of taxable earnings;

• future payments of the share appreciation value on

employee stock options depend on whether employees
exercise their stock options, the market price of
the Company’s common shares on the exercise date
and the manner in which they exercise those stock
options; and

• future payments of restricted share units depend on
market price of the Company’s common shares.

6.4 Off-Balance Sheet Arrangements

In the normal course of business, the Company enters
into the following off-balance sheet arrangements:
• standby letters of credit used in connection with
certain obligations mainly related to real estate
transactions and benefit programs, the aggregate
gross potential liability of which is approximately
$143 million (2004 – $104 million);

• guarantees;
• the securitization of a portion of PC Bank’s credit card

receivables through independent trusts;

• a standby letter of credit to an independent funding

trust which provides loans to the Company’s
franchisees for their purchase of inventory and
fixed assets; and

• financial derivative instruments in the form of interest

rate swaps.

Guarantees The Company has entered into various
guarantee agreements including standby letters of credit
in relation to the securitization of PC Bank’s credit card
receivables and in relation to third-party financing made
available to the Company’s franchisees and obligations
to indemnify third parties in connection with leases,
business dispositions and other transactions in the
normal course of the Company’s business. For a detailed
description of the Company’s guarantees, see Note 19
to the consolidated financial statements.

Securitization of Credit Card Receivables The Company,
through its wholly owned subsidiary PC Bank,
securitizes credit card receivables through an
independent trust administered by a major Canadian
bank. In these securitizations, PC Bank sells a portion
of its credit card receivables to the trust in exchange for
cash. The trust funds these purchases by issuing debt
securities in the form of asset-backed commercial paper
to third-party investors. The securitizations are accounted
for as asset sales only when PC Bank transfers control
of the transferred assets and receives consideration
other than beneficial interests in the transferred assets.
All transactions between the trust and PC Bank have
been, and are expected to continue to be, accounted
for as sales as contemplated by Canadian GAAP,
specifically Accounting Guideline (“AcG”) 12, “Transfers
of Receivables”. As PC Bank does not control or
exercise any measure of influence over the trust,
the financial results of the trust have not been included
in the Company’s consolidated financial statements.

When the Company sells credit card receivables to the
trust, it no longer has access to the receivables but
continues to maintain credit card customer account
relationships and servicing obligations. The Company
does not receive a servicing fee from the trust for
its servicing obligations. When a sale occurs, PC Bank
retains a subordinated interest consisting of rights
to future cash flows after obligations to the investors
in the trust have been met which is considered to
be a retained interest. The trust’s recourse to PC Bank’s
assets is limited to PC Bank’s retained interests and
is further supported through a standby letter of credit
provided by a major Canadian bank for 9% (2004 – 15%)
of the securitized amount. This standby letter of credit
could be drawn upon in the event of a major decline in
the income flow from or in the value of the securitized
credit card receivables. The Company has agreed
to reimburse the issuing bank for any amount drawn
on the standby letter of credit. The carrying value of the
retained interests is periodically reviewed and when a
decline in value is identified that is other than temporary,
the carrying value is written down to fair value.

2005 Financial Report Loblaw Companies Limited 15

Management’s Discussion and Analysis

As at December 31, 2005, the total amount of
securitized credit card receivables outstanding which
PC Bank continues to service was $1 billion (2004 –
$785 million) and the associated retained interests
amounted to $5 million (2004 – $12 million). The
standby letter of credit supporting these securitized
receivables amounted to approximately $91 million
(2004 – $118 million). During 2005, PC Bank received
income of $106 million (2004 – $83 million) in
securitization revenue from the independent trust
relating to the securitized credit card receivables.
In the absence of securitization, the Company would
be required to raise alternative financing by issuing debt
or equity instruments. Further disclosure regarding
this arrangement is provided in Notes 8 and 19 to
the consolidated financial statements.

In October 2005, Eagle Credit Card Trust (“Eagle”),
an independent trust, was established for the purpose of
issuing notes backed by credit card receivables originated
and serviced by PC Bank. Subsequent to year end,
Eagle issued $500 million, five year notes at a weighted
average rate of 4.5%, due 2011, to finance the purchase
of credit card receivables, previously securitized by
PC Bank, from an independent trust. PC Bank will
continue to service the credit card receivables on behalf
of Eagle but will not receive any fee for its servicing
obligations and has a retained interest in the securitized
receivables represented by the right to future cash
flows after obligations to investors have been met.
In accordance with Canadian GAAP, the financial
statements of Eagle will not be consolidated with
those of the Company.

Independent Funding Trust Franchisees of the Company
may obtain financing through a structure, involving
independent trusts, that was created to provide loans to
the franchisees to facilitate their purchase of inventory
and fixed assets, consisting mainly of fixturing and
equipment. These trusts are administered by a major
Canadian bank. The independent funding trust within the
structure finances its activities through the issuance of
short term asset-backed notes to third-party investors.
The total amount of loans issued to the Company’s
franchisees outstanding as of December 31, 2005
was $420 million (2004 – $394 million) including
$126 million of loans payable of VIEs consolidated
by the Company in 2005. Based on a formula, the

16 2005 Financial Report Loblaw Companies Limited

Company has agreed to provide credit enhancement in
the form of a standby letter of credit for the benefit of
the independent funding trust for approximately 10% of
the principal amount of the loans outstanding at any
point in time, or $42 million (2004 – $42 million) as
of December 31, 2005. This credit enhancement allows
the independent funding trust to provide favourable
financing terms to the Company’s franchisees. In the
event that a franchisee defaults on its loan and the
Company has not, within a specified time period,
assumed the loan, or the default is not otherwise
remedied, the independent funding trust may assign
the loan to the Company and draw upon this standby
letter of credit. The Company has agreed to reimburse
the issuing bank for any amount drawn on the standby
letter of credit. No amount has ever been drawn on
the standby letter of credit. The Company is confident
it would be able to fully recover from the franchisee any
amounts it had reimbursed to the issuing bank. Neither
the independent funding trust nor the Company can
voluntarily terminate the agreement prior to December
2009, and only upon six months’ prior notice following
that date. Automatic termination of the agreement
can only occur if specific, pre-determined events occur
and are not remedied within the time periods required.
If the arrangement is terminated, the franchisees
would be required to replace the loans provided by
the independent funding trust with alternative financing.
The Company is under no contractual obligation to
provide funding to franchisees under such circumstances.
In accordance with Canadian GAAP, the financial
statements of the independent funding trust are not
consolidated with those of the Company.

Financial Derivative Instruments The Company uses
off-balance sheet financial derivative instruments to
manage its exposure to changes in interest rates.
For a detailed description of the Company’s off-balance
sheet financial derivative instruments and the related
accounting policies, see Notes 1 and 18 to the
consolidated financial statements.

7. Selected Consolidated Annual Information

The following is a summary of selected consolidated
annual information extracted from the Company’s
audited consolidated financial statements. This
information was prepared in accordance with Canadian
GAAP and is reported in Canadian dollars. The analysis

of the data contained in the table focuses on the
trends affecting the financial condition and results
of operations over the latest two year period.

Selected Consolidated Annual Information

($ millions except
where otherwise indicated)

2005
(52 weeks)

2004
(52 weeks)

2003
(53 weeks)

Sales
Sales excluding

impact of VIEs(1)

Net earnings

Net earnings per

common share ($)

Basic
Adjusted basic(1)
Diluted

Total assets(2)
Long term debt

(excluding amount
due within one year)

Dividends declared per
common share ($)

$ 27,801

$ 26,209

$ 25,220

27,423
746

26,209
968

25,220
845

2.72
3.35
2.71

3.53
3.48
3.51

3.07
3.10
3.05

13,761
4,194

12,949
3,935

12,113
3,956

.84

.76

.60

(1) See Non-GAAP financial measures on page 33.
(2) Certain prior years’ information was reclassified to conform with the current

year’s presentation.

Sales in 2005 increased 6.1% to $27.8 billion from
$26.2 billion in 2004. Excluding the impact of VIEs
sales were $27.4 billion or 4.6% higher than 2004.
Sales growth of 3.9% for the full year 2004 includes
a 2% negative impact from the 53rd week in 2003.
Same-store sales increased 0.2% in 2005 and 1.5%
in 2004 on an equivalent 52 week basis. National food
price inflation as measured by CPI was approximately
2% for 2005 compared to 1% to 2% in 2004. The
Company’s calculation of food price inflation, which
considers Company specific product mix and pricing
strategy was reasonably consistent with that of CPI. Sales
growth in 2005 was adversely affected by supply chain
disruptions by approximately 0.5% to 0.7% over 2004.

Sales were also influenced by a number of other
factors, including changes in net retail square footage,
expansion into new services and/or departments and the
activities of competitors. Over the past two years, an
average of $1.2 billion annually in capital was invested,
resulting in an increase in net retail square footage of
approximately 6.2 million square feet or 14.7%.

Corporate store sales per average square foot declined
from $605 in 2003 (a 53 week year) to $579 in 2005.

The amount of new net retail square footage and the
timing of the store openings and closures within any
given year may vary. The increase in weighted average
net retail square footage was 7.5% in 2005 and
6.4% in 2004.

The rollout of The Real Canadian Superstore in Ontario,
Canada also had an impact on same-store sales in
that region by replacing mature, well performing stores
that were previously included in same-store sales,
and by creating pricing pressure on other Company
stores located within the respective trading areas.
In pursuit of improving its value proposition, Loblaw
has established price leadership in specific markets
by adopting everyday low pricing strategies. Consistent
with its strategy of focusing on food but serving the
consumer’s everyday household needs, the Company
has expanded its general merchandise and drugstore
offerings over this period and the retail sales growth
realized in those categories continued to surpass retail
sales growth of food. Competitor activity varied by
market. During the past two years, unprecedented levels
of retail square footage, mainly associated with food
offerings, have been introduced into certain markets,
resulting in pressure on prices and customer retention.

Full year 2005 net earnings decreased $222 million
or 22.9% and basic net earnings per common share
decreased 81 cents or 22.9% over 2004. This decline
included a decrease of 15.2% in operating income and a
5.4% increase in interest expense. The effective income
tax rate increased to 34.8% in 2005 from 31.5% in 2004.

In 2004, net earnings increased $123 million or 14.6%
and basic net earnings per common share increased
46 cents or 15.0% over 2003. The improvement
was due to an increase in operating income of 12.6%
over 2003 partially offset by a 21.9% increase in
interest expense. The effective income tax rate declined
to 31.5% in 2004 from 33.5% in 2003.

Operating income for the full year 2005 was lower
than in 2004 as a result of ongoing transformative
changes and certain other charges outlined previously.
Over the two year period, net interest expense increased,
primarily due to the increased weighted average
borrowing levels required to support the Company’s

2005 Financial Report Loblaw Companies Limited 17

Management’s Discussion and Analysis

funding requirements. The 2005 increase in the
effective income tax rate was mainly as a result
of the impact related to the net effect of stock-based
compensation and the associated equity forwards.
The 2004 effective income tax rate was positively
impacted by the successful resolution of certain income
tax matters from a previous year of $14 million.

Adjusted basic net earnings per common share(1) decreased
3.7% to $3.35 in 2005 from $3.48 in 2004 and
increased 12.3% to $3.48 in 2004 from $3.10 in 2003.

Total assets of the Company continued to increase. Fixed
assets have grown as a result of the capital investment
program. Inventory growth resulted from an investment
in general merchandise. Inventory turns of general
merchandise categories are lower than those of food
categories, resulting in higher aggregate levels of
investment in general merchandise inventories as that
business developed. A substantial portion of credit card
receivables is sold to an independent trust and the
unsecuritized balance net of the allowance for credit
losses increased by $94 million since 2003. Cash flows
from operating activities have covered a large portion
of the funding requirements for the Company. For each
of 2005 and 2004, total long term debt issued net
of the amounts retired was approximately $100 million.
The amount of fixed rate debt issued in any given year
is intended to continue to preserve the Company’s
liquidity needs. In addition, long term debt increased in
2005 as a result of consolidating $126 million of VIE
long term debt ($23 million of which is due within
one year) pursuant to AcG 15.

Summary of Quarterly Results(1)
(unaudited)

Dividends declared per common share have been
consistent with the Company’s policy of maintaining a
dividend payment equal to approximately 20% to 25%
of the prior year’s adjusted basic net earnings per
common share.

During the two year period ended December 31, 2005,
the Company implemented several new accounting
standards issued by the Canadian Institute of Chartered
Accountants (“CICA”). The new accounting standards
implemented in 2005 and the resulting impact on the
financial position and results of operations are outlined
in the Accounting Standards section of this MD&A.
The following standards were implemented in 2004:
• Section 3063, “Impairment of Long-lived Assets”;
• AcG 13, “Hedging Relationships”;
• Section 3110, “Asset Retirement Obligations”;
• Emerging Issues Committee (“EIC”) Abstract 144,

“Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor” and

• Section 3461, “Employee Future Benefits” (for

enhanced disclosure).

8. Quarterly Results of Operations

8.1 Results by Quarter

The 52 week reporting cycle followed by the Company
is divided into four quarters of 12 weeks each except
for the third quarter which is 16 weeks in duration.
The following is a summary of selected consolidated
financial information derived from the Company’s
unaudited interim consolidated financial statements
for each of the eight most recently completed quarters.
This information was prepared in accordance with
Canadian GAAP and is reported in Canadian dollars.

($ millions except
where otherwise indicated)

First
Quarter

Second
Quarter

2005
Third
Quarter

Fourth
Quarter

Total
(audited)

First
Quarter

Second
Quarter

2004

Third
Quarter

Fourth
Quarter

Total
(audited)

Sales
Net earnings

Net earnings per
common share
Basic ($)
Diluted ($)

$ 6,124 $ 6,436 $ 8,653 $ 6,588 $ 27,801
746
$ 142 $ 211 $ 192 $ 201 $

$ 5,677 $ 6,069 $ 8,134 $ 6,329 $ 26,209
968
$ 176 $ 197 $ 258 $ 337 $

$
$

.52 $
.52 $

.77 $
.76 $

.70 $
.70 $

$
.73 $ 2.72
.73 $ 2.71 $

.64 $
.64 $

.72 $
.71 $

.94 $ 1.23 $ 3.53
.94 $ 1.22 $ 3.51

(1) During 2005, the Company implemented AcG 15 retroactively without restatement as described in the “Accounting Standards” section of this MD&A. The

implementation of Emerging Issues Committee Abstract 144, “Accounting by a Customer (Including a Reseller) for Certain Consideration received from a Vendor”
(“EIC 144”), in the third quarter of 2004 on a retroactive basis with restatement did not result in a material change in the quarterly net earnings.

18 2005 Financial Report Loblaw Companies Limited

(1) See Non-GAAP Financial Measures on page 33.

Sales growth in 2005 was impacted by various factors.
Sales from VIEs consolidated by the Company in 2005
accounted for quarterly sales growth of between 1.2%
and 1.7% when compared to the respective quarters in
2004. Sales growth during the last two quarters of
2005 continued to be negatively impacted by supply
chain disruptions which started earlier in the year.
Net retail square footage increased by 2.8 million
square feet in 2005 and was somewhat weighted over
the last two quarters. Same-store sales growth declined
during the year from 2.4% in the first quarter to
a decline of approximately 0.7% in the fourth quarter.
Overall national food price inflation, as measured
by CPI, during 2005 was approximately 2%, trending
downwards in the last quarter of the year.

Fluctuations in quarterly net earnings in 2005
reflect the impact of restructuring and other charges
resulting from the ongoing transformative changes.
Quarter-to-quarter variability was also caused by
the following:
• Fluctuations in stock-based compensation net of the
impact of the associated equity forwards as a result
of changes in the market price of the Company’s
common shares;

• $30 million of direct costs in 2005 related to the
handling, storage and movement of inventory from
supply chain disruptions, of which $20 million
was incurred in the third quarter and an additional
$10 million was incurred in the fourth quarter;

• $40 million in GST and PST related charges recorded

in the third quarter of 2005; and

• Higher than normal inventory shrink in the general
merchandise categories throughout 2005 with
some progress back to more normal levels in the
fourth quarter.

Interest expense increased in the third and fourth
quarters of 2005 over 2004 primarily due to the
maturity of a portion of the interest rate swaps.

The change in the quarterly effective income tax rate
for 2005 over 2004 was primarily due to the change
in the proportion of taxable income across different
tax jurisdictions, the income tax impact related to
stock-based compensation and the associated equity
forwards and a reversal of $14 million due to the
successful resolution in the first quarter of 2004 of
certain income tax matters from a previous year.

During 2005 and 2004 the Company purchased common
shares for cancellation pursuant to its NCIB. The weighted
average number of common shares outstanding has not
been significantly impacted by these purchases.

8.2 Fourth Quarter Results

The following is a summary of selected consolidated
information for the fourth quarter of 2005 extracted from
the Company’s preliminary unaudited consolidated
financial statements. This information was prepared in
accordance with Canadian GAAP and is reported in
Canadian dollars. The analysis of the data contained
in the table focuses on the results of operations
and changes in the financial condition and cash flows
in the fourth quarter.

Selected Consolidated Information for the Fourth Quarter
(unaudited)

($ millions except where otherwise indicated)

Sales
Sales excluding impact of VIEs(1)
Operating income
Adjusted operating income(1)
Interest expense
Income taxes
Net earnings

Net earnings per common share ($)

Basic
Adjusted basic(1)
Diluted

Cash flows from (used in):
Operating activities
Investing activities
Financing activities

Dividends declared

per common share ($)

2005
(12 weeks)

2004
(12 weeks)

$ 6,588
6,501
394
441
61
132
201

$ 6,329
6,329
530
522
56
137
337

.73
.94
.73

830
(456)
(333)

1.23
1.17
1.22

894
(430)
(489)

.21

.19

(1) See Non-GAAP financial measures on page 33.

Sales for the fourth quarter of 2005 increased 4.1% or
$259 million to $6.6 billion from $6.3 billion reported
in the fourth quarter of 2004, including an increase of
1.4% or $87 million related to the consolidation of
certain independent franchisees.

2005 Financial Report Loblaw Companies Limited 19

Management’s Discussion and Analysis

Sales and Sales Growth Excluding Impact of VIEs(1)

($ millions except
where otherwise indicated)

Total sales
Less: Sales attributable to
the consolidation of VIEs
pursuant to AcG 15

2005
(12 weeks)

2004
(12 weeks)

$ 6,588

$ 6,329

Sales excluding impact of VIEs(1)

$ 6,501

$ 6,329

Total sales growth(2)
Less: Positive impact on sales
growth attributable to the
consolidation of VIEs
pursuant to AcG 15

Sales growth excluding impact of VIEs(1)

4.1%

(0.7)%

1.4%

2.7%

(0.7)%

(1) See Non-GAAP Financial Measures on page 33.
(2) Sales growth in 2004 calculated on a 13 week base in 2003.

The extra week in 2003 had a negative impact of approximately 7.5%
on the 2004 sales growth shown in the table above.

Sales in the fourth quarter continued to be negatively
impacted by the supply chain disruptions which started
earlier in 2005. Some improved stability had been
realized in the latter part of the quarter but significant
improvements are not expected to be felt until mid-2006.
The Real Canadian Superstore program has been
positively received in Ontario and has enjoyed growth
in both absolute and same-store sales.

