Building Out From the Core
2010 AnnuAl RepoRt
loblaw companies limited
loblaw’s mission is to
be Canada’s best food,
health and home retailer
by exceeding customer
expectations through
innovative products at
great prices.
table of contents
2 financial Highlights
4 message to shareholders
6 review of operations
14 corporate social responsibility
16 corporate Governance practices
18 board of directors
19 our leadership
20 shareholder and corporate information
pG 2
2010 annual report
loblaw at a Glance
Halifax, ns
toronto, on
Vancouver, bc
toronto, on
barrie, on
toronto, on
spryfield, ns
Verdun, Qc
pointe-aux-trembles, Qc
sherwood park, ab
toronto, on
west Vancouver, bc
loblaw companies limited is
canada’s largest food distributor
and a leading provider of drugstore,
general merchandise and financial
products and services.
O v e r
i o n
l
l
1 4 m i
c a n a d i a n s s h o p
t h u s e v e r y w e e k
w i
loblaw at a Glance
every day, over 136,000 full-time and part-time loblaw and franchisee employees serve
customers in more than 1,000 corporate and franchised stores from coast to coast. together
with its franchisees, loblaw is one of canada’s largest private sector employers. loblaw is
committed to being socially responsible by respecting the environment, sourcing with integrity,
making a positive difference in the communities it serves, reflecting the nation’s diversity and
being a great place to work.
22
banners across
the country
24
company and
6
third-party-operated
distribution centres
service our stores
576
MD
corporate and
451
franchised stores
coast to coast
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Green color : Pantone 355
Red color : Pantone 1795
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Green color : Pantone 355
Red color : Pantone 1795
MD
control brand advantage
MD
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loblaw offers customers high-quality products and great value through canada’s
strongest control label program with famous brands including President’s Choice, no name
and Joe Fresh. the company also offers canadians innovative financial products and
services under the President’s Choice Financial brand, including President’s Choice
Financial mastercard® and the PC points loyalty program.
#1 & #2
our President’s Choice and no name control
brands are the number one and number two
consumer packaged goods brands by sales
in canada, respectively.*
*source: ac nielsen market track, 52 weeks ending december 18, 2010
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loblaw companies limited
financial Highlights1
same-store sales
(decline) growth (%)
operating income
($ millions)
basic net earnings per
share and dividend rate
per common share ($)
1,269
1,205
2.39
2.45
1,052
2.01
4.2
08*
09
(1.1)
10
(0.6)
*53 weeks ending January 3, 2009.
08*
09
10
08*
09
10
0.84
dividend rate
per common share
FoRwARd-looking StAtementS
this annual report contains forward-looking statements about loblaw companies limited’s (the “company”) objectives, plans, goals, aspirations, strategies, financial condition,
obligations, results of operations, cash flows, performance, prospects and opportunities. words such as “anticipate”, “expect”, “believe”, “foresee”, “could”, “estimate”,
“goal”, “intend”, “plan”, “seek”, “strive”, “will”, “may” and “should” and similar expressions, as they relate to the company and its management, are intended to identify
forward-looking statements. these forward-looking statements are not historical facts but reflect the company’s current expectations concerning future results and events. these
forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including
the possibility that the company’s plans and objectives will not be achieved. these risks and uncertainties include, but are not limited to, those discussed in the forward-
looking statements disclaimer found on page 2 of the 2010 annual report – financial review, and the enterprise risks and risk management section of the management’s
discussion and analysis on pages 18 to 28 of the 2010 annual report – financial review. these forward-looking statements reflect management’s current assumptions
regarding these risks and uncertainties and their respective impact on the company. other risks and uncertainties not presently known to the company or that the company
presently believes are not material could also cause actual results or events to differ materially from those expressed in its forward-looking statements. readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect the company’s expectations only as of the date of this annual report. the company disclaims
any intention or obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
pG 2
2010 annual report
loblaw companies limited
for the years ended January 1, 2011, January 2, 2010 and January 3, 2009
($ millions except where otherwise indicated)
2008
(53 weeks)
2009
(52 weeks)
2010
(52 weeks)
OperatinG results
sales
Gross profit
operating income
interest expense and other financing charges
net earnings
$
30,802
6,911
1,052
263
550
$ 30,735
7,196
1,205
269
656
$ 30,997
7,604
1,269
273
681
Cash FlOw
cash flows from operating activities
capital investment
960
750
1,945
1,067
1,594
1,280
per COmmOn share ($)
basic net earnings
dividend rate at year end
cash flows from operating activities1
book value
market price at year end
FinanCial ratiOs
operating margin
ebitda2
ebitda margin2
net debt2
net debt2 to ebitda2
net debt2 to equity2
interest coverage1
return on average net assets2
return on average shareholders’ equity
OperatinG statistiCs
2.01
0.84
3.50
21.16
35.23
3.4%
1,602
5.2%
3,293
2.1x
0.5:1
3.7x
10.7%
9.7%
2.39
0.84
7.07
22.71
33.88
3.9%
1,794
5.8%
2,783
1.6x
0.4:1
4.2x
12.0%
10.9%
2.45
0.84
5.74
24.52
40.37
4.1%
1,924
6.2%
2,513
1.3x
0.4:1
4.3x
12.4%
10.4%
retail square footage (in millions)
corporate square footage (in millions)
franchise square footage (in millions)
average corporate store size (square feet)
average franchise store size (square feet)
corporate stores sales per average square foot ($)
same-store sales (decline) growth
number of corporate stores
number of franchise stores
percentage of corporate real estate owned
percentage of franchise real estate owned
49.8
37.7
12.1
61,900
28,400
624
4.2%
609
427
74%
48%
50.6
38.2
12.4
62,300
29,700
597
(1.1%)
613
416
72%
48%
50.7
37.3
13.4
64,800
29,500
601
(0.6%)
576
451
74%
46%
1 for financial definitions and ratios refer to the Glossary of terms on page 87 of the 2010 annual report – financial review.
2 see non-Gaap financial measures on page 38 of the 2010 annual report – financial review.
2010 annual report
pG 3
loblaw companies limited
Galen G. weston
executive chairman
as we continue to focus on
strengthening our core businesses,
we now have an eye on loblaw’s
next evolution – new opportunities
to build out from the core.
fellow shareholders,
in 2010, the fourth year of renewal, loblaw companies made
steady progress. every step towards the completion of our
program brings us closer to our goal of being the best retailer
in canada.
during the year, food retailers faced a difficult economic
environment. deflationary pressures, including intense
promotional activity across the country, made sales growth
difficult to achieve. despite lower prices on a wide variety of
goods, canadians did not buy more. unemployment,
household debt and personal bankruptcies – the key drivers
of consumer spending – all remained high during the year,
and canadian consumers became more value-conscious
than ever in their weekly grocery shop.
although consumer confidence has shown some signs of
improvement, it is still low, and volumes in the canadian
grocery industry continue to be relatively flat.
in a highly competitive market, and against these
economic conditions, loblaw delivered solid results for
2010. sales grew by 0.9%, while volume was relatively flat.
our earnings improved by 3.8%, and we finished the year
with 12 consecutive quarters of year-over-year ebitda
improvement. our balance sheet remains strong, and we
reduced our net debt by $270 million to $2.5 billion. at the
same time, we invested $1.3 billion in capital this year to build
out our system’s infrastructure and improve our stores.
since the launch of our internal renewal program, we have
focused our efforts and investments on the building blocks
of our business – products, stores, systems and colleagues.
this year, we have taken measured steps forward in each of
these areas.
we invested more than $700 million directly into our stores,
touching more than 200 stores from coast to coast, improving
the overall customer proposition through a combination of
improved freshness, assortment and customer service. these
renovations are performing in line with our expectations and we
expect to finish upgrading our network over the next few years.
in addition to renovations, this year, our ontario stores also
benefited from the successful negotiation of a new labour
contract that will enable us to improve how we deliver
in-store service directly to our customers. these were difficult
negotiations but collaboration with our united food and
commercial workers union (ufcw) partners delivered the
ratification of five-year collective agreements that met our
twin objectives of remaining the highest-paying employer in
our industry and giving us significantly enhanced and critical
scheduling flexibility.
when combined with our new store time and attendance
system (stas), we now have the management tools and
information needed to ensure that the right people are in the
right places at the right times. we currently have more than
pG 4
2010 annual report
300 stores using stas and all corporate stores will be on the
system by mid-2011.
our acquisition of t&t supermarket inc. (t&t) in september
2009 continues to provide us with valuable insight into the
important and growing asian market and we are busy
integrating that learning into our core business. in 2010, we
added another t&t store, bringing the banner’s total to 19.
in addition to improving our store base and operational
standards, we continued to enhance our key brands. this
year, we improved our overall control brand profitability while
at the same time investing in innovation and creative marketing
programs. over the summer months, “canada’s largest bbQ”
event toured the country to showcase exciting new products.
our President’s Choice ice cream shop flavours ice cream
and angus beef sliders proved to be a huge hit with customers
as we promoted them through fun events for our customers in
their communities. the combination of compelling marketing
and excellent execution drove improvements in market share
across the entire ice cream and burger categories. this now
provides a template for future innovation in, and promotion of,
control brands.
whether it is ice cream, Joe Fresh apparel, PC mobile phones
or PC Financial services, our customers expect quality and value
from our control brands, which continue to prove themselves
as key differentiators and a competitive advantage for loblaw.
alongside our progress in store renovations and control brand
development, our supply chain continued on its steady
improvement and optimization path. today, we believe that our
supply chain is better than it has ever been. we’re delivering
better value, improved availability and fresher produce – more
efficiently every day – but we still have work to do.
in 2010, we completed the national rollout of our transport
management system. we continue to implement our new
warehouse management system with virtually no disruption
to operations. and this year, we opened new distribution
centres in moncton and regina. as with others opened over the
last few years, these centres will improve our route productivity
and provide significant delivery efficiencies. our supply chain
teams are also transitioning to a new forecasting system for
more accurate ordering and replenishment. as they develop
good historical data, we are seeing encouraging improvements
in service levels.
the biggest project for loblaw in 2010 was the ongoing
implementation of our new enterprise resource planning (erp)
system. this year, we integrated our general ledger and related
financial reporting across the business onto the new erp
system, building on the learnings from our implementations
in our real estate and financial services divisions earlier in the
year. we also initiated rollouts in merchandising for roughly
20 categories.
loblaw companies limited
these erp implementations have been executed successfully
without disruptions to our day-to-day business and with each
one we learn something new and improve. as we continue to
roll out the system through the other parts of the business,
we must also maintain our legacy systems. this co-existence
elevates our risk and will remain until our final store is converted.
loblaw experienced many changes during 2010. our colleagues
continue to adapt to and embrace these changes. with the help
of increased communication, better training and colleague
recognition, we are seeing a higher level of engagement in the
workforce. Voluntary turnover in 2010 declined by 11.5% and our
efforts to make loblaw a great place to work were recognized
with the company being named as one of canada’s top 100
employers for the second year in a row. loblaw was also
named a regional winner in the canada’s 10 most admired
corporate cultures program.
i am pleased with what our company has accomplished in
2010 and with what has been achieved over the last four years.
we are now operating as a centralized, marketing-led retailer
and we are investing in our existing asset base to drive
profitable growth. we have improved our infrastructure, our
stores, our products, our balance sheet and our people.
and while there is still a great deal of work to be done, with
our five-year renewal period drawing to a close, we are also
focused on the future.
as we have developed our thinking around the next stage
of growth for the company, we have also spent considerable
time planning management succession. as agreed by the
board of directors, Vicente trius will succeed allan leighton
as president of loblaw companies in the second half of 2011.
mr. trius will bring his vast experience as a global retailer to
canada, building on the solid foundation established by
mr. leighton and moving the company further forward.
as you might expect, the future is both bright and challenging.
as competitive pressures increase, only the strongest canadian
retailers will prosper. i am confident that the right things are
being done to make sure loblaw companies will be one of them.
Galen G. weston
executive chairman
2010 annual report
pG 5
7 million
cans of President’s Choice
100% Sparkling Fruit Juice
sold since may – at two
servings per can, that’s
14 million servings of fruit!
10 million +
President’s Choice
Angus Beef Sliders
consumed since launch –
three sliders = one
regular burger. How
many can you eat?
lori Brown Zehrs, Barrie, on
lori likes being able to recommend
her favourite PC Organics products
to customers who share her health-
conscious lifestyle.
Reduced sodium
levels in
130 +
control brand products –
that’s over 27 million fewer
grams of sodium sold
to consumers
loblaw companies limited
we are proud to be the
home of some of canada’s
most successful and highly
recognized consumer brands,
including President’s Choice,
no name, Joe Fresh, Exact
and Teddy’s Choice.
our control brands are key differentiators and give
loblaw a competitive advantage. they offer our
customers quality products and services that can only
be found in our stores – making loblaw banner stores
a shopping destination for customers from coast to coast.
in 2010, we focused on improving the profitability of our
control brands. our process involved an in-depth review
of every facet of our key control brand products in order
to enhance cost efficiency without compromising quality
and value for our customers. the improvements we
implemented helped to deliver a significant basis
point lift in control brand profitability.
the foundation of loblaw’s control brand
success is innovation, not only in terms
of new products and improvements but also
in the innovative marketing campaigns and
events we use to reach existing and potential
customers. this year we launched more than
1,200 new control brand products, including
President’s Choice ice cream shop flavours ice
cream with 14 nostalgic parlour flavours such
as tiger’s tail, sprinkle party cake and bubble Gum
candy. the hot-pink loblaw ice cream truck toured
across the country along with our “canada’s largest
bbQ” event to serve canadians our must-try, mouth-
watering products, including our new ice cream, angus
beef sliders and sparkling fruit juices, right in their own
communities. the resounding success of our ice cream
innovation and promotion drove sales across the entire
category and set a new standard for event marketing.
Clockwise from top left President’s Choice 100% sparkling fruit Juice;
President’s Choice ice cream shop; Natural Value department, Zehrs essa road,
barrie, on; Blue Menu cut beans; President’s Choice ice cream shop flavours ice
cream; no name lemon Juice; PC Organics mild salsa.
2010 annual report
pG 7
loblaw companies limited
in 2010, we continued with our biggest store
revitalization program in 20 years. investments in
our existing stores are focused on making sure that
canadians’ favourite loblaw store locations continue
to provide the best shopping experience for them.
as we apply lessons that
we learn as we renovate,
our process has become
faster, less expensive and
less disruptive, all of which
have a positive impact for
our customers.
store refreshes in the atlantic region included
the conversion of six more no frills – today, we have
seven no frills in that region with our customers
benefiting from our discount offering. in Quebec,
we franchised 25 Provigo stores providing local,
family-run businesses in rural communities. based
on our successful “Great food” initiative in ontario,
we have turned our attention to Zehrs and Fortinos,
with 16 and seven renovations in 2010, respectively.
our no frills expansion program in the west has
gained critical mass with a total of 28 no frills stores
to date. we made real headway with renovations of
our large Real Canadian Superstore locations in the
west based on our produce first model, presenting
our customers with the freshest of products upon
arrival and a revitalized, optimized general
merchandise layout with a new Joe Fresh look.
Clockwise from top left Real Canadian Superstore Vancouver-Grandview
Hwy, Vancouver, bc; Atlantic Superstore barrington street, Halifax, ns;
Bloor Street Market, toronto, on; Atlantic Superstore barrington street,
Halifax, ns; Bloor Street Market, toronto, on.
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2010 annual report
200 +
stores touched as part
of revitalization program
in 2010, impacting almost
10 million square feet of
retail space
$700
million +
invested in our stores =
improved standards,
conditions and overall
shopping experience
ron Brown Atlantic Superstore, Halifax, nS
ron appreciates how the clean
and fresh feel of the renovated
store matches the quality and
freshness of the seafood products
he offers our customers.
Cheryl whitebone Real Canadian Superstore, Sherwood park, AB
cheryl finds the new technology
systems installed in the store
help her complete her inventory
checks more efficiently. she
likes how much easier it is to find
products for customers.
30%
of computer generated
reports eliminated with eRp
integration – colleagues can
get the information they
need faster
1 million +
retail-ready cases shipped
weekly = less case cutting
and shelf stacking, and
more customer service
1st
Canadian retailer to pilot
Hybrid Class 8 trucks –
improving fuel efficiency and
reducing carbon emissions
loblaw companies limited
supply chain and information technology
infrastructure remain key areas of focus for
loblaw. in 2010, we invested nearly half a
billion dollars in the infrastructure needed
to help us be the best retailer in canada
and position loblaw for future growth.
building a strong foundation ensures that our business is able to put
the right products and the right people in the right places at the right
times – all with the goal of exceeding our customers’ expectations
today, tomorrow and for years to come.
our infrastructure renewal program includes both the physical aspects
of our supply chain, from warehouses to transportation, and the
information technology systems to connect every point in the supply
chain. together, these infrastructure initiatives will give us accurate,
up-to-the-minute visibility of our inventory to improve on-shelf
availability for our customers. this year, we completed the rollout
of our new transport management system, giving our transport teams
a single, integrated platform to schedule the most efficient routes for
moving products from our suppliers to our distribution centres and on
to our stores. we are making steady progress with the implementation
of our new warehouse management system and have nearly completed
the design of our forecasting, planning and replenishment system. we
also introduced new retail-ready packaging to our supply chain, making
the replenishment process faster and easier for our colleagues and
enhancing the shopping experience for our customers.
in 2010, we made significant headway with the implementation of our
enterprise resource planning (erp) system. loblaw’s erp information
technology project is currently the largest retail implementation underway
in the world. we completed three successful “go-live” system transitions
during the year, integrating our real estate, financial services divisions
and our general ledger and related financial reporting across the
business onto the new system. we also completed two pilot launches
involving approximately 20 categories for our merchandising team
without any disruption to the business. there is still much work ahead
on this important project. the new erp system will impact every loblaw
colleague in some way. it will provide standard processes and tools
across the company, leading to greater collaboration, and ultimately,
better service to our customers.
Clockwise from top left Real Canadian Superstore sherwood park, sherwood park, ab; maple Grove
distribution centre, cambridge, on; Real Canadian Superstore Vancouver-Grandview Hwy, Vancouver, bc;
PC origins coffee; Maxi pointe-aux-trembles, pointe-aux-trembles, Qc; Real Canadian Superstore sherwood
park, sherwood park, ab.
2010 annual report
pG 11
loblaw companies limited
loblaw is canada’s largest and leading food
distributor. we plan on keeping it that way by
continually striving to exceed our customers’
expectations with innovative products at
great prices.
canadians are increasingly health-conscious in their purchasing decisions. when it
comes to providing choices that help consumers to lead healthier lifestyles, loblaw has
been at the forefront with Blue Menu and PC Organics products offering delicious and
nutritious alternatives in multiple food categories.
complementing our emphasis on healthy eating, our drugstore business is growing,
with nearly 500 in-store pharmacies operating across the country, and new, small-format
pharmacy pilots launched in 2010. together with a network of almost 100 medical centres
and nearly 60 onsite fitness facilities, loblaw offers canadians an effective combination of
products and services to help them eat well, stay healthy and feel great.
canada is one of the world’s most diverse, multicultural countries and home to a growing
number of new canadians. we believe that engaging and supporting canada’s diversity
is a key area of future growth for loblaw. since our acquisition of t&t in september 2009,
we have opened two new stores and currently have plans to open three more within the
next 12 months. we have a dedicated merchandising team that is focused on providing
our culturally diverse customers with well-known brands from their home countries, as
well as introducing them to our products and services.
extending beyond our core focus on food, we continue to build our strength in apparel
with Joe Fresh and its growing line of accessories and beauty products. in only five
years, the Joe Fresh brand has become the fourth-largest apparel brand in canada
with positive sales growth despite a tough economy. in 2010, we opened the first of 20
announced true standalone Joe Fresh stores on Granville street in the heart of
Vancouver’s shopping district to fantastic customer response.
like all President’s Choice products, President’s Choice Financial services delivers
unprecedented value to canadian consumers. the division continues to expand
its offering of cost-effective alternatives to traditional banking, credit services,
insurance and one of the most popular retail loyalty programs in canada,
PC points. in 2010, President’s Choice Financial relaunched its home and auto
insurance under a broker model and offers the best product and value to suit
each individual consumer’s specific needs. in october, The Mobile Shop kiosks
were launched in over 500 loblaw banner stores across the country and now
offer a new and expanded line-up of canada’s top nine mobile phone brands,
including the PC mobile brand.
Clockwise from top left The Mobile Shop; Joe Fresh spring 2011 lookbook; PC Financial pavilion;
Osaka Supermarket, west Vancouver, bc; Blue Menu Yogurt; Osaka Supermarket, west Vancouver, bc;
Real Canadian Superstore Vancouver-Grandview Hwy, Vancouver, bc.
pG 12
2010 annual report
1 million +
hours of pharmacist/
customer consultations
at loblaw banner
stores = 1,300
healthcare practitioners
working full time
70,000+
additional square feet for
Joe Fresh = more affordable
fashion for our customers
sun Chun Yan (sea) Osaka Supermarket, north Vancouver, BC
sun chun Yan (sea) is taking courses
towards her goal of becoming a
professional baker; she appreciates
everything that she is learning as
part of the in-store bakery team at the
new Osaka Supermarket.
loblaw companies limited
corporate social responsibility
as canada’s largest grocery retailer,
loblaw feeds canadians from coast
to coast. we also create jobs and help
support local economies. every day,
we work hard to make a positive
difference in our communities, our
country and our planet.
loblaw’s commitment to corporate social responsibility (csr) is part
of that difference. our five csr pillars shape the way we do business:
respect the environment, source with integrity, make a positive
difference in our community, reflect our nation’s diversity and be a
Great place to work.
our initiatives have earned us top accolades such as being included
in the corporate Knights’ 2010 best 50 corporate citizens in canada
list and the Globe and mail’s 2010 corporate social responsibility
rankings. following are some other highlights:
sustainable seafood
loblaw is canada’s largest buyer and seller of seafood. to protect
our oceans from overfishing and other detrimental impacts, we are
committed to sourcing 100% of seafood sold in loblaw banner stores
from sustainable sources by the end of 2013.
to date, we’ve changed our procurement practices for fresh swordfish,
implemented high-profile customer education campaigns and, at
select stores in ontario and Quebec, introduced WiseSource salmon,
which is a more responsibly sourced farmed atlantic salmon. at year
end, we carried 22 sustainable seafood products certified by the
marine stewardship council, with many more to come. w e are also
participating in global initiatives such as the salmon aquaculture
dialogue, which aims to develop and implement verifiable
environmental and social performance levels that reduce or eliminate
the key impacts of salmon farming while permitting the industry to
remain economically viable.
pG 14
2010 annual report
loblaw companies limited
plastic bag reduction
loblaw’s results in reducing plastic shopping bag use with the pay-
for-plastic-shopping-bag approach speak volumes. in 2010, our
customers used 73% fewer plastic shopping bags than they did prior
to the pay-for-plastic-shopping-bag approach. since 2007, we have
reduced the number of plastic bags from our stores by 2.5 billion.
partial proceeds of the plastic bag charge are used in partnership with
wwf-canada to help mobilize canadians to take action on the
environment in events such as the Great canadian shoreline cleanup ™,
national sweater day™ and the Green community school Grants program.
sustainable food production
in 2010, we announced the creation of the loblaw companies limited
chair in sustainable food production at the university of Guelph.
the chair was made possible by a $3 million gift from loblaw and
will be the centre of the university’s research focus on creating
sustainable, robust food production systems. it will help lead change
in food production systems through education, research, practice and
outreach within the context of the essential elements of sustainability –
the environment, communities and the economy.
grad@loblaw
our 18-month rotational program for recent university and college
graduates earned loblaw a spot on canada’s top employers for
Young people list for 2010. Graduates are hired as full-time salaried
employees and work in various store management positions, or in
merchandising, supply chain or other departments, before assuming
their regular role. to build an additional pipeline of future talent, our
goal is to hire 1,000 graduates into the program by 2013.
solar energy projects
to help reduce our carbon footprint, in partnership with northland
power inc., we installed photovoltaic panels on the rooftops of two
ontario stores as pilot projects to generate clean, renewable power.
the panels generate solar energy, which is supplied to the provincial
energy grid. this green energy offsets a portion of the stores’ electricity
requirements. we’ll add two more stores in 2011 and, if the pilots are
successful, we’ll expand to more stores in the future.
Clockwise from top left President’s Choice Children’s Charity breakfast for learning; msc-certified
sustainable seafood control brand products; Atlantic Superstore barrington street, Halifax, ns;
limei li, grad@loblaw; solar energy project; President’s Choice Green box.
2010 annual report
pG 15
loblaw companies limited
corporate Governance practices
the board of directors and management
of loblaw companies limited are
committed to sound corporate governance
practices and believe they contribute to
the effective management of the corporation
and its achievement of strategic and
operational objectives.
board leadership
Galen G. weston is the executive
chairman of the board and
allan l. leighton is the deputy
chairman and president of the
company. the board has established
a position description, which sets out
key responsibilities for each of the
executive chairman and the deputy
chairman and president.
the executive chairman directs the
operations of the board. He chairs each
meeting of the board and is responsible
for the management and effective
functioning 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.
the Governance committee regularly
reviews the company’s corporate
governance practices and considers
any changes necessary to maintain the
company’s high standards of corporate
governance in a rapidly changing
environment. our website,
www.loblaw.ca, sets out additional
governance information, including the
company’s code of business conduct
(the “code”), its disclosure policy and
the mandates of the board of directors
(the “board”) and of its committees.
director independence
the canadian securities administrators’
corporate governance disclosure rules
provide that a director is independent
if he or she has no material relationship
with the company or its affiliates that
could reasonably be expected to
interfere with the exercise of the
director’s independent judgment.
the independent directors of the board
meet separately following each
board meeting and on other occasions
as required or desirable. additional
information relating to each director,
including other public company boards
on which they serve, as well as their
attendance record for all board and
committee meetings, can be found in the
company’s management proxy circular.
pG 16
2010 annual report
board responsibilities
and duties
the board, directly and through
its committees, supervises the
management of the business and
affairs of the company. a copy of
the board’s mandate can be found
at www.loblaw.ca. 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 also
oversees the enterprise risk
management process. the board’s
expectations of management are
communicated to management
directly and through committees
of the board.
the board regularly receives
reports on the operating results of
the company as well as reports on
certain non-operational matters,
including insurance, pensions,
corporate governance, health and
safety, legal and treasury matters.
the directors are also subject to
the code.
ethical business conduct
the code reflects the company’s
long-standing commitment 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.
all 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 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 anonymous receipt, retention
and handling of complaints regarding
accounting, internal control or auditing
matters. these procedures are
available at www.loblaw.ca.
board committees
there are five committees of the
board: audit; Governance, employee
development, nominating and
compensation; pension; environmental,
Health and safety; and executive. the
following is a brief summary of some of
the responsibilities of each committee.
Audit Committee
the audit committee is responsible for
supporting the board in overseeing the
quality and 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.
goVeRnAnCe, employee d eVelopment,
nominAting And CompenSAtion Committee
the Governance committee is
responsible for the identification of
new director nominees for the board
and for the oversight of compensation
of directors and executive officers.
the Governance committee is also
responsible for developing and
maintaining governance practices
consistent with high standards of
corporate governance. the board has
appointed the chair of the Governance
committee, who is an independent
director, to serve as lead director.
loblaw companies limited
penSion Committee
the pension committee is responsible
for reviewing the performance and
overseeing the administration of the
company’s and its subsidiaries’
pension plans and pension funds.
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.
Opposite page, top to bottom Bloor Street Market,
toronto, on; Atlantic Superstore barrington street, Halifax, ns;
mike’s no frills, spryfield, ns.
2010 annual report
pG 17
loblaw companies limited
board of directors
our board represents the interests of all loblaw stakeholders. through
its oversight of the management of the company and its affairs, the
board actively demonstrates loblaw’s commitment to the principles of
transparency, accountability and sound corporate governance.
Galen G. westOn, B.A., m.B.A.1*
anthOnY s. Fell, o.C.3*,4*
pierre miChaud, C.m.5
executive chairman, loblaw companies limited;
corporate director; former chairman, rbc
president and director, capital GVr inc.;
director, wittington investments, limited; former
capital markets inc.; former chairman and chief
founder, chairman and chief executive officer,
director, George weston limited.
executive officer, rbc dominion securities;
réno-dépôt inc.; former director and past
allan l. leiGhtOn1
director, bell aliant regional communications
canada, director, bombardier recreational
deputy chairman and president, loblaw
income fund, bce inc. and cae inc.
products inc.
former deputy chairman, royal bank of canada;
chairman, provigo inc.; laurentian bank of
companies limited; deputy chairman, George
weston limited, selfridges & co. ltd.; former
anthOnY r. Graham1,3,4
thOmas C. O’neill, B. Comm., F.C.A.2*
chairman, royal mail Group (u.K. postal
president and director, wittington investments,
corporate director; chairman, bce inc.; retired
service); former president and chief executive
limited; president and chief executive officer,
chairman, pricewaterhousecoopers consulting;
officer, wal-mart europe; former chief
sumarria inc.; former Vice-chairman and
former chief executive officer and chief
executive, asda stores ltd.; director, George
director, national bank financial; chairman and
operating officer, pricewaterhousecoopers
weston limited, selfridges & co. ltd., brown
director, president’s choice bank; director,
llp; director, adecco s.a., nexen inc., bce
thomas Group limited, Holt, renfrew & co.,
George weston limited, brown thomas Group
inc., st. michael’s Hospital and the bank of
limited, bskyb plc and pandora a/s.
limited, Holt, renfrew & co., limited,
nova scotia.
selfridges & co. ltd., de bijenkorf b.V.,
stephen e. BaChand, B.A., m.B.A.3
Graymont limited, power corporation of
karen radFOrd, B.SC., m.B.A.5
corporate director; retired president and chief
canada, power financial corporation, Grupo
corporate director; former executive Vice
executive officer, canadian tire corporation,
calidra and Victoria square Ventures inc.
president and president, telus; special advisor,
limited; director, Harris financial corp,
a subsidiary of bank of montreal.
JOhn s. laCeY, B.A.
Youth in motion; member, alberta children’s
Hospital foundation; president and co-founder,
consultant to the chairman of the board of
women’s leadership foundation.
paul m. BeestOn, C.m., B.A., F.C.A.2,3
George weston limited; chairman of the
president and chief executive officer of toronto
advisory board of brookfield special situations
JOhn d. wetmOre, B. mAtH.2,4
blue Jays baseball team; former president and
funds; former president and chief executive
corporate director; former president and chief
chief executive officer, major league baseball;
officer, the oshawa Group (now part of sobeys
executive officer, ibm canada; retired Vice
director, president’s choice bank and Gluskin
sheff & associates inc.
inc.); director, George weston limited, telus
corporation and ainsworth lumber co. ltd.
president, contact centre development, ibm
americas; director, research in motion ltd.
GOrdOn a.m. Currie, B.A., ll.B.4
nanCY h.O. lOCkhart, o. ont.3,5*
executive Vice president and chief legal officer
chief administrative officer, frum development
of the corporation and George weston limited;
Group; former Vice president, shoppers drug
former senior Vice president and General
mart corporation; director, the stratford chefs
counsel, direct energy; former partner, blake,
school; member, advisory board for the belinda
cassels & Graydon llp.
stronach foundation and centre for addiction
and mental Health.
noteS
1 executive committee
2 audit committee
3 Governance, employee development, nominating
and compensation committee
4 pension committee
5 environmental, Health and safety committee
* chair of the committee
pG 18
2010 annual report
loblaw companies limited
our leadership
Galen G. westOn
executive chairman
allan l. leiGhtOn
president and deputy chairman
mark C. Butler
executive Vice president, brands
BarrY k. COlumB
president, pc bank
GOrdOn a.m. Currie
executive Vice president and chief legal officer
sarah r. davis
chief financial officer
Grant FrOese
executive Vice president, Hard discount and superstore
s. Jane marshall
executive Vice president, loblaw properties limited and
business strategies
JudY a. mcCrie
executive Vice president, Human resources and
labour relations
Calvin mcdOnald
executive Vice president, conventional
peter k. mcmahOn
executive Vice president, chief operating officer
Top to bottom Zehrs essa road, barrie, on; Osaka Supermarket,
west Vancouver, bc; mike’s no frills, spryfield, ns.
2010 annual report
pG 19
loblaw companies limited
shareholder and corporate information
nAtionAl HeAd o FFiCe And SuppoRt CentRe
loblaw Companies limited
1 president’s choice circle
brampton, ontario, canada l6Y 5s5
tel: 905-459-2500
fax: 905-861-2206
web: www.loblaw.ca
StoCk exCHAnge liSting And SymBol
Common diVidend dAteS
AnnuAl meeting o F SHAReHoldeRS
the company’s common shares and second
the declaration and payment of quarterly
loblaw companies limited annual meeting of
preferred shares are listed on the toronto stock
dividends are made subject to approval by the
shareholders will be held on thursday, may 5,
exchange and trade under the symbols “l” and
board of directors. the anticipated record and
2011, at 11:00 a.m. est at the metro toronto
“l.pr.a”, respectively.
payment for dates in 2011 are:
convention centre, south building, meeting
room 701, 222 bremner boulevard, toronto,
Common SHAReS
record date paYment date
ontario, canada.
w. Galen weston, directly and indirectly,
including through his controlling interest in
weston, owns approximately 64% of the
company’s common shares.
march 15
June 15
sept. 15
dec. 15
april 1
July 1
oct. 1
dec. 30
tRAdemARkS
loblaw companies limited and its
subsidiaries own a number of trademarks.
several subsidiaries are licensees of additional
at year end 2010 there were 280,578,130
pReFeRRed SHARe diVidend dAteS
trademarks. these trademarks are the exclusive
common shares issued and outstanding and
the declaration and payment of quarterly
property of the company or the licensor and
100,476,181 common shares available for
dividends are made subject to approval by the
where used in this report are in italics.
public trading.
board of directors. the anticipated payment
dates for 2011 are: January 31, april 30,
inVeStoR RelAtionS
the average daily trading volume of the
July 31 and october 31.
shareholders, security analysts and investment
company’s common shares for 2010 was 359,460.
noRmAl CouRSe iSSueR Bid
professionals should direct their requests to
Kim lee, Vice president, investor relations at
pReFeRRed SHAReS
the company has a normal course issuer
the company’s national Head office or by
at year end 2010 there were 9,000,000 second
bid on the toronto stock exchange.
e-mail at investor@loblaw.ca. additional
preferred shares issued and outstanding and
financial information has been filed
available for public trading.
