optimize
LOBLAW COMPANIES LIMITED 2015 ANNUAL REPORT
at a glance
JANUARY 2, 2016
A portfolio of strong, complementary and independent businesses
R E T A I L
F I N A N C I A L
S E R V I C E S
C H O I C E
P R O P E R T I E S
R E I T
shoppers
drug mart
market
discount
emerging
joe fresh
PC
fi nancial
choice
properties
REIT
Our Purpose – Live Life Wel l ®
Loblaw Companies Limited (“Loblaw” or the “Company”) is Canada’s food and pharmacy leader and the majority unitholder
of Choice Properties Real Estate Investment Trust (“Choice Properties”). Loblaw – and its portfolio of grocery, health and
beauty, fi nancial services and apparel businesses – provides Canadians with an unparalleled mix of value, assortment and
convenience, and offers Canadians three of the top consumer brands in President ’s Choice®, Life Brand®, and no name®.
Loblaw’s purpose – Live Life Well – supports the needs and well-being of Canadians who make one billion visits each year
to the Company’s network of corporate and independently operated stores in communities across the country. Loblaw is
positioned to meet and exceed those needs in many ways: convenient locations that span the value spectrum from Discount
to specialty; full-service pharmacies; no-fee banking; affordable fashion and family apparel.
TABLE OF CONTENTS
4
Financial Highlights
23
Corporate Governance Practices
6
Letter to Shareholders
25
Board of Directors
10
Review of Operations
25
Leadership
22 Corporate Social Responsibility
26
Shareholder and Corporate Information
optimize
Loblaw continued to
innovate and execute
throughout 2015,
introducing new
products and services
that delivered the
best in food, and
health and beauty
to our customers.
Equally important,
we continued to
build the foundation
required to fully
optimize our
portfolio of strong,
complementary
and independent
businesses.
This year’s
report explores
some of the
important
initiatives that
we are focused
on to improve
our position
and better serve
Canad ians as
Canada’s
largest retailer.
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Optimizing
Our Network
WE CONTINUE TO OPTIMIZE OUR PORTFOLIO OF ASSETS ,
LEVERAGING TECHNOLOGY TO IMPROVE THE EFFICIENCY OF OUR
STORE NETWORK AND SUPPLY CHAIN, GIVING CUSTOMERS INCREASED
ACCESS TO OUR PRODUCTS AND SERVICES, AND TAKING ADVANTAGE
OF GROWTH OPPORTUNITIES.
Synergies
Following the completion of the acquisition of Shoppers
Drug Mart , the Company established a target to generate
$300 million in net synergies.
A key driver of our fi nancial plan, we have made signifi cant
progress, generating $242 million in net synergies in 2015.
The synergies achievements were the result of a relentless
focus on the optimization of our product costs across the
Company, the refi nement and expansion of our enhanced
food offer pilots in Shoppers Drug Mart and improved
assortment of the health and beauty offer in a number of our
grocery stores. Building on these successes, we expect to
successfully complete our $300 million synergy target in 2016.
Dynamic Supply Chain
We are determined to make our 27 distribution centers part
of the most responsive and customer-centric supply chain
in North America. The recent completion of a common
information technology system for all Food retail banners
will enable key initiatives to harmonize business processes ,
allow the dynamic fl ow of product, and otherwise optimize
the effi ciency of our national distribution system.
Technology
2015 marked the completion of the implementation
of the SAP information technology system across
all of our Food retail corporate and franchise banners,
a signifi cant milestone that will help accelerate the
optimization of our entire food-retailing network. We
also continued to invest in our growing ecommerce
programs, enabling services such as: our increasingly
popular Click & Collect online food shopping service;
beautyboutique.ca, which extends our prestige
beauty lines to Canadians wherever they
live and shop; and joefresh.com,
our fast-growing distribution
channel for stylish and
affordable family apparel.
Strategic Locations
Making it easier for customers to fi nd us requires
not necessarily a bigger, but a better retail
network. We will continue to optimize our footprint
to refl ect urbanization and other demographic
trends while carefully managing total capital costs.
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Our Colleagues
Colleagues are the key to success in businesses that depend on
earning the satisfaction and loyalty of our customers every day.
That is why we have identifi ed culture as a strategic business
priority, one which helps to ensure we do the right things to
harness the energy, enthusiasm and talents of all colleagues .
An engaged workforce and a winning culture are essential for
achieving our Company purpose and business goals. A strong
emphasis on training and development helps our people achieve
personal satisfaction and growth, and contributes meaningfully to
our future success. Our colleagues are becoming more actively
engaged in creating a winning culture focused on achieving our
shared Company purpose – Live Life Well.
ared Company purpose Live Life Well.
Loyalty Programs
With more than 20 million members between
them, the PC Plus and Optimum programs are
two of the leading loyalty programs in Canada and
key to building stronger one-to-one relationships
with our customers. We continue to look at new
ways to increase the value of our points systems,
create broader and deeper
relationships and strengthen
our ability to help us build
loyalty with Canadians .
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Health Care
As Canada’s population ages, governments are searching for
new ways to control costs. With a national network of more than
1, 7 50 pharmacies, we are well positioned to play a larger role
in health care delivery and help Canadians better manage
their health care needs.
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Omni -Channel
i Ch
More and more Canadians are shopp ing online
and , increasingly, they are looking for the kind
of everyday products and services offered by
our retail businesses. We continue to invest to
improve and expand our omni-channel presence .
We are committed to providing a seamless,
one-to-one experience no matter how, when
or where our customers wish to shop with us,
and we gain new insights into their needs and
preferences with every transaction.
Delivering
Solid Results
2015 RESULTS REFLECT THE SUCCESSFUL EXECUTION
OF A FINANCIAL PLAN THROUGH WHICH WE MAINTAINED STABLE
TRADING, ACHIEVED $242 MILLION IN NET SYNERGIES, GAINED
INCREMENTAL EFFICIENCIES AND ACHIEVED OUR DELEVERAGING TARGET.
3.5%
Food retail same store
sales growth
4.7%
Drug retail front store
same store sales growth
3.7%
Drug retail pharmacy
same store sales growth
2013
2014
2015
2013
2014
2015
2013
2014
2015
3.5%1
4.7%
3.7%
2.0%
1.1%
2.5%
2.4%
2.7%
1.3%
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, fi nancial condition, results of operations, cash fl ows, performance, prospects, opportunities
and legal and regulatory matters. Specifi c 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 benefi ts associated with the acquisition of Shoppers Drug Mart Corporation
(“Shoppers Drug Mart”), future liquidity, planned capital investments, and status and impact of information technology (“IT”) systems implementation.
Forward-looking statements are typically identifi ed by words such as “expect”, “anticipate”, “believe”, “foresee”, “could”, “estimate”, “goal”, “intend”, “plan”,
“seek”, “strive”, “will”, “may” and “should” and similar expressions, as they relate to the Company and its management.
Forward-looking statements refl ect 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 fi nancial performance in 2016 is based on certain assumptions, including assumptions about anticipated cost savings, operating
effi ciencies and continued growth from current initiatives. The Company’s estimates, beliefs and assumptions are inherently subject to signifi cant 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 section 1, Forward-Looking Statements, and section 12,
Enterprise Risks and Risk Management, of Management’s Discussion and Analysis in the 2015 Annual Report – Financial Review, and section 4 of the
Company’s 2015 Annual Information Form (for the year ended January 2, 2016).
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 fi led 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 2, 2016).
Readers are cautioned not to place undue reliance on these forward-looking statements, which refl ect 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.
1 Same store sales after excluding the impact of gas bar and the negative impact of a change in distribution model by a tobacco supplier.
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26.4%
Adjusted retail segment
gross profit percentage1
(cid:2)
12.5%
Consolidated adjusted EBITDA1
and adjusted EBITDA margin1
($ millions)
$3.46
Adjusted basic EPS1
and dividend per share
($)
2013
2014
2015
2013
2014
2015
2013
2014
2015
26.4%
25.7%
22.0%
$3.46
$3.20
$2.48
$0.94
$0.98
$1.00
Dividend per
common share
3,549
3,1562
2,106
7.6%
7.8%
Adjusted
EBITDA margin1
6.5%
$1,241
Capital investments
($ millions)
$1,347
Free cash flow1
($ millions)
2.0x
Retail debt to
adjusted EBITDA1
2013
2014
2015
2013
2014
2015
2013
2014
2015
1,241
1,086
877
1,347
3.2x
2.6x
2.0x
977
244
1 See the Non-GAAP Financial Measures section of the 2015 Annual Report – Financial Review.
2 Excluding the impact of the 53rd week in 2014.
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Delivering on
Our Purpose
GUIDED BY OUR PURPOSE AND STRATEGIC FRAMEWORK ,
LOBLAW IS DELIVERING THE BEST IN FOOD EXPERIENCE, BEST IN
HEALTH AND BEAUTY, OPERATIONAL EXCELLENCE AND GROWTH.
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LOBLAW IS INCREASINGLY BECOMING A NUTRITION,
HEALTH, AND WELLNESS PARTNER FOR CANADIANS,
ANCHORED BY OUR PURPOSE – LIVE LIFE WELL .
Fellow Shareholders,
Guided by our purpose and strategic
framework, Loblaw is delivering
the best in food experience, best
in health and beauty, operational
excellence and growth. The entire
organization has made signifi cant
progress against this framework
over the last twelve months. As you
will discover in this year’s Annual
Report, 2015 has been a story of
continued innovation and execution,
and of providing great products and
services to our customers. Today,
the infrastructure and process
investments are in place to optimize
our network and leverage the shared
potential of our strong, independent
and complementary businesses .
IN THE FOURTH
QUARTER OF 2015,
WE BEGAN TO
RETURN EXCESS
FREE CASH FLOW
TO SHAREHOLDERS
UNDER A
COMMON SHARE
REPURCHASE
PROGRAM.
This past year we remained
focused on better serving our
customers. We rolled out Click &
Collect to 39 locations, bringing
Canada’s most exciting food to
customers at an unmatched level
of convenience. At the same time,
we delivered the best in health and
beauty at Shoppers Drug Mart,
where we introduced an improved
fresh food offering at 29 locations,
launched beautyboutique.ca,
and extended enhanced prestige
cosmetics to 40 beautyBoutiques.
Behind the scenes we have also
been very busy making progress
in delivering operational excellence
and growth. We completed the
roll-out of our SAP information
technology platform to all corporate
and franchise Food Retail stores,
and created a more robust loyalty
platform with improvements to PC
Plus and the launch of personalized
digital offers through My Optimum
My Rewards.
As we reach the second year
anniversary of Shoppers Drug Mart
joining our organization, we are
very pleased with the work that our
colleagues have done to combine
and optimize the two companies.
Our teams have built mutual trust
through steady progress, improving
our systems, our processes and
our talent. We continue to work
together and to learn, leveraging
each other’s strengths to improve
our customer proposition and
better serve Canadians .
Financial Plan
Our future growth and success
are anchored by our fi nancial plan,
and we executed well against it
in 2015. We maintained a stable
trading platform by delivering
strong same store sales and stable
margins in a highly competitive
grocery environment and in a Drug
retail business that saw negative
pressure from health care reform.
Against our target to generate
$300 million in net synergies related
to the acquisition of Shoppers Drug
Mart, we have already realized
$242 million and remain ahead of
our initial plan. We maintained our
focus on identifying and realizing
incremental effi ciencies in our
Food retailing businesses and will
continue this focus in 2016. We
also reduced total adjusted debt,
achieving the deleveraging target
set following the acquisition of
Shoppers Drug Mart. As a result,
in the fourth quarter of 2015,
we began to return excess free
cash fl ow to shareholders under
a common share repurchase
program.
On a comparative consolidated
basis, we increased revenue by
$3.6 billion or 8.5 per cent in
2015, refl ecting growth in all of our
businesses. We delivered $3.46 in
adjusted net earnings per share,
up 13.1 per cent from the previous
year. This increase was driven
primarily by an improvement in
the underlying performance of our
Retail segment, including positive
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WE WILL INVEST
TO ENSURE THAT
CUSTOMERS HAVE
OMNI-CHANNEL
ACCESS TO
ALL OF OUR
MAJOR PRODUCT
AND SERVICE
OFFERINGS.
WE WILL STRENGTHEN OUR LOYALTY PLATFORMS,
DELIVERING PERSONALIZED VALUE BY KNOWING,
ENGAGING AND REWARDING OUR CUSTOMERS .
same store sales in both Food
and Drug retail and an increase
in profi t driven by sales, effective
management of expenses, and the
positive contribution of synergies
realized to date.
President’s Choice Financial also
performed well with Revenue and
adjusted EBITDA increasing 4.8 per
cent and 1.2 per cent respectively
in 2015. We introduced several
innovative fi nancial products and
services to the market, including
the PC Financial World Elite
MasterCard®, Canada’s fi rst no-fee
premium card.
Choice Properties expanded its
portfolio through the acquisition of
47 additional properties, increasing
its real estate by 2.7 million square
feet and posting an 8.8 per cent
increase in revenue and a 9.8 per
cent increase in adjusted funds
from operations.
Innovate, Execute, Optimize
The implementation of SAP in our
corporate and franchise Food
stores was completed in 2015.
With SAP now in place, our focus
has turned from execution to
optimization. Beginning in 2016 we
will use the system to realize cost-
savings, improve the effi ciency of
our supply chain, and reduce the
complexity of running our business,
enabling our colleagues to better
serve customers.
At the same time, we are focused
on building our businesses in four
areas of growth that will optimize
our competitive position amid the
economic and demographic shifts
affecting our country, both now and
in the years ahead.
We will invest to ensure Canadians
have Omni-channel access
to all of our major product and
service offerings. Our ambition
is to create a seamless brand
and product experience across
multiple channels – one that keeps
customers coming back no matter
how, when or where they wish to
shop with us. In the year ahead,
we will advance our omni-channel
initiatives, continuing the roll-out
of Click & Collect, reaching more
customers through joefresh.com,
and expanding our assortment on
beautyboutique.ca. These omni-
channel initiatives provide the
opportunity to drive incremental
sales, build customer loyalty and
grow our business.
Today, Loyalty programs are
also a vital part of the retail
landscape. Among them, PC Plus
and Optimum are two of the
most successful, with more than
20 million members. We believe
that the greatest opportunity still
lies ahead and we will strengthen
our loyalty platforms, delivering
personalized value by knowing,
engaging and rewarding our
customers.
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With immigration fueling the
growth of Canada’s population,
our Multicultural expertise
represents another defi ning
competitive advantage and
signifi cant growth opportunity.
We are leveraging capabilities
in T&T Supermarkets, Arz, and
Quality Natural Foods to upgrade
facilities, develop new store-in-
store concepts, and expand our
fast-growing multicultural control
brands throughout our Market and
Discount divisions. It is through that
depth of offering that our Company
will better meet the needs of
Canada’s growing multicultural
population.
As these and other trends continue
to infl uence our customers, it is our
colleagues who remain the closest
link in how we serve them every
day. Our success depends on their
ability to earn the satisfaction and
loyalty of Canadians every time they
step into one of our stores. That is
why we have identifi ed our Culture
as a strategic priority and, in 2015,
articulated three key principles
that underpin our ideal culture:
Be Authentic, Build Trust, and
Make Connections. We have also
aligned our entire organization
around a common set of four
CORE values: Care, Ownership,
Respect, and Excellence. Already
well established at Shoppers Drug
Mart, we quickly realized that
these values are just as relevant
across each of our six distinct
divisions. As we begin the journey
of bringing our culture and values
to life in our stores, we believe
that harnessing the energy and
enthusiasm of our colleagues is
one of the most meaningful ways
we can better serve our customers.
HARNESSING THE ENERGY AND ENTHUSIASM OF
OUR COLLEAGUES IS ONE OF THE MOST MEANINGFUL
WAYS WE CAN BETTER SERVE OUR CUSTOMERS.
Aligned to our strategic framework,
built on the strengths of our
colleagues, and focused on the
customer, all of these initiatives are
an expression of our purpose –
Live Life Well. By remaining true to
that purpose, we will keep fi nding
better ways to serve Canadians,
and in so doing, accrue long-term
value for shareholders in the years
to come.
GALEN G. WESTON
Executive Chairman & President
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R E T A I L
Online renewals
R efi lling prescriptions
online is making it
easier for patients
to adhere to
medications.
Compliance packaging
Our compliance pack helps patients
organize their multiple medications
and remain
adherent.
Shoppers Drug Mart
YOUR LIFE, MADE EASIER. SHOPPERS DRUG MART IS COMMITTED TO
HELPING CANADIANS FEEL AND LOOK THEIR BEST BY OFFERING HIGH-
QUALITY HEALTH AND BEAUTY PRODUCTS AND SERVICES THROUGH
THE COUNTRY’S LARGEST AND MOST CONVENIENTLY LOCATED RETAIL
PHARMACY NETWORK.
Expanding Our Fresh Food Offering
During the past year, Shopper s Drug Mart introduced fresh food concepts in several stores in
Toronto and Regina . The expanded format has struck a chord with busy customers as evidenced
by increases in total store sales and strong traction in all food, health and beauty categories,
including our President’s Choice and Life Brand products. The addition of Shoppers Drug Mart to
our retail network represents an unparalleled opportunity to grow food sales through convenient,
smaller-scale stores in Canada’s fast-growing urban neighbourhoods.
WHERE CUSTOMERS
CAN FIND THE BEST
IN HEALTH AND
BEAUTY BRANDS
AND PROFESSIONAL,
PERSONALIZED SERVICES
IN CONVENIENTLY
LOCATED, EXTENDED-
HOUR STORES.
Shoppers Optimum Goes Digital
Drawing on our experience with
the PC Plus program, the Optimum
program has gone digital. The
new mobile Shoppers app allows
customers to download personalized
coupons that refl ect their individual
buying habits, plus special offers
designed to reward their loyalty
and increase traffi c and basket size
in stores.
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Patient Contact Centre
About 50 per cent of Canadians fail
to take their medicines properly ,
a problem that costs the health
care system an estimated
$7 billion to $9 billion annually. Our
Patient Contact Centre is part of
the solution, providing timely refi ll
reminders to thousands of patients
every day. With approximately
1 50 staff members, including
pharmacists and pharmacy
assistants , the Patient Contact
Cent re allows more time for in-store
pharmacists to focus on patient
counselling and expanded scope
o f practice (i.e. fl u shots).
Getting Ready for More
As provincial governments look for more effi cient
ways to provide health care to an aging population, we are building on the
strength and expertise of our Associate -owners and their pharmacy teams
to deliver an expanding range of professional health care services. During
the past year, we administered more than 725,000 fl u shots . Plans are
underway to play a greater role in the delivery of health care, including
the prevention and management of chronic diseases and patient
counselling services.
Life Brand
Life Brand is one of the most popular and trusted control
labels in Canada, with more than 2,000 over-the-counter
medications, vitamins, fi rst aid, oral care and other health care
products. During the past year, we continued to expand the
Life Brand product line s.
Gorgeous Got Easier
Last year we launched
beautyboutique.ca, a n
online shopping experience
that allows customers
to explore, discover and
shop for various brands
from their home . We also
opened three new enhanced
beautyBoutique locations in
2015. There are now seven
locations in Canada, which
offer customers an elevated
prestige beauty experience .
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Natural Value
The Market division is
a leader in providing
the best assortment of
healthy and natural
products in Canada.
Ready when you are
Innovative retail solutions
like Click & Collect offer
a new level of service
and convenience for
our customers.
Market
WE LOVE FOOD.
OUR MARKET DIVISION OPERATES IN BOTH INSPIRE AND NEIGHBOUR FORMATS, WITH OVER
4 00 STORES FROM COAST TO COAST UNDER THE REAL ATLANTIC SUPERSTORE, DOMINION, ZEHRS,
YOUR INDEPENDENT GROCER, VALU-MART, LOBLAWS, CITY MARKET, PROVIGO AND PROVIGO LE
MARCHÉ BANNERS. FEATURING BROAD AND DIFFERENTIATING ASSORTMENTS, EXCEPTIONAL
FRESH OFFERINGS AND UNPARALLELED SERVICE, EACH STORE IS FOCUSED ON DEL IVERING THE
VERY BEST SHOPPING EXPERIENCE IN ITS COMMUNITY.
INSPIR ING OUR
CUSTOMERS TO
EXPLORE THEIR
LOVE OF FOOD
WITH STORES AND
COLLEAGUES
WHO SHARE
THEIR PASSION.
Expect More from Your Food
Our Market division offers customers a huge selection of quality products and unique food experiences. The past
year ushered in a new era for the President’s Choice brand, building on the most ambitious marketing campaign,
Crave More. Today, customers care more than ever about the food they eat – how healthy it is, where it comes from
and how the food is made.
The launch of Crave More signalled a modernization of the President’s Choice brand, with more food innovation,
greater consciousness around product sourcing and ingredients, and shared excitement and curiosity over the
discovery of new foods. Our passionate, knowledgeable colleagues are always
available to help our customers make healthy decisions and fi nd the right foods for
any occasion.
From Our Chefs
A team of 30 chefs at our Loblaw s store at
Maple Leaf Gardens * continues to invent award
winning products and gourmet meals, with
six more internationally awarded items added
in 2015. These products are available in retail
locations across the country.
* Reg’d TM Lic’d Use.
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Click & Collect
Designed to help customers keep pace with
the demands of modern life , Click & Collect,
available i n 26 Ma rket division locations,
makes it easy to shop online and schedule
grocery orders for pick-up whenever it i s
most convenient. Customers can choose
from many items and shop by brand name,
grocery aisle, food category, event and fl yer.
Inspiring More Customers
The roll-out of the Inspire concept – a hub for innovation and
service – continued in 2015 with 31 stores now offering food
lovers exciting new fl avours and products, an expanded selection
of freshly prepared hot and cold meals and more specialty
departments.
Your Independent Grocer
Our largest Market franchise
banner continued to expand
across the country in 2015 with
the conversion of 14 stores
in both eastern and western
Canada, leveraging the strength
of our Independent banner store .
Our store now serves customers
in more than 75 Markets across
the country.
Elevating Neighbour
Every store in our Ma rket division aspires
to be “the best shop in town,” including
those in our neighbour format. Leveraging
concepts from our Inspire store, these
stores offer a range of customer - f acing
services .
Provigo & Provigo Le Marché
The revitalization of our Market store network in Quebec was completed in
2015 with 15 stores now under the Provigo Le Marché banner. The Provigo
Le Marché stores offer a Quebec-fl avoured shopping experience centred
on freshness, the discovery of new products and fl avours and exceptional
customer service. A smaller version of the Provigo Le Marché stores, with
greater emphasis on prepared foods, has proved to be a hit in busy urban
neighbourhoods.
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PC Plus
One of the best rewards
programs in Canadian food
retailing has received an
enthusiastic reception
in our Discount stores.
Won’t Be Beat
The “ Won’t Be Beat” slogan found in every
NO FRILLS location reinforces our highly
competitive
price
position.
Discount
FEED EVERYONE. WE ARE CANADA’S LARGEST DISCOUNT OPERATOR WITH MORE THAN
500 STORES INCLUDING NO FRILLS, MAXI AND REAL CANADIAN SUPERSTORE STORES. OUR
PURPOSE IS TO FEED EVERYONE BY MAKING HEALTHIER CHOICES MORE AFFORDABLE
AND APPEALING, AND BY DELIVERING DIFFERENTIATED FRESH AND MULTICULTURAL OFFERINGS,
ALL AT LOW PRICES.
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The Full Shop and More
Our Real Canadian Superstore stores offer a complete
one-stop shopping experience in the Discount business.
Here, customers fi nd much more than the full shop for
fresh foods and groceries. It’s a place where they can
also fi nd great wines, take a cooking class, drop off dry-
cleaning, fi ll a pharmacy prescription, buy the latest in
fashionable family apparel, squeeze in a workout at the
gym or have new glasses made while they shop.
Expanding West
We opened 10 new NO FRILLS stores in
British Columbia , Alberta , M anitoba and
Saskatchewan during 2015, bringing the
total number of stores in these four western
provinces to over 60. Our NO FRILLS fresh-
focused, hard discount format has found a
welcome reception in the region’s major cities
and secondary markets.
No Name Naturally Imperfect
Furthering our commitment to
offer affordable, quality products
to customers, the no name
Naturally Imperfect line of fruits
and vegetables is now available
at Real Canadian Superstore
locations , select NO FRILLS
locations in Ontario and select
Maxi® stores in Quebec.
Thirty Years and Growing
Loblaw introduced the fi rst control brand to Canadian
food retailing in 1978 as well as the country’s fi rst
Discount supermarket chain. Today, the no name brand
offers more than 1, 800 everyday basics on a wide
selection of grocery categories, from ingredients to
household products to produce.
Leaders in Unbeatable Prices
Offering unbeatable prices every day takes more than simple, straightforward
merchandising and a focused range of products and services; it depends on
a strong culture and a relentless
drive to gain incremental
effi ciencies and eliminat e waste.
Our Discount division continues
to fi nd new ways to harness
economies of scale, lower
operating costs and increase
shareholder return .
A Powerful Combination
Our Discount banners offer a
unique and powerful combination
of President’s Choice and no name
products, the two largest control
brands in Canadian food retailing.
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welcomes shoppers with an abundant
selection of traditional and exotic
fresh produce. Here they will also fi nd
unexpected features like a 1,200 sq. ft.
pita machine, 18 tanks of live seafood,
fresh T&T Sushi and Teppanyaki, an
extensive Asian beauty section and an
unprecedented variety of ingredients
for Asian and Middle
Eastern cuisine.
Fresh, Value
and Global Flavours
This is the fundamental concept
behind the launch of our pilot
Real Canadian Superstore store
in Mississauga, Ontario, where
the best specialty products
of T&T Supermarket, Arz Fine
Foods and Quality Natural Foods
have found expression in a
deliciously elevated shopping
experience. The store is meant
to serve the area’s increasingly
diverse population, and the
growing number of people who
are becoming more adventurous
when it comes to food. Fresh
takes centre stage at this newly
renovated location, which
R E T A I L
Driving traffi c
Our conveniently located gas bars
reward customers
for gas purchases
and drive traffi c
to our stores.
T&T control brands
Popular T&T control
brands are now
available at various
banners.
Emerging
REACH TOMORROW TOGETHER. THE MOSAIC OF PEOPLE AND STORES THAT MAKE UP
LOBLAW’S EMERGING DIVISION BUSINESS BRINGS TO REALITY THE FOOD, FUEL AND PRODUCTS
THAT EXPAND OUR HORIZONS OF LIVING WELL, WHILE STRENGTHENING OUR CORE.
Fine Middle Eastern Cuisine
Arz Fine Foods offers the best
in authentic Middle Eastern and
Mediterranean foods and baked
goods through our Toronto
location, and many other Loblaw
stores. During the past year,
we’ve been introducing Arz
grocery products in our Market
and Discount stores, widening
our appeal to fast-growing
multi cultural communities
and delighting shoppers
with an exotic new world
of tastes and textures.
Wholesale Club
Our national Wholesale Club banner proudly serves independent restaurants
and convenience stores as one of Canada’s leading self-serve wholesalers.
We continued to strengthen this business through a n effi cient and timely
capital investment plan.
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Real Canadian
Liquorstore
As Alberta’s leading liquor
retailer, this business continues
to grow through new banners
and an expanded control
label program. We continued
to leverage our experience in
these stores to strengthen
our core, as we introduced
the convenience of beer
sales to select stores in
Ontario, with a commitment
to dedicate about 50 per cent
of beer shelf space to local
or craft beer.
The Best in Asian Fresh
T&T Supermarket is dedicated to bringing Asian Canadian families the fresh
foods and cultural staples they love, and introducing all Canadian families
to the diversity of East Asian food culture at stores that offer exceptional
convenience, service, and value.
Fortinos
As one of Canada’s premiere
fresh food shops, Fortinos
delights its customers through
great service, high store
standards and unmatched
freshness and also offers
expertise and high -quality
Pane Fresco Home Meal
Replacement offerings that
deliver on taste and value.
East Meets West
Emerging banner
stores are the
incubators of fresh
ideas for the balance
of our retail network.
Sushi and teppanyaki
bars offered at T&T
Supermarket locations ,
which combine culinary
fl air with modern
chef-inspired creations,
have been replicated
in more than 15 stores
throughout our
food-retailing
network.
Growth in Sight
Optical departments represent a
fast-growing source of revenue for
our stores and other outstanding
value and convenience for
customers. Customers can fi ll
their optical needs during regular
trips to the grocery store .
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Social media
Fans can follow
the latest news and
style in spiration
on our blog and
social channels.
Shop from anywhere
Our mobile app provides
shoppers with easy
access to Joe Fresh
style and promos on
the go.
Joe Fresh
ESSENTIAL STYLE EXCEPTIONAL VALUE. THE JOE FRESH BRAND IS
ONE OF CANADA’S LEADING SOURCES FOR MODERN STYLE AND ACCESSIBLE
DESIGN, OFFERING EVERYDAY LIFESTYLE COLLECTIONS FOR WOMEN, MEN
AND CHILDREN. JOE FRESH OFFERS ESSENTIAL DESIGN AND EXCEPTIONAL
VALUE IN CATEGORIES SPANNING APPAREL, ACCESSORIES, FOOTWEAR
AND COSMETICS.
JOE FRESH PRODUCTS
ARE AVAILABLE ONLINE
AND IN OVER 350 RETAIL
LOCATIONS IN CANADA,
THE U.S., MEXICO
AND THE MIDDLE EAST.
THE BRAND WILL
LAUNCH IN THE
PHILIPPINES IN 2016.
Strategic Partnerships
Joe Fresh has become a recognized leader in the design of fashionable
and affordable apparel. Today, we are extending the power of the Joe Fresh
brand through selective partnerships with leading manufacturers of shoes and
accessories to deliver our customers the best combination of quality and
value in everything we offer.
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A Better Shopping Experience
As part of our go-forward strategy,
we have streamlin ed assortment ,
u pdated the look of our key stores
and implemented a pricing
strategy for an improved shopping
experience.
F I N A N C I A L S E R V I C E S
President’s Choice Financial
MAKE EVERY DAY SIMPLE AND BETTER. WE AIM TO BE THE BEST IN
SIMPLE, EVERYDAY FINANCIAL SERVICES WITH STRAIGHTFORWARD NO FEE
DAILY BANKING AND CREDIT CARD SERVICES THAT ARE EASY TO ACCESS
AND UNDERSTAND ONLINE AND THROUGH A NETWORK OF MORE THAN
215 IN-STORE BANKING PAVILIONS AND 3,900 ABM MACHINES, AVAILABLE
WHERE CANADIANS ALREADY SHOP EVERY WEEK.
Investing in Growth
President’s Choice Financial
continues to build the
infrastructure required to enable
new technology and keep pace
with the changing needs of our
customers – from the increasing
sophistication of loyalty and credit
card programs to the emergence
of mobile payment systems. We
are also investing in opportunities
to keep growing the trusted
PC Financial brand in areas such
as gift cards, travel services,
mobile phone plans, and insurance
and other fi nancial products.
President’s Choice
Financial® World
Elite MasterCard®
In 2015, PC Financial launched
the new PC Financial World
Elite MasterCard® – an elite
premium credit card offering with no annual
premium cred
fee , the fi rst of its kind in Canada. The PC Financial World Elite MasterCard ®
helps cardholders earn more rewards faster, at not only Loblaw and related
banner locations, but also at Shoppers Drug Mart , Esso and Loblaw-branded
gas stations. The World Elite MasterCard® achieved phenomenal uptake with
the help of an integrated ma rketing campaign in the fourth quarter.
A Canadian First
The launch of instant issuance marks the fi rst time a retail bank in a Canadian grocery
store has provided instant credit card issuance of a full, chip and pin, EMV* permanent
credit card in-store, making everyday banking even simpler for Canadians. An exclusive
pilot program is now live in Ontario, Alberta and British Columbia and will launch in
additional markets across Canada within the coming months.
* EMV is a technical standard for smart payment cards and for payment terminals and automated teller machines that can
accept them. EMV (Europay, MasterCard and Visa) cards are smart cards (also called chip cards or IC cards) which store
their data on integrated circuits rather than magnetic stripes.
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My Optimum My Rewards
PC Plus app version 2.0
The My Optimum My Rewards experience
was launched in May 2015 and already has
signed up 20 per
cent of Optimum
members.
In April 2015 we launched
version 2.0 of the
PC Plus app – a huge
success with almost
3 million downloads.
Loyalty
Matters
LOYALTY. WITH MORE THAN 20 MILLION MEMBERS BETWEEN THEM, THE PC PLUS AND
OPTIMUM PROGRAMS ARE TWO OF THE LEADING LOYALTY PLATFORMS IN CANADA.
DRIVEN BY ONE-TO-ONE COMMUNICATION, CARDHOLDERS OF BOTH PROGRAMS
HAVE LARGER BASKET SIZES , AND MAKE SIGNIFICANTLY MORE TRIPS PER YEAR.
OUR VISION IS A CUSTOMER ENGAGEMENT PLATFORM, LEVERAGING LOYALTY, THAT
WILL ALLOW US TO DELIVER PERSONALIZED VALUE BY KNOWING, ENGAGING AND
REWARDING OUR CUSTOMERS. AS A RESULT, WE CONTINUE TO LOOK AT NEW WAYS TO
INCREASE THE VALUE OF OUR POINTS SYSTEMS AND CREATE BROADER AND DEEPER
RELATIONSHIPS WITH CANADIANS .
The Shoppers Drug Mart Optimum Program
Already one of Canada’s most successful loyalty programs
with more than 10 million active members, the Optimum
program got even better in 2015 with the introduction
of My Optimum My Rewards . A new mobile app with
load -to- card functionality has unleashed the power of
one-to-one marketing with personalized digital coupons
and special offers.
The Loblaw PC Plus Program
Designed to be used through a smart phone,
the Loblaw PC Plus program has grown to
more than 1 0 million members in three years
thanks to personalized offers that allow
members to earn points on the items they
purchase the
most. Our
reward? More
frequent s hops,
bigger basket
sizes and more
categories
shopped.
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C H O I C E P R O P E R T I E S R E I T
Choice Properties REIT
CHOICE PROPERTIES REAL ESTATE INVESTMENT TRUST, WHICH IS 83 PER CENT OWNED
BY LOBLAW, IS AN OWNER, MANAGER AND DEVELOPER OF WELL-LOCATED RETAIL AND
COMMERCIAL REAL ESTATE ACROSS CANADA. ITS PORTFOLIO SPANS APPROXIMATELY
41.6 MILLION SQUARE FEET OF GROSS LEASABLE AREA AND CONSISTS OF 519 PROPERTIES
PRIMARILY FOCUSED ON SHOPPING CENTRES ANCHORED BY SUPERMARKETS AND DRUG
STORES AS WELL AS STAND-ALONE SUPERMARKETS AND DRUG STORES.
RETAIL
WAREHOUSE
LAND
INDUSTRIAL
OFFICE
1
YUKON TERRITORY
RETAIL
1
NORTHWEST
TERRITORIES
RETAIL
53
ALBERTA
RETAIL
SASKATCHEWAN
RETAIL
MANITOBA
RETAIL
15
14
BRITISH
COLUMBIA
RETAIL
28
SURREY, BC
LAND 1
SURREY, BC
WAREHOUSE 1
CALGARY, AB
WAREHOUSE 1
Our Strategy
207
ONTARIO
RETAIL
1
REGINA, SK
WAREHOUSE
ONTARIO
INDUSTRIAL 1
4
ONTARIO
WAREHOUSE 2
1
BRAMPTON, ON
OFFICE
ONTARIO
LAND
QUEBEC
WAREHOUSE 2
PRINCE EDWARD ISLAND
RETAIL
105
QUEBEC
RETAIL
NEWFOUNDLAND
& LABRADOR
RETAIL
9
27
4
3
37
1
ST. JOHN’S, NL
WAREHOUSE
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RETAIL
NEW BRUNSWICK
WAREHOUSE
NEW BRUNSWICK
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Choice Properties’ goal is to create value by growing its portfolio and distributable
income. Building on its competitive advantages, including its sizable asset base, strong
alliance with Loblaw and solid balance sheet, its strategy is to buy well-located and
desirable assets, to enhance its properties through development and to manage its
assets to improve operations and profi tability.
