INNOVATION
&
EXECUTION
LOBLAW COMPANIES LIMITED 2014 ANNUAL REPORT
Loblaw at a Glance
JANUARY 3, 2015
A portfolio of strong, complementary and independent businesses.
market
discount
shoppers
drug
mart
emerging
president’s
choice
financial
joe fresh
choice
properties
REIT
Our Purpose – Live Life Well
Loblaw Companies Limited (“Loblaw” or the “Company”) is Canada’s food and pharmacy leader, the nation’s largest retailer,
and the majority unitholder of Choice Properties Real Estate Investment Trust (“Choice Properties”). Loblaw – and its portfolio
of grocery, health and beauty, financial services and apparel businesses – provides Canadians with an unparalleled mix of
value, assortment and convenience, and offers Canadians two of the country’s most recognized brands – President’s Choice
and no name.
The acquisition of Shoppers Drug Mart, along with the powerful Life Brand and Optimum brand, has only served to reinforce
our leadership position in the marketplace. As well, our PC Plus program, omni-channel efforts and multicultural merchandising
offerings continued to be points of differentiation for our customer experience.
As a business, we remain committed to our purpose, Live Life Well – and as you will see in this report, we took many important
steps along this journey in 2014.
TABLE OF CONTENTS
2
Financial Highlights
22
Corporate Governance Practices
4
Letter to Shareholders
24
Board of Directors
8
Review of Operations
25
Leadership
20 Corporate Social Responsibility
26
Shareholder and Corporate Information
new products
and store formats
Our long track record of food innovation continued
in 2014. We added new products and expanded
our Inspire store format.
Creative and successful marketing
We launched the most ambitious advertising campaign in our history
with Crave More, a new era for the President’s Choice brand, which
invited customers to expect more from their food, now that Canadians
care more about the quality, taste, sources, ingredients, value, and
excitement of what they eat.
innovation &
Wider scope and stronger capabilities
Shoppers Drug Mart maintained its leadership in pharmacy
this year. Its pharmacists administered over 800,000 flu
shots this year. We opened a Patient Contact Centre,
Canada’s first, designed to advise patients
about their medications and remind
them about their refills. This should
result in greater patient
adherence and better
medical outcomes.
Enhanced capabilities and customer
experience
Committed to giving Canadians the best beauty experience
in retail, Shoppers Drug Mart opened its fourth enhanced
beautyBOUTIQUE. These enhanced boutiques feature
a wide assortment of prestigious brands and more advice,
resulting in an elevated beauty experience for customers.
Innovation continues to drive growth at
Loblaw. New products and services attract
customers and enhance our topr
line. New
id
deas have reshaped the Company
i
including the creation of Choice
l di
f
Properties
and the acquisition of
Shoppers
Drug Mart. However,
getting the most from innovative ideas
depends on how well
w
they arey
developed
and implemented. Loblaw is building value
through its
focus on
execution.
Offering healthier choices
Loblaw has led the industry with a focus
on health and wellness. In 2014, we
committed to reducing sodium content
levels by an average of 20% across the
President’s Choice line of products.
&
& execution
Information technology system
roll-out
e
reached an important milestone
formation
Loblaw completed the introduction of the new information
technology system to corporate retail grocery stores –
ores –
ss
an important step in increasing efficiencies across
the Company.
two leaders together
After completing the acquisition of
Shoppers Drug Mart in March 2014,
we immediately began aligning the
organization under division
presidents, finalized management
team members, and made
material progress on realizing the
expected synergies from the acquisition. We began
pilots to enhance the food offer in Shoppers Drug
Mart and to optimize the health and beauty offer in
a number of grocery stores.
F I N A N C I A L H I G H L I G H T S
Delivering solid results.
2.0%
Loblaw retail
same store sales
2.4%
Shoppers Drug Mart
front store same store sales
2.7%
Shoppers Drug Mart
pharmacy same store sales
2012
2013
2014
2012
2013
2014
2012
2013
2014
2.0%
3.1%
2.7%
2.5%
2.4%
1.2%
1.3%
1.1%
-0.2%
Forward-Looking Statements
This Annual Report for Loblaw Companies Limited and its subsidiaries (collectively, the “Company” or “Loblaw”) 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 forward-looking statements in this Annual Report include, but are not limited to, statements with respect to the Company’s anticipated
future results and events and plans, synergies and other benefits associated with the acquisition of Shoppers Drug Mart Corporation (“Shoppers Drug Mart”),
future liquidity and debt reduction targets, planned capital investments, and status and impact of information technology (“IT”) systems implementation.
Forward-looking statements are typically identified by words such as “expect,” “anticipate,” “believe,” “foresee,” “could,” “estimate,” “goal,” “intend,” “plan,”
“seek,” “strive,” “will,” “may,” “on track,” 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 2015 is based on certain assumptions, including assumptions about anticipated cost savings, operating
efficiencies and continued growth from current initiatives. 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 those expressed, implied or projected in the forward-
looking statements. These risks and uncertainties include, but are not limited to, those discussed in the forward-looking disclaimer found on pages 3 to 4 of
the 2014 Annual Report – Financial Review, and the Enterprise Risks and Risk Management section of the Management Discussion and Analysis on pages 33
to 40 of the 2014 Annual Report – Financial Review, and section 4 of the 2014 Annual Information Form.
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. 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.
Loblaw Companies Limited
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25.7%
Adjusted retail gross margin1
(cid:2)53.7%
Consolidated adjusted EBITDA1
and adjusted EBITDA margin1
($ millions)
(cid:2)70.1%
Consolidated adjusted
operating income1 and adjusted
operating margin1
($ millions)
2012
2013
2014
2012
2013
2014
2012
2013
2014
25.7%
22.0%
22.0%
3,236
7.6%
Adjusted
EBITDA margin
2,041
2,106
6.5%
6.5%
2,181
5.1%
Adjusted
operating margin
1,264
1,282
4.0%
4.0%
$3.22
Adjusted basic EPS1
and dividend per share
$977
Free cash flow1
($ millions)
3.1x
Adjusted debt1 to
adjusted EBITDA1
2012
2013
2014
2012
2013
2014
2012
2013
2014
$3.22
$2.43
$2.48
$0.98
Dividend per
common share
$0.94
$0.85
221
244
977
3.0x
3.1x
2.2x
1 See Non-GAAP Financial Measures beginning on page 45 of the 2014 Annual Report – Financial Review.
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L E T T E R T O S H A R E H O L D E R S
Over the last few years, we strengthened our business by
fundamentally improving our customer proposition, investing in price,
broadening our offer and improving our stores. We also achieved
operating efficiencies, and are well on our way to completing the
implementation of our new IT system.
Over the same period, Loblaw fundamentally changed its
strategic footprint, moving from a traditional grocer to a portfolio
of strong, complementary but independent businesses
through the creation of Choice Properties, the acquisition
of Shoppers Drug Mart, and the continued growth of
President’s Choice Financial.
Our progress gives us increased confidence.
Our strategic framework is clear, and the entire organization is
focused on delivering against it: best in food experience;
best in health and beauty; operational excellence; and growth.
This strategy is supported by our commitment to stable, consistent
trading; realizing synergies and efficiencies in our business;
as well as deleveraging the balance sheet.
By delivering the best in health, beauty and food in more than
2,300 convenient locations, we are a trusted leader in achieving
our purpose: Live Life Well.
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Loblaw Companies Limited
Fellow Shareholders
The past year was a significant one
for our Company
over $975 million in free cash flow. Having completed
three quarters since the closing of the Shoppers Drug
In 2014, our Company continued to evolve and grow
Mart acquisition, we made excellent progress, including
our diverse portfolio of complementary but distinct
realizing over $100 million of net synergies.
businesses. Choice Properties, one of Canada’s
largest REITs, had its first full year of operations; we
completed the acquisition of Shoppers Drug Mart;
President’s Choice Financial continued to grow; and
our grocery business continued to improve, supported
by stable business performance in an intensely
competitive industry.
On a consolidated basis, we grew revenue by
$10.2 billion to $42.6 billion, increased our adjusted
operating margin by 110 basis points and delivered
$1.2 billion in adjusted net earnings, which generated
Our retail businesses performed well, with our core
grocery business maintaining positive same store sales
and stable gross margin. Shoppers Drug Mart’s results
were reflected in three quarters of our financials, and
they underlined the strength of our front of store offer
as well as our resilience in pharmacy.
President’s Choice Financial had another strong year.
Revenues increased almost 10% and operating income
grew by $22 million as we expanded the breadth and
reach of our financial products.
G A L E N G . W E S T O N
E X E C U T I V E C H A I R M A N & P R E S I D E N T
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L E T T E R T O S H A R E H O L D E R S
Choice Properties completed its first full year in
of our beauty business broadened with the opening of
operation, expanded its portfolio through acquisitions,
26 additional beautyBOUTIQUEs. We also deepened
constructed new square footage, and had solid
our product offering and provided a wider assortment
financial performance.
of prestige brands.
Loblaw is in a strong financial position, with a solid
We are executing against our financial plan
balance sheet, net assets of $12.8 billion and adjusted
Coupled with our strategic framework, our financial
debt of $10.0 billion.
plan is built on four key elements.
we continue
our relentless focus on providing an
unsurpassed food experience to our customers
Our strategic framework is making us stronger
The first element is maintaining a stable trading
Our Company’s purpose, Live Life Well, is supported by
a strategic framework: to be the best in food experience;
to be the best in health and beauty; to obtain operational
excellence; and to grow. In 2014, we delivered against
this strategic framework.
As part of this strategy, we continued our relentless
focus on providing an unsurpassed food experience
to our customers. Our multi-format strategy offers
convenient retail locations and differentiated store
formats that fit the lifestyles and budgets of all
Canadians. In 2014, we expanded our fresh assortment,
added new multicultural products, and continued the
introduction of Inspire format stores.
environment. We delivered steady, consistent sales
and margin performance across each of our major
businesses this year. We believe we are well-positioned
competitively and see compelling traction in several
major customer initiatives, including PC Plus, which has
been rolled out across both our market and discount
network of grocery stores; increased adoption of an
expanded scope of services at our pharmacies; and the
continued roll-out of enhanced beautyBOUTIQUEs.
Efficiencies, the second element of our financial plan,
made meaningful progress at Loblaw with core supply
chain, IT and administrative expenses continuing to
moderate. Looking forward, we remain committed
to achieving efficiencies in our business. A key
At the same time, we grew our unique competitive
component of this will be the result of completing
position in health and beauty. Our pharmacists
the implementation and optimization of our new IT
administered over 1,000,000 flu shots in 2014 and
system. We realized an important milestone this
provided additional health services like flu screening
year with SAP operating in substantially all of our
and treatment where permitted by law. The reach
corporate grocery stores.
Loblaw Companies Limited
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The third element is synergies. For 2014, we recorded
on through our portfolio of independent and
over $100 million in net synergies, mostly benefitting
complementary businesses.
By remaining focused on delivering our purpose
of Live Life Well and executing on our strategic
framework and financial plan, we believe we will
accrue long-term value for shareholders.
GALEN G. WESTON
Executive Chairman & President
cost of goods sold. We remain confident in delivering
our target of realizing $300 million in net synergies
by the end of the third year following the close of the
Shoppers Drug Mart acquisition.
The final element is deleveraging the balance sheet. We
remain on track to achieve our deleveraging target by
the first quarter of 2016, and have reduced our adjusted
debt by almost $1.1 billion since closing the acquisition.
Despite our focus on debt reduction, we remained
committed to a balanced capital return strategy and
increased our dividend 3.7%.
Innovation and execution lead to long-term
competitive advantage
In 2015 we are making strategic investments in innovation
to increase the effectiveness of our pharmacies; unlock
additional opportunity in loyalty; offer an enhanced
convenience food offering at Shoppers Drug Mart; and
continue to grow our eCommerce platform. We believe
these investments will result in a strengthened customer
proposition, support long-term growth, and create
compelling differentiators for us in the industry.
Innovation alone, however, does not translate into
results. This year Loblaw also executed consistently,
both operationally and financially. Throughout this
annual report you will see many examples of how this
execution across all of our businesses contributed to
our strong performance.
Well-positioned for the future
Looking forward, I am very encouraged by the
opportunities we have in our business.
Loblaw is well-positioned as Canada’s leader in food,
health and beauty. We have a unique set of assets that
is unparalleled in Canada which we are capitalizing
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Loblaw Companies Limited
R E V I E W O F O P E R A T I O N S
Market
Our stores are coast to coast, with our Real Atlantic Superstore, Dominion, Zehrs,
Your Independent Grocer and valu-mart banners in our Neighbour format and Loblaws and
Provigo Le Marché in traditional and Inspire formats. Our mandate is to offer an exceptional fresh offering,
breadth of assortment
f
proposition to our customers. With stores tailored to the demographics of each
throughout the store and superb service, all of which
deliver a competitive value
local market and strong
f
f
ties to their communities, we earned higher net promoter scores for the fourth consecutive year.
More than fresh.
Ready to eat.
Time-pressed customers
are welcoming the
convenience of a variety
of chef-inspired meals fully
prepared in our stores
and ready to take home
and enjoy.
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Loblaw Companies Limited
More and more, customers want fresh
and delivering a differentiated offering
and nutritious food. Increasingly, they
including an in-store chef’s program
also want new and interesting food. We
with exclusive recipes from the
are cultivating these food enthusiasts
chefs at the Loblaws flagship store at
through our Crave More campaign,
Maple Leaf Gardens.*
innovation
Expanded our offering in
nutritious and fresh food with
the introduction of Fresh Juice
Bars to over 140 stores and
increased our presence in
organic and lifestyle offerings.
Introduced ACETM Bakery
destinations to over 140 stores
and our in-store chef’s program
of ready-to-eat products to
more than 290 stores.
Helped our customers make
smart food choices, by
introducing full-time in-store
dietitians, and expanded
the Guiding Stars® nutrition
program to Western and
Eastern Canada.
Market stores introduced
more products from our own
T&T Supermarket and
ARZ Fine Foods brands as
we expand our health and
multicultural offering.
execution
We are making strides in
growing our Market network
of stores in the west. To date
we have a total of 22 Market
stores in the west, including
our recently launched second
Loblaws CityMarket store in
British Columbia.
The Inspire format continues to
drive food discovery with our
customers. In 2015 we plan
to roll out more than 10 new
and renovated stores in the
Inspire format.
Converted corporate-owned
stores to franchises in Quebec,
which strengthened the
community ties and enhanced
performance.
* Reg’d TM Lic’d Use
Loblaw Companies Limited
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R E V I E W O F O P E R A T I O N S
Discount
Our stores are comprised of hard-discount and our Real Canadian
Superstore formats, each delivering a distinct value proposition for consumers.
We are Canada’s largest discount operator, with over 500 stores, including
NO FRILLS, Maxi, and Real Canadian
l
Superstore. Our mission is
to make healthier choices more affordable and appealing, by delivering
the lowest price and a differentiated fresh and multicultural offering.
Customers can
have fresh food
and low prices.
We are improving results
through differentiation –
focusing on fresh and
offering products that
reflect the ethnic diversity
of our customers.
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Loblaw Companies Limited
Leading with fresh, we offer great
Imbattable. Point final! price-matching
value on all grocery essentials. Our
programs. We offer customers a
NO FRILLS and Maxi stores honour
straightforward shopping experience
any competitor’s advertised prices
and cater to diverse lifestyles, including
under our Won’t Be Beat and
strong multicultural offerings.
innovation
Introduced the already
successful PC Plus loyalty
program into our Discount
format stores, one of the
first in Canada.
Launched a project to
re-envision our Real Canadian
Superstore format to better
serve the growing multicultural
population.
Added a new assortment of
products to our natural-value
section such as gluten-free
and organic products that
would not be expected in
discount stores.
execution
We increased central sourcing
to reduce procurement
costs and gained efficiencies
in labour.
To meet the growing demand
for hard-discount format
stores, we opened six more
NO FRILLS stores in Western
Canada.
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R E V I E W O F O P E R A T I O N S
Emerging
Our emerging businesses include a range of retail operations and initiatives
as
l
Real Canadian
Liquorstore locations. Increasingly, the Emerging
business has focused on serving Canada’s growing multicultural population through store banners
Wholesale Club and Real Canadian
l
such as Fortinos and T&T Supermarket
our Emerging
T
y
stores offer specialty
r
r
r
. All our stores
to appeal to those with a taste
reflect their surrounding
r
r
communities; however,
cultural foods.
for authentic
a
products
Our T&T stores
offer authentic
Asian products.
T&T also offers
customers a unique
assortment of their
private label products
in our Market and
Discount format stores.
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Loblaw Companies Limited
The stores in our Emerging business
and a focus on fresh meat and produce.
are growing to meet the needs of new
In 2014, we acquired ARZ Fine Foods,
Canadians. T&T Supermarket appeals
a Toronto-based Middle Eastern bakery
to Asian tastes in fresh and prepared
and grocery retailer.
goods. Fortinos has a European style
innovation
Our unique take on
meals-to-go at Fortinos gives
customers fresh, authentic
take-home options including
fresh pasta through the use
of a Pane Fresco market.
In response to the growing
trend in fresh noodles, T&T
introduced noodle bars in
selected stores and has seen
positive results.
Introduced the Loblaw PC Plus
program into our Loblaw
Gas Bars.
execution
T&T private label products
sold through our other
banners doubled in 2014.
The Real Canadian Wholesale
Club renovation program
began, completing the
renovations of four stores
including the introduction
of walk-in meat coolers.
Our Real Canadian Liquorstore
locations continue to add new
control brand products.
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R E V I E W O F O P E R A T I O N S
Shoppers Drug Mart
Shoppers Drug Mart/Pharmaprix has been at the forefront of retail
f
pharmacy
for over 50 years. Leveraging the strengths of our
f
Associate owners and
their pharmacy teams to deliver on the expanded scope of practice,
f
we believe
we can contribute to a sustainable health care system for all Canadians
through improved patient outcome and greater accessibility.
More than
a drug store.
For Canadians who believe
that being healthy means
looking and feeling good,
Shoppers Drug Mart is the
trusted leader in taking
care of the whole you by
integrating health with beauty
in easy and tangible ways.
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Shoppers Drug Mart has successfully
merchandise, including over-the-
leveraged its leadership position in
counter medications, health and
pharmacy and its convenient store
beauty aids, cosmetics and fragrances,
locations to capture a significant
seasonal products and everyday
share of the market in front store
household essentials.
innovation
Introduced the Patient Contact
Centre which allows us to
personally contact patients on
behalf of their home pharmacy
to ensure they are taking their
medications as prescribed
and help them stay on the
appropriate therapy.
Broadened our enhanced
beautyBOUTIQUE to
four stores across Canada,
including Calgary and
Vancouver.
Launched pilot stores to test
the enhanced convenience
Food offering.
execution
Same store pharmacy sales
and prescription count grew
2.7% and 4.6%, respectively.
Front store same store
sales grew on the back of
market share gains.
Administered over
800,000 flu shots across
Canada in 2014.
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I E W O F O P E R A T I O N S
The Value of Loyalty
Loyalty programs drive sales. The Shoppers Drug Mart Optimum card is one of Canada’s
most successful loyalty programs with over 10 million active members. Digitizing the Optimum card –
moving away from plastic and coupons and towards a mobile app – will allow for more personalized,
one-to-one, marketing.
The Loblaw PC Plus program offers a technologically advanced loyalty program designed
for use through a smart phone. It has grown to more than 8 million members in less than two years.
Our PC Plus users shop more frequently and with bigger baskets. Our PC Plus customers receive
personalized one-to-one offers, allowing them to earn points on the items they purchase the most.
Shoppers Drug Mart
Optimum card has
10 million+
active members
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Loblaw PC Plus program
has grown to over
8 million
members in less than 2 years
President’s
Choice Financial
Our financial services provide unprecedented value in everyday
banking to Canadians. The result is a full range of President’s
Choice Financial services, complete with the President’s Choice
Financial MasterCard®, no fee daily banking and the
ability to earn PC points.
innovation
Launched a prepaid, reloadable
President’s Choice Financial
MasterCard® and continue
to look at opportunities to
add even more value for our
customers.
Launched an enhanced
benefit for our President’s
Choice Financial MasterCard®
customers through PC travel
services, where cardholders
can book travel online or
by phone and earn more
PC points.
A digital wallet was introduced
with the launch of UGO wallet.
UGO is an open digital wallet
application that enables
consumers to start replacing
credit cards and loyalty cards
from their physical wallet
with a simple, secure digital
payment method on their
smart phone.
execution
We continued to generate
strong revenue and income
growth.
President’s Choice Financial
continued to grow the volume
of its credit card business
while maintaining the high
quality and creditworthiness
of its portfolio.
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R E V I E W O F O P E R A T I O N S
Joe Fresh
Joe Fresh offers stylish and affordable apparel, accessories and
beauty for all seasons. It is the answer to consumers’ desire for
accessible, of-the-moment style. With collections for women, men
and children, the label is designed to solve the family’s fashion
needs and is one of Canada’s leading apparel brands.
innovation
Delivering new styles at more
than three times the rate
of the industry, Joe Fresh
continues to attract customers
with new and fresh styling.
execution
International expansion was
furthered with the opening of
Joe Fresh stores in three new
countries in 2014, with stores
slated to open in another
two countries in 2015.
Domestic sales have
experienced positive growth
in 7 of the last 8 years.
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Loblaw Companies Limited
Choice
Properties
Choice Properties, which is 82.9%-owned by Loblaw,
used its first full year as a stand-alone, publicly traded company
to build its portfolio and its capabilities. It acquired 37 more
properties from Loblaw, taking its total to 472 across Canada,
representing 38.9 million square feet at year-end.
Property Portfolio
RETAIL
WAREHOUSE
LAND
INDUSTRIAL
OFFICE
1
YUKON TERRITORY
RETAIL
1
NORTHWEST
TERRITORIES
RETAIL
49
ALBERTA
RETAIL
SASKATCHEWAN
RETAIL
MANITOBA
RETAIL
20
12
12
BRITISH
COLUMBIA
RETAIL
SURREY, BC
LAND 1
SURREY, BC
WAREHOUSE 1
CALGARY, AB
WAREHOUSE 1
183
ONTARIO
RETAIL
1
REGINA, SK
WAREHOUSE
ONTARIO
INDUSTRIAL 1
4
ONTARIO
WAREHOUSE 2
1
BRAMPTON, ON
OFFICE
ONTARIO
LAND
PRINCE
EDWARD ISLAND
RETAIL
104
QUEBEC
RETAIL
NEWFOUNDLAND
& LABRADOR
RETAIL
9
26
3
3
37
1
ST. JOHN’S, NL
WAREHOUSE
NOVA SCOTIA
RETAIL
NEW BRUNSWICK
WAREHOUSE
innovation
Choice Properties expanded
its growth pipeline through
strategic relationships and
the acquisition of land. With
an expanded team of real
estate professionals through
internalization, Choice
Properties increased efficiency
and created a strong platform
for future growth.
execution
Choice Properties expanded
its asset base by 2.6 million
square feet through
acquisitions, and constructed
51,000 square feet of new
retail space.
At year-end, Choice
Properties’ occupancy rate
increased to 98%.
One of Canada’s largest REITs with a portfolio
consisting of 4751 properties spanning
approximately 39.91(cid:2)million sq. ft.
1 Includes acquisitions subsequent to December 31, 2014.
QUEBEC
WAREHOUSE 2
NEW BRUNSWICK
RETAIL
Choice Properties REIT units are listed on the Toronto Stock Exchange under the symbol CHP.UN. For more
information, visit choicereit.ca or refer to the 2014 Annual Report of Choice Properties REIT.
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Loblaw Companies Limited
19
Corporate Social Responsibility
Corporate Social Responsibility (CSR) is reflected in the way we do business
at Loblaw, delivering products, services and experiences to our customers, and
underpinning our Company purpose – Live Life Well.
As Canada’s
leader
in food and pharmacy,
we have a unique
opportunity to help
Canadians through our
strong commitment
to Corporate Social
Responsibility.
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Loblaw Companies Limited
1,700+
pharmacies
$15
million+
in contributions
to children’s
health
$9
million+
in contributions
to women’s
health
7 billion+
fewer plastic
shopping
bags
In 2014, our CSR activities included new commitments –
In 2014, Shoppers Drug Mart joined the Loblaw family
sodium reductions across our President’s Choice products;
of companies. Together, our respective commitments to
helping forge a sustainability vision for the beef industry;
women, children, and the challenges they face position
new animal welfare standards – as well as meaningful
Loblaw to make increasingly meaningful contributions to
advancements in the following long-standing
our national community.
commitments, among others:
(cid:85)(cid:202)(cid:202)(cid:47)(cid:133)(cid:105)(cid:202)(cid:20)(cid:213)(cid:136)(cid:96)(cid:136)(cid:152)(cid:125)(cid:202)(cid:45)(cid:204)(cid:62)(cid:192)(cid:195)® nutrition-rating system was extended
nationwide. And, we focused even more on fresh foods,
In 2014, President’s Choice Children’s Charity granted
$10.4 million to 2,021 families of children with disabilities
and $5 million to 2,271 child-nutrition programs. The
through merchandising and assortments.
Charity also marked its 25th anniversary, surpassing
(cid:85)(cid:202)(cid:202)(cid:34)(cid:213)(cid:192)(cid:202)(cid:10)(cid:62)(cid:152)(cid:62)(cid:96)(cid:136)(cid:62)(cid:152)(cid:135)(cid:119)(cid:192)(cid:195)(cid:204)(cid:202)(cid:195)(cid:156)(cid:213)(cid:192)(cid:86)(cid:136)(cid:152)(cid:125)(cid:202)(cid:171)(cid:143)(cid:105)(cid:96)(cid:125)(cid:105)(cid:202)(cid:220)(cid:62)(cid:195)(cid:202)(cid:62)(cid:147)(cid:171)(cid:143)(cid:136)(cid:119)(cid:105)(cid:96)(cid:202)(cid:220)(cid:136)(cid:204)(cid:133)(cid:202)
the new Near You marketing program, highlighting a
broader range of Canadian-grown and -produced fare
than in years past.
(cid:85)(cid:202)(cid:202)(cid:55)(cid:105)(cid:202)(cid:152)(cid:156)(cid:220)(cid:202)(cid:133)(cid:62)(cid:219)(cid:105)(cid:202)(cid:192)(cid:156)(cid:156)(cid:118)(cid:204)(cid:156)(cid:171)(cid:202)(cid:195)(cid:156)(cid:143)(cid:62)(cid:192)(cid:202)(cid:171)(cid:62)(cid:152)(cid:105)(cid:143)(cid:195)(cid:202)(cid:62)(cid:204)(cid:202)(cid:200)(cid:211)(cid:202)(cid:118)(cid:62)(cid:86)(cid:136)(cid:143)(cid:136)(cid:204)(cid:136)(cid:105)(cid:195)(cid:93)(cid:202)(cid:62)(cid:152)(cid:96)(cid:202)
(cid:220)(cid:105)(cid:202)(cid:86)(cid:156)(cid:147)(cid:171)(cid:143)(cid:105)(cid:204)(cid:105)(cid:96)(cid:202)(cid:143)(cid:136)(cid:125)(cid:133)(cid:204)(cid:136)(cid:152)(cid:125)(cid:202)(cid:192)(cid:105)(cid:204)(cid:192)(cid:156)(cid:119)(cid:204)(cid:195)(cid:202)(cid:136)(cid:152)(cid:202)(cid:147)(cid:156)(cid:192)(cid:105)(cid:202)(cid:204)(cid:133)(cid:62)(cid:152)(cid:202)(cid:211)(cid:228)(cid:228)(cid:202)(cid:195)(cid:204)(cid:156)(cid:192)(cid:105)(cid:195)(cid:202)
in 2014. Initiatives like these have driven double-digit
(cid:143)(cid:136)(cid:118)(cid:105)(cid:204)(cid:136)(cid:147)(cid:105)(cid:135)(cid:204)(cid:156)(cid:204)(cid:62)(cid:143)(cid:202)(cid:96)(cid:156)(cid:152)(cid:62)(cid:204)(cid:136)(cid:156)(cid:152)(cid:195)(cid:202)(cid:156)(cid:118)(cid:202)(cid:102)(cid:163)(cid:163)(cid:200)(cid:202)(cid:147)(cid:136)(cid:143)(cid:143)(cid:136)(cid:156)(cid:152)(cid:176)(cid:202)(cid:47)(cid:133)(cid:105)(cid:202)(cid:45)(cid:133)(cid:156)(cid:171)(cid:171)(cid:105)(cid:192)(cid:195)(cid:202)
(cid:12)(cid:192)(cid:213)(cid:125)(cid:202)(cid:31)(cid:62)(cid:192)(cid:204)(cid:202)(cid:55)(cid:34)(cid:31)(cid:13)(cid:32)(cid:202)(cid:171)(cid:192)(cid:156)(cid:125)(cid:192)(cid:62)(cid:147)(cid:202)(cid:125)(cid:192)(cid:62)(cid:152)(cid:204)(cid:105)(cid:96)(cid:202)(cid:102)(cid:153)(cid:176)(cid:120)(cid:202)(cid:147)(cid:136)(cid:143)(cid:143)(cid:136)(cid:156)(cid:152)(cid:202)(cid:204)(cid:156)(cid:202)
various charities and programs supporting women’s
health and well-being. It continued its flagship event, the
Shoppers Drug Mart Run for WOMEN, raising awareness
and funds in support of local women’s mental health
organizations in ten communities across Canada.
declines in store electricity use since 2011.
Our Company purpose – Live Life Well – focuses our
(cid:85)(cid:202)(cid:202)(cid:55)(cid:156)(cid:192)(cid:142)(cid:171)(cid:143)(cid:62)(cid:86)(cid:105)(cid:202)(cid:119)(cid:192)(cid:105)(cid:202)(cid:62)(cid:152)(cid:96)(cid:202)(cid:195)(cid:62)(cid:118)(cid:105)(cid:204)(cid:222)(cid:202)(cid:195)(cid:204)(cid:62)(cid:152)(cid:96)(cid:62)(cid:192)(cid:96)(cid:195)(cid:202)(cid:136)(cid:152)(cid:204)(cid:192)(cid:156)(cid:96)(cid:213)(cid:86)(cid:105)(cid:96)(cid:202)(cid:136)(cid:152)(cid:202)
2013 in the wake of the Rana Plaza factory tragedy in
Bangladesh were extended to Cambodia, Thailand,
Sri Lanka, India and Vietnam, supported by a regional
audit oversight team on the ground.
(cid:85)(cid:202)(cid:202)(cid:34)(cid:213)(cid:192)(cid:202)(cid:195)(cid:105)(cid:219)(cid:105)(cid:152)(cid:135)(cid:222)(cid:105)(cid:62)(cid:192)(cid:202)(cid:105)(cid:118)(cid:118)(cid:156)(cid:192)(cid:204)(cid:202)(cid:204)(cid:156)(cid:202)(cid:192)(cid:105)(cid:96)(cid:213)(cid:86)(cid:105)(cid:202)(cid:171)(cid:143)(cid:62)(cid:195)(cid:204)(cid:136)(cid:86)(cid:202)(cid:76)(cid:62)(cid:125)(cid:202)(cid:220)(cid:62)(cid:195)(cid:204)(cid:105)(cid:202)
marked an important milestone when we surpassed
(cid:62)(cid:202)(cid:204)(cid:156)(cid:204)(cid:62)(cid:143)(cid:202)(cid:156)(cid:118)(cid:202)(cid:195)(cid:105)(cid:219)(cid:105)(cid:152)(cid:202)(cid:76)(cid:136)(cid:143)(cid:143)(cid:136)(cid:156)(cid:152)(cid:202)(cid:76)(cid:62)(cid:125)(cid:195)(cid:202)(cid:96)(cid:136)(cid:219)(cid:105)(cid:192)(cid:204)(cid:105)(cid:96)(cid:202)(cid:118)(cid:192)(cid:156)(cid:147)(cid:202)(cid:143)(cid:62)(cid:152)(cid:96)(cid:119)(cid:143)(cid:143)(cid:176)(cid:202)(cid:202)
business and CSR activities on nutrition and wellness.
In 2014, we put more dietitians and pharmacists in more
communities, to help Canadians avoid, monitor, and
manage health conditions ranging from bone health,
to hypertension, to diabetes and more.
For more information on our CSR efforts, please visit
Loblaw.ca/csr; pc.ca/charity; shoppersdrugmart.ca/women.
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Loblaw Companies Limited
21
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
The Board has also appointed an independent director,
Company’s corporate governance practices and
Thomas C. O’Neill, to serve as lead director. The lead
considers any changes necessary to maintain the
director provides leadership to the Board and particularly
Company’s high standards of corporate governance
to the independent directors. He ensures that the
in a rapidly changing environment. The Company’s
Board operates independently of management and that
website, loblaw.ca, sets out additional governance
directors have an independent leadership contact.
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
Board responsibilities and duties
The Board, directly and through its committees,
supervises and oversees the management of the
business and affairs of the Company. A copy of
the Board’s mandate can be found at loblaw.ca.
The Canadian Securities Administrators’ Corporate
The Board reviews the Company’s strategic
Governance Guidelines provide that a director is
direction, assigns responsibility to management for
independent if he or she has no material relationship
the achievement of that direction, approves major
with the Company or its affiliates that could reasonably
policy decisions, delegates to management the
be expected to interfere with the exercise of the
authority and responsibility of handling day-to-day
director’s independent judgment.
affairs, and reviews management’s performance
At least 60% of the directors on the Board are
independent. The independent directors typically
meet separately following each Board meeting and
and effectiveness. The Board’s expectations of
management are communicated to management
directly and through committees of the Board.
on other occasions as required or desirable.
The Board regularly receives reports on the operating
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
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, a methodology and
Galen G. Weston is the Executive Chairman of the
tools for evaluating, measuring and monitoring key
Board. The Executive Chairman directs the operations
risks. The results of the ERM program and other
of the Board. He chairs each meeting of the Board,
business planning processes are used to identify
is responsible for the management and effective
emerging risks to the Company, prioritize risk
functioning of the Board generally and provides
management activities and develop a risk-based
leadership to the Board in all matters. These and other
internal audit plan.
key responsibilities of the Executive Chairman are set
out in a position description established by the Board.
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22
Loblaw Companies Limited
Ethical business conduct
The Code reflects the Company’s long-standing
commitment to high standards of ethical conduct and
business practices. The Code is reviewed annually to
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.
ensure it is current and reflects best practices in the
Pension Committee
area of ethical business conduct and includes a strong
“tone from the top” message. All directors, officers and
employees of the Company are required to comply with
the Code and must acknowledge their commitment to
abide by the Code on a periodic basis.
The Company encourages the reporting of violations
and potential violations 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
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
affairs, food safety and workplace health and safety
policies, procedures, practices and compliance.
fraudulent or unethical conduct. A fraud reporting
Finance Committee
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
The Finance Committee is responsible for assisting the
Board in monitoring and reviewing the capital structure
of the Company and the investment and financial risk
for the anonymous receipt, retention and handling of
programs of the Company.
complaints regarding accounting, internal control or
auditing matters. These procedures are available at
loblaw.ca.
Board committees
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 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
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Loblaw Companies Limited
23
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.
Executive Chairman and President, Loblaw
Companies Limited; Chairman and Trustee,
Choice Properties Real Estate Investment
Trust; Director, Wittington Investments,
Limited.
STEPHEN E. BACHAND, B.A., M.B.A.2
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., F.C.P.A.1
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.; Former Chairman, Centre
for Addiction and Mental Health; Former
Director, Newport Partners Income Fund.
PAVITER S. BINNING, F.C.M.A.
President and Director, George Weston
Limited; former Executive Vice President,
Chief Financial Officer and Chief
Restructuring Officer, Nortel Networks
Corporation and Nortel Networks Limited;
former Director and Chief Financial Officer,
Hanson plc and Marconi Corporation plc.
WARREN BRYANT, B.S., M.B.A.1, 4
Corporate Director; Former Chairman,
President and Chief Executive Officer
of Longs Drug Stores; former Executive
of Kroger Co.; Director, Dollar General
Corporation, Office Depot (formerly
OfficeMax Incorporated); Member of the
Executive Advisory Committee, Portland
State University Food Industry Leadership
Center; Former Director, George Weston
Limited; Former Chairman of the Board of
Directors and Former member of the
Board Executive Committee, National
Association of Chain Drug Stores
(“NACDS”); Former member of the Board
of Directors, California Governor’s Council
on Physical Fitness and Sports.
CHRISTIE J.B. CLARK, B. COMM., M.B.A.,
F.C.A., F.C.P.A1*,5
Corporate Director; Former Chief
Executive Officer and Senior Partner,
PricewaterhouseCoopers LLP; Trustee,
Choice Properties Real Estate Trust;
Director, Air Canada; Former Director,
Brookfield Office Properties Inc., IGM
Financial Inc.; Chair, Finance Committee of
Alpine Canada.
ANTHONY R. GRAHAM2, 3
Vice Chairman and Director, Wittington
Investments, Limited; President, Selfridges
Group Limited; President and Chief
Executive Officer, Sumarria Inc.; Former
Vice-Chairman and Director, National Bank
Financial; Director, President’s Choice
Bank, George Weston Limited, Brown
Thomas Group Limited, Graymont Limited,
Grupo Calidra, S.A. de C.V., Holt, Renfrew
& Co., Limited, Power Corporation of
Canada, Power Financial Corporation,
Selfridges & Co. Ltd.; Director, Art Gallery
of Ontario, Canadian Institute for Advanced
Research, St. Michael’s Hospital, Trans
Canada Trail Foundation and Luminato;
Chairman, Ontario Arts Foundation and
the Shaw Festival Theatre Endowment
Foundation.
HOLGER KLUGE, B. COMM., M.B.A.1, 3
Corporate Director; Former President
of Personal and Commercial Banking,
Canadian Imperial Bank of Commerce;
Former Director and Chairman, Shoppers
Drug Mart Corporation; Former Director,
Husky Energy Inc., Hutchinson Whampoa
Limited, Power Assets Holdings Limited.
JOHN S. LACEY, B.A.3*
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.2, 4*
Corporate Director; Former Chief
Administrative Officer, Frum Development
Group; Former Vice President, Shoppers
Drug Mart Corporation; Former President,
Canadian Club of Toronto; Director,
Barrick Gold Corporation, Gluskin Sheff
& Associates Inc., Atrium Mortgage
Investment Corporation, Centre for
Addiction and Mental Health Foundation,
Loran Scholars Foundation, The Royal
Conservatory of Music; Chair, Crow’s
Theatre Company; Member, Sotheby’s
Canada Advisory Board; Former Chair,
Canadian Film Centre, Ontario Science
Centre; Former Director, Canada Deposit
Insurance Corporation.
THOMAS C. O’NEILL, B. COMM., F.C.A.,
F.C.P.A.2*, 5*
Corporate Director; Chairman, BCE Inc.;
Chairman, The Bank of Nova Scotia;
Retired Chairman, PricewaterhouseCoopers
Consulting; Former Chief Executive
Officer and Chief Operating Officer,
PricewaterhouseCoopers LLP; Director,
Adecco S.A., BCE Inc., The Bank of Nova
Scotia; Chair, St. Michael’s Hospital;
Member, Advisory Board at Queen’s
University School of Business; Former
Vice Chair, Board of Trustees, Queen’s
University; Former Director of Nexen Inc.
BETH PRITCHARD, B.A., M.B.A.4
Principal and Strategic Advisor, Sunrise
Beauty Studio, LLC; Former North
American Advisor, M. H. Alshaya Co.;
Former President and Chief Executive
Officer and Vice Chairman of Dean &
DeLuca, Inc.; Former President and
Chief Executive Officer, Bath & Body
Works; Former Chief Executive Officer,
Victoria’s Secret Beauty; Director, Cabela’s
Incorporated, The Vitamin Shoppe, Inc.,
Borderfree, Inc.; Former Director, Shoppers
Drug Mart Corporation, Zale Corporation.
SARAH RAISS, B.S., M.B.A.2
Corporate Director; Former Executive,
TransCanada Corporation; Director,
Canadian Oil Sands Limited, Commercial
Metals Company and Vermillion Energy
Inc.; Chair, Alberta Electric System
Operator Board of Directors; Former
Director, Shoppers Drug Mart Corporation.
NOTES
1 Audit Committee
2 Governance, Employee Development, Nominating
and Compensation Committee
3 Pension Committee
4 Environmental, Health and Safety Committee
5 Finance Committee
* Chair of the Committee
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Loblaw Companies Limited
GALEN G. WESTON
Executive Chairman and President
GRANT FROESE
Chief Operating Officer
RICHARD DUFRESNE
Chief Financial Officer
SARAH R. DAVIS
Chief Administrative Officer
MARK C. BUTLER
Executive Vice President,
Business Synergies
Leadership
ROBERT CHANT
Senior Vice President,
Corporate Affairs and
Communication
BARRY K. COLUMB
President, President’s Choice Financial
GORDON A.M. CURRIE
Executive Vice President and
Chief Legal Officer
MARIO GRAUSO
President, Joe Fresh
ANDREW IACOBUCCI
President, Discount Division
JUDY A. McCRIE
Executive Vice President,
Speed of Change and Culture
PETER MCLAUGHLIN
President, Emerging Business
MIKE MOTZ
President, Shoppers Drug Mart
GARRY SENECAL
President, Market Division
MARY ALICE VUICIC
Executive Vice President,
Human Resources and
Labour Relations
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Loblaw Companies Limited
25
Shareholder and Corporate Information
Loblaw Companies Limited
1 President’s Choice Circle, Brampton, Canada L6Y 5S5
Tel: (905) 459-2500 | Fax: (905) 861-2206 | Internet: loblaw.ca
NTRE
COMMON DIVIDEND POLICY
REGISTRAR AND TRANSFER AGENT
Computershare Investor Services Inc.
100 University Avenue
Toronto, Canada M5J 2Y1
Toll-free: 1-800-564-6253
(Canada and the 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 2015 Annual Meeting of Shareholders
of Loblaw Companies Limited will be held
on Thursday, May 7, 2015 at 11:00 a.m.
(EST), at the Mattamy Athletic Centre,
50 Carlton Street, Toronto, Canada
M5B 1J2.
The Company’s dividend policy states:
the declaration and payment of dividends
and the amount thereof on the Company’s
common shares are at the discretion of
the Board of Directors, 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 of Directors. The anticipated
record and payments dates for 2015 are:
RECORD DATE
PAYMENT DATE
March 15
June 15
September 15
December 15
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 2015 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 Sophia Bisoukis,
Investor Relations, at the Company’s
National Head Office or by e-mail at:
investor@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 46% of the
Company’s common shares.
At year-end 2014, there were 412,480,891
common shares issued and outstanding.
The average daily trading volume of the
Company’s common shares for 2014 was
751,814.
PREFERRED SHARES
At year-end 2014, 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
2014 was 4,172.
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.
T
R
O
P
E
R
L
A
U
N
N
A
4
1
0
2
26
Loblaw Companies Limited
INNOVATION
&
EXECUTION
LOBLAW COMPANIES LIMITED 2014 ANNUAL REPORT –
FINANCIAL REVIEW
2014 Annual Report – Financial Review
Financial Highlights
Management’s Discussion and Analysis
Financial Results
Three Year Summary
Glossary of Terms
1
2
55
118
119
Footnote Legend
(1)
(2)
(3)
(4)
(5)
(6)
(7)
For financial definitions and ratios refer to the Glossary of Terms on page 119.
See Section 20 “Non-GAAP Financial Measures”.
Certain 2012 figures have been restated and amended due to the implementation of revised IAS 19, “Employee Benefits” and to conform with
the current year’s presentation, respectively.
Certain 2013 figures have been amended to conform with the current year’s presentation. See Section 20 “Non-GAAP Financial Measures”
and Section 18.1 “Accounting Standards Implemented in 2014”.
For segment presentation purposes, the results are for the periods ended December 31, 2014 and December 31, 2013, consistent with Choice
Properties’ fiscal calendar. Adjustments to January 3, 2015 and December 28, 2013 are included in Consolidation and Eliminations. See
Section 20 “Non-GAAP Financial Measures”.
Results are on an equivalent week basis and exclude the results of Shoppers Drug Mart. For Shoppers Drug Mart fourth quarter of 2014
results, please see Addendum A in the Company’s Fourth Quarter 2014 News Release.
For segment presentation purposes, the results are for the period ended December 31, 2014, consistent with Financial Services’ fiscal
calendar. Adjustments to January 3, 2015 are included in Consolidation and Eliminations. See Section 20 “Non-GAAP Financial Measures”.