Fourth quarter same-store sales in 2005 declined
approximately 0.7% when compared to the same period
last year. Expected sales growth was also negatively
impacted by approximately 0.9% to 1.2% for the
quarter due to supply chain disruptions and a drop in
service levels. During the quarter, 17 new corporate
and franchised stores were opened and 9 stores were
closed, resulting in a net increase of 0.8 million square
feet of retail square footage. The Company’s calculation
of food price inflation was reasonably consistent with
the national food price inflation as measured by CPI of
approximately 1% for the quarter.

Operating income for the fourth quarter of 2005
decreased $136 million or 25.7% from the fourth
quarter of 2004 to $394 million. Operating margin
declined to 6.0% from 8.4% in the comparable period
of 2004. Fourth quarter operating income in 2005
included a $6 million charge for restructuring and other

charges and incremental direct costs of approximately
$10 million related to supply chain disruptions. A charge
of $27 million related to stock-based compensation
net of the impact of the associated equity forwards was
also recorded in the fourth quarter and compared to
$8 million income in 2004. These items in addition
to the negative $4 million VIE impact, accounted
for a decline in operating margin of approximately
0.8 of a percentage point for the quarter.

The effective income tax rate for the fourth quarter of
2005 increased to 39.6% from 28.9% in 2004 mainly
as a result of the change in the income tax impact
related to stock-based compensation and the associated
equity forwards.

Net earnings for the quarter were at $201 million,
$136 million or 40.4% below the same period last year.
Basic net earnings per common share decreased
50 cents, or 40.7%, to 73 cents in 2005 from $1.23 in
2004. Adjusted basic net earnings per common share(1)
decreased 23 cents or 19.7% to 94 cents in 2005 from
$1.17 in 2004.

Fourth quarter cash flows from operating activities
were $830 million in 2005 compared to $894 million
in 2004. The decrease was mainly a result of lower net
earnings before minority interest. Fourth quarter cash
flows used in investing activities were $456 million in
2005 compared to $430 million in 2004.

Fourth quarter cash flows used in financing activities
were $333 million in 2005 compared to $489 million
in 2004, decreasing mainly due to the repayment of the
Company’s $100 million 6.35% Provigo Inc. Debenture
as it matured during the fourth quarter of 2004.

Further discussion and analysis of the fourth quarter
results was provided in the Company’s 2005 Fourth
Quarter News Release which is available online at
www.sedar.com.

9. Disclosure Controls and Procedures

Based on an evaluation of the Company’s disclosure
controls and procedures, the Company’s President
and Executive Vice President have concluded that
these controls and procedures were effective as of
December 31, 2005.

20 2005 Financial Report Loblaw Companies Limited

(1) See Non-GAAP Financial Measures on page 33.

10. Risks and Risk Management

10.1 Operating Risks and Risk Management

In the normal course of business, the Company is exposed
to operating risks that have the potential to negatively
affect its financial performance. The Company has
operating and risk management strategies and insurance
programs which help to minimize these operating risks.

Industry The retail industry in Canada is a changing
and competitive market. Consumer needs drive industry
changes, which are impacted by changing demographic
and economic trends such as changes in disposable
income, increasing ethnic diversity, nutritional awareness
and time availability. Over the past several years,
consumers have demanded more choice, value and
convenience. If the Company is ineffective in responding
to these demands, its financial performance could be
negatively impacted.

The Company monitors its market share and the market
in which it operates, and will adjust its operating
strategies, which include, but are not limited to, relocating
stores or reformatting them under a different banner,
reviewing pricing and adjusting product offerings and
marketing programs. The Company’s control label
program represents a significant competitive advantage
because it enhances customer loyalty by offering
superior value and provides some protection against
national brand pricing strategies.

Competitive Environment The Company faces increasing
competition from many types of non-traditional
competitors, such as mass merchandisers, warehouse
clubs, drugstores, limited assortment stores, discount
stores, convenience stores and specialty stores, all
of which continue to increase their offerings of products
typically associated with traditional supermarkets.
In order to compete effectively and efficiently, the
Company is developing and operating new departments
and services that complement the traditional supermarket
layout, as well as enhancing its product and service
offerings. The Company is also subject to competitive
pressures from new entrants into the marketplace
and from the potential consolidation of existing
competitors. These competitors may have extensive
resources which will allow them to compete effectively
with the Company in the long term. In order to remain
competitive by having an optimal cost structure,

the Company continuously evaluates and implements
various cost saving initiatives. The Company may
not always achieve the expected cost savings and
other benefits of these initiatives, which could negatively
impact the Company’s financial performance.

The Company continuously evaluates the markets
it operates in and will enter new markets and review
acquisitions when opportunities arise and will also exit a
particular market and reallocate assets elsewhere when
there is a strategic advantage to doing so. The Company
pursues a strategy of enhancing profitability on a
market-by-market basis using a multi-format approach.
By operating across Canada through corporate stores,
franchised stores and associated stores and by servicing
independent accounts, the Company strategically
minimizes and balances its exposure to industry and
competitive risks.

Increased competition could adversely affect the
Company’s ability to achieve its objectives. The
Company’s inability to compete effectively with its
current or any future competitors could result in, among
other things, lessening of market share and lower
pricing in response to its competitors’ pricing activities.
Accordingly, the Company’s competitive position and
financial performance could be negatively impacted.

Food Safety and Public Health The Company is subject to
potential liabilities connected with its business operations,
including potential exposures associated with product
defects, food safety and product handling. Such liabilities
may arise in relation to the storage, distribution and
display of products and, with respect to the Company’s
control label products, in relation to the production,
packaging and design of products.

A majority of the Company’s sales are generated from
food products and the Company 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
negatively affect the Company’s financial performance.
Procedures are in place to manage such events should
they occur. These procedures identify risks, provide
clear communication to employees and consumers and
ensure that potentially harmful products are removed
from inventories immediately. Food safety related

2005 Financial Report Loblaw Companies Limited 21

Management’s Discussion and Analysis

liability exposures are insured by the Company’s
insurance program. In addition, the Company has
food safety policies and programs which address
safe food handling and preparation standards.
The Company endeavours to employ best practices
for the storage and distribution of food products and is
intensifying the campaign for consumer awareness of
safe food handling and consumption.

In the event of a significant public health crisis, such
as a flu or other type of pandemic, it is possible that
significant numbers of customers may choose to
limit their activities outside of their home, including
shopping trips, thereby negatively impacting the
Company’s sales. Furthermore, it may not be possible
to adequately staff all the Company’s stores during such
an event. The Company is in the process of preparing
a plan for its approach to such an event.

Labour A significant portion of the Company’s workforce
is unionized. Renegotiating collective agreements might
result in work stoppages or slowdowns, which could
negatively affect the Company’s financial performance,
depending on their nature and duration. The Company is
willing to accept the short term costs of labour disruption
in order to negotiate competitive labour costs and
operating conditions for the longer term. Significant
labour negotiations took place across the Company in
2005 as 54 collective agreements expired and another
61 collective agreements were successfully negotiated
which represented a combination of agreements expiring
in 2005, those carried over from prior years, and those
negotiated early. In 2006, 79 collective agreements
affecting approximately 41,354 employees will expire,
with the single largest agreement covering approximately
14,300 employees. The Company will also continue
to negotiate the 35 collective agreements carried over
from 2003, 2004 and 2005 and anticipates no labour
disruption with respect to these negotiations. The
Company has good relations with its employees and
unions and, although it is possible, does not anticipate
any unusual difficulties in renegotiating these agreements.

Several of the Company’s competitors operate in a
non-union environment. These competitors may benefit
from lower labour costs, making it more difficult for
the Company to compete.

22 2005 Financial Report Loblaw Companies Limited

Employee Future Benefit Contributions While the Company’s
registered funded defined benefit pension plans are
currently adequately funded and returns on pension plan
assets are in line with expectations, there is no assurance
that this will continue. An extended period of depressed
capital markets and low interest rates could require
the Company to make contributions to its registered
funded defined benefit pension plans in excess of those
currently contemplated, which in turn could have a
negative effect on its financial performance.

During 2005, the Company contributed $59 million
(2004 – $40 million) to its registered funded defined
benefit pension plans. During 2006, the Company
expects to contribute approximately $61 million to these
plans. In 2006, the Company also expects to make a
contribution of $16 million to the long term disability
plan in addition to contributions to defined contribution
pension plans and multi-employer pension plans, as well
as benefit payments to the beneficiaries of the unfunded
defined benefit pension and other benefit plans.

In addition to the Company-sponsored pension plans, the
Company participates in various multi-employer pension
plans, providing pension benefits in which approximately
40% (2004 – 41%) of employees of the Company and
of its franchisees participate. The administration of these
plans and the investment of their assets are legally
controlled by a board of independent trustees generally
consisting of an equal number of union and employer
representatives. In some circumstances, Loblaw may
have a representative on the board of trustees of
these multi-employer pension plans. The Company’s
responsibility to make contributions to these plans is
limited by the amounts established pursuant to its
collective agreements. Pension cost for these plans
is recognized as contributions are paid. The Financial
Services Commission of Ontario has recently issued
a report concerning one of these multi-employer
pension plans. The report deals with alleged breaches
of the Ontario pension and benefits legislation in
connection with certain of the investments of the plan
under review and its governance practices.

Third-Party Service Providers Certain aspects of the
Company’s business are significantly affected by third
parties. While appropriate contractual arrangements
are put in place with these third parties, the Company

has no direct influence over how such third parties are
managed. It is possible that negative events affecting
these third parties could in turn negatively impact the
Company’s operations and its financial performance.

A large portion of the Company’s case-ready meat
products are produced by a third party which operates
facilities dedicated to Loblaw.

The Company’s control label products which are among
the most recognized brands in Canada are manufactured
under contract by third-party vendors. In order to
preserve the brands’ equity, these vendors are held
to high standards of quality.

The Company also uses third-party logistic services
including those in connection with a dedicated
warehouse and distribution centre in Pickering, Ontario
and third-party common carriers. Any disruption in these
services could interrupt the delivery of merchandise to
the stores and therefore could negatively impact sales.

President’s Choice Financial banking services are
provided by a major Canadian chartered bank. PC Bank
uses third-party service providers to process credit
card transactions, operate call centres and monitor
credit and fraud for the President’s Choice Financial
MasterCard®. In order to minimize operating risk,
PC Bank and the Company actively manage and

Corporate Stores Owned vs. Leased
(thousands of sq. ft.)

40,000

30,000

20,000

10,000

2001

2002

2003

2004

2005

Owned
Leased

monitor their relationships with all third-party service
providers. PC Bank has developed a vendor management
policy, approved by its Board of Directors, and provides
its Board with regular reports on vendor management
and risk assessment. PC Financial home and auto
insurance products are provided by companies within the
Aviva Canada group, the Canadian subsidiary of a major
international property and casualty insurance provider.

Real Estate The availability and conditions affecting the
acquisition and development of real estate properties
may impact the Company’s ability to execute its planned
real estate program on schedule and therefore, its ability
to achieve its sales targets. Real estate development
plans may be contingent on successful negotiation of
labour agreements with respect to same-site expansion
or redevelopment. As the Company expands its general
merchandise offering, on-time execution of the real
estate program becomes increasingly important due
to significantly longer lead times required for ordering
this merchandise. Delays in execution could lead to
inventory management issues. The Company maintains
a significant portfolio of owned retail real estate and,
whenever practical, pursues a strategy of purchasing
sites for future store locations. This enhances the
Company’s operating flexibility by allowing the Company
to introduce new departments and services that
could be precluded under operating leases. At year end
2005, the Company owned 72% (2004 – 70%) of its
corporate store square footage.

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. As the Company expands
the breadth of its general merchandise offering, it
may increase the number of seasonal products offered
and its operations may therefore be subject to more
seasonal fluctuations.

Leadership Development and Employee Retention Effective
leadership is essential to sustaining the growth and
success of the Company. The Company continues to
focus on the development of leaders at all levels and
across all regions by executing tailored leadership
development programs that provide the knowledge and
skills necessary to drive positive change and ensure

2005 Financial Report Loblaw Companies Limited 23

Management’s Discussion and Analysis

effective execution. The degree to which the Company
is effective in developing its leaders and retaining
key employees could affect its ability to execute its
strategies, efficiently run its operations and meet
its goals for financial performance.

A new office facility and Store Support Centre in
Brampton, Ontario opened in the third quarter of
2005 combining several administrative and operating
offices from across southern Ontario and the general
merchandise operations from Calgary, Alberta.
In addition, internal reorganizations involving the
merchandising, procurement and operations groups took
effect. These initiatives may result in further short term
employee turnover and disruption as certain employees
may assume new roles and responsibilities.

Utility and Fuel Prices The Company is a significant
consumer of electricity, other utilities and fuel.
Unanticipated cost increases in these items could
negatively affect the Company’s financial performance.

Insurance The Company limits its exposure to risk through
a combination of appropriate levels of self-insurance and
the purchase of various insurance coverages including
an integrated insurance program. The Company’s
insurance program is based on various lines and limits
of coverage which provides the appropriate level of
retained and insured risks. Insurance is arranged on a
multi-year basis with reliable, financially stable insurance
companies as rated by A.M. Best Company, Inc. The
Company combines comprehensive risk management
programs and the active management of claims handling
and litigation processes by using internal professionals
and external technical expertise to manage the risk
it retains.

Environmental, Health and Safety The Company has
environmental, health and workplace safety programs
in place and has established policies and procedures
aimed at ensuring compliance with applicable legislative
requirements. To this end, the Company employs risk
assessments and audits using internal and external
resources together with employee awareness programs
throughout its operating locations.

The Company endeavours to be socially and
environmentally responsible, and recognizes that the

24 2005 Financial Report Loblaw Companies Limited

competitive pressures for economic growth and cost
efficiency must be integrated with sound environmental
stewardship and ecological considerations. Environmental
protection requirements do not and are not expected
to have an adverse effect on the Company’s financial
performance.

The Environmental, Health and Safety Committee of
the Board receives regular reporting from management
addressing current and potential future issues,
identifying new legislative concerns and related
communication efforts.

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 has
adopted a Code of Business Conduct which employees
of the Company are required to acknowledge and
agree to on a regular basis. The Company has established
an Ethics and Business Conduct Committee which
monitors compliance with the Code of Business Conduct
and determines how the Company can best ensure
it is conducting its business in an ethical manner.
The Company has also adopted a Vendor Code of
Conduct which outlines its ethical expectations to
its vendor community in a number of areas, including
social responsibility.

Legal, Taxation and Accounting Changes to any of the laws,
rules, regulations or policies related to the Company’s
business including the production, processing,
preparation, distribution, packaging and labelling of its
products could have an adverse impact on its financial
and operational performance. In the course of complying
with such changes, the Company may incur significant
costs. Failure by the Company to fully comply with
applicable laws, rules, regulations and policies may
subject it to civil or regulatory actions or proceedings,
including fines, assessments, injunctions, recalls
or seizures, which may have an adverse effect on the
Company’s financial results.

There can be no assurance that the tax laws and
regulations in the jurisdictions affecting the Company
will not be changed in a manner which could adversely
affect the Company. New accounting pronouncements

introduced by appropriate authoritative bodies may also
impact the Company’s financial results.

Holding Company Structure Loblaw Companies Limited is a
holding company. As such, it does not carry on business
directly but does so through its subsidiaries. It has no
major source of income or assets of its own, other than
the interests it has in its subsidiaries, which are all
separate legal entities. Loblaw Companies Limited is
therefore financially dependent on dividends and other
distributions it receives from its subsidiaries.

10.2 Financial Risks and Risk Management

In the normal course of business, the Company is
exposed to financial risks that have the potential
to negatively affect its financial performance including
financial risks related to changes in foreign currency
exchange rates, interest rates and the market price of
the Company’s common shares. These risks and the
actions taken to minimize them are discussed below.
The Company is also exposed to credit risk on certain
of its financial instruments.

Financial Derivative Instruments The Company uses over-
the-counter financial derivative instruments, specifically
cross currency basis swaps, interest rate swaps and
equity forwards, to minimize the risks and costs
associated with its financing activities and its stock-based
compensation plans. The Company maintains treasury
centres that operate under policies and guidelines
approved by the Board covering funding, investing,
equity, foreign currency exchange and interest rate
management. The Company’s policies and guidelines
prevent it from using any financial derivative
instrument for trading or speculative purposes. See
Notes 1 and 18 to the consolidated financial statements
for additional information on the Company’s financial
derivative instruments.

Foreign Currency Exchange Rate The Company enters into
cross currency basis swaps to manage its current and
anticipated exposure to fluctuations in foreign currency
exchange rates. The Company’s cross currency basis
swaps are transactions in which floating interest
payments and principal in United States dollars are
exchanged against the receipt of floating interest
payments and principal in Canadian dollars. These
cross currency basis swaps limit the Company’s

exposure against foreign currency exchange rate
fluctuations on a portion of its United States dollar
denominated assets, principally cash, cash equivalents
and short term investments.

Interest Rate The Company enters into interest rate
swaps to manage its current and anticipated exposure
to fluctuations in interest rates and market liquidity.
Interest rate swaps are transactions in which the
Company exchanges interest flows with a counterparty
on a specified notional amount for a predetermined
period based on agreed upon fixed and floating interest
rates. Notional amounts are not exchanged. The
Company monitors market conditions and the impact
of interest rate fluctuations on its fixed and floating
interest rate exposure mix on an ongoing basis.

Common Share Market Price The Company enters into
equity forwards to manage its current and anticipated
exposure to fluctuations in its stock-based compensation
cost as a result of changes in the market price of its
common shares. These equity forwards change in value
as the market price of the underlying common shares
changes, which results in a partial offset to fluctuations
in the Company’s stock-based compensation costs.
The partial offset between the Company’s stock-based
compensation costs and the equity forwards exists
as long as the market price of the Company’s common
shares exceeds the exercise price of employee stock
options. As disclosed in Note 17 to the consolidated
financial statements, 2,254,639 stock options had
exercise prices which were greater than the market price
of the Company’s common shares at year end.

Counterparty Over-the-counter financial derivative
instruments are subject to counterparty risk. Counterparty
risk arises from the possibility that market changes
may affect a counterparty’s position unfavourably and
that the counterparty defaults on its obligations to the
Company. The Company has sought to minimize potential
counterparty risk and losses by conducting transactions
for its derivative agreements with counterparties
that have at minimum a long term A credit rating from
a recognized credit rating agency and by placing risk
adjusted limits on its exposure to any single counterparty
for its financial derivative agreements. The Company
has internal policies, controls and reporting processes,
which require ongoing assessment and corrective

2005 Financial Report Loblaw Companies Limited 25

Management’s Discussion and Analysis

action, if necessary, with respect to its derivative
transactions. In addition, principal amounts on cross
currency basis swaps and equity forwards are each
netted by agreement and there is no exposure to
loss of the original notional principal amounts on
the interest rate swaps and equity forwards.

Credit The Company’s exposure to credit risk relates
to the Company’s cash equivalents and short term
investments, PC Bank’s credit card receivables and
accounts receivable from franchisees, associates
and independent accounts.

Company) are related parties. It is the Company’s policy
to conduct all transactions and settle balances with
related parties on market terms and conditions.

Related party transactions between the Company and
Weston include:
• inventory purchases,
• cost sharing agreements,
• real estate leases,
• borrowings/lendings,
• income tax matters, and
• management agreements.

Credit risk associated with the Company’s cash
equivalents and short term investments results from
the possibility that a counterparty may default on the
repayment of a security. This risk is mitigated by the
established policies and guidelines that require issuers of
permissible investments to have at minimum a long term
A credit rating from a recognized credit rating agency
and that specify minimum and maximum exposures to
specific issuers.