VAlue oF Common SHAReS
electronically with various securities regulators
for capital gains purposes, the valuation day
in canada through the system for electronic
the average daily trading volume of the
(december 22, 1971) cost base for the company
document analysis and retrieval (sedar) and
company’s second preferred shares for 2010
is $0.958 per common share. the value on
with the office of the superintendent of financial
was 8,387.
february 22, 1994 was $7.67 per common share.
institutions (osfi) as the primary regulator for
Common diVidend poliCy
RegiStRAR And tRAnSFeR Agent
the declaration and payment of dividends and
the amount thereof are at the discretion of the
Computershare investor services inc.
100 university avenue
board, which takes into account the company’s
toronto, canada m5J 2Y1
financial results, capital requirements, available
tel: 416-263-9200
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 at www.loblaw.ca.
cash flow and other factors the board considers
toll-free: 1-800-663-9097
VeRSion FRAnÇAiS du RAppoRt
relevant from time to time. over the long term,
fax: 416-263-9394
pour obtenir la version français du rapport annuel
the company’s objective is for its dividend
toll-free fax: 1-888-453-0330
de les companies loblaw limitée, écrire à :
payment ratio to be in the range of 20% to 25%
of the prior year’s basic net earnings per
to change your address, eliminate multiple mailings,
common share adjusted as appropriate for
or for other shareholder account inquiries, please
Computershare investor services inc.
100 university avenue
items which are not regarded to be reflective of
contact computershare investor services inc.
toronto, canada m5J 2Y1
ongoing operations giving consideration to the
year end cash position, future cash flow
independent AuditoRS
requirements and investment opportunities.
kpmG llp
chartered accountants
toronto, canada
tel: 416-263-9200
toll-free: 1-800-663-9097
fax: 416-263-9394
ou
investor@loblaw.ca
pG 20
2010 annual report
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Financial Report
2010 Financial Review
loBlAw.CA
pC.CA
Joe.CA
pCFinAnCiAl.CA
Building Out From the Core
2010 Annual Report
Financial Review
2010 Annual Report – Financial Review
Management’s Discussion and Analysis
1
Financial Results
41
Three Year Summary
85
Earnings Coverage Exhibit to the Audited Consolidated Financial Statements
86
87 Glossary of Terms
Financial Highlights(1)
For the years ended January 1, 2011, January 2, 2010 and January 3, 2009
($ millions except where otherwise indicated)
Operating Results
Sales
Gross profit
Operating income
Interest expense and other financing charges
Net earnings
2010
(52 weeks)
$ 30,997
7,604
1,269
273
681
2009
(52 weeks)
2008
(53 weeks)
$ 30,735
7,196
1,205
269
656
$ 30,802
6,911
1,052
263
550
Cash Flow
Cash flows from operating activities
Capital investment
Per Common Share ($)
Basic net earnings
Dividend rate at year end
Cash flows from operating activities(1)
Book value
Market price at year end
Financial Measures and Ratios
Operating margin
EBITDA(2)
EBITDA margin(2)
Net debt (2)
Net debt(2) to EBITDA(2)
Net debt(2) to equity(2)
Interest coverage(1)
Return on average net assets(2)
Return on average shareholders’ equity
Operating Statistics
Retail square footage (in millions)
Corporate square footage (in millions)
Franchise square footage (in millions)
Average corporate store size (square feet)
Average franchise store size (square feet)
Corporate stores sales per average square foot ($)
Same-store sales (decline) growth
Number of corporate stores
Number of franchised stores
Percentage of corporate real estate owned
Percentage of franchise real estate owned
(1) For financial definitions and ratios refer to the Glossary of Terms on page 87.
(2) See Non-GAAP Financial Measures on page 38.
1,594
1,280
2.45
0.84
5.74
24.52
40.37
4.1%
1,924
6.2%
2,513
1.3x
0.4:1
4.3x
12.4%
10.4%
50.7
37.3
13.4
64,800
29,500
601
(0.6%)
576
451
74%
46%
1,945
1,067
2.39
0.84
7.07
22.71
33.88
3.9%
1,794
5.8%
2,783
1.6x
0.4:1
4.2x
12.0%
10.9%
50.6
38.2
12.4
62,300
29,700
597
(1.1%)
613
416
72%
48%
960
750
2.01
0.84
3.50
21.16
35.23
3.4%
1,602
5.2%
3,293
2.1x
0.5:1
3.7x
10.7%
9.7%
49.8
37.7
12.1
61,900
28,400
624
4.2%
609
427
74%
48%
1. Forward-Looking Statements
19
10.1 Operating Risks and Risk Management (continued)
Management’s Discussion and Analysis
2
3
2. Overview
4
3. Vision and Strategies
5 4. Key Performance Indicators
6 5. Financial Performance
6
5.1 Results of Operations
Sales
Gross Profit
Operating Income
EBITDA(1)
Interest Expense and Other Financing Charges
Income Taxes
Net Earnings
5.2 Financial Condition
Financial Ratios
Equity Forward Contracts
Net Debt(1)
8
9 6. Liquidity and Capital Resources
9
6.1 Cash Flows
11
13
14
Cash Flows from Operating Activities
Cash Flows used in Investing Activities
Cash Flows from Financing Activities
Employee Future Benefits
6.2 Sources of Liquidity
Independent Funding Trusts
Capital Securities
First Preferred Shares
Common Share Capital
Dividends
Dividend Reinvestment Plan (“DRIP”)
6.3 Contractual Obligations
6.4 Off-Balance Sheet Arrangements
Letters of Credit
Guarantees
Securitization of Credit Card Receivables
Independent Funding Trusts
15 7. Quarterly Results of Operations
7.1 Results by Quarter
15
7.2 Fourth Quarter Results
15
17 8. Disclosure Controls and Procedures
18 9. Internal Control over Financial Reporting
18 10. Enterprise Risks and Risk Management
19
10.1 Operating Risks and Risk Management
ERP and Other Systems Implementations
Information Integrity and Reliability
Change Management and Process Execution
Economic Environment
(1) See Non-GAAP Financial Measures on page 38.
Competitive Environment
Food Safety and Public Health
Distribution and Supply Chain
Colleague Retention and Succession Planning
Merchandising
Strategy Development and Execution
Labour Relations
Disaster Recovery and Business Continuity
Inventory Management
Privacy and Information Security
Tax and Regulatory
Vendor Management and Third Party Service
Providers
Workplace Health and Safety
Environmental
Franchise Independence and Relationships
Contract Management and Records Retention
Trademark and Brand Protection
Employee Future Benefit Contributions
Multi-Employer Pension Plans
Real Estate and Store Renovations
Utility and Fuel Prices
Ethical Business Conduct
Holding Company Structure
27
10.2 Financial Risks and Risk Management
Liquidity and Capital Availability
Credit
Foreign Currency Exchange Rate
Commodity Prices
Common Share Market Price
Interest Rate
Derivative Instruments
28 11. Related Party Transactions
29 12. Critical Accounting Estimates
29
30
30
31
31
12.1 Inventories
12.2 Fixed Assets
12.3 Employee Future Benefits
12.4 Goodwill and Indefinite Life Intangible Assets
12.5 Income and Other Taxes
32 13. Accounting Standards
32
32
13.1 Accounting Standards Implemented in 2009
13.2 International Financial Reporting Standards
38 14. Outlook
38 15. Non-GAAP Financial Measures
40 16. Additional Information
2010 Annual Report – Financial Review 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
48 to 84 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. The consolidated financial
statements include the accounts of the Company and its subsidiaries and variable interest entities (“VIEs”) that the Company is required
to consolidate in accordance with Accounting Guideline (“AcG”) 15, “Consolidation of Variable Interest Entities”. A glossary of terms used
throughout this Financial Report can be found on page 87. The information in this MD&A is current to February 23, 2011, unless
otherwise noted.
1. Forward-Looking Statements
This Annual Report – Financial Review for Loblaw Companies Limited contains forward-looking statements about the Company’s objectives,
plans, goals, aspirations, strategies, financial condition, results of operations, cash flows, performance, prospects and opportunities. Words
such as “anticipate”, “expect”, “believe”, “foresee”, “could”, “estimate”, “goal”, “intend”, “plan”, “seek”, “strive”, “will”, “may” and “should” and
similar expressions, as they relate to the Company and its management, are intended to identify forward-looking statements. These forward-
looking statements are not historical facts but reflect the Company’s current expectations concerning future results and events.
These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ
materially from current expectations, including, but not limited to:
the possibility that the Company’s plans and objectives will not be achieved;
changes in economic conditions including the rate of inflation or deflation and changes in interest and currency exchange rates;
changes in consumer spending and preferences;
heightened competition, whether from new competitors or current competitors;
changes in the Company’s or its competitors’ pricing strategies;
failure of the Company’s franchised stores to perform as expected;
failure to realize sales growth, anticipated cost savings or operating efficiencies from the Company’s major initiatives, including
investments in the Company’s information technology systems, supply chain investments and other cost reduction initiatives, or
unanticipated results from these initiatives;
increased costs relating to utilities, including electricity and fuel;
the inability of the Company to successfully implement its infrastructure and information technology components of its plan;
the inability of the Company’s information technology infrastructure to support the requirements of the Company’s business;
the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink;
failure to execute successfully and in a timely manner the Company’s introduction of innovative and reformulated products or new and
renovated stores;
the inability of the Company’s supply chain to service the needs of the Company’s stores;
failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements, which could lead
to work stoppages;
changes to and failure to comply with the legislative/regulatory environment in which the Company operates, including failure to comply
with environmental laws and regulations;
the adoption of new accounting standards and changes in the Company’s use of accounting estimates;
fluctuations in the Company’s earnings due to changes in the value of stock based compensation and equity forward contracts relating
to its Common Shares;
changes in the Company’s income, commodity and other tax liabilities including changes in tax laws or future assessments;
reliance on the performance and retention of third-party service providers including those associated with the Company’s supply chain
and apparel business;
public health events including those related to food safety;
the inability of the Company to collect on its credit card receivables;
any requirement of the Company to make contributions to its registered funded defined benefit pension plans in excess of those
currently contemplated;
2 2010 Annual Report – Financial Review
the inability of the Company to attract and retain key executives;
supply and quality control issues with vendors; and
failure by the Company to maintain appropriate documentation to support its compliance with accounting, tax or legal rules, regulations
and policies.
These and other risks and uncertainties are discussed in the Company’s materials filed with the Canadian securities regulatory authorities
from time to time, including the Enterprise Risks and Risk Management section of this MD&A. These forward looking statements reflect
management’s current assumptions regarding these risks and uncertainties and their respective impact on the Company.
Other risks and uncertainties not presently known to the Company or that the Company presently believes are not material could also cause
actual results or events to differ materially from those expressed in its forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect the Company’s expectations only as of the date of this MD&A. The
Company disclaims any intention or obligation to update or revise these forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.
2. Overview
The Company is a subsidiary of George Weston Limited (“Weston”) and is Canada’s largest food distributor and a leading provider of
drugstore, general merchandise and financial products and services. Loblaw is one of the largest private sector employers in Canada.
With more than 1,000 corporate and franchised stores from coast to coast, Loblaw and its franchisees employ approximately 136,000
full-time and part-time employees. Through its portfolio of store formats, Loblaw is committed to providing Canadians with a wide range
of products and services to meet the everyday household demands of Canadian consumers. Loblaw is known for the quality, innovation
and value of its food offering. It offers Canada’s strongest control (private) label program, including the unique President’s Choice, no
name and Joe Fresh brands. In addition, through its subsidiaries, the Company makes available to consumers President’s Choice
Financial services and offers the PC points loyalty program.
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 three year period.
($ millions except where otherwise indicated)
Sales
Net earnings
Basic net earnings per common share ($)
Diluted net earnings per common share ($)
Total assets
Long term debt
Capital securities
Dividends declared per common share($)
Dividends declared per Second Preferred Shares, Series A ($)
2010
(52 weeks)
$ 30,997
681
2.45
2.44
2009
(52 weeks)
$ 30,735
656
2.39
2.38
2008
(53 weeks)
$ 30,802
550
2.01
2.01
$ 15,919
$ 14,991
$ 13,943
4,646
221
0.84
1.49
4,505
220
0.84
1.49
4,235
219
0.84
0.91
2010 Annual Report – Financial Review 3
Management’s Discussion and Analysis
Total sales increased 0.9% and same-store sales declined 0.6% in 2010 compared to 2009. Sales and same store sales declined 0.2% and
1.1% respectively in 2009 compared to 2008. During the year, the number of corporate stores decreased to 576 (2009 – 613, 2008 – 609)
and the number of franchised stores increased to 451 (2009 – 416, 2008 – 427). In 2010, the Company converted 31 corporate stores to
franchised stores. In 2009, the number of corporate stores increased due to the addition of 17 stores related to the acquisition of T&T
Supermarket Inc. (“T&T”), partially offset by a conversion of corporate stores to franchised stores. The number of franchised stores decreased
in 2009 due to the conversion of franchised stores to independent affiliates. During 2010, corporate store sales per average square foot was
$601 (2009 – $597, 2008 - $624), with retail square footage increasing to 50.7 million (2009 – 50.6 million, 2008 – 49.8 million).
Net earnings and basic net earnings per common share increased in 2010 by $25 million and $0.06, respectively compared to 2009. The
improvement was a result of an increase in operating income, substantially offset by an increase in income tax expense, including the
impact of a $12 million charge due to changes in the federal tax legislation that resulted in the elimination of the Company’s ability to deduct
costs associated with cash-settled stock options. The increase in operating income was primarily due to an improvement in gross profit of
$408 million, which was offset by an increase in selling and administrative expenses of $278 million and an increase in depreciation and
amortization of $66 million. Operating income in 2010 included incremental costs of $142 million related to the Company's investment in
information technology and supply chain, an asset impairment charge of $26 million incurred on the closure of a distribution centre in
Quebec, a charge of $17 million incurred in connection with the ratification of new collective agreements with certain Ontario union locals,
and an incremental charge of $15 million in stock-based compensation, net of equity forwards.
In 2009 net earnings and basic net earnings per common share increased by $106 million and $0.38 compared to 2008 as a result of an
increase in operating income primarily due to an improvement in gross profit of $285 million, offset by an increase in selling and
administrative expenses of $93 million and an increase in depreciation and amortization of $39 million. Operating income in 2009 included
incremental costs of $73 million related to the Company’s investment in information technology and supply chain, an incremental charge of
$15 million in stock-based compensation, net of equity forwards, and a lower gain on the sale of financial investments by President's Choice
Bank ("PC Bank”), a wholly owned subsidiary of the Company.
Total assets in 2010 increased by 6.2% mainly due to an increase in the Company’s cash and cash equivalents, short term investments,
security deposits and fixed assets as a result of the Company’s capital investment program, including its incremental investment in
information technology and supply chain. In 2009, total assets increased by 7.5%, primarily as a result of an increase in cash and short term
investment balances, an increase in goodwill and intangible assets from the acquisition of T&T and an increase in fixed assets primarily as a
result of the Company’s capital investment program including its incremental investment in information technology and supply chain as well
as the acquisition of a distribution centre.
Long term debt and capital securities increased by 3.0% in 2010 compared to 2009 primarily due to new capital lease obligations, a net
increase in Medium Term Notes and the issuance of guaranteed investment certificates, partially offset by a revaluation for foreign exchange
rates on US dollar fixed rate private placement notes. Long term debt and capital securities increased by 6.1% in 2009 compared to 2008 due
to a net increase in Medium Term Notes and the assumption of a mortgage on the acquisition of a distribution centre. Cash flows from
operating activities covered the Company’s funding requirements and exceeded the capital investment program in both 2010 and 2009.
3. Vision and Strategies
The Company’s mission is to be Canada’s best food, health and home retailer by exceeding customer expectations through innovative
products at great prices. The Company initiated renewal plans four years ago to achieve its mission by transforming into a centralized,
marketing-led organization focused on customers, value, innovative and fresh products and stores, while leveraging its scale and asset
base to drive profitable growth.
In 2010, the Company continued to make steady progress in its renewal program. Progress during the year was achieved despite a difficult
economic environment. Deflationary pressures combined with heightened promotional and competitive activity resulted in soft sales
throughout 2010. Throughout the year, the Company delivered enhanced fresh food offerings, renovated and revitalized stores, and
introduced innovative and differentiated control label brands to provide an enhanced customer shopping experience. In addition, the
Company continued to invest and build its core infrastructure, including both information technology and supply chain.
4 2010 Annual Report – Financial Review
Improved fresh food quality and assortment;
Some of Loblaw’s key accomplishments in 2010 included:
Touched over 200 stores as part of the Company’s store revitalization program of which 160 were considered renovations;
Continued nofrills expansion program with an additional nine nofrills stores in Western Canada and six more nofrills stores in
Atlantic Canada;
Improved overall control brand profitability;
Completed the roll-out of a new transportation management system and continued to implement a new warehouse management system;
Enhanced supply chain efficiency that resulted in improved product availability;
Moved forward in implementing the Enterprise Resource Planning (“ERP”) system by integrating the real estate and financial services
divisions and the general ledger and related financial reporting across the business onto the new system with nearly 1,000 colleagues
now using the system;
Initiated the next wave of ERP implementation with two successful pilots in merchandising involving approximately 20 categories;
Strengthened the balance sheet providing enhanced financial flexibility;
Successfully completed labour negotiations in Ontario and British Colombia providing new and critical scheduling flexibility; and
Recognized as one of Canada’s Top 100 employers.
While the Company achieved many of its goals in 2010, the Company expects to continue the pace and focus on execution of its renewal plan
in a market environment that remains unpredictable and competitively intense. In 2011, the Company intends to continue to drive initiatives
that strengthen its base business including investments in infrastructure, and keeping a vigilant watch on cost control and cash management
as it turns its sights on new opportunities by:
Building out from its core food business to capitalize on opportunities in apparel, financial services, health and wellness and Canada’s
multicultural population.
Continuing to invest in and execute its information technology strategy through the rollout of subsequent supply chain and ERP
functionality releases with a focus on rolling-out to its merchandising organization and ensuring converted data has integrity for its ERP
implementation;
Improving in-store, distribution centre, and store support centre processes in an effort to make the business simpler and more efficient;
Continuing its store upgrade program that will roll out the food renewal and customer service enhancement programs;
Continuing to innovate its control label offering while enhancing profitability;
Continuing to improve its general merchandise range, assortment and profitability;
Focusing on in-store customer service and providing unmatched value; and
Optimizing its customer offering and shopping experience by re-aligning around a new organizational structure.
4. Key Performance Indicators
The Company has identified specific key performance indicators to measure the progress of short and long term strategies. The Company
believes that if it successfully implements and executes its strategic imperatives in support of its long term operating and financial strategies, it
will be well positioned to pursue its vision of providing long term value to its shareholders.
2010 Annual Report – Financial Review 5
Management’s Discussion and Analysis
Key financial performance indicators are set out below:
Sales growth (decline)
Same-store sales decline
EBITDA(1) ($ millions)
EBITDA margin(1)
Net earnings ($ millions)
Basic net earnings per common share ($)
Basic net earnings per common share increase
Cash flows from operating activities ($ millions)
Net debt(1) ($ millions)
Net debt(1) to EBITDA(1)
Net debt(1) to equity(1)
Interest coverage(2)
Return on average shareholders’ equity
Return on average net assets(1)
(1) See Non-GAAP Financial Measures on page 38.
(2) See glossary of terms on page 87.
(3) Compared to a 53-week year in 2008.
5. Financial Performance
2010
(52 weeks)
0.9%
(0.6%)
$ 1,924
6.2%
$ 681
$ 2.45
2.5%
$ 1,594
2,513
1.3x
0.4:1
4.3x
10.4%
12.4%
2009(3)
(52 weeks)
(0.2%)
(1.1%)
$ 1,794
5.8%
$ 656
$ 2.39
18.9%
$ 1,945
2,783
1.6x
0.4:1
4.2x
10.9%
12.0%
While the Company delivered solid earnings growth, deflationary pressures and competitive intensity resulted in declines in sales and
same-store sales, particularly in the fourth quarter 2010.
5.1 Results of Operations
Sales Sales in 2010 increased $262 million, or 0.9%, to $31.0 billion compared to $30.7 billion in 2009.
Total sales, sales growth (decline) and same-store sales declines were as follows:
2010
(52 weeks)
$ 30,997
0.9%
(0.6%)
2009(1)
(52 weeks)
$ 30,735
(0.2%)
(1.1%)
For the years ended January 1, 2011 and January 2, 2010
($ millions)
Total sales
Total sales growth (decline)
Same-store sales decline
(1) Compared to a 53-week year in 2008.
6 2010 Annual Report – Financial Review
The following factors explain the major components in the change in sales over the prior year:
same-store sales declined 0.6%;
T&T sales positively impacted sales by 1.4%;
sales in food and drugstore were flat;
sales growth in apparel was strong while sales of other general merchandise declined significantly due to lower discretionary
consumer spending and reductions in assortment and square footage;
gas bar sales increased significantly as a result of higher retail gas prices and strong volume growth;
the Company’s average annual internal retail food price index was deflated. This compared to average annual internal food price
inflation in 2009. Average annual national food price inflation was 1.0% (2009 – 5.5%) as measured by “The Consumer Price Index
for Food Purchased from Stores” (“CPI”). CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in
Loblaw stores; and
11 (2009 – 41) corporate and franchised stores were opened and 13 (2009 – 33) corporate and franchised stores were closed,
resulting in a net increase of 0.1 million square feet, or 0.2%.
In 2010, the Company launched over 1,200 new control label products and redesigned the packaging of approximately 300 products.
Sales of control label products in 2010 were $8.2 billion compared to $8.3 billion in 2009.
Gross Profit 2010 gross profit increased by $408 million to $7,604 million (24.5% of sales) compared to $7,196 million in 2009 (23.4% of
sales). The increase in gross profit was attributable to improved control label profitability and continued buying synergies and more
disciplined vendor management, a stronger Canadian dollar, improved shrink and the shift of pharmaceutical vendor rebates from selling
and administrative expenses to gross profit. Increased transportation costs partially offset these improvements.
Operating Income Operating income for 2010 increased by $64 million, or 5.3%, to $1,269 million, resulting in an operating margin of
4.1% compared to 3.9% in 2009. The increases in operating income and operating margin for 2010 were primarily due to the
improvement in gross profit and the impact of the acquisition of T&T, partially offset by incremental costs of $142 million related to the
Company’s investment in information technology and supply chain including incremental depreciation and amortization of $59 million, a
charge of $37 million (2009 – $22 million) related to stock-based compensation net of equity forwards, a $26 million asset impairment
charge on the closure of a distribution centre in Quebec, a charge of $17 million in connection with the ratification of new collective
agreements with certain Ontario union locals, and a charge of $28 million (2009 - $27 million) for fixed asset impairments related to asset
carrying values in excess of fair values for specific store locations. Operating income in 2009 included a gain of $8 million from the sale
of financial investments by PC Bank.
EBITDA(1) 2010 EBITDA(1) increased by $130 million, or 7.2%, to $1,924 million resulting in an EBITDA margin(1) of 6.2%
(2009 – 5.8%). The increases in EBITDA(1) and EBITDA margin(1) were primarily due to the increases in operating income and operating
margin as described above.
Interest Expense and Other Financing Charges Interest expense consists primarily of interest on short term and long term debt, the
interest on derivative instruments, the amortization of financing costs and interest earned on short term investments and security deposits net
of interest capitalized to fixed assets. Other financing charges consist of dividends on capital securities. In 2010 interest and other financing
charges increased $4 million, or 1.5%, to $273 million from $269 million in 2009 primarily due to an increase in interest on long term debt to
$288 million (2009 – $282 million). The 2010 weighted average fixed interest rate on long term debt (excluding capital lease obligations) was
6.3% (2009 – 6.4%) and the weighted average term to maturity was 14 years (2009 – 14 years).
Income Taxes The Company’s 2010 effective income tax rate increased to 29.8% from 28.7% in 2009. The 2009 tax rate was affected by
the inclusion of the impact of a statutory income tax rate reduction and accelerated utilization of loss carry forwards, which did not reoccur in
2010. The 2010 tax rate was further affected by a $12 million charge related to the changes in the federal tax legislation that resulted in the
elimination of the Company’s ability to deduct costs associated with cash-settled stock options. Net income taxes paid in 2010 were $298
million (2009 – $199 million).
(1) See Non-GAAP Financial Measures on page 38.
2010 Annual Report – Financial Review 7
Management’s Discussion and Analysis
Net Earnings In 2010, net earnings increased by $25 million, or 3.8%, to $681 million from $656 million in 2009. Basic net earnings per
common share increased by $0.06, or 2.5%, to $2.45 from $2.39 in 2009.
Basic net earnings per common share were impacted in 2010 by a charge of $0.10 (2009 – $0.08) per common share for the net effect of
stock-based compensation including equity forwards. The impact of the changes in the federal tax legislation that resulted in the elimination
of the Company’s ability to deduct costs associated with cash-settled stock options was a charge of $0.04 (2009 – nil) to basic net earnings
per common share. The incremental costs associated with the Company’s investment in information technology and supply chain impacted
basic net earnings per common share by a charge of $0.36 (2009 – $0.19). A charge of $0.07 (2009 – nil) to basic net earnings per common
share was incurred in relation to an asset impairment charge incurred on the closure of a distribution centre in Quebec. Additional fixed asset
impairments resulted in a charge of $0.07 (2009 – $0.07) to basic net earnings per common share.
5.2 Financial Condition
Financial Ratios The Company’s net debt(1) to equity(1) ratio was flat at 0.4:1 at the end of 2010 and is consistent with the Company’s
internal guideline of less than 1:1. Equity(1) for the purpose of calculating the net debt(1) to equity(1) ratio is defined by the Company as
capital securities plus shareholders’ equity. The net debt(1) to EBITDA(1) ratio was 1.3 times at the end of 2010 compared to 1.6 times at
the end of 2009. The decrease in this ratio was due to the decrease in net debt(1) as described below and the increase in EBITDA(1) as
described in Section 5.1.
The increase in operating income as described in Section 5.1 resulted in an improvement in the interest coverage ratio to 4.3 times in
2010 from 4.2 times in 2009.
The 2010 return on average net assets(1) was 12.4% compared to 12.0% in 2009. This ratio was positively impacted by the increase in
operating income as described in Section 5.1, partially offset by an increase in average net assets. The 2010 return on average
shareholders’ equity was 10.4% compared to the 2009 return of 10.9%. The decrease in this ratio was primarily a result of the increase
in common shares related to the Dividend Reinvestment Plan (“DRIP”).
Equity Forward Contracts As at January 1, 2011, Glenhuron Bank Limited (“Glenhuron”) a wholly owned subsidiary of the Company, had
cumulative equity forward contracts to buy 1.5 million (2009 – 1.5 million) of the Company’s common shares at an average forward price of
$56.26 (2009 – $66.25) including $0.04 (2009 – $10.03) per common share of interest expense. As at January 1, 2011, the cumulative
interest, dividends and unrealized market loss of $24 million (2009 – $48 million) was included in accounts payable and accrued liabilities.
During 2009, Glenhuron paid $55 million to terminate equity forwards representing 3.3 million shares, which led to the extinguishment of a
corresponding portion of the associated liability.
Net Debt(1) As at January 1, 2011, net debt(1) was $2,513 million compared to $2,783 million as at January 2, 2010. The decrease of
$270 million was primarily due to positive cash flows from operating activities and proceeds from fixed asset sales, partially offset by fixed
asset purchases.
In 2009, net debt(1) decreased by $510 million due to improvements in non-cash working capital and cash savings associated with the
DRIP. The decrease was partially offset by the acquisition of T&T, the long term debt secured by a mortgage associated with the
acquisition of a distribution centre and a purchase of common shares for cancellation in the fourth quarter of 2009.
(1) See Non-GAAP Financial Measures on page 38.
8 2010 Annual Report – Financial Review
6. Liquidity and Capital Resources
6.1 Cash Flows
Major Cash Flow Components
($ millions)
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
2010
(52 weeks)
$ 1,594
(1,448)
18
2009
(52 weeks)
$ 1,945
(1,212)
(173)
Change
$ (351)
(236)
191
Cash Flows from Operating Activities Cash flows from operating activities for 2010 were $1,594 million, which included net earnings
of $681 million, depreciation and amortization of $655 million and an improvement in non-cash working capital of $66 million due to
changes in accounts payable and accrued liabilities, partially offset by accounts receivable.
Cash flows from operating activities decreased by $351 million in 2010 to $1,594 million from $1,945 million in 2009. In 2009, the cash
flows from operating activities were positively impacted by a significant improvement in non-cash working capital as a result of the
improvement in inventory levels and changes in accounts payable and accrued liabilities. Improvements in non-cash working capital in
2010 were less than those in 2009 and contributed to the year-over-year decrease in cash flows from operating activities.
Cash Flows used in Investing Activities Cash flows used in investing activities were $1,448 million compared to $1,212 million in
2009. The change was primarily due to an increase in fixed asset purchases of $309 million and a change in security deposits of $263
million primarily as a result of PC Bank’s accumulation of cash of $167 million in 2010, partially offset by an increase in proceeds from
fixed assets sales of $63 million, and the acquisition of T&T of $204 million which was completed in 2009.
Capital investment in 2010 was $1.3 billion (2009 – $1.1 billion). Approximately 10% (2009 – 9%) of these investments were for new
store developments, expansions and land, approximately 44% (2009 − 38%) were for store conversions and renovations, and
approximately 46% (2009 − 53%) were for infrastructure investments. The capital investment benefited the regions to varying degrees
and strengthened the existing store base. In 2009, the capital investment of $1.1 billion included the purchase of a distribution centre for
$140 million plus closing costs. The Company assumed long term debt secured by a mortgage of $96 million in connection with the
purchase, resulting in net fixed asset purchases of $971 million in 2009.
The 2010 corporate and franchised store capital investment program, which included the impact of store openings and closures, resulted
in an increase in net retail square footage of 0.2% compared to 2009. During 2010, 11 (2009 – 41) corporate and franchised stores were
opened, 13 (2009 – 33) corporate and franchised stores were closed, resulting in a net increase of 0.1 million square feet (2009 – 0.5
million square feet). In 2010, 160 (2009 – 211) corporate and franchised stores underwent renovations.
As at January 1, 2011, the Company had committed approximately $95 million (2009 – $76 million) for the construction, expansion and
renovation of buildings and the purchase of real property.
The Company expects to invest approximately $1.0 billion in capital expenditures in 2011. Approximately 50% of these funds are
expected to be expended upgrading the information technology and supply chain infrastructure. The remainder will be spent on retail
operations as the Company plans to renovate certain banners and to add approximately 1.1 million square feet of retail space.
2010 Annual Report – Financial Review 9
Management’s Discussion and Analysis
Capital Investment and Store Activity
Capital investment ($ millions)
Corporate square footage (in millions)
Franchise square footage (in millions)
Retail square footage (in millions)
Number of corporate stores
Number of franchised stores
Percentage of corporate real estate owned
Percentage of franchise real estate owned
Average store size (square feet)
Corporate
Franchised
2010
(52 weeks)
$ 1,280
37.3
13.4
50.7
576
451
74%
46%
64,800
29,500
2009
(52 weeks)
$ 1,067
38.2
12.4
50.6
613
416
72%
48%
62,300
29,700
% Change
20.0%
(2.4%)
8.1%
0.2%
(6.0%)
8.4%
4.0%
(0.7%)
Cash Flows from Financing Activities In 2010, cash flows from financing activities were $18 million compared to cash flows used in
financing activities of $173 million in 2009. The increase in cash flows from financing activities was primarily due to the repayment of the
Company’s short term debt and bank indebtedness in the second quarter of 2009, an increase in long term debt issued, the purchase of
common shares in 2009 and the cash savings associated with the DRIP during 2010, partially offset by repayment of long term debt in
2010.
During the third quarter of 2010, PC Bank began accepting deposits under a new Guaranteed Investment Certificate (“GIC”) program. The
GICs, which are sold through the broker channel, are issued with fixed terms ranging from 12 to 60 months and are non-redeemable prior
to maturity. Individual balances up to $100,000 are insured by Canada Deposit Insurance Corporation (CDIC). As at January 1, 2011,
$18 million of GICs was recorded as long term debt on the consolidated balance sheet, of which $5 million is due within one year.
During the second quarter of 2010, the Company issued $350 million principal amount of 10 year unsecured Medium Term Notes, Series
2-B pursuant to its Medium Term Notes, Series 2 program. Interest on the notes is payable semi-annually at a fixed rate of 5.22%. The
notes are unsecured obligations and are redeemable at the option of the Company. In the second quarter of 2009, the Company issued
$350 million principal amount of 5 year unsecured Medium Term Notes, Series 2-A which pay a fixed rate of interest of 4.85% payable
semi-annually.
During the second quarter of 2010, the $300 million, 7.10% Medium Term Note due May 11, 2010 matured and was repaid. In the first
quarter of 2009, the $125 million, 5.75% Medium Term Note matured and was repaid. Subsequent to the end of the year, the $350
million 6.50% Medium Term Note due January 19, 2011, matured and was repaid.