This represents a change from the prior year whereby results were presented consistent with the Company’s reporting calendar. The results
for 2012 and 2013 have not been restated.
Financial Highlights(1)
As at or for the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Consolidated Results of Operations
Revenue
Operating income
Adjusted operating income(2)
EBITDA(2)
Adjusted EBITDA(2)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Net earnings
Adjusted net earnings(2)
Consolidated Financial Position and Cash Flows
Adjusted debt(2)
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Capital investments
Free cash flow(2)
Consolidated Per Common Share ($)
Basic net earnings
Adjusted basic net earnings(2)
Consolidated Financial Measures and Ratios
Revenue growth
Adjusted operating margin(2)
Adjusted EBITDA margin(2)
Adjusted debt(2) to adjusted EBITDA(2)
Retail Results of Operations
Sales
Gross profit
Adjusted gross profit(2)
Operating income
Adjusted operating income(2)
Adjusted EBITDA(2)
Retail Operating Statistics
Same-store sales(1), (6) growth
Adjusted gross profit percentage(2)
Adjusted operating margin(2)
Adjusted EBITDA margin(2)
Total retail square footage (in millions)
Number of corporate stores
Number of franchise stores
Number of Associate-owned drug stores
Financial Services Results of Operations(7)
Revenue
Operating income
Earnings before income taxes
Financial Services Operating Measures and Statistics(7)
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card receivables
Annualized credit loss rate on average quarterly gross credit card receivables
Choice Properties Results of Operations(5)
Revenue
Operating income
Net interest expense and other financing charges
Choice Properties Operating Measure(5)
Adjusted funds from operations(2)
2014
(53 weeks)
2013(4)
(52 weeks)
$
$
$
$
$
$
42,611
662
2,181
2,134
3,236
584
529
53
1,224
9,995
1,027
2,569
1,086
977
0.14
3.22
31.6%
5.1%
7.6%
3.1x
41,731
9,734
10,722
497
2,002
3,038
2.0%
25.7%
4.8%
7.3%
70.0
615
527
1,302
810
164
111
2,535
2,630
54
13.7%
4.4%
683
568
369
285
$
$
$
$
$
$
32,371
1,321
1,282
2,145
2,106
468
354
627
696
6,288
4,251
1,491
877
244
2.23
2.48
2.4%
4.0%
6.5%
3.0x
31,600
6,961
6,961
1,180
1,138
1,947
1.1%
22.0%
3.6%
6.2%
51.9
570
496
—
739
142
93
2,345
2,538
47
13.6%
4.2%
319
370
303
131
2014 Annual Report - Financial Review 1
Management's Discussion and Analysis
1.
Forward-Looking Statements
2. Overview
3.
4.
Strategic Framework
Key Financial Performance Indicators
5. Overall Financial Performance
5.1 Significant Accomplishments in 2014
5.2 Consolidated Results of Operations
5.3 Selected Financial Information
6. Reportable Operating Segments Results of Operations
6.1 Retail Segment
6.2
Financial Services Segment
6.3 Choice Properties Segment
7.
Acquisition of Shoppers Drug Mart Corporation
8. Other Business Matters
9.
Liquidity and Capital Structure
Liquidity and Capital Resources
9.1 Cash Flows
9.2
9.3 Credit Ratings
9.4 Other Sources of Funding
9.5 Share Capital
9.6 Contractual Obligations
10. Financial Derivative Instruments
11. Off-Balance Sheet Arrangements
12. Quarterly Results of Operations
12.1 Results by Quarter
12.2 Fourth Quarter Results
13. Disclosure Controls and Procedures
14.
Internal Control over Financial Reporting
15. Enterprise Risks and Risk Management
15.1 Operating Risks and Risk Management
15.2 Financial Risks and Risk Management
16. Related Party Transactions
17. Critical Accounting Estimates and Judgments
17.1 Consolidation
17.2 Inventories
17.3 Impairment of Non-Financial Assets (Goodwill, Intangible Assets, Fixed Assets and Investment Properties)
17.4 Franchise Loans Receivable and Certain Other Financial Assets
17.5 Loyalty Programs
17.6 Income and Other Taxes
18. Accounting Standards
18.1 Accounting Standards Implemented in 2014 and Changes to Significant Accounting Policies
18.2 Future Accounting Standards
19. Outlook
20. Non-GAAP Financial Measures
21. Additional Information
2 2014 Annual Report - Financial Review
3
4
4
5
6
6
6
9
11
11
14
15
16
17
17
17
19
20
21
22
24
24
25
25
25
26
33
33
33
34
39
41
42
42
42
42
43
43
43
43
43
44
44
45
54
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 55 to 117 of this Annual Report – Financial Review (“Annual Report”).
The Company’s annual audited consolidated financial statements and accompanying notes for the year ended January 3, 2015 have been
prepared in accordance with International Financial Reporting Standards (“IFRS” or “GAAP”) and include the accounts of the Company
and other entities that the Company controls and are reported in Canadian dollars, except where otherwise noted.
The information in this MD&A is current to February 25, 2015, unless otherwise noted. A glossary of terms used throughout this Annual
Report can be found on page 119.
Unless otherwise indicated, all comparisons of results for the fourth quarter of 2014 (13 weeks ended January 3, 2015) are against results
for the fourth quarter of 2013 (12 weeks ended December 28, 2013) and all comparisons of results for the full year of 2014 (53 weeks
ended January 3, 2015) are against the results for the full year of 2013 (52 weeks ended December 28, 2013).
1. Forward-Looking Statements
This Annual Report, including this MD&A, for the Company 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
forward-looking statements in this Annual Report include, but are not limited to, statements with respect to the Company’s anticipated
future results, events and plans, synergies and other benefits associated with the acquisition of Shoppers Drug Mart Corporation
(“Shoppers Drug Mart”), future liquidity and debt reduction targets, planned capital investments, and status and impact of information
technology (“IT”) systems implementation. These specific forward-looking statements are contained throughout this Annual Report
including, without limitation, in Section 3 "Strategic Framework", Section 9.2 “Liquidity and Capital Structure” and Section 19 "Outlook" 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”, “on track” 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 2015 is based on certain assumptions including
assumptions about anticipated cost savings, operating efficiencies and continued growth from current initiatives. 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 those expressed, implied or projected in
the forward-looking statements, including those described in Section 15 "Enterprise Risks and Risk Management" of this MD&A and the
Company’s Annual Information Form (for the year ended January 3, 2015). Such risks and uncertainties include:
•
failure to realize the anticipated strategic benefits or operational, competitive and cost synergies following the acquisition of Shoppers
Drug Mart;
•
•
•
•
•
•
•
•
•
failure to reduce indebtedness associated with the acquisition of Shoppers Drug Mart to bring leverage ratios to a level consistent with
investment grade ratings;
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;
failure to realize anticipated results, including revenue growth, anticipated cost savings or operating efficiencies from the Company’s
major initiatives, including those from restructuring;
the inability of the Company’s IT infrastructure to support the requirements of the Company’s business;
changes in the Company’s estimate of inventory cost as a result of its IT system upgrade;
changes to the regulation of generic prescription drug prices and the reduction of reimbursements under public drug benefit plans and
the elimination or reduction of professional allowances paid by drug manufacturers;
failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements, which could
lead to work stoppages;
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;
2014 Annual Report - Financial Review 3
Management’s Discussion and Analysis
•
•
•
•
changes in the Company’s income, capital, commodity, property and other tax and regulatory liabilities, including changes in tax laws,
regulations or future assessments;
the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink;
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; and
the inability of the Company to collect on and fund its credit card receivables.
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, without limitation, the section entitled "Risks" in the Company's Annual Information Form (for the year ended
January 3, 2015). 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
Loblaw Companies Limited includes retail businesses, a bank and a real estate company. The Company has three operating segments:
Retail, Financial Services and Choice Properties Real Estate Investment Trust (“Choice Properties”). The Retail segment consists primarily
of a discount supermarket business, a full-service supermarket business, an emerging and wholesale business and Shoppers Drug Mart.
The Company’s Financial Services segment provides retail banking, credit card services, auto, home, travel and pet insurance and
wireless mobile products and services. The Company also holds an 82.9% effective interest in Choice Properties, which owns, leases and
manages income-producing commercial properties.
3. Strategic Framework
The Company’s strategic framework is anchored by its vision to help Canadians “Live Life Well” and its commitment to produce industry
leading financial results through operational excellence. At the core of this framework is our focus on the customer – by providing the best
in food experience and the best in health and beauty.
Achieving a “best in food” experience is driven by our desire to lead in fresh selection, drive sustainable and competitive pricing and
provide customized assortments across our banners. Achieving “best in health and beauty” is driven by our pharmacies putting customers
first, our desire to provide high quality health and wellness products, a diverse and differentiated beauty offering and convenient locations
and hours of operations to meet individuals’ wellness needs.
The Company’s operational excellence goals include driving efficiencies and realizing synergies from its business acquisitions, particularly
the acquisition of Shoppers Drug Mart. We are focused on continued growth from President’s Choice Financial Services, Choice
Properties, product innovation, our emerging businesses and loyalty program initiatives.
4 2014 Annual Report - Financial Review
4. Key Financial Performance Indicators
The Company has identified key financial performance indicators to measure the progress of short and long term objectives. With the
completion of the acquisition of Shoppers Drug Mart, the Company’s 2014 results include the consolidation of Shoppers Drug Mart and the
associated acquisition-related accounting adjustments. Certain key financial performance indicators are set out below:
As at or for the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Consolidated:
Revenue growth
EBITDA(2)
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Operating income
Adjusted operating income(2)
Adjusted operating margin(2)
Net earnings
Adjusted net earnings(2)
Basic net earnings per common share ($)
Adjusted basic net earnings per common share(2) ($)
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Adjusted debt(2) to adjusted EBITDA(2)
Free cash flow(2)
Adjusted debt(2)
Retail Segment:
Same-store sales(1), (6) growth
Gross profit
Adjusted gross profit(2)
Adjusted gross profit %(2)
Adjusted operating margin(2)
Adjusted EBITDA margin(2)
Financial Services Segment(7):
Earnings before income taxes
Annualized yield on average quarterly gross credit card receivables
Annualized credit loss rate on average quarterly gross credit card receivables
Choice Properties Segment(5):
Adjusted funds from operations(2)
2014
(53 weeks)
2013(4)
(52 weeks)
31.6%
2,134
3,236
7.6%
662
2,181
5.1%
53
1,224
0.14
3.22
1,027
2,569
3.1x
977
9,995
2.0%
9,734
10,722
25.7%
4.8%
7.3%
111
13.7%
4.4%
285
$
$
$
$
$
$
$
2.4%
2,145
2,106
6.5%
1,321
1,282
4.0%
627
696
2.23
2.48
4,251
1,491
3.0x
244
6,288
1.1%
6,961
6,961
22.0%
3.6%
6.2%
93
13.6%
4.2%
131
$
$
$
$
$
$
$
During 2014, the Company introduced two new financial measures to the key financial performance indicators: Retail segment adjusted
gross profit(2) and Retail segment adjusted gross profit percentage(2), which are both non-GAAP financial measures. Management uses
these and other non-GAAP financial measures to exclude the impact of certain expenses and income that must be recognized under
GAAP when analyzing consolidated and segment underlying operating performance, as the excluded items are not necessarily reflective of
the Company’s underlying operating performance and make comparisons between periods difficult. From time to time, the Company may
exclude additional items if it believes doing so would result in a more effective analysis of underlying operating performance. The exclusion
of certain items does not imply that they are non-recurring. See Section 20 “Non-GAAP Financial Measures” for more information on the
Company’s non-GAAP financial measures.
2014 Annual Report - Financial Review 5
Management’s Discussion and Analysis
5. Overall Financial Performance
5.1 Significant Accomplishments in 2014
Acquisition of Shoppers Drug Mart On March 28, 2014, the Company acquired all of the outstanding shares of Shoppers Drug Mart for
total consideration of $12,273 million, comprised of approximately $6,600 million of cash and the issuance of approximately 119.5 million
common shares of the Company. The cash portion of the acquisition was partially funded by the issuance of $5,100 million of debt.
During 2014, the Company realized approximately $101 million of net synergies generated primarily from improved cost of goods sold and
from purchasing efficiencies in goods not for resale. Loblaw continues to expect to achieve annualized synergies of $300 million in the third
full year following the close of the acquisition of Shoppers Drug Mart (net of related costs).
Deleveraging On closing of the acquisition of Shoppers Drug Mart, adjusted debt(2) was $11,060 million. The Company made significant
progress in meeting its debt reduction target by decreasing adjusted debt(2) by $1,065 million since the closing of the acquisition of
Shoppers Drug Mart resulting in an outstanding adjusted debt(2) balance of $9,995 million as at January 3, 2015. The reduction in adjusted
debt(2) since closing included the repayment of a $350 million medium term note (“MTN”) and a repayment of the unsecured term loan
facility (net of the replacement of all tranches of inter-corporate debt of Choice Properties initially held by Loblaw and sold to unrelated
parties).
Information Technology and Other Systems Implementations As of the end of 2014, the Company completed the conversion of
substantially all of its corporate grocery locations and associated distribution centres to the new IT systems.
5.2 Consolidated Results of Operations
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Revenue
Revenue excluding Shoppers Drug Mart
EBITDA(2)
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Adjusted EBITDA(2) excluding Shoppers Drug Mart
Adjusted EBITDA margin(2) excluding Shoppers Drug Mart
Operating income
Adjusted operating income(2)
Adjusted operating margin(2)
Adjusted operating income(2) excluding Shoppers Drug Mart
Adjusted operating income margin(2) excluding Shoppers Drug Mart
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Net earnings
Adjusted net earnings(2)
Basic net earnings per common share ($)
Adjusted basic net earnings per common share(2) ($)
$
$
$
$
$
$
$
$
$
$
$
$
2014
(53 weeks)
42,611
33,561
2,134
3,236
7.6%
2,248
6.7%
662
2,181
5.1%
1,397
4.2%
584
529
53
1,224
0.14
3.22
2013(4)
(52 weeks)
$ Change
% Change
$
$
$
$
$
$
32,371
32,371
2,145
2,106
6.5%
2,106
6.5%
1,321
1,282
4.0%
1,282
4.0%
468
354
627
696
2.23
2.48
10,240
1,190
(11)
1,130
31.6 %
3.7 %
(0.5)%
53.7 %
142
6.7 %
(659)
899
115
116
175
(574)
528
(2.09)
0.74
(49.9)%
70.1 %
9.0 %
24.8 %
49.4 %
(91.5)%
75.9 %
(93.7)%
29.8 %
With the completion of the acquisition of Shoppers Drug Mart in 2014, the Company’s results include the consolidation of Shoppers Drug
Mart from the date of acquisition. The Shoppers Drug Mart assets were recognized in the Company’s financial results at their fair value,
including:
•
a fair value increase to Shoppers Drug Mart’s inventory on the date of acquisition of $798 million, which was fully recognized in cost of
merchandise inventories sold with a resulting negative impact on gross profit; and
•
a $6,050 million increase for the acquisition of definite life intangible assets, which is being amortized over their estimated useful lives.
In 2014, $417 million of related amortization was recognized in operating income. Annual amortization of approximately $550 million
associated with these intangibles will be recognized over the next ten years and decreasing thereafter.
6 2014 Annual Report - Financial Review
The Company also recognized acquisition-related costs and a net divestitures loss of $72 million (2013 – $6 million) in selling, general and
administrative expenses (“SG&A”) and $15 million (2013 – $25 million) in net interest expenses and other financing charges related to the
acquisition of Shoppers Drug Mart and the divestitures required by the Competition Bureau.
With the upgrade of its IT infrastructure, the Company completed the conversion of substantially all of its corporate grocery locations to a
perpetual inventory management system in 2014. As a result, the Company recognized a $190 million decrease in the value of inventory in
gross profit. The implementation of a perpetual inventory system, combined with visibility to integrated costing information provided by the
new IT systems enables the Company to estimate the cost of inventory using a more precise system-generated average cost.
In 2014, the Company restructured its fee arrangements with the franchisees of certain franchise banners. These revised arrangements
are expected to result in an annual reduction of Retail segment sales of approximately $150 million and a corresponding decrease in
SG&A. As a result of this restructuring, the Company re-evaluated the recoverable amount of franchise-related financial instruments and
recorded a reduction in previously recorded impairment of $40 million.
In 2014, the Company recorded $46 million (2013 – $35 million) in restructuring and reorganization costs primarily associated with the
reduction of corporate and store-support positions, the departure of certain executives and the realignment of certain of the Company’s
central office functions.
The Company’s 2014 financial results also included a charge of $37 million (2013 – $25 million), related to the transition of certain
grocery stores to more cost effective and efficient operating terms under collective agreements.
Revenue Revenue of $42,611 million in 2014 increased by $10,240 million compared to 2013, primarily due to Shoppers Drug Mart and
the impact of the 53rd week in 2014. Revenue in the 53rd week of 2014 was $789 million ($574 million excluding Shoppers Drug Mart).
Excluding the impact of Shoppers Drug Mart, consolidated revenue increased by $1,190 million, or 3.7%. Excluding the impact of
Shoppers Drug Mart and the 53rd week of 2014, consolidated revenue increased by $616 million, or 1.9%.
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
EBITDA(2)
Adjustments to EBITDA(2)
Adjusted EBITDA(2)
Operating income
Adjustments to EBITDA(2)
Amortization of intangible assets acquired with Shoppers Drug Mart
Adjusted operating income(2)
2014
(53 weeks)
$
$
$
2,134
1,102
3,236
662
1,102
417
2013(4)
(52 weeks)
$ Change
% Change
2,145
$
(11)
(0.5)%
(39)
2,106
1,321
$
$
(39)
1,130
(659)
53.7 %
(49.9)%
2,181
$
1,282
$
899
70.1 %
$
$
$
$
EBITDA(2) EBITDA(2) of $2,134 million in 2014 decreased by $11 million compared to 2013. The decrease in EBITDA(2) was negatively
impacted by adjustments of $1,102 million including the full recognition of the fair value increment on the acquired Shoppers Drug Mart
inventory sold ($798 million), the charge related to inventory measurement and other conversion differences associated with the
implementation of a perpetual inventory system ($190 million), increased costs related to the acquisition of Shoppers Drug Mart and a net
divestitures loss ($66 million), year-over-year unfavourable fixed asset and other related impairments ($48 million), a gain related to
defined benefit plan amendments recorded in 2013 ($51 million), increased restructuring and reorganization costs ($11 million) and certain
other items ($17 million). These increases were partially offset by restructuring of franchise fees ($40 million).
After excluding these adjustments, adjusted EBITDA(2) of $3,236 million increased by $1,130 million compared to 2013. The increase
included $988 million of adjusted EBITDA(2) contributed by Shoppers Drug Mart, with the remainder of the increase of $142 million primarily
driven by the Retail segment. The increase was positively impacted by net synergies of $101 million and the 53rd week in 2014 of $71
million. Adjusted EBITDA margin(2) was 7.6% compared to 6.5% in 2013. Excluding the impact of Shoppers Drug Mart, adjusted EBITDA(2)
increased by $142 million, or 6.7%, compared to 2013 and adjusted EBITDA margin(2) was 6.7%, compared to 6.5% in 2013.
Operating Income Operating income of $662 million in 2014 decreased by $659 million compared to 2013, primarily driven by the
acquisition-related accounting adjustments of Shoppers Drug Mart. Operating income was negatively impacted by the net adjustments
related to EBITDA(2) noted above of $1,102 million and the amortization of intangible assets of $417 million related to the acquisition of
Shoppers Drug Mart.
2014 Annual Report - Financial Review 7
Management’s Discussion and Analysis
After excluding these impacts to operating income, adjusted operating income(2) of $2,181 million increased by $899 million compared to
2013, including $784 million of adjusted operating income(2) contributed by Shoppers Drug Mart. Adjusted operating margin(2) was 5.1%
compared to 4.0% in 2013. Excluding the impact of Shoppers Drug Mart, adjusted operating income(2) increased by $115 million and was
positively impacted by the increase described in adjusted EBITDA(2) noted above of $142 million, partially offset by an increase in
depreciation and amortization(2) of $27 million.
Net Interest Expense and Other Financing Charges Net interest expense and other financing charges of $584 million in 2014 increased
by $116 million compared to 2013, including non-recurring charges incurred in 2013 related to Choice Properties initial public offering
(“IPO”) transaction costs and early debt settlement costs, and certain other adjustments as set out in Section 20 “Non-GAAP Financial
Measures”.
After excluding these impacts to net interest expense and other financing charges, adjusted net interest expense and other financing
charges(2) of $529 million increased by $175 million, primarily driven by higher interest on long term debt, primarily as a result of debt
incurred to finance the acquisition of Shoppers Drug Mart and distributions paid by Choice Properties on its Units, partially offset by a
decrease in net interest on the post-employment and other long term employee benefits.
Income Taxes Income tax expense for 2014 was $25 million and the effective tax rate was 32.1%. Income tax expense for 2013 was
$226 million and the effective tax rate was 26.5%. The increase in the effective tax rate compared to 2013 was primarily attributable to a
decrease in certain non-taxable amounts. The adjusted income tax expense(2) for 2014 was $428 million and the adjusted income tax
rate(2) was 25.9%. The adjusted income tax expense(2) for 2013 was $232 million and the adjusted income tax rate(2) was 25.0%. The
increase in the adjusted income tax rate(2) was primarily attributable to a decrease in certain non-taxable amounts.
In 2012, the Company received indication from the Canada Revenue Agency (the “CRA”) that the CRA intends to proceed with reassessments
of the tax treatment of the Company’s wholly owned subsidiary, Glenhuron Bank Limited (“Glenhuron”). The CRA’s position is that certain
income earned by Glenhuron in Barbados in respect of the 2000 to 2010 taxation years should be treated, and taxed, as income in Canada.
Based on the proposal letter from the CRA, if the CRA and the relevant provincial tax authorities were to prevail in all of these
reassessments, which the Company believes would be unlikely, the estimated total tax and interest for the 2000 to 2010 taxation years
would be approximately $440 million, which would increase as interest accrues. However, the Company is in discussions with the CRA
about the amount of taxes in dispute. The Company believes it is likely that the CRA and the relevant provincial tax authorities will issue
reassessments for 2011 to 2013 on the same or similar basis. No amount for any reassessments has been provided for in the Company’s
consolidated financial statements.
Subsequent to the end of 2014, the Company received a letter from the CRA stating that the CRA will be proceeding with the reassessments.
The Company expects to receive reassessments from the CRA and the relevant provincial tax authorities sometime in the coming months.
The Company strongly disagrees with the CRA’s position and intends to vigorously defend its position including appealing the reassessments
as and when they are received. The Company will make cash payments or provide other forms of security on a portion of the taxes in dispute.
If the Company is successful in defending its position, in whole or in part, some or all of the cash payments or security would be returned to
the Company.
Net Earnings Net earnings of $53 million in 2014 decreased by $574 million compared to 2013, primarily driven by the decrease in
operating income and the increase in net interest expense and other financing charges, partially offset by the decrease in income tax
expense, described above. Adjusted net earnings(2) of $1,224 million increased by $528 million compared to 2013, primarily driven by the
increase in adjusted operating income(2), primarily as a result of Shoppers Drug Mart, partially offset by the increase in adjusted net interest
expense and other financing charges(2) and the increase in adjusted income tax expense(2), described above.
Basic Net Earnings Per Common Share Basic net earnings per common share were $0.14 compared to $2.23 in 2013. Basic net
earnings per common share included the negative impact of the full recognition of the Shoppers Drug Mart acquisition-related fair value
increment on inventory sold ($1.55 per share), the amortization of intangible assets acquired with Shoppers Drug Mart ($0.80 per share), a
charge related to inventory measurement and other conversion differences associated with the implementation of a perpetual inventory
system ($0.37 per share), costs and a net divestitures loss associated with the acquisition of Shoppers Drug Mart ($0.19 per share) and
restructuring costs ($0.09 per share), accelerated amortization of deferred financing costs ($0.04 per share), fair value adjustment on Trust
Unit Liability ($0.04 per share), fixed asset and other related impairments, net of recoveries ($0.04 per share) and certain other
adjustments ($0.04 per share) and the positive impact of restructuring of franchise fees ($0.08 per share).
Adjusted basic net earnings per common share(2) were $3.22 compared to $2.48 in 2013, primarily due to the increase in adjusted net
earnings(2) as described above, partially offset by the dilutive effect of the 119.5 million common shares issued as part of the total
consideration for the acquisition of Shoppers Drug Mart.
8 2014 Annual Report - Financial Review
5.3 Selected Financial Information
The selected information presented below has been derived from and should be read in conjunction with the annual consolidated financial
statements of the Company dated January 3, 2015, December 28, 2013 and December 29, 2012. The analysis of the data contained in the
table focuses on the trends and significant events or items affecting the financial condition and results of the Company’s operations over
the latest three year periods.
For the years ended January 3, 2015 and December 28, 2013 and December 29, 2012
(millions of Canadian dollars except where otherwise indicated)
Revenue
Revenue excluding Shoppers Drug Mart
EBITDA(2)
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding Shoppers Drug Mart
Operating income
Adjusted operating income(2)
Adjusted operating income(2) excluding Shoppers Drug Mart
Adjusted net interest expense and other financing charges(2)
Adjusted income tax rate(2)
Net earnings
Adjusted net earnings(2)
Basic net earnings per common share ($)
Diluted net earnings per common share ($)
Adjusted basic net earnings per common share(2) ($)
Dividends declared per common share ($)
Dividends declared per Second Preferred Share, Series A ($)
2014
(53 weeks)
42,611
33,561
2,134
3,236
2,248
662
2,181
1,397
529
25.9%
53
1,224
0.14
0.14
3.22
0.975
1.49
$
$
$
$
$
$
$
2013(4)
(52 weeks)
32,371
32,371
2,145
2,106
2,106
1,321
1,282
1,282
354
25.0%
627
696
2.23
2.21
2.48
0.940
1.49
$
$
$
$
$
$
$
2012(3)
(52 weeks)
31,604
31,604
1,972
2,041
2,041
1,195
1,264
1,264
351
25.0%
634
685
2.25
2.23
2.43
0.850
1.49
$
$
$
$
$
$
$
Revenue Revenue of $42,611 million increased by $10,240 million compared to 2013, primarily due to Shoppers Drug Mart and the impact
of the 53rd week in 2014. Revenue in the 53rd week of 2014 was $789 million. Excluding the impact of Shoppers Drug Mart and the 53rd
week of 2014, consolidated revenue increased by $616 million, or 1.9%. Retail same-store(6) sales growth, on a comparable week basis,
was 2.0% (2013 – 1.1%) and excluding gas bar, was 2.1% (2013 – 1.0%).
Revenue in 2013 of $32,371 million increased by $767 million compared to 2012, primarily due to the increase in the Retail segment.
Retail same-store(6) sales growth was 1.1% (2012 – decline of 0.2%) and excluding gas bar was 1.0% (2012 – decline of 0.2%).
The Company’s Retail segment sales have continued to grow under the pressure of an intensely competitive retail market and uncertain
economic environment over the last three years.
EBITDA(2) EBITDA(2) of $2,134 million in 2014 decreased by $11 million compared to 2013, primarily driven by a decrease in the Retail
segment EBITDA(2) due to the acquisition-related accounting adjustments from the acquisition of Shoppers Drug Mart, partially offset by
increases in the Financial Services and Choice Properties segments. The 53rd week contributed $71 million to EBITDA(2).
EBITDA(2) in 2013 of $2,145 million increased by $173 million compared to 2012, primarily driven by increases in each of the Company’s
operating segments.
Over the past three years, the Company’s consolidated EBITDA(2) has been impacted by a number of items which the Company does not
consider to be indicative of operational performance. These items have been adjusted in the presentation of adjusted EBITDA(2) as set out
in Section 20 “Non-GAAP Financial Measures”.
Operating Income Operating income in 2014 of $662 million decreased by $659 million compared to 2013, primarily due to a decrease in
the Retail segment operating income. The decrease in the Retail segment is primarily driven by the items as set out in Section 20 “Non-
GAAP Financial Measures” and also impacted by the amortization of intangible assets related to the acquisition of Shoppers Drug Mart.
Operating income in 2013 of $1,321 million increased by $126 million compared to 2012, primarily driven by increases in each of the
Company’s operating segments.
2014 Annual Report - Financial Review 9
Management’s Discussion and Analysis
Over the past three years, the Company’s consolidated operating income has been impacted by a number of items which the Company
does not consider to be indicative of operational performance. These items have been adjusted in the presentation of adjusted operating
income(2) as set out in Section 20 “Non-GAAP Financial Measures”.
Net Earnings and Basic Net Earnings per Common Share In 2014, the decreases in net earnings and basic net earnings per common
share were primarily due to the decrease in operating income and the increase in net interest expense and other financing charges,
partially offset by the decrease in income tax expense. Net interest and other financing charges increased due to increased debt as a
result of the acquisition of Shoppers Drug Mart. The decrease in basic net earnings per common share was also impacted by the dilutive
effect of the 119.5 million common shares issued as part of the total consideration for the acquisition of Shoppers Drug Mart.
In 2013, the decreases in net earnings and basic net earnings per common share were negatively impacted by an increase in net interest
expense and other financing charges, driven by higher interest on long term debt, primarily as a result of debt incurred to finance the
acquisition of Shoppers Drug Mart and distributions paid by Choice Properties on its Units, and by a higher effective income tax rate,
partially offset by higher operating income.
Over the past three years, the Company’s adjusted net earnings(2) and adjusted net earnings per common share(2) have been impacted by
a number of items which the Company does not consider to be indicative of operational performance. These items have been normalized
in the presentation of adjusted net earnings(2) and adjusted net earnings per common share(2) as set out in Section 20 “Non-GAAP
Financial Measures”.
Total Assets and Long Term Financial Liabilities
(millions of Canadian dollars)
Total Assets
Long Term Debt
Capital Securities
Trust Unit Liability
Long term financial liabilities
As at
January 3, 2015
33,684
$
As at
As at
December 28, 2013 December 29, 2012
17,961
20,741
$
$
$
$
11,462
—
722
12,184
$
$
7,680
$
224
688
8,592
$
5,669
223
—
5,892
In 2014, total assets of $33,684 million and long term financial liabilities of $12,184 million increased by 62.4% and 41.8%, respectively,
compared to 2013. These increases were primarily driven by the consolidation of Shoppers Drug Mart balances, the issuance of debt to
finance the acquisition of Shoppers Drug Mart, partially offset by debt repayments. In 2014, capital securities became due within one year
and were presented in current liabilities.
In 2013, total assets of $20,741 million and long term financial liabilities of $8,592 million increased by 15.5% and 45.8%, respectively,
compared to 2012. These increases were primarily driven by the Choice Properties IPO, the completed offering of senior unsecured
debentures and the financing transactions in preparation for the Shoppers Drug Mart acquisition. Excluding these impacts, the Company’s
total assets and long term financial liabilities increased marginally over 2012.
10 2014 Annual Report - Financial Review
6. Reportable Operating Segments Results of Operations
6.1 Retail Segment
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Sales
Gross profit
Adjusted gross profit(2)
EBITDA(2)
Adjusted EBITDA(2)
Operating income
Adjusted operating income(2)
For the years ended January 3, 2015 and December 28, 2013
Same-store sales(1), (6) growth
Adjusted gross profit %(2)
Adjusted EBITDA margin(2)
Adjusted operating margin(2)
Sales
2014
(53 weeks)
2013(4)
(52 weeks)
$ Change
% Change
$
41,731
$
31,600
$
10,131
9,734
10,722
1,950
3,038
497
2,002
6,961
6,961
1,989
1,947
1,180
1,138
2,773
3,761
(39)
1,091
(683)
864
2014
(53 weeks)
2.0%
25.7%
7.3%
4.8%
32.1 %
39.8 %
54.0 %
(2.0)%
56.0 %
(57.9)%
75.9 %
2013(4)
(52 weeks)
1.1%
22.0%
6.2%
3.6%
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Retail segment sales
Shoppers Drug Mart
Excluding Shoppers Drug Mart
2014
(53 weeks)
41,731
9,050
32,681
$
$
$
$
2013(4)
(52 weeks)
31,600
31,600
$
$
$ Change
% Change
10,131
32.1%
1,081
3.4%
• Retail segment sales of $41,731 million in 2014 increased by $10,131 million compared to 2013, primarily due to Shoppers Drug Mart
and the impact of the 53rd week in 2014. Retail segment sales in the 53rd week of 2014 were $789 million ($574 million excluding
Shoppers Drug Mart). Excluding the impact of Shoppers Drug Mart and the 53rd week of 2014, Retail segment sales increased by
$507 million, or 1.6%, due to the following factors:
Same-store sales(1, 6) growth, for core grocery and on a comparable week basis, was 2.0% (2013 – 1.1%) and excluding gas
bar, was 2.1% (2013 – 1.0%);
On a comparable week basis:
Sales growth in food was moderate;
Sales in drugstore were flat;
Sales growth in gas bar was modest;
Sales in general merchandise, excluding apparel, were flat; and
Sales in retail apparel were modest, while U.S. wholesale apparel sales declined significantly;
The Company’s average annual internal food price index was slightly higher than (2013 – lower than) the average annual
national food price inflation of 2.5% (2013 – 1.1%) as measured by “The Consumer Price Index for Food Purchased from
Stores” (“CPI”). CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in Loblaw stores; and
22 corporate and franchise stores were opened and 12 corporate and franchise stores were closed in the last 12 months, with
an additional two franchise grocery stores divested as a result of a Consent Agreement with the Competition Bureau related to
the acquisition of Shoppers Drug Mart, resulting in flat square footage growth.
2014 Annual Report - Financial Review 11
Management’s Discussion and Analysis
• Since the acquisition date, Shoppers Drug Mart opened 17 new drug stores and closed 24 drug stores, including 13 drug stores
divested in accordance with the Consent Agreement with the Competition Bureau related to the acquisition of Shoppers Drug Mart. As
a result, net square footage increased by 0.1 million square feet, or 0.6%.
Gross Profit
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Retail gross profit
Adjustments(2)
Adjusted Retail gross profit(2)
Adjusted gross profit %(2)
Shoppers Drug Mart
Excluding Shoppers Drug Mart
Adjusted gross profit %(2)
2014
(53 weeks)
2013(4)
(52 weeks)
$
$
$
$
$
$
$
9,734
988
10,722
25.7%
3,543
7,179
22.0%
$
$
6,961
—
6,961
22.0%
6,961
$
22.0%
$ Change
% Change
2,773
3,761
39.8%
54.0%
218
3.1%
•
In 2014, gross profit of $9,734 million increased by $2,773 million compared to 2013, primarily due to Shoppers Drug Mart and was
negatively impacted by adjustments(2) of $988 million including the full recognition of the fair value increment on the acquired
Shoppers Drug Mart inventory sold and the charge related to inventory measurement and other conversion differences associated
with the implementation of a perpetual inventory system.
After excluding these adjustments(2), adjusted gross profit(2) of $10,722 million increased by $3,761 million, including $3,543 million of
adjusted gross profit(2) contributed by Shoppers Drug Mart. Adjusted gross profit percentage(2) was 25.7% compared to 22.0% in 2013.
Excluding Shoppers Drug Mart, adjusted gross profit percentage(2) was 22.0%, flat compared to 2013. While flat, adjusted gross profit
percentage(2) was positively impacted by synergies related to the acquisition and reductions in transportation costs, but were
negatively impacted by increased shrink. Excluding Shoppers Drug Mart, adjusted gross profit(2) increased by $218 million, or 3.1%,
compared to 2013, driven by higher sales, including the impact of the 53rd week of 2014.
EBITDA(2)
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
EBITDA(2)
Adjustments(2)
Adjusted Retail EBITDA(2)
Adjusted EBITDA margin(2)
Shoppers Drug Mart
Excluding Shoppers Drug Mart
Adjusted EBITDA margin(2)
2014
(53 weeks)
2013(4)
(52 weeks)
$
$
$
$
$
$
$
1,950
1,088
3,038
7.3%
988
2,050
6.3%
$ Change
% Change
(39)
(2.0)%
1,091
56.0 %
$
$
1,989
(42)
1,947
6.2%
1,947
$
103
5.3 %
6.2%
• EBITDA(2) of $1,950 million in 2014 decreased by $39 million compared to 2013. EBITDA(2) was negatively impacted by adjustments
of $1,088 million as set out in Section 20 “Non-GAAP Financial Measures”. The significant adjustments during 2014 included the
Shoppers Drug Mart acquisition-related costs of the full recognition of the fair value increment on the acquired Shoppers Drug Mart
inventory sold and the charge related to inventory measurement and other conversion differences associated with the implementation
of a perpetual inventory system.
After excluding these adjustments(2), adjusted EBITDA(2) of $3,038 million increased by $1,091 million compared to 2013, including
$988 million of adjusted EBITDA(2) contributed by Shoppers Drug Mart.
12 2014 Annual Report - Financial Review
Excluding the impact of Shoppers Drug Mart, adjusted EBITDA(2) of $2,050 million increased by $103 million, driven by the increase in
adjusted gross profit(2) of $218 million, as described above, partially offset by the increase in SG&A of $115 million. The increase in
SG&A was driven by the additional week in 2014 and a $12 million year-over-year increase in charges related to the transition of
certain grocery stores to more cost effective and efficient operating terms under collective agreements. Excluding these impacts,
SG&A decreased. This decrease was primarily driven by supply chain efficiencies and changes in the fair value of the Company's
franchise investments, partially offset by investments in the Company’s emerging business, higher foreign exchange losses, synergy
related costs and higher investments in the Company's franchise business.
• Adjusted EBITDA margin(2) for 2014 was 7.3%, compared to 6.2% in 2013, primarily driven by Shoppers Drug Mart. Excluding the
impact of Shoppers Drug Mart, adjusted EBITDA margin(2) was 6.3% compared to 6.2% in 2013.
Operating Income
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
2014
(53 weeks)
2013(4)
(52 weeks)
Retail operating income
Adjustments(2)
Adjusted Retail operating income(2)
Adjusted operating margin(2)
Shoppers Drug Mart
Excluding Shoppers Drug Mart
Adjusted operating margin(2)
$
$
$
$
$
$
$
497
1,505
2,002
4.8%
784
1,218
3.7%
$ Change
% Change
(683)
(57.9)%
864
75.9 %
$
$
1,180
(42)
1,138
3.6%
1,138
$
80
7.0 %
3.6%
• Operating income of $497 million in 2014 decreased by $683 million compared to 2013, primarily driven by the acquisition-related
accounting adjustments of Shoppers Drug Mart. Operating income was negatively impacted by the net adjustments related to
EBITDA(2) as noted above of $1,088 million and the amortization of intangible assets related to the acquisition of Shoppers Drug
Mart of $417 million.
After excluding the adjustments to operating income set out in Section 20 “Non-GAAP Financial Measures”, adjusted operating
income(2) of $2,002 million increased by $864 million compared to 2013, including $784 million of adjusted operating income(2)
contributed by Shoppers Drug Mart. Excluding the impact of Shoppers Drug Mart, adjusted operating income(2) increased by $80
million or 7.0%, driven by the increase in adjusted EBITDA(2) described above, partially offset by the increase in retail depreciation
and amortization(2) of $23 million.
• Adjusted operating margin(2) for 2014 was 4.8%, compared to 3.6% in 2013, primarily driven by the inclusion of Shoppers Drug Mart.
Excluding the impact of Shoppers Drug Mart, adjusted operating margin(2) was 3.7% compared to 3.6% in 2013.
2014 Annual Report - Financial Review 13
Management’s Discussion and Analysis
6.2 Financial Services Segment(7)
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Revenue
Operating income
Earnings before income taxes
2014
(53 weeks)
$
$
810
164
111
2013
(52 weeks)
$ Change
% Change
$
739
142
93
71
22
18
9.6%
15.5%
19.4%
(millions of Canadian dollars except where otherwise indicated)
January 3, 2015
December 28, 2013
$ Change
% Change
As at
As at
Average quarterly net credit card receivables
$
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card
receivables
Annualized credit loss rate on average quarterly gross credit
card receivables
$
2,535
2,630
54
13.7%
4.4%
2,345
2,538
47
13.6%
4.2%
$
190
92
7
8.1%
3.6%
14.9%
• Revenue for 2014 of $810 million increased by $71 million, or 9.6%, compared to 2013. This increase was primarily driven by higher
interest, interchange and other service fee related income as a result of a growth in the credit card receivables portfolio.
• Operating income of $164 million and earnings before income taxes of $111 million in 2014 increased by $22 million and $18 million,
respectively, compared to 2013. These increases were mainly attributable to the higher revenue described above, partially offset by
higher operating costs as a result of an increase in the active customer base, higher credit losses from increased credit card
receivable balances and higher costs associated with the Financial Services loyalty program.
• As at January 3, 2015, credit card receivables were $2,630 million, an increase of $92 million compared to December 28, 2013. This
increase was primarily driven by a growth in the active customer base as a result of continued investments in customer acquisitions
and marketing initiatives. As at January 3, 2015, the allowance for credit card receivables was $54 million, an increase of $7 million
compared to December 28, 2013, primarily due to the growth in the credit card receivables portfolio.
• Subsequent to the end of 2014:
The Company, through President’s Choice Bank (“PC Bank”), extended the maturity date for certain Other Independent
Securitization Trust agreements from the second quarter of 2016 to the second quarter of 2017, with all other terms and
conditions remaining substantially the same; and
PC Bank entered into USD foreign exchange forward agreements, which mature by December 2015. The notional amounts
of the contracts total USD $27 million.
14 2014 Annual Report - Financial Review
6.3 Choice Properties Segment(5)
For the periods ended January 3, 2015 and December 28, 2013
2014
2013(i)
(millions of Canadian dollars except where otherwise indicated)
(53 weeks)
(52 weeks)
$ Change
% Change
Revenue
Operating income
Adjusted operating income(2)
Net interest expense and other financing charges
Adjusted funds from operations(2)
(i)
Based on operations beginning July 5, 2013.
$
$
683
568
582
369
285
$
319
370
373
303
131
364
198
209
66
154
114.1%
53.5%
56.0%
21.8%
117.6%
• Revenue for 2014 of $683 million increased by $364 million, or 114.1%, compared to 2013, and included $613 million (2013 – $287
million) primarily related to intersegment revenue from Loblaw retail locations. The increase was primarily driven by the inclusion of a
full year of operations in 2014 compared to a partial year in 2013.
• Operating income of $568 million and adjusted operating income(2) of $582 million in 2014 increased by $198 million and $209 million,
respectively, compared to 2013. These increases were mainly attributable to a full year of operations in 2014, partially offset by a
$62 million year-over-year unfavourable fair value adjustment on investment properties. The fair value adjustment on investment
properties is eliminated on consolidation.
• Adjusted funds from operations(2) of $285 million in 2014 increased by $154 million compared to 2013. The increase was mainly
attributable to a full year of operations and acquisitions of properties from Loblaw.
• During 2014, the Company sold 36 investment properties to Choice Properties for an aggregate purchase price of approximately
$410 million, which was settled through the issuance of 21,957,351 Class B Limited Partnership units, $179 million in cash and the
assumption of a $4 million mortgage by Choice Properties. In addition, Choice Properties acquired a 40% interest in a limited
partnership, which acquired land from the Company, intended for development into a mixed-used property, for approximately $6
million.
• Choice Properties also acquired in 2014, from a third party, an industrial property in Mississauga, Ontario, for approximately
$16 million, funded by cash. This property is fully leased to a related party.
•
In 2014, Choice Properties acquired a 70% interest in a limited partnership, which holds land intended for future retail development,
for approximately $18 million.
• Subsequent to the end of 2014:
The Company sold a warehouse to Choice Properties for approximately $81 million. The warehouse is fully occupied by the
Company as the single tenant with a 20-year initial lease term with six five-year renewal options;
The Company sold a parcel of land to Choice Properties for approximately $12 million. Consideration for the acquisition
included 265,665 Class B Limited Partnership units, $7 million in cash and the assumption of a $2 million obligation. The
Class B Limited Partnership units issued to the Company as partial consideration for this transaction did not impact the
Company’s effective ownership percentage; and
Choice Properties issued $250 million aggregate principal amount of Series E senior unsecured debentures bearing interest
at a rate of 2.30% per annum and maturing in 2020. The net proceeds from the issuance were used by Choice Properties to
repay existing indebtedness and for general business purposes.
