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2017 ANNUAL REPORT
LOBL AW COMPANIES LIMITED 2017 ANNUA L REPORT
1
Growth in Digital
In 2017, we launched wellwise.ca to offer online shopping for home
healthcare products, accelerated growth of our online grocery service,
partnered with Instacart to explore grocery home delivery in certain
urban areas, and expanded our product offerings across all of our
digital platforms.
Five Online Platforms
• Click & Collect
• BeautyBOUTIQUE.ca
• JoeFresh.ca
• mypharmacy.shoppersdrugmart.ca
• wellwise.ca
for everyday
digital retail
With smarter technology at their fingertips, Canadians are
managing their everyday tasks in an increasingly digital way.
In this digital world, customers expect a multi-channel, convenient and personalized shopping experience.
Since beginning our e-commerce journey in 2013, we have built five digital platforms that integrate with our
network of stores to offer a more convenient shopping experience in apparel, pharmacy and healthcare.
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LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
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LOBL AW COMPANIES LIMITED 2017 ANNUA L REPORT
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Evolving Our Payments and Rewards Offering
We know our customers want seamless, personalized ways to pay. In 2017, we started to refocus PC Financial on
payments and rewards to build on the success of the PC Financial Mastercard and gave customers more ways to pay.
Introducing PC Optimum and PC Insiders
In 2017, we announced plans to bring together the PC Plus and Shoppers Optimum loyalty programs, under the
PC Optimum brand. Unlike any other rewards program, PC Optimum offers personalized rewards and the ability to earn
and redeem more points, on more products, in more stores than ever before. We also introduced PC Insiders, a pilot
subscription service that gives our busy customers access to exclusive benefits and perks across our businesses and
enables them to enjoy the things that make life better.
to reward our
customers even more
Our customers each have their own unique shopping needs,
preferences and habits, and are searching for ways to make
shopping easier and more personalized.
Our long-standing commitment to being a truly customer-centric organization is showcased, in part,
by our payments and rewards offerings. We believe our unparalleled loyalty program and rewarding
payments products have the potential to deepen our relationship with customers and unlock the value
they are looking for.
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LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
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LOBL AW COMPANIES LIMITED 2017 ANNUA L REPORT
5
Expanded Healthcare Services
Digitally Connected Healthcare
We are finding more ways for our pharmacists, nurses, opticians,
dietitians and nutritionists to help patients and customers live
healthier lives. In 2017, we expanded optical services into
three Shoppers Drug Mart stores, administered over 1.5 million
flu shots and vaccinations, achieved our 550th Certified Diabetes
Educator pharmacist, and held dietitian-led cooking classes
in stores across the country.
In 2017, we introduced new digital healthcare
capabilities, which included new wellness stations
in our grocery stores, an ePrescribing platform and
online prescription refills at Shoppers Drug Mart.
And, we continued to grow our electronic medical
record platform.
to integrate our health
and wellness offerings
Aging populations, rising costs and fast-growing urban areas
are having an impact on the delivery of healthcare solutions
to Canadians across the country. More than ever, our customers
expect convenient and accessible ways to manage their health
and wellness – and these needs go far beyond food.
The acquisition of Shoppers Drug Mart in 2014 accelerated our efforts to evolve from grocery retailer to
health and wellness partner. Today, with our network of food stores, pharmacies and thousands of health
and wellness experts, we can support Canadians with medication checks, minor ailment assessments,
flu shots, eye exams, nutrition counselling, and more. And thanks to QHR – our electronic medical records
provider – we are poised to make healthcare more convenient and accessible too.
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LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
TABLE OF CONTENTS
6 Financial Highlights 9 Chairman’s Message 12 Review of Operations
20 Corporate Social Responsibility 22 Corporate Governance Practices 24 Board of Directors
24 Leadership 25 Shareholder and Corporate Information 26 Forward-Looking Statements
Delivering Solid Results
2.9%
Drug Retail Front of
Store Same Store Sales
3.1%
Drug Retail Pharmacy
Same Store Sales
5.0%
4.7%
3.7%
2.9%
3.1%
2.9%
28.1%
Adjusted Retail Segment
Gross Margin3
26.4% 27.0%
28.1%
0.3%
Food Retail
Same Store Sales
3.5%1, 2
1.5%1
0.3%1
h
6.2%
Consolidated
Adjusted EBITDA3
($ millions)
3,852
4,092
3,549
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
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Consolidated Adjusted
Adjusted Diluted Net Earnings
8.8%
EBITDA Margin3
8.3%
8.8%
7.8%
h
11.9%
per Common Share3
($)
4.05
4.53
3.42
h
3.9%
Dividend Declared
per Common Share
($)
0.995
1.03
1.07
$1,259
Capital Investments
($ millions)
1,241
1,224
1,259
4000
3500
3000
2500
2000
1500
1000
500
0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1.10
1.04
0.98
0.92
0.86
0.80
'2013'
'2014'
'2015'
'2013'
'2013'
'2014'
'2014'
'2015'
'2015'
LOBL AW COMPANIES LIMITED 2017 ANNUA L REPORT
7
We deliver nutrition, wellness, innovation,
and value to Canadians.
Our PurPOSE – LIvE LIFE WELL
Loblaw Companies Limited (“Loblaw” or the “Company”) is Canada’s food and pharmacy leader, the nation’s largest
retailer, and the majority unitholder of Choice Properties Real Estate Investment Trust (“Choice Properties”). We are the
developer of Canada’s top control brand portfolio and a trusted health and wellness partner to millions of Canadians.
From coast-to-coast, our network of corporate and independently operated stores provides customers with grocery,
pharmacy, health and beauty, apparel and general merchandise. Our community-based retail locations are complemented
by innovative and convenient digital offerings, the PC Financial Mastercard portfolio, and PC Optimum – a loyalty program
that rewards our customers even more than before.
2.9%
Drug Retail Front of
Store Same Store Sales
3.1%
Drug Retail Pharmacy
Same Store Sales
5.0%
4.7%
3.7%
2.9%
3.1%
2.9%
0.3%
Food Retail
Same Store Sales
3.5%1, 2
1.5%1
0.3%1
28.1%
Adjusted Retail Segment
Gross Margin3
26.4% 27.0%
28.1%
h
6.2%
Consolidated
Adjusted EBITDA3
($ millions)
3,852
4,092
3,549
8.8%
Consolidated Adjusted
EBITDA Margin3
8.3%
8.8%
7.8%
®
®
h
3.9%
Dividend Declared
per Common Share
($)
h
11.9%
Adjusted Diluted Net Earnings
per Common Share3
($)
4.53
4.05
0.995
1.03
1.07
3.42
TM
®
MC
®
$1,259
Capital Investments
($ millions)
1,241
1,224
1,259
1 Same store sales after
excluding the impact of gas bar
2 Same store sales after
excluding the negative impact
of a change in distribution
model by a tobacco supplier
3 See the Non-GAAP Financial
Measures section of
the 2017 Annual Report –
Financial Review
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
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4000
3500
3000
2500
2000
1500
1000
500
0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1.10
1.04
0.98
0.92
0.86
0.80
'2013'
'2014'
'2015'
'2013'
'2013'
'2014'
'2014'
'2015'
'2015'
Galen G. Weston
Chairman and
Chief Executive Officer
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C H A I R M A N ’ S M E S S A G E
LOBLAW COMPANIES LIMITED 2017 ANNUAL REPORT
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Loblaw has always sought out innovation. We have created some
of the nation’s leading brands, introduced new formats, found
strength in partnerships and acquisitions – all based on the needs
of our customers. Now, as a wave of change takes place in our
industry, we are ready, with a digital portfolio, industry-leading
payment and reward options, and a series of connected health
and wellness services. We sit on a solid foundation. And it’s only
the beginning.