Employee Future Benefits During 2011, the Company expects to contribute approximately $100 million to its registered funded defined
benefits plans. The actual amount paid may vary from the estimate based on actuarial valuations being completed, market performance
and regulatory requirements. The Company also expects to make contributions in 2011 to defined contribution plans and multi-employer
pension plans as well as benefit payments to the beneficiaries of the supplemental unfunded defined benefit pension plans and other
benefit plans.
10 2010 Annual Report – Financial Review
6.2 Sources of Liquidity
The Company expects that cash and cash equivalents, short term investments, future operating cash flows and the amounts available to be
drawn against its committed credit facility will enable the Company to finance its capital investment program and fund its ongoing business
requirements, including working capital, pension plan funding and financial obligations, over the next 12 months. The Company has
traditionally obtained its long term financing primarily through a Medium Term Notes program. The Company may refinance maturing long
term debt with Medium Term Notes if market conditions are appropriate or it may consider other alternatives. In addition, given reasonable
access to capital markets, the Company does not foresee any impediments in obtaining financing to satisfy its long term obligations.
During the third quarter of 2010, the Company’s Short Form Base Shelf Prospectus dated June 5, 2008 which allowed for the issuance of
up to $1.0 billion of unsecured debentures and/or preferred shares, expired. During the fourth quarter of 2010, the Company filed a Short
Form Base Shelf Prospectus which allows for the issuance of up to $1.0 billion of unsecured debentures and/or preferred shares over a
25-month period.
During 2008, the Company entered into an $800 million, 5-year committed credit facility with a syndicate of third party lenders. The facility
contains certain financial covenants with which the Company was in compliance throughout the year. In addition to cash and short term
investments, this facility is the primary source of the Company’s short term funding requirements and permits borrowings having up to a
180-day term that accrue interest based on short term floating interest rates. As at January 1, 2011 and January 2, 2010, the Company had
not drawn on the 5-year committed credit facility.
PC Bank participates in various securitization programs that provide the primary source of funds for the operation of its credit card
business. Under these securitization programs, a portion of the total interest in the credit card receivables is sold to independent trusts
pursuant to co-ownership agreements. PC Bank purchases receivables from and sells receivables to the trusts from time to time
depending on PC Bank’s financing requirements. In 2010, PC Bank securitized $600 million (2009 – nil) credit card receivables and
repurchased $690 million (2009 – $50 million) of co-ownership interests in the securitized receivables from independent trusts. On
December 15, 2010, Eagle Credit Card Trust (“Eagle”), an independent trust through which the Company securitizes its accounts
receivable, issued two series of senior and subordinated notes maturing December 17, 2013 and December 17, 2015 for notional amounts
of $250 million and $350 million respectively. A portion of the securitized receivables was also renewed for two years during 2010.
The independent trusts’ recourse to PC Bank’s assets is limited to PC Bank’s excess collateral of $114 million as at January 1, 2011
(January 2, 2010 – $121 million) as well as standby letters of credit issued by the Company as at January 1, 2011 of $48 million
(January 2, 2010 – $116 million) based on a portion of the securitized amount.
On March 17, 2011, the five-year $500 million senior notes and subordinated notes issued by Eagle will mature. In conjunction with this
upcoming maturity, the Company accumulated $167 million of cash on December 1, 2010. Subsequent to the end of the year, the Company
accumulated $167 million in January 2011 and will continue to accumulate a further $166 million by the end of February 2011. In addition,
subsequent to year end, the Company increased its securitization of accounts receivable by approximately $230 million under one of the
independent trusts and expects to securitize further amounts coincident with the maturity of the Eagle Notes.
During 2010, Dominion Bond Rating Service and Standard & Poor’s reaffirmed the Company’s credit ratings and trend and outlook,
respectively. These rating organizations base their forward-looking credit ratings on both quantitative and qualitative considerations.
The following table sets out the current credit ratings of the Company:
Credit Ratings (Canadian Standards)
Commercial paper
Medium term notes
Preferred shares
Other notes and debentures
Dominion Bond Rating Service
Credit Rating
R-2 (middle)
BBB
Pfd-3
BBB
Trend
Stable
Stable
Stable
Stable
Standard & Poor's
Credit Rating
A-2
BBB
P-3 (high)
BBB
Outlook
Stable
Stable
Stable
Stable
2010 Annual Report – Financial Review 11
Management’s Discussion and Analysis
During the second quarter of 2010, Loblaw renewed its Normal Course Issuer Bid (“NCIB”) to purchase on the Toronto Stock Exchange
(“TSX”), or to enter into equity derivatives to purchase, up to 13,865,435 of the Company’s common shares, representing approximately 5%
of the common shares outstanding. In accordance with the requirements of the TSX, any purchases must be at the then market prices of
such shares. During 2010, the Company did not purchase any shares under its NCIB. During 2009, the Company purchased for cancellation
1,698,400 of its common shares at a price of $33.14. In 2011, the Company intends to renew its NCIB.
Independent Funding Trusts Certain independent franchisees of the Company obtain financing through a structure involving independent
funding trusts, which were created to provide loans to the independent franchisees to facilitate their purchase of inventory and fixed assets,
consisting mainly of fixtures and equipment. These trusts are administered by a major Canadian chartered bank.
The gross principal amount of loans issued to the Company’s independent franchisees by the independent funding trusts as at January 1,
2011 was $405 million (2009 – $390 million) including $202 million (January 2, 2010 – $163 million) of loans payable by VIEs consolidated
by the Company. The Company has agreed to provide credit enhancement of $66 million (2009 – $66 million) in the form of a standby letter
of credit for the benefit of the independent funding trust representing not less than 15% of the principal amount of the loans outstanding.
This standby letter of credit has never been drawn upon. This credit enhancement allows the independent funding trust to provide financing
to the Company’s independent franchisees. As well, each independent franchisee provides security to the independent funding trust for its
obligations by way of a general security agreement. In the event that an independent franchisee defaults on its loan and the Company has
not, within a specified time period, assumed the loan, or the default is not otherwise remedied, the independent funding trust would assign
the loan to the Company and draw upon this standby letter of credit.
During the second quarter of 2010, the $475 million, 364-day revolving committed credit facility that is the source of funding to the
independent trusts was renewed. The financing structure has been reviewed and the Company has determined there were no additional
VIEs to consolidate as a result of this financing.
Capital Securities 12.0 million non-voting Second Preferred Shares, Series A, are authorized, 9.0 million of which were outstanding at
year end. These preferred shares are classified as capital securities and included in long term liabilities on the consolidated balance sheet.
First Preferred Shares 1.0 million non-voting First Preferred Shares are authorized, none of which were outstanding at year end.
Common Share Capital An unlimited number of common shares is authorized, 280,578,130 of which were outstanding at year end.
Further information on the Company’s outstanding share capital is provided in note 19 to the consolidated financial statements.
At year end, a total of 9,320,865 stock options were outstanding, representing 3.3% of the Company’s issued and outstanding common
shares, which was within the Company’s internal guideline of no more than 5%. Each stock option is exercisable into one common share
of the Company at the price specified in the terms of the option agreement, 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. Subsequent to the end
of 2010, the right to receive a cash payment in lieu of exercising an option for shares was removed. Further information on the
Company’s stock option plans is provided in note 21 to the consolidated financial statements.
Dividends The declaration and payment of common share dividends are at the discretion of the Board of Directors of the Company (“Board”)
which takes into account the Company’s financial results, capital requirements, available cash flow and other factors considered relevant
from time to time. Over the long term, the Company’s objective is for its common share dividend payment ratio to be in the range of 20% to
25% of the prior year’s basic net earnings per common share adjusted as appropriate for items which are not regarded to be reflective of
ongoing operations giving consideration to the year-end cash position, future cash flow requirements and investment opportunities. Dividends
on the preferred shares shall be entitled to preference over the common shares with respect to the priority in the payment of dividends and
with respect to the priority in the distribution of assets of the Company in the event of liquidation, dissolution, or winding up of the Company.
During 2010, the Board declared dividends of $0.84 (2009 - $0.84) per common share. During 2010, the Board declared dividends of $1.49
(2009 – $1.49) per Second Preferred Share, Series A. For financial statement presentation purposes, Second Preferred Share, Series A
have been classified as Capital Securities and the associated dividend of $14 million (2009 – $14 million) is included as a component of
12 2010 Annual Report – Financial Review
interest expense and other financing charges in the Consolidated Statement of Earnings (see note 4). Subsequent to year end, the Board
declared a quarterly dividend of $0.21 per common share payable April 1, 2011 and a quarterly dividend of $0.37 per Second Preferred
Share, Series A payable April 30, 2011. At the time such dividends are declared, the Company identifies on its website (www.loblaw.ca) the
designation of eligible and ineligible dividends in accordance with the administrative position of the Canada Revenue Agency (CRA).
Dividend Reinvestment Plan (“DRIP”) During the second quarter of 2009, the Company commenced a DRIP with the objective of
raising $300 million in common share equity. Under the terms of the DRIP, eligible holders of common shares may elect to automatically
reinvest their regular quarterly dividends in additional common shares of the Company without incurring any commissions, service
charges or brokerage fees. The common shares issued to shareholders under the DRIP will be, at the Company’s option, either issued
from treasury or purchased on the open market. The Board may from time to time approve a discount on the issuance of common shares
from treasury under the DRIP. During the year, the Company issued 4,389,872 (2009 – 3,713,094) common shares from treasury under
the DRIP at a three percent (3%) discount to market resulting in net cash savings and incremental common share equity to the Company
of $167 million (2009 – $120 million) for the year. Subsequent to year end, the Board of Directors approved discontinuing the DRIP after
the dividend payment on April 1, 2011, when approximately $300 million in common share equity will be raised through the program as
planned.
6.3 Contractual Obligations
The following illustrates certain of the Company’s significant contractual obligations and discusses other obligations as at January 1, 2011:
Summary of Contractual Obligations
($ millions)
2011
2012
2013
2014
2015
Thereafter
Total
Payments due by year
$ 433
219
$ 77
199
$ 419
177
$ 482
156
$ 182
128
$ 3,053
629
$ 4,646
1,508
Long term debt (including
capital lease obligations)
Operating leases(1)
Contracts for purchases of
Real property and capital
Investment projects(2)
Purchase obligations(3)
Total contractual obligations
$ 783
$ 309
$ 622
$ 651
$ 320
92
39
−
33
−
26
3
10
−
10
−
−
$ 3,682
95
118
$ 6,367
(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 and capital commitments for construction, expansion and renovation of buildings. 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 underlying
transactions.
(3) These include contractual obligations of a material amount 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. These are only estimates of anticipated financial commitments under these arrangements and the amount of actual
payments will vary. These purchase obligations do not include purchase orders issued or agreements made in the ordinary course of business which are solely for goods which are
meant for resale, nor do they include any contracts which may be terminated on relatively short notice or with relatively insignificant cost or liability to the Company.
At year end, the Company had other long term liabilities which included accrued benefit plan liability, future income taxes liability,
stock-based compensation liability and an accrued self insurance liability. These long term liabilities have not been included in the table
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 and income tax rates;
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 colleagues exercise those stock options;
future payments of restricted share units depend on the market price of the Company’s common shares; and
future payments of insurance claims can extend over several years and depend on the timing of anticipated settlements and results of
litigation.
2010 Annual Report – Financial Review 13
Management’s Discussion and Analysis
6.4 Off-Balance Sheet Arrangements
In the normal course of business, the Company enters into off-balance sheet arrangements including:
Letters of Credit Standby and documentary letters of credit are used in connection with certain obligations mainly related to real estate
transactions, benefit programs, purchase orders and performance guarantees. The aggregate gross potential liability related to the
Company’s letters of credit is approximately $325 million (2009 – $277 million).
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, third-party financing made available to the Company’s independent 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. Additionally, the Company has a guarantee on behalf of PC Bank in the amount of US $180 million. For a detailed
description of the Company’s guarantees, see note 26 to the consolidated financial statements.
Securitization of Credit Card Receivables PC Bank participates in bank supported and term securitization programs. Under these
programs, PC Bank sells a portion of the total interest in its credit card receivables to independent trusts in exchange for cash. The trusts
fund these purchases by issuing debt securities in the form of asset-backed commercial paper or asset-backed term notes 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 trusts and PC Bank have
been accounted for as sales as contemplated by Canadian GAAP, specifically AcG 12, “Transfers of Receivables”. The trusts are either
not controlled by PC Bank or are qualifying special purpose entities and therefore the financial results of the trusts are not included in the
Company’s consolidated financial statements.
PC Bank sells interest in its credit card receivables to the trusts on a fully serviced basis. PC Bank does not receive a servicing fee from
the trusts for its servicing responsibilities and accordingly a servicing obligation is recorded. When a sale occurs, PC Bank retains rights to
future cash flows after obligations to the investors in the trusts have been met, which is considered to be a retained interest. The
independent trusts’ recourse to PC Bank’s assets is limited to PC Bank’s excess collateral as well as standby letters of credit provided by
major Canadian chartered banks for 9% (2009 – 9%) on a portion of the securitized amount. These standby letters 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 subordinated
notes issued by Eagle provide credit support to those notes which are more senior. The retained interest is recorded at fair value.
As at year end 2010, the total amount of securitized credit card receivables outstanding which PC Bank continues to service was
$1.6 billion (2009 – $1.7 billion) and the associated retained interest was $21 million (2009 – $13 million). During 2010, PC Bank earned
income of $245 million (2009 – $235 million) related primarily to PC Bank’s rights to excess cash flows earned on the securitized credit
card receivables. In the absence of securitization, the Company would be required to use its cash and short term investments or raise
alternative financing by issuing debt or equity instruments. Further disclosure regarding this arrangement is provided in notes 8 and 26 to
the consolidated financial statements.
Independent Funding Trusts Certain independent franchisees of the Company obtain financing through a structure involving
independent trusts, which were created to provide loans to the independent franchisees to facilitate their purchase of inventory and fixed
assets, consisting mainly of fixtures and equipment. Further disclosure regarding this arrangement is provided in Section 6.2,
“Independent Funding Trusts” and in note 26 to the consolidated financial statements.
14 2010 Annual Report – Financial Review
7. Quarterly Results of Operations
7.1 Results by Quarter
Under an accounting convention common in the food distribution industry the Company follows a 52-week reporting cycle which periodically
necessitates a fiscal year of 53 weeks. 2008 was a 53-week fiscal year. The 52-week reporting cycle is divided into four quarters of 12
weeks each except for the third quarter, which is 16 weeks in duration. The following is a summary of selected consolidated financial
information derived from the Company’s unaudited interim consolidated financial statements for each of the eight most recently completed
quarters. This information was prepared in accordance with Canadian GAAP.
Summary of Quarterly Results
(unaudited)
First
Second
Quarter Quarter
Third
Quarter
Fourth
Quarter
Total
(audited)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2010
2009
Total
(audited)
($ millions except where otherwise indicated) (12 weeks)
(12 weeks)
(16 weeks)
(12 weeks)
(52 weeks)
(12 weeks)
(12 weeks)
(16 weeks)
(12 weeks)(1)
(52 weeks)(2)
Sales
Net earnings
$6,926
$7,317
$9,593
$7,161 $30,997
$6,718 $7,233
$9,473
$7,311
$30,735
137
180
213
151
681
109
193
189
165
656
Net earnings per common share
Basic ($)
Diluted ($)
Average national food price
inflation
Sales growth (decline)
Same-store sales growth (decline)
T&T acquisition impact on sales
(1) As compared to a 13-week quarter in 2008
(2) As compared to a 53-week year in 2008.
0.50
0.49
0.7%
3.1%
0.3%
2.0%
0.64
0.64
0.2%
1.2%
0.77
0.76
1.3%
1.3%
(0.3%)
(0.4%)
1.9%
1.7%
0.54
0.54
2.45
2.44
1.5%
(2.1%)
(1.6%)
0.0%
1.0%
0.9%
(0.6%)
1.4%
0.40
0.40
9.0%
2.9%
2.1%
n/a
0.70
0.70
7.4%
2.8%
2.5%
0.69
0.69
0.60
0.59
4.2%
(0.2%)
1.6%
(5.6%)
(0.6%)
(7.8%)
n/a
0.2%
1.8%
2.39
2.38
5.5%
(0.2%)
(1.1%)
0.5%
The Company’s average quarterly internal retail food price inflation/deflation for 2009 and 2010 remained lower than the average quarterly
national food price inflation as measured by CPI. CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in
Loblaw stores.
In the last eight quarters, net retail square footage increased by 0.9 million square feet, to 50.7 million square feet, including the acquisition of
17 T&T stores in the third quarter of 2009 which increased net retail square footage by 0.8 million square feet.
Fluctuations in quarterly net earnings during 2010 reflect the underlying operations of the Company as well as the impact of specific charges
including the impact of stock-based compensation, net of equity forwards and costs related to the incremental investment in information
technology and supply chain. Quarterly net earnings are also impacted by seasonality and the timing of holidays.
7.2 Fourth Quarter Results
The following is a summary of selected consolidated unaudited financial information for the fourth quarter of 2010. This information was
prepared in accordance with Canadian GAAP and is reported in Canadian dollars.
2010 Annual Report – Financial Review 15
Management’s Discussion and Analysis
Selected Consolidated Information for the Fourth Quarter
(unaudited)
($ millions except where otherwise indicated)
Sales
Gross profit
Operating income
Interest expense and other financing charges
Income taxes
Net earnings
Basic net earnings per common share ($)
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Dividends declared per common share ($)
Dividends declared on second preferred share Series A ($)
Total sales, sales declines and same-store sales declines were as follows:
($ millions)
Total sales
Total sales decline
Same-store sales decline
(1) As compared to a 13-week quarter in 2008.
2010
(12 weeks)
$ 7,161
1,774
289
63
71
151
0.54
603
(481)
6
0.21
0.37
2010
(12 weeks)
$ 7,161
(2.1%)
(1.6%)
2009
(12 weeks)
$ 7,311
1,728
277
64
39
165
0.60
615
(647)
(51)
0.21
0.37
2009(1)
(12 weeks)
$ 7,311
(5.6%)
(7.8%)
Sales for the fourth quarter decreased 2.1% to $7,161 million compared to $7,311 million in the fourth quarter of 2009.
The following factors explain the major components that influenced sales for the fourth quarter of 2010 compared to the fourth quarter of 2009:
same-store sales declined 1.6%;
sales in food declined marginally;
sales in drugstore declined moderately, impacted by deflation due to regulatory changes in Ontario and the impact of generic versions of
certain prescription drugs;
sales growth in apparel was moderate while sales of other general merchandise declined significantly due to lower discretionary
consumer spending and reductions in assortment and square footage;
gas bar sales growth was strong as a result of higher retail gas prices and moderate volume growth;
the Company’s average quarterly internal retail food price index was flat. This compared to average quarterly internal food price deflation
in the fourth quarter of 2009. Average quarterly national food price inflation was 1.5% as measured by CPI. CPI does not necessarily
reflect the effect of inflation on the specific mix of goods sold in Loblaw stores; and
during the fourth quarter of 2010, six corporate and franchised stores were opened and one corporate store was closed, resulting in a net
increase of 0.1 million square feet or 0.3%.
16 2010 Annual Report – Financial Review
Gross profit increased by $46 million to $1,774 million (24.8% of sales) in the fourth quarter of 2010 compared to $1,728 million (23.6% of
sales) in 2009. This increase was primarily attributable to improved control label profitability and continued buying synergies and disciplined
vendor management, the shift of pharmaceutical vendor rebates from selling and administrative expenses to gross profit, improved shrink
and a stronger Canadian dollar. Increased transportation costs partially offset these improvements.
Operating income increased by $12 million to $289 million for the fourth quarter of 2010 compared to $277 million in 2009. Operating margin
was 4.0% for the fourth quarter of 2010 compared to 3.8% in 2009. Contributing to the increase in operating income was improved gross
profit as described above, partially offset by incremental costs of $27 million related to the Company’s investment in information technology
and supply chain including incremental depreciation and amortization of $14 million, a charge of $7 million (2009 –$5 million) related to
stock-based compensation net of equity forwards and a charge of $28 million (2009 - $27 million) for fixed asset impairments related to
asset carrying values in excess of fair values for specific store locations.
EBITDA(1) increased by $22 million, or 5.2%, to $442 million in the fourth quarter of 2010 compared to $420 million in the fourth quarter of
2009. EBITDA margin(1) increased to 6.2% compared to 5.7% in the fourth quarter of 2009. The increases in EBITDA(1) and EBITDA
margin(1) were primarily due to the increase in operating income and operating margin.
Total interest expense and other financing charges for the fourth quarter of 2010 were $63 million compared to $64 million in 2009.
The effective income tax rate in the fourth quarter of 2010 was 31.4% (2009 – 18.3%). The 2009 tax rate was affected by the inclusion of
the impact of a statutory income tax rate reduction and accelerated utilization of loss carry forwards, which did not reoccur in 2010. The
2010 tax rate was further affected by a $12 million charge related to the changes in the federal tax legislation that resulted in the
elimination of the Company’s ability to deduct costs associated with cash-settled stock options. Net income taxes paid in the fourth
quarter were $81 (2009 – $15).
Net earnings for the fourth quarter decreased by $14 million, or 8.5%, to $151 million from $165 million in the fourth quarter of 2009. Basic
net earnings per common share for the fourth quarter decreased by $0.06, or 10%, to $0.54 from $0.60 in the fourth quarter of 2009. Basic
net earnings per common share were impacted in the fourth quarter of 2010 by a charge of $0.02 (2009 – $0.01) per common share for
the net effect of the stock-based compensation net of equity forwards. The impact of the change in federal tax legislation that resulted in
the elimination of the Company’s ability to deduct costs associated with cash-settled stock options was a charge of $0.04 to basic net
earnings per common share in the fourth quarter of 2010. The incremental costs associated with the Company’s investments in
information technology and supply chain impacted basic net earnings per common share by a charge of $0.07 (2009 – $0.03). Fixed asset
impairments resulted in a charge of $0.07 (2009 – $0.07) to basic net earnings per common share.
Fourth quarter cash flows from operating activities were $603 million in 2010 compared to $615 million in the fourth quarter of 2009. The
increase can be attributed to the settlement of equity forward contracts which occurred in 2009 and the increase in depreciation and
amortization, partially offset by the change in non-cash working capital and a decrease in net earnings for the quarter. Fourth quarter cash
flows used in investing activities were $481 million in 2010 compared to $647 million in 2009. The change was primarily due to the change
in short term investments, a change in cash flows from credit card receivables, after securitization, an increase in proceeds from fixed
asset sales, partially offset by an increase in fixed asset purchases and the change in security deposits. During the fourth quarter of 2009,
a distribution centre that was sold in 2007 was acquired for approximately $140 million including the assumption of a mortgage for $96
million. Capital expenditures for the fourth quarter were approximately $453 million (2009 – $461 million). Fourth quarter cash flows from
financing activities were $6 million in 2010 compared to cash flows used in financing activities of $51 million in 2009. The change was
primarily due to the purchase of common shares in the fourth quarter of 2009.
8. Disclosure Controls and Procedures
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable
assurance that all material information relating to the Company and its subsidiaries is gathered and reported to senior management on a
timely basis so that appropriate decisions can be made regarding public disclosure.
(1) See Non-GAAP Financial Measures on page 38.
2010 Annual Report – Financial Review 17
Management’s Discussion and Analysis
As required by National Instrument 52-109 (Certification of Disclosure in Issuers’ Annual and Interim Filings), the Executive Chairman, as
Chief Executive Officer, and the Chief Financial Officer have caused to be evaluated under their supervision the effectiveness of such
disclosure controls and procedures. Based on that evaluation, they have concluded that the design and operation of the system of disclosure
controls and procedures were effective as at January 1, 2011.
9. Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
Canadian GAAP.
As required by National Instrument 52-109 (Certification of Disclosure in Issuers’ Annual and Interim Filings), the Executive Chairman, as
Chief Executive Officer, and the Chief Financial Officer have caused to be evaluated under their supervision the effectiveness of such internal
controls over financial reporting using the framework established in ‘Internal Control – Integrated Framework (COSO Framework) published
by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, they have concluded that
the design and operation of the Company’s internal controls over financial reporting were effective as at January 1, 2011.
In designing and evaluating such controls, it should be recognized that due to inherent limitations, any controls, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives and may not prevent or detect
misstatements. Projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Additionally,
management is required to use judgment in evaluating controls and procedures.
Changes in Internal Control over Financial Reporting Management has also evaluated whether there were changes in the Company’s
internal controls over financial reporting that occurred during the period beginning on October 10, 2010 and ended on January 1, 2011 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Management has
determined that no material changes occurred during this period.
During the first and third quarters of 2010, the Company successfully implemented the first and second phases of its Enterprise Resource
Planning system. The implementation resulted in material changes in those periods to the internal controls over financial reporting for the
Company’s real estate and financial services divisions, corporate administration functions and the general ledger.
10. Enterprise Risks and Risk Management
The Company is committed to establishing a framework that ensures risk management is an integral part of its activities. To ensure the
continued growth and success of the Company, risks are identified and managed through an Enterprise Risk Management (“ERM”) program.
The Board has approved an ERM policy and oversees the ERM program through approval of the Company’s risks and risk prioritization. The
ERM program assists all areas of the business in managing appropriate levels of risk tolerance by bringing a systematic approach,
methodology and tools for evaluating, measuring and monitoring key risks. The results of the ERM program and other business planning
processes are used to identify emerging risks to the Company, prioritize risk management activities and develop a risk-based internal audit
plan.
18 2010 Annual Report – Financial Review
Risk is not eliminated through the ERM program. Risks are identified and managed within acceptable risk tolerances. The ERM program is
designed to:
Promote a cultural awareness of risk management and compliance within the Company;
Facilitate corporate governance by providing a consolidated view of risks across the Company and insight into the methodologies for
identification, assessment, measurement and monitoring of the risks;
Assist in developing consistent risk management methodology and tools across the organization;
Ensure that resources are acquired economically, used efficiently and adequately protected; and
Allow the Company to focus on its key risks in the business planning process and optimize financial performance through responsible
risk management.
Risk identification and assessments are important elements to the Company’s ERM framework. An annual ERM assessment is completed to
assist in the update and identification of financial, operational or reputational risks affecting the Company and to effectively prioritize the risks.
The annual ERM assessment is primarily carried out through interviews and risk assessments with senior management. Risks are assessed
and evaluated based on the Company’s vulnerability to the risk and the potential impact that the underlying risk would have on the
Company’s ability to execute its strategies and achieve its objectives. Risk owners are assigned relevant risks and metrics are developed for
the top risks for quarterly monitoring. Each quarter, management provides an update to the Audit Committee of the status of the top risks
based on significant changes from the prior quarter, anticipated impacts in future quarters and significant changes in key risk metrics. In
addition, the long-term (1-3 year) risk level is assessed in order to monitor potential long term impacts on the risk which may assist in risk
mitigation planning activities.
The Internal Audit and Risk Management group manages the ERM program through the development of the risk framework and
methodologies, completion of the annual ERM assessment, continuous monitoring of the key risks and quarterly reporting to the Audit
Committee. The accountability for oversight of the management of each risk is allocated by the Audit Committee to either the full Board of
Directors or to a Committee of the Board. At least once a year, the relevant business owners update the applicable Committee or the full
Board of Directors on their risk management activities over the course of the preceding year.
In the normal course of business, the Company is exposed to financial and market risks that have the potential to negatively affect its
financial performance. The Company operates with policies and guidelines covering funding, investing, equity, commodity, foreign currency
exchange and interest rate management. Policies and guidelines prohibit the use of any financial derivative instrument for speculative
purposes.
The operating, financial and reputational risks and risk management strategies are discussed below. Any of these risks has the potential to
negatively affect financial performance. The Company has risk management strategies including insurance programs, which are intended to
mitigate the potential impact of these risks. Although these strategies are designed to minimize these risks, the strategies do not guarantee
that the associated risks will be mitigated or not materialize or that events or circumstances will not occur which could negatively affect the
Company’s financial condition or performance.
10.1 Operating Risks and Risk Management
ERP and Other Systems Implementations The Company has under-invested in its information technology (“IT”) infrastructure in the past
and its systems are in need of upgrading. An IT strategic plan was developed to guide the new systems environment that the Company
requires.
In 2010, the Company began to deploy its new ERP system. This project, along with other systems implementations planned for 2011 and
beyond, is one of the largest technology infrastructure programs ever implemented by the Company and is fundamental to its long-term
growth strategies. The work will transform the systems used in virtually every area of the Company’s business. Completing it will require
continued focus and significant investment over the next two years. The failure to successfully migrate from legacy systems to the ERP could
negatively affect the Company’s reputation, operations and its revenues and financial performance. Failure or disruption in the Company’s IT
systems during the implementation of the ERP or other new systems may result in a lack of relevant and reliable information to enable
2010 Annual Report – Financial Review 19
Management’s Discussion and Analysis
management to effectively achieve its strategic plan or manage the day-to-day operations of the business, causing significant disruptions to
business and potential financial losses. In addition, the failure to implement appropriate processes to support the ERP system may result in
inefficiencies and duplication in current processes.
Change management risk and other associated risks will arise from the various projects which will be undertaken to upgrade existing
systems and introduce new systems. Failure by the Company to appropriately invest in IT or failure to implement IT infrastructure in a
timely or effective manner may negatively impact the Company’s financial performance.
Information Integrity and Reliability To support the current and future requirements of the business the Company is reliant on IT systems.
These systems are essential to provide management with the appropriate information for decision making, including its key performance
indicators, and when necessary must be appropriately supported through systems upgrades to and maintenance of infrastructure.
Although the Company has the appropriate controls in place over the conversion of data, the process of converting data from legacy systems
to the ERP and other new systems increases the risk of poor data integrity and reliability if the data are not accurate and complete upon
conversion. In addition, for the next few years the business will operate in new and old systems at the same time. Ensuring that the data is
flowing accurately between all systems and ensuring the integrity of this data once it is converted will be critical to maintain the integrity and
reliability of the Company’s financial information. Ownership of data management is essential to ensure ongoing reliability and relevancy of
the data. Any failure or disruption of these systems or during the data conversion process for the ERP could negatively affect the Company’s
reputation, its operations, revenues and financial performance. Lack of relevant, reliable and accessible information that enables
management to effectively manage the business may preclude the Company from optimizing its overall performance.
Change Management and Process Execution Significant initiatives in support of the Company’s renewal plan are underway or planned.
These initiatives include the execution of the IT strategic plan and ongoing organizational changes. Success of these initiatives is dependent
on management effectively realizing the intended benefits and effectively executing the related processes. To assist in the management of
change throughout the organization, the Company has positioned a team to support the major change initiatives in the Company. A team of
colleagues has been assigned and is dedicated to business change management activities with a focus on integration of the business
process and systems changes through communication, training and other change events in support of major change initiatives within the
Company.
Ineffective change management or inexperienced colleagues leading change management could result in disruptions to the operations of the
business or affect the ability of the Company to implement and achieve its long term strategic objectives. This could result from a lack of clear
accountabilities, communication, training or lack of requisite knowledge, which may cause colleagues to act in a manner which is inconsistent
with Company objectives. Failure to properly execute the various processes may increase the risk of customer dissatisfaction, which in turn
could adversely affect the reputation, operations and financial performance of the Company. The failure to properly integrate several large,
complex initiatives in a timely manner will adversely impact the operations of the Company. If colleagues are not able to develop and perform
new roles, processes and disciplines, the Company may not always achieve the expected cost savings and other benefits of its initiatives.
Economic Environment Economic factors that impact consumer spending patterns could deteriorate or remain unpredictable due to global
economic volatility. These factors include continued high levels of unemployment, household debt, changes in interest rates, changes in
inflation, changes in exchange rates and access to consumer credit. Management regularly monitors economic conditions and estimates their
impact on the Company’s operations and incorporates these estimates in short term operating and longer term strategic decisions. Despite
these activities, one or more of these factors could negatively affect the Company’s sales and margins. Inflationary trends are unpredictable
and changes in the rate of inflation or deflation will affect consumer prices, which in turn could have a negative impact on the results of the
Company.
Competitive Environment The retail industry in Canada is highly competitive. If the Company is ineffective in responding to consumer
trends or in executing its strategies, its revenues and financial performance could be negatively impacted.
20 2010 Annual Report – Financial Review
The Company’s competitors include traditional supermarket operators, as well as mass merchandisers, warehouse clubs, drugstores, limited
assortment stores, discount stores, convenience stores and specialty stores. Many of these competitors now offer a selection of food,
drugstore and general merchandise. Others remain focused on supermarket-type merchandise. The Company is also subject to competitive
pressures from new entrants into the marketplace and from the expansion or renovation of existing competitors, particularly those expanding
into the grocery market. Some of these competitors have extensive resources that allow them to compete vigorously in the market. Several of
these competitors operate in a non-union environment. The Company’s unionized workforce environment may reduce the ability of the
Company to compete on labour costs or may adversely impact the Company’s ability to react to the competition in a timely manner.
Increased competition and pressures on growth and pricing could adversely affect the Company’s ability to achieve its objectives. The
Company’s inability to effectively predict market activity or compete effectively with its current or future competitors could result in, among
other things, reduced market share and lower pricing in response to its competitors’ pricing activities.
In addition, competitors could acquire or develop partnerships with other businesses, which could increase their market share or otherwise
improve their competitiveness. If significant acquisitions or alliances are undertaken by competitors, the Company could lose opportunities
for growth and partnerships in the market or otherwise experience adverse consequences.
The Company monitors its market share and the markets in which it operates and adjusts its operating strategies by closing
underperforming stores, relocating stores or reformatting them under a different banner, reviewing and adjusting pricing, product offerings
and marketing programs. Failure by the Company to sustain its competitive position could have a negative impact on the revenues and
financial performance of the Company.