2015 Highlights
· I ncreased its annual distribution to $0.67 per unit, or by 3.1 per cent, effective January 29,
2016, distribution payable February 16, 2016.
· A dded 47 properties comprising 2.7 million square feet of gross leasable area.
· Developed 124,000 square feet of gross leasable area.
· Improved occupancy rates from 98.1 per cent to 98.6 per cent.
Choice Propert ies REIT units are listed on the Toronto Stock Exchange under the symbol CHP.UN. For more information,
visit choicereit.ca or refer to the 2015 Annual Report of Choice Propert ies REIT.
Corporate
Social
Responsibility
LOBLAW’S COMMITMENT TO CORPORATE SOCIAL RESPONSIBILITY
(CSR) IS INGRAINED IN THE WAY WE DO BUSINESS. OUR EFFORTS
ARE FOCUSED ON THE AREAS RELEVANT TO OUR CUSTOMERS,
OUR BUSINESS, AND OUR ABILITY TO LEAD. OUR COMPANY PURPOSE –
LIVE LIFE WELL – IS REFLECTED IN OUR THREE CSR PILLARS:
SOURCING, ENVIRONMENT, AND COMMUNITY.
Feeding Our Neighbours
This year we launched the no name Naturally Imperfect line
of produce to provide Canadians with access to fresh produce
eading
at more affordable prices. We are also a leading
supporter of Canadian food banks
with 100 per cent of our Market and
Discount stores matched to local
food banks, and donating more than
2.4 million pounds of perishable food
through the Retail Food Program.
Removing Ingredients
of Concern
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We committed that by the end of
2018, Life Brand and President’s
Choice household, beauty and
cosmetic products will no longer
be formulated using triclosan,
phthalates or plastic microbeads.
This is in addition to our ongoing
efforts to reduce sodium in
President’s Choice food products,
by an average of 20 per cent.
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Helping Kids
Kid
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Putting Women’s Health First
We recently rebranded our
community investment efforts at
Shoppers Drug Mart under the new
umbrella SHOPPERS LOVE. YOU.
and our support of women’s health
has never been stronger. During
the year we granted $ 9. 4 million
to various women’s health initiatives
benefi ting more than 426,000
women across Canada.
President’s Choice Children’s
Charity continue d to support
children’s health by granting
$ 14.2 million to children with
disabilities and
to child-nutrition
programs to
provide healthy
meals to more
than 459,000
children across
Canada.
Focus on Reduction
From plastic bags to electricity, we continued to reduce our
impact on the environment. Our pay-for-bag program has
diverted more than 8.5 billion bags from landfi ll since 200 7,
a nearly 70 per cent reduction in the number of bags. We
also reduced energy use by retrofi tting the fresh counters
in 149 stores and task lighting in 131 stores with LED light
fi xtures. Initiatives like these have driven double-digit declines
in store electricity use since 2011.
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.
independent directors. He ensures that the Board operates
independently of management and that directors have
an independent leadership contact.
Board responsibilities and duties
The Board, directly and through its committees, supervises
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 Board reviews the Company’s
strategic direction, assigns responsibility to management
for the achievement of that direction, approves major
policy decisions, delegates to management the authority
and responsibility of handling day-to-day affairs, and
reviews management’s performance and effectiveness. The
Board’s expectations of management are communicated to
management directly and through committees of the Board.
The Board regularly receives reports on the operating
results of the Company as well as reports on certain non-
operational matters, including insurance, pensions, corporate
governance, workplace 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 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.
The Governance Committee regularly reviews the Company’s
corporate governance practices and considers any changes
necessary to maintain the Company’s high standards of
corporate governance in a rapidly changing environment. The
Company’s website, loblaw.ca, sets out additional governance
information, including the Company’s Code of Conduct (the
“Code”), its Disclosure Policy and the Mandates of the Board
of Directors (the “Board”) and its committees.
Director independence
The Canadian Securities Administrators’ Corporate Governance
Guidelines provide that a director is independent if he or she
has no material relationship with the Company or its affi liates
that could reasonably be expected to interfere with the exercise
of the director’s independent judgment.
At least two-thirds of the directors on the Board are
independent. The independent directors typically meet
separately following each Board meeting and on other
occasions as required or desirable.
Information relating to each of the directors, including their
independence, committee membership, other public company
boards on which they serve, as well as their attendance record
for all Board and committee meetings, can be found in the
Company’s Management Proxy Circular.
Board leadership
Galen G. Weston is the Executive Chairman of the Board.
The Executive Chairman directs the operations of the Board.
He chairs each meeting of the Board, is responsible for the
management and effective functioning of the Board generally
and provides leadership to the Board in all matters. These and
other key responsibilities of the Executive Chairman are set
out in a position description established by the Board.
The Board has also appointed an independent director,
Thomas C. O’Neill, to serve as lead director. The lead director
provides leadership to the Board and particularly to the
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Governance, Employee Development, Nominating
and Compensation Committee
The Governance Committee is responsible for the identifi cation
of new director nominees for the Board and for the oversight
of compensation of directors and executive offi cers. The
Governance Committee is also responsible for developing
and maintaining governance practices consistent with
high standards of corporate governance. The Chair of the
Governance Committee, who is an independent director, has
also been appointed by the Board to serve as lead director.
Pension Committee
The Pension Committee is responsible for reviewing the
performance and overseeing the administration of the Company’s
and its subsidiaries’ pension plans and pension funds.
Environmental, Health and Safety Committee
The Environmental, Health and Safety Committee is responsible
for reviewing and monitoring environmental matters, food safety
and health and safety policies, procedures, practices and
compliance.
Ethical business conduct
The Code refl ects the Company’s long-standing commitment to
high standards of ethical conduct and business practices. The
Code is reviewed annually to ensure it is current and refl ects
best practices in the area of ethical business conduct and
includes a strong “tone from the top” message. All directors,
offi cers 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, offi cer or employee may use
to report conduct which he or she feels violates the Code or
otherwise constitutes fraudulent or unethical conduct. A fraud
reporting protocol has also been implemented to ensure that
fraud is reported to senior management in a timely manner. In
addition, the Audit Committee has endorsed procedures for
the anonymous receipt, retention and handling of complaints
regarding accounting, internal control or auditing matters.
These procedures are available at loblaw.ca.
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
fi nancial reporting and internal controls over fi nancial reporting,
disclosure controls, internal audit function, and compliance with
legal and regulatory requirements.
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Board of
Directors
GALEN G. WESTON, B.A., M.B.A.
Executive Chairman and President, Loblaw
Companies Limited; Deputy Chairman, George
Weston 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 Offi cer, Canadian Tire Corporation,
Limited; Former Director, Canadian Pacifi c
Railway Limited, George Weston Limited, Bank
of Montreal.
PAUL M. BEESTON, C.M., B.A., F.C.A., F.C.P.A.1
Corporate Director; Former President and Chief
Executive Offi cer, Toronto Blue Jays Baseball
Team; Former President and Chief Executive
Offi cer, 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 Chief Executive Offi cer and Director,
George Weston Limited; former Executive Vice
President, Chief Financial Offi cer and Chief
Restructuring Offi cer, Nortel Networks Corporation
and Nortel Networks Limited; former Director and
Chief Financial Offi cer, Hanson plc and Marconi
Corporation plc.
WARREN BRYANT, B.S., M.B.A.1, 4
Corporate Director; Former Chairman, President
and Chief Executive Offi cer of Longs Drug Stores;
former Executive of Kroger Co.; Director, Dollar
General Corporation, Offi ce Depot (formerly
Offi ceMax 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.
Leadership
GALEN G. WESTON
Executive Chairman and President
GRANT FROESE
Chief Operating Offi cer
RICHARD DUFRESNE
Chief Financial Offi cer
SARAH R. DAVIS
Chief Administrative Offi cer
MARK C. BUTLER
Executive Vice President, Business Synergies
CHRISTIE J.B. CLARK, B. COMM., M.B.A., F.C.A.,
F.C.P.A.1*
Corporate Director; Former Chief Executive Offi cer
and Senior Partner, PricewaterhouseCoopers
LLP; Trustee, Choice Properties Real Estate Trust;
Director, Air Canada; Hydro One Inc.; Hydro
One Limited; Former Director, Brookfi eld Offi ce
Properties Inc., IGM Financial Inc.; Chair, Finance
Committee of Alpine Canada.
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, Brookfi eld
Private Equity Group; Consultant to the Board
and to the Board of George Weston Limited;
Former President and Chief Executive Offi cer, the
Oshawa Group (now part of Sobeys Inc.); Director,
George Weston Limited, Telus Corporation;
Former Chairman, Alderwoods Group, Inc.;
Former Director, Ainsworth Lumber Co. Ltd.,
Canadian Imperial Bank of Commerce.
NANCY H.O. LOCKHART, O. ONT.2, 4*
Corporate Director; Former Chief Administrative
Offi cer, 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*
Corporate Director; Chairman, BCE Inc.;
Chairman, The Bank of Nova Scotia; Retired
Chairman, PricewaterhouseCoopers Consulting;
Former Chief Executive Offi cer and Chief
Operating Offi cer, 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 Offi cer and Vice Chairman of Dean
& DeLuca, Inc.; Former President and Chief
Executive Offi cer, Bath & Body Works; Former
Chief Executive Offi cer, Victoria’s Secret Beauty;
Director, Cabela’s Incorporated, The Vitamin
Shoppe, Inc., Former Director, Borderfree, Inc.;
Shoppers Drug Mart Corporation, Zale Corporation.
SARAH RAISS, B.S., M.B.A.2
Corporate Director; Former Executive,
TransCanada Corporation; Director, Commercial
Metals Company and Vermillion Energy Inc.;
Former Chair, Alberta Electric System Operator
Board of Directors; Former Director, Canadian Oil
Sands Limited, 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
* Chair of the Committee
ROBERT CHANT
Senior Vice President, Corporate Affairs
and Communication
BARRY K. COLUMB
President, President’s Choice Financial
GORDON A.M. CURRIE
Executive Vice President , Chief Legal Offi cer
and Secretary
MARIO GRAUSO
President, Joe Fresh
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
MARK WILSON
Executive Vice President, Human Resources
and Labour Relations
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Shareholder
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NATIONAL HEAD OFFICE AND STORE SUPPORT CENTRE
LOBLAW COMPANIES LIMITED
1 PRESIDENT’S CHOICE CIRCLE, BRAMPTON, CANADA L6Y 5S5
TEL: (905) 459-2500 | FAX: (905) 861-2206 | INTERNET: LOBLAW.CA
STOCK EXCHANGE LISTING
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. B”, respectively.
COMMON SHARES
W. Galen Weston, directly and indirectly,
including through his controlling interest in
Weston, owns approximately 4 6 per cent of
the Company’s common shares.
At year-end 2015, there were 409,985,226
common shares issued and outstanding.
The average daily trading volume of the
Company’s common shares for 2015 was
526,372.
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 fi nancial results, capital
requirements, available cash fl ow, 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 payment dates for 2016 are:
RECORD DATE
PAYMENT DATE
PREFERRED SHARES
At year-end 201 5, there were 9,000,000
second preferred shares, series B, issued and
outstanding and available for public trading.
March 15
June 15
September 15
December 15
April 1
July 1
October 1
December 30
The average daily trading volume of the
Company’s second preferred shares w ere:
Series A: 15,171
Series B: 18,452
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, its subsidiaries or the licensor and,
where used in this report, are in italics.
PREFERRED SHARE, SERIES B,
DIVIDEND DATES
The declaration and payment of quarterly
dividends are made subject to approval
by the Board of Directors. The anticipated
payment dates for 2016 are :
RECORD DATE
PAYMENT DATE
March 15
June 15
September 15
December 15
March 31
June 30
September 30
December 3 1
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
Offi ce or by e-mail at: investor@loblaw.ca
REGISTRAR AND TRANSFER AGENT
Computershare Investor Services Inc.
100 University Avenue
Toronto, Canada M5J 2Y1
Toll-free: 1-800-564-6253
(Canada and 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 fi nancial information has been
fi led electronically with various securities
regulators in Canada through the System
for Electronic Document Analysis and
Retrieval (SEDAR) and with the Offi ce 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
ANNUAL MEETING
The 2016 Annual Meeting of Shareholders of
Loblaw Companies Limited will be held on
Thursday, May 5, 2016 at 11:00 a.m. (EST),
at the Mattamy Athletic Centre,
50 Carlton Street, Toronto, Canada
M5B 1J2.
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LOBLAW COMPANIES LIMITED 2015 ANNUAL REPORT – FINANCIAL REVIEW
2015 Annual Report – Financial Review
Financial Highlights
Management’s Discussion and Analysis
Financial Results
Notes to the Consolidated Financial Statements
Three Year Summary
Glossary of Terms
1
3
55
63
118
120
Financial Highlights(1),(5)
As at or for the years ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars except where otherwise indicated)
Consolidated Results of Operations
Revenue
Revenue excluding 53rd week
Revenue growth
Revenue growth excluding 53rd week
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Net earnings available to common shareholders of the Company excluding 53rd week
Adjusted net earnings available to common shareholders of the Company(2)
Adjusted net earnings available to common shareholders of the Company(2) excluding 53rd
week
Retail debt to retail adjusted EBITDA(2)
Adjusted return on equity
Adjusted return on capital
Consolidated Financial Position and Cash Flows
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
Basic net earnings excluding 53rd week
Adjusted basic net earnings(2)
Adjusted basic net earnings(2) excluding 53rd week
Dividends
Dividends declared per common share ($)
2015
(52 weeks)
2014
(53 weeks)
$
$
$
$
$
$
$
$
$
45,394
45,394
6.5%
8.5%
3,549
3,549
7.8%
644
548
623
632
625
625
1,422
1,422
2.0x
11.1%
8.5%
1,084
3,079
1,241
1,347
1.52
1.52
3.46
3.46
0.995
$
$
$
$
$
$
$
$
$
42,611
41,822
31.6%
29.2%
3,227
3,156
7.6%
584
529
53
53
53
1
1,217
1,165
2.6x
12.3%
10.4%
1,027
2,569
1,086
977
0.14
—
3.20
3.06
0.975
2015 Annual Report - Financial Review 1
Financial Highlights(1),(5)
As at or for the years ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars except where otherwise indicated)
2015
(52 weeks)
2014
(53 weeks)
$
$
$
$
$
$
44,469
44,469
11,689
11,689
11,747
11,747
26.4%
3,352
3,352
7.5%
1,567
1.9%
4.3%
3.7%
4.7%
69.9
591
525
1,313
849
173
106
2,642
2,790
54
13.6%
4.3%
743
602
756
313
$
$
$
$
$
$
41,731
40,942
9,734
9,534
10,722
10,522
25.7%
3,040
2,969
7.3%
1,453
2.0%
2.6%
2.7%
2.4%
70.0
615
527
1,302
810
171
111
2,535
2,630
54
13.7%
4.4%
683
571
369
285
Retail Results of Operations
Sales
Sales excluding 53rd week
Gross profit
Gross profit excluding 53rd week
Adjusted gross profit(2)
Adjusted gross profit(2) excluding 53rd week
Adjusted gross profit %(2)
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Depreciation and amortization
Retail Operating Statistics
Food retail same-store sales growth
Drug retail same-store sales growth
Drug retail same-store pharmacy sales growth
Drug retail same-store front store sales growth
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(4)
Revenue
Adjusted EBITDA(2)
Earnings before income taxes
Financial Services Operating Measures and Statistics(4)
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 and Measures(4)
Revenue
Adjusted EBITDA(2)
Net interest expense and other financing charges
Adjusted funds from operations(2)
2 2015 Annual Report - Financial Review
Management's Discussion and Analysis
1.
2.
3.
4.
5.
Forward-Looking Statements
Overview
Strategic Framework
Key Financial Performance Indicators
Overall Financial Performance
5.1
5.2
Consolidated Results of Operations
Selected Financial Information
6.
Reportable Operating Segments Results of Operations
6.1
6.2
6.3
Retail Segment
Financial Services Segment
Choice Properties Segment
7.
Liquidity and Capital Resources
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
Cash Flows
Liquidity and Capital Structure
Financial Condition
Credit Ratings
Other Sources of Funding
Share Capital
Off-Balance Sheet Arrangements
Contractual Obligations
8.
9.
Financial Instruments
Quarterly Results of Operations
9.1
9.2
Results by Quarter
Fourth Quarter Results
10. Disclosure Controls and Procedures
11.
Internal Control over Financial Reporting
12. Enterprise Risks and Risk Management
12.1 Operating Risks and Risk Management
12.2 Financial Risks and Risk Management
13. Related Party Transactions
14. Critical Accounting Estimates and Judgments
14.1 Consolidation
14.2 Inventories
14.3 Impairment of Non-Financial Assets (Goodwill, Intangible Assets, Fixed Assets and Investment Properties)
14.4 Franchise Loans Receivable and Certain Other Financial Assets
14.5 Customer Loyalty Awards Programs
14.6 Income and Other Taxes
14.7 Segment Information
15. Accounting Standards
15.1 Changes to Significant Accounting Policies
15.2 Future Accounting Standards
16. Outlook
17. Non-GAAP Financial Measures
18. Additional Information
4
5
5
6
7
7
11
13
13
16
17
18
18
20
22
22
22
24
25
26
26
27
27
28
35
35
36
37
41
42
43
43
43
44
44
44
44
44
45
45
45
46
46
53
2015 Annual Report - Financial Review 3
Management’s Discussion and Analysis
The following Management’s Discussion and Analysis (“MD&A”) for Loblaw Companies Limited and its subsidiaries (collectively, the
“Company” or “Loblaw”) should be read in conjunction with the annual audited consolidated financial statements and the accompanying
notes on page 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 2, 2016 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 when otherwise noted.
The information in this MD&A is current to February 24, 2016, unless otherwise noted. A glossary of terms used throughout this Annual
Report can be found on page 120.
Unless otherwise indicated, all comparisons of results for the fourth quarter of 2015 (12 weeks ended January 2, 2016) are against results
for the fourth quarter of 2014 (13 weeks ended January 3, 2015) and all comparisons of results for the full year of 2015 (52 weeks ended
January 2, 2016) are against the results for the full year 2014 (53 weeks ended January 3, 2015).
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, opportunities and legal and
regulatory matters. 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, 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 7 “Liquidity and Capital Resources” and Section 16 “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” 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 2016 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 12 “Enterprise Risks and Risk Management” of this MD&A and the
Company’s 2015 Annual Information Form (for the year ended January 2, 2016). Such risks and uncertainties include:
•
changes to the regulation of generic prescription drug prices, the reduction of reimbursements under public drug benefit plans and the
elimination or reduction of professional allowances paid by drug manufacturers;
•
•
•
•
•
•
•
•
•
the inability of the Company’s IT infrastructure to support the requirements of the Company’s business, or the occurrence of any
internal or external security breaches, denial of service attacks, viruses, worms and other known or unknown cybersecurity or data
breaches;
failure to realize benefits from investments in the Company’s new IT systems;
the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink;
failure to realize the anticipated strategic benefits associated with the acquisition of Shoppers Drug Mart;
public health events including those related to food or drug safety;
failure to realize anticipated results, including revenue growth, anticipated cost savings or operating efficiencies associated with the
Company’s major initiatives, including those from restructuring;
failure by the Company's franchisees or Associates to operate in accordance with prescribed procedures or standards, or disruptions
to the Company's relationship with its franchisees or Associates;
failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements, which could
lead to work stoppages;
changes in the Company’s income, capital, commodity, property and other tax and regulatory liabilities, including changes in tax laws,
regulations or future assessments;
4 2015 Annual Report - Financial Review
•
•
•
•
•
•
•
reliance on the performance and retention of third party service providers, including those associated with the Company’s supply
chain and apparel business;
issues with vendors in both advanced and developing markets;
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;
heightened competition, whether from current competitors or new entrants to the marketplace;
changes in economic conditions, including economic recession or changes in the rate of inflation or deflation, employment rates,
interest rates, currency exchange rates or derivative and commodity prices;
the impact of potential environmental liabilities; and
the inability of the Company to collect on or 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 2015 Annual Information Form (for the year
ended January 2, 2016). 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 83.0% 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 purpose of “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 the 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 putting our pharmacy customers
first, our desire to provide high quality health and wellness products, a diverse and differentiated beauty offering and convenient locations
and hours of operation to meet individuals’ wellness needs.
The Company’s operational excellence goals include driving efficiencies and realizing operating synergies from its retail businesses. This
includes product innovation, development of the emerging businesses and loyalty program initiatives. We are also focused on continued
growth from President’s Choice Financial Services and Choice Properties segments.
2015 Annual Report - Financial Review 5
Management’s Discussion and Analysis
4. Key Financial Performance Indicators(5)
The Company has identified key financial performance indicators to measure the progress of short and long term objectives. Certain key
financial performance indicators are set out below:
As at or for the years ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars except where otherwise indicated)
2015
(52 weeks)
2014
(53 weeks)
Consolidated:
Revenue growth
Revenue excluding 53rd week
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Net earnings available to common shareholders of the Company excluding 53rd week
Adjusted net earnings available to common shareholders of the Company(2)
Adjusted net earnings available to common shareholders of the Company(2) excluding 53rd
week
Basic net earnings per common share ($)
Basic net earnings per common share excluding 53rd week ($)
Adjusted basic net earnings per common share(2) ($)
Adjusted basic net earnings per common share excluding 53rd week ($)
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Free cash flow(2)
Retail debt to retail adjusted EBITDA(2)
Adjusted return on equity(1)
Adjusted return on capital(1)
Retail Segment:
Food retail same-store sales growth
Drug retail same-store sales growth
Adjusted gross profit(2)
Adjusted gross profit(2) excluding 53rd week
Adjusted gross profit %(2)
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Financial Services Segment(4):
Adjusted EBITDA(2)
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(4):
Adjusted EBITDA(2)
Adjusted funds from operations(2)
6 2015 Annual Report - Financial Review
$
$
$
$
$
$
$
$
$
$
$
6.5%
8.5%
3,549
3,549
7.8%
623
632
625
625
1,422
1,422
1.52
1.52
3.46
3.46
1,084
3,079
1,347
2.0x
11.1%
8.5%
1.9%
4.3%
11,747
11,747
26.4%
3,352
3,352
7.5%
173
106
13.6%
4.3%
602
313
$
$
$
$
$
$
$
$
$
$
$
31.6%
29.2%
3,227
3,156
7.6%
53
53
53
1
1,217
1,165
0.14
—
3.20
3.06
1,027
2,569
977
2.6x
12.3%
10.4%
2.0%
2.6%
10,722
10,522
25.7%
3,040
2,969
7.3%
171
111
13.7%
4.4%
571
285
5. Overall Financial Performance
5.1 Consolidated Results of Operations(5)
For the years ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(52 weeks)
(53 weeks)
$ Change
% Change
Revenue
Revenue excluding 53rd week
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Depreciation and amortization(i)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Adjusted income taxes(2)
Adjusted income tax rate(2)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Net earnings available to common shareholders of the Company
excluding 53rd week
Adjusted net earnings available to common shareholders of the
Company(2)
Adjusted net earnings available to common shareholders of the
Company(2) excluding 53rd week
Basic net earnings per common share ($)
Basic net earnings per common share excluding 53rd week ($)
Adjusted basic net earnings per common share(2) ($)
Adjusted basic net earnings per common share(2) excluding 53rd
week ($)
Basic weighted average common shares outstanding (in millions)
$
$
$
$
$
$
$
$
$
$
45,394
45,394
3,549
3,549
7.8%
1,592
644
548
525
27.0%
623
632
625
625
1,422
1,422
1.52
1.52
3.46
3.46
411.5
$
$
$
$
$
$
$
$
$
$
$
$
$
42,611
41,822
3,227
3,156
7.6%
1,472
$
$
$
584
529
426
25.9%
53
53
53
1
1,217
1,165
0.14
$
— $
$
$
3.20
3.06
380.5
2,783
3,572
322
393
120
60
19
99
570
579
572
6.5%
8.5%
10.0%
12.5%
8.2%
10.3%
3.6%
23.2%
1,075.5%
1,092.5%
1,079.2%
624
62,400.0%
205
257
1.38
1.52
0.26
0.40
16.8%
22.1%
985.7%
100.0%
8.1%
13.1%
(i) Depreciation and amortization for the calculation of adjusted EBITDA(2) excludes $536 million (2014 – $417 million) of amortization of intangible assets acquired with
Shoppers Drug Mart for 2015 and 2014, respectively.
The Company’s comparative results were negatively impacted by the inclusion of an additional selling week in 2014 (the “53rd week”). In
2014, the 53rd week resulted in $789 million of higher retail sales, $71 million of higher EBITDA, and estimated impacts on net earnings and
basic net earnings per common share of $52 million and $0.13 per share, respectively.
The following comparisons are based on results excluding the 53rd week.
Net Earnings Available to Common Shareholders of the Company and Basic Net Earnings Per Common Share Adjusted net
earnings available to common shareholders of the Company(2) were $1,422 million ($3.46 per common share) in 2015 compared to $1,165
million ($3.06 per common share) in 2014. The increase in adjusted net earnings available to common shareholders of the Company(2) was
primarily due to the following factors:
•
a full year of contribution of Shoppers Drug Mart, following the acquisition of all of the outstanding common shares of Shoppers Drug
Mart in the second quarter of 2014;
•
consistent operating performance in the Retail segment, despite the impact of healthcare reform; with the unfavourable impact of non-
recurring transactions that had positive impacts in the prior year and unfavourable foreign exchange impacts on the year-over-year
results;
2015 Annual Report - Financial Review 7
Management’s Discussion and Analysis
•
•
•
a positive contribution from incremental net synergies of $242 million; partially offset by
an increase in adjusted net interest expense and other financing charges(2), primarily driven by an increase in Choice Properties’ debt,
partially offset by repayments of the Company’s $3,500 million unsecured term loan facility related to the acquisition of Shoppers Drug
Mart (“Acquisition Term Loan”); and
an increase in adjusted income taxes(2) driven by an increase in the effective income tax rate and an increase in certain non-deductible
items.
Net earnings available to common shareholders of the Company were $625 million ($1.52 per common share) in 2015 compared to
$1 million (nil per common share) in 2014. In addition to the items described above, the increase in net earnings available to
common shareholders of the Company included the year-over-year impacts of the following significant items:
•
the favourable impact related to the fair value increment on the acquired inventory sold associated with the acquisition of Shoppers
Drug Mart of $798 million in 2014 ($1.55 per common share);
•
•
•
•
•
•
•
•
the favourable impact of charges related to inventory measurement and other conversion differences associated with the conversion of
the Company’s corporate stores to the new IT systems in the prior year of $190 million ($0.37 per common share), partially offset by a
charge related to franchise stores in the current year of $33 million ($0.06 per common share); and
the favourable impact of Shoppers Drug Mart acquisition-related costs, net of impact from divestitures of $85 million ($0.19 per
common share), partially offset by;
the unfavourable impact of restructuring and other related costs, primarily related to the closure of certain unprofitable retail locations
that commenced in 2015 of $108 million ($0.22 per common share);
the unfavourable impact of the impairment of Drug retail ancillary assets held for sale of $112 million ($0.20 per common share);
the unfavourable impact of the amortization of intangible assets related to the Shoppers Drug Mart acquisition of $119 million ($0.16
per common share);
the unfavourable impact of an increase in net interest expense and other financing charges, primarily due to the fair value adjustment
to the Trust Unit Liability for Choice Properties’ Trust Units (“Units”) of $64 million ($0.16 per common share);
the unfavourable impact of the accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient
operating terms under collective agreements (“Labour Agreements”) of $55 million ($0.10 per common share); and
an increase in the effective income tax rate from 32.1% to 34.9%, primarily attributable to an increase in current tax as a result of an
increase of 2% in the Alberta statutory corporate income tax rate and the non-deductible fair value adjustment to the Trust Unit Liability.
Basic net earnings per common share were $1.52 in 2015, an increase of $1.38 compared to 2014. Excluding the impact of the 53rd week,
basic net earnings per common share increased by $1.52 compared to 2014. The increase was primarily due to the increase in net earnings
available to common shareholders of the Company(2) 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, as well as shares issued to George Weston Limited
(“Weston”) in relation to the acquisition.
Revenue(5)
For the years ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(52 weeks)
(53 weeks)
$ Change
% Change
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Revenue
53rd week
Revenue excluding 53rd week
$
$
$
44,469
$
41,731 $
2,738
849
743
(667)
45,394
45,394
810
683
(613)
39
60
(54)
$
$
42,611 $
2,783
789
41,822 $
3,572
6.6%
4.8%
8.8%
6.5%
8.5%
Revenue was $45,394 million in 2015, an increase of $3,572 million compared to 2014, primarily driven by a $2,738 million increase in the
Retail segment due to the contribution from Shoppers Drug Mart of $2,596 million in the first quarter of 2015 and positive same-store sales
growth. Food retail same-store sales growth was 1.9% (2014 – 2.0%) and excluding gas bar, was 2.8% (2014 – 2.1%). Drug retail same-
store sales growth was 4.3% (2014 – 2.6%).
8 2015 Annual Report - Financial Review
Adjusted EBITDA(2),(5)
For the years ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(52 weeks)
(53 weeks)
$ Change
% Change
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Adjusted EBITDA(2)
53rd week
Adjusted EBITDA(2) excluding 53rd week
$
$
$
3,352
$
3,040 $
173
602
(578)
3,549
3,549
$
$
171
571
(555)
3,227 $
71
3,156 $
312
2
31
(23)
322
393
10.3%
1.2%
5.4%
10.0%
12.5%
Adjusted EBITDA(2) was $3,549 million, an increase of $393 million compared to 2014, primarily driven by the Retail segment. The Retail
segment adjusted EBITDA(2) increase included the contribution from Shoppers Drug Mart in the first quarter of 2015. Excluding this
contribution, the increase in Retail segment adjusted EBITDA(2) was primarily driven by higher sales, an increase in Retail segment gross
profit percentage, partially offset by an increase in selling, general and administrative expenses (“SG&A”). Adjusted EBITDA(2) was also
positively impacted by net synergies of $242 million (2014 – $101 million).
Depreciation and Amortization Depreciation and amortization was $1,592 million in 2015, an increase of $120 million compared to 2014,
primarily driven by an increase in amortization of intangible assets of $119 million related to the acquisition of Shoppers Drug Mart.
Excluding this impact, depreciation and amortization increased by $1 million, driven by the Retail segment, as a result of the following:
•
•
•
the depreciation and amortization of assets of Shoppers Drug Mart in the first quarter of 2015; partially offset by
lower depreciation on older IT, supply chain and store assets in the Retail segment.
an increase in the estimated useful life of certain IT systems; and
Net Interest Expense and Other Financing Charges
For the years ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars)
Net interest expense and other financing charges
Deduct impact of the following:
Fair value adjustment to the Trust Unit Liability
Accelerated amortization of deferred financing costs
Shoppers Drug Mart acquisition-related costs, net of impact from
divestitures
Adjusted net interest expense and other financing charges(2)
2015
(52 weeks)
644
(81)
(15)
—
548
$
$
$
$
2014
(53 weeks)
584 $
(17)
(23)
(15)
529 $
$ Change
60
% Change
10.3%
(64)
8
15
19
3.6%
an increase in Choice Properties debt;
lower interest income as a result of the year-over-year decline in cash and cash equivalents and short term investments;
Net interest expense and other financing charges were $644 million, an increase of $60 million compared to 2014. Adjusted net interest
expense and other financing charges(2) of $548 million in 2015 increased by $19 million compared to 2014, primarily driven by:
•
•
• Shoppers Drug Mart debt assumed on the acquisition; and
•
•
•
•
lower interest expense due to the repayment of Medium Term Notes (“MTNs”) in the first and second quarters of 2014; and
higher interest expense to fund the growth of credit card receivables in Financial Services segment; partially offset by
lower interest expense due to the repayment of capital securities that matured in the third quarter of 2015.
lower interest expense on the Acquisition Term Loan due to a decline in the principal amount owing;
2015 Annual Report - Financial Review 9
Management’s Discussion and Analysis
Income Taxes
For the years ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars except where otherwise indicated)
Income taxes
Add (deduct) impact of the following:
Tax impact of items included in adjusted earnings before taxes(2)
Provincial statutory corporate income tax rate change
Adjusted income taxes
Effective tax rate
Adjusted income tax rate(2)
$
$
2015
(52 weeks)
334
229
(38)
525
34.9%
27.0%
$
$
2014
(53 weeks)
25
$
$ Change
309
% Change
1,236.0%
(172)
(38)
99
23.2%
401
—
426
$
32.1%
25.9%
The effective tax rate in 2015 was 34.9% compared to 32.1% in 2014. The increase in the effective tax rate was primarily attributable to:
•
the increase in the current and deferred tax expense resulting from an increase in the Alberta statutory corporate income tax rate
described below; and
•
the non-deductible fair value adjustment to the Trust Unit Liability.
The adjusted income tax rate(2) year-to-date was 27.0% compared to 25.9% in 2014. The increase was primarily attributable to a 2%
increase in the Alberta provincial statutory corporate income tax rate from 10.0% to 12.0% and an increase in certain other non-deductible
items.
In the second quarter of 2015, the Company recorded a charge of $38 million related to the remeasurement of its deferred tax liabilities.
During the second quarter of 2015, the Company was reassessed by the Canada Revenue Agency (“CRA”) and the Ontario Ministry of
Finance on the basis that certain income earned by Glenhuron Bank Limited (“Glenhuron”), a wholly owned Barbadian subsidiary, should be
treated, and taxed, as income in Canada. The reassessments were for the 2000 to 2010 taxation years totaling $341 million including
interest and penalties as at the time of reassessment. The Company believes it is likely that the CRA will issue reassessments for the 2011
to 2013 taxation years on the same or similar basis. The Company strongly disagrees with the CRA’s position and has filed a Notice of
Appeal. No amount for any reassessments has been provided for in the Company’s consolidated financial statements. 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 material negative impact on the Company’s reputation, results of operations and financial position in the year(s) of resolution.
10 2015 Annual Report - Financial Review
5.2 Selected Financial Information(5)
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 2, 2016, January 3, 2015 and December 28, 2013. 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 most recent three years.
For the years ended January 2, 2016 and January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Revenue
Revenue excluding 53rd week
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Depreciation and amortization(i)
Adjusted net interest expense and other financing charges(2)
Adjusted income tax rate(2)
Net earnings
Net earnings attributable to the shareholders of the Company
Net earnings available to common shareholders of the Company
Net earnings available to common shareholders of the Company excluding
53rd week
Adjusted net earnings available to common shareholders of the Company(2)
Adjusted net earnings available to common shareholders of the Company(2)
excluding 53rd week
Basic net earnings per common share ($)
Basic net earnings per common share excluding 53rd week ($)
Diluted net earnings per common share ($)
Diluted net earnings per common share excluding 53rd week ($)
Adjusted basic net earnings per common share(2) ($)
Adjusted basic net earnings per common share(2) excluding 53rd week ($)
Basic weighted average common shares (in millions)
Dividends declared per common share ($)
Dividends declared per Second Preferred Share, Series A ($)
Dividends declared per Second Preferred Share, Series B ($)
$
$
$
$
$
$
2015
(52 weeks)
45,394
45,394
3,549
3,549
7.8%
1,592
548
27.0%
623
632
625
625
1,422
1,422
1.52
1.52
1.51
1.51
3.46
3.46
411.5
0.995
0.74
0.74
$
$
$
$
$
$
2014
(53 weeks)
42,611
41,822
3,227
3,156
7.6%
1,472
529
25.9%
53
53
53
1
1,217
1,165
0.14
—
0.14
—
3.20
3.06
380.5
0.975
1.49
—
$
$
$
$
$
$
2013
(52 weeks)
32,371
32,371
2,106
2,106
6.5%
824
354
25.0%
627
627
627
627
696
696
2.23
2.23
2.21
2.21
2.48
2.48
281.1
0.940
1.49
—
(i)
Depreciation and amortization for the calculation of adjusted EBITDA(2) excludes $536 million (2014 – $417 million) of amortization of intangible assets acquired with
Shoppers Drug Mart.