• As of January 3, 2015, the Company’s ownership interest in Choice Properties was 82.9%.
2014 Annual Report - Financial Review 15
Management’s Discussion and Analysis
7. Acquisition of Shoppers Drug Mart Corporation
On March 28, 2014, the Company acquired all of the outstanding shares of Shoppers Drug Mart for total consideration of $12,273 million,
comprised of approximately $6,600 million of cash and the issuance of approximately 119.5 million common shares of the Company.
The cash portion of the acquisition of Shoppers Drug Mart was financed as follows:
•
$3,500 million was obtained through an unsecured term loan facility bearing interest at a rate equal to the Bankers’ Acceptance rate
plus 1.75% and maturing March 28, 2019 (the facility was re-priced to Bankers’ Acceptance rate plus 1.45% on July 23, 2014);
•
•
•
$1,600 million of proceeds from the issuance of unsecured notes in 2013;
$500 million was received in consideration of the issuance of 10.5 million common shares to George Weston Limited (“Weston”); and
approximately $1,000 million was used from cash on hand.
Based on a preliminary assessment, the Company recognized the following amounts of net tangible assets, goodwill and intangible assets
in 2014:
(millions of Canadian dollars except where otherwise indicated)
Fair Value of Net Tangible Assets Acquired
$
Estimated
Useful Life
11 years
indefinite
18 years
5 to 10 years
548
2,285
5,005
3,390
490
555
9,440
$
12,273
Goodwill
Prescription files
Brands
Optimum loyalty program
Other
Total Intangible Assets
Total Net Assets Acquired
As at January 3, 2015, the Company has not yet finalized the above purchase price allocation. In the fourth quarter of 2014, the Company
revised its fair value estimate of intangible assets and updated the purchase price equation. The result was to decrease intangible assets
by $35 million to $9,440 million, decrease deferred income tax liabilities by $9 million to $2,252 million and increase goodwill by $26 million
to $2,285 million. The Company has one year from the date of acquisition to finalize the fair value of net tangible assets, goodwill and
intangible assets and any further changes to the amounts presented above will be reflected in the first half of 2015.
Pursuant to a Consent Agreement reached with the Competition Bureau in 2014, the Company was required to divest 16 Shoppers Drug
Mart stores, two of the Company’s franchise grocery stores and nine in-store pharmacies.
During 2014, two franchise grocery stores and 13 Shoppers Drug Mart stores were sold and nine in-store pharmacies were licensed to
unrelated parties, which resulted in a net divestitures loss of $12 million. The final three Shoppers Drug Mart stores were approved for sale
by the Competition Bureau and were sold subsequent to the end of 2014 for estimated proceeds of $9 million.
The Company has incurred costs of $75 million (2013 – $31 million) related to the acquisition of Shoppers Drug Mart, of which $60 million
(2013 – $6 million) was recorded in SG&A and $15 million (2013 – $25 million) was recorded in net interest expense and other financing
charges.
Upon closing of the acquisition, all amounts owing on Shoppers Drug Mart’s revolving bank credit facility were repaid and the facility was
cancelled. In addition, upon closing, the Company guaranteed the outstanding principal amount of Shoppers Drug Mart MTNs of
$500 million, along with accrued interest. The Company has also provided guarantees to various Canadian banks in support of the
financing obtained by Shoppers Drug Mart’s licensees (“Associates”). An Associate is a pharmacist-owner of a corporation that is licensed
to operate a retail drug store at a specific location using Shoppers Drug Mart’s trademarks.
16 2014 Annual Report - Financial Review
8. Other Business Matters
Inventory Valuation Prior to the second quarter of 2014, the Company valued its merchandise inventories at the lower of cost and net
realizable value and used the retail method to measure the cost of the majority of its retail store inventories. The implementation of a
perpetual inventory system, combined with visibility to integrated costing information provided by the new IT systems, enables the
Company to estimate the cost of inventory using a more precise system-generated average cost.
As of the end of 2014, the Company completed the conversion of substantially all of its corporate grocery locations and associated
distribution centres to the new IT systems. As a result of the conversion, the Company recognized a $190 million charge to cost of
merchandise inventories sold and a corresponding reduction in inventory, representing the estimate of the difference between the
measurement of the cost of corporate grocery store inventory using a system generated weighted average cost compared to the retail
inventory method and other conversion differences associated with the implementation of a perpetual inventory system.
9. Liquidity and Capital Resources
9.1 Cash Flows
Major Cash Flow Components
For the years ended January 3, 2015 and December 28, 2013
2014
2013
(millions of Canadian dollars except where otherwise indicated)
(53 weeks)
(52 weeks)
$ Change
% Change
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
$
2,569
$
1,491
$
(5,684)
1,845
(1,839)
1,521
1,078
(3,845)
324
72.3 %
(209.1)%
21.3 %
Cash Flows from Operating Activities Cash flows from operating activities were $2,569 million compared to $1,491 million in 2013. The
increase was primarily driven by higher cash earnings, primarily driven by the acquisition of Shoppers Drug Mart and a lower increase in
credit card receivables, partially offset by a higher change in non-cash working capital and the settlement of cross currency swaps in 2013.
The change in non-cash working capital was due to year-over-year increases in inventory and prepaid expenses, partially offset by a lower
year-over-year increase in accounts receivable.
Cash Flows used in Investing Activities Cash flows used in investing activities were $5,684 million compared to $1,839 million in 2013.
The increase in cash flows used in investing activities was primarily due to the acquisition of Shoppers Drug Mart.
Fixed asset purchases in 2014 were $996 million (2013 – $865 million). Approximately 22% (2013 – 14%) of this investment was for new
store developments, expansions and land, approximately 45% (2013 – 45%) was for store conversions and renovations, and
approximately 33% (2013 – 41%) was for infrastructure investments. Intangible asset additions in 2014 were $90 million (2013 – $12
million) and primarily related to the acquisition and development of software and the acquisition of prescription files.
During 2014, 22 corporate and franchise stores were opened and 12 corporate and franchise stores were closed, with an additional two
franchise grocery stores divested as a result of a Consent Agreement with the Competition Bureau related to the acquisition of Shoppers
Drug Mart, resulting in flat square footage growth. Since the acquisition date, Shoppers Drug Mart opened 17 new drug stores and closed
24 drug stores, including 13 drug stores divested in accordance with the Consent Agreement with the Competition Bureau related to the
acquisition of Shoppers Drug Mart. As a result, Shoppers Drug Mart’s net square footage increased by 0.1 million square feet, or 0.6%.
The Company expects to invest approximately $1,200 million in capital investments in 2015. Approximately 22% of these funds are
expected to be dedicated to investing in IT and supply chain projects, 57% will be spent on retail operations, 14% on Choice Properties’
development projects and 7% on other infrastructure projects.
2014 Annual Report - Financial Review 17
Management’s Discussion and Analysis
Capital Investments and Store Activity
As at or for the years ended January 3, 2015 and December 28, 2013
Capital investments (millions of Canadian dollars)
Corporate square footage (in millions)
Franchise square footage (in millions)
Associate-owned drug store square footage (in millions)
Total retail square footage (in millions)
Number of corporate stores(i)
Number of franchise stores
Number of Associate-owned drug stores
Total number of stores
Percentage of corporate real estate owned
Percentage of franchise real estate owned
Percentage of Associate-owned drug store real estate owned
Average store size (square feet)
Corporate
Franchise
Associate-owned drug store
(i)
2014 figure includes 68 Shoppers Drug Mart corporate stores.
2014
(53 weeks)
1,086
$
2013
(52 weeks)
877
$
36.8
15.5
17.7
70.0
615
527
1,302
2,444
72.0%
45.0%
1.0%
59,800
29,400
13,600
37.2
14.7
—
51.9
570
496
—
1,066
72.0%
45.0%
—%
65,300
29,600
—
% Change
23.8 %
(1.1)%
5.4 %
100.0 %
34.9 %
7.9 %
6.3 %
100.0 %
129.3 %
(8.4)%
(0.7)%
100.0 %
Cash Flows from Financing Activities During 2014, cash flows from financing activities were $1,845 million compared to cash flows from
financing activities of $1,521 million in 2013. In 2014, cash flows used in financing activities were primarily driven by net issuance of long
term debt and proceeds from the issuance of common shares, both primarily used to fund the acquisition of Shoppers Drug Mart. These
cash inflows were partially offset by interest and dividend payments, which include one quarter of Shoppers Drug Mart dividends that were
declared prior to closing of the acquisition and paid during the second quarter of 2014. Cash flows from financing activities in 2013 were
primarily driven by net issuance of long term debt and the issuance of Choice Properties’ Trust Units (“Units”), partially offset by repayment
of short term debt, as well as interest and dividend payments.
In 2014, net issuances of long term debt included:
• Drawings on the unsecured term loan facility of $3,500 million and repayments of $2,271 million for a net outstanding amount of
$1,229 million;
The issuance and sale to unrelated parties of $1,500 million of replacement notes related to the Choice Properties Transferor Notes;
The net issuance of $201 million of Guaranteed Investment Certificates (“GICs”);
The issuance of $450 million aggregate principal amount of senior unsecured debentures by Choice Properties;
•
•
•
•
•
•
The repayment of the outstanding $478 million balance of the Shoppers Drug Mart revolving bank credit facility; and
• Drawings on the $500 million senior unsecured committed credit facility (“Choice Properties’ Credit Facility”) of $122 million.
The repayment of the Company’s $350 million, 4.85% MTN upon maturity;
The repayment of the Company’s $100 million, 6.0% MTN upon maturity;
18 2014 Annual Report - Financial Review
In 2013, net issuances of long term debt included:
•
The issuance of $1,600 million aggregate principal amount of senior unsecured notes issued to partially fund the acquisition of the
outstanding common shares of Shoppers Drug Mart;
• Choice Properties’ public offering of $600 million aggregate principal amount of Debentures;
•
The issuance of $400 million of senior and subordinated term notes by the Independent Securitization Trust, partially offset by the
repayment of its $250 million of senior and subordinated term notes;
•
•
•
The net issuance of $125 million of GICs;
The repayment of the Company’s remaining USD $300 million U.S. Private Placement (“USPP”) note; and
The repayment of the Company’s $200 million, 5.40% MTN upon maturity.
Free Cash Flow(2)
For the years ended January 3, 2015 and December 28, 2013
2014
2013(4)
(millions of Canadian dollars except where otherwise indicated)
(53 weeks)
(52 weeks)
$ Change
% Change
Free cash flow(2)
$
977
$
244
$
733
300.4%
For 2014, free cash flow(2) was $977 million compared to $244 million in 2013. The increase in free cash flow(2) for 2014 was primarily due
to higher cash flows from operating activities, partially offset by an increase in capital investments as well as higher interest payments.
9.2 Liquidity and Capital Structure
The Company expects that cash and cash equivalents, short term investments, future operating cash flows and the amounts available to
be drawn against its committed credit facilities will enable the Company to finance its capital investments program and fund its ongoing
business requirements, including working capital, pension plan funding requirements, financial obligations and debt reduction commitments
over the next 12 months.
Adjusted Debt(2) On closing of the acquisition of Shoppers Drug Mart, adjusted debt(2) was $11,060 million. The Company made significant
progress in meeting its debt reduction target by decreasing adjusted debt(2) by $1,065 million since the closing of the acquisition of
Shoppers Drug Mart resulting in an outstanding adjusted debt(2) balance of $9,995 million as at January 3, 2015. The reduction in adjusted
debt(2) since closing included the repayment of a $350 million MTN and a repayment of the unsecured term loan facility (net of the
replacement of all tranches of inter-corporate debt of Choice Properties initially held by Loblaw and sold to unrelated parties).
Under the terms of the unsecured term loan facility, the proceeds from the store divestitures required pursuant to the Consent Agreement
must be used to repay the facility. Of the total amount repaid under the facility in 2014, $57 million related to these proceeds.
Adjusted Debt(2) to Adjusted EBITDA(2)
Adjusted debt(2) to adjusted EBITDA(2)
As at
January 3, 2015
3.1x
As at
December 28, 2013(4)
3.0x
The adjusted debt(2) to adjusted EBITDA(2) ratio increased at the end of 2014 compared to the end of 2013 as a result of the $3,500 million
unsecured term loan facility used to partially fund the cash portion of the Shoppers Drug Mart acquisition, and the assumption of Shoppers
Drug Mart outstanding debt, partially offset by the increase in adjusted EBITDA(2) due to the inclusion of Shoppers Drug Mart adjusted
EBITDA(2) and the debt reduction progress since the acquisition. The Company will continue to target leverage ratios consistent with those
of investment grade ratings.
Unsecured Term Loan Facility In connection with the financing of the acquisition of Shoppers Drug Mart, $3,500 million was obtained
through an unsecured term loan facility bearing interest at a rate equal to the Bankers’ Acceptance rate plus 1.75% maturing March 28,
2019. Loblaw used the proceeds from the sale of $1,500 million of Transferor Notes to third parties, mentioned below, to partially repay the
$3,500 million unsecured term loan facility. The overall consolidated impact was neutral to adjusted debt(2). However, this repayment
combined with the $771 million in unsecured term loan facility repayments during the year reduced the term loan facility balance to
approximately $1,229 million as at January 3, 2015.
2014 Annual Report - Financial Review 19
Management’s Discussion and Analysis
In 2014, the Company reached an agreement to re-price the interest rate on its unsecured term loan facility, obtained to finance the
acquisition of Shoppers Drug Mart, to reduce the rate from Bankers’ Acceptance rate plus 1.75% to Bankers’ Acceptance rate plus 1.45%.
Committed Credit Facility In 2014, effective on the closing of the acquisition of Shoppers Drug Mart, the Company’s $800 million
committed credit facility (“Credit Facility”) was increased to $1,000 million and the term was extended to December 31, 2018, with all other
terms and conditions remaining substantially the same. The Credit Facility contains certain financial covenants with which the Company
was in compliance throughout the year and as at the end of 2014. As at January 3, 2015 and December 28, 2013, there were no amounts
drawn under the Credit Facility.
PC Bank Securities Portfolio In 2014, the Office of the Superintendent of Financial Institutions (“OFSI”) released the final Guideline on
Liquidity Adequacy Requirements (“LARs”). The LARs guideline establishes standards based on the Basel III framework, including a
Liquidity Coverage Ratio (“LCR”) standard effective January 1, 2015 and a Net Stable Funding Ratio standard effective January 1, 2018.
The LCR standard specifies the level of liquid securities that PC Bank is required to maintain to meet its financial liabilities.
Choice Properties Choice Properties expects to obtain its long term financing, for the acquisition of accretive properties, primarily through
the issuance of equity and unsecured debentures.
In 2014, Choice Properties Limited Partnership entered into a Master Trust Indenture agreement with Computershare Trust Company of
Canada to create supplemental indentures in order to facilitate the replacement of all tranches of Transferor Notes held by Loblaw, with
Series 5 to Series 10 notes containing the same principal amounts, interest rates and maturity dates. These replacement notes bear fixed
interest rates between 3.00% and 3.60% and mature during 2016 through 2022. The remaining terms and conditions were substantially
similar to the original notes. Loblaw subsequently sold the replacement notes to unrelated parties and received net proceeds of $1,500
million.
In 2014, Choice Properties issued $250 million principal amount of Series C senior unsecured debentures with a 7-year term and a coupon
rate of 3.50% per annum and $200 million principal amount of Series D senior unsecured debentures with a 10-year term and a coupon
rate of 4.29% per annum, under its Short Form Base Shelf Prospectus. The majority of the proceeds were used to repay $440 million of
Transferor Notes held by Loblaw.
Subsequent to the end of the year, Choice Properties issued $250 million aggregate principal amount of Series E senior unsecured
debentures bearing interest at a rate of 2.30% per annum and maturing in 2020. The net proceeds from the issuance were used by Choice
Properties to repay existing indebtedness and for general business purposes.
In 2013, Choice Properties entered into an agreement for the Choice Properties Credit Facility, provided by a syndicate of lenders. In 2014,
Choice Properties extended the maturity date of the Choice Properties Credit Facility to July 5, 2019. The facility contains certain financial
covenants with which Choice Properties was in compliance throughout the year and as at the end of 2014. As at January 3, 2015, Choice
Properties had drawn $122 million (2013 – nil) under the Choice Properties Credit Facility.
Prospectus Subsequent to the end of 2014, the Company received approval from its Board of Directors (“Board”) to file a Short Form
Base Shelf Prospectus which allows for the issuance of up to $1,500 million of unsecured debentures and/or preference shares subject to
the availability of funding in capital markets.
9.3 Credit Ratings
The Company guaranteed the outstanding MTNs of Shoppers Drug Mart (see Section 7, “Acquisition of Shoppers Drug Mart” of this
MD&A). As a result, Standard & Poor’s changed its credit rating of the outstanding Shoppers Drug Mart MTNs to BBB with “Stable” outlook
and DBRS changed its rating to BBB with a “Stable” trend, in each case consistent with the credit ratings of the Company. In the fourth
quarter of 2014, Dominion Bond Rating Service reaffirmed Loblaw’s credit ratings and trends.
The following table sets out the current credit ratings of the Company:
Credit Ratings (Canadian Standards)
Issuer rating
Medium term notes
Other notes and debentures
Preferred shares
Dominion Bond Rating Service
Credit Rating
BBB
BBB
BBB
Pfd-3
Trend
Stable
Stable
Stable
Stable
Standard & Poor’s
Credit Rating
BBB
BBB
BBB
P-3 (high)
Outlook
Stable
n/a
n/a
n/a
20 2014 Annual Report - Financial Review
The following table sets out the current credit ratings of Choice Properties:
Credit Ratings (Canadian Standards)
Issuer rating
Senior unsecured debentures
9.4 Other Sources of Funding
Dominion Bond Rating Service
Credit Rating
BBB
BBB
Trend
Stable
Stable
Standard & Poor’s
Credit Rating
BBB
BBB
Outlook
Stable
n/a
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 and repurchases credit card receivables with
independent securitization trusts, including Eagle Credit Card Trust® (“Eagle”) and Other Independent Securitization Trusts, from time to
time, depending on PC Bank’s financing requirements. As at January 3, 2015, the amount of credit card receivables securitized to Eagle
was $750 million (December 28, 2013 – $750 million) and $605 million (December 28, 2013 – $605 million) were securitized to Other
Independent Securitization Trusts.
Letters of credit for the benefit of independent securitization trusts with respect to the securitization programs of PC Bank have been
issued by major financial institutions. These standby letters of credit can 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.
As at January 3, 2015, the aggregate gross potential liability under these arrangements for the Other Independent Securitization Trusts
was $61 million (December 28, 2013 – $54 million), which represented 10% (2013 – 9%) of the securitized credit card receivables amount.
As at January 3, 2015, the aggregate gross potential liability under these arrangements for Eagle was $68 million (December 28, 2013 –
nil), which represented 9% (2013 – nil) of the Eagle notes outstanding.
In 2014, PC Bank extended the maturity date for one of its Other Independent Securitization Trust agreements from the third quarter of
2015 to the third quarter of 2016, with all other terms and conditions remaining substantially the same. In addition, PC Bank extended the
maturity date for two of its Other Independent Securitization Trust agreements from the second quarter of 2015 to the second quarter of
2016, with all other terms and conditions remaining substantially the same. Subsequent to the end of the year, PC Bank extended the
maturity date for certain Other Independent Securitization Trust agreements from the second quarter of 2016 to the second quarter of
2017, with all other terms and conditions remaining substantially the same.
The undrawn commitments on facilities available from the Other Independent Securitization Trusts as at January 3, 2015 were $120 million
(December 28, 2013 – $120 million).
Independent Funding Trusts The Company has a revolving committed credit facility that is the source of funding to the independent
funding trusts. As at January 3, 2015, the independent funding trusts had drawn $498 million (December 28, 2013 – $475 million).
In 2014, the Company renewed the revolving committed credit facility and extended the maturity date to May 6, 2017, with terms and
conditions remaining substantially the same.
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% of the principal amount of the loans outstanding. As at January 3, 2015, the Company had provided a letter
of credit in the amount of $50 million (December 28, 2013 – $48 million). 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.
2014 Annual Report - Financial Review 21
Management’s Discussion and Analysis
Guaranteed Investment Certificates The following table summarizes PC Bank’s GICs activity, before commissions, for the years ended
2014 and 2013:
(millions of Canadian dollars)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
$
$
2014
430
261
(57)
634
$
$
2013
303
167
(40)
430
As at January 3, 2015, $29 million in GICs were recorded as long term debt due within one year (December 28, 2013 – $52 million).
Associate Guarantees The Company has arranged for its Shoppers Drug Mart Associates to obtain financing to facilitate their inventory
purchases and fund their working capital requirements by providing guarantees to various Canadian chartered banks that support
Associate loans. As at January 3, 2015, the Company’s maximum obligation in respect of such guarantees was $570 million with an
aggregate amount of $476 million in available lines of credit allocated to the Associates by the various banks. As at January 3, 2015,
Associates had drawn an aggregate amount of $162 million against these available lines of credit. Any amounts drawn by the Associates
are included in bank indebtedness on the Company’s consolidated balance sheet. As recourse in the event that any payments are made
under the guarantees, the Company holds a first-ranking security interest on all assets of Associates, subject to certain prior-ranking
statutory claims.
9.5 Share Capital
Outstanding Share Capital and Capital Securities The following table details the outstanding common shares and preferred shares as
at January 3, 2015:
Common Shares
First Preferred Shares
Second Preferred Shares, Series A(i)
Authorized
Unlimited
1,000,000
12,000,000
Outstanding
412,480,891
nil
9,000,000
(i) The Second Preferred Shares, Series A are presented as capital securities on the consolidated balance sheet.
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 2014 and 2013 were as follows:
(number of common shares)
Issued and outstanding, beginning of year
Issued for settlement of stock options
Issued for acquisition of Shoppers Drug Mart(i)
Issued to controlling shareholder(i)
Purchased for cancellation
Issued and outstanding, end of year
Shares held in trust, beginning of year
Purchased for future settlement of RSUs and PSUs
Released for settlement of RSUs and PSUs
Shares held in trust, end of year
Issued and outstanding, net of shares held in trust, end of year
Weighted average outstanding, net of shares held in trust
(i) See Section 7 “Acquisition of Shoppers Drug Mart Corporation”.
22 2014 Annual Report - Financial Review
2014
282,311,573
3,536,489
119,471,382
10,515,247
(3,353,800)
412,480,891
(1,067,323)
—
512,277
(555,046)
411,925,845
380,540,877
2013
281,680,157
2,131,416
—
—
(1,500,000)
282,311,573
—
(1,103,500)
36,177
(1,067,323)
281,244,250
281,123,452
Dividends 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 time, it is the Company’s intention to increase the
amount of the dividend while retaining appropriate free cash flow to reduce debt and finance future growth.
The following table summarizes the Company’s cash dividends declared for 2014 and 2013:
Dividends declared per share ($):
Common share
Second Preferred Share, Series A(ii)
2014(i)
(53 weeks)
$
$
0.975
1.49
$
$
2013
(52 weeks)
0.940
1.49
(i)
The fourth quarter dividends of $0.245 per share declared on common shares were paid on December 30, 2014. The fourth quarter dividends of $0.37 per share
declared on Second Preferred Shares, Series A were paid on January 31, 2015.
(ii) Dividends on Second Preferred Share, Series A are presented in net interest and other financing charges on the consolidated statements of earnings.
Subsequent to the end of the year, the Board declared a quarterly dividend of $0.245 per common share, payable April 1, 2015, and
declared a quarterly dividend of $0.37 per Second Preferred Share, Series A, payable April 30, 2015. At the time such 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 CRA.
Normal Course Issuer Bid The activity under the Company’s Normal Course Issuer Bid (“NCIB”) is summarized as follows:
(millions of Canadian dollars except where otherwise indicated)
Shares repurchased under the NCIB for cancellation (number of shares)
Cash consideration paid
Premium charged to Retained Earnings
Reduction in common shares
Shares repurchased under the NCIB and held in trusts (number of shares)
Cash consideration paid
Premium charged to Retained Earnings
Reduction in common shares
2014
(53 weeks)
3,353,800
$
178
115
63
—
— $
—
—
2013
(52 weeks)
1,500,000
73
64
9
1,103,500
46
40
6
$
$
In 2014, the Company renewed its NCIB to purchase on the Toronto Stock Exchange (“TSX”) or to enter into equity derivatives to purchase
up to 20,636,596 of the Company’s common shares, representing approximately 5% of the common shares outstanding after taking into
account shares issued in connection with the acquisition of Shoppers Drug Mart. In accordance with the rules and by-laws of the TSX, the
Company may purchase its common shares from time to time at the then market price of such shares.
2014 Annual Report - Financial Review 23
Management’s Discussion and Analysis
9.6 Contractual Obligations
The following illustrates certain of the Company’s significant contractual obligations and discusses other obligations as at January 3, 2015:
Summary of Contractual Obligations
(millions of Canadian dollars)
2015
2016
Payments due by year
2017
2018
2019
Thereafter
Total
Long term debt (including interest payments(i))
$
Operating leases(ii)
Contracts for purchases of investment projects(iii)
Purchase obligations(iv)
Total contractual obligations
911
674
191
124
$
1,445
$
1,278
$ 1,767
$
2,920
$
8,263
$ 16,584
654
1
68
620
—
36
573
—
23
529
—
1
2,818
5,868
—
5
192
257
$
1,900
$
2,168
$
1,934
$ 2,363
$
3,450
$ 11,086
$ 22,901
(i)
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 Consolidated Structured Entities, mortgages and finance lease obligations. Variables interest
payments are based on the forward rates as of January 3, 2015.
(ii) Represents the minimum or base rents payable. Amounts are not offset by any expected sub-lease income.
(iii) These obligations include agreements for the purchase of real property and capital commitments for construction, expansion and renovation of buildings. These
(iv)
agreements may contain conditions that may or may not be satisfied. If the conditions are not satisfied, it is possible the Company will no longer have the obligation to
proceed with the underlying transactions.
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 post-employment and other long term employee benefit plan
liabilities, deferred vendor allowances, deferred income tax liabilities, Trust Unit Liability and provisions, including insurance liabilities.
These long term liabilities have not been included above as the timing and amount of future payments are uncertain.
10. Financial Derivative Instruments
The following describes the financial derivative instruments that were terminated in 2013:
Cross Currency Swaps In 2013, Glenhuron unwound its cross currency swaps and received a net cash settlement of $76 million,
representing the cumulative fair value gain on the swaps. The swaps were offset by the effect of translation gains and losses relating to
USD cash and cash equivalents, short term investments and security deposits.
In 2013, the Company settled its USD $300 million USPP cross currency swaps in conjunction with the settlement of the underlying USD
$300 million USPP debt.
The following table summarizes the 2013 impact to operating income resulting from changes in the fair value of the cross currency swaps
and the underlying exposures:
(millions of Canadian dollars)
Fair value loss (gain) related to swaps(i)
Translation (gain) loss related to the underlying exposures
Glenhuron
Cross Currency
Swaps
December 28, 2013
(52 weeks)
37
(33)
$
USPP
Cross Currency
Swaps
December 28, 2013
(52 weeks)
(11)
14
$
(i)
The impact to USPP cross currency swaps excludes the $7 million gain on derecognized derivative instruments, before income taxes, reclassified from accumulated
other comprehensive income.
Interest Rate Swaps During 2013, the Company settled its notional $150 million in interest rate swaps and recognized a $5 million fair
value gain in operating income related to these swaps.
24 2014 Annual Report - Financial Review
Trust Unit Liability As at January 3, 2015, the fair value of the Trust Unit Liability of $722 million (December 28, 2013 – $688 million) was
recorded on the consolidated balance sheet. In 2014, the Company recorded a fair value loss of $17 million (2013 – $27 million), in net
interest expense and other financing charges related to Choice Properties’ Units.
11. 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 $586 million (December 28, 2013 – $470 million).
As at January 3, 2015, the Company had agreements to cash collateralize certain of these letters of credit up to an amount of $141 million
(December 28, 2013 – $136 million), of which $7 million (December 28, 2013 – $102 million) was deposited with major financial institutions
and classified as security deposits.
Guarantees In addition to the letters of credit mentioned above, the Company has entered into various guarantee arrangements including
obligations to indemnify third parties in connection with leases, business dispositions and other transactions in the normal course of
business, some of which are discussed in section 9 “Liquidity and Capital Resources.”
In addition, the Company has provided a guarantee on behalf of PC Bank to MasterCard® International Incorporated (“MasterCard®”) for
accepting PC Bank as a card member and licensee of MasterCard®. As at January 3, 2015, the guarantee on behalf of PC Bank to
MasterCard® was USD $170 million (December 28, 2013 – USD $170 million).
12. Quarterly Results of Operations
12.1 Results by Quarter
Under an accounting convention common in the retail industry, the Company follows a 52-week reporting cycle which periodically
necessitates a fiscal year of 53 weeks. Fiscal year 2014 is 53 weeks and fiscal year 2013 is 52 weeks. When a fiscal year such as 2014
contains 53 weeks, the fourth quarter is 13 weeks in duration. The 52-week reporting cycle is divided into four quarters of 12 weeks each
except for the third quarter, which is 16 weeks in duration.
The following is a summary of selected consolidated financial information derived from the Company’s unaudited interim period condensed
consolidated financial statements for each of the eight most recently completed quarters:
Summary of Consolidated Quarterly Results
(millions of Canadian dollars except
where otherwise indicated)
Revenue
Net earnings (loss)
Net earnings (loss) per
common share:
Basic ($)
Diluted ($)
Average national food
price inflation (as
measured by CPI)
Retail same-store
sales(1), (6) growth
First
Quarter
(12 weeks)
Second
Quarter
(12 weeks)
Third
Quarter
(16 weeks)
Fourth
Quarter
(13 weeks)
Total
(audited)
(53 weeks)
First
Quarter
(12 weeks)
Second
Quarter
(12 weeks)
Third
Quarter
(16 weeks)
Fourth
Quarter
(12 weeks)
2014
2013(4)
Total
(audited)
(52 weeks)
$ 7,292
$ 10,307
$ 13,599
$ 11,413
$ 42,611
$ 7,202
$ 7,520
$ 10,009
$ 7,640
$ 32,371
$
120
$
(456)
$
142
$
247
$
53
$
186
$
177
$
150
$
114
$
627
$
$
0.43
0.42
$ (1.13)
$ (1.13)
$
$
0.34
0.34
$
$
0.60
0.59
$
$
0.14
0.14
$
$
0.66
0.65
$
$
0.63
0.62
$
$
0.53
0.53
$
$
0.41
0.40
$
$
2.23
2.21
1.2%
2.5%
2.8%
3.5%
2.5%
1.4%
1.5%
0.9%
0.9%
1.1%
0.9%
1.8%
2.6%
2.4%
2.0%
2.8%
1.1%
0.4%
0.6%
1.1%
CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in Loblaw stores.
2014 Annual Report - Financial Review 25
Management’s Discussion and Analysis
Over the past eight quarters, net retail square footage increased by 0.4 million square feet to 51.9 million square feet, excluding Shoppers
Drug Mart.
Fluctuations in quarterly net earnings reflect the underlying operations of the Company and are impacted by seasonality, which is greatest
in the fourth quarter and least in the first quarter, the timing of holidays and were impacted by the items set out in Section 20 “Non-GAAP
Financial Measures” of the MD&A as well as the following significant items:
•
• Equity-based compensation, net of equity forwards.
Transition of certain stores to more cost effective and efficient operating terms under collective agreements; and
12.2 Fourth Quarter Results
The following is a summary of selected consolidated unaudited financial information for the fourth quarter of 2014:
For the periods ended January 3, 2015 and December 28, 2013
2014
2013(4)
(millions of Canadian dollars except where otherwise indicated)
(13 weeks)
(12 weeks)
$ Change
% Change
Revenue
Revenue excluding Shoppers Drug Mart
EBITDA(2)
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Adjusted EBITDA(2) excluding Shoppers Drug Mart
Adjusted EBITDA margin(2) excluding Shoppers Drug Mart
Operating income
Adjusted operating income(2)
Adjusted operating margin(2)
Adjusted operating income(2) excluding Shoppers Drug Mart
Adjusted operating margin(2) excluding Shoppers Drug Mart
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Net earnings
Adjusted net earnings(2)
Basic net earnings per common share ($)
Adjusted basic net earnings per common share(2) ($)
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Dividends declared per common share ($)
Dividends declared on Second Preferred Share, Series A ($)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
11,413
8,359
900
950
8.3%
598
7.2%
507
681
6.0%
391
4.7%
169
144
247
396
0.60
0.96
952
(363)
(575)
0.245
0.37
$
$
$
$
$
$
$
$
7,640
7,640
492
489
6.4%
489
6.4%
296
293
3.8%
293
3.8%
141
92
114
161
0.41
0.57
738
471
(387)
3,773
719
408
461
109
211
388
98
28
52
133
235
0.19
0.39
214
(834)
(188)
0.240
$
0.005
0.37
—
49.4 %
9.4 %
82.9 %
94.3 %
22.3 %
71.3 %
132.4 %
33.4 %
19.9 %
56.5 %
116.7 %
146.0 %
46.3 %
68.4 %
29.0 %
(177.1)%
(48.6)%
2.1 %
— %
Revenue Revenue of $11,413 million in the fourth quarter of 2014 increased by $3,773 million compared to the fourth quarter of 2013,
primarily due to Shoppers Drug Mart and the impact of the 13th week of the fourth quarter of 2014. Revenue in the 13th week of the fourth
quarter of 2014 was $789 million ($574 million excluding Shoppers Drug Mart). Excluding the impact of Shoppers Drug Mart, consolidated
revenue increased by $719 million, or 9.4%. Excluding the impact of Shoppers Drug Mart and the 13th week of the fourth quarter of 2014,
consolidated revenue increased by $145 million, or 1.9%.
26 2014 Annual Report - Financial Review
EBITDA(2) EBITDA(2) of $900 million in the fourth quarter of 2014 increased by $408 million compared to the fourth quarter of 2013,
primarily driven by Shoppers Drug Mart. The increase in EBITDA(2) was positively impacted by adjustments of $50 million including
restructuring of franchise fees ($40 million) and restructuring costs incurred in 2013 ($32 million), that were not incurred in 2014. The
increases were partially offset by the net loss on divestitures related to the acquisition of Shoppers Drug Mart ($7 million), the recognition
of the fair value increment on the acquired Shoppers Drug Mart inventory sold ($69 million), increased fixed asset and other related
impairments ($43 million), the fair value adjustment on fuel and foreign currency contracts ($4 million) and the fair value adjustment on
Shoppers Drug Mart’s equity-based compensation liability ($2 million).
After excluding these adjustments, adjusted EBITDA(2) of $950 million increased by $461 million compared to the fourth quarter of 2013.
The increase included $352 million of adjusted EBITDA(2) contributed by Shoppers Drug Mart, with the remainder of the increase of $109
million primarily driven by the Retail segment. The increase was positively impacted by net synergies of $49 million and the 13th week of
the fourth quarter of 2014 of $71 million. Adjusted EBITDA margin(2) was 8.3% for the fourth quarter of 2014 compared to 6.4% in the same
quarter in 2013. Excluding the impact of Shoppers Drug Mart, adjusted EBITDA(2) increased by $109 million, or 22.3%, compared to the
fourth quarter of 2013 and adjusted EBITDA margin(2) was 7.2% compared to 6.4% in the same quarter in 2013.
Synergies During the fourth quarter of 2014, the Company realized approximately $49 million of net synergies associated with the
acquisition of Shoppers Drug Mart, primarily in cost of goods sold.
Operating Income Operating income of $507 million in the fourth quarter of 2014 increased by $211 million compared to the fourth quarter
of 2013, primarily driven by Shoppers Drug Mart. Operating income was negatively impacted by the net adjustments related to EBITDA(2)
noted above of $50 million and by the amortization of intangible assets of $124 million related to the acquisition of Shoppers Drug Mart.
After excluding these impacts to operating income, adjusted operating income(2) of $681 million increased by $388 million compared to the
fourth quarter of 2013, including $290 million of adjusted operating income(2) contributed by Shoppers Drug Mart. Adjusted operating
margin(2) was 6.0% compared to 3.8% in the fourth quarter of 2013. Excluding the impact of Shoppers Drug Mart, adjusted operating
income(2) increased by $98 million and was positively impacted by the increase in adjusted EBITDA(2) noted above of $109 million, partially
offset by an increase in depreciation and amortization(2) of $11 million.
Net Interest Expense and Other Financing Charges Net interest expense and other financing charges of $169 million in the fourth
quarter of 2014 increased by $28 million compared to the fourth quarter of 2013, including a lower fair value adjustment related to the Trust
Unit Liability for the change in the fair value of Choice Properties’ Units held by unitholders other than the Company, Shoppers Drug Mart
acquisition-related costs incurred in the fourth quarter of 2013 and certain other adjustments as set out in Section 20 “Non-GAAP Financial
Measures”.
After excluding these impacts to net interest expense and other financing charges, adjusted net interest expense and other financing
charges(2) of $144 million increased by $52 million, primarily driven by higher interest on long term debt, primarily as a result of debt
incurred to finance the acquisition of Shoppers Drug Mart.
Income Taxes Income tax expense for the fourth quarter of 2014 was $91 million and the effective tax rate was 26.9%. Income tax
expense for the fourth quarter of 2013 was $41 million and the effective tax rate was 26.5%. The marginal increase in the effective tax rate
was primarily attributable to an increase in certain non-deductible amounts. The adjusted income tax expense(2) for the fourth quarter was
$141 million and the adjusted income tax rate(2) was 26.3%. The adjusted income tax expense(2) for the fourth quarter of 2013 was $40
million and the adjusted income tax rate(2) was 19.9%, which reflects an increase in certain non-taxable amounts.
Net Earnings Net earnings of $247 million in the fourth quarter of 2014 increased by $133 million compared to the fourth quarter of 2013,
primarily driven by the increase in operating income, partially offset by the increase in net interest expense and other financing charges
and by the increase in the income tax expense, described above.
Adjusted net earnings(2) of $396 million increased by $235 million compared to the fourth quarter of 2013, primarily driven by the increase
in adjusted operating income(2), primarily as a result of Shoppers Drug Mart, partially offset by the increase in adjusted net interest expense
and other financing charges(2) and the increase in the adjusted income tax expense(2), described above.
Basic Net Earnings Per Common Share Basic net earnings per common share were $0.60 compared to $0.41 in the fourth quarter of
2013. Basic net earnings per common share included the negative impacts of amortization of intangible assets ($0.22 per share), the
recognition of a portion of the Shoppers Drug Mart acquisition-related fair value adjustments for inventory sold ($0.12 per share), the
divestiture of certain stores related to the acquisition of Shoppers Drug Mart ($0.02 per share), certain other adjustments ($0.07 per share),
partially offset by restructuring of franchise fees ($0.07 per share).
2014 Annual Report - Financial Review 27
Management’s Discussion and Analysis
Adjusted basic net earnings per common share(2) were $0.96 in the fourth quarter of 2014 compared to $0.57 in the fourth quarter of 2013.
This increase was primarily due to the increase in adjusted net earnings(2) as described above, partially offset by the dilutive effect of the
119.5 million common shares issued as partial consideration for the acquisition of Shoppers Drug Mart.
Capital Investments In the fourth quarter of 2014, the Company invested $400 million (2013 – $304 million) in fixed asset purchases and
intangible asset additions.
Free Cash Flow(2) For the fourth quarter of 2014, free cash flow(2) was $439 million compared to $336 million in the fourth quarter of 2013.
The increase in free cash flow(2) in the fourth quarter of 2014 was primarily due to higher cash flows from operating activities, partially offset
by an increase in capital investments as well as higher interest payments.
Adjusted Debt(2) On closing of the acquisition of Shoppers Drug Mart, adjusted debt(2) was $11,060 million. The Company made significant
progress in meeting its debt reduction target by decreasing adjusted debt(2) by $421 million in the fourth quarter of 2014 and by $1,065
million since the closing of the acquisition of Shoppers Drug Mart resulting in an outstanding adjusted debt(2) balance of $9,995 million as
at January 3, 2015. The reduction in adjusted debt(2) since closing included the repayment of a $350 million MTN and a repayment of the
unsecured term loan facility (net of the replacement of all tranches of inter-corporate debt of Choice Properties initially held by Loblaw and
sold to unrelated parties).
Cash Flows from Operating Activities Cash flows from operating activities for the fourth quarter of 2014 were $952 million compared to
$738 million in 2013. The increase was primarily driven by higher cash earnings, primarily driven by the acquisition of Shoppers Drug Mart,
partially offset by a higher change in non-cash working capital and the settlement of cross currency swaps in the fourth quarter of 2013.
The change in non-cash working capital was due to a quarter over quarter lower increase in accounts payable and decrease in prepaid
expenses, partially offset by a decrease in inventory.
Cash Flows (used in) from Investing Activities Cash flows used in investing activities for the fourth quarter of 2014 were $363 million
compared to cash flows from investing activities of $471 million in 2013. The decrease in cash flows from investing activities was primarily
due to a reduction in short term investments and the release of funds from security deposits in the fourth quarter of 2013 for the repayment
of Eagle notes.
Cash Flows used in Financing Activities Cash flows used in financing activities for the fourth quarter of 2014 were $575 million
compared to $387 million in 2013. In the fourth quarter of 2014, cash flows used in financing activities were primarily driven by net
repayment of long term debt, change in bank indebtedness acquired with the Shoppers Drug Mart acquisition, as well as interest and
dividend payments. In the same period in 2013, cash flows used in financing activities were primarily due to the repayment of short term
debt and interest payments.
Retail Segment Fourth Quarter Results of Operations
For the periods ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Sales
Gross profit
Adjusted gross profit(2)
EBITDA(2)
Adjusted EBITDA(2)
Operating income
Adjusted operating income(2)
2014
(13 weeks)
2013(4)
(12 weeks)
$
11,164
$
7,419
$
2,925
2,994
847
897
459
633
1,625
1,625
443
440
252
249
For the periods ended January 3, 2015 and December 28, 2013
Same-store sales(1), (6) growth.
Adjusted gross profit %(2)
Adjusted EBITDA margin(2)
Adjusted operating margin(2)
2014
(13 weeks)
2.4%
26.8%
8.0%
5.7%
$ Change
% Change
3,745
1,300
1,369
404
457
207
384
50.5%
80.0%
84.2%
91.2%
103.9%
82.1%
154.2%
2013(4)
(12 weeks)
0.6%
21.9%
5.9%
3.4%
For a discussion of Shoppers Drug Mart results, please see Addendum A on page 29 of the Company’s fourth quarter of 2014 News
Release.
28 2014 Annual Report - Financial Review
Sales
For the periods ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Retail segment sales
Shoppers Drug Mart
Excluding Shoppers Drug Mart
2014
(13 weeks)
11,164
3,054
8,110
$
$
$
$
2013(4)
(12 weeks)
7,419
7,419
$
$
$ Change
% Change
3,745
50.5%
691
9.3%
• Retail segment sales of $11,164 million in the fourth quarter of 2014 increased by $3,745 million compared to the fourth quarter of
2013, primarily due to Shoppers Drug Mart and the impact of the 13th week of the fourth quarter of 2014. Retail segment sales in the
13th week of the fourth quarter of 2014 were $789 million ($574 million excluding Shoppers Drug Mart). Excluding the impact of
Shoppers Drug Mart and the 13th week of the fourth quarter of 2014, Retail segment sales increased by $117 million, or 1.6%, due to
the following factors:
Same-store sales(1, 6) growth, for core grocery, was 3.3% for the quarter, excluding gas bar (0.5%) and the negative impact of a
change in distribution model by a tobacco supplier (0.4%). On a comparable basis, same-store sales(1, 6) growth was 2.4%
(2013 – 0.6%);
On a comparable week basis:
Sales growth in food was strong, primarily driven by inflation;
Sales in drugstore were flat, with increases in health and beauty, offset by declines in pharmacy;
Sales in gas bar declined, primarily driven by a decline in gas prices;
Sales in general merchandise, excluding apparel, were flat; and
Sales in retail apparel were flat, while U.S. wholesale apparel sales declined significantly;
The Company’s average quarterly internal food price index was slightly higher than (2013 – lower than) the average quarterly
national food price inflation of 3.5% (2013 – 0.9%) as measured by CPI. CPI does not necessarily reflect the effect of inflation
on the specific mix of goods sold in Loblaw stores; and
22 corporate and franchise stores were opened and 12 corporate and franchise stores were closed in the last 12 months, with
an additional two franchise grocery stores divested as a result of a Consent Agreement with the Competition Bureau related to
the acquisition of Shoppers Drug Mart, resulting in flat square footage growth.