Food Safety and Public Health The Company is subject to risks associated with food safety and general merchandise product defects.
These risks may arise as part of product procurement, distribution, preparation or display, including the development and manufacturing of
the Company’s control label products. A majority of the Company’s sales are generated from food products and thus could be vulnerable in
the event of a significant outbreak of food-borne illness or other public health concerns related to food products. The occurrence of such
events or incidents could result in negative publicity, damage to the Company’s brands and potentially lead to legal claims. In addition,
failure to trace or locate any contaminated or defective products may affect the Company’s ability to be effective in a recall situation. Any of
these events could negatively impact the Company’s revenues and financial performance
In addition, failure to maintain the cleanliness and health standards at store level, including pest control, may negatively impact revenues
and the reputation of the Company.
The Company has an incident management process in place to manage such events, should they occur. The program identifies risks,
provides clear procedures for communication to employees and consumers and is aimed at ensuring that potentially harmful products are
expeditiously removed from inventory and are not available for sale. The Company also has extensive food safety procedures and training
programs which address safe food handling and preparation standards. The Company endeavours to employ current best practices for the
procurement, distribution and preparation and display of food products. Also, it actively supports customer awareness of safe food handling
and healthy choices. The Company places special focus on applying a safety and quality management system to ensure its control label
products meet all food safety and regulatory requirements. The ability of these programs and procedures to address such events is
dependent on their successful execution. The existence of these procedures does not mean that the Company will in all circumstances be
able to mitigate the underlying risks and any event related to these matters has the potential to adversely affect the Company’s reputation
and its financial performance.
Distribution and Supply Chain The need to invest in and improve the Company’s supply chain may adversely affect the Company’s
capacity to effectively and efficiently attract and retain current and potential customers. A significant restructuring of the Company’s supply
chain will continue for the next eighteen months. Although this initiative is expected to result in improved service levels and product
availability for the Company’s stores, the scale of the change and the implementation of new processes could cause disruption in the flow
of goods to stores, which would negatively affect revenues and financial performance. In addition, the integration of new supply chain
systems with the ERP could cause disruptions to the network if not properly executed which would also negatively affect revenues and
financial performance.
2010 Annual Report – Financial Review 21
Management’s Discussion and Analysis
Colleague Retention and Succession Planning The degree to which the Company is not effective in establishing appropriate
succession planning processes and retention strategies could lead to a lack of requisite knowledge, skills and experience on the part of
management. This, in turn, could affect the Company’s ability to execute its strategies, efficiently run its operations and meet its goals for
financial performance. Effective succession planning for senior management and colleague retention are essential to sustaining the growth
and success of the Company. In addition, loss of talent to the competition can be a significant risk to the Company’s business strategy.
Effective retention strategies will be necessary due to the significant changes, potential increase in workload and marketability of those
colleagues who have developed specialized skills during the implementation of the ERP and other significant initiatives in the Company.
Management has implemented new programs throughout 2010 to assist in colleague retention, succession planning and development.
These will continue into 2011. The initiatives are focused on improving colleague engagement and succession plans as well as supporting
the Company’s goal to “Be a Great Place to Work”. Should these initiatives not be successful, the Company may not be able to execute its
strategies or efficiently run its operations which in turn could negatively affect financial performance.
Merchandising The Company may have inventory that customers don’t want or need, is not reflective of current trends in customer tastes,
habits, or regional preferences, is priced at a level customers are not willing to pay, is late in reaching the market or does not have optimal
commercial product placement on store shelves. Innovation is critical to the Company in order to respond to customer demands and to
stay competitive in the marketplace. In addition, the Company’s operations as they relate to food, sales volumes and product mix are
impacted to some degree by certain holiday periods in the year. In 2010, the active trading initiative was rolled out which included a focus
on the merchandising group strategy, structure, roles and process improvements, to assist in installing best practices and efficiencies
throughout the merchandising organization. If the Company is not successful with these initiatives, or if merchandising efforts are not
effective or responsive to customer demand, the Company’s revenues and financial performance could be negatively impacted.
Strategy Development and Execution The long term vision and strategies of the Company must be understood, communicated and
properly managed in order to deliver growth for the Company. If these strategies are not clear or if consumer trends and expectations are
not considered, stores may not be properly positioned in the marketplace. The execution of the Company’s capital plans could pose a risk
if they are not aligned with the strategy of the Company. In addition, the Company’s ability to operate in the long term is affected by the
development and location of real estate and spending decisions made in the short term. Areas of strategic focus are formulated annually
by senior management and then communicated throughout the Company. These are reviewed on a periodic basis to drive execution and
ensure ongoing relevance. If the Company’s vision and strategies are not effectively developed, communicated and executed in the short
term and long term, the financial performance of the Company could suffer.
Labour Relations A majority of the Company’s store level and distribution centre workforce is unionized. Renegotiating collective
agreements may result in work stoppages or slowdowns, delays to construction projects and increases in costs. Any of these could
negatively affect the Company’s financial performance. The Company successfully negotiated 58 collective agreements in 2010 and the
Company continues to negotiate the 86 remaining collective agreements carried over from prior years. In 2011, 49 collective agreements
affecting approximately 15,000 colleagues expire with the largest of the agreements covering approximately 11,000 colleagues in Ontario
expiring in June 2011. Although the Company attempts to mitigate work stoppages and disputes through early negotiations, work
stoppages or slowdowns and the resulting negative effects on revenues and financial performance are possible.
Disaster Recovery and Business Continuity The Company’s ability to continue critical operations and processes could be negatively
impacted by a weather disaster, work stoppage, prolonged IT failure, terrorist activity, power failures, border closures, a pandemic or other
national or international catastrophe. The Company has an enterprise wide business continuity program which is being continually
matured. However, ineffective contingency planning could result in reputational and/or financial losses to the Company. There can be no
assurance that the existence of the program will ensure that the Company responds appropriately in the event of business interruptions,
crises or potential disasters and negative impacts on revenue and financial performance could occur.
Inventory Management Inappropriate inventory management may lead to excess inventory or a shortage of inventory which may impact
customer satisfaction and overall financial performance. The Company may experience excess inventory that cannot be sold profitably or
which could increase levels of inventory shrink which in turn could negatively impact the Company’s financial performance. The Company
focuses on reducing inventory levels and early identification of inventory at risk. New information systems are being implemented that are
22 2010 Annual Report – Financial Review
expected to improve demand forecasting. In order to reduce the amount of excess inventory, the Company monitors the impact of
customer trends. Despite these efforts, the Company may experience excess inventory that cannot be sold profitably, which may
negatively impact the Company’s financial performance.
Privacy and Information Security The Company is subject to various laws regarding the protection of personal information of its
customers and colleagues and has adopted a Privacy Code setting out guidelines for the handling of personal information. Any failure of
the Company to comply with these laws could result in damage to its reputation and negatively affect financial performance. The
Company’s information systems contain personal information of customers and colleagues. Any failures or vulnerabilities in these security
systems or non-compliance with information security standards, including those in relation to personal information belonging to the
Company’s customers and colleagues, could result in harm to the reputation of the Company and negatively affect financial performance.
Information security risks will also arise in the implementation of the Company’s IT strategic plan. The strategic plan includes the upgrading
of information security systems to adhere to information security standards by instituting more stringent security system protocols and
corporate information security policies. A failure in these information systems or noncompliance with information security standards,
including those in relation to personal information belonging to the Company’s customers and colleagues, could result in harm to the
reputation or competitive position of the Company and could negatively affect financial performance.
Tax and Regulatory Changes to any of the laws, rules, regulations or policies related to the Company’s business including income,
commodity and other taxes, and the production, processing, preparation, distribution, packaging and labelling of its products could have an
adverse impact on the Company’s financial and operational performance. New accounting pronouncements introduced by appropriate
authoritative bodies may also impact the Company’s financial results including the Company’s transition to International Financial
Reporting Standards. In the course of complying with such changes, the Company may incur significant costs. Changing regulations or
enhanced enforcement of existing regulations could restrict its operations or profitability and thereby threaten the Company’s competitive
position and its capacity to efficiently conduct business. Failure by the Company to comply with applicable laws, rules, regulation and
policies may subject it to civil or regulatory actions or proceedings, including fines, assessment, injunctions, recalls or seizures, which in
turn could have an adverse effect on the Company’s financial results. PC Bank operates in a highly regulated environment, failure to
comply, understand, acknowledge and effectively respond to the regulators could result in monetary penalties, regulatory intervention and
reputational damage. Taxing authorities may also disagree with the positions and conclusions taken by the Company in its filings with such
authorities. An unfavourable resolution to any such dispute could have an adverse effect on the Company’s financial results.
In 2010, the provincial governments of Quebec, Ontario, Alberta, Nova Scotia and British Columbia introduced amendments to the
regulation of generic prescription drug prices paid by provincial governments pursuant to their respective public drug benefit plans. Under
these amendments, manufacturer costs of generic drugs paid by the provincial drug plans are being reduced, and in Ontario, the current
system of drug manufacturers paying professional allowances to pharmacies will be eliminated. The amendments also reduce the
manufacturer costs of generic drugs purchased out-of-pocket or through private employer drug plans. The Company continues to identify
opportunities to mitigate the impact of these amendments, including the introduction of programs to add new services and enhance
existing services to attract customers. The amendments could have a material impact on the financial results of the Company if it is not
able to effectively mitigate their negative impact.
Vendor Management and Third Party Service Providers The Company relies on suppliers that provide the Company with goods and
services. Although contractual arrangements are put in place with these suppliers, the Company has no direct influence over how the
companies are managed. Negative events affecting the suppliers could in turn negatively impact the Company’s reputation in operations
and its financial performance. Inefficient, ineffective or incomplete vendor management strategies, policies and/or procedures may impact
the Company’s ability to optimize financial performance, meet customer needs and control costs and quality.
Vendor production capacity or information technology capabilities may limit the Company’s ability to service its customers or implement
new processes to increase efficiencies and consistencies across vendors. Sourcing from developing markets results in enhanced risk
which requires mitigation through additional safety, quality and management reviews.
2010 Annual Report – Financial Review 23
Management’s Discussion and Analysis
The Company’s control label products are manufactured under contract by third-party suppliers. Product development and sourcing of the
Company’s control brand apparel products is conducted by a third party. In order to preserve brand equity, these suppliers are held to high
standards of quality. Ineffective selection, contract terms, management and reliance on third party service providers may impact the
Company’s ability to source control brand products, to have products available for customers, to market to customers and to operate
efficiently and effectively on a day to day basis.
The Company also uses third-party logistic services including the operation of dedicated warehouse and distribution facilities and third-
party common carriers. The Company maintains a strategy of multiple sources for logistics providers so that in the event of a disruption of
service from one supplier another supplier can be used. However, disruption in these services is possible which could interrupt the delivery
of merchandise to stores thereby negatively affecting sales.
The Company continues to implement practices and performance expectations with its supplier base, including asking suppliers to support
sales plans and cost reduction initiatives and to align with major program changes. However, failure to effectively implement these
programs will have a negative impact on the Company’s ability to realize the expected benefits and could negatively impact revenues and
financial performance.
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 operationalize certain risk management strategies for the
President’s Choice Financial MasterCard®. To minimize operating risk, PC Bank and the Company actively manage and monitor their
relationships with all third-party service providers. In addition, PC Bank has developed an outsourcing risk policy, approved by its Board of
Directors, and has established a vendor governance team that provides its Board with regular reports on vendor governance and annual
vendor risk assessments. Despite these activities, a significant disruption in the services provided by the bank would negatively impact
revenues and the financial performance of PC Bank and the Company.
The Company relies on third parties for investment management, custody and other services for its cash equivalents, short term
investments, security deposits and pension assets. Any disruption in the services provided by these suppliers could affect the return on
these assets or liquidity of the Company.
Workplace Health and Safety The failure of the Company to adhere to appropriate health and safety procedures and to ensure
compliance with applicable laws and regulations could have an adverse effect on the organization’s operations and financial performance.
The Company has established a national health and safety policy, a national health and safety management system and a 5 year injury
reduction plan, Periodic updates are provided by health and safety colleagues to the executive team and quarterly updates are made to the
Environmental, Health and Safety Committee of the Board. The Company has also developed a 3 year plan to establish a corporate
wellness program. These initiatives cannot, however, prevent all workplace incidents. It remains possible that any such incident or series of
incidents could have a negative impact on the Company’s reputation, operations or financial performance.
Environmental The Company maintains a large portfolio of real estate and infrastructure and is subject to environmental risks associated
with the contamination of such properties and facilities, whether by previous owners or occupants, neighbouring properties or from its own
operations.
The Company operates a number of underground storage tanks, the majority of which are used for the retailing of automotive fuel.
Contamination resulting from leaks from these tanks is possible. The Company employs monitoring and testing regimens, in addition to risk
assessments and audits, to minimize the potential for subsurface impacts from fuel losses. The Company also operates refrigerant
equipment in its stores and distribution centres to preserve perishable products through the supply chain. These systems contain
refrigerant gases which could be released if the related equipment fails. It is possible that a release of these gases could have adverse
affects on the environment. To minimize the potential for refrigerant releases, the Company has implemented preventative maintenance
programs and refrigeration system inspections and is considering the implementation of new refrigeration system technologies.
24 2010 Annual Report – Financial Review
In recent years, provincial and municipal governments have introduced legislation that imposes liabilities on retailers, brand owners and
importers for costs associated with recycling and disposal of consumer goods packaging and printed materials distributed to consumers.
This is a growing trend and the Company expects to be subject to increased costs associated with these laws.
The Company has environmental safety programs and has established policies and procedures aimed at ensuring compliance with
applicable environmental legislative requirements. To this end, the Company employs environmental risk assessments and audits using
internal and external resources together with employee awareness programs throughout its operating locations. The Environmental, Health
and Safety Committee of the Board receives regular reporting from management addressing current and potential future issues, risks,
programs/initiatives, identifying new regulatory concerns and related communication efforts. The Company’s environmental affairs
department works closely with operations to help ensure requirements are met.
Despite these mitigation activities, the Company could be subject to increased or unexpected costs associated with environmental
incidents and the related remediation activities, including litigation and regulatory related costs, all of which could negatively impact the
Company’s reputation and financial performance.
Recent consumer trends include an increasing demand for products with less impact on the environment and that the Company’s
operations demonstrate environmentally responsible practices. As set out in its annual Corporate Social Responsibility report, the
Company sets environmental goals and monitors its progress towards their achievement. Should the Company fail to meet consumer
demand in this area or otherwise face adverse publicity with respect to the environmental impact of its business practices, its reputation
may be negatively affected which may lead to decreased revenues and a negative impact on financial performance.
Franchise Independence and Relationships A substantial portion of the Company’s revenues and earnings comes from amounts paid
by franchisees. Franchisees are independent businesses and, as a result, their operations may be negatively affected by factors beyond
the Company’s control which in turn may damage the Company’s reputation and potentially affect revenues and financial performance.
Revenues and earnings could also be negatively affected, and the Company’s reputation could be harmed, if a significant number of
franchisees were to experience operational failures, including health and safety exposures, financial difficulty, or were unwilling or unable
to pay the Company for products, rent or other fees, or fail to enter into renewals of franchise agreements. The Company’s franchise
system is also subject to franchise legislation enacted by a number of provinces. Any new legislation or failure to comply with existing
legislation may negatively affect operations and could add administrative costs and burdens, any of which could affect the Company’s
relationship with its franchisees. Relationships with franchisees could pose significant risks if they are disrupted which could result in legal
action, reputational damage and/or adverse financial consequences. Supply chain or system changes by the Company could cause or be
perceived to cause disruptions to franchise operations and could result in negative effects on franchisee revenues or earnings.
Reputational damage or adverse consequences for the Company, including litigation and disruption to sales from franchised stores, could
result.
Contract Management and Records Retention The Company’s contract management and records management processes are being
upgraded. A lack of effective processes for the tendering, drafting, review and approval of Company contracts and the appropriate level of
management and legal involvement increases the risk of financial losses to the business. In addition, inefficient, ineffective or incomplete
document management and retention policies, procedures and practices increase the risk of incomplete Company records and potential
non-compliance with laws and regulations, which could negatively impact the Company’s reputation and financial performance.
Trademark and Brand Protection Decrease in value of the Company’s trademarks, banners or control brands, as a result of adverse
events, changes to the branding strategies or otherwise, could weaken the demand for the Company’s products or services or damage the
Company’s reputation. The Company endeavours to have the appropriate contractual protections in its arrangements with control label
vendors and suppliers of all marketing elements including, printing, flyers and advertising agencies. The Company actively monitors and
manages its trademark portfolio. Despite these activities, adverse events could impact the value of the Company’s trademarks, banners or
brands and may negatively affect revenues and financial performance.
2010 Annual Report – Financial Review 25
Management’s Discussion and Analysis
Employee Future Benefit Contributions The Company manages the assets in its defined benefit pension plans by engaging professional
investment managers who operate under prescribed investment policies and procedures in respect of permitted investments and asset
allocations. The future contributions to the Company’s pension plans are impacted by a number of variables, including the investment
performance of the plan assets and the discount rate used to value the liabilities of the plans. The Company regularly monitors and assesses
plan performance and the impact of changes in participant demographics, changes in capital markets and other economic factors that may
impact funding requirements, employee future benefit costs and actuarial assumptions. If capital market returns are below assumed levels, or
if the discount rate drops, the Company may be required to make contributions to its registered funded defined benefit pension plans in
excess of those currently contemplated, which in turn may have a negative effect on the Company’s financial performance and cash flows.
Multi-Employer Pension Plans In addition to the Company-sponsored pension plans, the Company participates in various multi-employer
pension plans, providing pension benefits to union employees pursuant to provisions of collective bargaining agreements. Approximately 40%
(2009 – 40%) of employees of the Company and of its independent franchisees participate in these plans. The administration of these plans
and the investment of their assets are controlled by a board of independent trustees generally consisting of an equal number of union and
employer representatives. In some circumstances, the Company 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; however, poor performance of these plans could have an adverse impact on the Company’s employees and former
employees who are members of these plans. Pension cost for these plans is recognized as contributions are due.
The Company is the largest participating employer in the Canadian Commercial Workers Industry Pension Plan (CCWIPP), with
approximately 54,000 (2009 – 55,000) employees as members. In 2010, the Company contributed $55 million (2009 - $54 million) to
CCWIPP. At the end of 2010, the CCWIPP actuarial accrued benefit obligations exceeded the value of the assets held in trust. As a result of
this underfunding, CCWIPP received approval from the pension regulator to reduce the accrued benefits and future service benefits of certain
participants. Further benefit reductions would negatively affect the retirement benefits of the Company’s employees, which in turn could
negatively affect their morale and performance.
Real Estate and Store Renovations 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 enabling the Company
to introduce new departments and services that could be precluded under third party operating leases. As part of ongoing review of the
performance of the Company’s stores, the Company from time to time undertakes store renovations. Efforts are made to minimize the
duration of these projects in order to limit the disruption at store level. However, the Company’s revenues and financial performance will be
negatively impacted if such renovations and remodelling are carried out in a manner that is disruptive to the ongoing store operations or
results in a poor customer experience.
Utility and Fuel Prices The Company is a significant consumer of electricity, other utilities and fuel. The Company has entered into contracts
to fix the price of a portion of its future variable costs associated with electricity, natural gas and fuel. However, cost increases in these items
could negatively affect the Company’s financial performance.
Ethical Business Conduct The Company has adopted a Code of Business Conduct which colleagues and directors of the Company are
required to acknowledge on a regular basis. The Company has in place 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. Any failure of the Company or its vendors to adhere to ethical business conduct policies
could significantly affect the Company’s reputation and brands and could, therefore, negatively impact the Company’s financial performance.
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.
26 2010 Annual Report – Financial Review
10.2 Financial Risks and Risk Management
Liquidity and Capital Availability Liquidity risk is the risk that the Company cannot meet a demand for cash or fund its obligations as they
come due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Insufficient
access to capital would impair the Company’s capacity to grow, execute its business model and generate financial returns.
The Company mitigates liquidity and capital availability risks by maintaining appropriate levels of cash and cash equivalents and short
term investments, committed line of credit, actively monitoring market conditions, and by diversifying its sources of funding and maturity
profile of its debt and capital obligations. Should the Company’s or PC Bank’s financial performance and condition deteriorate or
downgrades in the Company’s current credit ratings occur, the Company’s or PC Bank’s ability to obtain funding from external sources
may be restricted. In addition, credit and capital markets are subject to inherent risks that may negatively affect the Company’s access
and ability to fund its financial and other liabilities.
Credit The Company is exposed to credit risk resulting from the possibility that counterparties may default on their financial obligations.
Exposure to credit risk relates to derivative instruments, cash and cash equivalents, short term investments, security deposits, pension
assets held in the Company’s defined benefit plans, PC Bank’s credit card receivables and other receivables from vendors, independent
franchisees, associated stores and independent accounts.
The Company may be exposed to losses if a counterparty to the Company’s financial or non-financial derivative agreements fails to fulfill
its obligations. Potential counterparty risk and losses are limited to the net amounts recoverable under such derivative agreements with
any specific counterparty. These risks are further reduced by entering into 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 exposure to any single
counterparty for financial derivative agreements. Internal policies, controls and reporting processes, which require ongoing assessment
and corrective action, if necessary, are in place with respect to derivative transactions.
Credit risk associated with cash equivalents, short term investments and security deposits results from the possibility that a counterparty
may default on the repayment of a security. Efforts to mitigate credit risk include 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 industries, issuers and types of investment instruments. These investments are purchased and held
directly in custody accounts and there is limited exposure to any third party money market portfolios and funds.
Credit risk from PC Bank’s credit card receivables and receivables from independent franchisees, associated stores and independent
accounts results from the possibility that customers may default on their payment obligations. PC Bank manages the credit card receivable
risk by employing stringent credit scoring techniques, actively monitoring the credit card portfolio, and reviewing techniques and technology
that can improve the effectiveness of the collection process. In addition, these receivables are dispersed among a large, diversified group
of credit card customers. Accounts receivable from independent franchisees, associated stores 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.
Despite the mitigation strategies described above, it is possible that the Company’s financial performance could be negatively impacted by
the failure of a counterparty to fulfill its obligations, whether as a result of loss of value of receivables or increased costs associated with
counterparty default.
Foreign Currency Exchange Rate The Company is exposed to foreign currency exchange rate variability, primarily on United States
dollar denominated cash and cash equivalents, short term investments, security deposits held by Glenhuron, foreign denominated and
foreign currency based purchases in accounts payable and accrued liabilities, and USD private placement notes included in long term
debt. The Company and Glenhuron have cross currency swaps that partially offset their respective exposure to fluctuations in foreign
currency exchange rates. Cross currency swaps are transactions in which interest payments and principal amounts in one currency are
exchanged against the receipt of interest payments and principal amounts in a second currency. Despite these mitigation strategies the
Company’s financial performance could be negatively impacted by foreign currency variability.
2010 Annual Report – Financial Review 27
Management’s Discussion and Analysis
Commodity Prices The Company uses financial and non-financial derivative instruments in the form of future contracts, option contracts
and forward contracts to manage its current and anticipated exposure to fluctuations in commodity prices. The Company is exposed to
increases in the prices of commodities in operating its stores and distribution centres and is also exposed as a result of the direct link
between commodities and the cost of consumer products. To manage a portion of this exposure, the Company uses purchase
commitments for a portion of its needs for certain consumer products that may be commodities based and the Company expects to take
delivery of these consumer products in the normal course of business. A non-financial derivative contract, which expires at the end of
2011, is used to hedge electricity price risk for a portion of the Company’s expected electricity consumption in Alberta. The Company also
enters into exchange traded futures and option contracts to minimize cost volatility in fuel prices. Despite these strategies, high commodity
prices could negatively affect the Company’s financial performance.
Common Share Market Price The Company issues stock-based compensation to certain of its employees in the form of stock options
and Restricted Share Units (“RSUs”) based on its common shares. Glenhuron’s equity forwards provide a partial offset to fluctuations in
stock-based compensation cost. The equity forwards allow for settlement in cash, common shares or net settlement. These forwards
change in value as the market price of the Company’s common shares changes and provide a partial offset to fluctuations in the
Company’s stock-based compensation cost, including RSU plan expense. The partial offset between the Company’s stock-based
compensation costs, including RSU plan expense, and the equity forwards is more effective when the market price of the Company’s
common shares exceeds the exercise price of the employee stock options. When the market price of the common shares is lower than the
exercise price of the employee stock options, only RSUs will provide a partial offset to these equity forwards. The amount of net stock-
based compensation cost recorded in operating income is mainly dependent upon the number of unexercised stock options and RSUs,
their vesting schedules relative to the number of underlying common shares on the equity forwards, and the level of fluctuations in the
market price of the underlying common shares. As at January 1, 2011, 2,840,638 stock options had exercise prices which were greater
than the market price of the Company’s common shares at year end. High share prices could negatively affect the Company’s financial
performance.
Interest Rate Interest rate risk arises from the issuance of short term debt by the Company and equity forwards by Glenhuron, net of cash
and cash equivalents, short term investments and security deposits. The Company is exposed to changes in short term interest rates
which is offset partly by Glenhuron’s and the Company’s interest rate swaps. Interest rate swaps are transactions in which interest flows
are exchanged with a counterparty on a specified notional amount for a pre-determined period based on agreed-upon fixed and floating
interest rates. Despite these strategies, changes in interest rates could negatively affect the Company’s cash flows and financial
performance.
Derivative Instruments Over-the counter derivative instruments offset certain risks. Policies and guidelines prohibit the use of any
derivative instrument for trading or speculative purposes. See notes 1 and 23 to the consolidated financial statements for additional
information about the Company’s financial derivative instruments. The fair value of derivative instruments is subject to changing market
conditions which could negatively impact the Company’s cash flow and financial performance.
11. Related Party Transactions
The Company’s majority shareholder, Weston and its affiliates other than the Company are related parties. The Company’s policy is 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%
(2009 – 3%) of the cost of merchandise inventories sold.
Cost Sharing Agreements Weston 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 Weston concerning these costs, the Company has agreed to
assume its proportionate share of costs incurred on its behalf. Payments by the Company pursuant to these cost sharing agreements in
2010 were approximately $9 million (2009 – $10 million).
28 2010 Annual Report – Financial Review
Real Estate Matters The Company leases office space from an affiliate of Weston for approximately $3 million (2009 – $3 million).
Borrowings/Lending From time to time the Company may borrow funds from or may lend funds to Weston on a short term basis at
short term market borrowing rates. There were no amounts outstanding as at January 1, 2011 or January 2, 2010.
Income Tax Matters From time to time, the Company, Weston and its affiliates may enter into agreements to make elections that are
permitted or required under applicable income tax legislation with respect to affiliated corporations. These elections and accompanying
agreements did not have a material impact on the Company in 2010.
Management Agreements The Company has an agreement with Weston to provide certain administrative services by each company to the
other. The services to be provided under this agreement include those related to commodity management, pension and benefits, tax, medical,
travel, information system, risk management, treasury and legal. Payments are made quarterly based on the actual costs of providing these
services. When services are provided on a joint basis for the benefit of the Company and Weston together, each party pays the appropriate
proportion of such costs. Net payments by the Company under this agreement in 2010 were $16 million (2009 – $16 million). Fees paid under
this agreement are reviewed each year by the Audit Committee.
Glenhuron manages certain United States cash, cash equivalents and short term investments for wholly owned non-Canadian subsidiaries of
Weston and management fees earned are based on market rates.
Dividend Reinvestment Plan During the year, the Company issued 3,621,086 (2009 – 3,163,375) common shares to Weston under the DRIP
(see note 19 of the consolidated financial statements for more information).
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 Inventories
Certain retail store inventories are stated at the lower of cost and estimated net realizable value. 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
the category 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 will 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.
Additional information on inventories is provided in note 9 to the consolidated financial statements.
2010 Annual Report – Financial Review 29
Management’s Discussion and Analysis
12.2 Fixed Assets
Fixed assets are reviewed for impairment annually and also when events or circumstances indicate that their carrying value exceeds the sum
of the undiscounted cash flows expected from their use and eventual disposition. An impairment loss is measured as the amount by which
the fixed assets carrying value exceeds the fair value. As discussed in note 10 to the consolidated financial statements, the Company
recorded a fixed asset impairment charge of $28 million (2009 − $27 million) and other related charges of $18 million (2009 –$19 million) in
2010. In addition, the Company recorded in operating income an asset impairment charge of $26 million (2009 – nil) related to the closure of
a distribution centre in Quebec.
The factor that most significantly influences the impairment assessments is the determination of future cash flows. The Company uses its
internal plans in estimating future cash flows. These plans reflect the Company’s current best estimate of future cash flows but may change
due to uncertain competitive and economic market conditions or changes in business strategies. Changes or differences in these estimates
may result in changes to fixed assets on the consolidated balance sheet and a charge to operating income on the consolidated statement of
earnings.
12.3 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
rates, termination rates 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 2010 net cost for defined benefit pension and other benefit plans were 5.75% and 5.5%, respectively, on a weighted average
basis, compared to 6.0% and 5.7%, respectively, in 2009.
The expected long term rate of return on plan assets is based on current market conditions, the asset mix, the active management of defined
benefit pension plan assets and historical returns. The 2010 expected long term rate of return on plan assets was 6.75%.
The expected growth rate in health care costs for 2010 was based on external data and the Company’s historical trends for health care costs.
In 2011, the growth rate of health care costs is estimated at 8.0% and is assumed to gradually decrease to 5.0% by 2015, remaining at that
level thereafter.
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 materially. In accordance with Canadian GAAP, differences between actual results and the assumptions, as well as the
impact of changes in the assumptions, are accumulated as unamortized net actuarial gains or losses and amortized over future periods,
affecting the recognized cost of defined benefit pension plans and other benefit plans and the accrued benefit plan obligation in future
periods. Although the Company believes that its assumptions are appropriate, differences in actual results or changes in the Company’s
assumptions may materially affect its defined benefit pension plans and other benefit plans accrued benefit plan obligations and future
costs.
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 Section 10.1.
30 2010 Annual Report – Financial Review
12.4 Goodwill and Indefinite Life Intangible Assets
Goodwill is assessed for impairment at the reporting unit level annually and whenever events or circumstances indicate that it is more
likely than not that the carrying value may not be recoverable. 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 charge is recognized to the extent that, at the reporting unit level, the carrying value of goodwill
exceeds the implied fair value.
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 of a long term nature including 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 a weighted average cost of capital. These estimates and assumptions are subject to change in the future
due to uncertain competitive and economic market conditions and changes in business strategies.
The Company performed the annual goodwill impairment test in 2010 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.
Intangible assets with indefinite useful lives consist of T&T trademarks and brand names and are assessed for impairment annually and
whenever events or circumstances indicate that it is more likely than not that the carrying value may not be recoverable. Any potential
intangible asset impairment is identified by comparing the fair value of the indefinite life intangible asset to its carrying value. If the fair
value of the intangible asset exceeds its carrying value, the intangible asset is considered not to be impaired. If the carrying value of the
intangible asset exceeds its fair value, impairment is identified as the difference between the fair value and the carrying value and will
result in a reduction in the carrying value of the intangible asset on the consolidated balance sheet and the recognition of an impairment
charge in operating income in the consolidated statement of earnings.
The Company determines the fair value of its trademarks and brand names by using an income approach, specifically the “Relief from
Royalty” method. The process of determining the fair values requires management to make assumptions of a long term nature regarding
projected future sales, terminal growth rates, notional royalty rates and discount rates. Projected future sales are consistent with strategic
plans presented to the Company’s Board and discount rates correspond with the risk profile of the subject intangible assets. 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 impairment test of its indefinite life intangible assets in 2010 and determined that there was no
impairment of the carrying value of indefinite life intangible assets.
12.5 Income and Other 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, the timing of reversal of temporary differences and possible audits of income tax
filings by the tax authorities. Management believes it has adequately provided for income taxes based on currently available information.
At each balance sheet date, future income tax assets are reviewed to determine whether a valuation allowance is required. Such an
allowance is not required when it is deemed more likely than not that projected future taxable income will be sufficient to realize the future
income tax benefits.
2010 Annual Report – Financial Review 31
Management’s Discussion and Analysis
Changes or differences in underlying 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.
All income, capital and commodity tax filings are subject to audits and reassessments. Management believes that adequate provisions
have been made for all income and other tax obligations. However, changes in interpretations or judgments may result in a change in the
Company’s income, capital or commodity tax provisions in the future. The amount of such a change cannot be reasonably estimated.
13. Accounting Standards
13.1 Accounting Standards Implemented in 2009
Goodwill and Intangible Assets In November 2007, the Canadian Institute of Chartered Accountants (“CICA”) issued amendments to
Section 1000 “Financial Statement Concepts”, and AcG 11 “Enterprises in the Development Stage”, issued a new Handbook Section 3064
“Goodwill and Intangible Assets” (“Section 3064”) to replace Section 3062 “Goodwill and Other Intangible Assets”, withdrew Section 3450
“Research and Development Costs” and amended Emerging Issues Committee (“EIC”) Abstract 27 “Revenues and Expenditures During the
Pre-operating Period” to not apply to entities that have adopted Section 3064. These amendments, in conjunction with Section 3064,
provide guidance for the recognition of intangible assets, including internally developed assets from research and development activities,
ensuring consistent treatment of all intangible assets, whether separately acquired or internally developed. The Company implemented
these requirements effective 2009, retroactively with restatement.