Fellow shareholders,
This year we faced into several challenges, but also positioned our business for the future. We delivered against our financial
plan, while at the same time setting a strategic path for our business based on the evolving needs of our customers.
And, as you will see, we remain as committed as ever to delivering on our company purpose – Live Life Well – in new and
innovative ways.
I am pleased to share a number of highlights from 2017, beginning with strong performance in our retail segment.
Ready to deliver what’s
next for Canadians
Strong Foundation
Nationwide, our network of 2,500 stores and pharmacies
remain a powerful competitive advantage.
Our grocery stores are recognized for offering value,
assortment, and quality, along with many of the country’s
top brands in President’s Choice, no name, Life Brand,
Farmer’s Market and more. In total, we introduced over
820 new products, improved another 450, and consistently
outsold national brand equivalents.
Similarly, our pharmacies continued to earn the trust
of millions of Canadians every single week. Thanks to
expanded scope of practice in many provinces, we are
helping to ease the burden on our healthcare system –
last year alone, we administered over 1.5 million flu shots
and travel vaccinations. We refined our convenience
food offering in key markets, enhanced our approach in
beauty with new boutique concepts, and introduced the
Wellwise brand.
Customers responded well to these efforts. We once again
grew same-store sales in both food and drug retail, and
achieved steady increases in customer satisfaction.
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LOBLAW COMPANIES LIMITED 2017 ANNUAL REPORT
We are working
hard to anticipate
and deliver on
the expectations
of Canadians,
and as an
organization,
we are proving
ready
ready for this
ready for this
challenge.
A Vision for the Future
While we have many of the most trusted brands in Canada,
a national store network, high customer frequency, and deep
customer relationships in our grocery and drug stores, we are
also conscious that the needs and expectations of those we
serve are rapidly evolving. This is why, in 2017, we introduced
a new strategic framework that reflects our commitment to
remaining at the forefront of shifting consumer behaviour.
We are working hard to anticipate and deliver on the
expectations of Canadians, and as an organization, we are
proving ready for this challenge.
Our strategic shift starts with reaffirming a passion for
customers, and centres around three areas where we will
invest and grow to serve them better:
Everyday Digital Retail
We entered the year with a number of successful digital
offerings, including joefresh.com, BeautyBoutique.ca,
and online shopping through Click & Collect at many of
our retail banners. In 2017, we continued to build on that
positive momentum. We launched an online prescription
renewal service through shoppersdrugmart.ca, opened
our 200th Click & Collect location, introduced wellwise.ca
to help Canadians take charge of the way they age, and
partnered with Instacart, the leading on-demand grocery
delivery service. Underneath each of these properties lies our
commitment to everyday digital retail, and a promise to give
consumers access to all of our assets when, where and
how they choose.
Connected Healthcare
The acquisition of Shoppers Drug Mart in 2014 was a clear
signal that we aspire to become a health and wellness
partner for Canadians. With the addition of QHR – and an
electronic medical records platform that is already used by
more doctors than any other – we are working to connect
our customers to a variety of health and wellness services,
including over 5,000 pharmacists, nurses, dietitians,
physicians and in-store clinics. Making it easier for Canadians
to access their health information is just one more example of
how we can realize our company purpose – Live Life Well.
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Amidst a dynamic and rapidly changing future, our collection of
complementary assets remains unrivalled and is uniquely positioned
to allow us to deliver on our purpose – Live Life Well.
Payments and Rewards
Since the launch of PC Financial over 20 years ago, we have
shown the potential of linking payments and rewards through
our PC Financial Mastercard and PC points program. In
2017, we took the next step in that journey, moving on
from everyday banking services in order to better focus on
delivering an exceptional customer experience in payments
and rewards. We announced the merger of the PC Plus and
Shoppers Optimum loyalty programs under the PC Optimum
brand, and piloted a subscription service that offers value
where customers want it most. Moving forward, we will
continue to look for ways to create a compelling payments
and rewards offering for our customers.
These three growth areas – Everyday Digital Retail,
Connected Healthcare Network, and Payments and
Rewards – have significant potential, but will all take focus
and persistence to realize. To do so, we will rely on our
outstanding talent, who share a common culture and
values, and whose actions are guided by a commitment
to compliance and social responsibility every day. In this
regard, in 2017 we sought to do even more to strengthen
this commitment. We created a group-wide compliance
function that reports to the Board of Directors. We
announced $150 million over 10 years to fight child hunger
and poor nutrition in Canada through local school programs
and social service agencies. We renewed our participation
in the Accord for Fire and Building Safety in Bangladesh.
And, we made significant progress toward reaching our
goal of reducing our carbon emissions by 20 per cent by
2020. Each of these actions are meaningful on their own,
but together they show our conviction to help strengthen
the communities we serve.
Choice Properties REIT also continued to bring value to
those communities and in 2017 we added 347,000 square
feet of new gross leasable area (GLA), maintained a 98.9 per
cent occupancy rate, and completed acquisitions totaling
$126 million. Each of these achievements reflects our focus
on the development, active management, and acquisition
of real estate. Nearly five years since its creation, Choice
Properties has grown to 546 properties and has one of the
country’s most promising pipelines of retail and mixed-use
development opportunities. With that solid foundation in
place, the Board of Trustees has turned their attention to
the next strategic evolution of Choice Properties, setting the
course for steady value creation over the long-term.
Financial Highlights
Once again, we delivered on our financial plan in 2017.
We achieved same-store sales increases of 3 per cent in
drug retail and 0.3 per cent in food retail excluding gas
bar operations. Revenue increased by $317 million or
0.7 per cent, and while much of this growth came in the
retail segment ($250 million or 0.6 per cent), we also saw
revenue and earnings growth from both Financial Services
and Choice Properties.
In a year that saw fluctuating food inflation, we were pleased
to deliver a relatively stable gross margin of 28.1 per cent in
our retail segment where data-driven insights continue to play
an increasingly important role in how we trade day-to-day.
This was combined with steady improvements in our selling,
general and administrative expenses as our organization
remained focused on improving processes and surfacing
incremental efficiencies. Together, these led to consolidated
adjusted EBITDA of $4.09 billion, up 6.2 per cent, and
adjusted diluted net earnings per share of $4.53, or +11.9 per
cent. We also continued to return excess free cash flow to
shareholders under a common share repurchase program.
Looking ahead, our management team remains confident
in our long-term financial plan and motivated by a passion
for serving our customers. As our business faces a dynamic
future, our collection of complementary assets remains
unrivalled and is uniquely positioned to allow us to deliver
on our purpose – Live Life Well. We will do so thanks to a
dedicated team of colleagues who share a common culture
and values, and whose actions every day will continue to
create value for our shareholders. Together, we are excited
by the challenge, and ready to deliver against it both now,
and in the years to come.
Galen G. Weston
Chairman and Chief Executive Officer
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LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
OUR PURPOSE:
Brands
Culture
Our product developers are passionate about
delivering the best food experiences the
world has to offer. Our brands are synonymous
with quality and innovation, including
President’s Choice, which ranked as one of
Canada’s most trusted brands in 2017.*
Our culture encourages authenticity, trust and
strong connections, and urges colleagues to
consider not just “what” we do but “how” we
do it. This helps us deliver an amazing customer
experience, achieve sustainable business
results and create positive work environments.
CORE values
Our CORE Values – Care, Ownership,
Respect, Excellence – work hand-in-hand
with our culture to guide our decision-
making and make Loblaw a great place to
work and shop.
A passion for customers is the heart of our
strategy and how we serve Canadians daily
Data-Driven Insights
Extracting insights from our rich data lets
us truly put customers first as we make
strategic decisions, improve product,
category and store performance, and realize
efficiencies in our business.