• Since the acquisition date, Shoppers Drug Mart opened 17 new drug stores and closed 24 drug stores, including 13 drug stores
divested in accordance with the Consent Agreement with the Competition Bureau related to the acquisition of Shoppers Drug Mart. As
a result, net square footage increased by 0.1 million square feet, or 0.6%.
Gross Profit
For the periods ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Retail gross profit
Adjustments(2)
Adjusted Retail gross profit(2)
Adjusted gross profit %(2)
Shoppers Drug Mart
Excluding Shoppers Drug Mart
Adjusted gross profit %(2)
2014
(13 weeks)
2013(4)
(12 weeks)
$
$
$
$
$
$
$
2,925
69
2,994
26.8%
1,221
1,773
21.9%
$
$
1,625
—
1,625
21.9%
1,625
$
21.9%
$ Change
% Change
1,300
1,369
80.0%
84.2%
148
9.1%
•
In the fourth quarter of 2014, gross profit of $2,925 million increased by $1,300 million compared to 2013, primarily due to Shoppers
Drug Mart and was negatively impacted by the recognition of the fair value increment on the acquired Shoppers Drug Mart inventory
sold ($69 million).
After excluding this adjustment(2), adjusted gross profit(2) of $2,994 million increased by $1,369 million, including $1,221 million of
adjusted gross profit(2) contributed by Shoppers Drug Mart. Adjusted gross profit percentage(2) was 26.8% compared to 21.9% in the
fourth quarter of 2013.
• Excluding Shoppers Drug Mart, adjusted gross profit percentage(2) was 21.9%, flat compared to 2013. While flat, adjusted gross profit
percentage(2) was positively impacted by synergies related to the acquisition and reductions in transportation costs, but negatively
impacted by increased shrink. Excluding Shoppers Drug Mart, adjusted gross profit(2) increased by $148 million, or 9.1%, compared to
2013, driven by higher sales, including the impact of the 13th week in the fourth quarter of 2014.
2014 Annual Report - Financial Review 29
Management’s Discussion and Analysis
EBITDA(2)
For the periods ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
EBITDA(2)
Adjustments(2)
Adjusted Retail EBITDA(2)
Adjusted EBITDA margin(2)
Shoppers Drug Mart
Excluding Shoppers Drug Mart
Adjusted EBITDA margin(2)
2014
(13 weeks)
2013(4)
(12 weeks)
$
$
$
$
$
$
$
847
50
897
8.0%
352
545
6.7%
$
$
443
(3)
440
5.9%
440
$
5.9%
$ Change
% Change
404
457
91.2%
103.9%
105
23.9%
• EBITDA(2) of $847 million in the fourth quarter of 2014 increased by $404 million compared to the fourth quarter of 2013, primarily
driven by Shoppers Drug Mart. EBITDA(2) was negatively impacted by adjustments of $50 million as set out in Section 20 “Non-GAAP
Financial Measures”. The significant adjustments during the fourth quarter of 2014 included restructuring of franchise fees, the
recognition of the fair value increment on the acquired Shoppers Drug Mart inventory sold and net divestitures loss related to the
acquisition of Shoppers Drug Mart.
After excluding these adjustments(2), adjusted EBITDA(2) of $897 million increased by $457 million compared to the fourth quarter of
2013, including $352 million of adjusted EBITDA(2) contributed by Shoppers Drug Mart.
Excluding the impact of Shoppers Drug Mart, adjusted EBITDA(2) of $545 million increased by $105 million, driven by the increase in
adjusted gross profit(2) of $148 million, as described above, partially offset by the increase in SG&A of $43 million. The increase in
SG&A was driven by the 13th week in the fourth quarter of 2014. Excluding the 13th week of the fourth quarter of 2014, SG&A
decreased. This decrease was primarily driven by supply chain efficiencies, changes in the fair value of the Company's franchise
investments and lower administrative and other operating costs, partially offset by higher foreign exchange losses, higher investments
in the Company's franchise business and synergy related costs.
•
For the fourth quarter of 2014, adjusted EBITDA margin(2) was 8.0% compared to 5.9% in 2013, primarily driven by Shoppers Drug
Mart. Excluding the impact of Shoppers Drug Mart, adjusted EBITDA margin(2) was 6.7% compared to 5.9% in 2013.
Operating Income
For the periods ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Retail operating income
Adjustments(2)
Adjusted Retail operating income(2)
Adjusted operating margin(2)
Shoppers Drug Mart
Excluding Shoppers Drug Mart
Adjusted operating margin(2)
2014
(13 weeks)
2013(4)
(12 weeks)
$
$
$
$
$
$
$
459
174
633
5.7%
290
343
4.2%
$
$
252
(3)
249
3.4%
249
$
3.4%
$ Change
% Change
207
384
82.1%
154.2%
94
37.8%
• Operating income of $459 million in the fourth quarter of 2014 increased by $207 million compared to the fourth quarter of 2013,
primarily driven by the acquisition-related accounting adjustments of Shoppers Drug Mart. Operating income was negatively
impacted by the amortization of intangible assets related to the acquisition of $124 million and the net adjustments related to
EBITDA(2) of $50 million, as noted above.
After excluding the adjustments to operating income set out in Section 20 “Non-GAAP Financial Measures”, adjusted operating
income(2) of $633 million increased by $384 million compared to the fourth quarter of 2013, including $290 million of adjusted
operating income(2) contributed by Shoppers Drug Mart. Excluding the impact of Shoppers Drug Mart, adjusted operating income(2)
increased by $94 million, or 37.8%, driven by the increase in adjusted EBITDA(2) described above, partially offset by the increase in
retail depreciation and amortization(2) of $11 million.
•
For the fourth quarter of 2014, adjusted operating margin(2) was 5.7%compared to 3.4% in 2013, primarily driven by the inclusion of
Shoppers Drug Mart. Excluding the impact of Shoppers Drug Mart, adjusted operating margin(2) was 4.2% compared to 3.4% in 2013.
30 2014 Annual Report - Financial Review
Financial Services Segment Fourth Quarter Results of Operations(7)
For the periods ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
2014
(13 weeks)
2013
(12 weeks)
$ Change
% Change
Revenue
Operating income
Earnings before income taxes
$
231
$
204
$
49
35
43
29
27
6
6
13.2%
14.0%
20.7%
(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
Annualized credit loss rate on average quarterly gross credit
card receivables
$
As at
As at
January 3, 2015
December 28, 2013
$ Change
% Change
$
190
92
7
8.1%
3.6%
14.9%
$
2,535
2,630
54
13.7%
4.4%
2,345
2,538
47
13.6%
4.2%
• Revenue for the fourth quarter of 2014 of $231 million increased by $27 million, or 13.2%,compared to the fourth quarter of 2013. This
increase was primarily driven by higher interest and interchange income as a result of growth in the credit card receivables portfolio.
• Operating income of $49 million increased by $6 million and earnings before income taxes of $35 million in the fourth quarter of 2014
increased by $6 million, respectively, compared to the fourth quarter of 2013. These increases were primarily driven by higher revenue
described above, partially offset by higher costs associated with the Financial Services loyalty program, higher credit losses from
increased credit card receivable balances and higher operating costs as a result of an increase in the active customer base.
• As at January 3, 2015, credit card receivables were $2,630 million, an increase of $92 million compared to December 28, 2013. This
increase was primarily driven by a growth in the active customer base as a result of continued investments in customer acquisitions
and marketing initiatives. As at January 3, 2015, the allowance for credit card receivables was $54 million, an increase of $7 million
compared to December 28, 2013, primarily due to the growth in the credit card receivables portfolio.
• Subsequent to the end of 2014:
The Company, through PC Bank, extended the maturity date for certain Other Independent Securitization Trust agreements
from the second quarter of 2016 to the second quarter of 2017, with all other terms and conditions remaining substantially
the same; and
PC Bank entered into USD foreign exchange forward agreements, which mature by December 2015. The notional amounts
of the contracts total USD $27 million.
2014 Annual Report - Financial Review 31
Management’s Discussion and Analysis
Choice Properties Segment Fourth Quarter Results of Operations(5)
For the periods ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars)
Revenue
Operating income
Adjusted operating income(2)
Net interest expense and other financing charges
Adjusted funds from operations(2)
$
2014
(13 weeks)
2013(4)
(12 weeks)
$ Change
% Change
$
175
223
223
137
74
$
165
186
186
193
65
10
37
37
(56)
9
6.1 %
19.9 %
19.9 %
(29.0)%
13.8 %
• Revenue for the fourth quarter of 2014 of $175 million increased by 10 million, or 6.1%,compared to 2013, and included $157 million
(2013 – $148 million) generated from tenants within the Retail segment. The increase was primarily driven by revenue from properties
acquired since the IPO.
• Operating income and adjusted operating income(2) of $223 million in the fourth quarter of 2014 increased by $37 million compared to
the fourth quarter of 2013 and included a $29 million year-over-year favourable fair value adjustment on investment properties. The
fair value adjustment on investment properties is eliminated on consolidation.
• Adjusted funds from operations(2) of $74 million in the fourth quarter of 2014 increased by $9 million compared to the fourth quarter of
2013. The increase was mainly attributable to an increase in net property income and the decrease in sustaining property and leasing
capital expenditures, normalized, partially offset by increased general and administrative expenses and interest and other financing
charges.
•
In the fourth quarter of 2014:
The Company sold 16 properties to Choice Properties for an aggregate price of approximately $210 million. Consideration
for the properties included 10,698,143 Class B Limited Partnership units, $98 million in cash and the assumption of a $4
million mortgage by Choice Properties. In addition, Choice Properties acquired a 40% interest in a limited partnership, which
acquired land from the Company, intended for development into a mixed-used property, for approximately $6 million; and
Choice Properties acquired a 70% interest in a limited partnership, which holds land intended for future retail development,
for approximately $18 million.
• Subsequent to the end of 2014:
The Company sold a warehouse to Choice Properties for approximately $81 million. The warehouse is fully occupied by the
Company as the single tenant with a 20-year initial lease term with six five-year renewal options;
The Company sold a parcel of land to Choice Properties for approximately $12 million. Consideration for the acquisition
included 265,665 Class B Limited Partnership units, $7 million in cash and the assumption of a $2 million obligation. The
Class B Limited Partnership units issued to the Company as partial consideration for this transaction did not impact the
Company’s effective ownership percentage; and
Choice Properties issued $250 million aggregate principal amount of Series E senior unsecured debentures bearing interest
at a rate of 2.30% per annum and maturing in 2020. The net proceeds from the issuance were used by Choice Properties to
repay existing indebtedness and for general business purposes.
• As of January 3, 2015, the Company’s ownership interest in Choice Properties was 82.9%.
32 2014 Annual Report - Financial Review
13. 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 President, as the Chief
Executive Officer (“CEO”), and the Chief Financial Officer (“CFO”) 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 January 3, 2015.
14. Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial reports for external purposes in accordance with
IFRS.
As required by National Instrument 52-109 (Certification of Disclosure in Issuers’ Annual and Interim Filings), the President, as CEO, and
the CFO 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), 2013. Based on that evaluation, they have concluded that the design and operation of the Company’s internal
controls over financial reporting were effective as at January 3, 2015.
In designing such controls, it should be recognized that due to inherent limitations, any controls, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives and may not prevent or detect misstatements.
Projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Additionally, management is
required to use judgment in evaluating controls and procedures.
Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal controls over financial
reporting in the fourth quarter of 2014 that materially affected, or are reasonably likely to materially affect the Company’s internal control
over financial reporting, except as noted below:
In accordance with the provisions of National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings,
management, including the CEO and CFO, have limited the scope of their design of the Company’s disclosure controls and procedures
and internal control over financial reporting to exclude controls, policies and procedures of Shoppers Drug Mart. Loblaw acquired the net
assets of Shoppers Drug Mart and its subsidiaries on March 28, 2014.
Shoppers Drug Mart’s contribution to the Company’s consolidated financial statements for the year ended January 3, 2015 was
approximately 20 percent of consolidated revenues and approximately 35 percent of consolidated adjusted operating income. Additionally,
Shoppers Drug Mart’s current assets and current liabilities were approximately 30 percent and 25 percent of consolidated current assets
and liabilities, respectively, and its long term assets and long term liabilities were approximately 55 percent and 20 percent of consolidated
long term assets and long term liabilities, respectively.
The scope limitation is primarily based on the time required to assess Shoppers Drug Mart’s disclosure controls and procedures (DC&P)
and internal controls over financial reporting in a manner consistent with the Company’s other operations. The assessment on the design
effectiveness of DC&P and internal controls over financial reporting is on track for completion by the second quarter of 2015 and the
assessment of operating effectiveness will be completed by fourth quarter of 2015.
Further details related to the acquisition of Shoppers Drug Mart are disclosed in Section 7 “Acquisition of Shoppers Drug Mart Corporation”
of this MD&A and in the notes to the Company’s annual audited consolidated financial statements for the fiscal year ended January 3,
2015.
15. Enterprise Risks and Risk Management
The Company is committed to maintaining 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.
2014 Annual Report - Financial Review 33
Management’s Discussion and Analysis
Risks are not eliminated through the ERM program. Risks are identified and managed within understood risk tolerances. The ERM
program is designed to:
•
•
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;
promote a culture of awareness of risk management and compliance within the Company;
•
•
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.
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 may be 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 key 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 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.
Operating and financial risks which are reasonably likely to affect the Company’s future performance 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, controls and contractual arrangements. However, there can be no assurance that the associated risks will
be mitigated or will not materialize or that events or circumstances will not occur that could adversely affect the Company’s financial
condition or performance. The risks included below should be read in conjunction with the risks included in the Company’s AIF (for the year
ended January 3, 2015).
15.1 Operating Risks and Risk Management
The following is a summary of the Company’s key operating risks which are discussed in detail below:
Acquisition of Shoppers Drug Mart Corporation
Competitive Environment
IT Systems Implementations
Pharmacy Industry Regulations
Inventory Management
Information Integrity and Reliability
Regulatory and Tax
Legal Proceedings
Vendor Management and Third Party Service Providers
Franchisee Independence and Relationships
Availability, Access and Security of Information Technology
Associate-owned Drug Store Network and Relationships with
Associates
Product Safety and Public Health
Labour Relations
Alternative Arrangements for Sourcing Generic Drug Products
Multi-Employer Pension Plans
Discussion of Operating Risks and Risk Management Strategies
Acquisition of Shoppers Drug Mart Corporation On March 28, 2014, the Company acquired all of the outstanding shares of Shoppers
Drug Mart. The realization of the anticipated strategic benefits associated with this acquisition will depend on several factors and will
require significant effort on the part of management of the Company. Failure to realize the anticipated strategic benefits or operational,
competitive and cost synergies associated with this acquisition could adversely affect the reputation, operations or financial performance of
the Company.
34 2014 Annual Report - Financial Review
IT Systems Implementations The Company continues to undertake a major upgrade of its IT infrastructure. Completing the IT systems
deployment will require continued focus and investment. Failure to successfully migrate from legacy systems to the new IT systems or a
significant disruption in the Company’s current IT systems during the implementation of the new systems could result in a lack of accurate
data to enable management to effectively manage day-to-day operations of the business or achieve its operational objectives, causing
significant disruptions to the business and potential financial losses. Failure to successfully adopt the new IT systems or to implement
appropriate processes to support them could result in inefficiencies and duplication in processes, which could in turn adversely affect the
reputation, operations and financial performance of the Company. Failure to realize the anticipated strategic benefits including revenue
growth, anticipated cost savings or operating efficiencies associated with the new IT systems could adversely affect the reputation,
operations or financial performance of the Company.
Pharmacy Industry Regulation With the acquisition of Shoppers Drug Mart, the Company is reliant on prescription drug sales for a more
significant portion of its sales and profits. Prescription drugs and their sales are subject to numerous federal, provincial, territorial and local
laws and regulations. Changes to these laws and regulations, or non-compliance with these laws and regulations, could adversely affect
the reputation, operations or financial performance of the Company.
Federal and provincial laws and regulations that establish public drug plans typically regulate prescription drug coverage, patient eligibility,
pharmacy reimbursement, drug product eligibility and drug pricing and may also regulate manufacturer allowance funding that is provided
to or received by pharmacy or pharmacy suppliers. With respect to pharmacy reimbursement, such laws and regulations typically regulate
the allowable drug cost of a prescription drug product, the permitted mark-up on a prescription drug product and the professional or
dispensing fees that may be charged on prescription drug sales to patients eligible under the public drug plan. With respect to drug product
eligibility, such laws and regulations typically regulate the requirements for listing the manufacturer’s products as a benefit or partial benefit
under the applicable governmental drug plan, drug pricing and, in the case of generic prescription drug products, the requirements for
designating the product as interchangeable with a branded prescription drug product. In addition, other federal, provincial, territorial and
local laws and regulations govern the approval, packaging, labeling, sale, marketing, advertising, handling, storage, distribution, dispensing
and disposal of prescription drugs.
Sales of prescription drugs, pharmacy reimbursement and drug prices may be affected by changes to the health care industry, including
legislative or other changes that impact patient eligibility, drug product eligibility, the allowable cost of a prescription drug product, the mark-
up permitted on a prescription drug product, the amount of professional or dispensing fees paid by third-party payers or the provision or
receipt of manufacturer allowances by pharmacy and pharmacy suppliers.
The majority of prescription drug sales are reimbursed or paid by third-party payers, such as governments, insurers or employers. These
third-party payers have pursued and continue to pursue measures to manage the costs of their drug plans. Each provincial jurisdiction has
implemented legislative and/or other measures directed towards managing pharmacy service costs and controlling increasing drug costs
incurred by public drug plans and private payers which impact pharmacy reimbursement levels and the availability of manufacturer
allowances. Legislative measures to control drug costs include lowering of generic drug pricing, restricting or prohibiting the provision of
manufacturer allowances and placing limitations on private label prescription drug products. Other measures that have been implemented
by certain government payers include restricting the number of interchangeable prescription drug products which are eligible for
reimbursement under provincial drug plans. Additionally, the Council of the Federation, an institution created by the provincial Premiers in
2003 to collaborate on intergovernmental relations, continues its work regarding cost reduction initiatives for pharmaceutical products and
services.
Legislation in certain provincial jurisdictions establish listing requirements that ensure that the selling price for a prescription drug product
will not be higher than any selling price established by the manufacturer for the same prescription drug product under other provincial drug
insurance programs. In some provinces, elements of the laws and regulations that impact pharmacy reimbursement and manufacturer
allowances for sales to the public drug plans are extended by legislation to sales in the private sector. Also, private third-party payers (such
as corporate employers and their insurers) are looking or may look to benefit from any measures implemented by government payers to
reduce prescription drug costs for public plans by attempting to extend these measures to prescription drug plans they own or manage.
Accordingly, changes to pharmacy reimbursement and manufacturer allowances for a public drug plan could also impact pharmacy
reimbursement and manufacturer allowances for private sector sales. In addition, private third-party payers could reduce pharmacy
reimbursement for prescription drugs provided to their members or could elect to reimburse members only for products included on closed
formularies or available from preferred providers.
2014 Annual Report - Financial Review 35
Management’s Discussion and Analysis
Ongoing changes impacting pharmacy reimbursement programs, prescription drug pricing and manufacturer allowance funding, legislative
or otherwise, are expected to continue to put downward pressure on prescription drug sales. These changes may have a material adverse
impact on the Company’s business, sales and profitability. In addition, the Company could incur significant costs in the course of complying
with any changes in the regulatory regime affecting prescription drugs. Non-compliance with any such existing or proposed laws or
regulations, particularly those that provide for the licensing and conduct of wholesalers, the licensing and conduct of pharmacists, the
regulation and ownership of pharmacies, the advertising of pharmacies and prescription services, the provision of information concerning
prescription drug products, the pricing of prescription drugs and restrictions on manufacturer allowance funding, could result in audits, civil
or regulatory proceedings, fines, penalties, injunctions, recalls or seizures, any of which could adversely affect the reputation, operations
and financial performance of the Company.
Inventory Management The Company is subject to risks associated with managing its inventory. Failure to successfully manage such
risks could result in shortages of inventory, or excess or obsolete inventory which cannot be sold profitably or increases in levels of
inventory shrink. Any of these outcomes could negatively affect the financial results of the Company. The Company is continuing to
convert its grocery stores to a new IT system, and in doing so is gaining increased visibility to integrated costing and sales information at
store level. With this increased visibility, the Company will have more precise information to better identify and assess risks relating to
inventory, however this will not eliminate such risks.
Information Integrity and Reliability Management depends on relevant and reliable information for decision making purposes, including
key performance indicators and financial reporting. A lack of relevant and reliable information necessary to manage the business could
preclude the Company from optimizing its overall performance. Any significant loss of data or failure to maintain reliable data could
adversely affect the reputation, operations or financial performance of the Company.
Availability, Access and Security of Information Technology The Company is reliant on the continuous and uninterrupted operations of
its IT systems. Point of sale availability, 24/7 user access and security of all IT systems, including distribution of prescription drugs and
reimbursement by third-party payors, are critical elements to the operations of the Company. Protection against cyber security incidents
and cloud security, and security of all of the Company’s IT systems are critical to the operations of the Company. Any IT failure pertaining to
availability, access or system security could result in disruption for the customer and could adversely affect the reputation, operations or
financial performance of the Company.
Product Safety and Public Health The Company is subject to risks associated with product safety and defects, 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, health and wellness, including pharmaceuticals, or general merchandise products. The occurrence of such
events or incidents could result in harm to customers, negative publicity or damage to the Company’s brands and could lead to unforeseen
liabilities from legal claims or otherwise. 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 adversely affect the reputation, operations or financial performance of the Company.
Labour Relations The Company’s workforce is comprised of both unionized and non-unionized colleagues. With respect to those
colleagues that are covered by collective agreements, there can be no assurance as to the outcome of any labour negotiations or the
timing of their completion. Failure to renegotiate collective agreements could result in strikes, work stoppages or business interruptions,
and if any of these events were to occur, they could adversely affect the reputation, operations or financial performance of the Company. If
non-unionized colleagues become unionized, the terms of the resulting collective agreements would have implications for the affected
operations and those implications could be material.
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 adversely affected.
The Company’s competitors include supermarket and retail drug store operators, as well as mass merchandisers, warehouse clubs, on-line
retailers, mail order prescription drug distributors, limited assortment stores, discount stores, convenience stores and specialty stores.
Many of these competitors now offer a selection of food, drug store 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 adversely
affect the financial performance of the Company.
36 2014 Annual Report - Financial Review
Regulatory and Tax Changes to any of the laws, rules, regulations or policies (collectively, “laws”) applicable to the Company’s business,
including laws affecting all types of taxes, and laws affecting the production, processing, preparation, distribution, packaging and labelling
of products, could have an adverse impact on the financial or operational performance of the Company. In the course of complying with
such changes, the Company could incur significant costs. Changing laws or interpretations of such laws or enhanced enforcement of
existing laws could restrict the Company’s operations or profitability and thereby threaten the Company’s competitive position and ability to
efficiently conduct business. Failure by the Company to comply with applicable laws and orders could subject the Company to civil or
regulatory actions, investigations or proceedings, including fines, assessments, injunctions, recalls or seizures, which in turn could
adversely affect the reputation, operations or financial performance of the Company.
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
or interpretations of current legislation could change, any of which events could lead to reassessments. These reassessments could have
a material impact on the Company.
In 2012, the Company received indication from the CRA that the CRA intends to proceed with reassessments of the tax treatment of the
Company’s wholly owned subsidiary, Glenhuron. The CRA’s position is that certain income earned by Glenhuron in Barbados in respect of
the 2000 to 2010 taxation years should be treated, and taxed, as income in Canada.
Based on the proposal letter from the CRA, if the CRA and the relevant provincial tax authorities were to prevail in all of these reassessments,
which the Company believes would be unlikely, the estimated total tax and interest for the 2000 to 2010 taxation years would be approximately
$440 million, which would increase as interest accrues. However, the Company is in discussions with the CRA about the amount of taxes in
dispute. The Company believes it is likely that the CRA and the relevant provincial tax authorities will issue reassessments for 2011 to 2013
on the same or similar basis. No amount for any reassessments has been provided for in the Company’s consolidated financial statements.
Subsequent to the end of 2014, the Company received a letter from the CRA stating that the CRA will be proceeding with the
reassessments. The Company expects to receive reassessments from the CRA and the relevant provincial tax authorities sometime in the
coming months. The Company strongly disagrees with the CRA’s position and intends to vigorously defend its position including appealing
the reassessments as and when they are received. The Company will make cash payments or provide other forms of security on a portion
of the taxes in dispute. If the Company is successful in defending its position, in whole or in part, some or all of the cash payments or
security would be returned to the Company. If the CRA were to ultimately prevail with respect to the proposed reassessment or if the CRA
were to successfully pursue other reassessments, the outcome could have a negative material impact on the Company’s reputation,
results of operations and financial position of the Company in the year(s) of resolution.
As part of the review undertaken by the Competition Bureau of the acquisition by the Company of Shoppers Drug Mart, it expressed
concerns about practices that the Company has in place with certain suppliers. In connection with this review, the Competition Bureau
issued requests for documents from 12 suppliers of the Company. The Company has and will continue to cooperate with the Competition
Bureau in its review of these practices. At this stage of the review, it is not possible to predict when the review will be completed or the
outcome of such review. If the Competition Bureau is not satisfied that the Company’s practices satisfy the Competition Bureau’s objectives
of maintaining competitive markets, then the Competition Bureau may pursue remedies that could have a negative material impact on the
Company’s reputation, results of operations and financial position of the Company.
PC Bank operates in a highly regulated environment and a failure by it to comply, understand, acknowledge and effectively respond to applicable
regulators could result in monetary penalties, regulatory intervention and reputational damage.
Choice Properties is currently classified as a “unit trust” and a “mutual fund trust” under the Income Tax Act. It also qualifies for the Real
Estate Investment Trust Exception under the Income Tax Act and as such is not subject to specified investment flow-through rules. If
Choice Properties ceases to qualify for these and other classifications and exceptions, the taxation of Choice Properties and unitholders,
including Loblaw, could be materially adversely different in certain respects, which in turn could materially adversely affect the trading price
of the Units.
Legal Proceedings As part of its normal course of operations, the Company is involved in and potentially subject to a variety of legal
claims and proceedings. With the acquisition of Shoppers Drug Mart, the Company is the subject of a class action brought by two licensed
Associate-owners. The claim seeks damages in the amount of $500 million based on alleged breaches of the Associate Agreement with
Shoppers Drug Mart. At this stage of the proceeding any potential liability and the quantum of any loss cannot be determined. Since
litigation is inherently uncertain, the outcome of this class action, and all other litigation proceedings and claims remains uncertain.
However, based on information currently available, these matters, individually and in the aggregate, are not expected to have a material
impact on the Company. In the event that management’s assessment of materiality of current claims and proceedings proves inaccurate or
litigation that is material arises in the future, there may be a material adverse effect on the Company’s operations, revenues or financial
performance.
2014 Annual Report - Financial Review 37
Management’s Discussion and Analysis
Vendor Management and Third Party Service Providers The Company relies on vendors, including offshore vendors in both mature and
developing markets, to provide the Company with goods and services. Offshore sourcing increases certain risks to the Company, including
risks associated with food safety and general merchandise product defects, non-compliance with ethical and safe business practices and
inadequate supply of products. The Company has no direct influence over how vendors are managed. Negative events affecting vendors
or inefficient, ineffective or incomplete vendor management strategies, policies and/or procedures could adversely impact the Company’s
reputation and impair the Company’s ability to meet customer needs or control costs and quality, which could adversely 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 for 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. Disruption in services from third party suppliers could interrupt
the delivery of merchandise to stores, thereby adversely affecting the operations or 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®. A significant disruption in the services provided by the chartered bank or by third party service
providers would adversely 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.
Franchisee Independence and Relationships A substantial portion of the Company’s revenues and earnings comes from amounts paid
by franchisees of its grocery store operations. 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. 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.
Associate-owned Drug Store Network and Relationships with Associates The success of the Company and the reputation of its
brands are closely tied to the performance of the Shoppers Drug Mart Associate-owned drug stores. Accordingly, the Company relies on
Associates to successfully operate, manage and execute retail programs and strategies at their respective drug store locations. Associates
are independent business operators and the success of the operations and financial performance of their respective drug stores may be
beyond the Company’s control. In addition, Associates operate in the same regulatory framework as described above under “Franchisee
Independence and Relationships”. Disruptions to the Company’s relationships with Shoppers Drug Mart Associate-owned drug stores or
changes in legislation could negatively affect revenue from Associates, which in turn, could adversely affect the reputation, operations or
financial performance of the Company.
Alternative Arrangements for Sourcing Generic Drug Products As the utilization rate of generic prescription drugs increases, the
Company is pursuing alternative sourcing and procurement models for generic prescription drug products. As part of this alternative
sourcing and procurement initiative, the Company has entered into contracts for the fabrication of private label generic prescription drug
products. These alternative sourcing and procurement models contain certain additional risks beyond those associated with the Company’s
conventional procurement strategy. The most significant of these additional risks are product liability and intellectual property infringement.
Product liability claims may arise in the event that the use of the Company’s products cause, or are alleged to have caused, any injury to
consumers. Intellectual property infringement claims may arise in the event that the Company’s products infringe or violate, or are alleged
to infringe or violate, the patents or other intellectual property rights of any third parties, including the brand manufacturer. Both product
liability and intellectual property infringement claims could be costly to defend and could result in significant liabilities and monetary
damages. Failure to successfully implement these alternative sourcing and procurement models could adversely affect the reputation,
operations or financial performance of the Company.
38 2014 Annual Report - Financial Review
In addition, the market for generic prescription drug products and eligibility for reimbursement from governmental and other third-party
payers will depend on the extent to which the products are designated as interchangeable with the branded products and are included as a
benefit on the public drug plans in Canada. These interchangeability designations and benefit listings are highly regulated and will be
dependent on the products and the procurement model meeting the regulatory requirements. If the demand for generic products is
negatively affected by fewer designations, it could adversely affect the reputation, operations or 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
27% (2013 – 39%) of employees of the Company, and of its franchisees and Associates, participate in these plans. These plans are
administered by independent boards 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 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 in turn could adversely affect the financial performance
of the Company.
The Company, together with its franchisees, is the largest participating employer in the Canadian Commercial Workers Industry Pension
Plan (“CCWIPP”), with approximately 52,000 (2013 – 53,000) employees as members. In 2014, the Company contributed approximately
$54 million (2013 – $54 million) to CCWIPP. The recent actuarial reports filed for CCWIPP indicate that the Plan is underfunded with the
accrued benefit obligations exceeding the value of CCWIPP assets. Any 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 adversely affect the
reputation of the Company.
15.2 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 adversely affect the financial performance of the Company.
The following is a list of the Company’s financial risks which are discussed in detail below:
Level of Indebtedness
Liquidity
Choice Properties’ Capital Availability
Commodity Prices
Discussion of Financial Risks
Foreign Currency Exchange Rates
Interest Rates
Credit
Choice Properties Unit Price
Level of Indebtedness To fund the cash portion of the acquisition of Shoppers Drug Mart, the Company utilized excess cash and
significantly increased its indebtedness. Although the Company has made progress in reducing its indebtedness subsequent to the
acquisition of Shoppers Drug Mart, there can be no assurance that the Company will generate sufficient free cash flow to significantly
further reduce indebtedness and maintain adequate cash reserves. A failure to achieve these objectives could adversely affect the
Company’s credit ratings and its cost of funding.
If the Company, PC Bank or Choice Properties’ financial performance and condition deteriorate or downgrades in the Company’s or Choice
Properties’ current credit ratings occur, their ability to obtain funding from external sources could be restricted, which could adversely affect
the financial performance of the Company.
Liquidity Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash or its equivalents in a cost effective
manner to fund its obligations as they come due. The Company is exposed to liquidity risk through, among other areas, PC Bank and its
credit card business, which requires a reliable source of funding for its credit card business. PC Bank relies on its securitization programs
and the acceptance of GIC deposits to fund the receivables of its credit cards. The Company would experience liquidity risks if it fails to
maintain appropriate levels of cash and short term investments, it is unable to access sources of funding or it fails to appropriately diversify
sources of funding. If any of these events were to occur, they would adversely affect the financial performance of the Company.
Liquidity risk is mitigated by maintaining appropriate levels of cash and cash equivalents and short term investments, actively monitoring
market conditions, and by diversifying sources of funding, including the Company’s committed credit facility, and maintaining a well-
diversified maturity profile of debt and capital obligations.
2014 Annual Report - Financial Review 39
Management’s Discussion and Analysis
Choice Properties’ Capital Availability The real estate industry is highly capital intensive. Choice Properties requires access to capital to
maintain its properties, refinance its indebtedness as well as to fund its growth strategy and certain capital expenditures from time to time.
Although Choice Properties expects to have access to its credit facility, there can be no assurance that it will otherwise have sufficient
capital or access to capital on acceptable terms for future property acquisitions, refinancing indebtedness, financing or refinancing
properties, funding operating expenses or for other purposes. Further, in certain circumstances, Choice Properties may not be able to
borrow funds due to certain limitations. Failure by Choice Properties to access required capital could have a material adverse effect on the
Company’s ability to pay its financial or other obligations. An inability to access capital could also impact Choice Properties’ ability to make
distributions which could have a material adverse effect on the trading price of Units which would adversely affect the financial
performance of the Company.
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 effect of changing commodity prices on the price of consumer products. Rising commodity prices could adversely
affect the financial performance of the Company and the impact could be material. To manage a portion of this exposure, the Company
uses purchase commitments for a portion of its need for certain consumer products that are commodities based. The Company enters into
exchange traded futures contracts and forward contracts to minimize cost volatility related to energy.
Foreign Currency Exchange Rates The Company is exposed to foreign currency exchange rate variability, primarily on its USD
denominated based purchases in trade payables and other liabilities. A depreciating Canadian dollar relative to the USD will have a
negative impact on year-over-year changes in reported operating income and net earnings, while an appreciating Canadian dollar relative
to the USD will have the opposite impact.
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. An increase in interest rates could adversely
affect the financial performance of the Company. The Company manages interest rate risk by monitoring the 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.
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, pension assets held in the Company’s defined benefit plans and
accounts receivable, including amounts due from independent franchisees, government, prescription sales and third-party drug plans,
independent accounts and amounts owed from vendors. Failure to manage credit risk could adversely affect the financial performance of
the Company.
The risk related to derivative instruments, cash and cash equivalents, short term investments and security deposits is reduced by policies
and guidelines that require that the Company enters 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.
Choice Properties mitigates the risk of credit loss relating to rent receivables by evaluating the creditworthiness of new tenants, obtaining
security deposits wherever permitted by legislation, ensuring its tenant mix is diversified and by limiting its exposure to any one tenant
except Loblaw. Choice Properties establishes an allowance for doubtful accounts that represents the estimated losses with respect to rents
receivable. The allowance is determined on a tenant-by-tenant basis based on the specific factors related to the tenant.
PC Bank manages its credit card receivable risk by employing stringent credit scoring techniques, actively monitoring the credit card
portfolio and reviewing techniques and technology that can improve the effectiveness of the collection process. In addition, these
receivables are dispersed among a large, diversified group of credit card customers.
Franchise loans receivable and accounts receivable, including amounts due from independent franchisees, governments, prescription
sales covered by third-party drug plans, independent accounts and amounts owed from vendors, are actively monitored on an ongoing
basis and settled on a frequent basis in accordance with the terms specified in the applicable agreements.
Choice Properties Unit Price The Company is exposed to market price risk as a result of Choice Properties’ Units that are held by
unitholders other than the Company. These Units are presented as a liability on the Company’s consolidated balance sheets as they are
redeemable for cash at the option of the holder. The liability is recorded at fair value at each reporting period based on the market price of
Units. The change in the fair value of the liability negatively impacts net earnings when the Unit price increases and positively impacts net
earnings when the Unit price declines.
40 2014 Annual Report - Financial Review
16. Related Party Transactions
The Company’s controlling shareholder is Weston, which owns, directly and indirectly, 187,815,136 of the Company’s common shares,
representing approximately 46% of the Company’s 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
80,746,099 of Weston’s common shares, representing approximately 63% of Weston’s outstanding common shares. Mr. Weston also
beneficially owns 5,096,189 of the Company’s common shares, representing approximately 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)
Included in Cost of Merchandise Inventories Sold
Inventory purchases from a subsidiary of Weston
Inventory purchases from a related party(i)
Operating Income
Cost sharing agreements with Parent(ii)
Net administrative services provided by Parent(iii)
Choice Properties distributions to Parent(iv)
Lease of office space from a subsidiary of Wittington
Transaction Value
2014
(53 weeks)
2013
(52 weeks)
$
$
615
24
20
18
14
3
601
22
9
13
6
3
$
$
(i) 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 January 3, 2015 was $3 million (December 28, 2013 – $4 million).
(ii) Weston and the Company have each entered into certain contracts with third parties for administrative and corporate services, including telecommunication services and
IT 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.
(iii) 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.
(iv) Weston is a unitholder of Choice Properties and is entitled to receive distributions declared by the trust. Unitholders who elect to participate in the Choice Properties
Distribution Reinvestment Plan ("DRIP") receive a further distribution, payable in Units, equal in value to 3% of each cash distribution. In 2014, Choice Properties issued
1,306,847 Units (2013 – 107,810 Units) to Weston under its DRIP at a weighted average price of $10.30 (2013 – $10.05) per Unit.
The net balances due to Weston are comprised as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
As at
January 3, 2015
7
$
As at
December 28, 2013
27
$
Joint Venture In 2014, a joint venture, formed between Choice Properties and Wittington, completed the acquisition of property from
Loblaw. The joint venture intends to develop the acquired site into a mixed-used property, anchored by a Loblaw food store. As at January
3, 2015, the joint venture did not have any operating activity. Choice Properties uses the equity method of accounting to record its 40%
interest in the joint venture, which is included in other assets.
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 the notes to the consolidated financial statements.
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. In 2014, these elections and
accompanying agreements did not have a material impact on the Company.
2014 Annual Report - Financial Review 41
Management’s Discussion and Analysis
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
Equity-based compensation
Total compensation
17. Critical Accounting Estimates and Judgments
2014
(53 weeks)
9
3
12
$
$
2013
(52 weeks)
8
6
14
$
$
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 Annual Report, 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.
17.1 Consolidation
Judgments Made in Relation to Accounting Policies Applied The Company uses judgment in determining the entities that it controls
and therefore consolidates. The Company controls an entity when the Company has the existing rights that give it the current ability to
direct the activities that significantly affect the entities’ returns. The Company consolidates all of its wholly owned subsidiaries. Judgment is
applied in determining whether the Company controls the entities in which it does not have ownership rights or does not have full
ownership rights. Most often, judgment involves reviewing contractual rights to determine if rights are participating (giving power over the
entity) or protective rights (protecting the Company’s interest without giving it power).
17.2 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 shrink, future retail prices, the impact of vendor rebates on cost, seasonality and costs necessary to sell
the inventory.
17.3 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 location is a separate CGU for purposes of fixed asset impairment testing. For the purpose of goodwill and
indefinite life 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.
42 2014 Annual Report - Financial Review
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.
17.4 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 the Company’s 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. 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.
17.5 Loyalty Programs
Key Sources of Estimation The Company defers revenue equal to the fair value of the award points earned by loyalty program members
at the time of award. The Company determines fair value using such estimates as breakage (the amount of points that will never be
redeemed) and the estimated retail value per point on redemption. The trends in breakage are reviewed on an ongoing basis and the
estimated retail value per point is adjusted based on expected future activity.
17.6 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 the 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 by the tax authorities.
18. Accounting Standards
18.1 Accounting Standards Implemented in 2014 and Changes to Significant Accounting Policies
The Company implemented the amendments to International Accounting Standards (“IAS”) 32, “Financial Instruments: Presentation” and
International Financial Reporting Interpretations Committee (“IFRIC”) 21, “Levies” retrospectively in 2014. There was no significant impact
on the Company’s annual audited consolidated financial statements as a result of the implementation of these standards.
Vendor Allowances The timing of recognition of vendor allowances requires judgment to determine the point at which the Company has
earned the allowance. In conjunction with the acquisition of Shoppers Drug Mart, management reviewed the timing of recognition of certain
vendor allowances and has determined that it would be appropriate to align the policies of both companies. The Company has
implemented the change retrospectively in 2014, as follows:
Consolidated Statement of Earnings and Comprehensive Income
Increase (Decrease)
(millions of Canadian dollars except where otherwise indicated)
Cost of Merchandise Inventories Sold
Operating Income
Earnings Before Income Taxes
Income taxes
Net Earnings
Total Comprehensive Income
Net Earnings per Common Share ($)
Basic
Diluted
$
$
$
December 28, 2013
(12 weeks)
18
$
(18) $
(18) $
(5)
(13) $
(13) $
$
$
December 28, 2013
(52 weeks)
5
(5)
(5)
(2)
(3)
(3)
$
$
(0.04) $
(0.05) $
(0.01)
(0.01)
2014 Annual Report - Financial Review 43
Management’s Discussion and Analysis
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Accounts receivable
Inventories
Deferred Income Tax Assets
Total Equity Attributable to Shareholders of the Company
18.2 Future Accounting Standards
As at
December 28, 2013
(39)
$
13
8
(18)
$
As at
December 30, 2012
(32)
$
11
6
(15)
$
In May 2014, the International Accounting Standards Board (“IASB”) issued IFRS 15, “Revenue from Contracts with Customers” (“IFRS
15”). The new standard provides a comprehensive framework for the recognition, measurement and disclosure of revenue from contracts
with customers, excluding contracts within the scope of the accounting standards on leases, insurance contracts and financial instruments.
IFRS 15 becomes effective for annual periods beginning on or after January 1, 2017, and is to be applied retrospectively. Early adoption is
permitted. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
In July 2014, the IASB issued IFRS 9, “Financial Instruments”, replacing IAS 39, “Financial Instruments: Recognition and Measurement.”
The standard had three main phases: classification and measurement, impairment, and general hedging. The standard becomes effective
for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively with the exception of the general hedging
phase which is applied prospectively. Early adoption is permitted. The Company is currently assessing the impact of the new standard on
its consolidated financial statements.
In December 2014, the IASB issued amendments to IAS 1, “Presentation of Financial Statements” (“IAS 1 amendments”). The IAS 1
amendments provide guidance on the application of judgment in the preparation of financial statements and disclosures. The IAS 1
amendments are effective for annual periods beginning on or after January 1, 2016. Early adoption is permitted. The Company is currently
assessing the impact of the IAS 1 amendments on its consolidated financial statements.
19. Outlook
Loblaw’s strategic framework is focused on delivering the best in food, best in health and beauty, operational excellence and growth. This
strategic framework is supported by a financial strategy of maintaining a stable trading environment which targets positive same-store
sales(3), (6) and stable gross margin; surfacing efficiencies; delivering synergies as a result of its acquisition of Shoppers Drug Mart; and
deleveraging the balance sheet.
On a full year comparative basis, reflecting 2014 financial results for Loblaw and Shoppers Drug Mart, in 2015 the Company expects to:
• Maintain positive same-store sales(3), (6) and stable gross margin (excluding synergies) in its Retail segment;
• Achieve net synergies as a result of the acquisition of Shoppers Drug Mart approaching $200 million;
• Continue to drive net efficiencies across the core grocery business by achieving reductions in supply chain, administrative functions
and IT, while still investing in key areas, like eCommerce;
• Grow adjusted operating income in its core grocery business, excluding synergies;
• Experience a decline in adjusted operating income(2) in its core pharmacy business, excluding synergies, as a result of investments in
key projects and other factors;
• Grow consolidated adjusted net earnings(2) (including synergies) relative to 2014, with adjusted basic net earnings per common share(2)
being moderated due to a significantly increased weighted average share count (approximately 412 million in 2015 versus
approximately 380 million in 2014);
Target a capital expenditure program of approximately $1,200 million; and
•
• Remain on track with its deleveraging target, expecting to meet its target in the first quarter of 2016.
The Company’s expectations for 2015 also include the following:
• Competitive intensity expected to remain high, but relatively stable as industry square footage growth in supermarket-type
merchandise moderates; and
• Continued pressure in our pharmacy business from the ongoing impact of healthcare reform.