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities On January 20, 2009 EIC Abstract No.173 “Credit Risk and
the Fair Value of Financial Assets and Financial Liabilities” (“EIC 173”) was issued. The committee reached a consensus that a company’s
credit risk and the credit risk of its counterparties should be considered when determining the fair value of its financial assets and financial
liabilities, including derivative instruments. The transitional provisions required the abstract to be applied retrospectively without restatement
of prior periods. Financial assets and financial liabilities, including derivative instruments, were remeasured as at January 4, 2009 to take into
account the appropriate Company’s credit risk and counterparty credit risk. As a result, a decrease in other assets of $12 million, a decrease
in other liabilities of $4 million, a decrease net of income taxes in accumulated other comprehensive income of $2 million and a decrease in
retained earnings of $6 million were recorded in the consolidated balance sheet.
Financial Instruments – Disclosures In June 2009, the CICA amended Section 3862, “Financial Instruments – Disclosures,” to include
additional disclosure relating to the measurement of fair value for financial instruments and liquidity risk. The amendment establishes a three
level hierarchy that reflects the significance of the inputs used in fair value measurements on financial instruments. The amendment was
effective for annual financial statements relating to fiscal years ending after September 30, 2009. See note 24 for disclosures.
13.2 International Financial Reporting Standards
The Canadian Accounting Standards Board requires that all public companies adopt International Financial Reporting Standards
(“IFRS”) for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. As a result, the
Company’s audited annual consolidated financial statements for the year ending December 31, 2011 will be the first audited annual
consolidated financial statements that will be prepared in accordance with the requirements of IFRS. Starting in the first quarter of 2011
the unaudited interim period consolidated financial statements will be prepared in accordance with International Accounting Standard
(“IAS”) 34, “Interim Financial Reporting”, including 2010 comparative figures and required reconciliations prepared in accordance with
IFRS 1, “First-Time Adoption of International Financial Reporting Standards” (“IFRS 1”).
Project Structure and Status The Company has an IFRS team led by the Chief Financial Officer to ensure the timely and
appropriate implementation of IFRS. The IFRS team consists of dedicated resources as well as consultants and other employees on
an as needed basis. This team reports regularly to a steering committee comprised of senior management, as well as to the Audit
Committee.
32 2010 Annual Report – Financial Review
The Company’s IFRS conversion project plan consists of three main phases:
Phase One: Diagnostic Impact Assessment This phase consisted of a high-level impact assessment that identified the key areas
of accounting differences between Canadian GAAP and IFRS that were likely to impact the Company. The diagnostic impact
assessment was completed in 2008 and resulted in the ranking of accounting differences as high, medium, or low priority.
Phase Two: Detailed Assessment This phase involved a comprehensive assessment of the differences between IFRS and the
Company’s current accounting policies and included reviews with the various finance groups and business process owners to further
understand the impact of these differences. The detailed assessment was completed in April 2009 at which time the changes
required to existing accounting policies, business process and information systems were identified.
Phase Three: Implementation This phase includes two components: implementation development and implementation transition
and resulted in the compilation of IFRS transitional adjustments, as required, as well as IFRS financial statements for 2010 with
required reconciliations to Canadian GAAP. To achieve this result the changes identified in the detailed assessment phase were
implemented as discussed below.
Policy selection The analysis of policy alternatives under IFRS, including certain exemptions and elections available on transition in
accordance with IFRS 1, was completed in 2010. Management has preliminarily concluded on all of its policy alternatives, and obtained
preliminary audit committee approval of these choices. These preliminary conclusions and approvals will be finalized prior to the end of
the first quarter of 2011.
Business Processes Changes to business processes, including the budgeting and planning process, arising as a result of IFRS were
also identified in the detailed assessment phase. Certain immaterial changes were taken into account in the budgeting and planning
cycle that occurred throughout 2010. All other required business process changes were also implemented by the end of 2010.
Information Systems Changes to supporting information systems were identified in the detailed assessment phase. Required changes to
supporting information systems were designed, developed and implemented by the end of 2010. The IFRS conversion project is
integrated with the Company’s ERP implementation. As ERP phases have been deployed, the Company has ensured that the requirements
of IFRS adoption were incorporated. For ERP phases that have not yet been deployed, the Company is ensuring that the requirements of
IFRS are identified and incorporated.
Financial Statement Presentation In accordance with the Company’s transition plan, the Company also completed its preliminary first
quarter 2011 IFRS financial statement format and draft note disclosures. In addition, the Company has completed its preliminary
unaudited opening transitional balance sheet as well as financial statements for each of the quarters of 2010 based on the preliminary
elections and exemptions as discussed below. A summary of the significant impacts is provided below.
Training Targeted training regarding anticipated changes resulting from IFRS implementation was provided to appropriate business
units and finance colleagues throughout 2010 and will continue as appropriate into 2011. In addition, the Company provided quarterly
and supplementary IFRS information sessions to the Board which included updates on certain preliminary transitional and 2010
quarterly IFRS adjustments including preliminary policy choices, implications of IFRS standards to the business, and their impacts on
financial statement disclosures. As previously announced, the Company will provide an information session on March 3, 2011 to key
external stakeholders regarding the impacts of IFRS.
Contractual Arrangements and Covenants The implementation of IFRS is expected to have an impact on certain financial metrics that are
used in calculating the Company’s financial covenants under certain of its debt agreements. These debt agreements provide for the
opportunity to renegotiate the covenants to reflect the impact of the transition to IFRS. The Company has reached an understanding with
certain of its lenders to defer any adjustments that may be required to its borrowing agreements until such later date that the parties may
agree following the adoption of IFRS. The Company will continue to demonstrate compliance with its borrowing agreements on a basis that
is consistent with Canadian GAAP as it exists immediately prior to the conversion to IFRS, until such time that the parties agree to
formalize the adjustments for IFRS.
2010 Annual Report – Financial Review 33
Management’s Discussion and Analysis
Internal Control Compliance Changes to the Company’s internal controls over financial reporting and disclosure controls and
procedures, which include enhancement of existing controls and the design and implementation of new controls, where needed, are
in process and progressing to plan. At this time the Company expects no material change in internal controls over financial reporting
or disclosure controls and procedures resulting from the adoption and implementation of IFRS.
Preliminary Estimated Impact of Conversion The information below is provided to allow investors and others to obtain an understanding
of the preliminary unaudited effects on the Company’s consolidated financial statements and operating performance measures. The changes
described below should not be regarded as a complete description of the changes resulting from the transition to IFRS. Readers are
cautioned that it may not be appropriate to use such information for any other purpose and the information is subject to change.
The International Accounting Standards Board has significant ongoing projects that could change the current standards under IFRS and their
impact on the Company’s consolidated financial statements. Therefore, the Company’s analysis of changes and accounting policy decisions
have been made based on the accounting standards that are currently in effect. To date, the Company has made preliminary decisions
relating to certain IFRS policies as discussed below. The following information is contingent on the standards that will be effective as at
December 31, 2011, the date of the Company’s first audited annual consolidated financial statements prepared in accordance with IFRS.
The table below summarizes the estimated impact of conversion to IFRS on the Company’s key financial highlights from the
unaudited (except where otherwise noted) consolidated statements of earnings for each of the interim periods and year ended January
1, 2011, based on the preliminary elections and exemptions noted below:
($ millions except where
otherwise indicated)
Revenues
Operating income
Net earnings
Basic net earnings per
common share ($)
Diluted net earnings per
common share ($)
EBITDA
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Canadian
GAAP
IFRS
$ 6,926 $ 6,914
294
138
260
137
Canadian
GAAP
IFRS
$ 7,317 $ 7,267
334
174
330
180
Canadian
GAAP
IFRS
$ 9,593 $ 9,536
389
196
390
213
Canadian
GAAP
IFRS
$ 7,161 $ 7,110 $ 30,997 $ 30,827
1,295
634
1,269
681
278
126
289
151
For the year ended
January 1, 2011
Canadian
GAAP
(audited)
IFRS
0.50
0.50
0.64
0.63
0.77
0.70
0.54
0.45
2.45
2.28
0.49
0.47
$ 412 $ 436
0.64
0.61
$ 479 $ 474
0.76
0.70
$ 591 $ 584
0.54
2.24
$ 442 $ 430 $ 1,924 $ 1,924
2.44
0.45
The table below reconciles EBITDA to the unaudited IFRS net earnings for each of the interim periods and year ended January 1, 2011,
based on the preliminary elections and exemptions noted below:
First Quarter Second Quarter
$ 174
$ 138
Third Quarter
$ 196
Fourth Quarter
$ 126
For the year ended
January 1, 2011
$ 634
67
89
294
79
81
334
89
104
389
67
85
278
302
359
1,295
142
$ 436
140
$ 474
195
$ 584
152
$ 430
629
$ 1,924
($ millions)
Net earnings
Add impact of the following:
Income taxes
Net interest expense and other financing
charges
Operating income
Add impact of the following:
Depreciation and amortization
EBITDA
34 2010 Annual Report – Financial Review
In addition, the table below summarizes the estimated impact of conversion to IFRS on the Company’s unaudited opening transitional
balance sheet as at January 3, 2010 and as at January 1, 2011, based on the preliminary elections and exemptions noted below:
($ millions)
Total assets
Total liabilities
Shareholders' equity
First-Time Adoption of IFRS
As at January 1, 2011
As at January 3, 2010
Canadian
GAAP
(audited)
$ 15,919
9,039
6,880
IFRS
(unaudited)
$ 16,798
11,255
5,543
Canadian
GAAP
(audited)
$ 14,991
8,718
6,273
IFRS
(unaudited)
$ 16,058
10,997
5,061
Change
6%
25%
(19%)
Change
7%
26%
(19%)
The adoption of IFRS will require the application of IFRS 1, which provides guidance for an entity’s initial adoption of IFRS. IFRS 1 generally
requires retrospective application of all IFRS standards, with the exception of certain mandatory exceptions and limited optional exemptions
provided in the standard. The following are the significant optional exemptions that the Company expects to apply in preparing the opening
transitional balance sheet in accordance with IFRS 1.
Employee Benefits The Company expects to apply the election to recognize, for all defined benefit plans, all cumulative unamortized
actuarial gains and losses, which are currently deferred under Canadian GAAP, through opening retained earnings. The Company will apply
this exemption to all defined benefit plans consistently and the expected impact has been quantified by the Company’s external actuaries.
The expected impact of IAS 19, “Employee Benefits” (“IAS 19”), including this IFRS 1 exemption is disclosed in the Changes in Accounting
Policies – Employee Benefits section below.
Borrowing Costs The Company expects to apply IAS 23, “Borrowing Costs”, prospectively and expects to eliminate all previously capitalized
interest costs as at the date of transition through opening retained earnings. Upon implementation of IFRS, the Company expects to record a
decrease in total assets and liabilities of approximately $220 million and $21 million, respectively, with a corresponding impact to
shareholders’ equity of $199 million.
Business Combinations The Company expects to apply IFRS 3, “Business Combinations” prospectively only to those business
combinations that occur after the date of transition.
Changes in Accounting Policies
Consolidation IAS 27, “Consolidated and Separate Financial Statements” and Standing Interpretations Committee Interpretation 12,
“Consolidation – Special Purpose Entities” (“IAS 27”) assess consolidation based on the control model and IFRS does not include the
concept of a variable interest entity. Accordingly, the Company will no longer be required to consolidate certain independent franchisees
and other entities subject to warehouse and distribution service agreements that were previously consolidated under Canadian GAAP
pursuant to the requirements of Accounting Guideline 15, “Consolidation of Variable Interest Entities” (“AcG 15”). The independent
funding trust through which franchisees obtain financing and Eagle, the independent credit card trust that finances certain PC Bank
credit card receivables, will be subject to consolidation under IFRS based on the indicators of control as assessed in accordance with
Standing Interpretations Committee Interpretation 12. As a result of the above, the Company will be required to re-measure the initial
consideration received from the independent franchisee, in the form of a loan receivable, to exclude the benefit of the credit
enhancement provided to the independent funding trust by the Company. Upon implementation of IFRS, the Company expects to
record an increase in total assets and liabilities of approximately $719 million and $739 million, respectively, with a corresponding impact
to shareholders’ equity of $20 million primarily resulting from the items described above. In addition, upon implementation the Company
expects to record additional total assets and liabilities of $39 million and $117 million, respectively, with a corresponding impact to
shareholders’ equity of $78 million related to immaterial adjustments of prior period balances. The Company has determined that
these amounts were not material to its consolidated financial statements for any prior interim or annual periods.
2010 Annual Report – Financial Review 35
Management’s Discussion and Analysis
Revenue Under Canadian GAAP each franchise arrangement was evaluated under AcG 15. Revenues for independent franchisees that
were not consolidated under AcG 15 were accounted for under AcG 2 “Franchise Fee Revenue”. As a result of the Company no longer
consolidating certain independent franchisees the Company was required to evaluate the sale of each franchise arrangement under IAS 18,
“Revenue” (‘IAS 18”) at its inception. Based on the guidance in IAS 18, the Company concluded that each franchise arrangement contains
separately identifiable components. As a result of this multi-element arrangement the Company will be required to determine the fair value of
all consideration exchanged including certain loans and receivables. The impact of applying these requirements will result in the fair value of
certain consideration being less than the amounts recorded at inception. Furthermore, the Company allocated the consideration to each
component in the multi-element arrangement, on a relative fair value basis to both the delivered and undelivered components. The total
impact of these items is included within the overall financial instruments impacts described below.
Financial Instruments As a result of no longer consolidating the franchise arrangements under IAS 27, the Company will recognize and
evaluate additional financial assets and financial liabilities in accordance with IAS 39, “Financial Instruments: Recognition and Measurement”
(“IAS 39”) which requires application retrospectively to the inception of each arrangement. The Company’s evaluation has identified one or
more events that provide objective evidence that the cash flows associated with certain of these financial assets are such that the fair value
has been determined to be impaired. Upon implementation of IFRS, the Company expects to record a decrease in certain financial assets
and a corresponding decrease to shareholders’ equity.
IAS 39 contains different criteria than Canadian GAAP for the derecognition of financial assets and requires an evaluation of the extent to
which an entity retains the risks and rewards of ownership as well as control over the transferred assets. Under Canadian GAAP these
financial assets qualify for sale treatment. The Company has determined that under IFRS, securitized credit card receivables will not qualify
for derecognition. Upon implementation of IFRS, the Company expects to record an increase in credit card receivables of approximately
$1,179 million (excluding Eagle of $500 million which is discussed above) before the provision for loan losses with a corresponding increase
to liabilities.
Cross-currency and interest rate swaps were effective cash flow hedging relationships under Canadian GAAP. Certain tranches of the
swaps that were part of the hedging relationship have expired in 2010 and will continue to expire up to mid-2011. The Company has
decided not to apply hedge accounting under IFRS which will result in derecognition at the date of transition to IFRS. Upon implementation
of IFRS, the Company expects to reclassify approximately $16 million of deferred gains from accumulated other comprehensive income to
retained earnings within shareholders’ equity.
As a result of IAS 39 and IAS 18, the Company expects to record an increase in total assets and liabilities of approximately $959 million and
$1,290 million, respectively, with a corresponding impact to shareholders’ equity of $331 million primarily resulting from the items described in
IAS 18 and IAS 39 above.
Employee Benefits IAS 19 provides a policy choice regarding recognition of actuarial gains and losses for defined benefit pension plans
and other defined benefit plans, permitting deferred recognition using the corridor method or immediate recognition in either other
comprehensive income within equity or through earnings. Under Canadian GAAP the Company applies the corridor method. Upon
implementation of IFRS, the Company intends to recognize actuarial gains and losses immediately in other comprehensive income within
equity for defined benefit pension plans and other defined benefit plans and immediately in net earnings for other long term employee
benefits. Upon implementation of IFRS, the Company expects to record a decrease in total assets and an increase in total liabilities of
approximately $242 million and $25 million, respectively, with a corresponding impact to shareholders’ equity of $267 million primarily
resulting from the items described above and the IFRS 1 exemption described in the First-Time Adoption of IFRS section above. In addition,
upon implementation the Company expects to record additional total assets and liabilities of $14 million and $52 million, respectively,
with a corresponding impact to shareholders’ equity of $38 million related to immaterial adjustments of prior period balances. The
Company has determined that these amounts were not material to its consolidated financial statements for any prior interim or annual
periods.
Share-based Payments IFRS 2, “Share-Based Payments”, requires that cash-settled stock-based compensation be measured based
on the fair value of the awards. Canadian GAAP requires that such compensation be measured based on the intrinsic value of the
awards. This difference is expected to impact the accounting measurement of the Company’s stock options, restricted share units and
36 2010 Annual Report – Financial Review
deferred share units. Upon implementation of IFRS, the Company expects to record an increase in total assets and liabilities of
approximately $3 million and $9 million, respectively, with a corresponding impact to shareholders’ equity of $6 million primarily resulting
from the items described above.
Property, Plant and Equipment IAS 16, “Property, Plant and Equipment”, provides specific guidance such that when an individual component
of an item within property, plant and equipment is replaced and capitalized, the carrying value of the replaced component of the original asset
must be derecognized even if the replacement part was not separately accounted for. In addition IFRS is more prescriptive with respect to
eligible costs such as site-dismantling and restoration costs. Upon implementation of IFRS, the Company expects to record a decrease in total
assets and liabilities of approximately $60 million and $2 million, respectively, with a corresponding impact to shareholders’ equity of $58
million primarily resulting from the items described above.
Impairment of Assets IAS 36, “Impairment of Assets”, requires that assets be tested for impairment at the level of cash generating units
(“CGU”), which are defined as the smallest group of assets that generate largely independent cash inflows. The Company has completed its
analysis and has concluded that the CGU will predominantly be an individual retail location compared to Canadian GAAP where store net
cash flows are grouped together by primary market areas, where they are largely dependent on each other. The Company has completed
its preliminary assessment of the events triggering potential impairments and the events triggering the reversal of previously recorded
impairments. Upon implementation of IFRS, the Company expects to record a decrease in total assets and liabilities of approximately $216
million and $29 million, respectively, with a corresponding impact to shareholders’ equity of $187 million primarily resulting from the items
described above.
Leases IAS 17, “Leases” (“IAS 17”), requires the allocation of minimum lease payments between the land and building elements of a lease
to be in proportion to the relative fair values of the leasehold interests in the land and building, whereas under Canadian GAAP it is based
on the fair value of the land and building in aggregate. In addition, IFRS permits the immediate recognition of gains and losses on sale
leaseback transactions which result in an operating lease, provided that the transaction is established at fair value. Under Canadian GAAP,
gains and losses are generally deferred and amortized in proportion to the lease payments over the lease term. IAS 17 also provides
additional indicators of a capital lease that were not provided under Canadian GAAP. Capital leases are referred to as finance leases under
IFRS. Upon implementation of IFRS, the Company expects to record an increase in total assets and liabilities of approximately $62 million
and $78 million, respectively, with a corresponding impact to shareholders’ equity of $16 million primarily resulting from the items described
above. In addition, upon implementation the Company expects to record additional total assets and liabilities of $50 million and $61
million, respectively, with a corresponding impact to shareholders’ equity of $11 million related to immaterial unrecorded capital leases
from prior periods. The Company has determined that these immaterial unrecorded amounts were not material to its consolidated
financial statements for any prior interim or annual periods.
Customer Loyalty Programs International Financial Reporting Interpretations Committee 13, “Customer Loyalty Programs”, requires the
fair value of loyalty programs to be recognized as a separate component of the related sales transaction, such that a portion of the revenue
from the initial sales transaction in which the awards were granted is deferred until the points are redeemed. The Company has made a
policy choice to defer the relevant portion of the sales transaction based on the relative fair value of the awards granted. Under Canadian
GAAP, the Company recognizes the net cost of the program in operating expenses measured at the cost to service the liability. Upon
implementation of IFRS, the Company expects to record an increase in total assets and liabilities of approximately $5 million and $19
million, respectively, with a corresponding impact to shareholders’ equity of $14 million primarily resulting from the items described above.
Provisions IAS 37, “Provision, Contingent Liabilities and Contingent Assets” requires an entity to recognize a provision when a contract is
determined to be onerous. A contract is onerous when the unavoidable costs of meeting the obligations under the contract exceed the
economic benefits expected to be received under it. Canadian GAAP only requires the recognition of such a liability in certain prescribed
situations. This difference could result in the recognition of a liability under IFRS that was not previously recognized under Canadian
GAAP. Other measurement differences under IFRS could result in the earlier recognition of provisions or the recognition of a different
amount than under Canadian GAAP. Upon implementation of IFRS, the Company expects to record an increase in total assets and
liabilities of approximately $4 million and $22 million, respectively, with a corresponding impact to shareholders’ equity of $18 million
primarily resulting from the items described above.
2010 Annual Report – Financial Review 37
Management’s Discussion and Analysis
Changes in Financial Statement Presentation and Cash Flows
In addition to the changes in recognition and measurement described above, the conversion to IFRS will result in a number of changes to
financial statement presentation.
IFRS 8, “Operating Segments” is substantially converged with Canadian GAAP, however with the combined impact of IAS 39, resulting in
securitized credit card receivables not qualifying for derecognition and the impact of IAS 27, resulting in the consolidation of Eagle, PC
Financial will now meet quantitative thresholds requiring it to be disclosed as a reportable segment under IFRS.
On the consolidated balance sheets, the significant required reclassifications from Canadian GAAP to IFRS include: presenting all future
income taxes as long-term, rather than presenting current and long term future income taxes separately; presenting investment properties
separately from fixed assets; presenting current and long-term provisions separately from accounts payable and accrued liabilities and other
liabilities, respectively; and presenting non-controlling interest as a component of equity instead of as a liability.
On the statement of earnings, minority interests will be presented as an allocation of net earnings rather than as a deduction in the calculation
of net earnings. In addition, the Company has made a policy choice under IAS 19 to disaggregate pension costs and post retirement benefits
on the statement of net earnings, and present the interest and expected return on asset components of total pension cost within interest and
other financing charges. This change related to pension costs will have the effect of increasing operating income and EBITDA(1), and
increasing interest and other financing charges reported under Canadian GAAP in 2010.
The impact of IFRS on total consolidated cash flows is due only to the change in entities that are recognized on-balance sheet under IFRS as
compared to Canadian GAAP, as discussed above related to IAS 27 and IAS 39. In addition, within the consolidated statements of cash
flows, there will be differences in the presentation of cash flows between operating, investing and financing.
14. Outlook(2)
2010 was a year of real progress towards completing the Company’s renewal plan. Now entering its fifth and final year of renewal, the
Company expects to continue its focus on executing the plan in a market environment that remains unpredictable and competitively
intense. In 2011, the Company plans to continue its investments in information technology and supply chain which will negatively impact
operating income by approximately $135 million over 2010, and estimates capital expenditures for the year to be roughly $1.0 billion.
15. Non-GAAP Financial Measures
The Company uses the following non-GAAP financial measures: EBITDA and EBITDA margin, net debt, net debt to EBITDA, net debt to
equity and return on average net assets. The Company believes these non-GAAP financial measures provide useful information to both
management and investors in measuring the financial performance and financial condition of the Company for the reasons outlined below.
These measures do not have a standardized meaning prescribed by Canadian GAAP and therefore they may not be comparable to similarly
titled measures presented by other publicly traded companies, and they should not be construed as an alternative to other financial
measures determined in accordance with Canadian GAAP.
(1) See Non-GAAP financial measures beginning on page 38.
(2) To be read in conjunction with “Forward-Looking Statements” on page 2
38 2010 Annual Report – Financial Review
EBITDA and EBITDA Margin The following table reconciles earnings before minority interest, income taxes, interest expense and
depreciation and amortization (“EBITDA”) to operating income which is reconciled to Canadian GAAP net earnings measures reported in the
consolidated statements of earnings for the years ended January 1, 2011, January 2, 2010 and January 3, 2009. EBITDA is useful to
management in assessing the Company’s performance of its ongoing operations and its ability to generate cash flows to fund its cash
requirements, including the Company’s capital investment program.
($ millions)
Net earnings
Add impact of the following:
Minority interest
Income taxes
Interest expense and other financing charges
Operating income
Add impact of the following:
Depreciation and amortization
EBITDA
2010
(unaudited)
(12 weeks)
$ 151
2009
(unaudited)
(12 weeks)
$ 165
2010
(audited)
(52 weeks)
$ 681
2009
(audited)
(52 weeks)
$ 656
2008
(audited)
(53 weeks)
$ 550
4
71
63
289
9
39
64
277
18
297
273
1,269
11
269
269
1,205
10
229
263
1,052
153
$ 442
143
$ 420
655
$ 1,924
589
$ 1,794
550
$ 1,602
EBITDA margin is calculated as EBITDA divided by sales.
Net Debt The following table reconciles net debt used in the net debt to EBITDA and net debt to equity ratios to Canadian GAAP
measures reported in the audited consolidated balance sheets as at the years ended. The Company calculates net debt as the sum of
bank indebtedness, short term debt, long term debt, other liabilities and the fair value of financial derivatives less cash and cash
equivalents, short term investments, security deposits and the fair value of financial derivatives. The Company believes that this measure
is useful in assessing the amount of financial leverage employed.
($ millions)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Certain other liabilities
Fair value of financial derivatives related to the above
Less: Cash and cash equivalents
Short term investments
Security deposits
Fair value of financial derivatives related to the above
Net debt
As at
January 1, 2011
$ 3
−
433
4,213
35
37
4,721
932
735
354
187
2,208
$ 2,513
As at
January 2, 2010
$ 2
−
343
4,162
36
58
4,601
776
614
250
178
1,818
$ 2,783
As at
January 3, 2009
$ 52
190
165
4,070
−
63
4,540
243
510
437
57
1,247
$ 3,293
The Second Preferred Shares, Series A are classified as capital securities and are excluded from the calculation of net debt. For the purpose
of calculating net debt, fair value of financial derivatives is not credit value adjusted in accordance with EIC 173. As at January 1, 2011 the
credit value adjustment was $4 million (2009 – $4 million).
2010 Annual Report – Financial Review 39
Management’s Discussion and Analysis
Net Assets The following table reconciles net assets used in the return on average net assets ratio to Canadian GAAP measures reported in
the audited consolidated balance sheets as at the years ended. The Company believes the return on average net assets ratio is useful in
assessing the return on productive assets.
Net assets is calculated as total assets as reported under Canadian GAAP less cash and cash equivalents, short term investments, security
deposits and accounts payable and accrued liabilities. Return on average net assets is calculated as operating income for the year divided by
average net assets.
($ millions)
Canadian GAAP total assets
Less: Cash and cash equivalents
Short term investments
Security deposits
Accounts payable and accrued liabilities
Net assets
As at
January 1, 2011
As at
January 2, 2010
As at
January 3, 2009
$ 15,919
932
735
354
3,416
$ 10,482
$ 14,991
776
614
250
3,279
$ 10,072
$ 13,943
243
510
437
2,823
$ 9,930
Equity The following table reconciles equity used in the net debt to equity ratio to Canadian GAAP measures reported in the audited
consolidated financial statements as at the years ended.
Equity is calculated as the sum of capital securities and shareholder’s equity.
($ millions)
Capital securities
Shareholders' equity
Equity
16. Additional Information
As at
January 1, 2011
As at
January 2, 2010
As at
January 3, 2009
221
6,880
7,101
220
6,273
6,493
219
5,803
6,022
Additional information about the Company, including its Annual Information Form and other disclosure documents, 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, PC Bank.
February 23, 2011
Toronto, Canada
40 2010 Annual Report – Financial Review
Financial Results
42 Management’s Statement of Responsibility for Financial Reporting
43 Independent Auditors’ Report
44 Consolidated Financial Statements
44 Consolidated Statements of Earnings
45 Consolidated Statements of Changes in Shareholders’ Equity
45 Consolidated Statements of Comprehensive Income
46 Consolidated Balance Sheets
47 Consolidated Cash Flow Statements
48 Notes to the Consolidated Financial Statements
48 Note 1. Summary of Significant Accounting Policies
53 Note 2. Implementation of New Accounting Standards
54 Note 3. Distribution Network Costs
54 Note 4. Interest Expense and Other Financing Charges
55 Note 5. Income Taxes
56 Note 6. Basic and Diluted Net Earnings per Common Share
56 Note 7. Cash and Cash Equivalents
57 Note 8. Accounts Receivable
59 Note 9. Inventories
59 Note 10. Fixed Assets
59 Note 11. Goodwill and Intangible Assets
60 Note 12. Other Assets
60 Note 13. Employee Future Benefits
64 Note 14. Short Term Debt
65 Note 15. Long Term Debt
66 Note 16. Other Liabilities
66 Note 17. Leases
67 Note 18. Preferred Shares
67 Note 19. Common Share Capital
68 Note 20. Capital Management
70 Note 21. Stock-Based Compensation
73 Note 22. Accumulated Other Comprehensive Income
73 Note 23. Financial Derivative Instruments
75 Note 24. Fair Values of Financial Instruments
78 Note 25. Financial Instrument Risk Management
80 Note 26. Contingencies, Commitments and Guarantees
82 Note 27. Variable Interest Entities
82 Note 28. Related Party Transactions
83 Note 29. Business Acquisitions and Dispositions
84 Note 30. Other Information
85 Three Year Summary
86 Earnings Coverage Exhibit to the Audited Consolidated Financial Statements
87 Glossary of Terms
2010 Annual Report – Financial Review 41
Management’s Statement of Responsibility for Financial Reporting
The management of Loblaw Companies Limited is responsible for the preparation and fair presentation 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 (“GAAP”). It also includes ensuring that the financial information presented elsewhere in the Annual
Report is consistent with that in the consolidated financial statements.
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with Canadian GAAP. A dedicated control compliance team reviews and evaluates internal controls, the results of which are
shared with management on a quarterly basis. 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, 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
February 23, 2011
[signed]
Galen G. Weston
Executive Chairman Deputy Chairman and President
[signed]
Allan L. Leighton Sarah R. Davis
[signed]
Chief Financial Officer
42 2010 Annual Report – Financial Review
Independent Auditors’ Report
To the Shareholders:
We have audited the accompanying consolidated financial statements of Loblaw Companies Limited, which comprise the consolidated
balance sheets as at January 1, 2011 and January 2, 2010, the consolidated statements of earnings, changes in shareholders’ equity,
comprehensive income and the consolidated cash flow statements for the 52 week years ended January 1, 2011 and January 2, 2010,
and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and
plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant
to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinions.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Loblaw
Companies Limited as at January 1, 2011 and January 2, 2010, and the consolidated results of its operations and its consolidated cash
flows for the 52 week years then ended in accordance with Canadian generally accepted accounting principles.
Toronto, Canada
February 23, 2011
Chartered Accountants, Licensed Public Accountants
2010 Annual Report – Financial Review 43
Consolidated Statements of Earnings
For the years ended January 1, 2011 and January 2, 2010
($ millions except where otherwise indicated)
Sales
Cost of Merchandise Inventories Sold (note 9)
Gross Profit
Operating Expenses
Selling and administrative expenses
Depreciation and amortization
Operating Income
Interest expense and other financing charges (note 4)
Earnings Before Income Taxes and Minority Interest
Income Taxes (note 5)
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.
2010
(52 weeks)
$ 30,997
23,393
7,604
5,680
655
6,335
1,269
273
996
297
699
18
2009
(52 weeks)
$ 30,735
23,539
7,196
5,402
589
5,991
1,205
269
936
269
667
11
$ 681
$ 656
$ 2.45
$ 2.44
$ 2.39
$ 2.38
44 2010 Annual Report – Financial Review
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended January 1, 2011 and January 2, 2010
($ millions except where otherwise indicated)
Common Share Capital, Beginning of Year
Common shares issued (note 19)
Purchased for cancellation (note 19)
Common Share Capital, End of Year
Retained Earnings, Beginning of Year
Cumulative impact of implementing new accounting standards (note 2)
Net earnings
Dividends declared per common share – $0.84 (2009 – $0.84)
Premium on common shares purchased for cancellation (note 19)
Retained Earnings, End of Year
Accumulated Other Comprehensive Income, Beginning of Year
Cumulative impact of implementing new accounting standards (note 2)
Other comprehensive loss
Accumulated Other Comprehensive Income, End of Year (note 22)
Total Shareholders’ Equity
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the years ended January 1, 2011 and January 2, 2010
($ millions)
Net earnings
Other comprehensive income
Net unrealized loss on available-for-sale financial assets
Reclassification of loss on available-for-sale financial assets to net earnings
Net gain on derivative instruments designated as cash flow hedges
Reclassification of (gain) loss on derivative instruments designated as
cash flow hedges to net earnings
Other comprehensive loss (note 22)
Total Comprehensive Income
See accompanying notes to the consolidated financial statements.
2010
2009
(52 weeks)
(52 weeks)
$ 1,308
167
−
$ 1,475
$ 4,948
−
681
(234)
−
$ 5,395
$ 17
−
(7)
$ 10
$ 6,880
$ 1,196
120
(8)
$ 1,308
$ 4,577
(6)
656
(231)
(48)
$ 4,948
$ 30
(2)
(11)
$ 17
$ 6,273
2010
(52 weeks)
$ 681
2009
(52 weeks)
$ 656
(12)
13
1
1
(9)
(8)
(7)
(23)
2
(21)
8
2
10
(11)
$ 674
$ 645
2010 Annual Report – Financial Review 45
Consolidated Balance Sheets
As at January 1, 2011 and January 2, 2010
($ millions)
Assets
Current Assets
Cash and cash equivalents (note 7)
Short term investments
Accounts receivable (note 8)
Inventories (note 9)
Future income taxes (note 5)
Prepaid expenses and other assets
Total Current Assets
Fixed Assets (note 10)
Goodwill and Intangible Assets (notes 11)
Security Deposits
Other Assets (note 12)
Total Assets
Liabilities
Current Liabilities
Bank indebtedness
Accounts payable and accrued liabilities
Income taxes payable (note 5)
Long term debt due within one year (note 15)
Total Current Liabilities
Long Term Debt (note 15)
Other Liabilities (note 16)
Future Income Taxes (note 5)
Capital Securities (note 18)
Minority Interest
Total Liabilities
Shareholders’ Equity
Common Share Capital (note 19)
Retained Earnings
Accumulated Other Comprehensive Income (notes 2 and 22)
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
Contingencies, commitments and guarantees (note 26). Leases (note 17).