Process and Efficiency
Excellence
We continually seek and implement new ways to
work smarter, minimize duplication and increase
rigour in our processes. This focus helps us
minimize our operating costs so we can invest in
areas that matter most to our customers.
Best in Food
We bring Canadians the best in food,
meeting a variety of needs and tastes: great
value and quality in our Discount division; an
incredible selection and exciting new tastes
in our Market division; multicultural offerings;
and unsurpassed convenience at Shoppers
Drug Mart.
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We continue to serve our customers by delivering on our purpose –
Live Life Well. Our five distinct divisions bring that purpose to life
in unique ways, supported by a shared passion for customers and
a common set of strategic enablers.
Technology
Supply Chain
Technology provides a solid foundation for
our future by supporting customer-focused
innovation and helping to increase process
and efficiency while managing costs. We will
work to build on that foundation through AI,
robotic automation and more.
Our Supply Chain is one of the most efficient,
responsive and customer-centric teams in
North America. In 2017, we implemented
additional automation for increased outbound
capacity and improved warehouse inventory
efficiency.
A passion for customers is the heart of our
strategy and how we serve Canadians daily
Best in Health
With more than 1,750 pharmacies and
5,000 health and wellness professionals
across our network, we play an important
role in managing the well-being of
Canadians. Many of our stores and
pharmacies offer services such as
medication checks, flu shots, nutrition
counselling and eye exams.
Best in Beauty
We remain a top beauty
destination for Canadian women
and continue to elevate this
category both in store, with new
Enhanced and Next Generation
Beauty Boutique concepts, and
online through beautyboutique.ca.
* Source: The Gustavson Brand Trust Index:
http://www.newswire.ca/news-releases/2017-gustavson-brand-trust-index-reveals-canadas-
most-trusted-brands-622487684.html
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LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
YOur LIFE. MADE EASIEr. Shoppers Drug Mart operates more than
1,300 Associate-owned stores, luxury beauty and home healthcare retail outlets,
a specialty drug distribution network, pharmacy services for long-term care and
retirement communities, a generic drug manufacturer, and an electronic medical
records organization – collectively offering Canadians convenient access to the
best in health, beauty, food and more.
We continued to enhance our
food offering in urban locations,
focusing on Greater Vancouver
and Toronto. Fifty-one stores
now offer a wide selection of
fresh food and grocery items,
increasing convenience for our
customers.
Optical by Shoppers Drug Mart launched in
three stores. The “store-within-a-store” concept
offers a selection of frames for every budget
with brands like Prada, Coach and our own
Joe Fresh line of eyewear. The optician can
arrange on-site eye exams and fit contact lenses.
Wellwise is a new retail experience, offering
products and services to help Canadians
stay active and well as they age. The
store offers a modern, hands-on shopping
experience, complemented by online
shopping at wellwise.ca.
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FEED EvErYONE. Our Discount division believes a great future for all Canadians
starts with easy access to affordable necessities. Powered by over 60,000 colleagues
in over 500 corporate and franchise stores, Discount stands ready to provide
freshness, value and a broad assortment of quality products in equal measure.
Discount knows that value comes
in many forms. Our best-in-class
control brands are complemented
by powerful promotions and
programs, including Club Size,
10-for-$10, and Save It Forward.
All of this value is supported by our
loyalty program, which is used in
over 50 per cent of transactions.
®
®
As the needs of our customers change,
we change with them.
• Expanded natural food offering brings
organic and healthy options to every
community we serve
• Curated products from around the world help
our multicultural customers feel at home
• Non-food assortment provides outstanding
value for household needs
• Continued e-commerce expansion helps
busy parents save time without sacrificing
value
TM
®
MC
®
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LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
WE LOvE FOOD. The Market team of 62,000 colleagues is passionate about
food and creating great customer experiences. Our impressive assortment of
top-quality products reflects the latest and greatest food trends and inspires
Canadians to feed the moments that matter in their lives.
In 2017, we continued to
differentiate in service with our
Market Moments program,
delivering over 2.8 million
“Moments” to our best customers
and nearly $650,000 in free
groceries. Our Market Moments
videos drove engagement,
with 4.8 million views across
Facebook, Twitter and Instagram.
In 2017, the President’s
Choice brand encouraged
Canadians to share meals
together more often
through the #EatTogether
campaign. Market stores
brought the campaign to
life through a series of local
events where we connected
with customers and brought
communities together over
a shared meal.
We continued to grow Market’s control brand
business, launching 500 new President’s Choice
products, including items in PC Organics, PC Free
From and PC Discovery, encouraging Canadians
to explore new foods.
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LOBL AW COMPANIES LIMITED 2017 ANNUA L REPORT
17
ESSENTIAL STYLE. EXCEPTIONAL vALuE. Joe Fresh brings the elements of modern
style to life through essential designs known for their easy polish, thoughtful details and
exceptional value. This assortment forms the building blocks of personal style in apparel,
accessories, footwear and beauty.
Store and Website refresh
As Joe Fresh continues to evolve, we are
committed to updating our in-store and online
experience through the completion of 51 store
refreshes and a homepage redesign.
Family Activewear
From affordable workout gear to athleisure
solutions for the entire family, we have
continued to see significant growth of the
activewear apparel category.
Launch of Extended Sizes
Joe Fresh was thrilled to expand the
womenswear line to offer a selection of
our favourite styles in extended sizes
(2–22/XS–3X) at the same great price.
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LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
MAKE THE EvErYDAY SIMPLE AND BETTEr. PC Financial offers value,
convenience and simplicity through convenient, no-fee payment offerings
that enable customers to earn rewards on everyday purchases.
Refocusing on Payments and Rewards
In 2017, PC Financial started to refocus on payments and rewards to offer customers more
seamless and personalized ways to pay and discontinued everyday banking products under
the PC Financial brand. As part of the transition, we continued to invest in our in-store presence
through pavilion upgrades, expanding our ATM network and introducing new staffing models.
We also introduced the PC Insiders program, a new pilot subscription service that gives our
busy customers access to exclusive benefits and perks across our business and enables them
to enjoy the things that make life better.
More Ways to Pay
Strong growth in PC Services
PC Financial teamed up with Google to become one of the first
financial institutions to launch Android Pay in Canada, allowing
customers to use their Android phones to make purchases in-app
or in-store, all without pulling out a physical wallet.
We also strengthened our Mastercard credit card suite by
relaunching the PC Financial World Mastercard, offering customers
more opportunities to earn rewards with no annual fee. PC Financial
Mastercard products have rewarded Canadians with $1 billion in
points to date.
Thanks to continued investment in PC Services, we saw growth
across a range of our businesses. The Mobile Shop achieved high
customer satisfaction ratings and awarded customers $17 million
in PC points; PC mobile introduced the iPhone to their handset
line-up, offering customers a stronger value proposition; and our
rewards offering continues to expand across our suite of
PC Services.
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LOBL AW COMPANIES LIMITED 2017 ANNUA L REPORT
19
2017 HIgHLIgHTS:
Choice Properties is expanding its development expertise thanks to properties in
hundreds of communities across Canada and a robust pipeline of mixed-use real
estate. The end goal is to unlock the potential of this investment through complete
communities for the future.