44 2014 Annual Report - Financial Review
20. Non-GAAP Financial Measures
The Company uses the following non-GAAP financial measures: EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted operating
income, adjusted operating margin, adjusted net earnings, adjusted basic net earnings per common share, free cash flow, adjusted debt
and adjusted debt to adjusted EBITDA and with respect to Choice Properties: adjusted funds from operations. In 2014, the Company has
introduced five new financial measures: adjusted net interest expense and other financing charges, adjusted income taxes, adjusted
income tax rate, Retail segment adjusted gross profit and Retail segment adjusted gross profit percentage. 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.
Management uses these and other non-GAAP financial measures to exclude the impact of certain expenses and income that must be
recognized under GAAP when analyzing consolidated and segment underlying operating performance, as the excluded items are not
necessarily reflective of the Company’s underlying operating performance and make comparisons of underlying financial performance
between periods difficult. From time to time, the Company may exclude additional items if it believes doing so would result in a more
effective analysis of underlying operating performance. The exclusion of certain items does not imply that they are non-recurring.
The Company enters into exchange traded futures contracts and forward contracts to minimize cost volatility relating to fuel prices and
foreign exchange rates. Pursuant to the Company’s derivative instruments accounting policy, changes in the fair value of these instruments
are recorded in operating income. With significant fluctuations in fuel and foreign exchange rates, commencing in the fourth quarter of
2014 the Company has excluded the fair value adjustment on fuel and foreign currency contracts in calculating adjusted operating income.
In 2014, the Company restructured its fee arrangements with the franchisees of certain franchise banners. As a result of the restructuring,
the Company re-evaluated the recoverable amount of the franchise-related financial instruments and recorded a reduction in previously
recorded impairment.
The Company has adjusted for Choice Properties' general and administrative costs incurred in the first half of 2014. As Choice Properties'
operations commenced on July 5, 2013, there were no comparative amounts.
With the acquisition of Shoppers Drug Mart, the Company converted certain Shoppers Drug Mart cash-settled equity-based compensation
awards to cash-settled awards based on the Company’s common shares. The Company is exposed to market price fluctuations in its
common share price as these awards are settled in cash and the associated liability is recorded at fair value at each reporting date based
on the market price of the Company’s common shares. The Company excludes the fair value adjustment when calculating adjusted
operating income. On November 10, 2014, the Company amended these compensation awards to be settled in shares and is no longer
exposed to market price fluctuations.
As of the second quarter of 2014, the Company no longer excludes net interest expense incurred in connection with the financing related
to the acquisition of Shoppers Drug Mart when analyzing consolidated underlying operating performance. These amounts were excluded
from adjusted net earnings and adjusted basic net earnings per common share in periods prior to the closing of the acquisition of Shoppers
Drug Mart.
Beginning in 2014, the Company no longer excludes the impact of equity-settled equity-based compensation when analyzing consolidated
and segment underlying operating performance. As a result, prior year adjusted EBITDA and adjusted EBITDA margin, adjusted operating
income and adjusted operating margin, and adjusted net earnings and adjusted basic net earnings per common share were restated to
conform with the current year’s presentation.
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 should not be construed as an alternative to other financial measures
determined in accordance with GAAP.
2014 Annual Report - Financial Review 45
Management’s Discussion and Analysis
Retail Segment Adjusted Gross Profit and Retail Segment Adjusted Gross Profit Percentage The following table reconciles Retail
segment adjusted gross profit to gross profit measures reported in the consolidated statements of earnings for the periods ended
January 3, 2015 and December 28, 2013. The Company believes that Retail segment adjusted gross profit is useful in assessing the Retail
segment’s underlying operating performance and in making decisions regarding the ongoing operations of the business.
Retail segment adjusted gross profit percentage is calculated as adjusted Retail segment gross profit divided by Retail segment sales.
(millions of Canadian dollars)
Retail segment gross profit
Add impact of the following:
Recognition of fair value increment on inventory sold
Charge related to inventory measurement and other
conversion differences
Retail segment adjusted gross profit
$
$
2014
(13 weeks)
2013(4)
(12 weeks)
2014
(53 weeks)
2013(4)
(52 weeks)
2,925
$
1,625
$
9,734
$
6,961
69
—
—
—
798
190
—
—
2,994
$
1,625
$
10,722
$
6,961
Recognition of fair value increment on inventory sold In connection with the acquisition of Shoppers Drug Mart, acquired assets and
liabilities were recorded on the Company’s consolidated balance sheets at their fair value. This resulted in a fair value adjustment to
Shoppers Drug Mart inventory on the date of acquisition representing the difference between inventory cost and its fair value. This
difference was recognized in cost of sales as the inventory was sold, with a resulting negative impact on gross profit. In the fourth quarter
of 2014, $69 million (2013 – nil) and year-to-date $798 million (2013 – nil), was recognized in gross profit and operating income,
representing the full amount of the fair value adjustment.
Charge related to inventory measurement and other conversion differences for the Company’s corporate grocery stores As of the
end of 2014, the Company had completed the conversion of substantially all of its corporate grocery locations and associated distribution
centres to the new IT systems. The implementation of a perpetual inventory system, combined with visibility to integrated costing
information provided by the new IT systems, enabled the Company to estimate the cost of inventory using a more precise system-
generated average cost. The impact was estimated to be a $190 million (2013 – nil) decrease in the value of the inventory, which was
recognized in gross profit and operating income in 2014. The Company is undertaking the conversion of its remaining grocery locations
during 2015 and additional impacts may result.
46 2014 Annual Report - Financial Review
(millions of Canadian dollars)
Net earnings
Add impact of the following:
Net interest expense and other
financing charges
Income taxes
Operating income
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Operating Income and Adjusted Operating Margin The following
tables reconcile earnings before income taxes, net interest expense and other financing charges and depreciation and amortization
(“EBITDA”), adjusted EBITDA and adjusted operating income to operating income, which is reconciled to GAAP net earnings measures
reported in the consolidated statements of earnings for the periods ended January 3, 2015 and December 28, 2013. The Company
believes that adjusted EBITDA is useful in assessing the performance of its ongoing operations and its ability to generate cash flows to
fund its cash requirements, including the Company’s capital investments program. The Company also believes that adjusted operating
income is useful in assessing the Company’s underlying operating performance and in making decisions regarding the ongoing operations
of the business.
Adjusted EBITDA margin is calculated as adjusted EBITDA divided by revenue. Adjusted operating margin is calculated as adjusted
operating income divided by revenue.
Financial
Services(7)
Choice
Properties(5)
Retail
Consolidation
and
Eliminations Consolidated
Retail
Financial
Services
Choice
Properties(5)
Consolidation
and
Eliminations Consolidated
2014
(13 weeks)
2013(4)
(12 weeks)
$
247
$
114
$ 459 $
49 $
223 $
(224) $
Depreciation and amortization
388
2
—
3
EBITDA
$ 847 $
51 $
223 $
(221) $
169
91
507
393
900
$ 252 $
43 $
186 $
(185) $
191
2
—
3
$ 443 $
45 $
186 $
(182) $
Operating income
$ 459 $
49 $
223 $
(224) $
507
$ 252 $
43 $
186 $
(185) $
Add (deduct) impact of the following:
Amortization of intangible assets
acquired with Shoppers Drug
Mart
Recognition of fair value
increment on inventory sold
Restructuring of franchise fees
Shoppers Drug Mart acquisition-
related costs and net
divestitures loss
Fair value adjustment on fuel and
foreign currency contracts
Fair value adjustment on
Shoppers Drug Mart’s equity-
based compensation liability
Fixed asset and other related
impairments, net of recoveries
Restructuring costs
124
69
(40)
14
4
2
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Adjusted operating income
$ 633 $
49 $
223 $
(224) $
Depreciation and amortization
388
Less: Amortization of intangible
assets acquired with Shoppers
Drug Mart
(124)
2
—
—
—
3
—
—
—
—
7
—
—
(42)
32
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 249 $
43 $
186 $
(185) $
124
69
(40)
14
4
2
1
—
681
393
191
(124)
—
2
—
—
—
3
—
Adjusted EBITDA
$ 897 $
51 $
223 $
(221) $
950
$ 440 $
45 $
186 $
(182) $
141
41
296
196
492
296
—
—
—
7
—
—
(42)
32
293
196
—
489
2014 Annual Report - Financial Review 47
Management’s Discussion and Analysis
(millions of Canadian dollars)
Net earnings
Add impact of the following:
Net interest expense and other
financing charges
Income taxes
Operating income
2014
(53 weeks)
2013(4)
(52 weeks)
Financial
Services(7)
Choice
Properties(5)
Retail
Consolidation
and
Eliminations Consolidated
Retail
Financial
Services
Choice
Properties(5),(i)
Consolidation
and
Eliminations Consolidated
$
53
$
627
Operating income
$ 497 $
164 $
568 $
(567) $
662
$1,180 $
142 $
370 $
(371) $
1,321
$ 497 $
164 $
568 $
(567) $
Depreciation and amortization
1,453
7
—
12
EBITDA
$1,950 $
171 $
568 $
(555) $
Add (deduct) impact of the
following:
Recognition of fair value
increment on inventory sold
798
Amortization of intangible assets
acquired with Shoppers Drug
Mart
Charge related to inventory
measurement and other
conversion differences
Shoppers Drug Mart acquisition-
related costs and net
divestitures loss
Restructuring costs
Restructuring of franchise fees
Fixed asset and other related
impairments, net of
recoveries
Choice Properties general and
administrative costs
Fair value adjustment on
Shoppers Drug Mart’s equity-
based compensation liability
Fair value adjustments on fuel
and foreign currency
contracts
Defined benefit plan
amendments
Choice Properties start-up costs
417
190
72
44
(40)
15
(2)
7
4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
—
1
11
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Adjusted operating income
$2,002 $
164 $
582 $
(567) $
Depreciation and amortization
1,453
Less: Amortization of intangible
assets acquired with
Shoppers Drug Mart
(417)
7
—
—
—
12
—
584
25
662
1,472
2,134
468
226
$1,180 $
142 $
370 $
(371) $
1,321
809
9
—
6
824
$1,989 $
151 $
370 $
(365) $
2,145
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6
35
—
(32)
—
—
—
(51)
3
798
417
190
72
46
(40)
—
—
—
6
35
—
16
(32)
9
7
4
—
—
2,181
1,472
—
—
—
(51)
—
809
$1,138 $
142 $
373 $
(371) $
1,282
9
—
—
—
6
—
824
—
(417)
—
Adjusted EBITDA
$3,038 $
171 $
582 $
(555) $
3,236
$1,947 $
151 $
373 $
(365) $
2,106
(i)
Based on operations beginning July 5, 2013.
48 2014 Annual Report - Financial Review
Amortization of intangible assets acquired with Shoppers Drug Mart The acquisition of Shoppers Drug Mart in the second quarter of
2014 included approximately $6,050 million of definite life intangible assets, which are being amortized over their estimated useful lives.
During the fourth quarter of 2014, $124 million and year-to-date $417 million of amortization were recognized in operating income. Annual
amortization associated with the acquired intangibles will be approximately $550 million over the next ten years, and will decrease
thereafter.
Shoppers Drug Mart acquisition-related costs and net divestitures loss In connection with the agreement to acquire all of the
outstanding common shares of Shoppers Drug Mart, in the fourth quarter of 2014, the Company excluded nil (2013 – $7 million) and year-
to-date $60 million (2013 – $16 million) of acquisition-related costs in operating income. The Company recorded a net loss related to the
completed divestitures in the fourth quarter of 2014 of $14 million and year-to-date of $12 million (grouped with acquisition-related costs).
Although no further significant acquisition-related costs are anticipated, further adjustments for divestitures gain or loss will be made when
the remaining three Shoppers Drug Mart stores are sold. In the third quarter of 2013, in connection with the issuance of $1,600 million of
unsecured notes, the Company hedged its exposure to interest rates for the period prior to issuance. As the hedge did not qualify for
hedge accounting, the resulting $10 million gain on settlement was recorded in operating income.
Restructuring costs In the fourth quarter of 2014 and year-to-date, the Company recorded a charge of nil (2013 – $32 million) and $46
million (2013 – $35 million), respectively, of restructuring and reorganization costs primarily associated with the reduction of corporate and
store-support positions, the departure of certain executives and the realignment of certain of the Company’s central office functions.
Restructuring of franchise fees In the fourth quarter and year-to-date of 2014, the Company restructured its fee arrangements with the
franchisees of certain franchise banners. As a result of this restructuring, the Company re-evaluated the recoverable amount of franchise-
related financial instruments and recorded a reduction in previously recorded impairment of $40 million (2013 – nil).
Fixed asset and other related impairments, net of recoveries At each balance sheet date, the Company assesses and, when required,
records impairments and recoveries of previous impairments related to the carrying value of its fixed assets, investment properties and
intangible assets. In the fourth quarter of 2014, the Company recorded an impairment of $1 million (2013 – recovery of $42 million) and
year-to-date $16 million (2013 – recovery of $32 million) related to fixed asset and other related impairments.
Choice Properties general and administrative costs During the fourth quarter of 2014, the Company recorded nil and year-to-date
$9 million of general and administrative costs incurred by Choice Properties in operating income. The Company has adjusted for
Choice Properties' general and administrative costs incurred in the first half of 2014. As Choice Properties' operations commenced on
July 5, 2013, there were no comparative amounts.
Fair value adjustment on Shoppers Drug Mart’s equity-based compensation liability In the second quarter of 2014, in conjunction
with the acquisition, the Company converted certain Shoppers Drug Mart cash-settled equity-based compensation awards to cash-settled
awards based on the Company’s common shares. The Company is exposed to market price fluctuations in its common share price as
these awards are settled in cash and the associated liability is recorded at fair value at each reporting date based on the market price of
the Company’s common shares. In the fourth quarter and year-to-date of 2014, the Company recorded a loss of $2 million (2013 – nil) and
a loss of $7 million (2013 – nil), respectively. On November 10, 2014, the Company amended these compensation awards to be settled in
shares and is no longer exposed to market price fluctuations.
Fair value adjustment on fuel and foreign currency contracts The Company enters into exchange traded futures contracts and
forward contracts to minimize cost volatility relating to fuel prices and foreign exchange rates. Pursuant to the Company’s derivative
instruments accounting policy, changes in the fair value of these instruments are recorded in operating income. With significant
fluctuations in fuel and foreign exchange rates, commencing in the fourth quarter of 2014, the Company has excluded the fair value
adjustment on fuel and foreign currency contracts in calculating adjusted operating income. In the fourth quarter and year-to-date of
2014, the Company recorded a net fair value adjustment loss on these fuel and foreign currency contracts of $4 million (2013 – nil).
Defined benefit plan amendments In the first quarter of 2013, the Company announced amendments to certain of its defined benefit
plans that impact certain employees retiring after January 1, 2015. As a result, the Company recorded a gain of $51 million in the first
quarter of 2013.
Choice Properties start-up costs In connection with the IPO of Choice Properties, the Company incurred certain costs to facilitate the
start-up of the new entity. For the year ended 2013, the Company recorded $3 million of Choice Properties’ start-up costs in operating
income.
2014 Annual Report - Financial Review 49
Management’s Discussion and Analysis
Adjusted Net Interest Expense and Other Financing Charges The following table reconciles adjusted net interest expense and other
financing charges to net interest and other financing charges in the consolidated statements of earnings for the periods ended January 3,
2015 and December 28, 2013. The Company believes that adjusted net interest expense and other financing charges is useful in
assessing the Company’s underlying financial performance and in making decisions regarding the financial operations of the business.
(millions of Canadian dollars)
2014
(13 weeks)
2013(4)
(12 weeks)
2014
(53 weeks)
2013(4)
(52 weeks)
Net interest expense and other financing charges
$
169
$
141
$
584
$
468
Deduct impact of the following:
Accelerated amortization of deferred financing costs
Fair value adjustment on Trust Unit Liability
Shoppers Drug Mart acquisition-related costs and net divestitures loss
Choice Properties IPO transaction costs
Early debt settlement costs
(5)
(20)
—
—
—
Adjusted net interest expense and other financing charges
$
144
$
—
(34)
(14)
(1)
—
92
(23)
(17)
(15)
—
—
$
529
$
—
(27)
(25)
(44)
(18)
354
Accelerated amortization of deferred financing costs In the fourth quarter of 2014, the Company recorded a $5 million charge and
year-to-date a $23 million charge related to the accelerated amortization of deferred financing costs due to the repayment of $321 million
and $2,271 million year-to-date of the unsecured term loan facility.
Fair value adjustment on Trust Unit Liability The Company is exposed to market price fluctuations as a result of the Units held by
unitholders other than the Company. These Units are presented as a liability on the Company’s consolidated balance sheets as they are
redeemable for cash at the option of the holder, subject to certain restrictions. This liability is recorded at fair value at each reporting date
based on the market price of Units at the end of the period. In the fourth quarter of 2014, the Company recorded a loss of $20 million (2013
– $34 million) and year-to-date a loss of $17 million (2013 – $27 million) related to the fair value adjustment on the Trust Unit Liability.
Shoppers Drug Mart acquisition-related costs and net divestitures loss In addition to the acquisition-related costs and net divestitures
loss recorded in operating income noted above, during the first quarter and year-to-date of 2014, $15 million and during the fourth quarter
and year-to-date of 2013, $14 million and $25 million, respectively, of additional net interest expense were incurred in connection with the
financing related to the acquisition of Shoppers Drug Mart. As of the acquisition date, these costs are no longer excluded from adjusted net
interest expense and other financing charges as they are now part of ongoing business operations.
Choice Properties IPO transaction costs In addition to the start-up costs recorded in operating income noted above, in the fourth quarter
and year-to-date of 2013, $1 million and $44 million, respectively, of transaction costs were incurred related directly to the Choice
Properties IPO.
Early debt settlement costs In the third quarter of 2013, the Company settled its remaining USD $150 million USPP note in advance of
its May 29, 2015 maturity date and settled the related cross currency swap. The Company incurred early-settlement costs related to the
prepayment of $18 million.
50 2014 Annual Report - Financial Review
Adjusted Income Tax Expense and Adjusted Income Tax Rate The Company believes the adjusted income tax expense is useful in
assessing the underlying operating performance and in making decisions regarding the ongoing operations of its business.
(millions of Canadian dollars)
Adjusted operating income(i)
Adjusted net interest and other financing charges(i)
Adjusted earnings before taxes
Income taxes
Tax impact of items included in adjusted earnings before taxes(ii)
Adjusted income taxes
Effective tax rate
Adjusted income tax rate
$
$
$
$
2014
(13 weeks)
681
144
537
91
50
141
26.9%
26.3%
$
$
$
$
2013(4)
(12 weeks)
293
92
201
41
(1)
40
26.5%
19.9%
$
$
$
$
2014
(53 weeks)
2,181
529
1,652
25
403
428
32.1%
25.9%
$
$
$
$
2013(4)
(52 weeks)
1,282
354
928
226
6
232
26.5%
25.0%
(i)
(ii)
See reconciliations of adjusted operating income and adjusted net interest and other financing charges above.
See the EBITDA, adjusted EBITDA and adjusting operating income table and the adjusted net interest and other financing charges table above for a complete list of
items included in adjusted earnings before taxes.
Adjusted income tax rate is calculated as adjusted income taxes divided by the sum of adjusted operating income less adjusted net interest
expense and other financing charges.
2014 Annual Report - Financial Review 51
Management’s Discussion and Analysis
Adjusted Net Earnings and Adjusted Basic Net Earnings Per Common Share The Company believes adjusted net earnings and
adjusted basic net earnings per common share are useful in assessing the Company’s underlying operating performance and in making
decisions regarding the ongoing operations of its business.
The following table reconciles adjusted net earnings and adjusted basic net earnings per common share to GAAP net earnings and basic
net earnings per common share reported for the periods ended January 3, 2015 and December 28, 2013:
(millions of Canadian dollars/Canadian dollars)
Net Earnings
2014
(13 weeks)
Basic Net
Earnings Per
Common
Share
2013(4)
(12 weeks)
Basic Net
Earnings Per
Common
Share
Net
Earnings
2014
(53 weeks)
Basic Net
Earnings Per
Common
Share
2013(4)
(52 weeks)
Basic Net
Earnings Per
Common
Share
Net Earnings
Net Earnings
$
247 $
0.60
$
114 $
0.41
$
53 $
0.14
$
627 $
2.23
Add (deduct) impact of the following:
Recognition of fair value increment on inventory
sold
Amortization of intangible assets acquired with
Shoppers Drug Mart
Charge related to inventory measurement and
other conversion differences
Shoppers Drug Mart acquisition-related costs and
net divestitures loss
Restructuring costs
Restructuring of franchise fees
Fair value adjustment on Trust Unit Liability(i)
Accelerated amortization of deferred financing
costs
Fixed asset and other related impairments, net of
recoveries
Choice Properties general and administrative
costs
Fair value adjustment on Shoppers Drug Mart’s
equity-based compensation liability
Fair value adjustment on fuel and foreign currency
contracts
Defined benefit plan amendments
Choice Properties start-up costs and IPO
transaction costs
Early debt settlement costs
50
90
—
9
—
(30)
20
4
2
—
1
3
—
—
—
0.12
0.22
—
0.02
—
(0.07)
0.05
0.01
—
—
—
0.01
—
—
—
—
—
—
17
24
—
34
—
—
—
—
0.05
0.09
—
0.12
—
(29)
(0.10)
—
—
—
—
1
—
—
—
—
—
—
—
586
306
139
73
34
(30)
17
17
14
7
5
3
—
—
—
1.55
0.80
0.37
0.19
0.09
(0.08)
0.04
0.04
0.04
0.02
0.01
0.01
—
—
—
—
—
—
27
26
—
27
—
—
—
—
0.10
0.09
—
0.10
—
(22)
(0.08)
—
—
—
—
—
—
(37)
(0.13)
35
13
0.12
0.05
2.48
Adjusted
$
396 $
0.96
$
161 $
0.57
$
1,224 $
3.22
$
696 $
(i)
Gains or losses related to the fair value adjustment on Trust Unit Liability are not subject to tax.
52 2014 Annual Report - Financial Review
Free Cash Flow The following table reconciles free cash flow used in assessing the Company’s financial condition to GAAP measures for
the periods ended week periods ended January 3, 2015 and December 28, 2013. In the fourth quarter of 2014, the Company refined its
definition of free cash flow as cash flows from operating activities less intangible asset additions, fixed asset purchases and interest paid.
The Company believes that free cash flow is the appropriate measure in assessing the Company’s cash available for additional financing
and investing activities.
(millions of Canadian dollars)
Cash flows from operating activities
Less:
Intangible asset additions
Fixed asset purchases
Interest paid
Free cash flow
2014
(13 weeks)
952
42
358
113
439
$
$
2013
(12 weeks)
738
—
304
98
336
$
$
2014
(53 weeks)
2,569
90
996
506
977
$
$
2013
(52 weeks)
1,491
12
865
370
244
$
$
Adjusted Debt The following table reconciles adjusted debt, used in the adjusted debt to adjusted EBITDA ratio, to GAAP measures
reported as at the periods ended as indicated. The Company believes that adjusted debt is relevant in assessing the amount of financial
leverage employed. The Company changed its definition of adjusted debt in the second quarter of 2014 to include capital securities to
better align with management’s definition for deleveraging purposes. In the table below, the Company has also presented adjusted debt as
at March 28, 2014, the date of the acquisition of Shoppers Drug Mart, as this is the baseline for the Company’s debt reduction targets.
(millions of Canadian dollars)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Trust Unit Liability
Capital securities
Certain other liabilities
Total debt
Less:
Independent Securitization Trusts
Independent Funding Trusts
Trust Unit Liability
Guaranteed Investment Certificates
Adjusted debt
As at
As at
As at
January 3, 2015
March 28, 2014
December 28, 2013
$
$
162
605
420
(unaudited)
$
295
605
902
11,042
11,262
722
225
28
703
224
39
$
13,204
$
14,030
$
1,355
498
722
634
1,355
469
703
443
$
9,995
$
11,060
$
—
605
1,008
6,672
688
224
39
9,236
1,355
475
688
430
6,288
Adjusted debt to adjusted EBITDA is calculated as adjusted debt divided by adjusted EBITDA.
2014 Annual Report - Financial Review 53
Management’s Discussion and Analysis
Choice Properties' Adjusted Funds from Operations The following table reconciles Choice Properties’ adjusted funds from operations
to GAAP measures for the periods ended January 3, 2015 and December 28, 2013. The Company believes adjusted funds from
operations is useful in measuring economic performance and is indicative of Choice Properties ability to pay distributions.
(millions of Canadian dollars)
Net income
Fair value adjustments on Class B Limited Partnership
units
Fair value adjustments on investment properties
Fair value adjustments on unit-based compensation
Distributions on Class B Limited Partnership units
Amortization of tenant improvement allowances
Funds from Operations
Restructuring
Business start-up costs
Straight-line rental revenue
Amortization of finance charges
Unit-based compensation expense
Sustaining property and leasing capital expenditures,
normalized(ii)
Adjusted Funds from Operations
2014(5)
(13 weeks)
87
51
(98)
—
50
—
90
—
—
(9)
—
—
(7)
74
$
$
$
2013(5)
(12 weeks)
(6)
112
(69)
—
46
—
83
—
—
(8)
1
—
(11)
65
$
$
$
$
$
$
2014(5)
(53 weeks)
200
(12)
(82)
(1)
191
1
297
2
—
(35)
50
2
(31)
285
2013(5),(i)
(52 weeks)
67
147
(144)
—
89
—
159
—
3
(16)
1
—
(16)
131
$
$
$
(i)
(ii)
Based on operations beginning July 5, 2013.
Seasonality impacts the timing of capital expenditures. The adjusted funds from operations calculation has been adjusted for this factor to make the quarters more
comparable.
21. Additional Information
Additional information about the Company 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 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 25, 2015
Toronto, Canada
54 2014 Annual Report - Financial Review
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 Equity
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Interest in Other Entities
Significant Accounting Policies
Investment Properties
Intangible Assets
Future Accounting Standards
Acquisition of Shoppers Drug Mart Corporation
Income Taxes
Basic and Diluted Net Earnings per Common Share
Note 1. Nature and Description of the Reporting Entity
Note 2.
Note 3. Critical Accounting Estimates and Judgments
Note 4.
Note 5.
Note 6. Net Interest Expense and Other Financing Charges
Note 7.
Note 8.
Note 9. Cash and Cash Equivalents, Short Term Investments and Security Deposits
Note 10. Accounts Receivable
Note 11. Credit Card Receivables
Note 12.
Inventories
Note 13. Assets Held for Sale
Note 14. Fixed Assets
Note 15.
Note 16.
Note 17. Goodwill
Note 18.
Note 19. Other Assets
Note 20. Short Term Debt
Note 21. Provisions
Note 22. Long Term Debt
Note 23. Other Liabilities
Note 24. Share Capital
Note 25. Capital Management
Note 26. Equity-Based Compensation
Note 27. Post-Employment and Other Long Term Employee Benefits
Note 28. Employee Costs
Note 29. Leases
Note 30. Financial Instruments
Note 31. Financial Risk Management
Note 32. Contingent Liabilities
Note 33. Financial Guarantees
Note 34. Related Party Transactions
Note 35. Segment Information
Note 36. Subsequent Events
Three Year Summary
Glossary of Terms
56
57
58
58
59
60
61
62
63
63
63
73
75
75
77
77
79
80
81
81
82
82
83
85
86
87
89
90
90
90
91
94
94
95
96
100
106
107
108
110
112
113
114
116
117
118
119
2014 Annual Report - Financial Review 55
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 as issued by the International Accounting Standards Board. 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 25, 2015
[signed]
Galen G. Weston
President and Executive Chairman
[signed]
Richard Dufresne
Chief Financial Officer
56 2014 Annual Report - Financial Review
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 January 3, 2015 and December 28, 2013, the consolidated statements of earnings, comprehensive income, changes
in equity and cash flows for the 53 and 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 January 3, 2015 and December 28, 2013, and its consolidated financial performance and its consolidated cash
flows for the 53 and 52 week years then ended in accordance with International Financial Reporting Standards.
Toronto, Canada
February 25, 2015
Chartered Professional Accountants, Licensed Public Accountants
2014 Annual Report - Financial Review 57
Consolidated Statements of Earnings
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Revenue
Cost of Merchandise Inventories Sold (note 12)
Selling, General and Administrative Expenses
Operating Income
Net interest expense and other financing charges (note 6)
Earnings Before Income Taxes
Income taxes (note 7)
Net Earnings
Net Earnings per Common Share ($) (note 8)
Basic
Diluted
Weighted Average Common Shares Outstanding (note 8) (millions)
Basic
Diluted
(i) Certain comparative figures have been amended. See note 2.
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
$
$
$
$
$
$
$
2014
42,611
32,063
9,886
662
584
78
25
53
0.14
0.14
380.5
384.4
2013(i)
32,371
24,701
6,349
1,321
468
853
226
627
2.23
2.21
281.1
284.1
58 2014 Annual Report - Financial Review
Consolidated Statements of Comprehensive Income
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars)
Net Earnings
Other comprehensive income (loss), net of taxes
Items that are or may be subsequently reclassified to profit or loss:
Foreign currency translation adjustment
Gain on derecognized derivative instrument (note 30)
Items that will not be reclassified to profit or loss:
Net defined benefit plan actuarial (loss) gain (note 27)
Other comprehensive (loss) income
Total Comprehensive Income
(i) Certain comparative figures have been amended. See note 2.
See accompanying notes to the consolidated financial statements.
$
$
$
$
2014
53
8
—
(46)
(38)
15
$
$
$
$
2013(i)
627
—
(5)
234
229
856
2014 Annual Report - Financial Review 59
Consolidated Statements of Changes in Equity
(millions of Canadian dollars except where otherwise indicated)
Common
Share Capital
Retained
Earnings(i)
Contributed
Surplus
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests Total Equity(i)
1,642 $
5,271 $
Balance at December 28, 2013
Net Earnings
Other comprehensive (loss) income
Total Comprehensive Income
$
$
$
— $
—
— $
Acquisition of Shoppers Drug Mart Corporation (note 5 and 24)
6,119
Contribution from non-controlling interests (note 18)
Net effect of equity-based compensation (note 24 and 26)
Net effect of shares held in trust (note 24 and 26)
Common shares purchased for cancellation (note 24)
Dividends declared per common share – $0.975 (note 24)
—
156
3
(63)
—
Balance at January 3, 2015
$
$
6,215 $
7,857 $
53 $
(46)
7 $
—
—
(1)
19
(115)
(371)
(461) $
4,810 $
87 $
— $
—
— $
—
—
17
—
—
—
17 $
104 $
— $
— $
8
8 $
—
—
—
—
—
—
— $
— $
—
— $
—
8
—
—
—
—
7,000
53
(38)
15
6,119
8
172
22
(178)
(371)
8 $
8 $
8 $
8 $
5,787
12,787
(millions of Canadian dollars except where otherwise indicated)
Common
Share Capital
Retained
Earnings(i)
Contributed
Surplus
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests
Balance at December 29, 2012
Net earnings
Other comprehensive income (loss)
Total Comprehensive Income (Loss)
Net effect of equity-based compensation (note 24 and 26)
Net effect of shares held in trust (note 24 and 26)
Common shares purchased for cancellation (note 24)
Dividends declared per common share – $0.940 (note 24)
Balance at December 28, 2013
(i) Certain comparative figures have been amended. See note 2.
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
1,567 $
4,777 $
— $
—
— $
90
(6)
(9)
—
75 $
627 $
234
861 $
—
(39)
(64)
(264)
494 $
1,642 $
5,271 $
55 $
— $
—
— $
32
—
—
—
32 $
87 $
5 $
— $
(5)
(5) $
—
—
—
—
(5) $
— $
— $
— $
—
— $
—
—
—
—
— $
— $
Total Equity(i)
6,404
627
229
856
122
(45)
(73)
(264)
596
7,000
60 2014 Annual Report - Financial Review
Consolidated Balance Sheets
(millions of Canadian dollars)
Assets
Current Assets
Cash and cash equivalents (note 9)
Short term investments (note 9)
Accounts receivable (note 10)
Credit card receivables (note 11)
Inventories (note 12)
Prepaid expenses and other assets
Assets held for sale (note 13)
Total Current Assets
Fixed Assets (note 14)
Investment Properties (note 15)
Intangible Assets (note 16)
Goodwill (note 17)
Deferred Income Tax Assets (note 7)
Security Deposits (note 9)
Franchise Loans Receivable (note 30)
Other Assets (note 19)
Total Assets
Liabilities
Current Liabilities
Bank indebtedness (note 33)
Trade payables and other liabilities
Provisions (note 21)
Income taxes payable
Short term debt (note 20)
Long term debt due within one year (note 22)
Associate interest
Capital securities (note 24)
Total Current Liabilities
Provisions (note 21)
Long Term Debt (note 22)
Trust Unit Liability (note 30)
Deferred Income Tax Liabilities (note 7)
Capital Securities (note 24)
Other Liabilities (note 23)
Total Liabilities
Equity
Share Capital (note 24)
Retained Earnings
Contributed Surplus (note 26)
Accumulated Other Comprehensive Income
Total Equity Attributable to Shareholders of the Company
Non-Controlling Interests (note 18)
Total Equity
Total Liabilities and Equity
(i) Certain comparative figures have been amended. See note 2.
Leases (note 29). Contingent Liabilities (note 32). Financial Guarantees (note 33). Subsequent Events (note 36).
See accompanying notes to the consolidated financial statements.
As at
January 3, 2015
As at
December 28, 2013(i)
$
$
$
$
$
$
$
$
$
999
21
1,209
2,630
4,309
214
23
9,405
10,794
185
9,177
3,243
193
7
399
281
33,684
162
4,672
84
34
605
420
193
225
6,395
76
11,042
722
1,880
—
782
20,897
7,857
4,810
104
8
12,779
8
12,787
33,684
$
$
$
$
$
$
$
$
$
2,260
290
579
2,538
2,097
75
22
7,861
9,105
99
111
943
261
1,701
375
285
20,741
—
3,797
66
37
605
1,008
—
—
5,513
56
6,672
688
34
224
554
13,741
1,642
5,271
87
—
7,000
—
7,000
20,741
2014 Annual Report - Financial Review 61
Consolidated Statements of Cash Flows
For the years ended January 3, 2015 and December 28, 2013
(millions of Canadian dollars)
Operating Activities
Net earnings
Income taxes (note 7)
Net interest expense and other financing charges (note 6)
Depreciation and amortization
Income taxes paid
Interest received
Settlement of equity forward contracts (note 30)
Settlement of cross currency swaps (note 30)
Change in credit card receivables (note 11)
Change in non-cash working capital
Fixed asset and other related impairments (recoveries)
Loss (gain) on disposal of assets
Recognition of fair value increment on inventory sold (note 12)
Charge related to inventory measurement and other conversion differences (note 12)
Gain on defined benefit plan amendments (note 27)
Other
Cash Flows from Operating Activities
Investing Activities
Acquisition of Shoppers Drug Mart Corporation, net of cash acquired (note 5)
Fixed asset purchases
Change in short term investments (note 9)
Proceeds from disposal of assets
Change in franchise investments and other receivables
Change in security deposits (note 9)
Intangible asset additions
Investment in joint venture
Other
Cash Flows used in Investing Activities
Financing Activities
Change in bank indebtedness
Change in Associate interest
Change in short term debt
Long Term Debt (note 22)
Issued
Retired
Deferred debt financing costs
Issuance of Trust Units (note 30)
Trust Unit issuance costs
Interest paid
Dividends paid (note 24)
Share capital (note 24)
Issued
Purchased and held in trust
Purchased for cancellation
Contribution from non-controlling interests (note 18)
Cash Flows from 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
(i) Certain comparative figures have been amended. See note 2.
See accompanying notes to the consolidated financial statements.
62 2014 Annual Report - Financial Review
2014
53
25
584
1,472
(293)
29
—
—
(92)
(321)
16
3
798
190
—
105
2,569
(6,619)
(996)
269
129
(25)
1,694
(90)
(6)
(40)
(5,684)
(133)
19
—
5,865
(3,336)
(28)
1
—
(506)
(496)
629
—
(178)
8
1,845
9
(1,261)
2,260
999
$
$
$
$
$
$
$
$
$
2013(i)
627
226
468
824
(272)
49
(16)
94
(233)
(224)
(32)
(1)
—
—
(51)
32
1,491
—
(865)
451
26
5
(1,444)
(12)
—
—
(1,839)
—
—
(300)
2,770
(871)
(21)
660
(44)
(370)
(259)
75
(46)
(73)
—
1,521
8
1,181
1,079
2,260
$
$
$
$
$
$
$
$
$
Notes to the Consolidated Financial Statements
For the years ended January 3, 2015 and December 28, 2013 (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 food and pharmacy leader, the nation's
largest retailer and the majority unitholder of Choice Properties Real Estate Investment Trust (“Choice Properties”). Loblaw Companies
Limited provides Canadians with grocery, pharmacy, health and beauty, apparel, 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 the “Company” or “Loblaw”.
The Company’s controlling shareholder is George Weston Limited (“Weston”) which owns approximately 46% of the Company’s
outstanding common shares. The Company’s ultimate parent is Wittington Investments, Limited (“Wittington”). The remaining common
shares are widely held.
In 2014, the Company acquired all of the outstanding shares of Shoppers Drug Mart Corporation ("Shoppers Drug Mart") (see note 5).
The Company has three reportable operating segments: Retail, Financial Services and Choice Properties (see note 35).
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 25, 2015.
Basis of Preparation The consolidated financial statements were prepared on a historical cost basis except for the following items that
were measured at fair value:
•
•
defined benefit plan assets with the obligations related to these pension plans measured at their discounted present value as
described in note 27; and
liabilities for cash-settled equity-based compensation arrangements as described in note 26;
•
certain financial instruments as described in note 30.
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. Control exists when the Company has the existing rights that give it the current ability to direct the activities that significantly affect
the entities’ returns. The Company reassesses control on an ongoing basis.
Structured entities are entities controlled by the Company which were designed so that voting or similar rights are not the dominant factor
in deciding who controls the entity. Structured entities are consolidated if, based on an evaluation of the substance of its relationship with
the Company, the Company concludes that it controls the structured entity. Structured entities controlled by the Company were established
under terms that impose strict limitations on the decision-making powers of the structured entities’ management and that results in the
Company receiving the majority of the benefits related to the structured entities’ operations and net assets, being exposed to the majority
of risks incident to the structured entities’ activities, and retaining the majority of the residual or ownership risks related to the structured
entities or their assets.
Transactions and balances between the Company and its consolidated entities have been eliminated on consolidation.
Non-controlling interests are separately presented in the consolidated financial statements and represent the non-controlling shareholders’
equity in an entity consolidated by the Company for which its ownership is less than 100%. Transactions with non-controlling interests are
treated as transactions with equity owners of the Company. Changes in the Company’s ownership interest in its subsidiaries are accounted
for as equity transactions.
Choice Properties’ Trust Units (“Units”) held by unitholders other than the Company are presented as a Trust Unit Liability in the
consolidated financial statements, as the Units are redeemable for cash at the option of the holder, subject to certain restrictions. As at the
end of the fourth quarter of 2014, the Company held an 82.9% ownership interest in Choice Properties.
2014 Annual Report - Financial Review 63
Notes to the Consolidated Financial Statements
The Company consolidates the Shoppers Drug Mart licensees (“Associates”). An Associate is a pharmacist-owner of a corporation that is
licensed to operate a retail drug store at a specific location using Shoppers Drug Mart’s trademarks. The consolidation of the Associates is
based on the concept of control, for accounting purposes, which was determined to exist primarily through Shoppers Drug Mart’s
agreements that govern the relationship between Shoppers Drug Mart and the Associates (“Associate Agreements”). The Company does
not have any direct or indirect shareholdings in the corporations that operate the Associates. Accordingly, included in the consolidated
financial statements is associate interest to reflect the investment the Associates have in the net assets of their businesses. Under the
terms of the Associate Agreements, Shoppers Drug Mart agrees to purchase the assets that the Associates use in store operations,
primarily at the carrying value to the Associate, when Associate Agreements are terminated by either party.
Fiscal Year The fiscal year of the Company ends on the Saturday closest to December 31. Under an accounting convention common in
the retail industry, the Company follows a 52-week reporting cycle, which periodically necessitates a fiscal year of 53 weeks. The years
ended January 3, 2015 and December 28, 2013 contained 53 weeks and 52 weeks, respectively.
Business Combinations Business combinations are accounted for using the acquisition method as of the date when control is transferred
to the Company. The Company measures goodwill as the excess of the sum of the fair value of the consideration transferred over the net
identifiable assets acquired and liabilities assumed, all measured as at the acquisition date. Transaction costs that the Company incurs in
connection with a business combination, other than those associated with the issue of debt or equity securities, are expensed as incurred.
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. Diluted EPS is calculated by
adjusting the net earnings available to common shareholders and the weighted average number of common shares outstanding for the
effects of all potential dilutive instruments.
Revenue Recognition The Company recognizes revenue when the amount can be reliably measured, when it is probable that future
economic benefits will flow to the entity and when specific criteria have been met for each of the Company’s activities as described below.
Retail segment revenue includes sale of goods and services to customers through corporate stores and Associates, sales to franchised
stores, and independent account customers. Revenue is measured at the fair value of the consideration received or receivable, net of
estimated returns and sales incentives. The Company recognizes revenue at the time the sale is made or service is delivered to its
customers and at the time of delivery of inventory to its franchise stores. Revenue also includes services fees from franchised stores, and
independent account customers, which are recognized when services are rendered.
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 franchising arrangements, the Company offers products and services as part of a multiple deliverable arrangement,
which is recorded using a relative fair value approach.
Financial Services segment revenue includes interest income on credit card loans, service fees and other revenue related to financial
services. Interest income is recognized using the effective interest method. Service fees are recognized when services are rendered. Other
revenue is recognized periodically or according to contractual provisions.
Choice Properties segment revenue includes rental revenue on base rents earned from tenants under lease agreements, realty tax and
operating cost recoveries and other incidental income, including intersegment revenue earned from the Retail segment. The rental revenue
is recognized on a straight-line basis over the terms of the respective leases. Property tax and operating cost recoveries are recognized in
the period that recoverable costs are chargeable to tenants. Percentage participation rents are recognized when tenants’ specified sales
targets have been met as set out in the lease agreements.
Taxation Current and deferred taxes are recognized in the consolidated statement of earnings, except when it relates to a business
combination, or items recognized directly to equity or to other comprehensive income.
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 recognized using the asset and liability method of accounting on temporary differences arising between the financial
statement carrying values of existing assets and liabilities and their respective income tax bases. 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.
64 2014 Annual Report - Financial Review
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to
income taxes levied by the same taxation authority on the same taxable entity, or on different taxable entities where 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.
Choice Properties qualifies as a “mutual fund trust” under the Income Tax Act (Canada). The Trustees intend to distribute all taxable
income directly earned by Choice Properties to unitholders and to deduct such distributions for income tax purposes. Legislation relating to
the federal income taxation of Specified Investment Flow Through trusts or partnerships (“SIFT”) provide that certain distributions from a
SIFT will not be deductible in computing the SIFT’s taxable income and that the SIFT will be subject to tax on such distributions at a rate
that is substantially equivalent to the general tax rate applicable to Canadian corporations. However, distributions paid by a SIFT as return
of capital should generally not be subject to tax.
Under the SIFT rules, the taxation regime will not apply to a real estate investment trust (“REIT”) that meets prescribed conditions relating
to the nature of its assets and revenue (the “REIT Conditions”). Choice Properties has reviewed the SIFT rules and has assessed its
interpretation and application to the REIT’s assets and revenue. While there are uncertainties in the interpretation and application of the
SIFT rules, Choice Properties has determined that it meets the REIT Conditions.
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 consist of marketable investments with an original maturity date greater than 90 days
and less than 365 days from the date of acquisition.
Security Deposits Security deposits consist of cash and cash equivalents and short term investments. Security deposits also include
amounts which are required to be placed with counterparties as collateral to enter into and maintain outstanding letters of credit and
financial derivative contracts.
Accounts Receivable Accounts receivable, net of allowances for doubtful accounts, include amounts due from independent franchisees,
government, prescription sales and third-party drug plans, independent accounts and amounts owed from vendors.
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.