During 2005, Glenhuron Bank Limited (“Glenhuron”),
a wholly owned subsidiary of the Company, sold
a portfolio of third-party long term loans receivable
to a wholly owned subsidiary of George Weston
Limited. Originally, the loans in this portfolio were
acquired from third-party financial institutions in
2001. This transaction was undertaken by Glenhuron
as part of its overall ongoing management of its
investment portfolio.

PC Bank manages the President’s Choice Financial
MasterCard®. PC Bank grants credit to its customers
on President’s Choice Financial MasterCard® with the
intention of increasing the loyalty of those customers
and the Company’s profitability. Credit risk results from
the potential for loss due to those customers defaulting
on their payment obligations. In order to minimize the
associated credit risk, PC Bank employs stringent credit
scoring techniques, actively monitors the credit card
portfolio and reviews techniques and technology that
can improve the effectiveness of its collection process.
In addition, these receivables are dispersed among
a large, diversified group of credit card customers.

The Company also has accounts receivable from
its franchisees, associates and independent accounts,
mainly as a result of sales to these customers. The
Company actively monitors the balances on an ongoing
basis and collects funds from its franchisees on a
frequent basis in accordance with terms specified in
the applicable agreements.

11. Related Party Transactions

The Company’s majority shareholder, George Weston
Limited and its affiliates (“Weston”) (other than the

26 2005 Financial Report Loblaw Companies Limited

The amount of the cash consideration of U.S.$106 million
was based on a fair market value of the loan portfolio
and was approximately equal to carrying value. An
independent review of the valuation analysis has been
obtained by the Company to ensure that Glenhuron’s
methodology used in arriving at fair market value was
reasonable. As at the date of sale, the current portion
of this loan portfolio of U.S.$13 million was included
in accounts receivable and the long term portion of
U.S.$93 million was included in other assets.

Glenhuron has entered into an agreement with the
George Weston Limited subsidiary for the administration
of the loan portfolio.

For a detailed description of the Company’s related
party transactions, see Note 20 to the consolidated
financial statements.

12. Critical Accounting Estimates

The preparation of financial statements in accordance
with Canadian GAAP requires management to make
estimates and assumptions that affect the reported
amounts and disclosures made in the consolidated
financial statements and accompanying notes.

Management continually evaluates the estimates and
assumptions it uses. These estimates and assumptions
are based on management’s historical experience,
best knowledge of current events and conditions and
activities that the Company may undertake in the future.
Actual results could differ from these estimates.

The estimates and assumptions described in this
section depend upon subjective or complex judgments
about matters that may be uncertain and changes
in these estimates and assumptions could materially
impact the consolidated financial statements.

12.1 Valuation of Inventories

Certain retail store inventories are stated at the lower
of cost and estimated net realizable value less normal
gross profit margin. Significant estimation or judgment is
required in the determination of (i) discount factors used
to convert inventory to cost after a physical count at
retail has been completed and (ii) estimated inventory
losses, or shrinkage, occurring between the last physical
inventory count and the balance sheet date.

Inventories counted at retail are converted to cost
by applying a discount factor to retail selling prices.
This discount factor is determined at a category
or department level, is calculated in relation to historical
gross margins and is reviewed on a regular basis
for reasonableness.

Inventory shrinkage, which is calculated as a percentage
of sales, is evaluated throughout the year and provides
for estimated inventory shortages from the last physical
count to the balance sheet date. To the extent that
actual losses experienced vary from those estimated,
both inventories and operating income may be impacted.

Changes or differences in these estimates may result
in changes to inventories on the consolidated balance
sheet and a charge or credit to operating income in
the consolidated statement of earnings.

12.2 Employee Future Benefits

The cost and accrued benefit plan obligations of the
Company’s defined benefit pension plans and other
benefit plans are accrued based on actuarial valuations
which are dependent on assumptions determined by
management. These assumptions include the discount

rate, the expected long term rate of return on plan
assets, the expected growth rate of health care costs,
the rate of compensation increase, retirement ages and
mortality rates. These assumptions are reviewed annually
by management and the Company’s actuaries.

The discount rate, the expected long term rate of return
on plan assets and the expected growth rate in health
care costs are the three most significant assumptions.

The discount rates are based on market interest rates,
as at the Company’s measurement date of September 30
on a portfolio of Corporate AA bonds with terms to
maturity that, on average, match the terms of the
accrued benefit plan obligations. The discount rates
used to determine the 2005 net cost for defined benefit
pension and other benefit plans were 6.25% and 6.1%,
respectively, on a weighted average basis, compared
to 6.25% and 6.0%, respectively, in 2004. Certain
defined benefit pension and other benefit plans affected
by the plan to restructure the supply chain operations
nationally, were remeasured as at March 31, 2005.
For these plans, costs subsequent to April 1, 2005 were
determined using a discount rate of 5.75%, resulting in
a nominal impact to net earnings and curtailment gains
which were offset against unamortized net actuarial
losses for these plans. Additional defined benefit
pension costs also resulted from the restructuring plan
and were recorded in restructuring and other charges
in the consolidated statement of earnings. The discount
rates used to determine the net 2006 defined benefit
pension and other benefit plans costs decreased
to 5.25% and 5.2%, respectively and as a result, the
Company expects an increase in these costs in 2006.

The expected long term rate of return on plan assets
is based on historical returns, on the asset mix and
on the active management of defined benefit pension
plan assets. The Company’s defined benefit pension plan
assets had a 10 year annualized return of 9.3% as at
the 2005 measurement date. The actual annual returns
within this 10 year period varied with market conditions.
Consistent with 2005, the Company has assumed
an 8.0% expected long term rate of return on plan
assets in calculating its defined benefit pension plans
cost for 2006.

2005 Financial Report Loblaw Companies Limited 27

Management’s Discussion and Analysis

The expected growth rate in health care costs for 2005
was based on external data and the Company’s historical
trends. Higher initial growth rates were used in 2006,
when compared to 2005.

Since the three key assumptions discussed above are
forward-looking and long term in nature, they are subject
to uncertainty and actual results may differ. Differences
between actual experience and the assumptions and
changes in the assumptions may result in changes to
the accrued benefit plan asset and liability presented in
the consolidated balance sheet and the defined benefit
pension and other benefit plans cost recognized in the
consolidated statement of earnings.

In accordance with Canadian GAAP, the difference
between actual results and assumptions are accumulated
in net actuarial gain or loss. The magnitude of any
immediate impact to the Company’s operating income
is mitigated by the fact that the excess net accumulated
actuarial gain or loss over 10% of the greater of the
accrued benefit plan obligation or the fair value of the
plan assets at the beginning of the year is amortized
over the expected average remaining service period of
the active employees. As at September 30, 2005, the
unamortized net actuarial loss was $271 million (2004
– $137 million) for defined benefit pension plans and
$128 million (2004 – $70 million) for other benefit plans.

Additional information regarding the Company’s pension
and other benefit plans, including a sensitivity analysis
for changes in key assumptions, is provided in Note 13
to the consolidated financial statements and in the
Employee Future Benefit Contributions discussion in
the Operating Risks and Risk Management section of
this MD&A.

12.3 Goodwill

Goodwill is not amortized and is assessed for impairment
at the reporting unit level at least annually. Any
potential goodwill impairment is identified by comparing
the fair value of a reporting unit to its carrying value.
If the fair value of the reporting unit exceeds its carrying
value, goodwill is considered not to be impaired. If the
carrying value of the reporting unit exceeds its fair value,
a more detailed goodwill impairment assessment must
be undertaken. A goodwill impairment loss would be
recognized to the extent that, at the reporting unit

28 2005 Financial Report Loblaw Companies Limited

level, the carrying value of goodwill exceeds the implied
fair value. Any goodwill impairment will result in
a reduction in the carrying value of goodwill on the
consolidated balance sheet and in the recognition of
a non-cash impairment charge in operating income in
the consolidated statement of earnings.

The Company determines the fair value of its reporting
units using a discounted cash flow model corroborated
by other valuation techniques such as market multiples.
The process of determining these fair values requires
management to make estimates and assumptions
including, but not limited to projected future sales,
earnings and capital investment, discount rates and
terminal growth rates. Projected future sales, earnings
and capital investment are consistent with strategic
plans presented to the Company’s Board. Discount
rates are based on an industry weighted average cost of
capital. These estimates and assumptions may change
in the future due to uncertain competitive and economic
market conditions or changes in business strategies.

The Company performed the annual goodwill impairment
test and it was determined that the fair value of each of
the reporting units exceeded its respective carrying value
and therefore, no goodwill impairment was identified.

12.4 Income Taxes

Future income tax assets and liabilities are recognized
for the future income tax consequences attributable
to temporary differences between the financial statement
carrying values of assets and liabilities and their
respective income tax bases. Future income tax assets
or liabilities are measured using enacted or substantively
enacted income tax rates expected to apply to taxable
income in the years in which those temporary differences
are expected to be recovered or settled. The calculation
of current and future income taxes requires management
to make estimates and assumptions and to exercise
judgment regarding the financial statement carrying
values of assets and liabilities which are subject to
accounting estimates inherent in those balances, the
interpretation of income tax legislation across various
jurisdictions, expectations about future operating results
and the timing of reversal of temporary differences and
possible audits of tax filings by the regulatory authorities.
Management believes it has adequately provided for
income taxes based on current available information.

Changes or differences in these estimates or assumptions
may result in changes to the current or future income
tax balances on the consolidated balance sheet,
a charge or credit to income tax expense in the
consolidated statement of earnings and may result
in cash payments or receipts.

12.5 Goods and Services Tax (“GST”) and Provincial Sales Taxes (“PST”)

During the third quarter of 2005, the Company recorded
a charge relating to an audit and proposed assessment
by the Canada Revenue Agency relating to GST on certain
products sold between 2000 and 2002 on which GST
was not appropriately charged and remitted. In light of
this proposed assessment, the Company assessed and
estimated the potential liabilities for GST and PST in
other areas of its operations for various periods up to the
end of 2004. Accordingly, a charge of $40 million was
recorded in operating income in the third quarter to
reflect management’s best estimate of all such potential
tax liabilities of which management is currently aware.
Approximately $15 million of this amount was settled
during the fourth quarter of 2005. The ultimate remaining
amount paid will depend on the outcome of audits
performed by, or settlements reached with the various
tax authorities and therefore may differ from this
estimate. Management will continue to assess the
remaining accrual as progress towards resolution with
the various tax authorities is made and will adjust
the remaining accrual accordingly. Changes in this
accrual may result in a charge or credit to operating
income in the consolidated statement of earnings.

13. Accounting Standards

13.1 Accounting Standards Implemented in 2005

Effective January 2, 2005, the Company implemented
the following accounting standards issued by the CICA:

• Accounting Guideline 15, “Consolidation of Variable
Interest Entities”, issued by the CICA in June 2003
and amended in September 2004 requires the
consolidation of certain entities that are subject to
control on a basis other than through ownership
of a majority of voting interests.

lack the characteristics of a controlling financial
interest. AcG 15 requires the primary beneficiary to
consolidate VIEs.

AcG 15 considers an entity to be the primary beneficiary
of a VIE if it holds variable interests that expose it
to a majority of the VIE’s expected losses or that entitle
it to receive a majority of the VIE’s expected residual
returns or both.

Prior to AcG 15, the Company consolidated all entities
that it controlled through ownership of a majority
of voting interests. Effective January 2, 2005, the
Company implemented AcG 15, retroactively without
restatement of prior periods and as a result, the
Company consolidates entities in which it has
control through ownership of a majority of the
voting interests as well as all VIEs for which it is
the primary beneficiary.

Upon implementation of AcG 15, the Company
identified the following significant VIEs:

Independent Franchisees The Company enters into various
forms of franchise agreements that generally require
the independent franchisee to purchase inventory from
the Company and pay certain fees in exchange for
services provided by the Company and for the right
to use certain trademarks and licences owned by the
Company. Independent franchisees generally lease the
land and building from the Company, and when eligible,
may obtain financing through a structure involving
independent trusts to facilitate the purchase of the
majority of their inventory and fixed assets, consisting
mainly of fixturing and equipment. These trusts are
administered by a major Canadian bank. Under the
terms of certain franchise agreements, the Company
may also lease equipment to independent franchisees.
Independent franchisees may also obtain financing
through operating lines of credit with traditional financial
institutions or through issuing preferred shares or
notes payable to the Company. The Company monitors
the financial condition of its independent franchisees
and provides for estimated losses or write-downs
on its accounts and notes receivable or investments
when appropriate. Upon implementation of AcG 15,
the Company determined that 121 of its independent
franchisee stores met the criteria for VIEs that require
consolidation by the Company pursuant to AcG 15.

2005 Financial Report Loblaw Companies Limited 29

Management’s Discussion and Analysis

Warehouse and Distribution Agreement The Company has
entered into a warehousing and distribution agreement
with a third party to provide to the Company
distribution and warehousing services from a
dedicated facility. The Company has no equity interest
in this third party; however, the terms of the
agreement with the third party are such that the
Company has determined that the third party meets
the criteria for a VIE that requires consolidation by the
Company. As a result of the fee structure agreed to
with this third party, the impact of the consolidation
of this warehouse and distribution entity was
not material.

Condensed Consolidated Balance Sheet as at January 2, 2005

($ millions)

Cash and cash equivalents
Short term investments
Accounts receivable
Inventories
Other current assets

Total current assets
Fixed assets
Goodwill
Other assets

Total assets

Total current liabilities
Long term debt
Other liabilities
Minority interest

Total liabilities

Common share capital
Retained earnings

Condensed consolidated balance
sheet as at January 2, 2005
before AcG 15 impact

549
275
665
1,821
113

3,423
7,113
1,621
792

$ 12,949

$ 3,133
3,935
467

7,535

1,192
4,222

Total liabilities and shareholders’ equity

$ 12,949

Accordingly, the Company has included the results
of these independent franchisees and this third-party
entity that provides distribution and warehousing
services in its consolidated financial statements
effective January 2, 2005.

Details of the amounts recorded upon implementation
and the effect on the opening consolidated balance
sheet as at January 2, 2005 are summarized below
and include the impact of both the independent
franchisees and the warehouse and distribution entity:

Impact of the
implementation
of AcG 15

$ 20

(73)
78
4

29
136
3
(51)

$ 117

$ 48
96
(8)
10

146

(29)

$ 117

Condensed consolidated balance
sheet as at January 2, 2005
after AcG 15 impact

569
275
592
1,899
117

3,452
7,249
1,624
741

$ 13,066

$ 3,181
4,031
459
10

7,681

1,192
4,193

$ 13,066

The impact of AcG 15 on the opening consolidated
balance sheet can be further explained as follows:
• An after-tax, one-time charge of $29 million (net

of income taxes of $12 million) was recorded upon
implementation and resulted mainly from delaying
the recognition of vendor monies to when the related
inventories of the independent franchisees are sold
to their customers, the excess of the independent
franchisees’ accumulated losses over the allowance for

doubtful accounts previously recorded by the Company
and the reversal of initial franchise fees initially
recognized upon the sale of franchises to third parties.

• Accounts receivable due from the independent

franchisees and the investment in preferred shares
of the independent franchisees were eliminated upon
consolidation; cash and cash equivalents, inventories
and fixed assets financed by long term debt (a portion
of which is due within one year) were recorded.

30 2005 Financial Report Loblaw Companies Limited

• An increase in fixed assets and total current liabilities
in respect of the warehouse and distribution entity.

• Minority interest representing the common
stakeholder’s equity in the respective VIEs.

As at December 31, 2005, 123 of the Company’s
independent franchise stores met the criteria for a VIE
and were consolidated pursuant to AcG 15.

The impact from the consolidation of these VIEs on the
consolidated balance sheet as at December 31, 2005
was not significantly different than the impact on the
opening consolidated balance sheet as outlined
above. The impact on the consolidated statement of
earnings for the year ended December 31, 2005 was
predominantly an increase in sales as quantified in
the table “Sales and Sales Growth Excluding Impact
of VIEs” included on page 6. The impact on basic
net earnings per common share for 2005 was
a decline of approximately 3 cents.

The consolidation of these VIEs by the Company
does not result in any change to its tax, legal or credit
risks nor does it result in the Company assuming any
obligations of these third parties.

Independent Trust The Company has also identified that
it holds a variable interest, by way of a standby letter
of credit, in an independent trust which is used to
securitize credit card receivables for PC Bank. In these
securitizations, PC Bank sells a portion of its credit
card receivables to the independent trust in exchange
for cash. Although this independent trust has been
identified as a VIE, it was determined that the Company
is not the primary beneficiary and therefore this VIE
is not subject to consolidation by the Company. The
Company’s maximum exposure to loss as a result of its
involvement with this independent trust is disclosed in
the Off-Balance Sheet Arrangements section of this
MD&A and in Notes 8 and 19 to the consolidated
financial statements.

• EIC Abstract 150, “Determining Whether an

Arrangement Contains a Lease”, (“EIC 150”) addresses
arrangements comprising a transaction or a series of
transactions that do not take the legal form of a lease
but convey a right to use a tangible asset in return for
a payment or a series of payments. EIC 150 provides
guidance for determining whether these types of
arrangements contain a lease within the scope of
Section 3065, “Leases”, and should be accounted

for accordingly. The assessment should be based on
whether the fulfillment of the arrangement is dependent
on the use of specific tangible assets and whether the
arrangement conveys the right to control the use of
the tangible assets. This assessment should be made
at inception of the arrangement and only reassessed
if certain conditions are met. EIC 150 is effective
for arrangements entered into or modified as of the
beginning of 2005 and did not have any impact during
2005. The Company will continue to monitor whether
EIC 150 is applicable to transactions undertaken
by the Company.

• EIC Abstract 154, “Accounting for Pre-Existing

Relationships Between the Parties of a Business
Combination”, (“EIC 154”) issued on May 31, 2005,
requires that a business combination between parties
that have a pre-existing relationship be evaluated to
determine if a settlement of a pre-existing contract
has occurred which would require separate accounting
from the business combination. The settlement of
the pre-existing contract should be measured at the
settlement amount as defined within the standard.
In addition, EIC 154 requires that certain reacquired
rights, including the rights to the acquirer’s trade
name under a franchise agreement, be recognized
as an intangible asset separate from goodwill.

The Company has determined that acquisitions by the
Company of franchised, associated and independent
stores are within the scope of EIC 154. The adoption
of EIC 154 by the Company on a prospective basis did
not have a material impact on net earnings.

13.2 Future Accounting Standards

The Company closely monitors new accounting standards
to assess the impact, if any, on its consolidated financial
statements. In 2006, the Company will be reviewing
the implications of the following standards and
implementing the recommendations as required:

• In 2005, the Accounting Standards Board finalized its
strategic plan for financial reporting in Canada whereby
Canadian GAAP will converge with International
Financial Reporting Standards over a five-year period.
After this transitional period, Canadian GAAP will
cease to exist as a separate, distinct basis of financial
reporting. The Company will continue to monitor
the changes resulting from this transition.

2005 Financial Report Loblaw Companies Limited 31

Management’s Discussion and Analysis

• EIC 156, “Accounting for Consideration by a Vendor
to a Customer (Including a Reseller of the Vendor’s
Products)”, issued in September 2005 addresses cash
consideration, including a sales incentive, given by a
vendor to a customer. This consideration is presumed
to be a reduction of the selling price of the vendor’s
products and should therefore be classified as a
reduction of sales in the vendor’s income statement.
These recommendations are effective for all interim and
annual financial statements for fiscal years beginning
on or after January 1, 2006. The Company is currently
assessing the impact of these recommendations and
will implement them in the first quarter of 2006.