See accompanying notes to the consolidated financial statements.
Approved on Behalf of the Board
[signed]
Galen G. Weston
Director
[signed]
Thomas C. O’Neill
Director
46 2010 Annual Report – Financial Review
2010
2009
$ 932
735
724
2,114
39
82
4,626
9,123
1,029
354
787
$ 776
614
774
2,112
38
92
4,406
8,559
1,026
250
750
$ 15,919
$ 14,991
$ 3
3,416
−
433
$ 2
3,279
41
343
3,852
4,213
534
178
221
41
9,039
1,475
5,395
10
6,880
3,665
4,162
497
143
220
31
8,718
1,308
4,948
17
6,273
$ 15,919
$ 14,991
Consolidated Cash Flow Statements
For the years ended January 1, 2011 and January 2, 2010
($ millions)
Operating Activities
Net earnings before minority interest
Depreciation and amortization
Future income taxes
Settlement of equity forward contracts (note 23)
Change in non-cash working capital
Fixed assets and other related impairments
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)
Business acquisitions – net of cash acquired (note 29)
Franchise investments and other receivables
Security deposits
Other
Cash Flows used in Investing Activities
Financing Activities
Bank indebtedness
Short term debt
Long term debt (note 15)
Issued
Retired
Common shares retired (note 19)
Dividends
Cash Flows from (used in) Financing Activities
Effect of foreign currency exchange rate changes on cash and cash equivalents (note 7)
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.
2010
(52 weeks)
$ 699
655
42
–
66
72
60
1,594
(1,280)
(159)
90
7
–
(11)
(115)
20
(1,448)
1
–
450
(368)
–
(65)
18
(8)
156
776
2009
(52 weeks)
$ 667
589
(29)
(55)
707
46
20
1,945
(971)
(181)
27
8
(204)
6
148
(45)
(1,212)
(50)
(190)
402
(167)
(56)
(112)
(173)
(27)
533
243
$ 932
$ 776
2010 Annual Report – Financial Review 47
Notes to the Consolidated Financial Statements
For the years ended January 1, 2011 and January 2, 2010
($ millions except where otherwise indicated)
Note 1. Summary of Significant Accounting Policies
The Company is a subsidiary of George Weston Limited (“Weston”) and is Canada’s largest food distributor and a leading provider of
drugstore, general merchandise and financial products and services.
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%.
The Company also consolidates variable interest entities (“VIEs”) pursuant to Canadian Institute of Chartered Accountants (“CICA”)
Accounting Guideline (“AcG”) 15, “Consolidation of Variable Interest Entities” (“AcG 15”), that are subject to control by the Company on a
basis other than through ownership of a majority of voting interest. AcG 15 defines a variable interest entity as an entity that either does
not have sufficient equity at risk to finance its activities without subordinated financial support or where the holders of the equity at risk
lack the characteristics of a controlling financial interest. AcG 15 requires the primary beneficiary to consolidate VIEs and considers an
entity to be the primary beneficiary of a VIE if it holds variable interests that expose it to a majority of the VIEs’ expected losses or that
entitle it to receive a majority of the VIEs’ expected residual returns or both.
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 January 1, 2011 and January 2, 2010 both
contained 52 weeks.
Revenue Recognition Sales include revenues, net of estimated 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 net of sales
incentives offered by the Company. The Company recognizes revenue at its corporate and VIE stores at the time the sale is made to its
customers and at the time of delivery of inventory to its associated and franchised stores.
Net Earnings per Common 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 and the
if converted method. The treasury stock method assumes that all outstanding stock options with an exercise price below the average market
price during the year are exercised and the assumed proceeds are used to purchase the Company’s common shares at the average market
price during the year. Under the if converted method, diluted EPS also takes into consideration the dilutive effect of the conversion options on
the capital securities and a component of other liabilities which are assumed to be converted using the market share price at the end of the
year.
Cash, Cash Equivalents and Bank Indebtedness Cash equivalents consist primarily of highly liquid marketable investments with a
maturity of 90 days or less from the date of acquisition. Cash equivalents are either designated as held-for-trading financial assets or
classified as available-for-sale financial assets which approximates the fair value of these instruments. See note 7 for more information.
Short Term Investments Short term investments consist primarily of government treasury bills, government-sponsored debt securities,
corporate commercial paper and bank term deposits. Short term investments are either designated as held-for-trading financial assets or
classified as available-for-sale financial assets which approximates the fair value of these instruments.
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. Any credit card receivable with a payment that is
contractually 180 days in arrears, or where the likelihood of collection is considered remote, is written off. Interest income on credit card
receivables is recorded on an accrual basis and is recognized in operating income.
48 2010 Annual Report – Financial Review
PC Bank maintains an 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 and current 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.
PC Bank securitizes credit card receivables through the sale of a portion of the total interest in certain receivables to independent trusts.
These trusts are either not controlled by PC Bank or are qualifying special purpose entities. The credit card receivables are removed from the
consolidated balance sheet when PC Bank has surrendered control and are considered sold for accounting purposes pursuant to AcG 12,
“Transfers of Receivables”. When PC Bank sells credit card receivables in a securitization transaction, it retains servicing responsibilities,
certain administrative responsibilities and the rights 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 and accordingly a servicing liability is recorded. The servicing liability is recorded at fair value upon initial recognition. In the
absence of quoted market rates for servicing securitized assets, fees payable to a replacement servicer, in the event that a replacement
servicer was to be appointed, formed the basis of determination of fair value of the servicing liability. Gains or losses on the securitization of
the receivables depends, in part, on the previous carrying amount of the receivables involved in the transfer, allocated between the assets
sold and retained interest, based on their relative fair values at the date of transfer. The fair value of the retained interest is determined as the
best estimate of the net present value of expected future cash flows using management’s best estimates of key assumptions such as net
yield, monthly payment rates, weighted average life, expected annual credit losses and discount rates. Any gain or loss on a sale is
recognized in operating income at the time of the securitization. Retained interest is primarily designated as a held-for-trading financial asset
and is recorded at fair value on the consolidated balance sheet.
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 merchandise inventories sold and the related
inventory when recognized in the consolidated statement of earnings and the consolidated 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 these costs are separate, incremental and identifiable.
Inventories The Company values merchandise inventories at the lower of cost and net realizable value. Cost includes the costs of
purchases net of vendor allowances, plus other costs that are directly incurred to bring inventories to their present location and condition.
Seasonal general merchandise and inventories at the distribution centres are measured at weighted average cost. The Company uses
the retail method to measure the cost of certain retail store inventories. The Company estimates net realizable value as the amount that
inventories are expected to be sold taking into consideration fluctuations in retail prices due to seasonality less estimated costs
necessary to make the sale. Inventories are written down to net realizable value when the cost of inventories is estimated to be
unrecoverable due to obsolescence, damage or declining selling prices. When circumstances that previously caused inventories to be
written down below cost no longer exist or when there is clear evidence of an increase in retail selling prices, the amount of the write-
down previously recorded is reversed. Storage costs, indirect administrative overhead and certain selling costs related to inventories are
expensed in the period that these costs are incurred.
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, up to 10 years for building improvements and from 3 to 10 years for equipment and fixtures.
Leasehold improvements are depreciated over the lesser of the lease term and their estimated useful lives and may include renewal
options when an improvement is made after inception of the lease to a maximum of 25 years, which approximates economic life.
Equipment and buildings under capital leases are depreciated over the term of the lease.
2010 Annual Report – Financial Review 49
Notes to the Consolidated Financial Statements
Fixed assets are reviewed for impairment annually and when events or changes in circumstances indicate that the carrying value
exceeds the sum of the undiscounted future cash flows expected from use and eventual disposal. These events or changes in
circumstances include a commitment to close a store or distribution centre or to relocate or convert a store. 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 may indicate an impairment in the distribution centre assets as well. If any of these assets are determined to be
impaired, the impairment loss is measured as the excess of the carrying value over fair value.
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 assessed for impairment at a minimum on an annual basis, at the reporting unit level. Any potential
goodwill impairment is identified by comparing the fair value of a reporting unit to its carrying value. If the carrying value of the reporting unit
exceeds its fair value, a more detailed goodwill impairment assessment must be undertaken. A goodwill impairment charge is recognized to the
extent that the carrying value of goodwill exceeds the implied fair value in operating income.
The Company determines the fair value 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 of Directors (“Board”). Discount
rates are based on an industry weighted average cost of capital. These estimates and assumptions are subject to change in the future
due to uncertain competitive and economic market conditions or changes in business strategies.
Intangible Assets The Company assesses intangible assets for legal, regulatory, contractual, competitive or other factors to determine if
the useful life is definite. Intangible assets which are determined to have a definite life are amortized over the related assets’ estimated
useful lives, to a maximum of 17 years.
Intangible assets with indefinite useful lives, consisting of T&T Supermarket Inc. (“T&T”) trademarks and brand names, are assessed for
impairment at least annually. Any potential intangible asset impairment is identified by comparing the fair value of the indefinite life
intangible asset to its carrying value. If the carrying value of the intangible asset exceeds its fair value, impairment is identified as the
difference between the fair value and the carrying value and will result in the recognition of an impairment charge in operating income.
The Company determines the fair value of its trademarks and brand names by using the “Relief from Royalty” method, a discounted cash
flow model. The process of determining the fair values requires management to make assumptions of a long term nature regarding
projected future sales, terminal growth rates, royalty rates and discount rates. Projected future sales are consistent with strategic plans
presented to the Board and discount rates are based on an industry after-tax cost of equity. These estimates and assumptions may
change in the future due to uncertain competitive and economic market conditions or changes in business strategies.
Security Deposits Security deposits consist primarily of cash, government treasury bills and government-sponsored debt securities held
as security for certain of the Company’s derivatives or securitized receivables. Security deposits are either designated as held-for-trading
financial assets or classified as available-for-sale financial assets which approximates the fair value of these instruments.
50 2010 Annual Report – Financial Review
Financial Instruments Financial instruments are classified as held-for-trading financial assets or financial liabilities, held-to-maturity
investments, loans and receivables, available-for-sale financial assets, or other financial liabilities. Financial instruments are included on
the Company’s balance sheet and measured at fair value, except for loans and receivables, held-to-maturity financial assets and other
financial liabilities which are measured at cost or amortized cost. Financial assets and financial liabilities have been initially remeasured
as at January 4, 2009 to take into account the appropriate Company’s credit risk and counterparty credit risk (see note 2). Gains and
losses on held-for-trading financial assets and financial liabilities are recognized in net earnings in the period in which they arise.
Unrealized gains and losses, including changes in foreign exchange rates on available-for-sale financial assets are recognized in other
comprehensive income until the financial asset is derecognized or impaired, at which time any unrealized gains or losses are recorded in
net earnings. Transaction costs other than those related to financial instruments classified as held-for-trading, which are expensed as
incurred, are amortized using the effective interest method.
The following classifications have been applied:
Cash and cash equivalents, short term investments and security deposits are designated as held-for-trading with the exception of certain
United States dollar denominated cash equivalents, short term investments and security deposits designated in a cash flow hedging
relationship, which are classified as available-for-sale financial assets.
Accounts receivable are classified as loans and receivables.
Bank indebtedness, accounts payable and certain accrued liabilities, short term debt, long term debt, capital lease obligations, certain
Investments in equity instruments are classified as available-for-sale.
other liabilities and capital securities have been classified as other financial liabilities.
Certain accrued liabilities are classified as held-for-trading.
The Company has not classified any financial assets as held-to-maturity.
Derivative Instruments Financial derivative instruments in the form of cross currency swaps, foreign exchange forwards, interest rate
swaps and equity forwards partially offset exposure to fluctuations in foreign currency exchange rates, interest rates and the market price
of the Company’s common shares. Financial and non-financial derivative instruments in the form of futures contracts, option contracts
and forward contracts mitigate current and anticipated exposure to fluctuations in commodity prices and foreign currency exchange
rates. Policies and guidelines prohibit the use of any derivative instruments for trading or speculative purposes.
All financial derivative instruments are recorded at fair value on the consolidated balance sheet taking into account the appropriate
Company’s credit risk and counterparty credit risk (see note 24). Non-financial derivative instruments, such as certain contracts that are
linked to commodity prices, are recorded at fair value on the consolidated balance sheet unless they are exempt from this treatment based
upon expected purchase, sale or usage requirements. Embedded derivative instruments which are not closely related to the host contract are
separated from their host contract and recorded on the consolidated balance sheet at fair value. Fair values are based on quoted market
prices where available from active markets, otherwise fair values are estimated using valuation methodologies, primarily discounted cash flow
analysis (see note 24). Derivative instruments are recorded in current or non-current assets and liabilities based on their remaining terms to
maturity. All changes in fair value of the derivative instruments are recorded in net earnings unless cash flow hedge accounting is applied.
The Company formally identifies, designates and documents the relationship between hedging instruments and hedged items including
cross currency swaps and interest rate swaps as cash flow hedges against exposure to fluctuations in the foreign currency exchange rate
and variable interest rates (see note 23). The Company assesses whether these derivative instruments are highly effective in offsetting the
change in the cash flows of hedged items at the inception of the hedging relationship and on an ongoing basis. If and when a derivative
instrument is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in
current period net earnings.
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 except for items which are designated in a cash flow hedge which
are deferred in accumulated other comprehensive income and reclassified to net earnings when realized. Revenues and expenses
denominated in foreign currencies are translated into Canadian dollars at the average foreign currency exchange rate for the year.
2010 Annual Report – Financial Review 51
Notes to the Consolidated Financial Statements
Income Taxes The Company accounts for income taxes using the asset and liability method of accounting. 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 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 Company sponsors a number of pension plans including registered funded defined benefit pension
plans, defined contribution pension plans and supplemental unfunded arrangements providing pension benefits in excess of statutory
limits. The Company also offers other employee benefit plans comprised of post-retirement and post-employment benefit plans which are
generally unfunded and non-contributory. Post-retirement benefit plans include health care, life insurance and dental benefits during
retirement while post-employment benefit plans include long term disability benefits and the continuation of health and dental benefits
while on disability. The Company also contributes to various multi-employer pension plans which provide pension benefits.
Defined Benefit Plans The cost and accrued benefit plan obligations of the Company’s defined benefit pension plans and other benefit
plans, including post-retirement and post-employment, are accrued based on actuarial valuations. The actuarial valuations for the
defined benefit plans are determined using the projected benefit method prorated on service and management’s best estimate of the
discount rate, the expected long term rate of return on plan assets, the rate of compensation increase, retirement rates, termination
rates, mortality rates 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 and then
adjusted for employer contributions made between the measurement date and the fiscal year end. The discount rate used to value the
accrued benefit plan obligation is based on 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 obligations.
Past service costs arising from plan amendments are amortized over the expected average remaining service period of the active
employees. The unamortized net actuarial gain or loss that exceeds 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 is amortized over the expected average remaining service period of the
active employees for defined benefit pension and post-retirement benefit plans, unless the plan covers mostly inactive members in which
case life expectancy is used. The amortization period for the defined benefit pension plans ranges from 7 to 18 years, with a weighted
average of 11 years. The amortization period for the post-retirement benefit plans ranges from 8 to 16 years, with a weighted average of
15 years. The unamortized net actuarial gain or loss for post-employment benefits is amortized over a period not exceeding three years.
The net 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.
Defined Contribution and Multi-Employer Pension Plans The costs of pension benefits for defined contribution pension plans and multi-
employer pension plans are expensed as contributions are due.
Stock Option Plan The Company recognizes a compensation cost in operating income and a liability related to employee stock option
grants 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 at the balance sheet date exceeds the exercise price of the stock options. A year-over-year change in the stock-based
compensation liability is recognized in operating income over the vesting period of the options.
Restricted Share Unit (“RSU”) Plan The Company recognizes a compensation cost in operating income on a prescribed vesting basis
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.
52 2010 Annual Report – Financial Review
Employee Share Ownership Plan (“ESOP”) 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% of each employee’s contribution to the plan, which is recognized in operating income as a compensation cost
when the contribution is made.
Director Deferred Share Unit (“DSU”) Plan Members of the Board, who are not management of the Company, may elect annually to
receive all or a portion of their annual retainer(s) and fees in the form of DSUs. The DSU compensation liability is accounted for based on
the number of units outstanding and the market value of Loblaw common shares at the balance sheet date. The year-over-year change in
the deferred share unit compensation liability is recognized in operating income.
Executive Deferred Share Unit (“EDSU”) Plan Under this plan, executives may elect to defer up to 100% of the Short Term Incentive Plan
(“STIP”) earned by the executive in any year into the EDSU Plan, subject to an overall cap of three times the executive’s base salary. All
EDSUs held by an executive will be paid out in cash by December 15 of the year following the year in which the executive’s employment
ceases for any reason. An election to participate in the plan in any year must be made before the beginning of the year and is irrevocable.
The number of EDSUs granted in respect of any year will be determined by dividing the STIP bonus that is subject to the EDSU plan
election by the value of the Company’s common shares on the date the STIP bonus would otherwise be payable. For this purpose, and for
purposes of determining the value of an EDSU upon conversion of the EDSUs into cash, the value of the EDSUs will be calculated by using
the weighted average of the trading prices of the Company’s common shares on the Toronto Stock Exchange for the five trading days prior
to the valuation date.
Use of Estimates and Assumptions The preparation of the consolidated financial statements 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 and intangible assets, income and other taxes, fixed asset
impairment and employee future benefits, depend upon subjective or complex judgments about matters that may be uncertain, and changes
in those estimates could materially impact the consolidated financial statements. Illiquid credit markets, volatile equity, foreign currency, and
energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions.
As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in
future periods.
Presentation Certain prior year information has been reclassified to conform with current year presentation.
Future Accounting Standards The Company will adopt International Financial Reporting Standards (“IFRS”) effective January 2, 2011.
Note 2. Implementation of New Accounting Standards
Accounting Standards Implemented in 2009
Goodwill and Intangible Assets In November 2007, the CICA issued amendments to Section 1000 “Financial Statement Concepts”, and
AcG 11 “Enterprises in the Development Stage”, issued a new Handbook Section 3064 “Goodwill and Intangible Assets” (“Section 3064”) to
replace Section 3062 “Goodwill and Other Intangible Assets”, withdrew Section 3450 “Research and Development Costs” and amended
Emerging Issues Committee (“EIC”) Abstract 27 “Revenues and Expenditures During the Pre-operating Period” to not apply to entities that
have adopted Section 3064. These amendments, in conjunction with Section 3064, provide guidance for the recognition of intangible assets,
including internally developed assets from research and development activities, ensuring consistent treatment of all intangible assets,
whether separately acquired or internally developed. The Company implemented these requirements effective 2009, retroactively with
restatement.
2010 Annual Report – Financial Review 53
Notes to the Consolidated Financial Statements
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities On January 20, 2009 EIC Abstract No.173 “Credit Risk and
the Fair Value of Financial Assets and Financial Liabilities” (“EIC 173”) was issued. The committee reached a consensus that a company’s
credit risk and the credit risk of its counterparties should be considered when determining the fair value of its financial assets and financial
liabilities, including derivative instruments. The transitional provisions required the abstract to be applied retrospectively without restatement
of prior periods. Financial assets and financial liabilities, including derivative instruments, were remeasured as at January 4, 2009 to take into
account the appropriate Company’s credit risk and counterparty credit risk. As a result, a decrease in other assets of $12 million, a decrease
in other liabilities of $4 million, a decrease net of income taxes in accumulated other comprehensive income of $2 million and a decrease in
retained earnings of $6 million were recorded in the consolidated balance sheet.
Financial Instruments – Disclosures In June 2009, the CICA amended Section 3862, “Financial Instruments – Disclosures,” to include
additional disclosure relating to the measurement of fair value for financial instruments and liquidity risk. The amendment establishes a three
level hierarchy that reflects the significance of the inputs used in fair value measurements on financial instruments. The amendment was
effective for annual financial statements relating to fiscal years ending after September 30, 2009. See note 24 for disclosures.
Note 3. Distribution Network Costs
During 2010, the Company announced changes to its distribution network in Quebec. In connection with these changes a certain distribution
centre was closed and an asset impairment charge in 2010 of $26 million was recorded in operating income as the carrying value of the
facility exceeded the fair value. In addition, employee termination charges and other costs of $16 million were recorded in operating income.
As at January 1, 2011, $7 million was recorded on the consolidated balance sheet in accounts payable and accrued liabilities related to these
charges.
Note 4. Interest Expense and Other Financing Charges
($ millions)
Interest on long term debt
Interest expense (income) on financial derivative instruments
Net short term interest (income) expense
Interest income on security deposits
Dividends on capital securities
Capitalized to fixed assets
Interest expense
2010
$ 288
–
(8)
–
14
(21)
$ 273
2009
$ 282
2
(6)
(2)
14
(21)
$ 269
During 2010, net interest expense of $271 million (2009 − $263 million) was recorded related to the financial assets and financial liabilities
not classified as held-for-trading. In addition, $2 million (2009 – $2 million) of income from cash and cash equivalents and short term
investments, held by Glenhuron Bank Limited (“Glenhuron”), a wholly owned subsidiary of the Company, were recognized in net short term
interest income.
Cash interest and dividends on capital securities paid in 2010 were $371 million (2009 – $365 million), and cash interest received in 2010 was
$52 million (2009 − $73 million).
54 2010 Annual Report – Financial Review
Note 5. 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-deductible amounts including cash settled stock options
Impact of statutory income tax rate changes on future income tax balances
Other
2010
29.9%
2009
30.7%
(1.4)
1.8
–
(0.5)
(0.6)
0.2
(0.4)
(1.2)
Effective income tax rate
29.8%
28.7%
Net cash income taxes paid in 2010 were $298 million (2009 – $199 million).
The cumulative effects of changes in Canadian federal and certain provincial statutory income tax rates on future income tax assets and
liabilities are included in the consolidated financial statements at the time of substantive enactment. Accordingly, in 2010 a $nil
(2009 – $3 million) net reduction to the future income tax expense was recognized as a result of the change in the Canadian federal and
certain provincial statutory income tax rates.
The income tax effects of temporary differences that gave rise to significant portions of the future income tax assets (liabilities) were as
follows:
($ millions)
Accounts payable and accrued liabilities
Other liabilities
Fixed assets
Other assets
Losses carried forward (expiring 2015 to 2030)
Other
Net future income tax liabilities
($ millions)
Recorded on the consolidated balance sheets as follows:
Current future income tax assets
Non-current future income tax liabilities
Net future income tax liabilities
2010
$ 35
152
(296)
(140)
91
19
$ (139)
2009
$ 35
158
(281)
(103)
92
(6)
$ (105)
2010
2009
$ 39
(178)
$ (139)
$ 38
(143)
$ (105)
2010 Annual Report – Financial Review 55
Notes to the Consolidated Financial Statements
Note 6. Basic and Diluted Net Earnings per Common Share ($, except where otherwise indicated)
Net earnings for basic earnings per share ($ millions)
Dividends on capital securities ($ millions) (note 18)
Net earnings for diluted earnings per share ($ millions)
Weighted average common shares outstanding (in millions) (note 19)
Dilutive effect of stock-based compensation (in millions)
Dilutive effect of capital securities (in millions) (note 18)
Dilutive effect of certain other liabilities (in millions) (note 16)
Diluted weighted average common shares outstanding (in millions)
Basic net earnings per common share ($)
Diluted net earnings per common share ($)
2010
$ 681
14
695
277.9
0.6
5.9
0.9
285.3
2009
$ 656
14
670
275.0
0.2
6.6
0.3
282.1
$ 2.45
$ 2.44
$ 2.39
$ 2.38
Stock options outstanding with an exercise price greater than the market price of the Company’s common shares at January 1, 2011
were not recognized in the computation of diluted net earnings per common share. Accordingly, 2,840,638 (2009 – 4,118,464) stock
options, with a weighted average exercise price of $52.50 (2009 – $52.64) per common share, were excluded from the computation of
diluted net earnings per common share.
Note 7. Cash and Cash Equivalents
The components of cash and cash equivalents as at January 1, 2011 and January 2, 2010 were as follows:
($ millions)
Cash
Cash equivalents:
Bankers’ acceptances
Government treasury bills
Bank term deposits
Corporate commercial paper
Other
Cash and cash equivalents
2010
$ 150
2009
$ 219
240
224
200
113
5
296
71
45
116
29
$ 932
$ 776
The Company recognized an unrealized foreign currency exchange loss of $52 million (2009 – $146 million) as a result of translating
United States dollar denominated cash and cash equivalents, short term investments and security deposits, of which a loss of $8 million
(2009 – $27 million) is related to cash and cash equivalents. The resulting unrealized foreign currency exchange loss on cash and cash
equivalents, short term investments and security deposits is offset in operating income and accumulated other comprehensive income by
the unrealized foreign currency exchange gain of $52 million (2009 –$145 million) on the cross currency swaps as described in note 23.
56 2010 Annual Report – Financial Review
Note 8. Accounts Receivable
The components of accounts receivable as at January 1, 2011 and January 2, 2010 were as follows:
($ millions)
Credit card receivables
Amount securitized
Net credit card receivables
Other receivables
Accounts receivable
2010
$ 2,015
(1,635)
380
344
2009
$ 2,128
(1,725)
403
371
$ 724
$ 774
Credit Card Receivables The Company, through PC Bank, securitizes certain credit card receivables as described in note 1.
In 2010, $600 million (2009 – nil) of credit card receivables were securitized which yielded a net loss of $3 million (2009 - nil). During 2010,
PC Bank repurchased $690 million (2009 – $50 million) of the co-ownership interest in the securitized receivables from several independent
trusts. A portion of the securitized receivables that is held by an independent trust facility was renewed for two years during 2010. During 2010,
PC Bank received income of $245 million (2009 − $235 million) related primarily to PC Bank’s rights to excess cash flows earned on the
securitized credit card receivables. A decrease in servicing liability of nil (2009 –$3 million) was recognized during the year on securitization and
as at year end the servicing liability was $8 million (2009 – $8 million). The independent trusts’ recourse to PC Bank’s assets is limited to
PC Bank’s excess collateral of $114 million (2009 – $121 million) as well as standby letters of credit for $48 million (2009 – $116 million) based
on a portion of the securitized amount (see note 26).
On March 17, 2011, the five-year $500 million senior notes and subordinated notes issued by Eagle Credit Card Trust will mature. In
conjunction with the upcoming maturity, the Company accumulated $167 million of cash on December 1, 2010. Subsequent to the end of the
year, the Company accumulated $167 million in January 2011 and will continue to accumulate a further $166 million by the end of February
2011. In addition, subsequent to year end, the Company increased its securitization of accounts receivable by approximately $230 million under
one of the independent trusts and expects to securitize further amounts coincident with the maturity of the Eagle Credit Card Trust Notes.
Net credit loss experience of $16 million (2009 – $21 million) includes $110 million (2009 – $139 million) of credit losses on the total portfolio of
credit card receivables net of credit losses of $94 million (2009 – $118 million) relating to securitized credit card receivables.
The following table displays the sensitivity of the current fair value of the retained interest to an immediate 10% and 20% adverse change in the
2010 key assumptions. The sensitivity analysis provided in the table is hypothetical and should be used with caution. The sensitivities of each
key assumption have been calculated independently of any changes in other key assumptions. Actual experience may result in changes in a
number of key assumptions simultaneously. Changes in one factor may result in changes in another, which could amplify or reduce the impact
of such assumptions.
Carrying value of retained interest ($ millions)
Payment rate (monthly)
Weighted average life (years)
Expected credit losses
Annual discount rate applied to residual cash flows
Net Yield
Cost of Funds
2010
$ 21
49%
0.7
5.67%
9.13%
14.11%
2.60%
Change in Assumptions
10%
20%
$ (2)
$ (1)
$ (4)
$ (1)
$ (3)
$ (3)
$ (8)
$ (1)
2010 Annual Report – Financial Review 57
Notes to the Consolidated Financial Statements
The details on the cash flows from securitization are as follows:
($ millions)
Proceeds from new securitizations
Repurchase of co-ownership interests
Net cash flows received on retained interest
2010
$ 600
$ (690)
$ 250
2009
$ –
$ (50)
$ 244
Other Receivables Other receivables consist mainly of receivables from vendors, independent franchisees, associated stores and
independent accounts.
Allowances for Receivables The allowance for credit card receivables recorded in accounts receivable on the consolidated balance
sheets is maintained at a level which is considered adequate to absorb credit related losses on credit card receivables. The allowance
for other receivables from associated stores and independent accounts is recorded in accounts receivable on the consolidated balance
sheets. A continuity of the Company’s allowances for losses is as follows:
Credit Card Receivables
($ millions)
Allowance, at beginning of year
Provision for losses
Recoveries
Write-offs
Allowance, at end of year
Other Receivables
($ millions)
Allowance, at beginning of year
Provision for losses
Write-offs
Allowance, at end of year
January 1, 2011
January 2, 2010
$ (16)
(16)
(11)
27
$ (16)
$ (15)
(21)
(9)
29
$ (16)
January 1, 2011
$ (20)
(107)
111
$ (16)
January 2, 2010
$ (24)
(101)
105
$ (20)
Aging of Receivables The following is an aging of the Company’s credit card and other receivables as at January 1, 2011 and
January 2, 2010:
Credit card receivables
Other receivables
Total
2010
2009
Current
370
276
646
> 30 days
3
16
19
> 60 days
7
52
59
Total
380
344
724
Current
390
273
663
> 30 days
4
47
51
> 60 days
9
51
60
Total
403
371
774
58 2010 Annual Report – Financial Review
Credit card receivables that are past due but not impaired totaled $10 million (2009 – $13 million) as at January 1, 2011 as they are either
less than 90 days past due or are reasonably expected to remedy the past due status. Any credit card receivable balances that are 180
days in arrears or where the likelihood of collection is considered remote are written-off. Credit risk on the credit card receivables is
managed as described in note 25.
Other receivables that are past due but not impaired totaled $10 million as at January 1, 2011 (2009 – $46 million).
Note 9. Inventories
For inventories recorded as at January 1, 2011, the Company recorded $17 million (2009 – $15 million) as an expense for the write-
down of inventories below cost to net realizable value. There were no reversals of inventories written down previously that are no longer
estimated to sell below cost.
Note 10. Fixed Assets
($ millions)
Assets under construction
Land
Buildings
Equipment and fixtures
Building and leasehold
improvements
Capital leases − buildings
and equipment
January 1, 2011
Accumulated
Depreciation
$ −
−
1,770
3,662
329
5,761
Cost
$ 1,172
1,761
5,947
5,268
606
14,754
Net Book
Value
$ 1,172
1,761
4,177
1,606
277
8,993
January 2, 2010
Accumulated
Depreciation
$ −
−
1,614
3,316
272
5,202
Cost
$ 685
1,840
5,871
4,744
559
13,699
247
117
130
179
117
Net Book
Value
$ 685
1,840
4,257
1,428
287
8,497
62
$ 15,001
$ 5,878
$ 9,123
$ 13,878
$ 5,319
$ 8,559
Included in land and buildings is $73 million (2009 – $58 million) of properties held for sale. During the year, fixed asset impairment charges of
$28 million (2009 − $27 million) and other related charges of $18 million (2009 – $19 million) were recognized in operating income. In addition,
in 2010 the Company recorded in operating income an asset impairment charge of $26 million related to the closure of a distribution centre in
Quebec (see note 3).
During 2009, the Company completed the purchase of a distribution centre for consideration of $140 million plus closing costs. The Company
assumed a mortgage of $96 million in connection with the purchase, of which $2 million (2009 – $2 million) is included in long term debt due
within one year (see note 15).
Note 11. Goodwill and Intangible Assets
In 2010 and 2009, the Company performed its annual goodwill and indefinite life intangible assets impairment test and determined that there
was no impairment to the carrying value of goodwill and indefinite life intangible assets.
2010 Annual Report – Financial Review 59
Notes to the Consolidated Financial Statements
During 2010, the Company acquired nil (2009 – 3) franchisee stores for cash consideration of nil (2009 – $6 million) resulting in goodwill
acquired of nil (2009 – $5 million).
The following table discloses the components of goodwill and intangible assets as at January 1, 2011 and January 2, 2010:
($ millions)
Goodwill, beginning of year
Acquisition of T&T (note 29)
Other
Goodwill, end of year
Indefinite life intangible assets - trademarks and brand names (note 29)
Other definite life intangible assets
Goodwill and Intangible Assets
Note 12. Other Assets
($ millions)
Accrued benefit plan asset (note 13)
Franchise investments and other receivables
Unrealized cross currency swaps receivable (note 23)
Other
Note 13. Employee Future Benefits
2010
$ 943
(2)
1
$ 942
51
36
2009
$ 807
131
5
$ 943
51
32
$ 1,029
$ 1,026
January 1, 2011
January 2, 2010
$ 355
203
172
57
$ 787
$ 319
225
142
64
$ 750
Pension and Other Benefit Plans The Company sponsors a number of pension plans, including registered funded defined benefit pension
plans, defined contribution pension plans and supplemental unfunded arrangements providing pension benefits in excess of statutory limits.
Certain obligations of the Company to these supplemental pension arrangements are secured by a standby letter of credit issued by a major
Canadian chartered bank. The Company’s defined benefit pension plans are predominantly non-contributory and these benefits are, in
general, based on career average earnings.
A national defined contribution pension plan for salaried employees was introduced by the Company during 2006. All eligible salaried
employees were given the option to join this new plan and convert their past accrued pension benefits or to remain in their existing defined
benefit pension plans. All new salaried employees participate only in the national defined contribution pension plan.