The Company periodically 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. As a result, the Company has not transferred all of the risks and
rewards related to these assets and continues to recognize these assets in credit card receivables. The transferred receivables are
accounted for as financing transactions. The Company consolidates Eagle Credit Card Trust® (“Eagle”), one of the independent
securitization trusts, as a structured entity. 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.
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.
Franchise Loans Receivable Franchise loans receivable are comprised of amounts due from independent franchisees for loans issued
through a consolidated independent funding trust. 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. The carrying amount of franchise loan receivables approximates fair value.
2014 Annual Report - Financial Review 65
Notes to the Consolidated Financial Statements
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. The cost of inventories at retail stores and distribution centres are measured at weighted
average cost, with the exception of inventories at Shoppers Drug Mart, which are measured on a first-in first-out basis.
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, when it is probable that they will be received
and the amount of the allowance can be reliably estimated. Amounts received but not yet earned are presented in other liabilities as
deferred vendor allowances.
Certain exceptions apply if the consideration is a payment for assets or services delivered to the vendor or for reimbursement of selling
expenses incurred to promote the vendor’s products. The consideration is then recognized as a reduction of the expense incurred in the
consolidated statements of earnings.
Fixed Assets Fixed assets are recognized at cost 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, including costs
incurred 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.
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,
based on a quarterly weighted average cost of borrowing. All other borrowing costs are expensed as incurred and recognized in net
interest expense and other financing charges.
The cost of replacing a fixed asset component is recognized in the carrying amount of the item if it is probable that the future economic
benefits embodied within the component will flow to the Company and its cost can be measured reliably. The carrying amount of the
replaced part is de-recognized. The cost of repairs and maintenance of fixed assets are expensed as incurred and recognized in operating
income.
Gains and losses on disposal of fixed assets are determined by comparing the fair value of the proceeds from disposal with the net book
value of the assets and are recognized net, in operating income.
Fixed assets are depreciated on a straight-line basis over their estimated useful lives to their estimated residual value when the assets are
available for use. When significant parts of a fixed asset have different useful lives, they are accounted for as separate components and
depreciated separately. Depreciation methods, useful lives and residual values are reviewed at each financial year end and are adjusted
for prospectively, if appropriate. Estimated useful lives are as follows:
Buildings
Equipment and fixtures
Building improvements
Leasehold improvements
Assets held under financing leases
10 to 40 years
2 to 10 years
up to 10 years
Lesser of term of the lease and useful life up to 25 years
Lesser of term of the lease(i) and useful life(ii)
(i)
If it is reasonably certain that the Company will obtain ownership by the end of the lease term, assets under finance leases would be depreciated over the life of the
asset.
(ii) Same basis as owned assets.
66 2014 Annual Report - Financial Review
Non-current assets are classified as assets held for sale if their carrying amount will be recovered principally through a sale transaction
rather than through continuing use. To qualify as assets held for sale, the sale must be highly probable, assets must be available for
immediate sale in their present condition and management must be committed to a plan to sell assets that should be expected to close
within one year from the date of classification. Assets held for sale are recognized at the lower of their carrying amount and fair value less
costs to sell and are not depreciated.
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.
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.
Joint Ventures A joint venture is a joint arrangement whereby the parties to the arrangement have rights to the net assets of the joint
arrangement. Investments in joint ventures are accounted for using the equity method, where the investment is initially recognized in the
consolidated balance sheet at cost and adjusted thereafter to recognize the Company’s share of the profit or loss and other comprehensive
income of the joint venture.
Goodwill Goodwill arising in a business combination is recognized as an asset at the date that control is acquired. Goodwill is
subsequently measured at cost less any accumulated impairment losses. Goodwill is not amortized but is tested for impairment on an
annual basis or more frequently if there are indicators that goodwill may be impaired as described in the Impairment of Non-Financial
Assets policy.
Intangible Assets Intangible assets with finite lives are measured at cost less accumulated amortization and any accumulated impairment
losses. These intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from three to 18 years, and
are tested for impairment as described in the Impairment of Non-Financial Assets policy. Useful lives, residual values and amortization
methods for intangible assets with finite useful lives are reviewed at least annually.
Indefinite life intangible assets are measured at cost less any accumulated impairment losses. These intangible assets are tested for
impairment on an annual basis or more frequently if there are indicators that intangible assets may be impaired as described in the
Impairment of Non-Financial Assets policy.
Impairment of Non-Financial Assets At each balance sheet date, the Company reviews the carrying amounts of its non-financial assets,
other than inventories and deferred tax assets, to determine whether there is any indication of impairment. If any such indication exists, the
asset is then tested for impairment by comparing its recoverable amount to its carrying value. Goodwill and indefinite life intangible assets
are tested for impairment at least annually.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generate cash inflows from
continuing use that 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 location is a separate CGU for purposes of impairment testing.
Corporate assets, which include head office facilities and distribution centers, do not generate separate cash inflows. Corporate assets are
tested for impairment at the minimum grouping of CGUs to which the corporate assets can be reasonably and consistently allocated.
Goodwill arising from a business combination is tested for impairment at the minimum grouping of CGUs that are expected to benefit from
the synergies of the combination.
The recoverable amount of a CGU or CGU grouping is the higher of its value in use and its fair value less costs to sell. Value in use is
based on the estimated future cash flows from the CGU or CGU grouping, discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money and the risks specific to the CGU or CGU group. The fair value less
costs to sell is based on the best information available to reflect the amount that could be obtained from the disposal of the CGU or CGU
group in an arm’s length transaction between knowledgeable and willing parties, net of estimates of the costs of disposal.
2014 Annual Report - Financial Review 67
Notes to the Consolidated Financial Statements
An impairment loss is recognized if the carrying amount of a CGU or CGU group exceeds its recoverable amount. For asset impairments
other than goodwill, the impairment loss reduces the carrying amounts of the non-financial assets in the CGU on a pro-rata basis. Any loss
identified from goodwill impairment testing is first applied to reduce the carrying amount of goodwill allocated to the CGU grouping, and
then to reduce the carrying amounts of the other non-financial assets in the CGU or CGU group on a pro-rata basis. Impairment losses are
recognized in operating income.
For other assets other than goodwill, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed
the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. An
impairment loss in respect of goodwill is not reversed.
Bank Indebtedness Bank indebtedness is comprised of Associate bank lines of credit.
Provisions Provisions are recognized when there is a present legal or constructive obligation as a result of a past event, it is probable that
the Company will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. 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 specific to the obligation. The unwinding of the discount rate is
recognized in net interest expense and other financing charges.
Financial Instruments and Derivative Financial Instruments Financial assets and liabilities are recognized when the Company
becomes party to the contractual provisions of the financial instrument. Financial instruments, including derivatives and embedded
derivatives in certain contracts, upon initial recognition are measured at fair value and classified as either financial assets or financial
liabilities at fair value through profit or loss, held-to-maturity investments, loans and receivables or other financial liabilities. Loans and
receivables, and other financial liabilities are subsequently measured at cost or amortized cost. Derivatives and non-financial derivatives
must be recorded at fair value on the consolidated balance sheets. 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.
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. The Company does not use derivative instruments for speculative purposes. Any embedded derivative
instruments that may be identified are separated from their host contract and recorded on the consolidated balance sheets at fair value.
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.
Classification The following table summarizes the classification and measurement of the Company’s financial assets and liabilities:
Asset/Liability
Cash and cash equivalents
Short term investments
Accounts receivable
Credit card receivables
Security deposits
Franchise loans receivable
Certain other assets
Bank indebtedness
Trade payables and other liabilities
Short term debt
Long term debt
Trust Unit Liability
Certain other liabilities
Capital securities
Derivatives
Classification
Fair value through profit and loss(i)
Fair value through profit and loss(i)
Loans and receivables
Loans and receivables
Fair value through profit and loss(i)
Loans and receivables
Loans and receivables
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Fair value through profit and loss(ii)
Other liabilities
Other liabilities
Fair value through profit and loss(ii)
Measurement
Fair value
Fair value
Amortized cost
Amortized cost
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value
Amortized cost
Amortized cost
Fair value
(i)
(ii)
Financial instruments designated at fair value through profit and loss.
Financial instruments required to be classified at fair value through profit and loss.
The Company has not classified any financial assets as held-to-maturity.
68 2014 Annual Report - Financial Review
Fair Value The Company measures financial assets and financial liabilities under the following fair value hierarchy. The different levels
have been defined as follows:
•
•
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 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
•
Fair Value Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification of
a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value.
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.
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 earnings before
income taxes.
Valuation process The determination of the fair value of financial instruments is performed by the Company’s treasury and financial
reporting departments on a quarterly basis. There was no change in the valuation techniques applied to financial instruments in the current
year. The following table describes the valuation techniques used in the determination of the fair values of financial instruments:
Type
Valuation Approach
Cash and cash equivalents, short term investments,
security deposits, accounts receivable, credit card
receivables, bank indebtedness, trade payables and
other liabilities and short term debt
Franchise loans receivable
Derivatives
Long term debt, Trust Unit Liability, capital securities
and certain other financial instruments
The carrying amount approximates fair value due to the short term maturity of
these instruments.
The carrying amount approximates fair value as fluctuations in the forward
interest rates would not have significant impacts on the valuation and the
provisions recorded for all impaired receivables.
Specific valuation techniques used to value derivative financial instruments
include:
Quoted market prices or dealer quotes for similar instruments;
The fair value of interest rate swaps is calculated as the present value of
the estimated future cash flows based on observable yield curves; and
The fair value of other derivative instruments are determined based on
observable market information as well as valuations determined by
external valuators with experience in financial markets.
The fair value is based on the present value of contractual cash flows,
discounted at the Company’s current incremental borrowing rate for similar
types of borrowing arrangements or, where applicable, quoted market prices.
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. The difference
between the carrying amount of the financial asset and the sum of the consideration received and receivable is recognized in earnings
before income taxes.
Financial liabilities are derecognized when obligations under the contract expire, are discharged or cancelled. The difference between the
carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in earnings before income
taxes.
2014 Annual Report - Financial Review 69
Notes to the Consolidated Financial Statements
Impairment of Financial Assets 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 estimated future cash flows occur after their initial recognition and the loss can be reliably
measured. If such objective evidence 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 assets’ original effective interest
rate. Impairment losses are recorded in the consolidated statement of earnings with the carrying amount of the financial asset or group of
financial assets reduced through the use of impairment allowance accounts.
In periods subsequent to the impairment where the impairment loss has decreased, and such decrease can be related objectively to an
event occurring after the impairment was initially recognized, the previously recognized impairment loss is reversed through the
consolidated statement of earnings. The impairment reversal is limited to the lesser of the decrease in impairment or the extent that the
carrying amount of the financial asset at the date the impairment is reversed does not exceed what the amortized cost would have been
had the impairment not been recognized, after the reversal.
Foreign Currency Translation The functional currency of the Company is the Canadian dollar.
The assets and liabilities of foreign operations that have a functional currency different from that of the Company, including goodwill and
fair value adjustments arising on acquisition, are translated into Canadian dollars at the foreign currency exchange rate in effect at the
balance sheet date. The resulting foreign currency exchange gains or losses are recognized in the foreign currency translation adjustment
as part of other comprehensive income. When such foreign operation is disposed of, the related foreign currency translation reserve is
recognized in net earnings as part of the gain or loss on disposal. On the partial disposal of such foreign operation, the relevant proportion
is reclassified to net earnings.
Assets and liabilities of foreign operations that have the same functional currency as the Company are translated into Canadian dollars at
the foreign currency exchange rate in effect at the balance sheet date. The resulting foreign currency exchange gains or losses are
recognized in operating income.
Revenues and expenses of foreign operations are translated into Canadian dollars at the 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.
Defined Benefit Post-Employment Plans The Company has a number of contributory and non-contributory defined benefit post-
employment 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 defined benefit plan obligations (assets)
for each plan are actuarially calculated by a qualified actuary at the end of each annual reporting period using the projected unit credit
method pro-rated based on service and management’s best estimate of the discount rate, 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 with
cash flows that match the terms of the defined benefit plan obligations. Past service costs (credits) arising from plan amendments are
recognized in operating income in the year that they arise. The actuarially determined net interest costs on the net defined benefit plan
obligation are recognized in net interest expense and other financing charges.
The fair values of plan assets are deducted from the defined benefit plan obligations to arrive at the net defined benefit plan obligations
(assets). For plans that result in a net defined benefit asset, the recognized asset is limited to 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”). 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. 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.
Re-measurements including actuarial gains and losses, the effect of the asset ceiling (if applicable) and the impact of any minimum funding
requirements are recognized through other comprehensive income and subsequently reclassified from accumulated other comprehensive
income to retained earnings.
70 2014 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 accounting for other long term employee benefit plans is similar to the method used
for defined benefit plans except that all actuarial gains and losses are recognized in operating income.
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 costs of benefits for defined contribution plans are expensed as employees have rendered service.
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 limited by amounts established pursuant to its
collective agreements. Defined benefit multi-employer pension plans are accounted for as defined contribution plans as adequate
information to account for the Company’s participation in the plans is not available due to the size and number of contributing employers in
the plans. The contributions made by the Company to multi-employer plans are expensed as contributions are due.
Termination Benefits Termination benefits are recognized as an expense at the earlier of when the Company can no longer withdraw the
offer of those benefits and when the Company recognizes costs for a restructuring. Benefits payable are discounted to their present value
when the effect of the time value of money is material.
Equity-Settled Equity-Based Compensation Plans Stock options, Restricted Share Units (“RSUs”), Performance Share Units (“PSUs”),
Director Deferred Share Units (“DSUs”) and Executive Deferred Share Units (“EDSUs”) issued by the Company are settled in common
shares and are accounted for as equity-settled awards.
Stock options may have a five to ten 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. The fair
value of each tranche of options granted is measured separately at the grant date using a Black-Scholes option pricing model, and
includes the following assumptions:
•
The expected dividend yield is estimated based on the expected annual dividend prior to the option grant date and the closing share
price as at the 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; and
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.
RSUs and PSUs vest after the end of a performance period, ranging from three to five years. The number of PSUs that vest is based on
the achievement of specified performance measures. The fair value of each RSU and PSU granted is measured separately at the grant
date based on the market value of a Loblaw common share less the net present value of the expected dividend stream at the date on
which RSUs and PSUs are awarded to each participant.
Members of the Board, who are not management of the Company, may elect to receive a portion of their annual retainers and fees in the
form of DSUs. Eligible executives of the Company may elect to defer up to 100% of the Short Term Incentive Plan earned in any year into
the EDSU plan. Dividends paid earn fractional DSUs and EDSUs, respectively and are treated as additional awards. DSUs and EDSUs
vest upon grant.
The compensation expense for equity-settled plans is prorated over the vesting or performance period, with a corresponding increase to
contributed surplus. Forfeitures are estimated at the grant date and are revised to reflect changes in expected or actual forfeitures.
Upon exercise of options, the amount recognized in contributed surplus for the award plus the cash received upon exercise is recognized
as an increase in share capital. Upon settlement of RSUs and PSUs, the amount recognized in contributed surplus for the award is
reclassified to share capital, with any premium or discount applied to retained earnings.
The Company established a trust for each of the RSU and PSU plans to facilitate the purchase of shares for future settlement upon
vesting. The trusts are considered structured entities and are consolidated in the Company’s financial statements with the cost of the
acquired shares recorded at book value as a reduction to share capital. Any premium on the acquisition of the shares above book value is
applied to retained earnings until the shares are issued to settle RSU and PSU plan obligations.
2014 Annual Report - Financial Review 71
Notes to the Consolidated Financial Statements
Cash-Settled Equity-Based Compensation Unit Options, Restricted Units (“RUs”) and Trustee Deferred Units (“DUs”) issued by Choice
Properties, and certain DSUs are accounted for as cash-settled awards.
Choice Properties’ Unit Options may have a five to ten year term, vest 25% cumulatively on each anniversary date of the grant and are
exercisable at the designated Unit price, which is based on the greater of the volume weighted average trading price of a Unit for the five
trading days prior to the date of grant or the trading day immediately preceding the grant date. The fair value of each tranche is valued
separately using a Black-Scholes option pricing model, and includes the following assumptions:
•
The expected distribution yield is estimated based on the expected annual distribution prior to the balance sheet date and the closing
share price as at the balance sheet date;
•
•
•
The expected unit price volatility is estimated based on the average volatility of investment grade entities in the Standard & Poor’s/
Toronto Stock Exchange (“TSX”) REIT Index 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 balance sheet date for a term
to maturity equal to the expected life of the options; and
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 expectations of option holder behaviour.
RUs entitle certain employees to receive the value of the RU award in cash or Units at the end of the applicable vesting period, which is
usually three years in length. The RU plan provides for the crediting of additional RUs in respect of distributions paid on Units for the period
when an RU is outstanding. The fair value of each RU granted is measured based on the market value of a Unit at the balance sheet date.
Members of the Choice Properties’ Board of Trustees, who are not management of Choice Properties, are required to receive a portion of
their annual retainer in the form of DUs and may also elect to receive up to 100% of their remaining fees in DUs. Distributions paid earn
fractional DUs, which are treated as additional awards. DUs vest upon grant.
The fair value of the amount payable to employees in respect of these cash settled awards plan is re-measured at each balance sheet
date, and a compensation expense is recognized in selling, general and administrative expenses (“SG&A”) over the vesting period for each
tranche with a corresponding change in the liability.
On the acquisition of Shoppers Drug Mart, the Company converted Shoppers Drug Mart DSUs to Loblaw DSUs. Former directors of
Shoppers Drug Mart who continue to serve the Company in the same capacity, hold DSU’s that they have previously elected to receive in
lieu of director fees. These converted DSUs, which vested upon grant, will be settled in cash based on the market value of the Company’s
shares on the date the recipient ceases to serve the Company as director. Dividends paid earn fractional DSUs and are treated as
additional awards. The fair value of each converted DSU granted is measured based on the market value of a Loblaw common share at
the balance sheet date.
Employee Share Ownership Plan The Company’s contributions to the Employee Share Ownership Plan (“ESOP”) are measured at cost
and recorded as 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.
72 2014 Annual Report - Financial Review
Accounting Standards Implemented in 2014 and Changes to Significant Accounting Policies
The Company implemented the amendments to International Accounting Standards (“IAS”) 32, “Financial Instruments: Presentation” and
International Financial Reporting Interpretations Committee (“IFRIC”) 21, “Levies” retrospectively in 2014. There was no significant impact
on the Company’s annual audited consolidated financial statements as a result of the implementation of these standards.
Vendor Allowances The timing of recognition of vendor allowances requires judgment to determine the point at which the Company has
earned the allowance. In conjunction with the acquisition of Shoppers Drug Mart, management reviewed the timing of recognition of certain
vendor allowances and has determined that it would be appropriate to align the policies of both companies. The Company has
implemented the change retrospectively in 2014, as follows:
Consolidated Statement of Earnings and Comprehensive Income
Increase (Decrease)
(millions of Canadian dollars except where otherwise indicated)
Cost of Merchandise Inventories Sold
Operating Income
Earnings Before Income Taxes
Income taxes
Net Earnings
Total Comprehensive Income
Net Earnings per Common Share ($)
Basic
Diluted
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Accounts receivable
Inventories
Deferred Income Tax Assets
Total Equity Attributable to Shareholders of the Company
Note 3. Critical Accounting Estimates and Judgments
2013
5
(5)
(5)
(2)
(3)
(3)
(0.01)
(0.01)
$
$
$
$
$
$
$
$
As at
As at
December 28, 2013 December 30, 2012
(32)
11
6
(15)
(39)
13
8
(18)
$
$
$
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.
2014 Annual Report - Financial Review 73
Notes to the Consolidated Financial Statements
Consolidation
Judgments Made in Relation to Accounting Policies Applied The Company uses judgment in determining the entities that it controls
and therefore consolidates. The Company controls an entity when the Company has the existing rights that give it the current ability to
direct the activities that significantly affect the entities’ returns. The Company consolidates all of its wholly owned subsidiaries. Judgment is
applied in determining whether the Company controls the entities in which it does not have ownership rights or does not have full
ownership rights. Most often, judgment involves reviewing contractual rights to determine if rights are participating (giving power over the
entity) or protective rights (protecting the Company’s interest without giving it power).
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 shrink, future retail prices, the impact of vendor rebates on cost, 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 location is a separate CGU for purposes of fixed asset impairment testing. For the purpose of goodwill and indefinite life 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 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 the Company’s 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. 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.
Loyalty Programs
Key Sources of Estimation The Company defers revenue equal to the fair value of the award points earned by loyalty program members
at the time of award. The Company determines fair value using such estimates as breakage (the amount of points that will never be
redeemed) and the estimated retail value per point on redemption. The trends in breakage are reviewed on an ongoing basis and the
estimated retail value per point is adjusted based on expected future activity.
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 the 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 by the tax authorities.
74 2014 Annual Report - Financial Review
Note 4. Future Accounting Standards
In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”). The new standard provides a
comprehensive framework for the recognition, measurement and disclosure of revenue from contracts with customers, excluding contracts
within the scope of the accounting standards on leases, insurance contracts and financial instruments. IFRS 15 becomes effective for
annual periods beginning on or after January 1, 2017, and is to be applied retrospectively. Early adoption is permitted. The Company is
currently assessing the impact of the new standard on its consolidated financial statements.
In July 2014, the IASB issued IFRS 9, “Financial Instruments”, replacing IAS 39, “Financial Instruments: Recognition and Measurement.”
The standard had three main phases: classification and measurement, impairment, and general hedging. The standard becomes effective
for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively with the exception of the general hedging
phase which is applied prospectively. Early adoption is permitted. The Company is currently assessing the impact of the new standard on
its consolidated financial statements.
In December 2014, the IASB issued amendments to IAS 1, “Presentation of Financial Statements” (“IAS 1 amendments”). The IAS 1
amendments provide guidance on the application of judgment in the preparation of financial statements and disclosures. The IAS 1
amendments are effective for annual periods beginning on or after January 1, 2016. Early adoption is permitted. The Company is currently
assessing the impact of the IAS 1 amendments on its consolidated financial statements.
Note 5. Acquisition of Shoppers Drug Mart Corporation
On March 28, 2014, the Company acquired all of the outstanding shares of Shoppers Drug Mart for total consideration of $12,273 million,
comprised of approximately $6,600 million of cash and the issuance of approximately 119.5 million common shares of the Company.
$3,500 million unsecured term loan facility (see note 22);
The cash portion of the acquisition of Shoppers Drug Mart was financed as follows:
•
•
•
•
approximately $1,000 million was used from cash on hand.
$1,600 million of proceeds from the issuance of unsecured notes in 2013 (see note 9);
$500 million was received in consideration of the issuance of 10.5 million common shares to Weston; and
The preliminary purchase equation is based on management’s current best estimates of fair value. The actual amount allocated to certain
identifiable net assets could vary as the purchase equation is finalized. The preliminary purchase price allocation as at March 28, 2014 is
as follows:
(millions of Canadian dollars)
Net Assets Acquired:
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid expenses and other assets
Fixed assets
Investment properties
Intangible assets
Goodwill
Deferred income tax assets
Other assets
Bank indebtedness
Trade payables and other liabilities
Income taxes payable
Associate interest
Provisions
Long term debt
Deferred income tax liabilities
Other liabilities
Total Net Assets Acquired
$
$
27
534
3,003
67
1,792
16
9,440
2,285
68
7
(295)
(924)
(11)
(174)
(19)
(1,127)
(2,252)
(164)
12,273
2014 Annual Report - Financial Review 75
Notes to the Consolidated Financial Statements
As at January 3, 2015, the Company has not yet finalized the above purchase price allocation. In the fourth quarter of 2014, the Company
revised its fair value estimate of intangible assets and updated the purchase price equation. The result was to decrease intangible assets
by $35 million to $9,440 million, decrease deferred income tax liabilities by $9 million to $2,252 million and increase goodwill by $26 million
to $2,285 million. The Company has one year from the date of acquisition to finalize the fair value of net tangible assets, goodwill and
intangible assets and any further changes to the amounts presented above will be reflected in the first half of 2015.
Goodwill is attributable to synergies expected following the integration of Shoppers Drug Mart, improved competitive positioning in the
retail market, and future growth of the Company’s customer base as a result of the acquisition. The goodwill arising from this acquisition is
not deductible for tax purposes.
Intangible assets are comprised of the following:
(millions of Canadian dollars)
Intangible Assets:
Prescription files
Brands
Optimum loyalty program
Other
Total Intangible Assets
Estimated
Useful Life
11 years
indefinite
18 years
5 to 10 years
$
$
5,005
3,390
490
555
9,440
Pursuant to a Consent Agreement reached with the Competition Bureau in 2014, the Company was required to divest 16 Shoppers Drug
Mart stores, two of the Company’s franchise grocery stores, as well as nine of the Company’s in-store pharmacy operations. As at
January 3, 2015, the Competition Bureau has approved the sale of all properties. During 2014, the divestitures of all but three Shoppers
Drug Mart stores were completed (see note 36) and the Company received total proceeds of $60 million and recorded a loss of $12 million
in operating income related to divestitures that have been completed.
The Company has incurred costs of $75 million (2013 – $31 million) related to the acquisition of Shoppers Drug Mart, of which $60 million
(2013 – $6 million) was recorded in SG&A and $15 million (2013 – $25 million) was recorded in net interest expense and other financing
charges.
Upon closing of the acquisition, all amounts owing on Shoppers Drug Mart’s revolving bank credit facility were repaid and the facility was
cancelled. In addition, upon closing, the Company guaranteed the outstanding principal amount of Shoppers Drug Mart medium term notes
(“MTNs”) of $500 million, along with accrued interest. The Company has also provided guarantees to various Canadian banks in support of
the financing obtained by Shoppers Drug Mart’s Associates (see note 33).
Included in the consolidated statement of earnings for the year ended January 3, 2015 are approximately $9,100 million in revenue and
approximately $542 million in net earnings contributed by Shoppers Drug Mart, since the date of acquisition, excluding the impact of
purchase price adjustments, acquisition costs and divestitures required by the Competition Bureau.
On a combined pro forma basis for 2014, the Company’s total revenue would have amounted to approximately $45,100 million and the
Company’s net earnings would have amounted to approximately $83 million. This pro forma information incorporates the effect of the
preliminary purchase equation as if the acquisition had been effective December 29, 2013.
76 2014 Annual Report - Financial Review
Note 6. Net Interest Expense and Other Financing Charges
(millions of Canadian dollars)
Interest expense and other financing charges:
Long term debt
Choice Properties Initial Public Offering transaction costs
Early debt settlement costs (note 22)
Shoppers Drug Mart acquisition-related costs (note 5)
Borrowings related to credit card receivables
Trust Unit distributions
Post-employment and other long term employee benefits (note 27)
Independent funding trusts
Dividends on capital securities (note 24)
Fair value adjustment of Trust Unit Liability (note 30)
Bank indebtedness (note 33)
Capitalized interest (capitalization rate 6.2% (2013 – 6.4%)) (note 14 and 16)
Interest income:
Accretion income
Derivative financial instruments
Short term interest income
Security deposits(i)
Net interest expense and other financing charges
2014
$
466
$
—
—
18
37
44
12
15
14
17
6
(4)
625
(25)
—
(12)
(4)
(41)
584
$
$
$
$
$
$
$
$
2013
287
44
18
30
39
21
23
15
14
27
—
(2)
516
(21)
(10)
(11)
(6)
(48)
468
(i)
Includes interest income of $3 million (2013 – $5 million) related to $1,599 million of proceeds from the issuance of senior unsecured notes previously held in escrow
(see note 9), which were used to partially fund the acquisition of all of the outstanding common shares of Shoppers Drug Mart (see note 5).
Note 7. 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
Income taxes
$
$
2014
297
(18)
279
(273)
19
(254)
25
$
2013
287
(1)
286
(50)
(10)
(60)
226
$
$
$
2014 Annual Report - Financial Review 77
Notes to the Consolidated Financial Statements
Income tax (recovery) expense recognized in other comprehensive income (loss) was as follows:
(millions of Canadian dollars)
Defined benefit plan actuarial (loss) income
Derecognized derivative instrument
Other comprehensive (loss) income
$
$
2014
(16)
—
(16)
$
$
2013
85
(2)
83
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 items
Impact of fair value adjustments of the Trust Unit Liability
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
2014
26.1%
(3.2)
2.2
5.8
—
1.2
32.1%
2013
26.0%
(0.6)
1.7
0.8
(0.1)
(1.3)
26.5%
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
$
$
2014
19
57
76
$
$
2013
12
29
41
The income tax losses expire in the years 2027 to 2034. 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.
78 2014 Annual Report - Financial Review
Recognized deferred tax assets and liabilities Deferred tax assets and liabilities were attributable to the following:
(millions of Canadian dollars)
Trade payables and other liabilities
Other liabilities
Fixed assets
Goodwill and intangible assets
Other assets
Non-capital loss carryforwards (expiring 2030 to 2034)
Capital loss carryforwards
Other
Net deferred income tax (liabilities) assets
Recorded on the consolidated balance sheets as follows:
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax (liabilities) assets
Note 8. Basic and Diluted Net Earnings per Common Share
(millions of Canadian dollars except where otherwise indicated)
Net earnings
Weighted average common shares outstanding (note 24) (in millions)
Dilutive effect of equity-based compensation (in millions)
Dilutive effect of certain other liabilities (in millions)
Diluted weighted average common shares outstanding (in millions)
Basic net earnings per common share ($)
Diluted net earnings per common share ($)
As at
January 3, 2015
56
$
As at
December 28, 2013
48
$
347
(517)
(1,816)
10
161
20
52
(1,687)
$
193
(1,880)
(1,687)
$
2014
53
380.5
3.4
0.5
384.4
0.14
0.14
$
$
$
243
(356)
(4)
38
201
1
56
227
261
(34)
227
2013
627
281.1
2.1
0.9
284.1
2.23
2.21
$
$
$
$
$
Excluded from the computation of diluted net earnings per common share were 10,620,095 (2013 – 11,503,993) potentially dilutive
instruments, as they were anti-dilutive.
2014 Annual Report - Financial Review 79
Notes to the Consolidated Financial Statements
Note 9. 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:
Cash and Cash Equivalents
(millions of Canadian dollars)
Cash
Cash equivalents:
Bankers’ acceptances
Government treasury bills
Bank term deposits
Corporate commercial paper
Total cash and cash equivalents
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(i)
Total security deposits
As at
January 3, 2015
464
$
As at
December 28, 2013
515
$
57
463
—
15
$
999
$
270
1,420
42
13
2,260
As at
January 3, 2015
2
$
As at
December 28, 2013
162
$
17
1
—
1
21
$
98
—
30
—
290
As at
January 3, 2015
7
As at
December 28, 2013
102
$
—
7
$
1,599
1,701
$
$
$
(i)
As at December 28, 2013, Government treasury bills included $1,599 million of proceeds from the issuance of senior unsecured notes that were held in escrow as part
of the financing for the acquisition of Shoppers Drug Mart. In 2014, the Company completed the acquisition of Shoppers Drug Mart and the proceeds were released
from escrow (see note 5).
As at January 3, 2015, the Company had agreements to cash collateralize certain of its uncommitted credit facilities up to an amount of
$141 million (December 28, 2013 – $136 million), of which $7 million (December 28, 2013 – $102 million) was deposited with major
financial institutions and classified as security deposits.
80 2014 Annual Report - Financial Review
Note 10. Accounts Receivable
The following is an aging of the Company’s accounts receivable:
(millions of Canadian dollars)
Accounts receivable
As at
January 3, 2015
As at
December 28, 2013
0-90
days
$ 1,104 $
91-180
days
> 180
days
38 $
67 $
Total
1,209
0-90
days
546 $
$
91-180
days
> 180
days
17 $
16 $
Total
579
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
Credit risk associated with accounts receivable are discussed in note 31.
Note 11. 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®
Securitized to Other Independent Securitization Trusts
$
$
$
$
$
2014
(118)
22
(96)
$
$
2013
(110)
(8)
(118)
As at
January 3, 2015
2,684
As at
December 28, 2013
2,585
$
(54)
2,630
750
605
$
$
(47)
2,538
750
605
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 and repurchases credit card receivables with independent securitization trusts, including Eagle
and Other Independent Securitization Trusts, from time to time, depending on PC Bank’s financing requirements.
The associated liability of Eagle is recorded in long term debt (see note 22). The associated liabilities of credit card receivables securitized
to the Other Independent Securitization Trusts are recorded in short term debt (see note 20).
The Company has arranged letters of credit on behalf of PC Bank, for the benefit of the independent securitization trusts (see note 33).
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 as at January 3, 2015 and throughout the year.
2014 Annual Report - Financial Review 81
Notes to the Consolidated Financial Statements
The following is an aging of the Company’s gross credit card receivables:
(millions of Canadian dollars)
Gross credit card receivables
As at
January 3, 2015
As at
December 28, 2013
Current
2,505
$
1-90 days
past due
150
$
> 90 days
past due
29
$
Total
2,684
Current
2,416
$
$
1-90 days
past due
142
$
> 90 days
past due
27
$
Total
2,585
$
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
$
$
2014
(47)
(121)
(19)
133
(54)
$
$
2013
(43)
(105)
(14)
115
(47)
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.
Note 12. Inventories
For inventories recorded as at January 3, 2015, the Company recorded $23 million (December 28, 2013 – $16 million) as an expense for
the write-down of inventories below cost to net realizable value. The write-down was included in cost of merchandise inventories sold.
There were no reversals of previously recorded write-downs of inventories during 2014 and 2013.
In connection with the acquisition of Shoppers Drug Mart, acquired assets and liabilities were recorded on the Company’s consolidated
balance sheet at their fair value. This resulted in a fair value adjustment to Shoppers Drug Mart inventory on the date of acquisition of
$798 million representing the difference between inventory cost and its fair value. This difference was recognized in cost of merchandise
inventories sold during 2014, with a resulting negative impact to operating income.
As at the end of 2014, with the upgrade of its information technology (“IT”) infrastructure, the Company had completed the conversion of
substantially all of its corporate grocery stores to the new systems. The implementation of a perpetual inventory system, combined with
visibility to integrated costing information provided by the new IT systems, enabled the Company to estimate the cost of inventory using a
more precise system-generated average cost. As a result of the conversion, the Company recognized a $190 million charge to cost of
merchandise inventories sold and a corresponding reduction in inventory, representing the estimate of the difference between the
measurement of the cost of corporate grocery store inventory using a system generated weighted average cost compared to the retail
inventory method and other conversion differences associated with the implementation of a perpetual inventory system.
Note 13. Assets Held for Sale
The Company holds land and buildings as assets held for sale that it intends to dispose of in the next 12 months. These assets were
previously used in the Company’s retail business segment. There were no impairment or other charges recognized on these properties
during 2014 (2013 – nil). In 2014, the Company recorded a $4 million gain (2013 – $7 million) from the sale of these assets, excluding the
impact of completed divestitures related to the acquisition of Shoppers Drug Mart (see note 5).
As a condition to receiving the approval of the Competition Bureau in relation to the acquisition of Shoppers Drug Mart, the Company was
required to divest 16 Shoppers Drug Mart stores, two of the Company’s franchise grocery stores, as well as nine of the Company’s in-store
pharmacy operations. During 2014, a $12 million net loss was recorded in operating income from the divestiture of properties required by
the Competition Bureau related to the acquisition of Shoppers Drug Mart.
As at January 3, 2015, assets totalling $8 million, including intangible assets of $3 million, inventories of $3 million and fixed assets of
$2 million, relating to the three remaining Shoppers Drug Mart stores expected to be sold in the first quarter of 2015, have been included in
assets held for sale.
82 2014 Annual Report - Financial Review
Note 14. Fixed Assets
The following are continuities of the cost and accumulated depreciation of fixed assets for the years ended January 3, 2015 and
December 28, 2013:
(millions of Canadian dollars)
Land
Buildings
Cost
2014
Equipment
and
Fixtures
Leasehold
Improvements
Finance
Leases - Land,
Buildings,
Equipment
and Fixtures
Assets
Under
Construction
Balance, beginning of year
$ 1,678
$
6,849
$
6,424
$
7
88
(11)
(5)
5
38
13
268
(13)
(16)
12
255
101
374
(108)
(11)
—
472
$
846
82
830
(11)
(14)
—
32
$
567
102
162
(14)
—
—
—
596
776
72
(13)
—
(73)
(797)
Total
$ 16,960
1,081
1,794
(170)
(46)
(56)
—
$ 1,800
$
7,368
$
7,252
$
1,765
$
817
$
561
$ 19,563
$
$
2
—
1
(1)
—
—
1
3
$ 1,797
$
2,429
$
4,663
$
201
11
(31)
(9)
(4)
8
$
$
2,605
4,763
$
$
658
12
(1)
(86)
(10)
—
5,236
2,016
$
$
493
132
13
(2)
(9)
(7)
—
620
1,145
$
261
$
47
1
—
(14)
—
—
295
522
$
$
$
$
7
1
2
—
—
—
—
10
$
7,855
1,039
40
(35)
(118)
(21)
9
$
8,769
551
$ 10,794
Additions
Business acquisitions(i)
Disposals
Net transfer to assets held for
sale
Net 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
Net transfer from investment
properties
Balance, end of year
Carrying amount as at:
January 3, 2015
(i)
Includes $1,792 million related to the acquisition of Shoppers Drug Mart (see note 5).
2014 Annual Report - Financial Review 83
Additions
Disposals
Net transfer from assets held for
sale
Net 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
Net transfer (to) from investment
properties
Balance, end of year
Carrying amount as at:
December 28, 2013
Notes to the Consolidated Financial Statements
2013
(millions of Canadian dollars)
Land
Buildings
Equipment
and Fixtures
Leasehold
Improvements
Cost
Balance, beginning of year
$ 1,650
$
6,555
$
5,950
$
790
$
Finance
Leases - Land,
Buildings,
Equipment
and Fixtures
Assets Under
Construction
Total
$
554
62
(53)
—
4
—
664
837
—
—
(5)
(900)
$ 16,163
923
(123)
1
(4)
—
$
567
$
596
$ 16,960
1
(2)
1
(2)
30
—
(4)
—
(1)
299
14
(57)
—
—
517
$ 1,678
$
6,849
$
6,424
$
9
(7)
—
—
54
846
$
$
7
—
—
(4)
(1)
—
2
$ 1,676
$
2,298
$
4,176
$
433
$
269
$
184
20
(71)
(1)
532
5
(2)
(48)
(1)
2,429
4,420
$
$
$
$
—
4,663
1,761
$
$
44
24
(3)
(5)
—
493
353
$
$
44
3
(3)
(53)
1
261
306
$
$
7
—
—
—
—
—
7
589
$
7,190
804
52
(83)
(108)
—
7,855
9,105
$
$
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 January 3, 2015, the net carrying amount of leased land and buildings was $466 million (December 28,
2013 – $274 million), and the net carrying amount of leased equipment and fixtures was $56 million (December 28, 2013 – $32 million).
Assets under Construction The cost of additions to properties under construction for the year ended January 3, 2015 was $776 million
(December 28, 2013 – $837 million). Included in this amount are capitalized borrowing costs of $3 million (2013 – $2 million), with a
weighted average capitalization rate of 6.2% (2013 – 6.4%).
Security and Assets Pledged As at January 3, 2015, fixed assets with a carrying amount of $191 million (December 28, 2013 –
$187 million) were encumbered by mortgages of $86 million (December 28, 2013 – $87 million).
Fixed Asset Commitments As at January 3, 2015, the Company had entered into commitments of $192 million (December 28, 2013 –
$55 million) for the construction, expansion and renovation of buildings and the purchase of real property.
Impairment Losses For the year ended January 3, 2015, the Company recorded $26 million (2013 – $48 million) of impairment losses on
fixed assets in respect of 13 CGUs (2013 – 21 CGUs) in the retail operating segment. Additional impairment losses of $14 million (2013 –
$4 million) were incurred related to store closures, renovations and conversions. 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 23% (2013 – 10%) of impaired CGUs had carrying values which were $7 million (2013
– $6 million) greater than their fair value less costs to sell. The remaining 77% (2013 – 90%) of impaired CGUs had carrying values which
were $19 million (2013 – $46 million) greater than their value in use.
For the year ended January 3, 2015, the Company recorded $35 million (2013 – $83 million) of impairment reversals on fixed assets in
respect of 14 CGUs (2013 – 26 CGUs) in the retail operating segment. Impairment reversals are recorded where the recoverable amount
of the retail location exceeds its carrying amount. Approximately 93% (2013 – 92%) of CGUs with impairment reversals had fair value less
costs to sell which were $33 million (2013 – $75 million) greater than their carrying values. The remaining 7% (2013 – 8%) of CGUs with
impairment reversals had value in use which were $2 million (2013 – $8 million) greater than carrying values.
84 2014 Annual Report - Financial Review
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 assets 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 January 3, 2015 (December 28, 2013 – 8.0% to 8.5%).
Note 15. Investment Properties
The following are continuities of investment properties:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Business acquisitions(i)
Additions
Disposals
Net transfer from fixed assets
Net transfer to assets held for sale
Balance, end of year
Accumulated depreciation and impairment losses
Balance, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Net transfer to fixed assets
Net transfer (to) from assets held for sale
Balance, end of year
Carrying amount
Fair value
$
$
$
$
$
2014
172
$
16
16
(4)
56
(1)
255
73
2
11
—
(2)
(9)
(5)
70
185
225
$
$
$
$
2013
169
—
1
(2)
4
—
172
69
2
—
(1)
(1)
—
4
73
99
144
(i)
Relates to the acquisition of Shoppers Drug Mart (see note 5).
During 2014, the Company recognized in operating income $7 million of rental income (2013 – $4 million) and incurred direct operating
costs of $3 million (2013 – $3 million) related to its investment properties. In addition, the Company recognized direct operating costs of
$2 million (2013 – $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. 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.
2014 Annual Report - Financial Review 85
Notes to the Consolidated Financial Statements
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 January 3, 2015, the pre-tax discount rates used in the valuations for investment properties ranged from
6.00% to 9.75% (December 28, 2013 – 6.50% to 9.75%) and the terminal capitalization rates ranged from 5.50% to 8.50% (December 28,
2013 – 5.75% to 8.75%).
For the year ended January 3, 2015, the Company recorded $11 million (2013 – nil) of impairment losses in operating income on
investment properties as the carrying amounts of all impaired properties were lower than their recoverable amounts. The Company
recorded no reversals of impairment losses on investment properties (2013 – $1 million) in operating income where their fair values less
costs to sell were greater than their carrying values.
Note 16. Intangible Assets
The following are continuities of the cost and accumulated amortization of intangible assets for the years ended January 3, 2015 and
December 28, 2013:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Business acquisitions(i)
Additions
Disposal
Transfer to assets held for sale
Write off of cost for fully amortized assets
Balance, end of year
Accumulated amortization and impairment losses
Balance, beginning of year
Amortization
Transfer to assets held for sale
Write off of amortization for fully amortized assets
Balance, end of year
Carrying amount as at:
January 3, 2015
2014
Indefinite Life
Intangible
Assets
Definite Life
Internally
Generated
Intangible Assets
Definite Life
Other
Intangible
Assets
$
$
$
$
$
71
$
3,390
—
—
—
—
3,461
$
— $
—
—
—
— $
20
230
85
(3)
—
—
332
19
23
—
—
42
3,461
$
290
$
$
$
$
$
71
$
5,824
5
(2)
(29)
(1)
5,868
32
414
(3)
(1)
442
5,426
$
$
$
$
Total
162
9,444
90
(5)
(29)
(1)
9,661
51
437
(3)
(1)
484
9,177
(i)
Includes $9,440 million related to the acquisition of Shoppers Drug Mart (see note 5).
86 2014 Annual Report - Financial Review
(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 28, 2013
$
$
$
$
$
2013
Indefinite Life
Intangible
Assets
Definite Life
Internally
Generated
Intangible Assets
Definite Life
Other
Intangible
Assets
62
9
—
71
$
$
— $
—
—
— $
71
$
20
—
—
20
14
5
—
19
1
$
$
$
$
$
76
3
(8)
71
30
10
(8)
32
39
$
$
$
$
$
Total
158
12
(8)
162
44
15
(8)
51
111
Indefinite life intangible assets are comprised of brand names, trademarks, and import purchase quota. The brand names and trademarks
are a result of the Company’s acquisition of Shoppers Drug Mart and T&T Supermarket Inc. The Company expects to renew the
registration of the brand names, trademarks, and import purchase quota at each expiry date indefinitely, and expects these assets to
generate economic benefit in perpetuity. As such, the Company assessed these intangibles to have indefinite useful lives.
