2016 Annual Report –
Financial Review
o u r p u r p o s e :
Live
Life
Well
2016 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
62
70
125
127
Financial Highlights(1)
As at or for the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Consolidated Results of Operations
Revenue
Revenue growth
Revenue growth excluding 53rd week in 2014
Operating Income
Adjusted EBITDA(2)
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
Adjusted net earnings available to common shareholders of the Company(2)
Retail debt to retail adjusted EBITDA(1)(2)
Adjusted return on equity(1)(2)
Adjusted return on capital(1)(2)
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 ($)
Diluted net earnings
Adjusted diluted net earnings(2)
Dividends
Dividends declared per common share ($)
2016
(52 weeks)
2015(6),(7)
(52 weeks)
46,385
2.2%
2.2%
2,092
3,852
8.3%
653
535
990
983
971
1,655
1.7x
12.9%
8.8%
1,559
3,519
1,224
1,821
2.37
4.05
1.03
$
$
$
$
$
$
$
45,394
6.5%
8.5%
1,601
3,549
7.8%
644
548
589
598
591
1,422
2.0x
11.1%
7.6%
1,084
3,079
1,241
1,347
1.42
3.42
0.995
$
$
$
$
$
$
$
2016 Annual Report - Financial Review 1
Financial Highlights(1)
As at or for the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
2016
(52 weeks)
2015
(52 weeks)
Retail Results of Operations
Sales
Operating Income
Adjusted gross profit(2)
Adjusted gross profit %(2)
Adjusted EBITDA(2)
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
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
Net interest expense and other financing charges
Net loss
Adjusted funds from operations(2)
$
$
$
$
$
$
$
$
$
$
$
$
45,384
1,902
12,262
27.0%
3,631
8.0%
1,512
1.1%
4.0%
2.9%
5.0%
70.2
565
533
1,326
911
124
2,769
2,926
52
13.5%
4.3%
784
900
(223)
330
44,469
1,429
11,747
26.4%
3,352
7.5%
1,567
1.9%
4.3%
3.7%
4.7%
69.9
591
525
1,313
849
106
2,642
2,790
54
13.6%
4.3%
743
756
(155)
313
2 2016 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
Components of Total Debt
Financial Condition
Credit Ratings
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 Changes to Accounting Estimates
15.3 Future Accounting Standards
16. Outlook
17. Non-GAAP Financial Measures
18. Additional Information
4
5
5
6
7
7
11
13
13
17
18
19
19
21
21
24
24
24
26
27
27
29
29
31
38
39
39
40
44
46
47
47
47
47
48
48
48
48
48
48
49
49
51
51
60
2016 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 70 to 124 of this Annual Report – Financial Review (“Annual Report”).
The Company’s annual audited consolidated financial statements and accompanying notes for the year ended December 31, 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.
Under GAAP, certain expenses and income must be recognized that are not necessarily reflective of the Company’s underlying operating
performance. Non-GAAP financial measures exclude the impact of certain adjusting items and are used internally when analyzing
consolidated and segment underlying operating performance. These non-GAAP financial measures are also helpful in assessing
underlying operating performance on a consistent basis. See Section 17, “Non-GAAP Financial Measures”, of this MD&A for more
information on the Company’s non-GAAP financial measures.
The information in this MD&A is current to February 22, 2017, unless otherwise noted. A glossary of terms used throughout this Annual
Report can be found on page 127.
Unless otherwise indicated, all comparisons of results for the fourth quarter of 2016 (12 weeks ended December 31, 2016) are against
results for the fourth quarter of 2015 (12 weeks ended January 2, 2016) and all comparisons of results for the full year of 2016 (52 weeks
ended December 31, 2016) are against the results for the full year 2015 (52 weeks ended January 2, 2016).
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”), anticipated insurance recoveries, future liquidity, planned capital investments, and the status and
impact of information technology (“IT”) systems implementation. These specific forward-looking statements are contained throughout this
Annual Report including, without limitation, 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 2017 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 2016 Annual Information Form (“AIF”) (for the year ended December 31, 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;
•
•
•
•
•
•
•
failure to effectively manage the Company’s loyalty programs;
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;
failure to effectively respond to consumer trends or heightened competition, whether from current competitors or new entrants to the
marketplace;
public health events including those related to food and drug safety;
changes to any of the laws, rules, regulations or policies applicable to the Company's business;
failure to merchandise effectively, to execute the Company's e-commerce initiative or to adapt its business model to the shifts in the
retail landscape caused by digital advances;
4 2016 Annual Report - Financial Review
•
•
•
•
•
•
failure to realize the anticipated benefits, including revenue growth, anticipated cost savings or operating efficiencies, associated with
the Company's investment in major initiatives that support its strategic priorities;
changes in economic conditions, including economic recession or changes in the rate of inflation or deflation, employment rates and
household debt, interest rates, currency exchange rates or derivative and commodity prices;
failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements;
adverse outcomes of legal and regulatory proceedings and related matters;
reliance on the performance and retention of third party service providers, including those associated with the Company’s supply
chain and apparel business, including issues with vendors in both advanced and developing markets; and
the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink.
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 (“securities
regulators”) from time to time, including, without limitation, the section entitled "Risks" in the Company's 2016 AIF (for the year
ended December 31, 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 has three operating segments: Retail, Financial Services and Choice Properties Real Estate Investment Trust
(“Choice Properties”). 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.The
Company’s Financial Services segment provides credit card services, loyalty programs, insurance brokerage services, personal banking
services, gift cards and telecommunication services. The Choice Properties segment owns, manages and develops retail and commercial
properties across Canada. The Company holds an 83% effective interest in Choice 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. At the core of this framework is our focus on the customer - by providing the best in food experience, the best in health and beauty,
operational excellence and growth.
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 and services, 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 throughout our businesses. This includes product innovation,
leveraging control brands across businesses and delivering continued growth in President’s Choice Financial Services and Choice
Properties segments.
2016 Annual Report - Financial Review 5
Management’s Discussion and Analysis
4. Key Financial Performance Indicators
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 December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Consolidated:
Revenue growth
Revenue growth excluding 53rd week in 2014
Operating Income
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Adjusted net earnings available to common shareholders of the Company(2)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(2) ($)
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(1)(2)
Adjusted return on equity(1)(2)
Adjusted return on capital(1)(2)
Retail Segment:
Food retail same-store sales growth
Drug retail same-store sales growth
Operating Income
Adjusted gross profit(2)
Adjusted gross profit %(2)
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Financial Services Segment(4):
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):
Net loss
Adjusted funds from operations(2)
2016
(52 weeks)
2015(6),(7)
(52 weeks)
2.2%
2.2%
2,092
3,852
8.3%
990
983
971
1,655
2.37
4.05
1,559
3,519
1,821
1.7x
12.9%
8.8%
1.1%
4.0%
1,902
12,262
27.0%
3,631
8.0%
124
13.5%
4.3%
(223)
330
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6.5%
8.5%
1,601
3,549
7.8%
589
598
591
1,422
1.42
3.42
1,084
3,079
1,347
2.0x
11.1%
7.6%
1.9%
4.3%
1,429
11,747
26.4%
3,352
7.5%
106
13.6%
4.3%
(155)
313
6 2016 Annual Report - Financial Review
5. Overall Financial Performance
5.1 Consolidated Results of Operations
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Operating Income
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Depreciation and amortization
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 attributable to shareholders of the Company
Net earnings available to common shareholders of the
Company(i)
Adjusted net earnings available to common shareholders of the
Company(2)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(2) ($)
Diluted weighted average common shares outstanding (millions)
$
$
$
$
2016
(52 weeks)
46,385
2,092
3,852
8.3%
1,543
653
535
635
27.5%
983
971
1,655
2.37
4.05
409.1
$
$
$
$
$
$
2015(6)
(52 weeks)
45,394
1,601
3,549
7.8%
1,592
644
548
525
27.0%
598
$
591
1,422
1.42
3.42
415.2
$
$ Change
991
% Change
2.2 %
491
303
(49)
9
(13)
110
385
380
233
0.95
0.63
30.7 %
8.5 %
(3.1)%
1.4 %
(2.4)%
21.0 %
64.4 %
64.3 %
16.4 %
66.9 %
18.4 %
(i) Net earnings available to common shareholders of the Company are net earnings attributable to shareholders of the Company net of dividends declared on the
Company’s Second Preferred Shares, Series B.
Net Earnings Available to Common Shareholders of the Company and Diluted Net Earnings Per Common Share Net earnings
available to common shareholders of the Company were $971 million ($2.37 per common share) in 2016, an increase of $380 million
($0.95 per common share) compared to 2015. The increase in net earnings available to common shareholders of the Company was driven
by improvements in underlying operating performance of $233 million and the net favourable impact of certain adjusting items totaling $147
million as described below:
•
improvements in underlying operating performance of $233 million ($0.57 per common share), primarily due to the following:
the Retail segment, which (excluding the impact of the consolidation of franchises) included higher sales with stable gross
margins and lower selling, general and administrative expenses (“SG&A”) and the positive contribution from incremental net
synergies;
the Financial Services segment, primarily driven by the growth in the credit card portfolio;
the favourable impact of a decrease in depreciation and amortization, primarily due to a change in the estimated useful life of
certain equipment and fixtures in the second quarter of 2016; and
the favourable impact of a decrease in adjusted net interest expense and other financing charges(2) due to debt repayments;
partially offset by
the impact of an increase in the adjusted income tax rate(2) primarily due to an increase in the Alberta statutory corporate
income tax rate.
2016 Annual Report - Financial Review 7
Management’s Discussion and Analysis
•
the net favourable year-over-year impact of certain adjusting items totaling $147 million ($0.32 per common share) including:
the impairment of Drug retail ancillary assets held for sale of $85 million ($0.21 per common share) in the prior year;
the impact of a decrease in restructuring and other related costs of $83 million ($0.20 per common share);
the impact of statutory corporate income tax rate changes of $69 million ($0.16 per common share); and
the accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient Labour Agreements of
$40 million ($0.10 per common share) incurred in the prior year; partially offset by
an unfavourable impact of asset impairments, net of recoveries, of $87 million ($0.22 per common share); and
an increase due to the change in the fair value adjustment to the Trust Unit Liability of $37 million ($0.09 per common share).
• Diluted net earnings per common share were also impacted by the favourable impact of the repurchase of common shares for
cancellation ($0.06 per common share).
Adjusted net earnings available to common shareholders of the Company(2) were $1,655 million ($4.05 per common share), an increase of
$233 million ($0.63 per common share) compared to 2015, due to the improvements in underlying operating performance and the
favourable impact of the repurchase of common shares for cancellation, as described above.
Revenue
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Revenue
2016
(52 weeks)
45,384
$
2015
(52 weeks)
44,469
$
$ Change
915
$
% Change
2.1%
911
784
(694)
849
743
(667)
$
46,385
$
45,394
$
62
41
(27)
991
7.3%
5.5%
2.2%
Revenue was $46,385 million in 2016, an increase of $991 million compared to 2015, primarily driven by an increase in Retail segment
sales of $915 million. Excluding the consolidation of franchises, Retail segment sales increased by $608 million primarily due to positive
same-store sales growth. Food retail same-store sales growth was 1.1% (2015 – 1.9%) and excluding gas bar was 1.5% (2015 – 3.5%(5)).
Drug retail same-store sales growth was 4.0% (2015 – 4.3%). The impact of an extra selling day on Food and Drug retail same-store sales
growth, due to the timing of New Year’s day, was nominal.
Operating Income Operating income was $2,092 million, an increase of $491 million compared to 2015. The increase in operating income
was driven by improvements in underlying operating performance of $351 million and the net favourable impact of certain adjusting items
totaling $140 million as described below:
•
improvements in underlying operating performance of $351 million, primarily due to the following:
the Retail segment, including higher sales with stable gross margins, lower SG&A, the positive contribution from incremental
net synergies and the favourable impact from the consolidation of franchises;
the Financial Services segment, primarily driven by the growth in the credit card portfolio; and
the favourable impact of a decrease in depreciation and amortization primarily due to a change in the estimated useful life of
certain equipment and fixtures in the second quarter of 2016.
•
the net favourable year-over-year impact of certain adjusting items totaling $140 million including:
the impairment of Drug retail ancillary assets held for sale of $116 million in the prior year;
the impact of a decrease in restructuring and other related costs of $108 million; and
the accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient Labour Agreements of
$55 million incurred in the prior year; partially offset by
an unfavourable impact of asset impairments, net of recoveries, of $122 million.
8 2016 Annual Report - Financial Review
Adjusted EBITDA(2)
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Adjusted EBITDA(2)
2016
(52 weeks)
3,631
2015
(52 weeks)
3,352
$
$ Change
279
$
% Change
8.3%
188
678
(645)
173
602
(578)
3,852
$
3,549
$
15
76
(67)
303
8.7%
12.6%
8.5%
$
$
Adjusted EBITDA(2) was $3,852 million in 2016, an increase of $303 million compared to 2015. Excluding the impact of the consolidation of
franchises, adjusted EBITDA(2) increased by $271 million. The increase was primarily driven by Retail segment performance including
higher sales with stable gross margins, lower SG&A and the positive impact of incremental net synergies.
Depreciation and Amortization Depreciation and amortization was $1,543 million in 2016, a decrease of $49 million compared to 2015
primarily attributable to a change in the estimated useful life of certain equipment and fixtures in the second quarter of 2016 and lower
depreciation of older supply chain assets, partially offset by an increase in depreciation from the consolidation of franchises. Included in
depreciation and amortization was the impact of the amortization of intangible assets related to the acquisition of Shoppers Drug Mart of
$535 million (2015 – $536 million).
Net Interest Expense and Other Financing Charges
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
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)
2016
(52 weeks)
653
(118)
—
535
$
$
$
$
2015
(52 weeks)
644
(81)
(15)
548
$
$
$ Change
9
% Change
1.4 %
(37)
15
(13)
45.7 %
(100.0)%
(2.4)%
Net interest expense and other financing charges were $653 million in 2016, an increase of $9 million compared to 2015. The increase in
net interest and other financing charges was primarily due to the year-over-year impact of an increase in certain adjusting items totaling
$22 million, itemized in the table above, partially offset by a decrease in adjusted net interest expense and other financing charges(2) of $13
million driven by:
•
a decrease in interest expense in the Retail segment due to the repayment of Medium Term Notes (“MTNs”) in 2016 and repayment of
capital securities at par in the third quarter of 2015; and
•
•
a decrease in interest expense in the Financial Services segment due to the Eagle Credit Card Trust® (“Eagle”) debt repayment;
partially offset by
an increase in interest expense in the Choice Properties segment due to the issuance of senior unsecured debentures.
2016 Annual Report - Financial Review 9
Management’s Discussion and Analysis
Income Taxes
For the years ended December 31, 2016 and January 2, 2016
(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
Statutory corporate income tax rate change
Adjusted income taxes(2)
Effective tax rate
Adjusted income tax rate(2)
$
$
2016
(52 weeks)
449
$
2015(6)
(52 weeks)
368
$ Change
81
$
% Change
22.0 %
189
(3)
229
(72)
635
$
525
$
31.2%
27.5%
38.5%
27.0%
(40)
69
110
21.0 %
The effective tax rate in 2016 was 31.2% compared to 38.5% in 2015. The decrease in the effective tax rate was primarily attributable to:
•
a decrease in deferred tax expense resulting from a prior year charge related to the increase in the Alberta statutory corporate income
tax rate, net of an increase in deferred tax expense due to the increase in the New Brunswick statutory corporate income tax rate in
2016, as described below; partially offset by
•
an increase in current tax as a result of a prorated increase in the Alberta statutory corporate income tax rate enacted in 2015 and
fully implemented in 2016.
The adjusted income tax rate(2) in 2016 was 27.5% compared to 27.0% in 2015. The increase in the adjusted income tax rate(2) was
primarily attributable to:
•
•
an increase in current tax as a result of a prorated increase in the Alberta statutory corporate income tax rate enacted in 2015 and
fully implemented in 2016, as described above.
an increase in certain other non-deductible items; and
In the first quarter of 2016, the Government of New Brunswick announced a 2% increase in the provincial statutory corporate income tax
rate from 12% to 14%. The Company recorded a charge of $3 million in 2016 related to the re-measurement of its deferred tax liabilities. In
the second quarter of 2015, the government of Alberta announced an increase to the provincial corporate income tax rate from 10% to
12% and as a result, the Company recorded a charge of $72 million related to the remeasurement of deferred tax liabilities.
The Company has been 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, which were received in 2015 and 2016, are for the 2000 to 2011 taxation years and total $351 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 2012 and 2013 taxation years on the same or similar basis. The Company has filed a Notice of Appeal with the Tax Court of Canada for
the 2000 to 2010 taxation years and a Notice of Objection for the 2011 taxation year. 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 reassessments, the
outcome could have a material adverse effect on the Company’s reputation, operations or financial condition or performance.
10 2016 Annual Report - Financial Review
5.2 Selected Financial Information
The selected information presented below has been derived from and should be read in conjunction with the annual consolidated financial
statements of the Company dated December 31, 2016, January 2, 2016 and January 3, 2015. 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 December 31, 2016 and January 2, 2016 and January 3, 2015
(millions of Canadian dollars except where otherwise indicated)
Revenue
Revenue excluding 53rd week in 2014
Operating Income
Operating Income excluding 53rd week in 2014
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week in 2014
Adjusted EBITDA margin(2)
Depreciation and amortization
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 in 2014
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 in 2014
Basic net earnings per common share ($)
Basic net earnings per common share excluding 53rd week in 2014 ($)
Diluted net earnings per common share ($)
Diluted net earnings per common share excluding 53rd week in 2014 ($)
Adjusted diluted net earnings per common share(2) ($)
Adjusted diluted net earnings per common share(2) excluding 53rd week
in 2014 ($)
Diluted weighted average common shares (in millions)
Dividends declared per common share ($)
Dividends declared per Second Preferred Share, Series A ($)(i)
Dividends declared per Second Preferred Share, Series B ($)
$
$
$
$
$
$
2016
(52 weeks)
46,385
46,385
2,092
2,092
3,852
3,852
8.3%
1,543
535
27.5%
990
983
971
971
1,655
1,655
2.40
2.40
2.37
2.37
4.05
4.05
409.1
1.03
—
1.325
$
$
$
$
$
$
2015(6)
(52 weeks)
45,394
45,394
1,601
1,601
3,549
3,549
7.8%
1,592
548
27.0%
589
598
591
591
1,422
1,422
1.44
1.44
1.42
1.42
3.42
3.42
415.2
0.995
0.74
0.74
$
$
$
$
$
$
2014(7)
(53 weeks)
42,611
41,822
662
591
3,227
3,156
7.6%
1,472
529
25.9%
53
53
53
1
1,217
1,165
0.14
—
0.14
—
3.17
3.03
384.4
0.975
1.49
—
(i) Second Preferred Share Series A were redeemed in the third quarter of 2015.
Revenue Revenue was $46,385 million in 2016, an increase of $991 million compared to 2015. Food retail same-store sales growth was
1.1% (2015 –1.9%) and excluding gas bar was 1.5% (2015 – 3.5%(5)). Drug retail same-store sales growth was 4.0% (2015 – 4.3%). The
impact of an extra selling day on Food and Drug retail same-store sales growth, due to the timing of New Year’s day, was nominal.
Revenue was $45,394 million in 2015, an increase of $3,572 million compared to 2014, excluding the impact of 53rd week in 2014. The
increase was primarily due to the contribution of Shoppers Drug Mart in the first quarter of 2015 which was not in the comparative 2014
results. Food retail same-store sales growth was 1.9% (2014 –2.0%) and excluding gas bar was 3.5%(5) (2014 – 2.0%(5)). Drug retail same-
store sales growth was 4.3% (2014 – 2.6%).
The Company’s Retail segment sales have continued to grow despite the pressure of an intensely competitive retail market and an
uncertain economic and regulatory environment over the last three years. Through 2014 and 2015, the Company was operating in an
inflationary environment for food prices. In 2016 this food price inflation trend reversed with inflation declining each quarter and becoming
deflationary in the fourth quarter. Retail segment sales were also impacted by the consolidation of franchisees and the Company’s store
closure plan announced in 2015 and completed in 2016.
2016 Annual Report - Financial Review 11
Management’s Discussion and Analysis
The Company’s Financial Services segment sales have continued to grow mainly driven by growth in the credit card portfolio.
Diluted net earnings per common share Diluted net earnings per common share increased over the past three years and were impacted
by certain adjusting items set out in Section 17 “Non-GAAP Financial Measures” and the improvements in the underlying operating
performance of the Company. The increases in diluted net earnings per common share were primarily due to:
•
•
•
improvements in underlying operating performance of the Retail segment, including positive same-store sales growth in both Food
retail and Drug retail in 2016 and 2015;
the contribution from Shoppers Drug Mart from the date of acquisition in 2014;
the 53rd week in the fourth quarter of 2014;
•
•
•
•
positive contribution from net synergies since the acquisition of Shoppers Drug Mart in the second quarter of 2014;
improvements in the performance of the Financial Services segment;
the favourable impact of the repurchase of common shares for cancellation; and
the net favourable year-over-year impact of certain adjusting items, including:
the recognition of the fair value increment on the acquired Shoppers Drug Mart inventory sold;
a charge related to inventory measurement associated with the conversion of the Company’s grocery stores to the new IT
systems;
Shoppers Drug Mart acquisition-related costs;
restructuring and other related costs;
the impairment on Drug retail ancillary assets held for sale; and
the accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient Labour Agreements;
partially offset by
amortization of intangible assets acquired with Shoppers Drug Mart;
asset impairments, net of recoveries; and
the change in the fair value adjustment to the Trust Unit Liability.
the contribution from Shoppers Drug Mart from the date of acquisition in 2014;
Adjusted diluted net earnings per common share(2) Adjusted diluted net earnings per common share(2) for the last three years
increased primarily due to the following:
•
•
•
improvements in underlying operating performance of the Retail segment, including positive same-store sales growth in both Food
retail and Drug retail in 2016 and 2015;
the 53rd week in the fourth quarter of 2014;
•
•
•
positive contribution from net synergies since the acquisitions of Shoppers Drug Mart in the second quarter of 2014;
improvements in the performance of the Financial Services segment; and
the favourable impact of the repurchase of common shares for cancellation.
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
As at
As at
December 31, 2016
January 2, 2016(6)
January 3, 2015(6)
$
$
$
34,436
10,870
—
959
11,829
$
$
$
34,357
11,011
$
$
—
821
34,177
11,462
225
722
11,832
$
12,409
In 2016, total assets of $34,436 million increased marginally compared to 2015. Long term financial liabilities of $11,829 million were
relatively flat compared to 2015. The Company’s square footage has increased 0.4% with new store openings largely offset by the
Company’s store closure plan.
12 2016 Annual Report - Financial Review
In 2015, total assets of $34,357 million increased by 0.5% and long term financial liabilities of $11,832 million decreased by 4.6%
compared to 2014. Long term financial liabilities decreased compared to 2014 primarily due to net repayments on the $3,500 million
unsecured term loan facility (“Acquisition Term Loan”) and the repayment of capital securities partially offset by the issuance of debt by
Choice Properties.
The Trust Unit Liability is recognized at fair value on the consolidated balance sheets and will change due to changes in the fair value of
the Choice Properties’ Trust Units (“Units”).
6. Reportable Operating Segments Results of Operations
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, manages and develops retail and commercial properties across Canada. 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.
6.1 Retail Segment
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Sales
Operating Income
Adjusted gross profit(2)
Adjusted gross profit %(2)
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Depreciation and amortization
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Food retail
Drug retail
Pharmacy
Front Store
2016
(52 weeks)
2015
(52 weeks)
$
45,384
$
44,469
$
$
$
$
1,902
12,262
27.0%
3,631
8.0%
1,512
1,429
11,747
26.4%
3,352
7.5%
1,567
$
$
2016
(52 weeks)
Same-store
sales
1.1%
4.0%
2.9%
5.0%
Sales
33,175
12,209
5,730
6,479
$
$
$
$ Change
% Change
915
473
515
279
2.1 %
33.1 %
4.4 %
8.3 %
(55)
(3.5)%
2015
(52 weeks)
Same-store
sales
1.9%
4.3%
3.7%
4.7%
Sales
32,672
11,797
5,545
6,252
Sales, operating income, adjusted gross profit(2), adjusted gross profit percentage(2), adjusted EBITDA(2) and adjusted EBITDA margin(2)
included the impacts of the consolidation of franchises, as set out in “Other Retail Business Matters”.
2016 Annual Report - Financial Review 13
Management’s Discussion and Analysis
Sales Retail segment sales were $45,384 million, an increase of $915 million compared to 2015. Excluding the consolidation of franchises,
Retail segment sales increased by $608 million primarily driven by the following factors:
•
Food retail same-store sales growth was 1.5% (2015 –3.5%(5)) for 2016, after excluding gas bar (0.4%). This same-store sales growth
includes the impact of retail promotional investments. Including gas bar, Food retail same-store sales growth was 1.1% (2015 – 1.9%).
The impact of an extra selling day on Food and Drug retail same-store sales growth, due to the timing of New Year’s day, was
nominal.
The Company’s Food retail average annual internal food price index declined and was slightly lower than (2015 – moderately
higher than) the average annual national food price inflation of 1.0% (2015 – 4.1%), as measured by The Consumer Price
Index for Food Purchased from Stores (“CPI”). CPI does not necessarily reflect the effect of inflation on the specific mix of
goods sold in the Company’s stores;
Sales growth in food was modest;
Sales growth in pharmacy was flat; and
Sales growth in gas bar was flat.
• Drug retail same-store sales growth was 4.0% (2015 – 4.3%).