The Company’s comparative results for 2014 were impacted by the inclusion of the 53rd week and its impacts are set out in Section 5.1
“Consolidated Results of Operations”.
Revenue Excluding the impact of the 53rd week, revenue was $45,394 million in 2015, an increase of $3,572 million compared to 2014,
primarily due to the contribution of Shoppers Drug Mart in the first quarter of 2015. Food retail same-store sales growth was 1.9% (2014 –
2.0%) and excluding gas bar was 2.8% (2014 – 2.1%). Drug retail same-store sales growth was 4.3% (2014 – 2.6%).
Revenue in 2014 was $42,611 million, an increase of $10,240 million compared to 2013, primarily due to Shoppers Drug Mart and the
impact of the 53rd week in 2014. Excluding the impact of Shoppers Drug Mart and the 53rd week, consolidated revenue increased by
$616 million, or 1.9%. Retail same-store sales growth was 2.0% (2013 – 1.1%) and excluding gas bar was 2.1% (2013 – 1.0%).
The Company’s Retail segment sales have continued to grow in spite of the pressure of an intensely competitive retail market and an
uncertain economic and regulatory environment over the last three years.
2015 Annual Report - Financial Review 11
Management’s Discussion and Analysis
Adjusted basic net earnings per common share(2) Adjusted basic net earnings per common share(2) excluded a number of items which
the Company does not consider to be indicative of operational performance. The items that have been adjusted in 2015 and 2014 in the
presentation of adjusted basic net earnings per common share(2) are set out in Section 17 “Non-GAAP Financial Measures.”
Adjusted basic net earnings per common share(2) increased over the past three years. The increases were attributable to the following
significant items:
•
•
improvement in underlying operating performance of the Retail segment, including positive same-store sales in both Food and Drug
retail in 2015 and 2014; and
the contribution from Shoppers Drug Mart from the date of acquisition in 2014;
•
•
•
•
positive contribution from net synergies in 2015 and 2014; partially offset by
an increase in depreciation and amortization in 2015 and 2014, primarily from the amortization of assets from the Shoppers Drug Mart
acquisition;
an increase in adjusted net interest expense and other financing charges, primarily due to an increase in Choice Properties debt in
2015 and debt assumed as a result of the acquisition of Shoppers Drug Mart in 2014; and
an increase in adjusted income taxes due to a higher effective income tax rate in 2015 and 2014.
Total Assets and Long Term Financial Liabilities
(millions of Canadian dollars)
Total Assets
Total Long Term Debt
Capital Securities
Trust Unit Liability
Long term financial liabilities
As at
January 2, 2016
33,939
$
As at
As at
January 3, 2015(3) December 28, 2013
20,741
$
33,759
$
$
$
11,011
—
821
11,832
$
$
11,462
$
225
722
12,409
$
7,680
224
688
8,592
In 2015, total assets of $33,939 million increased marginally compared to 2014. Long term financial liabilities of $11,832 million decreased
by 4.6% compared to 2014, primarily due to net repayments on the Acquisition Term Loan, the repayment of capital securities, partially
offset by the issuance of debt by Choice Properties.
In 2014, total assets of $33,759 million and long term financial liabilities of $12,409 million increased by 62.8% and 44.4%, 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.
12 2015 Annual Report - Financial Review
6. Reportable Operating Segments Results of Operations
6.1 Retail Segment(5)
For the years ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(52 weeks)
(53 weeks)
$ Change
% Change
$
$
$
Sales
Sales excluding 53rd week
Gross profit
Gross profit excluding 53rd week
Adjusted gross profit(2)
Adjusted gross profit(2) excluding 53rd week
Adjusted gross profit %(2)
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Depreciation and amortization
For the years ended January 2, 2016 and January 3, 2015
Food retail same-store sales growth
Drug retail same-store sales growth
Same-store pharmacy sales growth
Same-store front store sales growth
$
41,731
$
44,469
44,469
11,689
11,689
11,747
11,747
26.4%
3,352
3,352
7.5%
1,567
$
$
40,942
9,734
9,534
10,722
10,522
25.7%
3,040
2,969
7.3%
1,453
2,738
3,527
1,955
2,155
1,025
1,225
312
383
114
6.6%
8.6%
20.1%
22.6%
9.6%
11.6%
10.3%
12.9%
7.8%
2015
(52 weeks)
2014
(52 weeks)
1.9%
4.3%
3.7%
4.7%
2.0%
2.6%
2.7%
2.4%
The Company’s comparative results in the Retail segment were negatively impacted by the inclusion the 53rd week of 2014, as previously
described.
Sales Retail sales were $44,469 million in 2015 compared to $41,731 million in 2014.
•
Food retail (Loblaw) sales were $32,672 million in 2015 (2014 – $32,681 million) and Drug retail (Shoppers Drug Mart) sales were
$11,797 million in 2015 (2014 – $9,050 million).
Excluding the impact of the 53rd week of 2014, Food retail sales were $32,672 million in 2015 (2014 – $32,107 million) and
Drug retail sales were $11,797 million in 2015 (2014 – $8,835 million).
Excluding the impact of the 53rd week of 2014, Retail sales increased by $3,527 million compared to 2014, and included $2,596 million of
retail sales contributed by Shoppers Drug Mart in the first quarter of 2015.
•
Food retail same-store sales growth was 3.5%, after excluding gas bar (0.9%) and the negative impact of a change in distribution
model by a tobacco supplier (0.7%). Including these impacts, Food retail same-store sales growth was 1.9% (2014 – 2.0%).
The Company’s Food retail annual average internal food price index was moderately higher than (2014 – slightly higher) the
annual average national food price inflation of 4.1% (2014 – 2.5%) as measured by The Consumer Price Index for Food
Purchased from Stores (“CPI”). CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in the
Company’s stores.
Sales growth in food was strong;
Sales growth in pharmacy and health and beauty was moderate;
Sales in gas bar declined significantly, primarily driven by the decline in gas prices;
Sales in general merchandise, excluding apparel, were flat; and
Sales growth in retail apparel was moderate, while U.S. wholesale apparel sales declined significantly.
2015 Annual Report - Financial Review 13
Management’s Discussion and Analysis
• Drug retail (Shoppers Drug Mart) sales were comprised of pharmacy sales of $5,545 million (2014 – $4,251 million) and front store
sales of $6,252 million (2014 – $4,799 million).
Same-store pharmacy sales growth was 3.7% (2014 – 2.7%);
the number of prescriptions dispensed increased by 2.1% (2014 – 6.6%). On a same-store basis, the number of
prescriptions dispensed increased by 4.3% (2014 – 4.6%) and year-over-year, the average prescription value
decreased by 0.2% (2014 – 1.5%);
generic molecules comprised 64.4% of the prescriptions dispensed in 2015 compared to 62.7% in 2014; and
Same-store front store sales growth was 4.7% (2014 – 2.4%) across all front store categories.
•
•
47 food and drug stores were opened and 62 food and drug stores were closed in the 12 months ended January 2, 2016, resulting in
a decrease in Retail net square footage of 0.1 million, or 0.1%, primarily driven by the Company’s store closure plan announced
during 2015. In the first quarter of 2015, the Company completed the divestitures pursuant to a Consent Agreement with the
Competition Bureau related to the acquisition of Shoppers Drug Mart.
In 2014, the Company modified its fee arrangements with the franchisees of certain franchise banners. The modified arrangements
resulted in an annual reduction of Food retail segment sales and gross profit of approximately $140 million, with a corresponding
decrease in SG&A. In 2016, the Company will implement these modified fee arrangements with the remaining franchise banners. In
2016, the incremental impact of modified fee arrangements to the remaining franchise banners is expected to result in an annual
reduction in Food retail segment sales and gross profit of approximately $60 million, with a corresponding decrease in SG&A.
Adjusted Gross Profit(2) Adjusted gross profit(2) was $11,747 million in 2015 compared to $10,722 million in 2014. Excluding the impact of
the 53rd week of 2014, adjusted gross profit(2) increased by $1,225 million compared to 2014. Adjusted gross profit percentage(2) was
26.4%, and included the following impacts:
•
•
•
a positive impact of 10 basis points due to the consolidation of franchises, which commenced in the second quarter of 2015; and
a negative impact of 30 basis points from the above mentioned modification to certain franchise fee arrangements.
the contribution from Shoppers Drug Mart in the first quarter of 2015;
After excluding these impacts, adjusted gross profit percentage(2) was 25.8% compared to 25.7% in 2014. The increase in adjusted gross
profit percentage(2) was due to:
•
•
the achievement of operational synergies in both Food and Drug retail; partially offset by
a decline in Drug retail gross profit percentage due to the impact of healthcare reform.
Adjusted EBITDA(2) Adjusted EBITDA(2) was $3,352 million in 2015 compared to $3,040 million in 2014. Excluding the impact of the 53rd
week of 2014, adjusted EBITDA(2) increased by $383 million compared to 2014, primarily driven by the increase in adjusted gross profit(2)
described above, partially offset by an increase in SG&A of $842 million. As a percentage of sales, SG&A increased by 50 basis points
compared to 2014 and included the following impacts:
•
•
a positive impact of 30 basis points from the above mentioned modification to certain franchise fee arrangements, which was fully
offset in gross profit above; and
the contribution from Shoppers Drug Mart in the first quarter of 2015;
•
a negative impact of 20 basis points due to the consolidation of franchises, as described below.
higher store and store support costs;
Excluding the above impacts, SG&A was flat due to the following factors:
•
•
•
•
unfavourable foreign exchange impacts; offset by
efficiencies achieved in Food retail supply chain, administration and IT.
favourable changes in the fair value of the Company’s investments in its franchise business; and
Depreciation and Amortization Depreciation and amortization were $1,567 million, an increase of $114 million compared to the same
period in 2014 and included $536 million (2014 – $417 million) in amortization of intangible assets related to the acquisition of Shoppers
Drug Mart. Excluding this amount, depreciation and amortization decreased by $5 million, primarily driven by lower depreciation on older
IT, supply chain and other store assets.
14 2015 Annual Report - Financial Review
Other Retail Business Matters
Impairment of Drug Retail Ancillary Assets Held for Sale During 2015, the Company commenced actively marketing the sale of certain
assets of the Shoppers ancillary healthcare businesses. As a result, the Company recorded a charge of $112 million in the fourth quarter
associated with the write-down of the assets and other related restructuring charges. The charge was excluded in calculating adjusted net
earnings available to common shareholders of the Company(2). Of the $112 million charge, $46 million was recognized in gross profit and
the remainder in SG&A. Subsequent to the end of 2015, the Company signed an agreement for the sale of certain of these assets. The
Company expects the annualized impact of the divestitures to be a decrease in sales of approximately $245 million and an increase in
adjusted EBITDA(2) of $14 million.
Inventory Measurement As of the end of 2015, the Company had completed the conversion of all of its franchised grocery stores to the
new IT systems that include a perpetual inventory system. The re-measurement of inventory owned by the franchises as a result of
implementing the system resulted in a decrease in inventory value of $33 million. The re-measurement resulted in a charge of $4 million in
gross profit related to consolidated franchises and $29 million to SG&A related to non-consolidated franchises. The total charge was
excluded in calculating adjusted net earnings available to common shareholders of the Company(2).
Consolidation of Franchises In 2015, the Company implemented a new, simplified franchise agreement (“Franchise Agreement”) for its
franchised Food retail stores. For financial reporting purposes, the franchise stores subject to the Franchise Agreement were consolidated.
All new franchises will be subject to the Franchise Agreement. Existing franchises will be converted to the Franchise Agreement as the
existing agreements expire. As at January 2, 2016, 85 franchises were consolidated and the impacts of the consolidation on the
Company’s results were as follows:
(millions of Canadian dollars)
Sales
Gross profit
Adjusted gross profit(2)
Adjusted EBITDA(2)
Depreciation and amortization
Net loss attributable to Non-Controlling Interest
$
2015
(12 weeks)
2015
(52 weeks)
$
28
32
32
(4)
3
(3)
56
58
58
(12)
5
(9)
The Company expects that the impact in 2016 of new and current consolidated franchises will be incremental revenue of approximately
$320 million, an increase to EBITDA(2) of approximately $40 million and an increase in depreciation and amortization of approximately $20
million.
Closure of Certain Unprofitable Retail Locations In 2015, the Company finalized a plan that will result in the closure of 52 unprofitable
retail locations across a range of banners and formats. The Company expects that the closures will be completed by the end of the second
quarter of 2016. On an annualized basis, the closures will decrease sales by approximately $300 million but will result in a favourable
impact of approximately $30 million to EBITDA(2) and $5 million to depreciation and amortization.
The restructuring and other related costs associated with the plan are expected to total approximately $133 million. In the fourth quarter of
2015, the Company recorded a recovery of $7 million and a year-to-date charge of $124 million. During 2015, the recorded charge
included $92 million for severance and lease termination costs and $39 million for asset impairments associated with these retail locations.
The Company expects approximately $9 million to be recognized as the remaining stores close.
As at the end of 2015, 33 retail locations had been closed.
Accelerated Finalization of Labour Agreements Over the past five years, the Company has been transitioning stores to more cost
effective and efficient operating terms under collective agreements. The Company was committed to the transition and accordingly
accelerated the finalization of these Labour Agreements for the majority of the remaining stores in the fourth quarter of 2015. The
Company incurred a charge of $55 million in SG&A related to the completion of this process in the fourth quarter of 2015, which was
excluded in calculating adjusted net earnings available to common shareholders of the Company(2).
2015 Annual Report - Financial Review 15
Management’s Discussion and Analysis
Future Disclosures Shoppers Drug Mart is aggregated with the Company’s retail businesses in the Retail reportable operating segment
on the basis that all of the Company’s retail operations have the same economic characteristics. The Retail reportable operating segment
is separately discussed in the Company’s interim and annual disclosures. Continuing in the 2016 fiscal year, the Company will limit the
amount of separate financial disclosures specific to Shoppers Drug Mart in the Retail reportable operating segment. The results of
Shoppers Drug Mart will be fully incorporated into the Company’s comparative figures in 2016 and as such its year-over-year results will be
more meaningful in the future.
The Company will continue to provide sales metrics on Drug retail pharmacy and front store sales to the extent that those categories
remain relevant to how the Company views the Retail segment. Disclosures related to gross profit and adjusted EBITDA(2) will be on a
combined basis and will include business-specific disclosures only to the extent that those disclosures are significant to the understanding
of the underlying drivers of the overall Retail segment results.
6.2 Financial Services Segment(4)
For the years ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(52 weeks)
(53 weeks)
$ Change
% Change
Revenue
Adjusted EBITDA(2)
Earnings before income taxes
$
$
849
173
106
$
810
171
111
39
2
(5)
4.8 %
1.2 %
(4.5)%
(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 2, 2016
January 3, 2015
$ Change
% Change
$
$
2,642
2,790
54
13.6%
4.3%
$
2,535
2,630
54
13.7%
4.4%
107
160
—
4.2%
6.1%
—%
Revenue Revenue in 2015 was $849 million, an increase of $39 million, compared to 2014, primarily driven by:
•
•
higher interest income attributable to growth in credit card receivables;
higher interchange income, which experienced more moderate growth than the corresponding increase in credit card receivables due
to an industry-wide reduction in interchange rates by MasterCard® International Incorporated (“MasterCard®”); and
•
an increase in PC Telecom revenue from higher Mobile Shop sales.
revenue growth as described above; and
Adjusted EBITDA(2) Adjusted EBITDA(2) in 2015 was $173 million, an increase of $2 million, compared to 2014. The increase in adjusted
EBITDA(2) was primarily driven by:
•
•
•
•
higher operating costs as a result of an increase in the active customer base and the depreciation of the Canadian dollar.
lower credit card losses from improved performance of the receivable balances; partially offset by
higher costs associated with the Financial Services loyalty program; and
Earnings before income taxes Earnings before income taxes in 2015 were $106 million, a decrease of $5 million compared to 2014. The
decrease was driven by:
•
•
•
higher depreciation related to an increased investment in IT; partially offset by
higher interest expenses to fund the growth in credit card receivables; and
higher EBITDA described above.
16 2015 Annual Report - Financial Review
Credit Card Receivables As at January 2, 2016, credit card receivables were $2,790 million, an increase of $160 million compared to
January 3, 2015. This increase was primarily driven by a growth in the active customer base as a result of continued investments in
customer acquisition, marketing and product initiatives. As at January 2, 2016, the allowance for credit card receivables was $54 million,
flat compared to January 3, 2015 due to the strong credit performance from the receivables balance.
Subsequent to the end of 2015:
• President’s Choice Bank (“PC Bank”) reduced $100 million of co-ownership interest in the securitized receivables held with the
Other Independent Securitization Trusts; and
• PC Bank extended the maturity date for certain Other Independent Securitization Trust agreement from the first quarter of 2017
to the first quarter of 2018, with all other terms and conditions substantially the same.
6.3 Choice Properties Segment(4)
For the years ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(52 weeks)
(53 weeks)
$ Change
% Change
Revenue
Adjusted EBITDA(2)
Net interest expense and other financing charges
Adjusted funds from operations(2)
$
$
743
602
756
313
$
683
571
369
285
60
31
387
28
8.8%
5.4%
104.9%
9.8%
Revenue Revenue for 2015 was $743 million, an increase of $60 million compared to 2014 and included $667 million (2014 – $613
million) generated from tenants within the Retail segment. The increase in revenue was primarily driven by:
•
•
an increase in base rent and recoveries of property tax and operating cost from existing properties.
revenue from acquired properties; and
contributions from acquired properties; and
Adjusted EBITDA(2) Adjusted EBITDA(2) in 2015 was $602 million, an increase of $31 million compared to 2014, primarily driven by:
•
•
•
an increase in base rent and net recoveries of property tax and operating cost from existing properties; partially offset by
the change in fair value adjustment on investment properties.
Net Interest Expense and Other Financing Charges Net interest expense and other financing charges in 2015 were $756 million, an
increase of $387 million compared to 2014, primarily driven by:
•
•
higher interest expense due to the issuance of Series E and F senior unsecured debentures in the first and fourth quarter of 2015,
respectively; partially offset by
the fair value adjustment on Class B Limited Partnership units; and
•
the non-cash finance charge incurred in 2014 related to the early repayment of the transferor notes.
Adjusted Funds from Operations(2) Adjusted funds from operations(2) in 2015 were $313 million, an increase of $28 million compared to
2014, primarily driven by higher contributions from property operations.
Other Matters During 2015, Choice Properties acquired 46 properties from the Company for a purchase price of approximately
$357 million, excluding acquisition costs, for consideration of $236 million in cash and the issuance of 11,077,687 Class B Limited
Partnership units.
Subsequent to the end of 2015, Choice Properties entered into certain bond forward contracts with a notional value of $300 million. In
addition, Choice Properties issued an early redemption notice for the $300 million Series 5 senior unsecured debenture at par, effective
March 7, 2016.
2015 Annual Report - Financial Review 17
Management’s Discussion and Analysis
7. Liquidity and Capital Resources
7.1 Cash Flows
Major Cash Flow Components
For the years ended January 2, 2016 and January 3, 2015
2015
2014(3)
(millions of Canadian dollars except where otherwise indicated)
(52 weeks)
(53 weeks)
$ Change
% Change
Cash and cash equivalents, beginning of period
$
999
$
2,260
$
(1,261)
(55.8)%
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
3,079
(1,238)
(1,839)
2,569
(5,684)
1,845
510
4,446
19.9 %
78.2 %
(3,684)
(199.7)%
Effect of foreign currency exchange rate changes on cash and
cash equivalents
17
9
Cash and cash equivalents, end of period
$
1,018
$
999
$
8
19
88.9 %
1.9 %
Cash Flows from Operating Activities Cash flows from operating activities were $3,079 million, an increase of $510 million compared to
2014 primarily due to a positive change in non-cash working capital driven by a change in inventory, in trade payables and other liabilities,
and in provisions.
Cash Flows used in Investing Activities Cash flows used in investing activities were $1,238 million, a decrease of $4,446 million
compared to 2014 primarily due to the 2014 cash flow impacts as a result of the acquisition of Shoppers Drug Mart.
Capital investments in 2015 were $1,241 million (2014 – $1,086 million). Approximately 47% (2014 – 57%) of this investment was spent on
Retail Operations, 34% (2014 – 27%) on IT and supply chain projects, 15% (2014 –11%) on Choice Properties’ development projects and
4% (2014 – 5%) on other infrastructure projects.
In 2015, 47 food and drug stores were opened and 62 food and drug stores were closed in the 12 months ended January 2, 2016, resulting
in a decrease in Retail net square footage of 0.1 million, or 0.1%.
The Company expects to invest approximately $1,300 million in capital investments in 2016. Approximately 44% of these funds are
expected to be dedicated to investing in retail operations, 28% will be spent on IT and supply chain projects, 22% on Choice Properties’
development projects and 6% on infrastructure and other projects.
18 2015 Annual Report - Financial Review
Capital Investments and Store Activity
As at or for the periods ended January 2, 2016 and January 3, 2015
2015
(52 weeks)
2014
(53 weeks)
% Change
Capital investments (millions of Canadian dollars)
$
1,241
$
1,086
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
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
36.1
15.8
18.0
69.9
591
525
1,313
2,429
72%
47%
2%
61,100
30,100
13,700
36.8
15.5
17.7
70.0
615
527
1,302
2,444
72%
45%
1%
59,800
29,400
13,600
14.3 %
(1.9)%
1.9 %
1.7 %
(0.1)%
(3.9)%
(0.4)%
0.8 %
(0.6)%
2.2 %
2.4 %
0.7 %
Cash Flows (used in) from Financing Activities Cash flows used in financing activities were $1,839 million, an increase in cash outflow
of $3,684 million. In 2015, cash outflows were primarily driven by net repayments of long term debt, interest and dividend payments, and
the purchase of common shares for cancellation. In 2014, cash inflows were primarily driven by net issuances of long term debt and
proceeds from the issuance of common shares to fund the acquisition of Shoppers Drug Mart, partially offset by interest and dividend
payments, which included one quarter of Shoppers Drug Mart dividends that were declared prior to the closing of the acquisition and paid
during the second quarter of 2014.
net repayments on unsecured term loan facilities of $931 million;
In 2015, significant long term debt transactions included:
•
•
•
issuance of $450 million aggregate principal amount of senior unsecured debentures by Choice Properties; and
net repayments of $100 million of senior and subordinated term notes by Eagle Credit Card Trust® (“Eagle”).
In 2014, significant long term debt transactions included:
•
•
•
•
•
drawings on the Acquisition Term Loan of $3,500 million and repayments of $2,271 million;
the issuance and sale to unrelated parties of $1,500 million of replacement notes related to the Choice Properties Transferor Notes;
the issuance of $450 million aggregate principal amount of senior unsecured debentures by Choice Properties;
the repayment of $450 million of the Company’s MTN’s upon maturity; and
the repayment of the outstanding $478 million balance of the Shoppers Drug Mart revolving bank credit facility.
Free Cash Flow(2)
For the years ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(52 weeks)
(53 weeks)
$ Change
% Change
Free cash flow(2)
$
1,347
$
977
$
370
37.9%
Free cash flow(2) was $1,347 million, an increase of $370 million compared to 2014, primarily driven by higher cash flows from operating
activities, partially offset by higher capital investments.
2015 Annual Report - Financial Review 19
Management’s Discussion and Analysis
7.2 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 committed credit facilities will enable the Company to finance its capital investment program and fund its ongoing
business requirements over the next 12 months, including working capital, pension plan funding requirements and financial obligations.
Choice Properties expects to obtain long term financing for the acquisition of accretive properties primarily through the issuance of equity
and unsecured debentures.
The Company and Choice Properties are required to comply with certain financial covenants for various debt instruments. As at January 2,
2016 and throughout 2015, the Company and Choice Properties were in compliance with their respective covenants.
Deleveraging The Company achieved its debt reduction target of $1,700 million established at the closing of the acquisition of Shoppers
Drug Mart, by the net repayments on the Company’s unsecured term loan facilities, the redemption of capital securities and the
repayment of $350 million MTN, net of the issuance of Choice Properties’ $450 million senior unsecured debentures.
As the debt reduction target has been achieved, the Company is focused on managing its capital structure on a segmented basis to ensure
that each of the reportable operating segments are employing a capital structure that is appropriate for the industry in which it operates.
The following table presents total debt, as monitored by management, by reportable operating segments:
As at
January 2, 2016
As at
January 3, 2015
(millions of Canadian dollars)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Capital securities
Certain other liabilities
Total debt
Retail
Financial
Services
Choice
Properties
$
143
$
— $
— $
—
584
550
112
—
302
Total
143
550
998
Retail
Financial
Services
Choice
Properties
$
162
$
— $
— $
—
40
605
379
—
1
Total
162
605
420
5,968
1,347
2,698
10,013
7,361
1,005
2,676
11,042
—
30
—
—
—
—
—
30
225
28
—
—
—
—
225
28
$
6,725
$
2,009
$
3,000
$ 11,734
$
7,816
$
1,989
$
2,677
$ 12,482
The Company targets at maintaining Retail segment credit metrics consistent with those of investment grade retailers. The Company
monitors the Retail segment’s debt to adjusted EBITDA ratio as a measure of the leverage being employed.
Retail debt to retail adjusted EBITDA(2)
As at
As at
January 2, 2016
2.0x
January 3, 2015
2.6x
The Retail segment debt to retail adjusted EBITDA(2) ratio decreased compared to January 3, 2015 primarily as a result of adjusted
EBITDA(2) growth and the debt reduction progress during the year.
Choice Properties targets at maintaining credit metrics consistent with those of investment grade REITs. Choice Properties monitors
metrics relevant to the REIT industry including targeting an appropriate debt to total assets ratio.
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 the Office of the
Superintendent of Financial Institutions (“OSFI”). As at the end of 2015 and throughout the year, PC Bank has met all applicable regulator
requirements.
20 2015 Annual Report - Financial Review
Unsecured Term Loan Facilities In 2015, the Company obtained $250 million through an unsecured term loan facility bearing interest at
a rate equal to the Bankers’ Acceptance rate plus 1.13%, maturing March 30, 2019.
In connection with the financing of the acquisition of Shoppers Drug Mart, the Company obtained a $3,500 million Acquisition Term Loan.
As at January 2, 2016, the outstanding balance on the Acquisition Term Loan was $48 million (January 3, 2015 – $1,229 million). During
2015, the Company repaid $1,181 million of the Acquisition Term Loan. Since the acquisition, the Company has repaid $3,452 million of
the Acquisition Term Loan, including the use of net proceeds of $1,500 million from the sale of Choice Properties Transferor Notes to third
parties and proceeds from the $250 million unsecured term loan noted above, both of which had a neutral impact on long term debt. Also
included in the total amount repaid was $66 million of net proceeds from the store divestitures required pursuant to the Consent Agreement
with the Competition Bureau related to the acquisition of Shoppers Drug Mart.
Debentures and Medium Term Notes The following table summarizes the debentures and MTNs issued in 2015 and 2014:
(millions of Canadian dollars)
Choice Properties Series senior unsecured debentures(i)
– Series E
– Series F
– Series C
– Series D
Shoppers Drug Mart MTNs(ii)
Shoppers Drug Mart MTNs(ii)
Total Medium Term Notes issued
Interest Rate
Maturity Date
Principal
Amount 2015
Principal
Amount 2014
2.30%
4.06%
3.50%
4.29%
2.01%
2.36%
September 14, 2020
November 24, 2025
February 8, 2021
February 8, 2024
May 24, 2016
May 24, 2018
$
$
250
200
—
—
—
—
450
$
$
—
—
250
200
225
275
950
(i) Offerings were made under the Choice Properties’ Short Form Base Shelf Prospectus. Choice Properties used these proceeds to repay existing debt and for general
business purposes.
(ii) The Company assumed these MTNs in connection with the acquisition of Shoppers Drug Mart.
The following table summarizes the MTNs repaid in 2015 and 2014:
(millions of Canadian dollars)
Loblaw MTNs
Loblaw MTNs
Total Medium Term Notes repaid
Interest Rate
6.00%
Maturity Date
March 3, 2014
4.85%
May 8, 2014
Principal
Amount 2015
$
— $
$
—
— $
Principal
Amount 2014
100
350
450
Subsequent to the end of 2015, Choice Properties entered into certain bond forward contracts with a notional value of $300 million and
issued an early redemption notice for its $300 million Series 5 3.00% senior unsecured debentures at par effective March 7, 2016.
Committed Credit Facilities The components of the committed lines of credit as of January 2, 2016 and January 3, 2015 were as follows:
(millions of Canadian dollars)
Loblaw’s Committed Credit Facility(i)
Choice Properties Committed Credit Facility(ii)
Total Committed Lines of Credit
As at January 2, 2016
As at January 3, 2015
Available
1,000
500
1,500
$
$
Drawn
— $
—
— $
Available
1,000
500
1,500
$
$
Drawn
—
122
122
(i)
(ii)
In 2015, the Company amended its credit facility agreement to extend the maturity date to March 31, 2020, with all other terms and conditions remaining substantially the
same.
In 2015, Choice Properties amended its credit facility agreement to extend the maturity date to July 5, 2020, with all other terms and conditions remaining substantially
the same.
2015 Annual Report - Financial Review 21
Management’s Discussion and Analysis
President’s Choice Bank Securities Portfolio In 2014, OSFI released the final Liquidity Adequacy Requirements (“LARs”) Guideline.
The LARs Guideline establishes standards based on the Basel III framework and includes a Liquidity Coverage Ratio (“LCR”) standard
effective January 1, 2015. The standard specifies the level of high quality liquid securities that PC Bank is required to maintain to meet its
upcoming financial obligations. As at the end 2015, PC Bank was in compliance with the LCR standard.
Short Form Base Shelf Prospectus Filings On March 19, 2015, the Company filed a Short Form Base Shelf Prospectus (“Base
Prospectus”) for the potential issuance of up to $1,500 million of debentures and/or preferred shares. The Base Prospectus expires in
2017. In 2015, the Company issued $225 million of preferred shares under this prospectus, as described in Section 7.6 “Share Capital”.
On October 14, 2015, Choice Properties filed a new base shelf prospectus allowing for the issuance, from time to time, of Units and debt
securities, or any combination thereof, having an aggregate offering price of up to $2 billion. The new prospectus is effective for a 25-
month period from the date of issuance.
7.3 Financial Condition
Adjusted Return on Equity(2) and Adjusted Return on Capital(2)
Adjusted return on equity(2)
Adjusted return on capital(2)
As at
As at
January 2, 2016
11.1%
8.5%
January 3, 2015
12.3%
10.4%
The adjusted return on equity(2) and the adjusted return on capital(2) as at January 2, 2016 decreased compared to January 3, 2015,
primarily due to the increase in capital as a result of the acquisition of Shoppers Drug Mart being fully reflected.
7.4 Credit Ratings
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
Second Preferred Shares, Series B
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
In 2015, the Company’s Second Preferred Shares, Series B were rated by Dominion Bond Rating Service and Standard & Poor’s
concurrent with their issuance. In 2015, Standard & Poor’s reaffirmed Loblaw’s credit ratings and outlook. In 2015, Dominion Bond Rating
Service reaffirmed Loblaw’s credit ratings and trends.
The following table sets out the current credit ratings of Choice Properties:
Credit Ratings (Canadian Standards)
Issuer rating
Senior unsecured debentures
Dominion Bond Rating Service
Credit Rating
BBB
BBB
Trend
Stable
Stable
Standard & Poor’s
Credit Rating
BBB
BBB
Outlook
Stable
n/a
In 2015, Dominion Bond Rating Service reaffirmed Choice Properties’ credit ratings and trends. In 2015, Standard & Poor’s reaffirmed
Choice Properties’ credit ratings and outlook.
7.5 Other Sources of Funding
Independent Securitization Trusts The Company, through PC Bank, participates in various securitization programs that provide a source
of funds for the operation of its credit card business. PC Bank maintains and monitors the co-ownership interest in credit card receivables
with independent securitization trusts, including Eagle and Other Independent Securitization Trusts, in accordance with its financing
requirements.
22 2015 Annual Report - Financial Review
The following table summarizes the amounts securitized to independent securitization trusts:
(millions of Canadian dollars)
Securitized to independent securitization trusts:
Securitized to Eagle Credit Card Trust®
Securitized to Other Independent Securitization Trusts
Total securitized to independent securitization trusts
As at
January 2, 2016
As at
January 3, 2015
$
$
650
550
1,200
$
$
750
605
1,355
In 2015, the five-year $350 million 3.58% senior and subordinated term notes issued by Eagle matured and were repaid. In addition, Eagle
issued $250 million senior and subordinated term notes with a weighted average interest rate of 2.23%, maturing on September 17, 2020.
The notes issued by Eagle are MTNs, which are collateralized by PC Bank’s credit card receivables.
In 2015, Eagle filed a short form base shelf prospectus for the potential issuance of up to $1,000 million of notes over a 25-month period.
During 2015, PC Bank recorded a $55 million net reduction of co-ownership interest in the securitized receivables held with the Other
Independent Securitization Trusts. As at January 2, 2016, the corresponding short term debt was $550 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. The aggregate gross potential liability under these arrangements for the Other Independent
Securitization Trusts was $56 million (January 3, 2015 – $61 million), which represented approximately 10% (2014 – 10%) of the
securitized credit card receivables amount. As at January 2, 2016, the aggregate gross potential liability under these arrangements for
Eagle was $36 million (January 3, 2015 – $68 million), which represented approximately 6% (2014 – 9%) of the Eagle notes outstanding.
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. PC Bank was in compliance with this requirement as at January 2, 2016 and throughout
2015.
The undrawn commitments on facilities available from the Other Independent Securitization Trusts as at January 2, 2016 were $175 million
(January 3, 2015 – $120 million).
Independent Funding Trusts As at January 2, 2016, the independent funding trusts had drawn $529 million (January 3, 2015 –
$498 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. As at January 2, 2016 the Company has agreed to provide a credit enhancement of $53 million
(January 3, 2015 – $50 million) for the benefit of the independent funding trusts representing not less than 10% (2014 – 10%) of the
principal amount of loans outstanding.
Guaranteed Investment Certificates The following table summarizes PC Bank’s Guaranteed Investment Certificates (“GICs”) activity,
before commissions, for the years ended 2015 and 2014:
(millions of Canadian dollars)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
$
$
2015
634
211
(36)
809
$
$
2014
430
261
(57)
634
As at January 2, 2016, $112 million in GICs were recorded as long term debt due within one year (January 3, 2015 – $29 million).
2015 Annual Report - Financial Review 23
Management’s Discussion and Analysis
Associate Guarantees The Company has arranged for its Shoppers Drug Mart licensees (“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 2, 2016, the Company’s maximum obligation in respect of such guarantees was $570
million (January 3, 2015 – $570 million) with an aggregate amount of $483 million (January 3, 2015 – $476 million) in available lines of
credit allocated to the Associates by the various banks. As at January 2, 2016, Associates had drawn an aggregate amount of $143 million
(January 3, 2015 – $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.
7.6 Share Capital
First Preferred Shares (authorized – 1.0 million shares) There were no First Preferred Shares outstanding as at January 2, 2016 and
January 3, 2015.
Second Preferred Share Capital (authorized – unlimited) In 2015, the Company redeemed all of the outstanding 9.0 million 5.95% non-
voting Second Preferred Shares, Series A, for a face value of $225 million and recorded a corresponding decrease to capital securities,
which were classified as other financial liabilities. The redemption was funded primarily through the proceeds received from the issuances
of the Second Preferred Shares, Series B.