• Section 3855, “Financial Instruments – Recognition

and Measurement”, Section 3865, “Hedges”
and Section 1530, “Comprehensive Income” issued
in January 2005:

• Section 3855, “Financial Instruments – Recognition

and Measurement”, establishes standards for
recognizing and measuring financial assets, financial
liabilities and non-financial derivatives. All financial
instruments must be classified into a defined category,
namely, held-to-maturity investments, held for trading,
loans and receivables, available-for-sale financial
assets, and other liabilities. This classification will
determine how each instrument is measured and
how gains and losses are recognized. In addition,
the recommendations define derivatives to include
non-financial derivatives and embedded derivatives
which meet certain criteria. All such derivatives
must be classified as held for trading and therefore
recorded at fair value unless they are designated
in a hedging relationship.

• Section 3865, “Hedges”, replaces AcG 13,

“Hedging Relationships” and the guidance formerly
in Section 1650, “Foreign Currency Translation”.
The recommendations of this section are optional
and are only required if the entity is applying hedge
accounting. This section establishes standards
for the accounting treatment of qualifying hedge
relationships and the necessary disclosures.

• Section 1530, “Comprehensive Income”, introduces
a statement of comprehensive income which will be
included in the full set of interim and annual financial
statements. Comprehensive income will represent
the change in equity during a period from transactions

32 2005 Financial Report Loblaw Companies Limited

and other events and circumstances from non-owner
sources and will include all changes in equity other
than those resulting from investments by owners and
distributions to owners.

These standards are effective for interim and annual
financial statements for fiscal years beginning on
or after October 1, 2006. The Company is currently
assessing the impact of these recommendations
and will implement them in the first quarter of
2007 prospectively.

14. Outlook

Loblaw continues to expect that the negative impact
of its transformative process will be absorbed by the
end of the second quarter of 2006. This includes
an anticipated decline in adjusted basic net earnings per
common share(1) in the first quarter of 2006 compared
to the same period in 2005. This decline is expected
to be consistent with the relative decline in adjusted
basic net earnings per common share(1), experienced
in the fourth quarter of 2005. The Company expects
that adjusted basic net earnings per common
share(1) performance will improve during the second
half of 2006.

The Company remains confident that its strategic plan
is appropriate given the increased competitive landscape.
It believes that the transformation will provide the
benefits of being a national organization while operating
locally in each community. Loblaw expects these
initiatives will better position the Company to meet
the food and everyday household needs of Canadian
consumers, and make the Company more aligned,
streamlined and efficient so that it can continue to offer
customers the best value in the form of lower prices
and better service.

Loblaw confirms its previously announced anticipated
sales and earnings performance for the 2006 fiscal year.
It anticipates that sales growth, excluding variable
interest entities, will be in the range of 3% to 6%, while
growth in adjusted basic net earnings per common
share(1) will be in the range of 4% to 7%, as it enters
2006 with confidence in its strategy.

This outlook should be read in conjunction with the
Forward-Looking Statements section of this MD&A
on page 2.

(1) See Non-GAAP Financial Measures on page 33.

15. Non-GAAP Financial Measures

The Company reports its financial results in accordance
with Canadian GAAP. However, the Company has
included certain non-GAAP financial measures and
ratios which it believes provide useful information
to both management and readers of this Annual Report,
including this Financial Report, in measuring the
financial performance and financial condition of the
Company for the reasons set out below. These measures
do not have a standardized meaning prescribed by
Canadian GAAP and, therefore, may not be comparable
to similarly titled measures presented by other publicly
traded companies, nor should they be construed as
an alternative to other financial measures determined
in accordance with Canadian GAAP. For the following
tables, the annual non-GAAP financial measures for the
years 2005 through to 2001, are for the 52 or 53 weeks
ended or as at December 31, 2005; January 1, 2005;
January 3, 2004; December 28, 2002 and
December 29, 2001, respectively.

Sales and Sales Growth Excluding Impact of VIEs These
financial measures exclude the impact of the increase
in sales from the consolidation by the Company of
the independent franchisees which resulted from the

implementation of AcG 15 retroactively without
restatement effective January 2, 2005. These sales are
excluded because they affect the comparability of the
financial results and could potentially distort the analysis
of trends. A reconciliation of the financial measures to
the Canadian GAAP financial measures is included in
the “Sales and Sales Growth Excluding Impact of VIEs”
tables on pages 6 and 20 of this MD&A.

Adjusted Operating Income and Margin The following table
reconciles adjusted operating income to Canadian
GAAP operating income reported in the consolidated
statements of earnings for the twelve week periods
ended December 31, 2005 and January 1, 2005 and the
years ended as previously indicated. Items listed in the
reconciliation below are excluded because the Company
believes this allows for a more effective analysis of
the operating performance of the Company. In addition,
they affect the comparability of the financial results
and could potentially distort the analysis of trends.
The exclusion of these items does not imply they are
non-recurring. Adjusted operating income and margin
are useful to management in assessing the Company’s
performance and in making decisions regarding the
ongoing operations of its business.

($ millions)

Operating income
Add (deduct) impact of the following:

Net effect of stock-based
compensation and the
associated equity forwards
Restructuring and other charges
Goods and Services Tax and

provincial sales taxes

Direct costs associated with
supply chain disruptions

Variable interest entities
The Real Canadian Superstore

labour arrangement

2005
(12 weeks)

2004
(12 weeks)

2005
(52 weeks)

2004
(52 weeks)

2003
(53 weeks)

2002
(52 weeks)

2001
(52 weeks)

$ 394

$ 530

$ 1,401

$ 1,652

$ 1,467

$ 1,303

$ 1,136

27
6

10
4

(8)

43
86

(4)

Adjusted operating income

$ 441

$ 522

$ 1,600

$ 1,652

$ 1,488

$ 1,317

$ 1,136

Adjusted operating margin is calculated as adjusted operating income divided by sales excluding the impact of VIEs.

2005 Financial Report Loblaw Companies Limited 33

Management’s Discussion and Analysis

Adjusted EBITDA and Margin The following table reconciles
adjusted earnings before interest, income taxes,
depreciation and amortization (“EBITDA”) to adjusted
operating income which is reconciled to Canadian GAAP
measures reported in the consolidated statements of
earnings, in the table above, for the twelve week periods

ended December 31, 2005 and January 1, 2005 and
the years ended as previously indicated. Adjusted EBITDA
is useful to management in assessing the Company’s
performance of its ongoing operations and its ability
to generate cash flows to fund its cash requirements,
including the Company’s capital investment program.

($ millions)

Adjusted operating income
Add (deduct) impact of the following:
Depreciation and amortization
VIE depreciation and amortization

2005
(12 weeks)

2004
(12 weeks)

2005
(52 weeks)

2004
(52 weeks)

2003
(53 weeks)

2002
(52 weeks)

2001
(52 weeks)

$ 441

$ 522

$ 1,600

$ 1,652

$ 1,488

$ 1,317

$ 1,136

140
(8)

117

558
(26)

473

393

354

315

Adjusted EBITDA

$ 573

$ 639

$ 2,132

$ 2,125

$ 1,881

$ 1,671

$ 1,451

Adjusted EBITDA margin is calculated as adjusted EBITDA divided by sales excluding the impact of VIEs.

Adjusted Basic Net Earnings per Common Share The
following table reconciles adjusted basic net earnings
per common share to Canadian GAAP basic net
earnings per common share measures reported in the
consolidated statements of earnings for the twelve week
periods ended December 31, 2005 and January 1, 2005
and the years ended as previously indicated. Items
listed in the reconciliation below are excluded because
the Company believes this allows for a more effective

analysis of the operating performance of the Company.
In addition, they affect the comparability of the financial
results and could potentially distort the analysis of
trends. The exclusion of these items does not imply they
are non-recurring. Adjusted basic net earnings per
common share is useful to management in assessing
the Company’s performance and in making decisions
regarding the ongoing operations of its business.

Basic net earnings per common share(1)
Add (deduct) impact of the following:

Net effect of stock-based compensation
and the associated equity forwards

Restructuring and other charges
Goods and Services Tax and

provincial sales taxes

Direct costs associated with
supply chain disruptions

Changes in statutory income tax rates

in certain provinces
Variable interest entities
Resolution of certain income tax matters
The Real Canadian Superstore

labour arrangement

2005
(12 weeks)

2004
(12 weeks)

2005
(52 weeks)

2004
(52 weeks)

2003
(53 weeks)

2002
(52 weeks)

2001
(52 weeks)

$ .73

$ 1.23

$ 2.72

$ 3.53

$ 3.07

$ 2.64

$ 2.20

.15
.01

.02

.01
.02

(.06)

.22
.20

.10

.07

.01
.03

(.06)

.04

(.05)

.03

.06

Adjusted basic net earnings per common share

$ .94

$ 1.17

$ 3.35

$ 3.48

$ 3.10

$ 2.68

$ 2.20

(1) 2001 basic net earnings per common share is before goodwill charges.

34 2005 Financial Report Loblaw Companies Limited

Net Debt The following table reconciles net debt used in
the net debt to equity ratio to Canadian GAAP measures
reported in the consolidated balance sheets as at the
years ended as previously indicated. The Company

calculates net debt as the sum of long term debt and
short term debt less cash, cash equivalents and short
term investments. The net debt to equity ratio is
useful in assessing the amount of leverage employed.

($ millions)

2005

2004

2003

2002

2001

Bank indebtedness
Commercial paper
Long term debt due within one year
Long term debt
Less: Cash and cash equivalents

Short term investments

$ 30
436
161
4,194
916
4

$ 28
473
216
3,935
549
275

$ 38
603
106
3,956
618
378

$ 533
106
3,420
823
304

$ 95
191
81
3,333
575
426

Net debt

$ 3,901

$ 3,828

$ 3,707

$ 2,932

$ 2,699

Total Assets The following table reconciles total assets
used in the return on average total assets to Canadian
GAAP measures reported in the consolidated balance
sheets as at the years ended as previously indicated.
The Company believes the return on average total

assets ratio is useful in assessing the performance
of its operating assets and therefore excludes cash, cash
equivalents and short term investments from the total
assets used in the ratio.

($ millions)

2005

2004

2003

2002

2001

Total assets(1)
Less: Cash and cash equivalents
Short term investments

$ 13,761
916
4

$ 12,949
549
275

$ 12,113
618
378

$ 11,047
823
304

$ 10,025
575
426

Total assets

$ 12,841

$ 12,125

$ 11,117

$ 9,920

$ 9,024

(1) Certain prior years’ information was reclassified to conform with the current year’s presentation.

16. Additional Information

Additional information has been filed electronically with
various securities regulators in Canada through the
System for Electronic Document Analysis and Retrieval
(SEDAR) and is available online at www.sedar.com and
with the Office of the Superintendent of Financial
Institutions (OSFI) as the primary regulator for the
Company’s subsidiary, President’s Choice Bank.

March 7, 2006
Toronto, Canada

2005 Financial Report Loblaw Companies Limited 35

Financial Results

Management’s Statement of Responsibility for Financial Reporting

Independent Auditors’ Report

Consolidated Statements of Earnings

Consolidated Statements of Retained Earnings

Consolidated Balance Sheets

Consolidated Cash Flow Statements

41
41
45
47
48
49
49
49
49
51
52
52
53
53
57
58
59
59
61
63
64
65

Interest Expense

Notes to the Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Note 2. Variable Interest Entities
Note 3. Restructuring and Other Charges
Note 4. Goods and Services Tax and Provincial Sales Taxes
Note 5.
Note 6. Basic and Diluted Net Earnings per Common Share
Note 7. Cash, Cash Equivalents and Short Term Investments
Note 8. Credit Card Receivables
Note 9.
Income Taxes
Note 10. Fixed Assets
Note 11. Goodwill
Note 12. Other Assets
Note 13. Employee Future Benefits
Note 14. Long Term Debt
Note 15. Other Liabilities
Note 16. Common Share Capital
Note 17. Stock-Based Compensation
Note 18. Financial Instruments
Note 19. Contingencies, Commitments and Guarantees
Note 20. Related Party Transactions
Note 21. Other Information

Five Year Summary

Glossary of Terms

36 2005 Financial Report Loblaw Companies Limited

Management’s Statement of Responsibility for Financial Reporting

The management of Loblaw Companies Limited is responsible for the preparation, presentation and integrity of
the accompanying consolidated financial statements, Management’s Discussion and Analysis and all other information
in the Annual Report. This responsibility includes the selection and consistent application of appropriate accounting
principles and methods in addition to making the judgments and estimates necessary to prepare the consolidated
financial statements in accordance with Canadian generally accepted accounting principles. It also includes ensuring
that the financial information presented elsewhere in the Annual Report is consistent with that in the consolidated
financial statements.

To provide reasonable assurance that assets are safeguarded and that relevant and reliable financial information is
produced, management maintains a system of internal controls reinforced by the Company’s Code of Business Conduct.
Internal auditors, who are employees of the Company, review and evaluate internal controls on management’s behalf,
coordinating this work with the independent auditors. KPMG LLP, whose report follows, were appointed as independent
auditors by a vote of the Company’s shareholders to audit the consolidated financial statements.

The Board of Directors, acting through an Audit Committee comprised solely of directors who are independent of the
Company, is responsible for determining that management fulfills its responsibilities in the preparation of the consolidated
financial statements and the financial control of operations. The Audit Committee recommends the independent auditors
for appointment by the shareholders. The Audit Committee meets regularly with senior and financial management,
internal auditors and the independent auditors to discuss internal controls, auditing activities and financial reporting
matters. The independent auditors and internal auditors have unrestricted access to the Audit Committee. These
consolidated financial statements and Management’s Discussion and Analysis have been approved by the Board
of Directors for inclusion in the Annual Report based on the review and recommendation of the Audit Committee.

Toronto, Canada
March 7, 2006

John A. Lederer
President

Richard P. Mavrinac
Executive Vice President

Stephen A. Smith
Executive Vice President

Independent Auditors’ Report

To the Shareholders of Loblaw Companies Limited:
We have audited the consolidated balance sheets of Loblaw Companies Limited as at December 31, 2005 and
January 1, 2005 and the consolidated statements of earnings, retained earnings and cash flow for the 52 week years
then ended. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position
of the Company as at December 31, 2005 and January 1, 2005 and the results of its operations and its cash flow
for the years then ended in accordance with Canadian generally accepted accounting principles.

Toronto, Canada
March 7, 2006

Chartered Accountants

2005 Financial Report Loblaw Companies Limited 37

Consolidated Statements of Earnings

For the years ended December 31, 2005 and January 1, 2005
($ millions except where otherwise indicated)

Sales
Operating Expenses

Cost of sales, selling and administrative expenses
Depreciation and amortization
Restructuring and other charges (note 3)
Goods and Services Tax and provincial sales taxes (note 4)

Operating Income
Interest Expense (note 5)

Earnings before Income Taxes
Income Taxes (note 9)

Net Earnings before Minority Interest
Minority Interest

Net Earnings

Net Earnings per Common Share ($) (note 6)
Basic
Diluted

See accompanying notes to the consolidated financial statements.

Consolidated Statements of Retained Earnings

For the years ended December 31, 2005 and January 1, 2005
($ millions except where otherwise indicated)

Retained Earnings, Beginning of Year

as Previously Reported

Impact of implementing new accounting standard (note 2)

Retained Earnings, Beginning of Year Restated
Net earnings
Premium on common shares purchased for cancellation (note 16)
Dividends declared per common share – 84¢ (2004 – 76¢)

2005
(52 weeks)

2004
(52 weeks)

$ 27,801

$ 26,209

25,716
558
86
40

26,400

1,401
252

1,149
400

749
3

746

2.72
2.71

2005
(52 weeks)

4,222
(29)

4,193
746
(15)
(230)

$
$

24,084
473

24,557

1,652
239

1,413
445

968

$
$

968

3.53
3.51

2004
(52 weeks)

3,496

3,496
968
(33)
(209)

Retained Earnings, End of Year

4,694

4,222

See accompanying notes to the consolidated financial statements.

38 2005 Financial Report Loblaw Companies Limited

Consolidated Balance Sheets

As at December 31, 2005 and January 1, 2005
($ millions)

Assets
Current Assets

Cash and cash equivalents (note 7)
Short term investments (note 7)
Accounts receivable (note 8)
Inventories
Income taxes
Future income taxes (note 9)
Prepaid expenses and other assets

Total Current Assets
Fixed Assets (note 10)
Goodwill (note 11)
Other Assets (note 12)

Total Assets

Liabilities
Current Liabilities

Bank indebtedness
Commercial paper
Accounts payable and accrued liabilities
Income taxes
Long term debt due within one year (note 14)

Total Current Liabilities
Long Term Debt (note 14)
Future Income Taxes (note 9)
Other Liabilities (note 15)
Minority Interest

Total Liabilities

Shareholders’ Equity
Common Share Capital (note 16)
Retained Earnings

Total Shareholders’ Equity

2005

2004

916
4
656
2,020
3
72
30

3,701
7,785
1,587
688

549
275
665
1,821

81
32

3,423
7,113
1,621
792

$ 13,761

$ 12,949

30
436
2,535

161

3,162
4,194
237
271
11

7,875

1,192
4,694

5,886

28
473
2,307
109
216

3,133
3,935
184
283

7,535

1,192
4,222

5,414

Total Liabilities and Shareholders’ Equity

$ 13,761

$ 12,949

See accompanying notes to the consolidated financial statements.

Approved on Behalf of the Board

W. Galen Weston
Director

Thomas C. O’Neill
Director

2005 Financial Report Loblaw Companies Limited 39

Consolidated Cash Flow Statements

For the years ended December 31, 2005 and January 1, 2005
($ millions)

Operating Activities

Net earnings before minority interest
Depreciation and amortization
Restructuring and other charges (note 3)
Goods and Services Tax and provincial sales taxes (note 4)
Future income taxes
Change in non-cash working capital
Other

Cash Flows from Operating Activities

Investing Activities

Fixed asset purchases
Short term investments
Proceeds from fixed asset sales
Credit card receivables, after securitization (note 8)
Franchise investments and other receivables
Other

Cash Flows used in Investing Activities

Financing Activities

Bank indebtedness
Commercial paper
Long term debt (note 14)

Issued
Retired

Common share capital
Issued (notes 16 and 17)
Retired (note 16)

Dividends
Other

Cash Flows used in Financing Activities

Effect of foreign currency exchange rate changes

on cash and cash equivalents (note 7)

Initial impact of variable interest entities (note 2)

Change 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.

40 2005 Financial Report Loblaw Companies Limited

2005
(52 weeks)

2004
(52 weeks)

749
558
86
40
90
(51)
17

1,489

(1,156)
271
109
(84)
53
(96)

(903)

(17)
(37)

333
(240)

1
(16)
(230)
(2)

(208)

(31)
20

367
549

916

968
473

67
(99)
34

1,443

(1,258)
83
110
(34)
(26)
(52)

(1,177)

(11)
(130)

200
(103)

(35)
(209)
(2)

(290)

(45)

(69)
618

549

Notes to the Consolidated Financial Statements

For the years ended December 31, 2005 and January 1, 2005
($ millions except where otherwise indicated)

Note 1. Summary of Significant Accounting Policies

The consolidated financial statements were prepared in accordance with Canadian generally accepted accounting
principles (“GAAP”).