Same-store pharmacy sales growth was 2.9% (2015 – 3.7%);
the number of prescriptions dispensed increased by 3.8% (2015 – 2.1%). On a same-store basis, the number of
prescriptions dispensed increased by 3.5% (2015 – 4.3%) and year-over-year, the average prescription value
decreased by 0.5% (2015 – decreased by 0.2%).
Same-store front store sales growth was 5.0% (2015 – 4.7%), with growth in all front store categories.
•
32 food and drug stores were opened and 37 food and drug stores were closed in the 12 months ended December 31, 2016, resulting
in an increase in Retail net square footage of 0.3 million square feet, or 0.4%. Store closures were driven by the Company’s store
closure plan that was announced in 2015 and completed in 2016.
Operating Income Operating Income was $1,902 million, an increase of $473 million compared to 2015. The increase in operating income
was driven by improvements in underlying operating performance of $333 million and the net favourable impact of certain adjusting items
totaling $140 million as described below:
•
the improvements in underlying operating performance of $333 million were driven by higher sales with stable gross margins, lower
SG&A, lower depreciation and amortization, the positive contribution from incremental net synergies and the favourable impact from
the consolidation of franchises; and
•
the net favourable year-over-year impact of certain adjusting items totaling $140 million including:
the impairment of Drug retail ancillary assets held for sale of $116 million in the prior year;
the favourable impact of a decrease in restructuring and other related costs of $108 million; and
the accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient Labour Agreements of
$55 million incurred in the prior year; partially offset by
an unfavourable impact of asset impairments, net of recoveries, of $122 million.
Adjusted Gross Profit(2) Adjusted gross profit(2) was $12,262 million compared to $11,747 million, an increase of $515 million compared to
2015. Adjusted gross profit percentage(2) was 27.0% compared to 26.4% in 2015. Excluding the consolidation of franchises, the adjusted
gross profit percentage(2) was 26.4%, an increase of 10 basis points compared to 2015, primarily driven by the achievement of operational
synergies and improvements in shrink, partially offset by lower Food retail margins due to promotional investments.
Adjusted EBITDA(2) Adjusted EBITDA(2) was $3,631 million, compared to $3,352 million in 2015, an increase of $279 million, driven by the
increase in adjusted gross profit(2) described above, partially offset by an increase in SG&A of $236 million. SG&A as a percentage of sales
was 19.0%, an increase of 10 basis points compared to 2015. Excluding the consolidation of franchises, SG&A decreased $35 million and
as a percentage of sales, was 18.4%, an improvement of 30 basis points compared to 2015, driven by the following factors:
•
•
•
•
higher retail store costs as efficiencies achieved in retail stores were more than offset by an increase in financial support to franchises.
the positive impact of the Company’s store closure plan announced in 2015 and completed in 2016; and
favourable year-over-year foreign exchange impacts; partially offset by
lower store support costs;
14 2016 Annual Report - Financial Review
Depreciation and Amortization Depreciation and amortization was $1,512 million, compared to $1,567 million in 2015, a decrease of $55
million primarily attributable to a change in the estimated useful life of certain equipment and fixtures in the second quarter of 2016 and
lower depreciation of older supply chain assets, partially offset by an increase in depreciation from the consolidation of franchises. Included
in depreciation and amortization in 2016 was the impact of the amortization of intangible assets related to the acquisition of Shoppers Drug
Mart of $535 million (2015 – $536 million).
Other Retail Business Matters
Acquisition of QHR Corporation In 2016, the Company, through its wholly-owned subsidiary Shoppers Drug Mart, completed the
acquisition of all of the issued and outstanding common shares of QHR Corporation (“QHR”), a publicly traded healthcare technology
company. The shares of QHR were acquired for cash consideration of approximately $167 million. The preliminary purchase price
allocation, which has not yet been finalized, is as follows:
(millions of Canadian dollars)
Net Assets Acquired:
Cash and cash equivalents
Accounts receivable and Prepaid expenses
Fixed assets
Intangible assets
Goodwill
Trade payables and other liabilities
Deferred income tax liabilities
Other liabilities
Total Net Assets Acquired
$
$
14
2
2
72
99
(3)
(14)
(5)
167
Goodwill is attributable to synergies expected from integrating QHR into the Company’s existing business. The goodwill is not deductible
for tax purposes.
Impairment of Ancillary Healthcare Business In the fourth quarter, a Shoppers Drug Mart ancillary healthcare business was triggered for
impairment testing due to impacts of Ontario healthcare reform implemented in the long term care industry. The Company recorded a
charge of $88 million related to the impairment of fixed assets of $15 million and a customer relationship intangible asset of $73 million.
Consolidation of Franchises The Company has more than 500 franchise food retail stores in its network. As of the end of the fourth
quarter of 2016, 200 of these stores were consolidated for accounting purposes under a new, simplified franchise agreement (“Franchise
Agreement”) implemented in 2015.
The Company will convert franchises to the Franchise Agreement as existing agreements expire, at the end of which all franchises will be
consolidated. The following table presents the number of franchises consolidated in the fourth quarter of 2016 and year-to-date, and the
total impact of the consolidation of franchises included in the consolidated results of the Company:
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars unless where otherwise indicated)
Number of Consolidated Franchise stores, beginning of period
Add: Net number of Consolidated Franchise stores in the period
Number of Consolidated Franchise stores, end of period
Sales
Adjusted gross profit(2)
Adjusted EBITDA(2)
Depreciation and amortization
Operating Income
Net earnings (loss) attributable to Non-Controlling Interests
2016
(12 weeks)
165
2015
(12 weeks)
43
2016
(52 weeks)
85
2015
(52 weeks)
—
$
$
35
200
99
107
27
6
21
28
$
42
85
28
32
(4)
3
(7)
(4)
$
115
200
363
361
20
21
(1)
7
85
85
56
58
(12)
5
(17)
(9)
Operating Income included in the table above does not significantly impact net earnings available to common shareholders of the
Company as this amount is largely attributable to Non-Controlling Interests.
2016 Annual Report - Financial Review 15
Management’s Discussion and Analysis
The Company expects that the estimated impact in 2017 of new and current consolidated franchises will be revenue of approximately
$680 million, adjusted EBITDA(2) of approximately $55 million, depreciation and amortization of approximately $45 million and net earnings
attributable to Non-Controlling Interests of approximately $10 million.
Retail Locations in Fort McMurray In the second quarter of 2016, 10 retail locations in Fort McMurray were impacted by a wildfire that
caused an evacuation of the city. During the second quarter of 2016, the Company recognized a charge of $12 million related to inventory
losses, site clean-up and restoration costs at these locations. As at the end of 2016, the Company received partial proceeds of $10 million
from the insurance claim. The insurance claim remains in progress and further proceeds are expected to be recorded as the claim
progresses.
The Company estimates the financial impact to the Company’s 2016 results from the temporary closure of these retail locations as a
decrease in sales of approximately $27 million and a decrease in adjusted EBITDA(2) of approximately $7 million. The Company maintains
business interruption insurance and expects that certain losses will be recoverable under this insurance coverage.
Gas Bar Network In the second quarter of 2016, the Company began engaging with potential buyers for the sale of its gas bar operations.
The gas bar network is comprised of more than 200 retail fuel sites. On an annual basis, the gas bar operations sell approximately 1,700
million litres of gas and generate sales of approximately $1,600 million.
Restructuring and Other Related costs In the fourth quarter of 2016 and for the full year, the Company recorded an additional charge
related to store closures of approximately $2 million and $46 million, respectively. This amount was primarily related to the closure of the
remaining Joe Fresh retail locations in the U.S.
Drug Retail Ancillary Assets In 2015, the Company began actively marketing the sale of certain assets of the Shoppers Drug Mart
ancillary healthcare business and recorded asset impairments on these assets and other related restructuring charges. In 2016, the
Company signed agreements for the sale of a portion of these assets.
In 2016, the Company ceased actively marketing the remaining assets and restructured those assets as part of ongoing operations. As a
result, the Company recorded a charge of $4 million related to inventory impairment and reversed $8 million of previous asset impairments
and other related restructuring charges.
16 2016 Annual Report - Financial Review
6.2 Financial Services Segment(4)
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Earnings before income taxes
2016
(52 weeks)
911
124
2015
(52 weeks)
849
106
$
$
$ Change
62
$
18
% Change
7.3%
17.0%
(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
December 31, 2016
2,769
$
2,926
52
$
January 2, 2016
2,642
2,790
54
$
$ Change
127
136
(2)
% Change
4.8 %
4.9 %
(3.7)%
13.5%
4.3%
13.6%
4.3%
Revenue Revenue was $911 million, an increase of $62 million, compared to 2015, primarily driven by:
•
•
higher interest income attributable to growth in credit card receivables;
higher interchange income from higher credit card transaction volumes, partially offset by an industry-wide reduction in interchange
rates by MasterCard® International Incorporated (“MasterCard®”) effective in the second quarter of 2015; and
•
higher sales attributable to The Mobile Shop.
revenue growth as described above;
Earnings before income taxes Earnings before income taxes were $124 million, an increase of $18 million compared to 2015, primarily
driven by:
•
•
•
•
•
higher operating costs and credit losses as a result of an increase in the active customer base.
higher costs associated with the Financial Services’ loyalty program; and
lower marketing and acquisition costs and IT costs; and
lower net interest expense; partially offset by
Credit Card Receivables As at December 31, 2016, credit card receivables were $2,926 million, an increase of $136 million compared to
January 2, 2016. This increase was primarily driven by growth in the active customer base as a result of continued investments in
customer acquisition, marketing and product initiatives. As at December 31, 2016, the allowance for credit card receivables was $52
million, a decrease of $2 million compared to January 2, 2016.
2016 Annual Report - Financial Review 17
Management’s Discussion and Analysis
6.3 Choice Properties Segment(4)
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Net interest expense and other financing charges
Net loss(i)
Adjusted funds from operations(2)
2016
(52 weeks)
784
$
2015
(52 weeks)
743
$
$ Change
41
$
% Change
5.5 %
900
(223)
330
756
(155)
313
144
(68)
17
19.0 %
(43.9)%
5.4 %
(i)
Choice Properties qualifies as a “mutual fund trust” under the Income Tax Act (Canada) and therefore net income (loss) is equal to earnings before income taxes.
Revenue Revenue was $784 million, an increase of $41 million compared to 2015 and included $694 million (2015 – $667 million)
generated from tenants within the Retail segment. The increase in revenue was primarily driven by:
•
•
•
additional revenue generated from tenant openings in newly developed leasable space; and
revenue from properties acquired in 2015 and 2016;
an increase in base rent from existing properties.
Net Interest Expense and Other Financing Charges Net interest expense and other financing charges were $900 million, an increase of
$144 million compared to 2015, primarily driven by:
•
•
higher interest expense due to the issuance of senior unsecured debentures in 2015 and 2016.
the change in fair value adjustment on Class B Limited Partnership units; and
Net loss Net loss was $223 million, an increase of $68 million compared to 2015. The increase in loss was primarily driven by:
• Net interest expense and other financing charges as described above; partially offset by
•
•
•
revenue growth from expansion of the portfolio through acquisitions and development of existing properties; and
the change in fair value adjustment on investment properties;
an increase in base rent from existing properties.
Adjusted Funds from Operations(2) Adjusted funds from operations(2) were $330 million, an increase of $17 million compared to 2015,
primarily driven by higher contributions from property operations partially offset by increased spending in operating capital.
Other Matters During 2016, Choice Properties acquired 15 properties from the Company for a purchase price of approximately $158
million, excluding acquisition costs, for consideration of $150 million in cash and the issuance of 878,713 Class B Limited Partnership
units. Choice Properties also acquired three investment properties from third-parties for an aggregate purchase price of $34 million,
excluding acquisition costs, which was fully settled in cash.
Subsequent to the end of 2016, Choice Properties redeemed, at par, the $200 million Series 6 senior unsecured debentures with an
original maturity date of April 20, 2017.
18 2016 Annual Report - Financial Review
7. Liquidity and Capital Resources
7.1 Cash Flows
Major Cash Flow Components
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Cash and cash equivalents, beginning of period
2016
(52 weeks)
2015
(52 weeks)
$ Change
% Change
$
1,018
$
999
$
19
1.9 %
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
3,519
(1,437)
(1,782)
3,079
(1,238)
(1,839)
Effect of foreign currency exchange rate changes on cash and cash
equivalents
Cash and cash equivalents, end of period
(4)
17
$
1,314
$
1,018
$
440
(199)
57
(21)
296
14.3 %
(16.1)%
3.1 %
(123.5)%
29.1 %
Cash Flows from Operating Activities Cash flows from operating activities were $3,519 million in 2016, an increase of $440 million
compared to 2015. The increase was primarily driven by:
•
•
a change in non-cash working capital driven by a use of cash in trade payables and other liabilities and provisions partially offset by
cash from a decrease in accounts receivable and prepaid expenses and other assets.
higher cash earnings; partially offset by
Cash Flows used in Investing Activities Cash flows used in investing activities were $1,437 million, an increase of $199 million
compared to 2015, primarily due to the acquisition of QHR and an increase in short term investments.
Capital investments in 2016 were $1,224 million (2015 – $1,241 million). Approximately 45% (2015 – 47%) of this investment was spent on
retail operations, 34% (2015 – 34%) on IT and supply chain projects, 19% (2015 –15%) on Choice Properties’ development projects and
2% (2015 – 4%) on other infrastructure projects.
In 2016, 32 food and drug stores were opened and 37 food and drug stores were closed in the 12 months ended December 31, 2016,
resulting in an increase in Retail net square footage of 0.3 million square feet, or 0.4%. Store closures were driven by the Company’s store
closure plan that was announced in 2015 and completed in 2016.
The Company expects to invest approximately $1,300 million in capital investments in 2017. Approximately 44% of these funds are
expected to be dedicated to investing in retail operations, 27% will be spent on IT and supply chain projects, 23% on Choice Properties’
development projects and 6% on infrastructure and other projects.
2016 Annual Report - Financial Review 19
Management’s Discussion and Analysis
Capital Investments and Store Activity
As at or for the years ended December 31, 2016 and January 2, 2016
2016
(52 weeks)
2015
(52 weeks)
% Change
Capital investments (millions of Canadian dollars)
$
1,224
$
1,241
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
35.7
16.3
18.2
70.2
565
533
1,326
2,424
72%
47%
1%
63,200
30,600
13,700
36.1
15.8
18.0
69.9
591
525
1,313
2,429
72%
47%
2%
61,100
30,100
13,700
(1.4)%
(1.1)%
3.2 %
1.1 %
0.4 %
(4.4)%
1.5 %
1.0 %
(0.2)%
3.4 %
1.7 %
— %
Cash Flows used in Financing Activities Cash flows used in financing activities were $1,782 million, a decrease of $57 million compared
to 2015. The decrease was primarily driven by lower net repayments of long term debt and an increase in President’s Choice Bank’s (“PC
Bank’s”) co-ownership interest held with the Other Independent Securitization Trusts partially offset by higher repurchases of common
shares for cancellation. In 2015, cash flow from financing activities also included proceeds from the issuance of preferred shares offset by
the redemption of capital securities. The Company’s significant long term debt transactions are set out in Section “7.3 Components of Total
Debt”.
Free Cash Flow(2)
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Free cash flow(2)
2016
(52 weeks)
2015
(52 weeks)
$ Change
% Change
$
1,821
$
1,347
$
474
35.2%
Free cash flow(2) was $1,821 million in 2016, an increase of $474 million compared to 2015, primarily driven by higher cash flows from
operating activities as described above.
20 2016 Annual Report - Financial Review
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 manages its capital structure on a segmented basis to ensure that each of the reportable operating segments is 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
December 31, 2016
As at
January 2, 2016
(millions of Canadian dollars)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Certain other liabilities
Total debt
Retail
Financial
Services(4)
Choice
Properties(4)
$
115
$
— $
— $
Retail
Financial
Services(4)
Choice
Properties(4)
$
143
$
— $
— $
—
56
6,019
31
665
142
1,436
—
Total
115
665
400
—
202
3,015
10,470
—
31
—
584
5,968
30
550
112
1,347
—
Total
143
550
998
—
302
2,698
10,013
—
30
$
6,221
$
2,243
$
3,217
$ 11,681
$
6,725
$
2,009
$
3,000
$ 11,734
Retail The Company manages its capital structure with the objective of maintaining Retail segment credit metrics consistent with those of
investment grade retailers. The Company monitors the Retail segment’s debt to retail adjusted EBITDA(2) ratio as a measure of the
leverage being employed.
Retail debt to retail adjusted EBITDA(1)(2)
As at
As at
December 31, 2016
1.7x
January 2, 2016
2.0x
The Retail debt to retail adjusted EBITDA(2) ratio as at December 31, 2016 decreased compared to January 2, 2016 primarily as a result of
growth in adjusted EBITDA(2) and repayment of $525 million of MTNs that matured in the second quarter of 2016.
Choice Properties Choice Properties manages its capital structure with the objective of maintaining credit metrics consistent with those of
investment grade real estate investment trusts (“REITs”). Choice Properties monitors metrics relevant to the REIT industry including
targeting an appropriate debt to total assets ratio.
The Company and Choice Properties are required to comply with certain financial covenants for various debt instruments. As at
December 31, 2016 and throughout the year, the Company and Choice Properties were in compliance with their respective covenants.
President’s Choice 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 requirements as defined by the
Office of the Superintendent of Financial Institutions (“OSFI”). As at December 31, 2016 and throughout the year, PC Bank has met all
applicable regulatory requirements.
7.3 Components of Total Debt
Unsecured Term Loan Facility In connection with the financing of the acquisition of Shoppers Drug Mart, the Company obtained an
Acquisition Term Loan. As at December 31, 2016, the outstanding balance on the Acquisition Term Loan was $48 million (January 2, 2016
– $48 million).
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.
2016 Annual Report - Financial Review 21
Management’s Discussion and Analysis
Debentures and Medium Term Notes The following table summarizes the debentures and MTNs issued in 2016 and 2015:
(millions of Canadian dollars except where otherwise indicated)
Interest Rate
Maturity Date
Principal Amount
December 31, 2016
(52 weeks)
January 2, 2016
(52 weeks)
Principal
Amount
Choice Properties senior unsecured debentures
– Series G(i)
– Series H(i)
– Series E
– Series F
Total Debentures and Medium Term Notes issued
3.20%
5.27%
2.30%
4.06%
March 7, 2023
March 7, 2046
September 14, 2020
November 24, 2025
$
$
$
250
100
—
—
350
$
—
—
250
200
450
(i) Offerings were made under the Choice Properties’ Short Form Base Shelf Prospectus filed in the fourth quarter of 2015.
The following table summarizes the debentures and MTNs repaid in 2016 and 2015:
December 31, 2016
(52 weeks)
January 2, 2016
(52 weeks)
(millions of Canadian dollars except where otherwise indicated)
Loblaw Companies Limited Notes
Shoppers Drug Mart Notes
Choice Properties senior unsecured debentures –
Series 5
Interest Rate
7.10%
2.01%
Maturity Date
June 1, 2016
May 24, 2016
3.00%
April 20, 2016(i)
Total Debentures and Medium Term Notes repaid
$
Principal Amount
300
$
Principal Amount
—
—
—
—
$
$
225
300
825
(i) Choice Properties Series 5 unsecured debentures was redeemed on March 7, 2016.
Subsequent to the end of 2016, Choice Properties redeemed, at par, the $200 million Series 6 3.00% senior unsecured debentures with an
original maturity date of April 20, 2017.
Committed Credit Facilities The components of the committed lines of credit as at December 31, 2016, and January 2, 2016 were as
follows:
As at December 31, 2016
As at January 2, 2016
(millions of Canadian dollars)
Loblaw’s Committed Credit Facility
Maturity Date
June 10, 2021
Choice Properties Committed Syndicated Credit Facility
July 5, 2021
Choice Properties Committed Bi-lateral Credit Facility
December 21, 2018
Total Committed Lines of Credit
Available
Credit
1,000 $
500
250
1,750 $
$
$
Drawn
— $
Drawn
—
$
Available
Credit
1,000
500
—
$
1,500
$
172
—
172
—
—
—
On December 23, 2016, Choice Properties entered into a new bi-lateral $250 million senior unsecured committed revolving credit facility
with a major Canadian financial institution maturing on December 21, 2018. The credit facility bears interest at variable rates of either:
Prime plus 0.25% or Bankers’ Acceptance rate plus 1.25%. Certain conditions of the credit facility are contingent on Choice Properties’
credit rating remaining at “BBB”. Should certain conditions not be met, the credit facility would become secured against select properties.
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 2016 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
December 31, 2016
As at
January 2, 2016
$
$
650
665
1,315
$
$
650
550
1,200
The associated liability of Eagle is recorded in long term debt. The associated liabilities of credit card receivables securitized to the Other
Independent Securitization Trusts are recorded in short term debt.
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 $71 million (January 2, 2016 – $56 million), which represented approximately 11% (2015 – 10%) of the
securitized credit card receivables amount. As at December 31, 2016, the aggregate gross potential liability under these arrangements for
Eagle was $36 million (January 2, 2016 – $36 million), which represented approximately 9% (2015 – 9%) of the outstanding Eagle notes
issued prior to 2015.
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 December 31, 2016 and throughout
2016.
The undrawn commitments on facilities available from the Other Independent Securitization Trusts as at December 31, 2016, were $210
million (January 2, 2016 – $175 million).
Independent Funding Trusts As at December 31, 2016, the independent funding trusts had drawn $587 million (January 2, 2016 – $529
million) from the revolving committed credit facility that is the source of funding to the independent funding trusts. In 2016, the Company
amended the committed credit facility agreement to increase the size of the facility to $700 million and extended the maturity date to June
10, 2019, 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 December 31, 2016, the Company has agreed to provide a
credit enhancement of $64 million (January 2, 2016 – $53 million) for the benefit of the independent funding trusts representing not less
than 10% (2015 – 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, in 2016 and 2015:
(millions of Canadian dollars)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
$
$
2016
809
239
(120)
928
$
$
2015
634
211
(36)
809
As at December 31, 2016, $142 million in GICs were recorded as long term debt due within one year (January 2, 2016 – $112 million).
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 December 31, 2016, the Company’s maximum obligation in respect of such guarantees was $580
million (January 2, 2016 – $570 million) with an aggregate amount of $488 million (January 2, 2016 – $483 million) in available lines of
credit allocated to the Associates by the various banks. As at December 31, 2016, Associates had drawn an aggregate amount of $115
million (January 2, 2016 – $143 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.
2016 Annual Report - Financial Review 23
Management’s Discussion and Analysis
7.4 Financial Condition
Adjusted Return on Equity(1)(2) and Adjusted Return on Capital(1)(2)
Adjusted return on equity(1)(2)
Adjusted return on capital(1)(2)(i)
As at
As at
December 31, 2016
12.9%
January 2, 2016(6)
11.1%
8.8%
7.6%
(i) Capital for the purposes of this calculation is defined as total debt, plus equity attributable to shareholders of the Company, less cash and cash equivalents, and short
term investments.
Adjusted return on equity(2) as at December 31, 2016 increased compared to January 2, 2016, primarily due to higher adjusted net
earnings and common shares repurchased for cancellation. The adjusted return on capital(2) as at December 31, 2016 increased compared
to January 2, 2016, primarily due to the factors noted above, as well as debt reduction during the year.
7.5 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
Positive
Positive
Positive
Positive
Standard & Poor’s
Credit Rating
BBB
BBB
BBB
P-3 (high)
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
Positive
Positive
Standard & Poor’s
Credit Rating
BBB
BBB
Outlook
Stable
n/a
n/a
n/a
Outlook
Stable
n/a
In 2016, Standard and Poor’s reaffirmed the credit ratings for the Company and Choice Properties. Also in 2016, Dominion Bond Rating
Service reaffirmed the credit ratings and changed the trends to Positive from Stable for the Company and Choice Properties.
7.6 Share Capital
First Preferred Shares (authorized – 1.0 million shares) There were no First Preferred Shares outstanding as at December 31, 2016
and January 2, 2016.
Second Preferred Share Capital (authorized – unlimited) In 2015, the Company issued 9.0 million 5.30% non–voting Second Preferred
Shares, Series B and redeemed all of the outstanding 9.0 million 5.95% non–voting Second Preferred Shares, Series A. The Second
Preferred Shares, Series B have a face value of $225 million and are presented as a component of equity in the consolidated balance
sheet in the amount of $221 million, net of $4 million of after–tax issuance costs.
24 2016 Annual Report - Financial Review
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
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
Shares held in trust, end of period
Issued and outstanding, net of shares held in trust, end of period
Weighted average outstanding, net of shares held in trust
Number of
Common
Shares
409,985,226
$
1,131,944
(10,287,300)
400,829,870
(643,452)
(1,250,000)
787,832
(1,105,620)
399,724,250
405,058,645
$
$
$
$
2016
Common
Share
Capital
7,861
50
(198)
7,713
(10)
(24)
13
(21)
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)
7,851
7,692
409,341,774
411,543,393
Dividends The declaration and payment of dividends on the Company’s common shares and the amount thereof are at the discretion of
the Board of Directors which takes into account the Company’s financial results, capital requirements, available cash flow, future prospects
of the Company’s business and other factors considered relevant from time to time. Over the long term, it is the Company’s intention to
increase the amount of the dividend while retaining appropriate free cash flow to finance future growth. In the second quarter of 2016 and
2015, the Board raised the quarterly dividend by $0.01 to $0.26 and $0.005 to $0.25 per common share, respectively.
The following table summarizes the Company’s cash dividends declared for 2016 and 2015:
Dividends declared per share ($):
Common Share
Second Preferred Share, Series A
Second Preferred Share, Series B
$
2016(i)
1.03
—
1.325
$
2015
0.995
0.74
0.74
(i) The fourth quarter dividends for 2016 of $0.26 per share declared on common shares were paid on December 30, 2016. The fourth quarter dividends for 2016 of $0.33
per share declared on Second Preferred Shares, Series B were payable on December 31, 2016 and subsequently paid on the first business day following the end of the
fiscal year.