546
properties
44.1
million
square feet of GLA
98.9%
occupancy
$9.6
billion
fair value
Acquisitions:
• 12 properties1
• 517,000 square feet of gross
leasable area (GLA)
• 3 parcels of land for future
development
• $126 million in value2
• $7.0 million in annual net operating
income (NOI) with an implied
capitalization rate of 6.5 per cent3
Development:
• Completed 347,000 square feet
of new GLA
Active Management:
• Signed leases for 589,000 square
feet of GLA
• Delivered 81 new retail spaces
• Increased rent by 8.1 per cent
at 16 sites
for renewing leases
• Generated a return on investment
• Invested $45M in maintaining
of approximately 8 per cent
portfolio quality
• Ongoing progress with mixed-use
• High total occupancy of
development
98.9 per cent
1 Net of four properties that were combined with existing adjacent Choice Properties-owned sites on acquisition
2 Excludes acquisition costs
3 Represents the NOI and capitalization rate for income-producing properties only
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20
LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
Corporate
Social
responsibility
Focused on Carbon reduction
In 2017, we saw progress on our ambitious goal to reduce our carbon emissions by
20 per cent by 2020 and 30 per cent by 2030. As a first step towards converting
to a fully electric fleet by 2030, we unveiled a first-of-its-kind, 53-foot, fully electric
Class 8 truck and pre-ordered 25 Tesla fully electric semis.
Ethical Sourcing
In 2017, we shared more
information with our customers
by publishing the list of
factories that we contract to
make our apparel and footwear.
We were also proud to be one
of the first brands worldwide
to join the Transition Accord
to continue our contribution to
increasing building and worker
safety in developing nations.
Plastic Bag Reduction
Since it began 10 years ago,
our plastic bag program
has diverted nearly 11 billion
plastic bags from landfills
and raised $9 million for
WWF Canada.
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LOBL AW COMPANIES LIMITED 2017 ANNUA L REPORT
21
Our focus on Corporate Social responsibility (CSr) is organized
around three pillars: Community, Sourcing and Environment.
These pillars guide our decision-making and help us set targets
that make us a better organization – one that earns Canadians’
trust and pride.
Tackling Childhood Hunger
President’s Choice Children’s Charity has focused its attention on tackling childhood
hunger in Canada and rests on two new strategic pillars: Feed Kids Good Food and
Feed Kids Food Knowledge.
In 2017, the Charity announced a commitment to grant $150 million over the next
10 years towards nutrition programs in schools across Canada and increase food
knowledge to empower children to make healthier food choices.
Supporting Women’s Health
Through SHOPPERS LOVE. YOU., we are
passionate supporters of women’s mental
and physical well-being. Now in its sixth year,
our SHOPPERS LOVE. YOU. Run for Women
welcomed over 17,000 people in 15 Canadian
cities, bringing hope and light to those
impacted by mental health issues, and raised
$1.9 million in support of local women’s mental
health charities.
Supporting Local growers
As a proud Canadian company,
we are committed to
supporting local growers and
farmers in the communities
where we operate. In 2017,
during peak growing season,
nearly 50 per cent of the
produce in our stores was
Canadian grown.
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22
LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
Corporate
Governance
Practices
The Board of Directors and senior executives of Loblaw Companies Limited
are committed to sound corporate governance practices and believe they
contribute to the effective management of the Company and its achievement
of strategic and operational objectives.
The Governance Committee regularly reviews the Company’s
corporate governance practices and considers any changes
necessary to maintain the Company’s high standards of
corporate governance in a rapidly changing environment. The
Company’s website, loblaw.ca, sets out additional governance
information, including the Company’s Code of Conduct (the
“Code”), its Disclosure Policy and the Mandates of the Board
of Directors (the “Board”) and its committees.
Director independence
The Canadian Securities Administrators’ Corporate Governance
Guidelines provide that a director is independent if he or she
has no material relationship with the Company or its affiliates
that could reasonably be expected to interfere with the exercise
of the director’s independent judgment.
At least 67 per cent of the directors on the Board are
independent. The independent directors typically meet
separately following each Board meeting and on other occasions
as required or desirable.
Information relating to each of the directors, including their
independence, committee membership, other public company
boards on which they serve, as well as their attendance
record for all Board and committee meetings, can be found at
loblaw.ca and in the Company’s Management Proxy Circular.
Board leadership
Galen G. Weston is the Chairman of the Board and the
Company’s CEO. The Chairman & CEO directs the operations of
the Board. He chairs each meeting of the Board, is responsible
for the management and effective functioning of the Board
generally and provides leadership to the Board in all matters.
These and other key responsibilities of the Chairman
& CEO are set out in a position description established by
the Board.
The Board has also appointed an independent director,
Thomas C. O’Neill, to serve as lead director. The lead director
provides leadership to the Board and particularly to the
independent directors. He ensures that the Board operates
independently of management and that directors have
an independent leadership contact.
Board responsibilities and duties
The Board, directly and through its committees, supervises
and oversees the management of the business and affairs
of the Company. A copy of the Board’s mandate can be
found at loblaw.ca. The Board reviews the Company’s
strategic direction, assigns responsibility to management for
the achievement of that direction, approves major policy
decisions, delegates to management the authority and
responsibility of handling day-to-day affairs, and reviews
management’s performance and effectiveness. The Board’s
expectations of management are communicated to
management directly and through committees of the Board.
The Board regularly receives reports on the operating
results of the Company as well as reports on certain non-
operational matters, including insurance, pensions, corporate
governance, workplace health and safety, legal and treasury
matters. The Board also oversees the enterprise risk
management (ERM) process, which is designed to assist all
areas of the business in managing appropriate levels of risk
tolerance by bringing a systematic approach, a methodology
and tools for evaluating, measuring and monitoring key
risks. The results of the ERM program and other business
planning processes are used to identify emerging risks to the
Company, prioritize risk management activities and develop
a risk-based internal audit plan.
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LOBL AW COMPANIES LIMITED 2017 ANNUA L REPORT
23
governance, Employee Development, Nominating
and Compensation Committee
The Governance Committee is responsible for developing and
maintaining governance practices consistent with high standards
of corporate governance. The Governance Committee is also
responsible for the identification of new director nominees for
the Board and for the oversight of compensation of directors
and executive officers. The Chair of the Governance Committee,
who is an independent director, has also been appointed by the
Board to serve as lead director.
Pension Committee
The Pension Committee is responsible for reviewing the
performance and overseeing the administration of the Company’s
and its subsidiaries’ pension plans and pension funds.
Environmental, Health and Safety Committee
The Environmental, Health and Safety Committee is responsible
for reviewing and monitoring environmental affairs, food
safety and health and safety policies, procedures, practices
and compliance.
Ethical business conduct
The Code reflects the Company’s long-standing commitment to
high standards of ethical conduct and business practices. The
Code is reviewed annually to ensure it is current and reflects
best practices in the area of ethical business conduct and
includes a strong “tone from the top” message. All directors,
officers and employees of the Company are required to comply
with the Code and must acknowledge their commitment to
abide by the Code on a periodic basis.
The Company encourages the reporting of violations and
potential violations and has established an Integrity Action Line,
a toll-free number that any director, officer or employee may use
to report conduct which he or she feels violates the Code or
otherwise constitutes fraudulent or unethical conduct. A fraud
reporting protocol has also been implemented to ensure that
fraud is reported to senior management in a timely manner. In
addition, the Audit Committee has endorsed procedures for
the anonymous receipt, retention and handling of complaints
regarding accounting, internal control or auditing matters. These
procedures are available at loblaw.ca.
Board committees
The following is a brief summary of some of the responsibilities
of each committee of the Board.
Audit Committee
The Audit Committee is responsible for supporting the Board
in overseeing the quality and integrity of the Company’s
financial reporting and internal controls over financial reporting,
disclosure controls, internal audit function, assisting the Board
in overseeing the Company’s ERM process and compliance
with legal and regulatory requirements with respect to financial
disclosure.
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24
LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
Board of
Directors
gALEN g. WESTON, B.A., M.B.A.
