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2012 Annual Report
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
4
Financial Highlights
Letter to Shareholders
6
Review of Operations
14
Corporate Social Responsibility
16
Corporate Governance Practices
18
Board of Directors
19
Leadership
20
Shareholder and Corporate
Information
Live Life Well
As Canada’s largest retailer, we take pride and ownership
in helping Canadians each and every day.
Offering Customers the Best in Food
Loblaw is changing the way that Canadians experience food. We’re sourcing the very best
quality food – working with suppliers close to home and travelling the world to provide our
customers with outstanding tastes and fresh food experiences, all available at great value.
We’re also expanding variety and selection in every department to ensure we offer more
choice and convenience, along with competitive prices and services that keep our customers
coming back for more.
Working Efficiently for Our Customers
The efficiency of our operations and supply chain is the foundation for delivering the right
products, on time and at the right prices, in every Loblaw banner store.
Investments in systems and infrastructure will help us be more efficient and cost-effective in
giving customers the products and services they want. Efficiency also frees up our colleagues
to spend more time providing the service our customers deserve.
Innovations to Grow with Our Customers
We are building new capabilities and new ways of meeting the ever-changing needs of
Canadian consumers.
From innovations in customer loyalty programs to expanded health-care services available
right in our stores, Loblaw is responding to emerging trends and customer feedback to better
reach Canadians where, when and how they want to shop.
With over 14 million
shoppers each week,
Loblaw is uniquely
positioned to deliver
on our purpose –
Live Life Well – and
to provide Canadians
with products, services
and experiences to
enrich their lives. Every
day, we connect with
Canadians from coast
to coast through our
retail stores, our supplier
relationships, our investor
services, and our contact
with Loblaw colleagues
as one of Canada’s
largest employers.
MD
No artificial flavour
or colouring
Responding to
consumer trends toward
heathier eating.
Protein rich and fat -free
There are 18 grams of protein
in every 176 gram serving of
PC 0% MF Plain Greek Yogurt.
MD
Financial Highlights(1)
Same-store sales
(decline) growth (%)
Operating income
($ millions)
Basic net earnings per
share and dividend rate
per common share ($)
2010
2011
2012
2010
2011
2012
2010
2011
2012
1,384
1,347
1,196
2.73
2.43
2.31
0.9
(0.2)
(0.6)
0.84
Dividend rate
per common share
0.85
Dividend rate
per common share
Forward-LooKinG statements
This Annual Report for Loblaw Companies Limited contains forward-looking
statements about the Company’s objectives, plans, goals, aspirations,
strategies, prospects and opportunities. Forward-looking statements are
typically identified by words such as “expect”, “anticipate”, “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. Forward-looking statements reflect the
Company’s current estimates, beliefs and assumptions, which are based
on management’s perception of historical trends, current conditions and
expected future developments, as well as other factors it believes are
appropriate in the circumstances. The Company’s estimates, beliefs and
assumptions are inherently subject to significant business, economic,
competitive and other uncertainties and contingencies regarding future events
and as such, are subject to change. The Company can give no assurance
that such estimates, beliefs and assumptions will prove to be correct.
Numerous risks and uncertainties could cause the Company’s actual results
to differ materially from the estimates, beliefs and assumptions expressed or
implied in the forward-looking statements, including, but not limited to: those
discussed in the forward-looking statements disclaimer found on pages 2 to 3
of the 2012 Annual Report – Financial Review, and the Enterprise Risks and
Risk Management section of the Management’s Discussion and Analysis on
pages 23 to 31 of the 2012 Annual Report – Financial Review. 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. Except as required by law, the Company does not
undertake to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
pG 2
LobLaw companies Limited | 2012 annuaL report
As at or for the periods ended December 29, 2012, December 31, 2011 and January 1, 2011 (unaudited)
($ millions, except where otherwise indicated)
2010(2)
(52 weeks)
2011
(52 weeks)
2012
(52 weeks)
CONSOLIDATED RESuLTS OF OpERATIONS
Revenue
Operating income
EBITDA(3)
Net interest expense and other financing charges
Net earnings
CONSOLIDATED FINANCIAL pOSITION AND CASh FLOW
Adjusted debt(3)
Free cash flow(3)
Cash and cash equivalents, short-term investments and security deposits
Cash flows from operating activities
Capital investment(1)
CONSOLIDATED pER COMMON ShARE ($)
Basic net earnings
CONSOLIDATED FINANCIAL MEASuRES AND RATIOS
Revenue growth
Operating margin(1)
EBITDA margin(3)
Adjusted debt(3) to EBITDA(3)
Interest coverage(3)
Return on average net assets(1)
Return on average shareholders’ equity(1)
RETAIL RESuLTS OF OpERATIONS
Sales
Gross profit
Operating income
RETAIL OpERATING STATISTICS
Same-store sales(1) (decline) growth
Gross profit percentage
Operating margin(1)
Retail square footage(1) (in millions)
Number of corporate stores
Number of franchise stores
FINANCIAL SERvICES RESuLTS OF OpERATIONS
Revenue
Operating income
Earnings before income taxes
FINANCIAL SERvICES OpERATING MEASuRES AND STATISTICS
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card receivables(1)
Annualized credit loss rate on average quarterly gross credit card receivables(1)
$ 30,836
1,347
1,975
353
675
$ 31,250
1,384
2,083
327
769
$ 31,604
1,196
1,973
331
650
4,669
741
1,965
2,029
1,190
4,341
931
1,986
1,814
987
4,360
824
2,047
1,637
1,017
2.43
2.73
2.31
0.3%(4)
4.4%
6.4%
2.4x
3.8x
12.0%
12.6%
30,315
6,787
1,239
(0.6%)
22.4%
4.1%
50.7
576
451
521
108
66
1,941
1,997
34
13.2%
5.6%
1.3%
4.4%
6.7%
2.1x
4.2x
12.0%
13.2%
30,703
6,820
1,312
0.9%
22.2%
4.3%
51.2
584
462
547
72
24
1,974
2,101
37
12.5%
4.2%
1.1%
3.8%
6.2%
2.2x
3.6x
10.0%
10.5%
30,960
6,819
1,101
(0.2%)
22.0%
3.6%
51.5
580
473
644
95
50
2,105
2,305
43
12.8%
4.3%
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103 of the 2012 Annual Report – Financial Review.
(2) 2010 comparative figures previously reported in accordance with Canadian generally accepted accounting principles (CGAAp) have been restated to conform with
International Financial Reporting Standards (IFRS or GAAp).
(3) See Non-GAAp Financial Measures on page 37 of the 2012 Annual Report – Financial Review.
(4) As compared to 2009 figures reported in accordance with CGAAp.
LobLaw companies Limited | 2012 annuaL report
pG 3
Letter to Shareholders
Loblaw’s mission is to be Canada’s best food, health and home
retailer by exceeding customer expectations through innovative
products at great prices. That mission is brought to life through a
simple and powerful consumer purpose – Live Life Well.
Shareholders:
Our Company has a strong foundation from which we
continue to build: national scale; exceptional real estate;
pre-eminent brands; leadership in fresh food; and powerful
complementary products and services including apparel,
in-store pharmacies and PC Financial services. With these
compelling competitive advantages and the incremental
efficiencies we expect to be gained from our information
technology (IT) and supply chain initiatives, we are confident
in Loblaw’s ability to remain an industry leader in an
increasingly competitive Canadian retail landscape.
2012 Was a pivotal Year for Our Company
In the last Annual Report we outlined our strategy to strengthen our customer proposition through improved competitiveness,
better service and more compelling assortment; to complete our infrastructure upgrades and drive appropriate efficiencies; and
to invest in growth areas that support long-term profitability. In 2012, we made significant progress against these priorities
and delivered financial performance in line with our expectations.
STRATEGIC pILLAR
customer-centric
best in Food
relentless efficiency
Growth
colleagues
2012 hIGhLIGhT
Improved Net promoter Score (NpS), our primary measure of
customer satisfaction, by 300 basis points
Delivered sustained tonnage share growth in two key markets
and improving trends in the rest
Launched the first store and distribution centre on SAp, and
reduced 700 office and administrative positions
Expanded PC Financial customer base with more than
one million new applications acquired
Named among the Top 100 Employers, Top Employers for
Young people, Best Employers for New Canadians and Best
Diversity Employers
Our revenues grew 1.1%, while investments in our business
and the ongoing IT systems implementation were a drag
on our basic earnings per share, which decreased about
15% to $2.31 per share. We continue to benefit from a strong
balance sheet, with net assets of $12.2 billion and adjusted
debt of $4.4 billion. Lying beneath top-line numbers are
some important trends and accomplishments that position
us well in the future. In fact, through the year we have
seen material, sustained positive trends in key areas of our
business, which have accelerated during the last quarter of
2012 and through the first seven weeks of 2013.
pG 4
LobLaw companies Limited | 2012 annuaL report
This year, we began to see our retail strategy take hold, our
confidence in the underlying fundamentals of the core business
grew, and we took steps intended to unlock value for our
shareholders. This included the 4.8% increase in our quarterly
dividend payout, as well as the announcement of our intent to
create one of Canada’s largest real estate investment trusts
(REIT). Moving forward, as our core business strengthens we
expect to continue this emphasis on long-term value creation.
In 2013, we will focus on rolling out our new IT system
to distribution centres and stores, accelerating the
improvements in our customer proposition, and effectively
managing our expenses and operating costs.
Live Life Well
As the country’s largest food retailer, we sell more fresh food
than anyone else. We offer Canadians a market-leading
selection of healthy food and we are home to one of the
largest pharmacy businesses in the country. We reach
across Canada’s immense geography, as well as its social
and economic diversity. With our ability to connect with so
many Canadians through our stores, we take pride in helping
people through our Live Life Well purpose every day.
Our Live Life Well purpose means many things. It is access
to nutritious and delicious food through the largest produce
departments in the country and through brands like PC Blue
Menu; it also means more time spent with family and friends
because full-service ATM banking is available in the same store
as the weekly grocery shop; it is enjoying something truly
indulgent with a PC black label gourmet product, or trying
something new at T&T Supermarkets; and it’s extra money in
someone’s pocket because nofrills stores’ Won’t be Beat price
match program offers low prices; and it is feeling great about the
way you look when you buy fashion or beauty from the Joe Fresh
brand at incredible value. This combination of assets is unique in
Canada and perfectly suited to the demographic trends
and consumer tastes of the next decade.
Thinking about what we do and how we do it through the
lens of our Live Life Well purpose will keep us firmly focused
on our customers and giving them something they can’t get
anywhere else. Success will deliver the financial results that
create sustained shareholder value over the long term.
GaLen G. WeSton
Executive Chairman
LobLaw companies Limited | 2012 annuaL report
pG 5
Gluten-free and delicious
customers with dietary restrictions
can enjoy President’s Choice products
certified gluten-free by the canadian
celiac association.
as part of our preferred
language program,
annamaria proudly has
“italiano” on her name
badge. customers who
prefer to speak italian know
that she can help them when
they shop in our store.
annamaria SaLvaGio
Loblaws Richmond hill
Richmond hill, Ontario
From the fish counter to the deli, the bakery to the
produce aisles, we offer nutritious and delicious foods
that help our customers create exceptional meals at
affordable prices and bring them into our stores again
and again. Our goal is to be the shopping destination of
choice for our customers with more selection across a
variety of food and complementary categories, better
service and value, and deeper product knowledge than
any competitor.
Loblaw’s conventional stores delivered exceptional
shopping experiences in 2012, led by fresh food, new
taste experiences, and more variety in every department.
New layouts and displays showcase our expanded
selection of fruits and vegetables with spotlights on locally
grown produce, as well as exciting tropical and exotic
flavours that offer new and fresh eating experiences.
We also invested resources to ensure our conventional
stores offered competitive pricing each week, and we
added more training for colleagues through our innovative
Learning Academy to expand their knowledge of the
products and services we offer.
pG 6
pG 6
LobLaw companies Limited | 2012 annuaL report
LobLaw companies Limited | 2012 annuaL report
Showing the benefits
of Blue Menu
over 400 PC Blue Menu products
were repackaged to make the
nutritional information easier for
customers to understand.
Over 250 different products
our PC black label line helps customers
indulge their inner foodie.
with over 40 years of
service, France knows that
by offering a wide variety
of fresh products at the
lowest price her store helps
the local community make
healthier choices.
France Zimmermann
Maxi & Cie Jean Talon
Montreal, Quebec
We believe that leading with fresh at the lowest prices is the
key to winning with our customers in our discount stores. For
this reason, our teams scour the globe for the best-tasting,
quality products, building on the right assortment to meet
Canadians’ tastes and lifestyle needs.
In 2012, discount customers enjoyed some of the most
exceptional taste experiences. From poultry to produce,
22 President’s Choice and national brand items were
promoted under the “Our Taste Favourite” program.
Items featured undergo a rigorous selection process
by our in-house Taste Council, and only the very best
make the cut. Throughout the year, we also presented
12 national fresh food programs to showcase the
best of fresh in a number of categories like citrus and
seafood. The programs spanned multiple departments,
from a freshly picked lemon in produce to the bakery
department’s lemon pie to a household helper like the
perfect lemon zester!
Our price match program offering low prices is equally
important to our success. In order to deliver on this
promise, the discount team is focused on optimizing
our cost of operations and passing on these savings
directly to the customer.
pG 8
LobLaw companies Limited | 2012 annuaL report
Essentials our
customers need
From pillows to the oh-so-perfect
shade of lipstick – all in one place.
Introducing new items
like dragon fruit
one way we’re helping customers
discover new and exciting products
from around the world.
A fresh-baked idea
enjoy the sights – and the delicious aroma –
at the new T&T open concept bakery.
mary enjoys helping
customers select the best
beauty and personal care
products from the familiar
asian brands now available
in canada as part of the
T&T Be Beauty line.
mary Lai
T&T Supermarket unionville
Markham, Ontario
Canada’s rich cultural diversity presents a wealth of
opportunities for retailers. Loblaw has a strong
foundation of merchandising and sourcing expertise
and capability to serve Canadians’ expanding tastes and
growing demand for international flavours and foods.
In 2012, a collection of international control brand
products was successfully piloted in select conventional
and discount stores. under the trusted T&T brand, these
new products gave customers greater choice of high-
quality Asian fusion foods that add variety and diversity
to mealtime. We will continue to expand the selection
and availability of T&T branded products in our
mainstream banners.
We’ve also responded to the growing demand for
international food offerings by expanding our assortment
with hundreds of new Asian products now available in our
Wholesale Club stores. This channel provides competitive
prices for restaurant and independent convenience store
customers who serve the consumers’ growing demand
for global taste and international ingredients in their local
markets. Our knowledge and expertise in international
foods, coupled with Loblaw’s insights into the changing
trends and demographics of Canada, positions us well
to further capitalize on future growth potential in
international foods and distribution channels.
pG 10
LobLaw companies Limited | 2012 annuaL report
From pineapple cakes
to shrimp dumplings
T&T control brand products
are bringing the tastes of asia
to canada.
Day-to-day banking
making financial solutions
convenient for our customers.
danny likes the variety of
options at our full-service
The Mobile Shop kiosk
because he can help
customers find the mobile
solution that’s right for them.
Danny Lam
Loblaws Richmond hill
Richmond hill, Ontario
helping Canadians simplify their lives and have more
time for the things that matter most means providing the
services they need at great value in convenient locations.
What could be more convenient than having access to
full-service ATM banking and mobile phone services in
the same place you do your weekly grocery shop?
We provide customers with a convenient financial
services experience from a name they trust. It’s a simple
and straightforward service that offers value including
loyalty rewards, low fees and no-hassle tools for banking
in person, online or over the telephone. Over the past two
years, we’ve invested in programs to raise awareness
of PC Financial MasterCard® benefits and experienced
double-digit growth in our subscriber base, growth that
has been profitable and well ahead of the industry.
With the rapid growth in mobile phone use, Loblaw is well
positioned to seize opportunities in the wireless space
through our PC telecom division and the growing number
of self-serve and full-service kiosks located inside Loblaw
banner stores. Technology will be a key factor in the way
Canadians experience grocery shopping in the future, and
Loblaw is ready to leverage technology and add another
channel for connecting with our customers.
pG 12
LobLaw companies Limited | 2012 annuaL report
Over 160 The Mobile Shop
kiosks across Canada
our kiosks offer customers a full
range of carriers in one location.
More than 3,800
banking machines
across Canada
Helping PC Financial
customers do their banking
at their convenience.
Live Life Well
As the country’s largest food retailer, Loblaw has a unique
opportunity to help Canadians through the products and
services we offer and the strong commitment we make
to Corporate Social Responsibility (CSR).
The way we do business is founded in our five CSR
principles: 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. We made good progress on our commitments
again this past year.
As of 2012, we have reduced the number of plastic
shopping bags from our stores by more than five billion.
We also generated significant electricity and fuel savings
last year by converting standard lighting in our stores and
distribution centres to new fluorescent technology and
through various fuel efficiency initiatives throughout
our truck fleet.
To help Canadians make healthier food and lifestyle
choices, we continue to reduce sodium levels in
control brand products, and we are in the process of
removing artificial flavours and artificial colours from all
President’s Choice products. The Guiding Stars program
was introduced in Loblaws banner stores in Ontario and
22 dietitians are available in 50 stores in the province to
provide health education to consumers.
In keeping with our Canadian First approach, 30% of the
produce sold in our stores year-round was sourced from
Canadian growers. We also achieved our goal to source
100% fresh pork from Canada (excluding hard discount
stores and sale items).
We took a stand on seafood in 2009, committing to
source 100% of our seafood from sustainable sources
by 2013. Today, we offer 108 Marine Stewardship Council
(MSC)-certified wild-caught seafood products in our
stores, more than any other Canadian food retailer.
To learn more, please see our CSR Report at loblaw.ca/csr.
Reducing electricity
to date, we have converted
more than 72,000 light fixtures
in our corporate stores
to fluorescent technology
resulting in energy savings
sufficient to power 9,923
homes for a year.
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LobLaw companies Limited | 2012 annuaL report
Local sourcing
we are committed to offering
customers more fresh choices
from local growers.
Granted more than
$14 million in 2012
President’s Choice children’s charity
supports children with special needs
and nutrition programs that aim to fight
childhood hunger across canada.
Proud to be a
Top Employer
in 2012, Loblaw was named
among the top 100 employers,
top employers for Young
people, best employers
for new canadians and
best diversity employers.
corporate Governance practices
The Board of Directors and senior executives of Loblaw Companies
Limited are committed to sound corporate governance practices and
believe they contribute to the effective management of the Company and
its achievement of strategic and operational objectives.
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. The
Company’s website, loblaw.ca, sets out additional governance
information, including the Company’s Code of Conduct (the
“Code”), its Disclosure policy and the Mandates of the Board
of Directors (the “Board”) and its committees.
Director Independence
The Canadian Securities Administrators’ Corporate
Governance Guidelines 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.
Two-thirds of the directors on the Board are independent. The
independent directors meet separately following each Board
meeting and on other occasions as required or desirable.
Information relating to each of the directors, including
their independence, committee membership, 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.
Board Leadership
Galen G. Weston is the Executive Chairman of the Board.
The Executive Chairman directs the operations of the Board.
he chairs each meeting of the Board, is responsible for the
management and effective functioning of the Board generally
and provides leadership to the Board in all matters. These
and other key responsibilities of the Executive Chairman are
set out in a position description established by 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.
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 loblaw.ca.
The Board reviews the Company’s strategic direction, assigns
responsibility to management for the achievement of that
direction, develops and approves major policy decisions,
delegates to management the authority and responsibility
of handling day-to-day affairs, and reviews management’s
performance and effectiveness. The Board’s expectations
of management are communicated to management directly
and through committees of the Board.
The Board 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 Board also
oversees the enterprise risk management (ERM) process, which
is designed to assist 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.
pG 16
LobLaw companies Limited | 2012 annuaL report
Ethical Business Conduct
Board Committees
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. In 2012, the Code underwent a comprehensive
review and re-draft to ensure it reflected industry best
practices. 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
an annual basis.
The Company encourages the reporting of unethical
behaviour and has established an Integrity Action Line, a
toll-free number that any director, officer or employee may use
to report conduct which he or she feels violates the Code or
otherwise constitutes fraudulent 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 loblaw.ca.
The following is a brief summary of some of the
responsibilities of each committee of the Board.
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 deveLopment, 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 Chair of the
Governance Committee, who is an independent director, has
also been appointed by the Board to serve as lead director.
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.
LobLaw companies Limited | 2012 annuaL report
pG 17
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*
Executive Chairman, Loblaw Companies
Limited; Former Senior vice president,
Loblaw Companies Limited; Director,
Wittington Investments, Limited.
StepHen e. BacHanD, b.a., m.b.a.3
Corporate Director; Retired president
and Chief Executive Officer, Canadian
Tire Corporation, Limited; Former
Director, Canadian pacific Railway
Limited, George Weston Limited,
Bank of Montreal.
pauL m. BeeSton, c.m., b.a., F.c.a.2
president and Chief Executive Officer,
Toronto Blue Jays Baseball Team;
Former president and Chief Executive
Officer, Major League Baseball; Director,
president’s Choice Bank, Gluskin Sheff
& Associates Inc.; Trustee and Former
Chairman, Centre for Addiction and
Mental health; Former Director, Newport
partners Income Fund.
cHriStie J.B. cLark,
b. comm., m.b.a., F.c.a.2*
Corporate Director; Former Chief
Executive Officer and Senior partner,
pricewaterhouseCoopers LLp; Director,
Brookfield Office properties Inc.,
IGM Financial Inc.; Chair, Canadian
partnership Against Cancer Corporation,
Finance and Governance Committees
of Alpine Canada.
GorDon a.m. currie, b.a., LL.b.4, 5
Executive vice president and Chief Legal
Officer of the Company and George
Weston Limited; Former Senior vice
president and General Counsel,
Direct Energy; Former partner,
Blake, Cassels & Graydon LLp.
antHony S. FeLL, o.c.3*, 4*
Corporate Director; Former Chairman,
RBC Capital Markets Inc.; Former
Chairman and Chief Executive Officer,
RBC Dominion Securities; Former Deputy
Chairman, Royal Bank of Canada;
Director, BCE Inc.; Former Chairman,
Investment Dealers Association of
Canada; Former Director, CAE Inc.
cHriStiane Germain, c.Q.5
Co-president and Co-Founder, Groupe
Germain hospitalité; Director, Groupe
Le Massif, Institute for Governance of
private and public Organizations, The
Banff Centre.
antHony r. GraHam1, 3, 4
president and Director, Wittington
Investments, Limited; president,
Selfridges Group Limited; president and
Chief Executive Officer, Sumarria Inc.;
Former vice-Chairman and Director,
National Bank Financial; Chairman
and Director, president’s Choice Bank;
Director, George Weston Limited,
Brown Thomas Group Limited,
Graymont Limited, holt, Renfrew & Co.,
Limited, power Corporation of Canada,
power Financial Corporation, Selfridges
& Co. Ltd., Grupo Calidra, S.A. de
C.v., de Bijenkorf B.v.
JoHn S. Lacey, b.a.1
Chairman of the Advisory Board,
Brookfield private Equity Group;
Consultant to the Board and to the Board
of George Weston Limited; Former
president and Chief Executive Officer,
the Oshawa Group (now part of Sobeys
Inc.); Director, George Weston Limited,
Telus Corporation, Ainsworth Lumber
Co. Ltd.; Former Chairman, Alderwoods
Group, Inc.; Former Director, Canadian
Imperial Bank of Commerce.
nancy H.o. LockHart, o. ont.3, 5*
Chief Administrative Officer, Frum
Development Group; Former vice
president, Shoppers Drug Mart
Corporation; Former president, Canadian
Club of Toronto; Director, Centre for
Addiction and Mental health Foundation,
The Canada Merit Scholarship
Foundation; Member, Advisory Board of
Belinda Stronach Foundation; Former
Chair, Canadian Film Centre, Ontario
Science Centre; Former Director, Canada
Deposit Insurance Corporation.
tHomaS c. o’neiLL, b. comm., F.c.a.3
Corporate Director; Chairman,
BCE Inc.; Retired Chairman,
pricewaterhouseCoopers Consulting;
Former Chief Executive Officer
and Chief Operating Officer,
pricewaterhouseCoopers LLp; vice-
Chair, St. Michael’s hospital; Director,
Adecco S.A., Nexen Inc., BCE Inc., The
Bank of Nova Scotia; Former vice Chair,
Board of Governors, Queen’s university;
past Member, Advisory Council at
Queen’s university School of Business.
JoHn D. Wetmore, b. matH.2, 4
Corporate Director; Former president
and Chief Executive Officer, IBM Canada;
Retired vice president, Contact Centre
Development, IBM Americas; Director,
Research In Motion Ltd. (also known as
Blackberry); Former Director, Resolve
Business Outsourcing Income Fund.
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
LobLaw companies Limited | 2012 annuaL report
Leadership
S. JANE MARSHALL
Executive Vice President,
Loblaw Properties Limited
and Business Strategy
JUDY A. MCCRIE
Executive Vice President,
Human Resources and Labour
Relations
PETER MCLAUGHLIN
Executive Vice President,
Emerging Business
PETER K. MCMAHON
Executive Vice President,
Chief Operating Officer
GARRY SENECAL
Executive Vice President,
Division Support and Brands
GALEN G. WESTON
Executive Chairman
VICENTE TRIUS
President
SARAH R. DAVIS
Chief Financial Officer
MARK C. BUTLER
Executive Vice President,
Conventional Division
ROBERT CHANT
Senior Vice President,
Corporate Affairs and Communication
BARRY K. COLUMB
President, PC Bank
GORDON A.M. CURRIE
Executive Vice President and
Chief Legal Officer
GRANT FROESE
Executive Vice President,
Hard Discount and Superstore
LobLaw companies Limited | 2012 annuaL report
PG 19
Shareholder and corporate information
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: loblaw.ca
stocK excHanGe ListinG
flow, future prospects of the Company’s
reGistrar and transFer aGent
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.
During 2012, there were 718,544 common
shares issued and at year end 281,680,157
outstanding common shares available for
public trading.
The average daily trading volume of the
Company’s common shares for 2012
was 499,774.
preFerred sHares
At year-end 2012, there were 9,000,000
second preferred shares issued and
outstanding and available for public trading.
business and other factors considered
relevant from time to time. Over the long
term, it is the Company’s intention to
increase the amount of the dividend while
retaining appropriate free cash flow to
finance future growth.
common dividend dates
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
The declaration and payment of quarterly
To change your address, eliminate multiple
dividends are made subject to approval
mailings, or for other shareholder account
by the Board. The anticipated record and
inquiries, please contact Computershare
payment dates for 2013 are:
Investor Services Inc.
RECORD DATE
pAYMENT DATE
Additional financial information has been
march 15
June 15
september 15 october 1
december 15
april 1
July 1
december 30
preFerred sHare
dividend dates
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 declaration and payment of quarterly
dividends are made subject to approval by
independent auditors
the Board. The anticipated payment dates
for 2013 are: January 31, April 30, July 31
KpMG LLp
Chartered Accountants
Toronto, Canada
The average daily trading volume of the
and October 31.
Company’s second preferred shares for
2012 was 7,941.
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.
common dividend poLicY
During 2012, the Company amended its
dividend policy to state: the declaration
and payment of dividends and the amount
thereof on the Company’s common shares
are at the discretion of the Board which
takes into account the Company’s financial
results, capital requirements, available cash
normaL course issuer bid
annuaL meetinG
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
The 2013 Annual Meeting of Shareholders
of Loblaw Companies Limited will be held
on Thursday, May 2, 2013 at 11:00 am (EST),
at the Mattamy Athletic Centre,
50 Carlton Street, Toronto, Canada M5B 1J2.
Company is $0.958 per common share. The
The Company holds an analyst call shortly
value on February 22, 1994 was $7.67 per
following the release of its quarterly results.
These calls are archived in the Investor
Centre section of the Company’s website
(loblaw.ca).
common share.
investor reLations
Shareholders, security analysts and
investment professionals should direct
their requests to Kim Lee, vice president,
Investor Relations, at the Company’s
National head Office or by e-mail at:
investor@loblaw.ca
pG 20
LobLaw companies Limited | 2012 annuaL report
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2012 Annual Report
Financial Review
Financial Highlights(1)
As at or for the periods ended December 29, 2012, December 31, 2011 and
January 1, 2011
(millions of Canadian dollars except where otherwise indicated)
Consolidated Results of Operations
Revenue
Operating income
EBITDA(3)
Net interest expense and other financing charges
Net earnings
Consolidated Financial Position and Cash Flow
Adjusted debt(3)
Free cash flow(3)
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Capital investment(1)
Consolidated Per Common Share ($)
Basic net earnings
Consolidated Financial Measures and Ratios
Revenue growth
Operating margin(1)
EBITDA margin(3)
Adjusted debt(3) to EBITDA(3)
Interest coverage(3)
Return on average net assets(1)
Return on average shareholders’ equity(1)
Retail Results of Operations
Sales
Gross profit
Operating income
Retail Operating Statistics
Same-store sales(1) (decline) growth
Gross profit percentage
Operating margin(1)
Retail square footage(1) (in millions)
Number of corporate stores
Number of franchise stores
Financial Services Results of Operations
Revenue
Operating income
Earnings before income taxes
Financial Services Operating Measures and Statistics
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card receivables(1)
Annualized credit loss rate on average quarterly gross credit card
receivables(1)
2012
(52 weeks)
$ 31,604
1,196
2011
(52 weeks)
2010(2)
(52 weeks)
$ 31,250
1,384
$ 30,836
1,347
1,973
331
650
4,360
824
2,047
1,637
1,017
2.31
1.1%
3.8%
6.2%
2.2x
3.6x
10.0%
10.5%
30,960
6,819
1,101
(0.2%)
22.0%
3.6%
51.5
580
473
644
95
50
2,105
2,305
43
12.8%
4.3%
2,083
327
769
4,341
931
1,986
1,814
987
2.73
1.3%
4.4%
6.7%
2.1x
4.2x
12.0%
13.2%
30,703
6,820
1,312
0.9%
22.2%
4.3%
51.2
584
462
547
72
24
1,974
2,101
37
12.5%
4.2%
1,975
353
675
4,669
741
1,965
2,029
1,190
2.43
0.3%(4)
4.4%
6.4%
2.4x
3.8x
12.0%
12.6%
30,315
6,787
1,239
(0.6%)
22.4%
4.1%
50.7
576
451
521
108
66
1,941
1,997
34
13.2%
5.6%
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
(2) 2010 comparative figures previously reported in accordance with Canadian generally accepted accounting principles (“CGAAP”) have been restated to conform with International Financial
Reporting Standards (“IFRS” or “GAAP”).
(3) See Non-GAAP Financial Measures on page 37.
(4) As compared to 2009 figures reported in accordance with CGAAP.
2012 Annual Report – Financial Review
Management’s Discussion and Analysis
Financial Results
Earnings Coverage Exhibit to the Audited Consolidated Financial Statements
Three Year Summary
Glossary of Terms
Management’s Discussion and Analysis
1. Forward-Looking Statements
2. Overview
3. Vision and Strategies
4. Key Financial Performance Indicators
5. Overall Financial Performance
5.1 Consolidated Results of Operations
5.2 Selected Financial Information
6. Reportable Operating Segments Results of Operations
6.1 Retail Segment
6.2 Financial Services Segment
7. Liquidity and Capital Resources
7.1 Cash Flows
7.2 Sources of Liquidity
7.3 Capital Structure
7.4 Financial Derivative Instruments
7.5 Contractual Obligations
7.6 Off-Balance Sheet Arrangements
8. Other Business Matters
9. Quarterly Results of Operations
9.1 Results by Quarter
9.2 Fourth Quarter Results
10. Disclosure Controls and Procedures
11. Internal Control over Financial Reporting
12. Enterprise Risks and Risk Management
12.1 Operating Risks and Risk Management
12.2 Financial Risks and Risk Management
13. Related Party Transactions
14. Critical Accounting Estimates and Judgments
14.1 Inventories
14.2 Impairment of Non-Financial Assets (Goodwill, Intangible Assets, Fixed Assets and Investment Properties)
14.3 Franchise Loans Receivable and Certain Other Financial Assets
14.4 Income and Other Taxes
14.5 Post-Employment and Other Long Term Employee Benefits
14.6 Allowance for Credit Card Receivables
15. Accounting Standards
15.1 Accounting Standards Implemented in 2012
15.2 Future Accounting Standards
16. Outlook
17. Non-GAAP Financial Measures
18. Additional Information
2
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101
102
103
2
3
3
5
6
6
8
9
9
10
11
11
12
14
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29
31
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37
39
2012 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 annual audited consolidated financial statements and the accompanying notes on pages 43
to 100 of this Annual Report – Financial Review (“Annual Report”). The Company’s annual audited consolidated financial statements and
accompanying notes for the year ended December 29, 2012 are prepared in accordance with International Financial Reporting Standards
(“IFRS”) and include the accounts of the Company and other entities that the Company controls and are reported in millions of Canadian
dollars, except where otherwise indicated.
The information in this MD&A is current to February 20, 2013, unless otherwise noted. A glossary of terms used throughout this Annual Report
can be found on page 103.
1. Forward-Looking Statements
This Annual Report, including this MD&A, 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. Specific
statements with respect to anticipated future results and planned capital expenditures are included in the Outlook section on page 36 of this
MD&A and future plans are included in the Visions and Strategies section on page 3 of this MD&A. Forward-looking statements are typically
identified by words such as “expect”, “anticipate”, “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.