(millions of Canadian dollars)
Dividends declared:
Common Share
Second Preferred Share, Series A(i)
Second Preferred Share, Series B
Total dividends declared
2016
416
—
12
428
$
$
2015
409
8
7
424
$
$
(i) For financial statement purposes, Second Preferred Shares, Series A dividends of $8 million in 2015 were recognized on an accrual basis and included as a component
of net interest expense and other financing charges in the consolidated statement of earnings.
Subsequent to end of the year, the Board of Directors (“Board”) declared a quarterly dividend of $0.26 per common share, payable on
April 1, 2017 to shareholders of record on March 15, 2017 and a dividend on the Second Preferred Shares, Series B of $0.33 per share
payable on March 31, 2017 to shareholders of record on March 15, 2017. 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.
2016 Annual Report - Financial Review 25
Management’s Discussion and Analysis
Normal Course Issuer Bid Activity under the Company’s Normal Course Issuer Bid (“NCIB”) during the periods was 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
2016
(52 weeks)
10,287,300
708
510
198
1,250,000
90
66
24
$
$
$
$
2015
(52 weeks)
4,336,839
280
197
83
971,894
63
44
19
In 2016, the Company renewed its NCIB to purchase on the Toronto Stock Exchange (“TSX”) or through alternative trading systems up to
21,401,867 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 7.3 “Components of Total Debt”.
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 $683 million as at December 31, 2016 (January 2, 2016 – $860 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®. As at December 31, 2016, the guarantee on behalf of PC Bank to MasterCard® was USD $190 million (January 2, 2016 –
USD $190 million).
Glenhuron Bank Limited Surety Bond In 2015, in connection with the CRA’s reassessment of the Company on certain income earned by
Glenhuron, the Company arranged for a surety bond of $141 million (2015 – $132 million) to the Ministry of Finance in order to dispute the
reassessments.
Cash Collateralization As at December 31, 2016, the Company had agreements to cash collateralize certain of its uncommitted credit
facilities up to an amount of $103 million (January 2, 2016 – $149 million), of which $4 million (January 2, 2016 – $2 million) was deposited
with major financial institutions and classified as security deposits.
26 2016 Annual Report - Financial Review
7.8 Contractual Obligations
The following illustrates certain of the Company’s significant contractual obligations and discusses other obligations as at December 31,
2016:
Summary of Contractual Obligations
(millions of Canadian dollars)
Total debt (including interest payments(i))
Foreign Exchange Forward Contracts
Operating leases(ii)
Contracts for purchases of investment projects(iii)
Purchase obligations(iv)
Total contractual obligations
2017
1,620
387
686
113
154
2,960
$
$
$
$
2018
1,810
—
664
6
131
2,611
$
$
$
Payments due by year
2019
2,546
—
620
—
47
3,213
2020
$ 1,663
—
550
—
20
$ 2,233
$
2021
1,115
—
480
—
5
1,600
Thereafter
7,339
$
—
2,352
—
—
9,691
$
Total
$ 16,093
387
5,352
119
357
$ 22,308
(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 structured entities, mortgages and finance lease obligations. Variable interest payments are
based on the forward rates as of December 31, 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 From time to time, PC Bank enters into foreign exchange forward agreements to hedge its exposure on
certain USD payables. These agreements, which mature by December 2017, qualify for hedge accounting as cash flow hedges of future
foreign currency transactions. Accordingly, during 2016, PC Bank recorded an unrealized fair value loss of $1 million (2015 – unrealized
fair value gain of $3 million) in other comprehensive income related to the effective portion of these agreements.
Bond Forwards During 2016, in connection with expected funding needs, PC Bank entered into bond forward agreements with a notional
value of $95 million (2015 – $350 million) to hedge its exposure to interest rate risk against the future issuance of debt instruments 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 recorded a nominal unrealized fair value gain (2015 –
unrealized fair value loss of $2 million) in other comprehensive income to be recognized in income as future interest payments are made.
Interest Rate Swaps During 2016, PC Bank entered into interest rate swaps with a notional value of $200 million to hedge its exposure to
interest rates associated with Other Independent Securitization Trusts. These agreements, which mature by February 2018, qualify for
hedge accounting as cash flow hedges of future interest payments. Accordingly, during 2016, PC Bank recorded a nominal unrealized fair
value gain in other comprehensive income.
2016 Annual Report - Financial Review 27
Management’s Discussion and Analysis
Other Derivatives In addition to the derivatives mentioned above, the Company uses other derivative financial instruments for which
hedge accounting is not applied. The Company uses bond forwards and interest rate swaps, to manage its anticipated exposure to
fluctuations in interest rates on future debt issuances. The Company also uses futures, options and forward contracts to manage its
anticipated exposure to fluctuations in commodity prices and exchange rates in its underlying operations. The following is a summary of
the fair values recognized in the consolidated balance sheet and the net realized and unrealized gains (losses) before income taxes
related to the Company’s other derivatives:
(millions of Canadian dollars)
Derivatives not designated in a formal hedging relationship
Foreign Exchange Futures and Forwards
Bond Forwards(i)
Other Non-Financial Derivatives
Total derivatives not designated in a formal hedging relationship
$
$
2016
(52 weeks)
2015
(52 Weeks)
Net Asset/
(Liability)
Fair value
Gain/(loss)
recorded in
operating income
Net Asset/
(Liability)
Fair value
Gain/(loss)
recorded in
operating income
9
—
7
16
$
$
(8)
3
8
3
$
$
33
—
(6)
27
$
$
58
—
(7)
51
(i) Realized fair value gain of $3 million related to Choice Properties bond forward agreements settled in the first quarter of 2016 and recorded in net interest expense and
other financing charges
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 December 31, 2016, the fair value of these investments of
$23 million (January 2, 2016 – $25 million) was included in other assets. During 2016, PC Bank recorded a nominal fair value loss (2015 -
nominal 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 Liquidity Coverage Ratio (“LCR”) standard.
Trust Unit Liability 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 December 31, 2016, the fair value of the
Trust Unit Liability of $959 million (January 2, 2016 – $821 million) was recorded on the consolidated balance sheet. During 2016, the
Company recorded a fair value loss of $118 million (2015 – loss of $81 million) in net interest expense and other financing charges related
to the Units.
As at December 31, 2016, 71,068,828 Units were held by unitholders other than the Company (January 2, 2016 – 69,453,817) and the
Company held an 83% (January 2, 2016 – 83%) effective ownership interest in Choice Properties.
28 2016 Annual Report - Financial Review
9. Quarterly Results of Operations
9.1 Results by Quarter
Under an accounting convention common in the retail industry, the Company follows a 52-week reporting cycle which periodically
necessitates a fiscal year of 53 weeks. Fiscal years 2016 and 2015 were 52 weeks. The next 53 week year will occur in 2020. The 52-
week reporting cycle is divided into four quarters of 12 weeks each except for the third quarter, which is 16 weeks in duration.
The following is a summary of selected consolidated financial information derived from the Company’s unaudited interim period condensed
consolidated financial statements for each of the eight most recently completed quarters:
Summary of Consolidated Quarterly Results
(millions of Canadian dollars except where
otherwise indicated)
Revenue
Net earnings available to
common shareholders of
the Company
Adjusted net earnings
available to common
shareholders of the
Company(2)
Net earnings per common
share:
Basic ($)
Diluted ($)
Adjusted diluted net earnings
per common share(2) ($)
Average national food price
inflation (deflation) (as
measured by CPI)
Food retail same-store sales
growth
Drug retail same-store sales
growth
2016
2015(6)
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
(12 weeks)
Total
(audited)
(52 weeks)
$ 10,381
$ 10,731
$ 14,143
$11,130
$ 46,385
$ 10,048
$10,535
$13,946
$10,865
$45,394
193
158
419
201
971
146
151
166
128
591
338
412
512
393
1,655
301
350
408
363
1,422
$
$
$
0.47
0.47
0.82
$
$
$
0.39
0.39
1.01
$
$
$
1.04
1.03
$
$
0.50
0.50
1.26
$
0.97
$
$
$
2.40
2.37
4.05
$
$
$
0.35
0.35
$ 0.37
$ 0.40
$ 0.31
$ 1.44
$ 0.36
$ 0.40
$ 0.31
$ 1.42
0.72
$ 0.84
$ 0.98
$ 0.87
$ 3.42
4.3%
1.8%
0.2%
(2.3)%
1.0%
4.6%
3.9%
3.8%
4.1%
4.1%
2.0%
0.4%
0.8%
1.1 %
1.1%
2.0%
2.1%
1.3%
2.4%
1.9%
6.3%
4.0%
2.8%
3.4 %
4.0%
3.1%
3.8%
4.9%
5.0%
4.3%
the timing of holidays;
seasonality, which was greatest in the fourth quarter and least in the first quarter;
Revenue Revenue for the last eight quarters was impacted by various factors including the following:
•
•
•
•
•
•
the changes in the price of fuel sold at the Company’s gas bars;
consolidation of franchises; and
food price inflation trends;
changes in net retail square footage. Over the past eight quarters, net retail square footage increased by 0.2 million square feet to
70.2 million square feet, primarily driven by new store openings partially offset by the Company’s store closure plan announced in
2015 and completed in the first half of 2016.
Through 2015, the Company was operating in an inflationary environment in food prices. In 2016 this food price inflation trend reversed
with inflation declining each quarter and becoming deflationary in the fourth quarter. CPI does not necessarily reflect the effect of inflation
on the specific mix of goods sold in the Company’s stores.
2016 Annual Report - Financial Review 29
Management’s Discussion and Analysis
the timing of holidays;
seasonality, which was greatest in the fourth quarter and least in the first quarter;
Net Earnings Available to Common Shareholders of the Company and Diluted Net Earnings Per Common Share Net earnings
available to common shareholders of the Company and diluted net earnings per common share for the last eight quarters were impacted
by the following items:
•
•
•
•
•
•
the impact of certain adjusting items, as set out in Section 17 “Non-GAAP Financial Measures”, including:
improvements in underlying operating performance of the Company; and
the impact of the Company’s store closure plan;
acquisition-related net synergies;
the impairment of Drug retail ancillary assets held for sale;
restructuring and other related charges;
the modifications to the fee arrangements with franchisees of certain franchise banners;
the transition of stores to more cost effective and efficient labour agreements;
asset impairments, net of recoveries; and
the change in fair value adjustment to Trust Unit Liability.
seasonality, which was greatest in the fourth quarter and least in the first quarter;
Adjusted net earnings available to common shareholders of the Company(2) and adjusted diluted net earnings per common share(2) for the
last eight quarters were impacted by the following:
•
•
•
•
•
improvements in underlying operating performance of the Company.
the impact of the Company’s store closure plan; and
acquisition-related net synergies;
the timing of holidays;
30 2016 Annual Report - Financial Review
9.2 Fourth Quarter Results
The following is a summary of selected consolidated unaudited financial information for the fourth quarter of 2016:
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Operating Income
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Depreciation and amortization
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 attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Adjusted net earnings available to common shareholders of the
Company(2)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(2) ($)
Diluted weighted average common shares outstanding (in millions)
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Dividends declared per common share ($)
Dividends declared per Second Preferred Share, Series B ($)
2016
(12 weeks)
11,130
449
956
8.6%
365
128
130
161
27.5%
204
201
393
0.50
0.97
405.6
861
(676)
(185)
0.26
0.33
$
$
$
$
$
$
$
$
2015
(12 weeks)
10,865
316
881
8.1%
376
141
134
133
26.9%
131
128
363
0.31
0.87
415.2
564
(173)
(655)
0.25
0.33
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$ Change
265
% Change
2.4 %
133
75
(11)
(13)
(4)
28
73
73
30
0.19
0.10
297
(503)
470
0.01
42.1 %
8.5 %
(2.9)%
(9.2)%
(3.0)%
21.1 %
55.7 %
57.0 %
8.3 %
61.3 %
11.5 %
52.7 %
290.8 %
(71.8)%
4.0 %
Net Earnings Available to Common Shareholders of the Company and Diluted Net Earnings Per Common Share Net earnings
available to common shareholders of the Company in the fourth quarter of 2016 were $201 million ($0.50 per common share), an increase
of $73 million ($0.19 per common share) compared to the fourth quarter of 2015. The increase in net earnings available to common
shareholders of the Company was driven by improvements in underlying operating performance of $30 million and the net favourable
impact of certain adjusting items totaling $43 million as described below:
•
improvements in underlying operating performance of $30 million ($0.10 per common share), primarily due to the following:
the Retail segment, which (excluding the impact of the consolidation of franchises) included achieving higher sales with stable
gross margins and lower SG&A;
the Financial Services segment, primarily driven by growth in the credit card portfolio;
the Choice Properties segment, primarily resulting from expansion of the property portfolio through development of properties
and an increase in base rent from existing properties; and
the favourable impact of a decrease in depreciation and amortization, primarily due to a change in the estimated useful life of
certain equipment and fixtures in the second quarter of 2016.
2016 Annual Report - Financial Review 31
Management’s Discussion and Analysis
•
the net favourable year-over-year impact of certain adjusting items totaling $43 million ($0.09 per common share) including:
the impairment of Drug retail ancillary assets held for sale of $82 million ($0.20 per common share) in the prior year;
the accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient Labour Agreements of
$40 million ($0.10 per common share) incurred in the prior year;
the charge related to inventory measurement associated with the conversion of all of its franchised grocery stores to the new
IT systems of $24 million ($0.06 per common share) incurred in the prior year; partially offset by
an unfavourable impact of asset impairments, net of recoveries, of $90 million ($0.21 per common share); and
an unfavourable impact of pension annuities and buy-outs of $10 million ($0.03 per common share).
Adjusted net earnings available to common shareholders of the Company(2) in the fourth quarter of 2016 were $393 million ($0.97 per
common share), an increase of $30 million ($0.10 per common share) compared to the fourth quarter of 2015, primarily due to the
improvements in underlying operating performance, as described above.
Revenue
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Revenue
2016
(12 weeks)
10,845
$
2015
(12 weeks)
10,606
$
$ Change
239
$
% Change
2.3%
261
198
(174)
240
191
(172)
$
11,130
$
10,865
$
21
7
(2)
265
8.8%
3.7%
2.4%
Revenue was $11,130 million in the fourth quarter of 2016, an increase of $265 million compared to the fourth quarter of 2015, primarily
driven by a $239 million increase in Retail segment sales. Excluding the consolidation of franchises, Retail segment sales increased by
$168 million primarily due to positive same-store sales growth.
•
Food retail same-store sales growth was 1.1% (2015 – 3.1%(5)) for the quarter, after excluding gas bar which had no impact in the
fourth quarter of 2016. This same-store sales growth includes the impact of retail promotional investments. Including gas bar, Food
retail same-store sales growth was 2.4% in 2015. Food retail same-store sales included the favourable impact of an extra selling day
in the fourth quarter of 2016, due to the timing of New Year’s Day, of approximately 1.0%.
• Drug retail same-store sales growth was 3.4% (2015 – 5.0%) and was comprised of pharmacy same-store sales growth of 2.5%
(2015 – 4.2%) and front store same-store sales growth of 4.1% (2015 – 5.7%). Drug retail same-store sales included the favourable
impact of an extra selling day in the fourth quarter of 2016, due to the timing of New Year’s Day, of approximately 0.6%.
Operating Income Operating income was $449 million in the fourth quarter of 2016, an increase of $133 million compared to the fourth
quarter of 2015. The increase in operating income was driven by improvements in underlying operating performance of $86 million and the
net favourable impact of certain adjusting items totaling $47 million as described below:
•
the improvements in underlying operating performance of $86 million were driven by higher sales with stable gross margins, lower
SG&A, lower depreciation and amortization and the favourable impact from the consolidation of franchises; and
the net favourable year-over-year impact of certain adjusting items totaling $47 million, including:
the impairment of Drug retail ancillary assets held for sale of $112 million in the prior year;
•
the accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient Labour Agreements of
$55 million incurred in the prior year;
the charge related to inventory measurement associated with the conversion of all of its franchised grocery stores to the new
IT systems of $33 million incurred in the prior year; partially offset by
an unfavourable impact of asset impairments, net of recoveries, of $126 million; and
an unfavourable impact of pension annuities and buy-outs of $15 million.
32 2016 Annual Report - Financial Review
Adjusted EBITDA(2)
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Adjusted EBITDA(2)
2016
(12 weeks)
2015
(12 weeks)
$ Change
$
$
889
56
245
(234)
956
$
$
$
823
51
224
(217)
881
$
66
5
21
(17)
75
% Change
8.0%
9.8%
9.4%
8.5%
Adjusted EBITDA(2) was $956 million in the fourth quarter of 2016, an increase of $75 million compared to the fourth quarter of 2015.
Excluding the impact of the consolidation of franchises, adjusted EBITDA(2) increased by $44 million. The increase was primarily driven by
Retail segment performance including higher sales, maintaining stable gross margins and achieving lower SG&A.
Depreciation and Amortization Depreciation and amortization was $365 million in the fourth quarter of 2016, a decrease of $11 million
compared to the fourth quarter of 2015 primarily attributable to a change in the estimated useful life of certain equipment and fixtures in the
second quarter of 2016. Included in depreciation and amortization in the fourth quarter of 2016 was the impact of the amortization of
intangible assets related to the acquisition of Shoppers Drug Mart of $124 million (2015 – $124 million).
Net Interest Expense and Other Financing Charges
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Net interest expense and other financing charges
Add (deduct) impact of the following:
Fair value adjustment to the Trust Unit Liability
Adjusted net interest expense and other financing charges(2)
2016
(12 weeks)
128
2
130
$
$
2015
(12 weeks)
141
(7)
134
$
$
$
$
$ Change
(13)
% Change
(9.2)%
9
(4)
(3.0)%
Net interest expense and other financing charges were $128 million in the fourth quarter of 2016, a decrease of $13 million compared to
the fourth quarter of 2015. The decrease in net interest and other financing charges was primarily due to the year-over-year impact of the
change in the fair value adjustment to the Trust Unit Liability of $9 million and a decrease in adjusted net interest expense and other
financing charges(2) of $4 million driven by:
•
•
•
an increase in interest expense in the Choice Properties segment due to the issuance of senior unsecured debentures.
lower interest expense in the Financial Services segment due to repayment of Eagle debt; partially offset by
lower interest expense in the Retail segment due to repayment of MTNs in 2016;
Income Taxes
For the periods ended December 31, 2016 and January 2, 2016
(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
Adjusted income taxes(2)
Effective tax rate
Adjusted income tax rate(2)
$
$
2016
(12 weeks)
89
72
161
27.7%
27.5%
$
$
2015
(12 weeks)
48
85
133
27.4%
26.9%
$
$
$ Change
41
% Change
85.4 %
(13)
28
21.1 %
The effective tax rate in the fourth quarter of 2016 was 27.7% compared to 27.4% in the fourth quarter of 2015. The increase in the
effective tax rate was primarily attributable to an increase in certain other non-deductible items.
The adjusted income tax rate(2) in the fourth quarter was 27.5% compared to 26.9% in the fourth quarter of 2015. The increase in the
adjusted income tax rate(2) was primarily attributable to an increase in certain other non-deductible items.
2016 Annual Report - Financial Review 33
Management’s Discussion and Analysis
Cash Flow
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Cash and cash equivalents, beginning of period
2016
(12 weeks)
1,312
$
2015
(12 weeks)
1,275
$
$ Change
37
$
% Change
2.9 %
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Effect of foreign currency exchange rate changes on cash and cash
equivalents
861
(676)
(185)
2
564
(173)
(655)
7
Cash and cash equivalents, end of period
$
1,314
$
1,018
$
297
(503)
470
(5)
296
52.7 %
(290.8)%
71.8 %
(71.4)%
29.1 %
Cash Flows from Operating Activities Cash flows from operating activities in the fourth quarter of 2016 were $861 million, an increase of
$297 million compared to the fourth quarter of 2015, primarily due to higher cash earnings.
Cash Flows used in Investing Activities Cash flows used in investing activities in the fourth quarter of 2016 were $676 million, an
increase of $503 million compared to the fourth quarter of 2015, primarily due to the acquisition of QHR, an increase in short term
investments and the release of funds from security deposits in the fourth quarter of 2015 to fund the repayment of Eagle notes.
Cash Flows used in Financing Activities Cash flows used in financing activities in the fourth quarter of 2016 were $185 million, a
decrease of $470 million compared to the fourth quarter of 2015. The decrease was primarily driven by an increase in PC Bank’s co-
ownership interest held with the Other Independent Securitization Trusts and lower net repayments of long term debt.
Capital Investments In the fourth quarter of 2016, the Company invested $470 million (2015 – $433 million) in fixed asset purchases and
intangible asset additions.
Free Cash Flow(2)
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Free cash flow(2)
2016
(12 weeks)
313
$
2015
(12 weeks)
36
$
$ Change
277
$
% Change
769.4%
Free cash flow(2) was $313 million in the fourth quarter of 2016, an increase of $277 million compared to the fourth quarter of 2015,
primarily driven by higher cash flows from operating activities as described above.
34 2016 Annual Report - Financial Review
Retail Segment Fourth Quarter Results of Operations
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Sales
Operating Income
Adjusted gross profit(2)
Adjusted gross profit %(2)
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Depreciation and amortization
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Food retail
Drug retail
Pharmacy
Front Store
2016
(12 weeks)
2015
(12 weeks)
$
10,845
$
10,606
$
392
2,945
27.2%
889
8.2%
355
265
2,844
26.8%
823
7.8%
369
$
$
$ Change
% Change
239
127
101
66
2.3 %
47.9 %
3.6 %
8.0 %
(14)
(3.8)%
2016
(12 weeks)
Same-store
sales
$
1.1%
3.4%
2.5%
4.1%
Sales
7,789
3,056
1,361
1,695
2015
(12 weeks)
Same-store
sales
2.4%
5.0%
4.2%
5.7%
Sales
7,631
2,975
1,315
1,660
$
$
$
Sales, operating income, adjusted gross profit(2), adjusted gross profit percentage(2), adjusted EBITDA(2) and adjusted EBITDA margin(2) in
the fourth quarter of 2016 included the impacts of the consolidation of franchises, as set out in “Other Retail Business Matters”.
Sales Retail segment sales in the fourth quarter of 2016 were $10,845 million, an increase of $239 million compared to the fourth quarter
of 2015. Excluding the consolidation of franchises, Retail segment sales increased by $168 million primarily driven by the following factors:
•
Food retail same-store sales growth was 1.1% (2015 – 3.1%(5)) for the quarter, after excluding gas bar which had no impact in the
fourth quarter of 2016. This same-store sales growth includes the impact of retail promotional investments. Including gas bar, Food
retail same-store sales growth was 2.4% in 2015. Food retail same-store sales included the favourable impact of an extra selling day
in the fourth quarter of 2016, due to the timing of New Year’s Day, of approximately 1.0%.
The Company’s Food retail average quarterly internal food price index declined and was slightly lower than (2015 –
moderately higher than) the average quarterly national food price deflation of 2.3% (2015 – inflation of 4.1%), 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 modest;
Sales growth in pharmacy was flat; and
Sales growth in gas bar was flat.
• Drug retail same-store sales growth was 3.4% (2015 – 5.0%). Drug retail same-store sales included the favourable impact of an extra
selling day in the fourth quarter of 2016, due to the timing of New Year’s Day, of approximately 0.6%.
Same-store pharmacy sales growth was 2.5% (2015 – 4.2%);
the number of prescriptions dispensed increased by 5.0% (2015 – decreased by 4.7%). On a same-store basis, the
number of prescriptions dispensed increased by 4.5% (2015 – 3.2%) and year-over-year, the average prescription
value decreased by 2.0% (2015 – increased by 0.9%).
Same-store front store sales growth was 4.1% (2015 – 5.7%), with growth in all front store categories.
•
32 food and drug stores were opened and 37 food and drug stores were closed in the 12 months ended December 31, 2016, resulting
in an increase in Retail net square footage of 0.3 million square feet, or 0.4%. Store closures were driven by the Company’s store
closure plan that was announced in 2015 and completed in 2016.
2016 Annual Report - Financial Review 35
Management’s Discussion and Analysis
Operating Income Operating Income in the fourth quarter of 2016 was $392 million, an increase of $127 million compared to the fourth
quarter of 2015. The increase in operating income was driven by improvements in underlying operating performance of $80 million and the
net favourable impact of certain adjusting items totaling $47 million as described below:
•
the improvements in underlying operating performance of $80 million were driven by higher sales with stable gross margins, lower
SG&A, lower depreciation and amortization and the favourable impact from the consolidation of franchises; and
the net favourable year-over-year impact of certain adjusting items totaling $47 million, including:
the impairment of Drug retail ancillary assets held for sale of $112 million in the prior year;
•
the accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient Labour Agreements of
$55 million incurred in the prior year;
the charge related to inventory measurement associated with the conversion of all of its franchised grocery stores to the new
IT systems of $33 million incurred in the prior year; partially offset by
an unfavourable impact of asset impairments, net of recoveries, of $126 million; and
an unfavourable impact of pension annuities and buy-outs of $15 million.
Adjusted Gross Profit(2) Adjusted gross profit(2) in the fourth quarter of 2016 was $2,945 million, an increase of $101 million compared to
the fourth quarter of 2015. Adjusted gross profit percentage(2) of 27.2% increased by 40 basis points compared to the fourth quarter of
2015. Excluding the consolidation of franchises, the adjusted gross profit percentage(2) was 26.4%, a decrease of 20 basis points
compared to the fourth quarter of 2015. The decrease in adjusted gross profit percentage(2) was driven by Food retail promotional
investments, partially offset by improvements in Drug retail margins due to strong front store performance, and improvements in shrink
driven by improved inventory management.