In 2015, the Company issued 9.0 million 5.30% non-voting Second Preferred Shares, Series B, with a face value of $225 million. These
shares entitle the holder to receive fixed cumulative preferential cash dividends of approximately $1.325 per share per annum, as and
when declared by the Board of Directors (“Board”), which will accrue from the date of issue and are payable quarterly on the last day of
March, June, September and December of each year.
As at January 2, 2016, the Second Preferred Shares, Series B in the amount of $221 million, net of $4 million of after-tax issuance costs,
are presented as a component of equity in 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 the periods was as follows:
(millions of Canadian dollars except where otherwise indicated)
Issued and outstanding, beginning of period
Issued for settlement of stock options
Issued for acquisition of Shoppers Drug Mart
Issued to controlling shareholder
Purchased and cancelled
Issued and outstanding, end of period
Shares held in trust, beginning of period
Purchased for future settlement of Restricted Share Units and
Performance Share Units
Released for settlement of Restricted Share Units and Performance
Share Units
Shares held in trust, end of period
Number of
Common
Shares
412,480,891 $
1,841,174
—
—
(4,336,839)
409,985,226 $
(555,046) $
(971,894)
883,488
(643,452) $
2015
Common
Share
Capital
7,860
84
—
—
(83)
7,861
(3)
(19)
12
(10)
Number of
Common
Shares
282,311,573 $
3,536,489
119,471,382
10,515,247
(3,353,800)
2014
Common
Share
Capital
1,648
156
5,619
500
(63)
412,480,891 $
7,860
(1,067,323) $
—
512,277
(555,046) $
(6)
—
3
(3)
Issued and outstanding, net of shares held in trust, end of period
409,341,774 $
7,851
411,925,845 $
7,857
Weighted average outstanding, net of shares held in trust
411,543,393
380,540,877
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. In the second quarter of 2015
and 2014, the Board raised the quarterly dividend by $0.005 to $0.25 and $0.245 per common share, respectively.
24 2015 Annual Report - Financial Review
The following table summarizes the Company’s cash dividends declared for 2015 and 2014:
Dividends declared per share ($):
Common share
Second Preferred Share, Series A
Second Preferred Share, Series B
2015
(52 weeks)
2014
(53 weeks)
$
$
$
0.995
0.74
0.74
$
$
$
0.975
1.49
—
(i) The fourth quarter dividends for 2015 of $0.25 per share declared on common shares were paid on December 30, 2015. The fourth quarter dividends for 2015 of $0.33
per share declared on Second Preferred Shares, Series B were paid on December 31, 2015.
Subsequent to end of the year, the Board declared a quarterly dividend of $0.25 per common share, payable on April 1, 2016 to
shareholders of record on March 15, 2016 and a dividend on the Second Preferred Shares, Series B of $0.33 per share payable on March
31, 2016 to shareholders of record on March 15, 2016. 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 Activity under the Company’s Normal Course Issuer Bid (“NCIB”) is summarized as follows:
(millions of Canadian dollars except where otherwise indicated)
Common shares repurchased under the NCIB for cancellation (number of shares)
Cash consideration paid
Premium charged to Retained Earnings
Reduction in Common Share Capital
Common shares repurchased under the NCIB and held in trust (number of shares)
Cash consideration paid
Premium charged to Retained Earnings
Reduction in Common Share Capital
2015
(52 weeks)
4,336,839
280
197
83
971,894
63
44
19
$
$
2014
(53 weeks)
3,353,800
178
115
63
—
—
—
—
$
$
In 2015, the Company renewed its NCIB to purchase on the Toronto Stock Exchange (“TSX”) or through alternative trading systems up to
21,931,288 of the Company’s common shares, representing approximately 10% of the public float. 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.
7.7 Off-Balance Sheet Arrangements
The following is a summary of the Company’s off-balance sheet arrangements. Certain significant arrangements have also been discussed
in Section 7.5 “Other Sources of Funding”.
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 other performance guarantees, securitization of PC Bank’s credit card receivables
and third party financing made available to the Company’s franchisees. The gross potential liability related to the Company’s letters of
credit is approximately $860 million as at January 2, 2016 (January 3, 2015 – $586 million).
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.
The Company has provided a guarantee on behalf of PC Bank to MasterCard® for accepting PC Bank as a card member and licensee of
MasterCard®. During the third quarter of 2015, the Company increased its guarantee on behalf of PC Bank to MasterCard® by USD
$20 million (2014 – nil) to USD $190 million as at January 2, 2016 (January 3, 2015 – USD $170 million).
Cash Collateralization As at January 2, 2016, the Company had agreements to cash collateralize certain of its uncommitted credit
facilities up to an amount of $149 million (January 3, 2015 – $141 million), of which $2 million (January 3, 2015 – $7 million) was deposited
with major financial institutions and classified as security deposits.
2015 Annual Report - Financial Review 25
Management’s Discussion and Analysis
7.8 Contractual Obligations
The following illustrates certain of the Company’s significant contractual obligations and discusses other obligations as at January 2, 2016:
Summary of Contractual Obligations
(millions of Canadian dollars)
2016
2017
Payments due by year
2018
2019
2020
Thereafter
Total
Total debt (including interest payments(i))
$
2,147
$
1,316
$
1,775
$ 1,913
$
1,640
$
7,610
$ 16,401
Derivative Financial Liabilities
Operating leases(ii)
Contracts for purchases of investment projects(iii)
Purchase obligations(iv)
Total contractual obligations
441
682
54
152
—
658
—
125
—
617
—
85
—
571
—
5
—
504
—
1
—
2,606
—
—
441
5,638
54
368
$
3,476
$
2,099
$
2,477
$ 2,489
$
2,145
$ 10,216
$ 22,902
(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 2, 2016.
(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
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.
(iv) These obligations 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.
8. Financial Instruments
Foreign Exchange Forwards During 2015, PC Bank entered into USD foreign exchange forward agreements to hedge its exposure on
certain USD payables. These agreements, which mature by December 2016, qualify for hedge accounting as cash flow hedges of future
foreign currency transactions. Accordingly, during 2015, PC Bank recorded an unrealized fair value gain of $3 million in other
comprehensive income related to the effective portion of these agreements.
Bond Forwards During 2015, in connection with expected funding needs in the latter half of the year, PC Bank entered into bond forward
agreements with a notional value of $350 million to hedge its exposure to interest rate changes prior to obtaining financing and settled
these agreements within the year. These agreements qualified for hedge accounting as cash flow hedges of future interest payments.
Accordingly, upon maturity of these bond forward agreements, PC Bank deferred a loss of $2 million in accumulated other comprehensive
income to be recognized in income as future interest payments are made.
Subsequent to the end of 2015, Choice Properties entered into certain bond forward agreements with a notional value of $300 million.
Securities Investments In 2015, PC Bank purchased and designated certain long term investments as available-for-sale financial assets,
which are measured at fair value through other comprehensive income. As at January 2, 2016, the fair value of these investments of
$25 million was included in other assets. During 2015, PC Bank recorded a nominal fair value loss in other comprehensive income related
to these investments. These investments are considered part of the liquid securities required to be held by PC Bank to meet its LCR
standard, which was established under OSFI’s final Guideline on LARs, effective January 1, 2015.
Trust Unit Liability Choice Properties’ Units held by unitholders other than the Company are presented as a liability as the Units are
redeemable for cash at the option of the holder, subject to certain restrictions. As at January 2, 2016, the fair value of the Trust Unit Liability
of $821 million (January 3, 2015 – $722 million) was recorded on the consolidated balance sheet. During 2015 the Company recorded a
fair value loss of $81 million (2014 – loss of $17 million) in net interest expense and other financing charges related to Choice Properties’
Units.
As at January 2, 2016, 69,453,817 Units were held by unitholders other than the Company (January 3, 2015 – 67,755,010) and the
Company held an 83.0% (January 3, 2015 – 82.9%) effective ownership interest in Choice Properties.
26 2015 Annual Report - Financial Review
9. Quarterly Results of Operations
9.1 Results by Quarter
Under an accounting convention common in the retail industry, the Company follows a 52-week reporting cycle which periodically
necessitates a fiscal year of 53 weeks. Fiscal year 2015 was 52 weeks and fiscal year 2014 was 53 weeks. When a fiscal year such as
2014 contains 53 weeks, the fourth quarter is 13 weeks in duration. The 52-week reporting cycle is divided into four quarters of 12 weeks
each except for the third quarter, which is 16 weeks in duration.
The following is a summary of selected consolidated financial information derived from the Company’s unaudited interim period condensed
consolidated financial statements for each of the eight most recently completed quarters:
Summary of Consolidated Quarterly Results
(millions of Canadian dollars except
where otherwise indicated)
First
Quarter
(12 weeks)
Second
Quarter
(12 weeks)
Third
Quarter
(16 weeks)
Fourth
Quarter
(12 weeks)
Total
(audited)
(52 weeks)
First Quarter
(12 weeks)
Second
Quarter
(12 weeks)
Third
Quarter
(16 weeks)
Fourth
Quarter
(13 weeks)
2015
2014
Total
(audited)
(53 weeks)
Revenue
Net earnings (loss)
available to common
shareholders of the
Company
Net earnings (loss) per
common share:
Basic ($)
Diluted ($)
Average national food
price inflation (as
measured by CPI)
Food retail same-store
sales growth
Drug retail same-store
sales growth
$ 10,048
$ 10,535
$ 13,946
$ 10,865
$ 45,394
$ 7,292
$10,307
$ 13,599
$11,413
$ 42,611
$
146
$
185
$
166
$
128
$
625
$
120
$
(456)
$
142
$
247
$
53
$
$
0.35
0.35
$
$
0.45
0.44
$
$
0.40
0.40
$
$
0.31
0.31
$
$
1.52
1.51
$
$
0.43
0.42
$ (1.13)
$ (1.13)
$
$
0.34
0.34
$
$
0.60
0.59
$
$
0.14
0.14
4.6%
3.9%
3.8%
4.1%
4.1%
1.2%
2.5%
2.8%
3.5%
2.5%
2.0%
2.1%
1.3%
2.4%
1.9%
0.9%
1.8%
2.6%
2.4%
2.0%
3.1%
3.8%
4.9%
5.0%
4.3%
1.4%
2.5%
2.5%
3.8%
2.6%
CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in Loblaw stores.
Over the past eight quarters, net retail square footage increased by 18.0 million square feet, including 18.0 million square feet contributed
by Shoppers Drug Mart at acquisition, to 69.9 million square feet, primarily due to the contribution by Shoppers Drug Mart at acquisition in
2014 partially offset by decreases from the Company’s store closure plan in 2015.
Fluctuations in quarterly net earnings (loss) available to common shareholders of the Company 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 53rd week of 2014 in the
fourth quarter, the timing of holidays and were impacted by the items set out in Section 17 “Non-GAAP Financial Measures” of the MD&A
as well as the following significant items:
•
• modifications to the fee arrangements with franchisees of certain franchise banners; and
•
the transition of certain stores to more cost effective and efficient Labour Agreements.
the acquisition of Shoppers Drug Mart, including the associated acquisition-related accounting adjustments and net synergies;
2015 Annual Report - Financial Review 27
Management’s Discussion and Analysis
9.2 Fourth Quarter Results
The following is a summary of selected consolidated unaudited financial information for the fourth quarter of 2015:
For the periods ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(12 weeks)
(13 weeks)
$ Change
% Change
Revenue
Revenue excluding 53rd week
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Depreciation and amortization(i)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Net earnings available to common shareholders of the Company
excluding 53rd week
Adjusted net earnings available to common shareholders of the
Company(2)
Adjusted net earnings available to common shareholders of the
Company(2) excluding 53rd week
Basic net earnings per common share ($)
Basic net earnings per common share excluding 53rd week ($)
Adjusted basic net earnings per common share(2) ($)
Adjusted basic net earnings per common share(2) excluding 53rd
week ($)
Basic weighted average common shares outstanding (in millions)
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Dividends declared per common share ($)
Dividends declared per Second Preferred Share, Series A ($)
Dividends declared per Second Preferred Share, Series B ($)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
10,865
10,865
881
881
8.1%
376
141
134
127
131
128
128
363
363
0.31
0.31
0.88
0.88
410.7
564
(173)
(655)
0.25
—
0.33
$
$
$
$
$
$
$
$
$
11,413
10,624
950
879
8.3%
393
169
144
247
247
247
195
396
344
0.60
0.47
0.96
0.83
412.0
952
(363)
(575)
(548)
241
(69)
2
(17)
(28)
(10)
(120)
(116)
(119)
(67)
(33)
19
(0.29)
(0.16)
(0.08)
(4.8 )%
2.3 %
(7.3 )%
0.2 %
(4.3 )%
(16.6 )%
(6.9 )%
(48.6 )%
(47.0 )%
(48.2 )%
(34.4 )%
(8.3 )%
5.5 %
(48.3 )%
(34.0 )%
(8.3 )%
0.05
6.0 %
(388)
190
(80)
(40.8)%
(52.3)%
13.9 %
2.0 %
0.245
$
0.005
0.37
—
(i)
Depreciation and amortization for the calculation of adjusted EBITDA(2) excludes $124 million (2014 – $124 million) of amortization of intangible assets acquired with
Shoppers Drug Mart for the fourth quarter of 2015.
Adjusted net earnings available to common shareholders of the Company(2) were $363 million ($0.88 per common share) in the fourth
quarter of 2015 compared to $396 million ($0.96 per common share) in the fourth quarter of 2014. Net earnings available to common
shareholders of the Company were $128 million ($0.31 per common share) in the fourth quarter of 2015 compared to $247 million ($0.60
per common share) in the fourth quarter of 2014.
The Company’s comparative results were negatively impacted by the inclusion of the 53rd week of 2014. The 53rd week resulted in the
following impacts to the Company’s 2014 fourth quarter and full year results: $789 million of higher retail sales, $71 million of higher
EBITDA, and estimated impacts on net earnings and basic net earnings per common share of $52 million and $0.13 per share,
respectively.
28 2015 Annual Report - Financial Review
The following comparisons exclude the impacts of the 53rd week.
Adjusted net earnings available to common shareholders of the Company(2) in the fourth quarter of 2015 were $363 million ($0.88 per
common share), an increase of $19 million ($0.05 per common share) compared to 2014, excluding the impact of the 53rd week, primarily
due to the following:
•
consistent operating performance in the Retail segment, despite the impact of healthcare reform; with the unfavourable impact of non-
recurring transactions that had positive impacts in the prior year and unfavourable foreign exchange impacts;
•
•
•
a positive contribution from incremental net synergies;
a reduction in depreciation and amortization in the Retail segment due to an increase in the estimated useful life of certain IT systems
and lower depreciation on older IT and other store assets; and
a reduction in adjusted net interest expense and other financing charges(2) primarily driven by repayments of the Acquisition Term
Loan.
Net earnings available to common shareholders of the Company in the fourth quarter of 2015 were $128 million ($0.31 per common
share), a decrease of $67 million ($0.16 per common share) compared to the fourth quarter of 2014. In addition to the items described
above, the decrease in net earnings available to common shareholders of the Company(2) included the year-over-year impact of the
following significant items:
•
•
the unfavourable impact of the accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient
Labour Agreements of $55 million ($0.10 per common share); and
the unfavourable impact of the impairment of Drug retail ancillary assets held for sale of $112 million ($0.20 per common share);
•
•
•
the unfavourable impact of a charge related to inventory measurement associated with the conversion of all of its franchised grocery
stores to the new IT systems of $33 million ($0.06 per common share); partially offset by
the favourable impacts of the recognition of the fair value increment on the acquired Shoppers Drug Mart inventory sold in the prior
year of $69 million ($0.12 per common share); and
the favourable impact of a decrease in net interest expense and other financing charges, primarily due to the fair value adjustment to
the Trust Unit Liability of $13 million ($0.04 per common share).
Revenue(5)
For the periods ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(12 weeks)
(13 weeks)
$ Change
% Change
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Revenue
53rd week
Revenue excluding 53rd week
$
$
$
240
191
(172)
10,865
10,865
$
$
231
175
(157)
11,413 $
789
9
16
(15)
(548)
(5.0)%
3.9 %
9.1 %
(4.8)%
10,624 $
241
2.3 %
10,606
$
11,164 $
(558)
Revenue was $10,865 million in the fourth quarter of 2015, an increase of $241 million compared to the fourth quarter of 2014 primarily
due to positive same-store sales growth in Food and Drug retail.
2015 Annual Report - Financial Review 29
Management’s Discussion and Analysis
Adjusted EBITDA(2),(5)
For the periods ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(12 weeks)
(13 weeks)
$ Change
% Change
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Adjusted EBITDA(2)
53rd week
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
$
$
$
$
$
$
823
51
224
(217)
881
881
8.1%
897
$
51
223
(221)
950
71
879
8.3%
$
$
(74)
—
1
4
(69)
2
(8.2)%
— %
0.4 %
(7.3)%
0.2 %
Adjusted EBITDA(2) was $881 million in the fourth quarter of 2015, an increase of $2 million, primarily driven by Choice Properties net of
consolidation and eliminations, partially offset by the Retail segment. Adjusted EBITDA margin(2) was 8.1%, a decrease of 20 basis points
compared to the fourth quarter of 2014. The Company experienced consistent performance in the Retail segment, but was negatively
impacted by 20 basis points due to the following factors:
•
•
•
non-recurring transactions that had positive impacts in the prior year; and
unfavourable foreign exchange impacts; partially offset by
a positive contribution from net synergies.
Net Interest Expense and Other Financing Charges
For the periods ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars)
Net interest expense and other financing charges
Add (deduct) impact of the following:
Fair value adjustment to the Trust Unit Liability
Accelerated amortization of deferred financing costs
Adjusted net interest expense and other financing charges(2)
$
$
2015
(12 weeks)
141
2014
(13 weeks)
$
169 $
$ Change
(28)
% Change
(16.6)%
(7)
—
134
$
(20)
(5)
144 $
13
5
(10)
(6.9)%
Net interest expense and other financing charges were $141 million in the fourth of 2015, a decrease of $28 million compared to the fourth
quarter of 2014. Adjusted net interest expense and other financing charges(2) were $134 million, a decrease of $10 million compared to the
fourth quarter of 2014, primarily driven by repayments of the Acquisition Term Loan.
Depreciation and Amortization Depreciation and amortization was $376 million compared to $393 million in the fourth quarter of 2014.
Excluding the amortization of intangible assets acquired with Shoppers Drug Mart of $124 million (2014 – $124 million), depreciation and
amortization decreased by $17 million compared to the fourth quarter of 2014, primarily driven by a reduction in depreciation and
amortization in the Retail segment due to an increase in the estimated useful life of certain IT systems and lower depreciation on older IT
and other store assets.
30 2015 Annual Report - Financial Review
Income Taxes
For the periods ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars except where otherwise indicated)
Income taxes
Add impact of the following:
Tax impact of items included in adjusted earnings before taxes(2)
Adjusted income taxes
Effective tax rate
Adjusted income tax rate(2)
$
$
2015
(12 weeks)
48
85
133
27.4%
26.9%
$
$
2014
(13 weeks)
91
$
50
141
$
26.9%
26.3%
$ Change
(43)
% Change
(47.3)%
35
(8)
(5.7)%
The effective tax rate in the fourth quarter of 2015 was 27.4% compared to 26.9% in the fourth quarter of 2014. The adjusted tax rate(2) in
the fourth quarter of 2015 was 26.9% compared to 26.3% in the fourth quarter of 2014. The increase in the effective and adjusted income
tax rate(2) was primarily attributable to the increase in current tax as a result of an increase in the Alberta statutory corporate income tax
rate and an increase in certain other non-deductible items.
Cash Flow
Cash Flows from Operating Activities Cash flows from operating activities for the fourth quarter of 2015 were $564 million, a decrease in
cash inflow of $388 million compared to the fourth quarter of 2014, primarily driven by lower cash earnings and an increase in credit card
receivables.
Cash Flows used in Investing Activities Cash flows used in investing activities for the fourth quarter of 2015 were $173 million, a
decrease in cash outflow of $190 million compared to the fourth quarter of 2014, primarily due to the release of funds from security
deposits to fund the repayment of Eagle notes in the fourth quarter of 2015, partially offset by higher capital investments.
Cash Flows used in Financing Activities Cash flows used in financing activities for the fourth quarter of 2015 were $655 million, an
increase in cash outflow of $80 million compared to the fourth quarter of 2014. In the fourth quarter of 2015, cash flows used in financing
activities were primarily driven by common shares purchased for cancellation, net repayment of long term debt, change in bank
indebtedness, as well as dividend and interest payments. 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.
Capital Investments In the fourth quarter of 2015, the Company invested $433 million (2014 – $400 million) in fixed asset purchases and
intangible asset additions.
Free Cash Flow(2) In the fourth quarter of 2015, free cash flow(2) was $36 million compared to $439 million in the fourth quarter of 2014.
The decrease was primarily driven by the decrease in cash flows from operating activities.
2015 Annual Report - Financial Review 31
Management’s Discussion and Analysis
Retail Segment Fourth Quarter Results of Operations
For the periods ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(12 weeks)
(13 weeks)
$ Change
% Change
$
$
$
Sales
Sales excluding 53rd week
Gross profit
Gross profit excluding 53rd week
Adjusted gross profit(2)
Adjusted gross profit(2) excluding 53rd week
Adjusted gross profit %(2)
Adjusted gross profit %(2) excluding 53rd week
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Depreciation and amortization
For the periods ended January 2, 2016 and January 3, 2015
Food retail same-store sales growth
Drug retail same-store sales growth
Same-store pharmacy sales growth
Same-store front store sales growth
$
11,164
$
10,606
10,606
2,794
2,794
2,844
2,844
26.8%
26.8%
823
823
7.8%
369
$
$
10,375
2,925
2,725
2,994
2,794
26.8%
26.9%
897
826
8.0%
388
(558)
231
(131)
69
(150)
50
(74)
(3)
(19)
(5.0)%
2.2 %
(4.5)%
2.5 %
(5.0)%
1.8 %
(8.2)%
(0.4)%
(4.9)%
2015
(12 weeks)
2014
(12 weeks)
2.4%
5.0%
4.2%
5.7%
2.4%
3.8%
4.2%
3.6%
The Company’s comparative results in the Retail segment were negatively impacted by the inclusion of the 53rd week, as previously
described.
Sales Retail segment sales were $10,606 million in the fourth quarter of 2015 compared to $11,164 million of the fourth quarter of 2014.
•
Food retail (Loblaw) sales were $7,631 million in the fourth quarter of 2015 (2014 – $8,110 million) and Drug retail (Shoppers Drug
Mart) sales were $2,975 million in the fourth quarter of 2015 (2014 – $3,054 million).
Excluding the impact of the 53rd week, Food retail sales were $7,631 million in the fourth quarter of 2015 (2014 – $7,536 million)
and Drug retail sales were $2,975 million in the fourth quarter of 2015 (2014 – $2,839 million).
Excluding the impact of the 53rd week of 2014, Retail segment sales increased by $231 million compared to the fourth quarter of 2014,
primarily due to the following factors:
•
Food retail same-store sales growth was 3.1% for the quarter, after excluding gas bar (0.5%) and the negative impact of a change in
distribution model by a tobacco supplier (0.2%). Including these impacts, Food retail same-store sales growth was 2.4% (2014 –
2.4%).
The Company’s Food retail average quarterly internal food price index was moderately higher than (2014 – slightly higher) the
average quarterly national food price inflation of 4.1% (2014 – 3.5%) as measured by CPI. CPI does not necessarily reflect the
effect of inflation on the specific mix of goods sold in the Company’s stores;
Sales growth in food was strong;
Sales growth in pharmacy and health and beauty was moderate;
Sales in gas bar declined significantly, primarily driven by the decline in gas prices;
Sales in general merchandise, excluding apparel, were modest; and
Sales growth in retail apparel was moderate, while U.S. wholesale apparel sales declined significantly.
32 2015 Annual Report - Financial Review
• Drug retail sales were comprised of pharmacy sales of $1,315 million, with same-store sales growth of 4.2% (2014 – 4.2%) and front
store sales of $1,660 million, with same-store sales growth of 5.7% (2014 – 3.6%).
Same-store pharmacy sales growth was 4.2% (2014 – 4.2%);
the number of prescriptions dispensed decreased by 4.7% (2014 – increase of 13.8%). On a same-store basis, the
number of prescriptions dispensed increased by 3.2% (2014 – 6.0%) and year-over-year, the average prescription
value increased by 0.9% (2014 – decreased by 1.7%);
generic molecules comprised 63.7% of the prescriptions dispensed in 2015 compared to 62.5% in 2014; and
Same-store front store sales growth was 5.7% (2014 – 3.6%) across all front store categories.
•
•
47 food and drug stores were opened and 62 food and drug stores were closed in the 12 months ended January 2, 2016, resulting in
a decrease in Retail net square footage of 0.1 million, or 0.1%, primarily driven by the Company’s store closure plan announced
during 2015.
In 2014, the Company modified its fee arrangements with the franchisees of certain franchise banners. The modified arrangements
resulted in an annual reduction of Food retail segment sales and gross profit with a corresponding decrease in SG&A. In the fourth
quarter of 2015, the impact of the modified arrangements was a $32 million negative impact to Food retail sales and gross profit, with
an offsetting $32 million positive impact to SG&A. In 2016, the Company will implement these modified fee arrangements with the
remaining franchise banners. In 2016, the incremental impact of modified fee arrangements to the remaining franchise banners is
expected to result in an annual reduction in Food retail segment sales and gross profit of approximately $60 million, with a
corresponding decrease in SG&A.
Adjusted Gross Profit(2) Adjusted gross profit(2) was $2,844 million in the fourth quarter of 2015 compared to $2,994 million in the fourth
quarter of 2014. Excluding the impact of the 53rd week of 2014, adjusted gross profit(2) was $50 million higher compared to the fourth
quarter of 2014. Excluding the impact of the 53rd week, adjusted gross profit percentage(2) of 26.8% decreased by 10 basis points
compared to the fourth quarter of 2014, and included the following impacts:
•
a positive impact of approximately 30 basis points due to the consolidation of franchises, which commenced in the second quarter of
2015; and
•
a negative impact of approximately 30 basis points from the above mentioned modification to certain franchise fee arrangements.
After excluding these impacts, adjusted gross profit percentage of 26.8% was 10 basis points lower compared to the fourth quarter of 2014
and reflects the following:
•
•
a decline in Drug retail gross profit percentage primarily due to the impact of healthcare reform; partially offset by
the achievement of operational synergies in both Food and Drug retail.
Adjusted EBITDA(2) Adjusted EBITDA(2) was $823 million in the fourth quarter of 2015 compared to $897 million in the fourth quarter of
2014. Excluding the impact of the 53rd week of 2014, adjusted EBITDA(2) decreased by $3 million compared to the fourth quarter of 2014,
driven by an increase in SG&A of $53 million, or 10 basis points, partially offset by the increase in adjusted gross profit(2) described above.
As a percentage of sales, the increase in SG&A was impacted by the following factors:
•
a positive impact of approximately 30 basis points from the above mentioned modification to certain franchise fee arrangements,
which was fully offset in gross profit above; and
•
a negative impact of approximately 30 basis points due to the consolidation of franchises.
Excluding these impacts, as a percentage of sales, SG&A was essentially flat compared to 2014 and reflects the following:
•
•
•
•
non-recurring transactions that had positive impacts in the prior year;
unfavourable foreign exchange impacts;
higher store and store support costs; partially offset by
favourable changes in the fair value of the Company’s investments in its franchise business.
Depreciation and Amortization Depreciation and amortization was $369 million in the fourth quarter of 2015, a decrease of $19 million
compared to the fourth quarter of 2014, and included $124 million (2014 – $124 million) in amortization of intangible assets related to the
acquisition of Shoppers Drug Mart. Excluding this amount, depreciation and amortization decreased by $19 million driven by:
•
•
an increase in the estimated useful life of certain IT systems; and
lower depreciation on older IT and other store assets.
2015 Annual Report - Financial Review 33
Management’s Discussion and Analysis
Financial Services Segment Fourth Quarter Results of Operations(4)
For the periods ended January 2, 2016 and January 3, 2015
2015
2014
(millions of Canadian dollars except where otherwise indicated)
(12 weeks)
(13 weeks)
$ Change
% Change
Revenue
Adjusted EBITDA(2)
Earnings before income taxes
$
240
$
231
$
51
33
51
35
9
—
(2)
3.9 %
— %
(5.7)%
(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 2, 2016
January 3, 2015
$ Change
% Change
$
$
2,642
2,790
54
13.6%
4.3%
$
2,535
2,630
54
13.7%
4.4%
107
160
—
4.2%
6.1%
—%
Revenue Revenue was $240 million in the fourth quarter of 2015, an increase of $9 million, compared to the fourth quarter of 2014. The
increase was primarily driven by:
•
•
higher interchange income, which experienced more moderate growth than the corresponding increase in credit card receivables due
to an industry-wide reduction in interchange rates by MasterCard®.
higher interest income attributable to growth in credit card receivables; and
Adjusted EBITDA(2) Adjusted EBITDA(2) was $51 million in the fourth quarter of 2015, flat compared to the fourth quarter of 2014. Although
flat, adjusted EBITDA(2) included the following:
•
•
higher costs associated with the Financial Services loyalty program driven by higher transaction volumes.
revenue growth as described above; offset by
Earnings before income taxes Earnings before income taxes were $33 million in the fourth quarter of 2015, a decrease of $2 million
compared to the fourth quarter of 2014. The decrease was primarily driven by higher interest expenses to fund the growth in credit card
receivables and higher depreciation related to an increased investment in IT.
Credit Card Receivables As at January 2, 2016, credit card receivables were $2,790 million, an increase of $160 million compared to
January 3, 2015. This increase was primarily driven by a growth in the active customer base as a result of continued investments in
customer acquisition, marketing and product initiatives. As at January 2, 2016, the allowance for credit card receivables was $54 million,
flat compared to January 3, 2015 due to the strong credit performance from the receivables balance.
34 2015 Annual Report - Financial Review
Choice Properties Segment Fourth Quarter Results of Operations(4)
For the periods ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars except where otherwise indicated)
2015
(12 weeks)
2014
(13 weeks)
$ Change
% Change
Revenue
Adjusted EBITDA(2)
Net interest expense and other financing charges
Adjusted funds from operations(2)
$
$
191
224
184
82
$
175
223
137
74
16
1
47
8
9.1%
0.4%
34.3%
10.8%
Revenue Revenue was $191 million in the fourth quarter of 2015, an increase of $16 million, compared to the fourth quarter of 2014, and
included $172 million (2014 – $157 million) generated from tenants within the Retail segment. The increase in revenue was primarily driven
by:
•
•
an increase in base rent and recoveries of property tax and operating cost from existing properties.
revenue from acquired properties; and
Adjusted EBITDA(2) Adjusted EBITDA(2) was $224 million in the fourth quarter of 2015, an increase $1 million compared to the fourth
quarter of 2014, primarily driven by:
•
•
•
an increase in base rent and net recoveries of property tax and operating cost from existing properties; partially offset by
the change in the fair value adjustment on investment properties.
contributions from acquired properties; and
Net Interest Expense and Other Financing Charges Net interest expense and other financing charges were $184 million in the fourth
quarter of 2015, an increase of $47 million compared to the fourth quarter of 2014. The increase was primarily driven by the fair value
adjustment on Class B Limited Partnership units.
Adjusted Funds from Operations(2) Adjusted funds from operations(2) were $82 million in the fourth quarter of 2015, an increase of $8
million compared to the fourth quarter of 2014, primarily driven by higher contributions from property operations.
Other Matters In the fourth quarter of 2015, Choice Properties acquired four properties from the Company for a purchase price of
approximately $45 million, excluding acquisition costs, for consideration of $31 million in cash and issuance of 1,294,701 Class B Limited
Partnership units.
Subsequent to the end of 2015, Choice Properties entered into certain bond forward contracts with a notional value of $300 million. In
addition, Choice Properties issued an early redemption notice for the $300 million Series 5 senior unsecured debenture at par, effective
March 7, 2016.
10. Disclosure Controls and Procedures
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable
assurance that all material information relating to the Company and its subsidiaries is gathered and reported to senior management on a
timely basis so that appropriate decisions can be made regarding public disclosure.
As required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), the Executive
Chairman, as 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 2, 2016.
11. Internal Control over Financial Reporting
Management is 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 NI 52-109, the Executive Chairman, 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 2,
2016.
2015 Annual Report - Financial Review 35
Management’s Discussion and Analysis
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 control over financial reporting
in the fourth quarter of 2015 that materially affected, or are reasonably likely to materially affect the Company’s internal controls over
financial reporting.
12. Enterprise Risks and Risk Management
The Enterprise Risk Management (“ERM”) program assists all areas of the business in managing within appropriate levels of risk tolerance
by bringing a systematic approach and methodology 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 mitigation activities and develop
a risk-based internal audit plan.
Risks are not eliminated through the ERM program, but rather, are identified and managed in line with the Company’s risk appetite and
within understood risk tolerances. The ERM program is designed to:
•
•
enable the Company to focus on key risks that could impact its strategic objectives in order to reduce harm to financial performance
through responsible risk management;
facilitate effective corporate governance by providing a consolidated view of risks across the Company;
•
•
•
•
ensure that the Company’s risk appetite and tolerances are defined and understood;
promote a culture of awareness of risk management and compliance within the Company;
assist in developing consistent risk management methodologies and tools across the Company including methodologies for the
identification, assessment, measurement and monitoring of risks; and
anticipate and provide early warnings of risks through key risk indicators.
Risk appetite and governance The Loblaw Board has approved an ERM policy and a risk appetite framework and oversees the ERM
program, including through a review of the Company’s risks and risk prioritization. The risk appetite framework articulates key aspects of
the Company, values, and brands and provides directional guidance on risk taking. Key risk indicators are used to monitor and report on
risk performance and whether the Company is operating within its risk appetite. Risk owners are assigned relevant risks by management
and are responsible for managing risk and implementing risk mitigation strategies.
ERM framework Risk identification and assessments are important elements of the Company’s ERM process and framework. An annual
ERM assessment is completed to assist in the update and identification of internal and external risks. This assessment is carried out in
parallel with strategic planning through interviews, surveys and facilitated workshops with management and the Board to align stakeholder
views. This assessment is completed for each business unit and aggregated where appropriate. 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
on its strategies and achieve its objectives.
Risk monitoring and reporting On a quarterly basis, management provides an update to the Board (or 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 (three year) risk level is assessed to monitor potential long term risk impacts, which may
assist in risk mitigation planning activities.
Any of the key risks has the potential to negatively affect the Company and its financial performance. The Company has risk management
strategies in place for key risks. However, there can be no assurance that the risks will be mitigated or will not materialize or that events or
circumstances will not occur that could adversely affect the reputation, operations or financial condition or performance of the Company.
36 2015 Annual Report - Financial Review
12.1 Operating Risks and Risk Management
The following risks are a subset of the key risks identified through the ERM program. They should be read in conjunction with the full set of
risks inherent in the Company’s business, as included in the Company’s Annual Information Form for the year ended January 2, 2016,
which is hereby incorporated by reference:
Healthcare Reform
Cyber Security and Data Breaches
IT Systems Implementations and Data Management
Inventory Management
Franchisee Relationships
Labour Relations
Regulatory and Tax
Legal Proceedings
Shoppers Drug Mart Enterprise Harmonization and Synergies
Competitive Environment
Healthcare Reform 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.
2015 Annual Report - Financial Review 37
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 or
financial performance of the Company.
Cyber Security and Data Breaches The Company depends on the uninterrupted operation of its IT systems, networks and services
including internal and public internet sites, data hosting and processing facilities, cloud-based services and hardware, such as point-of-sale
processing at stores, to operate its business.
In the ordinary course of business, the Company collects, processes, transmits and retains confidential, sensitive and personal information
(“Confidential Information”) regarding the Company and its employees, franchisees, Associates, vendors, customers and credit card
holders. Some of this Confidential Information is held and managed by third party service providers. As with other large and prominent
companies, the Company is regularly subject to cyberattacks and such attempts are occurring more frequently, are constantly evolving in
nature and are becoming more sophisticated.