Basis of Consolidation The consolidated financial statements include the accounts of Loblaw Companies Limited and its
subsidiaries, collectively referred to as the “Company” or “Loblaw”. The Company’s interest in the voting share capital
of its subsidiaries is 100%. Effective January 2, 2005, the Company was required, pursuant to Accounting Guideline 15,
“Consolidation of Variable Interest Entities”, (“AcG 15”) issued by the Canadian Institute of Chartered Accountants
(“CICA”), to consolidate certain variable interest entities (“VIEs”) that are subject to control on a basis other than
through ownership of a majority of voting interest.

Additional disclosure regarding the implementation of AcG 15 is provided in Note 2.

Fiscal Year The fiscal year of the Company ends on the Saturday closest to December 31. As a result, the Company’s
fiscal year is usually 52 weeks in duration but includes a 53rd week every 5 to 6 years. The years ended
December 31, 2005 and January 1, 2005 each contained 52 weeks.

Revenue Recognition Sales include revenues, net of returns, from customers through corporate stores operated by
the Company and independent franchisee stores that are consolidated by the Company pursuant to AcG 15.
In addition, sales include sales to and service fees from associated stores and independent account customers and
franchised stores excluding VIE stores. The Company recognizes revenue at the time the sale is made to its customers.

Earnings per Share (“EPS”) Basic EPS is calculated by dividing the net earnings available to common shareholders by the
weighted average number of common shares outstanding during the year. Diluted EPS is calculated using the treasury
stock method, which assumes that all outstanding stock options with an exercise price below the average market price
are exercised and the assumed proceeds are used to purchase the Company’s common shares at the average market
price during the year.

Cash, Cash Equivalents and Bank Indebtedness Cash balances which the Company has the ability and intent to offset are
used to reduce reported bank indebtedness. Cash equivalents are highly liquid investments with a maturity of 90 days
or less.

Short Term Investments Short term investments are carried at the lower of cost or quoted market value and consist
primarily of United States government securities, commercial paper and bank deposits.

Credit Card Receivables The Company, through President’s Choice Bank (“PC Bank”), a wholly owned subsidiary
of the Company, has credit card receivables that are stated net of an allowance for credit losses. Credit card
receivables, if contractually past due, are not classified as impaired but are fully written off the earlier of when
payments are contractually 180 days in arrears or when the likelihood of collection is considered remote.
Interest income on credit card receivables is recorded on an accrual basis and is recognized in operating income.

Allowance for Credit Losses PC Bank maintains a general allowance for probable credit losses on aggregate exposures for
which losses cannot be determined on an item-by-item basis. The allowance is based upon a statistical analysis
of past performance, the level of allowance already in place and management’s judgment. The allowance for credit
losses is deducted from the credit card receivables balance. The net credit loss experience for the year is recognized
in operating income.

2005 Financial Report Loblaw Companies Limited 41

Notes to the Consolidated Financial Statements

Securitization PC Bank securitizes credit card receivables through the sale of a portion of the total interest in these
receivables to an independent trust and does not exercise any control over the trust’s management, administration
or assets. When PC Bank sells credit card receivables in a securitization transaction, it has a retained interest
in the securitized receivables represented by the right to future cash flows after obligations to investors have been
met. Although PC Bank remains responsible for servicing all credit card receivables, it does not receive additional
compensation for servicing those credit card receivables sold to the trust. Any gain or loss on the sale of these
receivables depends, in part, on the previous carrying amount of receivables involved in the securitization, allocated
between the receivables sold and the retained interest, based on their relative fair values at the date of securitization.
The fair values are determined using a financial model. Any gain or loss on a sale is recognized in operating income
at the time of the securitization. The carrying value of retained interests is periodically reviewed and when a decline
in value is identified that is other than temporary, the carrying value is written down to fair value.

Vendor Allowances The Company receives allowances from certain of its vendors whose products it purchases for
resale. These allowances are received for a variety of buying and/or merchandising activities, including vendor
programs such as volume purchase allowances, purchase discounts, listing fees and exclusivity allowances.
Consideration received from a vendor is a reduction in the cost of the vendor’s products or services and is recognized
as a reduction in the cost of sales and the related inventory when recognized in the income statement and balance
sheet. Certain exceptions apply if the consideration is a payment for assets or services delivered to the vendor or for
reimbursement of selling costs incurred to promote the vendor’s products, provided that certain conditions are met.

Inventories Retail store inventories are stated at the lower of cost and estimated net realizable value less normal
gross profit margin. Wholesale and seasonal general merchandise inventories are stated at the lower of cost and
estimated net realizable value. Cost is determined substantially using the first-in, first-out method.

Fixed Assets Fixed assets are recorded at cost including capitalized interest. Depreciation commences when the assets
are put into use and is recognized on a straight-line basis to depreciate the cost of these assets over their estimated
useful lives. Estimated useful lives range from 20 to 40 years for buildings, 10 years for building improvements
and from 3 to 10 years for equipment and fixtures. Leasehold improvements are depreciated over the lesser of their
estimated useful lives and the term of the lease, plus renewal options when applicable, to a maximum of 10 years.

Fixed assets are reviewed for impairment when events or circumstances indicate that the carrying value exceeds the
sum of the undiscounted future cash flows expected from use and eventual disposal. Fixed assets are also reviewed
for impairment annually. For purposes of annually reviewing store assets for impairment, asset groups are reviewed at
their lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities.
Therefore, store net cash flows are grouped together by primary market areas, where cash flows are largely dependent
on each other. Primary markets are regional areas where a number of store formats operate within close proximity to
one another. If an indicator of impairment exists, such as sustained negative operating cash flows of the respective
asset group, then an estimate of undiscounted future cash flows of each such store within this group is prepared and
compared to its carrying value. For purposes of annually reviewing distribution centre assets for impairment, distribution
centre net cash flows are grouped with the respective net cash flows of the stores they service. An impairment in
the store network serviced by the distribution centre would indicate an impairment in the distribution centre assets
as well. If these assets are determined to be impaired, the impairment loss is measured as the excess of the carrying
value over fair value. In addition, the carrying value of long-lived assets is evaluated whenever events or changes in
circumstances indicate that the carrying value of long-lived assets may not be recoverable. These events or changes
in circumstances include a commitment to close a store or distribution centre or to relocate or convert a store where
the carrying value of its assets is greater than the expected undiscounted future cash flows.

42 2005 Financial Report Loblaw Companies Limited

Deferred Charges Debt issue costs associated with long term debt are deferred and amortized on a straight-line basis
over the term of the debt. Other deferred charges are amortized over the related assets’ estimated useful lives, to a
maximum of 15 years.

Goodwill Goodwill represents the excess of the purchase price of a business acquired over the fair value of the
underlying net assets acquired at the date of acquisition. Goodwill is not amortized and its carrying value is tested at
least annually for impairment. Any impairment in the carrying value of goodwill is recognized in operating income.

Financial Derivative Instruments The Company uses financial derivative agreements in the form of cross currency basis
swaps, interest rate swaps and equity forwards to manage its current and anticipated exposure to fluctuations in
foreign currency exchange rates, interest rates and the market price of the Company’s common shares. The Company
does not enter into financial derivative agreements for trading or speculative purposes.

The Company formally identifies, designates and documents the relationships between hedging instruments and hedged
items including cross currency basis swaps and interest rate swaps as cash flow hedges against its exposure to
fluctuations in the foreign currency exchange rate and variable interest rates on a portion of its United States dollar
denominated assets, principally cash equivalents and short term investments; and interest rate swaps as a cash flow
hedge of the variable interest rate exposure on commercial paper. Effectiveness tests are performed to evaluate hedge
effectiveness at inception and on an ongoing basis, both retrospectively and prospectively.

Realized and unrealized foreign currency exchange rate adjustments on cross currency basis swaps are offset
by realized and unrealized foreign currency exchange rate adjustments on a portion of the Company’s United States
dollar denominated assets and are recognized in operating income. The cumulative unrealized foreign currency
exchange rate receivable or payable is recorded in other assets or other liabilities, respectively. The exchange
of interest payments on the cross currency basis swaps and interest rate swaps is recognized on an accrual basis
in interest expense. Unrealized gains or losses on the interest rate swaps designated within an effective hedging
relationship are not recognized.

Financial derivative instruments not designated within an effective hedging relationship are measured at fair value
with changes in fair value recorded in interest expense.

During 2005, an electricity forward contract expired which had been designated as a cash flow hedge of price
volatility of the Company’s electricity costs in Ontario, Canada. Prior to its expiry, gains and losses on this electricity
forward contract were recognized in operating income as actual electricity costs were recognized.

Equity forwards are used to manage exposure to fluctuations in the Company’s stock-based compensation cost because
they change in value as the market price of the underlying common shares changes. The market price adjustments
on the equity forwards are recognized in operating income as gains or losses and the cumulative unrealized gains or
losses are recorded in other assets or other liabilities, respectively. Interest on the equity forwards is recognized on an
accrual basis in interest expense.

Foreign Currency Translation Assets and liabilities denominated in foreign currencies are translated into Canadian dollars
at the foreign currency exchange rate in effect at the balance sheet date. Exchange gains or losses arising from the
translation of these balances denominated in foreign currencies are recognized in operating income. Revenues and
expenses denominated in foreign currencies are translated into Canadian dollars at the average foreign currency
exchange rate for the year.

Income Taxes The asset and liability method of accounting is used for income taxes. Under the asset and liability
method, future income tax assets and liabilities are recognized for the future income tax consequences attributable
to temporary differences between the financial statement carrying values of existing assets and liabilities and their
respective income tax bases. Future income tax assets and 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

2005 Financial Report Loblaw Companies Limited 43

Notes to the Consolidated Financial Statements

expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in income
tax rates is recognized in income tax expense when enacted or substantively enacted. Future income tax assets are
evaluated and a valuation allowance, if required, is recorded against any future income tax asset if it is more likely
than not that the asset will not be realized.

Employee Future Benefits The cost and accrued benefit plan obligations of the Company’s defined benefit pension
plans and other benefit plans, which include post-retirement, post-employment and long term disability benefits,
are accrued based on actuarial valuations. The actuarial valuations are determined using the projected benefit
method prorated on service and management’s best estimate of the expected long term rate of return on plan assets,
rate of compensation increase, retirement ages and expected growth rate of health care costs. Actuarial valuations
are performed using a September 30 measurement date for accounting purposes. Market values used to value benefit
plan assets are as at the measurement date. The accrued benefit plan obligation is measured using market interest
rates as at the measurement date, assuming a portfolio of Corporate AA bonds with terms to maturity that, on average,
match the terms of the accrued benefit plan obligation.

The cost of plan amendments and the excess unamortized net actuarial gain or loss over 10% of the greater of the
accrued benefit plan obligation or the fair value of the benefit plan assets at the beginning of the year are amortized
over the expected average remaining service period of the active employees. The expected average remaining
service period of the active employees covered by the defined benefit pension plans ranges from 6 to 17 years with
a weighted average of 13 years. The expected average remaining service period of the employees covered by the
other benefit plans ranges from 7 to 13 years with a weighted average of 11 years.

The cost of pension benefits for defined contribution pension plans and multi-employer pension plans are expensed
as contributions are paid.

The accrued benefit plan asset or liability represents the cumulative difference between the cost and the funding
contributions and is recorded in other assets and other liabilities.

Stock Option Plan The Company recognizes a compensation cost in operating income and a liability related to
employee stock options that allow for settlement in shares or in the share appreciation value in cash at the option
of the employee, using the intrinsic value method. Under the intrinsic value method, the stock-based compensation
liability is the amount by which the market price of the common shares exceeds the exercise price of the stock
options. A year-over-year change in the stock-based compensation liability is recognized in operating income on
a prescribed vesting basis.

The Company accounts for stock options issued prior to December 30, 2001 that will be settled by issuing common
shares as capital transactions. Consideration paid by employees on the exercise of this type of stock option is credited
to common share capital. This type of option was last issued in 2001 and represents approximately 2.9% of all
options outstanding at year end.

Restricted Share Unit (“RSU”) Plan The Company recognizes a compensation cost in operating income for each RSU
granted equal to the market value of a Loblaw common share at the date on which RSUs are awarded to each
participant prorated over the performance period and adjusts for changes in the market value until the end of the
performance date. The cumulative effect of the change in market value is recognized in operating income in the
period of change.

Employee Share Ownership Plan The Company maintains an Employee Share Ownership Plan which allows employees to
acquire the Company’s common shares through regular payroll deductions of up to 5% of their gross regular earnings.
The Company contributes an additional 25% (2004 – 15%) of each employee’s contribution to the plan, which is
recognized in operating income as a compensation cost when the contribution is made.

44 2005 Financial Report Loblaw Companies Limited

Deferred Share Units Members of the Company’s Board of Directors may elect annually to receive all or a portion of
their annual retainer(s) and fees in the form of deferred share units, which are accounted for using the intrinsic value
method. Under the intrinsic value method, the deferred share unit compensation liability is the amount by which
the market price of the common shares exceeds the initial value of the deferred share unit. The year-over-year change
in the deferred share units liability is recognized in operating income as a compensation cost.

Use of Estimates and Assumptions The preparation of the consolidated financial statements in accordance with Canadian
GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures
made in the consolidated financial statements and accompanying notes. These estimates and assumptions are based
on management’s historical experience, best knowledge of current events and conditions and activities that may be
undertaken in the future. Actual results could differ from these estimates.

Certain estimates, such as those related to valuation of inventories, goodwill, income taxes, Goods and Services Tax
and provincial sales taxes and employee future benefits, depend upon subjective or complex judgments about matters
that may be uncertain, and changes in those estimates could materially impact the consolidated financial statements.

Comparative Information Certain prior year’s information was reclassified to conform with the current year’s presentation.

Note 2. Variable Interest Entities

Effective January 2, 2005, the Company implemented AcG 15, retroactively without restatement of prior periods and
as a result, the Company consolidates entities in which it has control through ownership of a majority of the voting
interests as well as all VIEs for which it is the primary beneficiary.

AcG 15 defines a variable interest entity as an entity that either does not have sufficient equity at risk to finance its
activities without subordinated financial support or where the holders of the equity at risk lack the characteristics of a
controlling financial interest. AcG 15 requires the primary beneficiary to consolidate VIEs and considers an entity to be
the primary beneficiary of a VIE if it holds variable interests that expose it to a majority of the VIE’s expected losses or
that entitle it to receive a majority of the VIE’s expected residual returns or both.

Upon implementation of AcG 15, the Company identified the following significant VIEs:

Independent Franchisees The Company enters into various forms of franchise agreements that generally require the
independent franchisee to purchase inventory from the Company and pay certain fees in exchange for services provided
by the Company and for the right to use certain trademarks and licences owned by the Company. Independent
franchisees generally lease the land and building from the Company, and when eligible, may obtain financing through
a structure involving independent trusts to facilitate the purchase of the majority of their inventory and fixed assets,
consisting mainly of fixturing and equipment. These trusts are administered by a major Canadian bank. Under the
terms of certain franchise agreements, the Company may also lease equipment to independent franchisees. Independent
franchisees may also obtain financing through operating lines of credit with traditional financial institutions or through
issuing preferred shares or notes payable to the Company. The Company monitors the financial condition of its
independent franchisees and provides for estimated losses or write-downs on its accounts and notes receivable or
investments when appropriate. Upon implementation of AcG 15, the Company determined that 121 of its independent
franchisee stores met the criteria for VIEs that require consolidation by the Company pursuant to AcG 15.

2005 Financial Report Loblaw Companies Limited 45

Notes to the Consolidated Financial Statements

Warehouse and Distribution Agreement The Company has entered into a warehousing and distribution agreement with a
third party to provide to the Company distribution and warehousing services from a dedicated facility. The Company
has no equity interest in this third party; however, the terms of the agreement with the third party are such that the
Company has determined that the third party meets the criteria for a VIE that requires consolidation by the Company.
As a result of the fee structure agreed to with this third party, the impact of the consolidation of the warehouse and
distribution entity was not material.

Accordingly, the Company has included the results of these independent franchisees and this third-party entity that
provides distribution and warehousing services in its consolidated financial statements effective January 2, 2005.

Details of the amounts recorded upon implementation and the effect on the opening consolidated balance sheet as at
January 2, 2005 are summarized below and include the impact of both the independent franchisees and the
warehouse and distribution entity:

Condensed Consolidated Balance Sheet as at January 2, 2005

Cash and cash equivalents
Short term investments
Accounts receivable
Inventories
Other current assets

Total current assets
Fixed assets
Goodwill
Other assets

Total assets

Total current liabilities
Long term debt
Other liabilities
Minority interest

Total liabilities

Common share capital
Retained earnings

Condensed consolidated
balance sheet before
AcG 15 impact

549
275
665
1,821
113

3,423
7,113
1,621
792

$ 12,949

$ 3,133
3,935
467

7,535

1,192
4,222

Total liabilities and shareholders’ equity

$ 12,949

Impact of the
implementation
of AcG 15

$ 20

(73)
78
4

29
136
3
(51)

$ 117

$ 48
96
(8)
10

146

(29)

$ 117

Condensed consolidated
balance sheet after
AcG 15 impact

569
275
592
1,899
117

3,452
7,249
1,624
741

$ 13,066

$ 3,181
4,031
459
10

7,681

1,192
4,193

$ 13,066

The impact of AcG 15 on the opening consolidated balance sheet can be further explained as follows:

• An after-tax, one-time charge of $29 (net of income taxes of $12) was recorded upon implementation and resulted
mainly from delaying the recognition of vendor monies to when the related inventories of the independent franchisees
are sold to their customers, the excess of the independent franchisees’ accumulated losses over the allowance for
doubtful accounts previously recorded by the Company and the reversal of initial franchise fees initially recognized
upon the sale of franchises to third parties.

46 2005 Financial Report Loblaw Companies Limited

• Accounts receivable due from the independent franchisees and the investment in preferred shares of the independent

franchisees were eliminated upon consolidation; cash and cash equivalents, inventories and fixed assets financed by
long term debt (a portion of which is due within one year) were recorded.

• An increase in fixed assets and total current liabilities in respect of the warehouse and distribution entity.
• Minority interest representing the common stakeholder’s equity in the respective VIEs.

As at December 31, 2005, 123 of the Company’s independent franchise stores met the criteria for a VIE and were
consolidated pursuant to AcG 15.

The impact from the consolidation of these VIEs on the consolidated balance sheet as at December 31, 2005 was
not significantly different than the impact on the opening consolidated balance sheet as outlined above. The impact on
the consolidated statement of earnings for the year ended December 31, 2005 was predominantly an increase in sales
of 1.5%. The impact on basic net earnings per common share for 2005 was a decline of approximately 3 cents.

The consolidation of these VIEs by the Company does not result in any change to its tax, legal or credit risks nor does
it result in the Company assuming any obligations of these third parties.

Independent Trust The Company has also identified that it holds a variable interest, by way of a standby letter of credit,
in an independent trust which is used to securitize credit card receivables for PC Bank. In these securitizations,
PC Bank sells a portion of its credit card receivables to the independent trust in exchange for cash. Although this
independent trust has been identified as a VIE, it was determined that the Company is not the primary beneficiary
and therefore this VIE is not subject to consolidation by the Company. The Company’s maximum exposure to loss
as a result of its involvement with this independent trust is disclosed in Notes 8 and 19.