Forward-looking statements reflect the Company's current estimates, beliefs and assumptions, which are based on management's
perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in
the circumstances. The Company's expectation of operating and financial performance in 2013 is based on certain assumptions including
assumptions about revenue growth, anticipated cost savings and operating efficiencies, no unanticipated changes in the effective income
tax rates, the Company’s plan to increase net retail square footage by 1% and no unexpected adverse events or costs related to the
Company’s investments in information technology (“IT”) and supply chain. The Company’s estimates, beliefs and assumptions are inherently
subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and as such, are
subject to change. The Company can give no assurance that such estimates, beliefs and assumptions will prove to be correct.
Numerous risks and uncertainties could cause the Company’s actual results to differ materially from the estimates, beliefs and assumptions
expressed or implied in the forward-looking statements, including, but not limited to:
failure to realize anticipated results, including revenue growth, anticipated cost savings or operating efficiencies from the Company’s major
initiatives, including those from restructuring;
failure to realize benefits from investments in the Company’s IT systems, including the Company’s IT systems implementation, or
unanticipated results from these initiatives;
the inability of the Company’s IT infrastructure to support the requirements of the Company’s business;
heightened competition, whether from current competitors or new entrants to the marketplace;
changes in economic conditions including the rate of inflation or deflation, changes in interest and currency exchange rates and derivative
and commodity prices;
public health events including those related to food safety;
failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements, which could lead to
work stoppages;
the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink;
the impact of potential environmental liabilities;
failure to respond to changes in consumer tastes and buying patterns;
reliance on the performance and retention of third-party service providers including those associated with the Company’s supply chain and
apparel business;
supply and quality control issues with vendors;
changes to the regulation of generic prescription drug prices and the reduction of reimbursement under public drug benefit plans and the
elimination or reduction of professional allowances paid by drug manufacturers;
2 2012 Annual Report – Financial Review
changes in the Company’s income, commodity, other tax and regulatory liabilities including changes in tax laws, regulations or future
assessments;
any requirement of the Company to make contributions to its registered funded defined benefit pension plans or the multi-employer pension
plans in which it participates in excess of those currently contemplated;
the risk that the Company would experience a financial loss if its counterparties fail to meet their obligations in accordance with the terms and
conditions of their contracts with the Company;
the inability of the Company to collect on its credit card receivables; and
failure to execute the Initial Public Offering (“IPO”) of the Company’s proposed Real Estate Investment Trust (“REIT”) could adversely affect
the reputation, operations and financial performance of the Company.
This is not an exhaustive list of the factors that may affect the Company’s forward-looking statements. 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. Additional 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 on
pages 23 to 31 of this MD&A. 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. Except as required by law, the Company does not undertake to update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise.
2. Overview
The Company is a subsidiary of George Weston Limited (“Weston”) and is Canada’s largest food retailer and a leading provider of drugstore,
general merchandise and financial products and services. The Company has two reportable operating segments: Retail and Financial Services.
Loblaw and its franchisees together are among the largest private sector employers in Canada, employing approximately 134,000 full-time and
part-time employees across more than 1,000 corporate and franchise stores from coast to coast. 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 one of Canada’s strongest control brand
programs, 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.
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. As one of the country’s leading retailers, reaching 14 million consumers each week, the Company is uniquely
positioned to deliver on its purpose – Live Life Well – and to provide Canadians with products, services, value and experience to enrich their
lives. The Company delivers on this purpose through its strategy to strengthen its competitive position with a winning customer proposition and
efficient and cost-effective operations fueled by growth opportunities in emerging and complementary businesses.
During 2012, the Company executed its plan to strengthen its competitive position. Targeted investments to improve the customer proposition
delivered clear signs of progress, key milestones on IT systems initiatives were met and planned efficiencies were realized. To further
enhance customers’ shopping experience, stores were renovated and the Company strategically invested in square footage with new stores.
A number of important strategic initiatives were also announced during the year. Some of Loblaw’s key accomplishments in 2012 include:
Invested in an expanded fresh product assortment and related colleague training to support an improved customer experience at
competitive prices;
Completed the development and implementation of several comprehensive category reviews across both divisions to improve the
competitiveness, profitability and relevance of individual categories;
Improved overall net promoter score, a measure of customer satisfaction, by 3 percentage points, through consistent execution of
initiatives to strengthen the customer proposition and competitive position of the Company;
Rolled-out a national point of sale system in order to standardize the applications and infrastructure across the store network in
preparation for conversion to the Company’s new IT system and other new capabilities across the distribution centre and store network;
2012 Annual Report – Financial Review 3
Management’s Discussion and Analysis
Achieved a significant milestone in the implementation of the Company’s IT system, with the first distribution centre and first store going
live on fully integrated systems with little to no impact on customers;
Continued to innovate its control brand products, including a T&T Supermarket Inc. private label pilot in a selection of the Company’s
mainstream stores;
Reset the general merchandise section in 78 stores with differentiated product assortments that are complementary to a weekly food
shop and have compelling value price points;
Invested strategically in its store network, renovating and revitalizing 103 stores and opening seven net new stores, expanding the
Company’s retail square footage to 51.5 million square feet;
Grew the PC Financial services business by achieving one million new PC MasterCard® applicants and opening 87 additional Mobile
Shop locations;
Purchased prescription files from 106 Zellers stores, contributing to prescription count growth;
Announced a relationship with J.C. Penney Corporation, Inc. (“JC Penney”) to introduce Joe Fresh women’s apparel to almost 700 JC
Penney stores in the United States starting in March 2013; and
Announced its intention to create a REIT, which will acquire a significant portion of Loblaw’s real estate assets and sell units by way of an
IPO.
In 2013, the Company expects to continue to execute on its plan to strengthen the competitive position of its businesses. Key focus areas for
the year include launching the roll-out program to convert its network of distribution centres and stores to the new IT system; accelerating
business competitiveness with a more responsive and proactive culture to better serve customers; and managing expenses and operating
costs to return efficiencies to customers. The Company’s plans for 2013 include:
Integrating supply chain systems at each distribution centre to the new IT system in lock-step with store implementations;
Implementing a staggered roll-out of the IT system to a significant number of corporate stores;
Exceeding customer expectations and achieving improved customer feedback scores with the right assortment, improved customer in-store
experience and competitive prices;
Offering customized assortment, compelling displays and delivering competitive value across banners through ongoing development and
implementation of strategic category reviews;
Capitalizing on its established control brands across food and general merchandise;
Expanding the financial services business by creating in-store customer awareness and expanding product offerings;
Managing costs across the business with a focus on improved shrink, inventory turns, labour and administrative expenses to drive efficient
operations and provide customers greater value;
Investing to improve standards and in-store experience through renovations and strategically investing in new square footage; and
Completing the creation of a REIT by way of an IPO.
4 2012 Annual Report – Financial Review
4. Key Financial Performance Indicators
The Company has identified specific key financial performance indicators to measure the progress of short and long term objectives.
Key financial performance indicators are set out below:
As at or for the periods ended December 29, 2012 and December 31, 2011
(millions of Canadian dollars except where otherwise indicated)
Consolidated:
Revenue growth
Operating income
EBITDA(1)
EBITDA margin(1)
Net earnings
Basic net earnings per common share ($)
Operating margin(2)
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Adjusted debt(1) to EBITDA(1)
Free cash flow(1)
Interest coverage(1)
Return on average net assets(2)
Return on average shareholders’ equity(2)
Retail Segment:
Same-store sales(2) (decline) growth
Gross profit
Gross profit percentage
Operating margin(2)
Financial Services Segment:
Earnings before income taxes
Annualized yield on average quarterly gross credit card receivables(2)
Annualized credit loss rate on average quarterly gross credit card receivables(2)
2012
(52 weeks)
2011
(52 weeks)
1.1%
$ 1,196
1,973
6.2%
650
2.31
3.8%
2,047
1,637
2.2x
824
3.6x
10.0%
10.5%
(0.2%)
$ 6,819
22.0%
3.6%
$ 50
12.8%
4.3%
1.3%
$ 1,384
2,083
6.7%
769
2.73
4.4%
1,986
1,814
2.1x
931
4.2x
12.0%
13.2%
0.9%
$ 6,820
22.2%
4.3%
$ 24
12.5%
4.2%
(1) See Non-GAAP Financial Measures on page 37.
(2) For financial definitions and ratios refer to the Glossary of Terms on page 103.
2012 Annual Report – Financial Review 5
Management’s Discussion and Analysis
5. Overall Financial Performance
In 2012, the Company invested to strengthen its customer proposition and at the same time continued with its ongoing IT infrastructure
renewal program. With investments in the customer proposition, the Company made progress in delivering an improved price position,
enhanced assortment and variety, particularly in fresh departments, and better in-store execution and customer service. The decline in net
earnings was primarily due to incremental investments in the customer proposition and the IT infrastructure program that operations was not
expected to cover, partially offset by improved earnings in the Financial Services segment.
5.1 Consolidated Results of Operations
For the periods ended December 29, 2012 and December 31, 2011
(millions of Canadian dollars except where otherwise indicated)
2012
(52 weeks)
2011
(52 weeks)
$ Change
% Change
Revenue
Operating income
Net interest expense and other financing charges
Income taxes
Net earnings
Basic net earnings per common share ($)
Operating margin(1)
EBITDA(2)
EBITDA margin(2)
Dividends declared per common share ($)
Dividends declared on Second Preferred Share, Series A ($)
$ 31,604
1,196
331
215
650
2.31
3.8%
$ 1,973
6.2%
0.85
1.49
$ 31,250
1,384
327
288
769
2.73
4.4%
$ 2,083
6.7%
0.84
1.49
$ 354
(188)
4
(73)
(119)
(0.42)
1.1%
(13.6%)
1.2%
(25.3%)
(15.5%)
(15.4%)
$ (110)
(5.3%)
0.01
–
1.2%
–
During 2012, the Company announced a plan that reduced the number of head office and administrative positions. Focused primarily on
management and office positions, the reductions affected approximately 700 jobs. The Company incurred a $61 million charge associated with
this restructuring.
For 2012, the Company incurred $55 million of incremental investment in its customer proposition that was not covered by operations. This
amount was comprised of $20 million in price and $15 million in shrink, both of which were included in gross profit, and $20 million in labour.
Revenue The $354 million increase in revenue compared to 2011 was driven by increases in both the Company’s Retail and Financial Services
operating segments, as described below.
Operating Income Operating income decreased by $188 million compared to 2011. Retail operating income decreased by $211 million,
including the $61 million charge for restructuring, partially offset by an increase in Financial Services operating income of $23 million compared
to 2011. In 2012, operating margin(1) was 3.8% compared to 4.4% in 2011.
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
(2) See Non-GAAP Financial Measures on page 37.
6 2012 Annual Report – Financial Review
Included in 2012 consolidated operating income were the following notable items:
Incremental costs of $63 million related to investments in IT and supply chain. These costs included the following charges:
o
o
o
o
$316 million (2011 – $266 million) related to IT costs;
$221 million (2011 – $172 million) related to depreciation and amortization;
$10 million (2011 – $34 million) related to other supply chain project costs; and
$11 million (2011 – $23 million) related to changes in the distribution network.
A $61 million charge associated with the reduction in head office and administrative positions;
A $38 million charge (2011 – $35 million) related to the transition of certain Ontario conventional stores to the more cost effective and
efficient operating terms of collective agreements ratified in 2010;
A $28 million charge (2011 – $27 million) related to the effect of share-based compensation net of equity forwards; and
A $17 million charge (2011 – $5 million) related to fixed asset impairments, net of recoveries, related to asset carrying values in excess of
recoverable amounts for specific retail locations.
Included in 2011 consolidated operating income were the following additional notable items:
A $21 million charge related to start-up costs associated with the launch of the Joe Fresh brand in the United States;
A $15 million charge related to certain prior years’ commodity tax matters;
An $8 million charge related to an internal re-alignment of the Retail segment into a two division structure – conventional and discount; and
A $14 million gain recognized related to the sale of a portion of a property in North Vancouver, British Columbia.
Net Interest Expense and Other Financing Charges In 2012, net interest expense and other financing charges increased by $4 million, or
1.2%, to $331 million compared to 2011, primarily due to the maturity of interest rate swaps in the third quarter of 2011 and an increase in
interest expense on long term debt, mainly driven by guaranteed investment certificate (“GIC”) issuances, partially offset by net repayments
of borrowings related to credit card receivables in 2011.
Income Taxes For 2012, income tax expense was $215 million (2011 – $288 million). The effective income tax rate was 24.9% (2011 – 27.2%).
This decrease was primarily due to further reductions in the Federal and Ontario statutory income tax rates and a recovery on the revaluation of
deferred tax assets on the enactment of the revised Ontario corporate income tax rate.
Net Earnings Net earnings for 2012 decreased by $119 million, or 15.5%, compared to 2011. Basic net earnings per common share for 2012
decreased by 15.4%, to $2.31 from $2.73 in 2011.
Basic net earnings per common share for 2012 were impacted by the following notable items:
A $0.16 charge related to the incremental costs for the Company’s investment in IT and supply chain;
A $0.16 charge related to the reduction in head office and administrative positions;
A $0.10 charge (2011 – $0.09) related to the transition of certain Ontario conventional stores under collective agreements ratified
in 2010;
A $0.09 charge (2011 – $0.09) for the effect of share-based compensation net of equity forwards; and
A $0.05 charge (2011 – $0.01) related to the fixed asset impairments net of recoveries.
Basic net earnings per common share for 2011 were further impacted by the following notable items:
A $0.05 charge related to the start-up costs associated with the launch of the Company’s Joe Fresh brand in the United States;
A $0.04 charge related to certain prior years’ commodity tax matters;
A $0.02 charge related to the internal re-alignment of the business; and
Income of $0.04 related to the gain recognized on the sale of a portion of a property in North Vancouver, British Columbia.
2012 Annual Report – Financial Review 7
Management’s Discussion and Analysis
5.2 Selected Financial Information
The following is a summary of selected annual audited consolidated information extracted from the Company’s annual audited consolidated
financial statements. The analysis of the data contained in the table focuses on the trends and significant events or items affecting the
financial condition and results of the Company’s operations over the latest three year period.
For the periods ended December 29, 2012, December 31, 2011
and January 1, 2011
(millions of Canadian dollars except where otherwise indicated)
Revenue
Net earnings
Basic net earnings per common share ($)
Diluted net earnings per common share ($)
Dividends declared per common share ($)
Dividends declared per Second Preferred Share, Series A ($)
2012
(52 weeks)
$ 31,604
2011
(52 weeks)
$ 31,250
2010
(52 weeks)
$ 30,836
650
2.31
2.28
0.85
1.49
769
2.73
2.71
0.84
1.49
675
2.43
2.38
0.84
1.49
(millions of Canadian dollars)
Total assets
Long term debt
Capital securities
As at
December 29, 2012
As at
December 31, 2011
As at
January 1, 2011
$ 17,961
$ 17,428
$ 16,841
5,669
223
5,580
222
6,100
221
Over the past three years, the Company’s sales were under pressure in a competitively intense retail market place with an uncertain
economic environment. Average annual national food price inflation as measured by “The Consumer Price Index for Food Purchased from
Stores” (“CPI”) was 2.3% in 2012 and 4.2% in 2011. In 2012 and 2011, the Company’s average annual internal retail food price index was
lower than CPI. The Company experienced modest average annual internal food price inflation in 2012 and moderate inflation in 2011. In
2012, same-store sales(1) decline was 0.2% compared to growth of 0.9% in 2011. During the year, the number of corporate and franchise
stores increased to 1,053 (2011 – 1,046; 2010 – 1,027). Retail square footage in 2012 increased to 51.5 million (2011 – 51.2 million; 2010 –
50.7 million).
In 2012, to better position itself in an intensely competitive market place, the Company made investments in its customer proposition that
were not covered by operations. These investments were focused on price, assortment and customer service and impacted both gross profit
and selling, general and administrative expenses. Additionally, in 2012, the Company announced a plan that reduced the number of head
office and administrative positions, affecting approximately 700 jobs.
In both 2011 and 2012, the Company’s operating income was significantly impacted by incremental supply chain and IT charges related to its
infrastructure implementation and charges associated with transitioning certain Ontario conventional stores to the more cost effective and
efficient operating terms of collective agreements ratified in 2010. Operating income in 2011 and 2012 was further impacted by year-over-
year fluctuations in fixed asset impairment charges and recoveries and other related charges and share-based compensation charges net of
equity forwards.
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
8 2012 Annual Report – Financial Review
In addition to changes in operating income, over the past two years, net earnings and basic net earnings per common share were positively
impacted by a decline in net interest expense and other financing charges compared to 2010, driven primarily by reductions in long term debt.
Net earnings and basic net earnings per common share were also positively impacted by lower income taxes, partially due to declines in
statutory income tax rates.
In the last two years, total assets increased by 6.7% mainly due to increases in cash and cash equivalents, accounts receivable and credit
card receivables and the Company’s capital investment program, partially offset by declines in security deposits and other assets.
In the last two years, long term debt and capital securities decreased by 6.8%. In 2011, the Company repaid $500 million of Eagle Credit
Card Trust® (“Eagle”) medium term notes (“MTN”) and a $350 million, 6.5% MTN. These repayments were partially offset by an increase in
President’s Choice Bank’s (“PC Bank”) GIC program, which was introduced in 2010, and increases in debt associated with the Company’s
Independent Funding Trusts and finance lease obligations.
Cash flows from operating activities covered the Company’s funding requirements and exceeded the capital investment program in both 2012
and 2011.
6. Reportable Operating Segments Results of Operations
6.1 Retail Segment
For the periods ended December 29, 2012 and December 31, 2011
(millions of Canadian dollars except where otherwise indicated)
2012
(52 weeks)
2011
(52 weeks)
Sales
Gross profit
Operating income
Same-store sales(1) (decline) growth
Gross profit percentage
Operating margin(1)
$ 30,960
6,819
1,101
(0.2%)
22.0%
3.6%
$ 30,703
6,820
1,312
0.9%
22.2%
4.3%
$ Change
% Change
$ 257
(1)
(211)
0.8%
–
(16.1%)
Sales In 2012, the increase in Retail sales of $257 million, or 0.8% over 2011 was impacted by the following factors:
Same-store sales(1) decline was 0.2% (2011 – growth of 0.9%);
Sales growth in food was modest;
Sales in drugstore were flat;
Sales growth in gas bar was modest;
Sales in general merchandise, excluding apparel, declined moderately;
Sales in apparel were flat;
The Company experienced modest average annual internal food price inflation during 2012 (2011 – moderate inflation), which was
lower than the average annual national food price inflation of 2.3% (2011 – 4.2%) 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 2012, 18 (2011 – 26) corporate and franchise stores were opened and 11 (2011 – seven) corporate and franchise stores were
closed, resulting in a net increase of 0.3 million square feet, or 0.6%.
In 2012, the Company launched over 650 new control brand products and redesigned and/or improved the packaging of approximately 750
other products. Sales of control brand products in 2012 were $9.4 billion compared to $9.5 billion in 2011.
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
2012 Annual Report – Financial Review 9
Management’s Discussion and Analysis
Gross Profit For 2012, gross profit percentage was 22.0%, a decrease from 22.2% in 2011. This decline was primarily driven by investments in
food margins and increased shrink, partially offset by margin improvements in drugstore. Gross profit decreased by $1 million compared to
2011, mainly driven by the investments in gross profit percentage, almost completely offset by higher sales. In 2012, gross profit included an
estimated $35 million of the incremental investment in the Company’s customer proposition that was not covered by operations, of which $20
million was in price and $15 million was in shrink related to improved assortment in stores.
Operating Income Operating income decreased by $211 million, including the $61 million charge for restructuring, compared to 2011, while
operating margin(1) decreased to 3.6% for 2012 compared to 4.3% in 2011. In addition to the notable items described in the Consolidated
Results of Operations above, operating income and operating margin(1) were negatively impacted by an increase in labour and other operating
costs. The increase in labour included an estimated $20 million of the incremental investment in the Company’s customer proposition related
to improved service in stores that was not covered by operations.
6.2 Financial Services Segment
For the periods ended December 29, 2012 and December 31, 2011
(millions of Canadian dollars except where otherwise indicated)
2012
(52 weeks)
Revenue
Operating income
Earnings before income taxes
$ 644
95
50
2011
(52 weeks)
$ Change
% Change
$ 547
72
24
$ 97
23
26
17.7%
31.9%
108.3%
(millions of Canadian dollars except where otherwise indicated)
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card
receivables(1)
Annualized credit loss rate on average quarterly gross credit
card receivables(1)
As at
December 29, 2012
As at
December 31, 2011
$ Change
% Change
$ 2,105
2,305
43
12.8%
4.3%
$ 1,974
2,101
37
$ 131
204
6
6.6%
9.7%
16.2%
12.5%
4.2%
Revenue The $97 million increase in revenue compared to 2011 was primarily due to higher PC Telecom revenue resulting from the launch of
the new Mobile Shop kiosks in the fourth quarter of 2011 and higher interest and interchange fee income as a result of increased credit card
transaction values and higher credit card receivables balances.
Operating Income and Earnings Before Income Taxes Operating income increased by $23 million and earnings before income taxes
increased by $26 million compared to 2011. The increases were mainly attributable to the higher revenue described above, partially offset by
investments in the launch of the Mobile Shop kiosk business, higher PC points loyalty costs and a higher allowance for credit card receivables
on higher receivables balances. Earnings before income taxes also benefitted from a decrease in net interest expense and other financing
charges due to lower securitization costs.
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
10 2012 Annual Report – Financial Review
7. Liquidity and Capital Resources
7.1 Cash Flows
Major Cash Flow Components
For the periods ended December 29, 2012 and December 31, 2011
(millions of Canadian dollars except where otherwise indicated)
2012
(52 weeks)
2011
(52 weeks)
$ Change
% Change
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
$ 1,637
$ 1,814
$ (177)
(989)
(531)
(856)
(853)
(133)
322
(9.8%)
(15.5%)
37.7%
Cash Flows from Operating Activities Cash flows from operating activities of $1,637 million, decreased by $177 million compared to $1,814
million in 2011. Cash flows from operating activities for 2012 included EBITDA(1) of $1,973 million and a net investment in non-cash working
capital of $55 million, offset by income taxes paid of $232 million and a net increase in credit card receivables of $204 million.
The lower cash flows from operations compared to 2011 were mainly due to a decrease in EBITDA(1) and increase in credit card receivables,
partially offset by investment in non-cash working capital.
Cash Flows used in Investing Activities Cash flows used in investing activities of $989 million, increased by $133 million compared to
$856 million in 2011, primarily due to a reduction in security deposits as a result of the repayment of Eagle notes in 2011, increased fixed
asset purchases and intangible asset additions in 2012, including the purchase of Zellers prescription files for approximately $31 million.
Capital investment(2) in 2012 was $1.0 billion (2011 – $1.0 billion). Approximately 15% (2011 – 17%) of this investment was for new store
developments, expansions and land, approximately 31% (2011 − 32%) was for store conversions and renovations, and approximately 54%
(2011 − 51%) was for infrastructure investments.
The 2012 corporate and franchise store capital investment program, which included the impact of store openings and closures, resulted in
an increase in net retail square footage of 0.6% compared to 2011. During 2012, 18 (2011 – 26) corporate and franchise stores were
opened and 11 (2011 – seven) corporate and franchise stores were closed, resulting in a net increase of 0.3 million square feet (2011 – 0.5
million square feet). In 2012, 181 (2011 – 121) corporate and franchise stores were renovated.
As at December 29, 2012, the Company had committed approximately $60 million (2011 – $52 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 2013. Approximately 25% of these funds are expected
to be dedicated to investing in the IT and supply chain projects, 65% will be spent on retail operations and 10% on other infrastructure.
(1) See Non-GAAP Financial Measures on page 37
(2) For financial definitions and ratios refer to the Glossary of Terms on page 103.
2012 Annual Report – Financial Review 11
Management’s Discussion and Analysis
Capital Investment(1) and Store Activity
As at or for the periods ended December 29, 2012 and December 31, 2011
Capital investment(1) (millions of Canadian dollars)
Corporate square footage (in millions)
Franchise square footage (in millions)
Retail square footage(1) (in millions)
Number of corporate stores
Number of franchise stores
Percentage of corporate real estate owned
Percentage of franchise real estate owned
Average store size (square feet)
Corporate
Franchise
2012
(52 weeks)
$ 1,017
37.6
13.9
51.5
580
473
72%
45%
2011
(52 weeks)
$ 987
37.5
13.7
51.2
584
462
72%
46%
% Change
3.0%
0.3%
1.5%
0.6%
(0.7%)
2.4%
64,800
29,400
64,200
29,600
0.9%
(0.3%)
Cash Flows used in Financing Activities In 2012, cash flows used in financing activities of $531 million, decreased by $322 million
compared to $853 million in 2011. The decrease in cash flows used in financing activities was primarily due to lower net repayments of long
term debt and fewer cash payments of dividends, partially offset by cash received from the securitization of $370 million credit card
receivables in 2011.
Free Cash Flow(2) In 2012, free cash flow(2) of $824 million, decreased by $107 million compared to $931 million in 2011. This decrease was
primarily driven by the decrease in cash flows from operating activities and the increase in the Company’s capital investment program.
Defined Benefit Pension Plan Contributions During 2013, the Company expects to contribute approximately $150 million (2012 – contributed
approximately $150 million) to its registered funded defined benefit pension plans. The actual amount paid may vary from the estimate based on
actuarial valuations being completed, investment performance, volatility in discount rates, regulatory requirements and other factors. In 2013, the
Company also expects to make contributions to its defined contribution plans and multi-employer pension plans in which it participates as well as
make benefit payments to the beneficiaries of the supplemental unfunded defined benefit pension plans, other defined benefit plans and other
long term employee benefit plans.
7.2 Sources of Liquidity
Adjusted Debt(2) to EBITDA(2) The Company monitors its adjusted debt(2) to EBITDA(2) ratio as a measure to ensure it is operating under an
efficient capital structure. As at December 29, 2012, the Company’s adjusted debt(2) to EBITDA(2) ratio was 2.2x compared to 2.1x as at
December 31, 2011. The increase was driven primarily by capital lease obligations, which increased adjusted debt(2), while lower operating
income from the retail business contributed to a decrease in EBITDA(2).
The Company expects that cash and cash equivalents, short term investments, future operating cash flows and the amounts available to be
drawn against its $800 million committed credit facility (“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 an MTN program. The Company may refinance maturing long
term debt 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 material impediments in obtaining financing to satisfy its long term obligations.
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
(2) See Non-GAAP Financial Measures on page 37.
12 2012 Annual Report – Financial Review
During 2012, the Company renewed and extended the Credit Facility to March 2017. As at December 29, 2012 and December 31, 2011, there
were no amounts drawn upon the Credit Facility. During 2011, the Company amended its agreements for the Credit Facility and its United
States dollar (“USD”) $300 million private placement notes to include certain relevant IFRS adjustments in computing the financial metrics that
are used in calculating the Company’s financial covenants. These amendments largely served to neutralize the impact of IFRS on the
covenant calculations as of the date of conversion. As at December 29, 2012, the Company was in compliance with all of its covenants.
In December 2012, the Company filed a Short Form Base Shelf Prospectus (“Prospectus”), which expires in 2015, allowing for the potential
issuance of up to $1.0 billion of unsecured debentures and/or preferred shares subject to the availability of funding in capital markets. The
Company had filed a similar Prospectus in 2010 that expired in 2012.
During 2012, the Company entered into agreements to cash collateralize certain of its uncommitted credit facilities up to an amount of $133
million (2011 – $88 million), of which $97 million (2011 – $85 million) was deposited with major financial institutions and classified as security
deposits as at December 29, 2012.
The Company’s debt and preferred share instruments are rated by two independent credit rating agencies: Dominion Bond Rating Service
(“DBRS”) and Standard & Poor’s (“S&P”). During the fourth quarter of 2012, DBRS and S&P reaffirmed the Company’s credit ratings and trend
and outlook, respectively, following the Company’s announcement of its intention to create a REIT. These ratings 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)
Medium term notes
Preferred shares
Other notes and debentures
Dominion Bond Rating Service
Credit Rating
BBB
Pfd-3
BBB
Trend
Stable
Stable
Stable
Standard & Poor's
Credit Rating
BBB
P-3 (high)
BBB
Outlook
Stable
Stable
Stable
Independent Securitization Trusts The Company, through PC Bank, participates in various securitization programs that provide the primary
source of funds for the operation of its credit card business. PC Bank sells credit card receivables to these Independent Securitization Trusts,
including Eagle and Other Independent Securitization Trusts, from time to time depending on PC Bank’s financing requirements. During 2012,
PC Bank amended and extended the maturity date for two of its independent securitization trust agreements from the third quarter of 2013 to the
second quarter of 2015, with all other terms and conditions remaining substantially the same.
The Company has arranged letters of credit on behalf of PC Bank, representing 9% (2011 – 9%) of the outstanding securitized liability for
the benefit of the Other Independent Securitization Trusts in the amount of $81 million (2011 – $81 million). In the event of a major decline in
the income flow from or in the value of the securitized credit card receivables, the Other Independent Securitization Trusts can draw upon
these letters of credit to recover up to a maximum of the amount outstanding on the letters of credit. Under its securitization programs, PC
Bank is required to maintain at all times a credit card receivable pool balance equal to a minimum of 107% of the outstanding securitized
liability and was in compliance with this requirement throughout the year.
Guaranteed Investment Certificates In addition to participating in various securitization programs to fund its operations, PC Bank also
obtains short term and long term financing through its GIC Program. During 2012, PC Bank sold $76 million (2011 – $264 million) in GICs
through independent brokers. In addition, during 2012, $49 million (2011 – $6 million) of GICs matured and were repaid. As at December 29,
2012, $303 million (December 31, 2011 – $276 million) in GICs were recorded in long term debt, of which $36 million (December 31, 2011 –
$46 million) were recorded as long term debt due within one year.
2012 Annual Report – Financial Review 13
Management’s Discussion and Analysis
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 independent funding trusts are administered by a major financial institution. During 2012,
the Company amended and increased the size of the revolving committed credit facility that is the source of funding to the independent
funding trust from $475 million to $575 million. Other terms and conditions remain substantially the same. This facility bears interest at
variable rates and expires in 2014. As at December 29, 2012, the independent funding trust had drawn $459 million (December 31, 2011 –
$424 million) from this committed credit facility.
The Company provides credit enhancement in the form of a standby letter of credit for the benefit of the independent funding trusts
representing not less than 10% (2011 – 10%) of the principal amount of the loans outstanding. As at December 29, 2012, the Company had
provided a letter of credit in the amount of $48 million (December 31, 2011 – $48 million). The credit enhancement allows the independent
funding trusts to provide financing to the Company’s independent franchisees. As well, each franchisee provides security to the independent
funding trusts 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
trusts would assign the loan to the Company and draw upon this standby letter of credit. This standby letter of credit has never been drawn
upon. The Company has agreed to reimburse the issuing bank for any amount drawn on the standby letter of credit.
7.3 Capital Structure
First Preferred Shares 1.0 million non-voting First Preferred Shares are authorized, none of which were issued and outstanding at year end.
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.
Common Share Capital An unlimited number of common shares are authorized, 281,680,157 of which were outstanding at year end.
At year end, a total of 12,538,928 stock options were outstanding, representing 4.5% of the Company’s issued and outstanding common
shares. Each stock option is exercisable into one common share of the Company at the price specified in the terms of the option agreement.
At the Company’s Annual and Special Meeting of Shareholders on May 3, 2012, the shareholders approved an amendment to the
Company’s employee stock option plan that increased the total number of common shares authorized for issuance under the plan by
14,428,484 to 28,137,162 common shares. This amendment increased the Company’s number of common shares authorized for issuance
under the stock option plan from 5% to 10% of the total issued and outstanding common shares.
Dividends
The amount of cash dividends declared in 2012 and 2011 is as follows:
For the periods ended December 29, 2012 and December 31, 2011
2012
2011
Dividends declared per share ($):
Common share
Second Preferred Share, Series A
$ 0.85
$ 1.49
$ 0.84
$ 1.49
14 2012 Annual Report – Financial Review
During 2012, the Company amended its dividend policy to state: the declaration and payment of dividends on the Company’s common
shares and the amount thereof are at the discretion of the Board of Directors (“Board”), which takes into account the Company’s financial
results, capital requirements, available cash flow, future prospects of the Company’s business and other factors considered relevant from
time to time. Over the long term, it is the Company’s intention to increase the amount of the dividend while retaining appropriate free cash
flow to finance future growth. During the fourth quarter of 2012, the Board raised the quarterly dividend by approximately 4.8%, to $0.22 per
common share.
Subsequent to the end of the year, the Board declared a quarterly dividend of $0.22 per common share payable April 1, 2013 and a quarterly
dividend of $0.37 per Second Preferred Share, Series A payable April 30, 2013. At the time dividends are declared, the Company identifies on its
website (loblaw.ca) the designation of eligible and ineligible dividends in accordance with the administrative position of the Canada Revenue
Agency.
Normal Course Issuer Bid During 2012, the Company 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 14,070,352 (2011 – 14,096,437) of the Company’s common shares,
representing approximately 5% of the common shares outstanding. In accordance with the rules and by-laws of the TSX, any purchases must
be at the then market prices of such shares. During 2012, the Company purchased for cancellation 423,705 (2011 – 1,021,986) common
shares under the NCIB, resulting in a charge to retained earnings of $14 million (2011 – $33 million) for the premium on the common shares
and a reduction in common share capital of $2 million (2011 – $6 million). The Company intends to renew its NCIB in 2013.