The Company completed its annual impairment tests for indefinite life intangible assets and concluded that there was no impairment.
Key Assumptions The key assumptions used to calculate the fair value less costs to sell are those regarding discount rates, growth rates
and expected changes in margins. These assumptions are consistent with the assumptions used to calculate fair value less costs to sell for
goodwill (see note 17).
Definite Life Intangible Assets Definite life intangible assets are primarily comprised of Shoppers Drug Mart prescription files and the
carrying value of the Optimum loyalty program (see note 5), and software purchases and development. Included in these amounts are
capitalized borrowing costs of $1 million (2013 – nil).
Note 17. Goodwill
The following is a continuity of the cost and accumulated amortization of goodwill for the years ended January 3, 2015 and December 28,
2013:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Business acquisitions(i)
Balance, end of year
Accumulated amortization and impairment losses
Balance, beginning of year
Balance, end of year
Carrying amount as at the end of the year:
(i)
Includes $2,285 million related to the acquisition of Shoppers Drug Mart (see note 5).
2014
1,932
2,300
4,232
989
989
3,243
$
$
$
$
$
2013
1,932
—
1,932
989
989
943
$
$
$
$
$
2014 Annual Report - Financial Review 87
The carrying amount of goodwill attributed to each CGU grouping was as follows:
(millions of Canadian dollars)
Shoppers Drug Mart
Market
Discount
Quebec region
T&T Supermarket Inc.
All other
Carrying amount of goodwill
As at
January 3, 2015
2,294
$
As at
December 28, 2013
—
$
337
459
—
129
24
$
3,243
$
—
—
700
129
114
943
The Company completed its annual impairment tests for goodwill and concluded that there was no impairment. Subsequent to the
acquisition of Shoppers Drug Mart, the Company reorganized its senior management, including the heads of the Company’s banner
groups, and as a result, the Company reallocated goodwill to this reorganized structure subsequent to the completion of the annual
impairment test in 2014. CGU groupings for goodwill allocation are done by banner or groups of banners, whereas they were previously
grouped by region.
Key Assumptions The key assumptions used to calculate the fair value less costs to sell are those regarding discount rates, growth rates
and expected changes in margins. These assumptions are considered to be Level 3 in the fair value hierarchy.
The weighted average cost of capital was determined to be in the range of 6.0% to 6.5% (December 28, 2013 – 6.5% to 7.0%) and is
based on a risk-free rate, an equity risk premium adjusted for betas of comparable publicly traded companies, an unsystematic risk
premium, an after-tax cost of debt based on corporate bond yields and the capital structure of the Company.
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 January 3, 2015, the after-tax discount rates used in the recoverable amount
calculations ranged from 8.5% to 9.5% (December 28, 2013 – 9.5%). The pre-tax discount rates ranged from 11.4% to 13.0%
(December 28, 2013 – 12.8% to 13.0%).
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 rate of 2.0% (December 28, 2013 – 2.0%). The budgeted EBITDA(1) growth
is based on the Company’s five year strategic plan approved by the Board.
(1) See Section 20 “Non-GAAP Financial Measures” of the Company’s Management’s Discussion and Analysis.
88 2014 Annual Report - Financial Review
Note 18. Interest in Other Entities
Subsidiaries
Loblaw Companies Limited is a holding company which carries on its business through its subsidiaries. The subsidiaries of the Company
that carry on its principal business are: Loblaws Inc., a retail operations company incorporated in Ontario, Shoppers Drug Mart
Corporation, a pharmacy operations company incorporated in Canada, President’s Choice Bank, a financial services company
incorporated in Canada; Choice Properties Real Estate Investment Trust, a trust formed in Ontario; and Choice Properties Limited
Partnership, a limited partnership formed in Ontario. During 2014 and 2013, the Company owned, either directly or indirectly, 100% of the
voting securities of its subsidiaries, other than Choice Properties Real Estate Investment Trust and its subsidiaries, including Choice
Properties Limited Partnership, of which Loblaw held an 82.9% (2013 – 82.2%) effective interest.
As at year end 2014, there were no significant restrictions on the ability to access or use assets and settle liabilities of the subsidiaries. In
addition, there was no change in control of any subsidiary during 2014 and 2013.
The Company acquired and began consolidating Shoppers Drug Mart Corporation in 2014 (see note 5).
In 2014, Choice Properties Real Estate Investment Trust entered into an agreement with a third party for a controlling 70% ownership
interest in Choice Properties PRC Brampton Limited Partnership, a subsidiary which holds land for future retail development. Choice
Properties Real Estate Investment Trust fully consolidates this subsidiary and recognized non-controlling interests of $8 million, which was
included as a component of total equity.
Consolidated Associates
Associates The Company consolidates the Associates based on the concept of control, which is determined, for accounting purposes, to
exist through Associate Agreements. The Company does not have any direct or indirect shareholdings in the corporations (the "Associates'
corporations") that operate the Associates. The Associates’ corporations remain separate legal entities.
Consolidated Structured Entities
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 franchisees to facilitate their purchase of inventory and fixed assets, consisting
mainly of fixtures and equipment. The Company provides a standby letter of credit for the benefit of the independent funding trust (see
note 33).
Eagle Credit Card Trust® 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. Under these securitization programs, a portion of the total interest in credit card
receivables is sold to third parties pursuant to co-ownership agreements that issue interest bearing securities. PC Bank participates in a
single seller revolving co-ownership securitization program with Eagle and continues to service the credit card receivables on behalf of
Eagle, but does not receive any fee for its servicing obligations and has a retained interest in the securitized receivables represented by
the right to future cash flows after obligations to investors have been met. The Company provides a standby letter of credit for the benefit
of the independent securitization trust (see note 33).
Equity-Based Compensation Trusts In 2013, the Company established trusts to facilitate the purchase of shares for future settlement of
each of the RSU and PSU plans upon vesting. The Company is the sponsor of the trusts and has assigned Computershare Trust Company
of Canada as the trustee. The Company funds the purchase of shares for settlement and earns management fees from the trusts.
Unconsolidated Structured Entities
Other Independent Securitization Trusts The Other Independent Securitization Trusts administer multi-seller, multi-asset securitization
programs that acquire assets from various participants, including credit card receivables from PC Bank. These trusts are managed by
major Canadian chartered banks. PC Bank does not control the trusts through voting interests and does not exercise any control over the
trusts’ management, administration or assets. The activities of these trusts are conducted on behalf of the participants and each trust is a
conduit through which funds are raised to purchase assets through the issue of senior and subordinated short term and medium term asset
backed notes. The Company provides standby letters of credit for the benefit of these trusts (see note 33).
2014 Annual Report - Financial Review 89
Notes to the Consolidated Financial Statements
Note 19. Other Assets
(millions of Canadian dollars)
Sundry investments and other receivables
Accrued benefit plan asset (note 27)
Interest in joint venture (note 34)
Other
Other assets
Note 20. Short Term Debt
As at
January 3, 2015
141
As at
December 28, 2013
136
$
90
6
44
281
$
106
—
43
285
$
$
The outstanding short term debt balance of $605 million (2013 – $605 million) includes credit card receivables securitized to the Other
Independent Securitization Trusts (see note 11).
In 2014, PC Bank extended the maturity date for one of its Other Independent Securitization Trust agreements from the third quarter of
2015 to the third quarter of 2016, with all other terms and conditions remaining substantially the same. In addition, PC Bank extended the
maturity date for two of its Other Independent Securitization Trust agreements from the second quarter of 2015 to the second quarter of
2016, with all other terms and conditions remaining substantially the same.
During 2013, PC Bank repurchased $300 million of co-ownership interests in the securitized receivables from the Other Independent
Securitization Trusts, and recorded a corresponding decrease to short term debt.
The undrawn commitments on facilities available from the Other Independent Securitization Trusts as at January 3, 2015 were $120 million
(December 28, 2013 – $120 million). The Company has arranged letters of credit on behalf of PC Bank, for the benefit of the Other
Independent Securitization Trusts (see note 33).
Note 21. Provisions
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
Acquisition of Shoppers Drug Mart
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
$
$
$
$
2014
122
19
81
(60)
(2)
160
2014
84
76
160
$
$
$
$
2013
137
—
38
(43)
(10)
122
2013
66
56
122
During 2014, the Company recorded $46 million (2013 – $32 million) of restructuring and reorganization costs in operating income,
primarily associated with the reduction of corporate and store-support positions, the departure of certain executives and the realignment of
certain of the Company’s central office functions. As at January 3, 2015, $37 million was included in provisions relating to these
restructuring initiatives (2013 – $39 million).
90 2014 Annual Report - Financial Review
Note 22. Long Term Debt
(millions of Canadian dollars)
Loblaw Companies Limited Notes (a)
6.00%, due 2014
4.85%, due 2014
7.10%, due 2016
3.75%, due 2019
5.22%, due 2020
4.86%, due 2023
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
Shoppers Drug Mart Notes (b)
2.01%, due 2016
2.36%, due 2018
Unsecured Term Loan Facility (c)
1.45% + Bankers’ Acceptance, due 2019
Long Term Debt Secured by Mortgage
5.49%, due 2018 (note 14)
Guaranteed Investment Certificates (d)
Due 2015 - 2019 (1.20% – 3.78%)
Independent Securitization Trusts (e)
Eagle Credit Card Trust®, 3.58%, due 2015
Eagle Credit Card Trust®, 2.91%, due 2018
Independent Funding Trusts (f)
Finance Lease Obligations
Choice Properties (g)
Series A 3.55%, due 2018
Series B 4.90%, due 2023
Series C 3.50%, due 2021
Series D 4.29%, due 2024
Series 5 3.00%, due 2016
Series 6 3.00%, due 2017
Series 7 3.00%, due 2019
Series 8 3.60%, due 2020
Series 9 3.60%, due 2021
Series 10 3.60%, due 2022
Choice Properties Credit Facility
Transaction costs and other
Total long term debt
Less amount due within one year
Long Term Debt
As at
January 3, 2015
As at
December 28, 2013
$
$
$
—
—
300
800
350
800
100
200
175
151
(57)
200
200
200
200
200
300
200
150
55
225
275
1,229
86
634
350
400
498
600
400
200
250
200
300
200
200
300
200
300
122
(31)
11,462
420
11,042
$
$
$
100
350
300
800
350
800
100
200
175
151
(67)
200
200
200
200
200
300
200
150
55
—
—
—
87
430
350
400
475
388
400
200
—
—
—
—
—
—
—
—
—
(14)
7,680
1,008
6,672
2014 Annual Report - Financial Review 91
Notes to the Consolidated Financial Statements
a) Loblaw Companies Limited Notes During 2014, the Company’s $100 million 6.00% and $350 million 4.85% MTNs matured and were
repaid. In 2013, the Company’s $200 million 5.40% MTN matured and was repaid.
During 2013, the Company issued $1,600 million aggregate principal amount of senior unsecured notes, consisting of $800 million of
Senior Unsecured Notes, 3.75% Series 2019 due March 12, 2019 and $800 million of Senior Unsecured Notes, 4.86% Series 2023, due
September 12, 2023. The net proceeds from the offering were initially placed in escrow until used in connection with acquisition of
Shoppers Drug Mart (see note 5).
b) Shoppers Drug Mart Notes In connection with the acquisition of Shoppers Drug Mart, the Company assumed MTNs of $225 million at
2.01% and $275 million at 2.36%, maturing in 2016 and 2018, respectively.
c) Unsecured Term Loan Facility In connection with the financing of the acquisition of Shoppers Drug Mart, $3,500 million was obtained
through an unsecured term loan facility bearing interest at a rate equal to the Bankers’ Acceptance rate plus 1.75% maturing March 28,
2019. The Company incurred $41 million in financing costs related to the unsecured term loan facility, which were capitalized. On July 23,
2014, the Company reached an agreement to re-price the interest rate on its unsecured term loan facility to reduce the rate from Bankers’
Acceptance rate plus 1.75% to Bankers’ Acceptance rate plus 1.45%.
During 2014, the Company repaid $2,271 million of the unsecured term loan facility using net proceeds of $1,500 million from the sale of
Choice Properties Transferor Notes to unrelated parties, $714 million of existing cash and $57 million from the proceeds of divested assets
required by the Competition Bureau. As at January 3, 2015, the outstanding balance on the unsecured term loan facility was
$1,229 million. The amortization of the financing costs related to the unsecured term loan facility was $25 million, of which $23 million was
accelerated due to early repayments on the facility.
As required by the unsecured term loan facility agreement, $478 million, which was the outstanding balance owing on Shoppers Drug
Mart’s revolving bank credit facility, was repaid and the facility was cancelled upon closing of the acquisition of Shoppers Drug Mart.
d) Guaranteed Investment Certificates The following table summarizes PC Bank’s Guaranteed Investment Certificates (“GICs”) activity,
before commissions, for the years ended 2014 and 2013:
(millions of Canadian dollars)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
$
$
2014
430
261
(57)
634
$
$
2013
303
167
(40)
430
e) Independent Securitization Trust The notes issued by Eagle are MTNs, which are collateralized by PC Bank’s credit card receivables
(see note 11). In 2014, the Company has arranged letters of credit on behalf of PC Bank, for the benefit of Eagle (see note 33).
In 2013, Eagle issued $400 million of senior and subordinated term notes with a maturity date of October 17, 2018 at a weighted average
interest rate of 2.91%, and repaid $250 million of senior and subordinated term notes which matured on December 17, 2013.
f) Independent Funding Trusts As at January 3, 2015, the independent funding trusts had drawn $498 million (December 28, 2013 –
$475 million) from the revolving committed credit facility that is the source of funding to the independent funding trusts. In 2014, the
Company renewed the revolving committed credit facility and extended the maturity date to May 6, 2017, with all other terms and
conditions remaining substantially the same. The Company provides credit enhancement in the form of a standby letter of credit for the
benefit of the independent funding trusts (see note 33).
g) Choice Properties In 2014, Choice Properties Limited Partnership entered into a Master Trust Indenture agreement with
Computershare Trust Company of Canada to create supplemental indentures in order to facilitate the replacement of all tranches of
Transferor Notes held by Loblaw, with Series 5 to Series 10 notes containing the same principal amounts, interest rates and maturity dates.
These replacement notes bear fixed interest rates between 3.00% and 3.60% and mature during 2016 through 2022. The remaining terms
and conditions were substantially similar to the original notes. Loblaw subsequently sold the replacement notes to unrelated parties and
received net proceeds of $1,500 million. Loblaw used these proceeds to partially repay the $3,500 million unsecured term loan facility
drawn to fund a portion of the cost to acquire Shoppers Drug Mart (see note 5).
92 2014 Annual Report - Financial Review
In 2014, Choice Properties issued $250 million principal amount of Series C senior unsecured debentures with a 7-year term and a coupon
rate of 3.50% per annum and $200 million principal amount of Series D senior unsecured debentures with a 10-year term and a coupon
rate of 4.29% per annum, under its Short Form Base Shelf Prospectus. The majority of the proceeds were used to repay $440 million of
Transferor Notes held by Loblaw.
As part of the Choice Properties initial public offering on July 5, 2013, Choice Properties issued $400 million Series A Debentures with a 5-
year term and a coupon of 3.55% per annum due July 5, 2018 and $200 million Series B Debentures with a 10-year term and a coupon of
4.90% per annum due July 5, 2023.
In 2013, Choice Properties entered into an agreement for a $500 million, 5 year senior unsecured committed credit facility (“Choice
Properties Credit Facility”) provided by a syndicate of lenders. In 2014, Choice Properties extended the maturity date of the Choice
Properties Credit Facility to July 5, 2019. This facility bears interest at variable rates: Prime plus 0.45% or Banker’s Acceptance rate plus
1.45%. The facility contains certain financial covenants (see note 25). As at January 3, 2015, Choice Properties had drawn $122 million
(2013 – nil) under the Choice Properties Credit Facility.
Committed Credit Facility In 2014, effective on the closing of the acquisition of Shoppers Drug Mart, the Company’s $800 million
committed credit facility (“Credit Facility”) was increased to $1,000 million and the term was extended to December 31, 2018, with all other
terms and conditions remaining substantially the same. The Credit Facility contains certain financial covenants (see note 25). As at
January 3, 2015 and December 28, 2013, there were no amounts drawn under the Credit Facility.
Private Placement Notes During 2013, the Company settled its USD $300 million U.S. Private Placement (“USPP”) notes and related
cross currency swaps (see note 30). The Company incurred approximately $18 million of early-settlement costs related to the settlement of
the USPP note due on May 29, 2015, which was recorded in net interest expense and other financing charges.
Long Term Debt due Within One Year The following table summarizes long term debt due within one year:
As at
As at
(millions of Canadian dollars)
Loblaw Companies Limited Notes
Independent Funding Trust
Independent Securitization Trusts
Finance Lease Obligations
Guaranteed Investment Certificates
Long term debt secured by mortgage
Total long term debt due within one year
$
$
Schedule of Repayments The schedule of repayment of long term debt, based on maturity is as follows:
(millions of Canadian dollars)
2015
2016
2017
2018
2019
Thereafter
January 3, 2015
December 28, 2013
450
— $
—
350
38
29
3
475
—
28
52
3
420
$
1,008
As at
January 3, 2015
420
$
983
847
1,353
2,588
5,359
Total Long Term Debt (excludes transaction costs)
$
11,550
See note 30 for the fair value of long term debt.
2014 Annual Report - Financial Review 93
Notes to the Consolidated Financial Statements
Note 23. Other Liabilities
(millions of Canadian dollars)
Net defined benefit plan obligation (note 27)
Other long term employee benefit obligation
Equity-based compensation liability (note 26)
Fair value adjustment to acquired leases
Deferred lease obligation
Other
Other liabilities
Note 24. Share Capital
As at
January 3, 2015
311
116
7
104
77
167
782
$
$
As at
December 28, 2013
238
$
107
1
—
25
183
554
$
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.
On and after July 31, 2014 and July 31, 2015 the Company may, at its option, redeem for cash, in whole or in part, these outstanding
preferred shares for $25.50 and $25.00 respectively. 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. As at January 3, 2015, the
capital securities have been recorded as a current liability.
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 2014 and 2013 were as follows:
(millions of Canadian dollars except where otherwise indicated)
Issued and outstanding, beginning of year
Issued for settlement of stock options
Issued for acquisition of Shoppers Drug Mart (note 5)
Issued to controlling shareholder (note 5)
Purchased for cancellation
Issued and outstanding, end of year
Shares held in trust, beginning of year
Purchased for future settlement of RSUs and PSUs
Release for settlement of RSUs and PSUs (note 26)
Shares held in trust, end of year
2014
2013
Number of
Common Shares
Common Share
Capital
Number of
Common Shares
Common Share
Capital
282,311,573
$
3,536,489
119,471,382
10,515,247
(3,353,800)
1,648
156
5,619
500
(63)
281,680,157
$
1,567
2,131,416
—
—
(1,500,000)
90
—
—
(9)
412,480,891
$
7,860
282,311,573
$
1,648
(1,067,323) $
—
512,277
(555,046) $
(6)
—
3
(3)
— $
(1,103,500)
36,177
(1,067,323) $
—
(6)
—
(6)
Issued and outstanding, net of shares held in trust, end of year
411,925,845
$
7,857
281,244,250
$
1,642
Weighted average outstanding, net of shares held in trust
380,540,877
281,123,452
94 2014 Annual Report - Financial Review
Dividends The following table summarizes the Company’s cash dividends declared for 2014 and 2013:
Dividends declared per share ($):
Common share
Second Preferred Share, Series A
$
2014(i)
0.975
1.49
$
2013
0.940
1.49
(i) The fourth quarter dividends of $0.245 per share declared on common shares were paid on December 30, 2014. The fourth quarter dividends of $0.37 per share
declared on Second Preferred Shares, Series A have a payment date of January 31, 2015.
For financial statement presentation purposes, Second Preferred Shares, Series A dividends of $14 million for the year ended January 3,
2015 was included as a component of net interest expense and other financing charges in the consolidated statements of earnings (2013 –
$14 million) (see note 6).
Subsequent to the end of the year, the Board declared a quarterly dividend of $0.245 per common share, payable April 1, 2015, and
declared a quarterly dividend of $0.37 per Second Preferred Share, Series A, payable April 30, 2015.
Normal Course Issuer Bid The activity under the Company’s Normal Course Issuer Bid (“NCIB”) is summarized as follows:
(millions of Canadian dollars except where otherwise indicated)
Shares repurchased under the NCIB for cancellation (number of shares)
Cash consideration paid
Premium charged to Retained Earnings
Reduction in common shares
Shares repurchased under the NCIB and held in trusts (number of shares)
Cash consideration paid
Premium charged to Retained Earnings
Reduction in common shares
$
$
2014
3,353,800
2013
1,500,000
$
$
178
115
63
—
—
—
—
73
64
9
1,103,500
46
40
6
In 2014, the Company renewed its NCIB to purchase on the TSX or to enter into equity derivatives to purchase up to 20,636,596 of the
Company’s common shares, representing approximately 5% of the common shares outstanding after taking into account shares issued in
connection with the acquisition of Shoppers Drug Mart. In accordance with the rules and by-laws of the TSX, the Company may purchase
its common shares from time to time at the then market price of such shares.
Note 25. 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:
•
•
targeting a reduction in debt following the Shoppers Drug Mart transaction to return to credit rating metrics consistent with those of
investment grade companies;
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; and
•
utilizing short term funding sources to manage its working capital requirements and long term funding sources to manage the long
term capital investments of the business.
2014 Annual Report - Financial Review 95
Notes to the Consolidated Financial Statements
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.
The following table summarizes the Company’s total capital under management:
(millions of Canadian dollars)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Certain other liabilities
Total debt
Capital securities
Equity attributable to shareholders of the Company
Total capital under management
As at
January 3, 2015
162
As at
December 28, 2013
—
$
605
420
11,042
28
12,257
225
12,779
25,261
$
$
605
1,008
6,672
39
8,324
224
7,000
15,548
$
$
$
Covenants and Regulatory Requirements The Company is subject to certain key financial and non-financial covenants under its existing
Credit Facility, unsecured term loan facility, certain MTNs, and letters of credit. These covenants, which include interest coverage and
leverage ratios, as defined in the respective agreements, are measured by the Company on a quarterly basis to ensure compliance with
these agreements. As at January 3, 2015 and throughout the year, the Company was in compliance with each of the covenants under
these agreements.
Choice Properties has certain key financial and non-financial covenants in its Debentures and the Choice Properties Credit Facility, which
include debt service ratios and leverage ratios. These ratios are measured by Choice Properties on a quarterly basis to ensure
compliance. As at January 3, 2015 and throughout the year, Choice Properties was in compliance with 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 the economic risks generated by its credit card receivables portfolio and to meet all regulatory capital requirements as defined
by OSFI. PC Bank uses Basel III as its regulatory capital management framework which includes a common equity Tier 1 capital ratio of
4.0%, a Tier 1 capital ratio of 5.5% and a total capital ratio of 8%. In addition to the regulatory capital ratios requirement, prior to January 1,
2015, financial institutions were expected to meet an assets-to-capital multiple test. As at the end of 2014 and 2013, and throughout these
years, PC Bank has met all applicable regulatory requirements related to capital ratios and the assets-to-capital multiple test. Effective
January 1, 2015, the Basel III Leverage ratio replaced the assets-to-capital multiple test.
In 2014, OFSI released the final Guideline on Liquidity Adequacy Requirements (“LARs”). The LARs guideline establishes standards based
on the Basel III framework, including a Liquidity Coverage Ratio (“LCR”) standard effective January 1, 2015 and a Net Stable Funding
Ratio standard effective January 1, 2018. The LCR standard specifies the level of liquid securities that PC Bank is required to maintain to
meet its financial liabilities.
Note 26. Equity-Based Compensation
The Company’s equity-based compensation expense, which includes Loblaw Stock Option, RSU, PSU, DSU, EDSU plans, and the unit-
based compensation plans of Choice Properties, was $73 million for year (2013 – $35 million). The expense was recognized in operating
income.
As a result of the acquisition of Shoppers Drug Mart, all awards that were based on Shoppers Drug Mart shares were converted to awards
based on shares of the Company. Accordingly, included in the Company’s equity-based compensation expense during 2014 above was
$28 million related to these converted awards, of which $7 million related to the fair value adjustment of converted awards that initially
required settlement in cash.
96 2014 Annual Report - Financial Review
The carrying amount of the Company’s equity-based compensation arrangements including Loblaw Stock Option, RSU, PSU, DSU, EDSU
plans, and the unit-based compensation plans of Choice Properties, are recorded on the consolidated balance sheet as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
Other liabilities
Contributed surplus
As at
January 3, 2015
3
$
7
104
As at
December 28, 2013
$
—
1
87
The following are details related to the equity-based compensation plans of the Company:
Stock Option Plan The Company maintains a stock option plan for certain employees. Under this plan, the Company may grant options
for up to 28,137,162 common shares which is the Company’s guideline for the number of stock option grants.
The following is a summary of the Company’s stock option plan activity:
Outstanding options, beginning of year
Granted
Converted options
Exercised
Forfeited/cancelled
Expired
Outstanding options, end of year
Options exercisable, end of year
Range of Exercise Prices
$28.95 - $35.55
$35.56 - $39.92
$39.93 - $60.29
2014
2013
Options
(number of
shares)
10,995,995
1,688,368
1,026,118
(3,536,489)
(1,074,427)
(734,681)
8,364,884
3,195,241
Weighted
Average Exercise
Price / Share
37.37
$
47.67
35.26
36.47
40.75
45.49
38.42
35.95
$
$
Options
(number of
shares)
12,538,928
1,484,264
—
(2,131,416)
(847,039)
(48,742)
10,995,995
4,200,472
Weighted
Average Exercise
Price / Share
36.74
$
40.62
—
35.25
38.03
54.71
37.37
38.04
$
$
2014 Outstanding Options
2014 Exercisable Options
Number of
Options
Outstanding
3,424,670
2,414,922
2,525,292
8,364,884
Weighted
Average
Remaining
Contractual
Life (years)
4
3
6
Weighted
Average
Exercise
Price/Share
34.08
38.14
44.57
38.42
$
$
$
Number of
Exercisable
Options
1,553,396
1,354,570
287,275
3,195,241
Weighted
Average
Exercise
Price/Share
33.09
37.88
42.33
35.95
$
$
$
During 2014, the Company issued common shares on the exercise of stock options with a weighted average market share price of $51.20
(2013 – $46.54). The Company received cash consideration of $129 million (2013 – $75 million) related to the exercise of these option.
2014 Annual Report - Financial Review 97
Notes to the Consolidated Financial Statements
In connection with the acquisition of Shoppers Drug Mart, the Company converted Shoppers Drug Mart stock options to Loblaw stock
options. The fair value of converted Shoppers Drug Mart stock options to Loblaw stock options was $13 million. The fair value of stock
options granted during 2014 was $13 million (2013 – $11 million). The assumptions used to measure the fair value of options granted and
converted during 2014 and 2013 under the Black-Scholes valuation model at date of grant or conversion were as follows:
Expected dividend yield
Expected share price volatility
Risk-free interest rate
Expected life of options
2014
1.8%
2013
2.1%
18.5% – 23.2%
19.2% – 23.8%
1.1% – 1.9%
1.0 – 6.5 years
1.2% – 2.0%
4.2 – 6.5 years
Estimated forfeiture rates are incorporated into the measurement of stock option plan expense. The forfeiture rate applied as at January 3,
2015 was 11.0% (December 28, 2013 – 12.0%).
Restricted Share Unit Plan The following is a summary of the Company’s RSU plan activity:
(Number of Awards)
RSUs, beginning of year
Granted
Converted RSUs
Settled
Forfeited
RSUs, end of year
2014
1,084,514
435,976
542,175
(494,912)
(104,963)
1,462,790
2013
1,038,271
379,899
—
(273,937)
(59,719)
1,084,514
The fair value of RSUs granted during 2014 was $20 million (2013 – $15 million).
In connection with the acquisition of Shoppers Drug Mart, the Company converted Shoppers Drug Mart RSUs to Loblaw RSUs, which
initially required settlement in cash. On November 10, 2014, the Company amended the plan for the remaining 542,175 converted RSUs to
require settlement in shares. The fair value of these converted awards on the amendment date was $32 million. These converted RSUs will
vest on December 1, 2015 and earn Loblaw dividends during the vesting period, which are reinvested as additional RSUs.
During 2014, the Company settled $2 million of Shoppers Drug Mart converted RSUs in cash prior to amending the RSU plan for
converted awards to require settlement in shares on November 10, 2014. During 2013, the Company settled $10 million of RSUs in cash
prior to amending its RSU plan to require settlement in shares.
Performance Share Unit Plan The following is a summary of the Company’s PSU plan activity:
(Number of Awards)
PSUs, beginning of year
Granted
Settled
Forfeited
PSUs, end of year
2014
309,110
871,355
(17,365)
(143,796)
1,019,304
2013
50,818
283,569
(2,794)
(22,483)
309,110
The fair value of PSUs granted during 2014 was $39 million (2013 – $11 million).
Settlement of Awards from Shares Held in Trust In 2013, the Company established a trust for each of the RSU and PSU plans to
facilitate the purchase of shares for future settlement upon vesting. During 2014, the Company settled RSUs and PSUs totaling 512,277
(2013 – 36,177) through the trusts established for settlement of each of the RSU and PSU plans (see note 24). The settlements resulted in
a $3 million (2013 – nominal) increase to share capital and a $18 million (2013 – $1 million) increase to retained earnings.
98 2014 Annual Report - Financial Review
Director Deferred Share Unit Plan The following is a summary of the Company’s DSU plan activity:
(Number of Awards)
DSUs outstanding, beginning of year
Granted
Reinvested
DSUs outstanding, end of year
2014
226,601
31,322
5,901
263,824
2013
198,780
24,582
3,239
226,601
The fair value of DSUs granted during 2014 was $2 million (2013 – $1 million).
In 2014, in addition to the awards granted under the Company’s equity settled DSU plan, the Company converted Shoppers Drug Mart
DSUs to Loblaw DSUs. These converted DSUs, which have all vested, will be settled in cash. As at January 3, 2015, the number of
converted DSUs outstanding was 101,788.
Executive Deferred Share Unit Plan The following is a summary of the Company’s EDSU plan activity:
(Number of Awards)
EDSUs outstanding, beginning of year
Granted
Reinvested
Settled
EDSUs outstanding, end of year
2014
22,126
4,929
599
(4,739)
22,915
2013
26,707
2,606
421
(7,608)
22,126
The fair value of EDSUs granted during 2014 was nominal (2013 – nominal).
Choice Properties The following are details related to the unit-based compensation plans of Choice Properties:
Unit Option Plan Choice Properties maintains a Unit Option plan for certain employees. Under this plan, Choice Properties may grant
Options totaling up to 4,075,000 Units. The Unit Options vest in tranches over a period of four years. The following is a summary of Choice
Properties’ Unit Option plan activity:
Number of awards
2014
Weighted average
exercise price/unit
Number of awards
2013
Weighted average
exercise price/unit
Outstanding Unit Options, beginning of year
Granted
Forfeited
Exercised
Outstanding Unit Options, end of year
Unit Options exercisable, end of year
1,196,866
1,247,247
$
$
(643,294) $
(118,309) $
1,682,510
$
— $
10.04
10.80
10.35
10.05
10.48
—
— $
1,196,866
$
— $
— $
1,196,866
$
— $
—
10.04
—
—
10.04
—
2014 Annual Report - Financial Review 99
Notes to the Consolidated Financial Statements
The assumptions used to measure the fair value of the Unit Options under the Black-Scholes model were as follows:
Expected average distribution yield
Expected average Unit price volatility
Average risk-free interest rate
Expected average life of options
2014
6.2%
2013
6.2%
14.2% – 18.9%
19.1% – 30.2%
1.0% – 1.4%
1.6% – 2.0%
2.5 – 5.4 years
4.0 – 5.5 years
Estimated forfeiture rates are incorporated into the measurement of the Unit Option expense. The forfeiture rate applied as at January 3,
2015 was nil (December 28, 2013 – nil).
Restricted Unit Plan The following is a summary of Choice Properties’ RU plan activity:
(Number of awards)
Outstanding Restricted Units, beginning of year
Granted
Reinvested
Forfeited
Outstanding Restricted Units, end of year
2014
108,746
100,523
10,804
(35,919)
184,154
RUs vest over a period of three years. There were no RUs vested as at January 3, 2015 (December 28, 2013 – nil).
Trustee Deferred Unit Plan A summary of the DU plan activity is as follows:
(Number of awards)
Outstanding Trustee Deferred Units, beginning of year
Granted
Reinvested
Outstanding Trustee Deferred Units, end of year
2014
31,936
64,150
3,144
99,230
2013
—
105,948
2,798
—
108,746
2013
—
31,758
178
31,936
All the DUs vest when issued, however, they cannot be exercised while Trustees are members of the Board.
Note 27. Post-Employment and Other Long Term Employee Benefits
The Company sponsors a number of pension plans, including registered 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 Pension Committee (“The Committee”) oversees the Company’s pension plans. The Committee is responsible for
assisting the Board in fulfilling its general oversight responsibilities for the plans. The Committee assists the Board with administration of
the plans, pension investment and monitoring responsibilities, and compliance with legal and regulatory requirements.
The Company’s defined benefit pension plans are primarily funded by the Company, predominantly non-contributory and the benefits are,
in general, based on career average earnings subject to limits. The funding is based on a solvency valuation for which the assumptions
may differ from the assumptions used for accounting purposes as detailed in this note.
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.
100 2014 Annual Report - Financial Review
The Company’s defined benefit pension plans and other defined benefit plans expose it to a number of actuarial risks, such as longevity
risk, interest rate risk and market risk.
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.
The Company also contributes to various multi-employer pension plans, which are administered by independent boards of trustees
generally consisting of an equal number of union and employer representatives. The Company’s responsibility to make contributions to
these plans is limited by amounts established pursuant to its collective agreements.
The Company expects to make contributions in 2015 to its defined benefit and defined contribution plans and the multi-employer pension
plans in which it participates as well as benefit payments to the beneficiaries of the supplemental unfunded defined benefit pension plans,
other defined benefit plans and other long term employee benefit plans.
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.
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
Present value of unfunded obligations
Total present value of defined benefit obligation
Fair value of plan assets
Total funded status of (obligations) surplus
Liability arising from minimum funding requirement for past
service
Total net defined benefit plan (obligation) surplus
Recorded on the consolidated balance sheets as follows:
Other Assets (note 19)
Other Liabilities (note 23)
2014
2013
Defined
Benefit
Pension
Plans
(2,077)
(81)
(2,158)
2,136
(22)
(2)
(24)
90
(114)
$
$
$
$
$
$
$
$
Other
Defined
Benefit
Plans
—
(197)
(197)
—
(197)
—
(197)
—
(197)
Defined
Benefit
Pension
Plans
(1,597)
(71)
(1,668)
1,709
41
(6)
35
106
(71)
$
$
$
$
$
$
$
$
Other
Defined
Benefit
Plans
—
(167)
(167)
—
(167)
—
(167)
—
(167)
2014 Annual Report - Financial Review 101
Notes to the Consolidated Financial Statements
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
2014
Other
Defined
Benefit
Plans
Defined
Benefit
Pension
Plans
Defined
Benefit
Pension
Plans
Total
2013
Other
Defined
Benefit
Plans
Total
Fair value, beginning of year
$
1,709
$
— $
1,709
$
1,532
$
— $
1,532
Additions from the acquisition of Shoppers Drug Mart
Employer contributions
Employee contributions
Benefits paid
Interest Income
Actuarial gains in other comprehensive (loss) income
Other
Fair value, end of year
Changes in the present value of the defined benefit
plan obligations
Balance, beginning of year
Additions from the acquisition of Shoppers Drug Mart
Current service cost
Interest cost
Benefits paid
Employee contributions
Actuarial losses (gains) in other comprehensive (loss)
income
Plan amendments
Contractual termination benefits(i)
Special termination benefits(i)
Other
Balance, end of year
161
55
3
(83)
86
210
(5)
—
—
—
—
—
—
—
161
55
3
(83)
86
210
(5)
—
99
2
(82)
62
101
(5)
—
—
—
—
—
—
—
—
99
2
(82)
62
101
(5)
$
2,136
$
— $
2,136
$
1,709
$
— $
1,709
$
1,668
$
167
$
1,835
$
1,811
$
247
$
2,058
173
51
86
(87)
3
261
—
1
2
—
6
7
8
(6)
—
15
—
—
—
—
179
58
94
(93)
3
276
—
1
2
—
—
52
72
(86)
2
(159)
(28)
2
—
2
—
9
9
(6)
—
(62)
(23)
—
—
(7)
—
61
81
(92)
2
(221)
(51)
2
—
(5)
$
2,158
$
197
$
2,355
$
1,668
$
167
$
1,835
(i) Contractual and special termination benefits include $3 million (2013 – $2 million) related to the reduction of head office and administrative positions.
For the fiscal year ended 2014, the actual return on plan assets was $296 million (2013 – $163 million).
The net defined benefit obligation can be allocated to the plans’ participants as follows:
• Active plan participants 46% (2013 – 46%)
• Deferred plan participants 11% (2013 – 12%)
• Retirees 43% (2013 – 42%)
During 2015, the Company expects to contribute approximately $34 million (2014 – contributed $55 million) to its registered 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.
102 2014 Annual Report - Financial Review
The net cost recognized in net earnings before income taxes for the Company’s defined benefit pension plans and other defined benefit
plans was as follows:
(millions of Canadian dollars)
Current service cost
Interest cost on net defined benefit plan obligations
Contractual and special termination benefits(i)
Past service cost(ii)
Other
Net post-employment defined benefit cost
2014
Other
Defined
Benefit
Plans
7
8
—
—
—
15
$
$
Defined
Benefit
Pension
Plans
51
—
3
—
5
59
$
$
2013
Other
Defined
Benefit
Plans
9
$
$
Defined
Benefit
Pension
Plans
52
10
2
(28)
7
43
9
—
(23)
(3)
$
(8) $
Total
61
19
2
(51)
4
35
Total
58
8
3
—
5
74
$
$
$
$
Includes $3 million (2013 – $2 million) of contractual and special termination benefits related to the reduction in head office and administrative positions (see note 21).
(i)
(ii) Relates to the announced amendments to certain of the Company’s defined benefit plans impacting certain employees retiring after January 1, 2015.
The actuarial losses (gains) recognized in other comprehensive (loss) income net of taxes for defined benefit plans was as follows:
2014
Other
Defined
Benefit
Plans
Defined
Benefit
Pension
Plans
Defined
Benefit
Pension
Plans
Total
2013
Other
Defined
Benefit
Plans
$
(210) $
— $
(210)
$
(101) $
— $
(millions of Canadian dollars)
Return on plan assets, excluding amounts included
in net interest expense and other financing
charges
Experience adjustments
Actuarial losses from change in demographic
assumptions
Actuarial losses (gains) from change in financial
assumptions
Change in liability arising from minimum funding
requirements for past service
Total net actuarial losses (gains) recognized in other
comprehensive (loss) income before income taxes
Income tax (recoveries) expenses on actuarial
losses (gains) (note 7)
Actuarial losses (gains) net of income tax recoveries
11
23
227
(4)
(1)
3
13
—
$
$
47
$
15
$
(12)
35
$
(4)
11
$
10
26
240
(4)
62
(16)
46
Total
(101)
(61)
74
(234)
3
(10)
70
(219)
3
(51)
4
(15)
—
$
$
(257) $
(62) $
(319)
68
(189) $
17
(45) $
85
(234)
2014 Annual Report - Financial Review 103
Notes to the Consolidated Financial Statements
The cumulative actuarial losses (gains) before income taxes recognized in equity for the Company’s defined benefit plans were as follows:
(millions of Canadian dollars)
Cumulative amount, beginning of year
Net actuarial losses (gains) recognized in the year
before income taxes
Cumulative amount, end of year
2014
Other
Defined
Benefit
Plans
$
(31) $
Defined
Benefit
Pension
Plans
123
47
15
170
$
(16) $
$
$
2013
Other
Defined
Benefit
Plans
31
$
Defined
Benefit
Pension
Plans
380
(257)
(62)
$
Total
411
(319)
123
$
(31) $
92
Total
92
62
154
$
$
Composition of Plan Assets The defined benefit pension plan assets are held in trust and consisted of the following asset categories:
(millions of Canadian dollars, except where otherwise indicated)
Equity securities
2014
2013
Canadian:
- common
- pooled funds
Foreign:
- pooled funds
Total Equity Securities
Debt securities
Fixed income securities:
- government
- corporate
Fixed income pooled funds(i):
- government
- corporate
Total Debt Securities
Other investments
Cash and cash equivalents
Refundable tax on account with CRA
Total
$
$
$
$
$
$
—
303
511
814
665
239
314
19
1,237
54
16
15
$
$
$
$
$
—%
14%
24%
38%
31%
11%
15%
1%
58%
3%
1%
—%
131
178
518
827
452
151
203
20
826
—
56
—
8%
10%
30%
48%
27%
9%
12%
1%
49%
—%
3%
—%
2,136
100%
$
1,709
100%
(i) Both government and corporate securities may be included within the same fixed income pooled fund.
As at January 3, 2015 and December 28, 2013, the defined benefit pension plans did not directly include any of the Company’s securities.
All equity and debt securities and other investments are valued based on quoted prices (unadjusted) in active markets for identical assets
or liabilities or based on inputs other than quoted prices in active markets that are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices).
The Company’s asset allocation reflects a balance of interest-rate sensitive investments, such as fixed income investments and equities,
which are expected to provide higher returns over the long term. The Company’s targeted asset allocations are actively monitored and
adjusted on a plan by plan basis to align the asset mix with the liability profiles of the plans.
104 2014 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 (expressed as weighted averages):
2014
Defined
Benefit
Pension
Plans
4.00%
3.50%
Other
Defined
Benefit
Plans
4.00%
n/a
2013
Defined
Benefit
Pension
Plans
4.75%
3.50%
Other
Defined
Benefit
Plans
4.50%
n/a
CPM-RPP2014
Pub/Priv
Generational
CPM-RPP2014
Pub/Priv
Generational
CPM-RPP2014
Priv Generational
CPM-RPP2014
Priv Generational
4.75%
3.50%
4.50%
n/a
4.00%
3.50%
4.00%
n/a
CPM-RPP2014
Priv Generational
CPM-RPP2014
Priv Generational
UP94@Fully
Generational
UP94@Fully
Generational
Defined Benefit Plan Obligations
Discount rate
Rate of compensation increase
Mortality table
Net Defined Benefit Plan Cost
Discount rate
Rate of compensation increase
Mortality table
n/a – not applicable
The weighted average duration of the defined benefit obligation at the end of the reporting period is 15.8 years (2013 – 16.2 years).
The growth rate of health care costs, primarily drug and other medical costs, for the other defined benefit plan obligations as at the end of
the year was estimated at 4.50% and is expected to remain at 4.50% at the end of 2015 and thereafter.
Sensitivity of Key Actuarial Assumptions The following table outlines the key assumptions for 2014 (expressed as weighted averages)
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)
(millions of Canadian dollars except where otherwise indicated)
Discount rate
Impact of:
1% increase
1% decrease
Expected growth rate of health care costs
Impact of:
1% increase
1% decrease
2014
Defined Benefit Pension Plans
Other Defined Benefit Plans
Defined
Benefit
Plan
Obligations
4.00%
Net
Defined
Benefit
Plan Cost(i)
4.75%
Defined
Benefit
Plan
Obligations
4.00%
Net Defined
Benefit
Plan Cost(i)
4.50%
$
$
(316)
371
$
$
n/a
n/a
(29)
29
n/a
n/a
$
$
$
$
(24)
31
4.50%
25
(20)
$
$
$
$
—
1
4.00%
2
(2)
n/a – not applicable
(i) Discount rate and expected growth rate of health care costs sensitivity is for current service and interest costs only.
2014 Annual Report - Financial Review 105
Notes to the Consolidated Financial Statements
Multi-Employer Pension Plans
During 2014, the Company recognized an expense of $55 million (2013 – $55 million) in operating income, which represents the
contributions made in connection with multi-employer pension plans. During 2015, the Company expects to continue to make contributions
into these multi-employer pension plans.
The Company, together with its independent franchises, is the largest participating employer in the Canadian Commercial Workers Industry
Pension Plan (“CCWIPP”), with approximately 52,000 (2013 – 53,000) employees as members. Included in the 2014 expense described
above are contributions of $54 million (2013 – $54 million) to CCWIPP.