Note 3. Restructuring and Other Charges

During 2005, after completion of a detailed assessment of its supply chain network, management of the Company
approved a comprehensive plan to restructure its supply chain operations nationally. This plan is expected to reduce
future operating costs, provide a smoother flow of products and better service levels to stores and further enable the
Company to achieve its targeted operating efficiencies. The plan involves the closure of six distribution centres and
the relocation of certain activities to new distribution centres. The transfer of the distribution activities of general
merchandise to a new facility owned and operated by a third party in Pickering, Ontario was substantially completed by
the end of 2005. In addition, a new distribution centre dedicated to food distribution is expected to open in late 2007
or early 2008 in Ajax, Ontario. As a result of these initiatives, it is expected that approximately 1,400 positions will
be affected within the supply chain network. The restructuring plan is expected to be completed by late 2007 or
early 2008 and the total restructuring cost under this plan is estimated to be approximately $90. Of the $90 total
estimated cost, approximately $57 is attributable to employee termination benefits which include severance and
additional pension costs resulting from the termination of employees, $13 to fixed asset impairment and accelerated
depreciation of assets relating to this restructuring activity and $20 to site closing and other costs directly attributable
to the restructuring plan. In 2005, the Company recognized $62 of restructuring costs resulting from this plan.

In addition, the Company consolidated several administrative and operating offices from across southern Ontario
into a new national head office and Store Support Centre in Brampton, Ontario and reorganized the merchandising,
procurement and operations groups which included the transfer of the general merchandise operations from Calgary,
Alberta to the new office. The charge recognized in 2005 was $24. These restructuring activities were substantially
completed by the end of 2005.

2005 Financial Report Loblaw Companies Limited 47

Notes to the Consolidated Financial Statements

The following table provides a summary of the costs recognized and cash payments made in 2005, as well as the
corresponding net liability as at December 31, 2005:

Fixed Asset
Impairment and
Accelerated
Depreciation

$ 11

$ 14

Total

$ 62

$ 86

Employee
Termination
Benefits

Site
Closing
Costs and
Other

$ 21

–

Costs recognized in 2005:
Supply chain network
Office move and reorganization of
the operation support functions

Cash payments during 2005:

Supply chain network
Office move and reorganization of
the operation support functions

Net liability as at December 31, 2005

Recorded in the consolidated
balance sheet as follows:
Other assets(1) (note 13)
Accounts payable and
accrued liabilities
Other liabilities (note 15)

$ 45

$ 51

$ 7

$ 10

$ 41

$ 9

7
25

Net liability as at December 31, 2005

$ 41

(1) Represents defined benefit pension plan costs applied to other assets.

Note 4. Goods and Services Tax (“GST”) and Provincial Sales Taxes (“PST”)

Total
Net
Liability

$ 51

$ 72

$ 13

$ 31

$ 41

$ 9

7
25

$ 41

During 2005, a charge was recorded relating to an audit and proposed assessment by the Canada Revenue Agency
relative to GST on certain products sold between 2000 and 2002 on which GST was not appropriately charged
and remitted. In light of this proposed assessment, the Company assessed and estimated the potential liabilities
for GST and PST in other areas of its operations for various periods up to the end of 2004. Accordingly, a charge of
$40 was recorded in operating income in the third quarter to reflect management’s best estimate of such potential
tax liabilities of which management is currently aware. Approximately $15 of this amount was settled during the
fourth quarter. The ultimate remaining amount paid will depend on the outcome of audits performed by, or settlements
reached with the various tax authorities and therefore may differ from this estimate. Management will continue to
assess the remaining accrual as progress towards resolution with the various tax authorities is made and will adjust
the remaining accrual accordingly.

48 2005 Financial Report Loblaw Companies Limited

Note 5. Interest Expense

Interest on long term debt
Interest on financial derivative instruments
Net short term interest
Capitalized to fixed assets

Interest expense

Net interest paid in 2005 was $263 (2004 – $254).

Note 6. Basic and Diluted Net Earnings per Common Share

Net earnings

Weighted average common shares outstanding (in millions)
Dilutive effect of stock-based compensation (in millions)

Diluted weighted average common shares outstanding (in millions)

Basic net earnings per common share ($)
Dilutive effect of stock-based compensation per common share ($)

Diluted net earnings per common share ($)

2005

$ 290
(6)
(11)
(21)

$ 252

2005

$ 746

274.2
0.8

275.0

$ 2.72
(0.01)

$ 2.71

2004

$ 290
(30)

(21)

$ 239

2004

$ 968

274.3
1.6

275.9

$ 3.53
(0.02)

$ 3.51

At the end of 2005, there were 2,254,639 stock options outstanding with a weighted average exercise price of
$69.578 per common share that were not recognized in the computation of diluted net earnings per common share
because the exercise prices of the options were greater than the average market price of the common shares for 2005.

Note 7. Cash, Cash Equivalents and Short Term Investments

At year end, the Company had $837 (2004 – $819) in cash, cash equivalents and short term investments held by
Glenhuron Bank Limited (“Glenhuron”), a wholly owned subsidiary of the Company in Barbados. The $27 (2004 –
$14) of income from cash, cash equivalents and short term investments was recognized in net short term interest.

The Company recognized an unrealized foreign currency exchange rate loss of $31 (2004 – $65) as a result of
translating its United States dollar denominated cash, cash equivalents and short term investments, of which $31
(2004 – $45) related to cash and cash equivalents. The resulting loss on cash, cash equivalents and short term
investments is offset in operating income by the unrealized foreign currency exchange rate gain on the cross currency
basis swaps. A cumulative unrealized foreign currency exchange rate receivable of $168 (2004 – $155) relating to
these swaps is recorded in other assets on the balance sheet.

Note 8. Credit Card Receivables

The Company, through PC Bank, securitizes credit card receivables through the sale of a portion of the total interest in
these receivables to an independent trust and does not exercise any control over the trust’s management, administration
or assets. When PC Bank sells credit card receivables in a securitization transaction, it has a retained interest
in the securitized receivables represented by the right to future cash flows after obligations to investors have been
met. Although PC Bank remains responsible for servicing all credit card receivables, it does not receive additional
compensation for servicing those credit card receivables sold to the trust.

2005 Financial Report Loblaw Companies Limited 49

Notes to the Consolidated Financial Statements

During 2005, $225 (2004 – $227) of credit card receivables were securitized, through the sale of a portion of the
total interest in these receivables to an independent trust yielding a nominal net loss (2004 – nominal net gain) on the
initial sale inclusive of a $1 (2004 – $1) servicing liability. Servicing liabilities expensed during the year were $13
(2004 – $11) and the fair value at year end of recognized servicing liabilities was $8 (2004 – $7). The trust’s recourse
to PC Bank’s assets is limited to PC Bank’s retained interests and is further supported by the Company through a
standby letter of credit for 9% (2004 – 15%) of the securitized amount.

Credit card receivables
Amount securitized

Net credit card receivables

Net credit loss experience

2005

$ 1,257
(1,010)

247

2004

$ 950
(785)

$ 165

The net credit loss experience of $5 (2004 – $4) includes $33 (2004 – $23) of credit losses on the total portfolio
of credit card receivables net of credit losses of $28 (2004 – $19) relating to securitized credit card receivables.
The following table outlines the key economic assumptions used in measuring the retained interests at the date of
securitization for securitizations completed in 2005. The table also displays the sensitivity of the current fair value
of retained interests to an immediate 10% and 20% adverse change in the 2005 key economic assumptions. The
sensitivity analysis provided in the table is hypothetical and should be used with caution. The sensitivities of each key
assumption have been calculated independently of any changes in other key assumptions. Actual experience may
result in changes in a number of key assumptions simultaneously. Changes in one factor may result in changes in
another, which could amplify or reduce the impact of such assumptions.

Carrying value of retained interests
Payment rate (monthly)
Weighted average life (years)
Expected credit losses (annual)
Discount rate applied to

residual cash flows (annual)

2005

5
46.0%
0.6
3.0%

14.0%

The details on the cash flows from securitization are as follows:

Proceeds from new securitizations
Net cash flows received on retained interests

10%

Change in Assumptions
20%

$ (0.5)

$ (1.6)

2005

$ 225
$ 106

$ (1.0)

$ (3.1)

2004

$ 227
$ 83

In October 2005, Eagle Credit Card Trust (“Eagle”), an independent trust, was established for the purpose of issuing
notes backed by credit card receivables originated and serviced by PC Bank. Subsequent to year end, Eagle issued
$500, five year notes at a weighted average rate of 4.5%, due 2011, to finance the purchase of credit card receivables
previously securitized by PC Bank, from an independent trust. PC Bank will continue to service the credit card
receivables on behalf of Eagle, but will not receive any fee for its servicing obligations and has a retained interest in
the securitized receivables represented by the right to future cash flows after obligations to investors have been met.
In accordance with Canadian GAAP, the financial statements of Eagle will not be consolidated with those of the Company.

50 2005 Financial Report Loblaw Companies Limited

Note 9. Income Taxes

The effective income tax rate in the consolidated statements of earnings is reported at a rate different than the weighted
average basic Canadian federal and provincial statutory income tax rate for the following reasons:

Weighted average basic Canadian federal and

provincial statutory income tax rate
Net increase (decrease) resulting from:

Earnings in jurisdictions taxed at rates different
from the Canadian statutory income tax rates

Non-taxable amounts
Large corporation tax
Impact of statutory income tax rate changes

on future income tax balances

Impact of successful resolution of certain income tax

matters from a previous year and other

Effective income tax rate

2005

2004

34.4%

34.9%

0.5
(0.7)
0.5

0.3

(0.2)

34.8%

(2.0)
(0.7)
0.7

(1.4)

31.5%

Net income taxes paid in 2005 were $387 (2004 – $400).

Future income tax balances were adjusted for statutory income tax rate changes in certain provinces, in 2005,
resulting in a $3 charge to future income tax expense. In 2004, the Company recognized a $14 reduction to the
income tax expense as a result of the successful resolution of certain income tax matters from a previous year.

The income tax effects of temporary differences that gave rise to significant portions of the future income tax assets
(liabilities) were as follows:

Accounts payable and accrued liabilities
Other liabilities
Fixed assets
Other assets
Other

Net future income tax liabilities

Recorded in the consolidated balance sheets as follows:
Current future income tax assets
Non-current future income tax liabilities

Net future income tax liabilities

2005

55
86
(278)
(64)
36

2004

56
90
(222)
(55)
28

$ (165)

$ (103)

2005

2004

72
(237)

$ (165)

81
(184)

$ (103)

2005 Financial Report Loblaw Companies Limited 51

Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements

Note 10. Fixed Assets

Properties held for development
Properties under development
Land
Buildings
Equipment and fixtures
Building and leasehold

improvements

Capital leases – buildings

and equipment

2005

Accumulated
Depreciation

835
2,207

Cost

442
231
1,629
4,579
3,589

647

11,117

290

3,332

Net Book
Value

442
231
1,629
3,744
1,382

357

7,785

Cost

378
290
1,530
4,040
3,057

656

9,951

2004

Accumulated
Depreciation

731
1,835

276

2,842

Net Book
Value

378
290
1,530
3,309
1,222

380

7,109

–

$ 11,212

$ 3,427

$ 7,785

$ 10,046

$ 2,933

$ 7,113

Fixed asset impairment and accelerated depreciation charges of $7 (2004 – $22) were recognized in operating income.
An additional $14 was recognized in restructuring and other charges in 2005 for charges primarily due to the plan
to restructure the supply chain operations nationally (see Note 3). The majority of the charges in 2004 resulted from
the repositioning of the Ontario, Canada banner portfolio. The fair values were determined using quoted market prices
where available, independent offers to purchase where available or prices for similar assets.

Note 11. Goodwill

In the normal course of business, the Company may acquire from time to time franchisee stores and convert them to
corporate stores. In 2005, the Company acquired 7 franchisee businesses (2004 – 5 franchisee businesses). The
acquisitions were accounted for using the purchase method of accounting with the results of the businesses acquired
included in the consolidated financial statements from the date of acquisition. The fair value of the net assets acquired
consisted of a nominal amount of fixed assets (2004 – nominal), other assets principally inventory of $3 (2004 – $2)
and goodwill of $3 (2004 – $6) for cash consideration of $5 (2004 – $6), net of accounts receivable due from the
franchisees of $1 (2004 – $2).

The consolidated balance sheet as at December 31, 2005 includes $4 of goodwill of independent franchisees that
were consolidated by the Company pursuant to the requirements of AcG 15.

During 2005, the Company reduced goodwill by $41 due to the resolution of certain income tax matters previously
accrued for as part of the Provigo Inc. purchase equation.

The Company performed the annual impairment test for goodwill and determined that there was no impairment to
the carrying value of goodwill.

In 2004, Westfair Foods Ltd. (“Westfair”), a subsidiary of the Company, redeemed its Class A shares at a price of
350 dollars per share for cash consideration of $8. Previously, the minority interest related to these Class A shares
was included in other liabilities. This transaction was accounted for as a step-by-step purchase of Westfair, which
resulted in the Company recognizing $8 of goodwill.

52 2005 Financial Report Loblaw Companies Limited

Note 12. Other Assets

Franchise investments and other receivables
Accrued benefit plan asset (note 13)
Unrealized equity forwards receivable (note 18)
Unrealized cross currency basis swaps receivable (notes 7 and 18)
Deferred charges and other

2005

$ 194
139
30
168
157

$ 688

2004

$ 323
106
109
155
99

$ 792

Note 13. Employee Future Benefits

The Company sponsors a number of pension plans, which include registered funded defined benefit pension plans,
supplemental unfunded arrangements which provide pension benefits in excess of statutory limits and defined
contribution pension plans. Certain obligations of the Company to these supplemental pension arrangements are
secured by a standby letter of credit issued by a major Canadian bank. Its defined benefit pension plans are
predominantly non-contributory and these benefits are, in general, based on career average earnings.

The Company also offers certain employees post-retirement and post-employment benefit plans and a long term
disability benefit plan. Post-retirement and post-employment benefit plans are not funded, are mainly non-contributory
and include health care, life insurance and dental benefits. Employees eligible for post-retirement benefits are those
who retire at certain retirement ages and employees eligible for post-employment benefits are those on long term
disability leave. The majority of post-retirement health care plans for current and future retirees include a limit on the
total benefits payable by the Company.

The Company also contributes to various multi-employer pension plans which provide pension benefits.

The accrued benefit plan obligations and the fair value of the benefit plan assets were determined using a September 30
measurement date for accounting purposes.

The most recent actuarial valuations of the defined benefit pension plans for funding purposes (“funding valuations”)
were as of December 31, 2003 for all plans except two small plans which were as of December 31, 2004. The
Company is required to file funding valuations at least every three years; accordingly, the next required funding
valuations will be as of December 31, 2006 and 2007, respectively.

Total cash payments made by the Company during 2005, consisting of contributions to funded defined benefit
pension plans, defined contribution pension plans, multi-employer pension plans, long term disability benefit plan and
benefits paid directly to beneficiaries of the unfunded defined benefit pension plans and unfunded other benefit plans,
were $134 (2004 – $105).

The aggregate of the funded defined benefit pension plans and long term disability benefit plan contributions for 2006
are estimated to be $77, and may vary subject to actuarial valuations being completed. The Company also expects to
make contributions in 2006 to defined contribution pension plans and multi-employer pension plans, as well as benefit
payments directly to beneficiaries of the unfunded defined benefit pension plans and other unfunded benefit plans.

2005 Financial Report Loblaw Companies Limited 53

Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements

Information on the Company’s defined benefit pension plans and other benefit plans, in aggregate, was as follows:

Benefit Plan Assets
Fair value, beginning of year

Actual return on plan assets
Employer contributions
Voluntary employee
contributions

Benefits paid
Other

2005

2004

Pension
Benefit Plans

Other
Benefit Plans(1)

838
98
61

2
(53)
(2)

35
2
22

(17)

Total

873
100
83

2
(70)
(2)

Pension
Benefit Plans

Other

Benefit Plans(1)

$ 771
74
42

30
1
18

2
(49)
(2)

(14)

Total

801
75
60

2
(63)
(2)

Fair value, end of year

944

986

$ 838

873

Accrued Benefit Plan

Obligations

Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Actuarial loss
Plan amendments/

past service costs
Contractual termination

benefits(2)

Curtailment gain (3)
Other

937
37
60
(53)
173

$ 181
4
11
(17)
64

$ 1,118
41
71
(70)
237

$ 887
33
56
(49)
11

$ 190
4
11
(14)
1

$ 1,077
37
67
(63)
12

(2)

9
(8)
(2)

9
(6)
(2)

(11)

(10)

(2)

Balance, end of year

$ 1,155

$ 243

$ 1,398

$ 937

$ 181

$ 1,118

Deficit of Plan Assets

Versus Plan Obligations
Unamortized cost of plan

$ (211)

$ (201)

$ (412)

$ (99)

$ (146)

$ (245)

amendments/past service costs

Unamortized net actuarial loss

6
271

(7)
128

(1)
399

6
137

(9)
70

(3)
207

Net accrued benefit plan

asset (liability)

Recorded in the consolidated
balance sheets as follows:
Other assets (note 12)
Other liabilities (note 15)

Net accrued benefit plan

asset (liability)

$ (80)

(14)

$ 44

$ (85)

(41)

102
(36)

37
(117)

139
(153)

78
(34)

28
(113)

106
(147)

$ (80)

(14)

$ 44

$ (85)

(41)

(1) Other Benefit Plans include post-retirement, post-employment and long term disability benefits.
(2) Contractual termination benefits resulted from the plan to restructure the supply chain operations nationally and were recorded in restructuring and other charges.

See Note 3.

(3) Certain defined benefit pension and other benefit plans affected by the plan to restructure the supply chain operations nationally were remeasured as at March 31, 2005
and costs subsequent to April 1, 2005 were determined using a discount rate of 5.75%. This resulted in a nominal impact to net earnings and curtailment gains
which were offset against unamortized net actuarial losses for those plans.

54 2005 Financial Report Loblaw Companies Limited

Included in the accrued benefit plan obligations and the fair value of benefit plan assets at year end are the following
amounts in respect of plans with accrued benefit plan obligations in excess of benefit plan assets:

Fair Value of Benefit Plan Assets
Accrued Benefit Plan Obligations

Deficit

2005

2004

Pension
Benefit Plans

Other
Benefit Plans

Pension
Benefit Plans

Other
Benefit Plans

944
1,155

211

$ 202

$ 773
873

$ 100

$ 151

The significant annual weighted average actuarial assumptions used in calculating the Company’s accrued benefit plan
obligations as at the measurement date of September 30 and the net defined benefit plan cost for the year were as follows:

Accrued Benefit Plan Obligations

Discount rate
Rate of compensation increase

Net Defined Benefit Plan Cost

Discount rate(1)
Expected long term rate of
return on plan assets

Rate of compensation increase

2005

2004

Pension
Benefit Plans

Other
Benefit Plans

Pension
Benefit Plans

Other
Benefit Plans

5.25%
3.5%

5.2%

6.25%
3.5%

6.25%

6.1%

6.25%

8.0%
3.5%

5.5%

8.0%
3.5%

6.1%

6.0%

4.5%

(1) Certain defined benefit pension and other benefit plans affected by the plan to restructure the supply chain operations nationally were remeasured as at March 31, 2005
and costs subsequent to April 1, 2005 were determined using a discount rate of 5.75%. This resulted in a nominal impact to net earnings and curtailment gains
which were offset against unamortized net actuarial losses for those plans.