7.4 Financial Derivative Instruments
Cross Currency Swaps As at December 29, 2012, Glenhuron Bank Limited (“Glenhuron”) held cross currency swaps to exchange USD for
$1,199 million (December 31, 2011 – $1,252 million) Canadian dollars. The swaps mature by 2019 and are financial derivatives classified as
fair value through profit or loss. Currency adjustments receivable or payable arising from these swaps are settled in cash on maturity. As at
December 29, 2012, a cumulative unrealized foreign currency exchange rate receivable of $93 million (December 31, 2011 – $89 million) was
recorded in other assets, and a receivable of $20 million (December 31, 2011 – $48 million) was recorded in prepaid expenses and other
assets. During 2012, a fair value gain of $25 million (2011 – loss of $29 million) was recognized in operating income relating to these cross
currency swaps. Offsetting the fair value gain was a loss of $27 million (2011 – gain of $25 million) as a result of translating USD $1,113
million (December 31, 2011 – USD $1,073 million) cash and cash equivalents, short term investments and security deposits, which was also
recognized in operating income.
In 2008, the Company entered into fixed cross currency swaps to exchange $148 million Canadian dollars for USD $150 million, which mature
in the second quarter of 2013 and entered into additional fixed cross currency swaps to exchange $148 million Canadian dollars for USD $150
million, which mature by 2015. A portion of these cross currency swaps was originally designated in a cash flow hedge to manage the foreign
exchange variability related to part of the Company’s fixed rate US Private Placement (“USPP”) notes. In 2011, the designated swap was no
longer classified as a cash flow hedge and as a result, fair value changes were recorded in operating income. As at December 29, 2012, a
cumulative unrealized foreign currency exchange rate receivable of $5 million (December 31, 2011 – $14 million) was recorded in other assets
and a receivable of $2 million (December 31, 2011 – nil) was recorded in prepaid expenses and other assets. During 2012, the Company
recognized in operating income an unrealized fair value loss of $7 million (2011 – gain of $2 million) on these cross currency swaps. Offsetting
the unrealized fair value loss was an unrealized foreign currency exchange gain of $6 million (2011 – loss of $6 million), which was also
recognized in operating income, related to the translation of USD $300 million USPP.
Interest Rate Swaps The Company maintains a notional $150 million (2011 − $150 million) in interest rate swaps that mature by the third
quarter of 2013, on which it pays a fixed rate of 8.38%. At December 29, 2012, the fair value of these interest rate swaps of $5 million
(December 31, 2011 – $16 million) was recorded in other liabilities. During 2012, the Company recognized a fair value gain of $11 million
(2011 – gain of $8 million) in operating income related to these swaps.
Interest rate swaps previously held by Glenhuron converted a notional $200 million of floating rate cash and cash equivalents, short term
investments and security deposits to average fixed rate investments at 4.74%. These interest rate swaps matured in 2011. During 2012, no
fair value loss (2011 – $7 million) was recognized on these interest rate swaps in operating income.
2012 Annual Report – Financial Review 15
Management’s Discussion and Analysis
Equity Forward Contracts As at December 29, 2012, Glenhuron had cumulative equity forward contracts to buy 1.1 million (December 31,
2011 – 1.1 million) of the Company’s common shares at an average forward price of $56.59 (December 31, 2011 – $56.38) including $0.16
interest expense (December 31, 2011 – $0.05 interest income) per common share. In 2012, Glenhuron recognized a $5 million gain (2011 –
$2 million expense) in operating income in relation to these equity forwards. In addition, during 2011 Glenhuron paid $7 million to settle equity
forwards representing 390,100 Loblaw common shares, which the Company purchased for cancellation for $15 million under its NCIB.
As at December 29, 2012, the cumulative accrued interest and unrealized market loss of $16 million (December 31, 2011 – loss of $20 million)
was included in trade payables and other liabilities. Subsequent to the end of 2012, these equity forwards were settled. Please refer to Section
8. Other Business Matters for further details.
7.5 Contractual Obligations
The following illustrates certain of the Company’s significant contractual obligations and discusses other obligations as at December 29, 2012:
Summary of Contractual Obligations
(millions of Canadian dollars)
Long term debt (including fixed interest
payments(1))
Operating leases(2)
Contracts for purchases of
Real property and Capital
Investment projects(3)
Purchase obligations(4)
2013
2014
2015
2016
2017
Thereafter
Total
Payments due by year
$ 973
202
$ 1,237
185
$ 777
162
$ 640
132
$ 284
108
$ 5,925
442
$ 9,836
1,231
57
142
1
107
1
73
1
25
–
24
–
–
60
371
Total contractual obligations
$ 1,374
$ 1,530
$ 1,013
$ 798
$ 416
$ 6,367
$ 11,498
(1) Fixed interest payments are based on the maturing face values and annual interest for each instrument, including GICs, long term independent securitization trusts and an
independent funding trust, as well as annual payment obligations for Special Purpose Entities, mortgages and finance lease obligations.
(2) Represents the minimum or base rents payable. Amounts are not offset by any expected sub-lease income.
(3) These obligations include agreements for the purchase of real property and capital commitments for construction, expansion and renovation of buildings. These agreements
(4)
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.
Include contractual obligations to purchase goods or services of a material amount 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 additional long term liabilities which included defined benefit plan and other long term employee benefit plan
liabilities, deferred vendor allowances, share-based compensation liabilities and provisions, including insurance liabilities. These long term
liabilities have not been included above as the timing and amount of future payments are uncertain.
7.6 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, securitization of PC Bank’s credit card receivables and third
party financing made available to the Company’s independent franchisees. The aggregate gross potential liability related to the Company’s
letters of credit is approximately $477 million (2011 – $443 million).
16 2012 Annual Report – Financial Review
Guarantees In addition to the letters of credit mentioned above, the Company has entered into various guarantee agreements including
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 provided a guarantee on behalf of PC Bank to MasterCard® International Incorporated
in the amount of USD $230 million (2011 – USD $180 million) for accepting PC Bank as a card member and licensee of MasterCard®.
8. Other Business Matters
IT and Other Systems Implementations The Company is undertaking a major upgrade of its IT infrastructure that began in 2010. This project
constitutes one of the largest technology infrastructure programs ever implemented by the Company and is fundamental to its long term growth
strategies. During 2012, the Company continued to make progress on the implementation of the new IT system and successfully achieved two of
its key milestones – the implementation at the first distribution centre and first store, with little to no impact to the Company’s customers. In
addition, in 2012, as part of the implementation process, the Company added all of the supply chain master data to the system. This master
data, including delivery schedules, replenishment and costing information, now originates in the new system. In 2013, the Company will roll-out
the IT system to the remaining distribution centres and a portion of the store network.
Real Estate Investment Trust In December 2012, the Company announced its intention to create a REIT, which will acquire a significant portion
of Loblaw’s real estate assets and sell units by way of an IPO. The IPO of the REIT is expected to be completed by mid-2013, subject to
prevailing market conditions and receipt of required regulatory approvals, including approval to list the units on the TSX.
Restricted Share Unit and Performance Share Unit Plans Subsequent to the end of the year, the Company’s Restricted Share Unit (“RSU”)
and Performance Share Unit (“PSU”) plans were amended to require settlement in equity. A trust has been established to facilitate the purchase
of shares for future settlement for each of the RSU and PSU plans upon vesting. These trusts will be consolidated into the results of the
Company on an ongoing basis. On January 7, 2013, Glenhuron paid $16 million to settle the remaining equity forwards representing 1,103,500
Loblaw common shares, which the Company purchased under its NCIB for $46 million, and placed them into the trusts.
Pension Plan Changes Subsequent to the end of the year, the Company announced changes to certain of its defined benefit pension and
post-employment benefits plans impacting certain employees retiring after January 1, 2015. These changes are expected to result in a one-
time gain of approximately $51 million, which will be recorded in the first quarter of 2013.
9. Quarterly Results of Operations
9.1 Results by Quarter
Under an accounting convention common in the food retail industry the Company follows a 52-week reporting cycle which periodically
necessitates a fiscal year of 53 weeks. 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 period condensed consolidated financial statements for each of the eight most recently completed quarters.
2012 Annual Report – Financial Review 17
Management’s Discussion and Analysis
Summary of Consolidated Quarterly Results
(millions of Canadian dollars except where
otherwise indicated) (unaudited)
First
Quarter
Third
Second
Quarter Quarter
Fourth
Quarter
2012
Total
(audited)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2011
Total
(audited)
(12 weeks)
(12 weeks)
(16 weeks)
(12 weeks)
(52 weeks)
(12 weeks)
(12 weeks)
(16 weeks)
(12 weeks)
(52 weeks)
Revenue
Net earnings
$ 6,937 $ 7,375 $ 9,827 $ 7,465
$ 31,604 $ 6,872 $ 7,278 $ 9,727 $ 7,373 $ 31,250
126
159
222
143
650
162
197
236
174
769
Net earnings per common share
Basic ($)
Diluted ($)
Average national food price
$ 0.45 $ 0.57 $ 0.79 $ 0.51
$ 2.31 $ 0.58 $ 0.70 $ 0.84 $ 0.62 $ 2.73
$ 0.45 $ 0.56 $ 0.77 $ 0.48
$ 2.28
$ 0.56 $ 0.69 $ 0.83 $ 0.60 $ 2.71
inflation (as measured by CPI)
3.7%
2.5%
1.8%
1.5%
2.3%
2.5%
4.0%
4.9%
5.2%
4.2%
Retail same-store sales(1)
(decline) growth
(0.7%)
0.2%
(0.2%)
0.0%
(0.2%)
(0.1%)
(0.4%)
1.3%
2.5%
0.9%
The Company’s average quarterly internal retail food price inflation for 2011 and 2012 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 0.8 million square feet, to 51.5 million square feet.
Fluctuations in quarterly net earnings during 2012 reflect the underlying operations of the Company and are impacted by seasonality and the
timing of holidays and were impacted by the following significant items:
Costs associated with reducing head office and administrative positions;
Costs related to the transition of certain Ontario conventional stores to the more cost effective and efficient operating terms of collective
Incremental costs related to investments in IT and supply chain;
agreements ratified in 2010;
The impact of share-based compensation net of equity forwards;
Fixed asset impairment charges and recoveries and other related charges;
Start-up costs associated with the launch of the Joe Fresh brand in the United States incurred in the fourth quarter of 2011;
Costs related to certain prior years’ commodity tax matters incurred in the second quarter of 2011;
Costs associated with the re-alignment of the Retail segment into a two division structure – conventional and discount, incurred in the
first quarter of 2011; and
A gain recognized related to the sale of a portion of a property in North Vancouver, British Columbia in the third quarter of 2011.
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
18 2012 Annual Report – Financial Review
9.2 Fourth Quarter Results
The following is a summary of selected consolidated unaudited financial information for the fourth quarter of 2012.
Selected Consolidated Information for the Fourth Quarter
For the periods ended December 29, 2012 and December 31, 2011
(unaudited)
2012
2011
(millions of Canadian dollars except where otherwise indicated)
(12 weeks)
(12 weeks)
$ Change
% Change
Revenue
Operating income
Interest expense and other financing charges
Income taxes
Net earnings
Basic net earnings per common share ($)
Operating margin(1)
EBITDA(2)
EBITDA margin(2)
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Dividends declared per common share ($)
Dividends declared on Second Preferred Share, Series A ($)
$ 7,465
262
80
39
143
$ 7,373
315
81
60
174
0.51
3.5%
449
6.0%
605
(223)
(54)
0.22
0.37
0.62
4.3%
485
6.6%
620
(414)
(226)
0.21
0.37
$ 92
(53)
(1)
(21)
(31)
(0.11)
1.2%
(16.8%)
(1.2%)
(35.0%)
(17.8%)
(17.7%)
(36)
(7.4%)
(15)
191
172
0.01
–
(2.4%)
46.1%
76.1%
4.8%
–
During the fourth quarter of 2012, the Company announced a plan that reduced the number of head office and administrative positions. Focused
primarily on management and office positions, the plan affected approximately 700 jobs. In the fourth quarter of 2012, the Company incurred a
$61 million charge associated with this restructuring.
During the fourth quarter of 2012, the Company incurred a $15 million charge related to its incremental investment in its customer proposition
that was not covered by operations. Of this amount, $10 million was in shrink, which was included in gross profit, and $5 million was in
labour.
The $92 million increase in revenue compared to the fourth quarter of 2011 was driven by increases in both the Company’s Retail and Financial
Services operating segments, as described below.
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
(2) See Non-GAAP Financial Measures on page 37.
2012 Annual Report – Financial Review 19
Management’s Discussion and Analysis
Operating income decreased by $53 million compared to the fourth quarter of 2011 as a result of a decrease in Retail operating income of
$69 million partially offset by an increase in Financial Services operating income of $16 million. Consolidated operating income included the
following notable items:
A $61 million charge associated with the reduction in head office and administrative positions;
Incremental costs of $19 million related to investments in IT and supply chain. These costs included the following charges:
o
o
o
o
$79 million (2011 – $67 million) related to IT costs;
$53 million (2011 – $43 million) related to depreciation and amortization;
$2 million (2011 – nil) related to changes in the distribution network; and
$2 million (2011 – $7 million) related to other supply chain project costs.
A $17 million charge (2011 – $5 million) for fixed asset impairments net of recoveries, related to asset carrying values in excess of
recoverable amounts for specific retail locations;
A $5 million charge (2011 – $23 million) related to the transition of certain Ontario conventional stores to the more cost effective and
efficient operating terms of collective agreements ratified in 2010;
A $2 million charge (2011 – $4 million) related to the effect of share-based compensation net of equity forwards; and
A nil charge (2011 – $16 million) related to start-up costs associated with the launch of the Company’s Joe Fresh brand in the United
States.
Operating margin(1) was 3.5%, or 4.3% excluding the charge for restructuring, for the fourth quarter of 2012, compared to 4.3% in the same
quarter in 2011.
EBITDA(2) decreased by $36 million in the fourth quarter of 2012, including the $61 million charge for restructuring, compared to 2011.
EBITDA margin(2) was 6.0%, or 6.8% excluding the charge for restructuring, compared to 6.6% in the fourth quarter of 2011.
In the fourth quarter of 2012, net interest expense and other financing charges was consistent with the fourth quarter of 2011.
The income tax expense for the fourth quarter 2012 was $39 million (2011 – $60 million). The effective income tax rate for the fourth quarter
of 2012 was 21.4% (2011 – 25.6%). This decrease was primarily due to further reductions in the Federal and Ontario statutory income tax
rates and a change in the proportion of taxable income earned across different tax jurisdictions.
The decrease in net earnings of $31 million compared to the fourth quarter of 2011 was primarily due to the decrease in operating income,
partially offset by the decline in the effective income tax rate.
Basic net earnings per common share were impacted by the following notable items:
A $0.16 charge related to the reduction in head office and administrative positions;
A $0.05 charge related to incremental investments in IT and supply chain;
A $0.05 charge (2011 – $0.01) for fixed asset impairments net of recoveries;
A $0.01 charge (2011 – $0.06) related to the transition of certain Ontario conventional stores to the operating terms under collective
agreements ratified in 2010;
A nil charge (2011 – $0.01) related to the effect of share-based compensation net of equity forwards; and
A nil charge (2011 – $0.04) related to the start-up costs associated with the launch of the Company’s Joe Fresh brand in the United
States.
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
(2) See Non-GAAP Financial Measures on page 37.
20 2012 Annual Report – Financial Review
Cash flows from operating activities for the fourth quarter of 2012 of $605 million, decreased by $15 million compared to $620 million in
2011. Cash flows from operating activities for the fourth quarter of 2012 included EBITDA(1) of $449 million and a change in non-cash
working capital of $431 million, partially offset by a change in credit card receivables of $232 million. The decrease in cash flows from
operations was primarily due to a decrease in EBITDA(1) in the fourth quarter of 2012 compared to 2011 and an increase in the investment in
credit card receivables, partially offset by a reduction in the investment in non-cash working capital.
Cash flows used in investing activities in the fourth quarter of 2012 of $223 million, decreased $191 million compared to $414 million in the
fourth quarter of 2011. The decrease in cash flows used was primarily driven by change in security deposits, including $97 million of cash
collateralized for letter of credit facilities, an increase in short term investments and higher proceeds from fixed asset sales.
Cash flows used in financing activities in the fourth quarter of 2012 of $54 million, decreased by $172 million compared to $226 million in the
same period in 2011. The decrease in cash flows used in financing activities was primarily due to higher net issuances of long term debt and
fewer cash dividends paid.
Retail Segment Fourth Quarter Results of Operations
For the periods ended December 29, 2012 and December 31, 2011
(unaudited)
(millions of Canadian dollars except where otherwise indicated)
2012
(12 weeks)
2011
(12 weeks)
Sales
Gross profit
Operating income
Same-store sales(2) growth
Gross profit percentage
Operating margin(1)
$ 7,289
1,575
228
0.0%
21.6%
3.1%
$ 7,226
1,569
297
2.5%
21.7%
4.1%
$ Change
% Change
$ 63
6
(69)
0.9%
0.4%
(23.2%)
In the fourth quarter of 2012, the increase of $63 million in Retail sales over the same period in the prior year was impacted by the following
factors:
Same-store sales(2) were flat (2011 – growth of 2.5%), with an extra day of store operations having a positive impact on 2011 same-store
sales(2) estimated to be between 0.8% and 1.0%;
Sales growth in both food and drugstore were modest;
Sales growth in gas bar was moderate;
Sales in general merchandise, excluding apparel, declined moderately;
Sales in apparel were flat;
The Company’s average quarterly internal food price index was flat during the fourth quarter of 2012 (2011 – moderate inflation), which
was lower than the average quarterly national food price inflation of 1.5% (2011 – 5.2%) as measured by CPI. CPI does not necessarily
reflect the effect of inflation on the specific mix of goods sold in Loblaw stores; and
18 corporate and franchise stores were opened and 11 corporate and franchise stores were closed in the last 12 months, resulting in a
net increase of 0.3 million square feet, or 0.6%.
In the fourth quarter of 2012, gross profit percentage was 21.6%, a decrease from 21.7% in the fourth quarter of 2011. This decline was
primarily driven by investments in food margins and increased shrink, partially offset by margin improvements in drugstore and general
merchandise and decreased transportation costs. Gross profit increased by $6 million compared to the fourth quarter of 2011, primarily driven
by higher sales, partially offset by investments in gross profit percentage. Increased shrink expense included an estimated $10 million of the
incremental investment in the Company’s customer proposition related to improved assortment in stores that was not covered by operations.
(1) See Non-GAAP Financial Measures on page 37.
(2) For financial definitions and ratios refer to the Glossary of Terms on page 103.
2012 Annual Report – Financial Review 21
Management’s Discussion and Analysis
Operating income decreased by $69 million, including the $61 million charge for restructuring, compared to the fourth quarter of 2011 and
operating margin(1) was 3.1%, or 4.0% excluding the restructuring charge, for the fourth quarter of 2012 compared to 4.1% in the same period
in 2011. In addition to the notable items described in the Consolidated Results of Operations above, operating income and operating margin(1)
were negatively impacted by foreign exchange losses and increased labour costs, partially offset by other operating cost efficiencies and an
increase in gross profit. Increased labour costs included an estimated $5 million of the incremental investment in the Company’s customer
proposition related to improved service in the stores that was not covered by operations.
Financial Services Segment Fourth Quarter Results of Operation
For the periods ended December 29, 2012 and December 31, 2011
(unaudited)
(millions of Canadian dollars except where otherwise indicated)
Revenue
Operating income
Earnings before income taxes
2012
(12 weeks)
2011
(12 weeks)
$ Change
% Change
$ 176
34
23
$ 147
18
7
$ 29
16
16
19.7%
88.9%
228.6%
(millions of Canadian dollars except where otherwise indicated)
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card
receivables(1)
Annualized credit loss rate on average quarterly gross credit
card receivables(1)
As at
December 29, 2012
$ 2,105
2,305
43
12.8%
4.3%
As at
December 31, 2011
$ 1,974
2,101
37
12.5%
4.2%
$ Change
$ 131
204
6
% Change
6.6%
9.7%
16.2%
The 19.7% increase in revenue over the fourth quarter of 2011 was driven by higher PC Telecom revenues resulting from the 2011 launch of
Mobile Shop kiosks and higher interest income and interchange fee income as a result of higher credit card transaction values and
increased credit card receivable balances.
The increases of $16 million in operating income and in earnings before income taxes compared to the fourth quarter of 2011 were mainly
attributable to the higher revenue described above and lower costs related to the renegotiation of vendor contracts. This was partially offset
by investments in the launch of PC Telecom’s Mobile Shop kiosks and an increased allowance for credit card receivables as a result of
quarterly growth in the credit card receivables program.
10. 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.
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 the effectiveness of the disclosure controls and procedures to be evaluated.
Based on that evaluation, they have concluded that the design and operation of the system of disclosure controls and procedures were effective
as at December 29, 2012.
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
22 2012 Annual Report – Financial Review
11. 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 consolidated financial statements for external purposes in
accordance with IFRS.
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 the effectiveness of the internal controls over financial reporting to be evaluated
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 December 29, 2012.
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 The Company successfully implemented the IT system in the fourth quarter of
2012 at one distribution centre and at one store. These implementations resulted in changes to the Company’s internal controls over
financial reporting during the fourth quarter of 2012 impacting the store, the distribution centre and a significant number of legacy corporate,
franchise, and affiliate stores that the distribution centre services. The changes in controls have materially affected the Company’s internal
controls over financial reporting impacting the following key areas: (1) Accounts Payable, (2) Cash Management, (3) Order Processing and
Billing, (4) Vendor Income, (5) Costing, (6) Inventory Management and Valuation and (7) Credit Management.
Except for the preceding changes, there were no other changes in the Company’s internal controls over financial reporting during the fourth
quarter of 2012 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
12. 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.
Risks are not eliminated through the ERM program. Risks are identified and managed within understood risk tolerances. The ERM program is
designed to:
promote a culture of 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 methodologies and tools across the organization; and
enable the Company to focus on its key risks in the business planning process and reduce harm to financial performance through
responsible risk management.
2012 Annual Report – Financial Review 23
Management’s Discussion and Analysis
Risk identification and assessments are important elements of the Company’s ERM framework. An annual ERM assessment is completed to
assist in the update and identification of internal and external risks, which are both strategic and operational in nature. Key risks affecting the
Company are prioritized under five categories: financial, operational, regulatory, human capital and reputational risks. The annual ERM
assessment is carried out through interviews, surveys and facilitated workshops with management and the Board. Risks are assessed and
evaluated based on the Company’s vulnerability to the risk and the potential impact that the underlying risks would have on the Company’s
ability to execute its strategies and achieve its objectives. Risk owners are assigned relevant risks and key risk indicators are developed.
Management provides a semi-annual update to a Committee of the Board on the status of the top risks based on significant changes from
the prior update, anticipated impacts in future quarters and significant changes in key risk indicators. In addition, the long term (3-5 year) risk
level is assessed to monitor potential long term risk impacts, which may assist in risk mitigation planning activities. Accountability for
oversight of the management of each risk is allocated by the Board either to the full Board or to a Committee of the Board.
The operating, financial, regulatory, human capital and reputational risks and risk management strategies are discussed below. Any of these
risks has the potential to negatively affect the Company and its financial performance. The Company has risk management strategies, including
insurance programs, that are intended to mitigate the potential impact of these risks. However, these strategies do not guarantee that the
associated risks will be mitigated or will not materialize or that events or circumstances will not occur that could negatively affect the Company’s
financial condition or performance.
12.1 Operating Risks and Risk Management
The following is a summary of the Company’s operating risks which are discussed in detail below:
Systems Implementations
Information Integrity and Reliability
Availability, Access and Security of Information Technology
Change Management and Process Execution
Food Safety and Public Health
Competitive Environment
Economic Environment
Merchandising
Distribution and Supply Chain
Disaster Recovery and Business Continuity
Real Estate Investment Trust Initial Public Offering
Discussion of Operating Risks and Risk Management Strategies
Colleague Retention and Succession Planning
Labour Relations
Regulatory and Tax
Privacy and Information Security
Franchisee Independence and Relationships
Inventory Management
Vendor Management and Third Party Service Providers
Environmental
Trademark and Brand Protection
Defined Benefit Pension Plans
Multi-Employer Pension Plans
Systems Implementations The Company continues to undertake a major upgrade of its IT infrastructure. Completing the IT system deployment
will require continued focus and investment. Failure to successfully migrate from legacy systems to the IT system or disruption in the Company’s
current IT systems during the implementation of the new IT systems, could result in a lack of accurate data to enable management to effectively
achieve its strategic plan or manage the day-to-day operations of the business, causing significant disruptions to the business and potential
financial losses. Failure to implement appropriate processes to support the IT system could result in inefficiencies and duplication in processes
and could negatively affect the reputation, operations, revenues and financial performance of the Company.
Information Integrity and Reliability Management depends on relevant, reliable and accessible information for decision making purposes,
including key performance indicators and financial reporting. Lack of relevant, reliable and accessible information that enables management to
effectively manage the business could preclude the Company from optimizing its overall performance. Any significant loss of data or failure to
maintain reliable data could negatively affect the reputation, operations and financial performance of the Company.
24 2012 Annual Report – Financial Review
Availability, Access and Security of Information Technology The Company is reliant on the continuous and uninterrupted operations of
information technology systems. Point of sale availability, 24/7 user access and security of all IT systems are critical elements to the
operations of the Company. Any IT failure pertaining to availability, access or system security could result in disruption for the customer, lost
revenue and could negatively impact the Company's operations, reputation or financial performance.
Change Management and Process Execution Significant initiatives within the Company, including the execution of the IT infrastructure
plan, are underway. Ineffective 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. 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 could not achieve the expected cost savings and other benefits of its initiatives. Failure to properly execute the
various processes will increase the risk of customer dissatisfaction, which in turn could negatively affect the reputation, operations 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 could arise as part of the procurement, distribution, preparation or display of products, including the Company’s control brand
products. The Company could be adversely affected 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 harm to the Company’s customers, negative publicity or
damage to the Company’s brands and could lead to unforeseen liabilities from legal claims or otherwise. In addition, failure to trace or locate
any contaminated or defective products could affect the Company’s ability to be effective in a recall situation. Any of these events, as well as
the failure to maintain the cleanliness and health standards at store level, could negatively affect the reputation, operations and financial
performance of the Company.
The Company has an incident management process in place to manage such events, should they occur. 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 negatively affect the reputation, operations and financial performance 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 strategic plans its financial performance could be negatively affected.
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 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. 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. Failure by the Company to sustain
its competitive position could negatively affect the financial performance of the Company.
Economic Environment Economic factors that impact consumer spending patterns could deteriorate or remain unpredictable due to global,
national or regional economic volatility. These factors include high levels of unemployment and household debt, increased interest rates,
inflation, foreign exchange rates and commodity prices and access to consumer credit. Any of these factors could negatively affect the
Company’s revenue and margins. Inflationary trends are unpredictable and changes in the rate of inflation or deflation will affect consumer
prices, which in turn could negatively affect the financial performance of the Company.
Merchandising The Company could have goods and services that customers do not want or need, are not reflective of current trends in
customers’ tastes, habits, or regional preferences, are priced at a level customers are not willing to pay or are late in reaching the market.
Innovation is critical if the Company is to respond to customer demands and stay competitive in the marketplace. If merchandising efforts
are not effective or responsive to customer demand, the operations and financial performance of the Company could be negatively affected.
2012 Annual Report – Financial Review 25
Management’s Discussion and Analysis
Distribution and Supply Chain Failure to continue to invest in and improve the Company’s supply chain could adversely affect the
Company’s capacity to effectively and efficiently attract and retain current and potential customers. Any delay or disruption in the flow of goods
to stores, could negatively affect the operations and financial performance of the Company.
Disaster Recovery and Business Continuity The Company’s ability to continue critical operations and processes could be negatively
impacted by adverse events resulting from various incidents, including severe weather, work stoppages, prolonged IT failure, power failures,
border closures or a pandemic or other national or international catastrophe. The Company has an enterprise wide business continuity
program, which reduces, but does not completely mitigate, the risk of business interruptions, crises or potential disasters, which could
negatively affect the reputation, operations and financial performance of the Company.
Real Estate Investment Trust Initial Public Offering On December 6, 2012, the Company announced its intention to create a REIT to acquire
a significant portion of the Company’s real estate assets and for the REIT to sell trust units to the public by way of an IPO. The Company
estimates that it will initially sell to the REIT real estate with a current market value exceeding $7 billion and it intends to retain a significant
majority interest in the REIT. The Company expects the IPO to be completed in mid-2013. However, completion of the IPO and the purchase of
certain of the Company’s real estate assets will be subject to prevailing market conditions and receipt of required regulatory approvals, including
approval to list the trust units on the TSX. In addition, the execution and implementation of the REIT’s IPO will have a significant impact on the
Company’s management and operations as a result of the time and attention required of management to complete the offering. Failure to
properly execute and implement the REIT’s IPO could adversely affect the reputation, operations and financial performance of the Company.
Colleague Retention and Succession Planning 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. If the Company is not effective in establishing appropriate succession planning processes and retention strategies, it could
lead to a lack of requisite knowledge, skills and experience on the part of management. This, in turn, could adversely affect the Company’s
ability to execute its strategies, and negatively affect its reputation, operations and financial performance.
Labour Relations A majority of the Company’s store level and distribution centre workforce is unionized. Failure to renegotiate collective
agreements could result in work stoppages or slowdowns, which could negatively affect the Company’s financial performance, depending on
their nature and duration. There can be no assurance as to the outcome of these negotiations or the timing of their completion. Although the
Company attempts to mitigate work stoppages and disputes through early negotiations, work stoppages or slowdowns remain possible, which
could negatively affect the reputation, operations and financial performance of the Company.
Regulatory and Tax Changes to any of the laws, rules, regulations or policies applicable to the Company’s business, including income,
commodity and other taxes, and the production, processing, preparation, distribution, packaging and labelling of products, could have an
adverse impact on the Company’s financial or operational performance. New accounting pronouncements introduced by appropriate
authoritative bodies could also impact the Company’s financial results. In the course of complying with such changes, the Company could
incur significant costs. Changing regulations or enhanced enforcement of existing regulations could restrict the Company’s operations or
profitability and thereby threaten the Company’s competitive position and capacity to efficiently conduct business. Failure by the Company to
comply with applicable laws, rules, regulations, orders and policies or comply with orders for records in a timely manner could 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 and a failure by it to comply, understand, acknowledge and effectively respond to the
regulators could result in monetary penalties, regulatory intervention and reputational damage.
26 2012 Annual Report – Financial Review
The Company is subject to tax audits from various government and regulatory agencies on an ongoing basis. As a result, from time to time,
taxing authorities may disagree with the positions and conclusions taken by the Company in its tax filings or legislation could be amended,
which could lead to reassessments. These reassessments could have a material impact on the Company in future periods. During 2012, the
Company received indication from the Canada Revenue Agency that it intends to proceed with a reassessment with regard to the tax treatment
of Glenhuron. At this early stage, it is not possible to quantify the amount of the proposed reassessment. Although the Company does not
expect the ultimate outcome to be material, such matters cannot be predicted with certainty and could result in a material charge for the
Company in future periods.
During 2012, the majority of provincial governments announced or enacted amendments to the regulation of generic prescription drug prices
paid by provincial governments pursuant to public drug benefit plans. Subsequent to the end of the year, all provinces and territories, with the
exception of Quebec, announced that reimbursement rates on six common generic prescription drugs would be significantly reduced. All
provinces have now announced various forms of amendments to regulation of generic drug pricing. Under these amendments, the prices paid
by the provincial drug plans for generic drugs are being reduced. The amendments also reduce out-of-pocket and private employer drug plan
payments for generic drugs. The amendments impact pharmacy sales and therefore could have an adverse effect on the financial
performance of the Company. 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, but despite these efforts, the amendments
could have an adverse effect on the financial performance of the Company.
Privacy and Information Security The Company is subject to various laws regarding the protection of personal information of its customers,
cardholders and colleagues and has adopted a Privacy Policy setting out guidelines for the handling of personal information. The Company’s
information systems contain personal information of customers, cardholders and colleagues. Any failures or vulnerabilities in these security
systems or non-compliance with regulations, including those in relation to personal information belonging to the Company’s customers and
colleagues, could negatively affect the reputation, operations and financial performance of the Company.
Franchisee 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 could negatively affect the Company’s reputation, operations 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, health and safety exposures or were unable to pay the Company for products, rent or fees. 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 could negatively affect operations and could add administrative costs and burdens, any of which could affect the
Company’s relationship with its franchisees. The Company provides various services to the franchisees to assist with management of store
operations and dedicated personnel manage the Company’s obligations to its franchisees. Despite these efforts, relationships with franchisees
could pose significant risks if they are disrupted, which could negatively affect the reputation, operations and financial performance of the
Company. 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 financial performance. Reputational damage or adverse consequences for the Company,
including litigation and disruption to revenue from franchise stores could result.
Inventory Management Inappropriate inventory management could 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. The Company focuses on reducing inventory levels and early identification of inventory at risk
and monitors demand, forecasting and the impact of customer trends. Despite these efforts, the Company could experience excess inventory
that cannot be sold profitably, which could negatively affect the operations and financial performance of the Company.