The Company has implemented security measures, including employee training, monitoring and testing, maintenance of protective
systems and contingency plans, to protect and to prevent unauthorized access of Confidential Information and to reduce the likelihood of
disruptions to its IT systems. The Company also has security processes, protocols and standards that are applicable to its third party
service providers.
Despite these measures, all of the Company’s information systems, including its back-up systems and any third party service provider
systems that it employs, are vulnerable to damage, interruption, disability or failures due to a variety of reasons, including physical theft,
fire, power loss, computer and telecommunication failures or other catastrophic events, as well as from internal and external security
breaches, denial of service attacks, viruses, worms and other known or unknown disruptive events.
The Company or its third party service providers may be unable to anticipate, timely identify or appropriately respond to one or more of the
rapidly evolving and increasingly sophisticated means by which computer hackers, cyber terrorists and others may attempt to breach the
Company’s security measures or those of our third party service providers’ information systems.
As cyber threats evolve and become more difficult to detect and successfully defend against, one or more cyber threats might defeat the
Company’s security measures or those of its third party service providers. Moreover, employee error or malfeasance, faulty password
management or other irregularities may result in a breach of the Company’s or its third party service providers’ security measures, which
could result in a breach of employee, franchisee, Associate, customer or credit card holder privacy or Confidential Information.
If the Company does not allocate and effectively manage the resources necessary to build and sustain reliable IT infrastructure, fails to
timely identify or appropriately respond to cybersecurity incidents, or the Company’s or its third party service providers’ information systems
are damaged, destroyed, shut down, interrupted or cease to function properly, the Company’s business could be disrupted and the
Company could, among other things, be subject to: transaction errors; processing inefficiencies; the loss of or failure to attract new
customers; the loss of revenue; the loss or unauthorized access to Confidential Information or other assets; the loss of or damage to
intellectual property or trade secrets; damage to its reputation; litigation; regulatory enforcement actions; violation of privacy, security or
other laws and regulations; and remediation costs.
IT Systems Implementations and Data Management 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. The Company also depends on
relevant and reliable information to operate its business. As the volume of data being generated and reported continues to increase across
the Company, data accuracy, quality and governance are required for effective decision making.
Failure to successfully adopt or implement appropriate processes to support the new IT systems, or failure to effectively leverage or
convert data from one system to another, may preclude the Company from optimizing its overall performance and could result in
inefficiencies and duplication in processes, which could in turn adversely affect the reputation, operations or 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.
38 2015 Annual Report - Financial Review
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 adversely affect the financial performance of the Company. Although the new IT system is
intended to provide the Company with increased visibility to integrated costing and sales information at store level, failure to effectively
implement the new IT system and applicable processes may increase the risks associated with managing inventory, including the risk that
inaccurate inventory could result in inaccurate financial statements.
Shoppers Drug Mart Enterprise Harmonization and Synergies The successful implementation of the Shoppers Drug Mart acquisition
requires significant effort on the part of management of the Company. Ineffective change management practices and harmonization
decisions could cause disruptions to operations or may negatively impact colleague engagement. Management attention will be required in
order to successfully achieve the appropriate culture transformation, growth opportunities and cost efficiencies envisioned in the
acquisition. Failure to successfully execute enterprise harmonization or 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.
Franchisee Relationships The Company has entered into agreements with third party franchisees that permit the franchisees to own and
operate retail stores in accordance with prescribed procedures and standards. A substantial portion of the Company’s revenues and
earnings comes from amounts paid by franchisees in connection with their store operations and leased property. Franchisees are
independent operators and their operations may be negatively affected by factors beyond the Company’s control. If franchisees do not
operate their stores in accordance with the Company’s standards or otherwise in accordance with good business practices, franchisee fees
and rent paid to the Company could be negatively affected, which in turn could negatively affect the Company’s reputation, operations and
financial performance. In addition, 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, fees or rent.
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 franchised store operations and could result in negative effects on the financial performance of franchisees. Reputational
damage or adverse consequences for the Company, including litigation and disruption to revenue from franchised stores, could result.
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. Renegotiating collective agreements or the failure to successfully 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 and 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, such as higher labour costs, and those implications could be material.
Regulatory and Tax The Company is subject to a wide variety of laws and regulations across all countries in which it does business,
including those laws involving product liability, labour and employment, anti-trust and competition, intellectual property, privacy,
environmental and other matters. The Company is subject to taxation by various taxation authorities in Canada and a number of foreign
jurisdictions. Changes to any of the laws, rules, regulations or policies (collectively, “laws”) applicable to the Company’s business, including
tax laws, and laws affecting the production, processing, preparation, distribution, packaging and labelling of food, health and wellness,
including pharmaceuticals, or general merchandise products, could have an adverse impact on the operational or financial 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.
2015 Annual Report - Financial Review 39
Management’s Discussion and Analysis
During the second quarter of 2015, the Company was reassessed by the CRA and the Ontario Ministry of Finance on the basis that certain
income earned by Glenhuron, a wholly owned Barbadian subsidiary, should be treated, and taxed, as income in Canada. The
reassessments were for the 2000 to 2010 taxation years totaling $341 million including interest and penalties as at the time of
reassessment. The Company believes it is likely that the CRA will issue reassessments for the 2011 to 2013 taxation years on the same or
similar basis. The Company strongly disagrees with the CRA’s position and has filed a Notice of Appeal. No amount for any reassessments
has been provided for in the Company’s consolidated financial statements. 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 material negative
impact on the Company’s reputation, results of operations and financial position in the year(s) of resolution.
As part of the review undertaken by the Competition Bureau of the Company’s acquisition 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 the Company and 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.
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
4.5%, a Tier 1 capital ratio of 6.0% and a total capital ratio of 8%. In addition to the regulatory capital ratios requirement, PC Bank is
subject to the Basel III Leverage ratio effective January 1, 2015. As at the end of 2015 and throughout the year, PC Bank has met all
applicable regulatory requirements.
In 2014, OSFI 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. As at the end of 2015, PC
Bank was in compliance with the LCR standard.
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. There
can be no assurance that the Canadian federal income tax laws will not be changed in a manner which adversely affects Choice
Properties. 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 could in turn materially adversely affect the
trading price of the Units.
Legal Proceedings From time to time, the Company is involved in and subject to legal proceedings, including class actions and other
proceedings, regarding commercial relationships, employment matters, product liability, personal injury claims, protection of intellectual
property and other matters. The proceedings involve suppliers, Associates, franchisees, regulators, tax authorities or other persons. The
potential outcome of litigation proceedings and claims is uncertain. Some of these proceedings could result in a material adverse effect on
the Company’s reputation, results of operation or financial performance.
On August 26, 2015, the Company was served with a proposed class action, which was commenced in the Ontario Superior Court of
Justice against the Company and certain subsidiaries, Weston and others in connection with the collapse of the Rana Plaza complex in
Dhaka, Bangladesh in 2013. The claim seeks approximately $2 billion in damages. The Company believes the class action is without merit
and intends to vigorously defend itself against any claims arising out of any such action.
Shoppers Drug Mart has been served with an Amended Statement of Claim in a class action proceeding that has been filed in 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 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. The Court imposed a class closing date based on the date of certification. New Associates after July 9, 2013 are not members of
the class. 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.
Competitive Environment The retail industry in Canada is highly competitive. The Company competes against a wide variety of retailers
including supermarket and retail drug store operators, as well as mass merchandisers, warehouse clubs, online 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.
In addition, the Company is subject to competitive pressures from new entrants into the marketplace and from the expansion or renovation
40 2015 Annual Report - Financial Review
of existing competitors, particularly those expanding into the grocery and retail drug store markets. 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 reduced profitability. 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 closely monitors its competitors and their strategies, market
developments and market share trends. Failure by the Company to sustain its competitive position could adversely affect the Company's
financial performance.
12.2 Financial Risks and Risk Management
The Company is exposed to a number of financial risks, including those associated with financial instruments, which have the potential to
affect its operating and financial performance. The Company uses 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:
Liquidity
Commodity Prices
Foreign Currency Exchange Rates
Credit
Choice Properties’ Unit Price
Interest Rate Risk
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.
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. 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.
Credit The Company is exposed to credit risk resulting from the possibility that counterparties could default on their financial obligations to
the Company, including 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 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.
2015 Annual Report - Financial Review 41
Management’s Discussion and Analysis
Franchise loans receivable and accounts receivable, including amounts due from 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 sheet 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.
Interest Rate Risk The Company is exposed to interest rate risk from fluctuations in interest rates on its floating rate debt and from the
refinancing of existing financial instruments. The Company manages interest rate risk by monitoring the respective mix of fixed and floating
rate debt and by taking action as necessary to maintain an appropriate balance considering current market conditions, with the objective of
maintaining the majority of its debt at fixed interest rates.
13. 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 that he controls, including Wittington Investments, Limited (“Wittington”), which owns a total of
80,769,249 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
2015
(52 weeks)
2014
(53 weeks)
$
$
642
25
27
23
14
3
615
24
20
18
14
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 2, 2016 was $2 million (January 3, 2015 – $3 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, certain
accounting and control functions 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 2015, Choice Properties issued
1,317,405 Units (2014 – 1,306,847 Units) to Weston under its DRIP at a weighted average price of $10.86 (2014 – $10.30) per Unit.
The net balances due to Weston are comprised as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
42 2015 Annual Report - Financial Review
As at
January 2, 2016
3
$
As at
January 3, 2015
7
$
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
2, 2016, 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 2015, these elections and
accompanying agreements did not have a material impact on the Company.
Key Management Personnel The Company’s key management personnel are comprised of the Board and certain members of the
executive team of the Company, as well as both the Board and certain members of the executive team of Weston and Wittington to the
extent that they have the authority and responsibility for planning, directing and controlling the day-to-day activities of the Company.
Compensation of Key Management Personnel Annual compensation of key management personnel that is directly attributable to the
Company was as follows:
(millions of Canadian dollars)
Salaries, director fees and other short term employee benefits
Equity-based compensation
Total compensation
14. Critical Accounting Estimates and Judgments
2015
(52 weeks)
6
4
10
$
$
2014
(53 weeks)
9
3
12
$
$
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.
14.1 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).
14.2 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.
2015 Annual Report - Financial Review 43
Management’s Discussion and Analysis
14.3 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.
Key Sources of Estimation In determining the recoverable amount of a CGU or a group of CGUs, various estimates are employed. The
Company determines fair value less costs to sell using such estimates as market rental rates for comparable properties, recoverable
operating costs for leases with tenants, non-recoverable operating costs, discount rates, capitalization rates and terminal capitalization
rates. The Company determines value in use by using estimates including projected future sales, earnings and capital investment
consistent with strategic plans presented to the Board. Discount rates are consistent with external industry information reflecting the risk
associated with the specific cash flows.
14.4 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. These estimates are derived from past experience, actual
operating results and budgets.
14.5 Customer Loyalty Awards 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 estimated fair value per point is based on the program reward
schedule, which for the PC points and PC Plus programs is $1 for every 1,000 points. For the Shoppers Optimum program, the estimated
fair value is determined based on the expected weighted average redemption levels for future redemptions, including special redemption
events. Breakage rates are primarily based on historical redemption experience. The trends in breakage are reviewed on an ongoing basis
and the estimated retail value per point is adjusted based on expected future activity.
14.6 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.
14.7 Segment Information
Judgments Made in Relation to Determining the Aggregation of Operating Segments The Company uses judgment in assessing the
criteria used to determine the aggregation of operating segments. The Retail reportable operating segment consists of several operating
segments comprised primarily of food retail and Associate-owned drug stores, and also includes in-store pharmacies and other health and
beauty products, gas bars, apparel and other general merchandise. The Company has aggregated its retail operating segments on the
basis of their similar economic characteristics, customers and nature of products. This similarity in economic characteristics reflects the fact
that the Company’s retail operating segments operate primarily in Canada and are therefore subject to the same economic market
pressures and regulatory environment. The Company’s retail operating segments are subject to similar competitive pressures such as
price and product innovation and assortment from existing competitors and new entrants into the marketplace. The similar economic
characteristics also include the provision of centralized, common functions such as marketing and IT across all retail operating segments.
44 2015 Annual Report - Financial Review
The retail operating segments’ customer profile is primarily individuals who are purchasing goods for their own or their family’s personal
needs and consumption. The nature of products and the product assortment sold by each of the retail operating segments is also similar
and includes grocery, pharmaceuticals, cosmetics, electronics and housewares. The aggregation of the retail operating segments reflects
the nature and financial effects of the business activities in which the Company engages and the economic environment in which it
operates.
15. Accounting Standards
15.1 Changes to Significant Accounting Policies
Intangible Assets The classification of software costs requires judgment to determine whether such costs should be classified as fixed
assets or intangible assets. Management has reviewed the classification of the Company’s software costs, primarily related to the
implementation of its IT systems, and has determined that it would be appropriate to present certain costs as intangible assets. The
Company implemented the change retrospectively in the first quarter of 2015, with the following impact:
Consolidated Balance Sheet
Increase (Decrease)
(millions of Canadian dollars)
Fixed Assets
Intangible Assets
As at
January 3, 2015
(498)
498
$
In addition, the Company reassessed and revised the useful life of its new IT systems from five to seven years. This revision represents a
change in estimate resulting in a current year reduction of depreciation and amortization expense, related to these assets, of approximately
$34 million compared to 2014.
15.2 Future Accounting Standards
In 2016, the International Accounting Standards Board (“IASB”) issued IFRS 16, “Leases” (“IFRS 16”), replacing International Accounting
Standards (“IAS”) 17, “Leases” and related interpretations. The standard introduces a single on-balance sheet recognition and
measurement model for lessees, eliminating the distinction between operating and finance leases. Lessors continue to classify leases as
finance and operating leases. IFRS 16 becomes effective for annual periods beginning on or after January 1, 2019, and is to be applied
retrospectively. Early adoption is permitted if IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) has been adopted. The
Company is currently assessing the impact of the new standard on its consolidated financial statements.
In 2014, the IASB issued IFRS 15, replacing IAS 18, “Revenue”, IAS 11, “Construction Contracts”, and related interpretations. 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, 2018, 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 2014, the IASB issued IFRS 9, “Financial Instruments”, replacing IAS 39, “Financial Instruments: Recognition and Measurement”, and
related interpretations. 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 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, and therefore the Company will apply these amendments in the first
quarter of 2016. The Company does not expect any material impact on its financial statement disclosures as a result of adopting these
amendments.
2015 Annual Report - Financial Review 45
Management’s Discussion and Analysis
16. Outlook(6)
Loblaw remains focused on its strategic framework, 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 that targets positive
same-store sales and stable gross margin; surfacing efficiencies; delivering synergies as a result of its acquisition of Shoppers Drug Mart;
and returning capital to shareholders. In 2016, the Company expects to:
•
deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive grocery market and with
continued negative pressure from healthcare reform;
grow adjusted net earnings;
invest approximately $1.3 billion in capital expenditures, including $1.0 billion in its Retail segment; and
return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.
•
•
•
17. Non-GAAP Financial Measures
The Company uses the following non-GAAP financial measures: Retail segment adjusted gross profit, Retail segment adjusted gross profit
percentage, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted net interest expense and other financing charges, adjusted
income taxes, adjusted income tax rate, adjusted net earnings, adjusted basic net earnings per common share, free cash flow, adjusted
return on equity and adjusted return on capital and with respect to Choice Properties: adjusted funds from operations. 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. The Company excludes 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.
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.
Retail Segment Adjusted Gross Profit and Retail Segment Adjusted Gross Profit Percentage Retail segment adjusted gross profit
percentage is calculated as adjusted Retail segment gross profit divided by Retail segment sales. 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.
For the periods ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars)
Retail segment gross profit
Add impact of the following:
Impairment of Drug retail ancillary assets held for sale
Charge related to apparel inventory
Charge related to inventory measurement and other
conversion differences
Recognition of fair value increment on inventory sold
2015
(12 weeks)
2014
(13 weeks)
2015
(52 weeks)
2014
(53 weeks)
$
2,794
$
2,925
$
11,689
$
9,734
46
—
4
—
—
—
—
69
46
8
4
—
—
—
190
798
Retail segment adjusted gross profit
$
2,844
$
2,994
$
11,747
$
10,722
Impairment of Drug retail ancillary assets held for sale In fourth quarter of 2015 and year-to-date, the Company commenced actively
marketing the sale of certain assets of its Shoppers ancillary healthcare businesses. As a result, the Company recorded a charge of $112
million associated with the write-down of the assets and other related restructuring charges. Of this amount, $46 million was recognized in
gross profit and $66 million was recognized in SG&A.
Charge related to apparel inventory In 2015, the Company entered into an agreement to liquidate, in the U.S., certain older Canadian
apparel inventory and recorded a charge of $8 million (2014 – nil).
46 2015 Annual Report - Financial Review
Charge related to inventory measurement and other conversion differences for the Company’s corporate and franchise grocery
stores As of the end of 2015, the Company had completed the conversion of all of its franchised grocery stores to the new IT systems that
include a perpetual inventory system. The re-measurement of inventory owned by the franchises as a result of implementing the system
resulted in a decrease in inventory value of $33 million. The re-measurement resulted in a charge of $4 million in gross profit related to
consolidated franchises and $29 million to SG&A related to non-consolidated franchises in the fourth quarter and year-to-date. During
2014, the Company completed the same conversion of its corporate grocery locations and associated distribution centres, resulting in a
decrease of $190 million in inventory value and a charge of $190 million in gross profit.
Recognition of fair value increment on inventory sold In connection with the acquisition of Shoppers Drug Mart in 2014, 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 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 and year-to-date $798 million was recognized in gross profit and operating income, representing the
full amount of the fair value adjustment.
2015 Annual Report - Financial Review 47
Management’s Discussion and Analysis
EBITDA, Adjusted EBITDA and Adjusted EBITDA 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 2, 2016 and January 3, 2015. 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 investment
program.
Adjusted EBITDA margin is calculated as adjusted EBITDA divided by revenue.
2015
(12 weeks)
Financial
Services(4)
Choice
Properties(4)
Retail
Consolidation
and
Eliminations Consolidated
Retail
Financial
Services(4)
Choice
Properties(4)
Consolidation
and
Eliminations
$
131
2014
(13 weeks)
Consolidated
$
247
(millions of Canadian dollars)
Net earnings attributable to
shareholders of the Company
Add (deduct) impact of the following:
Non-Controlling Interests
Net interest expense and other
financing charges
Income taxes
Operating income
(4)
141
48
316
376
692
$ 459 $
49 $
223 $
(224) $
388
2
—
3
$ 847 $
51 $
223 $
(221) $
$ 265 $
48 $
224 $
(221) $
Depreciation and amortization
369
3
—
4
EBITDA
$ 634 $
51 $
224 $
(217) $
Operating income
$ 265 $
48 $
224 $
(221) $
316
$ 459 $
49 $
223 $
(224) $
Add (deduct) impact of the following:
Amortization of intangible assets
acquired with Shoppers Drug
Mart
Impairment of Drug retail ancillary
assets held for sale
Labour agreements
Charge related to inventory
measurement and other
conversion differences
Fixed asset and other related
impairments, net of recoveries
Modifications to certain franchise
fee arrangements
Pension annuities and buy-outs
Fair value adjustment on fuel and
foreign currency contracts
Restructuring and other related
costs
Recognition of fair value
increment on inventory sold
Shoppers Drug Mart acquisition-
related costs, net of impact
from divestitures
Fair value adjustment on
Shoppers Drug Mart's equity-
based compensation liability
124
112
55
33
4
(8)
6
(6)
(7)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Adjusted operating income
$ 578 $
48 $
224 $
(221) $
Depreciation and amortization
369
Less: Amortization of intangible
assets acquired with Shoppers
Drug Mart
(124)
3
—
—
—
4
—
124
—
—
—
1
(40)
—
4
—
69
14
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 633 $
49 $
223 $
(224) $
124
112
55
33
4
(8)
6
(6)
(7)
—
—
—
629
376
388
(124)
(124)
2
—
—
—
3
—
Adjusted EBITDA
$ 823 $
51 $
224 $
(217) $
881
$ 897 $
51 $
223 $
(221) $
48 2015 Annual Report - Financial Review
—
169
91
507
393
900
507
124
—
—
—
1
(40)
—
4
—
69
14
2
681
393
(124)
950
53
—
584
25
662
1,472
2,134
2015
(52 weeks)
Financial
Services(4)
Choice
Properties(4)
Retail
Consolidation
and
Eliminations Consolidated
Retail
Financial
Services(4)
Choice
Properties(4)
Consolidation
and
Eliminations
$
632
$
2014
(53 weeks)
Consolidated
(9)
644
334
$1,429 $
163 $
601 $
(592) $
1,601
$ 497 $
164 $
568 $
(567) $
(millions of Canadian dollars)
Net earnings attributable to
shareholders of the Company
Add (deduct) impact of the following:
Non-Controlling Interests
Net interest expense and other
financing charges
Income taxes
Operating income
Depreciation and amortization
1,567
10
1
14
1,592
1,453
7
—
12
EBITDA
$2,996 $
173 $
602 $
(578) $
3,193
$ 1,950 $
171 $
568 $
(555) $
Operating income
$1,429 $
163 $
601 $
(592) $
1,601
$ 497 $
164 $
568 $
(567) $
662
Add (deduct) impact of the following:
Amortization of intangible assets
acquired with Shoppers Drug
Mart
Restructuring and other related
costs
Impairment of Drug retail ancillary
assets held for sale
Labour agreements
Charge related to inventory
measurement and other
conversion differences
Fixed asset and other related
impairments, net of recoveries
Fair value adjustment on fuel and
foreign currency contracts
Modifications to certain franchise
fee arrangements
Charge related to apparel
inventory
Pension annuities and buy-outs
Shoppers Drug Mart acquisition-
related costs, net of impact
from divestitures
Recognition of fair value
increment on inventory sold
Fair value adjustment on
Shoppers Drug Mart's equity-
based compensation liability
536
154
112
55
33
13
(21)
(8)
8
8
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
536
154
112
55
33
13
(21)
417
44
—
—
190
15
4
(8)
(40)
8
8
2
—
—
—
—
72
798
7
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Adjusted operating income
$2,321 $
163 $
601 $
(592) $
2,493
$ 2,004 $
164 $
571 $
(567) $
Depreciation and amortization
1,567
Less: Amortization of intangible
assets acquired with Shoppers
Drug Mart
(536)
10
—
1
—
14
—
1,592
1,453
(536)
(417)
7
—
—
—
12
—
417
46
—
—
190
16
4
(40)
—
—
72
798
7
2,172
1,472
(417)
Adjusted EBITDA
$3,352 $
173 $
602 $
(578) $
3,549
$ 3,040 $
171 $
571 $
(555) $
3,227
Amortization of intangible assets acquired with Shoppers Drug Mart The acquisition of Shoppers Drug Mart in 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 2015, $124 million (2014 – $124 million) and year-to-date of $536 million (2014 – $417 million) of amortization was recognized in
SG&A. Annual amortization associated with the acquired intangibles will be approximately $550 million over the next nine years, and will
decrease thereafter.
2015 Annual Report - Financial Review 49
Management’s Discussion and Analysis
Restructuring and other related costs The Company continuously evaluates strategic and cost reduction initiatives related to its store
infrastructure, distribution networks and administrative infrastructure with the objective of ensuring a low cost operating structure.
Restructuring activities related to these initiatives are ongoing. In addition to these ongoing initiatives, during 2015, the Company
announced the closure of certain unprofitable retail locations, as set out in Section 6.1 “Retail Segment – Other Retail Business Matters”.
Labour agreements Over the past five years, the Company has been transitioning stores to more cost effective and efficient operating
terms under collective agreements. During the fourth quarter of 2015, the Company recorded a charge of $55 million related to the
completion of these agreements.
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 2015, the Company recorded $4 million (2014 – $1 million) and year-to-date $13 million (2014 –
$16 million) related to net fixed asset and other related impairments.
Fair value adjustment on fuel and foreign currency contracts The Company is exposed to commodity price and U.S. dollar
exchange rate fluctuations. In accordance with the Company’s commodity risk management policy, the Company enters into
exchange traded futures contracts and forward contracts to minimize cost volatility relating to fuel prices and the U.S. dollar exchange
rate. These derivatives are not acquired for trading or speculative purposes. Pursuant to the Company’s derivative instruments
accounting policy, changes in the fair value of these instruments, which include realized and unrealized gains and losses, are
recorded in operating income. In the fourth quarter of 2015, the Company recorded a net fair value gain on fuel and foreign currency
contracts of $6 million (2014 – loss of $4 million) and a year-to-date gain of $21 million (2014 – loss of $4 million). Despite the impact
of accounting for these commodity and foreign currency derivatives on the Company’s reported results, the derivatives have the
economic impact of largely mitigating the associated risks arising from price and exchange rate fluctuations in the underlying
commodities and U.S. dollar commitments.
Modifications to certain franchise fee arrangements The Company modified its fee arrangements with franchisees of certain
franchise banners. As a result of this modification, the Company re-evaluated the recoverable amount of franchise-related financial
instruments and the related previously recorded impairment. In the fourth quarter of 2015 and year-to-date, the Company recorded a
reduction in previously recorded impairment of $8 million (2014 – $40 million).
Pension annuities and buy-outs In 2015, the Company completed several annuity purchases and pension buy-outs in respect of former
employees designed to reduce its defined benefit pension plan obligation and decrease future pension volatility and risks. In the fourth
quarter of 2015 and year-to-date, the Company recorded a charge of $6 million (2014 – nil) and $8 million (2014 – nil), respectively.
Shoppers Drug Mart acquisition-related costs, net of impact from divestitures In the first quarter of 2015, the Company completed all
divestitures required by the Competition Bureau and recorded a divestiture loss of $2 million. In the fourth quarter and year-to-date of
2014, the Company recorded net divestiture losses of $14 million and $12 million, respectively. Also during 2014, the Company incurred
acquisition costs of $60 million year-to-date related to the agreement to acquire all of the outstanding common shares of Shoppers Drug
Mart.
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 share. In the fourth quarter and year-to-date 2014, the Company recorded a
loss of $2 million and $7 million, 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.
50 2015 Annual Report - Financial Review
Adjusted Net Interest Expense and Other Financing Charges The following table reconciles adjusted net interest expense and other
financing charges to net interest expense and other financing charges in the consolidated statements of earnings for the periods ended
January 2, 2016 and January 3, 2015. 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.
For the periods ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars)
Net interest expense and other financing charges
Deduct impact of the following:
Fair value adjustment to the Trust Unit Liability
Accelerated amortization of deferred financing costs
Shoppers Drug Mart acquisition-related costs, net of
impact from divestitures
Adjusted net interest expense and other financing charges
$
2015
(12 weeks)
141
$
2014
(13 weeks)
169
(20)
(5)
—
144
$
$
$
$
2015
(52 weeks)
644
(81)
(15)
—
548
2014
(53 weeks)
584
(17)
(23)
(15)
529
$
$
(7)
—
—
134
Fair value adjustment to the 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 sheet 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 each period. In the fourth quarter of 2015, the Company recorded a loss of $7
million (2014 – loss of $20 million) and year-to-date a loss of $81 million (2014 – loss of $17 million) related to the fair value adjustment to
the Trust Unit Liability. An increase (decrease) in market price of Units results in a charge (income) to net interest expense and other
financing charges.
Accelerated amortization of deferred financing costs The Company recorded charges related to accelerated amortization of deferred
financing costs due to the early repayments of the Acquisition Term Loan. In the fourth quarter and year-to-date, the Company recorded
accelerated amortization charges of nil (2014 – $5 million) and $15 million (2014 – $23 million).
Shoppers Drug Mart acquisition-related costs, net of impact from divestitures In addition to the acquisition-related costs and
divestitures loss recorded in operating income noted above, during the first quarter of 2014, $15 million of additional net interest expense
was 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 part of ongoing operations.
Adjusted Income Taxes and Adjusted Income Tax Rate The Company believes adjusted income taxes is useful in assessing the
underlying operating performance and in making decisions regarding the ongoing operations of its business.
For the periods ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars except where otherwise indicated)
Adjusted operating income(i)
Adjusted net interest expense and other financing
charges(i)
Adjusted earnings before taxes
Income taxes
Add (deduct) impact of the following:
Tax impact of items included in adjusted earnings before
taxes(ii)
Provincial statutory corporate income tax rate change
Adjusted income taxes
Effective tax rate
Adjusted income tax rate
$
$
$
$
2015
(12 weeks)
629
134
495
48
85
—
133
27.4%
26.9%
$
$
$
$
2014
(13 weeks)
681
144
537
91
50
—
141
26.9%
26.3%
$
$
$
$
2015
(52 weeks)
2,493
548
1,945
334
229
(38)
525
34.9%
27.0%
$
$
$
$
2014
(53 weeks)
2,172
529
1,643
25
401
—
426
32.1%
25.9%
(i) See reconciliations of adjusted operating income and adjusted net interest expense and other financing charges above.
(ii) See the EBITDA, adjusted EBITDA and adjusted EBITDA margin table and the adjusted net interest expense 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.
2015 Annual Report - Financial Review 51
Management’s Discussion and Analysis
Provincial statutory corporate income tax rate change In the second quarter of 2015, the government of Alberta announced an
increase in the provincial corporate income tax rate from 10% to 12%. The increase was effective July 1, 2015, but was enacted on June
19, 2015. As a result, the Company recorded a charge of $38 million in the second quarter of 2015 and year-to-date related to the re-
measurement of its deferred tax liabilities.
Adjusted Net Earnings and Adjusted Basic Net Earnings Per Common Share The Company believes adjusted net earnings and
adjusted basic net earnings per common share are useful in assessing the Company’s underlying operating performance and in making
decisions regarding the ongoing operations of its business.
The following table reconciles adjusted basic net earnings per common share to GAAP basic net earnings per common share as reported
for the periods ended January 2, 2016 and January 3, 2015:
($)
Basic net earnings per common share
Add (deduct) impact of the following:
Amortization of intangible assets acquired with Shoppers Drug Mart
Restructuring and other related costs
Impairment of Drug retail ancillary assets held for sale
Fair value adjustment to the Trust Unit Liability(i)
Labour agreements
Provincial statutory corporate income tax rate change
Charge related to inventory measurement and other conversion
differences
Fixed asset and other related impairments, net of recoveries
Fair value adjustment on fuel and foreign currency contracts
Modifications to certain franchise fee arrangements
Accelerated amortization of deferred financing costs
Charge related to apparel inventory
Pension annuities and buy-outs
Shoppers Drug Mart acquisition-related costs, net of impact from
divestitures
Recognition of fair value increment on inventory sold
Fair value adjustment on Shoppers Drug Mart’s equity-based
compensation liability
Adjusted basic net earnings per common share
Weighted average common shares outstanding (millions)
Adjusted net earnings attributable to shareholders of the Company
(millions of Canadian dollars)
Less: Prescribed dividends on preferred shares in share capital
(millions of Canadian dollars)
Adjusted net earnings available to common shareholders of the
Company (millions of Canadian dollars)
$
$
2015
2014
2015
2014
(12 weeks)
(13 weeks)
(52 weeks)
(53 weeks)
$
0.31
$
0.60
$
1.52
$
0.22
(0.01)
0.20
0.01
0.10
—
0.06
0.01
(0.01)
(0.02)
—
—
0.01
—
—
—
0.22
—
—
0.05
—
—
—
—
0.01
(0.07)
0.01
—
—
0.02
0.12
—
0.96
0.31
0.20
0.20
0.10
0.09
0.06
0.02
(0.04)
(0.02)
0.03
0.02
0.01
—
—
—
0.88
$
0.96
$
3.46
$
410.7
412.0
411.5
0.14
0.80
0.09
—
0.04
—
—
0.37
0.04
0.01
(0.08)
0.04
—
—
0.19
1.55
0.01
3.20
380.5
366
$
396
$
1,429
$
1,217
(3)
363
—
396
(7)
1,422
—
1,217
(i) Gains or losses related to the fair value adjustment to the Trust Unit Liability are not subject to tax.
52 2015 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 January 2, 2016 and January 3, 2015. 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:
Capital investments
Interest paid
Free cash flow
2015
(12 weeks)
564
433
95
36
$
$
2014
(13 weeks)
952
400
113
439
$
$
$
$
2015
(52 weeks)
3,079
2014
(53 weeks)
2,569
$
1,241
491
1,347
$
1,086
506
977
Choice Properties' Adjusted Funds from Operations The following table reconciles Choice Properties’ adjusted funds from operations
to GAAP measures for the periods ended January 2, 2016 and January 3, 2015. 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 (loss)
Fair value adjustment on Class B Limited Partnership
units
Fair value adjustment on investment properties
Fair value adjustments on unit-based compensation
Distributions on Class B Limited Partnership units
Amortization of tenant improvement allowances
Internal expenses for leasing
Funds from Operations
Restructuring
Straight-line rental revenue
Amortization of finance charges
Unit-based compensation expense
Sustaining property and leasing capital expenditures,
normalized(i)
Adjusted Funds from Operations
2015
(12 weeks)
41
96
(88)
—
52
—
—
101
—
(10)
—
—
(9)
82
$
$
$
$
$
$
$
$
2014
(13 weeks)
87
51
(98)
—
50
—
—
90
—
(9)
—
—
(7)
74
2015
(52 weeks)
(155)
411
(72)
1
203
—
1
389
—
(37)
(1)
2
(40)
313
$
$
$
$
2014
(53 weeks)
200
(12)
(82)
(1)
191
1
—
297
2
(35)
50
2
(31)
285
$
$
$
$
(i) 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.
18. 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 OSFI as the primary regulator for the
Company’s subsidiary, PC Bank.
February 24, 2016
Toronto, Canada
2015 Annual Report - Financial Review 53
Management’s Discussion and Analysis
MD&A Endnotes
For financial definitions and ratios refer to the Glossary of Terms on page 120 of the Company’s 2015 Annual Report.
(1)
(2) See Section 17 “Non-GAAP Financial Measures”.
(3) Certain 2014 figures have been restated to conform with the current year’s presentation. See Section 15.1 “Changes to Significant Accounting Policies” and Section 17
“Non-GAAP Financial Measures”.
For segment presentation purposes, the results are for the periods ended December 31, 2015 and December 31, 2014, consistent with Financial Services’ and Choice
Properties’ fiscal calendars. Adjustments to January 2, 2016 and January 3, 2015 are included in Consolidation and Eliminations. See Section 17 “Non-GAAP Financial
Measures” and Note 36 “Segment Information” in the Company’s 2015 consolidated financial statements.
The Company’s comparative results were negatively impacted by the inclusion of an additional selling week, the 53rd week in 2014. The 53rd week resulted in the
following impacts to the Company’s 2014 fourth quarter and full year results: $789 million of higher retail sales, $71 million of higher EBITDA, and estimated impacts on
net earnings and basic net earnings per common share of $52 million and $0.13 per share, respectively. The impact of the 53rd week on net earnings available to
common shareholders of the Company is estimated based on operating income of the 53rd week and applying the effective tax rate for the fourth quarter of 2014. The
impact of the 53rd week on basic net earnings per common share is based on the estimated net earnings available to common shareholders of the Company divided by
the weighted average common shares outstanding for the fourth quarter and year-to-date of 2014, as applicable.
To be read in conjunction with Section 1 “Forward-Looking Statements”.