The Company also offers other employee benefit plans comprised of post-retirement and post-employment benefit plans which are
generally unfunded and non-contributory. Post retirement benefit plans include health care, life insurance and dental benefits during
retirement while post-employment benefit plans include long term disability benefits and the continuation of health and dental benefits while
on disability. Employees eligible for post-retirement benefits are those who retire at certain retirement ages having met certain service
requirements 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.
60 2010 Annual Report – Financial Review
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.
Funding of Pension and Other Benefit Plans The most recent actuarial valuations of the defined benefit pension plans for funding
purposes (“funding valuations”) were performed as at December 31, 2007 and December 31, 2009. The Company is required to file funding
valuations at least every three years; accordingly, the next funding valuations will be performed as at December 31, 2010 and 2012,
respectively.
Total cash paid or payable by the Company for 2010, consisting of contributions to registered funded defined benefit pension plans, defined
contribution pension plans, multi-employer pension plans and benefits paid directly to beneficiaries of the supplemental unfunded defined
benefit pension plans and other benefit plans, were $200 million (2009 – $183 million).
Pension and Other Benefit Plans Status Information on the Company’s defined benefit pension plans and other benefit plans, in
aggregate, was as follows:
($ millions)
Benefit Plan Assets
Fair value, beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Benefits paid
Fair value, end of year
Accrued Benefit Plan Obligations
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Actuarial loss (gain)
Contractual termination benefits(2)
Plan amendments
Balance, end of year
Deficit of Plan Assets Versus Plan
Obligations
Unamortized past service costs
Unamortized net actuarial loss
Net accrued benefit plan asset (liability)
Recorded in the consolidated balance
sheets as follows:
Other assets (note 12)
Other liabilities (note 16)
Net accrued benefit plan asset (liability)
2010
2009
Pension
Benefit Plans
Other
Benefit Plans(1)
Total
Pension
Benefit Plans
Other
Benefit Plans(1)
$ 1,120
89
103
2
(71)
$ 1,243
$ 1,242
45
71
(71)
155
3
−
$ 1,445
$ (202)
5
507
$ 310
$ 9
−
23
−
(29)
$ 3
$ 319
27
17
(29)
23
−
−
$ 357
$ (354)
(4)
88
$ (270)
$ 1,129
89
126
2
(100)
$ 1,246
$ 1,561
72
88
(100)
178
3
−
$ 1,802
$ (556)
1
595
$ 40
$ 1,056
51
104
2
(93)
$ 1,120
$ 1,161
43
70
(93)
57
−
4
$ 1,242
$ (122)
6
393
$ 277
$ 23
1
11
−
(26)
$ 9
$ 323
32
19
(26)
(29)
−
−
$ 319
$ (310)
(5)
65
$ (250)
Total
$ 1,079
52
115
2
(119)
$ 1,129
$ 1,484
75
89
(119)
28
−
4
$ 1,561
$ (432)
1
458
$ 27
$ 355
(45)
$ 310
$ −
(270)
$ (270)
$ 355
(315)
$ 40
$ 319
(42)
$ 277
$ −
(250)
$ (250)
$ 319
(292)
$ 27
(1) Other benefit plans include post-retirement and post-employment benefit plans.
(2) Contractual termination benefits resulted from distribution centre closures in 2010.
2010 Annual Report – Financial Review 61
Notes to the Consolidated Financial Statements
Funded Status of Plans in a Deficit 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:
($ millions)
Fair Value of Benefit Plan Assets
Accrued Benefit Plan Obligations
Deficit of Plan Assets versus Plan Obligations
2010
2009
Pension
Benefit Plans
Other
Benefit Plans(1)
Pension
Benefit Plans
Other
Benefit Plans(1)
$ 1,224
1,426
$ (202)
$ 3
357
$ (354)
$ 1,037
1,161
$ (124)
$ 9
319
$ (310)
(1) Other benefit plans include post-retirement and post-employment benefit plans.
Asset Allocations The benefit plan assets are held in trust and at September 30 consisted of the following asset categories:
Percentage of Plan Assets
2010
2009
Asset Category
Equity securities
Debt securities
Cash and cash equivalents
Total
Pension
Benefit Plans
Other
Benefit Plans(1)
Pension
Benefit Plans
Other
Benefit Plans(1)
58%
40%
2%
100%
−%
−%
100%
100%
55%
43%
2%
100%
−%
98%
2%
100%
(1) Other benefit plans include post-employment benefit plans.
Pension benefit plan assets include securities issued by the Company having a fair value of $4 million (2009 – $2 million) as at
September 30, 2010. Other benefit plan assets do not include any of the Company’s securities.
62 2010 Annual Report – Financial Review
Pension and Other Benefit Plans Cost The total net cost for the Company’s benefit plans and multi-employer pension plans was as
follows:
($ millions)
Current service cost, net of employee contributions
Interest cost on plan obligations
Actual return on plan assets
Actuarial loss (gain)
Contractual termination benefits(2)
Plan amendments
Defined benefit plan cost, before
adjustments to recognize the long term
nature of employee future benefit costs
Excess (shortfall) of actual return over
expected return on plan assets
(Shortfall) excess of amortized net actuarial loss
(gain) over actual actuarial loss (gain) on
accrued benefit obligation
Excess (shortfall) of amortized past service
costs over actual past service costs
Net defined benefit plan cost
Defined contribution plan cost
Multi-employer pension plan cost
Net benefit plan cost
2010
2009
Pension
Other
Pension
Other
Benefit Plans
Benefit Plans(1)
Benefit Plans
Benefit Plans(1)
$ 43
71
(89)
155
3
−
183
15
(129)
1
70
16
58
$ 27
17
−
23
−
−
67
−
(23)
(1)
43
−
−
$ 41
70
(51)
57
−
4
121
(23)
(36)
(4)
58
13
55
$ 32
19
(1)
(29)
−
−
21
−
32
−
53
−
−
$ 144
$ 43
$ 126
$ 53
(1) Other benefit plans include post-retirement and post-employment benefit plans.
(2) Contractual termination benefits resulted from distribution centre closures in 2010.
Plan Assumptions 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:
($ millions)
Accrued Benefit Plan Obligations
Discount rate
Rate of compensation increase
Net Defined Benefit Plan Cost
Discount rate
Expected long term rate of
return on plan assets
Rate of compensation increase
2010
2009
Pension
Benefit Plans
Other
Benefit Plans(1)
Pension
Benefit Plans
Other
Benefit Plans(1)
5.00%
3.5%
5.75%
6.75%
3.5%
4.8%
5.5%
5.0%
5.75%
3.5%
6.0%
7.25%
3.5%
5.5%
5.7%
5.0%
(1) Other benefit plans include post-retirement and post-employment benefit plans.
2010 Annual Report – Financial Review 63
Notes to the Consolidated Financial Statements
The growth rate of health care costs, primarily drug and other medical costs for other benefit plans, for the net benefit plan cost was
estimated at 9.0% (2009 – 9.5%) and is assumed to gradually decrease to 5.0% by 2015 (2009 – 5.0% by 2015), remaining at that level
thereafter.
Sensitivity of Key Assumptions The following table outlines the key assumptions for 2010 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.
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(3)
Impact of: 1% increase
1% decrease
Pension Benefits Plans
Other Benefit Plans(1)
Accrued Benefit
Benefit
Accrued Benefit
Benefit
Plan Obligations
Plan Cost(2) Plan Obligations
Plan Cost(2)
n/a
n/a
5.00%
$ (194)
$ 225
6.75%
$ (11)
$ 11
5.75%
$ (7)
$ 7
n/a
n/a
n/a
n/a
n/a
n/a
4.8%
$ (40)
$ 45
8.0%
$ 35
$ (31)
5.0%
−
−
5.5%
$ (2)
$ 2
9.0%
$ 4
$ (4)
n/a – not applicable
(1) Other benefit plans include post-retirement and post-employment benefit plans.
(2) Discount rate and expected growth rate of health care costs sensitivity is for current service and interest costs only.
(3) Gradually decreasing to 5.0% by 2015 (2009 – 5.0% by 2015) for the accrued benefit plan obligation and the benefit plan cost, and remaining at that level thereafter.
Note 14. Short Term Debt
The Company has an $800 million committed credit facility expiring in March of 2013 provided by a syndicate of third party lenders which
contains certain financial covenants (see note 20). This facility is a potential source of the Company’s short term funding requirements and
permits borrowings having up to a 180-day term. Interest is based on a floating rate, primarily the bankers’ acceptance rate and an applicable
margin based on the Company’s credit rating. As at January 1, 2011 and January 2, 2010, the Company had not drawn on the committed credit
facility.
64 2010 Annual Report – Financial Review
Note 15. Long Term Debt
($ millions)
Loblaw Companies Limited Notes
7.10%, due 2010
6.50%, due 2011
5.40%, due 2013
6.00%, due 2014
4.85%, due 2014
7.10%, due 2016
5.22%, due 2020
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
6.45%, due 2039
7.00%, due 2040
5.86%, due 2043
Private Placement Notes
6.48%, due 2013 (US $150 million)
6.86%, due 2015 (US $150 million)
Long Term Debt Secured by Mortgage
5.49%, due 2018 (see note 10)
Guaranteed investment certificates due 2011 – 2015 (1.55% - 3.15%)
VIE loans payable(1) (see note 26)
Capital lease obligations(1) (see note 17)
Other
Total long term debt
Less amount due within one year
January 1, 2011
January 2, 2010
$ –
350
200
100
350
300
350
100
200
175
151
(81)
200
200
200
200
200
300
200
150
55
150
150
93
18
202
132
1
$ 300
350
200
100
350
300
–
100
200
175
151
(67)
200
200
200
200
200
300
200
150
55
158
158
96
–
163
64
2
4,646
433
$ 4,213
4,505
343
$ 4,162
(1) Pursuant to the requirements of AcG 15, the consolidated balance sheet as at January 1, 2011 includes $221 million (2009 – $181 million) of loans payable and capital
lease obligations of VIEs consolidated by the Company, $39 million (2009 – $37 million) of which is due within one year.
During the second quarter of 2010, the Company issued $350 million principal amount of unsecured Medium Term Notes, Series 2-B
pursuant to its Medium Term Notes, Series 2 program. The Series 2-B notes pay a fixed rate of interest of 5.22% payable semi-annually
commencing on December 18, 2010 until maturity on June 18, 2020. During the second quarter of 2009, the Company issued $350
million principal amount of unsecured Medium Term Notes, Series 2-A which pay a fixed rate of interest of 4.85% payable semi-annually.
The Series 2-A and 2-B notes are subject to certain covenants and are unsecured obligations of the Company and rank equally with all
the unsecured indebtedness that has not been subordinated. The Series 2-A and 2-B notes may be redeemed at the option of the
Company, in whole at any time or in part from time to time, upon not less than 30 days and not more than 60 days notice to the holders
of the notes.
2010 Annual Report – Financial Review 65
Notes to the Consolidated Financial Statements
During the third quarter of 2010, PC Bank began accepting deposits under a new Guaranteed Investment Certificate (“GIC”) program. The
GICs, which are sold through independent brokers, are issued with fixed terms ranging from 12 to 60 months and are non-redeemable
prior to maturity. Individual balances up to $100,000 are Canada Deposit Insurance Corporation (CDIC) insured. As at January 1, 2011,
$18 million was recorded as long term debt on the consolidated balance sheet of which $5 million is due within one year.
In 2010, the $300 million 7.10% medium term note due May 11, 2010 matured and was repaid. In 2009, the $125 million 5.75% medium
term note due January 22, 2009 matured and was repaid. Subsequent to the end of 2010, the $350 million 6.50% medium term note due
January 19, 2011 matured and was repaid.
The schedule of repayment of long term debt, inclusive of VIE and other debt, based on maturity is as follows: 2011 − $433 million;
2012 − $77 million; 2013 − $419 million; 2014 – $482 million; 2015 - $182 million; thereafter − $3,053 million.
See note 24 for the fair value of long term debt.
Note 16. Other Liabilities
($ millions)
Accrued benefit plan liability (note 13)
Deferred vendor allowances
Unrealized interest rate swap liability (note 23)
Stock-based compensation (note 21)
Other
January 1, 2011
January 2, 2010
$ 315
40
24
51
104
$ 534
$ 292
48
31
23
103
$ 497
Included in Other above is the liability associated with the preferred shares issued by T&T (see note 29) and amounts related to various
insurance matters.
Note 17. Leases
As Lessee Future minimum lease payments relating to the Company’s operating leases are as follows:
Payments due by year
($ millions)
2011
2012
2013
2014
2015
Thereafter
Operating lease payments
Sub-lease income
$ 219
(34)
$ 199
(31)
$ 177
(28)
$ 156
(23)
$ 128
(15)
Net operating lease payments
$ 185
$ 168
$ 149
$ 133
$ 113
$ 629
(43)
$ 586
2010
Total
2009
Total
$ 1,508
(174)
$ 1,505
(204)
$ 1,334
$ 1,301
As Lessor Fixed assets on the consolidated balance sheets include cost of properties which are currently leased to third parties of $885
million (2009 − $755 million) and related accumulated depreciation of $230 million (2009 − $211 million). Rental income for the year
ended January 1, 2011 from these operating leases totaled $47 million (2009 − $47 million).
Capital Leases Capital lease obligations of $132 million (2009 – $64 million) are included in the consolidated balance sheet as at year
end (see note 15). The amount due within one year is $40 million (2009 – $8 million).
66 2010 Annual Report – Financial Review
Note 18. Preferred Shares ($, except where otherwise indicated)
First Preferred Shares (authorized – 1.0 million shares) There were no non-voting First Preferred Shares outstanding at year end.
Second Preferred Shares, Series A (authorized – 12.0 million shares) There are 9.0 million 5.95% non-voting Second Preferred
Shares, Series A outstanding which entitle the holder to a fixed cumulative preferred cash dividend of $1.4875 per share per annum which
will, if declared, be payable quarterly. The Second Preferred Shares, Series A are classified as Capital Securities on the Consolidated
Balance Sheets. During 2010, the Board declared dividends of $1.4875 (2009 – $1.4875) per second preferred share which are included
as a component of interest expense and other financing charges on the Consolidated Statement of Earnings for the year ended January 1,
2011 (see note 4). Subsequent to year end, the Board declared a dividend of $0.37 per Second Preferred Share,
Series A payable April 30, 2011.
Note 19. Common Share Capital (authorized – unlimited)
The changes in the common shares issued and outstanding during the year were as follows:
2010
2009
Number of
Common
Shares
276,188,258
4,389,872
−
280,578,130
277,875,697
Common
Share
Capital
($ millions)
$ 1,308
$ 167
$ −
$ 1,475
Number of
Common
Shares
274,173,564
3,713,094
(1,698,400)
276,188,258
275,028,991
Common
Share
Capital
($ millions)
$ 1,196
$ 120
$ (8)
$ 1,308
Issued and outstanding, beginning of year
Common shares issued
Purchased for cancellation
Issued and outstanding, end of year
Weighted average outstanding
During 2009, the Company purchased for cancellation 1,698,400 of its common shares for $56 million at a premium of $48 million which
has been charged to retained earnings.
Approximately 63% (2009 – 63%) of the common shares are owned by Weston; the remaining shares are widely held.
Common Share Dividends ($) The declaration and payment of dividends and the amount thereof are at the discretion of the Board
which takes into account the Company’s financial results, capital requirements, available cash flow and other factors the Board considers
relevant from time to time. Over the long term, the Company’s objective is for its dividend payment ratio to be in the range of 20% to 25%
of the prior year’s basic net earnings per common share adjusted as appropriate for items which are not regarded to be reflective of
ongoing operations giving consideration to the year-end cash position, future cash flow requirements and investment opportunities.
During 2010, the Board declared common share dividends of $0.84 (2009 – $0.84) per common share. Subsequent to year end, the
Board declared a quarterly dividend of $0.21 per common share payable April 1, 2011.
2010 Annual Report – Financial Review 67
Notes to the Consolidated Financial Statements
Dividend Reinvestment Plan During the second quarter of 2009, the Company commenced a Dividend Reinvestment Plan (“DRIP”) with
the objective of raising $300 million in common share equity. Under the terms of the DRIP, eligible holders of common shares may elect to
automatically reinvest their regular quarterly dividends in additional common shares of the Company without incurring any commissions,
service charges or brokerage fees. The common shares issued to shareholders under the DRIP will be, at the Company’s option, either
issued from treasury or purchased on the open market. The Board may from time to time approve a discount on the issuance of common
shares from treasury under the DRIP. During the year, the Company issued 4,389,872 (2009 – 3,713,094) common shares from treasury
under the DRIP at a three percent (3%) discount to market resulting in incremental common share equity of $167 million (2009 – $120
million). Subsequent to January 1, 2011, the Board approved discontinuing the Company’s DRIP after the dividend payment on April 1,
2011 when approximately $300 million in common share equity will be raised through the program as planned.
Normal Course Issuer Bids (“NCIB”) In the second quarter of 2010, the Company renewed its NCIB to purchase on the Toronto Stock
Exchange, or enter into equity derivatives to purchase, up to 13,865,435 of Company’s common shares, representing approximately 5% of
the common shares outstanding. In accordance with the rules and by-laws of the Toronto Stock Exchange, the Company may purchase its
shares at the then market price of such shares. During 2010, the Company did not purchase any common shares for cancellation (2009 –
1,698,400) at a price of nil (2009 – $33.14).
Note 20. Capital Management
The Company defines capital as net debt(1) capital securities and shareholders’ equity. The Company’s objectives when managing capital
are to:
ensure sufficient liquidity to support its financial obligations and execute its operating and strategic plans;
maintain financial capacity and access to capital to support future development of the business;
minimize the cost of its capital while taking into consideration current and future industry, market and economic risks and conditions;
utilize short term funding sources to manage its working capital requirements and long term funding sources to match the long term
nature of the fixed assets of the business.
The following ratios are used by the Company to monitor its capital:
Interest coverage
Net debt(1) to equity(1)
Net debt(1) to EBITDA(1)
As at January 1, 2011
4.3x
0.4:1
1.3:1
As at January 2, 2010
4.2x
0.4:1
1.6:1
The Company manages debt on a net basis as outlined below. The net debt(1) to equity(1) ratio is consistent with the Company’s internal
guideline of less than 1:1. This ratio is useful in assessing the amount of leverage employed. These ratios are also calculated from time-to-
time on an alternative basis by management to approximate the methodology of debt rating agencies and other market participants.
(1) See Non-GAAP Financial Measures on page 38 of the Company’s Management’s Discussion & Analysis.
68 2010 Annual Report – Financial Review
Net Debt(1) The following table details the net debt(1) calculation used in the net debt(1) to equity(1) and the net debt(1) to EBITDA(1) ratios:
($ millions)
Bank indebtedness
Long term debt due within one year
Long term debt
Certain other liabilities
Fair value of financial derivatives related to the above
Less: Cash and cash equivalents
Short term investments
Security deposits
Fair value of financial derivatives related to the above
Net debt(1)
As at January 1, 2011
As at January 2, 2010
$ 3
433
4,213
35
37
4,721
932
735
354
187
2,208
$ 2,513
$ 2
343
4,162
36
58
4,601
776
614
250
178
1,818
$ 2,783
The capital securities are excluded from the calculation of net debt(1). For purposes of calculating net debt, fair value of financial derivatives is
not credit value adjusted in accordance with EIC 173 (see note 2). As at January 1, 2011, the credit value adjustment was $4 million (January
2, 2010 – $4).
EBITDA(1) The following table reconciles EBITDA(1) used in the net debt(1) to EBITDA(1) ratio to Canadian generally accepted accounting
principles (“GAAP”) measures reported in the audited consolidated financial statements for the years ended:
($ millions)
Net earnings
Add impact of the following:
Minority interest
Income taxes
Interest expense and other financing charges
Operating income
Add impact of the following:
Depreciation and amortization
EBITDA(1)
2010
(52 weeks)
$ 681
18
297
273
1,269
655
2009
(52 weeks)
$ 656
11
269
269
1,205
589
$ 1,924
$ 1,794
(1) See Non-GAAP Financial Measures on page 38 of the Company’s Management’s Discussion & Analysis.
2010 Annual Report – Financial Review 69
Notes to the Consolidated Financial Statements
Equity(1)The following table reconciles equity used in the net debt(1) to equity(1) ratio to Canadian GAAP measures reported in the audited
consolidated financial statements as at the years ended.
Equity(1) is calculated as the sum of capital securities and shareholder’s equity as follows:
($ millions)
Capital securities
Shareholders' equity
Equity(1)
As at
January 1, 2011
221
6,880
7,101
As at
January 2, 2010
220
6,273
6,493
During the fourth quarter of 2010, the Company filed a Short Form Base Shelf Prospectus (“Prospectus”) allowing for the potential issue of
up to $1.0 billion of unsecured debentures and/or preferred shares subject to the availability of funding by capital markets. As at
January 1, 2011, no amounts have been drawn on the Prospectus.
Covenants and Regulatory Requirements The committed credit facility which the Company entered into during 2008, the USD $300
million fixed-rate private placement notes which the Company issued during 2008, the Company’s Medium Term Notes and certain of the
Company’s letters of credit contain certain financial and non-financial covenants. Certain agreements include maintaining an interest
coverage ratio as well as a leverage ratio, which the Company measures on a quarterly basis. These ratios are defined in the respective
agreements. As at January 1, 2011, the Company was in compliance with the covenants under these agreements.
The Company is also subject to externally imposed capital requirements from the Office of the Superintendent of Financial Institutions
(“OSFI”), as the primary regulator of PC Bank, and the Central Bank of Barbados, as the primary regulator of Glenhuron, both wholly owned
subsidiaries of the Company. PC Bank’s capital management objectives are to maintain a consistently strong capital position while
considering the Bank’s economic risks generated by its credit card loan portfolio and to meet all regulatory capital requirements as defined
by OSFI. PC Bank is subject to the Basel II regulatory capital management framework which includes a Tier 1 capital ratio of 7% and a total
capital ratio of 10%. PC Bank has met all applicable capital targets as at the end of 2010. Glenhuron is currently regulated under Basel I.
Under Basel I, Glenhuron’s assets are risk weighted and the minimum ratio of capital to risk weighted assets is 8.0%. Glenhuron’s ratio of
capital to risk weighted assets met the minimum requirements under Basel I as at January 1, 2011.
Note 21. Stock-Based Compensation ($, except where otherwise indicated)
The Company’s net stock-based compensation cost recognized in operating income related to its stock option and restricted share unit
plans, including Glenhuron’s equity forwards, was as follows:
($ millions)
Stock option plan expense
Restricted share unit plan expense
Equity forwards (gain) loss (note 23)
Net stock-based compensation cost
2010
$ 33
15
(11)
$ 37
2009
$ 6
10
6
$ 22
(1) See Non-GAAP Financial Measures on page 38 of the Company’s Management’s Discussion & Analysis.
70 2010 Annual Report – Financial Review
Stock Option Plan The Company maintains a stock option plan for certain employees. Under this plan, the Company may grant options
for up to 13.7 million common shares which is the Company’s guideline for the number of stock option grants up to a maximum of 5% of
outstanding common shares at any time. Stock options have up to a seven-year term, vest 20% or 33% 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 agreement, 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. Subsequent
to the end of the year, the right to receive a cash payment in lieu of exercising an option for shares was removed.
In 2010, the share appreciation value of $6 million (2009 – $1 million) was paid on the exercise of 603,787 (2009 – 127,513) stock
options. In 2010 and 2009, the Company did not issue common shares or receive cash consideration on the exercise of stock options. At
year end, a total of 9,320,865 (2009 – 9,207,816) stock options were outstanding, and represented approximately 3.3% (2009 – 3.3%) of
the Company’s issued and outstanding common shares, which was within the Company’s guideline of 5%.
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
Outstanding options, end of year
Options exercisable, end of year
2010
2009
Options
Weighted
Options
Weighted
(number of
Average Exercise
(number of
Average Exercise
shares)
Price/Share
shares)
Price/Share
9,207,816
2,571,203
(603,787)
(1,854,367)
9,320,865
2,938,014
$ 40.14
$ 36.52
$ 29.68
$ 46.48
$ 38.56
$ 46.33
7,892,660
2,787,970
(127,513)
(1,345,301)
9,207,816
2,940,474
$ 43.29
$ 31.13
$ 29.00
$ 40.99
$ 40.14
$ 50.15
Range of Exercise Prices
$ 28.95 − $ 31.77
$ 31.78 − $ 46.72
$ 46.73 − $ 69.75
2010 Outstanding Options
2010 Exercisable Options
Number of
Average Remaining
Weighted
Weighted
Options
Outstanding
3,878,261
2,705,513
2,737,091
9,320,865
Contractual
Life (years)
Average Exercise
Price/Share
5
6
3
$ 29.97
$ 36.40
$ 52.88
Number of
Exercisable
Options
972,010
55,194
1,910,810
2,938,014
Weighted
Average Exercise
Price/Share
$ 29.56
$ 36.26
$ 55.16
Restricted Share Unit Plan The Company maintains a RSU plan for certain senior employees. The RSUs entitle employees 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 last three trading days preceding the end of the performance
period for the RSUs multiplied by the number of RSUs held by the employee.
2010 Annual Report – Financial Review 71
Notes to the Consolidated Financial Statements
The RSU activity during the year is as follows:
Number of Awards
RSUs, beginning of year
Granted
Cancelled
Cash settled
RSUs, end of year
RSUs Cash Settled ($ millions)
2010
973,351
381,712
(111,328)
(198,389)
1,045,346
$ 8
2009
829,399
453,680
(104,785)
(204,943)
973,351
$ 7
Employee Share Ownership Plan 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%
(2009 – 25%) 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 $6 million (2009 – $6 million) related to this plan
was recognized in operating income.
Director Deferred Share Unit Plan Members of the Board, who are not management of the Company, 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, 147,358 (2009 – 110,303) DSUs were outstanding. The year-over-year change in the deferred share unit compensation liability
was $2 million (2009 – $1 million) and was recognized in operating income.
Executive Deferred Share Unit Plan Under this plan, executives may elect to defer up to 100% of the STIP earned by the executive in
any year into the EDSU Plan, subject to an overall cap of three times the executive’s base salary. All EDSUs held by an executive will be
paid out in cash by December 15 of the year following the year in which the executive’s employment ceases for any reason. An election
to participate in the plan in any year must be made before the beginning of the year and is irrevocable. The number of EDSUs granted in
respect of any year will be determined by dividing the STIP bonus that is subject to the EDSU plan election by the value of the
Company’s common shares on the date the STIP bonus would otherwise be payable. For this purpose, and for purposes of determining
the value of an EDSU upon conversion of the EDSUs into cash, the value of the EDSUs will be calculated by using the weighted average
of the trading prices of the Company’s common shares on the Toronto Stock Exchange for the five trading days prior to the valuation
date. As at the end of 2010 and 2009, there were 29,143 and nil EDSUs outstanding, respectively. A compensation cost of $1 million
(2009 – nil) related to this plan was recognized in operating income.
72 2010 Annual Report – Financial Review
Note 22. Accumulated Other Comprehensive Income
The following table provides further detail regarding the composition of accumulated other comprehensive income for the years ended
January 1, 2011 and January 2, 2010:
($ millions)
Balance, beginning of year
Cumulative impact of implementing new accounting
standards [net of income taxes recovered of nil
(2009 − $1 million)] (note 2)
Net unrealized loss on available-for-sale financial
assets [net of income taxes of nil
(2009 − $1 million)]
Reclassification of loss on available-for-sale financial
assets [net of income taxes recovered of nil (2009
− $3 million)]
Net gain on derivatives designated as cash flow
hedges [net of income taxes recovered of $1
million (2009 –$9 million)]
Reclassification of (gain) loss on derivatives
designated as cash flow hedges [net of income
taxes recovered of $3 million (2009 –$6 million)]
2010
Available-
for-sale
Assets
Cash Flow
Hedges
$ 22
$ (5)
2009
Available-
for-sale
Assets
Cash Flow
Hedges
$ 14
$ 16
Total
$ 17
Total
$ 30
−
−
−
1
(9)
−
−
(2)
−
(2)
(12)
(12)
13
−
−
13
1
(9)
−
−
8
2
(23)
(23)
2
−
−
2
8
2
Balance, end of year
$ 14
$ (4)
$ 10
$ 22
$ (5)
$ 17
An estimated gain of $3 million (2009 –$8 million) recorded in accumulated other comprehensive income related to interest rate swaps as at
January 1, 2011, is expected to be reclassified to net earnings during the next 12 months. A gain of $4 million (2009 − $5 million)
recorded in accumulated other comprehensive income on cross currency swaps will be reclassified to net earnings over the next 12
months but will be partially offset by the losses reclassified from accumulated other comprehensive income to net earnings on available-
for-sale assets. Remaining amounts on the cross currency swaps will be reclassified to net earnings over periods up to three years.
Note 23. Financial Derivative Instruments
A summary of the Company’s outstanding financial derivative instruments is as follows:
($ millions)
Cross currency swap receivable
Cross currency swap payable
Interest rate swaps receivable
Interest rate swaps payable
Equity forwards
Foreign Exchange Forwards
Electricity forward contract
2011
$ 56
$ −
$ 200
$ −
$ (84)
$ (66)
$ (8)
Notional Amounts Maturing
2012
$ 166
$ −
$ −
$ −
$ −
$ −
$ −
2013
$ 75
$ (148)
$ −
$ (150)
$ −
$ −
$ −
2014
$ 145
$ −
$ −
$ −
$ −
$ −
$ −
2015
$ 236
$ (148)
$ −
$ −
$ −
$ −
$ −
Thereafter
$ 528
$ −
$ −
$ −
$ −
$ −
$ −
2010
Total
$ 1,206
$ (296)
$ 200
$ (150)
$ (84)
$ (66)
$ (8)
2009
Total
$ 1,149
$ (296)
$ 250
$ (150)
$ (99)
$ (5)
$ (17)
2010 Annual Report – Financial Review 73
Notes to the Consolidated Financial Statements
Notional amounts do not represent assets or liabilities and are therefore not recorded on the consolidated balance sheet. The notional
amounts are used in order to calculate the payments to be exchanged under the contracts.
Cross Currency Swaps Glenhuron entered into cross currency swaps (see note 25) to exchange United States dollars for $1,206 million
(2009 – $1,149 million) Canadian dollars, which mature by 2017. Cross currency swaps totalling $200 million (2009 − $250 million) are
designated in a cash flow hedge and the remaining undesignated $1,006 million (2009 − $899 million) are classified as held-for-trading
financial assets. Currency adjustments receivable or payable arising from these swaps are settled in cash on maturity. As at January 1,
2011, a cumulative unrealized foreign currency exchange rate receivable of $161 million (2009 − $123 million) was recorded in other
assets (see note 12), and a receivable of $15 million (2009 − $40 million) was recorded in prepaid expenses and other assets.
In 2008, the Company entered into fixed cross currency swaps to exchange $296 million Canadian dollars for $300 million USD, which
mature by 2015. A portion of these cross currency swaps are designated in a cash flow hedge to manage the foreign exchange related to
a part of the Company’s fixed rate USD private placement notes (see note 15). As at January 1, 2011, a cumulative unrealized foreign
currency exchange rate receivable of $11 million (2009 − $19 million) was recorded in other assets (see note 12).
Interest Rate Swaps Glenhuron maintains interest rate swaps (see note 25) that convert a notional $200 million (2009 – $250 million) of
floating rate available-for-sale cash and cash equivalents, short term investments and security deposits to average fixed rate investments
at 4.74% (2009 – 5.11%), which are part of a hedging relationship that matures in 2011. As at January 1, 2011, the fair value of these
interest rate swaps of $7 million (2009 − $15 million) was recorded in other assets and the unrealized fair value gain of $7 million (2009 −
$15 million) is deferred, net of tax, in accumulated other comprehensive income. When realized, these unrealized gains are reclassified to
net earnings.
The Company also maintains a notional $150 million (2009 – $150 million) in interest rate swaps, on which it pays a fixed rate of 8.38%
that are not part of a hedging relationship. At January 1, 2011, the fair value of these interest rate swaps of $24 million (2009 − $31
million) was recorded in other liabilities (see note 16).
Equity Forwards ($, except where otherwise indicated) At year end 2010, Glenhuron had cumulative equity forwards (see note 21) to
buy 1.5 million (2009 – 1.5 million) of the Company’s common shares at a cumulative average forward price of $56.26 (2009 – $66.25)
including $0.04 (2009 – $10.03) per common share of interest expense and dividends that has been recognized in net earnings and will
be paid at each reset date. The equity forwards provide for settlement of net amounts owing between Glenhuron and its counterparty in
cash or common shares. The equity forwards change in value as the market price of Loblaw’s common shares changes (see note 25).
The equity forwards provide a partial offset to fluctuations in the Company’s stock-based compensation cost, including RSU plan expense
which is effective when the market price of the Company’s common shares exceed the exercise price of the related employee stock
options. When the market price of the common shares is lower than the exercise price of the related employee stock options, only RSUs
will provide a partial offset to these equity forwards. The amount of net stock-based compensation cost recorded in operating income is
mainly dependent upon the number of unexercised stock options and RSUs, their vesting schedules relative to the number of underlying
common shares on the equity forwards, the market price and fluctuations in the market price of the underlying common shares.
Cumulative interest, dividends and the unrealized market loss of $24 million (2009 – $48 million) is included in accounts payable and
accrued liabilities relating to these equity forwards. During 2010, Glenhuron paid $16 million to its counterparty to settle the interest and
dividends accrued on outstanding equity forwards. During 2009, Glenhuron paid $55 million to terminate equity forwards representing 3.3
million shares, which led to the extinguishment of a corresponding portion of the associated liability.
Foreign Exchange Forward During 2010, the Company entered into forward contracts to hedge a portion of its United States dollar fixed
asset and inventory purchases. As at January 1, 2011, the fair value of the foreign exchange forward contracts of $1 million (2009 − $nil) was
recorded in accounts payable and accrued liabilities. During 2010, a $2 million loss (2009 − $nil) was recorded in operating income.