As part of its IT system upgrade implementation plan, the Company will be converting to a perpetual inventory system. Through the
conversion process, the Company will determine the value of its retail store inventories using weighted average cost. As a result, valuation
differences could arise which could negatively affect the carrying amount of the Company’s inventory.
2012 Annual Report – Financial Review 27
Management’s Discussion and Analysis
Vendor Management and Third Party Service Providers The Company relies on vendors, including offshore vendors, that provide the
Company with goods and services. Although contractual arrangements, sourcing guidelines, supplier audits and Corporate Social
Responsibility guidelines are in place, the Company has no direct influence over how the vendors are managed. Negative events affecting any
vendors or inefficient, ineffective or incomplete vendor management strategies, policies and/or procedures could adversely impact the
Company’s ability to meet customer needs or control costs and quality, which could in turn negatively affect the reputation, operations and
financial performance of the Company.
The Company also uses third party suppliers, carriers, logistic service providers and operators of warehouses and distribution facilities,
including the product development, design and sourcing of the Company’s control brand apparel products. Ineffective selection, contract terms
or relationship management could impact the Company’s ability to source control brand products, to have products available for customers, to
market to customers or to operate efficiently and effectively. 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 the operations and financial performance of the
Company.
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®. PC Bank and the Company actively manage and monitor their relationships with all third party service providers and
PC Bank has an outsourcing risk policy and a vendor governance team that provides regular reports on vendor governance and annual
vendor risk assessments. Despite these activities, a significant disruption in the services provided by the chartered bank or by third party
service providers would negatively affect 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 adversely affect the return on these
assets or liquidity of the Company.
Environmental The Company maintains a large portfolio of real estate and other facilities and is subject to environmental risks associated with
the contamination of such properties and facilities, whether by previous owners or occupants, neighbouring properties or by the Company itself.
The Company has a number of underground storage tanks, the majority of which are used for the retailing of automotive fuel or for its supply
chain transport fleets. Contamination resulting from leaks from these tanks is possible. The Company also operates refrigeration equipment in
its stores and distribution centres to preserve perishable products as it passes through the supply chain and ultimately into the hands of the
consumer. These systems contain refrigerant gases which could be released if equipment fails or leaks. A release of these gases could have
adverse effects on the environment.
The Company is subject to 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. There is a risk that the Company will be subject to
increased costs associated with these laws.
The Company has environmental management programs and has established assessment, compliance, monitoring and reporting policies and
procedures aimed at ensuring compliance with applicable environmental legislative requirements and protecting the environment. 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 affect the reputation and financial
performance of the Company.
Consumer trends are increasingly demanding that retailers sell products with less impact on the environment and that their 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. If the Company fails to meet consumer demand in this area or
otherwise fails to adequately address the environmental impact of its business practices, its reputation and financial performance could be
negatively affected.
28 2012 Annual Report – Financial Review
Trademark and Brand Protection A 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 negatively affect the reputation, operations and financial performance of the
Company.
Defined Benefit Pension Plans The Company manages the assets in its registered funded 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. Future contributions to the Company’s registered funded defined benefit pension plans are impacted by a number of
variables, including the investment performance of the plans’ 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, net defined benefit costs and actuarial assumptions. If capital
market returns are below assumed levels, or if the discount rates do not increase, the Company could be required to make contributions to its
registered funded defined benefit pension plans in excess of those currently expected, which in turn could negatively affect the financial
performance of the Company.
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%
(2011 – 39%) 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 trustees generally consisting of an equal number of union and employer
representatives. In some circumstances, the Company has 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 or could result in changes to the terms and conditions of participation in these plans, which could have a
negative impact on the Company’s results of operations or financial condition.
The Company, together with its independent franchisees, is the largest participating employer in the Canadian Commercial Workers Industry
Pension Plan (“CCWIPP”), with approximately 54,000 (2011 – 53,000) employees as members. In 2012, the Company contributed $52
million (2011 – $49 million) to CCWIPP. At the end of 2012 and 2011, the CCWIPP actuarial accrued benefit obligations greatly exceeded the
value of the assets held in trust. Further benefit reductions would negatively affect the retirement benefits of the Company’s employees,
which in turn could negatively affect their morale and productivity and, in turn, could negatively affect the Company’s reputation.
12.2 Financial Risks and Risk Management
The Company is exposed to a number of financial risks, including those associated with financial instruments, which have the potential to
affect its operating and financial performance. The Company uses over-the-counter derivative instruments to offset certain of these risks.
Policies and guidelines prohibit the use of any derivative instrument for trading or speculative purposes. The fair value of derivative
instruments is subject to changing market conditions which could negatively impact the financial performance of the Company.
The following is a summary of the Company’s financial risks which are discussed in detail below:
Liquidity and Capital Availability
Credit
Interest Rates
Foreign Currency Exchange Rates
Commodity Prices
Common Share Price
2012 Annual Report – Financial Review 29
Management’s Discussion and Analysis
Discussion of Financial Risks and Risk Management Strategies
Liquidity and Capital Availability Liquidity risk is the risk that the Company cannot meet its 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. Difficulty
accessing capital markets could impair the Company’s capacity to grow, execute its business model or generate financial returns. Liquidity
and capital availability risks are mitigated by maintaining appropriate levels of cash and cash equivalents and short term investments, actively
monitoring market conditions, and by diversifying its sources of funding, including its Credit Facility and maintaining a well-diversified maturity
profile of debt and capital obligations. Despite these mitigation strategies, if 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 could be restricted. In addition, credit and capital markets are subject to inherent risks that could 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 could default on their financial obligations to
the Company. Exposure to credit risk relates to derivative instruments, cash and cash equivalents, short term investments, security deposits,
PC Bank’s credit card receivables, franchise loans receivable, accounts receivable from franchisees and other receivables from vendors,
associated stores and independent accounts and pension assets held in the Company’s defined benefit plans.
The risk related to derivative instruments, cash and cash equivalents, short term investments or security deposits is reduced by policies and
guidelines that require that the Company enter into transactions only with counterparties or issuers that have a minimum long term “A-”
credit rating from a recognized credit rating agency and place minimum and maximum limits for exposures to specific counterparties and
instruments. PC Bank manages its credit card receivable risk by employing stringent credit scoring techniques and 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. Franchise loans receivable, accounts receivable from
franchisees and other receivables from vendors, 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.
Credit risk associated with investments in the Company’s defined benefit pension plans is described in the Defined Benefit Pension Plan
Contributions discussion in Section 12.1 Operating Risks and Risk Management.
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.
Interest Rates The Company is exposed to interest rate risk from fluctuations in interest rates on its floating rate debt and financial
instruments, net of cash and cash equivalents, short term investments and security deposits. The Company manages interest rate risk by
monitoring its respective mix of fixed and floating rate debt net of cash and cash equivalents, short term investments and security deposits,
and by taking action as necessary to maintain an appropriate balance considering current market conditions. Despite these mitigations
strategies, changes in interest rates could negatively affect the Company’s financial performance.
Foreign Currency Exchange Rates The Company is exposed to foreign currency exchange rate variability, primarily on its USD
denominated cash and cash equivalents, short term investments and security deposits held by Glenhuron, foreign denominated and foreign
currency based purchases in trade payables and other liabilities, and USD private placement notes included in long term debt. The
Company and Glenhuron have cross currency swaps and foreign currency forward contracts 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 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.
30 2012 Annual Report – Financial Review
Commodity Prices The Company is exposed to increases in the prices of commodities in operating its stores and distribution networks, as
well as to the indirect link of commodities to consumer products and prices. To manage a portion of this exposure, the Company uses
purchase commitments for a portion of its needs for certain consumer products that are commodities based. The Company enters into
exchange traded futures contracts and forward contracts to minimize cost volatility relating to energy. Despite these mitigation strategies,
rising commodity prices could negatively affect the Company’s financial performance.
Common Share Price The Company is exposed to common share market price risk as a result of the issuance to certain employees of stock
options, to the extent that they are repurchased by the Company on exercise, RSUs and PSUs. RSUs and PSUs negatively impact operating
income when the common share price increases and positively impact operating income when the common share price declines. Glenhuron
is a party to an equity forward contract, which allows for settlement in cash, common shares or net settlement. This forward contract changes
in value as the market price of the Company’s common shares changes and provides a partial offset to fluctuations in the Company’s RSU
and PSU plan expense or income. Despite this partial offset, increases in the common share price could negatively affect the Company’s
financial performance.
13. Related Party Transactions
The Company’s parent corporation is Weston, which owns, directly and indirectly, 177,299,889 of the Company’s common shares,
representing approximately 63% of the Company’s 281,680,157 outstanding common shares. Mr. W. Galen Weston controls Weston,
directly and indirectly through private companies which he controls, including Wittington Investments, Limited (“Wittington”) who owns a total
of 80,724,599 of Weston’s common shares, representing approximately 63% of Weston’s 128,220,992 outstanding common shares. Mr.
Weston also beneficially owns 3,753,789 of the Company’s common shares, representing approximately 1% (December 31, 2011 – 1%) of
the Company’s outstanding common shares. The Company’s policy is to conduct all transactions and settle all balances with related parties
on market terms and conditions.
Transactions with Related Parties
(millions of Canadian dollars)
Cost of Merchandise Inventory Sold
Inventory purchases from a subsidiary of Weston
Inventory purchases from a related party(1)
Operating Income
Cost sharing agreements with Parent(2)
Net administrative services provided by Parent(3)
Lease of office space from a subsidiary of Wittington
Transaction Value
2012
2011
$ 627
18
$ 646
18
12
17
3
10
17
3
(1) Associated British Foods plc is a related party by virtue of Mr. W. Galen Weston being a director of such entity’s parent company. Total balance outstanding owing to
Associated British Foods plc as at December 29, 2012 was $2 million (December 31, 2011 – $2 million).
(2) Weston and the Company have each entered into certain contracts with third parties for administrative and corporate services, including telecommunication services and
information technology related matters on behalf of itself and the related party. 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 the Company’s proportionate share of the total costs incurred.
(3) The Company and Weston have entered into an agreement whereby certain administrative services are provided by one party 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 the costs. Fees paid under this agreement are reviewed each year by the Audit Committee.
The net balances due to related parties are comprised as follows:
(millions of Canadian dollars)
Balance Sheets
Trade payables and other liabilities
As at
December 29, 2012
As at
December 31, 2011
$ 25
$ 28
2012 Annual Report – Financial Review 31
Management’s Discussion and Analysis
Post-Employment Benefit Plans The Company sponsors a number of post-employment plans, which are related parties. Contributions
made by the Company to these plans are disclosed in Section 7.1 Cash Flows.
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.
Key Management Personnel The Company’s key management personnel are comprised of the Board and certain members of the
executive team of the Company, as well as both the Board and certain members of the executive team of Weston and Wittington to the
extent that they have the authority and responsibility for planning, directing and controlling the day-to-day activities of the Company.
Compensation of Key Management Personnel Annual compensation of key management personnel that is directly attributable to the
Company was as follows:
(millions of Canadian dollars)
Salaries, director fees and other short term employee benefits
Share-based compensation
Total compensation
2012
$ 7
4
$ 11
2011
$ 10
4
$ 14
Dividend Reinvestment Plan During the year, the Company issued nil (2011 – 938,984) common shares to Weston under the Dividend
Reinvestment Plan.
14. Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements requires management to make estimates and judgments in applying the Company’s
accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes.
Within the context of this MD&A, a judgment is a decision made by management in respect of the application of an accounting policy, a
recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant information that may include
estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of balances recognized or disclosed
in the consolidated financial statements and are based on a set of underlying data that may include management’s historical experience,
knowledge of current events and conditions and other factors that are believed to be reasonable under the circumstances. Management
continually evaluates the estimates and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that the Company believes could
have the most significant impact on the amounts recognized in the consolidated financial statements.
14.1 Inventories
Key Sources of Estimation Inventories are carried at the lower of cost and net realizable value which requires the Company to utilize
estimates related to fluctuations in future retail prices, seasonality and costs necessary to sell the inventory.
32 2012 Annual Report – Financial Review
14.2 Impairment of Non-Financial Assets (Goodwill, Intangible Assets, Fixed Assets and Investment Properties)
Judgments Made in Relation to Accounting Policies Applied Management is required to use judgment in determining the grouping of
assets to identify their cash generating units (“CGUs”) for the purposes of testing fixed assets for impairment. Judgment is further required to
determine appropriate groupings of CGUs, for the level at which goodwill and intangible assets are tested for impairment. The Company has
determined that each retail location and each investment property is a separate CGU for purposes of fixed asset impairment testing. For the
purpose of goodwill and intangible impairment testing, CGUs are grouped at the lowest level at which goodwill and intangibles are monitored
for internal management purposes. In addition, judgment is used to determine whether a triggering event has occurred requiring an
impairment test to be completed.
Key Sources of Estimation In determining the recoverable amount of a CGU or a group of CGUs, various estimates are employed. The
Company determines fair value less costs to sell using such estimates as market rental rates for comparable properties, recoverable
operating costs for leases with tenants, non-recoverable operating costs, discount rates, capitalization rates and terminal capitalization rates.
The Company determines value in use by using estimates including projected future sales, earnings and capital investment consistent with
strategic plans presented to the Board. Discount rates are consistent with external industry information reflecting the risk associated with the
specific cash flows.
14.3 Franchise Loans Receivable and Certain Other Financial Assets
Judgments Made in Relation to Accounting Policies Applied Management reviews franchise loans receivable, trade receivables and
certain other assets relating to their franchise business at each balance sheet date utilizing judgment to determine whether a triggering
event has occurred requiring an impairment test to be completed.
Key Sources of Estimation Management determines the initial fair value of its franchise loans and certain other financial assets using
discounted cash flow models corroborated by other valuation techniques. The process of determining these fair values requires
management to make estimates of a long term nature regarding discount rates, projected revenues, and margins, as applicable, derived
from past experience, actual operating results, budgets and the Company’s five year forecast.
14.4 Income and Other Taxes
Judgments Made in Relation to Accounting Policies Applied The calculation of current and deferred income taxes requires
management to make certain judgments regarding the tax rules in jurisdictions where the Company performs activities. Application of
judgments is required regarding classification of transactions and in assessing probable outcomes of claimed deductions including
expectations about future operating results, the timing and reversal of temporary differences and possible audits of income tax and other tax
filings to the tax authorities.
14.5 Post-Employment and Other Long Term Employee Benefits
Key Sources of Estimation Accounting for the costs of defined benefit pension plans and other applicable post-employment benefits is
based on using a number of assumptions including estimates for expected return on plan assets. Expected returns on plan assets is based
on current market conditions, the asset mix, the active management of defined benefit pension plan assets and historical returns. Other key
assumptions for pension obligations are based in part on current market conditions.
14.6 Allowance for Credit Card Receivables
Key Sources of Estimation The allowance for credit card receivables is measured based upon statistical analysis that includes estimates
for past and current performance, aging, arrears status, the level of allowance already in place, and management’s interpretation of
economic conditions and other trends specific to our customer base, including but not limited to bankruptcies. Changes in circumstances
may cause future assessments of credit risk to be materially different from current assessments, which could require an increase or
decrease in the allowance for credit receivables.
2012 Annual Report – Financial Review 33
Management’s Discussion and Analysis
15. Accounting Standards
15.1 Accounting Standards Implemented in 2012
Financial Instruments – Disclosures In 2010, the International Accounting Standards Board (“IASB”) issued amendments to IFRS 7,
“Financial Instruments: Disclosures”, which increase the disclosure requirements for transactions involving transfers of financial assets to help
users of the consolidated financial statements evaluate the risk exposures related to such transfers and the effect of those risks on an entity’s
financial position. These amendments are effective and were implemented in the first quarter of 2012.
Deferred Tax – Recovery of Underlying Assets In 2010, the IASB issued amendments to International Accounting Standard (“IAS”) 12,
“Income Taxes” (“IAS 12”), that introduce an exception to the general measurement requirements of IAS 12 for investment properties
measured at fair value. These amendments were effective in the first quarter of 2012. As part of its transition to IFRS, the Company elected to
account for its investment properties at cost and as such, the amendments did not have an impact on the Company’s results of operations or
financial condition.
15.2 Future Accounting Standards
Unless otherwise indicated, the Company intends to adopt the following standards in its consolidated financial statements for fiscal 2013:
Consolidated Financial Statements In 2011, the IASB issued IFRS 10, “Consolidated Financial Statements” (“IFRS 10”). This IFRS replaces
portions of IAS 27, “Consolidated and Separate Financial Statements” and supersedes SIC-12, “Consolidation – Special Purpose Entities”.
IFRS 10 defines principles of control and establishes the basis of determining when and how an entity should be included within a set of
consolidated financial statements. The standard introduces a single control model that requires an entity to consolidate an investee when it has
power, exposure to variability in returns and has the ability to use its power over the investee to affect its returns, regardless of whether voting
rights are present. The adoption of IFRS 10 is not expected to have an impact on the Company’s consolidated financial statements.
Disclosure of Interests in Other Entities In 2011, the IASB issued IFRS 12, “Disclosure of Interests in Other Entities” (“IFRS 12”). This IFRS
requires extensive disclosures relating to a company’s interests in subsidiaries, joint arrangements, associates, and unconsolidated structured
entities. IFRS 12 enables users of the consolidated financial statements to evaluate the nature and risks associated with a company’s interests
in other entities and the effects of those interests on a company’s financial performance and position. The adoption of IFRS 12 is not expected
to have a significant impact on the Company’s consolidated financial statements.
Fair Value Measurement In 2011, the IASB issued IFRS 13, “Fair Value Measurement” (“IFRS 13”), which establishes a single framework for
the fair value measurement and disclosure of financial and non-financial assets and liabilities. The new standard unifies the definition of fair
value and also introduces new concepts including ‘highest and best use’ and ‘principle markets’ for non-financial assets and liabilities. There
are additional disclosure requirements, including increased fair value disclosure for financial instruments for interim financial statements.
Although the Company expects additional disclosure, it does not anticipate material measurement impacts on its consolidated financial
statements as a result of the adoption of IFRS 13.
Employee Benefits In 2011, the IASB revised IAS 19, “Employee Benefits” (“IAS 19”).The most significant amendments for the Company will
be the requirement to immediately recognize all unvested past service costs and the replacement of interest cost and expected return on plan
assets with a net interest amount that is calculated by applying a prescribed discount rate to the net defined benefit liability. Upon
implementation of these amendments, the Company will restate its annual 2012 consolidated financial statements. The preliminary expected
impact arising from the adoption of the amendments to IAS 19 is summarized as follows:
34 2012 Annual Report – Financial Review
Consolidated Statements of Earnings and Comprehensive Income
Increase (Decrease)
(millions of Canadian dollars except where otherwise indicated)
Selling, General and Administrative Expenses
Operating Income
Net interest expense and other financing charges
Earnings Before Income Taxes
Income taxes
Net Earnings
Other comprehensive income, net of taxes
Total Comprehensive Income
Basic net earnings per common share ($)
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Other long term liabilities
Shareholders' equity
52 Weeks Ended
December 29, 2012
$ 1
$ (1)
20
$ (21)
(5)
$ (16)
15
$ (1)
$ (0.06)
As at
December 29, 2012
$ (2)
$ 2
As a result, in 2013, post-employment and other long term benefits expense will be accounted for on a consistent basis year-over-year. The
amendments also require enhanced disclosures for defined benefit plans, including additional information on the characteristics and risks of
those plans.
Other Standards In addition to the above standards, the Company will be implementing the following standards and amendments effective
January 1, 2013: IFRS 11, “Joint Arrangements”, IAS 28, “Investments in Associates” and IAS 1, “Presentation of Financial Statements”. The
Company does not expect a significant impact as a result of these standards and amendments on its consolidated financial statements.
Financial Instruments In 2011, the IASB issued amendments to IFRS 7, “Financial Instruments: Disclosures” and IAS 32, “Financial
Instruments: Presentation”, these amendments are required to be applied for periods beginning on or after January 1, 2014. The Company
does not expect any significant impacts on its consolidated financial statements as a result of these amendments.
In 2010, the IASB issued a new standard, IFRS 9, “Financial Instruments” (“IFRS 9”), which will ultimately replace IAS 39, “Financial
Instruments: Recognition and Measurement” (“IAS 39”). The replacement of IAS 39 is a three-phase project with the objective of improving
and simplifying the reporting for financial instruments. The issuance of IFRS 9 is the first phase of the project, which provides guidance on
the classification and measurement of financial assets and financial liabilities. This standard becomes effective on January 1, 2015, with
early adoption permitted. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
2012 Annual Report – Financial Review 35
Management’s Discussion and Analysis
16. Outlook(1)
In 2012, the Company strengthened its customer proposition and made significant progress with its IT infrastructure implementation. These
initiatives will continue in 2013, with investments in price, assortment and labour expected to be offset by operating efficiencies. Investment
in infrastructure programs will continue as the IT system is rolled out to distribution centres and stores, with associated expenses flat to
2012. Sales growth in 2013 will be moderated by a competitive environment characterized by ongoing square footage expansions, a new
competitor’s entry into the market and generic drug deflation. As a result, the Company expects modest growth in operating income in 2013,
excluding the impact of the $61 million restructuring charge recorded in the fourth quarter of 2012 and the impact of the previously
announced plan to launch an IPO of a new REIT.
In addition, the Company expects the following for 2013:
an effective tax rate in the range of 26% – 27%, compared to 24.9% in 2012;
the adoption of amendments to the accounting standard related to employee benefits, which will result in a restatement of the 2012
consolidated financial statements to reflect a reduction in net earnings by approximately $16 million or $0.06 per share; and
capital expenditures to be approximately $1 billion, unchanged from 2012, with net new retail square footage growth of approximately 1%.
Over the long term, the Company still expects positive same-store sales(2), a decline in IT and supply chain costs, and a moderation of
capital expenditures. This should result in growth in operating income, EBITDA(3) and an increase in free cash flow(3).
(1) To be read in conjunction with “Forward-Looking Statements” on page 2.
(2) For financial definitions and ratios refer to the Glossary of Terms on page 103.
(3) See Non-GAAP Financial Measures on page 37.
36 2012 Annual Report – Financial Review
17. Non-GAAP Financial Measures
The Company uses the following non-GAAP financial measures: EBITDA and EBITDA margin, interest and interest coverage, free cash flow,
return on average net assets, adjusted debt and adjusted debt to EBITDA. 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 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 GAAP.
EBITDA and EBITDA Margin The following table reconciles earnings before income taxes, net interest expense and other financing charges
and depreciation and amortization (“EBITDA”) to operating income which is reconciled to GAAP net earnings measures reported in the
consolidated statements of earnings for the years and quarters ended December 29, 2012 and December 31, 2011. EBITDA is useful to
management in assessing performance of its ongoing operations and its ability to generate cash flows to fund its cash requirements, including
the Company’s capital investment program.
EBITDA margin is calculated as EBITDA divided by revenue.
(millions of Canadian dollars) (unaudited)
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
2012
(12 weeks)
$ 143
2011
(12 weeks)
$ 174
2012
(52 weeks)
$ 650
2011
(52 weeks)
$ 769
39
80
262
187
60
81
315
170
215
331
1,196
777
288
327
1,384
699
$ 449
$ 485
$ 1,973
$ 2,083
Interest and Interest Coverage The following table reconciles interest expense used in the calculations of the interest coverage ratio to
GAAP measures reported in the annual audited consolidated financial statements for the years ended December 29, 2012 and December 31,
2011. Interest coverage is calculated as operating income divided by net interest expense and other financing charges adding back interest
capitalized to fixed assets. The Company believes the interest coverage ratio is useful in assessing the Company’s ability to cover its net
interest charge with its operating income.
(millions of Canadian dollars) (unaudited)
Net interest expense and other financing charges
Add: Interest capitalized to fixed assets
Interest expense
2012
(52 weeks)
$ 331
1
$ 332
2011
(52 weeks)
$ 327
1
$ 328
2012 Annual Report – Financial Review 37
Management’s Discussion and Analysis
Free Cash Flow The following table reconciles free cash flow used in assessing the Company’s financial condition to GAAP measures
reported in the annual audited consolidated financial statements for the years ended December 29, 2012 and December 31, 2011. The
Company believes that free cash flow is a useful measure in assessing the Company’s cash available for additional funding and investing
activities.
Free cash flow is calculated as cash flows from operating activities excluding the net change in credit card receivables, less fixed asset
purchases.
(millions of Canadian dollars) (unaudited)
Cash flows from operating activities
Net increase (decrease) in credit card receivables
Less: Fixed asset purchases
Free cash flow
2012
(52 weeks)
$ 1,637
204
1,017
$ 824
2011
(52 weeks)
$ 1,814
104
987
$ 931
Net Assets The following table reconciles net assets used in the return on average net assets ratio to GAAP measures reported in the
annual audited consolidated balance sheets as at the years ended December 29, 2012 and December 31, 2011. The Company believes the
return on average net assets ratio is useful in assessing the return on productive assets.
Return on average net assets is calculated as operating income for the year divided by average net assets.
(millions of Canadian dollars) (unaudited)
Total assets
Less: Cash and cash equivalents
Short term investments
Security deposits
Trade payables and other liabilities
Net assets
As at
December 29, 2012
As at
December 31, 2011
$ 17,961
1,079
716
252
3,720
$ 17,428
966
754
266
3,677
$ 12,194
$ 11,765
38 2012 Annual Report – Financial Review
Adjusted Debt The following table reconciles adjusted debt used in the adjusted debt to EBITDA ratio to GAAP measures reported in the
annual audited consolidated balance sheets as at the years ended December 29, 2012 and December 31, 2011. The Company calculates
debt as the sum of short term debt, long term debt, certain other liabilities and the fair value of financial derivatives. The Company calculates
adjusted debt as debt less independent securitization trusts, independent funding trusts and PC Bank’s GICs in short term and long term debt.
The Company believes that adjusted debt to EBITDA is useful in assessing its ability to cover its debt repayments with its EBITDA.
Adjusted debt to EBITDA is calculated as adjusted debt divided by EBITDA.
(millions of Canadian dollars) (unaudited)
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
Total debt
Less:
Independent Securitization Trusts in Short term debt
Independent Securitization Trusts in Long term debt
Independent Funding Trusts
Guaranteed Investment Certificates
Adjusted debt
As at
December 29, 2012
$ 905
672
4,997
39
14
$ 6,627
905
600
459
303
$ 4,360
As at
December 31, 2011
$ 905
87
5,493
39
22
$ 6,546
905
600
424
276
$ 4,341
The Second Preferred Shares, Series A are classified as capital securities and are excluded from the calculations of adjusted debt.
18. Additional Information
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 20, 2013
Toronto, Canada
2012 Annual Report – Financial Review 39
Financial Results
Management’s Statement of Responsibility for Financial Reporting
Independent Auditors’ Report
Consolidated Financial Statements
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Balance Sheets
Consolidated Statements of Cash Flow
Notes to the Consolidated Financial Statements
Note 1. Nature and Description of the Reporting Entity
Note 2. Significant Accounting Policies
Note 3. Critical Accounting Estimates and Judgments
Note 4. Future Accounting Standards
Note 5. Net Interest Expense and Other Financing Charges
Note 6. Income Taxes
Note 7. Basic and Diluted Net Earnings per Common Share
Note 8. Cash and Cash Equivalents, Short Term Investments and Security Deposits
Note 9. Accounts Receivable
Note 10. Credit Card Receivables
Note 11. Inventories
Note 12. Assets Held for Sale
Note 13. Fixed Assets
Note 14. Investment Properties
Note 15. Goodwill and Intangible Assets
Note 16. Other Assets
Note 17. Provisions
Note 18. Short Term Debt
Note 19. Long Term Debt
Note 20. Other Liabilities
Note 21. Share Capital
Note 22. Capital Management
Note 23. Share-Based Compensation
Note 24. Post-Employment and Other Long Term Employee Benefits
Note 25. Employee Costs
Note 26. Leases
Note 27. Financial Instruments
Note 28. Financial Risk Management
Note 29. Contingent Liabilities
Note 30. Financial Guarantees
Note 31. Related Party Transactions
Note 32. Subsequent Event
Note 33. Segment Information
Earnings Coverage Exhibit to the Audited Consolidated Financial Statements
Three Year Summary
Glossary of Terms
40 2012 Annual Report – Financial Review
41
42
43
44
45
46
47
48
48
48
57
58
60
60
62
62
63
64
65
65
66
68
69
71
71
72
73
74
75
76
77
81
87
88
89
94
96
96
97
99
99
101
102
103
Management’s Statement of Responsibility for Financial Reporting
The management of Loblaw Companies Limited is responsible for the preparation, presentation and integrity of the accompanying
consolidated financial statements, Management’s Discussion and Analysis and all other information in the Annual Report – Financial
Review (“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
International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). 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 to provide reasonable assurance that assets are safeguarded and that relevant and reliable financial
information is produced. Management is required to design a system of internal controls and certify as to the design and
operating effectiveness of internal controls over financial reporting. 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 20, 2013
[signed]
Galen G. Weston
Executive Chairman
[signed]
Vicente Trius
President
Sarah R. Davis
[signed]
Chief Financial Officer
2012 Annual Report – Financial Review 41
Independent Auditors’ Report
To the Shareholders of Loblaw Companies Limited:
We have audited the accompanying consolidated financial statements of Loblaw Companies Limited, which comprise the consolidated
balance sheets as at December 29, 2012 and December 31, 2011, the consolidated statements of earnings, comprehensive income,
changes in shareholders’ equity and cash flow for the 52 week years then ended, and notes, comprising a summary of significant
accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ 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 the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on 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 opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Loblaw
Companies Limited as at December 29, 2012 and December 31, 2011, and its consolidated financial performance and its consolidated
cash flows for the 52 week years then ended in accordance with International Financial Reporting Standards.
Toronto, Canada
February 20, 2013
Chartered Accountants, Licensed Public Accountants
42 2012 Annual Report – Financial Review
Consolidated Statements of Earnings
For the years ended December 29, 2012 and December 31, 2011
(millions of Canadian dollars except where otherwise indicated)
Revenue
Cost of Merchandise Inventories Sold (note 11)
Selling, General and Administrative Expenses
Operating Income
Net interest expense and other financing charges (note 5)
Earnings Before Income Taxes
Income taxes (note 6)
Net Earnings
Net Earnings per Common Share ($) (note 7)
Basic
Diluted
See accompanying notes to the consolidated financial statements.
2012
(52 Weeks)
31,604
24,185
6,223
1,196
331
865
215
650
2.31
2.28
$
$
$
$
2011
(52 Weeks)
31,250
23,894
5,972
1,384
327
1,057
288
769
2.73
2.71
$
$
$
$
2012 Annual Report – Financial Review 43
Consolidated Statements of Comprehensive Income
For the years ended December 29, 2012 and December 31, 2011
(millions of Canadian dollars)
Net earnings
Other comprehensive loss, net of taxes
Net defined benefit plan actuarial loss (note 24)
Total Comprehensive Income
See accompanying notes to the consolidated financial statements.
2012
(52 Weeks)
$
$
650
(21)
629
2011
(52 Weeks)
$
769
(208)
561
$
44 2011 Annual Report – Financial Review
Consolidated Statements of Changes in Shareholders’ Equity
(millions of Canadian dollars except where otherwise indicated)
Balance at December 31, 2011
Net earnings
Other comprehensive loss (note 24)
Total Comprehensive Income
Net effect of share-based compensation (notes 21 and 23)
Common shares purchased for cancellation (note 21)
Dividends declared per common share − $0.85
Balance at December 29, 2012
See accompanying notes to the consolidated financial statements.
(millions of Canadian dollars except where otherwise indicated)
Balance at January 1, 2011
Net earnings
Other comprehensive loss (note 24)
Total Comprehensive Income
Dividend reinvestment plan (note 21)
Net effect of share-based compensation (notes 21 and 23)
Common shares purchased for cancellation (note 21)
Dividends declared per common share − $0.84
Balance at December 31, 2011
See accompanying notes to the consolidated financial statements.
Common
Share
Capital
1,540
−
−
−
29
(2)
−
27
1,567
Common
Share
Capital
1,475
−
−
−
43
28
(6)
−
65
1,540
$
$
$
$
Retained
Earnings
4,414
650
(21)
629
−
(14)
(239)
376
4,790
Retained
Earnings
4,122
769
(208)
561
−
−
(33)
(236)
292
4,414
$
$
$
$
$
Accumulated
Other
Comprehensive
Income
5
−
−
−
−
−
−
−
5
$
$
Total
Shareholders'
Equity
6,007
650
(21)
629
36
(16)
(239)
410
6,417
$
$
Contributed
Surplus
48
−
−
−
7
−
−
7
55
$
$
Accumulated
Other
Comprehensive
Income
5
−
−
−
−
−
−
−
−
5
$
$
Total
Shareholders'
Equity
5,603
769
(208)
561
43
75
(39)
(236)
404
6,007
$
$
Contributed
Surplus
1
−
−
−
−
47
−
−
47
48
$
2012 Annual Report – Financial Review 45
As at
December 29, 2012
As at
December 31, 2011
$
$
$
$
1,079
716
456
2,305
2,007
74
30
6,667
8,973
100
1,057
260
252
363
289
17,961
3,720
78
21
905
672
5,396
59
4,997
18
223
851
11,544
1,567
4,790
55
5
6,417
17,961
$
$
$
$
966
754
467
2,101
2,025
117
32
6,462
8,725
82
1,029
232
266
331
301
17,428
3,677
35
14
905
87
4,718
50
5,493
21
222
917
11,421
1,540
4,414
48
5
6,007
17,428
Consolidated Balance Sheets
(millions of Canadian dollars)
Assets
Current Assets
Cash and cash equivalents (note 8)
Short term investments (note 8)
Accounts receivable (note 9)
Credit card receivables (note 10)
Inventories (note 11)
Prepaid expenses and other assets
Assets held for sale (note 12)
Total Current Assets
Fixed Assets (note 13)
Investment Properties (note 14)
Goodwill and Intangible Assets (note 15)
Deferred Income Taxes (note 6)
Security Deposits (note 8)
Franchise Loans Receivable
Other Assets (note 16)
Total Assets
Liabilities
Current Liabilities
Trade payables and other liabilities
Provisions (note 17)
Income taxes payable
Short term debt (note 18)
Long term debt due within one year (note 19)
Total Current Liabilities
Provisions (note 17)
Long Term Debt (note 19)
Deferred Income Taxes (note 6)
Capital Securities (note 21)
Other Liabilities (note 20)
Total Liabilities
Shareholders' Equity
Common Share Capital (note 21)
Retained Earnings
Contributed Surplus (note 23)
Accumulated Other Comprehensive Income
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
Contingent liabilities (note 29). Leases (note 26). Financial guarantees (note 30).