(4)
(5)
(6)
54 2015 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
Note 1. Nature and Description of the Reporting Entity
Note 2. Significant Accounting Policies
Note 3. Critical Accounting Estimates and Judgments
Note 4. Future Accounting Standards
Note 5. Business Acquisitions
Note 6. Net Interest Expense and Other Financing Charges
Note 7. Income Taxes
Note 8. Basic and Diluted Net Earnings per Common Share
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. Investment Properties
Note 16. Intangible Assets
Note 17. Goodwill
Note 18. Other Assets
Note 19. Customer Loyalty Awards Program Liability
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. Restructuring and Other Related Costs
Note 36. Segment Information
Three Year Summary
Glossary of Terms
56
57
58
58
59
60
61
62
63
63
63
73
75
76
78
78
80
80
81
81
82
82
83
85
86
88
89
89
89
89
91
94
94
96
97
102
107
108
109
111
112
113
114
115
116
118
120
2015 Annual Report - Financial Review 55
Management’s Statement of Responsibility for Financial Reporting
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 control 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 24, 2016
[signed]
Galen G. Weston
Executive Chairman and President
[signed]
Richard Dufresne
Chief Financial Officer
56 2015 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 2, 2016 and January 3, 2015, the consolidated statements of earnings, comprehensive income, changes in
equity and cash flows for the 52 and 53 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 2, 2016 and January 3, 2015, and its consolidated financial performance and its consolidated cash flows
for the 52 and 53 week years then ended in accordance with International Financial Reporting Standards.
Toronto, Canada
February 24, 2016
Chartered Professional Accountants, Licensed Public Accountants
2015 Annual Report - Financial Review 57
Consolidated Statements of Earnings
For the years ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars except where otherwise indicated)
Revenue
Cost of Merchandise Inventories Sold
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
Attributable to:
Shareholders of the Company
Non-Controlling Interests
Net Earnings
Net Earnings per Common Share ($) (note 8)
Basic
Diluted
Weighted Average Common Shares Outstanding (millions) (note 8)
Basic
Diluted
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2015
45,394
32,846
10,947
1,601
644
957
334
623
632
(9)
623
1.52
1.51
411.5
415.2
2014
42,611
32,063
9,886
662
584
78
25
53
53
—
53
0.14
0.14
380.5
384.4
58 2015 Annual Report - Financial Review
Consolidated Statements of Comprehensive Income
For the years ended January 2, 2016 and January 3, 2015
(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
Unrealized gain on cash flow hedges (note 30)
Items that will not be reclassified to profit or loss:
Net defined benefit plan actuarial gains (losses) (note 27)
Other comprehensive income (loss)
Total Comprehensive Income
Attributable to:
Shareholders of the Company
Non-Controlling Interests
Total Comprehensive Income
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
$
2015
623
14
1
143
158
781
790
(9)
781
$
$
$
$
$
$
2014
53
8
—
(46)
(38)
15
15
—
15
2015 Annual Report - Financial Review 59
Consolidated Statements of Changes in Equity
(millions of Canadian dollars except where otherwise indicated)
Balance at January 3, 2015
Net earnings (loss)
Other comprehensive income
Total Comprehensive Income (Loss)
Preferred share issuance (note 24)
Common shares purchased and cancelled (note 24)
Net effect of equity-based compensation (notes 24
and 26)
Shares purchased and held in trust (note 24)
Shares released from trust (notes 24 and 26)
Dividends declared per common share – $0.995 (note 24)
Dividends declared per preferred share – $0.74 (note 24)
Contribution from non-controlling interests (note 5)
Balance at January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Balance at December 28, 2013
Net earnings
Other comprehensive (loss) income
Total Comprehensive Income
Acquisition of Shoppers Drug Mart Corporation (notes 5
and 24)
Common shares purchased and cancelled (note 24)
Net effect of equity-based compensation (notes 24 and 26)
Shares released from trust (notes 24 and 26)
Dividends declared per common share – $0.975 (note 24)
Contribution from non-controlling interests
Balance at January 3, 2015
See accompanying notes to the consolidated financial statements.
Preferred
Share
Capital
Common
Share
Capital
Retained
Earnings
Contributed
Surplus
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests
Total
Equity
— $
— $
—
— $
221
—
—
—
—
—
—
—
7,857 $
4,810 $
— $
632 $
—
143
— $
775 $
104 $
— $
—
— $
—
(83)
84
(19)
12
—
—
—
—
(197)
(11)
(44)
37
(409)
(7)
—
—
—
(2)
—
—
—
—
—
8 $
— $
15
15 $
—
—
—
—
—
—
—
—
8 $ 12,787
(9) $
—
(9) $
—
—
—
—
—
—
—
14
623
158
781
221
(280)
71
(63)
49
(409)
(7)
14
221 $
(6) $
144 $
221 $
7,851 $
4,954 $
(2) $
102 $
15 $
23 $
5 $
377
13 $ 13,164
Preferred
Share
Capital
Common
Share
Capital
Retained
Earnings
Contributed
Surplus
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests
Total
Equity
— $
— $
—
— $
1,642 $
5,271 $
— $
—
— $
53 $
(46)
7 $
—
—
—
—
—
—
6,119
(63)
156
3
—
—
—
(115)
(1)
19
(371)
—
87 $
— $
—
— $
—
—
17
—
—
—
— $
— $
8
8 $
—
—
—
—
—
—
— $
7,000
— $
— $
—
—
—
—
—
8
53
(38)
15
6,119
(178)
172
22
(371)
8
— $
— $
6,215 $
(461) $
7,857 $
4,810 $
17 $
104 $
8 $
8 $
8 $
5,787
8 $ 12,787
$
$
$
$
$
$
$
$
$
$
60 2015 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 18)
Total Assets
Liabilities
Current Liabilities
Bank indebtedness (note 33)
Trade payables and other liabilities (note 19)
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)
Other Liabilities (note 23)
Total Liabilities
Equity
Preferred Share Capital (note 24)
Common 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
Total Equity
Total Liabilities and Equity
(i) Certain comparative figures have been restated. See note 2 and note 5.
Contingent Liabilities (note 32).
See accompanying notes to the consolidated financial statements.
As at
January 2, 2016
As at
January 3, 2015(i)
$
$
$
$
$
$
$
$
$
$
1,018
64
1,325
2,790
4,322
265
71
9,855
10,480
160
9,164
3,362
132
2
329
455
33,939
143
5,106
127
82
550
998
216
—
7,222
131
10,013
821
1,834
754
20,775
221
7,851
4,954
102
23
13,151
13
13,164
33,939
$
$
$
$
$
$
$
$
$
$
999
21
1,209
2,630
4,309
214
23
9,405
10,296
185
9,675
3,318
193
7
399
281
33,759
162
4,774
84
34
605
420
193
225
6,497
76
11,042
722
1,853
782
20,972
—
7,857
4,810
104
8
12,779
8
12,787
33,759
2015 Annual Report - Financial Review 61
Consolidated Statements of Cash Flows
For the years ended January 2, 2016 and January 3, 2015
(millions of Canadian dollars)
Operating Activities
Net earnings
Adjustments for:
Income taxes (note 7)
Net interest expense and other financing charges (note 6)
Depreciation and amortization
Net fixed asset and other related impairments
(Gain) Loss 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)
Change in non-cash working capital
Change in credit card receivables (note 11)
Income taxes paid
Interest received
Other
Cash Flows from Operating Activities
Investing Activities
Fixed asset purchases
Intangible asset additions
Acquisition of Shoppers Drug Mart Corporation, net of cash acquired (note 5)
Cash assumed on initial consolidation of franchises (note 5)
Change in short term investments (note 9)
Proceeds from disposal of assets
Change in security deposits (note 9)
Other
Cash Flows used in Investing Activities
Financing Activities
Change in bank indebtedness (note 33)
Change in short term debt (note 20)
Long Term Debt (note 22)
Issued
Retired
Redemption of Capital Securities
Interest paid
Dividends paid on common and preferred shares (note 24)
Common Share Capital
Issued (note 26)
Purchased and held in trust (note 24)
Purchased and cancelled (note 24)
Issuance of Preferred Share Capital (note 24)
Other
Cash Flows (used in) 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 period
Cash and Cash Equivalents, End of Period
(i) Certain comparative figures have been restated. See note 2 and note 5.
See accompanying notes to the consolidated financial statements.
62 2015 Annual Report - Financial Review
2015
2014(i)
$
$
$
$
$
$
$
$
$
$
623
$
334
644
1,592
73
(5)
—
4
3,265
235
(160)
(296)
7
28
3,079
(1,008)
(233)
—
33
(43)
36
5
(28)
(1,238)
(19)
(55)
1,186
(1,783)
(225)
(491)
(416)
63
(63)
(280)
221
23
(1,839)
17
19
999
1,018
$
$
$
$
$
$
$
$
$
53
25
584
1,472
16
3
798
190
3,141
(321)
(92)
(293)
29
105
2,569
(856)
(230)
(6,619)
—
269
129
1,694
(71)
(5,684)
(133)
—
5,865
(3,336)
—
(506)
(496)
629
—
(178)
—
—
1,845
9
(1,261)
2,260
999
Notes to the Consolidated Financial Statements
For the periods ended January 2, 2016 and January 3, 2015 (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 and wireless mobile
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.
The Company has three reportable operating segments: Retail, Financial Services and Choice Properties (see notes 3 and 36).
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.
These consolidated financial statements were authorized for issuance by the Company’s Board of Directors (“Board”) on February 24,
2016.
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 pension plan assets with the obligations related to these pension plans measured at their discounted present value as
described in note 27;
•
•
liabilities for cash-settled equity-based compensation arrangements as described in note 26; and
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.
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 2, 2016 and January 3, 2015 contained 52 weeks and 53 weeks, respectively.
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 assesses 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 recorded in the consolidated financial statements and represent the non-controlling shareholders’ equity in an
entity consolidated by the Company for which the Company’s 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.
2015 Annual Report - Financial Review 63
Notes to the Consolidated Financial Statements
Loblaw consolidates the Shoppers Drug Mart Corporation (“Shoppers Drug Mart”) licensees (“Associates”) as well as the franchisees of its
food retail stores that are subject to a new, simplified franchise agreement (“Franchise Agreement”). 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 and the new franchisees is based on the concept of control, for accounting purposes, which was determined to exist
through the agreements that govern the relationships between the Company and the Associates and franchisees. Loblaw does not have
any direct or indirect shareholdings in the corporations that operate the Associates. Associate interest reflects 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. The Associates’ corporations and the franchisees remain separate legal entities.
Choice Properties’ Trust Units (“Units”) held by unitholders other than the Company are presented as a liability as the Units are
redeemable for cash at the option of the holder, subject to certain restrictions. As at January 2, 2016, the Company held an 83.0%
ownership interest in Choice Properties.
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 Company and when specific criteria have been met as described below.
Retail segment revenue includes sale of goods and services to customers through corporate stores and consolidated franchise stores and
Associates, and sales to non-consolidated franchise stores and independent wholesale 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 non-consolidated franchises.
Revenue also includes services fees from non-consolidated franchises and independent wholesale account customers, which are
recognized when services are rendered.
On the initial sale of franchising arrangements, the Company offered products and services as part of a multiple deliverable arrangement.
Prior to the implementation of the new Franchise Agreement, the initial sales to non-consolidated franchise stores were recorded using a
relative fair value approach.
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.
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.
Income Taxes Current and deferred taxes are recognized in the consolidated statement of earnings, except when it relates to a business
combination, or items recognized in 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.
64 2015 Annual Report - Financial Review
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.
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 Equivalents 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 certain outstanding letters of credit and
certain financial derivative contracts.
Accounts Receivable Accounts receivable consists primarily of receivables from non-consolidated franchisees, government and third-
party drug plans arising from prescription drug sales, independent accounts and amounts owed from vendors, and are recorded net of
allowances.
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.
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.
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 maintains and monitors co-ownership interest in credit card receivables with independent
securitization trusts, in accordance with its financing requirements. PC Bank is required to absorb a portion of the related credit losses. As
a result, Loblaw 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 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. Loblaw
provides a standby letter of credit for the benefit of the independent securitization trusts.
2015 Annual Report - Financial Review 65
Notes to the Consolidated Financial Statements
Eagle Credit Card Trust® PC Bank participates in a single seller revolving co-ownership securitization program with Eagle Credit Card
Trust® (“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 consolidates Eagle as a structured entity.
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 issuance of senior and subordinated short term and medium term
asset backed notes. These trusts are unconsolidated structured entities.
Franchise Loans Receivable Franchise loans receivable are comprised of amounts due from non-consolidated franchises for loans
issued through a structure involving consolidated independent funding trusts. These trusts, which are considered structured entities, were
created to provide loans to franchises to facilitate their purchase of inventory and fixed assets. Each franchise provides security to the
independent funding trust for its obligations by way of a general security agreement. In the event that a franchise 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.
Inventories The Company values 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. Shoppers Drug Mart inventories 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 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. 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 are a reduction in the cost of the vendor’s
products and services, and are recognized as a reduction in the cost of merchandise inventories sold and the related inventory in the
consolidated statement of earnings and the consolidated balance sheet, 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
costs incurred to promote the vendor’s products. The consideration is then recognized as a reduction of the cost incurred in the
consolidated statement of earnings.
Fixed Assets Fixed assets are recognized and subsequently measured at cost less accumulated depreciation and any accumulated
impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset, 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 if it is probable that the future economic benefits
embodied within the component will flow to the Company and the cost can be measured reliably. The carrying amount of the replaced
component is derecognized. The cost of repairs and maintenance of fixed assets is expensed as incurred and recognized in operating
income.
66 2015 Annual Report - Financial Review
Gains and losses on disposal of fixed assets are determined by comparing the fair value of 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 annually 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.
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 significant 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 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.
2015 Annual Report - Financial Review 67
Notes to the Consolidated Financial Statements
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 grouping. 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
grouping in an arm’s length transaction between knowledgeable and willing parties, net of estimates of the costs of disposal.
An impairment loss is recognized if the carrying amount of a CGU or CGU grouping 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 grouping on a pro-rata basis.
Impairment losses are recognized in operating income.
For 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 balances outstanding on 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 for the
passage of time 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, available-for-sale financial assets, 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 sheet. 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 forwards and futures, 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 sheet. 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 sheet 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 item in a designated hedging relationship. The Company has cash
flow hedges which are used to manage exposure to fluctuations in foreign currency exchange and interest rates. The effective portion of
the change in fair value of the hedging item is recorded in other comprehensive income. If the change in fair value of the hedging item is
not completely offset by the change in fair value of the hedged item, the ineffective portion of the hedging relationship is recorded in net
earnings. Amounts accumulated in other comprehensive income are reclassified to net earnings when the hedged item is recognized in net
earnings.
68 2015 Annual Report - Financial Review
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
Certain long term investments
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
Available-for-sale
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
Fair value(iii)
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value
Amortized cost
Amortized cost
Fair value
(i) Financial instruments designated at fair value through profit and loss.
(ii) Financial instruments required to be classified at fair value through profit and loss.
(iii) Measured at fair value through other comprehensive income until realized through disposal or impairment.
The Company has not classified any financial assets as held-to-maturity.
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 net earnings in the period in
which they are incurred. Settlement date accounting is used to account for the purchase and sale of financial assets. Gains or losses
between the trade date and settlement date on fair value through profit or loss financial assets are recorded in net earnings.
2015 Annual Report - Financial Review 69
Notes to the Consolidated Financial Statements
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 during 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; 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.
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 denominated in a foreign currency held in 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.
70 2015 Annual Report - Financial Review
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 high quality corporate 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.
Remeasurements 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.
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 (“MEPPs”) which are accounted for as defined
contribution plans. The Company’s responsibility to make contributions to these plans is limited to amounts established pursuant to its
collective agreements. Defined benefit MEPPs 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 MEPPs 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.
2015 Annual Report - Financial Review 71
Notes to the Consolidated Financial Statements
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.
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 Company is the sponsor of the respective trusts and has assigned Computershare Trust Company of Canada as the trustee.
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.
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.
Cash-Settled Equity-Based Compensation Plans 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 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
unit 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.
72 2015 Annual Report - Financial Review
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 remeasured 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, now hold converted DSUs 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.
Changes to Significant Accounting Policies
Intangible Assets The classification of software costs requires judgment to determine whether such costs should be classified as fixed
assets or intangible assets. Management has reviewed the classification of the Company’s software costs, primarily related to the
implementation of its new information technology (“IT”) systems, and has determined that it would be appropriate to present certain costs
as intangible assets. The Company implemented the change retrospectively in the first quarter of 2015, with the following impact:
Consolidated Balance Sheet
Increase (Decrease)
(millions of Canadian dollars)
Fixed Assets
Intangible Assets
As at
January 3, 2015
(498)
498
$
In addition, the Company reassessed and revised the useful life of its new IT systems from five to seven years. This revision represents a
change in estimate resulting in a current year reduction of depreciation and amortization expense, related to these assets, of approximately
$34 million compared to 2014.
Note 3. Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements requires management to make estimates and judgments in applying the
Company’s accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and
accompanying notes.
Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application
of an accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant
information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of
balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include
management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable
under the circumstances. Management continually evaluates the estimates and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that the Company believes could
have the most significant impact on the amounts recognized in the consolidated financial statements. The Company’s significant
accounting policies are disclosed in note 2.
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).
2015 Annual Report - Financial Review 73
Notes to the Consolidated Financial Statements
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. These estimates are derived from past experience, actual
operating results and budgets.
Customer Loyalty Awards 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 estimated fair value per point is based on the program reward
schedule, which for the PC points and PC Plus programs is $1 for every 1,000 points. For the Shoppers Optimum program, the estimated
fair value is determined based on the expected weighted average redemption levels for future redemptions, including special redemption
events. Breakage rates are primarily based on historical redemption experience. 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.
Segment Information
Judgments Made in Relation to Determining the Aggregation of Operating Segments The Company uses judgment in assessing the
criteria used to determine the aggregation of operating segments. The Retail reportable operating segment consists of several operating
segments comprised primarily of food retail and Associate-owned drug stores, and also includes in-store pharmacies and other health and
beauty products, gas bars, apparel and other general merchandise. The Company has aggregated its retail operating segments on the
basis of their similar economic characteristics, customers and nature of products. This similarity in economic characteristics reflects the fact
that the Company’s retail operating segments operate primarily in Canada and are therefore subject to the same economic market
pressures and regulatory environment. The Company’s retail operating segments are subject to similar competitive pressures such as
price and product innovation and assortment from existing competitors and new entrants into the marketplace. The similar economic
characteristics also include the provision of centralized, common functions such as marketing and IT across all retail operating segments.
74 2015 Annual Report - Financial Review
The retail operating segments’ customer profile is primarily individuals who are purchasing goods for their own or their family’s personal
needs and consumption. The nature of products and the product assortment sold by each of the retail operating segments is also similar
and includes grocery, pharmaceuticals, cosmetics, electronics and housewares. The aggregation of the retail operating segments reflects
the nature and financial effects of the business activities in which the Company engages and the economic environment in which it
operates.
Note 4. Future Accounting Standards
In 2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”), replacing International Accounting Standards (“IAS”) 17, “Leases” and related
interpretations. The standard introduces a single on-balance sheet recognition and measurement model for lessees, eliminating the
distinction between operating and finance leases. Lessors continue to classify leases as finance and operating leases. IFRS 16 becomes
effective for annual periods beginning on or after January 1, 2019, and is to be applied retrospectively. Early adoption is permitted if IFRS
15, “Revenue from Contracts with Customers” (“IFRS 15”) has been adopted. The Company is currently assessing the impact of the new
standard on its consolidated financial statements.
In 2014, the IASB issued IFRS 15, replacing IAS 18, “Revenue”, IAS 11, “Construction Contracts”, and related interpretations. 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, 2018, 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 2014, the IASB issued IFRS 9, “Financial Instruments”, replacing IAS 39, “Financial Instruments: Recognition and Measurement”, and
related interpretations. 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 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, and therefore the Company will apply these amendments in the first
quarter of 2016. The Company does not expect any material impact on its financial statement disclosures as a result of adopting these
amendments.
2015 Annual Report - Financial Review 75
Notes to the Consolidated Financial Statements
Note 5. Business Acquisitions
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 Company also issued 10.5 million common shares to Weston for cash that was used in connection
with the acquisition of Shoppers Drug Mart.
In the first quarter of 2015, the Company finalized the purchase price allocation and revised its fair value estimate of the Shoppers
Optimum loyalty program liability retrospective to the date of acquisition. The result increased trade payables and other liabilities by $102
million to $1,026 million, decreased deferred income tax liabilities by $27 million to $2,225 million and increased goodwill by $75 million to
$2,360 million. The finalized purchase price allocation is summarized 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
2,360
68
7
(295)
(1,026)
(11)
(174)
(19)
(1,127)
(2,225)
(164)
12,273
In the fourth quarter of 2014, the Company finalized its fair value estimate of intangible assets and updated the purchase price equation.
The result was to decrease intangible assets by $35 million and deferred income tax liabilities by $9 million, and increase goodwill by
$26 million.
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 except where otherwise indicated)
Intangible Assets:
Prescription files
Brands
Shoppers Optimum loyalty program
Other
Total Intangible Assets
76 2015 Annual Report - Financial Review
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. In the first
quarter of 2015, the Company met this requirement by completing all required divestitures with the sale of three remaining Shoppers Drug
Mart stores. The Company received gross proceeds of $9 million and recorded a loss of $2 million in operating income related to these
final divestitures. Since the closing of the acquisition, the Company received gross proceeds of $69 million and recognized a cumulative
net divestitures loss of $14 million.
In 2014, the Company incurred costs of $75 million related to the acquisition of Shoppers Drug Mart. Of this amount, $60 million was
recorded in SG&A and $15 million was recorded in net interest expense and other financing charges.
Consolidation of Franchises The Company treats the consolidation of existing franchises as business acquisitions. The acquisition date
was the date the franchisee entered into a new Franchise Agreement with the Company. The assets acquired and liabilities assumed
through the consolidation were valued at the acquisition date using fair values, which approximate the franchise carrying values at the date
of acquisition. The results of operations of the acquired franchises were included in the Company’s results of operations from the date of
acquisition. As at January 2, 2016, the Company has not yet finalized the purchase price allocation related to these acquisitions.
The following table summarizes the amounts recognized for the assets acquired, the liabilities assumed and the non-controlling interests
recognized at the acquisition date:
(millions of Canadian dollars)
Net Assets Acquired:
Cash and cash equivalents
Inventories
Fixed assets
Trade payables and other liabilities(i)
Other liabilities(i)
Non-controlling interests
Total Net Assets Acquired
$
$
33
46
52
(33)
(84)
(14)
—
(i)
On consolidation, Trade payables and other liabilities and Other Liabilities eliminate against existing Accounts receivable, Franchise Loans Receivable and franchise
investments held by the Company.
Other Business Acquisitions In 2015, the Company acquired the net assets of a grocery store, including land and a building, for total
consideration of $41 million, and has allocated $21 million to goodwill. The Company has not yet finalized the purchase price allocation
related to this acquisition.
2015 Annual Report - Financial Review 77
Notes to the Consolidated Financial Statements
Note 6. Net Interest Expense and Other Financing Charges
(millions of Canadian dollars)
Interest expense and other financing charges:
Long term debt
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 to the Trust Unit Liability (note 30)
Bank indebtedness
Capitalized interest (capitalization rate 5.7% (2014 – 6.2%)) (notes 14 and 16)
Interest income:
Accretion income
Short term interest income
Security deposits(i)
Net interest expense and other financing charges
2015
$
475
$
—
37
45
13
14
8
81
6
(5)
674
(21)
(9)
—
(30)
644
$
$
$
$
$
$
$
$
2014
466
18
37
44
12
15
14
17
6
(4)
625
(25)
(12)
(4)
(41)
584
(i) 2014 includes interest income of $3 million related to $1,600 million of proceeds from the issuance of senior unsecured notes previously held in escrow, which were used
to partially fund the acquisition of all of the outstanding common shares of Shoppers Drug Mart.
Note 7. Income Taxes
Income taxes recognized in the consolidated statement 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
Effect of change in income tax rates
Adjustment in respect of prior periods
Income taxes
Income tax expense (recovery) recognized in Other Comprehensive Income was as follows:
(millions of Canadian dollars)
Defined benefit plan actuarial gains and losses
Total income tax expense (recovery) recognized in Other Comprehensive Income
78 2015 Annual Report - Financial Review
$
$
2015
340
3
343
(43)
38
(4)
(9)
334
$
2015
52
52
$
$
2014
297
(18)
279
(273)
—
19
(254)
25
2014
(16)
(16)
$
$
$
$
$
The effective income tax rate in the consolidated statement 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 and non-taxable 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
2015
26.4%
0.7
1.6
2.3
4.0
(0.1)
34.9%
2014
26.1%
(3.2)
2.2
5.8
—
1.2
32.1%
In 2015, the government of Alberta announced an increase to the provincial corporate income tax rate from 10% to 12%. As a result, the
Company recorded a charge of $38 million related to the remeasurement of deferred tax liabilities.
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
$
$
2015
36
80
116
$
$
2014
19
57
76
The income tax losses expire in the years 2027 to 2035. The deductible temporary differences do not expire under current income tax
legislation. Deferred income tax assets were not recognized in respect of these items because it is not probable that future taxable income
will be available to the Company to utilize the benefits.
Recognized deferred tax assets 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
Recorded on the consolidated balance sheet as follows:
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax liabilities
(i) Certain 2014 figures have been amended (see note 5).
As at
January 2, 2016
79
$
As at
January 3, 2015(i)
83
$
302
(487)
(1,742)
63
33
23
27
347
(517)
(1,816)
10
161
20
52
$
$
(1,702)
$
(1,660)
132
(1,834)
(1,702)
$
193
(1,853)
(1,660)
2015 Annual Report - Financial Review 79
Notes to the Consolidated Financial Statements
Note 8. Basic and Diluted Net Earnings per Common Share
(millions of Canadian dollars except where otherwise indicated)
Net earnings attributable to shareholders of the Company
Dividends on Preferred Shares in Equity
Net earnings available to common shareholders
Weighted average common shares outstanding (in millions) (note 24)
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 ($)
Diluted net earnings per common share ($)
$
$
$
$
2015
632
(7)
625
411.5
3.7
—
415.2
1.52
1.51
$
$
$
$
2014
53
—
53
380.5
3.4
0.5
384.4
0.14
0.14
Excluded from the computation of diluted net earnings per common share were 10,828,275 (2014 – 10,620,095) potentially dilutive
instruments, as they were anti-dilutive.
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:
Government treasury bills
Bank term deposits
Bankers’ acceptances
Corporate commercial paper
Government agencies securities
Total cash and cash equivalents
Short Term Investments
(millions of Canadian dollars)
Government treasury bills
Bankers’ acceptances
Corporate commercial paper
Other
Total short term investments
80 2015 Annual Report - Financial Review
As at
January 2, 2016
352
$
As at
January 3, 2015
464
$
208
129
213
96
20
1,018
$
463
—
57
15
—
999
As at
January 2, 2016
60
2
—
2
64
As at
January 3, 2015
17
2
1
1
21
$
$
$
$
$
Security Deposits
(millions of Canadian dollars)
Cash
Total security deposits
As at
January 2, 2016
2
2
$
$
As at
January 3, 2015
7
7
$
$
As at January 2, 2016, the Company had agreements to cash collateralize certain of its uncommitted credit facilities up to an amount of
$149 million (January 3, 2015 – $141 million), of which $2 million (January 3, 2015 – $7 million) was deposited with major financial
institutions and classified as security deposits.
Note 10. Accounts Receivable
The following is an aging of the Company’s accounts receivable:
(millions of Canadian dollars)
Accounts receivable
As at
January 2, 2016
As at
January 3, 2015
0-90
days
$ 1,204 $
91-180
days
> 180
days
58 $
63 $
Total
1,325
0-90
days
$ 1,104 $
91-180
days
> 180
days
38 $
67 $
Total
1,209
The following are continuities of the Company’s allowances for uncollectable accounts receivable:
(millions of Canadian dollars)
Allowances, beginning of year
Net (additions) reversals
Allowances, end of year
Credit risk associated with accounts receivable is 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
$
$
$
$
$
2015
(96)
(6)
(102)
As at
January 2, 2016
2,844
(54)
2,790
650
550
$
$
$
$
$
2014
(118)
22
(96)
As at
January 3, 2015
2,684
(54)
2,630
750
605
The Company, through PC Bank, participates in various securitization programs that provide a source of funds for the operation of its credit
card business. PC Bank maintains and monitors the co-ownership interest in credit card receivables with independent securitization trusts,
including Eagle and Other Independent Securitization Trusts, in accordance with its 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).
During 2015, PC Bank decreased its co-ownership interest in securitized receivables held with Eagle by $100 million. In addition, PC Bank
2015 Annual Report - Financial Review 81
Notes to the Consolidated Financial Statements
recorded a $55 million net reduction of co-ownership interest in the securitized receivables held with the Other Independent Securitization
Trusts. Subsequent to the end of 2015, PC Bank reduced $100 million of co-ownership interest in the securitized receivables held with the
Other Independent Securitization Trusts.
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. PC Bank was in compliance with this requirement as at January 2, 2016 and throughout
2015.
The following is an aging of the Company’s gross credit card receivables:
(millions of Canadian dollars)
Gross credit card receivables
As at
January 2, 2016
As at
January 3, 2015
Current
2,652
$
1-90 days
past due
162
$
> 90 days
past due
30
$
Total
2,844
Current
2,505
$
$
1-90 days
past due
150
$
> 90 days
past due
29
$
Total
2,684
$
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
$
$
2015
(54)
(118)
(16)
134
(54)
$
$
2014
(47)
(121)
(19)
133
(54)
The allowances for credit card receivables recorded in credit card receivables on the consolidated balance sheet are 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 2, 2016, the Company recorded $85 million (January 3, 2015 – $23 million) as an expense for the
write-down of inventories below cost to net realizable value, of which $46 million related to the anticipated sale of certain assets of the
Shoppers ancillary healthcare businesses (see note 35). The write-down was included in cost of merchandise inventories sold. There were
no reversals of previously recorded write-downs of inventories during 2015 and 2014.
In connection with the acquisition of Shoppers Drug Mart in the second quarter of 2014, 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
subsequently recognized in cost of merchandise inventories sold throughout 2014, with a resulting negative impact to operating income.
In 2014, 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 certain assets, primarily land and buildings that it intends to dispose of in the next 12 months, as assets held for sale.
These assets were previously used in the Company’s retail business segment. In 2015, the Company recorded a $1 million gain (2014 –
$4 million) from the sale of these assets, excluding the impact of completed divestitures related to the acquisition of Shoppers Drug Mart
(see note 5). There were no impairment or other charges recognized on these properties during 2015 (2014 – nil).
In 2015, the Company commenced actively marketing the sale of certain assets of its Shoppers ancillary healthcare businesses. As at
January 2, 2016, assets totaling $17 million, including inventory of $16 million and fixed assets of $1 million, were classified as assets held
for sale.
82 2015 Annual Report - Financial Review
As at January 3, 2015, assets of $8 million, including intangible assets of $3 million, inventories of $3 million and fixed assets of $2 million,
relating to the three Shoppers Drug Mart stores sold in the first quarter of 2015, were included in assets held for sale.
Note 14. Fixed Assets
The following are continuities of the cost and the accumulated depreciation and impairment losses of fixed assets for the years ended
January 2, 2016 and January 3, 2015:
(millions of Canadian dollars)
Land
Buildings
Cost
2015
Equipment
and
Fixtures
Leasehold
Improvements
Finance
Leases - Land,
Buildings,
Equipment
and Fixtures
Assets
Under
Construction
Balance, beginning of year
$ 1,800
$
7,368
$
5,949
$
1,765
$
Additions
Business acquisitions
Disposals
Net transfer to assets held for
sale
Transfers from intangible assets
Net transfer to investment
properties
Transfer from assets under
construction
Balance, end of year
Accumulated depreciation and
impairment losses
Balance, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Net transfer to investment
properties
Balance, end of year
Carrying amount as at:
January 2, 2016
2
8
—
—
—
(10)
66
—
9
(1)
—
—
(29)
350
151
52
(89)
(2)
1
—
235
114
—
(53)
—
—
—
26
Total
$ 18,236
1,096
69
(190)
(2)
1
(39)
—
$
817
103
—
(37)
—
—
—
—
537
726
—
(10)
—
—
—
(677)
$ 1,866
$
7,697
$
6,297
$
1,852
$
883
$
576
$ 19,171
$
$
3
—
—
—
—
—
3
$ 1,863
$
2,605
$
4,407
$
200
19
(14)
(2)
432
42
—
(87)
(7)
2,801
4,896
$
$
$
$
—
4,794
1,503
$
$
620
159
13
(1)
(46)
—
745
1,107
$
295
$
57
—
—
(14)
—
338
545
$
$
$
$
10
—
—
—
—
—
10
$
7,940
848
74
(15)
(149)
(7)
$
8,691
566
$ 10,480
2015 Annual Report - Financial Review 83
Notes to the Consolidated Financial Statements
(millions of Canadian dollars)
Land
Buildings
Equipment
and Fixtures
Leasehold
Improvements
Finance
Leases - Land,
Buildings,
Equipment
and Fixtures
Assets Under
Construction
Total
2014(i)
Cost
Balance, beginning of year
$ 1,678
$
6,849
$
5,309
$
Additions
Business acquisitions
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
7
88
(11)
(5)
5
38
13
268
(13)
(16)
12
255
101
374
(105)
(11)
—
281
$
846
82
830
(11)
(14)
—
32
$
567
102
162
(14)
—
—
—
521
636
72
(13)
—
(73)
(606)
$ 15,770
941
1,794
(167)
(46)
(56)
—
$ 1,800
$
7,368
$
5,949
$
1,765
$
817
$
537
$ 18,236
$
$
2
—
1
(1)
—
—
1
3
$ 1,797
$
2,429
$
4,063
$
201
11
(31)
(9)
(4)
8
$
$
2,605
4,763
$
$
426
12
(1)
(83)
(10)
—
4,407
1,542
$
$
493
132
13
(2)
(9)
(7)
—
620
1,145
$
261
$
47
1
—
(14)
—
—
295
522
$
$
$
$
7
1
2
—
—
—
—
10
$
7,255
807
40
(35)
(115)
(21)
9
$
7,940
527
$ 10,296
(i)
Certain comparative figures have been restated. See note 2.
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 2, 2016, the net carrying amount of leased land and buildings was $479 million (January 3,
2015 – $466 million), and the net carrying amount of leased equipment and fixtures was $66 million (January 3, 2015 – $56 million).
Assets under Construction The cost of additions to properties under construction for the year ended January 2, 2016 was $726 million
(January 3, 2015 – $636 million). Included in this amount are capitalized borrowing costs of $4 million (2014 – $3 million), with a weighted
average capitalization rate of 5.7% (2014 – 6.2%).
Security and Assets Pledged As at January 2, 2016, fixed assets with a carrying amount of $231 million (January 3, 2015 – $191 million)
were encumbered by mortgages of $82 million (January 3, 2015 – $86 million).
Fixed Asset Commitments As at January 2, 2016, the Company had entered into commitments of $54 million (January 3, 2015 –
$192 million) for the construction, expansion and renovation of buildings and the purchase of real property.
Impairment Losses For the year ended January 2, 2016, the Company recorded $18 million (2014 – $26 million) of impairment losses on
fixed assets in respect of eight CGUs (2014 – 13 CGUs) in the retail operating segment. The recoverable amount was based on the
greater of the CGU’s fair value less costs to sell and its value in use. Approximately 75% (2014 – 23%) of impaired CGUs had carrying
values which were $14 million (2014 – $7 million) greater than their fair value less costs to sell. The remaining 25% (2014 – 77%) of
impaired CGUs had carrying values which were $4 million (2014 – $19 million) greater than their value in use.
84 2015 Annual Report - Financial Review
For the year ended January 2, 2016, the Company recorded $15 million (2014 – $35 million) of impairment reversals on fixed assets in
respect of six CGUs (2014 – 14 CGUs) in the retail operating segment. Impairment reversals are recorded where the recoverable amount
of the retail location exceeds its carrying amount. Approximately 50% (2014 – 93%) of CGUs with impairment reversals had fair value less
costs to sell which were $7 million (2014 – $33 million) greater than their carrying values. The remaining 50% (2014 – 7%) of CGUs with
impairment reversals had value in use which were $8 million (2014 – $2 million) greater than carrying values.
When determining the value in use of a retail location, the Company develops a discounted cash flow model for each CGU. The duration of
the cash flow projections for individual CGUs varies based on the remaining useful life of the significant 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 are 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 2, 2016 (January 3, 2015 – 8.0% to 8.5%).