Adjusted EBITDA(2) Adjusted EBITDA(2) in the fourth quarter of 2016 was $889 million, an increase of $66 million, compared to the fourth
quarter of 2015 driven by the increase in adjusted gross profit(2) described above, partially offset by an increase in SG&A of $35 million.
SG&A as a percentage of sales was 19.0%, a decrease of 10 basis points compared to the fourth quarter of 2015. Excluding the
consolidation of franchises, SG&A decreased $9 million and as a percentage of sales was 18.4%, an improvement of 40 basis points
compared to the fourth quarter of 2015, driven by the following factors:
•
•
•
•
higher retail store costs as efficiencies achieved in retail stores were more than offset by an increase in financial support to franchises.
the positive impact of the Company’s store closure plan announced in 2015 and completed in 2016;
favourable year-over-year foreign exchange impacts; partially offset by
lower store support costs;
Depreciation and Amortization Depreciation and amortization in the fourth quarter of 2016 was $355 million, a decrease of $14 million
compared to the fourth quarter of 2015 primarily attributable to a change in the estimated useful life of certain equipment and fixtures in the
second quarter of 2016. Included in depreciation and amortization in the fourth quarter of 2016 was the impact of the amortization of
intangible assets related to the acquisition of Shoppers Drug Mart of $124 million (2015 – $124 million).
36 2016 Annual Report - Financial Review
Financial Services Segment Fourth Quarter Results of Operations(4)
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Earnings before income taxes
2016
(12 weeks)
2015
(12 weeks)
$ Change
% Change
$
261
39
$
240
$
33
21
6
8.8%
18.2%
As at
As at
(millions of Canadian dollars except where otherwise indicated)
December 31, 2016
January 2, 2016
$ Change
% Change
Average quarterly net credit card receivables
$
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card receivables
Annualized credit loss rate on average quarterly gross credit card
receivables
2,769
2,926
52
13.5%
4.3%
$
2,642
2,790
54
13.6%
4.3%
$
127
136
(2)
4.8 %
4.9 %
(3.7)%
Revenue Revenue in the fourth quarter of 2016 was $261 million, an increase of $21 million compared to the fourth quarter of 2015,
primarily driven by:
•
•
higher interest and net interchange income attributable to growth in the credit card portfolio; and
higher sales attributable to The Mobile Shop.
Earnings before income taxes Earnings before income taxes in the fourth quarter of 2016 were $39 million, an increase of $6 million
compared to the fourth quarter of 2015, primarily driven by:
•
•
•
•
revenue growth as described above; and
lower interest and credit card losses; partially offset by
higher costs associated with the Financial Services’ loyalty program; and
higher operating costs as a result of an increase in the active customer base.
Credit Card Receivables As at December 31, 2016, credit card receivables were $2,926 million, an increase of $136 million compared to
January 2, 2016. This increase was primarily driven by growth in the active customer base as a result of continued investments in
customer acquisition, marketing and product initiatives. As at December 31, 2016, the allowance for credit card receivables was $52
million, a decrease of $2 million compared to January 2, 2016.
2016 Annual Report - Financial Review 37
Management’s Discussion and Analysis
Choice Properties Segment Fourth Quarter Results of Operations(4)
For the periods ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Net interest expense and other financing charges
Net income(i)
Adjusted funds from operations(2)
2016
(12 weeks)
198
$
2015
(12 weeks)
191
$
$ Change
7
$
(11)
256
82
184
41
82
(195)
215
—
% Change
3.7 %
(106.0)%
524.4 %
— %
(i)
Choice Properties qualifies as a “mutual fund trust” under the Income Tax Act (Canada) and therefore net income (loss) is equal to earnings before income taxes.
Revenue Revenue in the fourth quarter of 2016 was $198 million, an increase of $7 million compared to the fourth quarter of 2015 and
included $174 million (2015 – $172 million) generated from tenants within the Retail segment. The increase in revenue was primarily driven
by:
•
•
•
additional revenue generated from tenant openings in newly developed leasable space; and
revenue from properties acquired in 2015 and 2016.
an increase in base rent from existing properties.
Net Interest Expense and Other Financing Charges Net interest expense and other financing charges in the fourth quarter of 2016
resulted in income of $11 million compared to a charge of $184 million in the fourth quarter of 2015, a decrease of $195 million. The
decrease in net interest expense and other financing charges was primarily driven by the change in fair value adjustment on Class B
Limited Partnership units.
Net income Net income in the fourth quarter of 2016 was $256 million, an increase of $215 million compared to the fourth quarter of 2015.
The increase was primarily driven by:
•
•
•
•
the change in fair value adjustment on Class B Limited Partnership units;
the change in fair value adjustment on investment properties;
additional net operating income generated from tenant openings in newly developed leasable space; and
an increase in base rent from existing properties.
Adjusted Funds from Operations(2) Adjusted funds from operations(2) in the fourth quarter of 2016 were $82 million, flat compared to the
fourth quarter of 2015.
Other Matters In the fourth quarter of 2016, Choice Properties acquired two investment properties from third-parties for a purchase price
of approximately $14 million, excluding acquisition costs, which was fully settled in cash.
Subsequent to the end of 2016, Choice Properties redeemed, at par, the $200 million Series 6 senior unsecured debentures with an
original maturity date of April 20, 2017.
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 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 December 31, 2016.
38 2016 Annual Report - Financial Review
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 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 December 31, 2016.
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 2016 that materially affected, or are reasonably likely to materially affect the Company’s internal control over
financial reporting.
12. Enterprise Risks and Risk Management
The 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 oversees the ERM program, including a review of the Company’s risks and risk
prioritization and annual approval of the ERM policy and risk appetite framework. The risk appetite framework articulates key aspects of
the Company’s businesses, 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
the Board 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 At least semi-annually, 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 periods 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.
2016 Annual Report - Financial Review 39
Management’s Discussion and Analysis
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.
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 AIF for the year ended December 31, 2016, which is hereby
incorporated by reference:
Healthcare Reform
Loyalty Programs
Cyber Security and Data Breaches
Product Safety and Public Health
Regulatory Compliance
Legal Proceedings
IT Systems Implementations and Data Management
Merchandising, Electronic Commerce and Disruptive Technologies
Competitive Environment
Healthcare Reform 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 pharmacies 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 pharmacies 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.
40 2016 Annual Report - Financial Review
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
effect 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.
Loyalty Programs The Company’s loyalty programs are a valuable offering to customers and provide a key differentiating marketing tool
for the business. The marketing, promotional and other business activities related to possible changes to the loyalty programs must be well
managed and coordinated to preserve positive customer perception. Any failure to successfully manage either of the loyalty programs may
negatively impact the Company’s reputation and financial performance.
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
including personal health and financial information (“Confidential Information”) regarding the Company and its employees, franchisees,
Associates, vendors, customers, patients, credit card holders and loyalty program members. 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,
electronic 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, credit card holder or loyalty program member 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 investments in new IT systems to improve
the operating effectiveness of the organization. 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 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.
2016 Annual Report - Financial Review 41
Management’s Discussion and Analysis
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 in turn could 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.
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 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 of
existing competitors, particularly those expanding into the grocery and retail drug 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.
Product Safety and Public Health The Company’s products may expose it to risks associated with product safety and defects and
product handling in relation to the manufacturing, design, packaging and labeling, storage, distribution, and display of products. The
Company cannot assure that active management of these risks, including maintaining strict and rigorous controls and processes in its
manufacturing facilities and distribution systems, will eliminate all the risks related to food and product safety. The Company could be
adversely affected in the event of a significant outbreak of food-borne illness or food safety issues including food tampering or
contamination. In addition, failure to trace or locate any contaminated or defective products could affect the Company’s ability to be
effective in a recall situation. The Company is also subject to risk associated with errors made through medication dispensing or errors
related to patient services or consultation. The occurrence of such events or incidents, as well as the failure to maintain the cleanliness and
health standards at store level, could result in harm to customers, negative publicity or could adversely affect the Company’s brands,
reputation, operations or financial performance and could lead to unforeseen liabilities from legal claims or otherwise.
Regulatory Compliance The Company is subject to a wide variety of laws, regulations and orders across all countries in which it does
business, including those laws involving product liability, labour and employment, anti-trust and competition, pharmacy, food safety,
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, pharmaceuticals and general merchandise products, could adversely affect the operations or financial condition or
performance of the Company.
Failure by the Company to comply with applicable laws, regulations 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 condition or performance of the Company. In the course of complying with changes to laws, 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.
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 has issued
requests for documents from the Company and 13 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 meet the Competition
Bureau’s objectives of maintaining competitive markets, then the Competition Bureau may pursue remedies that could have a material
adverse effect on the Company’s reputation, operations or financial condition or performance.
The Régie de l'assurance maladie du Québec (“RAMQ”) has been investigating certain aspects of Shoppers Drug Mart’s contractual
arrangements with pharmacists and drug manufacturers. Shoppers Drug Mart has and will continue to cooperate with RAMQ in its review
of these practices. If RAMQ is not satisfied with Shoppers Drug Mart’s practices, then RAMQ may pursue remedies that could have a
material adverse effect on the Company’s reputation, operations or financial condition or performance.
42 2016 Annual Report - Financial Review
The Company is subject to tax audits from various tax authorities on an ongoing basis. As a result, from time to time, tax 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 result in a material
adverse effect on the Company’s reputation, operations or financial condition or performance.
The Company is subject to externally imposed capital requirements from 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 and OSFI’s
Guideline on Liquidity Adequacy Requirements (“LARs”). The LARs guideline establishes standards based on the Basel III framework. PC
Bank would be assessed fines and other penalties for non-compliance with these and other regulations. In addition, failure by PC Bank to
comply, understand, acknowledge and effectively respond to applicable regulators could result in regulatory intervention and reputational
damages.
Choice Properties is currently classified as a “unit trust” and a “mutual fund trust” under the Income Tax Act (Canada). It also qualifies for
the Real Estate Investment Trust Exception under the Income Tax Act (Canada) 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 In the ordinary course of business, the Company is involved in and potentially subject to legal proceedings. The
proceedings may involve suppliers, customers, Associates, franchisees, regulators, tax authorities or other persons. The potential outcome
of legal proceedings and claims is uncertain and could result in a material adverse effect on the Company’s reputation, operations or
financial condition or 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.
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.
The Company has been 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, which were
received in 2015 and 2016, are for the 2000 to 2011 taxation years and total $351 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 2012 and 2013 taxation years on the same
or similar basis. The Company has filed a Notice of Appeal with the Tax Court of Canada for the 2000 to 2010 taxation years and a Notice
of Objection for the 2011 taxation year.
2016 Annual Report - Financial Review 43
Management’s Discussion and Analysis
Merchandising, Electronic Commerce and Disruptive Technologies The Company may have inventory that customers do not want or
need, is not reflective of current trends in customer tastes, habits or regional preferences, is priced at a level customers are not willing to
pay, is late in reaching the market or does not have optimal commercial product placement on store shelves. In addition, the Company’s
operations as they relate to food, specifically inventory levels, sales, volume and product mix, are impacted to some degree by seasonality,
including certain holiday periods in the year. Certain health care, related professional services and general merchandise offerings are also
subject to seasonal fluctuations. If merchandising efforts are not effective or responsive to customer demand, it could adversely affect the
Company’s financial performance.
The Company’s electronic commerce strategy is a growing business initiative. As part of the e-commerce initiative, customers expect
innovative concepts and a positive customer experience, including a user-friendly website, safe and reliable processing of payments and a
well-executed merchandise pick up or delivery process. If systems are damaged or cease to function properly, capital investment may be
required. The Company is also vulnerable to various additional uncertainties associated with e-commerce including website downtime and
other technical failures, changes in applicable federal and provincial regulations, security breaches, and consumer privacy concerns. If
these technology-based systems do not function effectively, the Company’s ability to grow its e-commerce business could be adversely
affected. The Company has increased its investment in improving the digital customer experience, but there can be no assurances that the
Company will be able to recover the costs incurred to date.
The retail landscape is quickly changing due to the rise of the digitally influenced shopping experience and the emergence of disruptive
technologies, such as digital payments, drones, driverless cars and robotics. In addition, the effect of increasing digital advances could
have an impact on the physical space requirements of retail businesses. Although the importance of a retailer’s physical presence has
been demonstrated, the size requirements and locations may be subject to further disruption. Any failure to adapt the business models to
recognize and manage this shift in a timely manner could adversely affect the Company’s operations or 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 could 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. During 2016 and 2015, the Company entered into derivative instruments in the form of futures
contracts and forward contracts to manage its current and anticipated exposure to fluctuations in U.S. dollar exchange rates.
44 2016 Annual Report - Financial Review
Credit The Company is exposed to credit risk resulting from the possibility that counterparties could default on their financial obligations to
the Company, 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.
Choice Properties’ Unit Price The Company is exposed to market price risk as a result of 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.
2016 Annual Report - Financial Review 45
Management’s Discussion and Analysis
13. Related Party Transactions
The Company’s controlling shareholder is George Weston Limited (“Weston”), which owns, directly and indirectly, 187,815,136 of the
Company’s common shares, representing approximately 47% 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 80,773,740 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 from a subsidiary of Wittington
Transaction Value
2016
(52 weeks)
2015
(52 weeks)
$
$
654
28
27
21
16
3
642
25
27
23
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 December 31, 2016 was $5 million (January 2, 2016 – $2 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 systems, 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 2016, Choice Properties issued
1,265,160 Units (2015 – 1,317,405 Units) to Weston under its DRIP at a weighted average price of $12.63 (2015 – $10.86) per Unit.
The net balances due to Weston are comprised as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
As at
December 31, 2016
44
$
As at
January 2, 2016
3
$
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
December 31, 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 2016, 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.
46 2016 Annual Report - Financial Review
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
2016
(52 weeks)
4
6
10
$
$
2015
(52 weeks)
6
4
10
$
$
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 entity’s 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.
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 the purposes of fixed asset impairment testing. For the purpose of goodwill and
indefinite life intangible assets impairment testing, CGUs are grouped at the lowest level at which goodwill and indefinite life intangible
assets 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.
2016 Annual Report - Financial Review 47
Management’s Discussion and Analysis
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.
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
Presentation of Financial Statements The Company implemented the amendments to IAS 1, “Presentation of Financial Statements”,
effective January 1, 2016. There was no significant impact on the Company’s consolidated financial statements as a result of the
implementation of this amendment.
48 2016 Annual Report - Financial Review
Income Taxes In November 2016, the IFRS Interpretations Committee issued its agenda decision related to the expected manner of
recovery of indefinite life intangible assets when measuring deferred income taxes in accordance with IAS 12, “Income Taxes” and clarified
its interpretation that an indefinite life intangible asset does not have an unlimited life and its economic benefit flows to an entity in future
periods through use and not just through future sale. Accordingly, it is appropriate to measure the associated deferred income tax liability at
the income tax rate applicable to ordinary taxable income expected to apply in the years in which the temporary differences are expected
to be recovered or settled. The Company's accounting policy reflected an accepted view that an indefinite life intangible will be recovered
through its disposition and was using a capital gains tax rate to measure deferred income taxes associated with its indefinite life intangible
assets. The Company implemented this guidance in the fourth quarter of 2016 on a retrospective basis as an accounting policy change in
accordance with IAS 8, “Accounting Policies, Changes to Accounting Estimates and Errors”. The impact of this change was as follows:
Consolidated Statement of Earnings and Comprehensive Income
Increase (Decrease)
(millions of Canadian dollars except where otherwise indicated)
Income taxes(i)
Net Earnings
Net Earnings attributable to Shareholders of the Company
Total Comprehensive Income
Net Earnings per Common Share ($)
Basic
Diluted
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Goodwill
Deferred Income Tax Liabilities
Retained Earnings
$
$
$
$
$
$
$
2015
34
(34)
(34)
(34)
(0.08)
(0.08)
As at
January 4, 2015
418
424
(6)
$
As at
January 2, 2016
418
458
(40)
(i) Relates to the re-measurement of deferred income tax liabilities as a result of the Alberta statutory corporate income tax rate change in 2015.
15.2 Changes to Accounting Estimates
Fixed Assets In the second quarter of 2016, the Company reassessed and revised the useful life of certain classes of equipment and
fixtures from eight to ten 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 $66 million compared to 2015.
15.3 Future Accounting Standards
The future accounting standards noted below will impact the Company’s business processes, internal controls over financial reporting, data
systems, and IT, as well as financing and compensation arrangements. As a result, the Company has developed comprehensive project
plans to guide the implementations.
IFRS 15 In 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers” (“IFRS 15”), replacing IAS 18, “Revenue”, IAS 11,
“Construction Contracts”, and related interpretations. IFRS 15 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. IFRS
15 is to be applied retrospectively using either the retrospective or cumulative effect method. While early adoption is permitted, the
Company will not early adopt IFRS 15.
The Company has completed a preliminary assessment of the potential impact of the adoption of IFRS 15 on its consolidated financial
statements.
The Company expects that the implementation of IFRS 15 will impact the allocation of revenue that is deferred in relation to its customer
loyalty award programs. Revenue is currently allocated to the customer loyalty awards using the residual fair value method. Under IFRS
15, consideration will be allocated between the loyalty program awards and the goods or services on which the awards were earned,
based on their relative stand-alone selling prices. The Company is currently assessing the impact of this change on its consolidated
financial statements.
2016 Annual Report - Financial Review 49
Management’s Discussion and Analysis
The Company is still assessing the impacts of IFRS 15, if any, on its franchise arrangements with non-consolidated stores. The Company
does not expect the implementation of IFRS 15 to otherwise have a significant impact on its Retail, Financial Services or Choice Properties
segment revenue streams, however the detailed assessment is ongoing.
The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical
expedients available under the standard. The Company expects to disclose additional detailed information, including any exemptions
elected and estimated quantitative financial effects, before the adoption of IFRS 15.
IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments” (“IFRS 9”), replacing IAS 39, “Financial Instruments: Recognition and
Measurement” (“IAS 39”), and related interpretations. The standard includes revised guidance on the classification and measurement of
financial assets, including impairment and a new general hedge accounting model. IFRS 9 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 requirements which are to be
applied prospectively. While early adoption is permitted, the Company will not early adopt IFRS 9.
The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 9 on its consolidated financial
statements based on its positions at December 31, 2016 and hedging relationships designated during 2016 under IAS 39, which are
discussed below.
Classification and measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the
business model in which assets are managed and their cash flow characteristics. IFRS 9 largely retains the existing requirements in IAS 39
for the classification of financial liabilities. Based on its preliminary assessment, the Company does not believe that the new classification
requirements will have a significant impact on its consolidated financial statements.
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. Applying the
ECL model will require considerable judgment, including consideration of how changes in economic factors affect ECLs, which will be
determined on a probability-weighted basis. The new impairment model will apply to financial assets measured at amortized cost or those
measured at fair value through other comprehensive income, except for investments in equity instruments, and to contract assets.
The Company expects that the ECL model will change the valuation of its Financial Services segment credit losses on credit card
receivables. The Company believes that impairment losses are likely to increase and become more volatile for assets in the scope of the
IFRS 9 impairment model. The Company is currently assessing the impact of this change on its consolidated financial statements and is
continuing to assess the impact of the ECL model on its other financial assets.
General hedging IFRS 9 will require the Company to ensure that hedge accounting relationships are aligned with the Company’s risk
management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. The
Company’s preliminary assessment indicates that the types of hedge accounting relationships that the Company currently designates
should be capable of meeting the requirements of IFRS 9 once the Company completes certain planned changes to its internal
documentation and monitoring processes.
The Company has not yet decided whether it will use the practical expedients available under the standard. The Company expects to
disclose additional detailed information, including any practical expedients and estimated quantitative financial effects, before the adoption
of IFRS 9.
IFRS 16 In 2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”), replacing 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. For leases where the Company is the lessee, it has the option of adopting a full retrospective
approach or a modified retrospective approach on transition to IFRS 16. While early adoption is permitted if IFRS 15 has been adopted,
the Company will not early adopt IFRS 16.
The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its consolidated financial
statements.
The Company expects the adoption of IFRS 16 will have a significant impact on its Retail segment as the Company will recognize new
assets and liabilities for its operating leases of property, buildings, vehicles and equipment. In addition, the nature and timing of expenses
related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-
use assets and interest expense on lease liabilities. No significant impacts are expected for the Company’s finance leases or leases where
the Company is the lessor.
The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical
expedients under the standard. The Company expects to disclose additional detailed information, including its transition method, any
practical expedients elected and estimated quantitative financial effects, before the adoption of IFRS 16.
50 2016 Annual Report - Financial Review
16. Outlook(3)
Loblaw remains focused on its strategic framework, delivering the best in food, best in health and beauty, operational excellence and
growth. This framework is supported by our financial plan of maintaining a stable trading environment that targets positive same-store
sales and stable gross margin, surfacing efficiencies to deliver operating leverage, and returning capital to shareholders.
In 2017, on a full year comparative basis, despite the current deflationary environment, the Company expects to:
•
deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive grocery market, 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 gross profit; Retail segment adjusted gross profit; Retail
segment adjusted gross profit percentage; adjusted earnings before income taxes, net interest expense and other financing charges and
depreciation and amortization (“adjusted EBITDA”); adjusted EBITDA margin; adjusted operating income; adjusted net interest expense
and other financing charges; adjusted income taxes; adjusted income tax rate; adjusted net earnings available to common shareholders;
adjusted diluted net earnings per common share; free cash flow; retail debt to retail adjusted EBITDA; adjusted return on equity; 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 underlying consolidated and segment 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.
2016 Annual Report - Financial Review 51
Management’s Discussion and Analysis
Retail Segment Gross Profit, Retail Segment Adjusted Gross Profit and Retail Segment Adjusted Gross Profit Percentage The
following table reconciles revenue and cost of merchandise inventories sold to gross profit by segment and then to adjusted gross profit by
segment. The Company believes that Retail segment gross profit and Retail segment adjusted gross profit are useful in assessing the
Retail segment’s underlying operating performance and in making decisions regarding the ongoing operations of the business.
Retail segment adjusted gross profit percentage is calculated as Retail segment adjusted gross profit divided by Retail segment revenue.
For the periods ended December 31,
2016 and January 2, 2016
(millions of Canadian dollars)
Revenue
Cost of Merchandise Inventories
Sold
Gross Profit
Add (deduct) impact of the
following:
Charges related to retail
locations in Fort McMurray,
net of recoveries
Net impairment (impairment
reversals) related to Drug
retail ancillary assets
Charge related to inventory
measurement and other
conversion differences
2016
(12 weeks)
2015
(12 weeks)
Financial
Services(4)
Choice
Properties(4)
Retail
Consolidation
and
Eliminations
Total
Retail
Financial
Services(4)
Choice
Properties(4)
Consolidation
and
Eliminations
Total
$10,845 $
261 $
198 $
(174) $ 11,130
$10,606 $
240 $
191 $
(172) $ 10,865
7,896
27
—
—
7,923
7,812
19
—
—
7,831
$ 2,949 $
234 $
198 $
(174) $ 3,207
$ 2,794 $
221 $
191 $
(172) $ 3,034
(4)
—
—
—
—
—
—
—
—
—
—
—
(4)
—
—
—
46
4
—
—
—
—
—
—
—
—
—
—
46
4
Adjusted Gross Profit
$ 2,945 $
234 $
198 $
(174) $ 3,203
$ 2,844 $
221 $
191 $
(172) $ 3,084
2016
(52 weeks)
2015
(52 weeks)
Financial
Services(4)
Choice
Properties(4)
Retail
Consolidation
and
Eliminations
Total
Retail
Financial
Services(4)
Choice
Properties(4)
Consolidation
and
Eliminations
Total
$45,384 $
911 $
784 $
(694) $ 46,385
$44,469 $
849 $
743 $
(667) $ 45,394
33,130
83
—
— 33,213
32,780
66
—
— 32,846
$12,254 $
828 $
784 $
(694) $ 13,172
$11,689 $
783 $
743 $
(667) $ 12,548
1
3
4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
3
4
—
—
—
—
46
4
8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
46
4
8
$12,262 $
828 $
784 $
(694) $ 13,180
$11,747 $
783 $
743 $
(667) $ 12,606
For the periods ended December 31,
2016 and January 2, 2016
(millions of Canadian dollars)
Revenue
Cost of Merchandise Inventories
Sold
Gross Profit
Add (deduct) impact of the
following:
Charges related to retail
locations in Fort McMurray,
net of recoveries
Restructuring and other related
costs
Net impairment (impairment
reversals) related to Drug
retail ancillary assets
Charge related to inventory
measurement and other
conversion differences
Charge related to apparel
inventory
Adjusted Gross Profit
52 2016 Annual Report - Financial Review
Charges related to retail locations in Fort McMurray, net of recoveries In the second quarter of 2016, 10 retail locations in Fort
McMurray were impacted by the wildfire that caused the evacuation of the city. The Company recognized charges related to the inventory
losses, site clean-up and other restoration costs as set out in Section “6.1 Other Retail Business Matters”. As at the end of 2016, the
Company received partial proceeds of $10 million from the insurance claim. The insurance claim remains in progress and further proceeds
are expected to be recorded as the claim progresses.
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.
Net impairment (impairment reversals) related to Drug retail ancillary assets In the second quarter of 2016, the Company ceased
actively marketing the remaining assets in certain Drug retail ancillary operations that were previously marketed for sale, as set out in
Section “6.1 Other Retail Business Matters”.
Charge related to inventory measurement and other conversion differences 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.
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.