See accompanying notes to the consolidated financial statements.
Approved on Behalf of the Board
[signed]
Galen G. Weston
Director
[signed]
Christie J. B. Clark
Director
46 2012 Annual Report – Financial Review
Consolidated Statements of Cash Flow
For the years ended December 29, 2012 and December 31, 2011
(millions of Canadian dollars)
Operating Activities
Net earnings
Income taxes (note 6)
Net interest expense and other financing charges (note 5)
Depreciation and amortization
Income taxes paid
Interest received
Settlement of equity forward contracts (note 27)
Change in credit card receivables (note 10)
Change in non-cash working capital
Fixed assets and other related impairments
Gain on disposal of assets
Other
Cash Flows from Operating Activities
Investing Activities
Fixed asset purchases (note 13)
Change in short term investments
Proceeds from fixed asset sales
Change in franchise investments and other receivables
Change in security deposits
Goodwill and intangible asset additions (note 15)
Other
Cash Flows used in Investing Activities
Financing Activities
Change in bank indebtedness
Change in short term debt (note 18)
Long term debt
Issued (note 19)
Retired (note 19)
Interest paid
Dividends paid (note 21)
Common shares
Issued (note 21)
Purchased for cancellation (note 21)
Cash Flows used in Financing Activities
Effect of foreign currency exchange rate changes on cash and cash equivalents
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.
2012
(52 weeks)
2011
(52 weeks)
$
$
650
215
331
777
(232)
52
–
(204)
55
19
(12)
(14)
1,637
(1,017)
20
62
(22)
11
(43)
–
(989)
–
–
111
(115)
(356)
(177)
22
(16)
(531)
(4)
113
966
$
1,079
$
769
288
327
699
(216)
60
(7)
(104)
8
5
(18)
3
1,814
(987)
18
57
(18)
92
(14)
(4)
(856)
(10)
370
287
(909)
(380)
(193)
21
(39)
(853)
4
109
857
966
2012 Annual Report – Financial Review 47
Notes to the Consolidated Financial Statements
For the years ended December 29, 2012 and December 31, 2011 (millions of Canadian dollars except where otherwise indicated)
Note 1. Nature and Description of the Reporting Entity
Loblaw Companies Limited is a Canadian public company incorporated in 1956 and is Canada’s largest food retailer and a leading provider
of drugstore, general merchandise and financial products and services. Its registered office is located at 22 St. Clair Avenue East, Toronto,
Canada M4T 2S7. Loblaw Companies Limited and its subsidiaries are together referred to in these consolidated financial statements as
“Loblaw” or the “Company”.
The Company’s parent is George Weston Limited (“Weston”), which owns approximately 63% of the Company’s outstanding common
shares. The Company’s ultimate parent is Wittington Investments, Limited (“Wittington”). The remaining common shares are widely held.
The Company has two reportable operating segments: Retail and Financial Services (see note 33).
In December 2012, the Company announced its intention to create a Real Estate Investment Trust (“REIT”), which will acquire a significant
portion of Loblaw’s real estate assets and sell units by way of an Initial Public Offering (“IPO”). The IPO of the REIT is expected to be
completed by mid-2013, subject to prevailing market conditions and receipt of required regulatory approvals, including approval to list the units
on the Toronto Stock Exchange (“TSX”).
Note 2. Significant Accounting Policies
Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS” or “GAAP”) as issued by the International Accounting Standards Board (“IASB”) and using the accounting policies
described herein.
The consolidated financial statements were authorized for issuance by the Company’s Board of Directors (“Board”) on February 20, 2013.
Basis of Preparation The consolidated financial statements were prepared on a historical cost basis except for certain financial
instruments carried at fair value. Liabilities for cash-settled share-based compensation arrangements are measured at fair value as
described in note 23 and defined benefit plan assets are also recorded at fair value with the obligations related to these pension plans
measured at their discounted present value as described in note 24.
The significant accounting policies set out below have been applied consistently in the preparation of the consolidated financial statements
for all periods presented.
The consolidated financial statements are presented in Canadian dollars.
Basis of Consolidation The consolidated financial statements include the accounts of the Company and other entities that the Company
controls in accordance with IAS 27, “Consolidated and Separate Financial Statements” (“IAS 27”). Special Purpose Entities (“SPE”) are
consolidated under Standing Interpretations Committee (“SIC”) Interpretation 12, “Consolidation – Special Purpose Entities”, (“SIC-12”), if,
based on an evaluation of the substance of its relationship with the Company and the SPE’s risks and rewards, the Company concludes that it
controls the SPE. SPEs controlled by the Company were established under terms that impose strict limitations on the decision-making powers
of the SPE’s management and that results in the Company receiving the majority of the benefits related to the SPE’s operations and net assets,
being exposed to the majority of risks incident to the SPE’s activities, and retaining the majority of the residual or ownership risks related to the
SPEs or their assets.
Fiscal Year The fiscal year of the Company ends on the Saturday closest to December 31. Under an accounting convention common in
the food retail industry, the Company follows a 52-week reporting cycle which periodically necessitates a fiscal year of 53 weeks. The years
ended December 29, 2012 and December 31, 2011 both contained 52 weeks. The next 53 week year will occur in fiscal 2014.
48 2012 Annual Report – Financial Review
Net Earnings per Common Share Basic net earnings per common share (“EPS”) is calculated by dividing the net earnings available to
common shareholders by the weighted average number of common shares outstanding during the period. The diluted EPS calculation
assumes that the weighted average number of outstanding stock options during the period with an exercise price below the average
market price during the period is exercised and the assumed proceeds are used to purchase the Company’s common shares at the
average market price during the period. Diluted EPS also takes into consideration the dilutive effect of the conversion options on the capital
securities, equity forwards recorded in trade and other payables and certain other liabilities.
Revenue Recognition Revenue includes sales, net of estimated returns, to customers through corporate stores operated by the Company,
sales to and service fees from franchised stores, associated stores, independent account customers, and financial services, net of sales
incentives offered by the Company. The Company recognizes revenue at the time the sale is made to its customers and at the time of
delivery of inventory to its associated and franchise stores. Interest income on credit card loans, service fees and other revenue related to
financial services are recognized on an accrual basis.
Customer loyalty awards are accounted for as a separate component of the sales transaction in which they are granted. A portion of the
consideration received in a transaction that includes the issuance of an award is deferred until the awards are ultimately redeemed. The
allocation of the consideration to the award is based on an evaluation of the award’s estimated fair value at the date of the transaction using
the residual fair value method.
On the initial sale of a franchising arrangement, the Company offers products and services as part of a multiple deliverable arrangement
which is recorded using a relative fair value approach.
Taxation The asset and liability method of accounting is used for income taxes. Under the asset and liability method, deferred income tax
assets and liabilities are recognized for the deferred income tax consequences attributable to temporary differences between the financial
statement carrying values of existing assets and liabilities and their respective income tax bases. Current and deferred taxes are charged to or
credited in the consolidated statement of earnings, except when it relates to a business combination, or items charged or credited directly to
equity or to other comprehensive income (loss). Current tax is the expected tax payable or receivable on the taxable income or loss for the
period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is measured using enacted or substantively enacted income tax rates expected to apply in the years in which those temporary
differences are expected to be recovered or settled. A deferred tax asset is recognized for unused tax losses and credits to the extent that it is
probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date
and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Deferred tax assets and liabilities are
offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and
liabilities on a net basis. Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of
the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the
foreseeable future.
Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid marketable investments with an original maturity date of 90
days or less from the date of acquisition.
Short Term Investments Short term investments primarily consist of government treasury bills, government agencies securities, corporate
commercial paper and bankers’ acceptances.
Security Deposits Security deposits consist primarily of cash, government treasury bills and government agencies securities, which are
required to be placed with counterparties as collateral to enter into and maintain outstanding letters of credit, financial derivative contracts
and equity forwards. The amount of the required security deposits will fluctuate primarily as a result of the change in market value of the
derivatives.
Accounts Receivable Accounts receivable, net of allowances for doubtful accounts, include amounts due from independent franchisees,
associated stores, independent accounts and amounts owed from vendors.
2012 Annual Report – Financial Review 49
Notes to the Consolidated Financial Statements
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. Interest income is recorded in revenue and interest expense is recorded in net
interest expense and other financing charges using the effective interest method. The effective interest rate is the rate that discounts the
estimated future cash receipts through the expected life of the credit card receivable (or, where appropriate, a shorter period) to the
carrying amount. When calculating the effective interest rate, the Company estimates future cash flows considering all contractual terms of
the financial instrument, but not future credit losses.
PC Bank considers evidence of impairment losses on a portfolio basis 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 card receivables is deducted from the credit card receivables balance. Interest on the impaired asset
continues to be recognized. The net credit loss experience for the year is recognized in operating income.
Periodically, the Company transfers credit card receivables by selling them to and repurchasing them from independent securitization trusts.
PC Bank is required to absorb a portion of the related credit losses. Accordingly, the Company continues to recognize these assets in credit
card receivables and the transferred receivables are accounted for as secured financing transactions. The Company consolidates one of the
independent securitization trusts, Eagle Credit Card Trust (“Eagle”), as a SPE. The associated liabilities secured by these assets are included
in either short term debt or long term debt based on their characteristics and are carried at amortized cost.
Franchise Loans Receivable Franchise loans receivable are comprised of amounts due from independent franchisees for loans issued
through an independent funding trust that is consolidated under SIC-12. 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 a standby letter of credit. The Company has agreed to reimburse the issuing
bank for any amount drawn on the standby letter of credit.
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, such as transportation, that are directly incurred to bring inventories to their present location and
condition. Seasonal general merchandise and inventories at distribution centres are measured at weighted average cost. The Company uses
the retail method to measure the cost of the majority of 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.
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. Allowances received from a vendor is a reduction in the cost of the vendor’s products and is
recognized as a reduction in the cost of merchandise inventories sold and the related inventory when recognized in the consolidated statements
of earnings and the consolidated balance sheets, respectively. 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. The consideration is then recognized
as a reduction of the cost incurred in the consolidated statements of earnings.
Fixed Assets Fixed assets are recognized and subsequently measured at cost less accumulated depreciation and any accumulated
impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset to prepare the asset for its intended
use and capitalized borrowing costs. The commencement date for capitalization of costs occurs when the Company first incurs expenditures for
the qualifying assets and undertakes the required activities to prepare the assets for their intended use.
50 2012 Annual Report – Financial Review
Depreciation commences when the assets are available for use and is expensed on a straight-line basis through operating income to
depreciate the cost of these assets to their estimated residual value over their estimated useful lives. When significant parts of a fixed asset
have different useful lives, they are accounted for as separate components of the asset and depreciated over their estimated useful lives.
Depreciation methods, useful lives and residual values are reviewed at each financial year end and are adjusted if appropriate. Estimated
useful lives are as follows:
Buildings – 10 to 40 years
Equipment and fixtures – 2 to 10 years
Building improvements – up to 10 years
Leasehold improvements are depreciated over the lesser of the lease term, which may include renewal options, and their estimated useful
lives to a maximum of 25 years.
Fixed assets held under finance leases are depreciated over the lesser of their expected useful lives, on the same basis as owned assets, or
the term of the lease, unless it is reasonably certain that the Company will obtain ownership by the end of the lease term in which case it
would be depreciated over the life of the asset.
Fixed assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. Refer to the Impairment of
Non-Financial Assets policy below.
Investment Properties Investment properties are properties owned by the Company that are held to either earn rental income, for capital
appreciation, or both. The Company’s investment properties include single tenant properties held to earn rental income and certain multiple
tenant properties. Land and buildings leased to franchisees are not accounted for as investment properties as these properties are related to
the Company’s operating activities.
Investment property assets are recognized at cost less accumulated depreciation and any accumulated impairment losses. The depreciation
policies for investment properties are consistent with those described in the accounting policy for fixed assets.
Investment properties are reviewed at each balance sheet date to determine whether there is any indication of impairment. Refer to the
Impairment of Non-Financial Assets policy below.
Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of fixed assets that necessarily take a
substantial period of time to prepare for their intended use and a proportionate share of general borrowings, are capitalized to the cost of
those fixed assets, until such time as the fixed assets are substantially ready for their intended use, based on a quarterly weighted average
cost of borrowing.
Goodwill Goodwill arising in a business combination is recognized as an asset at the date that control is acquired. Goodwill is measured as
the excess of the sum of the fair value of the consideration transferred over the fair value of the identifiable assets acquired less the fair value
of the liabilities assumed. Goodwill is tested for impairment at least annually and whenever there is an indication that the asset may be
impaired. Refer to the Impairment of Non-Financial Assets policy below.
Intangible Assets The Company assesses intangible asset for legal, regulatory, contractual, competitive or other factors to determine if the
useful life is definite. Acquired intangible assets that have definite useful lives are measured at cost less accumulated amortization and
accumulated impairment losses. Intangible assets with a definite life are amortized on a straight-line basis through operating income over the
related assets’ estimated useful lives, which range from 3 to 13 years.
Indefinite life intangible assets are measured at cost less any accumulated impairment losses. Indefinite life intangible assets are tested for
impairment at least annually and whenever there is an indication that the asset may be impaired. Refer to the Impairment of Non-Financial
Assets policy below.
2012 Annual Report – Financial Review 51
Notes to the Consolidated Financial Statements
Impairment of Non-Financial Assets At each balance sheet date, the Company reviews the carrying amounts of its definite life non-
financial assets, including fixed assets, investment properties and intangible assets to determine whether there is any indication of
impairment. Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, and whenever there is an
indication that the asset may be impaired. If any such indication of impairment exists, the recoverable amount of the asset is estimated in
order to determine the extent of the impairment loss, if any.
For the purposes of reviewing definite life non-financial assets for impairment, asset groups are reviewed at their lowest level for which
identifiable cash inflows are largely independent of cash inflows of other assets or groups of assets. This grouping is referred to as a cash
generating unit (“CGU”).
The Company has determined that each retail location and each investment property is a separate CGU for purposes of impairment testing.
Various impairment indicators are used to determine the need to test a retail location for an impairment loss. Indicators include performance
of a retail location below forecast and expectation of an adverse impact on future performance of a retail location from competitive activities.
The Company’s corporate assets, which include the head office facilities and distribution centres, do not generate separate cash inflows.
Corporate assets are tested for impairment at the minimum collection of CGUs to which the corporate asset can be allocated reasonably and
consistently.
The recoverable amount of a CGU is the greater of its value in current use and its fair value less costs to sell. The Company determines the
value in use of its retail locations by discounting the expected cash flows that management estimates can be generated from continued use
of the CGU. The process of determining the cash flows requires management to make estimates and assumptions including projected future
sales, earnings and capital investment, and discount rates.
The Company determines the fair value less costs to sell of its retail locations using various assumptions, including the market rental rates for
properties located within the same geographical areas as the properties being valued, highest and best use of the property for the
geographical area, recoverable operating costs for leases with tenants, non-recoverable operating costs, discount rates, capitalization rates
and terminal capitalization rates for the purposes of determining the estimated net proceeds from the sale of the property.
An impairment loss is recognized if the carrying amount of a CGU exceeds its recoverable amount. Impairment losses are recognized in
operating income in the period in which they occur. If an impairment subsequently reverses, the carrying amount of the asset is increased to
the extent that the carrying value of the underlying assets does not exceed the carrying amount, net of depreciation, that would have been
determined if no impairment had been recognized. Impairment reversals are recognized in operating income in the period in which they
occur.
Goodwill and intangible assets with indefinite lives are assessed for impairment based on the group of CGUs expected to benefit from the
synergies of the business combination, and the lowest level at which management monitors the goodwill. Any potential impairment is
identified by comparing the recoverable amount of the CGU grouping to which the assets are allocated to its carrying value. If the recoverable
amount, calculated as the higher of the fair value less costs to sell and the value in use, is less than its carrying amount, an impairment loss
is recognized in operating income in the period in which it occurs. Impairment losses on goodwill are not subsequently reversed if conditions
change.
Provisions Provisions are recognized when there is a legal or constructive obligation for which it is probable that a transfer of resources will
be required to settle the obligation. The amount recognized as a provision is the present value of the best estimate of the consideration
required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the
obligation.
52 2012 Annual Report – Financial Review
Financial Instruments Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of
the financial instrument. Financial assets are derecognized when the contractual rights to receive cash flows and benefits from the financial
asset expire, or if the Company transfers the control or substantially all the risks and rewards of ownership of the financial asset to another
party. Financial liabilities are derecognized when obligations under the contract expire, are discharged or cancelled. Financial instruments
upon initial recognition are measured at fair value and classified as either financial assets or financial liabilities as fair value through profit
or loss, held-to-maturity investments, loans and receivables or other financial liabilities. Financial instruments are included on the
consolidated balance sheets and measured after initial recognition at fair value, except for loans and receivables, held-to-maturity financial
assets and other financial liabilities, which are measured at amortized cost. Fair values are based on quoted market prices where available
from active markets, otherwise fair values are estimated using valuation methodologies, primarily discounted cash flows taking into account
external market inputs where possible.
Gains and losses on fair value through profit or loss financial assets and financial liabilities are recognized in earnings before income taxes in
the period in which they are incurred. Settlement date accounting is used to account for the purchase and sale of financial assets. Gains or
losses between the trade date and settlement date on fair value through profit or loss financial assets are recorded in net earnings before
income taxes and other comprehensive income, respectively. Transaction costs other than those related to financial instruments classified as
fair value through profit or loss, which are expensed as incurred, are capitalized to the carrying amount of the instrument and amortized using
the effective interest method.
Impairment of Financial Instruments An assessment of whether there is objective evidence that a financial asset or a group of financial
assets is impaired is performed at each balance sheet date. A financial asset or group of financial assets is considered to be impaired if one or
more loss events that have an impact on the future cash flows of the financial asset or group of assets occur after initial recognition of the
financial asset and the loss can be reliably measured. This assessment is performed on an individual financial asset basis or on a portfolio of
financial assets basis. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has occurred,
the loss is based on the difference between the carrying amount of the financial asset, or portfolio of financial assets, and the respective
estimated future cash flows discounted at the financial instruments’ original effective interest rate and is recorded as an allowance for losses.
If, in a subsequent period, the impairment loss decreases, the previously recognized impairment is reversed to the extent of the impairment.
Derivative Instruments Financial derivative instruments in the form of cross currency swaps, interest rate swaps, foreign exchange forwards
and equity forwards, as well as non-financial derivatives in the form of futures contracts, options contracts and forward contracts, are recorded
at fair value on the consolidated balance sheets. Any embedded derivative instruments that may be identified are separated from their host
contract and recorded on the consolidated balance sheets 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 flows, taking into account
external market inputs.
Derivative instruments are recorded in current or non-current assets and liabilities based on their remaining terms to maturity. All changes in
fair values of the derivative instruments are recorded in net earnings unless the derivative qualifies and is effective as a hedging instrument in
a designated hedging relationship.
Foreign Currency Translation The functional currency of the Company is the Canadian dollar. Assets and liabilities denominated in foreign
currencies are translated into Canadian dollars at the foreign currency exchange rate in effect at the balance sheet date. Exchange gains or
losses arising from the translation of these balances denominated in foreign currencies are recognized in operating income. Revenues and
expenses denominated in foreign currencies are translated into Canadian dollars at foreign currency exchange rates that approximate the
rates in effect at the dates when such items are transacted.
Short term Employee Benefits Short term employee benefits include wages, salaries, compensated absences, profit-sharing and bonuses.
Short term employee benefit obligations are measured on an undiscounted basis and are recognized in operating income as the related
service is provided or capitalized if the service rendered is in connection with the creation of a tangible or intangible asset. A liability is
recognized for the amount expected to be paid under short term cash bonus or profit sharing plans if the Company has a present legal or
constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
2012 Annual Report – Financial Review 53
Notes to the Consolidated Financial Statements
Defined Benefit Plans The Company has a number of contributory and non-contributory defined benefit plans providing pension and other
benefits to eligible employees. The defined benefit pension plans provide a pension based on length of service and eligible pay. The other
defined benefits include health care, life insurance and dental benefits provided to eligible employees who retire at certain ages having met
certain service requirements. The Company’s net obligation in respect of defined benefits is calculated separately for each plan. Defined
benefit plan obligations are actuarially calculated by a qualified actuary at the balance sheet date using the projected unit credit method.
The actuarial valuations are determined based on 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. The discount rate used to value the defined benefit plan obligation for accounting purposes is based on the yield on a portfolio
of Corporate AA bonds denominated in the same currency in which the benefits are expected to be paid and with terms to maturity that, on
average, match the terms of the defined benefit plan obligations. 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 expected
growth rate in health care costs is based on external data and the Company’s historical trends for health care costs. Unrecognized past
service costs (see below) and the fair value of plan assets are deducted from the defined benefit plan obligations to arrive at the net
defined benefit plan obligations.
Past service costs arising from plan amendments are recognized in operating income in the year that they arise to the extent that the
associated benefits are fully vested. Unvested past service costs are recognized in operating income on a straight-line basis over the vesting
period of the associated benefits. The interest cost on the defined benefit plan obligation and the expected return on plan assets as
determined by the actuarial valuations are recognized in net interest expense and other financing charges.
For plans that resulted in a net defined benefit asset, the recognized asset is limited to the total of any unrecognized past service costs plus
the present value of economic benefits available in the form of future refunds from the plan or reductions in future contributions to the plan (the
“asset ceiling”). In order to calculate the present value of economic benefits, consideration is given to minimum funding requirements that
apply to the plan. If it is anticipated that the Company will not be able to recover the value of the net defined benefit asset, after considering
minimum funding requirements for future service, the net defined benefit asset is reduced to the amount of the asset ceiling. The effect of the
asset ceiling is recognized in other comprehensive income or loss.
When the payment in the future of minimum funding requirements related to past service would result in a net defined benefit surplus or an
increase in a surplus, the minimum funding requirements are recognized as a liability to the extent that the surplus would not be fully available
as a refund or a reduction in future contributions. Remeasurement of this liability is recognized in other comprehensive income or loss in the
period in which the remeasurement occurs.
At each balance sheet date, plan assets are measured at fair value and defined benefit plan obligations are measured using assumptions
which approximate their fair values at the reporting date, with the resulting actuarial gains and losses from both of these measurements
recognized in other comprehensive income or loss.
Defined Contribution Plans The Company maintains a number of defined contribution pension plans for employees in which the Company
pays fixed contributions for eligible employees into a registered plan and has no further significant obligation to pay any further amounts. The
amount of the pension benefit is based on accumulated Company contributions and in most plans, employee contributions and investment gains
and losses. The costs of benefits for defined contribution plans are expensed as contributions are due.
Multi-Employer Pension Plans The Company participates in multi-employer pension plans which are accounted for as defined contribution
plans. The Company’s responsibility to make contributions to these plans is established pursuant to its collective agreements. The Company
does not administer these plans, but rather, the administration and the investment of their assets are controlled by a board of trustees
generally consisting of an equal number of union and employer representatives. The contributions made by the Company to multi-employer
plans are expensed as contributions are due.
54 2012 Annual Report – Financial Review
Other Long Term Employee Benefit Plans The Company offers other long term employee benefits including contributory long term
disability benefits and non-contributory continuation of health care and dental benefits to employees who are on long term disability leave.
As the amount of the long term disability benefit does not depend on length of service, the obligation is recognized when an event occurs
that gives rise to an obligation to make payments. The amount of other long term employee benefits is actuarially calculated by a qualified
actuary at the balance sheet date using the projected unit credit method. The discount rate used to value the other long term employee
benefit plan obligations is based on the yield on a portfolio of Corporate AA bonds denominated in the same currency in which the benefits
are expected to be paid and with terms to maturity that, on average, match the terms of the other long term employee benefit plan
obligations. The interest cost on the other long term employee benefit plan obligations and the expected return on plan assets as
determined by the actuarial valuations are recognized in net interest expense and other financing charges. At each balance sheet date,
plan assets are measured at fair value and other long term employee benefit plan obligations are measured using assumptions which
approximate their fair values at the reporting date, with the resulting actuarial gains and losses from both of these measurements
recognized immediately in operating income. Past service costs are recognized immediately in operating income in the period in which they
arise.
Termination Benefits Termination benefits are recognized as an expense when the Company is demonstrably committed, without realistic
possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination
benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an
expense if the Company has made an offer of voluntary redundancy, it is probable that the offer will be accepted and the number of
acceptances can be estimated reliably. Benefits payable are discounted to their present value when the effect of the time value of money is
material.
Stock Option Plan Stock options issued by the Company are settled in common shares and are accounted for as equity-settled stock
options. These stock options vest in tranches over a three to five year period. The fair value of each tranche of options granted to certain
employees is measured separately at the grant date using a Black-Scholes option pricing model, and is recognized as an expense in
operating income over the vesting period of each tranche, with a corresponding increase in contributed surplus. During the vesting period the
amount recognized as an expense is adjusted to reflect revised expectations about the number of options expected to vest, such that the
amount ultimately recognized as an expense is based on the number of awards that meet the vesting conditions. Upon exercise of vested
options, the amount recognized in contributed surplus for the award plus the cash received upon exercise is recognized as an increase in
share capital.
Prior to February 22, 2011, stock options could be settled in shares or in the share appreciation value in cash at the option of the
employee. These options were accounted for as cash-settled stock options and vested in tranches over a three to five year vesting period;
accordingly, each tranche was valued separately using a Black-Scholes option pricing model. The fair value of the amount payable to
employees in respect of these plans was re-measured at each balance sheet date, and a compensation expense was recognized in
operating income over the vesting period for each tranche with a corresponding change in the liability. Forfeitures were estimated at the
grant date and were revised to reflect a change in expected or actual forfeitures.
Restricted Share Unit Plan Restricted Share Unit (“RSU”) grants entitle certain employees to a cash payment equal to the weighted average
price of a Loblaw common share on the TSX in the five trading days after the end of a performance period ranging from three to five years
following the date of the award multiplied by the number of units that vest. The Company recognizes a compensation expense in operating
income for each RSU granted equal to the market value of a Loblaw common share less the net present value of the expected dividend stream
at the date on which RSUs are awarded to each participant. The compensation expense is prorated over the performance period reflecting
changes in the market value of a Loblaw common share until the end of the performance period. Forfeitures are estimated at the grant date and
are revised to reflect a change in expected or actual forfeitures.
2012 Annual Report – Financial Review 55
Notes to the Consolidated Financial Statements
Performance Share Unit Plan Performance Share Unit (“PSU”) grants entitle certain employees to a cash payment equal to the weighted
average price of a Loblaw common share on the TSX in the five trading days preceding the end of a three year performance period multiplied
by the number of units that vest. The number of units that vest will vary based on the achievement of specified performance measures. The
Company recognizes a compensation expense in operating income for each PSU expected to vest equal to the market value of a Loblaw
common share less the net present value of the expected dividend stream at the date on which PSUs are awarded to each participant. The
compensation expense is prorated over the performance period reflecting changes in the market value of a Loblaw common share and the
number of PSUs expected to vest until the end of the performance period based on the achievement of the associated performance measures.
Forfeitures are estimated at the grant date and are revised to reflect a change in expected or actual forfeitures.
Director Deferred Share Unit Plan Members of the Board, who are not management of the Company, are required to hold a portion of their
retainers and fees in the form of Director Deferred Share Units (“DSUs”) until they satisfy their required level of equity ownership. Holders of
DSUs earn dividends in the form of additional fractional DSUs during the holding period. The fractional DSU issued during the holding period is
treated as additional awards. The Company recognizes an expense in operating income for each DSU granted equal to the market value of a
Loblaw common share at the date on which DSUs are awarded and records a corresponding liability. After the grant date, the DSU liability is
re-measured for subsequent changes in the market value of a Loblaw common share. The DSU’s are settled upon termination of Board
service.
Executive Deferred Share Unit Plan Under this plan, eligible executives may elect to defer up to 100% of the Short Term Incentive Plan
(“STIP”) earned in any year into the Executive Deferred Share Unit (“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. Each EDSU entitles the holder to receive the cash equivalent of a Loblaw common share. The number of EDSUs granted in
respect of any year will be determined by dividing the STIP compensation that is subject to the EDSU plan election by the market value of the
Company’s common shares on the date the STIP compensation 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 TSX for the five trading days prior to the valuation date. After the grant date, any
change in fair value is recognized in operating income in the period of the change with a corresponding offset to the liability.
Employee Share Ownership Plan The Company maintains an Employee Share Ownership Plan (“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% of each employee’s contribution to the plan and recognizes a compensation expense in operating income when
the contribution is made. The ESOP is administered through a trust which purchases the Company’s common shares on the open market on
behalf of its employees.
Accounting Standards Implemented in 2012
Financial Instruments – Disclosures In 2010, the IASB issued amendments to IFRS 7, “Financial Instruments: Disclosures”, which increase
the disclosure requirements for transactions involving transfers of financial assets to help users of the financial statements evaluate the risk
exposures related to such transfers and the effect of those risks on an entity’s financial position. These amendments are effective and were
implemented in the first quarter of 2012. For new disclosures, see note 27.
Deferred Tax – Recovery of Underlying Assets In 2010, the IASB issued amendments to IAS 12, “Income Taxes” (“IAS 12”), that introduce an
exception to the general measurement requirements of IAS 12 for investment properties measured at fair value. These amendments were
effective in the first quarter of 2012. As part of its transition to IFRS, the Company elected to account for its investment properties at cost and as
such, the amendments did not have an impact on the Company’s results of operations or financial condition.
56 2012 Annual Report – Financial Review
Note 3. Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements requires management to make estimates and judgments in applying the Company’s
accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes.
Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application of an
accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant
information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of
balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include
management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under the
circumstances. Management continually evaluates the estimates and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that the Company believes could
have the most significant impact on the amounts recognized in the consolidated financial statements. The Company’s significant accounting
policies are disclosed in note 2.
Inventories
Key Sources of Estimation Inventories are carried at the lower of cost and net realizable value which requires the Company to utilize
estimates related to fluctuations in future retail prices, seasonality and costs necessary to sell the inventory.
Impairment of Non-Financial Assets (Goodwill, Intangible Assets, Fixed Assets and Investment Properties)
Judgments Made in Relation to Accounting Policies Applied Management is required to use judgment in determining the grouping of
assets to identify their CGUs for the purposes of testing fixed assets for impairment. Judgment is further required to determine appropriate
groupings of CGUs, for the level at which goodwill and intangible assets are tested for impairment. The Company has determined that each
retail location and each investment property is a separate CGU for purposes of fixed asset impairment testing. For the purpose of goodwill and
indefinite intangible impairment testing, CGUs are grouped at the lowest level at which goodwill and intangibles are monitored for internal
management purposes. In addition, judgment is used to determine whether a triggering event has occurred requiring an impairment test to be
completed.
Key Sources of Estimation In determining the recoverable amount of a CGU or a group of CGUs, various estimates are employed. The
Company determines fair value less costs to sell using such estimates as market rental rates for comparable properties, recoverable operating
costs for leases with tenants, non-recoverable operating costs, discount rates, capitalization rates and terminal capitalization rates. The
Company determines value in use by using estimates including projected future sales, earnings and capital investment consistent with
strategic plans presented to the Board. Discount rates are consistent with external industry information reflecting the risk associated with the
specific cash flows.
Franchise Loan Receivable and Certain Other Financial Assets
Judgments Made in Relation to Accounting Policies Applied Management reviews franchise loans receivable, trade receivables and
certain other assets relating to their franchise business at each balance sheet date utilizing judgment to determine whether a triggering event
has occurred requiring an impairment test to be completed.
Key Sources of Estimation Management determines the initial fair value of its franchise loans and certain other financial assets using
discounted cash flow models corroborated by other valuation techniques. The process of determining these fair values requires management
to make estimates of a long term nature regarding discount rates, projected revenues, and margins, as applicable, derived from past
experience, actual operating results, budgets and the Company’s five year forecast.
2012 Annual Report – Financial Review 57
Notes to the Consolidated Financial Statements
Income and Other Taxes
Judgments Made in Relation to Accounting Policies Applied The calculation of current and deferred income taxes requires management
to make certain judgments regarding the tax rules in jurisdictions where the Company performs activities. Application of judgments is required
regarding classification of transactions and in assessing probable outcomes of claimed deductions including expectations about future
operating results, the timing and reversal of temporary differences and possible audits of income tax and other tax filings to the tax authorities.