In 2015, the Company recorded impairment losses on its fixed assets of $23 million relating to the announced closures of approximately 52
unprofitable retail locations across a range of banners and formats, and $24 million relating to the anticipated sale of certain assets of the
Shoppers ancillary healthcare businesses (see note 35).
Additional impairment losses of $9 million (2014 – $14 million) were incurred related to store closures, renovations and conversions of
retail locations. Impairment losses are recorded where the carrying amount of the retail location exceeds its recoverable amount.
Note 15. Investment Properties
The following are continuities of the cost and the accumulated depreciation and impairment losses of investment properties for the years
ended January 2, 2016 and January 3, 2015:
(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 from (to) fixed assets
Net transfer to assets held for sale
Balance, end of year
Carrying amount
Fair value
$
$
$
$
$
2015
255
$
—
—
(5)
39
(53)
236
70
3
12
(1)
(3)
7
(12)
76
160
194
$
$
$
$
2014
172
16
16
(4)
56
(1)
255
73
2
11
—
(2)
(9)
(5)
70
185
225
(i) Relates to the acquisition of Shoppers Drug Mart (see note 5).
During 2015, the Company recognized in operating income $7 million of rental income (2014 – $7 million) and incurred direct operating
costs of $2 million (2014 – $3 million) related to its investment properties. In addition, the Company recognized direct operating costs of
$3 million (2014 – $2 million) related to its investment properties for which no rental income was earned.
2015 Annual Report - Financial Review 85
Notes to the Consolidated Financial Statements
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.
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 2, 2016, the pre-tax discount rates used in the valuations for investment properties ranged from
7.75% to 9.50% (January 3, 2015 – 6.00% to 9.75%) and the terminal capitalization rates ranged from 6.75% to 8.75% (January 3, 2015 –
5.50% to 8.50%).
For the year ended January 2, 2016, the Company recorded $12 million (2014 – $11 million) of impairment losses in operating income on
investment properties, including $9 million relating to the announced closures of approximately 52 unprofitable retail locations, as the
carrying amounts of all impaired properties were lower than their recoverable amounts (see note 35). The Company recorded $1 million of
reversals of impairment losses on investment properties (2014 – nil) 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 the accumulated amortization and impairment losses of intangible assets for the years ended
January 2, 2016 and January 3, 2015:
2015
Definite Life
Internally
Generated
Intangible
Assets
Indefinite Life
Intangible
Assets
Definite Life
Other
Intangible
Assets
Software
Total
(millions of Canadian dollars)
Cost
Balance, beginning of year
$
3,461
$
$
1,639
$
5,868
$
10,988
—
—
—
—
—
3,461
$
— $
—
—
—
—
— $
20
—
—
—
—
—
20
19
1
—
—
—
20
$
$
$
1,070
3,461
$
— $
782
216
—
(2)
(1)
—
17
14
(3)
—
(1)
233
14
(5)
(1)
(1)
1,852
$
5,895
$
11,228
852
220
(2)
—
—
$
$
$
442
531
(1)
3
(1)
974
4,921
$
$
$
1,313
752
(3)
3
(1)
2,064
9,164
Additions
Business acquisitions
Disposal
Transfer to property, plant and equipment
Write off of cost for fully amortized assets
Balance, end of year
Accumulated amortization and impairment
losses
Balance, beginning of year
Amortization
Disposal
Impairment losses
Write off of amortization for fully amortized assets
Balance, end of year
Carrying amount as at:
January 2, 2016
$
$
$
$
86 2015 Annual Report - Financial Review
(millions of Canadian dollars)
Cost
Balance, beginning of year
Business acquisitions(ii)
Additions
Disposal
Transfer to assets held for sale
Write off of cost for fully amortized assets
Balance, end of year
Accumulated amortization and impairment
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
Indefinite Life
Intangible
Assets
Definite Life
Internally
Generated
Intangible
Assets
2014(i)
Definite Life
Other
Intangible
Assets
Software
$
$
$
$
$
71
$
3,390
—
—
—
—
3,461
$
— $
—
—
—
— $
3,461
$
20
—
3
(3)
—
—
20
19
—
—
—
19
1
$
1,190
$
71
$
230
222
(3)
—
—
1,639
600
255
—
(3)
852
787
$
$
$
$
5,824
5
(2)
(29)
(1)
5,868
32
414
(3)
(1)
442
5,426
$
$
$
$
$
$
$
$
Total
1,352
9,444
230
(8)
(29)
(1)
10,988
651
669
(3)
(4)
1,313
9,675
(i)
(ii)
Certain comparative figures have been restated. See note 2.
Includes $9,440 million related to the acquisition of Shoppers Drug Mart (see note 5).
Indefinite Life Intangible Assets 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).
Software Software is comprised of software purchases and development costs. Included in these amounts are capitalized borrowing costs
of $1 million (2014 – $1 million).
Definite Life Other Intangible Assets Definite life intangible assets are primarily comprised of Shoppers Drug Mart prescription files and
the carrying value of the Shoppers Optimum loyalty program (see note 5).
2015 Annual Report - Financial Review 87
Notes to the Consolidated Financial Statements
Note 17. Goodwill
The following is a continuity of the cost and the accumulated amortization and impairment losses of goodwill for the years ended
January 2, 2016 and January 3, 2015:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Business acquisitions(ii)
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:
2015
4,307
44
4,351
989
989
3,362
$
$
$
$
$
2014(i)
1,932
2,375
4,307
989
989
3,318
$
$
$
$
$
(i) Certain comparative figures have been restated. See note 5.
(ii) Business acquisitions in 2015 included $21 million related to the acquisition of a grocery store. Business acquisitions in 2014 included $2,360 million related to the
acquisition of Shoppers Drug Mart (see note 5).
The carrying amount of goodwill attributed to each CGU grouping was as follows:
(millions of Canadian dollars)
Shoppers Drug Mart
Market
Discount
T&T Supermarket Inc.
All other
Carrying amount of goodwill
As at
January 2, 2016
2,390
As at
January 3, 2015
2,369
$
360
459
129
24
337
459
129
24
3,362
$
3,318
$
$
The Company completed its annual impairment tests for goodwill and concluded that there was no impairment as fair value less costs to
sell exceeded the carrying amount of each CGU grouping.
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 7.0% (January 3, 2015 – 6.0% to 6.5%) 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 2, 2016, the after-tax discount rates used in the recoverable amount
calculations ranged from 6.5% to 9.5% (January 3, 2015 – 8.5% to 9.5%). The pre-tax discount rates ranged from 8.7% to 12.9%
(January 3, 2015 – 11.4% to 13.0%).
The Company included a minimum of three years of cash flows in its discounted cash flow model. The cash flow forecasts were
extrapolated beyond the three year period using estimated long term growth rate of 2.0% (January 3, 2015 – 2.0%). The budgeted
EBITDA(1) growth is based on the Company’s three year strategic plan approved by the Board.
88 2015 Annual Report - Financial Review
Note 18. Other Assets
(millions of Canadian dollars)
Sundry investments and other receivables
Accrued benefit plan asset
Interests in joint ventures
Other
Other assets
As at
January 2, 2016
119
190
9
137
455
$
$
As at
January 3, 2015
141
90
6
44
281
$
$
Note 19. Customer Loyalty Awards Program Liability
The liability associated with the Company’s customer loyalty awards programs (“loyalty liability”) is included in trade payables and other
liabilities. The carrying amount of the loyalty liability is as follows:
(millions of Canadian dollars)
Loyalty liability
Note 20. Short Term Debt
As at
January 2, 2016
229
$
As at
January 3, 2015
229
$
The outstanding short term debt balance of $550 million (January 3, 2015 – $605 million) relates to credit card receivables securitized to
the Other Independent Securitization Trusts with recourse (see note 11). During 2015, PC Bank recorded a $55 million net reduction of co-
ownership interest in the securitized receivables held with the Other Independent Securitization Trusts.
The securitization agreements between PC Bank and the Other Independent Securitization Trusts are renewed and extended on an annual
basis. The existing agreements were renewed in 2015, with their respective maturity dates extended to 2017 and 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 2, 2016 were $175 million
(January 3, 2015 – $120 million).
Note 21. Provisions
Provisions consist primarily of amounts recorded in respect of restructuring (see note 35), self-insurance, commodity taxes, environmental
and decommissioning liabilities and onerous lease arrangements. The following is a continuity of provisions for the years ended January 2,
2016 and January 3, 2015:
(millions of Canadian dollars)
Provisions, beginning of year
Acquisition of Shoppers Drug Mart
Additions
Payments
Reversals
Provisions, end of year
$
$
2015
160
—
193
(84)
(11)
258
$
$
2014
122
19
81
(60)
(2)
160
2015 Annual Report - Financial Review 89
Notes to the Consolidated Financial Statements
(millions of Canadian dollars)
Recorded on the consolidated balance sheet as follows:
Current portion of provisions
Non-current portion of provisions
Total provisions
As at
January 2, 2016
As at
January 3, 2015
$
$
127
131
258
$
$
84
76
160
90 2015 Annual Report - Financial Review
Note 22. Long Term Debt
(millions of Canadian dollars)
Unsecured Term Loan Facility
1.13% + Bankers’ Acceptance, due 2019
1.45% + Bankers’ Acceptance, due 2019
Debentures and Medium Term Notes
Loblaw Companies Limited Notes
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
2.01%, due 2016
2.36%, due 2018
Choice Properties Senior Unsecured Debentures
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 E 2.30%, due 2020
Series F 4.06%, due 2025
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
Long Term Debt Secured by Mortgage
3.15% – 7.42%, due 2017 – 2029 (note 14)
Guaranteed Investment Certificates
1.10% – 3.78%, due 2016 – 2020
Independent Securitization Trust
3.58%, due 2015
2.91%, due 2018
2.23%, due 2020
Independent Funding Trusts
Finance Lease Obligations
Choice Properties Credit Facility
Transaction costs and other
Total long term debt
Less amount due within one year
Long Term Debt
$
$
$
As at
January 2, 2016
As at
January 3, 2015
$
—
1,229
250
48
300
800
350
800
100
200
175
151
(46)
200
200
200
200
200
300
200
150
55
225
275
400
200
250
200
250
200
300
200
200
300
200
300
82
809
—
400
250
529
629
—
(21)
11,011
998
10,013
$
$
300
800
350
800
100
200
175
151
(57)
200
200
200
200
200
300
200
150
55
225
275
400
200
250
200
—
—
300
200
200
300
200
300
86
634
350
400
—
498
600
122
(31)
11,462
420
11,042
2015 Annual Report - Financial Review 91
Notes to the Consolidated Financial Statements
Significant long term debt transactions are described below.
Unsecured Term Loan Facility In 2015, the Company obtained $250 million through an unsecured term loan facility bearing interest at a
rate equal to the Bankers’ Acceptance rate plus 1.13%, maturing March 30, 2019.
In connection with the financing of the acquisition of Shoppers Drug Mart, the Company obtained a $3,500 million unsecured term loan
facility (“Acquisition Term Loan”). As at January 2, 2016, the outstanding balance on the Acquisition Term Loan was $48 million (January 3,
2015 – $1,229 million). During 2015, the Company repaid $1,181 million of the Acquisition Term Loan. Since the acquisition, the Company
has repaid $3,452 million of the Acquisition Term Loan, including the use of net proceeds of $1,500 million from the sale of Choice
Properties Transferor Notes to third parties and proceeds from the $250 million unsecured term loan obtained in 2015, both of which had a
neutral impact on long term debt. Also included in the total amount repaid was $66 million of net proceeds from the store divestitures
required pursuant to the Consent Agreement with the Competition Bureau related to the acquisition of Shoppers Drug Mart.
The Company incurred $41 million in financing costs related to the unsecured term loan facility, which were capitalized. During 2015, the
amortization of the financing costs related to the Acquisition Term Loan was $16 million (2014 – $25 million). Of the amortized amount,
$15 million (2014 – $23 million) was accelerated due to early repayments on the facility.
The unsecured term loan facilities contain certain financial covenants (see note 25).
Debentures and Medium Term Notes The following table summarizes the debentures and Medium Term Notes (“MTNs”) issued by the
Company in 2015 and 2014:
(millions of Canadian dollars except where otherwise indicated)
Interest Rate
Maturity Date
Principal
Amount 2015
Principal
Amount 2014
Choice Properties Series senior unsecured debentures(i)
– Series E
– Series F
– Series C
– Series D
Shoppers Drug Mart MTNs(ii)
Shoppers Drug Mart MTNs(ii)
Total Medium Term Notes issued
2.30%
4.06%
3.50%
4.29%
2.01%
2.36%
September 14, 2020
$
November 24, 2025
February 8, 2021
February 8, 2024
May 24, 2016
May 24, 2018
$
250
200
—
—
—
—
$
450
$
—
—
250
200
225
275
950
(i) Offerings were made under the Choice Properties’ Short Form Base Shelf Prospectus.
(ii) The Company assumed these MTNs in connection with the acquisition of Shoppers Drug Mart.
The following table summarizes the MTNs repaid by the Company in 2015 and 2014:
(millions of Canadian dollars except where otherwise indicated)
Loblaw MTNs
Loblaw MTNs
Total Medium Term Notes repaid
Interest Rate
6.00%
4.85%
Maturity Date
March 3, 2014
May 8, 2014
Principal
Amount 2015
$
Principal
Amount 2014
100
350
— $
—
$
— $
450
Subsequent to the end of 2015, Choice Properties issued an early redemption notice for its $300 million Series 5 3.00% senior unsecured
debentures at par effective March 7, 2016.
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 in 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 and existing cash to partially repay the Acquisition Term Loan as discussed above.
92 2015 Annual Report - Financial Review
Guaranteed Investment Certificates The following table summarizes PC Bank’s Guaranteed Investment Certificates (“GICs”) activity,
before commissions, for the years ended 2015 and 2014:
(millions of Canadian dollars)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
$
$
2015
634
211
(36)
809
$
$
2014
430
261
(57)
634
Independent Securitization Trust In 2015, the five-year $350 million 3.58% senior and subordinated term notes issued by Eagle matured
and were repaid. In addition, Eagle issued $250 million senior and subordinated term notes with a weighted average interest rate of 2.23%,
maturing on September 17, 2020. The notes issued by Eagle are MTNs, which are collateralized by PC Bank’s credit card receivables (see
note 11). The Company has arranged letters of credit for the benefit of the Eagle notes issued prior to 2015 and outstanding as at
January 2, 2016 (see note 33).
Independent Funding Trusts As at January 2, 2016, the independent funding trusts had drawn $529 million (January 3, 2015 –
$498 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).
Committed Credit Facilities The components of the committed lines of credit as of January 2, 2016 and January 3, 2015 were as follows:
(millions of Canadian dollars)
Loblaw’s Committed Credit Facility(i)
Choice Properties Committed Credit Facility(ii)
Total Committed Lines of Credit
As at January 2, 2016
As at January 3, 2015
Available
1,000
500
1,500
$
$
Drawn
— $
—
— $
Available
1,000
500
1,500
$
$
Drawn
—
122
122
(i)
(ii)
In 2015, the Company amended its Credit Facility agreement to extend the maturity date to March 31, 2020, with all other terms and conditions remaining substantially
the same.
In 2015, Choice Properties amended its credit facility agreement to extend the maturity date to July 5, 2020, with all other terms and conditions remaining substantially
the same.
These facilities contain certain financial covenants (see note 25).
In 2014, upon closing of the Shoppers Drug Mart acquisition, the outstanding balance of $478 million owing on Shoppers Drug Mart’s
revolving bank credit facility, was repaid and the facility was cancelled.
Long Term Debt due Within One Year The following table summarizes long term debt due within one year:
(millions of Canadian dollars)
Loblaw Companies Limited Notes
Choice Properties Notes
Shoppers Drug Mart Notes
Independent Securitization Trusts
Guaranteed Investment Certificates
Finance Lease Obligations
Long term debt secured by mortgage
Long term debt due within one year
As at
January 2, 2016
300
$
As at
January 3, 2015
—
$
300
225
—
112
56
5
$
998
$
—
—
350
29
38
3
420
2015 Annual Report - Financial Review 93
Notes to the Consolidated Financial Statements
Schedule of Repayments The schedule of repayments of long term debt, based on maturity is as follows:
(millions of Canadian dollars)
2016
2017
2018
2019
2020
Thereafter
As at
January 2, 2016
998
$
903
1,377
1,567
1,339
4,894
Total Long Term Debt (excludes transaction costs and effect of coupon repurchases)
$
11,078
See note 30 for the fair value of long term debt.
Note 23. Other Liabilities
(millions of Canadian dollars)
Net defined benefit plan obligation
Other long term employee benefit obligation
Deferred lease obligation
Fair value adjustment to acquired leases
Equity-based compensation liability (note 26)
Other
Other liabilities
Note 24. Share Capital
As at
January 2, 2016
312
$
116
101
90
5
130
754
$
As at
January 3, 2015
311
116
77
104
7
167
782
$
$
First Preferred Shares (authorized – 1.0 million shares) There were no First Preferred Shares outstanding as at January 2, 2016 and
January 3, 2015.
Second Preferred Share Capital (authorized – unlimited) In 2015, the Company redeemed all of the outstanding 9.0 million 5.95% non-
voting Second Preferred Shares, Series A, for a face value of $225 million and recorded a corresponding decrease to capital securities,
which were classified as other financial liabilities. The redemption was funded primarily through the proceeds received from the issuances
of the Second Preferred Shares, Series B.
In 2015, the Company issued 9.0 million 5.30% non-voting Second Preferred Shares, Series B, with a face value of $225 million. These
shares entitle the holder to receive fixed cumulative preferential cash dividends of approximately $1.325 per share per annum, as and
when declared by the Board, which will accrue from the date of issue and are payable quarterly on the last day of March, June, September
and December of each year.
As at January 2, 2016, the Second Preferred Shares, Series B in the amount of $221 million, net of $4 million of after-tax issuance costs,
are presented as a component of equity in the consolidated balance sheet.
94 2015 Annual Report - Financial Review
The Second Preferred Shares, Series B do not have a fixed maturity date and are not redeemable at the option of the holder. The following
table outlines the redemption price at which the Company may redeem the Second Preferred Shares, Series B for cash, in whole or in part,
and in each case together with all accrued and unpaid dividends to, but not including, the redemption date.
Redemption Period
On and After:
June 30, 2020
June 30, 2021
June 30, 2022
June 30, 2023
June 30, 2024
Prior to:
June 30, 2021
June 30, 2022
June 30, 2023
June 30, 2024
–
Redemption Price
$
26.00
25.75
25.50
25.25
25.00
Common Shares (authorized – unlimited) Common shares issued are fully paid and have no par value. The activity in the common
shares issued and outstanding during the periods was as follows:
(millions of Canadian dollars except where otherwise indicated)
Number of Common
Shares
Common Share
Capital
Number of Common
Shares
Common Share
Capital
January 2, 2016
(52 weeks)
January 3, 2015
(53 weeks)
Issued and outstanding, beginning of period
412,480,891 $
7,860
282,311,573 $
Issued for settlement of stock options
Issued for acquisition of Shoppers Drug Mart (note 5)
Issued to controlling shareholder (note 5)
Purchased and cancelled
Issued and outstanding, end of period
Shares held in trust, beginning of period
Purchased for future settlement of RSUs and PSUs
Released for settlement of RSUs and PSUs (note 26)
Shares held in trust, end of period
Issued and outstanding, net of shares held in trust, end of
period
1,841,174
—
—
(4,336,839)
409,985,226 $
(555,046) $
(971,894)
883,488
(643,452) $
84
—
—
(83)
7,861
(3)
(19)
12
(10)
3,536,489
119,471,382
10,515,247
(3,353,800)
412,480,891 $
(1,067,323) $
—
512,277
(555,046) $
1,648
156
5,619
500
(63)
7,860
(6)
—
3
(3)
409,341,774 $
7,851
411,925,845 $
7,857
Weighted average outstanding, net of shares held in trust
411,543,393
380,540,877
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. In the second quarter of 2015
and 2014, the Board raised the quarterly dividend by $0.005 to $0.25 and $0.245 per common share, respectively.
The following table summarizes the Company’s cash dividends declared for 2015 and 2014:
Dividends declared per share ($):
Common share
Second Preferred Share, Series A
Second Preferred Share, Series B
2015(i)
0.995
0.74
0.74
$
$
$
2014
0.975
1.49
—
$
$
$
(i) The fourth quarter dividends for 2015 of $0.25 per share declared on common shares were paid on December 30, 2015. The fourth quarter dividends for 2015 of $0.33
per share declared on Second Preferred Shares, Series B were paid on December 31, 2015.
2015 Annual Report - Financial Review 95
Notes to the Consolidated Financial Statements
For financial statement presentation purposes, Second Preferred Shares, Series A dividends for 2015 of $8 million (2014 – $14 million)
were recognized on an accrued basis and included as a component of net interest expense and other financing charges in the
consolidated statement of earnings (see note 6).
Subsequent to the end of the year, the Board declared a quarterly dividend of $0.25 per common share, payable on April 1, 2016 to
shareholders of record on March 15, 2016 and a dividend on the Second Preferred Shares, Series B of $0.33 per share payable on March
31, 2016 to shareholders of record on March 15, 2016.
Normal Course Issuer Bid Activity under the Company’s Normal Course Issuer Bid (“NCIB”) is summarized as follows:
(millions of Canadian dollars except where otherwise indicated)
Common shares repurchased under the NCIB for cancellation (number of shares)
Cash consideration paid
Premium charged to Retained Earnings
Reduction in Common Share Capital
Common shares repurchased under the NCIB and held in trust (number of shares)
Cash consideration paid
Premium charged to Retained Earnings
Reduction in Common Share Capital
$
$
2015
4,336,839
280
197
83
971,894
63
44
19
$
$
2014
3,353,800
178
115
63
—
—
—
—
In 2015, the Company renewed its NCIB to purchase on the TSX or through alternative trading systems up to 21,931,288 of the
Company’s common shares, representing approximately 10% of the public float. 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:
•
• 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
ensuring sufficient liquidity is available to support its financial obligations and to execute its operating and strategic plans;
conditions;
•
•
•
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;
returning an appropriate amount of capital to shareholders; and
targeting an appropriate leverage and capital structure for the Company and each of its reportable operating segments.
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.
96 2015 Annual Report - Financial Review
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
Capital securities
Certain other liabilities
Total debt
Equity attributable to shareholders of the Company
Total capital under management
$
As at
January 2, 2016
143
$
As at
January 3, 2015
162
$
550
998
10,013
—
30
11,734
13,151
24,885
$
605
420
11,042
225
28
12,482
12,779
25,261
Short Form Base Shelf Prospectus Filings On March 19, 2015, the Company filed a Short Form Base Shelf Prospectus (“Base
Prospectus”) for the potential issuance of up to $1,500 million of debentures and/or preferred shares. The Base Prospectus expires in 2017.
In 2015, the Company issued $225 million of preferred shares under this prospectus.
On October 14, 2015, Choice Properties filed a new base shelf prospectus allowing for the issuance, from time to time, of Units and debt
securities, or any combination thereof, having an aggregate offering price of up to $2 billion. The new prospectus is effective for a 25-month
period from the date of issuance.
In 2015, Eagle filed a short form base shelf prospectus for the potential issuance of up to $1,000 million of notes over a 25-month period.
Covenants and Regulatory Requirements The Company is subject to certain key financial and non-financial covenants under its existing
Credit Facility, unsecured term loan facilities, 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 2, 2016 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 2, 2016 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
4.5%, a Tier 1 capital ratio of 6.0% and a total capital ratio of 8%. In addition to the regulatory capital ratios requirement, PC Bank is subject
to the Basel III Leverage ratio effective January 1, 2015. As at the end of 2015 and throughout the year, PC Bank has met all applicable
regulatory requirements.
In 2014, OSFI 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. As at the end of 2015, PC Bank
was in compliance with the LCR standard.
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 $71 million during 2015 (2014 – $73 million). The expense was recognized in
operating income.
2015 Annual Report - Financial Review 97
Notes to the Consolidated Financial Statements
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 2, 2016
4
$
$
5
102
As at
January 3, 2015
3
7
104
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
$30.99 – $36.26
$36.27 – $47.03
$47.04 – $69.83
2015
2014
Options (number
of shares)
8,364,884
Weighted
Average Exercise
Price / Share
38.42
$
Options (number
of shares)
10,995,995
Weighted Average
Exercise Price /
Share
37.37
$
1,571,495
$
— $
(1,735,959) $
(789,015) $
— $
7,411,405
2,862,545
$
$
63.62
—
36.19
44.13
—
43.77
37.41
1,688,368
1,026,118
$
$
(3,536,489) $
(1,074,427) $
(734,681) $
8,364,884
3,195,241
$
$
47.67
35.26
36.47
40.75
45.49
38.42
35.95
2015 Outstanding Options
2015 Exercisable Options
Number of
Options
Outstanding
2,311,974
2,547,326
2,552,105
7,411,405
Weighted
Average
Remaining
Contractual
Life (years)
3
3
6
Weighted
Average
Exercise
Price/Share
34.56
39.19
56.69
43.77
$
$
$
$
Number of
Exercisable
Options
1,138,051
1,553,901
170,593
2,862,545
$
$
$
$
Weighted
Average
Exercise
Price/Share
34.20
38.62
47.78
37.41
During 2015, the Company issued common shares on the exercise of stock options with a weighted average market share price of $67.04
(2014 – $51.20). The Company received cash consideration of $63 million (2014 – $129 million) related to the exercise of these option.
The fair value of stock options granted during 2015 was $14 million (2014 – $13 million). The fair value of converted Shoppers Drug Mart
stock options to Loblaw stock options in 2014 was $13 million.The assumptions used to measure the fair value of options granted and
converted during 2015 and 2014 under the Black-Scholes valuation model at date of grant were as follows:
98 2015 Annual Report - Financial Review
Expected dividend yield
Expected share price volatility
Risk-free interest rate
Expected life of options
2015
1.5%
2014
1.8%
18.3% – 20.1%
18.5% – 23.2%
0.6% – 1.4%
1.1% – 1.9%
3.9 – 6.3 years
1.0 – 6.5 years
Estimated forfeiture rates are incorporated into the measurement of stock option plan expense. The forfeiture rate applied as at January 2,
2016 was 10.0% (January 3, 2015 – 11.0%).
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
Reinvested
RSUs, end of year
2015
1,462,790
313,964
—
(802,957)
(92,213)
6,208
887,792
2014
1,084,514
435,976
542,175
(494,912)
(104,963)
—
1,462,790
The fair value of RSUs granted during 2015 was $19 million (2014 – $20 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
vested on December 1, 2015 and earned Loblaw dividends during the vesting period, which were 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.
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
2015
1,019,304
306,027
(80,881)
(144,094)
1,100,356
2014
309,110
871,355
(17,365)
(143,796)
1,019,304
The fair value of PSUs granted during 2015 was $19 million (2014 – $39 million).
Settlement of Awards from Shares Held in Trust During 2015, the Company settled RSUs and PSUs totaling 883,838 (2014 – 512,277),
of which 883,488 (2014 – 512,277) were settled through the trusts established for settlement of each of the RSU and PSU plans (see note
24). The settlements resulted in a $12 million (2014 – $3 million) increase to share capital and a $37 million (2014 – $18 million) increase
to retained earnings.
2015 Annual Report - Financial Review 99
Notes to the Consolidated Financial Statements
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
Settled
DSUs outstanding, end of year
2015
263,824
28,598
3,731
(112,431)
183,722
2014
226,601
31,322
5,901
—
263,824
The fair value of DSUs granted during 2015 was $2 million (2014 – $2 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 2, 2016, the number of
converted DSUs outstanding was 62,547 (January 3, 2015 – 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
2015
22,915
5,087
381
(4,360)
24,023
2014
22,126
4,929
599
(4,739)
22,915
The fair value of EDSUs granted during 2015 was nominal (2014 – 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 19,744,697 Units, as approved at the annual and special meeting of Unitholders on April 29, 2015 (December 31,
2014 – 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
2015
Weighted average
exercise price/unit
Number of awards
2014
Weighted average
exercise price/unit
Outstanding Unit Options, beginning of year
Granted
Exercised
Forfeited
Outstanding Unit Options, end of year
Unit Options exercisable, end of year
1,682,510
2,127,532
$
$
(30,461) $
(279,925) $
3,499,656
533,796
$
$
10.48
11.49
10.54
11.00
11.05
10.36
1,196,866
1,247,247
$
$
(118,309) $
(643,294) $
1,682,510
157,167
$
$
10.04
10.80
10.05
10.35
10.48
10.05
100 2015 Annual Report - Financial Review
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
2015
5.5%
2014
6.2%
15.4% – 17.4%
14.2% – 18.9%
0.5% – 0.8%
1.0% – 1.4%
1.5 – 5.4 years
2.5 – 5.4 years
Estimated forfeiture rates are incorporated into the measurement of the Unit Option expense. The forfeiture rate applied as at January 2,
2016 was nil (January 3, 2015 – nil).
Restricted Unit Plan 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
Trust Unit at the balance sheet date.
The following is a summary of Choice Properties’ RU plan activity:
(Number of awards)
Outstanding RUs, beginning of year
Granted
Reinvested
Settled
Forfeited
Outstanding RUs, end of year
2015
184,154
90,813
14,140
(5,433)
(15,953)
267,721
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 2, 2016 (January 3, 2015 – nil).
Trustee Deferred Unit Plan 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 each DU
granted is measured based on the market value of a Unit at the balance sheet date. A summary of the DU plan activity is as follows:
(Number of awards)
Outstanding DUs, beginning of year
Granted
Reinvested
Outstanding DUs, end of year
2015
99,230
52,736
6,812
158,778
2014
31,936
64,150
3,144
99,230
All the DUs vest when issued, however, they cannot be settled while Trustees are members of the Board.
2015 Annual Report - Financial Review 101
Notes to the Consolidated Financial Statements
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 oversight of
management’s 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.
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 MEPPs, 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 2016 to its defined benefit and defined contribution plans and the MEPPs 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:
2015
2014
Defined
Benefit
Pension
Plans
(1,990)
(134)
(2,124)
2,167
43
(4)
39
190
(151)
$
$
$
$
$
$
$
$
$
$
Other
Defined
Benefit
Plans
—
(161)
(161)
—
(161)
—
(161)
—
(161)
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)
$
$
$
$
$
(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 surpluses (obligations)
Assets not recognized due to asset ceiling
Total net defined benefit plan surplus (obligation)
Recorded on the consolidated balance sheet as follows:
Other Assets (note 18)
Other Liabilities (note 23)
102 2015 Annual Report - Financial Review
The following are the continuities of the fair value of plan assets and the present value of the defined benefit plan obligations:
(millions of Canadian dollars)
Changes in the fair value of plan assets
2015
Other
Defined
Benefit
Plans
Defined
Benefit
Pension
Plans
Defined
Benefit
Pension
Plans
Total
2014
Other
Defined
Benefit
Plans
Total
Fair value, beginning of year
$
2,136
$
— $
2,136
$
1,709
$
— $
1,709
Additions from the acquisition of Shoppers Drug Mart
Employer contributions(i)
Employee contributions
Benefits paid
Interest Income
Actuarial gains in other comprehensive income
Settlements(ii)
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 (gains) losses in other comprehensive
income (loss)
Settlements(ii)
Contractual termination benefits(iii)
Special termination benefits(iii)
Balance, end of year
—
(15)
3
(86)
84
117
(65)
(7)
—
—
—
—
—
—
—
—
—
(15)
3
(86)
84
117
(65)
(7)
161
55
3
(83)
86
210
—
(5)
—
—
—
—
—
—
—
—
161
55
3
(83)
86
210
—
(5)
$
2,167
$
— $
2,167
$
2,136
$
— $
2,136
$
2,158
$
197
$
2,355
$
1,668
$
167
$
1,835
—
61
87
(93)
3
(35)
(57)
—
—
—
7
8
(6)
—
(45)
—
—
—
—
68
95
(99)
3
(80)
(57)
—
—
173
51
86
(87)
3
261
—
1
2
6
7
8
(6)
—
15
—
—
—
179
58
94
(93)
3
276
—
1
2
$
2,124
$
161
$
2,285
$
2,158
$
197
$
2,355
(i) 2015 employer contributions are offset by a $50 million refund of employer contributions from the assets of one of the Company’s supplemental plans.
(ii) Settlements relate to annuity purchases and pension buy-outs completed in 2015.
(iii) Includes $3 million of contractual and special termination benefits in 2014 related to the reduction of head office and administrative positions.
In 2015, the Company completed several annuity purchases and pension buy-outs with respect to former employees. These activities are
designed to reduce the Company’s defined benefit pension plan obligations and decrease future risks and volatility associated with these
obligations. The Company paid $65 million from the impacted plans’ assets to settle $57 million of pension obligations and recorded
settlement charges of $8 million in SG&A. The settlement charges resulted from the discount rates used to value the annuity purchases
and pension buy-outs being lower than the discount rates used to value the Company’s defined benefit plan obligations.
For the fiscal year ended 2015, the actual return on plan assets was $201 million (2014 – $296 million).
The net defined benefit obligation can be allocated to the plans’ participants as follows:
• Active plan participants 47% (2014 – 46%)
• Deferred plan participants 10% (2014 – 11%)
• Retirees 43% (2014 – 43%)
2015 Annual Report - Financial Review 103
Notes to the Consolidated Financial Statements
During 2016, the Company expects to contribute approximately $29 million (2015 – contributed $35 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.
The net cost recognized in 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
Settlement charges(i)
Contractual and special termination benefits(ii)
Other
Net post-employment defined benefit cost
2015
Other
Defined
Benefit
Plans
7
8
—
—
—
15
$
$
$
$
Defined
Benefit
Pension
Plans
61
3
8
—
7
79
$
$
2014
Other
Defined
Benefit
Plans
7
$
Defined
Benefit
Pension
Plans
51
—
—
3
5
Total
68
$
11
8
—
7
94
$
59
$
Total
58
8
—
3
5
74
$
$
8
—
—
—
15
(i) Relates to annuity purchases and pension buy-outs completed in 2015.
(ii)
Includes $3 million of contractual and special termination benefits in 2014 related to the reduction in head office and administrative positions (see note 35)
The actuarial (gains) losses recognized in other comprehensive income (loss) net of taxes for defined benefit plans were as follows:
(millions of Canadian dollars)
Return on plan assets, excluding amounts included
in net interest expense and other financing
charges
Experience adjustments
Actuarial (gains) losses from change in demographic
assumptions
Actuarial (gains) losses from change in financial
assumptions
Change in liability arising from asset ceiling
Total net actuarial (gains) losses recognized in other
comprehensive income (loss) before income taxes
Income tax expenses (recoveries) on actuarial
(gains) losses (note 7)
Actuarial (gains) losses net of income tax
expense (recoveries)
2015
Other
Defined
Benefit
Plans
Defined
Benefit
Pension
Plans
$
(117) $
— $
(7)
(20)
(8)
2
(44)
(1)
—
—
Total
(117)
(51)
(21)
(8)
2
2014
Other
Defined
Benefit
Plans
Defined
Benefit
Pension
Plans
Total
$
(210) $
— $
(210)
11
23
227
(4)
(1)
3
13
—
10
26
240
(4)
$
(150) $
(45) $
(195)
$
47
$
15
$
62
40
12
52
(12)
(4)
(16)
$
(110) $
(33) $
(143)
$
35
$
11
$
46
104 2015 Annual Report - Financial Review
The cumulative actuarial (gains) losses 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 (gains) losses recognized in the year
before income taxes
Cumulative amount, end of year
$
$
2015
Other
Defined
Benefit
Plans
$
(16) $
Defined
Benefit
Pension
Plans
170
(150)
(45)
Total
154
(195)
20
$
(61) $
(41)
2014
Other
Defined
Benefit
Plans
$
(31) $
Defined
Benefit
Pension
Plans
123
47
15
170
$
(16) $
$
$
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
2015
2014
Canadian:
- 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
$
$
$
$
$
$
92
825
917
577
187
378
20
1,162
70
18
—
4%
$
$
$
$
$
38%
42%
27%
9%
17%
1%
54%
3%
1%
—%
303
511
814
665
239
314
19
1,237
54
16
15
2,167
100%
$
2,136
14%
24%
38%
31%
11%
15%
1%
58%
3%
1%
—%
100%
(i) Both government and corporate securities may be included within the same fixed income pooled fund.