Chairman and CEO, Loblaw Companies Limited;
Chairman and CEO, George Weston Limited;
Chairman and Director, President’s Choice Bank;
Director, Wittington Investments, Limited; Former
Chairman and Trustee, Choice Properties Real
Estate Investment Trust.
PAuL M. BEESTON, C.M., B.A., F.C.A., F.C.P.A.1
Corporate Director; Former President and Chief
Executive Officer, Toronto Blue Jays Baseball
Team; Former President and Chief Executive
Officer, Major League Baseball; Director,
President’s Choice Bank, Gluskin Sheff &
Associates Inc.; Former Chairman, Centre for
Addiction and Mental Health.
SCOTT B. BONHAM, B.SC., M.B.A.1
Co-Founder of Intentional Capital LLC, a real
estate asset management company, Former
Co-Founder of GGV Capital, a venture capital
firm; Former Vice President, Capital Group
Companies; Director, Magna International Inc.,
The Bank of Nova Scotia; Board Member of the
C100 Association, an association that connects
Canadian entrepreneurs and companies with its
Silicon Valley network, and the DenmarkBridge.
WARREN BRYANT, B.S., M.B.A.1, 2, 4
Corporate Director; Former Chairman, President
and Chief Executive Officer of Longs Drug Stores;
former Executive of Kroger Co.; Director, Dollar
General Corporation; Member of the Executive
Advisory Committee, Portland State University
Food Industry Leadership Center; Former
Director, George Weston Limited; Office Depot
Inc.; Former Chairman of the Board of Directors
and Former member of the Board Executive
Committee, National Association of Chain Drug
Stores (“NACDS”); Former member of the Board
of Directors, California Governor’s Council on
Physical Fitness and Sports.
CHrISTIE J.B. CLArK, B. COMM., M.B.A., F.C.A.,
F.C.P.A.1*, 3
Corporate Director; Former Chief Executive Officer
and Senior Partner, PricewaterhouseCoopers LLP;
Trustee, Choice Properties Real Estate Investment
Trust; Director, Air Canada; Hydro One Inc.;
Hydro One Limited; Former Director, Brookfield
Office Properties Inc., IGM Financial Inc.; Member
of the Board, Canadian Olympic Committee;
Own the Podium.
Leadership
M. MArIANNE HArrIS, B.SC., M.B.A, J.D.1
Corporate Director; Former Managing Director
and President, Corporate and Investment
Banking for Merrill Lynch Canada Inc., Former
Head of Financial Institutions Group Americas,
Merrill Lynch Pierce Fenner & Smith; Director,
Hydro One Inc., Hydro One Limited, Sun Life
Financial Inc.; Chair, Investment Industry
Regulatory Organization of Canada (IIROC);
Member, Investment Committee of the Princess
Margaret Cancer Foundation; Dean’s Advisory
Council, Schulich School of Business; Advisory
Council of the Hennick Centre for Business
and Law.
CLAuDIA KOTCHKA, B.B.A., C.P.A.4
Corporate Director; Former Vice President,
Design Innovation and Strategy, Procter &
Gamble; Board Member, American Red Cross,
Greater Miami and the Keys; Guest Lecturer,
Stanford University and former Trustee, Cooper
Hewitt Smithsonian Design Museum.
JOHN S. LACEY, B.A.3*
Lead Director, Brookfield Business Partners
L.P.; Consultant to the Board and to the
Board of George Weston Limited; Former
President and Chief Executive Officer, the
Oshawa Group (now part of Sobeys Inc.);
Director, TELUS Corporation; Former Chairman,
Alderwoods Group, Inc.; Former Director,
Ainsworth Lumber Co. Ltd., Canadian Imperial
Bank of Commerce, George Weston Limited.
NANCY H.O. LOCKHArT, O. ONT.2, 4*
Corporate Director; Former Chief Administrative
Officer, Frum Development Group; Former Vice
President, Shoppers Drug Mart Corporation;
Former President, Canadian Club of Toronto;
Director, Barrick Gold Corporation, Gluskin Sheff
& Associates Inc., Atrium Mortgage Investment
Corporation, The Royal Conservatory of Music;
Chair, Crow’s Theatre Company; Member,
Sotheby’s Canada Advisory Board; Former Chair,
Canadian Film Centre, Ontario Science Centre;
Former Director, Canada Deposit Insurance
Corporation.
THOMAS C. O’NEILL, B. COMM., F.C.A., F.C.P.A.2*
Corporate Director; Chairman, The Bank of
Nova Scotia; Retired Chairman, BCE Inc.,
PricewaterhouseCoopers Consulting; Former
Chief Executive Officer and Chief Operating
Officer, PricewaterhouseCoopers LLP; Member,
Advisory Board at Queen’s University School of
Business; Former Chair, St. Michael’s Hospital;
Former Vice Chair, Board of Trustees, Queen’s
University; Former Director of Adecco S.A. and
Nexen Inc.
BETH PrITCHArD, B.A., M.B.A.4
Corporate Director; Former Principal and Strategic
Advisor, Sunrise Beauty Studio, LLC; Former
North American Advisor, M. H. Alshaya Co.;
Former President and Chief Executive Officer and
Vice Chairman of Dean & DeLuca, Inc.; Former
President and Chief Executive Officer, Bath &
Body Works; Former Chief Executive Officer,
Victoria’s Secret Beauty; Director, e.l.f. Beauty,
Inc., The Vitamin Shoppe, Inc., Former Director,
Borderfree, Inc., Cabela’s Incorporated, Shoppers
Drug Mart Corporation, Zale Corporation.
SArAH rAISS, B.S., M.B.A.2, 3
Corporate Director; Former Executive,
TransCanada Corporation; Director,
Commercial Metals Company, Vermilion
Energy Inc., Ritchie Bros. Auctioneers
Incorporated; Former Chair, Alberta Electric
System Operator Board of Directors;
Former Director, Canadian Oil Sands Limited,
Shoppers Drug Mart Corporation.
NOTES
1 Audit Committee
2 Governance, Employee Development, Nominating
and Compensation Committee
3 Pension Committee
4 Environmental, Health and Safety Committee
* Chair of the Committee
gALEN g. WESTON
Chairman and Chief Executive Officer
SArAH r. DAvIS
President
JOCYANNE BOURDEAU
President, Discount Division
rOBErT CHANT
Senior Vice President, Corporate Affairs
and Communication
BARRY K. COLUMB
President, President’s Choice Financial
GORDON A.M. CURRIE
Executive Vice President, Chief Legal Officer
and Secretary
IAN FREEDMAN
President, Joe Fresh
JEFFERY LEGER
President, Shoppers Drug Mart
MIKE MOTZ
Chief Operating Officer
DArrEN MYErS
Chief Financial Officer
GREG RAMIER
Executive Vice President, Market Division
gArrY SENECAL
Chief Customer Officer
ROBERT WIEBE
Chief Administrative Officer
MArK WILSON
Executive Vice President, Human Resources
and Labour Relations
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LOBL AW COMPANIES LIMITED 2017 ANNUA L REPORT
25
Shareholder
and Corporate
Information
NATIONAL HEAD OFFICE AND STOrE SuPPOrT CENTrE
Loblaw Companies Limited
1 President’s Choice Circle, Brampton, Ontario, Canada L6Y 5S5
Tel: (905) 459-2500 | Fax: (905) 861-2206 | Internet: loblaw.ca
STOCK EXCHANgE LISTINg
AND SYMBOL
The Company’s common shares and
second preferred shares are listed on the
Toronto Stock Exchange and trade under
the symbols “L” and “L.PR.B”, respectively.
COMMON SHArES
George Weston Limited owns approximately
48.6 per cent of the Company’s common
shares.