Post-Employment and Other Long Term Employee Benefits
Key Sources of Estimation Accounting for the costs of defined benefit pension plans and other applicable post-employment benefits is based
on using a number of assumptions including estimates for expected return on plan assets. Expected returns on plan assets is based on current
market conditions, the asset mix, the active management of defined benefit pension plan assets and historical returns. Other key assumptions
for pension obligations are based in part on actuarial determined data and current market conditions.
Allowance for Credit Card Receivables
Key Sources of Estimation The allowance for credit card receivables is measured based upon statistical analysis that includes estimates
for past and current performance, aging, arrears status, the level of allowance already in place, and management’s interpretation of
economic conditions and other trends specific to our customer base, including but not limited to bankruptcies. Changes in circumstances
may cause future assessments of credit risk to be materially different from current assessments, which could require an increase or
decrease in the allowance for credit card receivables.
Note 4. Future Accounting Standards
Unless otherwise indicated, the Company intends to adopt the following standards in its consolidated financial statements for fiscal 2013:
Consolidated Financial Statements In 2011, the IASB issued IFRS 10, “Consolidated Financial Statements” (“IFRS 10”). This IFRS replaces
portions of IAS 27, and supersedes SIC-12. IFRS 10 defines principles of control and establishes the basis of determining when and how an
entity should be included within a set of consolidated financial statements. The standard introduces a single control model that requires an
entity to consolidate an investee when it has power, exposure to variability in returns and has the ability to use its power over the investee to
affect its returns, regardless of whether voting rights are present. The adoption of IFRS 10 is not expected to have an impact on the
Company’s consolidated financial statements.
Disclosure of Interests in Other Entities In 2011, the IASB issued IFRS 12, “Disclosure of Interests in Other Entities” (“IFRS 12”). This IFRS
requires extensive disclosures relating to a company’s interests in subsidiaries, joint arrangements, associates, and unconsolidated structured
entities. IFRS 12 enables users of the financial statements to evaluate the nature and risks associated with a company’s interests in other
entities and the effects of those interests on a company’s financial performance and position. The adoption of IFRS 12 is not expected to have
a significant impact on the Company’s consolidated financial statements.
Fair Value Measurement In 2011, the IASB issued IFRS 13, “Fair Value Measurement” (“IFRS 13”), which establishes a single framework
for the fair value measurement and disclosure of financial and non-financial assets and liabilities. The new standard unifies the definition of
fair value and also introduces new concepts including ‘highest and best use’ and ‘principle markets’ for non-financial assets and liabilities.
There are additional disclosure requirements, including increased fair value disclosure for financial instruments for interim financial
statements. Although the Company expects additional disclosure, it does not anticipate material measurement impacts on its consolidated
financial statements as a result of the adoption of IFRS 13.
58 2012 Annual Report – Financial Review
Employee Benefits In 2011, the IASB revised IAS 19, “Employee Benefits” (“IAS 19”).The most significant amendments for the Company will
be the requirement to immediately recognize all unvested past service costs and the replacement of interest cost and expected return on plan
assets with a net interest amount that is calculated by applying a prescribed discount rate to the net defined benefit liability. Upon
implementation of these amendments, the Company will restate its annual 2012 consolidated financial statements. The preliminary expected
impact arising from the adoption of the amendments to IAS 19 is summarized as follows:
Consolidated Statements of Earnings and Comprehensive Income
Increase (Decrease)
(millions of Canadian dollars)
Selling, General and Administrative Expenses
Operating Income
Net interest expense and other financing charges
Earnings Before Income Taxes
Income taxes
Net Earnings
Other comprehensive income, net of taxes
Total Comprehensive Income
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Other long term liabilities
Shareholders' equity
52 Weeks Ended
December 29, 2012
$ 1
$ (1)
20
$ (21)
(5)
$ (16)
15
$ (1)
As at
December 29, 2012
$ (2)
$ 2
As a result, in 2013, post-employment and other long term benefits expense will be accounted for on a consistent basis year-over-year. The
amendments also require enhanced disclosures for defined benefit plans, including additional information on the characteristics and risks of
those plans.
Other Standards In addition to the above standards, the Company will be implementing the following standards and amendments effective
January 1, 2013: IFRS 11, “Joint Arrangements”, IAS 28, “Investments in Associates” and IAS 1, “Presentation of Financial Statements”. The
Company does not expect a significant impact as a result of these standards and amendments on its consolidated financial statements.
Financial Instruments In 2011, the IASB issued amendments to IFRS 7, “Financial Instruments: Disclosures” and IAS 32, “Financial
Instruments: Presentation”, these amendments are required to be applied for periods beginning on or after January 1, 2014. The Company
does not expect any significant impacts on its consolidated financial statements as a result of these amendments.
In 2010, the IASB issued a new standard, IFRS 9, “Financial Instruments” (“IFRS 9”), which will ultimately replace IAS 39, “Financial
Instruments: Recognition and Measurement” (“IAS 39”). The replacement of IAS 39 is a three-phase project with the objective of improving
and simplifying the reporting for financial instruments. The issuance of IFRS 9 is the first phase of the project, which provides guidance on
the classification and measurement of financial assets and financial liabilities. This standard becomes effective on January 1, 2015, with
early adoption permitted. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
2012 Annual Report – Financial Review 59
Notes to the Consolidated Financial Statements
Note 5. Net Interest Expense and Other Financing Charges
(millions of Canadian dollars)
Interest expense and other financing charges:
Long term debt
Defined benefit and other long term employee benefit plan obligations
Borrowings related to credit card receivables
Independent funding trusts
Dividends on capital securities
Less: capitalized interest (capitalization rate 6.4% (2011 – 6.4%))
Interest income:
Expected return on pension benefit plan assets
Accretion income
Short term interest income
Security deposits
Financial derivative instruments
Net interest expense and other financing charges
Note 6. Income Taxes
Income taxes recognized in the consolidated statements of earnings were as follows:
(millions of Canadian dollars)
Current income taxes:
Current period
Adjustment in respect of prior periods
Deferred income taxes:
Origination and reversal of temporary differences
Adjustment in respect of prior periods
2012
2011
$ 285
87
37
15
14
(1)
437
(79)
(18)
(8)
(1)
–
(106)
$ 331
$ 282
90
41
16
14
(1)
442
(80)
(20)
(7)
–
(8)
(115)
$ 327
2012
2011
$ 257
(19)
$ 238
(31)
8
(23)
$ 239
(4)
$ 235
53
–
53
Income taxes
$ 215
$ 288
Income tax recovery recognized in other comprehensive loss was as follows:
(millions of Canadian dollars)
Defined benefit plan actuarial loss
Other comprehensive loss
60 2012 Annual Report – Financial Review
2012
(8)
2011
(72)
$ (8)
$ (72)
The effective income tax rate in the consolidated statements of earnings was reported at rates different than the weighted average basic
Canadian federal and provincial statutory income tax rates for the following reasons:
Weighted average basic Canadian federal and provincial statutory income tax rate
Net increase (decrease) resulting from:
Effect of tax rate in foreign jurisdictions
Non-deductible (taxable) items
Impact of statutory income tax rate changes on deferred income tax balances
Adjustments in respect of prior periods
Effective income tax rate applicable to earnings before income taxes
2012
26.0%
(0.4)
0.5
(0.4)
(0.8)
24.9%
2011
27.7%
0.2
(0.3)
–
(0.4)
27.2%
Unrecognized deferred tax assets Deferred income tax assets were not recognized on the consolidated balance sheet in respect of the
following items:
(millions of Canadian dollars)
Deductible temporary differences
Income tax losses
Unrecognized deferred tax assets
2012
$ 5
22
$ 27
2011
$ –
15
$ 15
The income tax losses expire in the years 2027 to 2032. The deductible temporary differences do not expire under current income tax
legislation. Deferred income tax assets were not recognized in respect of these items because it is not probable that future taxable income
will be available to the Company to utilize the benefits.
Recognized deferred tax assets Deferred tax assets and liabilities were attributable to the following:
(millions of Canadian dollars)
Trade and other payables
Other liabilities
Fixed assets
Other assets
Losses carried forward (expiring 2029 to 2032)
Other
Net deferred income tax assets
Recorded on the consolidated balance sheets as follows:
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax assets
As at
As at
December 29, 2012
December 31, 2011
$ 65
322
(311)
(9)
162
13
$ 242
260
(18)
$ 54
299
(208)
(22)
73
15
$ 211
232
(21)
$ 242
$ 211
2012 Annual Report – Financial Review 61
Notes to the Consolidated Financial Statements
Note 7. Basic and Diluted Net Earnings per Common Share
(millions of Canadian dollars except where otherwise indicated)
Net earnings for basic earnings per share
Impact of dividends on capital securities
Impact of equity forwards
Net earnings for diluted earnings per share
Weighted average common shares outstanding (note 21) (in millions)
Dilutive effect of capital securities (in millions)
Dilutive effect of share-based compensation (in millions)
Dilutive effect of equity forwards (in millions)
Dilutive effect of certain other liabilities (in millions)
Diluted weighted average common shares outstanding
Basic net earnings per common share ($)
Diluted net earnings per common share ($)
2012
$ 650
−
(3)
2011
$ 769
14
−
$ 647
$ 783
281.4
−
0.3
0.7
0.8
283.2
281.6
6.2
0.7
−
0.9
289.4
$ 2.31
$ 2.28
$ 2.73
$ 2.71
Excluded from the computation of diluted net EPS were 19,359,979 (2011 – 8,248,090) potentially dilutive instruments, as they were anti-
dilutive.
Note 8. Cash and Cash Equivalents, Short Term Investments and Security Deposits
The components of cash and cash equivalents, short term investments and security deposits were as follows:
As at
As at
December 29, 2012
December 31, 2011
$ 185
$ 232
279
322
−
238
11
44
150
227
170
132
−
55
$ 1,079
$ 966
Cash and Cash Equivalents
(millions of Canadian dollars)
Cash
Cash equivalents:
Bankers’ acceptances
Government treasury bills
Bank term deposits
Corporate commercial paper
Government agencies securities
Other
Total cash and cash equivalents
62 2012 Annual Report – Financial Review
Short Term Investments
(millions of Canadian dollars)
Bankers’ acceptances
Government treasury bills
Corporate commercial paper
Government agencies securities
Other
Total short term investments
Security Deposits
(millions of Canadian dollars)
Cash
Government treasury bills
Government agencies securities
Total security deposits
As at
As at
December 29, 2012
December 31, 2011
$ 33
282
151
237
13
$ 716
$ −
252
280
221
1
$ 754
As at
As at
December 29, 2012
December 31, 2011
$ 90
126
36
$ 252
$ 85
108
73
$ 266
During 2012, the Company entered into agreements to cash collateralize certain of its uncommitted credit facilities up to an amount of $133
million (2011 – $88 million) of which $97 million (2011 – $85 million) was deposited with major financial institutions and classified as security
deposits as at December 29, 2012 and December 31, 2011, respectively.
Note 9. Accounts Receivable
The following is an aging of the Company’s accounts receivable as at December 29, 2012 and December 31, 2011:
(millions of Canadian dollars)
2012
2011
Accounts receivable
Current
403
> 30 days
39
> 60 days
14
Total
456
Current
371
> 30 days
37
> 60 days
59
Total
467
The following are continuities of the Company’s allowances for uncollectable accounts receivable:
(millions of Canadian dollars)
Allowance, beginning of year
Net reversals (additions)
Allowance, end of year
2012
$ (112)
2
$ (110)
2011
$ (105)
(7)
$ (112)
Of the balance of accounts receivable that are past due as at December 29, 2012, $16 million (December 31, 2011 – $19 million) were not
classified as impaired as their past due status was reasonably expected to be remedied.
2012 Annual Report – Financial Review 63
Notes to the Consolidated Financial Statements
Note 10. Credit Card Receivables
The components of credit card receivables were as follows:
(millions of Canadian dollars)
Gross credit card receivables
Allowance for credit card receivables
Credit card receivables
Securitized to Independent Securitization Trusts
Securitized to Eagle Credit Card Trust(1)
Securitized to Other Independent Securitization Trusts(2)
As at
December 29, 2012
$ 2,348
(43)
2,305
As at
December 31, 2011
$ 2,138
(37)
2,101
600
905
600
905
(1) The Company consolidates Eagle, as a SPE as defined in SIC-12. The associated liability of Eagle is recorded in long term debt and long term debt due within one year.
(2) The associated liabilities of Other Independent Securitization Trusts are recorded in short term debt.
The Company, through PC Bank, participates in various securitization programs that provide the primary source of funds for the operation of its
credit card business. PC Bank sells credit card receivables to these Independent Securitization Trusts, including Eagle and Other Independent
Securitization Trusts, from time to time depending on PC Bank’s financing requirements.
The credit card receivables associated with the Other Independent Securitization Trusts are not derecognized by the Company since PC Bank
is required to absorb a portion of the related credit card losses. As a result, the Company has not transferred substantially all of the risks and
rewards relating to these assets and continues to recognize these assets in credit card receivables. The associated liabilities are secured by the
credit card receivables and are accounted for as financing transactions. The associated liabilities are included in short term debt based on their
characteristics and are carried at amortized cost (see note 18).
The Company has arranged letters of credit on behalf of PC Bank, representing 9% (2011 – 9%) of the outstanding securitized liability for
the benefit of the Other Independent Securitization Trusts in the amount of $81 million (2011 – $81 million). In the event of a major decline
in the income flow from or in the value of the securitized credit card receivables, the Other Independent Securitization Trusts can draw
upon these letters of credit to recover up to a maximum of the amount outstanding on the letters of credit. Under its securitization
programs, PC Bank is required to maintain at all times a credit card receivable pool balance equal to a minimum of 107% of the
outstanding securitized liability and was in compliance with this requirement throughout the year.
The following are continuities of the Company’s allowances for credit card receivables:
(millions of Canadian dollars)
Allowances, beginning of year
Provision for losses
Recoveries
Write-offs
Allowances, end of year
2012
$ (37)
(98)
(12)
104
$ (43)
2011
$ (34)
(87)
(14)
98
$ (37)
The allowance for credit card receivables recorded in credit card receivables on the consolidated balance sheets is maintained at a level
which is considered adequate to absorb credit related losses on credit card receivables.
64 2012 Annual Report – Financial Review
The following is an aging of the Company’s gross credit card receivables as at December 29, 2012 and December 31, 2011:
(millions of Canadian dollars)
2012
Gross credit card receivables
Current
2,213
1-90 days
past due
113
> 90 days
past due
22
Total
2,348
Current
2,024
2011
1-90 days
past due
93
> 90 days
past due
21
Total
2,138
Credit card receivables are considered past due when a cardholder has not made a payment by the contractual due date, taking into
account a grace period. The amount of credit card receivables that fall within the grace period is considered current. Credit card
receivables past due but not impaired are those receivables that are either less than 90 days past due or whose past due status is
reasonably expected to be remedied. Any credit card receivables with a payment that is contractually 180 days in arrears, or where the
likelihood of collection is considered remote, is written off.
Note 11. Inventories
For inventories recorded as at December 29, 2012, the Company recorded $14 million (2011 – $20 million) for the write-down of inventories
below cost to net realizable value. The write-down was included in cost of merchandise inventories sold in the consolidated statements of
earnings. There were no reversals of previously recorded write-downs of inventories during 2012 and 2011.
Note 12. Assets Held for Sale
The Company holds land and buildings that it intends to dispose of in the next 12 months as assets held for sale. These assets were
previously used in the Company’s retail business segment. In 2012, impairment and other charges of $1 million were recognized (2011 – $3
million) on these properties. During 2012, the Company recorded a $4 million gain (2011 – $19 million gain) from the sale of these assets.
2012 Annual Report – Financial Review 65
Notes to the Consolidated Financial Statements
Note 13. Fixed Assets
The following are continuities of the cost and accumulated depreciation of fixed assets for the years ended December 29, 2012 and
December 31, 2011:
2012
Land
Buildings
Equipment
and Fixtures
Leasehold
Improvements
Finance
Leases - Land,
Buildings,
Equipment
and Fixtures
Assets Under
Construction
Total
$ 1,658
–
(8)
(9)
$ 6,308
22
(20)
(25)
$ 5,410
19
(83)
–
$ 723
22
(9)
–
$ 510
73
(28)
–
$ 646
957
–
–
$ 15,255
1,093
(148)
(34)
(3)
1
–
–
(1)
–
(3)
12
$ 1,650
269
$ 6,555
604
$ 5,950
54
$ 790
–
$ 554
(939)
$ 664
–
$ 16,163
$ 9
–
2
(3)
–
–
$ 2,132
177
32
(25)
(7)
(15)
(1)
$ 7
4
$ 2,298
$ 3,745
489
7
–
(65)
–
–
$ 4,176
$ 392
46
4
–
(9)
–
–
$ 433
$ 245
43
4
–
(24)
–
1
$ 269
$ 7
–
–
–
–
–
$ 6,530
755
49
(28)
(105)
(15)
–
$ 7
4
$ 7,190
$ 1,643
$ 4,257
$ 1,774
$ 357
$ 285
$ 657
$ 8,973
(millions of Canadian dollars)
Cost
Balance, beginning of year
Additions
Disposals
Transfer to assets held for sale
Transfer (to)/from investment
properties
Transfer from assets under
construction
Balance, end of year
Accumulated depreciation and
impairment losses
Balance, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Transfer to assets held for sale
Transfer (to)/from investment
properties
Balance, end of year
Carrying amount as at:
December 29, 2012
66 2012 Annual Report – Financial Review
2011
Land
Buildings
Equipment
and Fixtures
Leasehold
Improvements
$ 1,537
–
–
5
(1)
$ 5,822
2
(5)
(9)
(3)
117
$ 1,658
501
$ 6,308
$ 6
–
3
(3)
–
2
–
$ 1,957
179
23
(30)
(5)
(3)
(2)
1
$ 9
13
$ 2,132
$ 4,815
16
(75)
–
–
654
$ 5,410
$ 3,389
429
3
(1)
(58)
–
–
(17)
$ 3,745
$ 608
16
(7)
–
–
106
$ 723
$ 350
38
7
–
(6)
–
–
3
$ 392
Finance
Leases - Land,
Buildings,
Equipment
and Fixtures
Assets Under
Construction
Total
$ 435
76
–
–
(1)
–
$ 510
$ 205
37
3
–
–
–
–
–
$ 245
$ 1,074
950
–
–
–
$ 14,291
1,060
(87)
(4)
(5)
(1,378)
$ 646
–
$ 15,255
$ 7
–
–
–
–
–
–
$ 5,914
683
39
(34)
(69)
(1)
(2)
–
$ 7
–
$ 6,530
$ 1,649
$ 4,176
$ 1,665
$ 331
$ 265
$ 639
$ 8,725
(millions of Canadian dollars)
Cost
Balance, beginning of year
Additions
Disposals
Transfer (to)/from assets held for sale
Transfer to investment properties
Transfer from assets under
construction
Balance, end of year
Accumulated depreciation and
impairment losses
Balance, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Transfer (to)/from assets held for sale
Transfer to investment properties
Transfer to/(from) assets under
construction
Balance, end of year
Carrying amount as at:
December 31, 2011
Assets Held under Finance Leases The Company leases various land and buildings, and equipment and fixtures under a number of finance
lease arrangements. As at December 29, 2012, the net carrying amount of leased land and buildings was $259 million (December 31, 2011 –
$223 million), and the net carrying amount of leased equipment and fixtures was $26 million (December 31, 2011 – $42 million).
Assets under Construction The cost of additions to properties under construction for the year ended December 29, 2012 was $957 million
(December 31, 2011 – $950 million). Included in this amount are capitalized borrowing costs of $1 million (2011 – $1 million), with a weighted
average capitalization rate of 6.4% (2011 – 6.4%).
Security and Assets Pledged As at December 29, 2012, fixed assets with a carrying amount of $191 million (December 31, 2011 – $194
million) were encumbered by mortgages of $93 million (December 31, 2011 – $96 million).
Fixed Asset Commitments As at December 29, 2012, the Company had entered into commitments of $60 million (2011 – $52 million) for the
construction, expansion and renovation of buildings and the purchase of real property.
2012 Annual Report – Financial Review 67
Notes to the Consolidated Financial Statements
Impairment Losses For the year ended December 29, 2012, the Company recorded $49 million (2011 − $39 million) of impairment losses
on fixed assets in respect of 17 CGUs (2011 − 21 CGUs) in the retail operating segment. Impairment losses are recorded where the
carrying amount of the retail location exceeds its recoverable amount. The recoverable amount was based on the greater of the CGU’s fair
value less costs to sell and its value in use. Approximately 35% (2011 − 52%) of impaired CGUs had carrying values which were $26
million (2011 − $24 million) greater than their fair value less costs to sell. The remaining 65% (2011 − 48%) of impaired CGUs had carrying
values which were $23 million (2011 − $15 million) greater than their value in use.
For the year ended December 29, 2012, the Company recorded $28 million (2011 − $34 million) of impairment reversals on fixed assets in
respect of 11 CGUs (2011 − 17 CGUs) in the retail operating segment. Impairment reversals are recorded where the recoverable amount of
the retail location exceeds its carrying amount. Approximately 55% (2011 − 71%) of CGUs with impairment reversals had fair value less
costs to sell which were $15 million (2011 − $24 million) greater than their carrying values. The remaining 45% (2011 − 29%) of CGUs with
impairment reversals had value in use which were $13 million (2011 − $10 million) greater than carrying values.
When determining the value in use of a retail location, the Company develops a discounted cash flow model for each CGU. The duration of
the cash flow projections for individual CGUs varies based on the remaining useful life of the significant asset within the CGU. Sales
forecasts for cash flows are based on actual operating results, operating budgets, and long term growth rates that were consistent with
industry averages, all of which is consistent with strategic plans presented to the Company’s Board. The estimate of the value in use of the
relevant CGUs was determined using a pre-tax discount rate of 8.0% to 8.5% at December 29, 2012 (December 31, 2011 – 8.75% to
9.25%).
Note 14. Investment Properties
The following are continuities of investment properties:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Disposals
Transfer from fixed assets
Transfer from assets held for sale
Balance, end of year
Accumulated depreciation and impairment losses
Balance, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Transfer (to)/from fixed assets
Transfer to assets held for sale
Balance, end of year
(millions of Canadian dollars)
Carrying amount
Fair value
68 2012 Annual Report – Financial Review
2012
2011
$ 158
–
3
8
$ 169
$ 76
2
1
(4)
(4)
(2)
$ 69
2012
$ 100
$ 125
$ 151
(1)
5
3
$ 158
$ 77
1
2
(6)
2
–
$ 76
2011
$ 82
$ 109
During 2012, the Company recognized in operating income $5 million of rental income (2011 – $5 million) and incurred direct operating costs
of $3 million (2011 – $3 million) related to its investment properties. In addition, the Company recognized direct operating costs of $1 million
(2011 – $1 million) related to its investment properties for which no rental income was earned.
An external, independent valuation company, having appropriate recognized professional qualifications and recent experience in the location
and category of property being valued, provided appraisals for certain of the Company’s investment properties. For the other investment
properties, the Company determined the fair value by relying on comparable market information and the independent manager of the
Company’s investment properties. Where available, the fair values are based on market values, being the estimated amount for which a
property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm’s length transaction after
proper marketing wherein the parties had each acted knowledgeably and willingly. Where market values are not available, valuations are
prepared using the income approach by considering the estimated cash flows expected from renting out the property based on existing lease
terms and where appropriate, the ability to renegotiate the lease terms once the initial term or option term(s) expire plus the net proceeds from
a sale of the property at the end of the investment horizon.
The valuations of investment properties using the income approach include assumptions as to market rental rates for properties of similar size
and condition located within the same geographical areas, recoverable operating costs for leases with tenants, non-recoverable operating costs,
vacancy periods, tenant inducements and capitalization rates for the purposes of determining the estimated net proceeds from the sale of the
property. At December 29, 2012, the pre-tax discount rates used in the valuations for investment properties ranged from 6.0% to 9.75%
(December 31, 2011 – 6.0% to 10.0%) and the terminal capitalization rates ranged from 5.75% to 8.75% (December 31, 2011 – 5.75% to 9.25%).
For the year ended December 29, 2012, the Company recorded in operating income $1 million (2011 − $2 million) in impairment losses on
investment properties as the carrying amounts of all impaired properties were higher than their recoverable amounts. The Company also
recorded reversals of impairment losses on investment properties of $4 million (2011 – $6 million) in operating income where their fair values
less costs to sell were greater than their carrying values. The main factor contributing to the impairment of investment properties was external
economic factors.
Note 15. Goodwill and Intangible Assets
The following are continuities of the cost and accumulated amortization of goodwill and intangible assets for the years ended December 29,
2012 and December 31, 2011:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Additions
Reclassification
Write off of cost for fully amortized assets
Balance, end of year
Accumulated amortization and impairment losses
Balance, beginning of year
Amortization
Write off of amortization for fully amortized assets
Balance, end of year
Carrying amount as at:
December 29, 2012
Indefinite Life Intangible
Assets and Goodwill
Other
Intangible
Assets(1)
$ 51
11
−
−
$ 62
$ –
−
−
$ −
Goodwill
$ 1,937
−
(5)
−
$ 1,932
$ 989
−
−
$ 989
2012
Definite Life
Intangible Assets
Internally
Generated
Intangible
Assets
Other
Intangible
Assets
$ 20
−
−
−
$ 20
$ 8
6
−
$ 14
$ 43
32
5
(4)
$ 76
$ 25
9
(4)
$ 30
Total
$ 2,051
43
−
(4)
$ 2,090
$ 1,022
15
(4)
$ 1,033
$ 943
$ 62
$ 6
$ 46
$ 1,057
(1) Includes trademark and brand names resulting from the Company’s acquisition of T&T Supermarket Inc.
2012 Annual Report – Financial Review 69
Notes to the Consolidated Financial Statements
(millions of Canadian dollars)
Cost
Balance, beginning of year
Additions
Write off of cost for fully amortized assets
Balance, end of year
Accumulated amortization and impairment losses
Balance, beginning of year
Amortization
Write off of amortization for fully amortized assets
Balance, end of year
Carrying amount as at:
December 31, 2011
Indefinite Life Intangible
Assets and Goodwill
Other
Intangible
Assets(1)
$ 51
−
−
$ 51
$ –
−
−
$ −
Goodwill
$ 1,929
8
−
$ 1,937
$ 989
−
−
$ 989
2011
Definite Life
Intangible Assets
Internally
Generated
Intangible Assets
Other
Intangible
Assets
$ 18
2
−
$ 20
$ 2
6
−
$ 8
$ 42
4
(3)
$ 43
$ 23
5
(3)
$ 25
Total
$ 2,040
14
(3)
$ 2,051
$ 1,014
11
(3)
$ 1,022
$ 948
$ 51
$ 12
$ 18
$ 1,029
(1) Includes trademark and brand names resulting from the Company’s acquisition of T&T Supermarket Inc.
During 2012, the Company had $43 million (2011 – $14 million) of goodwill and intangible asset additions, including $31 million (2011 – nil)
related to the purchase of prescription files from 106 Zellers Inc. stores, which were classified as definite life intangible assets.
Indefinite Life Intangible Assets and Goodwill For purposes of goodwill impairment testing, the Company’s CGUs were grouped at the
lowest level at which goodwill was monitored for internal management purposes. The carrying amount of goodwill attributed to each CGU
grouping was as follows:
(millions of Canadian dollars)
Quebec region
T&T Supermarket Inc.
All other
Carrying amount of goodwill
As at
December 29, 2012
As at
December 31, 2011
$ 700
129
114
$ 943
$ 700
129
119
$ 948
The Company completed its annual impairment tests for goodwill and indefinite life intangible assets and concluded that there was no
impairment.
Key Assumptions The key assumptions used to calculate the recoverable amount for the fair value less costs to sell are those regarding
discount rates, growth rates and expected changes in margins.
Cash flow projections have been discounted using a range of rates derived from the Company’s after-tax weighted average cost of capital
adjusted for specific risks relating to each CGU. At December 29, 2012, the after-tax discount rates used in the recoverable amount
calculations were approximately 9.5% (December 31, 2011 – 7.0% to 9.5%). The pre-tax discount rate ranged from 12.8% – 13.0%
(December 31, 2011 – 9.4% to 12.8%).
The Company included a minimum of five years of cash flows in its discounted cash flow model. The cash flow forecasts were extrapolated
beyond the five year period using estimated long term growth rates ranging from 0.9% to 2.0% (December 31, 2011 – 1.5% to 2.0%). The
budgeted EBITDA(2) growth is based on the Company’s five year strategic plan approved by the Board.
(2) See Non-GAAP Financial Measures on page 37 of the Company’s Management’s Discussion & Analysis.
70 2012 Annual Report – Financial Review
Sensitivity to Changes in Key Assumptions For the T&T Supermarket Inc. (“T&T”) CGU, two key assumptions were identified that if
changed could cause the carrying amount to exceed its recoverable amount. A change in the discount rate or terminal growth rate of
approximately 75 basis points or 125 basis points respectively would cause the estimated recoverable amount to equal the carrying amount
(December 31, 2011 – 75 basis points or 125 basis points). The values assigned to the key assumptions represent the Company’s
assessment of the future performance of T&T and are based on both external and internal sources of information. The Company does not
believe that any changes in key assumptions will have a significant impact on the determination of the recoverable amount of the Company’s
other CGUs to which goodwill is allocated.
Note 16. Other Assets
(millions of Canadian dollars)
Fair value of cross currency swaps (note 27)
Sundry investments and other receivables
Other
Other assets
Note 17. Provisions
As at
December 29, 2012
As at
December 31, 2011
$ 98
159
32
$ 289
$ 103
166
32
$ 301
Provisions consist primarily of amounts recorded in respect of restructuring, self-insurance, commodity taxes, environmental and
decommissioning liabilities and onerous lease arrangements. The following are continuities relating to the Company’s provisions:
(millions of Canadian dollars)
Provisions, beginning of year
Additions
Payments
Reversals
Provisions, end of year
(millions of Canadian dollars)
Recorded on the consolidated balance sheets as follows:
Current portion of provisions
Non-current portion of provisions
Total provisions
2012
$ 85
80
(20)
(8)
$ 137
2011
$ 105
56
(50)
(26)
$ 85
2012
2011
$ 78
59
$ 137
$ 35
50
$ 85
During 2012, the Company reduced a number of head office and administrative positions, affecting approximately 700 jobs. The Company
recorded a charge of $61 million to reflect the costs of these reductions. As at December 29, 2012, $45 million was included in provisions
and $6 million was included in other liabilities related to this charge.
2012 Annual Report – Financial Review 71
Notes to the Consolidated Financial Statements
Note 18. Short Term Debt
The outstanding short term debt balances relate to the associated liabilities of the independent securitization trusts, excluding Eagle, which
is included in long term debt (see note 19). During 2012, PC Bank amended and extended the maturity date for two of its independent
securitization trust agreements from the third quarter of 2013 to the second quarter of 2015, with all other terms and conditions remaining
substantially the same.
During 2012, PC Bank did not securitize any credit card receivables (2011 – $370 million). In addition to PC Bank’s securitized credit card
receivables, the independent securitization trusts’ recourse is limited to standby letters of credit arranged by the Company as at December
29, 2012 of $81 million (December 31, 2011 – $81 million) which is based on a portion of the securitized amount (see note 30).
72 2012 Annual Report – Financial Review
Note 19. Long Term Debt
(millions of Canadian dollars)
Loblaw Companies Limited Notes
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
US Private Placement Notes
6.48%, due 2013 (USD $150 million)
6.86%, due 2015 (USD $150 million)
Long Term Debt Secured by Mortgage
5.49%, due 2018 (note 13)
Guaranteed Investment Certificates
Due 2013 – 2017 (0.85% – 3.78%)
Independent Securitization Trusts(1)
Eagle Credit Card Trust, 2.88%, due 2013
Eagle Credit Card Trust, 3.58%, due 2015
Independent Funding Trusts
Finance Lease Obligations (note 26)
Transaction costs and other
Total long term debt
Less amount due within one year
Long Term Debt
As at
As at
December 29, 2012
December 31, 2011
$ 200
100
350
300
350
100
200
175
$ 200
100
350
300
350
100
200
175
151
(76)
200
200
200
200
200
300
200
150
55
150
150
88
303
250
350
459
366
(2)
151
(85)
200
200
200
200
200
300
200
150
55
153
153
91
276
250
350
424
334
3
5,669
672
5,580
87
$ 4,997
$ 5,493
(1) The notes issued by Eagle are medium term notes which are collateralized by PC Bank’s credit card receivables (see note 10).
2012 Annual Report – Financial Review 73
Notes to the Consolidated Financial Statements
Loblaw Companies Limited Notes During 2011, a $350 million 6.50% medium term note (“MTN”) due January 19, 2011 matured and was
repaid.
Guaranteed Investment Certificates During 2012, PC Bank sold $76 million (2011 – $264 million) in guaranteed investment certificates
(“GICs”) through independent brokers. In addition, during 2012, $49 million (2011 – $6 million) of GICs matured and were repaid. As at
December 29, 2012, $303 million (December 31, 2011 – $276 million) of outstanding GICs were recorded in long term debt, of which $36
million (December 31, 2011 - $46 million) were recorded as long term debt due within one year.
Independent Securitization Trusts During 2011, Eagle repaid $500 million senior and subordinated notes due March 17, 2011.