2016 Annual Report - Financial Review 53
Management’s Discussion and Analysis
Adjusted Operating Income, Adjusted EBITDA and Adjusted EBITDA Margin The following tables reconcile adjusted operating income
and adjusted EBITDA to operating income, which is reconciled to GAAP net earnings measures reported in the consolidated statements of
earnings for the periods ended December 31, 2016 and January 2, 2016. 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.
2016
(12 weeks)
Financial
Services(4)
Choice
Properties(4)
Retail
Consolidation
and
Eliminations Consolidated
Retail
Financial
Services(4)
Choice
Properties(4)
Consolidation
and
Eliminations
$
204
2015
(12 weeks)
Consolidated
$
131
(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
Add (deduct) impact of the following:
Amortization of intangible assets
acquired with Shoppers Drug
Mart
Restructuring and other related
costs
Charges related to retail locations
in Fort McMurray, net of
recoveries
Fair value adjustment on fuel and
foreign currency contracts
Net impairment (impairment
reversals) related to Drug
retail ancillary assets
Charge related to inventory
measurement and other
conversion differences
Asset impairments, net of
recoveries
Labour agreements
Modifications to certain franchise
fee arrangements
Pension annuities and buy-outs
$ 392 $
52 $
245 $
(240) $
124
2
(5)
(6)
—
—
130
—
—
21
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28
128
89
449
$ 265 $
48 $
224 $
(221) $
124
124
2
(5)
(6)
—
—
130
—
—
21
266
715
365
(7)
—
(6)
112
33
4
55
(8)
6
$ 313 $
$ 578 $
369
(124)
(124)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
48 $
— $
224 $
— $
(221) $
3
—
—
—
4
—
(4)
141
48
316
124
(7)
—
(6)
112
33
4
55
(8)
6
313
629
376
(124)
881
Adjusting Items
Adjusted operating income
$ 266 $
$ 658 $
— $
52 $
— $
245 $
— $
(240) $
Depreciation and amortization
355
Less: Amortization of intangible
assets acquired with Shoppers
Drug Mart
(124)
4
—
—
—
6
—
Adjusted EBITDA
$ 889 $
56 $
245 $
(234) $
956
$ 823 $
51 $
224 $
(217) $
54 2016 Annual Report - Financial Review
2016
(52 weeks)
Financial
Services(4)
Choice
Properties(4)
Retail
Consolidation
and
Eliminations Consolidated
Retail
Financial
Services(4)
Choice
Properties(4)
Consolidation
and
Eliminations
$
983
7
653
449
2015(6)
(52 weeks)
Consolidated
$
598
(9)
644
368
$1,902 $
175 $
677 $
(662) $
2,092
$ 1,429 $
163 $
601 $
(592) $
1,601
535
46
5
2
10
(4)
135
23
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
535
46
5
2
10
536
154
(21)
—
—
(4)
112
135
23
—
—
—
—
—
13
8
8
2
55
33
(8)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(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
Add (deduct) impact of the following:
Amortization of intangible assets
acquired with Shoppers Drug
Mart
Restructuring and other related
costs
Fair value adjustment on fuel and
foreign currency contracts
Charges related to retail locations
in Fort McMurray, net of
recoveries
Prior year tax assessment
Net impairment (impairment
reversals) related to Drug
retail ancillary assets
Asset impairments, net of
recoveries
Pension annuities and buy-outs
Charge related to apparel
inventory
Shoppers Drug Mart acquisition-
related cost, net of impact
from divestitures
Labour agreements
Charge related to inventory
measurement and other
conversion differences
Modifications to certain franchise
fee arrangements
Adjusting Items
$ 752 $
— $
— $
— $
752
$ 892 $
— $
— $
— $
Adjusted operating income
$2,654 $
175 $
677 $
(662) $
2,844
$ 2,321 $
163 $
601 $
(592) $
Depreciation and amortization
1,512
Less: Amortization of intangible
assets acquired with Shoppers
Drug Mart
(535)
13
—
1
—
17
—
1,543
1,567
(535)
(536)
10
—
1
—
14
—
Adjusted EBITDA
$3,631 $
188 $
678 $
(645) $
3,852
$ 3,352 $
173 $
602 $
(578) $
3,549
In addition to the items described in the Retail segment adjusted gross profit(2) section above, adjusted EBITDA(2) was impacted by the
following:
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. Annual
amortization associated with the acquired intangibles will be approximately $525 million until 2024, and will decrease thereafter.
2016 Annual Report - Financial Review 55
536
154
(21)
—
—
112
13
8
8
2
55
33
(8)
892
2,493
1,592
(536)
Management’s Discussion and Analysis
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. 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.
Prior year tax assessment During the first quarter of 2016, the province of Ontario enacted retroactive amendments to the Land Transfer
Tax Act. The amendments were applicable to land transfer activities between related parties that occurred on or after July 19, 1989. The
amendments impacted certain land transfers between the Company and Choice Properties at the time of the initial public offering, resulting
in a charge of $10 million in the first quarter of 2016 to SG&A in the Retail segment.
Asset 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 2016,
this included the impairment of a Shoppers Drug Mart ancillary healthcare business. The Company recorded a charge of $88 million
related to the impairment of fixed assets of $15 million and a customer relationship intangible asset of $73 million as set out in Section 6.1
“Retail Segment - Other Retail Business Matters”.
Pension annuities and buy-outs The Company is undertaking 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.
Shoppers Drug Mart acquisition-related costs, net of impact from divestitures In the first quarter of 2015, the Company completed all
remaining divestitures required by the Competition Bureau and recorded a divestiture loss of $2 million.
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.
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, the Company recorded a reduction in
previously recorded impairment of $8 million.
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
December 31, 2016 and January 2, 2016. The Company believes that adjusted net interest expense and other financing charges is useful
in assessing the Company’s underlying financial performance and in making decisions regarding the financial operations of the business.
(millions of Canadian dollars)
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
$
$
2016
(12 weeks)
128
2015
(12 weeks)
141
$
2016
(52 weeks)
653
$
2
—
(7)
—
130
$
134
$
(118)
—
535
2015
(52 weeks)
644
(81)
(15)
548
$
$
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. An increase (decrease) in market price of Units results in a charge (reduction)
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 early repayments of debt in 2015.
56 2016 Annual Report - Financial Review
Adjusted Income Taxes and Adjusted Income Tax Rate The Company believes adjusted income taxes is useful in assessing the
Company’s underlying operating performance and in making decisions regarding the ongoing operations of its business.
For the periods ended December 31, 2016 and January 2, 2016
(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)
Statutory corporate income tax rate change
Adjusted income taxes
Effective tax rate
Adjusted income tax rate
2016
(12 weeks)
715
130
585
89
72
—
161
$
$
$
$
2015
(12 weeks)
629
134
495
48
85
—
133
$
$
$
$
27.7%
27.5%
27.4%
26.9%
$
$
$
$
2016
(52 weeks)
2,844
535
2,309
449
189
(3)
635
31.2%
27.5%
$
$
$
$
2015(6)
(52 weeks)
2,493
548
1,945
368
229
(72)
525
38.5%
27.0%
(i) See reconciliations of adjusted operating income and adjusted net interest expense and other financing charges in the tables above.
(ii) See the adjusted operating income, 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.
Statutory corporate income tax rate change The Company’s deferred income tax assets and liabilities are impacted by changes to
provincial and federal statutory corporate income tax rates resulting in a charge or benefit to earnings. The Company implements changes
in the statutory corporate income tax rate in the same period the change is substantively enacted by the legislative body.
In the first quarter of 2016, the Government of New Brunswick announced a 2% increase in the provincial statutory corporate income tax
rate from 12% to 14%. The Company recorded a charge of $3 million in the first quarter of 2016 and year-to-date related to the re-
measurement of deferred tax liabilities.
In the second quarter of 2015, the Government of Alberta announced a 2% increase in the provincial statutory corporate income tax rate
from 10% to 12%. The Company recorded a charge of $72 million in the second quarter of 2015 and year-to-date related to the re-
measurement of its deferred tax liabilities.
2016 Annual Report - Financial Review 57
Management’s Discussion and Analysis
Adjusted Net Earnings Available to Common Shareholders and Adjusted Diluted Net Earnings Per Common Share The Company
believes adjusted net earnings available to common shareholders and adjusted diluted 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 net earnings attributable to shareholders of the Company to net earnings available to common shareholders
of the Company and then to adjusted net earnings available to common shareholders of the Company for the periods ended December 31,
2016 and January 2, 2016:
(millions of Canadian dollars except where otherwise indicated)
Net earnings attributable to shareholders of the Company
Less: Prescribed dividends on preferred shares in share capital
Net earnings available to common shareholders of the Company
Net earnings attributable to shareholders of the Company
Adjusting items (refer to the following table)
Adjusted net earnings attributable to shareholders of the Company
Less: Prescribed dividends on preferred shares in share capital
Adjusted net earnings available to common shareholders of the
Company
$
$
$
$
$
2016
(12 weeks)
2015
(12 weeks)
2016
(52 weeks)
2015(6)
(52 weeks)
204
(3)
201
204
192
396
(3)
393
$
$
$
$
$
131
(3)
128
131
235
366
(3)
363
$
$
$
$
$
$
$
$
$
$
983
(12)
971
983
684
1,667
(12)
1,655
409.1
598
(7)
591
598
831
1,429
(7)
1,422
415.2
Diluted weighted average common shares outstanding (millions)
405.6
415.2
58 2016 Annual Report - Financial Review
The following table reconciles adjusted net earnings available to common shareholders of the Company and adjusted diluted net earnings
per common share to GAAP net earnings available to common shareholders of the Company and diluted net earnings per common share
as reported for the periods ended December 31, 2016 and January 2, 2016:
(millions of Canadian dollars/Canadian
dollars)
As reported
Add (deduct) impact of the following:
Fair value adjustment to the Trust Unit
Liability(i)
Amortization of intangible assets
acquired with Shoppers Drug Mart
Restructuring and other related costs
Fair value adjustment on fuel and foreign
currency contracts
Charges related to retail locations in Fort
McMurray, net of recoveries
Net impairment (impairment reversals)
related to Drug retail ancillary assets
Statutory corporate income tax rate
change
Asset impairments, net of recoveries
Charge related to apparel inventory
Accelerated amortization of deferred
financing costs
Prior year tax assessment
Pension annuities and buy-outs
Labour agreements
Modifications to certain franchise fee
arrangements
Shoppers Drug Mart acquisition-related
cost, net of impact from divestitures
Charge related to inventory
measurement and other conversion
differences
2016
(12 weeks)
2015
(12 weeks)
2016
(52 weeks)
2015(6)
(52 weeks)
Net Earnings
Available to
Common
Shareholders
of the
Company
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders
of the
Company
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders
of the
Company
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders
of the
Company
Diluted
Net
Earnings
Per
Common
Share
$
201 $
0.50
$
128 $
0.31
$
971 $
2.37
$
591 $
1.42
(2)
90
3
(4)
(3)
—
—
93
—
—
—
15
—
—
—
—
—
0.22
0.01
(0.01)
(0.01)
—
—
0.22
—
—
—
0.04
—
—
—
—
0.47
0.97
7
0.01
92
(5)
0.21
(0.01)
(5)
(0.01)
—
82
—
3
—
—
—
5
40
—
0.20
—
0.01
—
—
—
0.01
0.10
(8)
(0.02)
—
24
$
$
235 $
363 $
—
0.06
0.56
0.87
118
395
44
4
2
0.29
0.97
0.11
0.01
—
(3)
(0.01)
3
97
—
—
7
17
—
—
—
—
$
$
684 $
1,655 $
0.01
0.24
—
—
0.02
0.04
—
—
—
—
1.68
4.05
81
0.20
394
127
0.95
0.31
(16)
(0.04)
—
82
72
10
6
11
—
6
40
—
0.20
0.17
0.02
0.01
0.03
—
0.01
0.10
(8)
(0.02)
2
24
$
$
831 $
1,422 $
—
0.06
2.00
3.42
Adjusting items
Adjusted
$
$
192 $
393 $
(i) Gains or losses related to the fair value adjustment to the Trust Unit Liability are not subject to tax.
2016 Annual Report - Financial Review 59
Management’s Discussion and Analysis
Free Cash Flow The following table reconciles free cash flow used in assessing the Company’s financial condition to GAAP measures for
the periods ended December 31, 2016 and January 2, 2016. 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
2016
(12 weeks)
861
470
78
313
$
$
2015
(12 weeks)
564
433
95
36
$
$
2016
(52 weeks)
3,519
1,224
474
1,821
$
$
2015
(52 weeks)
3,079
1,241
491
1,347
$
$
Choice Properties' Adjusted Funds from Operations The following table reconciles Choice Properties’ adjusted funds from operations
to GAAP measures for the periods ended December 31, 2016 and January 2, 2016. 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 adjustments on Class B Limited Partnership units
Fair value adjustments on investment properties
Fair value adjustments on unit-based compensation
Fair value adjustments of investment property held in equity
accounted joint venture
Distributions on Class B Limited Partnership units
Internal expenses for leasing
Funds from Operations
Straight-line rental revenue
Amortization of finance charges
Unit-based compensation expense
Sustaining property and leasing capital expenditures, normalized(i)
Adjusted Funds from Operations
2016
(12 weeks)
256
$
2015
(12 weeks)
41
$
2016
(52 weeks)
(223)
$
2015
(52 weeks)
(155)
$
(107)
(102)
(1)
—
56
1
103
(9)
1
1
(14)
82
$
$
96
(88)
—
—
52
—
101
(10)
—
—
(9)
82
$
$
530
(109)
4
(14)
219
3
410
(36)
1
3
(48)
330
$
$
411
(72)
1
—
203
1
389
(37)
(1)
2
(40)
313
$
$
(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 22, 2017
Toronto, Canada
60 2016 Annual Report - Financial Review
MD&A Endnotes
For financial definitions and ratios refer to the Glossary of Terms on page 127 of the Company’s 2016 Annual Report.
(1)
(2) See Section 17 “Non-GAAP Financial Measures”, which includes the reconciliation of such non-GAAP measures to the most directly comparable GAAP measures.
(3)
(4)
To be read in conjunction with Section 1 “Forward-Looking Statements”.
For segment presentation purposes, the results are for the periods ended December 31, consistent with Financial Services’ and Choice Properties’ fiscal calendars.
Adjustments to the Company’s fiscal calendar are included in Consolidation and Eliminations. See Section 17 “Non-GAAP Financial Measures” and Note 36 “Segment
Information” in the Company’s 2016 consolidated financial statements.
2015 comparative Food retail same-store sales growth also excludes the negative impact of a change in distribution model by a tobacco supplier, which had no impact
in the current period.
(5)
(6) Certain figures have been restated as a result of the IFRS Interpretations Committee’s agenda decision on IAS 12, “Income Taxes”. See Note 2 in the Company’s 2016
consolidated financial statements.
The Company’s 2014 results were impacted by the inclusion of an additional selling week, the 53rd week.
(7)
2016 Annual Report - Financial Review 61
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
Nature and Description of the Reporting Entity
Significant Accounting Policies
Critical Accounting Estimates and Judgments
Future Accounting Standards
Business Acquisitions
Net Interest Expense and Other Financing Charges
Income Taxes
Basic and Diluted Net Earnings per Common Share
Cash and Cash Equivalents, Short Term Investments and Security Deposits
Accounts Receivable
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6
Note 7.
Note 8.
Note 9.
Note 10.
Note 11. Credit Card Receivables
Inventories
Note 12.
Assets Held for Sale
Note 13.
Fixed Assets
Note 14.
Investment Properties
Note 15.
Note 16.
Intangible Assets
Note 17. Goodwill
Note 18. Other Assets
Note 19. Customer Loyalty Awards Program Liability
Provisions
Note 20
Short Term Debt
Note 21.
Long Term Debt
Note 22.
Note 23. Other Liabilities
Note 24.
Note 25. Capital Management
Note 26.
Note 27.
Note 28.
Note 29.
Note 30.
Note 31.
Note 32. Contingent Liabilities
Financial Guarantees
Note 33.
Note 34. Related Party Transactions
Note 35. Restructuring and Other Related Costs
Note 36.
Segment Information
Share Capital
Post-Employment and Other Long Term Employee Benefits
Equity-Based Compensation
Employee Costs
Leases
Financial Instruments
Financial Risk Management
Three Year Summary
Glossary of Terms
62 2016 Annual Report - Financial Review
63
64
65
66
67
68
69
70
70
70
81
82
84
85
86
87
88
88
89
90
90
90
92
93
95
96
96
96
96
97
100
100
102
103
109
113
114
115
117
119
120
121
122
123
125
127
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. 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 – Financial Review is consistent with that in the consolidated financial statements.
Management is also responsible for providing 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 – Financial Review based on the review and recommendation of the Audit Committee.
Toronto, Canada
February 22, 2017
[signed]
Galen G. Weston
Chairman and Chief Executive Officer
[signed]
Richard Dufresne
Chief Financial Officer
2016 Annual Report - Financial Review 63
Independent Auditors’ Report
To the Shareholders of Loblaw Companies Limited:
We have audited the accompanying consolidated financial statements of Loblaw Companies Limited, which comprise the consolidated
balance sheets as at December 31, 2016 and January 2, 2016, the consolidated statements of earnings, comprehensive income, changes
in equity and cash flows for the 52 week years then ended, and notes, comprising a summary of significant accounting policies and other
explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to
the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Loblaw
Companies Limited as at December 31, 2016 and January 2, 2016, and its consolidated financial performance and its consolidated cash
flows for the 52 week years then ended in accordance with International Financial Reporting Standards.
Toronto, Canada
February 22, 2017
Chartered Professional Accountants, Licensed Public Accountants
64 2016 Annual Report - Financial Review
Consolidated Statements of Earnings
For the years ended December 31, 2016 and January 2, 2016
(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
(i) Certain comparative figures have been restated. See note 2.
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
46,385
33,213
11,080
2,092
653
1,439
449
990
983
7
990
2.40
2.37
405.1
409.1
2015(i)
45,394
32,846
10,947
1,601
644
957
368
589
598
(9)
589
1.44
1.42
411.5
415.2
2016 Annual Report - Financial Review 65
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2016 and January 2, 2016
(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 (loss) gain on cash flow hedges (note 30)
Items that will not be reclassified to profit or loss:
Net defined benefit plan actuarial gains (note 26)
Other comprehensive income
Total Comprehensive Income
Attributable to:
Shareholders of the Company
Non-Controlling Interests
Total Comprehensive Income
(i) Certain comparative figures have been restated. See note 2.
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
$
2016
990
11
(1)
33
43
1,033
1,026
7
1,033
$
$
$
$
$
$
2015(i)
589
14
1
143
158
747
756
(9)
747
66 2016 Annual Report - Financial Review
Consolidated Statements of Changes in Equity
(millions of Canadian dollars except where
otherwise indicated)
Common
Share
Capital
Preferred
Share
Capital
Total
Share
Capital
Retained
Earnings
Contributed
Surplus
Foreign
Currency
Translation
Adjustment
Cash
Flow
Hedges
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests
Total Equity(i)
Balance at January 2, 2016
$ 7,851 $
221 $ 8,072 $ 4,914 $
102 $
— $
— $
— $
983 $
—
—
—
33
— $
—
22 $
— $
11
1 $
— $
(1)
23 $
— $
10
13 $
13,124
7 $
—
990
43
— $
— $
— $ 1,016 $
— $
11 $
(1) $
10 $
7 $
1,033
$
$
Net earnings
Other comprehensive income (loss)
Total Comprehensive Income
(Loss)
Common shares purchased and
cancelled (note 24)
Net effect of equity-based
compensation (notes 24 and 27)
Shares purchased and held in trust
(note 24)
Shares released from trust (notes 24
and 27)
Dividends declared per common
share - $1.03 (note 24)
Dividends declared per preferred
share - $1.325 (note 24)
Net contribution from non-controlling
interests
(198)
50
(24)
13
—
—
—
—
—
—
—
—
—
—
(198)
(510)
50
(19)
(24)
(66)
13
—
—
—
37
(416)
(12)
—
—
10
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2016
$ 7,692 $
221 $ 7,913 $ 4,944 $
112 $
$ (159) $
— $ (159) $
30 $
10 $
11 $
33 $
(1) $
— $
10 $
33 $
(millions of Canadian dollars except where
otherwise indicated)
Common
Share
Capital
Preferred
Share
Capital
Total
Share
Capital
Retained
Earnings(i)
Contributed
Surplus
Foreign
Currency
Translation
Adjustment
Cash
Flow
Hedges
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests
Total Equity(i)
Balance at January 3, 2015
$ 7,857 $
— $ 7,857 $ 4,804 $
104 $
8 $
12,781
— $
— $
— $
598 $
—
—
—
143
— $
—
8 $
— $
14
— $
— $
1
8 $
— $
15
Net earnings
Other comprehensive income
Total Comprehensive Income
(Loss)
$
$
— $
— $
— $
741 $
— $
14 $
1 $
15 $
(9) $
Preferred share issuance (note 24)
—
221
221
—
Common shares purchased and
cancelled (note 24)
Net effect of equity-based
compensation (notes 24 and 27)
Shares purchased and held in trust
(note 24)
Shares released from trust (notes 24
and 27)
Dividends declared per common
share – $0.995 (note 24)
Dividends declared per preferred
share – $0.74 (note 24)
Net contribution from non-controlling
interests
(83)
84
(19)
12
—
—
—
—
—
—
—
—
—
—
(83)
(197)
84
(11)
(19)
(44)
12
—
—
—
37
(409)
(7)
—
—
—
(2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance at January 2, 2016
$ 7,851 $
221 $ 8,072 $ 4,914 $
102 $
$
(6) $
221 $
215 $
110 $
(2) $
14 $
22 $
1 $
1 $
15 $
23 $
(i) Certain comparative figures have been restated. See note 2.
See accompanying notes to the consolidated financial statements.
—
—
—
—
—
—
6
13 $
(708)
41
(90)
50
(416)
(12)
6
(96)
26 $
13,028
(9) $
—
—
—
—
—
—
—
—
14
5 $
589
158
747
221
(280)
71
(63)
49
(409)
(7)
14
343
13 $
13,124
2016 Annual Report - Financial Review 67
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)
Franchise Loans Receivable (note 30)
Other Assets (note 18)
Total Assets
Liabilities
Current Liabilities
Bank indebtedness (note 33)
Trade payables and other liabilities
Provisions (note 20)
Income taxes payable
Short term debt (note 21)
Long term debt due within one year (note 22)
Associate interest
Total Current Liabilities
Provisions (note 20)
Long Term Debt (note 22)
Trust Unit Liability (note 30)
Deferred Income Tax Liabilities (note 7)
Other Liabilities (note 23)
Total Liabilities
Equity
Share Capital (note 24)
Retained Earnings
Contributed Surplus (note 27)
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.
Contingent Liabilities (note 32).
See accompanying notes to the consolidated financial statements.
68 2016 Annual Report - Financial Review
As at
December 31, 2016
As at
January 2, 2016(i)
$
$
$
$
$
$
$
$
$
$
1,314
241
1,122
2,926
4,371
190
40
10,204
10,559
218
8,745
3,895
130
233
452
34,436
115
5,091
99
329
665
400
243
6,942
120
10,470
959
2,190
727
21,408
7,913
4,944
112
33
13,002
26
13,028
34,436
$
$
$
$
$
$
$
$
$
$
1,018
64
1,325
2,790
4,322
265
71
9,855
10,480
160
9,164
3,780
132
329
457
34,357
143
5,106
127
82
550
998
216
7,222
131
10,013
821
2,292
754
21,233
8,072
4,914
102
23
13,111
13
13,124
34,357
Consolidated Statements of Cash Flows
For the years ended December 31, 2016 and January 2, 2016
(millions of Canadian dollars)
Operating Activities
Net earnings
Add (Deduct):
Income taxes (note 7)
Net interest expense and other financing charges (note 6)
Depreciation and amortization
Asset impairments, net of recoveries
Gain on disposal of assets
Charge related to inventory measurement and other conversion differences
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 QHR, 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 21)
Long Term Debt (note 22)
Issued
Retired
Interest paid
Dividends paid on common and preferred shares
Common Share Capital
Issued (note 27)
Purchased and held in trust (note 24)
Purchased and cancelled (note 24)
Preferred Share Capital Issued (note 24)
Redemption of Capital Securities (note 24)
Other
Cash Flows used in Financing Activities
Effect of foreign currency exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and Cash Equivalents, End of Period
(i) Certain comparative figures have been restated. See note 2.
See accompanying notes to the consolidated financial statements.
2016
2015(i)
$
$
$
$
$
$
$
$
$
$
990
$
449
653
1,543
139
—
—
3,774
134
(136)
(329)
9
67
3,519
(896)
(328)
(153)
42
(177)
62
(2)
15
(1,437)
(28)
115
815
(1,049)
(474)
(425)
42
(90)
(708)
—
—
20
(1,782)
(4)
296
1,018
1,314
$
$
$
$
$
$
$
$
$
589
368
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)
(491)
(416)
63
(63)
(280)
221
(225)
23
(1,839)
17
19
999
1,018
2016 Annual Report - Financial Review 69
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016 and January 2, 2016 (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, retail banking, credit card services,
insurance 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 47% 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 note 36). As at December
31, 2016, Loblaw held an effective interest in Choice Properties of 83%.
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 22,
2017.
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 26;
•
•
liabilities for cash-settled equity-based compensation arrangements as described in note 27; 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 December 31, 2016 and January 2, 2016 both contained 52 weeks. The next 53 week year will occur in fiscal 2020.
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.
70 2016 Annual Report - Financial Review
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 December 31, 2016, the Company held an 83%
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 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 for current and deferred taxes
related to a business combination, or amounts charged directly to equity or other comprehensive income, which are recognized in the
consolidated balance sheet.
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.
2016 Annual Report - Financial Review 71
Notes to the Consolidated Financial Statements
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 temporary differences as well as 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.