At year-end 2017, there were 386,293,941
common shares issued and outstanding.
The average daily trading volume of the
Company’s common shares for 2017
was 551,588.
PrEFErrED SHArES
At year-end 2017, there were 9,000,000
second preferred shares, series B, issued
and outstanding and available for public
trading.
The average 2017 trading volume of the
Company’s second preferred shares were:
Series B: 2,434
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, which takes into account
the Company’s financial results, capital
requirements, available cash flow, future
prospects of the Company’s business
and other factors considered relevant from
time to time.
COMMON DIvIDEND DATES
The declaration and payment of quarterly
dividends are made subject to approval
by the Board of Directors. The anticipated
record and payments dates for 2018 are:
RECORD DATE
PAYMENT DATE
March 15
June 15
September 15
December 15
April 1
July 1
October 1
December 30
PrEFErrED SHArE, SErIES B,
DIvIDEND DATES
The declaration and payment of quarterly
dividends are made subject to approval
by the Board of Directors. The anticipated
payment dates for 2018 are:
RECORD DATE
PAYMENT DATE
March 15
June 15
September 15
December 15
March 31
June 30
September 30
December 31
NOrMAL COurSE ISSuEr BID
The Company has a Normal Course Issuer
Bid on the Toronto Stock Exchange.
vALuE OF COMMON SHArES
For capital gains purposes, the valuation
day (December 22, 1971) cost base for the
Company is $0.958 per common share.
The value on February 22, 1994 was $7.67
per common share.
INvESTOr rELATIONS
Shareholders, security analysts and
investment professionals should direct
their requests to Investor Relations, at the
Company’s National Head Office or by
e-mail at: investor@loblaw.ca
rEgISTrAr AND TrANSFEr AgENT
Computershare Investor Services Inc.
100 University Avenue
Toronto, Canada M5J 2Y1
Toll-free: 1-800-564-6253
(Canada and the U.S.)
Fax: (416) 263-9394
Toll-free fax: 1-888-453-0330
International direct dial: (514) 982-7555
To change your address, eliminate multiple
mailings, or for other shareholder account
inquiries, please contact Computershare
Investor Services Inc.
Additional financial information has been
filed electronically with various securities
regulators in Canada through the System
for Electronic Document Analysis and
Retrieval (SEDAR) and with the Office
of the Superintendent of Financial
Institutions (OSFI) as the primary regulator
for the Company’s subsidiary, President’s
Choice Bank.
INDEPENDENT AuDITOrS
KPMG LLP
Chartered Professional Accountants
Toronto, Canada
ANNUAL MEETING
The Annual Meeting of Shareholders of
Loblaw Companies Limited will be held on
Thursday, May 3, 2018 at 11:00 a.m. (EDT),
at the Mattamy Athletic Centre,
50 Carlton Street, Toronto, Canada
M5B 1J2.
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26
LOBLAW COMPANIES LIMITED 2017 ANNUA L REPORT
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, strategic initiatives and restructuring, regulatory changes including minimum wage
increases and further healthcare reform, future liquidity, planned capital investments, and the status and impact of information technology
(“IT”) systems implementations. These specific forward-looking statements are contained throughout this Annual Report including, without
limitation, in Section 3 “Strategic Framework”, Section 6.1 “Retail Segment” Other Retail Business Matters, Section 7 “Liquidity and Capital
Resources”, Section 16 “Outlook” and Section 17 “Non-GAAP Financial Measures” 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”, “should” and similar expressions, as they relate to the Company and its management.
Forward-looking statements reflect the Company’s 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 2018 is based on certain assumptions including
assumptions about anticipated minimum wage increases, healthcare reform impacts, cost savings, operating efficiencies and anticipated
benefits from strategic initiatives. The Company’s estimates, beliefs and assumptions are inherently subject to significant business, economic,
competitive and other uncertainties and contingencies regarding future events, and as such, are subject to change. The Company can give
no assurance that such estimates, beliefs and assumptions will prove to be correct.
Numerous risks and uncertainties could cause the Company’s actual results to differ materially from those expressed, implied or projected in
the forward-looking statements. These risks and uncertainties include, but are not limited to those discussed in Section 1, Forward-Looking
Statements and Section 12, Enterprise Risks and Risk Management of Management’s Discussion and Analysis in the 2017 Annual Report –
Financial Review, and the Company’s 2017 Annual Information Form (for the year ended December 30, 2017).
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 2017 AIF (for the year ended December 30, 2017).
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.
2017 ANNUAL REPORT – FINANCIAL REVIEW
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ready
2017 ANNUA L REPORT – FINANCIA L REVIEW
LCL_Q4 2017_RTS.PDF 1
2018-03-09 3:49 AM
2017 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
61
69
125
127
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Financial Highlights(1)
As at or for the years ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Consolidated Results of Operations
Revenue
Revenue growth
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)
Income taxes
Adjusted income taxes(2)
Adjusted income tax rate(2)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Adjusted net earnings available to common shareholders of the Company(2)
Consolidated Per Common Share ($)
Diluted net earnings
Adjusted diluted net earnings(2)
Dividends
Dividends declared per common share ($)
Consolidated Financial Position and Cash Flows
Cash and cash equivalents and short term investments
Cash flows from operating activities
Capital investments
Free cash flow(2)
Financial Measures
Retail debt to retail adjusted EBITDA(2)
Adjusted return on equity(2)
Adjusted return on capital(2)
2017
(52 weeks)
2016
(52 weeks)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
46,702
0.7%
2,494
4,092
8.8%
525
535
443
678
27.0%
1,526
1,502
1,490
1,799
3.75
4.53
1.07
2,344
3,209
1,259
1,479
1.6x
14.1%
9.7%
46,385
2.2%
2,092
3,852
8.3%
653
535
449
635
27.5%
990
983
971
1,655
2.37
4.05
1.03
1,555
3,519
1,224
1,821
1.7x
12.9%
8.8%
The Financial Highlights include the impacts of the consolidation of franchises and the disposition of the gas bar operations in 2017.
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2017 Annual Report - Financial Review Loblaw Companies Limited 1
Financial Highlights(1)
As at or for the years ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
2017
(52 weeks)
2016
(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
Revenue
Earnings before income taxes
Financial Services Operating Measures and Statistics
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card receivables
Annualized credit loss rate on average quarterly gross credit card receivables
Choice Properties Results of Operations and Measures
Revenue
Net interest expense and other financing charges
Net Income (loss)
Funds from operations(2)
$
$
$
$
$
$
$
$
$
$
$
$
45,634
2,248
12,820
28.1%
3,836
8.4%
1,534
0.6%
3.0%
3.1%
2.9%
70.3
559
534
1,334
956
153
2,908
3,100
47
13.2%
3.7%
830
351
405
443
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)
410
The Financial Highlights include the impacts of the consolidation of franchises and the disposition of the gas bar operations in 2017.
2 2017 Annual Report - Financial Review Loblaw Companies Limited
LCL_Q4 2017_RTS.PDF 4
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Management's Discussion and Analysis
1.
2.
3.
4.
5.
6.
7.
8.
9.
Forward-Looking Statements
Overview
Strategic Framework
Key Financial Performance Indicators
Overall Financial Performance
5.1
5.2
Consolidated Results of Operations
Selected Financial Information
Reportable Operating Segments Results of Operations
6.1
6.2
6.3
Retail Segment
Financial Services Segment
Choice Properties Segment
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
Financial Derivative Instruments
Quarterly Results of Operations
Results by Quarter
9.1
Fourth Quarter Results
9.2
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 Impairment of Franchise Loans Receivable and Certain Other Financial Assets
14.5 Customer Loyalty Awards Programs
14.6 Income and Other Taxes
14.7 Segment Information
14.8 Provisions
15. Accounting Standards
15.1 Accounting Standards Implemented
15.2 Future Accounting Standards
16. Outlook
17. Non-GAAP Financial Measures
18. Additional Information
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5
6
7
7
11
13
13
17
18
19
19
20
22
24
24
24
26
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30
39
39
39
40
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49
49
49
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52
60
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2017 Annual Report - Financial Review Loblaw Companies Limited 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 61 to 126 of this Annual Report – Financial Review (“Annual Report”).