Independent Funding Trusts During 2012, the Company amended and increased the size of the revolving committed credit facility that is
the source of funding to the independent funding trusts from $475 million to $575 million. Other terms and conditions remain substantially
the same. This facility bears interest at variable rates and expires in 2014. As at December 29, 2012, the independent funding trusts had
drawn $459 million (December 31, 2011 – $424 million) from this committed credit facility.
The Company provides credit enhancement in the form of a standby letter of credit for the benefit of the independent funding trusts
representing not less than 10% (2011 – 10%) of the principal amount of the loans outstanding. As at December 29, 2012, the Company
had provided a letter of credit in the amount of $48 million (December 31, 2011 – $48 million).
Committed Credit Facility During 2012, the Company renewed and extended its existing $800 million committed credit facility to March
2017. 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 December 29, 2012, the Company was in compliance with all of its covenants (see note 22). As at December 29, 2012, and
December 31, 2011, there were no amounts drawn upon the Credit Facility.
Schedule of Repayments The schedule of repayment of long term debt, based on maturity is as follows: 2013 − $672 million; 2014 − $979
million; 2015 − $545 million; 2016 − $432 million; 2017 − $96 million; thereafter − $2,951 million. See note 27 for disclosure of the fair value
of long term debt.
As at
December 29, 2012
As at
December 31, 2011
$ 531
116
24
20
160
$ 579
118
32
15
173
$ 851
$ 917
Note 20. Other Liabilities
(millions of Canadian dollars)
Defined benefit plan liability (note 24)
Other long term employee benefit liability
Deferred vendor allowances
Share-based compensation liability (note 23)
Other
Other liabilities
74 2012 Annual Report – Financial Review
Note 21. Share Capital
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) The Company has outstanding 9.0 million 5.95% non-voting
Second Preferred Shares, Series A, with a face value of $225 million, which were issued for net proceeds of $218 million, and entitle the
holder to a fixed cumulative preferred cash dividend of $1.4875 per share per annum which, if declared, will be payable quarterly. These
preferred shares which are presented as capital securities on the consolidated balance sheets are classified as other financial liabilities, and
measured using the effective interest method. During 2012, the Board declared dividends of $1.4875 (2011 – $1.4875) per Second
Preferred Share, Series A which are included as a component of net interest expense and other financing charges on the consolidated
statements of earnings (see note 5). Subsequent to year end, the Board declared a dividend of $0.37 per Second Preferred Share, Series A
payable April 30, 2013.
On and after July 31, 2013, 2014 and 2015 the Company may, at its option, redeem for cash, in whole or in part, these outstanding
preferred shares for $25.75, $25.50 and $25.00 respectively. On and after July 31, 2013, the Company may, at its option, convert these
preferred shares into that number of common shares of the Company determined by dividing the then applicable redemption price, together
with all accrued and unpaid dividends to but excluding the date of conversion, by the greater of $2.00 and 95% of the then current market
price of the common shares. On and after July 31, 2015, these outstanding preferred shares are convertible, at the option of the holder, into
that number of common shares of the Company determined by dividing $25.00, together with accrued and unpaid dividends to but excluding
the date of conversion, by the greater of $2.00 and 95% of the then current market price of the common shares. This option is subject to the
Company’s right to redeem the preferred shares for cash or arrange for their sale to substitute purchasers.
Common Shares (authorized – unlimited) Common shares issued are fully paid and have no par value. The activity in the common
shares issued and outstanding during the year was as follows:
2012
2011
Number of
Common Shares
Common
Share Capital
Number of
Common Shares
Common
Share Capital
Issued and outstanding, beginning of year
281,385,318
$ 1,540
280,578,130
$ 1,475
Common shares issued:
Dividend Reinvestment Plan
Stock options
Purchased for cancellation
–
718,544
(423,705)
–
29
(2)
Issued and outstanding, end of year
281,680,157
$ 1,567
Weighted average outstanding
281,438,799
1,142,380
686,794
(1,021,986)
281,385,318
281,601,124
43
28
(6)
$ 1,540
During 2012, the Company amended its dividend policy to state: the declaration and payment of dividends on the Company’s common
shares 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, future prospects of the Company’s business and other factors considered relevant from time to time.
Over the long term, it is the Company’s intention to increase the amount of the dividend while retaining appropriate free cash flow to
finance future growth. During the fourth quarter of 2012, the Board raised the quarterly dividend by approximately 4.8% to $0.22 per
common share. During 2012, the Board declared dividends of $0.85 (2011 – $0.84) per common share. Subsequent to year end, the Board
declared a quarterly dividend of $0.22 per common share payable April 1, 2013.
2012 Annual Report – Financial Review 75
Notes to the Consolidated Financial Statements
Normal Course Issuer Bid During 2012, the Company renewed its Normal Course Issuer Bid (“NCIB”) to purchase on the TSX, or to enter
into equity derivatives to purchase, up to 14,070,352 (2011 – 14,096,437) of the Company’s common shares, representing approximately
5% of the common shares outstanding. In accordance with the rules and by-laws of the TSX, the Company may purchase its shares at the
then market price of such shares. During 2012, the Company purchased for cancellation 423,705 (2011 – 1,021,986) common shares
under the NCIB, resulting in a charge to retained earnings of $14 million (2011 – $33 million) for the premium on the common shares and a
reduction in common share capital of $2 million (2011 – $6 million).
Dividend Reinvestment Plan During 2011, the Company issued 1,142,380 common shares from treasury under the Dividend Reinvestment
Plan (“DRIP”) at a three percent (3%) discount to market resulting in incremental equity in the Company of $43 million. The Board approved the
discontinuance of the DRIP after the dividend payment on April 1, 2011. The DRIP raised approximately $330 million total common share equity
since 2009.
Note 22. Capital Management
In order to manage its capital structure, the Company, among other activities, may adjust the amount of dividends paid to shareholders,
purchase shares for cancellation pursuant to its NCIB, issue new shares or issue or repay long term debt with the objective of:
ensuring sufficient liquidity is available to support its financial obligations and to execute its operating and strategic plans;
maintaining financial capacity and flexibility through access to capital to support future development of the business;
minimizing the after-tax cost of its capital while taking into consideration current and future industry, market and economic risks and
conditions;
utilizing short term funding sources to manage its working capital requirements and long term funding sources to manage the long
term capital expenditures of the business; and
targeting credit rating metrics consistent with those of investment grade companies.
The Company has policies in place which govern debt financing plans and risk management strategies for liquidity, interest rates and
foreign exchange. These policies outline measures and targets for managing capital, including a range for leverage consistent with the
desired credit rating. Management and the Audit Committee regularly review the Company’s compliance with, and performance against,
these policies. In addition, Management regularly reviews these policies to ensure they remain consistent with the risk tolerance acceptable
to the Company.
In December 2012, the Company filed a Short Form Base Shelf Prospectus (“Prospectus”) which expires in 2015, allowing for the potential
issuance of up to $1.0 billion of unsecured debentures and/or preferred shares subject to the availability of funding in capital markets. The
Company had filed a similar Prospectus in 2010 that expired in 2012. The Company has not issued any instruments under either of the
expired or new Prospectus.
76 2012 Annual Report – Financial Review
As at December 29, 2012 and December 31, 2011, the items that the Company includes in its definition of capital were as follows:
(millions of Canadian dollars)
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
Total debt
Capital securities
Shareholders’ equity
Equity
Total capital under management
As at
December 29, 2012
As at
December 31, 2011
$ 905
672
4,997
39
14
$ 6,627
223
6,417
$ 6,640
$ 13,267
$ 905
87
5,493
39
22
$ 6,546
222
6,007
$ 6,229
$ 12,775
Covenants and Regulatory Requirements The Company has certain key financial and non-financial covenants under its existing Credit
Facility and certain MTNs, US Private Placement (“USPP”) notes and letters of credit. The key financial covenants include interest coverage
ratios as well as leverage ratios, as defined in the respective agreements. These ratios are measured by the Company on a quarterly basis
to ensure compliance with the agreements. During 2011, the Company amended these agreements to include certain relevant IFRS
adjustments in computing the financial metrics used in calculating the Company’s financial covenants. These amendments largely served to
neutralize the impact of IFRS on covenants calculations as at the date of conversion to IFRS. As at December 29, 2012, the Company was
in compliance with each of the covenants under these agreements.
The Company is subject to externally imposed capital requirements from the Office of the Superintendent of Financial Institutions (“OSFI”),
the primary regulator of PC Bank. PC Bank’s capital management objectives are to maintain a consistently strong capital position while
considering its economic risks generated by its credit card receivables 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 7.0% and a total
capital ratio of 10.0%. PC Bank has exceeded all applicable capital requirements as at year end 2012.
The Company is also subject to externally imposed capital requirements through its subsidiary Glenhuron Bank Limited (“Glenhuron”), which
is regulated by the Central Bank of Barbados. Glenhuron is regulated under Basel I which requires Glenhuron’s assets to be risk weighted
and the minimum ratio of capital to risk weighted assets to be 8.0%. Glenhuron’s ratio of capital to risk weighted assets exceeded the
minimum requirements under Basel I as at year end 2012.
Note 23. Share-Based Compensation
The Company’s net share-based compensation expense recognized in selling, general and administrative expenses related to its stock
options, RSU and PSU plans, including the equity forwards of Glenhuron, was:
(millions of Canadian dollars)
Stock option plan expense
Equity forwards (income) expense
RSU and PSU plan expense
Net share-based compensation expense
2012
$ 18
(5)
15
$ 28
2011
$ 12
2
13
$ 27
2012 Annual Report – Financial Review 77
Notes to the Consolidated Financial Statements
The carrying amount of the Company’s share-based compensation arrangements including stock option, RSU, PSU, DSU and EDSU plans
were recorded on the consolidated balance sheets as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
Other liabilities
Contributed surplus
As at
December 29, 2012
As at
December 31, 2011
$ 15
$ 15
20
55
15
48
Subsequent to the end of the year, the Company’s RSU and PSU plans were amended to require settlement in equity. A trust has been
established to facilitate the purchase of shares for future settlement for each of the RSU and PSU plans upon vesting. These trusts will be
consolidated by the Company on an ongoing basis.
Stock Option Plan The Company maintains a stock option plan for certain employees. Under this plan, the Company may grant options for
up to 28.1 million common shares which is the Company’s guideline for the number of stock option grants. 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 based on the greater of the volume weighted average trading price of the Company’s common share for either the five
trading days prior to the date of grant or the trading day immediately preceding the grant date. Each stock option is exercisable into one
common share of the Company at the price specified in the terms of the option agreement.
At the Company’s Annual and Special Meeting of Shareholders on May 3, 2012, the shareholders approved an amendment to the
Company’s employee stock option plan that increased the total number of common shares authorized for issuance under the plan by
14,428,484 to 28,137,162 common shares. This amendment increased the Company’s number of common shares authorized for issuance
under the stock option plan from 5% to 10% of the total issued and outstanding common shares.
Commencing February 22, 2011, the Company amended its stock option plan whereby the right to receive a cash payment in lieu of
exercising an option for shares was removed. As a result, $42 million previously recorded in trade payables and other liabilities and other
liabilities was reclassified to contributed surplus at that time.
The following is a summary of the Company’s stock option plan activity:
2012
2011
Options
(number of
shares)
10,750,993
4,605,970
(718,544)
(1,506,608)
(592,883)
12,538,928
4,120,017
Weighted
Average Exercise
Price/Share
$ 38.90
34.91
31.00
36.74
68.64
$ 36.74
$ 38.72
Options
(number of
shares)
9,320,865
3,337,049
(686,794)
(1,220,127)
−
10,750,993
3,671,069
Weighted
Average Exercise
Price/Share
$ 38.56
39.20
30.61
41.80
−
$ 38.90
$ 43.25
Outstanding options, beginning of year
Granted
Exercised
Forfeited/cancelled
Expired
Outstanding options, end of year
Options exercisable, end of year
78 2012 Annual Report – Financial Review
2012 Outstanding Options
2012 Exercisable Options
Weighted
Average
Remaining
Contractual
Life (years)
3
6
4
Weighted
Average Exercise
Price/Share
$ 30.23
$ 35.36
$ 42.21
Number of
Options
Outstanding
2,383,145
5,838,021
4,317,762
12,538,928
Number of
Exercisable
Options
1,419,209
635,412
2,065,396
4,120,017
Weighted
Average Exercise
Price/Share
$ 29.95
$ 36.35
$ 45.48
Range of Exercise Prices
$ 28.95 − $ 34.62
$ 34.63 − $ 36.85
$ 36.86 − $ 54.71
During 2012, 4,605,970 (2011 – 3,337,049) stock options were granted at an average exercise price of $34.91 (2011 – $39.20) which had
a fair value of $27 million (2011 – $26 million). In addition, in 2012, the Company issued 718,544 (2011 – 686,794) common shares on the
exercise of stock options, with a weighted average share price of $36.90 (2011 – $39.86), and received cash consideration of $22 million
(2011 – $21 million).
The assumptions used to measure the fair value of options granted during 2012 and 2011 under the Black-Scholes model at the grant date
were as follows:
Expected dividend yield
Expected share price volatility
Risk-free interest rate
Expected life of options
2012
2.4% – 2.7%
21.1% – 24.8%
1.3% – 1.6%
4.2 – 6.5 years
2011
2.1% – 2.3%
22.1% – 24.7%
1.2% – 2.9%
4.4 – 6.4 years
The expected dividend yield is estimated based on the annual dividend prior to the stock option grant date and the closing share price as at
the stock option grant date.
The expected share price volatility is estimated based on the Company’s historical volatility over a period consistent with the expected life of
the options.
The risk-free interest rate is estimated based on the Government of Canada bond yield in effect at the grant date for a term to maturity equal
to the expected life of the options.
The effect of expected exercise of options prior to expiry is incorporated into the weighted average expected life of the options, which is based
on historical experience and general option holder behaviour.
Estimated forfeiture rates are incorporated into the measurement of the stock option expense. The forfeiture rate applied as at December 29,
2012 was 15.0% (December 31, 2011 – 16.3%).
2012 Annual Report – Financial Review 79
Notes to the Consolidated Financial Statements
Equity Forward Contracts A summary of Glenhuron’s equity forward contracts is as follows (see note 27):
Outstanding contracts (in millions)
Average forward price per share ($)
Interest expense (income) per share ($)
Unrealized market loss recorded in trade payables and other liabilities (millions of Canadian
dollars)
As at
December 29, 2012
As at
December 31, 2011
1.1
$ 56.59
$ 0.16
1.1
$ 56.38
$ (0.05)
$ 16
$ 20
On January 7, 2013, Glenhuron paid $16 million to settle the remaining equity forwards representing 1,103,500 Loblaw common shares,
which the Company purchased under the NCIB for $46 million and placed these shares into trust for future settlement of the Company’s
RSUs and PSUs (see note 27).
Restricted Share Unit Plan The Company maintains a RSU plan for certain employees. The RSUs entitle employees to a cash payment
after the end of each performance period, of up to three to five years, following the date of the award. The RSU payment will be an amount
equal to the weighted average price of a Loblaw common share on the TSX in the five trading days preceding the end of the performance
period for the RSUs multiplied by the number of RSUs held by the employee.
The following is a summary of the Company’s RSU plan activity:
(Number of Awards)
RSUs, beginning of period
Granted
Settled
Forfeited
RSUs, end of period
RSUs, settled (millions of Canadian dollars)
2012
1,119,496
379,746
(382,871)
(78,100)
1,038,271
$ 13
2011
1,045,346
548,003
(398,532)
(75,321)
1,119,496
$ 15
As at December 29, 2012, the intrinsic value of vested RSUs was $22 million (December 31, 2011 – $22 million).
Performance Share Unit Plan During 2012, the Board approved a plan under which PSUs may be granted to certain employees. PSU grants
entitle employees to a cash payment equal to the weighted average price of a Loblaw common share on the TSX in the five trading days
preceding the end of a three year performance period multiplied by the number of units that are vested. The number of units that vest will vary
based on the achievement of specified performance measures.
The following is a summary of the Company’s PSU plan activity:
(Number of Awards)
PSUs, beginning of period
Granted
PSUs, end of period
2012
–
50,818
50,818
2011
–
–
–
As at December 29, 2012, the intrinsic value of vested PSUs was nominal.
80 2012 Annual Report – Financial Review
Director Deferred Share Unit Plan A summary of the DSU Plan activity is as follows:
(Number of Awards)
DSUs outstanding, beginning of year
Granted
Reinvested
Settled
DSUs outstanding, end of year
2012
158,017
36,570
4,193
–
198,780
2011
147,358
36,438
3,209
(28,988)
158,017
A compensation cost of $1 million (2011 – $2 million) related to this plan was recognized in operating income. As at December 29, 2012,
the intrinsic value of DSUs was $8 million (December 31, 2011 – $6 million).
Executive Deferred Share Unit Plan A summary of the EDSU Plan activity is as follows:
(Number of Awards)
EDSUs outstanding, beginning of year
Granted
Reinvested
Settled
EDSUs outstanding, end of year
2012
43,928
3,553
1,007
(21,781)
26,707
2011
29,143
14,733
877
(825)
43,928
A nominal compensation cost (2011 – $1 million) related to this plan was recognized in operating income. As at December 29, 2012, the
intrinsic value of EDSUs was $1 million (December 31, 2011 – $2 million).
Note 24. Post-Employment and Other Long Term Employee Benefits
Post-Employment Benefits
The Company sponsors a number of pension plans, including registered funded defined benefit pension plans, registered defined
contribution pension plans and supplemental unfunded arrangements providing pension benefits in excess of statutory limits. Certain
obligations of the Company under 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 subject to limits.
The Company also offers certain other defined benefit plans other than pension plans. These other defined benefit plans are generally not
funded, are mainly non-contributory and include health care, life insurance and dental benefits. Employees eligible for these other defined
benefits are those who retire at certain ages having met certain service requirements. The majority of other defined benefit plans for current
and future retirees include a limit on the total benefits payable by the Company.
In Canada, the Company also has a national defined contribution plan for salaried employees. All newly hired salaried employees are only
eligible to participate in this defined contribution plan.
2012 Annual Report – Financial Review 81
Notes to the Consolidated Financial Statements
The Company also contributes to various multi-employer pension plans which are administered by a board of trustees. The Company’s
responsibility to make contributions to these plans is established pursuant to its collective agreements.
Other Long Term Employee Benefits
The Company offers other long term employee benefit plans that include long term disability benefits and continuation of health care and
dental benefits while on disability.
(i) Defined Benefit Pension Plans and Other Defined Benefit Plans
Information on the Company’s defined benefit pension plans and other defined benefit plans, in aggregate, is summarized as follows:
(millions of Canadian dollars)
Present value of funded obligations
Fair value of plan assets
Status of funded obligations
Present value of unfunded obligations
Total funded status of obligations
Unrecognized past service credit
Liability arising from minimum funding requirement for past
service
Total net defined benefit plan obligation
Recorded on the consolidated balance sheets as follows:
As at
December 29, 2012
As at
December 31, 2011
Defined
Benefit
Pension Plans
Other
Defined
Benefit Plans
$ (1,736)
1,532
(204)
(75)
(279)
−
(3)
$ (282)
$ −
−
−
(247)
(247)
(2)
−
$ (249)
Defined
Benefit
Pension
Plans
$ (1,612)
1,330
(282)
(73)
(355)
−
−
$ (355)
Other
Defined
Benefit Plans
$ −
−
−
(221)
(221)
(3)
−
$ (224)
Other liabilities (note 20)
(282)
(249)
(355)
(224)
Total net defined benefit plan obligation
$ (282)
$ (249)
$ (355)
$ (224)
82 2012 Annual Report – Financial Review
The following are the continuities of the fair value of plan assets and the present value of the defined benefit plan obligations:
(millions of Canadian dollars)
Changes in the fair value of plan
assets
Fair value, beginning of year
Employer contributions
Employee contributions
Benefits paid
Expected return on plan assets
Actuarial (losses) gains in other
comprehensive loss
Fair value, end of year
Changes in the present value of the
defined benefit plan obligations
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Employee contributions
Actuarial losses in other
comprehensive loss
Contractual termination benefits(1)
Special termination benefits(1)
Balance, end of year
Defined
Benefit
Pension
Plans
$ 1,330
154
2
(92)
79
2012
Other
Defined
Benefit
Plans
$ −
6
−
(6)
−
Total
$ 1,330
160
2
(98)
79
59
$ 1,532
−
$ −
59
$ 1,532
$ 1,685
59
73
(92)
2
77
4
3
$ 1,811
$ 221
14
10
(6)
−
8
−
−
$ 247
$ 1,906
73
83
(98)
2
85
4
3
$ 2,058
Defined
Benefit
Pension
Plans
$ 1,267
103
2
(80)
80
(42)
$ 1,330
$ 1,402
48
74
(80)
2
236
3
−
$ 1,685
2011
Other
Defined
Benefit
Plans
$ −
6
−
(6)
−
−
$ −
$ 199
12
11
(6)
−
5
−
−
$ 221
Total
$ 1,267
109
2
(86)
80
(42)
$ 1,330
$ 1,601
60
85
(86)
2
241
3
−
$ 1,906
(1) Contractual and special termination benefits include $6 million related to the reduction of head office and administrative positions (see note 17).
For the year ended December 29, 2012, the actual return on plan assets was $138 million (2011 − $38 million).
During 2013, the Company expects to contribute approximately $150 million (2012 – contributed approximately $150 million) to its
registered funded defined benefit pension plans. The actual amount contributed may vary from the estimate based on actuarial valuations
being completed, investment performance, volatility in discount rates, regulatory requirements and other factors. In 2013, the Company also
expects to make contributions to its defined contribution plans and multi-employer pension plans in which it participates as well as make
benefit payments to the beneficiaries of the supplemental unfunded defined benefit pension plans, other defined benefit plans and other
long term employee benefit plans.
2012 Annual Report – Financial Review 83
Notes to the Consolidated Financial Statements
Composition of Plan Assets The defined benefit pension plan assets are held in trust and consisted of the following asset categories:
Percentage of plan assets
Asset category:
Equity securities
Debt securities
Cash and cash equivalents
Total
As at
December 29, 2012
As at
December 31, 2011
59%
40%
1%
100%
55%
44%
1%
100%
As at December 29, 2012 and December 31, 2011, the defined benefit pension plans did not directly hold any securities issued by the
Company.
The cost recognized in other comprehensive loss for post-employment defined benefit plans is as follows:
(millions of Canadian dollars)
Actuarial losses
Change in liability arising from asset ceiling
Change in liability arising from minimum funding
requirements for past service
Total net actuarial losses recognized in other
comprehensive loss before tax
Income tax recoveries on actuarial losses (note 6)
Actuarial losses net of income tax recoveries
2012
2011
Defined Benefit
Pension Plans
Other Defined
Benefit Plans
Defined Benefit
Pension Plans
Other Defined
Benefit Plans
$ 18
−
$ 8
−
$ 278
(1)
$ 5
–
3
−
(2)
–
$ 21
(6)
15
$ 8
(2)
6
$ 275
(71)
204
$ 5
(1)
4
The cumulative actuarial losses before tax recognized in retained earnings for the Company’s defined benefit plans are as follows:
(millions of Canadian dollars)
Cumulative amount, beginning of year
Net actuarial losses before tax recognized in the year
Cumulative amount, end of year
2012
2011
Defined Benefit
Pension Plans
Other Defined
Benefit Plans
Defined Benefit
Pension Plans
Other Defined
Benefit Plans
$ 379
21
$ 400
$ 23
8
$ 31
$ 104
275
$ 379
$ 18
5
$ 23
84 2012 Annual Report – Financial Review
Principal Actuarial Assumptions The principal actuarial assumptions used in calculating the Company’s defined benefit plan obligations
and net defined benefit plan cost for the year were as follows:
Defined Benefit Plan Obligations
Discount rate
Rate of compensation increase
Mortality table
Net Defined Benefit Plan Cost
Discount rate
Expected long term rate of
return on plan assets
Rate of compensation increase
Mortality table
n/a – not applicable
2012
2011
Defined Pension
Benefit Plans
Other Defined
Benefit Plans
Defined Pension
Benefit Plans
Other Defined
Benefit Plans
4.00%
3.50%
UP94 Fully
Generational
4.00%
n/a
UP94 Fully
Generational
4.25%
3.50%
UP94 Fully
Generational
4.25%
n/a
UP94 Fully
Generational
4.25%
4.25%
5.25%
5.25%
5.75%
3.50%
UP94 Fully
Generational
n/a
n/a
UP94 Fully
Generational
6.25%
3.50%
n/a
n/a
UP94@2020
UP94@2020
The growth rate of health care costs, primarily drug and other medical costs for the other defined benefit plan obligations as at December 29,
2012 was estimated at 5.75% and was assumed to gradually decrease to 4.5% by 2018, remaining at that level thereafter.
The overall expected long term rate of return on plan assets was 5.75%. The expected long term rate of return on plan assets was
determined based on asset mix, active management and a review of historical returns. The expected long term rate of return was based on
the portfolio as a whole and not on the sum of the individual asset categories.
Sensitivity of Key Actuarial Assumptions The following table outlines the key assumptions for 2012 and the sensitivity of a 1% change in
each of these assumptions on the defined benefit plan obligations and the net defined benefit plan cost.
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.
Increase (Decrease)
Expected long term rate of return on plan assets
Impact of: 1% increase
1% decrease
Discount rate
Impact of: 1% increase
1% decrease
Expected growth rate of health care costs(2)
Impact of: 1% increase
1% decrease
Defined Benefit Pension Plans
Defined Benefit Net Defined Benefit
Plan Obligations
Plan Cost(1)
5.75%
$ (14)
$ 14
4.25%
$ (7)
$ 7
n/a
n/a
n/a
n/a
4.00%
$ (273)
$ 322
n/a
n/a
n/a – not applicable
(1) Discount rate and expected growth rate of health care costs sensitivity is for current service and interest costs only.
(2) Gradually decreasing to 4.5% by 2018 for the defined benefit plan obligation, remaining at that level thereafter.
Other Defined Benefit Plans
Defined Benefit Net Defined Benefit
Plan Cost(1)
Plan Obligations
n/a
n/a
4.00%
$ (32)
$ 37
5.75%
$ 32
$ (28)
n/a
n/a
n/a
4.25%
$ (2)
$ 2
5.75%
$ 4
$ (3)
2012 Annual Report – Financial Review 85
Notes to the Consolidated Financial Statements
Historical Information The history of defined benefit plans was as follows:
(millions of Canadian dollars)
Fair value of plan assets
Present value of defined benefit plan obligation
Deficit in the plans
Experience adjustments arising on plan assets
Experience adjustments arising on plan liabilities
As at
December 29, 2012
As at
December 31, 2011
As at
January 1, 2011
As at
January 3, 2010
$ 1,532
(2,058)
$ (526)
59
(85)
$ 1,330
(1,906)
$ (576)
(42)
(241)
$ 1,267
(1,601)
$ (334)
41
(167)
$ 1,119
(1,375)
$ (256)
n/a
n/a
n/a – not applicable
(ii) Post-Employment and Other Long Term Employee Benefit Cost
The net cost recognized in earnings before income taxes for the Company’s post-employment and other long term employee benefit
plans was as follows:
(millions of Canadian dollars)
Current service cost
Interest cost on defined benefit plan obligations(1)
Expected return on pension plan assets(1)
Contractual and special termination benefits(2)
Net post-employment defined benefit cost
Defined contribution costs(3)
Multi-employer pension plan costs(3)
Total net post-employment benefit cost
Other long term employee benefit costs(1)
Net post-employment and other long term employee benefit costs
2012
Defined Benefit
Pension Plans
Other Defined
Benefit Plans
$ 59
73
(79)
7
$ 60
$ 14
10
−
−
$ 24
Total
$ 73
83
(79)
7
$ 84
18
53
155
27
$ 182
(1) Interest cost on defined benefit plan obligations, expected return on plan assets and $4 million of other long term employee benefit costs were recognized in net interest
expense and other financing charges.
(2) Includes $6 million of contractual and special termination benefits related to the reduction in head office and administrative positions (see note 17).
(3) Amounts represent the Company’s contribution made in connection with defined contribution plans and multi-employer pension plans.
86 2012 Annual Report – Financial Review
(millions of Canadian dollars)
Current service cost
Interest cost on defined benefit plan obligations(1)
Expected return on pension plan assets(1)
Contractual termination benefits
Net post-employment defined benefit cost
Defined contribution costs(2)
Multi-employer pension plan costs(2)
Total net post-employment benefit cost
Other long term employee benefit costs(1)
Net post-employment and other long term employee benefit costs
2011
Defined Benefit
Pension Plans
Other Defined
Benefit Plans
$ 48
74
(80)
3
$ 45
$ 12
11
–
–
$ 23
Total
$ 60
85
(80)
3
$ 68
17
50
135
26
$ 161
(1) Interest cost on defined benefit plan obligations, expected return on plan assets and $5 million of other long term employee benefits costs were recognized in net interest
expense and other financing charges.
(2) Amounts represent the Company’s contribution made in connection with defined contribution plans and multi-employer pension plans.
The net post-employment and other long term employee benefit costs presented in the consolidated statements of earnings were as
follows:
(millions of Canadian dollars)
Selling, general and administrative expenses
Net interest expense and other financing charges
Net post-employment and other long term employee benefit costs
2012
$ 174
8
$ 182
2011
$ 151
10
$ 161
Note 25. Employee Costs
Included in operating income are the following employee costs:
(millions of Canadian dollars)
Wages, salaries and other short term employment benefits
Post-employment benefits
Other long term employee benefits
Share-based compensation
Capitalized to fixed assets
Employee costs
2012
$ 3,002
151
23
33
(24)
$ 3,185
2011
$ 2,896
130
21
25
(21)
$ 3,051
2012 Annual Report – Financial Review 87
Notes to the Consolidated Financial Statements
Note 26. Leases
The Company leases certain of its retail stores, distribution centres, corporate offices, and other assets under operating or finance lease
arrangements. Substantially all of the retail store leases have renewal options for additional terms. The contingent rents under certain of the
retail store leases are based on a percentage of retail sales. The Company also has properties which are subleased to third parties.
Determining whether a lease arrangement is classified as finance or operating requires judgment with respect to the fair value of the leased
asset, the economic life of the lease, the discount rate and the allocation of leasehold interests between the land and building elements of
property leases.
Operating Leases – As Lessee Future minimum lease payments relating to the Company’s operating leases are as follows:
Payments due by year
(millions of Canadian dollars)
Operating lease payments
Sub-lease income
2013
2014
2015
2016
2017
Thereafter
$ 202
(46)
$ 185
(39)
$ 162
(26)
$ 132
(16)
$ 108
(8)
$ 442
(10)
Net operating lease payments
$ 156
$ 146
$ 136
$ 116
$ 100
$ 432
As at
December 29, 2012
As at
December 31, 2011
Total
$ 1,231
(145)
$ 1,086
Total
$ 1,179
(181)
$ 998
During 2012 the Company recorded $197 million (2011 – $187 million) as an expense in the statement of earnings in respect of operating
leases. During that period, contingent rent recognized as an expense in respect of operating leases totaled $1 million (2011 – $1 million),
while sub-lease income earned totaled $48 million (2011 – $46 million) which is recognized in operating income.
Operating Leases - As Lessor As at December 29, 2012, the Company leased certain owned land and buildings with a cost of $2,037
million (December 31, 2011 – $1,681 million) and related accumulated depreciation of $539 million (December 31, 2011 – $408 million). For
the year ended December 29, 2012, rental income was $132 million (2011 – $127 million) and contingent rent was $2 million (2011 – $1
million), both of which were recognized in operating income.
Payments to be received by year
As at
December 29, 2012
As at
December 31, 2011
(millions of Canadian dollars)
2013
2014
2015
2016
2017
Thereafter
Total
Total
Net operating lease income
$ 153
$ 131
$ 110
$ 86
$ 58
$ 158
$ 696
$ 634
88 2012 Annual Report – Financial Review
Finance Leases – As Lessee Future minimum lease payments relating to the Company’s finance leases are as follows:
Payments due by year
As at
December 29, 2012
As at
December 31, 2011
(millions of Canadian dollars)
Finance lease payments
Less future finance charges
Present value of minimum
lease payments
2013
2014
2015
2016
2017
Thereafter
$ 62
(28)
$ 43
(25)
$ 42
(23)
$ 41
(22)
$ 38
(21)
$ 529
(270)
Total
$ 755
(389)
Total
$ 708
(374)
$ 34
$ 18
$ 19
$ 19
$ 17
$ 259
$ 366
$ 334
During 2012, contingent rent recognized by the Company as an expense in respect of finance leases was $1 million (2011 − $1 million).
Future sub-lease income relating to the Company’s sub-lease agreements are as follows:
Payments to be received by year
As at
December 29, 2012
As at
December 31, 2011
(millions of Canadian dollars)
2013
2014
2015
2016
2017
Thereafter
Total
Total
Sub-lease income
$ (14)
$ (13)
$ (9)
$ (6)
$ (4)
$ (11)
$ (57)
$ (52)
At December 29, 2012, the sub-lease payments receivable under finance leases was $16 million (December 31, 2011 – $14 million).