Post-Employment and Other Long Term Employee Benefit Costs
The net cost recognized in net earnings before income taxes for the Company’s post-employment and other long term employee benefit
plans was as follows:
(millions of Canadian dollars)
Net post-employment defined benefit cost
Defined contribution costs(i)
Multi-employer pension plan costs(ii)
Total net post-employment benefit costs
Other long term employee benefit costs(iii)
Net post-employment and other long term employee benefit costs
Recorded on the consolidated statements of earnings as follows:
Selling, general and administrative expenses
Net interest expense and other financing charges
Net post-employment and other long term employee benefit costs
$
$
$
$
$
(i) Amounts represent the Company’s contributions made in connection with defined contribution plans.
(ii) Amounts represent the Company's contributions made in connection with multi-employer pension plans.
(iii) Other long term employee benefit costs include $4 million (2013 – $4 million) of net interest expense and other financing charges.
Note 28. 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
Equity-based compensation
Capitalized to fixed assets
Total employee costs
$
$
$
$
$
$
$
$
2014
74
20
55
149
28
177
165
12
177
2014
4,494
141
24
71
(30)
4,700
$
2013
35
20
55
110
21
131
108
23
131
2013
3,042
91
17
32
(10)
3,172
106 2014 Annual Report - Financial Review
Note 29. 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 segment sales. The Company also has properties which are sub-leased 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
As at
As at
January 3, 2015
December 28, 2013
(millions of Canadian dollars)
Operating lease payments
Sub-lease income
Net operating lease payments
2015
674
(60)
614
$
$
2016
654
(51)
603
$
$
2017
620
(40)
580
$
$
2018
573
(33)
540
$
$
2019
529
(23)
Thereafter
2,818
$
(88)
506
$
2,730
$
$
$
$
Total
5,868
(295)
5,573
$
$
Total
1,224
(166)
1,058
During 2014, the Company recorded $572 million (2013 – $206 million) as an expense included in operating income in respect of operating
leases. During that period, contingent rent recognized as an expense in respect of operating leases totaled $1 million (2013 – $1 million),
while sub-lease income earned totaled $58 million (2013 – $50 million) which is recognized in operating income. During 2014, contingent
rent recognized as income in respect of sub-leased operating leases was $3 million (2013 – $1 million).
Operating Leases – As Lessor As at January 3, 2015, the Company leased certain owned land and buildings with a cost of $2,578 million
(December 28, 2013 – $2,076 million) and related accumulated depreciation of $718 million (December 28, 2013 – $562 million). For the
year ended January 3, 2015, rental income was $148 million (2013 – $136 million) and contingent rent was $3 million (2013 – $2 million),
both of which were recognized in operating income.
Payments to be received by year
As at
As at
January 3, 2015
December 28, 2013
(millions of Canadian dollars)
Net operating lease income
2015
137
$
2016
116
$
2017
93
$
2018
76
$
2019
55
Thereafter
170
$
$
$
Total
647
$
Total
559
Finance Leases – As Lessee Future minimum lease payments relating to the Company’s finance leases are as follows:
Payments due by year
(millions of Canadian dollars)
Finance lease payments
Less future finance charges
Present value of minimum
lease payments
$
$
2015
85
(47)
$
2016
88
(43)
$
2017
78
(46)
$
2018
65
(36)
$
2019
60
(32)
Thereafter
715
$
(287)
38
$
45
$
32
$
29
$
28
$
428
As at
As at
January 3, 2015
December 28, 2013
$
$
Total
1,091
(491)
600
$
$
Total
771
(383)
388
During 2014, contingent rent recognized by the Company as an expense in respect of finance leases was $1 million (2013 – $1 million).
2014 Annual Report - Financial Review 107
Notes to the Consolidated Financial Statements
Future sub-lease income relating to the Company’s sub-lease agreements are as follows:
Payments to be received by year
(millions of Canadian dollars)
Sub-lease income
2015
16
$
2016
12
$
2017
11
$
2018
9
$
2019
8
Thereafter
33
$
$
$
Total
89
$
Total
45
As at
As at
January 3, 2015
December 28, 2013
At January 3, 2015, the sub-lease payments receivable under finance leases was $16 million (December 28, 2013 – $14 million).
Note 30. Financial Instruments
The following table presents the fair value hierarchy of financial assets and financial liabilities, excluding those classified as amortized cost
that are short term in nature:
(millions of Canadian dollars)
Financial assets:
Cash and cash equivalents
Short term investments
Security deposits
Franchise loans receivable
Certain other assets
Derivatives included in prepaid expenses
and other assets
Financial liabilities:
Derivatives included in trade payables and
other liabilities
Trust unit liability
Long term debt
Capital securities(i)
Certain other liabilities
Level 1
Level 2
As at
January 3, 2015
Total
Level 3
As at
December 28, 2013
Total
Level 3
Level 1
Level 2
$
$
984
19
7
—
—
—
$
15
2
—
—
8
10
— $
—
—
399
64
—
999
21
7
399
72
10
—
722
11
—
— 12,508
—
—
234
—
15
4
722
—
— 12,508
234
—
28
28
$
$ 2,247
290
1,701
—
—
—
—
688
—
236
—
13
—
—
—
8
2
—
—
8,188
—
—
$
— $
—
—
375
59
—
4
—
—
—
40
2,260
290
1,701
375
67
2
4
688
8,188
236
40
(i) As at January 3, 2015, capital securities were classified as current liabilities.
The carrying value of the Company’s financial instruments approximates its fair value except for long term debt and capital securities.
There were no transfers between levels of the fair value hierarchy.
The level 3 financial instruments classified as fair value through profit or loss as at January 3, 2015, and December 28, 2013 consist of
embedded derivatives on purchase orders placed in neither Canadian dollars, nor the functional currency of the vendor. These derivatives
are valued using a market approach based on the differential in exchange rates and timing of settlement. The significant unobservable
input used in the fair value measurement is the cost of purchase orders. Significant increases (decreases) in any of the inputs would result
in a significantly higher (lower) fair value measurement.
The fair value of the embedded foreign currency derivatives classified as Level 3 included in trade payables and other liabilities as at
January 3, 2015 was $4 million (December 28, 2013 – $4 million). During 2014, a nominal loss (2013 – $3 million) was recorded in
operating income. As at January 3, 2015, a 1% increase (decrease) in foreign currency exchange rates would result in a $1 million gain
(loss) in fair value.
During 2014, the Company recognized a gain of $11 million (2013 – $33 million) in earnings before incomes taxes on financial instruments
designated as fair value through profit or loss. In addition, during 2014 a loss of $18 million (2013 – $27 million) was recorded in earnings
before income taxes related to financial instruments required to be classified as fair value through profit or loss.
During 2014, net interest expense of $571 million (2013 – $446 million) was recorded related to financial instruments not classified or
designated as fair value through profit or loss.
108 2014 Annual Report - Financial Review
The following is a discussion of the Company’s derivative instruments:
Cross Currency Swaps In 2013, Glenhuron Bank Limited (“Glenhuron”) unwound its cross currency swaps and received a net cash
settlement of $76 million, representing the cumulative fair value gain on the swaps. The swaps were offset by the effect of translation gains
and losses relating to USD cash and cash equivalents, short term investments and security deposits.
In 2013, the Company settled its USD $300 million USPP cross currency swaps in conjunction with the settlement of the underlying USD
$300 million USPP notes, and received a net cash settlement of $18 million (see note 22). The USPP cross currency swaps were used to
manage the effect of translation (gains) losses on the underlying USD USPP notes in long term debt. As part of the full settlement, the
Company settled its USD $150 million USPP cross currency swap, which matured on May 29, 2013. On settlement of the swap, an
unrealized fair value gain of $5 million, net of tax of $2 million, which had been deferred in accumulated other comprehensive income was
realized in operating income.
The following table summarizes the 2013 impact to operating income resulting from changes in the fair value of the cross currency swaps
and the underlying exposures:
(millions of Canadian dollars)
Fair value loss (gain) related to swaps(i)
Translation (gain) loss related to the underlying exposures
Glenhuron
Cross Currency
Swaps
2013
37
(33)
$
USPP
Cross Currency
Swaps
2013
(11)
14
$
(i)
The impact to USPP cross currency swaps excludes the $7 million gain on derecognized derivative instruments, before income taxes, reclassified from accumulated
other comprehensive income.
Interest Rate Swaps During 2013, the Company settled its notional $150 million in interest rate swaps and recognized a $5 million fair
value gain in operating income related to these swaps.
Other Derivatives The Company also maintains other financial derivatives including foreign exchange forwards, electricity forwards and
fuel exchange traded futures and options. During 2014, the Company recognized a $1 million loss (2013 – $7 million gain) in operating
income related to these derivatives. The following table summarizes the cumulative unrealized impact of these derivatives included in the
consolidated balance sheet:
(millions of Canadian dollars)
Cumulative unrealized gains recorded in prepaid expenses and other assets
$
Cumulative unrealized losses recorded in trade payables and other liabilities
2014
10
11
$
2013
2
—
In connection with the issuance of $1,600 million of senior unsecured notes in 2013 (see note 22), the Company hedged its exposure to
interest rates in advance of the issuance. As this relationship did not qualify for hedge accounting, the resulting $10 million gain on
settlement was recorded in operating income.
Trust Unit Liability As at January 3, 2015, the fair value of the Trust Unit Liability of $722 million (December 28, 2013 – $688 million) was
recorded on the consolidated balance sheet. In 2014, the Company recorded a fair value loss of $17 million (2013 – $27 million), in net
interest expense and other financing charges related to Choice Properties’ Units.
As at January 3, 2015, 67,755,010 Choice Properties Units were held by unitholders other than the Company (December 28, 2013 –
66,114,229). During 2014, Choice Properties issued 1,640,781 Units (2013 – 114,229), to eligible unitholders under its distribution
reinvestment plan. Units held by unitholders other than the Company are presented as a liability on the Company’s consolidated balance
sheet as the Units are redeemable for cash at the option of the holder, subject to certain restrictions. As at January 3, 2015, the Company
held an 82.9% (December 28, 2013 – 82.2%) ownership interest in Choice Properties.
Franchise Loans Receivable and Franchise Investments in Other Assets The value of Loblaw franchise loans receivable of $399
million (December 28, 2013 – $375 million) was recorded on the consolidated balance sheets. In 2014, the Company recorded an
impairment loss of $12 million (2013 – $14 million) in operating income related to these loans receivable.
The value of Loblaw franchise investments of $62 million (December 28, 2013 – $58 million) was recorded in other assets. In 2014, the
Company recorded a $3 million loss (2013 – $6 million) in operating income related to these investments.
2014 Annual Report - Financial Review 109
Notes to the Consolidated Financial Statements
Note 31. 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:
Level of Indebtedness To fund the cash portion of the Shoppers Drug Mart acquisition, the Company utilized excess cash and
significantly increased its indebtedness. Although the Company has made progress in reducing its indebtedness subsequent to the
acquisition of Shoppers Drug Mart, there can be no assurance that the Company will generate sufficient free cash flow to significantly
further reduce indebtedness and maintain adequate cash reserves. A failure to achieve these objectives could adversely affect the
Company’s credit ratings and its cost of funding.
If the Company, PC Bank or Choice Properties’ financial performance and condition deteriorate or downgrades in the Company’s or Choice
Properties’ current credit ratings occur, their ability to obtain funding from external sources could be restricted, which could adversely affect
the financial performance of the Company.
Liquidity Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash or its equivalents in a cost effective
manner to fund its obligations as they come due. The Company is exposed to liquidity risk through, among other areas, PC Bank and its
credit card business, which requires a reliable source of funding for its credit card business. PC Bank relies on its securitization programs
and the acceptance of GIC deposits to fund the receivables of its credit cards. The Company would experience liquidity risks if it fails to
maintain appropriate levels of cash and short term investments, it is unable to access sources of funding or it fails to appropriately diversify
sources of funding. If any of these events were to occur, they would adversely affect the financial performance of the Company.
Liquidity risk is mitigated by maintaining appropriate levels of cash and cash equivalents and short term investments, actively monitoring
market conditions, and by diversifying sources of funding, including the Company’s committed credit facility, and maintaining a well-
diversified maturity profile of debt and capital obligations.
The following are the undiscounted contractual maturities of significant financial liabilities as at January 3, 2015:
Derivative Financial Liabilities
Foreign exchange forward contracts
$
232
$
— $
— $
— $
— $
— $
232
2015
2016
2017
2018
2019
Thereafter
Total(i)
Non-Derivative Financial Liabilities
Short term debt(ii)
Bank Indebtedness
Long term debt including interest
payments(iii)
Other liabilities(iv)
605
162
911
4
—
—
1,445
8
—
—
1,278
5
—
—
1,767
3
—
—
2,920
2
—
—
605
162
8,263
16,584
6
28
$
1,914
$
1,453
$
1,283
$
1,770
$
2,922
$
8,269
$
17,611
(i)
Capital securities and their related dividends, and the Trust Unit Liability have been excluded as these liabilities do not have a contractual maturity date. The Company
also excluded trade payables and other liabilities, which are due within the next 12 months.
These are obligations owed to independent securitization trusts which are collateralized by the Company’s credit card receivables (see note 11).
(ii)
(iii) 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 structured entities, mortgages and finance lease obligations. Variables interest payments are
based on the forward rates as of January 3, 2015.
(iv) Contractual obligation related to certain other liabilities.
Choice Properties’ Capital Availability The real estate industry is highly capital intensive. Choice Properties requires access to capital to
maintain its properties, refinance its indebtedness as well as to fund its growth strategy and certain capital investments from time to time.
Although Choice Properties expects to have access to its credit facility, there can be no assurance that it will otherwise have sufficient
capital or access to capital on acceptable terms for future property acquisitions, refinancing indebtedness, financing or refinancing
properties, funding operating expenses or for other purposes. Further, in certain circumstances, Choice Properties may not be able to
borrow funds due to certain limitations. Failure by Choice Properties to access required capital could have a material adverse effect on the
Company’s ability to pay its financial or other obligations. An inability to access capital could also impact Choice Properties’ ability to make
distributions which could have a material adverse effect on the trading price of Units which would adversely affect the financial
performance of the Company.
110 2014 Annual Report - Financial Review
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, pension assets held in the Company’s defined benefit plans and
accounts receivable, including amounts due from independent franchisees, government, prescription sales and third-party drug plans,
independent accounts and amounts owed from vendors. Failure to manage credit risk could adversely affect the financial performance of
the Company.
The risk related to derivative instruments, cash and cash equivalents, short term investments and security deposits is reduced by policies
and guidelines that require that the Company enters 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.
Choice Properties mitigates the risk of credit loss relating to rent receivables by evaluating the creditworthiness of new tenants, obtaining
security deposits wherever permitted by legislation, ensuring its tenant mix is diversified and by limiting its exposure to any one tenant
except Loblaw. Choice Properties establishes an allowance for doubtful accounts that represents the estimated losses with respect to rents
receivable. The allowance is determined on a tenant-by-tenant basis based on the specific factors related to the tenant.
PC Bank manages its credit card receivable risk by employing stringent credit scoring techniques, actively monitoring the credit card
portfolio and reviewing techniques and technology that can improve the effectiveness of the collection process. In addition, these
receivables are dispersed among a large, diversified group of credit card customers.
Franchise loans receivable and accounts receivable, including amounts due from independent franchisees, governments, prescription
sales covered by third-party drug plans, independent accounts and amounts owed from vendors, are actively monitored on an ongoing
basis and settled on a frequent basis in accordance with the terms specified in the applicable agreements.
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 and Unit price and the impact these factors may have on other counterparties.
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 the 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. The Company
estimates that a 1% increase (decrease) in short term interest rates, with all other variables held constant, would result in a increase
(decrease) of $16 million to net interest expense and other financing charges.
Foreign Currency Exchange Rates The Company is exposed to foreign currency exchange rate variability, primarily on its USD
denominated based purchases in trade payables and other liabilities. A depreciating Canadian dollar relative to the USD will have a
negative impact on year-over-year changes in reported operating income and net earnings, while an appreciating Canadian dollar relative
to the USD will have the opposite impact.
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 effect of changing commodity prices on the price of consumer products. To manage a portion of this exposure, the
Company uses purchase commitments for a portion of its need for certain consumer products that are commodities based. The Company
enters into exchange traded futures contracts and forward contracts to minimize cost volatility related to energy. Rising commodity prices
could adversely affect the financial performance of the Company. The Company estimates that based on the outstanding derivative
contracts held by the Company as at January 3, 2015, a 10% decrease in relevant energy prices, with all other variables held constant,
would result in a net loss of $3 million on earnings before income taxes.
Choice Properties Unit Price The Company is exposed to market price risk as a result of Choice Properties’ Units that are held by
unitholders other than the Company. These Units are presented as a liability on the Company’s consolidated balance sheets as they are
redeemable for cash at the option of the holder. The liability is recorded at fair value at each reporting period based on the market price of
Units. The change in the fair value of the liability negatively impacts net earnings when the Unit price increases and positively impacts net
earnings when the Unit price declines. A one dollar increase in the market value of Units, with all other variables held constant, would result
in $68 million increase to net interest expense and other financing charges.
2014 Annual Report - Financial Review 111
Notes to the Consolidated Financial Statements
Note 32. 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, commodity, property and
other 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, tax assessments and reassessments, 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.
Shoppers Drug Mart has been served with an Amended Statement of Claim in a proposed class action proceeding that has been filed
under the Ontario Superior Court of Justice by two licensed Associates, claiming various declarations and damages resulting from
Shoppers Drug Mart’s alleged breaches of the Associate Agreement, in the amount of $500 million. The proposed class action comprises
all of Shoppers Drug Mart’s current and former licensed Associates residing in Canada, other than in Québec, who are parties to Shoppers
Drug Mart’s 2002 and 2010 forms of the Associate Agreement. On July 9, 2013, the Ontario Superior Court of Justice certified as a class
proceeding portions of the action. While Shoppers Drug Mart continues to believe that the claim is without merit and will vigorously defend
the claim, the outcome of this matter cannot be predicted with certainty.
Tax 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 or interpretations of current legislation could change, any of which events could lead to reassessments. These reassessments
could have a material impact on the Company in future periods.
In 2012, the Company received indication from the Canada Revenue Agency (the “CRA”) that the CRA intends to proceed with reassessments
of the tax treatment of the Company’s wholly owned subsidiary, Glenhuron. The CRA’s position is that certain income earned by Glenhuron
in Barbados in respect of the 2000 to 2010 taxation years should be treated, and taxed, as income in Canada.
Based on the proposal letter from the CRA, if the CRA and the relevant provincial tax authorities were to prevail in all of these
reassessments, which the Company believes would be unlikely, the estimated total tax and interest for the 2000 to 2010 taxation years
would be approximately $440 million, which would increase as interest accrues. However, the Company is in discussions with the CRA
about the amount of taxes in dispute. The Company believes it is likely that the CRA and the relevant provincial tax authorities will issue
reassessments for 2011 to 2013 on the same or similar basis. No amount for any reassessments has been provided for in the Company’s
consolidated financial statements.
Subsequent to the end of 2014, the Company received a letter from the CRA stating that the CRA will be proceeding with the
reassessments. The Company expects to receive reassessments from the CRA and the relevant provincial tax authorities sometime in the
coming months. The Company strongly disagrees with the CRA’s position and intends to vigorously defend its position including appealing
the reassessments as and when they are received. The Company will make cash payments or provide other forms of security on a portion
of the taxes in dispute. If the Company is successful in defending its position, in whole or in part, some or all of the cash payments or
security would be returned to the Company.
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.
112 2014 Annual Report - Financial Review
Note 33. Financial Guarantees
The Company established letters of credit used in connection with certain obligations mainly related to real estate transactions, benefit
programs, purchase orders and performance guarantees with a gross potential liability of approximately $293 million (December 28, 2013
– $348 million). In addition, the Company has provided to third parties the following significant guarantees:
Associate Guarantees The Company has arranged for its Shoppers Drug Mart Associates to obtain financing to facilitate their inventory
purchases and fund their working capital requirements by providing guarantees to various Canadian chartered banks that support
Associate loans. As at January 3, 2015, the Company’s maximum obligation in respect of such guarantees was $570 million with an
aggregate amount of $476 million in available lines of credit allocated to the Associates by the various banks. As at January 3, 2015,
Associates had drawn an aggregate amount of $162 million against these available lines of credit. Any amounts drawn by the Associates
are included in bank indebtedness on the Company’s consolidated balance sheet. As recourse in the event that any payments are made
under the guarantees, the Company holds a first-ranking security interest on all assets of Associates, subject to certain prior-ranking
statutory claims.
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 (see note 22). As at January 3, 2015 the Company has agreed to provide a credit enhancement of $50 million
(December 28, 2013 – $48 million) in the form of a standby letter of credit for the benefit of the independent funding trusts representing not
less than 10% (2013 – 10%) of the principal amount of 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.
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 minimum rent, which does not include other lease related expenses such as property tax and common area maintenance charges, is
in aggregate, approximately $17 million (December 28, 2013 – $14 million). Additionally, the Company has guaranteed lease obligations of
a third party distributor in the amount of $13 million (December 28, 2013 – $17 million).
Financial Services The Company has provided a guarantee on behalf of PC Bank to MasterCard® International Incorporated
(“MasterCard®”) for accepting PC Bank as a card member and licensee of MasterCard®. As at January 3, 2015, the guarantee on behalf of
PC Bank to MasterCard® was USD $170 million (December 28, 2013 – USD $170 million).
In 2014, the Company arranged for an irrevocable standby letter of credit from a major Canadian chartered bank on behalf of one of its
wholly-owned subsidiaries in the amount of $91 million.
Letters of credit for the benefit of independent securitization trusts with respect to the securitization programs of PC Bank have been
issued by major financial institutions. These standby letters of credit can 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. As at January 3, 2015, the aggregate gross potential liability under these arrangements for the Other
Independent Securitization Trusts was $61 million (December 28, 2013 – $54 million), which represented 10% (2013 – 9%) of the
securitized credit card receivables amount (see note 20). As at January 3, 2015, the aggregate gross potential liability under these
arrangements for Eagle was $68 million (December 28, 2013 – nil), which represented 9% (2013 – nil) of the Eagle notes outstanding (see
note 22).
Choice Properties issues letters of credit to support performance guarantees related to its investment properties including maintenance
and development obligations to municipal authorities. As at January 3, 2015, the aggregate gross potential liability related to these letters
of credit totaled $23 million (December 28, 2013 – $20 million).
The Choice Properties Credit Facility and Choice Properties debentures are guaranteed by each of the General Partner, the Partnership
and any other person that becomes a subsidiary of Choice Properties (with some exceptions). In the case of default by Choice Properties,
the Indenture Trustee will be entitled to seek redress from the Guarantors for the guaranteed obligations in the same manner and upon the
same terms that it may seek to enforce the obligations of Choice Properties. These guarantees are intended to eliminate structural
subordination, which would otherwise arise as a consequence of Choice Properties’ assets being primarily held in its various subsidiaries.
2014 Annual Report - Financial Review 113
Notes to the Consolidated Financial Statements
Note 34. Related Party Transactions
The Company’s controlling shareholder is Weston, which owns, directly and indirectly, 187,815,136 of the Company’s common shares,
representing approximately 46% of the Company’s 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 80,746,099 of Weston’s common shares,
representing approximately 63% of Weston’s outstanding common shares. Mr. Weston also beneficially owns 5,096,189 of the Company’s
common shares, representing approximately 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)
Included in Cost of Merchandise Inventories Sold
Inventory purchases from a subsidiary of Weston
Inventory purchases from a related party(i)
Operating Income
Cost sharing agreements with Parent(ii)
Net administrative services provided by Parent(iii)
Choice Properties distributions to Parent(iv)
Lease of office space from a subsidiary of Wittington
$
$
Transaction Value
$
$
2014
615
24
20
18
14
3
2013
601
22
9
13
6
3
(i) 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 January 3, 2015 was $3 million (December 28, 2013 – $4 million).
(ii) Weston and the Company have each entered into certain contracts with third parties for administrative and corporate services, including telecommunication services and
IT 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.
(iii) 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.
(iv) Weston is a unitholder of Choice Properties and is entitled to receive distributions declared by the trust. Unitholders who elect to participate in the Choice Properties
Distribution Reinvestment Plan ("DRIP") receive a further distribution, payable in Units, equal in value to 3% of each cash distribution. In 2014, Choice Properties issued
1,306,847 Units (2013 – 107,810 Units) to Weston under its DRIP at a weighted average price of $10.30 (2013 – $10.05) per Unit.
The net balances due to Weston are comprised as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
As at
January 3, 2015
As at
December 28, 2013
$
7
$
27
Joint Venture In 2014, a joint venture, formed between Choice Properties and Wittington, completed the acquisition of property from
Loblaw. The joint venture intends to develop the acquired site into a mixed-used property, anchored by a Loblaw food store. As at January
3, 2015, the joint venture did not have any operating activity. Choice Properties uses the equity method of accounting to record its 40%
interest in the joint venture, which is included in other assets (see note 19).
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 27.
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. In 2014, these elections and
accompanying agreements did not have a material impact on the Company.
114 2014 Annual Report - Financial Review
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
Equity-based compensation
Total compensation
$
$
2014
9
3
12
$
$
2013
8
6
14
2014 Annual Report - Financial Review 115
Notes to the Consolidated Financial Statements
Note 35. Segment Information
The Company has three reportable operating segments with all material operations carried out in Canada:
•
The Retail segment consists primarily of retail food and Associate-owned drug stores, and also includes in-store pharmacies and
other health and beauty products, gas bars and apparel and other general merchandise. This segment is comprised of several
operating segments, which have been aggregated primarily due to similarities in the nature of products and services offered for sale in
the retail operations and the customer base;
•
•
The Financial Services segment provides credit card services, loyalty programs, insurance brokerage services, personal banking
services provided by a major Canadian chartered bank, deposit taking services and telecommunication services; and
The Choice Properties segment owns and leases income-producing commercial properties. The Choice Properties segment
information presented below reflects the accounting policies of Choice Properties, which may differ from those of the consolidated
Company. Differences in policies are eliminated in Consolidation and Eliminations.
The Company’s chief operating decision maker evaluates segment performance on the basis of adjusted EBITDA(1) and adjusted operating
income(1), as reported to internal management, on a periodic basis.
Information for each reportable operating segment is included below:
2014
2013(i)
(millions of Canadian dollars)
Revenue(iv)
EBITDA(v)
Adjustments(vi)
Financial
Services(ii)
Choice
Properties(ii)
Retail
Consolidation
and
Eliminations(iii)
Total
Retail
Financial
Services
Choice
Properties
Consolidation
and
Eliminations(iii)
Total
$ 41,731 $
$ 1,950 $
1,088
810 $
171 $
—
683 $
568 $
14
(613) $ 42,611
$ 31,600 $
739 $
(555) $
2,134
$ 1,989 $
151 $
—
1,102
(42)
—
319 $
370 $
3
(287) $ 32,371
(365) $
2,145
—
(39)
Adjusted EBITDA(vi)
$ 3,038 $
171 $
582 $
(555) $
3,236
$ 1,947 $
151 $
373 $
(365) $
2,106
Depreciation and Amortization(vii)
1,036
7
—
12
1,055
809
9
—
6
824
Adjusted Operating Income(vi)
$ 2,002 $
164 $
582 $
(567) $
2,181
$ 1,138 $
142 $
373 $
(371) $
1,282
Net interest expense and other
financing charges
$
386 $
53 $
369 $
(224) $
584
$
315 $
49 $
303 $
(199) $
468
(i)
(ii)
Certain 2013 figures have been amended to conform with the current year’s presentation. See Accounting Standards Implemented in 2014 and Changes to Significant
Accounting policies beginning on page 73.
For segment presentation purposes, the results are for the year ended December 31, 2014, consistent with the fiscal calendars of both Financial Services and Choice
Properties. Adjustments to January 3, 2015, are included in Consolidation and Eliminations.
(iii) Consolidation and Eliminations includes the following items:
• Revenue includes the elimination of $471 million (2013 – $221 million) of rental revenue and $142 million (2013 – $66 million) of cost recovery recognized by
Choice Properties, received from the Retail segment.
• Operating income includes the elimination of the $471 million (2013 – $221 million) impact of rental revenue described above; the elimination of a $82 million gain
(2013 – $144 million) recognized by Choice Properties related to the fair value adjustments on investment properties, which are classified as Fixed Assets or
Investment Properties by the Company and measured at cost; the recognition of $12 million (2013 – $6 million) of depreciation expense for certain investment
properties recorded by Choice Properties and measured at fair value; and the elimination of $2 million (2013 – nil) intercompany charges.
• Net interest expense and other financing charges includes the elimination of $297 million (2013 – $144 million) of interest expense included in Choice Properties
related to debt owing to the Company; Unit distributions to external unitholders of $44 million (2013 – $21 million), which excludes distributions paid to the
Company, and Choice Properties Unit issuance costs of nil (2013 – $44 million), which are reflected as a reduction of equity in Choice Properties, and presented
as interest expense for the consolidated Company; the elimination of a $12 million fair value gain (2013 – $147 million loss) recognized by Choice Properties on
Class B Limited Partnership units held by the Company; and a $17 million fair value loss (2013 – $27 million) on the Company’s Trust Unit Liability.
Included in Financial Services revenue is $356 million (2013 – $325 million) of interest income.
(iv)
(v) EBITDA(1) is equal to Operating Income of $662 million (2013 – $1,321 million) plus Depreciation and Amortization of $1,472 million (2013 – $824 million).
(vi) Certain items are excluded from operating income and EBITDA(1) to derive adjusted operating income(1) and adjusted EBITDA(1), respectively. Adjusted operating
income(1) and adjusted EBITDA(1) are used internally by management when analyzing segment underlying performance. Adjustments include: Recognition of fair value
increment on inventory sold; Amortization of intangible assets acquired with Shoppers Drug Mart; Charge related to inventory measurement and other conversion
differences; Shoppers Drug Mart acquisition-related costs and net divestitures loss; Restructuring costs; Restructuring of franchise fees; Fixed asset and other related
impairments, net of recoveries; Choice Properties general and administrative costs; Fair value adjustment on Shoppers Drug Mart’s equity-based compensation liability;
Fair value adjustments on fuel and foreign currency contracts; Defined benefit plan amendments; Choice Properties start-up costs.
(vii) Depreciation and amortization for the calculation of adjusted EBITDA(1) excludes $417 million (2013 – nil) of amortization of intangible assets acquired with Shoppers
Drug Mart.
(1) See Section 20 “Non-GAAP Financial Measures” of the Company’s Management’s Discussion and Analysis.
116 2014 Annual Report - Financial Review
(millions of Canadian dollars)
Total Assets
Retail
Financial Services(i)
Choice Properties(i)
Consolidation and Eliminations(ii)
Total
As at
January 3, 2015
As at
December 28, 2013
$
$
29,973
$
3,094
8,192
(7,575)
33,684
$
17,290
2,801
7,448
(6,798)
20,741
(i)
For segment presentation purposes, the amounts are for the year ended December 31, 2014, consistent with the fiscal calendars of both Financial Services and Choice
Properties. Adjustments to January 3, 2015, are included in Consolidation and Eliminations.
(ii) Consolidation and Eliminations includes the elimination of certain investment properties held by Choice Properties measured at fair value, which are presented in the
consolidated results as fixed assets and investment properties measured at cost.
(millions of Canadian dollars)
Additions to Fixed Assets and Intangible Assets
Retail(i)
Financial Services(ii)
Choice Properties(ii)
Consolidation and Eliminations(iii)
Total
As at
January 3, 2015
As at
December 28, 2013
$
$
$
941
18
280
(153)
1,086
$
835
6
7,129
(7,093)
877
(i)
(ii)
Excludes approximately $11,300 million of fixed assets, investment properties and intangible assets, resulting from the acquisition of Shoppers Drug Mart (see note 5).
For segment presentation purposes, the results are for the year ended December 31, 2014, consistent with the fiscal calendars of both Financial Services and Choice
Properties. Adjustments to January 3, 2015, are included in Consolidation and Eliminations.
(iii) Consolidations and Eliminations includes the elimination of $179 million (2013 – $7,093 million) of investment properties acquired by Choice Properties from the Retail
Segment.
Note 36. Subsequent Events
The following events have occurred subsequent to the end of the year:
The Company sold a warehouse to Choice Properties for approximately $81 million. The warehouse is fully occupied by the Company as
the single tenant with a 20-year initial lease term with six five-year renewal options.
The Company sold a parcel of land to Choice Properties for approximately $12 million. Consideration for the acquisition included 265,665
Class B Limited Partnership units, $7 million in cash and the assumption of a $2 million obligation. The Class B Limited Partnership units
issued to the Company as partial consideration for this transaction did not impact the Company’s effective ownership percentage.
Choice Properties issued $250 million aggregate principal amount of Series E senior unsecured debentures bearing interest at a rate of
2.30% per annum and maturing in 2020. The net proceeds from the issuance were used by Choice Properties to repay existing
indebtedness and for general business purposes.
The Company, through PC Bank, extended the maturity date for certain Other Independent Securitization Trust agreements from the
second quarter of 2016 to the second quarter of 2017, with all other terms and conditions remaining substantially the same.
PC Bank entered into USD foreign exchange forward agreements, which mature by December 2015. The notional amounts of the
contracts total USD $27 million.
Pursuant to the Consent Agreement reached with the Competition Bureau in 2014 (see note 5), the Company sold the remaining three
Shoppers Drug Mart stores for estimated proceeds of $9 million.
2014 Annual Report - Financial Review 117
Three Year Summary(1)
As at or for the years ended January 3, 2015, December 28, 2013 and December 29, 2012.
(millions of Canadian dollars except where otherwise indicated)
Consolidated Results of Operations
Revenue
Operating income
Adjusted operating income(2)
EBITDA(2)
Adjusted EBITDA(2)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Net earnings
Adjusted net earnings(2)
Consolidated Financial Position and Cash Flows
Adjusted debt(2)
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Capital investments
Free cash flow(2)
Consolidated Per Common Share ($)
Basic net earnings
Adjusted basic net earnings(2)
Consolidated Financial Measures and Ratios
Revenue growth
Adjusted operating margin(2)
Adjusted EBITDA margin(2)
Adjusted debt(2) to adjusted EBITDA(2)
Retail Results of Operations
Sales
Gross profit
Adjusted gross profit(2)
Operating income
Adjusted operating income(2)
Adjusted EBITDA(2)
Retail Operating Statistics
Same-store sales(1), (6) growth (decline)
Adjusted gross profit percentage(2)
Adjusted operating margin(2)
Adjusted EBITDA margin(2)
Total retail square footage (in millions)
Number of corporate stores
Number of franchise stores
Number of Associate-owned drug stores
Financial Services Results of Operations(7)
Revenue
Operating income
Earnings before income taxes
Financial Services Operating Measures and Statistics(7)
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card receivables
Annualized credit loss rate on average quarterly gross credit card receivables
Choice Properties Results of Operations(5)
Revenue
Operating income
Net interest expense and other financing charges
Choice Properties Operating Measures(5)
Adjusted funds from operations(2)
Please refer to the inside cover of the 2014 Annual Report for the Footnote Legend.
118 2014 Annual Report - Financial Review
2014
2013(4)
2012(3)
$
42,611
$
32,371
$
31,604
662
2,181
2,134
3,236
584
529
53
1,224
9,995
1,027
2,569
1,086
977
0.14
3.22
31.6%
5.1%
7.6%
3.1x
41,731
9,734
10,722
497
2,002
3,038
2.0%
25.7%
4.8%
7.3%
70.0
615
527
1,302
810
164
111
2,535
2,630
54
13.7%
4.4%
683
568
369
285
$
$
$
$
$
$
1,321
1,282
2,145
2,106
468
354
627
696
6,288
4,251
1,491
877
244
2.23
2.48
2.4 %
4.0 %
6.5 %
3.0x
$
1,195
1,264
1,972
2,041
351
351
634
685
4,583
2,047
1,637
1,060
221
2.25
2.43
1.1 %
4.0 %
6.5 %
2.2x
$
$
31,600
$
30,960
6,961
6,961
1,180
1,138
1,947
1.1 %
22.0 %
3.6 %
6.2 %
51.9
570
496
—
739
142
93
2,345
2,538
47
13.6 %
4.2 %
319
370
303
131
$
$
$
$
6,819
6,819
1,100
1,169
1,936
(0.2)%
22.0 %
3.8 %
6.3 %
51.5
580
473
—
644
95
50
2,105
2,305
43
12.8 %
4.3 %
—
—
—
—
$
$
$
$
Glossary of Terms
Term
Definition
Term
Definition
Adjusted basic net
earnings per
common share
Adjusted debt
Adjusted debt to
adjusted EBITDA
Adjusted net earnings available to common shareholders
divided by the weighted average number of common
shares outstanding during the year (see Section 20 “Non-
GAAP Financial Measures” of the Company’s
Management’s Discussion and Analysis).
Bank indebtedness, short term debt, long term debt, Trust
Unit Liability, capital securities, certain other liabilities and
the fair value of certain financial derivative liabilities less
independent securitization trusts in short term and long
term debt, independent funding trusts, Trust Unit Liability
and President’s Choice Bank’s guaranteed investment
certificates (see Section 20 “Non-GAAP Financial
Measures” of the Company’s Management’s Discussion
and Analysis).
Adjusted debt divided by adjusted EBITDA (see Section 20
“Non-GAAP Financial Measures” of the Company’s
Management’s Discussion and Analysis).
Adjusted EBITDA
Adjusted EBITDA
margin
Adjusted operating income before depreciation and
amortization (see Section 20 “Non-GAAP Financial
Measures” of the Company’s Management’s Discussion
and Analysis).
Adjusted EBITDA divided by sales (see Section 20 “Non-
GAAP Financial Measures” of the Company’s
Management’s Discussion and Analysis).
Adjusted income tax
expense
Adjusted income tax
rate
Income taxes adjusted for the tax impact of items included
in adjusted operating income less adjusted net interest and
other financing charges (see Section 20 “Non-GAAP
Financial Measures” of the Company’s Management’s
Discussion and Analysis).
Adjusted income taxes divided by adjusted operating
income less adjusted net interest and other financing
charges (see Section 20 “Non-GAAP Financial Measures”
of the Company’s Management’s Discussion and Analysis).
Adjusted net
earnings
Adjusted net
interest and other
financing charges
Adjusted operating
income
Net earnings available to common shareholders of the
Company adjusted for items that are not necessarily
reflective of the Company’s underlying operating
performance (see Section 20 “Non-GAAP Financial
Measures” of the Company’s Management’s Discussion
and Analysis).
Net interest expense and other financing charges adjusted
for items that are not necessarily reflective of the
Company’s financial performance (see Section 20 “Non-
GAAP Financial Measures” of the Company’s
Management’s Discussion and Analysis).
Operating income adjusted for items that are not
necessarily reflective of the Company’s underlying
operating performance (see Section 20 “Non-GAAP
Financial Measures” of the Company’s Management’s
Discussion and Analysis).
Choice Properties
adjusted funds from
operations
Control brand
Choice Properties’ funds from operations adjusted for items
that are not necessarily reflective of the REIT’s underlying
operating performance (see Section 20 “Non-GAAP
Financial Measures” of the Company’s Management’s
Discussion and Analysis).
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.
Diluted net earnings
per common share
EBITDA
Free Cash Flow
Major expansion/
contraction
Net earnings available to common shareholders of the
Company adjusted for the impact of dilutive items divided
by the weighted average number of common shares
outstanding during the period adjusted for the impact of
dilutive items.
Operating income before depreciation and amortization
(see Section 20 “Non-GAAP Financial Measures” of the
Company’s Management’s Discussion & Analysis).
Cash flows from operating activities less intangible asset
additions, fixed asset purchases and interest paid (see
Section 20 “Non-GAAP Financial Measures” of the
Company’s Management’s Discussion and Analysis).
Expansion/contraction of a store that results in an increase/
decrease in square footage that is greater than 25% of the
square footage of the store prior to the expansion/
contraction.
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.
New store
Operating income
A newly constructed store, acquisition, conversion or major
expansion.
Earnings before net interest expense and other financing
charges and income taxes.
Renovation
A capital investment in a store resulting in no significant
change to the store square footage.
Retail segment
adjusted gross profit
Retail segment sales less cost of merchandise inventories
sold, adjusted for items that are not necessarily reflective of
the Company’s underlying operating performance (see
Section 20 “Non-GAAP Financial Measures” of the
Company’s Management’s Discussion and Analysis).
Retail segment adjusted gross profit divided by Retail
segment sales.
Adjusted operating
margin
Adjusted operating income divided by sales (see Section
20 “Non-GAAP Financial Measures” of the Company’s
Management’s Discussion and Analysis).
Retail segment
adjusted gross profit
percentage
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
Total credit card losses year-to-date divided by the number
of days year-to-date times 365 divided by average quarterly
gross credit card receivables.
Retail square
footage
Retail square footage includes corporate, independent
franchised stores and associate-owned drug stores.
Interest earned on credit card receivables year-to-date
divided by the number of days year-to-date times 365
divided by average quarterly gross credit card receivables.
Same-store sales
Retail segment sales from the same location for stores in
operation in that location in both periods excluding sales
from a store that has undergone a major expansion/
contraction in the period.
Net earnings available to common shareholders divided by
the weighted average number of common shares
outstanding during 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 period.
Capital Investments
Fixed asset purchases and intangible asset additions.
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
January 3, 2015 and December 28, 2013 contained 53
weeks and 52 weeks, respectively.
2014 Annual Report - Financial Review 119
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.
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 Investor Relations at the
Company’s National Head Office or by e-mail at
investor@loblaw.ca.
Common Shares
W. Galen Weston, directly and indirectly, including through his
controlling interest in Weston, owns approximately 46% of the
Company’s common shares.
Registrar and Transfer Agent
Computershare Investor Services Inc.
100 University Avenue
Toronto, Canada M5J 2Y1
At year-end 2014, there were 412,480,891 common shares issued
and outstanding.
The average daily trading volume of the Company’s common
shares for 2014 was 751,814.
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
Preferred Shares
At year-end 2014, there were 9,000,000 second preferred shares
issued and outstanding.
To change your address, eliminate multiple mailings or for other
shareholder account inquiries, please contact Computershare
Investor Services Inc.
The average daily trading volume of the Company’s second
preferred shares for 2014 was 4,172.
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.
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 Professional Accountants
Toronto, Canada
Common Dividend Policy
The Company’s dividend policy states: the declaration and
payment of dividends and the amount thereof on the Company’s
common shares are at the discretion of the Board of Directors
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.
Annual General Meeting
The 2015 Annual Meeting of Shareholders of Loblaw Companies
Limited will be held on Thursday, May 7, 2015 at 11:00 a.m.
(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 (loblaw.ca).
Common Dividend Dates
The declaration and payment of quarterly dividends are made
subject to approval by the Board of Directors. The anticipated
record and payments dates for 2015 are:
Preferred Shares, Series A Dividend Dates
The declaration and payment of quarterly dividends are made
subject to approval by the Board. The anticipated payment dates
for 2015 are:
Record Date
March 15
June 15
September 15
December 15
Payment Date
April 1
July 1
October 1
December 30
Record Date
January 15
April 15
July 15
October 15
Payment Date
January 31
April 30
July 31
October 31
Printing: Transcontinental PLM
Ce rapport est disponible en français.
Environmental Savings Summary
By using 3,190 kg of paper manufactured with 30%
post-consumer recycled waste fibre for the Annual
Report and 2,789 kg of paper manufactured with 100%
post-consumer recycled waste fibre for the Financial
Review, Loblaw companies Limited reduced its
environmental footprint by:
19278 kg
50 million BTU’s
Wood Use:
Total Energy:
Greenhouse Gases: 3709 kg of CO2 equivalent
Wastewater Flow: 167875 L
Solid Waste:
1347 kg
Environmental impact savings estimates were made using the
Environmental Defense Paper Calculator, www.papercalculator.org.
Amounts calculated are approximate based on industry averages.
LOBLAW.CA SHOPPERSDRUGMART.CA PHARMAPRIX.CA PC.CA JOEFRESH.CA PCFINANCIAL.CA CHOICEREIT.CA
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LOBLAW.CA SHOPPERSDRUGMART.CA PHARMAPRIX.CA PC.CA JOEFRESH.CA PCFINANCIAL.CA CHOICEREIT.CA