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 at approximately 2006 rates. This electricity forward contract has an initial term of five years
and expires in December 2011. As at January 1, 2011, the fair value of this forward contract of $1 million (2009 − $3 million) was
recorded in other liabilities. During 2010, a gain in value of $2 million (2009 – loss of $10 million) was recorded in operating income.
74 2010 Annual Report – Financial Review
Fuel Exchange Traded Futures and Options The Company from time to time enters into exchange traded futures contracts and
options contracts to minimize cost volatility on fuel prices. Futures contracts establish a fixed cost on a portion of the Company’s fuel
exposure and option contracts typically provide protection against a range of cost outcomes. As at January 1, 2011, the Company did not
hold any outstanding fuel exchange traded future or option contracts (2009 – nil). During 2010, a gain in value of $1 million (2009 –$4
million) was recorded in operating income.
Note 24. Fair Values of Financial Instruments
The fair value of derivative instruments is the estimated amount that the Company would receive or pay to terminate the instrument at the
reporting date. The fair values have been determined by reference to prices available from the markets on which the instruments trade and
prices provided by counterparties. The fair values of all derivative instruments are recorded in other assets or other liabilities on the
consolidated balance sheets.
The following tables provide a comparison of carrying and fair values for each classification of financial instruments as at January 1,
2011 and January 2, 2010, and an analysis of financial instruments carried at fair value, by valuation method. The different levels have
been defined as follows:
Fair Value Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
Fair Value Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(i.e., as prices) or indirectly (i.e., derived from prices)
Fair Value Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs)
The following describes the fair value determinations of financial instruments:
Cash and Cash Equivalents, Short Term Investments and Security Deposits Fair value is primarily based on interest rates for
similar instruments. Due to the short term maturity of these instruments, the carrying amount approximates fair value.
Accounts Receivable, Accounts Payable and Accrued Liabilities and Short Term Borrowings The carrying amount approximates
fair value due to the short term maturity of these instruments.
Long-Term Debt and Capital Securities Fair value is based on the Company’s current incremental borrowing rate for similar types of
borrowing arrangements or, where applicable, quoted market prices.
Derivative Financial Instruments The fair values for the derivative assets and liabilities are estimated using industry standard valuation
models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based
observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies.
2010 Annual Report – Financial Review 75
Notes to the Consolidated Financial Statements
As at January 1, 2011
Financial
derivatives
designated in a
cash flow hedge
Financial
instruments
required to
be classified
as held-for-
trading
Financial
instruments
designated as
held-for-trading
Available-
for-sale
instruments
measured at
fair value
Loans
and
receivables
Other
financial
liabilities
Total
carrying
amount
Total fair
value
$ −
−
64
$ 64
$ −
64
−
$ 64
$ −
−
133
$ 133
$ −
130
3
$ 133
$ 1,874
21
−
$ 1,895
$ −
1,874
21
$ 1,895
$ 147
−
−
$ −
703
−
$ −
−
−
$ 2,021
724
197
$ 147
$ 703
$ −
$ 2,942
$ −
147
−
$ 147
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
$ 2,021
724
197
$ 2,942
$ −
2,215
24
$ 2,239
$ −
$ −
$ −
$ −
$ −
$ 3
$ 3
$ 3
−
−
−
−
−
24
−
−
−
26
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
3,392
4,646
35
221
7
3,416
4,646
35
221
33
$ −
$ −
−
−
$ −
$ 50
$ −
50
−
$ 50
$ −
$ −
−
−
$ −
$ −
$ −
$ 8,304
$ 8,354
$ −
−
−
$ −
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
3,416
5,142
35
252
33
$ 8,881
$ −
50
−
$ 50
($ millions)
Cash and cash
equivalents, short term
investments and
security deposits
Accounts receivable
Derivatives
Total financial
assets
Fair value level 1
Fair value level 2
Fair value level 3
Fair Value Total
Short term
borrowings
Accounts payable and
accrued liabilities
Long term debt
Certain other liabilities
Capital Securities
Derivatives (see note 23)
Total financial
liabilities
Fair value level 1
Fair value level 2
Fair value level 3
Fair Value Total
The equity investment in franchises is measured at a cost of $85 because quoted market prices in an active market are not available.
These investments are classified as available-for-sale.
76 2010 Annual Report – Financial Review
As at January 2, 2010
Financial
derivatives
designated in a
cash flow hedge
Financial
instruments
required to be
classified as
held-for-
trading
Financial
instruments
designated as
held-for-trading
Available-
for-sale
instruments
measured at
fair value
Loans
and
receivables
Other
financial
liabilities
Total
carrying
amount
Total fair
value
$ −
−
83
$ 83
$ −
83
−
$ 83
$ −
−
116
$ 116
$ −
115
1
$ 116
$ 1,448
13
−
$ 1,461
$ −
1,448
13
$ 1,461
$ 192
−
−
$ −
761
−
$ −
−
−
$ 1,640
774
199
$ 192
$ 761
$ −
2,613
$ −
192
−
$ 192
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
$ 1,640
774
199
$ 2,613
$ −
1,838
14
$ 1,852
$ −
$ −
$ −
$ −
$ −
$ 2
$ 2
$ 2
−
−
−
−
−
48
−
−
−
34
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
3,231
4,505
36
220
7
3,279
4,505
36
220
41
$ −
$ −
−
−
$ −
$ 82
$ −
82
−
$ 82
$ −
$ −
−
−
$ −
$ −
$ −
$ 8,001
$ 8,083
$ −
−
−
$ −
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
3,279
4,801
36
244
41
$ 8,403
$ −
82
−
$ 82
($ millions)
Cash and cash
equivalents, short term
investments and security
deposits
Accounts receivable
Derivatives
Total financial
assets
Fair value level 1
Fair value level 2
Fair value level 3
Fair Value Total
Short term
borrowings
Accounts payable and
accrued liabilities
Long term debt
Certain other liabilities
Capital Securities
Derivatives (see note 23)
Total financial
liabilities
Fair value level 1
Fair value level 2
Fair value level 3
Fair Value Total
The equity investment in franchises is measured at a cost of $75 million because quoted market prices in an active market are not available.
These investments are classified as available-for-sale.
The financial instruments classified as level 3 are as follows:
The retained interest from the securitization of PC Bank receivables, for which a reconciliation and sensitivity analysis are included in
note 8.
The fair value of the embedded foreign currency derivative was $3 million included in other assets (2009 - $1 million), of which the fair
value gain of $2 million (2009 –$4 million) was recognized in operating income. A 100 basis point increase (decrease) in foreign
currency exchange rates would result in a $1 gain (loss) in fair value.
There were no significant transfers between the fair value hierarchy levels during the year ended January 1, 2011.
During the year ended January 1, 2011, the net unrealized and realized loss on held-for-trading financial assets designated as held-for-
trading, recognized in net earnings before income taxes and minority interest was $32 million (2009 –$122 million). In addition, the net
unrealized and realized gain on held-for-trading financial assets and financial liabilities, including non-financial derivatives, required to be
classified as held-for-trading, recognized in net earnings before income taxes and minority interest was $53 million (2009 –$88 million).
2010 Annual Report – Financial Review 77
Notes to the Consolidated Financial Statements
Note 25. Financial Instrument Risk Management
The Company is exposed to the following risks as a result of holding and issuing financial instruments: liquidity risk, credit risk and market
risk. The following is a description of those risks and how the exposures are managed:
Liquidity Risk Liquidity risk is the risk that the Company cannot meet a demand for cash or fund its obligations as they come due. Liquidity
risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price.
Should the Company’s and PC Bank’s financial performance and condition deteriorate or downgrades in the Company’s credit ratings
occur, the Company’s and PC Bank’s ability to obtain funding from external sources may be restricted. In addition, credit and capital
markets are subject to inherent risks that may negatively affect the Company’s access and ability to fund its derivative and non-derivative
financial liabilities. The Company mitigates these risks by maintaining appropriate levels of cash and cash equivalents and short term
investments, committed line of credit, actively monitoring market conditions, and diversifying its sources of funding and maturity profile of
its debt and capital obligations.
Maturity Analysis The following are the undiscounted contractual maturities of significant financial liabilities as at January 1, 2011:
Derivative Financial Liabilities
Interest rate swaps payable(1)
Equity forward contracts(2)
Foreign Exchange forward
contracts
Non-Derivative Financial
Liabilities
Long term debt including fixed
interest payments(3)
Other Liabilities(4)
2011
2012
2013
2014
2015
Thereafter(5)
Total
$ 13
84
$ 13
−
$ 5
−
$ −
−
$ −
−
$ −
−
$ 31
84
66
−
−
−
−
−
66
685
−
315
−
655
−
688
35
366
−
6,136
−
8,845
35
$ 848
$ 328
$ 660
$ 723
$ 366
$ 6,136
$ 9,061
(1) Based on the pay fixed interest which will be partially offset by the floating interest received.
(2) Based on the average cost base as at January 1, 2011.
(3) Based on the maturing face values and annual interest for each instrument as well as annual payment obligations for VIEs, mortgages, and capital leases.
(4) Contractual amount of obligation related to certain other liabilities.
(5) Capital securities and their related dividends have been excluded as the Company is not contractually obligated to pay these amounts.
The Company’s bank indebtedness, short term debt, accounts payable and accrued liabilities are short term in nature, which are due
within the next 12 months, and thus not included above.
Credit Risk The Company is exposed to credit risk resulting from the possibility that counterparties may default on their financial
obligations. Exposure to credit risk relates to derivative instruments, cash and cash equivalents, short term investments, security
deposits, pension assets held in the Company’s defined benefit plans, PC Bank’s credit card receivables and other receivables from
vendors, independent franchisees, associated stores and independent accounts.
The Company may be exposed to losses if a counterparty to financial or non-financial derivative agreements fails to fulfill its obligations.
Potential counterparty risk and losses are limited to the net amounts recoverable under such derivative agreements with any specific
counterparty. These risks are further reduced by entering into agreements with counterparties that have at minimum long term “A” credit
rating from a recognized credit rating agency and by placing risk adjusted limits on exposure to any single counterparty for financial
derivative agreements. Internal policies, controls and reporting processes are in place and require ongoing assessment and corrective
action, if necessary, with respect to derivative transactions.
78 2010 Annual Report – Financial Review
Credit risk associated with cash equivalents, short term investments and security deposits results from the possibility that a counterparty
may default on the repayment of a security. Policies and guidelines that require issuers of permissible investments to have a minimum
long term “A” credit rating from a recognized credit rating agency and that specify minimum and maximum exposures to specific
industries, issuers and types of investment instruments mitigate credit risk. These investments are purchased and held directly in
custody accounts, and have limited exposure to third party money market portfolios and funds.
Credit risk from PC Bank’s credit card receivables and receivables from independent franchisees, associated stores and independent
accounts 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, actively monitoring the credit card portfolio, and reviewing techniques
and technology that can improve the effectiveness of the collection process. In addition, these receivables are dispersed among a large,
diversified group of credit card customers. Accounts receivable from independent franchisees, associated stores 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.
The Company’s maximum exposure to credit risk as it relates to derivative instruments is approximated by the positive fair market value
of the derivatives on the balance sheet (see note 24).
Refer to note 8 for additional information on the credit quality performance of credit card receivables and other receivables from
independent franchisees, associated stores and independent accounts.
Market Risk Market risk is the loss that may arise from changes in factors such as interest rates, foreign currency exchange rates,
commodity prices, common share price and the impact these factors may have on other counterparties.
Interest Rate Risk Interest rate risk arises from the issuance of short term debt by the Company and equity forwards by Glenhuron, net of
cash and cash equivalents, short term investments and security deposits. The Company is exposed to changes in short term interest
rate volatility which are offset partly by Glenhuron’s and the Company’s interest rate swaps. The Company estimates that a 100 basis
point increase (decrease) in short term interest rates, with all other variables held constant, could result in a decrease (increase) of $21
million to interest expense.
Foreign Currency Exchange Rate Risk The Company is exposed to foreign currency exchange rate variability, primarily on United States
dollar denominated cash and cash equivalents, short term investments, security deposits held by Glenhuron, foreign denominated and
foreign currency based purchases in accounts payable and accrued liabilities, and USD private placement notes included in long term
debt. The Company and Glenhuron have cross currency swaps and foreign exchange forward contracts that partially offset their
respective exposure to fluctuations in foreign currency exchange rates.
As at January 1, 2011, USD $1,033 million (2009 – USD $945 million) was included in cash and cash equivalents, short term
investments and security deposits (see note 7). The Company designates a portion of the cross currency swaps in a cash flow hedge of
the exposure to fluctuations in the foreign currency exchange rate on a portion of United States dollar denominated cash equivalents,
short term investments and security deposits. The remaining undesignated cross currency swaps partially offset fluctuations in the
foreign currency exchange rate on the remaining United States dollar denominated cash and cash equivalents, short term investments,
security deposits and the USD private placement notes.
During the year, the unrealized foreign currency exchange loss of $12 million (2009 – $25 million), related to the cash and cash
equivalents, short term investments and security deposits classified as available-for-sale is recognized in other comprehensive income
and was partially offset by the unrealized foreign currency exchange rate gain of $12 million (2009 –$28 million) before income taxes
relating to the designated cross currency swaps also deferred in other comprehensive income. The unrealized foreign currency
exchange loss of $40 million (2009 –$121 million) on the designated held-for-trading cash and cash equivalents, short term investments
and security deposits is partially offset in operating income by the unrealized foreign currency exchange rate gain of $40 million (2009 –
$117 million) relating to the cross currency swaps which are not designated in a cash flow hedge.
2010 Annual Report – Financial Review 79
Notes to the Consolidated Financial Statements
During the year, the Company realized a foreign currency exchange loss of $39 million (2009 – $14 million) relating to cross currency
swaps that matured or were terminated.
During 2010, the Company recognized in operating income an unrealized foreign currency exchange gain of $16 million (2009 – $45 million)
related to the USD $300 million fixed-rate private placement notes. This was partially offset by both the effective portion of the designated
cross currency swaps that was reclassified from other comprehensive income to operating income and the fair value gain of the cross
currency swaps that are not designated in a hedging relationship. At the inception of the cash flow hedge, a nominal amount of
ineffectiveness was recognized in operating income.
Commodity Price Risk The Company is exposed to increases in the prices of commodities in operating its stores and distribution centres,
as well as the indirect link of commodities to its consumer products. To manage a portion of this exposure, the Company uses purchase
commitments for a portion of its needs for certain consumer products that may be commodities based and the Company expects to take
delivery of these consumer products in the normal course of business. A non-financial derivative contract with a notional value of $8 million
(2009 – $17 million) is used to hedge electricity price risk for a portion of the Company’s expected electricity consumption in Alberta. The
Company also enters into exchange traded futures contracts and option contracts to minimize cost volatility on fuel prices. The Company
estimates that a 10% increase (decrease) in relevant commodity prices, with all other variables held constant, would result in a gain (loss)
of $1 million on earnings before income taxes and minority interest.
Common Share Price Risk The Company issues stock-based compensation to its employees in the form of stock options and RSU’s
based on its common shares. Consequently, operating income is negatively impacted when the common share price increases and
positively when the share price declines. Glenhuron’s equity forwards provide a partial offset to fluctuations in stock-based compensation
cost. The equity forwards allow for settlement in cash, common shares or net settlement. These forwards change in value as the market
price of the Company’s common shares changes and provide a partial offset to fluctuations in the Company’s stock-based compensation
cost, including RSU plan expense. The partial offset between the Company’s stock-based compensation costs, including RSU plan
expense, and the equity forwards is more effective when the market price of the Company’s common shares exceeds the exercise price
of the employee stock options. When the market price of the common shares is lower than the exercise price of the employee stock
options, only RSUs will provide a partial offset to these equity forwards. The amount of net stock-based compensation cost recorded in
operating income is mainly dependent upon the number of unexercised stock options and RSUs, their vesting schedules relative to the
number of underlying common shares on the equity forwards, and the level of fluctuations in the market price of the underlying common
shares. The impact on the equity forwards of a one dollar increase (decrease) of the market value in the Company’s underlying common
shares, with all other variables held constant, would result in a gain (loss) of $1 million in earnings before income taxes and minority
interest.
Note 26. 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, with the exception of the items disclosed in legal proceedings below.
At year end, the Company has committed approximately $95 million (2009 – $76 million) with respect to capital investment projects such
as the construction, expansion and renovation of buildings and the purchase of real property.
80 2010 Annual Report – Financial Review
The Company establishes letters of credit used in connection with certain obligations mainly related to real estate transactions, benefit
programs, purchase orders and performance guarantees. The aggregate gross potential liability related to these letters of credit is
approximately $325 million (2009 – $277 million). Additionally, the Company has a guarantee on behalf of PC Bank in the amount of US
$180 million. Other letters of credit related to the financing program for the Company’s independent 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 AcG 14, “Disclosure
of Guarantees”.
Independent Funding Trusts Certain independent franchisees of the Company obtain financing through a structure involving independent
funding trusts, which were created to provide loans to the independent franchisees to facilitate their purchase of inventory and fixed assets,
consisting mainly of fixtures and equipment. These trusts are administered by a major Canadian chartered bank.
The gross principal amount of loans issued to the Company’s independent franchisees by the independent funding trusts as at January 1,
2011 was $405 million (2009 − $390 million) including $202 million (2009 − $163 million) of loans payable by VIEs consolidated by the
Company. The Company has agreed to provide credit enhancement in the form of a standby letter of credit for the benefit of the
independent funding trust representing not less than 15% (2009 − 15%) of the principal amount of the loans outstanding. This standby
letter of credit has never been drawn upon. This credit enhancement allows the independent funding trust to provide financing to the
Company’s independent franchisees. As well, each independent franchisee provides security to the independent funding trust for its
obligations by way of a general security agreement. In the event that an independent franchisee defaults on its loan and the Company has
not, within a specified time period, assumed the loan, or the default is not otherwise remedied, the independent funding trust would assign
the loan to the Company and draw upon this standby letter of credit. The Company has agreed to reimburse the issuing bank for any
amount drawn on the standby letter of credit.
During the second quarter of 2010, the $475 million, 364-day revolving committed credit facility that is the source of funding to the
independent trusts was renewed. This facility has a further 12 month repayment term upon maturity. The financing structure has been
reviewed and the Company determined there were no additional VIEs to consolidate as a result of this financing. In accordance with
Canadian GAAP, the financial statements of the independent funding trust are not consolidated with those of the Company.
Letters of Credit Letters of credit for the benefit of independent trusts with respect to credit card receivables securitization programs of PC
Bank have been issued by major Canadian chartered banks. These standby letters 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
banks for any amount drawn on the standby letters of credit. The aggregate gross potential liability under these arrangements, which
represents 9% (2009 – 9%) on a portion of the securitized credit card receivables amount, is approximately $48 million (2009 – $116 million)
(see note 8).
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 in aggregate $26 million (2009 – $41 million).
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.
2010 Annual Report – Financial Review 81
Notes to the Consolidated Financial Statements
Legal Proceedings The Company is the subject of various legal proceedings and claims that arise in the ordinary course of business.
The outcome of all of these proceedings and claims is uncertain. However, based on information currently available, these proceedings
and claims, individually and in the aggregate, are not expected to have a material impact on the Company.
Note 27. Variable Interest Entities
Pursuant to AcG 15, the Company consolidates all VIEs for which it is the primary beneficiary. AcG 15 defines a VIE as an entity that either
does not have sufficient equity at risk to finance its activities without subordinated financial support or where the holders of the equity at risk
lack the characteristics of a controlling financial interest. AcG 15 requires the primary beneficiary to consolidate VIEs and considers an entity
to be the primary beneficiary of a VIE if it holds variable interests that expose it to a majority of the VIEs’ expected losses or that entitle it to
receive a majority of the VIEs’ expected residual returns or both. The Company has identified the following significant VIEs:
Franchisees The Company enters into various forms of franchise agreements that generally require the 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 licenses owned by the Company. 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 fixtures and equipment (see note 26). These trusts are administered by a major Canadian
chartered bank. Under the terms of certain franchise agreements, the Company may also lease equipment to franchisees. 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 franchisees and provides for estimated losses or
write-downs on its accounts and notes receivable or investments when appropriate.
As at January 1, 2011, 214 (2009 – 166) of the Company’s franchised stores met the criteria for a VIE and were consolidated pursuant to
AcG 15.
Warehouse and Distribution Agreements The Company has warehouse and distribution agreements with third-party entities to provide
to the Company distribution and warehousing services from dedicated facilities. The Company has no equity interest in these third-party
entities; however, the terms of the agreement with the third-party entities are such that the Company has determined that the third-party
entities meet the criteria for a VIE that requires consolidation by the Company. The impact of the consolidation of the warehouse and
distribution entities was not material.
Accordingly, the Company has included the results of these independent franchisees and these third-party entities that provide
distribution and warehousing services in its consolidated financial statements. 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 Trusts The Company has also identified that it holds variable interests, by way of standby letters of credit in independent
trusts which are 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 trusts in exchange for cash. Although these independent trusts have been identified as VIEs, it was
determined that the Company is not the primary beneficiary and therefore these VIEs are not subject to consolidation by the Company.
The Company’s maximum exposure to loss as a result of its involvement with these independent trusts is disclosed in note 26.
Note 28. Related Party Transactions
The Company’s majority shareholder, Weston and its affiliates other than the Company are related parties. The Company’s policy is 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%
(2009 – 3%) of the cost of merchandise inventories sold.
82 2010 Annual Report – Financial Review
Cost Sharing Agreements Weston 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 Weston concerning these costs, the Company has agreed to be
responsible to Weston for its proportionate share of the costs incurred on its behalf. Payments by the Company pursuant to these cost
sharing agreements in 2010 were approximately $9 million (2009 – $10 million).
Real Estate Matters The Company leases office space from an affiliate of Weston for approximately $3 million (2009 – $3 million).
Borrowings/Lending The Company, from time to time, may borrow funds from or may lend funds to Weston on a short term basis at
short term market borrowing rates. There were no amounts outstanding as at January 1, 2011 and January 2, 2010.
Income Tax Matters From time to time, the Company, Weston and its affiliates may enter into agreements to make elections that are
permitted or required under applicable income tax legislation with respect to affiliated corporations. These elections and accompanying
agreements did not have a material impact on the Company in 2010.
Management Agreements The Company has an agreement with Weston to provide certain administrative services by each company to the
other. The services to be provided under this agreement include those related to commodity management, pension and benefits, tax, medical,
travel, information system, risk management, treasury and legal. Payments are made quarterly based on the actual costs of providing these
services. Where services are provided on a joint basis for the benefit of the Company and Weston together, each party pays the appropriate
proportion of such costs. Net payments under this agreement in 2010 were $16 million (2009 – $16 million). Fees paid under this agreement
are reviewed each year by the Audit Committee.
Glenhuron manages certain United States cash, cash equivalents and short term investments for wholly owned non-Canadian subsidiaries of
Weston and management fees earned are based on market rates.
Dividend Reinvestment Plan During the year, the Company issued 3,621,086 (2009 – 3,163,375) common shares to Weston under the
DRIP (see note 19).
Note 29. Business Acquisitions and Dispositions
Acquisition of T&T The Company acquired all of the outstanding common shares of T&T in the third quarter of 2009 for cash consideration of
$200 million, $191 million of which was paid on the date of acquisition. The Company also assumed a liability of $34 million associated with
preferred shares issued by T&T to a vendor prior to the acquisition. The liability will increase with a favourable performance of the T&T
business and the increase in the liability will be expensed as incurred. $4 million of acquisition costs were incurred in connection with the
acquisition. The acquisition was accounted for using the purchase method of accounting and its results of operations from the date of the
acquisition have been included by the Company.
The preferred shares are classified as Other Liabilities on the Consolidated Balance Sheets. Redemption or purchase of the preferred shares
may take place upon the occurrence of certain events, including the expiry of 5 years from the closing date of the acquisition. The preferred
shareholder may increase this period up to a further 5 years if certain conditions are met. The preferred share liability may be satisfied in cash,
the Company’s common shares, or a combination thereof, at the option of the Company.
2010 Annual Report – Financial Review 83
Notes to the Consolidated Financial Statements
During 2010, the Company finalized the purchase price allocation related to the acquisition which resulted in a reduction of goodwill of $2
million (see note 11). The final purchase price allocation, based on management’s assessment of fair value is as follows:
Net assets acquired ($ millions):
Inventory
Other current assets
Fixed assets
Goodwill
Indefinite life intangible assets (trademarks and brand names)
Definite life intangible assets
Current liabilities
Other liabilities
Future income taxes
Cash consideration
$ 39
9
73
129
51
14
(60)
(39)
(16)
$ 200
In connection with the acquisition of T&T, the Company also acquired certain net assets for $5 million.
The goodwill associated with these transactions is not deductible for tax purposes.
Note 30. Other Information
Segment Information The only reportable operating segment is merchandising, which primarily includes food, general merchandise and
drugstore products and services. All sales to external parties were generated in Canada and all fixed assets and goodwill were
attributable to Canadian operations.
84 2010 Annual Report – Financial Review
Three Year Summary(1)
Year(2)
($ millions except where otherwise indicated)
Operating Results
Sales
Operating income
Interest expense and other financing charges
Net earnings
Financial Position
Working capital
Fixed assets
Goodwill and intangible assets
Total assets
Net debt(3)
Shareholders’ equity
Cash Flow
Cash flows from operating activities
Capital investment
Per Common Share ($)
Basic net earnings
Dividend rate at year end
Cash flows from operating activities(1)
Fixed asset purchases
Book value
Market price at year end
Financial Measures and Ratios
Operating margin (%)
EBITDA(3)
EBITDA margin(3) (%)
Net debt(3) to EBITDA(3)
Net debt(3) to equity(3)
Interest coverage(1)
Return on average net assets (%)(3)
Return on average shareholders’ equity (%)
Cash flows from operating activities
activities to net debt(3)
Price/net earnings ratio at year end
Market/book ratio at year end
Operating Statistics
Retail square footage (in millions)
Average corporate store size (square feet)
Average franchise store size (square feet)
Corporate stores sales per average square foot ($)
Same-store sales (decline) growth (%)
Number of corporate stores
Number of franchised stores
2010
30,997
1,269
273
681
774
9,123
1,029
15,919
2,513
6,880
1,594
1,280
2.45
0.84
5.74
4.61
24.52
40.37
4.1
1,924
6.2
1.3x
0.4:1
4.3x
12.4
10.4
0.63
16.5
1.6
50.7
64,800
29,500
601
(0.6)
576
451
2009
30,735
1,205
269
656
741
8,559
1,026
14,991
2,783
6,273
1,945
1,067
2.39
0.84
7.07
3.53
22.71
33.88
3.9
1,794
5.8
1.6x
0.4:1
4.2x
12.0
10.9
0.70
14.2
1.5
50.6
62,300
29,700
597
(1.1)
613
416
2008(2)
30,802
1,052
263
550
730
8,045
818
13,943
3,293
5,803
960
750
2.01
0.84
3.50
2.74
21.16
35.23
3.4
1,602
5.2
2.1x
0.5:1
3.7x
10.7
9.7
0.29
17.5
1.7
49.8
61,900
28,400
624
4.2
609
427
(1) For financial definitions and ratios refer to the Glossary of Terms on page 87.
(2) 2008 was a 53 week year.
(3) See Non-GAAP Financial Measures on page 38 of the Company’s Management’s Discussion & Analysis.
2010 Annual Report – Financial Review 85
Earnings Coverage Exhibit to the Audited Consolidated Financial Statements
The following is the Company's updated earnings coverage ratio for the rolling 52 week period ended January 1, 2011 in connection with
the Company's Short Form Base Shelf Prospectus dated November 25, 2010.
Earnings Coverage on long term debt obligations and capital securities
4.21 times
The earnings coverage ratio on long term debt (including any current portion) and capital securities is equal to net earnings before
interest on long term debt, dividends on capital securities, income taxes and minority interest divided by interest on long term debt and
dividends on capital securities as shown in the notes to the consolidated financial statements of the Company for the period.
86 2010 Annual Report – Financial Review
Glossary of Terms
Term
Definition
Annual Report
For 2010, the Annual Report consists of a Business
Review and a Financial Review.
Basic net earnings
per common share
Net earnings available to common shareholders 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.
Cash flows from
operating activities
per common share
Cash flows from operating activities divided by the
weighted average number of common shares outstanding
during the year.
Cash flows from
operating activities
to net debt
Control label
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.
Term
Net debt
Definition
Bank indebtedness, short term debt, long term debt due
within one year, certain other liabilities, long term debt,
and the fair value of certain financial derivative liabilities
less cash and cash equivalents, short term investments,
security deposits and the fair value of certain financial
derivative assets (see Non-GAAP Financial Measures on
page 38 of the Company’s Management’s Discussion &
Analysis).
Net debt to EBITDA
Net debt divided by EBITDA.
Net debt to equity
Net debt divided by total shareholders’ equity and capital
securities.
New store
A newly constructed store, conversion or major
expansion.
Operating income
Earnings before interest expense, income taxes and
minority interest.
Operating margin
Operating income divided by sales.
Conversion
A store that changes from one Company banner to
another Company banner.
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.
Sales by corporate stores divided by the average
corporate stores’ square footage at year end.
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, certain other liabilities and
capital securities at period end.
Renovation
Retail sales
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
Retail square footage includes corporate and independent
franchised stores.
Dividend per common share declared in the fourth quarter
multiplied by four.
Return on average
net assets
DRIP
Dividend Reinvestment Plan.
Operating income before depreciation and amortization
(see Non-GAAP Financial Measures on page 38 of the
Company’s Management’s Discussion & Analysis).
EBITDA divided by sales (see Non-GAAP Financial
Measures on page 38 of the Company’s Management’s
Discussion & Analysis).
Return on average
shareholders’
equity
Same-store sales
Fixed asset purchases divided by the weighted average
number of common shares outstanding during the year.
Variable interest
entity (“VIE”)
Operating income divided by average total assets
excluding cash and cash equivalents, short term
investments, security deposits and accounts payable and
accrued liabilities (see Non-GAAP Financial Measures on
page 38 of the Company’s Management’s Discussion &
Analysis).
Net earnings available to common shareholders divided
by average total common shareholders’ equity.
Retail sales from the same physical location for stores in
operation in that location in both periods being compared
by 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 27 to the consolidated financial statements).
Corporate stores
sales per average
square foot
Diluted net earnings
per common share
Dividend rate per
common share at
year end
EBITDA
EBITDA margin
Fixed asset
purchases per
common share
Gross margin
Interest coverage
Sales less cost of merchandise inventories sold including
inventory shrinkage divided by sales.
Operating income divided by interest expense and other
financing charges adding back interest capitalized to fixed
assets.
Weighted average
common shares
outstanding
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.
Major expansion
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.
Year
Market/book ratio
at year end
Market price per common share at year end divided by
book value per common share at year end.
Minor expansion
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.
The Company’s fiscal year ends on the Saturday closest
to December 31 and is usually 52 weeks in duration, but
includes 53 weeks every 5 to 6 years. The years ended
January 1, 2011 and January 2, 2010 both contained 52
weeks, while the year ended January 3, 2009 contained
53 weeks.
2010 Annual Report – Financial Review 87
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
Stock Exchange Listing
and Symbol
The Company’s common shares
and second preferred shares
are listed on the Toronto Stock
Exchange and trade under the
symbols “L” and “L.PR.A”,
respectively.
Common Shares
W. Galen Weston, directly
and indirectly, including through
his controlling interest in
Weston, owns approximately 64%
of the Company’s common shares.
At year end 2010 there were
280,578,130 common shares
Issued and outstanding and
100,476,181 common shares
available for public trading.
The average daily trading volume
of the Company’s common shares
for 2010 was 359,460.
Preferred Shares
At year end 2010 there were
9,000,000 second preferred
shares issued and outstanding and
available for public trading.
The average daily trading volume
of the Company’s second preferred
shares for 2010 was 8,387.
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.
M
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Independent Auditors
KPMG LLP
Chartered Accountants
Toronto, Canada
Annual Meeting
The 2011 Annual Meeting of
Shareholders of Loblaw Companies
Limited will be held on Thursday
May 5, 2011 at 11:00am (EST),
at the Metro Toronto Convention
Centre, South Building, Meeting
Room 701, 222 Bremner Boulevard,
Toronto, Ontario, Canada.
Common Dividend Policy
The declaration and payment of
dividends and the amount thereof
are at the discretion of the Board
of Directors which takes into
account the Company’s financial
results, capital requirements
available cash flow and other
factors the Board of Directors
considers relevant from time to
time. Over the long term, the
Company’s objective is for its
dividend payment ratio to be in
the range of 20% to 25% of the
prior year’s basic net earnings per
common share adjusted as
appropriate for items which are not
regarded to be reflective of
ongoing operations giving
consideration to the year-end cash
position, future cash flow
requirements and investment.
opportunities.
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 2011 are:
Record Date Payment Date
March 15 April 1
June 15 July 1
Sept. 15 Oct. 1
Dec. 15 Dec. 30
Preferred Share Dividend Dates
The declaration and payment of
quarterly dividends are made
subject to approval by the Board
of Directors. The anticipated
payment dates for 2011 are:
January 31, April 30, July 31 and
October 31.
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
Toll free: 1-800-564-6253
(Canada and U.S.)
Fax: (416) 263-9394
Toll free fax: 1-888-453-0330
International direct dial:
(514) 982-7555
To change your address, eliminate
multiple mailings, or for other
shareholder account inquiries,
please contact Computershare
Investor Services Inc.
Investor Relations
Shareholders, security analysts
and investment professionals
should direct their requests to
Kim Lee, Vice President,
Investor Relations at the
Company’s National Head
Office or by e-mail at:
investor@loblaw.ca
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
(www.loblaw.ca).
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Ce rapport est disponible en français.