Note 27. Financial Instruments
The Company’s financial assets and financial liabilities are classified as follows:
• Cash and cash equivalents, short term investments and security deposits are designated as fair value through profit or loss;
• Derivatives which are not designated in a hedge are classified as fair value through profit or loss;
• Accounts receivable, credit card receivables and franchise loans receivable are classified as loans and receivables and carried at
amortized cost;
• Other financial instruments included in other assets are classified as loans and receivables and carried at amortized cost; and
• Bank indebtedness, trade payables and other liabilities, short term debt, long term debt, certain other liabilities and capital securities
are classified as other financial liabilities and carried at amortized cost.
The Company has not classified any financial assets as held-to-maturity.
Cross Currency Swaps As at December 29, 2012, Glenhuron held cross currency swaps to exchange United States dollars (“USD”) for
$1,199 million (December 31, 2011 – $1,252 million) Canadian dollars. The swaps mature by 2019 and are financial derivatives classified as
fair value through profit or loss. Currency adjustments receivable or payable arising from these swaps are settled in cash on maturity. As at
December 29, 2012, a cumulative unrealized foreign currency exchange rate receivable of $93 million (December 31, 2011 – $89 million)
was recorded in other assets, and a receivable of $20 million (December 31, 2011 – $48 million) was recorded in prepaid expenses and other
assets. During 2012, a fair value gain of $25 million (2011 – loss of $29 million) was recognized in operating income relating to these cross
currency swaps. Offsetting the fair value gain was a loss of $27 million (2011 – gain of $25 million) as a result of translating USD $1,113
million (December 31, 2011 – USD $1,073 million) cash and cash equivalents, short term investments and security deposits, which was also
recognized in operating income.
2012 Annual Report – Financial Review 89
Notes to the Consolidated Financial Statements
In 2008, the Company entered into fixed cross currency swaps to exchange $148 million Canadian dollars for USD $150 million, which
mature in the second quarter of 2013 and entered into additional fixed cross currency swaps to exchange $148 million Canadian dollars for
USD $150 million, which mature by 2015. A portion of these cross currency swaps was originally designated in a cash flow hedge to manage
the foreign exchange variability related to part of the Company’s fixed rate USPP notes. In 2011, the designated swap was no longer
classified as a cash flow hedge and as a result, fair value changes were recorded in operating income. As at December 29, 2012, a
cumulative unrealized foreign currency exchange rate receivable of $5 million (December 31, 2011 – $14 million) was recorded in other
assets and a receivable of $2 million (December 29, 2011 – nil) was recorded in prepaid expenses and other assets. During 2012, the
Company recognized in operating income an unrealized fair value loss of $7 million (2011 – gain of $2 million) on these cross currency
swaps. Offsetting the unrealized fair value loss was an unrealized foreign currency exchange gain of $6 million (2011 – loss of $6 million),
which was also recognized in operating income, related to the translation of USD $300 million USPP.
Interest Rate Swaps The Company maintains a notional $150 million (2011 − $150 million) in interest rate swaps that mature by the third
quarter of 2013, on which it pays a fixed rate of 8.38%. At December 29, 2012, the fair value of these interest rate swaps of $5 million
(December 31, 2011 – $16 million) was recorded in other liabilities (see note 20). During 2012, the Company recognized a fair value gain of
$11 million (2011 – gain of $8 million) in operating income related to these swaps.
Interest rate swaps previously held by Glenhuron converted a notional $200 million of floating rate cash and cash equivalents, short term
investments and security deposits to average fixed rate investments at 4.74%. These interest rate swaps matured in 2011. During 2012, no
fair value loss (2011 – $7 million) was recognized on these interest rate swaps in operating income.
Equity Forward Contracts As at December 29, 2012, Glenhuron had cumulative equity forward contracts to buy 1.1 million (December
31, 2011 – 1.1 million) of the Company’s common shares at an average forward price of $56.59 (December 31, 2011 – $56.38) including
$0.16 interest expense (December 31, 2011 – $0.05 interest income) per common share (see note 21). In 2012, Glenhuron recognized a
$5 million gain (2011 – $2 million expense) in operating income in relation to these equity forwards. In addition, during 2011 Glenhuron
paid $7 million to settle equity forwards representing 390,100 Loblaw shares, which the Company purchased for cancellation for $15 million
under its NCIB.
As at December 29, 2012, the cumulative accrued interest and unrealized market loss of $16 million (December 31, 2011 – loss of $20
million) was included in accounts payable and accrued liabilities. On January 7, 2013, Glenhuron paid $16 million to settle the remaining
equity forwards representing 1,103,500 Loblaw common shares, which the Company purchased under the NCIB for $46 million and placed
these shares into trust for future settlement of the Company’s RSUs and PSUs (see note 23).
Other Derivatives The Company also maintains other financial derivatives including foreign exchange forwards, electricity forwards and
fuel exchange traded futures and options. As at December 29, 2012, the Company recognized a nominal (December 31, 2011 – $1 million)
cumulative unrealized gain receivable included in prepaid and other assets.
Franchise Loans Receivable and Franchise Investments in Other Assets The value of franchise loans receivable of $363 million
(December 31, 2011 – $331 million) was recorded on the consolidated balance sheets. During 2012, the Company recorded an impairment
loss of $12 million (2011 –$11 million) in operating income related to these loan receivables.
The value of franchise investments included in other assets recorded on the consolidated balance sheets was $64 million (December 31,
2011 – $53 million). During 2012, the Company recognized an impairment loss of $7 million (2011 – $4 million) in operating income related
to these investments.
90 2012 Annual Report – Financial Review
Fair Value Measurement
The Company measures financial assets and liabilities under the following fair value hierarchy in accordance with IFRS. 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); and
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, Credit Card Receivables, Bank indebtedness, Trade Payables and Other Liabilities, and Short Term Debt: Fair value
is based on estimated cash flows, discounted at interest rates for similar instruments. The carrying amount approximates fair value due to
the short term maturity of these instruments.
Franchise Loans Receivable: Fair value is based on estimated cash flows, discounted at interest rates for similar instruments. The carrying
amount approximates fair value due to the minimal fluctuations in the forward interest rate and the sufficiency of provisions recorded for all
impaired receivables.
Derivative Financial Instruments: The fair values of 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.
Long term Debt, Capital Securities and Other Financial Instruments: Fair value is based on the present value of contractual cash flows,
discounted at Company’s current incremental borrowing rate for similar types of borrowing arrangements or, where applicable, quoted
market prices.
2012 Annual Report – Financial Review 91
Notes to the Consolidated Financial Statements
The following tables provide a comparison of carrying and fair values for each classification of financial instruments as at December 29, 2012
and December 31, 2011:
As at December 29, 2012
Financial
Instruments
required to be
classified as
fair value
through
profit or loss
Financial
Instruments
designated
as fair value
through
profit or loss
$ −
−
−
−
120
−
$ 120
$ −
120
−
$ 120
$ 17
−
−
−
5
−
$ 22
$ −
21
1
$ 22
$ 2,047
−
−
−
−
−
$ 2,047
$ 275
1,772
−
$ 2,047
$ −
−
−
−
−
−
$ −
$ −
−
−
$ −
Loans
and
receivables
(Amortized
cost)
Other
financial
liabilities
(Amortized
cost)
$ −
456
2,305
363
−
75
$ −
−
−
−
−
−
Total
carrying
amount
$ 2,047
456
2,305
363
120
75
$ 3,199
$ −
$ 5,366
n/a
n/a
n/a
n/a
$ −
−
−
−
−
−
n/a
n/a
n/a
n/a
$ 3,703
905
5,669
223
−
44
n/a
n/a
n/a
n/a
$ 3,720
905
5,669
223
5
44
$ −
$ 10,544
$ 10,566
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Total
fair value
$ 2,047
456
2,305
363
120
75
$ 5,366
$ 275
1,892
−
$ 2,167
$ 3,720
905
6,542
243
5
44
$ 11,459
$ −
21
1
$ 22
Cash and cash equivalents, short term
investments and security deposits
Accounts receivable
Credit card receivables
Franchise Loans Receivable
Derivatives
Other
Total financial assets
Fair value level 1
Fair value level 2
Fair value level 3
Fair value total
Trade payables and other liabilities
Short term debt
Long term debt
Capital Securities
Derivatives
Other
Total financial liabilities
Fair value level 1
Fair value level 2
Fair value level 3
Fair value total
92 2012 Annual Report – Financial Review
As at December 31, 2011
Financial
Instruments
required to be
classified as
fair value
through
profit or loss
Financial
Instruments
designated
as fair value
through
profit or loss
Loans
and
receivables
(Amortized cost)
Cash and cash equivalents, short term
investments and security deposits
Accounts receivable
Credit card receivables
Franchise Loans Receivable
Derivatives
Other
Total financial assets
Fair value level 1
Fair value level 2
Fair value level 3
Fair value total
Trade payables and other liabilities
Short term debt
Long term debt
Capital Securities
Derivatives
Other
Total financial liabilities
Fair value level 1
Fair value level 2
Fair value level 3
Fair value total
$ −
−
−
−
152
−
$ 152
$ −
152
−
$ 152
22
−
−
−
19
−
$ 41
$ −
39
2
$ 41
$ 1,986
−
−
−
−
−
$ 1,986
$ 317
1,669
−
$ 1,986
−
−
−
−
−
−
$ −
$ −
−
−
$ −
Other
financial
liabilities
(Amortized
cost)
$ −
−
−
−
−
−
Total
carrying
amount
$ 1,986
467
2,101
331
152
64
$ −
467
2,101
331
−
64
$ 2,963
$ −
$ 5,101
n/a
n/a
n/a
n/a
−
−
−
−
−
−
n/a
n/a
n/a
n/a
3,655
905
5,580
222
−
49
n/a
n/a
n/a
n/a
3,677
905
5,580
222
19
49
$ −
$ 10,411
$ 10,452
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Total
fair value
$ 1,986
467
2,101
331
152
64
$ 5,101
$ 317
1,821
−
$ 2,138
3,677
905
6,262
248
19
49
$ 11,160
$ −
39
2
$ 41
The fair value of the embedded foreign currency derivative classified as Level 3 included in other liabilities was $1 million (December 31,
2011 – $2 million), of which the fair value gain of $1 million (2011 – loss of $5 million) was recognized in operating income. A 1% increase
(decrease) in foreign currency exchange rates would result in an additional $1 million gain (loss) in fair value.
During the year ended December 29, 2012, the net loss on financial instruments designated as fair value through profit or loss recognized
in net earnings before income taxes was $27 million (2011 – loss of $25 million). In addition, the net gain on financial instruments required
to be classified as fair value through profit or loss, recognized in net earnings before income taxes was $38 million (2011 – loss of $29
million).
During 2012, net interest expense of $332 million (2011 – expense of $332 million) was recorded related to financial instruments not
classified or designated as fair value through profit and loss.
2012 Annual Report – Financial Review 93
Notes to the Consolidated Financial Statements
Note 28. Financial Risk Management
As a result of holding and issuing financial instruments, the Company is exposed to liquidity and capital availability risk, credit risk and market
risk. The following is a description of those risks and how the exposures are managed:
Liquidity and Capital Availability Risk Liquidity risk is the risk that the Company cannot meet its demands 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. Difficulty
accessing capital markets could impair the Company’s capacity to grow, execute its business model and generate financial returns.
Liquidity and capital availability risks are mitigated by maintaining appropriate levels of cash and cash equivalents and short term
investments, actively monitoring market conditions, and by diversifying its sources of funding, including its Credit Facility and maintaining a
well-diversified maturity profile of its debt and capital obligations. Despite these mitigation strategies, if 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.
Maturity Analysis The following are the undiscounted contractual maturities of significant financial liabilities as at December 29, 2012:
Derivative Financial Liabilities
Interest rate swaps payable(1)
Equity forward contracts(2)
Foreign exchange forward contracts
Non-Derivative Financial Liabilities
Short term debt(3)
Long term debt including fixed interest payments(4)
Other liabilities(5)
2013
2014
2015
2016
2017
Thereafter(6)
Total
$ 6
$ –
$ –
$ –
$ –
$ –
$ 6
62
78
905
973
–
$ 2,024
–
–
–
1,237
35
$ 1,272
–
–
–
777
–
–
–
–
640
4
–
–
–
284
–
–
–
–
5,925
–
62
78
905
9,836
39
$ 777
$ 644
$ 284
$ 5,925
$ 10,926
(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 December 29, 2012 and includes cumulative accrued interest and unrealized market loss of $16 million.
(3) These are obligations owed to independent securitization trusts which are collateralized by the Company’s credit card receivables (see note 10).
(4) Based on the maturing face values and annual interest for each instrument, including GICs, long term independent securitization trusts and an independent funding trust,
as well as annual payment obligations for SPEs, mortgages and finance lease obligations.
(5) Contractual obligation related to certain other liabilities.
(6) Capital securities and their related dividends have been excluded as the Company is not contractually obligated to pay these amounts. The Company also excluded bank
indebtedness, trade payables and other liabilities, which are due within the next 12 months.
Credit Risk The Company is exposed to credit risk resulting from the possibility that counterparties may default on their financial
obligations to the Company. Exposure to credit risk relates to derivative instruments, cash and cash equivalents, short term investments,
security deposits, PC Bank’s credit card receivables, franchise loans receivable, accounts receivables from franchisees, other receivables
from vendors, associated stores and independent accounts and pension assets held in the Company’s defined benefit plans.
The risk related to derivative instruments, cash and cash equivalents, short term investments or security deposits is reduced by policies
and guidelines that require that the Company only enter into transactions with counterparties or issuers that have a minimum long term “A-”
credit rating from a recognized credit rating agency and by placing minimum and maximum limits for exposures to specific counterparties
and instruments. The Company’s maximum exposure to credit risk as it relates to derivative instruments is approximated by the positive fair
value of the derivatives on the balance sheet (see note 27).
94 2012 Annual Report – Financial Review
PC Bank manages its credit card receivable risk by employing stringent credit scoring techniques and 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.
Franchise loans receivable, accounts receivable from franchisees and other receivables from vendors, 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.
Refer to note 9 and note 10 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 The Company is exposed to fluctuations in interest rates on its floating rate debt and financial instruments net of cash
and cash equivalents, short term investments and security deposits. The Company manages interest rate risk by monitoring its respective
mix of fixed and floating rate debt, net of cash and cash equivalents, short term investments and security deposits, and taking action as
necessary to maintain an appropriate balance considering current market conditions. The Company estimates that a 100 basis point
increase (decrease) in short term interest rates, with all other variables held constant, would result in a decrease (increase) of $9 million to
interest expense.
Foreign Currency Exchange Rate Risk The Company is exposed to foreign currency exchange rate variability, primarily on its USD
denominated cash and cash equivalents, short term investments and security deposits held by Glenhuron, foreign denominated and
foreign currency based purchases in trade payables and other liabilities, and USPP notes included in long term debt. The Company and
Glenhuron have cross currency swaps and foreign currency forward contracts 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 receipt of interest payments and principal amounts in a second currency. Refer to note 27 for the
summary of the foreign exchange impact.
Commodity Price Risk The Company is exposed to increases in the prices of commodities in operating its stores and distribution networks,
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. The Company enters into exchange traded futures contracts and
forward contracts to minimize cost volatility relating to energy. The Company estimates that based on the outstanding derivative contracts
held by the Company as at December 29, 2012, a 10% decrease in relevant energy prices, with all other variables held constant, would
result in a net loss of $2 million on earnings before income taxes.
Common Share Price Risk The Company is exposed to common share market price risk as a result of the issuance to certain employees
of stock options, to the extent that they are repurchased by the Company on exercise. The Company is also exposed to common share
market price risk from its RSU and PSU plans. Both RSUs and PSUs negatively impact operating income when the common share price
increases and positively impact operating income when the common share price declines. Glenhuron is a party to an equity forward
contract, which allows for settlement in cash, common shares or net settlement. This forward contract changes in value as the market price
of the Company’s common shares changes and provides a partial offset to fluctuations in the Company’s RSU and PSU plan expense or
income. The impact on the equity forwards of a one dollar increase (decrease) of the market value in the Company’s underlying common
share, with all other variables held constant, would result in a $1 million gain (loss) on earnings before income taxes.
2012 Annual Report – Financial Review 95
Notes to the Consolidated Financial Statements
Note 29. Contingent Liabilities
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 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 the consolidated financial statements, but may have a material impact in
future periods.
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.
Tax and Regulatory The Company is involved in and potentially subject to tax audits from various governments and regulatory agencies
relating to income, capital and commodity taxes on an ongoing basis. As a result, from time to time, taxing authorities may disagree with the
positions and conclusions taken by the Company in its tax filings or legislation may be amended, which could lead to assessments and
reassessments. These assessments and reassessments may have a material impact on the Company’s financial statements in future periods.
During 2012, the Company received indication from the Canada Revenue Agency that it intends to proceed with a reassessment with regard to
the tax treatment of the Company’s wholly owned subsidiary, Glenhuron. At this early stage, it is not possible to quantify the amount of the
proposed reassessment. While the Company does not expect the ultimate outcome to be material, such matters cannot be predicted with
certainty and could result in a material charge for the Company in future periods.
Indemnification Provisions The Company from time to time enters into agreements in the normal course of its business, such as service
and outsourcing arrangements and leases, in connection with business or asset acquisitions or dispositions. These agreements by their
nature may provide for indemnification of counterparties. These indemnification provisions may be in connection with breaches of
representation and warranty or with future claims for certain liabilities, including liabilities related to tax and environmental matters. The
terms of these indemnification provisions vary in duration and may extend for an unlimited period of time. Given the nature of such
indemnification provisions, the Company is unable to reasonably estimate its total maximum potential liability as certain indemnification
provisions do not provide for a maximum potential amount and the amounts are dependent on the outcome of future contingent events, the
nature and likelihood of which cannot be determined at this time. Historically, the Company has not made any significant payments in
connection with these indemnification provisions.
Note 30. Financial Guarantees
The Company has provided to third parties the following significant guarantees:
Independent Funding Trusts The full balance relating to the debt of the independent funding trusts has been consolidated on the balance
sheet of the Company as at December 29, 2012 and December 31, 2011. The Company has agreed to provide a credit enhancement of $48
million (2011 – $48 million) in the form of a standby letter of credit for the benefit of the independent funding trusts representing not less than
10% (2011 − 10%) of the principal amount of the loans outstanding. This credit enhancement allows the independent funding trusts to
provide financing to the Company’s independent franchisees. As well, each independent franchisee provides security to the independent
funding trusts 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
trusts would assign the loan to the Company and draw upon this standby letter of credit. This standby letter of credit has never been drawn
upon. The Company has agreed to reimburse the issuing bank for any amount drawn on the standby letter of credit.
96 2012 Annual Report – Financial Review
Independent Securitization Trusts Letters of credit for the benefit of other independent securitization trusts with respect to the securitization
programs of PC Bank have been issued by major financial institutions. 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% (2011 – 9%) on a portion of the securitized credit card receivables amount, is approximately $81 million (December 31, 2011 –
$81 million) (see note 18). The undrawn commitments on the independent securitization trusts as at December 29, 2012 was $120 million
(December 31, 2011 – $120 million).
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 $13 million (December 31, 2011 – $14 million). Additionally, the Company has guaranteed lease
obligations of a third party distributor in the amount of $19 million (December 31, 2011 – $17 million).
President’s Choice Bank The Company has provided a guarantee on behalf of PC Bank to MasterCard® International Incorporated in the
amount of USD $230 million (2011 – USD $180 million) for accepting PC Bank as a card member and licensee of MasterCard®.
Other 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, not including
the standby letters of credit for the benefit of independent funding trusts and independent securitization trusts, is approximately $348 million
(December 31, 2011 − $314 million).
Note 31. Related Party Transactions
The Company’s parent corporation is Weston, which owns, directly and indirectly, 177,299,889 of the Company’s common shares,
representing approximately 63% of the Company’s 281,680,157 outstanding common shares. Mr. W. Galen Weston controls Weston,
directly and indirectly through private companies which he controls, including Wittington who owns a total of 80,724,599 of Weston’s
common shares, representing approximately 63% of Weston’s 128,220,992 outstanding common shares. Mr. Weston also beneficially
owns 3,753,789 of the Company’s common shares, representing approximately 1% (December 31, 2011 – 1%) of the Company’s
outstanding common shares. The Company’s policy is to conduct all transactions and settle all balances with related parties on market
terms and conditions.
2012 Annual Report – Financial Review 97
Notes to the Consolidated Financial Statements
Transactions with Related Parties
(millions of Canadian dollars)
Cost of Merchandise Inventory Sold
Inventory purchases from a subsidiary of Weston
Inventory purchases from a related party(1)
Operating Income
Cost sharing agreements with Parent2)
Net administrative services provided by Parent(3)
Lease of office space from a subsidiary of Wittington
Transaction Value
2012
2011
$ 627
18
$ 646
18
12
17
3
10
17
3
(1) Associated British Foods plc is a related party by virtue of Mr. W. Galen Weston being a director of such entity’s parent company. Total balance outstanding owing to Associated
British Foods plc as at December 29, 2012 was $2 million (December 31, 2011 – $2 million).
(2) Weston and the Company have each entered into certain contracts with third parties for administrative and corporate services, including telecommunication services and
information technology related matters on behalf of itself and the related party. 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 the Company’s proportionate share of the total costs incurred.
(3) The Company and Weston have entered into an agreement whereby certain administrative services are provided by one party 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 the costs. Fees paid under this agreement are reviewed each year by the Audit Committee.
The net balances due to related parties are comprised as follows:
(millions of Canadian dollars)
Balance Sheet
Trade payables and other liabilities
As at
December 29, 2012
As at
December 31, 2011
$ 25
$ 28
Post-Employment Benefit Plans The Company sponsors a number of post-employment plans, which are related parties. Contributions
made by the Company to these plans are disclosed in note 24.
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.
Key Management Personnel The Company’s key management personnel are comprised of the Board and certain members of the
executive team of the Company, as well as both the Board and certain members of the executive team of Weston and Wittington to the
extent that they have the authority and responsibility for planning, directing and controlling the day-to-day activities of the Company.
Compensation of Key Management Personnel Annual compensation of key management personnel that is directly attributable to the
Company was as follows:
(millions of Canadian dollars)
Salaries, director fees and other short term employee benefits
Share-based compensation
Total compensation
2012
$ 7
4
$ 11
2011
$ 10
4
$ 14
Dividend Reinvestment Plan During the year, the Company issued nil (2011 – 938,984) common shares to Weston under the DRIP (see
note 21).
98 2012 Annual Report – Financial Review
Note 32. Subsequent Event
Subsequent to the end of the year, the Company announced changes to certain of its defined benefit pension and post-employment
benefits plans impacting certain employees retiring after January 1, 2015. These changes are expected to result in a one-time gain of
approximately $51 million, which will be recorded in the first quarter of 2013.
Note 33. Segment Information
The Company has two reportable operating segments with all material operations carried out in Canada:
The Retail segment, which consists primarily of food and also includes drugstore, gas bars, apparel and other general merchandise;
and
The Financial Services segment, which includes credit card services, a retail loyalty program, insurance brokerage services,
personal banking services provided by a major Canadian chartered bank, deposit taking services and telecommunication services.
The Company’s chief operating decision maker evaluates segment performance on the basis of operating income, as reported to internal
management, on a periodic basis. This performance measure is used as it is considered to be the most relevant in evaluating the results of the
segments relative to other entities that operate within these industries.
Segment results and assets include items directly attributable to a segment as well as items that can be allocated on a reasonable basis.
There are varying levels of integration between the Retail and Financial Services segments. This integration includes shared expenses
relating to the Company’s brands, loyalty program, store displays and certain administrative services.
Information regarding the operations of each reportable operating segment is included below.
(millions of Canadian dollars)
Revenue
Retail
Financial services(1)
Consolidated
(1) Included in financial services revenue is $277 million (2011 – $252 million) of interest income.
(millions of Canadian dollars)
Depreciation and Amortization
Retail
Financial services
Consolidated
(millions of Canadian dollars)
Operating Income
Retail
Financial services
Consolidated
2012
2011
$ 30,960
644
$ 31,604
$ 30,703
547
$ 31,250
2012
2011
$ 767
10
$ 777
$ 691
8
$ 699
2012
2011
$ 1,101
95
$ 1,196
$ 1,312
72
$ 1,384
2012 Annual Report – Financial Review 99
Notes to the Consolidated Financial Statements
(millions of Canadian dollars)
Net Interest Expense and Other Financing Charges
Retail
Financial services
Consolidated
(millions of Canadian dollars)
Total Assets
Retail
Financial services
Consolidated
(millions of Canadian dollars)
Additions to Fixed Assets and Goodwill and Intangibles
Retail
Financial services
Consolidated
2012
2011
$ 286
45
$ 331
$ 279
48
$ 327
As at
December 29, 2012
As at
December 31, 2011
$ 15,474
2,487
$ 17,961
$ 15,098
2,330
$ 17,428
2012
2011
$ 1,045
15
$ 1,060
$ 997
4
$ 1,001
100 2012 Annual Report – Financial Review
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 December 29, 2012 in connection
with the Company's Short Form Base Shelf Prospectus dated December 21, 2012.
Earnings coverage on financial liabilities
3.42 times
The earnings coverage ratio on financial liabilities is equal to consolidated net earnings (before interest on short term and long term debt,
dividends on capital securities and income taxes) divided by consolidated interest on short term and long term debt and dividends on
capital securities. For purposes of calculating the earnings coverage ratio set forth above, long term debt includes the current portion of
long term debt.
2012 Annual Report – Financial Review 101
Three Year Summary(1)
For the years ended December 29, 2012, December 31, 2011 and January 1, 2011
(millions of Canadian dollars, except where otherwise indicated)
2012
(52 weeks)
2011
(52 weeks)
2010(2)
(52 weeks)
Consolidated Results of Operations
Revenue
Operating income
EBITDA(3)
Net interest and other financing charges
Net earnings
Consolidated Financial Position
Fixed assets
Goodwill and intangible assets
Total assets
Adjusted debt(3)
Shareholders’ equity
Consolidated Cash Flow
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Free cash flow(3)
Capital investment(1)
Consolidated Per Common Share ($)
Basic net earnings
Dividend rate at year end
Book value(1)
Market price at year end
Consolidated Financial Measures and Ratios
Revenue growth (%)
Operating margin(1) (%)
EBITDA margin(3) (%)
Adjusted debt(3) to EBITDA(3)
Interest coverage(3)
Return on average net assets(1) (%)
Return on average shareholders’ equity(1) (%)
Price/net earnings ratio(1) at year end
Retail Results of Operations
Sales
Gross profit
Operating income
Retail Operating Statistics
Same-store sales(1) (decline) growth (%)
Gross profit percentage (%)
Operating margin(1) (%)
Retail square footage(1) (in millions)
Corporate square footage (in millions)
Franchise square footage (in millions)
Corporate stores sales per average square foot(1) ($)
Number of corporate stores
Number of franchised stores
Percentage of corporate real estate owned (%)
Percentage of franchise real estate owned (%)
Financial Services Results of Operations
Revenue
Operating income
Earnings before income taxes
Financial Services Operating Measures and Statistics
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card receivables(1) (%)
Annualized credit loss rate on average quarterly gross credit card receivables(1) (%)
$ 31,604
1,196
1,973
331
650
$ 8,973
1,057
17,961
4,360
6,417
$ 31,250
1,384
2,083
327
769
$ 8,725
1,029
17,428
4,341
6,007
$ 30,836
1,347
1,975
353
675
$ 8,377
1,026
16,841
4,669
5,603
2,047
1,637
824
1,017
2.31
0.85
22.78
42.05
1.1
3.8
6.2
2.2x
3.6x
10.0
10.5
18.2
30,960
6,819
1,101
(0.2)
22.0
3.6
51.5
37.6
13.9
563
580
473
72
45
644
95
50
2,105
2,305
43
12.8
4.3
1,986
1,814
931
987
2.73
0.84
21.35
38.48
1.3
4.4
6.7
2.1x
4.2x
12.0
13.2
14.1
30,703
6,820
1,312
0.9
22.2
4.3
51.2
37.5
13.7
564
584
462
72
46
547
72
24
1,974
2,101
37
12.5
4.2
1,965
2,029
741
1,190
2.43
0.84
19.97
40.37
0.3(4)
4.4
6.4
2.4x
3.8x
12.0
12.6
16.6
30,315
6,787
1,239
(0.6)
22.4
4.1
50.7
37.3
13.4
563
576
451
74
46
521
108
66
1,941
1,997
34
13.2
5.6
(1) For financial definitions and ratios refer to the Glossary of Terms on page 103.
(2) 2010 comparative figures previously reported in accordance with Canadian generally accepted accounting principles (“CGAAP”) have been restated to conform with International Financial Reporting Standards (“IFRS” or “GAAP”).
(3) See Non-GAAP Financial Measures on page 37 of the Company’s Management Discussion and Analysis.
(4) As compared to 2009 figures reported in accordance with CGAAP.
102 2012 Annual Report – Financial Review
Glossary of Terms
Term
Definition
Term
Definition
Annualized credit
loss rate on average
quarterly gross
credit card
receivables
Annualized yield on
average quarterly
gross credit card
receivables
Basic net earnings
per common share
Adjusted debt to
EBITDA
Adjusted debt divided by EBITDA (see Non-GAAP
Financial Measures on page 37 of the Company’s
Management’s Discussion and Analysis).
Adjusted debt
Adjusted debt (see Non-GAAP Financial Measures on
page 37 of the Company’s Management’s Discussion and
Analysis).
Annual Report
For 2012, the Annual Report consists of a Business
Review and a Financial Review.
Major expansion
Total credit card losses divided by the number of days in
the quarter times 365 divided by average quarterly gross
credit card receivables.
Gross profit
percentage
Sales less cost of sales including inventory shrink divided
by sales.
Interest coverage
Operating income divided by net interest expense and
other financing charges adding back interest capitalized
to fixed assets (see Non-GAAP Financial Measures on
page 37 of the Company’s Management’s Discussion and
Analysis).
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.
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.
Interest earned on credit card receivables divided by the
number of days in the quarter times 365 divided by average
quarterly gross credit card receivables.
New store
A newly constructed store, conversion or major
expansion.
Net earnings available to common shareholders divided by
the weighted average number of common shares
outstanding during the year.
Operating income
Earnings before net interest expense and other financing
charges and income taxes.
Operating margin
Operating income divided by sales.
Book value per
common share
Shareholders’ equity divided by the number of common
shares outstanding at year end.
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.
Capital Investment
Fixed asset purchases.
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.
Control label
A brand and associated trademark that is owned by the
Company for use in connection with its own products and
services.
Conversion
A store that changes from one Company banner to
another Company banner.
Corporate stores
sales per average
square foot
Sales by corporate stores excluding gas bar sales divided
by the average corporate stores’ square footage at year
end.
Diluted net earnings
per common share
Dividend rate per
common share at
year end
DRIP
EBITDA
EBITDA margin
Free Cash Flow
Net earnings available to common shareholders divided by
the weighted average number of common shares
outstanding during the year minus the dilutive impact of
outstanding stock option grants, certain other liabilities,
equity forwards and capital securities at year end.
Dividend per common share declared in the fourth quarter
multiplied by four.
Dividend Reinvestment Plan.
Operating income before depreciation and amortization
(see Non-GAAP Financial Measures on page 37 of the
Company’s Management’s Discussion & Analysis).
EBITDA divided by sales (see Non-GAAP Financial
Measures on page 37 of the Company’s Management’s
Discussion & Analysis).
Cash flows (used in) from operating activities excluding
the net change in credit card receivables less fixed asset
purchases (see Non-GAAP Financial Measures on page
37 of the Company’s Management’s Discussion and
Analysis).
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.
Return on average
net assets
Return on average
shareholders’
equity
Same-store sales
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 37 of the Company’s Management’s Discussion and
Analysis).
Net earnings available to common shareholders divided
by average total common shareholders’ equity.
Retail sales from the same physical location for Canadian
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.
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.
Year
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
December 29, 2012 and December 31, 2011 both
contained 52 weeks.
2012 Annual Report – Financial Review 103
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: http://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.
During 2012, there were 718,544
common shares issued and at
year-end 2012, 281,680,157
outstanding common shares were
available for public trading.
The average daily trading volume of
the Company’s common shares for
2012 was 499,774.
Preferred Shares
At year-end 2012, 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 2012 was 7,941.
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.
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Common Dividend Policy
During 2012, the Company amended
its dividend policy to state: the
declaration and payment of
dividends and the amount thereof
on the Company’s common shares
are at the discretion of the Board
which takes into account the
Company’s financial results, capital
requirements, available cash flow,
future prospects of the Company’s
business and other factors
considered relevant from time to time.
Common Dividend Dates
The declaration and payment of
quarterly dividends are made
subject to approval by the Board.
The anticipated record and
payment dates for 2013 are:
Record Date
March 15
June 15
September 15
December 15
Payment Date
April 1
July 1
October 1
December 30
Preferred Share Dividend Dates
The declaration and payment of
quarterly dividends are made
subject to approval by the Board.
The anticipated payment dates
for 2013 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.
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.
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.
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.
Independent Auditors
KPMG LLP
Chartered Accountants
Toronto, Canada
Annual Meeting
The 2013 Annual Meeting of Shareholders
of Loblaw Companies Limited will be held
on Thursday, May 2, 2013 at 11:00am (EST),
at the Mattamy Athletic Centre, 50 Carlton Street,
Toronto, Canada M5B 1J2
The Company holds an analyst call shortly
following the release of its quarterly
results. These calls are archived in the
Investor Centre section of the Company’s
website (www.loblaw.ca).
LOBLAW.CA
PC.CA
JOEFRESH.CA
PCFINANCIAL.CA
Ce rapport est disponible en français.