The Company’s annual audited consolidated financial statements and accompanying notes for the year ended December 30, 2017 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 21, 2018, 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 2017 (12 weeks ended December 30, 2017) are against
results for the fourth quarter of 2016 (12 weeks ended December 31, 2016) and all comparisons of results for the full-year of 2017
(52 weeks ended December 30, 2017) are against the results for the full-year 2016 (52 weeks ended December 31, 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, strategic initiatives and restructuring, regulatory changes including minimum wage
increases and further healthcare reform, future liquidity, planned capital investments, and the status and impact of information technology
(“IT”) systems implementations. These specific forward-looking statements are contained throughout this Annual Report including, without
limitation, in Section 3 “Strategic Framework”, Section 6.1 “Retail Segment” Other Retail Business Matters, Section 7 “Liquidity and Capital
Resources”, Section 16 “Outlook” and Section 17 “Non-GAAP Financial Measures” 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”, “should” and similar expressions, as they relate to the Company and its management.
Forward-looking statements reflect the Company’s 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 2018 is based on certain assumptions including
assumptions about anticipated minimum wage increases, healthcare reform impacts, cost savings, operating efficiencies and anticipated
benefits from strategic 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 2017 Annual Information Form (“AIF”) (for the year ended December 30, 2017). 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 or combine 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 execute the Company’s e-commerce initiative or to adapt its business model to the shifts in the retail landscape caused by
digital advances;
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;
changes to any of the laws, rules, regulations or policies applicable to the Company's business, including increases to minimum
wage;
4 2017 Annual Report - Financial Review Loblaw Companies Limited
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•
•
•
•
•
•
•
public health events including those related to food and drug safety;
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;
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;
failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements;
the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink; and
changes in economic conditions, including economic recession or changes in the rate of inflation or deflation, employment rates and
household debt, political uncertainty, interest rates, currency exchange rates or derivative and commodity prices.
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 2017 AIF (for the year
ended December 30, 2017). 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 and apparel and other general merchandise. Prior to
July 17, 2017, the Retail segment also included gas bar operations. The Company’s Financial Services segment provides credit card
services, loyalty programs, insurance brokerage services, deposit taking services and telecommunication services. As a result of the wind-
down of PC Financial banking services announced in 2017, the Financial Services segment no longer offers personal banking services.
The Choice Properties segment owns, manages and develops well located retail and commercial properties across Canada. The Company
holds an 82.4% effective interest in Choice Properties.
3. Strategic Framework
The Company’s strategic framework is anchored by a powerful purpose: Live Life Well. The Company is committed to delivering industry-
leading financial results through data-driven insights and process and efficiency excellence, while maintaining an intense focus on our
customers.
Its aim is to offer the “best in food” and the “best in health and beauty”, supported by everyday digital retail, a connected healthcare
network and a single loyalty program - PC Optimum.
The approach to offering “best in food” is driven by fresh selection, and a desire to offer sustainable and competitive pricing, customized
assortments across banners and several of the country’s top control brands. Achieving “best in health and beauty” requires putting
pharmacy customers first, providing high quality health and wellness products and services, delivering a diverse and differentiated beauty
offering, and maintaining convenient locations and hours of operation.
The Company is also focused on continued growth in the President’s Choice Financial Services and Choice Properties segments.
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2017 Annual Report - Financial Review Loblaw Companies Limited 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 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
2017
(52 weeks)
2016
(52 weeks)
Consolidated:
Revenue growth
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 and short term investments
Cash flows from operating activities
Free cash flow(2)
Financial Measures:
Retail debt to retail adjusted EBITDA(2)
Adjusted return on equity(2)
Adjusted return on capital(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:
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:
Net Income (loss)
Funds from operations(2)
$
$
$
$
$
$
$
$
$
0.7%
2,494
4,092
8.8%
1,526
1,502
1,490
1,799
3.75
4.53
2,344
3,209
1,479
1.6x
14.1%
9.7%
0.6%
3.0%
2,248
12,820
28.1%
3,836
8.4%
153
13.2%
3.7%
405
443
$
$
$
$
$
$
$
$
$
2.2%
2,092
3,852
8.3%
990
983
971
1,655
2.37
4.05
1,555
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)
410
6 2017 Annual Report - Financial Review Loblaw Companies Limited
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5. Overall Financial Performance
5.1. Consolidated Results of Operations
For the years ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Operating income
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Depreciation and amortization
2017
(52 weeks)
46,702
$
2016
(52 weeks)
46,385
$
2,494
4,092
8.8%
2,092
3,852
8.3%
$ Change % Change
0.7 %
317
$
402
240
19.2 %
6.2 %
$
1,568
$
1,543
$
25
1.6 %
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Income taxes
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)
525
535
443
678
653
535
449
635
$
$
$
27.0%
27.5%
$
$
$
1,502
1,490
1,799
3.75
4.53
397.3
$
$
$
983
971
1,655
2.37
4.05
409.1
(128)
(19.6)%
—
(6)
43
519
519
144
1.38
0.48
— %
(1.3)%
6.8 %
52.8 %
53.5 %
8.7 %
58.2 %
11.9 %
(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 $1,490 million ($3.75 per common share) in 2017, an increase of $519 million
($1.38 per common share) compared to 2016. The increase in net earnings available to common shareholders of the Company was driven
by improvements in underlying operating performance of $144 million and the favourable year-over-year net impact of adjusting items
totaling $375 million, as described below:
•
improvements in underlying operating performance of $144 million ($0.35 per common share), were primarily due to the following:
the Retail segment (excluding the impact of the consolidation of franchises), driven by an increase in adjusted gross profit(2)
partially offset by an increase in selling, general and administrative expenses (“SG&A”);
the Choice Properties segment, primarily from the expansion of the property portfolio through acquisitions and completed
development projects, as well as an increase in net operating income from existing properties; and
the favourable impact of a decrease in the adjusted income tax rate(2) primarily attributable to a decrease in certain non-
deductible items.
•
the favourable year-over-year net impact of adjusting items totaling $375 million ($0.90 per common share) was primarily due to the
following:
the gain on disposition of gas bar operations of $432 million ($1.09 per common share);
the year-over-year change in fair value adjustment to the Trust Unit Liability of $128 million ($0.32 per common share);
the year-over-year favourable impact of asset impairments, net of recoveries of $57 million ($0.14 per common share); and
the favourable impact of income earned, net of certain costs incurred, from the wind-down of PC Financial banking services of
$18 million ($0.05 per common share); partially offset by
the unfavourable impact of charges related to the announcement of the PC Optimum Program, including the revaluation of the
existing points liability and the impairment of certain IT assets, of $154 million ($0.39 per common share);
the year-over-year unfavourable impact of restructuring and other related costs of $82 million ($0.21 per common share); and
the unfavourable impact of the Loblaw Card Program of $79 million ($0.20 per common share).
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Management’s Discussion and Analysis
•
the increase in diluted net earnings per common share also included the favourable impact of the repurchase of common shares
($0.13 per common share).
Adjusted net earnings available to common shareholders of the Company(2) were $1,799 million ($4.53 per common share) in 2017, an
increase of $144 million ($0.48 per common share) compared to 2016, due to the improvements in underlying operating performance and
the favourable impact of the repurchase of common shares, as described above.