72 2016 Annual Report - Financial Review
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.
2016 Annual Report - Financial Review 73
Notes to the Consolidated Financial Statements
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.
74 2016 Annual Report - Financial Review
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.
2016 Annual Report - Financial Review 75
Notes to the Consolidated Financial Statements
Classification The following table summarizes the classification and measurement of the Company’s financial assets and liabilities:
Asset/Liability
Classification
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
Derivatives
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
Fair value through profit and loss(ii)
(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.
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
Fair value
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.
76 2016 Annual Report - Financial Review
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 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.
2016 Annual Report - Financial Review 77
Notes to the Consolidated Financial Statements
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.
78 2016 Annual Report - Financial Review
Stock options outstanding have a seven year term to expiry, vest 20% 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 three year performance period. 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 capital transactions. 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”), Performance Units (“PUs”), 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.
2016 Annual Report - Financial Review 79
Notes to the Consolidated Financial Statements
PUs entitle certain employees to receive the value of the PU award in cash or Units at the end of the applicable performance period, which
is usually three years in length, based on Choice Properties achieving certain performance conditions. The PU plan provides for the
crediting of additional PUs in respect of distributions paid on Units for the period when an PU is outstanding. The fair value of each PU
granted is measured based on the market value of a Unit at the balance sheet date.
Members of the Choice Properties’ Board of Trustees, who are not management of Choice Properties, are required to receive a portion of
their annual retainer in the form of DUs and may also elect to receive up to 100% of their remaining fees in DUs. Distributions paid earn
fractional DUs, which are treated as additional awards. DUs vest upon grant. The fair value of each DU granted is measured based on the
market value of a Unit at the balance sheet date.
The fair value of the amount payable to award recipients in respect of these cash settled awards plan is re-measured at each balance
sheet date, and a compensation expense is recognized in selling, general and administrative expenses (“SG&A”) over the vesting period
for each tranche with a corresponding change in the liability.
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
Presentation of Financial Statements The Company implemented the amendments to IAS 1, “Presentation of Financial Statements”,
effective January 1, 2016. There was no significant impact on the Company’s consolidated financial statements as a result of the
implementation of this amendment.
Income Taxes In November 2016, the IFRS Interpretations Committee issued its agenda decision related to the expected manner of
recovery of indefinite life intangible assets when measuring deferred income taxes in accordance with IAS 12, “Income Taxes” and clarified
its interpretation that an indefinite life intangible asset does not have an unlimited life and its economic benefit flows to an entity in future
periods through use and not just through future sale. Accordingly, it is appropriate to measure the associated deferred income tax liability at
the income tax rate applicable to ordinary taxable income expected to apply in the years in which the temporary differences are expected
to be recovered or settled. The Company's accounting policy reflected an accepted view that an indefinite life intangible will be recovered
through its disposition and was using a capital gains tax rate to measure deferred income taxes associated with its indefinite life intangible
assets. The Company implemented this guidance in the fourth quarter of 2016 on a retrospective basis as an accounting policy change in
accordance with IAS 8, “Accounting Policies, Changes to Accounting Estimates and Errors”. The impact of this change was as follows:
Consolidated Statement of Earnings and Comprehensive Income
Increase (Decrease)
(millions of Canadian dollars except where otherwise indicated)
Income taxes(i)
Net Earnings
Net Earnings attributable to Shareholders of the Company
Total Comprehensive Income
Net Earnings per Common Share ($)
Basic
Diluted
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Goodwill
Deferred Income Tax Liabilities
Retained Earnings
$
$
$
$
$
$
$
2015
34
(34)
(34)
(34)
(0.08)
(0.08)
As at
January 4, 2015
418
424
(6)
$
As at
January 2, 2016
418
458
(40)
(i)
Relates to the re-measurement of deferred income tax liabilities as a result of the Alberta statutory corporate income tax rate change in 2015.
Changes to Accounting Estimates
Fixed Assets In the second quarter of 2016, the Company reassessed and revised the useful life of certain classes of equipment and
fixtures from eight to ten 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 $66 million compared to 2015.
80 2016 Annual Report - Financial Review
Note 3. Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements requires management to make estimates and judgments in applying the
Company’s accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and
accompanying notes.
Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application
of an accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant
information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of
balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include
management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable
under the circumstances. Management continually evaluates the estimates and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that the Company believes could
have the most significant impact on the amounts recognized in the consolidated financial statements. The Company’s significant
accounting policies are disclosed in note 2.
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 entity’s returns. The Company consolidates all of its wholly owned subsidiaries. Judgment is
applied in determining whether the Company controls the entities in which it does not have ownership rights or does not have full
ownership rights. Most often, judgment involves reviewing contractual rights to determine if rights are participating (giving power over the
entity) or protective rights (protecting the Company’s interest without giving it power).
Inventories
Key Sources of Estimation Inventories are carried at the lower of cost and net realizable value which requires the Company to utilize
estimates related to fluctuations in shrink, future retail prices, the impact of vendor rebates on cost, seasonality and costs necessary to sell
the inventory.
Impairment of Non-Financial Assets (Goodwill, Intangible Assets, Fixed Assets and Investment Properties)
Judgments Made in Relation to Accounting Policies Applied Management is required to use judgment in determining the grouping of
assets to identify their CGUs for the purposes of testing fixed assets for impairment. Judgment is further required to determine appropriate
groupings of CGUs, for the level at which goodwill and intangible assets are tested for impairment. The Company has determined that
each location is a separate CGU for the purposes of fixed asset impairment testing. For the purpose of goodwill and indefinite life
intangible assets impairment testing, CGUs are grouped at the lowest level at which goodwill and indefinite life intangible assets 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.
2016 Annual Report - Financial Review 81
Notes to the Consolidated Financial Statements
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 information technology (“IT”) across all
retail operating segments.
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
The future accounting standards noted below will impact the Company’s business processes, internal controls over financial reporting, data
systems, and IT, as well as financing and compensation arrangements. As a result, the Company has developed comprehensive project
plans to guide the implementations.
IFRS 15 In 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers” (“IFRS 15”), replacing IAS 18, “Revenue”, IAS 11,
“Construction Contracts”, and related interpretations. IFRS 15 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. IFRS
15 is to be applied retrospectively using either the retrospective or cumulative effect method. While early adoption is permitted, the
Company will not early adopt IFRS 15.
The Company has completed a preliminary assessment of the potential impact of the adoption of IFRS 15 on its consolidated financial
statements.
The Company expects that the implementation of IFRS 15 will impact the allocation of revenue that is deferred in relation to its customer
loyalty award programs. Revenue is currently allocated to the customer loyalty awards using the residual fair value method. Under IFRS
15, consideration will be allocated between the loyalty program awards and the goods or services on which the awards were earned,
based on their relative stand-alone selling prices. The Company is currently assessing the impact of this change on its consolidated
financial statements.
The Company is still assessing the impacts of IFRS 15, if any, on its franchise arrangements with non-consolidated stores. The Company
does not expect the implementation of IFRS 15 to otherwise have a significant impact on its Retail, Financial Services or Choice Properties
segment revenue streams, however the detailed assessment is ongoing.
82 2016 Annual Report - Financial Review
The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical
expedients available under the standard. The Company expects to disclose additional detailed information, including any exemptions
elected and estimated quantitative financial effects, before the adoption of IFRS 15.
IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments” (“IFRS 9”), replacing IAS 39, “Financial Instruments: Recognition and
Measurement” (“IAS 39”), and related interpretations. The standard includes revised guidance on the classification and measurement of
financial assets, including impairment and a new general hedge accounting model. IFRS 9 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 requirements which are to be
applied prospectively. While early adoption is permitted, the Company will not early adopt IFRS 9.
The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 9 on its consolidated financial
statements based on its positions at December 31, 2016 and hedging relationships designated during 2016 under IAS 39, which are
discussed below.
Classification and measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the
business model in which assets are managed and their cash flow characteristics. IFRS 9 largely retains the existing requirements in IAS 39
for the classification of financial liabilities. Based on its preliminary assessment, the Company does not believe that the new classification
requirements will have a significant impact on its consolidated financial statements.
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. Applying the
ECL model will require considerable judgment, including consideration of how changes in economic factors affect ECLs, which will be
determined on a probability-weighted basis. The new impairment model will apply to financial assets measured at amortized cost or those
measured at fair value through other comprehensive income, except for investments in equity instruments, and to contract assets.
The Company expects that the ECL model will change the valuation of its Financial Services segment credit losses on credit card
receivables. The Company believes that impairment losses are likely to increase and become more volatile for assets in the scope of the
IFRS 9 impairment model. The Company is currently assessing the impact of this change on its consolidated financial statements and is
continuing to assess the impact of the ECL model on its other financial assets.
General hedging IFRS 9 will require the Company to ensure that hedge accounting relationships are aligned with the Company’s risk
management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. The
Company’s preliminary assessment indicates that the types of hedge accounting relationships that the Company currently designates
should be capable of meeting the requirements of IFRS 9 once the Company completes certain planned changes to its internal
documentation and monitoring processes.
The Company has not yet decided whether it will use the practical expedients available under the standard. The Company expects to
disclose additional detailed information, including any practical expedients and estimated quantitative financial effects, before the adoption
of IFRS 9.
IFRS 16 In 2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”), replacing 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. For leases where the Company is the lessee, it has the option of adopting a full retrospective
approach or a modified retrospective approach on transition to IFRS 16. While early adoption is permitted if IFRS 15 has been adopted,
the Company will not early adopt IFRS 16.
The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its consolidated financial
statements.
The Company expects the adoption of IFRS 16 will have a significant impact on its Retail segment as the Company will recognize new
assets and liabilities for its operating leases of property, buildings, vehicles and equipment. In addition, the nature and timing of expenses
related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-
use assets and interest expense on lease liabilities. No significant impacts are expected for the Company’s finance leases or leases where
the Company is the lessor.
The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical
expedients under the standard. The Company expects to disclose additional detailed information, including its transition method, any
practical expedients elected and estimated quantitative financial effects, before the adoption of IFRS 16.
2016 Annual Report - Financial Review 83
Notes to the Consolidated Financial Statements
Note 5. Business Acquisitions
Acquisition of QHR Corporation In 2016, the Company, through its wholly-owned subsidiary Shoppers Drug Mart, completed the
acquisition of all of the issued and outstanding common shares of QHR Corporation (“QHR”), a publicly traded healthcare technology
company. The shares of QHR were acquired for cash consideration of approximately $167 million. The preliminary purchase price
allocation, which has not yet been finalized, is as follows:
(millions of Canadian dollars)
Net Assets Acquired:
Cash and cash equivalents
Accounts receivable and Prepaid expenses
Fixed assets
Intangible assets
Goodwill
Trade payables and other liabilities
Deferred income tax liabilities
Other liabilities
Total Net Assets Acquired
$
$
14
2
2
72
99
(3)
(14)
(5)
167
Goodwill is attributable to synergies expected from integrating QHR into the Company’s existing business. The goodwill is not deductible
for tax purposes.
Consolidation of Franchises The Company accounts for the consolidation of existing franchises as business acquisitions. During the
year, the Company consolidated its franchises as of the date the franchisee entered into a new, simplified 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.
The following table summarizes the amounts recognized for the assets acquired, the liabilities assumed and the non-controlling interests
recognized at the acquisition dates during the years:
(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
2016
42
72
76
(67)
(107)
(16)
—
$
$
2015
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.
84 2016 Annual Report - Financial Review
Notes to the Consolidated Financial Statements
Other Business Acquisitions In 2016, the Company finalized the purchase price allocation related to the acquisition of a grocery store in
2015. The Company acquired the net assets of the grocery store for total consideration of $41 million. The final purchase price allocation
was as follows:
(millions of Canadian dollars)
Net Assets Acquired:
Inventories
Fixed assets
Other assets
Goodwill
Total Net Assets Acquired
$
$
1
16
3
21
41
Goodwill is attributable to synergies expected from integrating the store into the Company’s existing franchise network. The goodwill is
deductible for tax purposes.
Note 6. Net Interest Expense and Other Financing Charges
(millions of Canadian dollars)
Interest expense and other financing charges:
Long term debt(i)
Borrowings related to credit card receivables
Trust Unit distributions
Post-employment and other long term employee benefits (note 26)
Independent funding trusts
Dividends on capital securities (note 24)
Bank indebtedness
Capitalized interest (capitalization rate 3.6% (2015 – 5.7%)) (note 14 and 16)
Interest income:
Accretion income
Short term interest income
Derivative financial instruments(ii)
Fair value adjustment to the Trust Unit Liability (note 30)
Net interest expense and other financing charges
2016
$
459
$
27
49
11
15
—
6
(4)
563
(15)
(10)
(3)
(28)
118
653
$
$
$
$
$
$
$
$
2015
475
37
45
13
14
8
6
(5)
593
(21)
(9)
—
(30)
81
644
(i)
Included in 2015 is accelerated amortization of deferred financing costs of $15 million, related to the early repayment of Loblaw’s $3.5 billion unsecured term loan facility,
obtained in connection with the acquisition of Shoppers Drug Mart.
(ii) Represents a realized fair value gain of $3 million related to Choice Properties bond forward agreements settled in the first quarter of 2016 (see note 30).
2016 Annual Report - Financial Review 85
Notes to the Consolidated Financial Statements
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
(i) Certain comparative figures have been restated. See note 2.
Income tax expense recognized in Other Comprehensive Income was as follows:
(millions of Canadian dollars)
Net defined benefit plan actuarial gains (note 26)
Total income tax expense recognized in Other Comprehensive Income
2016
563
5
568
(131)
3
9
(119)
449
2016
12
12
$
$
$
$
$
2015(i)
340
3
343
(43)
72
(4)
25
368
2015
52
52
$
$
$
$
$
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
2016
27.0%
0.3
0.4
2.2
0.2
1.1
31.2%
2015(i)
26.4%
0.7
1.6
2.3
7.6
(0.1)
38.5%
(i) Certain comparative figures have been restated. See note 2.
In the first quarter of 2016, the Government of New Brunswick announced a 2% increase in the provincial statutory corporate income tax
rate from 12% to 14%. The Company recorded a charge of $3 million in 2016 related to the remeasurement of its deferred tax liabilities. In
the second quarter of 2015, the government of Alberta announced an increase to the provincial corporate income tax rate from 10% to 12%
and as a result, the Company recorded a charge of $72 million related to the remeasurement of deferred tax liabilities.
86 2016 Annual Report - Financial Review
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
$
$
2016
48
92
140
$
$
2015
36
80
116
The income tax losses expire in the years 2028 to 2036. 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 2036)
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 comparative figures have been restated. See note 2.
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 (note 24)
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 ($)
Diluted net earnings per common share ($)
(i) Certain comparative figures have been restated. See note 2.
As at
December 31, 2016
56
$
As at
January 2, 2016(i)
79
$
282
(489)
(2,056)
55
34
24
34
302
(487)
(2,200)
63
33
23
27
(2,060)
$
(2,160)
130
(2,190)
(2,060)
2016
983
(12)
971
405.1
3.6
0.4
409.1
2.40
2.37
$
$
$
$
$
132
(2,292)
(2,160)
2015(i)
598
(7)
591
411.5
3.7
—
415.2
1.44
1.42
$
$
$
$
$
$
In 2016, 1,271,998 (2015 – 10,828,275) potentially dilutive instruments were excluded from the computation of diluted net earnings per
common share as they were anti-dilutive.
2016 Annual Report - Financial Review 87
Notes to the Consolidated Financial Statements
Note 9. Cash and Cash Equivalents, Short Term Investments and Security Deposits
The components of cash and cash equivalents, short term investments and security deposits were as follows:
Cash and Cash Equivalents
(millions of Canadian dollars)
Cash
Cash equivalents:
Government treasury bills
Bankers’ acceptances
Corporate commercial paper
Bank term deposits
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
Security Deposits
(millions of Canadian dollars)
Cash
Security Deposits included in Other Assets (note 18)
As at
December 31, 2016
553
$
As at
January 2, 2016
352
$
199
386
176
—
—
208
213
96
129
20
$
1,314
$
1,018
As at
December 31, 2016
24
$
As at
January 2, 2016
60
$
175
40
2
$
241
$
2
—
2
64
As at
December 31, 2016
4
$
$
4
As at
January 2, 2016
2
2
$
$
As at December 31, 2016, the Company had agreements to cash collateralize certain of its uncommitted credit facilities up to an amount of
$103 million (January 2, 2016 – $149 million), of which $4 million (January 2, 2016 – $2 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
December 31, 2016
As at
January 2, 2016
0-90
days
$ 1,004 $
91-180
days
> 180
days
42 $
76 $
Total
1,122
0-90
days
$ 1,204 $
91-180
days
> 180
days
58 $
63 $
Total
1,325
88 2016 Annual Report - Financial Review
The following are continuities of the Company’s allowances for uncollectable accounts receivable:
(millions of Canadian dollars)
Allowances, beginning of year
Net (additions) write-off
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
$
$
2016
(102)
31
(71)
As at
December 31, 2016
2,978
$
$
$
(52)
2,926
650
665
$
$
$
$
$
2015
(96)
(6)
(102)
As at
January 2, 2016
2,844
(54)
2,790
650
550
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 21).
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 December 31, 2016 and throughout
2016.
The following is an aging of the Company’s gross credit card receivables:
(millions of Canadian dollars)
Gross credit card receivables
As at
December 31, 2016
As at
January 2, 2016
Current
2,791
$
1-90 days
past due
156
$
> 90 days
past due
31
$
Total
2,978
Current
2,652
$
$
1-90 days
past due
162
$
> 90 days
past due
30
$
Total
2,844
$
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
$
$
2016
(54)
(120)
(19)
141
(52)
$
$
2015
(54)
(118)
(16)
134
(54)
2016 Annual Report - Financial Review 89
Notes to the Consolidated Financial Statements
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 December 31, 2016, the Company recorded $22 million (January 2, 2016 – $85 million) as an expense for
the write-down of inventories below cost to net realizable value. The write-down was included in cost of merchandise inventories sold.
There were no reversals of previously recorded write-downs of inventories during 2016 and 2015.
Note 13. Assets Held for Sale
The Company classifies 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 2016, the Company recorded a $5 million gain
(2015 – $1 million gain) from the sale of these assets. There were no impairment or other charges recognized on these properties during
2016 (2015 – nil).
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
December 31, 2016 and January 2, 2016:
(millions of Canadian dollars)
Land
Buildings
Cost
2016
Equipment
and
Fixtures
Leasehold
Improvements
Finance
Leases - Land,
Buildings,
Equipment
and Fixtures
Assets
Under
Construction
Balance, beginning of year
$ 1,866
$
7,697
$
6,297
$
1,852
$
883
$
Total
$ 19,171
927
79
(199)
576
571
—
(10)
(8)
(112)
(599)
—
7
—
—
(27)
66
43
—
(1)
(77)
259
194
76
(160)
—
227
77
2
(28)
—
47
35
1
—
—
—
$ 1,912
$
7,921
$
6,634
$
1,950
$
919
$
530
$ 19,866
3
—
—
(3)
—
—
$
2,801
$
4,794
$
198
21
(10)
(1)
(39)
363
43
(15)
(161)
—
5,024
1,610
$
$
$
$
$
— $
2,970
$ 1,912
$
4,951
745
160
16
—
(25)
—
896
1,054
$
338
$
67
4
—
—
—
409
510
$
$
$
$
10
—
—
—
(2)
—
8
$
8,691
788
84
(28)
(189)
(39)
$
9,307
522
$ 10,559
Additions
Business acquisitions (note 5)
Disposals
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:
December 31, 2016
90 2016 Annual Report - Financial Review
2015
(millions of Canadian dollars)
Land
Buildings
Equipment
and Fixtures
Leasehold
Improvements
Cost
Balance, beginning of year
$ 1,800
$
7,368
$
5,949
$
1,765
$
Finance
Leases - Land,
Buildings,
Equipment
and Fixtures
Assets Under
Construction
Total
$
817
103
—
(37)
—
—
—
—
537
726
$ 18,236
$
1,096
— $
69
(10) $
(190)
— $
— $
(2)
1
— $
(39)
(677) $
—
2
8
—
—
—
(10)
66
—
9
(1)
—
—
(29)
350
151
52
(89)
(2)
1
—
235
114
—
(53)
—
—
—
26
$ 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
Additions
Business acquisitions
Disposals
Net transfer to assets held for
sale
Net transfer 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
Assets Held under Finance Leases The Company leases various land and buildings, and equipment and fixtures under a number of
finance lease arrangements. As at December 31, 2016, the net carrying amount of leased land and buildings was $468 million (January 2,
2016 – $479 million), and the net carrying amount of leased equipment and fixtures was $42 million (January 2, 2016 – $66 million).
Assets under Construction The cost of additions to properties under construction for the year ended December 31, 2016 was
$571 million (January 2, 2016 – $726 million). Included in this amount are capitalized borrowing costs of $4 million (2015 – $4 million), with
a weighted average capitalization rate of 3.6% (2015 – 5.7%).
Security and Assets Pledged As at December 31, 2016, fixed assets with a carrying amount of $243 million (January 2, 2016 –
$231 million) were encumbered by mortgages of $78 million (January 2, 2016 – $82 million).
Fixed Asset Commitments As at December 31, 2016, the Company had entered into commitments of $119 million (January 2, 2016 –
$54 million) for the construction, expansion and renovation of buildings and the purchase of real property.
Impairment Losses For the year ended December 31, 2016, the Company recorded $41 million (2015 – $18 million) of impairment losses
on fixed assets in respect of 24 CGUs (2015 – eight 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 21% (2015 – 75%) of impaired CGUs had carrying
values which were $14 million (2015 – $14 million) greater than their fair value less costs to sell. The remaining 79% (2015 – 25%) of
impaired CGUs had carrying values which were $27 million (2015 – $4 million) greater than their value in use.
2016 Annual Report - Financial Review 91
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016, the Company recorded $13 million (2015 – $15 million) of impairment reversals on fixed assets in
respect of six CGUs (2015 – six CGUs) in the retail operating segment. Impairment reversals are recorded where the recoverable amount
of the retail location exceeds its carrying amount. All CGUs (2015 – 50%) with impairment reversals had fair value less costs to sell which
were $13 million (2015 – $7 million) greater than their carrying values. No CGUs (2015 – 50%) with impairment reversals had value in use
which were greater than carrying values (2015 – $8 million).
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 December 31, 2016 (January 2, 2016 – 8.0% to 8.5%).
In 2016, an ancillary healthcare business triggered for impairment testing and an impairment was identified. As a result the Company
recorded an impairment charge of $15 million (2015 – nil) in fixed assets.
Additional impairment losses of $13 million (2015 – $9 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.
In 2015, the Company recorded impairment losses on its fixed assets $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). No additional impairment amounts relating to these initiatives were recorded in
2016.
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 December 31, 2016 and January 2, 2016:
(millions of Canadian dollars)
Cost
Balance, beginning of year
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 fixed assets
Net transfer to assets held for sale
Balance, end of year
Carrying amount
Fair value
$
$
$
$
$
2016
2015
$
$
$
$
$
236
2
(19)
112
(7)
324
76
2
2
—
(9)
39
(4)
106
218
261
255
—
(5)
39
(53)
236
70
3
12
(1)
(3)
7
(12)
76
160
194
During 2016, the Company recognized in operating income $6 million of rental income (2015 – $7 million) and incurred direct operating
costs of $2 million (2015 – $2 million) related to its investment properties. In addition, the Company recognized direct operating costs of
$11 million (2015 – $3 million) related to its investment properties for which no rental income was earned.
92 2016 Annual Report - Financial Review
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 December 31, 2016, the pre-tax discount rates used in the valuations for investment properties ranged
from 7.75% to 9.50% (January 2, 2016 – 7.75% to 9.50%) and the terminal capitalization rates ranged from 6.75% to 8.75% (January 2,
2016 – 6.75% to 8.75%).
For the year ended December 31, 2016, the Company recorded $2 million (2015 – $12 million) of impairment losses in operating income
on investment properties, as the carrying amounts of the impaired properties were lower than their recoverable amounts. The Company
recorded no reversals of impairment losses on investment properties (2015 – $1 million) in operating income where their fair values less
costs to sell were greater than their carrying values.
Note 16. Intangible Assets
The following are continuities of the cost and the accumulated amortization and impairment losses of intangible assets for the years ended
December 31, 2016 and January 2, 2016:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Additions
Business acquisitions (note 5)
Disposal
Balance, end of year
Accumulated amortization and impairment
losses
Balance, beginning of year
Amortization
Disposal
Impairment losses
Balance, end of year
Carrying amount as at:
December 31, 2016
$
$
$
$
$
Definite Life
Internally
Generated
Intangible
Assets
Indefinite Life
Intangible
Assets
3,461
$
14
—
—
3,475
$
— $
—
—
—
— $
20
—
—
—
20
20
—
—
—
20
$
$
$
$
2016
Other Definite
Life Intangible
Assets
Software
Total
1,852
$
5,895
$
11,228
304
18
(2)
10
74
(3)
328
92
(5)
2,172
$
5,976
$
11,643
1,070
$
229
(2)
3
1,300
$
$
974
532
(1)
73
1,578
4,398
$
$
$
2,064
761
(3)
76
2,898
8,745
3,475
$
— $
872
2016 Annual Report - Financial Review 93
Notes to the Consolidated Financial Statements
(millions of Canadian dollars)
Cost
Indefinite Life
Intangible
Assets
Definite Life
Internally
Generated
Intangible
Assets
Balance, beginning of year
$
3,461
$
2015
Other Definite
Life Intangible
Assets
Software
Total
$
1,639
$
5,868
$
10,988
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
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
$
$
$
$
—
—
—
—
—
3,461
$
— $
—
—
—
—
— $
20
—
—
—
—
—
20
19
1
—
—
—
20
216
—
(2)
(1)
—
1,852
852
220
(2)
—
—
$
$
$
1,070
17
14
(3)
—
(1)
5,895
442
531
(1)
3
(1)
974
4,921
$
$
$
$
233
14
(5)
(1)
(1)
11,228
1,313
752
(3)
3
(1)
2,064
9,164
$
$
$
$
3,461
$
— $
782
Indefinite Life Intangible Assets Indefinite life intangible assets are comprised of brand names, trademarks, import purchase quotas and
certain liquor licenses. 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, import purchase quotas and liquor
licenses 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 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. There were no capitalized borrowing costs included in
2016 (2015 – $1 million).