The Company’s growth rate of health care costs, primarily drug and other medical costs, was estimated at 10.0%
(2004 – 9.0%) and is assumed to decrease to 5.0% by 2013 (2004 – 5.0% by 2008) and remain at that level thereafter.

The benefit plan assets are held in trust and at September 30 consisted of the following asset categories:

Percentage of Plan Assets

2005

2004

Asset Category

Equity securities
Debt securities
Cash and cash equivalents

Total

Pension
Benefit Plans

Other
Benefit Plans

Pension
Benefit Plans

Other
Benefit Plans

64%
34%
2%

100%

99%
1%

100%

64%
34%
2%

100%

95%
5%

100%

Pension benefit plan assets include securities issued by the Company’s majority shareholder, George Weston Limited
(“Weston”) having a fair value of $4 as at September 30 for each of 2005 and 2004. Other benefit plan assets do not
include any Weston or Loblaw securities.

2005 Financial Report Loblaw Companies Limited 55

Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements

The total net cost for the Company’s benefit plans and the multi-employer pension plans was as follows:

Current service cost, net of employee contributions
Interest cost on plan obligations
Actual return on plan assets
Actuarial loss
Plan amendments/past service costs
Contractual termination benefits(1)

Benefit plan cost, before adjustments
to recognize the long term nature
of employee future benefit costs

Difference between cost arising in the year

and cost recognized in the year in respect of:

Return on plan assets
Actuarial (loss) gain
Plan amendments/past service costs

Net defined benefit plan cost
Defined contribution plan cost
Multi-employer pension plan cost

Net benefit plan cost

Recognized in the consolidated statement

of earnings as follows:

Pension and other benefit plan costs
Restructuring and other charges(1)

Net benefit plan cost

2005

2004

Pension
Benefit Plans

Other
Benefit Plans

Pension
Benefit Plans

Other
Benefit Plans

$ 35
60
(98)
173

4
11
(2)
64
2

$ 31
56
(74)
11
1

4
11
(1)
1
(11)

179

30
(170)

39
6
45

(59)
(2)

5
9

13
(7)

31
6
39

$ 90

$ 18

$ 76

$ 18

$ 81
9

$ 90

$ 18

$ 76

$ 18

$ 76

$ 18

(1) Contractual termination benefits resulted from the plan to restructure the supply chain operations nationally and were recorded in restructuring and other charges.

See Note 3.

Sensitivity of Key Assumptions The following table outlines the key assumptions for 2005 and the sensitivity of a 1%
change in each of these assumptions on the accrued benefit plan obligations and on the benefit plan cost for defined
benefit pension plans and other benefit plans. The table reflects the impact on the current service and interest cost
components for the discount rate and expected growth rate of health care costs assumptions.

The sensitivity analysis provided in the table is hypothetical and should be used with caution. The sensitivities of each
key assumption have been calculated independently of any changes in other key assumptions. Actual experience
may result in changes in a number of key assumptions simultaneously. Changes in one factor may result in changes
in another, which could amplify or reduce the impact of such assumptions.

56 2005 Financial Report Loblaw Companies Limited

Expected long term rate of return on plan assets
Impact of: 1% increase
1% decrease

Discount rate
Impact of: 1% increase
1% decrease

Expected growth rate of health care costs (2)
Impact of: 1% increase
1% decrease

Pension Benefit Plans

Other Benefit Plans

Accrued Benefit
Plan Obligations

Benefit
Plan Cost(1)

Accrued Benefit
Plan Obligations

Benefit
Plan Cost(1)

n/a
n/a

5.25%
$ (160)
$ 186

n/a
n/a

8.0%
$ (7)
7

6.25%
$
(8)
$ 8

n/a
n/a

5.2%

$ (31)
$ 36

10.0%

$ 25
$ (28)

6.1%

$ (1)
$ 3

9.0%

$ 2
$ (3)

n/a – not applicable
(1) Discount rate and expected growth rate of health care costs sensitivity is for current service and interest costs only.
(2) Gradually decreasing to 5.0% by 2013 for the accrued benefit plan obligation and decreasing to 5.0% by 2008 for the benefit plan cost and remaining at that level thereafter.

Note 14. Long Term Debt

Provigo Inc. Debentures

Series 1996, 8.70%, due 2006
Other (i)

Loblaw Companies Limited Notes

6.95%, due 2005 (ii)
6.00%, due 2008
5.75%, due 2009
7.10%, due 2010
6.50%, due 2011
5.40%, due 2013
6.00%, due 2014
7.10%, due 2016
6.65%, due 2027
6.45%, due 2028
6.50%, due 2029
11.40%, due 2031

– principal
– effect of coupon repurchase

6.85%, due 2032
6.54%, due 2033
8.75%, due 2033
6.05%, due 2034
6.15%, due 2035
5.90%, due 2036 (ii)
6.45%, due 2039
7.00%, due 2040
5.86%, due 2043

Other at a weighted average interest rate of 7.21%, due 2006 to 2043
VIE loans payable (iii)

Total long term debt
Less amount due within one year

2005

125
1

390
125
300
350
200
100
300
100
200
175

151
(26)
200
200
200
200
200
300
200
150
55
33
126

2004

125
5

200
390
125
300
350
200
100
300
100
200
175

151
(18)
200
200
200
200
200

200
150
55
43

4,355
161

$ 4,194

4,151
216

$ 3,935

2005 Financial Report Loblaw Companies Limited 57

Notes to the Consolidated Financial Statements

The five year schedule of repayment of long term debt based on maturity is as follows: 2006 – $161; 2007 – $24;
2008 – $406; 2009 – $140; 2010 – $314.

(i) Other of $1 (2004 – $5) represents the unamortized portion of the adjustment to fair value the Provigo Inc.

Debentures. This adjustment was recorded as part of the Provigo purchase equation and was calculated using the
average credit spread applicable at that time to the remaining life of the Provigo Inc. Debentures. The adjustment
is being amortized over the remaining term of the Provigo Inc. Debentures.

(ii) During 2005, the Company issued $300 of 5.90% Medium Term Notes (“MTN”) due 2036 and $200 of 6.95%

MTN matured and was repaid.

(iii) Pursuant to the requirements of AcG 15, the consolidated balance sheet as at December 31, 2005 includes $126
of loans payable of VIEs consolidated by the Company, $23 of which is due within one year. The loans payable
represent financing obtained by eligible independent franchisees through a structure involving independent
trusts to facilitate the purchase of the majority of their inventory and fixed assets, consisting mainly of fixturing
and equipment. The loans payable, which have an average term to maturity of 7 years, are due and payable on
demand under certain predetermined circumstances and are secured through a general security agreement made
by the independent franchisees in favour of the independent funding trust. Interest is charged on a floating rate
basis and prepayment of the loans may be made without penalty. The independent funding trust within the
structure finances its activities through the issuance of short term asset-backed notes to third-party investors.

As disclosed in Note 19, a standby letter of credit has been provided by a major Canadian bank for the benefit of
the independent funding trust equal to approximately 10% of the total principal amount of the loans outstanding
at any point in time. The Company has agreed to reimburse the issuing bank for any amount drawn on the
standby letter of credit. In the event of a default by an independent franchisee the independent funding trust may
assign the loan to the Company and draw upon the standby letter of credit. No amount has ever been drawn on
the standby letter of credit.

Note 15. Other Liabilities

Accrued benefit plan liability (note 13)
Stock-based compensation
Restructuring and other charges (note 3)
Goods and Services Tax and provincial sales tax (note 4)
Other

2005

$ 153
13
25
16
64

$ 271

2004

$ 147
76

$ 283

58 2005 Financial Report Loblaw Companies Limited

Note 16. Common Share Capital (authorized – unlimited)

The changes in the common shares issued and outstanding during the year were as follows:

2005

2004

Number of
Common
Shares

Common
Share
Capital

Number of
Common
Shares

Issued and outstanding, beginning of year
Issued for stock options exercised (note 17)
Purchased for cancellation

274,255,914
25,000
(226,100)

$ 1,192
1
(1)

274,829,014
3,000
(576,100)

Common
Share
Capital

$ 1,194

(2)

Issued and outstanding, end of year

274,054,814

$ 1,192

274,255,914

$ 1,192

Weighted average outstanding

274,183,823

274,253,178

Normal Course Issuer Bids (“NCIB”) During 2005, the Company purchased for cancellation 226,100 (2004 – 576,100) of
its common shares for $16 (2004 – $35).

The Company intends to renew its NCIB to purchase on the Toronto Stock Exchange or enter into equity forwards to
purchase up to 5% of its common shares outstanding. The Company, in accordance with the rules and by-laws of the
Toronto Stock Exchange, may purchase its shares at the then market price of such shares.

Note 17. Stock-Based Compensation ($, except where otherwise indicated)

The Company maintains various types of stock-based compensation plans, which are described below.

The Company’s compensation cost recognized in operating income related to its stock option plan and the associated
equity forwards and the restricted share unit plan was as follows:

($ millions)

Stock option plan (income)/expense
Equity forwards loss/(gain) (note 18)
Restricted share unit plan expense

Net stock-based compensation cost

2005

$ (35)
71
7

$ 43

2004

$ 24
(24)

–

Stock Option Plan The Company maintains a stock option plan for certain employees. Under this plan, the Company
may grant options for up to 20.4 million common shares; however, the Company has set a guideline which limits the
number of stock option grants to a maximum of 5% of outstanding common shares at any time. Stock options have
up to a 7-year term, vest 20% cumulatively on each anniversary date of the grant and are exercisable at the designated
common share price, which is 100% of the market price of the Company’s common shares on the last trading day
prior to the effective date of the grant. Each stock option is exercisable into one common share of the Company at the
price specified in the terms of the option, or option holders may elect to receive in cash the share appreciation value
equal to the excess of the market price at the date of exercise over the specified option price.

During 2005, the Company granted 2,247,627 (2004 – 45,000) stock options with a weighted average exercise price
of $69.729 (2004 – $65.453) per common share under its existing stock option plan, which allows for settlement
in shares or in the share appreciation value in cash at the option of the employee.

2005 Financial Report Loblaw Companies Limited 59

Notes to the Consolidated Financial Statements

The share appreciation value of $41 million (2004 – $33 million) was paid on the exercise of 1,135,221 (2004 –
985,395) stock options. In 2005, the Company issued 25,000 (2004 – 3,000) common shares on the exercise of
stock options for cash consideration of $0.9 million (2004 – $0.1 million) for which it had recorded a stock-based
compensation liability of $1 million (2004 – nominal).

At year end, a total of 5,305,422 (2004 – 4,365,958) stock options were outstanding, and represented approximately
1.9% (2004 – 1.6%) of the Company’s issued and outstanding common shares, which was within the Company’s
guideline of 5%. Of the 5,305,422 outstanding options, 5,151,682 relate to stock option grants that allow for
settlement in shares or in the share appreciation value in cash at the option of the employee and 153,740 relate
to stock option grants, issued prior to December 30, 2001 that will be settled by issuing common shares.

A summary of the status of the Company’s stock option plan and activity was as follows:

Outstanding options, beginning of year
Granted
Exercised
Forfeited/cancelled

2005

2004

Options
(number of
shares)

Weighted
Average Exercise
Price/Share

Options
(number of
shares)

Weighted
Average Exercise
Price/Share

4,365,958
2,247,627
(1,160,221)
(147,942)

$ 45.039
$ 69.729
$ 36.411
$ 59.494

5,407,026
45,000
(988,395)
(97,673)

$ 42.533
$ 65.453
$ 32.440
$ 43.201

Outstanding options, end of year

5,305,422

$ 56.983

4,365,958

$ 45.039

Options exercisable, end of year

1,701,050

$ 43.251

1,736,769

$ 39.268

Range of Exercise Prices

$ 32.000 – $ 48.500
$ 49.050 – $ 53.600
$ 61.950 – $ 72.950

2005 Outstanding Options

2005 Exercisable Options

Number of
Options
Outstanding

991,215
2,059,568
2,254,639

Weighted
Average Remaining
Contractual
Life (years)

1
4
6

Weighted
Average Exercise
Price/Share

$ 35.691
$ 53.442
$ 69.578

Number of
Exercisable
Options

938,977
745,073
17,000

Weighted
Average Exercise
Price/Share

$ 34.978
$ 53.208
$ 63.805

Subsequent to year end 2005, the Company granted 48,742 stock options under its current stock option plan, that
allow for settlement in shares or in the share appreciation value in cash at the option of the employee, to 1 employee
with an exercise price of $54.71 per common share. Including stock option grants issued subsequent to year end, total
stock options outstanding represent approximately 2.0% of the Company’s issued and outstanding common shares.

Restricted Share Unit (“RSU”) Plan The Company adopted a RSU plan for certain senior employees. The RSUs entitle the
employee to a cash payment after the end of each performance period, of up to 3 years, following the date of award.
The RSU payment will be an amount equal to the weighted average price of a Loblaw common share on the three
last trading days preceding the end of the performance period for the RSUs multiplied by the number of RSUs held
by the employee.

During 2005, the Company granted 393,335 RSUs to 236 employees and 10,151 RSUs were cancelled. At year end,
a total of 383,184 RSUs were outstanding.

Subsequent to year end 2005, the Company granted 644,712 RSUs to 231 employees.

60 2005 Financial Report Loblaw Companies Limited

Employee Share Ownership Plan (“ESOP”) The Company maintains an ESOP which allows employees to acquire the
Company’s common shares through regular payroll deductions of up to 5% of their gross regular earnings. The Company
contributes an additional 25% (2004 – 15%) of each employee’s contribution to the plan. The ESOP is administered
through a trust which purchases the Company’s common shares on the open market on behalf of employees.
A compensation cost of $5 million (2004 – $2 million) related to this plan was recognized in operating income.

Deferred Share Units (“DSUs”) Plan Members of the Company’s Board of Directors may elect annually to receive all or a
portion of their annual retainer(s) and fees in the form of DSUs, the value of which is determined by the market price
of the Company’s common shares at the time the director’s annual retainer(s) or fees are earned. Upon termination
of Board service, the common shares due to the director, as represented by the DSUs, will be purchased on the open
market on the director’s behalf. At year end, 36,666 (2004 – 30,908) DSUs were outstanding. The year-over-year
change in the deferred share units liability was minimal and was recognized in operating income.

Note 18. Financial Instruments

A summary of the Company’s outstanding financial derivative instruments is as follows:

Cross currency basis swaps
Interest rate swaps (receive)/pay
Equity forwards
Electricity forward contract

Notional Amounts Maturing

2006

2007

2008

2009

2010

Thereafter

2005

Total

$ 11
$ (43)

$ 76

$ 140
$ 240

$ 31
$ 140

$ 174
$ 50
$ 117

$ 604 $ 1,036
437
$ 50 $
240
$ 123 $

2004

Total

$ 1,114
598
$
236
$
16
$

Cross Currency Basis Swaps The Company enters into cross currency basis swaps to hedge its exposure to fluctuations in
the foreign currency exchange rate on a portion of its United States dollar denominated assets, principally cash, cash
equivalents and short term investments.

The Company entered into cross currency basis swaps to exchange United States dollars for $1.0 billion (2004 –
$1.1 billion) Canadian dollars, which mature by 2016. Currency adjustments receivable or payable arising from these
swaps are settled in cash on maturity. At year end, a cumulative unrealized foreign currency exchange rate receivable
of $168 (2004 – $155) was recorded in other assets.

Interest Rate Swaps The Company enters into interest rate swaps to hedge a portion of its exposure to fluctuations
in interest rates. The Company’s interest rate swaps convert a net notional $437 (2004 – $598) of its floating rate
investments to fixed rate investments at 4.76% (2004 – 5.80%), which mature by 2013.

Equity Forwards ($) The Company enters into equity forwards to manage its exposure to fluctuations in its stock-based
compensation cost as a result of changes in the market price of its common shares. At year end 2005, the Company
had cumulative equity forwards to buy 4.8 million (2004 – 4.8 million) of its common shares at an average forward
price of $50.02 (2004 – $49.25) including $5.15 (2004 – $4.38) per common share of interest expense net of
dividends that has been recognized in net earnings and will be paid at termination. The equity forwards allow for
settlement in cash, common shares or net settlement. The Company has included a cumulative unrealized market
gain of $30 million (2004 – $109 million) in other assets relating to these equity forwards.

Electricity Forward Contract The Company entered into an electricity forward contract to minimize price volatility and to
maintain a portion of the Company’s electricity costs in Ontario, Canada at approximately 2001 rates. This electricity
forward contract had an initial term of three years and expired in May 2005.

2005 Financial Report Loblaw Companies Limited 61

Notes to the Consolidated Financial Statements

Fair Value of Financial Instruments The fair value of a financial instrument is the estimated amount that the Company
would receive or pay to terminate the instrument agreement at the reporting date. The following methods and
assumptions were used to estimate the fair value of each type of financial instrument by reference to various market
value data and other valuation techniques as appropriate.

The fair values of cash, cash equivalents, short term investments, accounts receivable, bank indebtedness, commercial
paper, accounts payable and accrued liabilities approximated their carrying values given their short term maturities.

The fair value of the cross currency basis swaps was estimated based on the market spot exchange rates and
forward interest rates and approximated their carrying value.

The fair value of long term debt issues was estimated based on the discounted cash flows of the debt at the Company’s
estimated incremental borrowing rates for debt of the same remaining maturities.

The fair value of the interest rate swaps was estimated by discounting net cash flows of the swaps at market and
forward interest rates for swaps of the same remaining maturities.

The fair value of the equity forwards, which approximated carrying value, was estimated by multiplying the number
of the Company’s common shares outstanding under the equity forwards by the difference between the market
price of its common shares and the average forward price of the outstanding forwards at year end.

In 2004, the fair value of the electricity forward contract was provided by the counterparty based on expected future
electricity prices.

Long term debt liability
Interest rate swaps net (liability) asset
Electricity forward contract net asset

2005

2004

Carrying
Value

$ 4,355

Estimated
Fair Value

$ 5,027
(11)
$

Carrying
Value

$ 4,151
(2)
$

Estimated
Fair Value

$ 4,665
5
$
3
$

Counterparty Risk The Company may be exposed to losses should any counterparty to its financial derivative
agreements fail to fulfill its obligations. The Company has sought to minimize potential counterparty risk and losses
by conducting transactions for its derivative agreements with counterparties that have at minimum a long term A
credit rating from a recognized credit agency and by placing risk adjusted limits on its exposure to any single
counterparty for its financial derivative agreements. The Company has internal policies, controls and reporting
processes which require ongoing assessment and corrective action, if necessary, with respect to its derivative
transactions. In addition, principal amounts on cross currency basis swaps and equity forwards are each netted by
agreement and there is no exposure to loss of the original notional principal amounts on the interest rate swaps
and equity forwards.

Credit Risk The Company’s exposure to credit risk relates to the Company’s cash equivalents and short term investments,
PC Bank’s credit card receivables and accounts receivable from franchisees, associates and independent accounts.

Credit risk associated with the Company’s cash equivalents and short term investments results from the possibility
that a counterparty may default on the repayment of a security. This risk is mitigated by established policies and
guidelines that require issuers of permissible investments to have at minimum a long term A credit rating from
a recognized credit rating agency and that specify minimum and maximum exposures to specific issuers.

62 2005 Financial Report Loblaw Companies Limited

Credit risk from PC Bank’s credit card receivables and receivables from franchisees, associates and independents
results from the possibility that customers may default on their payment obligation. PC Bank manages the credit
card receivable risk by employing stringent credit scoring techniques and actively monitoring the credit card portfolio.
In addition, these receivables are dispersed among a large, diversified group of credit card customers. Accounts
receivable from franchisees, associates and independent accounts are actively monitored on an ongoing basis and
settled on a frequent basis in accordance with the terms specified in the applicable agreements.