As at January 2, 2016 and January 3, 2015, 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 as
prices or indirectly, either derived from prices or as per agreements for contractual returns.
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.
2015 Annual Report - Financial Review 105
Notes to the Consolidated Financial Statements
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):
Defined Benefit Plan Obligations
Discount rate
Rate of compensation increase
Mortality table(i)
Net Defined Benefit Plan Cost
Discount rate
Rate of compensation increase
Mortality table(i)
2015
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
2014
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
4.00%
4.00%
4.00%
4.00%
3.50%
CPM-RPP2014
Pub/Priv
Generational
n/a
CPM-RPP2014
Pub/Priv
Generational
3.50%
CPM-RPP2014
Pub/Priv
Generational
n/a
CPM-RPP2014
Pub/Priv
Generational
4.00%
4.00%
3.50%
CPM-RPP2014
Pub/Priv
Generational
n/a
CPM-RPP2014
Pub/Priv
Generational
4.75%
3.50%
4.50%
n/a
CPM-RPP2014
Priv Generational
CPM-RPP2014
Priv Generational
n/a – not applicable
(i) Public or private sector mortality table is used depending on the prominent demographics of each plan.
The weighted average duration of the defined benefit obligation as at January 2, 2016 is 16.9 years (January 3, 2015 – 15.8 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 2016 and thereafter.
Sensitivity of Key Actuarial Assumptions The following table outlines the key assumptions for 2015 (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
2015
Defined Benefit Pension Plans
Other Defined Benefit Plans
Defined
Benefit
Plan
Obligations
4.00%
Net
Defined
Benefit
Plan Cost(i)
4.00%
Defined
Benefit
Plan
Obligations
4.00%
Net Defined
Benefit
Plan Cost(i)
4.00%
$
$
(331)
393
$
$
n/a
n/a
(29)
28
n/a
n/a
$
$
$
$
(20)
25
4.50%
18
(15)
$
$
$
$
—
1
4.50%
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.
106 2015 Annual Report - Financial Review
Multi-Employer Pension Plans
During 2015, the Company recognized an expense of $60 million (2014 – $55 million) in operating income, which represents the
contributions made in connection with MEPPs. During 2016, the Company expects to continue to make contributions into these MEPPs.
The Company, together with its franchises, is the largest participating employer in the Canadian Commercial Workers Industry Pension
Plan (“CCWIPP”), with approximately 52,000 (2014 – 52,000) employees as members. Included in the 2015 expense described above are
contributions of $59 million (2014 – $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(i)
Defined contribution costs(ii)
Multi-employer pension plan costs(iii)
Total net post-employment benefit costs
Other long term employee benefit costs(iv)
Net post-employment and other long term employee benefit costs
Recorded on the consolidated statement 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
$
$
$
$
$
Includes settlement charges of $8 million related to annuity purchases and pension buy-outs completed in 2015.
(i)
(ii) Amounts represent the Company’s contributions made in connection with defined contribution plans.
(iii) Amounts represent the Company's contributions made in connection with MEPPs.
(iv) Other long term employee benefit costs include $2 million (2014 – $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
$
$
$
$
$
$
$
$
2015
94
21
60
175
27
202
189
13
202
2015
4,958
164
25
69
(37)
2014
74
20
55
149
28
177
165
12
177
2014
4,494
141
24
71
(30)
5,179
$
4,700
2015 Annual Report - Financial Review 107
Notes to the Consolidated Financial Statements
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 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 2, 2016
January 3, 2015
(millions of Canadian dollars)
Operating lease payments
Sub-lease income
Net operating lease payments
2016
682
(54)
628
$
$
2017
658
(45)
613
$
$
2018
617
(38)
579
$
$
2019
571
(28)
543
$
$
2020
Thereafter
504
(18)
486
$
$
2,606
(79)
2,527
$
$
$
$
Total
5,638
(262)
5,376
$
$
Total
5,868
(295)
5,573
During 2015, the Company recorded $686 million (2014 – $572 million) as an expense included in the statement of earnings in respect of
operating leases. In addition, contingent rent recognized as an expense in respect of operating leases totaled $1 million (2014 – $1 million)
and sub-lease income earned totaled $62 million (2014 – $58 million), which is recognized in operating income. Contingent rent recognized
as income in respect of sub-leased operating leases in 2015 was $6 million (2014 – $3 million).
Operating Leases – As Lessor Future minimum lease payments to be received by the Company relating to properties that are leased to
third parties are as follows:
(millions of Canadian dollars)
2016
2017
2018
2019
2020
Thereafter
Net operating lease income
$
127
$
105
$
90
$
69
$
55
$
163
$
Payments to be received by year
As at
As at
January 2, 2016
January 3, 2015
Total
609
$
Total
647
As at January 2, 2016, the Company leased certain owned land and buildings with a cost of $2,591 million (January 3, 2015 –
$2,578 million) and related accumulated depreciation of $698 million (January 3, 2015 – $718 million). For the year ended January 2,
2016, rental income was $141 million (2014 – $148 million) and contingent rent was $5 million (2014 – $3 million), both of which were
recognized in operating income.
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)
2016
2017
2018
2019
2020
Thereafter
Finance lease payments
Less future finance charges
Present value of minimum
lease payments
$
$
89
$
82
$
69
$
62
$
58
$
(33)
(31)
(28)
(26)
(25)
700
(288)
56
$
51
$
41
$
36
$
33
$
412
As at
As at
January 2, 2016
January 3, 2015
Total
1,060
(431)
629
$
$
Total
1,091
(491)
600
$
$
During 2015, contingent rent recognized by the Company as an expense in respect of finance leases was $1 million (2014 – $1 million).
108 2015 Annual Report - Financial Review
Certain assets classified as finance leases have been sub-leased by the Company to third parties. The future sub-lease income relating to
the these sub-lease agreements are as follows:
(millions of Canadian dollars)
2016
2017
2018
2019
2020
Thereafter
Sub-lease income
$
15
$
13
$
12
$
12
$
11
$
35
$
Payments to be received by year
As at
As at
January 2, 2016
January 3, 2015
Total
98
$
Total
89
At January 2, 2016, the sub-lease income earned under finance leases was $15 million (January 3, 2015 – $16 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(i)
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(ii)
Certain other liabilities(i)
As at
January 2, 2016
Total
Level 3
Level 1
Level 2
As at
January 3, 2015
Total
Level 3
Level 1
Level 2
$
922
$
96
$
— $ 1,018
$
984
$
15
$
— $
999
62
2
—
25
—
6
821
2
—
—
2
37
—
—
—
—
329
59
—
7
—
64
2
329
86
37
13
821
19
7
—
—
—
—
722
2
—
—
8
10
11
—
—
—
399
64
—
4
—
21
7
399
72
10
15
722
— 12,003
— 12,003
— 12,508
— 12,508
—
—
—
—
—
20
—
20
234
—
—
—
—
28
234
28
(i) Certain other assets and Certain other liabilities are included in the consolidated balance sheet in Other Assets and Other Liabilities, respectively.
(ii)
In 2015, the Company redeemed its $225 million of Capital Securities, representing all of the outstanding Second Preferred Shares, Series A (see note 24). As at
January 3, 2015, capital securities were classified as current liabilities.
The carrying values of the Company’s financial instruments approximate their fair values except for long term debt and capital securities.
There were no transfers between levels of the fair value hierarchy.
During 2015, the Company recognized a gain of $18 million (2014 – gain of $11 million) in operating income on financial instruments
designated as fair value through profit or loss. In addition, during 2015, a net loss of $33 million (2014 – net loss of $18 million) was
recorded in earnings before income taxes related to financial instruments required to be classified as fair value through profit or loss.
Embedded Derivatives The level 3 financial instruments classified as fair value through profit or loss as at January 2, 2016 and
January 3, 2015 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
one of the inputs could result in a significantly higher (lower) fair value measurement.
2015 Annual Report - Financial Review 109
Notes to the Consolidated Financial Statements
The fair value of the embedded foreign currency derivatives classified as Level 3 included in trade payables and other liabilities as at
January 2, 2016 was $7 million (January 3, 2015 – $4 million). During 2015, a $3 million loss (2014 – nominal loss) was recorded in
operating income. As at January 2, 2016, a 1% increase (decrease) in foreign currency exchange rates would result in a $2 million gain
(loss) in fair value.
Other Derivatives The Company also maintains other financial derivatives including foreign exchange forwards, electricity forwards and
fuel exchange traded futures and options, which are classified as fair value through profit or loss. During 2015, the Company recognized a
fair value net gain of $51 million (2014 – net loss of $1 million) in operating income related to these derivatives.
The following table summarizes the cumulative unrealized impact of these other 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
2015
33
6
$
2014
10
11
Subsequent to the end of 2015, Choice Properties entered into certain bond forward agreements with a notional value of $300 million.
Trust Unit Liability As at January 2, 2016, the fair value of the Trust Unit Liability of $821 million (January 3, 2015 – $722 million) was
recorded on the consolidated balance sheet. During 2015 the Company recorded a fair value loss of $81 million (2014 – loss of $17
million) in net interest expense and other financing charges related to Choice Properties’ Units.
As at January 2, 2016, 69,453,817 Units were held by unitholders other than the Company (January 3, 2015 – 67,755,010) and the
Company held an 83.0% (January 3, 2015 – 82.9%) effective ownership interest in Choice Properties.
Franchise Loans Receivable and Franchise Investments in Other Assets The value of Loblaw franchise loans receivable of $329
million (January 3, 2015 – $399 million) was recorded on the consolidated balance sheet. In 2015, the Company recorded a $1 million
impairment loss (2014 – loss of $12 million) in operating income related to these loans receivable.
The value of Loblaw franchise investments of $54 million (January 3, 2015 – $62 million) was recorded in other assets. During 2015, the
Company recorded a net gain of $31 million (2014 – loss of $3 million) in operating income related to these investments.
Securities Investments In 2015, PC Bank purchased and designated certain long term investments as available-for-sale financial assets,
which are measured at fair value through other comprehensive income. As at January 2, 2016, the fair value of these investments of
$25 million was included in other assets. During 2015, PC Bank recorded a nominal fair value loss in other comprehensive income related
to these investments. These investments are considered part of the liquid securities required to be held by PC Bank to meet its LCR
standard, which was established under OSFI’s final Guideline on LARs, effective January 1, 2015.
The following is a description of the Company’s financial instruments that qualified for hedge accounting:
Foreign Exchange Forwards During 2015, PC Bank entered into USD foreign exchange forward agreements to hedge its exposure on
certain USD payables. These agreements, which mature by December 2016, qualify for hedge accounting as cash flow hedges of future
foreign currency transactions. Accordingly, during 2015, PC Bank recorded an unrealized fair value gain of $3 million in other
comprehensive income related to the effective portion of these agreements.
As at January 2, 2016, an unrealized fair value gain of $4 million (January 3, 2015 – nil) was included in prepaid expenses and other
assets related to these forwards.
Bond Forward During 2015, in connection with expected funding needs in the latter half of the year, PC Bank entered into bond forward
agreements with a notional value of $350 million to hedge its exposure to interest rate changes prior to obtaining financing and settled
these agreements within the year. These agreements qualified for hedge accounting as cash flow hedges of future interest payments.
Accordingly, upon maturity of these bond forward agreements, PC Bank deferred a loss of $2 million in accumulated other comprehensive
income to be recognized in income as future interest payments are made.
110 2015 Annual Report - Financial Review
Note 31. Financial Risk Management
As a result of holding and issuing financial instruments, the Company is exposed to liquidity, credit risk and market risk. The following is a
description of those risks and how the exposures are managed:
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 risk 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 2, 2016:
Derivative Financial Liabilities
Foreign exchange forward contracts
$
441
$
— $
— $
— $
— $
— $
441
2016
2017
2018
2019
2020
Thereafter
Total(i)
Non-Derivative Financial Liabilities
Bank Indebtedness
Short term debt(ii)
Long term debt including interest
payments(iii)
Other liabilities(iv)
143
550
1,440
14
—
—
1,311
5
—
—
1,772
3
—
—
1,911
2
—
—
1,637
3
—
—
143
550
7,607
15,678
3
30
$
2,588
$
1,316
$
1,775
$
1,913
$
1,640
$
7,610
$
16,842
(i)
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. Variable interest payments are
based on the forward rates as of January 2, 2016.
(iv) Contractual obligation related to certain other liabilities.
Credit The Company is exposed to credit risk resulting from the possibility that counterparties could default on their financial obligations to
the Company, including 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 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 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.
2015 Annual Report - Financial Review 111
Notes to the Consolidated Financial Statements
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 Rate Risk The Company is exposed to interest rate risk from fluctuations in interest rates on its floating rate debt and from the
refinancing of existing financial instruments. The Company manages interest rate risk by monitoring the respective mix of fixed and floating
rate debt and by taking action as necessary to maintain an appropriate balance considering current market conditions, with the objective of
maintaining the majority of its debt at fixed interest rates. The Company estimates that a 1% increase (decrease) in short term interest
rates, with all other variables held constant, would result in an increase (decrease) of $4 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. Rising commodity prices could adversely
affect the financial performance of the Company. 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. The Company estimates that based on the outstanding derivative
contracts held by the Company as at January 2, 2016, a 10% decrease in relevant energy prices, with all other variables held constant,
would result in a net loss of $1 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 sheet 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 a $69 million increase to net interest expense and other financing charges.
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.
On August 26, 2015, the Company was served with a proposed class action, which was commenced in the Ontario Superior Court of
Justice against the Company and certain subsidiaries, Weston and others in connection with the collapse of the Rana Plaza complex in
Dhaka, Bangladesh in 2013. The claim seeks approximately $2 billion in damages. The Company believes the class action is without merit
and intends to vigorously defend itself against any claims arising out of any such action.
Shoppers Drug Mart has been served with an Amended Statement of Claim in a class action proceeding that has been filed in 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 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. The Court imposed a class closing date based on the date of certification. New Associates after July 9, 2013 are not members of
the class. 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.
112 2015 Annual Report - Financial Review
During the second quarter of 2015, the Company was reassessed by the Canada Revenue Agency (“CRA”) and the Ontario Ministry of
Finance on the basis that certain income earned by Glenhuron Bank Limited (“Glenhuron”), a wholly owned Barbadian subsidiary, should
be treated, and taxed, as income in Canada. The reassessments were for the 2000 to 2010 taxation years totaling $341 million including
interest and penalties as at the time of reassessment. The Company believes it is likely that the CRA will issue reassessments for the 2011
to 2013 taxation years on the same or similar basis. The Company strongly disagrees with the CRA’s position and has filed a Notice of
Appeal. No amount for any reassessments has been provided for in the Company’s consolidated financial statements.
Indemnification Provisions The Company from time to time enters into agreements in the normal course of its business, such as service
and outsourcing arrangements, lease agreements in connection with business or asset acquisitions or dispositions, and other types of
commercial agreements. These agreements by their nature may provide for indemnification of counterparties. These indemnification
provisions may be in connection with breaches of representations and warranties or in respect of 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. In addition, the terms of these indemnification provisions vary in amount and certain indemnification
provisions do not provide for a maximum potential indemnification amount. Indemnity amounts are dependent on the outcome of future
contingent events, the nature and likelihood of which cannot be determined at this time. As a result, the Company is unable to reasonably
estimate its total maximum potential liability in respect of indemnification provisions. Historically, the Company has not made any significant
payments in connection with these indemnification provisions.
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 guarantees with a gross potential liability of approximately $448 million as at January 2, 2016 (January 3,
2015 – $293 million). In addition, the Company has provided to third parties the following significant guarantees:
Associate Guarantees The Company has arranged for its 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 2, 2016, the Company’s maximum obligation in respect of such guarantees was $570 million (January 3, 2015 – $570 million) with
an aggregate amount of $483 million (January 3, 2015 – $476 million) in available lines of credit allocated to the Associates by the various
banks. As at January 2, 2016, Associates had drawn an aggregate amount of $143 million (January 3, 2015 – $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 2, 2016 the Company has agreed to provide a credit enhancement of $53 million
(January 3, 2015 – $50 million) in the form of a standby letter of credit for the benefit of the independent funding trusts representing not
less than 10% (2014 – 10%) of the principal amount of loans outstanding. This credit enhancement allows the independent funding trusts
to provide financing to the Company’s franchisees. As well, each franchisee provides security to the independent funding trusts for its
obligations by way of a general security agreement. In the event that a franchisee defaults on its loan and the Company has not, within a
specified time period, assumed the loan, or the default is not otherwise remedied, the independent funding 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 $18 million (January 3, 2015 – $17 million). Additionally, the Company has guaranteed lease obligations of a
third party distributor in the amount of $7 million (January 3, 2015 – $13 million).
Glenhuron Bank Limited Surety Bond In 2015, in connection with the CRA’s reassessment of the Company on certain income earned by
Glenhuron (see note 32), the Company arranged for a surety bond of $132 million to the Ministry of Finance in order to dispute the
reassessments.
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 2, 2016, the guarantee on behalf of
PC Bank to MasterCard® was USD $190 million (January 3, 2015 – USD $170 million).
The Company had in place 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 $107 million (January 3, 2015 – $91 million).
2015 Annual Report - Financial Review 113
Notes to the Consolidated Financial Statements
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. The aggregate gross potential liability under these arrangements for the Other Independent
Securitization Trusts was $56 million (January 3, 2015 – $61 million), which represented approximately 10% (2014 – 10%) of the
securitized credit card receivables amount (see note 20). As at January 2, 2016, the aggregate gross potential liability under these
arrangements for Eagle was $36 million (January 3, 2015 – $68 million), which represented approximately 6% (2014 – 9%) of the Eagle
notes outstanding (see note 22).
Choice Properties Choice Properties issues letters of credit to support guarantees related to its investment properties including
maintenance and development obligations to municipal authorities. As at January 2, 2016, the aggregate gross potential liability related to
these letters of credit totaled $28 million (January 3, 2015 – $23 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 certain 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.
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 that he controls, including Wittington, which owns a total of 80,769,249 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
$
$
2015
642
25
27
23
14
3
2014
615
24
20
18
14
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 2, 2016 was $2 million (January 3, 2015 – $3 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, certain
accounting and control functions 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 2015, Choice Properties issued
1,317,405 Units (2014 – 1,306,847 Units) to Weston under its DRIP at a weighted average price of $10.86 (2014 – $10.30) per Unit.
114 2015 Annual Report - Financial Review
The net balances due to Weston are comprised as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
As at
January 2, 2016
As at
January 3, 2015
3
7
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
2, 2016, 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 18).
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 2015, these elections and
accompanying agreements did not have a material impact on the Company.
Key Management Personnel The Company’s key management personnel are comprised of the Board and certain members of the
executive team of the Company, as well as both the Board and certain members of the executive team of Weston and Wittington to the
extent that they have the authority and responsibility for planning, directing and controlling the day-to-day activities of the Company.
Compensation of Key Management Personnel Annual compensation of key management personnel that is directly attributable to the
Company was as follows:
(millions of Canadian dollars)
Salaries, director fees and other short term employee benefits
Equity-based compensation
Total compensation
$
$
2015
6
4
10
$
$
2014
9
3
12
Note 35. Restructuring and Other Related Costs
The following is a discussion of the Company’s significant restructuring activities in 2015 and 2014.
During 2015, the Company recorded $124 million of restructuring and other related costs in operating income associated with the
announced closures of approximately 52 unprofitable retail locations across a range of banners and formats. Of this amount, $92 million
related to severance and other store closure costs and $32 million related to impairment of assets. As at January 2, 2016, there were 33
retail location closures. The Company expects that the remaining closures will be completed by the end of the second quarter of 2016.
In 2015, the Company commenced actively marketing the sale of certain assets of its Shoppers ancillary healthcare businesses. As a
result, the Company recorded a charge of $112 million of restructuring and other related costs, in operating income. Of this amount,
$73 million related to the write-down of various assets with the remainder relating to other closure costs. Subsequent to the end of 2015,
the Company signed an agreement for the sale of certain of these assets.
During 2014, the Company recorded $46 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 2, 2016, $140 million (January 3, 2015 - $37 million) was included in Provisions relating to these restructuring initiatives (see
note 21).
2015 Annual Report - Financial Review 115
Notes to the Consolidated Financial Statements
Note 36. Segment Information
The Company has three reportable operating segments with all material operations carried out in Canada:
•
The Retail segment consists primarily of corporate and franchise-owned retail food and Associate-owned drug stores, and 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 that are 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(2) and adjusted operating
income(2), as reported to internal management, on a periodic basis.
Information for each reportable operating segment is included below:
(millions of Canadian dollars)
Revenue(ii)
EBITDA(iii)
Adjusting Items(iii)
2015
Retail
Financial
Services(4)
Choice
Properties(4)
Consolidation
and
Eliminations(i)
Total
Retail
Financial
Services(4)
Choice
Properties(4)
Consolidation
and
Eliminations(i)
2014
Total
$44,469 $
$ 2,996 $
356
849 $
173 $
—
743 $
602 $
—
(667) $45,394
$41,731 $
(578) $ 3,193
$ 1,950 $
—
356
1,090
810 $
171 $
—
683 $
568 $
3
(613) $ 42,611
(555) $ 2,134
—
1,093
Adjusted EBITDA(iii)
$ 3,352 $
173 $
602 $
(578) $ 3,549
$ 3,040 $
171 $
571 $
(555) $ 3,227
Depreciation and Amortization(iv)
1,031
10
1
14
1,056
1,036
7
—
12
1,055
Adjusted Operating Income(iii)
$ 2,321 $
163 $
601 $
(592) $ 2,493
$ 2,004 $
164 $
571 $
(567) $ 2,172
Net interest expense and other
financing charges
$
367 $
57 $
756 $
(536) $
644
$
386 $
53 $
369 $
(224) $
584
(i)
Consolidation and Eliminations includes the following items:
• Revenue includes the elimination of $502 million (2014 – $471 million) of rental revenue and $165 million (2014 – $142 million) of cost recovery recognized by
Choice Properties, generated from the Retail segment.
• Operating income includes the elimination of the $502 million (2014 – $471 million) impact of rental revenue described above; the elimination of a $72 million gain
(2014 – $82 million gain) 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 $14 million (2014 – $12 million) of depreciation expense for certain investment
properties recorded by Choice Properties; and the elimination of intercompany charges of $4 million (2014 – $2 million).
• Net interest expense and other financing charges includes the elimination of $251 million (2014 – $297 million) of interest expense included in Choice Properties
related to debt owing to the Company and a $411 million fair value loss (2014 – gain of $12 million) recognized by Choice Properties on Class B Limited
Partnership units held by the Company. Net interest and other financing charges also includes Unit distributions to external unitholders of $45 million (2014 – $44
million), which excludes distributions paid to the Company and a $81 million fair value loss (2014 – loss of $17 million) on the Company’s Trust Unit Liability.
Included in Financial Services revenue is $368 million (2014 – $356 million) of interest income.
(ii)
(iii) Certain items are excluded from EBITDA(2) to derive adjusted EBITDA(2). Adjusted EBITDA(2) is used internally by management when analyzing segment underlying
performance.
(iv) Depreciation and amortization for the calculation of adjusted EBITDA(2) excludes $536 million (2014 – $417 million) of amortization of intangible assets acquired with
Shoppers Drug Mart.
116 2015 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 2, 2016
As at
January 3, 2015
$
$
29,936
$
3,267
8,906
(8,170)
33,939
$
30,048
3,094
8,192
(7,575)
33,759
(i)
For segment presentation purposes, the balances are as at December 31, 2015 and December 31, 2014, consistent with the fiscal calendars of both Financial Services
and Choice Properties. Adjustments to January 2, 2016 and 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
Financial Services(i)
Choice Properties(i)
Consolidation and Eliminations(ii)
Total
January 2, 2016
(52 weeks)
January 3, 2015
(53 weeks)
$
$
1,041
$
14
410
(224)
1,241
$
941
18
280
(153)
1,086
(i)
For segment presentation purposes, the results are for the years ended December 31, 2015 and December 31, 2014, consistent with the fiscal calendars of both
Financial Services and Choice Properties. Adjustments to January 2, 2016 and January 3, 2015 are included in Consolidation and Eliminations.
(ii) Consolidations and Eliminations includes the elimination of investment properties acquired by Choice Properties from the Retail segment.
2015 Annual Report - Financial Review 117
Three Year Summary(1),(5)
For the years ended January 2, 2016 and January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Consolidated Results of Operations
Revenue
Revenue excluding 53rd week
Revenue growth
Revenue growth excluding 53rd week
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Net earnings available to common shareholders of the Company
excluding 53rd week
Adjusted net earnings available to common shareholders of the
Company(2)
Adjusted net earnings available to common shareholders of the
Company(2) excluding 53rd week
Retail debt to retail adjusted EBITDA(2)
Adjusted return on equity
Adjusted return on capital
Consolidated Financial Position and Cash Flows
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 ($)
Basic net earnings
Basic net earnings excluding 53rd week
Adjusted basic net earnings(2)
Adjusted basic net earnings(2) excluding 53rd week
Dividends
Dividends declared per common share ($)
Retail Results of Operations
Sales
Sales excluding 53rd week
Gross profit
Gross profit excluding 53rd week
Adjusted gross profit(2)
Adjusted gross profit(2) excluding 53rd week
Adjusted gross profit %(2)
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week
Adjusted EBITDA margin(2)
Depreciation and amortization
118 2015 Annual Report - Financial Review
2015
2014
2013
$
$
$
$
$
$
$
$
$
$
$
$
45,394
45,394
6.5%
8.5%
3,549
3,549
7.8%
644
548
623
632
625
625
1,422
1,422
2.0x
11.1%
8.5%
1,084
3,079
1,241
1,347
1.52
1.52
3.46
3.46
0.995
44,469
44,469
11,689
11,689
11,747
11,747
26.4%
3,352
3,352
7.5%
1,567
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
42,611
41,822
31.6%
29.2%
3,227
3,156
7.6%
584
529
53
53
53
1
1,217
1,165
2.6x
12.3%
10.4%
1,027
2,569
1,086
977
0.14
$
— $
$
$
3.20
3.06
0.975
41,731
40,942
9,734
9,534
10,722
10,522
25.7%
3,040
2,969
7.3%
1,453
$
$
$
$
32,371
32,371
2.4%
2.4%
2,106
2,106
6.5%
468
354
627
627
627
627
696
696
3.2x
10.4%
10.5%
4,251
1,491
877
244
2.23
2.23
2.48
2.48
0.940
31,600
31,600
6,961
6,961
6,961
6,961
22.0%
1,947
1,947
6.2%
809
Three Year Summary(1),(5)
For the years ended January 2, 2016 and January 3, 2015 and December 28, 2013
(millions of Canadian dollars except where otherwise indicated)
Retail Operating Statistics
Food retail same-store sales growth
Drug retail same-store sales growth
Drug retail same-store pharmacy sales growth
Drug retail same-store front store sales growth
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(4)
Revenue
Adjusted EBITDA(2)
Earnings before income taxes
Financial Services Operating Measures and Statistics(4)
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 and Measures(4)
Revenue
Adjusted EBITDA(2)
Net interest expense and other financing charges
Adjusted funds from operations(2)
2015
1.9%
4.3%
3.7%
4.7%
69.9
591
525
1,313
849
173
106
2,642
2,790
54
13.6%
4.3%
743
602
756
313
$
$
$
$
$
$
2014
2.0%
2.6%
2.7%
2.4%
70.0
615
527
1,302
810
171
111
2,535
2,630
54
13.7%
4.4%
683
571
369
285
$
$
$
2013
1.1%
—%
—%
—%
51.9
570
496
—
739
142
93
2,345
2,538
47
13.6%
4.2%
319
373
303
131
Financial Results and Financial Summary Endnotes
For financial definitions and ratios refer to the Glossary of Terms on page 120 of the Company’s 2015 Annual Report.
(1)
(2) See Section 17 “Non-GAAP Financial Measures” of the Company’s Management’s Discussion and Analysis.
(3) See the preface of the Company’s Management’s Discussion and Analysis for a definition of terms.
(4)
(5)
The results for the Financial Services and Choice Properties segments are for the periods ended December 31, 2015 and December 31, 2014, consistent with the
segments’ fiscal calendars. Adjustments to align Financial Services’ and Choice Properties’ results to January 2, 2016 and January 3, 2015 are included in
Consolidation and Eliminations. See Section 17 “Non-GAAP Financial Measures” of the Company’s Management’s Discussion and Analysis and Note 36 “Segment
Information”.
The Company’s comparative results were negatively impacted by the inclusion of an additional selling week, the 53rd week in 2014. The 53rd week resulted in the
following impacts to the Company’s 2014 fourth quarter and full year results: $789 million of higher retail sales, $71 million of higher EBITDA, and estimated impacts
on net earnings and basic net earnings per common share of $52 million and $0.13 per share, respectively. The impact of the 53rd week on net earnings available to
common shareholders of the Company is estimated based on operating income of the 53rd week and applying the effective tax rate for the fourth quarter of 2014.
The impact of the 53rd week on basic net earnings per common share is based on the estimated net earnings available to common shareholders of the Company
divided by the weighted average common shares outstanding for the fourth quarter and year-to-date of 2014, as applicable.
2015 Annual Report - Financial Review 119
Glossary of Terms
Term
Definition
Adjusted basic net earnings per common share
Adjusted EBITDA
Adjusted EBITDA margin
Adjusted income tax
Adjusted income tax rate
Adjusted net earnings attributable to shareholders of the
Company
Adjusted net earnings available to common shareholders divided by the weighted average number of common shares
outstanding during the period (see Section 17 “Non-GAAP Financial Measures” of the Company’s Management’s Discussion
and Analysis).
Adjusted operating income before depreciation and amortization (see Section 17 “Non-GAAP Financial Measures” of the
Company’s Management’s Discussion and Analysis).
Adjusted EBITDA divided by sales (see Section 17 “Non-GAAP Financial Measures” of the Company’s Management’s
Discussion and Analysis).
Income taxes adjusted for the tax impact of items included in adjusted operating income less adjusted net interest and other
financing charges (see Section 17 “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 17 “Non-GAAP Financial Measures” of the Company’s Management’s Discussion and Analysis).
Net earnings attributable to shareholders of the Company adjusted for items that are not necessarily reflective of the
Company’s underlying operating performance (see Section 17 “Non-GAAP Financial Measures” of the Company’s
Management’s Discussion and Analysis).
Adjusted net earnings available to common shareholders of
the Company
Adjusted net earnings attributable to shareholders of the Company less preferred dividends (see Section 17 “Non-GAAP
Financial Measures” of the Company’s Management’s Discussion and Analysis).
Adjusted net interest and other financing charges
Adjusted operating income
Adjusted return on average equity attributable to common
shareholders of the Company
Adjusted return on capital
Net interest expense and other financing charges adjusted for items that are not necessarily reflective of the Company’s
ongoing net financial performance (see Section 17 “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 17 “Non-GAAP Financial Measures” of the Company’s Management’s Discussion and Analysis).
Adjusted net earnings available to common shareholders of the Company divided by average total equity attributable to
common shareholders of the Company (see Section 17 “Non-GAAP Financial Measures” of the Company’s Management’s
Discussion and Analysis).
Tax-effected adjusted operating income divided by average capital (see Section 17 “Non-GAAP Financial Measures” of the
Company’s Management’s Discussion and Analysis).
Annualized credit loss rate on average quarterly gross credit
card receivables
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.
Annualized yield on average quarterly gross credit card
receivables
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.
Basic net earnings per common share
Capital under management
Capital Investments
Choice Properties adjusted funds from operations
Control brand
Conversion
Diluted net earnings per common share
EBITDA
Free Cash Flow
Major expansion/contraction
Minor expansion
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the
Company
New store
Operating income
Renovation
Retail debt to retail adjusted EBITDA
Retail segment adjusted gross profit
Retail segment adjusted gross profit percentage
Retail segment gross profit
Retail square footage
Same-store sales
Total equity attributable to common shareholders
Net earnings available to common shareholders divided by the weighted average number of common shares of the
Company outstanding during the period.
Total debt plus capital securities and equity attributable to shareholders of the Company.
Fixed asset purchases and intangible asset additions.
Choice Properties’ funds from operations adjusted for items that are not necessarily reflective of Choice Properties’
underlying operating performance (see Section 17 “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.
A store that changes from one Company banner to another Company banner.
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 17 “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 17
“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.
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.
Net earnings less non-controlling interests.
Net earnings attributable to shareholders of the Company less preferred dividends.
A newly constructed store, acquisition, conversion or major expansion.
Net earnings before net interest expense and other financing charges and income taxes.
A capital investment in a store resulting in no significant change to the store square footage.
Retail segment total debt (see Section 7.2 “Liquidity and Capital Structure” of the Company’s Management Discussion and
Analysis) divided by Retail segment adjusted EBITDA.
Retail segment gross profit, adjusted for items that are not necessarily reflective of the Company’s underlying operating
performance (see Section 17 “Non-GAAP Financial Measures” of the Company’s Management’s Discussion and Analysis).
Retail segment adjusted gross profit divided by Retail segment sales.
Retail segment sales less cost of merchandise inventories sold.
Retail square footage includes corporate, franchised stores and associate-owned drug stores.
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.
Total equity less preferred shares outstanding and non-controlling interests.
Total equity attributable to shareholders of the Company
Total equity less non-controlling interests.
Weighted average common shares outstanding
Year
The number of common shares outstanding determined by relating the portion of time within the period the common shares
were outstanding to the total time in that period.
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 2, 2016 and January 3, 2015 contained 52 weeks and 53 weeks,
120 2015 Annual Report - Financial Review
Corporate Profile
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
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.
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.B.”, respectively.
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 2015, there were 409,985,226 common shares issued and
outstanding.
The average daily trading volume of the Company’s common shares for
2015 was 526,372.
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 2015, there were 9,000,000 second preferred shares, Series
B 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 2015 was:
Series A: 15,171
Series B: 18,452
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, its subsidiaries or the licensor and where used in this report, are
in italics.
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.
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
Annual General Meeting
The 2016 Annual Meeting of Shareholders of Loblaw Companies Limited
will be held on Thursday, May 5, 2016 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 2016 are:
Preferred Shares, Series B Dividend Dates
The declaration and payment of quarterly dividends are made subject to
approval by the Board of Directors. The anticipated payment dates for
2016 are:
Record Date
March 15
June 15
September 15
December 15
Payment Date
April 1
July 1
October 1
December 30
Record Date
March 15
June 15
September 15
December 15
Payment Date
March 31
June 30
September 30
December 31
This report was printed in Canada on recycled paper.
Ce rapport est disponible en français.
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LOBLAW.CA SHOPPERSDRUGMART.CA PHARMAPRIX.CA PC.CA JOEFRESH.C OM PCFINANCIAL.C A CHOICEREIT.CA
Environmental Savings Summary
By using 3,050 kg. of paper manufactured with 30%
post-consumer recycled fi bre for the Annual Report
and 2,950 kg. of paper manufactured with 100%
post-consumer recycled waste fi bre for the Financial
Review, Loblaw Companies Limited reduced its
environmental footprint by:
19,660 kg.
49 million BTUs
Wood Use:
Total Energy:
Greenhouse Gases: 3,810 kg of CO2 equivalent
Wastewater Flow:
Solid Waste:
192,678 L
1,545 kg
Environmental impact savings estimates were made using the
Environmental Defense Paper Calculator, www.papercalculator.org.
Amounts calculated are approximate based on industry averages.
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LOBLAW.CA SHOPPERSDRUGMART.CA PHARMAPRIX.CA PC.CA JOEFRESH.C OM PCFINANCIAL.CA CHOICEREIT.CA