Other Definite Life Intangible Assets Other definite life intangible assets primarily consist of prescription files, the Shoppers Optimum
loyalty program and customer relationships.
In the fourth quarter of 2016, an ancillary healthcare business triggered for impairment testing and an impairment was identified. As a
result, the Company recorded an impairment charge of $73 million (2015 – nil) relating to a customer relationship intangible asset for an
ancillary healthcare business.
94 2016 Annual Report - Financial Review
Note 17. Goodwill
The following is a continuity of the cost and the accumulated amortization and impairment losses of goodwill for the years ended
December 31, 2016 and January 2, 2016:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Business acquisitions (note 5)
Balance, end of year
Accumulated amortization and impairment losses
Balance, beginning of year
Impairment losses
Balance, end of year
Carrying amount as at the end of the year:
(i) Certain comparative figures have been restated. See note 2.
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
2016
4,769
120
4,889
989
5
994
3,895
$
$
$
$
$
2015(i)
4,725
44
4,769
989
—
989
3,780
$
$
$
$
$
As at
December 31, 2016
2,925
$
As at
January 2, 2016
2,808
$
375
459
129
7
360
459
129
24
$
3,895
$
3,780
The Company completed its annual impairment tests for goodwill and concluded that there was an impairment loss of $5 million on a small
grocery business categorized in the ‘All other’ CGU grouping. The fair value less costs to sell exceeded the carrying amount of all the other
CGUs.
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 7.0% (January 2, 2016 – 6.0% to 7.0%) and is based on a risk-free rate, an
equity risk premium adjusted for betas of comparable publicly traded companies, an unsystematic risk premium, an after-tax cost of debt
based on corporate bond yields and the capital structure of the Company.
Cash flow projections have been discounted using a rate derived from the Company’s after-tax weighted average cost of capital. At
December 31, 2016, the after-tax discount rate used in the recoverable amount calculations was 7.0% (January 2, 2016 – 6.5% to 9.5%).
The pre-tax discount rate was 9.6% (January 2, 2016 – 8.7% to 12.9%).
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 an estimated long term growth rate of 2.0% (January 2, 2016 – 2.0%). The budgeted
EBITDA(1) growth is based on the Company’s three year strategic plan approved by the Board.
2016 Annual Report - Financial Review 95
Notes to the Consolidated Financial Statements
Note 18. Other Assets
(millions of Canadian dollars)
Sundry investments and other receivables
Accrued benefit plan asset (note 26)
Interests in joint ventures
Other
Other assets
As at
December 31, 2016
79
$
192
5
176
452
$
As at
January 2, 2016
119
190
9
139
457
$
$
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. Provisions
As at
December 31, 2016
229
$
As at
January 2, 2016
229
$
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 December
31, 2016 and January 2, 2016:
(millions of Canadian dollars)
Provisions, beginning of year
Additions
Payments
Reversals
Provisions, end of year
(millions of Canadian dollars)
Recorded on the consolidated balance sheet as follows:
Current portion of provisions
Non-current portion of provisions
Total provisions
Note 21. Short Term Debt
$
$
2016
258
123
(141)
(21)
219
As at
December 31, 2016
$
$
99
120
219
$
$
$
$
2015
160
193
(84)
(11)
258
As at
January 2, 2016
127
131
258
The outstanding short term debt balance of $665 million (January 2, 2016 – $550 million) relates to credit card receivables securitized to
the Other Independent Securitization Trusts with recourse (see note 11).
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 2016, with their respective maturity dates extended to 2018 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 December 31, 2016, were $210
million (January 2, 2016 – $175 million).
96 2016 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 G 3.20%, due 2023
Series H 5.27%, due 2046
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
1.00% – 3.25%, due 2017 – 2021
Independent Securitization Trust
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
December 31, 2016
As at
January 2, 2016
$
$
$
$
250
48
—
800
350
800
100
200
175
151
(33)
200
200
200
200
200
300
200
150
55
—
275
400
200
250
200
250
200
250
100
—
200
200
300
200
300
78
928
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
587
607
172
(23)
10,870
400
10,470
$
$
400
250
529
629
—
(21)
11,011
998
10,013
2016 Annual Report - Financial Review 97
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 December 31, 2016, the outstanding balance on the Acquisition Term Loan was $48 million
(January 2, 2016 – $48 million).
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 in 2016
and 2015:
(millions of Canadian dollars except where otherwise indicated)
Interest Rate
Maturity Date
Choice Properties Series senior unsecured debentures
– Series G(i)
– Series H(i)
– Series E
– Series F
Total Debentures and Medium Term Notes issued
3.20%
5.27%
2.30%
4.06%
March 7, 2023
March 7, 2046
September 14, 2020
November 24, 2025
Principal
Amount 2016
Principal
Amount 2015
$
$
$
250
100
—
—
350
$
—
—
250
200
450
(i) Offerings were made under the Choice Properties’ Short Form Base Shelf Prospectus filed in the fourth quarter of 2015.
The following table summarizes the debentures and MTNs repaid in 2016 and 2015:
(millions of Canadian dollars except where otherwise indicated)
Loblaw Companies Limited Notes
Shoppers Drug Mart Notes
Choice Properties senior unsecured debentures – Series 5
Total Debentures and Medium Term Notes repaid
Interest Rate
7.10%
2.01%
3.00%
Maturity Date
June 1, 2016
May 24, 2016
April 20, 2016(i)
Principal
Amount 2016
300
$
Principal
Amount 2015
—
$
225
300
825
$
$
—
—
—
(i) Choice Properties Series 5 unsecured debentures was redeemed on March 7, 2016.
Subsequent to the end of 2016, Choice Properties redeemed, at par, the $200 million Series 6 3.00% senior unsecured debentures with an
original maturity date of April 20, 2017.
Guaranteed Investment Certificates The following table summarizes PC Bank’s Guaranteed Investment Certificates (“GICs”) activity,
before commissions, in 2016 and 2015:
(millions of Canadian dollars)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
$
$
2016
809
239
(120)
928
$
$
2015
634
211
(36)
809
Independent Securitization Trust 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
December 31, 2016 (see note 33).
98 2016 Annual Report - Financial Review
Independent Funding Trusts As at December 31, 2016, the independent funding trusts had drawn $587 million (January 2, 2016 – $529
million) from the revolving committed credit facility that is the source of funding to the independent funding trusts. In 2016, the Company
amended the committed credit facility agreement to increase the size of the facility to $700 million and extended the maturity date to June
10, 2019, 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 at December 31, 2016 and January 2, 2016 were as
follows:
(millions of Canadian dollars)
Loblaw’s Committed Credit Facility
Maturity Date
June 10, 2021
Available
1,000
$
Drawn
$
— $
Available
1,000
$
Drawn
—
Choice Properties Committed Syndicated Credit Facility
July 5, 2021
Choice Properties Committed Bi-lateral Credit Facility
December 21, 2018
Total Committed Lines of Credit
500
250
$
1,750
$
172
—
172
500
—
$
1,500
$
—
—
—
As at December 31, 2016
As at January 2, 2016
On December 23, 2016, Choice Properties entered into a new bi-lateral $250 million senior unsecured committed revolving credit facility
with a major Canadian financial institution maturing on December 21, 2018. The credit facility bears interest at variable rates of either:
Prime plus 0.25% or Bankers’ Acceptance rate plus 1.25%. Certain conditions of the credit facility are contingent on Choice Properties’
credit rating remaining at “BBB”. Should certain conditions not be met, the credit facility would become secured against select properties.
These facilities contain certain financial covenants (see note 25).
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
Guaranteed Investment Certificates
Finance Lease Obligations
Long term debt secured by mortgage
Long term debt due within one year
As at
December 31, 2016
—
$
As at
January 2, 2016
300
$
200
—
142
53
5
$
400
$
300
225
112
56
5
998
Schedule of Repayments The schedule of repayments of long term debt, based on maturity is as follows:
(millions of Canadian dollars)
2017
2018
2019
2020
2021
Thereafter
As at
December 31, 2016
400
$
1,384
2,185
1,102
1,066
4,789
Total Long Term Debt (excludes transaction costs and effect of coupon repurchases)
$
10,926
See note 30 for the fair value of long term debt.
2016 Annual Report - Financial Review 99
Notes to the Consolidated Financial Statements
Note 23. Other Liabilities
(millions of Canadian dollars)
Net defined benefit plan obligation (note 26)
Other long term employee benefit obligation
Deferred lease obligation
Fair value of acquired leases
Equity-based compensation liability (note 27)
Other
Other liabilities
Note 24. Share Capital
As at
December 31, 2016
327
$
As at
January 2, 2016
312
$
108
119
77
4
92
$
727
$
116
101
90
5
130
754
First Preferred Shares (authorized – 1.0 million shares) There were no First Preferred Shares outstanding as at December 31, 2016
and January 2, 2016.
Second Preferred Share Capital (authorized – unlimited) In 2015, the Company issued 9.0 million 5.30% non–voting Second Preferred
Shares, Series B and redeemed all of the outstanding 9.0 million 5.95% non–voting Second Preferred Shares, Series A. The Second
Preferred Shares, Series B have a face value of $225 million and are presented as a component of equity in the consolidated balance
sheet in the amount of $221 million, net of $4 million of after–tax issuance costs.
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)
December 31, 2016
(52 weeks)
Common
Share
Capital
Number of
Common
Shares
January 2, 2016
(52 weeks)
Number of
Common
Shares
412,480,891
$
Common
Share
Capital
7,860
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)
7,851
$
$
$
$
7,861
50
(198)
7,713
(10)
(24)
13
(21)
7,692
409,341,774
411,543,393
Issued and outstanding, beginning of period
409,985,226
$
Issued for settlement of stock options
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 27)
Shares held in trust, end of period
Issued and outstanding, net of shares held in trust, end of period
Weighted average outstanding, net of shares held in trust
1,131,944
(10,287,300)
400,829,870
(643,452)
(1,250,000)
787,832
(1,105,620)
399,724,250
405,058,645
$
$
$
$
100 2016 Annual Report - Financial Review
Dividends The declaration and payment of dividends on the Company’s common shares and the amount thereof are at the discretion of
the Board of Directors which takes into account the Company’s financial results, capital requirements, available cash flow, future prospects
of the Company’s business and other factors considered relevant from time to time. Over the long term, it is the Company’s intention to
increase the amount of the dividend while retaining appropriate free cash flow to finance future growth. In the second quarter of 2016 and
2015, the Board raised the quarterly dividend by $0.01 to $0.26 and $0.005 to $0.25 per common share, respectively.
The following table summarizes the Company’s cash dividends declared for 2016 and 2015:
Dividends declared per share ($):
Common Share
Second Preferred Share, Series A
Second Preferred Share, Series B
$
2016(i)
1.03
—
1.325
$
2015
0.995
0.74
0.74
(i) The fourth quarter dividends for 2016 of $0.26 per share declared on common shares were paid on December 30, 2016. The fourth quarter dividends for 2016 of $0.33
per share declared on Second Preferred Shares, Series B were payable on December 31, 2016 and subsequently paid on the first business day following the end of the
fiscal year.
(millions of Canadian dollars)
Dividends declared:
Common Share
Second Preferred Share, Series A(i)
Second Preferred Share, Series B
Total dividends declared
2016
416
—
12
428
$
$
2015
409
8
7
424
$
$
(i) For financial statement purposes, Second Preferred Shares, Series A dividends of $8 million in 2015 were recognized on an accrual basis and included as a component
of net interest expense and other financing charges in the consolidated statement of earnings (note 6).
Subsequent to the end of the end of the year, the Board declared a quarterly dividend of $0.26 per common share, payable on April 1,
2017 to shareholders of record on March 15, 2017 and a dividend on the Second Preferred Shares, Series B of $0.33 per share payable
on March 31, 2017 to shareholders of record on March 15, 2017.
Normal Course Issuer Bid Activity under the Company’s Normal Course Issuer Bid (“NCIB”) during the periods was 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
$
$
2016
10,287,300
708
510
198
1,250,000
90
66
24
$
$
2015
4,336,839
280
197
83
971,894
63
44
19
In 2016, the Company renewed its NCIB to purchase on the TSX or through alternative trading systems up to 21,401,867 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.
2016 Annual Report - Financial Review 101
Notes to the Consolidated Financial Statements
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.
The following table summarizes the Company’s total capital under management:
(millions of Canadian dollars)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Certain other liabilities
Total debt
Equity attributable to shareholders of the Company
Total capital under management
As at
December 31, 2016
115
$
As at
January 2, 2016(4)
143
$
665
400
10,470
31
11,681
13,002
24,683
$
$
550
998
10,013
30
11,734
13,111
24,845
$
$
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. The Company intends to renew its Base Prospectus in
2017.
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 $2,000 million. The new prospectus is effective for a 25-
month period from the date of issuance.
On June 11, 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 December 31, 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 Facilities, which
include debt service ratios and leverage ratios. These ratios are measured by Choice Properties on a quarterly basis to ensure compliance.
As at December 31, 2016 and throughout the year, Choice Properties was in compliance with the covenants under these agreements.
102 2016 Annual Report - Financial Review
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 8.0%. In addition to the regulatory capital ratios requirement, PC Bank is
subject to the Basel III Leverage ratio. PC Bank is also subject to the OSFI’s Guideline on Liquidity Adequacy Requirements (“LARs”). The
LARs guideline establishes standards based on the Basel III framework, including a Liquidity Coverage Ratio (“LCR”) standard. As at the
end of 2016 and throughout the year, PC Bank has met all applicable regulatory requirements.
Note 26. 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 2017 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.
2016 Annual Report - Financial Review 103
Notes to the Consolidated Financial Statements
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:
2016
2015
(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)
$
$
$
$
$
Defined
Benefit
Pension
Plans
(1,768) $
(136)
(1,904) $
1,947
43
(7)
36
$
$
Other
Defined
Benefit
Plans
—
(171)
(171)
—
(171)
—
(171)
$
192
(156)
—
(171)
Defined
Benefit
Pension
Plans
(1,990) $
(134)
(2,124) $
2,167
43
(4)
39
$
$
Other
Defined
Benefit
Plans
—
(161)
(161)
—
(161)
—
(161)
$
190
(151)
—
(161)
$
$
$
$
$
The following are the continuities of the fair value of plan assets and the present value of the defined benefit plan obligations:
(millions of Canadian dollars)
Changes in the fair value of plan assets
Fair value, beginning of year
Employer contributions(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
Current service cost
Interest cost
Benefits paid
Employee contributions
Actuarial (gains) losses in other comprehensive
income (loss)
Settlements(ii)
Balance, end of year
Defined
Benefit
Pension
Plans
2016
Other
Defined
Benefit
Plans
Defined
Benefit
Pension
Plans
2015
Other
Defined
Benefit
Plans
Total
Total
$
2,167
$
— $
2,167
$
2,136
$
— $
2,136
29
3
(94)
86
11
(251)
(4)
—
—
—
—
—
—
—
29
3
(94)
86
11
(251)
(4)
(15)
3
(86)
84
117
(65)
(7)
—
—
—
—
—
—
—
(15)
3
(86)
84
117
(65)
(7)
$
1,947
$
— $
1,947
$
2,167
$
— $
2,167
$
2,124
$
161
$
2,285
$
2,158
$
197
$
2,355
61
87
(101)
3
(42)
(228)
5
7
(7)
—
5
—
66
94
(108)
3
(37)
(228)
61
87
(93)
3
(35)
(57)
7
8
(6)
—
(45)
—
68
95
(99)
3
(80)
(57)
$
1,904
$
171
$
2,075
$
2,124
$
161
$
2,285
(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.
104 2016 Annual Report - Financial Review
In 2016, 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 $251 million (2015 – $65 million) from the impacted plans’ assets to settle $228 million (2015 – $57 million)
of pension obligations and recorded settlement charges of $23 million (2015 – $8 million) in SG&A. The settlement charges resulted from
the difference between the amount paid for the annuity purchases and pension buy-outs and the value of the Company’s defined benefit
plan obligations related to these annuity purchases and buy-outs at the time of the settlement.
Subsequent to year end 2016, the Company completed an annuity purchase and paid $110 million from the impacted plans’ assets to
settle $103 million of pension obligations and recorded settlement charges of $7 million in SG&A.
For the fiscal year ended 2016, the actual return on plan assets was $97 million (2015 – $201 million).
The net defined benefit obligation can be allocated to the plans’ participants as follows:
• Active plan participants 48% (2015 – 47%);
• Deferred plan participants 9% (2015 – 10%); and
• Retirees 43% (2015 – 43%).
During 2017, the Company expects to contribute approximately $62 million (2016 – contributed $29 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:
Defined
Benefit
Pension
Plans
61
1
23
4
89
$
$
$
$
(millions of Canadian dollars)
Current service cost
Interest cost on net defined benefit plan obligations
Settlement charges(i)
Other
Net post-employment defined benefit cost
(i) Relates to annuity purchases and pension buy-outs.
2016
Other
Defined
Benefit
Plans
5
$
7
—
—
12
Total
66
8
23
4
Defined
Benefit
Pension
Plans
61
$
2015
Other
Defined
Benefit
Plans
7
$
3
8
7
Total
68
11
8
7
94
$
$
8
—
—
15
$
101
$
79
$
2016 Annual Report - Financial Review 105
Notes to the Consolidated Financial Statements
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 (recovery)
Defined
Benefit
Pension
Plans
2016
Other
Defined
Benefit
Plans
$
(11) $
— $
(9)
(1)
(32)
3
—
—
5
—
Total
(11)
(9)
(1)
(27)
3
Defined
Benefit
Pension
Plans
2015
Other
Defined
Benefit
Plans
$
(117) $
— $
(7)
(20)
(8)
2
(44)
(1)
—
—
Total
(117)
(51)
(21)
(8)
2
$
$
(50) $
5
$
(45)
$
(150) $
(45) $
(195)
13
(1)
12
40
12
52
(37) $
4
$
(33)
$
(110) $
(33) $
(143)
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
2016
Other
Defined
Benefit
Plans
$
(61) $
Defined
Benefit
Pension
Plans
20
(50)
5
(30) $
(56) $
$
$
2015
Other
Defined
Benefit
Plans
$
(16) $
Defined
Benefit
Pension
Plans
170
(150)
(45)
Total
154
(195)
20
$
(61) $
(41)
Total
(41)
(45)
(86)
$
$
106 2016 Annual Report - Financial Review
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
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
Total
$
$
$
$
$
$
2016
2015
87
770
857
437
134
386
14
971
108
11
1,947
4%
40%
44%
22%
7%
20%
1%
50%
5%
1%
100%
$
$
$
$
$
$
92
825
917
577
187
378
20
1,162
70
18
2,167
4%
38%
42%
27%
9%
17%
1%
54%
3%
1%
100%
(i) Both government and corporate securities may be included within the same fixed income pooled fund.
As at December 31, 2016 and January 2, 2016, 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.
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)
2016
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
2015
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
4.00%
3.00%
CPM-RPP2014
Pub/Priv
Generational
3.75%
n/a
CPM-RPP2014
Pub/Priv
Generational
4.00%
3.50%
CPM-RPP2014
Pub/Priv
Generational
4.00%
n/a
CPM-RPP2014
Pub/Priv
Generational
4.00%
3.50%
CPM-RPP2014
Pub/Priv
Generational
4.00%
n/a
CPM-RPP2014
Pub/Priv
Generational
4.00%
3.50%
CPM-RPP2014
Pub/Priv
Generational
4.00%
n/a
CPM-RPP2014
Pub/Priv
Generational
n/a – not applicable
(i) Public or private sector mortality table is used depending on the prominent demographics of each plan.
2016 Annual Report - Financial Review 107
Notes to the Consolidated Financial Statements
The weighted average duration of the defined benefit obligation as at December 31, 2016 is 17.7 years (January 2, 2016 – 16.9 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 2017 and thereafter.
Sensitivity of Key Actuarial Assumptions The following table outlines the key assumptions for 2016 (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
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
3.75%
Net
Defined
Benefit
Plan Cost(i)
4.00%
$
$
(311)
375
$
$
n/a
n/a
(31)
30
n/a
n/a
$
$
$
$
(21)
27
4.50%
20
(17)
$
$
$
$
—
—
4.50%
2
(1)
n/a – not applicable
(i) Discount rate and expected growth rate of health care costs sensitivity is for current service and interest costs only.
Multi-Employer Pension Plans
During 2016, the Company recognized an expense of $65 million (2015 – $60 million) in operating income, which represents the
contributions made in connection with MEPPs. During 2017, 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 53,000 (2015 – 52,000) employees as members. Included in the 2016 expense described above are
contributions of $65 million (2015 – $59 million) to CCWIPP.
108 2016 Annual Report - Financial Review
Post-Employment and Other Long Term Employee Benefit Costs
The net cost recognized in earnings before income taxes for the Company’s post-employment and other long term employee benefit plans
was as follows:
(millions of Canadian dollars)
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 (note 28)
Net interest expense and other financing charges (note 6)
Net post-employment and other long term employee benefit costs
$
$
$
$
$
2016
101
22
65
188
23
211
200
11
211
$
$
$
$
$
2015
94
21
60
175
27
202
189
13
202
Includes settlement charges of $23 million (2015 – $8 million) related to annuity purchases and pension buy-outs.
(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 $3 million (2015 – $2 million) of net interest expense and other financing charges.
Note 27. 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 $63 million during 2016 (2015 – $71 million). The expense was recognized in
operating income.
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 (note 23)
Contributed surplus
As at
December 31, 2016
10
$
$
4
112
As at
January 2, 2016
4
5
102
2016 Annual Report - Financial Review 109
Notes to the Consolidated Financial Statements
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
Exercised
Forfeited/cancelled
Outstanding options, end of year
Options exercisable, end of year
Range of Exercise Prices
$32.47 – $38.62
$38.63 – $51.85
$51.86 – $73.46
2016
2015
Options (number
of shares)
7,411,405
Weighted
Average Exercise
Price / Share
43.77
$
1,285,649
$
(1,131,944) $
(242,752) $
7,322,358
3,384,188
$
$
68.97
37.16
52.77
48.93
40.33
Options (number
of shares)
8,364,884
1,571,495
$
$
(1,735,959) $
(789,015) $
7,411,405
2,862,545
$
$
Weighted
Average Exercise
Price / Share
38.42
63.62
36.19
44.13
43.77
37.41
2016 Outstanding Options
2016 Exercisable Options
Weighted
Average
Remaining
Contractual
Life (years)
1.8
3.0
5.7
Weighted
Average
Exercise
Price/Share
35.14
42.92
66.09
48.93
$
$
$
$
Number of
Exercisable
Options
1,561,184
1,561,547
261,457
3,384,188
Weighted
Average
Exercise
Price/Share
35.22
41.60
63.31
40.33
$
$
$
$
Number of
Options
Outstanding
2,113,736
2,599,509
2,609,113
7,322,358
During 2016, the Company issued common shares on the exercise of stock options with a weighted average market share price of $70.19
(2015 – $67.04). The Company received cash consideration of $42 million (2015 – $63 million) related to the exercise of these options.
The fair value of stock options granted during 2016 was $13 million (2015 – $14 million). The assumptions used to measure the fair value
of options granted during 2016 and 2015 under the Black-Scholes valuation model at date of grant were as follows:
Expected dividend yield
Expected share price volatility
Risk-free interest rate
Expected life of options
2016
1.5%
2015
1.5%
17.7% – 19.0%
18.3% – 20.1%
0.6% – 1.1%
0.6% – 1.4%
3.8 – 6.3 years
3.9 – 6.3 years
Estimated forfeiture rates are incorporated into the measurement of stock option plan expense. The forfeiture rate applied as at
December 31, 2016 was 10.0% (January 2, 2016 – 10.0%).
110 2016 Annual Report - Financial Review
Restricted Share Unit Plan The following is a summary of the Company’s RSU plan activity:
(Number of Awards)
RSUs, beginning of year
Granted
Settled
Forfeited
Reinvested
RSUs, end of year
The fair value of RSUs granted during 2016 was $19 million (2015 – $19 million).
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
2016
887,792
283,962
(295,403)
(18,245)
—
858,106
2016
1,100,356
373,844
(492,929)
(15,408)
965,863
2015
1,462,790
313,964
(802,957)
(92,213)
6,208
887,792
2015
1,019,304
306,027
(80,881)
(144,094)
1,100,356
The fair value of PSUs granted during 2016 was $14 million (2015 – $19 million).
Settlement of Awards from Shares Held in Trust During 2016, the Company settled RSUs and PSUs totaling 788,332 (2015 – 883,838),
of which 787,832 (2015 – 883,488) were settled through the trusts established for settlement of each of the RSU and PSU plans (see note
24). The settlements resulted in a $13 million (2015 – $12 million) increase to share capital and a net increase of $18 million (2015 – $26
million) to retained earnings.
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
The fair value of DSUs granted during 2016 was $2 million (2015 – $2 million).