Note 19. Contingencies, Commitments and Guarantees

The Company is involved in and potentially subject to various claims by third parties arising out of the normal course
and conduct of its business including, but not limited to, product liability, labour and employment, regulatory and
environmental claims. In addition, the Company is involved in and potentially subject to regular audits from federal
and provincial tax authorities relating to income, capital and commodity taxes and as a result of these audits may
receive assessments and reassessments.

Although such matters cannot be predicted with certainty, management currently considers the Company’s exposure
to such claims and litigation, to the extent not covered by the Company’s insurance policies or otherwise provided for,
not to be material to these consolidated financial statements.

There are various operating leases that have been committed to. Future minimum lease payments relating to these
operating leases are as follows:

Amounts Maturing in

2006

2007

2008

2009

2010

Thereafter
to 2049

2005
Total

2004
Total

Operating lease payments
Expected sub-lease income

$ 192
(44)

$ 184
(37)

$ 166
(31)

$ 146
(26)

$ 126
(19)

$ 823 $ 1,637
(203)

(46)

$ 1,400
(296)

Net operating lease payments

$ 148

$ 147

$ 135

$ 120

$ 107

$ 777 $ 1,434

$ 1,104

At year end, the Company has committed approximately $264 (2004 – $354) with respect to capital investment
projects such as the construction, expansion and renovation of buildings and the purchase of real property.

The Company establishes standby letters of credit used in connection with certain obligations mainly related to
real estate transactions and benefit programs. The aggregate gross potential liability related to these standby letters
of credit is approximately $143 (2004 – $104). Other standby letters of credit related to the financing program for
the Company’s franchisees and securitization of PC Bank’s credit card receivables have been identified as guarantees
and are discussed further in the Guarantees section below.

Guarantees The Company has provided to third parties the following significant guarantees as defined pursuant to
Accounting Guideline 14, “Disclosure of Guarantees”:

2005 Financial Report Loblaw Companies Limited 63

Notes to the Consolidated Financial Statements

Standby Letters of Credit A standby letter of credit for the benefit of an independent trust with respect to the credit card
receivables securitization program of PC Bank has been issued by a major Canadian bank. This standby letter of
credit could be drawn upon in the event of a major decline in the income flow from or in the value of the securitized
credit card receivables. The Company has agreed to reimburse the issuing bank for any amount drawn on the standby
letter of credit. The Company believes that the likelihood of this occurrence is remote. The aggregate gross potential
liability under this arrangement, which represents 9% (2004 – 15%) of the securitized credit card receivables amount,
is approximately $91 (2004 – $118).

A standby letter of credit has been issued by a major Canadian bank in the amount of $42 (2004 – $42) for the
benefit of an independent funding trust which provides loans to the Company’s franchisees for their purchase of
inventory and fixed assets, mainly fixturing and equipment. The amount of the standby letter of credit is based on
a formula and is equal to approximately 10% of the principal amount of the loans outstanding at any point in time.
In the event that an independent franchisee defaults on its loan and the Company has not, within a specified time
period, assumed the loan or the default is not otherwise remedied, the independent funding trust may assign the loan
to the Company and draw upon this standby letter of credit. The Company has agreed to reimburse the issuing bank
for any amount drawn on the standby letter of credit.

Lease Obligations In connection with historical dispositions of certain of its assets, the Company has assigned leases to
third parties. The Company remains contingently liable for these lease obligations in the event any of the assignees
are in default of their lease obligations. The estimated amount for minimum rent, which does not include other lease
related expenses such as property tax and common area maintenance charges, is $138 (2004 – $143).

Indemnification Provisions The Company from time to time enters into agreements in the normal course of its business,
such as service and outsourcing arrangements and leases, in connection with business or asset acquisitions or
dispositions. These agreements by their nature may provide for indemnification of counterparties. These indemnification
provisions may be in connection with breaches of representation and warranty or with future claims for certain
liabilities, including liabilities related to tax and environmental matters. The terms of these indemnification provisions
vary in duration and may extend for an unlimited period of time. Given the nature of such indemnification provisions,
the Company is unable to reasonably estimate its total maximum potential liability as certain indemnification provisions
do not provide for a maximum potential amount and the amounts are dependent on the outcome of future contingent
events, the nature and likelihood of which cannot be determined at this time. Historically, the Company has not made
any significant payments in connection with these indemnification provisions.

Note 20. Related Party Transactions

The Company’s majority shareholder, George Weston Limited, and its affiliates (other than the Company) are related
parties. It is the Company’s policy to conduct all transactions and settle all balances with related parties on market
terms and conditions. Related party transactions include:

Inventory Purchases Purchases of inventory from related parties for resale in the distribution network represented
approximately 3% (2004 – 3%) of the cost of sales, selling and administrative expenses.

64 2005 Financial Report Loblaw Companies Limited

Cost Sharing Agreements George Weston Limited has entered into certain contracts with third parties for administrative
and corporate services, including telecommunication services and information technology related matters on behalf
of the Company. Through cost sharing agreements that have been established between the Company and George
Weston Limited concerning these costs, the Company has agreed to be responsible to George Weston Limited for its
proportionate share of the costs incurred on its behalf. Payments by the Company pursuant to these cost sharing
agreements were approximately $22 (2004 – $21).

Real Estate Leases The Company leases certain properties from an affiliate of George Weston Limited, namely office
space for approximately $4 (2004 – $3) and a property designated for future development for a total one time
payment made in 2004 of $8.

Borrowings/Lendings The Company, from time to time, may borrow from or may lend to George Weston Limited on
a short term basis at commercial paper rates. There were no such amounts outstanding as at year end.

Income Tax Matters From time to time, the Company and George Weston Limited and its affiliates may make elections
that are permitted or required under applicable income tax legislation with respect to affiliated corporations and, as a
result, may enter into agreements in that regard. These elections and accompanying agreements do not have any
material impact on the Company.

Management Agreements The Company, through Glenhuron, manages certain United States cash, cash equivalents and
short term investments for wholly owned non-Canadian subsidiaries of George Weston Limited. Management fees are
based on market rates and included in interest expense.

Sale of Loan Portfolio During 2005, Glenhuron sold a portfolio of third-party long term loans receivable to a wholly
owned subsidiary of George Weston Limited, the Company’s majority shareholder. Originally, the loans in this portfolio
were acquired from third-party financial institutions in 2001. This transaction was undertaken by Glenhuron as part
of its overall ongoing management of its investment portfolio.

The amount of the cash consideration of U.S. $106 was based on a fair market value of the loan portfolio and was
approximately equal to carrying value. An independent review of the valuation analysis has been obtained by the
Company to ensure that Glenhuron’s methodology used in arriving at fair market value was reasonable. As at the date
of sale, the current portion of this loan portfolio of U.S. $13 was included in accounts receivable and the long term
portion of U.S. $93 was included in other assets.

Glenhuron has entered into an agreement with the George Weston Limited subsidiary for the administration of the
loan portfolio.

Electricity Forward Contract Pursuant to an agreement between the Company and George Weston Limited, George
Weston Limited agreed to remain responsible for its proportionate share of all costs and liability associated with
its usage of the Company’s electricity forward contract that expired during 2005.

Note 21. Other Information

Segment Information The only reportable operating segment is merchandising, which includes primarily food as well
as general merchandise and drugstore products and services. All sales to external parties were generated in Canada
and all fixed assets and goodwill were attributable to Canadian operations.

2005 Financial Report Loblaw Companies Limited 65

Five Year Summary (1)

Year (2)
($ millions except where otherwise indicated)

Operating Results
Sales
Sales excluding impact of VIEs
Adjusted EBITDA(3)
Operating income
Adjusted operating income
Interest expense
Net earnings

Financial Position
Working capital
Fixed assets
Goodwill
Total assets
Net debt (3)
Shareholders’ equity

Cash Flow
Cash flows from operating activities
Capital investment

Per Common Share ($)
Basic net earnings
Basic earnings before goodwill charges
Adjusted basic net earnings(3)
Dividend rate at year end
Cash flows from operating activities
Capital investment
Book value
Market price at year end

Financial Ratios
Adjusted EBITDA margin (%)(3)
Operating margin (%)
Adjusted operating margin (%)
Return on average total assets (%)(3)
Return on average shareholders’ equity (%)
Interest coverage
Net debt(3) to equity
Cash flows from operating
activities to net debt(3)

Price/net earnings ratio at year end
Market/book ratio at year end

2005

2004

2003

2002

2001

27,801
27,423
2,132
1,401
1,600
252
746

539
7,785
1,587
13,761
3,901
5,886

1,489
1,156

2.72
2.72
3.35
.84
5.43
4.22
21.48
56.37

7.8
5.0
5.8
11.2
13.2
5.6
.66

.38
20.7
2.6

26,209
26,209
2,125
1,652
1,652
239
968

290
7,113
1,621
12,949
3,828
5,414

1,443
1,258

3.53
3.53
3.48
.76
5.26
4.59
19.74
72.02

8.1
6.3
6.3
14.2
19.2
6.9
.71

.38
20.4
3.6

25,220
25,220
1,881
1,467
1,488
196
845

356
6,390
1,607
12,113
3,707
4,690

1,032
1,271

3.07
3.07
3.10
.60
3.75
4.62
17.07
67.85

7.5
5.8
5.9
13.9
19.3
7.5
.79

.28
22.1
4.0

23,082
23,082
1,671
1,303
1,317
161
728

320
5,557
1,599
11,047
2,932
4,082

998
1,079

2.64
2.64
2.68
.48
3.61
3.91
14.79
54.00

7.2
5.6
5.7
13.8
19.0
8.1
.72

.34
20.5
3.7

21,486
21,486
1,451
1,136
1,136
158
563

290
4,931
1,599
10,025
2,699
3,569

818
1,108

2.04
2.20
2.20
.40
2.96
4.01
12.92
51.85

6.8
5.3
5.3
13.4
16.8
7.2
.76

.30
25.4
4.0

(1) For financial definitions and ratios refer to the Glossary of Terms on page 68.
(2) 2003 contained 53 weeks.
(3) See Non-GAAP Financial Measures on page 33.
(4) Certain prior years’ information was reclassified to conform with current year’s presentation.
(5) Basic earnings before goodwill charges per common share.

66 2005 Financial Report Loblaw Companies Limited

Shareholders’ Equity and Net Debt(3)

($ millions)

Cash Flows from Operating Activities
and Capital Investment ($ millions)

$6,000

4,500

3,000

1,500

2001

2002

2003
(2)

2004

2005

Shareholders’ Equity
Net Debt
(3)

$1,500

1,125

750

375

2001

2002

2003

(2)

2004

2005

Cash Flows from Operating Activities
Capital Investment

Basic Net Earnings and Adjusted Basic Net
Earnings per Common Share(3) ($)

Common Share Market Price Range

($)

$3.60

2.70

1.80

.90

.00

2001
(5)

2002

2003
(2)

2004

2005

Basic Net Earnings per Common Share
Adjusted Basic Net Earnings per Common Share(3)

$84

2001

2002

2003
(2)

2004

2005

Common Share Market Price Range

2005 Financial Report Loblaw Companies Limited 67

Glossary of Terms

Term

Definition

Term

Definition

Adjusted basic
net earnings
per common share

Adjusted EBITDA

Basic net earnings per common share adjusted for
items that affect the comparability of the financial
results and are not a result of ongoing operations
(see Non-GAAP Financial Measures on page 33).

Adjusted operating income before depreciation
and amortization (see Non-GAAP Financial
Measures on page 33).

Market/book ratio
at year end

Minor expansion

Net debt

Adjusted EBITDA margin

Adjusted EBITDA divided by sales excluding impact of
VIEs (see Non-GAAP Financial Measures on page 33).

Market price per common share at year end divided
by book value per common share at year end.

Expansion of a store that results in an increase in
square footage that is less than or equal to 25% of
the square footage of the store prior to the expansion.

Bank indebtedness, commercial paper, long term
debt due within one year, long term debt and
debt equivalents less cash, cash equivalents and
short term investments (see Non-GAAP Financial
Measures on page 33).

Adjusted operating
income

Adjusted operating
income margin

Annual Report

Basic net earnings per
common share

Basic earnings per
common share before
goodwill charges

Operating income adjusted for items that affect
the comparability of the financial results and are
not a result of ongoing operations (see Non-GAAP
Financial Measures on page 33).

Adjusted operating income divided by sales
excluding impact of VIEs (see Non-GAAP Financial
Measures on page 33).

For 2005, the Annual Report consists of the Annual
Summary and the Financial Report.

Net earnings available to common shareholders
divided by the weighted average number of common
shares outstanding during the year.

Net earnings available to common shareholders
before goodwill charges, net of tax, divided
by the weighted average number of common shares
outstanding during the year.

Book value per
common share

Shareholders’ equity divided by the number of
common shares outstanding at year end.

Capital investment

Fixed asset purchases.

Capital investment
per common share

Cash flows from
operating activities
per common share

Cash flows from
operating activities
to net debt

Control label

Conversion

Capital investment divided by the weighted
average number of common shares outstanding
during the year.

Cash flows from operating activities divided by
the weighted average number of common shares
outstanding during the year.

Cash flows from operating activities divided by
net debt.

A brand and associated trademark that is owned
by the Company for use in connection with its
own products and services.

A store that changes from one Company banner to
another Company banner.

Corporate stores sales
per average square foot

Sales by corporate stores divided by the average
corporate stores’ square footage at year end.

Diluted net earnings
per common share

Dividend rate per
common share at
year end

Gross margin

Interest coverage

Major expansion

Net earnings available to common shareholders divided
by the weighted average number of common shares
outstanding during the period minus the dilutive impact
of outstanding stock option grants at period end.

Dividend per common share declared in the
fourth quarter multiplied by four.

Sales less cost of sales and inventory shrinkage
divided by sales.

Operating income divided by interest expense.

Expansion of a store that results in an increase
in square footage that is greater than 25% of the
square footage of the store prior to the expansion.

68 2005 Financial Report Loblaw Companies Limited
68 2005 Financial Report Loblaw Companies Limited
68 2005 Financial Report Loblaw Companies Limited

Net debt to equity

Net debt divided by total shareholders’ equity.

New store

Operating income

A newly constructed store, conversion or
major expansion.

Earnings before interest expense and
income taxes.

Operating margin

Operating income divided by sales.

Price/net earnings ratio
at year end

Market price per common share at year end divided
by basic net earnings per common share for the year.

Renovation

Retail sales

Retail square footage

Return on average
total assets

Return on average
shareholders’ equity

Sales excluding
impact of VIEs

Same-store sales

Variable interest
entity (“VIE”)

Weighted average
common shares
outstanding

A capital investment in a store resulting in no
change to the store square footage.

Combined sales of stores owned by the
Company and those owned by the Company’s
independent franchisees.

Retail square footage includes corporate and
independent franchised stores.

Operating income divided by average total
assets excluding cash, cash equivalents
and short term investments (see Non-GAAP
Financial Measures on page 33).

Net earnings available to common shareholders
divided by average total common shareholders’
equity.

Total sales less sales attributable to the consolidation
of VIEs pursuant to AcG 15 (see Non-GAAP
Financial Measures on page 33 and Note 2 to the
consolidated financial statements).

Retail sales from the same physical location
for stores in operation in that location in both
periods being compared but excluding sales from a
store that has undergone a conversion or major
expansion in the period.

An entity that either does not have sufficient equity
at risk to finance its activities without subordinated
financial support or where the holders of the equity
at risk lack the characteristics of a controlling
financial interest (see Note 2 to the consolidated
financial statements).

The number of common shares outstanding
determined by relating the portion of time within
the year the common shares were outstanding
to the total time in that year.

Working capital

Total current assets less total current liabilities.

Year

A fiscal year ends on the Saturday closest to
December 31, usually 52 weeks in duration, but
includes 53 weeks every 5 to 6 years. The year
ended January 3, 2004 contained 53 weeks.

Common Dividend Policy
It is the Company’s policy to maintain a dividend
payment equal to approximately 20% to 25% of the
prior year’s adjusted basic net earnings per
common share.(1)

Value of Common Shares
For capital gains purposes, the valuation
day (December 22, 1971) cost base for the Company
is $0.958 per common share. The value on
February 22, 1994 was $7.67 per common share.

Common Dividend Dates
The declaration and payment of quarterly dividends
are made subject to approval by the Board of
Directors. The anticipated record and payment
dates for 2006 are:

Record Date

Payment Date

March 15
June 15
Sept. 15
Dec. 15

April 1
July 1
Oct. 1
Dec. 30

Normal Course Issuer Bid
The Company has a Normal Course Issuer Bid on
the Toronto Stock Exchange.

To change your address, eliminate multiple mailings,
or for other shareholder account inquiries, please
contact Computershare Investor Services Inc.

Independent Auditors
KPMG LLP
Chartered Accountants
Toronto, Canada

Annual Meeting
Loblaw Companies Limited Annual Meeting of
Shareholders will be held on Thursday, May 4, 2006
at 11:00 a.m. at the Metro Toronto Convention
Centre, Constitution Hall, Toronto, Canada.

Additional financial information has been filed
electronically with various securities regulators in
Canada through the System for Electronic Document
Analysis and Retrieval (SEDAR) and with the Office
of the Superintendent of Financial Institutions (OSFI)
as the primary regulator for the Company’s
subsidiary, President’s Choice Bank. The Company
holds an analyst call shortly following the release of
its quarterly results. These calls are archived in the
Investor Zone section of the Company’s website.

Ce rapport est disponible en français.

This Financial Report was printed in Canada
on Husky Offset, manufactured elemental chlorine-free,
at a mill independently certified as meeting the
procurement provisions of the Sustainable Forestry
Initiative® (SFI) standard.

Shareholder and Corporate Information

National Head Office
and Store Support Centre
Loblaw Companies Limited
1 President’s Choice Circle
Brampton, Canada
L6Y 5S5
Tel:
Fax:
Internet: www.loblaw.ca

(905) 459-2500
(905) 861-2206

Registered Office
22 St. Clair Avenue East
Toronto, Canada
M4T 2S7
Tel:
Fax:

(416) 922-8500
(416) 922-7791

Stock Exchange Listing
and Symbol
The Company’s common shares are listed
on the Toronto Stock Exchange and trade under
the symbol “L”.

Common Shares
63% of the Company’s common shares are
owned beneficially by W. Galen Weston and
George Weston Limited.

At year end 2005 there were 274,054,814
common shares outstanding, 5,124 registered
common shareholders and 100,737,979
common shares available for public trading.

The average daily trading volume of the Company’s
common shares for 2005 was 322,169.

Trademarks
Loblaw Companies Limited and its subsidiaries
own a number of trademarks. Several subsidiaries
are licensees of additional trademarks. These
trademarks are the exclusive property of Loblaw
Companies Limited or the licensor and where
used in this report are in italics.

Investor Relations
Shareholders, security analysts and investment
professionals should direct their requests
to Geoffrey H. Wilson, Senior Vice President,
Investor Relations and Public Affairs at the
Company’s National Head Office or by e-mail
at investor@loblaw.ca

(1) See Non-GAAP Financial Measures on page 33.

Loblaw Companies Limited
1 President’s Choice Circle
Brampton, Canada
L6Y 5S5

Tel:
(905) 459-2500
Fax: (905) 861-2206

loblaw.ca