2016
183,722
27,784
2,773
(26,077)
188,202
2015
263,824
28,598
3,731
(112,431)
183,722
2016 Annual Report - Financial Review 111
Notes to the Consolidated Financial Statements
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
2016
24,023
15,383
434
(4,281)
35,559
2015
22,915
5,087
381
(4,360)
24,023
The fair value of EDSUs granted during 2016 was $1 million (2015 – 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,
2015 – 19,744,697 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
2016
Weighted average
exercise price/unit
Number of awards
2015
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
3,499,656
655,266
$
$
(65,318) $
(99,373) $
3,990,231
1,764,241
$
$
11.05
12.38
11.21
11.76
11.25
10.95
1,682,510
2,127,532
$
$
(30,461) $
(279,925) $
3,499,656
533,796
$
$
The assumptions used to measure the fair value of the Unit Options under the Black-Scholes model were as follows:
10.48
11.49
10.54
11.00
11.05
10.36
2015
5.5%
2016
5.3%
16.3% – 19.2%
15.4% – 17.4%
0.5% – 1.1%
0.5% – 0.8%
0.5 – 4.7 years
1.5 – 5.4 years
Expected average distribution yield
Expected average Unit price volatility
Average risk-free interest rate
Expected average life of options
112 2016 Annual Report - Financial Review
Restricted Unit Plan 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
2016
267,721
93,561
15,927
(106,370)
(6,148)
264,691
RUs vest over a period of three years. There were no RUs vested as at December 31, 2016 (January 2, 2016 – nil).
Performance Unit Plan The following is a summary of Choice Properties’ PU plan activity:
(Number of awards)
Outstanding PUs, beginning of year
Granted
Reinvested
Cancelled
Outstanding PUs, end of year
PUs vest over a period of three years. There were no PUs vested as at December 31, 2016.
Trustee Deferred Unit Plan 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
2016
158,778
50,844
9,370
218,992
All DUs vest when issued, however, they cannot be settled while Trustees are members of the Board.
2015
184,154
90,813
14,140
(5,433)
(15,953)
267,721
2016
—
39,772
1,678
(1,754)
39,696
2015
99,230
52,736
6,812
158,778
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 (note 26)
Other long term employee benefits (note 26)
Equity-based compensation
Capitalized to fixed assets
Total employee costs
$
$
$
2016
5,176
180
20
60
(42)
2015
4,958
164
25
69
(37)
5,394
$
5,179
2016 Annual Report - Financial Review 113
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
December 31, 2016
January 2, 2016
(millions of Canadian dollars)
Operating lease payments
Sub-lease income
Net operating lease payments
2017
686
(46)
640
$
$
2018
664
(41)
623
$
$
2019
620
(34)
586
$
$
2020
550
(25)
525
$
$
2021
Thereafter
480
(22)
458
$
$
2,352
(76)
2,276
$
$
$
$
Total
5,352
(244)
5,108
$
$
Total
5,638
(262)
5,376
During 2016, the Company recorded $679 million (2015 – $686 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 $2 million (2015 – $1 million)
and sub-lease income earned totaled $48 million (2015 – $62 million), which is recognized in operating income. Contingent rent recognized
as income in respect of sub-leased operating leases in 2016 was $4 million (2015 – $6 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:
Payments to be received by year
As at
As at
December 31, 2016
January 2, 2016
(millions of Canadian dollars)
2017
2018
2019
2020
2021
Thereafter
Net operating lease income
$
135
$
120
$
99
$
82
$
68
$
222
$
Total
726
$
Total
609
As at December 31, 2016, the Company leased certain owned land and buildings with a cost of $2,721 million (January 2, 2016 –
$2,591 million) and related accumulated depreciation of $759 million (January 2, 2016 – $698 million). For the year ended December 31,
2016, rental income was $138 million (2015 – $141 million) and contingent rent was $4 million (2015 – $5 million), both of which were
recognized in operating income.
114 2016 Annual Report - Financial Review
Finance Leases – As Lessee Future minimum lease payments relating to the Company’s finance leases are as follows:
Payments due by year
(millions of Canadian dollars)
2017
2018
2019
2020
2021
Thereafter
Finance lease payments
Less future finance charges
Present value of minimum
lease payments
$
$
83
$
70
$
63
$
59
$
57
$
(30)
(27)
(25)
(24)
(26)
657
(250)
53
$
43
$
38
$
35
$
31
$
407
As at
As at
December 31, 2016
January 2, 2016
$
$
Total
989
(382)
607
$
$
Total
1,060
(431)
629
During 2016, contingent rent recognized by the Company as an expense in respect of finance leases was $1 million (2015 – $1 million).
Certain assets classified as finance leases have been sub-leased by the Company to third parties. The future sub-lease income relating to
these sub-lease agreements are as follows:
Payments to be received by year
As at
As at
December 31, 2016
January 2, 2016
(millions of Canadian dollars)
2017
2018
2019
2020
2021
Thereafter
Sub-lease income
$
13
$
11
$
11
$
9
$
6
$
27
$
Total
77
$
Total
98
During 2016, the sub-lease income earned under finance leases was $15 million (2015 – $15 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. The carrying values of the Company’s financial instruments approximate their fair values except for long term
debt.
(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:
Long term debt
Trust unit liability
Certain other liabilities(i)
Derivatives included in trade payables and other
liabilities
As at
December 31, 2016
As at
January 2, 2016
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
$
752
$
24
4
—
23
7
562
217
—
—
2
11
$
— $ 1,314
$
560
$
458
$
— $ 1,018
—
—
233
42
—
241
4
233
67
18
60
2
—
25
—
4
—
—
2
37
—
—
329
59
—
64
2
329
86
37
— 11,864
— 11,864
— 12,003
— 12,003
959
—
—
—
—
—
—
22
2
959
22
2
821
—
6
—
—
—
—
20
7
821
20
13
(i) Certain other assets and Certain other liabilities are included in the consolidated balance sheet in Other Assets and Other Liabilities, respectively.
There were no transfers between levels of the fair value hierarchy during the period presented.
2016 Annual Report - Financial Review 115
Notes to the Consolidated Financial Statements
During 2016, the Company recognized a gain of $5 million (2015 – gain of $18 million) in operating income on financial instruments
designated as fair value through profit or loss. In addition, during 2016, a net loss of $110 million (2015 – loss of $33 million) was recorded
in earnings before income taxes related to financial instruments required to be classified as fair value through profit or loss.
Franchise Loans Receivable and Franchise Investments The value of Loblaw franchise loans receivable of $233 million (January 2,
2016 – $329 million) was recorded in the consolidated balance sheet. In 2016, the Company recorded a $1 million loss (2015 – loss of $1
million) in operating income related to these loans receivable.
The value of Loblaw franchise investments of $39 million (January 2, 2016 – $54 million) was recorded in other assets. During 2016, the
Company recorded a gain of $4 million (2015 – gain of $31 million) in operating income related to these investments.
Embedded Derivatives The Company’s level 3 financial instruments classified as fair value through profit or loss 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.
During 2016, a $5 million gain (2015 – loss of $3 million) was recorded in operating income related to these derivatives. In addition, a
corresponding liability of $2 million was included in trade payables and other liabilities as at December 31, 2016 (January 2, 2016 –
$7 million). As at December 31, 2016, a 1% increase (decrease) in foreign currency exchange rates would result in a $2 million gain (loss)
in fair value.
Trust Unit Liability During 2016, the Company recorded a fair value loss of $118 million (2015 – loss of $81 million) in net interest
expense and other financing charges related to Units (note 6).
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 December 31, 2016, the fair value of these investments of
$23 million (January 2, 2016 – $25 million) was included in other assets. During 2016, PC Bank recorded a nominal fair value loss (2015 –
nominal 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.
Other Derivatives The Company uses bond forwards and interest rate swaps, to manage its anticipated exposure to fluctuations in
interest rates on future debt issuances. The Company also uses futures, options and forward contracts to manage its anticipated exposure
to fluctuations in commodity prices and exchange rates in its underlying operations. The following is a summary of the fair values
recognized in the consolidated balance sheet and the net realized and unrealized gains (losses) before income taxes related to the
Company’s other derivatives:
(millions of Canadian dollars)
Derivatives designated as cash flow hedges(i)
Foreign Exchange Forwards
Total derivatives designated as cash flow hedges
Derivatives not designated in a formal hedging relationship
Foreign Exchange Futures and Forwards
Bond Forwards(ii)
Other Non-Financial Derivatives
Total derivatives not designated in a formal hedging relationship
Total derivatives
December 31, 2016
(52 weeks)
Net Asset/
(Liability)
Fair value
Gain/(loss)
recorded in OCI
Gain/(loss)
recorded in
operating income
$
$
$
$
$
2
2
9
—
7
16
18
$
$
$
$
$
(1) $
(1) $
— $
—
—
— $
(1) $
2
2
(8)
3
8
3
5
(i)
Includes bond forward agreements with a notional value of $95 million, which were settled within the year, and interest rate swap agreements with a notional value of
$200 million. During 2016, a nominal unrealized fair value gain was recorded in OCI relating to these agreements.
(ii) Realized fair value gain of $3 million related to Choice Properties bond forward agreements settled in the first quarter of 2016 and recorded in net interest expense and
other financing charges (see note 6).
116 2016 Annual Report - Financial Review
(millions of Canadian dollars)
Derivatives designated as cash flow hedges
Foreign Exchange Forwards
Bond Forwards
Total derivatives designated as cash flow hedges
Derivatives not designated in a formal hedging relationship
Foreign Exchange Futures and Forwards
Other Non-Financial Derivatives
Total derivatives not designated in a formal hedging relationship
Total derivatives
Note 31. Financial Risk Management
Net Asset/
(Liability)
Fair value
Gain/(loss)
recorded in OCI
January 2, 2016
(52 weeks)
Gain/(loss)
recorded in
operating income
$
$
$
$
$
4
—
4
33
(6)
27
31
$
$
$
$
$
3
(2)
1
$
$
— $
—
— $
$
1
1
—
1
58
(7)
51
52
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 could 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 facilities, 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 December 31, 2016:
Derivative Financial Liabilities
Foreign exchange forward contracts
$
387
$
— $
— $
— $
— $
— $
387
2017
2018
2019
2020
2021
Thereafter
Total(i)
Non-Derivative Financial Liabilities
Bank Indebtedness
Short term debt(ii)
Long term debt including interest
payments(iii)
Other liabilities
115
665
835
5
—
—
1,807
3
—
—
2,544
2
—
—
1,660
3
—
—
1,112
3
—
—
115
665
7,339
—
15,297
16
$
2,007
$
1,810
$
2,546
$
1,663
$
1,115
$
7,339
$
16,480
(i) The Trust Unit Liability has been excluded as this liability does not have a contractual maturity date. The Company also excluded trade payables and other liabilities,
which are due within the next 12 months.
(ii) These are obligations owed to independent securitization trusts which are collateralized by the Company’s credit card receivables (see note 11).
(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 December 31, 2016.
2016 Annual Report - Financial Review 117
Notes to the Consolidated Financial Statements
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 and joint
venture partners, 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.
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 $3 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. During 2016 and 2015, the Company entered into derivative instruments in the form of futures
contracts and forward contracts to manage its current and anticipated exposure to fluctuations in U.S. dollar exchange rates.
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 December 31, 2016, a 10% decrease in relevant energy prices, with all other variables held constant,
would result in a loss of $4 million on earnings before income taxes.
Choice Properties’ Unit Price The Company is exposed to market price risk as a result of 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 $71 million increase to
net interest expense and other financing charges.
118 2016 Annual Report - Financial Review
Note 32. Contingent Liabilities
In the ordinary course of business, the Company is involved in and potentially subject to, legal actions and proceedings. In addition, the
Company is subject to tax audits from various tax authorities on an ongoing basis. As a result, from time to time, tax 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.
It is not currently possible to predict the outcome of the Company’s legal actions and proceedings with certainty. Based on current
knowledge and in consultation with legal counsel, management 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.
However, there are a number of uncertainties involved in such matters, individually or in aggregate, and as such, there is a possibility that
the ultimate resolution of these matters may result in a material adverse effect on the Company’s reputation, operations or financial
condition or performance in future periods. The Company does not currently have any significant accruals or provisions for its litigation
matters. Management regularly assesses its position on the adequacy of such accruals or provisions and will make any necessary
adjustments.
The following is a description of the Company’s significant legal proceedings, which the Company believes are without merit and is
vigorously defending:
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.
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.
The Company has been reassessed by the Canada Revenue Agency (“CRA”) and the Ontario Ministry of Finance on the basis that certain
income earned by Glenhuron Bank Limited, a wholly owned Barbadian subsidiary, should be treated, and taxed, as income in Canada. The
reassessments, which were received in 2015 and 2016, are for the 2000 to 2011 taxation years and total $351 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 2012 and
2013 taxation years on the same or similar basis. The Company has filed a Notice of Appeal with the Tax Court of Canada for the 2000 to
2010 taxation years and a Notice of Objection for the 2011 taxation year.
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.
2016 Annual Report - Financial Review 119
Notes to the Consolidated Financial Statements
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 $329 million as at December 31, 2016
(January 2, 2016 – $448 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
December 31, 2016, the Company’s maximum obligation in respect of such guarantees was $580 million (January 2, 2016 – $570 million)
with an aggregate amount of $488 million (January 2, 2016 – $483 million) in available lines of credit allocated to the Associates by the
various banks. As at December 31, 2016, Associates had drawn an aggregate amount of $115 million (January 2, 2016 – $143 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 December 31, 2016 the Company has agreed to provide a credit enhancement of $64 million
(January 2, 2016 – $53 million) in the form of a standby letter of credit for the benefit of the independent funding trusts representing not
less than 10% (2015 – 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 $16 million (January 2, 2016 – $18 million). Additionally, the Company has guaranteed lease obligations of a
third party distributor in the amount of $6 million (January 2, 2016 – $7 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 $141 million (2015 – $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 December 31, 2016, the guarantee on
behalf of PC Bank to MasterCard® was USD $190 million (January 2, 2016 – USD $190 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 $11 million (January 2, 2016 – $107 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 $71 million (January 2, 2016 – $56 million), which represented approximately 11% (2015 – 10%) of the
securitized credit card receivables amount (see note 21). As at December 31, 2016, the aggregate gross potential liability under these
arrangements for Eagle was $36 million (January 2, 2016 – $36 million), which represented approximately 9% (2015 – 9%) of the
outstanding Eagle notes issued prior to 2015 (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 December 31, 2016, the aggregate gross potential liability related
to these letters of credit totaled $31 million (January 2, 2016 – $28 million).
The Choice Properties Credit Facilities 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.
120 2016 Annual Report - Financial Review
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 47% 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 80,773,740 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 from a subsidiary of Wittington
$
$
Transaction Value
$
$
2016
654
28
27
21
16
3
2015
642
25
27
23
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 December 31, 2016 was $5 million (January 2, 2016 – $2 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 systems, 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 2016, Choice Properties issued
1,265,160 Units (2015 – 1,317,405 Units) to Weston under its DRIP at a weighted average price of $12.63 (2015 – $10.86) per Unit.
The net balances due to Weston are comprised as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
As at
December 31, 2016
As at
January 2, 2016
$
44
$
3
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
December 31, 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 26.
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 2016, 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.
2016 Annual Report - Financial Review 121
Notes to the Consolidated Financial Statements
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
$
$
2016
4
6
10
$
$
2015
6
4
10
Note 35. Restructuring and Other Related Costs
In 2015, the Company finalized a plan to close approximately 52 unprofitable retail locations across a range of banners and formats. In
2016, the Company completed the closures of those retail locations as well as the closure of the remaining Joe Fresh retail location in the
U.S. During the year, approximately $46 million (2015 – $124 million) of restructuring and other related costs pertaining to this initiative
were recorded, primarily in selling, general and administrative expenses.
In 2015, the Company began actively marketing the sale of certain assets of its Shoppers ancillary healthcare business and recorded
asset impairments on these assets and other related restructuring charges totaling $112 million. In 2016, the Company signed agreements
for the sale of a portion of these assets and ceased actively marketing the remaining assets, and restructured them as part of ongoing
operations. As a result, in 2016, the Company recorded a charge of $4 million related to inventory impairment and a net reversal of $8
million of previous asset impairments and other related restructuring charges.
122 2016 Annual Report - Financial Review
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, manages and develops retail and commercial properties across Canada. 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:
December 31, 2016
(52 weeks)
Retail
Financial
Services(3)
Choice
Properties(3)
Consolidation
and
Eliminations(i)
Total
Retail
Financial
Services(3)
Choice
Properties(3)
January 2, 2016
(52 weeks)
Consolidation
and
Eliminations(i)
Total
$45,384 $
$ 1,902 $
911 $
175 $
784 $
677 $
(694) $ 46,385
$44,469 $
(662) $ 2,092
$ 1,429 $
849 $
163 $
743 $
601 $
(667) $ 45,394
(592) $ 1,601
332
51
900
(630)
653
367
57
756
(536)
644
(millions of Canadian dollars)
Revenue(ii)
Operating Income
Net interest expense and other
financing charges
Earnings before Income
Taxes
$ 1,570 $
124 $
(223) $
(32) $ 1,439
$ 1,062 $
106 $
(155) $
(56) $
957
Operating Income
$ 1,902 $
175 $
677 $
(662) $ 2,092
$ 1,429 $
163 $
601 $
(592) $ 1,601
Depreciation and Amortization
Adjusting items(iii)
Less: amortization of intangible
assets acquired with Shoppers
Drug Mart
1,512
752
(535)
13
—
—
1
—
—
17
—
1,543
752
1,567
892
—
(535)
(536)
10
—
—
1
—
—
14
—
1,592
892
—
(536)
Adjusted EBITDA(iii)
$ 3,631 $
188 $
678 $
(645) $ 3,852
$ 3,352 $
173 $
602 $
(578) $ 3,549
Depreciation and Amortization(iv)
977
13
1
17
1,008
1,031
10
1
14
1,056
Adjusted Operating Income
$ 2,654 $
175 $
677 $
(662) $ 2,844
$ 2,321 $
163 $
601 $
(592) $ 2,493
(i)
Consolidation and Eliminations includes the following items:
• Revenue includes the elimination of $520 million (2015 – $502 million) of rental revenue and $174 million (2015 – $165 million) of cost recovery recognized by
Choice Properties, generated from the Retail segment.
• Adjusted operating income includes the elimination of the $520 million (2015 – $502 million) impact of rental revenue described above; the elimination of a $109
million gain (2015 – $72 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 elimination of a $14 million gain (2015 – nil) recognized by Choice Properties related
to the fair value adjustments on investment properties in the joint venture; $17 million (2015 – $14 million) of depreciation expense for certain investment
properties recorded by Choice Properties; and the elimination of intercompany charges of $2 million (2015 – $4 million).
• Net interest expense and other financing charges includes the elimination of $267 million (2015 – $251 million ) of interest expense included in Choice Properties
related to debt owing to the Company and a $530 million fair value loss (2015 – loss of $411 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 $49 million (2015 – $45
million), which excludes distributions paid to the Company and a $118 million fair value loss (2015 – loss of $81 million) on the Company’s Trust Unit Liability.
Included in Financial Services revenue is $383 million (2015 – $368 million) of interest income.
(ii)
(iii) Certain items are excluded from operating income to derive at 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 $535 million (2015 – $536 million) of amortization of intangible assets acquired with
Shoppers Drug Mart.
2016 Annual Report - Financial Review 123
Notes to the Consolidated Financial Statements
(millions of Canadian dollars)
Total Assets
Retail
Financial Services
Choice Properties
Consolidation and Eliminations(ii)
Total
As at
December 31, 2016
As at
January 2, 2016(i)
$
$
30,055
$
3,531
9,435
(8,585)
34,436
$
30,354
3,267
8,906
(8,170)
34,357
(i) Certain comparative figures have been restated. See note 2.
(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(3)
Choice Properties(3)
Consolidation and Eliminations(i)
Total
December 31, 2016
(52 weeks)
January 2, 2016
(52 weeks)
$
$
$
985
11
377
(149)
1,224
$
1,041
14
410
(224)
1,241
(i) Consolidations and Eliminations includes the elimination of investment properties acquired by Choice Properties from the Retail segment.
124 2016 Annual Report - Financial Review
Three Year Summary(1),(5)
For the years ended December 31, 2016 and January 2, 2016 and January 3, 2015
(millions of Canadian dollars except where otherwise indicated)
Consolidated Results of Operations
Revenue
Revenue excluding 53rd week in 2014
Revenue growth
Revenue growth excluding 53rd week in 2014
Operating Income
Operating Income excluding 53rd week in 2014
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week in 2014
Adjusted EBITDA margin(2)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
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 in 2014
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 in 2014
Retail debt to retail adjusted EBITDA(1)(2)
Adjusted return on equity(1)(2)
Adjusted return on capital(1)(2)
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 ($)
Diluted net earnings
Diluted net earnings excluding 53rd week in 2014
Adjusted diluted net earnings(2)
Adjusted diluted net earnings(2) excluding 53rd week in 2014
Dividends
Dividends declared per common share ($)
Retail Results of Operations
Sales
Sales excluding 53rd week in 2014
Operating Income
Operating Income excluding 53rd week in 2014
Adjusted gross profit(2)
Adjusted gross profit(2) excluding 53rd week in 2014
Adjusted gross profit %(2)
Adjusted EBITDA(2)
Adjusted EBITDA(2) excluding 53rd week in 2014
Adjusted EBITDA margin(2)
Depreciation and amortization
2016
2015(4)
2014
$
$
$
$
$
$
$
$
$
$
$
$
46,385
46,385
2.2%
2.2%
2,092
2,092
3,852
3,852
8.3%
653
535
983
971
971
1,655
1,655
1.7x
12.9%
8.8%
1,559
3,519
1,224
1,821
2.37
2.37
4.05
4.05
1.03
45,384
45,384
1,902
1,902
12,262
12,262
27.0%
3,631
3,631
8.0%
1,512
$
$
$
$
$
$
$
$
$
$
$
$
45,394
45,394
6.5%
8.5%
1,601
1,601
3,549
3,549
7.8%
644
548
598
591
591
1,422
1,422
2.0x
11.1%
7.6%
1,084
3,079
1,241
1,347
1.42
1.42
3.42
3.42
0.995
44,469
44,469
1,429
1,429
11,747
11,747
26.4%
3,352
3,352
7.5%
1,567
$
$
$
$
$
$
$
$
$
$
$
$
42,611
41,822
31.6%
29.2%
662
591
3,227
3,156
7.6%
584
529
53
53
1
1,217
1,165
2.6x
12.3%
9.0%
1,027
2,569
1,086
977
0.14
—
3.17
3.03
0.975
41,731
40,942
497
426
10,722
10,522
25.7%
3,040
2,969
7.3%
1,453
2016 Annual Report - Financial Review 125
Three Year Summary(1),(5)
For the years ended December 31, 2016 and January 2, 2016 and January 3, 2015
(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(3)
Revenue
Earnings before income taxes
Financial Services Operating Measures and Statistics(3)
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(3)
Revenue
Net interest expense and other financing charges
Net Income (loss)
Adjusted funds from operations(2)
2016
1.1%
4.0%
2.9%
5.0%
70.2
565
533
1,326
911
124
2,769
2,926
52
13.5%
4.3%
784
900
(223)
330
$
$
$
2015
1.9%
4.3%
3.7%
4.7%
69.9
591
525
1,313
849
106
2,642
2,790
54
13.6%
4.3%
743
756
(155)
313
$
$
$
2014
2.0%
2.6%
2.7%
2.4%
70.0
615
527
1,302
810
111
2,535
2,630
54
13.7%
4.4%
683
369
200
285
$
$
$
Financial Results and Financial Summary Endnotes
For financial definitions and ratios refer to the Glossary of Terms on page 127 of the Company’s 2016 Annual Report.
(1)
(2) See Section 17 “Non-GAAP Financial Measures” of the Company’s Management’s Discussion and Analysis for the reconciliation of such non-GAAP measures to the
(3)
most directly comparable GAAP measures.
For segment presentation purposes, the results are for the periods ended December 31, consistent with Financial Services’ and Choice Properties’ fiscal calendars.
Adjustments to the Company’s fiscal calendar are included in Consolidation and Eliminations. See Section 17 “Non-GAAP Financial Measures” in the Company’s
Management’s Discussion and Analysis and Note 36 “Segment Information” in the Company’s 2016 consolidated financial statements.
(4) Certain figures have been restated as a result of the IFRS Interpretations Committee’s agenda decision on IAS 12, “Income Taxes”. See Note 2 in the Company’s 2016
consolidated financial statements.
The Company’s 2014 results were impacted by the inclusion of an additional selling week, the 53rd week.
(5)
126 2016 Annual Report - Financial Review
Glossary of Terms
Term
Definition
Adjusted diluted 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
of the Company
Adjusted net interest and other financing charges
Adjusted operating income
Adjusted return on capital
Adjusted return on equity
Annualized credit loss rate on average quarterly gross
credit card receivables
Adjusted net earnings available to common shareholders including the effects of all dilutive instruments divided by the diluted
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 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).
Net interest expense and other financing charges adjusted for items that are not necessarily reflective of the Company’s ongoing
net financing costs (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).
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).
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).
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
Diluted weighted average common shares outstanding
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 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 of the
Company
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 total 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.
Weighted average number of common shares outstanding including the effects of all dilutive instruments.
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 December 31, 2016 and January 2, 2016 both contained 52 weeks.
2016 Annual Report - Financial Review 127
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
Website: 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 47% of the Company’s common
shares.
Registrar and Transfer Agent
Computershare Investor Services Inc.
100 University Avenue
Toronto, Canada M5J 2Y1
At year-end 2016, there were 400,829,870 common shares issued and
outstanding.
The average daily trading volume of the Company’s common shares for
2016 was 609,842.
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 2016, 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, Series B for 2016 was 4,567.
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 2017 Annual Meeting of Shareholders of Loblaw Companies Limited
will be held on Thursday, May 4, 2017 at 11:00 a.m. (EDT), 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 Investors 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 2017 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
2017 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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