Revenue
For the years ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Revenue
2017
(52 weeks)
45,634
2016
(52 weeks)
45,384
$
$ Change
250
$
% Change
0.6%
956
830
(718)
911
784
(694)
46,702
$
46,385
$
45
46
(24)
317
4.9%
5.9%
0.7%
$
$
Revenue was $46,702 million in 2017, an increase of $317 million, or 0.7%, compared to 2016, primarily driven by an increase in Retail
segment sales of $250 million. Excluding the consolidation of franchises, Retail segment sales decreased by $97 million, or 0.2%. The
decrease was primarily due to the impact of the disposition of gas bar operations of $718 million, partially offset by positive same-store
sales growth and a net increase in Retail square footage. The unfavourable impact of the timing of New Year’s Day was nominal on Food
and Drug retail same-store sales growth.
Operating Income Operating income was $2,494 million in 2017, an increase of $402 million compared to 2016. The increase in operating
income was driven by improvements in underlying operating performance of $204 million and the favourable year-over-year net impact of
adjusting items totaling $198 million, as described below:
•
improvements in underlying operating performance of $204 million were primarily due to the Retail segment and the Choice
Properties segment net of consolidation and eliminations. The Retail segment included the positive contribution from the consolidation
of franchises, partially offset by the unfavourable impact of the disposition of gas bar operations; and
•
the favourable year-over-year net impact of adjusting items totaling $198 million was primarily due to the following:
the gain on disposition of gas bar operations of $501 million;
the year-over-year favourable impact of asset impairments, net of recoveries of $82 million; and
the favourable impact of income earned, net of certain costs incurred, from the wind-down of PC Financial banking services of
$24 million; partially offset by
the unfavourable impact of charges related to the announcement of the PC Optimum Program, including the revaluation of the
existing points liability and the impairment of certain IT assets, of $211 million;
the year-over-year unfavourable impact of restructuring and other related costs of $119 million; and
the unfavourable impact of the Loblaw Card Program of $107 million.
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Adjusted EBITDA(2)
For the years ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Adjusted EBITDA(2)
2017
(52 weeks)
3,836
2016
(52 weeks)
3,631
$
$ Change
205
$
% Change
5.6%
195
757
(696)
188
678
(645)
4,092
$
3,852
$
7
79
(51)
240
3.7%
11.7%
6.2%
$
$
Adjusted EBITDA(2) was $4,092 million in 2017, an increase of $240 million compared to 2016. The increase in adjusted EBITDA(2) was
primarily due to improvements in the Retail segment and the Choice Properties segment net of consolidation and eliminations. The Retail
segment included the positive contribution from the consolidation of franchises, partially offset by the unfavourable impact of the disposition
of gas bar operations.
Depreciation and Amortization Depreciation and amortization was $1,568 million in 2017, an increase of $25 million compared to 2016,
primarily driven by the consolidation of franchises and an increase in IT assets, partially offset by the impact of the change in estimated
useful life of certain equipment and fixtures in the second quarter of 2016. Included in depreciation and amortization is the amortization of
intangible assets related to the acquisition of Shoppers Drug Mart Corporation (“Shoppers Drug Mart”) of $524 million (2016 –
$535 million).
Net Interest Expense and Other Financing Charges
For the years ended December 30, 2017 and December 31, 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)
2017
(52 weeks)
525
10
535
$
$
2016
(52 weeks)
653
(118)
535
$
$
$
$
$ Change
(128)
% Change
(19.6)%
128
—
108.5 %
— %
Net interest expense and other financing charges were $525 million in 2017, a decrease of $128 million compared to 2016. The decrease
was primarily due to the year-over-year impact of the change in the fair value adjustment to the Trust Unit Liability of $128 million. Adjusted
net interest expense and other financing charges(2) were flat compared to 2016 and included:
•
lower interest expense in the Retail segment primarily due to the repayment of Medium Term Notes (“MTNs”) in the second quarter of
2016; offset by
•
•
an increase in interest expense in the Choice Properties segment due to higher drawings on credit facilities, higher distributions to
Trust unitholders other than the Company and a prior year gain on settlement of bond forwards, partially offset by lower interest due to
the repayment of the Series 6 senior unsecured debentures in the first quarter of 2017; and
an increase in interest expense in the Financial Services segment primarily due to the Eagle Credit Card Trust® (“Eagle”) debt
issuance in the fourth quarter of 2017.
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2017 Annual Report - Financial Review Loblaw Companies Limited 9
Management’s Discussion and Analysis
Income Taxes
For the years ended December 30, 2017 and December 31, 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
Remeasurement of deferred tax balances
Statutory corporate income tax rate change
Adjusted income taxes(2)
Effective tax rate
Adjusted income tax rate(2)
$
$
2017
(52 weeks)
443
218
17
—
678
22.5%
27.0%
$
$
2016
(52 weeks)
449
$ Change
(6)
$
% Change
(1.3)%
29
17
3
43
$
189
—
(3)
635
31.2%
27.5%
6.8 %
The effective tax rate in 2017 was 22.5% compared to 31.2% in 2016. The decrease in the effective tax rate was primarily attributable to
the impact of the non-taxable portion of the gain on disposition of gas bar operations, a decrease in the non-deductible fair value
adjustment to the Trust Unit Liability and a deferred tax recovery resulting from the remeasurement of certain deferred tax balances.
The adjusted income tax rate(2) in 2017 was 27.0% compared to 27.5% in 2016. The decrease in the adjusted income tax rate(2) was
primarily attributable to a decrease in certain non-deductible items.
In the fourth quarter of 2017, the Company recorded a deferred tax recovery of $17 million resulting from a change in the applicable
provincial income tax rate used to measure certain deferred tax balances caused by a change in the location of certain business activities.
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 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 between 2015 and 2017, are for the 2000 to 2012 taxation years and total
$406 million including interest and penalties. The Company believes the reassessments are without merit and is vigorously defending
them. The Company believes it is likely that the CRA will issue reassessments for the 2013 taxation year on the same or similar basis. The
Company has filed a Notice of Appeal with the Tax Court of Canada for the 2000 to 2010 taxation years and a Notice of Objection for the
2011 and 2012 taxation years. The Tax Court of Canada trial is scheduled to commence in the second quarter of 2018. The Company does
not currently have any significant accruals or provisions for this matter recorded in the consolidated financial statements.
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5.2 Selected Financial Information
The selected information presented below has been derived from and should be read in conjunction with the annual consolidated financial
statements of the Company dated December 30, 2017, December 31, 2016 and January 2, 2016. The analysis of the data contained in the
table focuses on the trends and significant events or items affecting the financial condition and results of the Company’s operations over
the most recent three years.
For the years ended December 30, 2017 and December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Operating Income
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Depreciation and amortization
Adjusted net interest expense and other financing charges(2)
Adjusted income tax rate(2)
Net earnings
Net earnings attributable to the shareholders of the Company
Net earnings available to common shareholders of the Company
Adjusted net earnings available to common shareholders of the Company(2)
Basic net earnings per common share ($)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(2) ($)
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 ($)
$
$
$
$
$
2017
(52 weeks)
46,702
2,494
4,092
8.8%
1,568
535
27.0%
1,526
1,502
1,490
1,799
3.78
3.75
4.53
397.3
1.07
—
1.325
$
$
$
$
$
2016
(52 weeks)
46,385
2,092
3,852
8.3%
1,543
535
27.5%
990
983
971
1,655
2.40
2.37
4.05
409.1
1.03
—
1.325
$
$
$
$
$
2015
(52 weeks)
45,394
1,601
3,549
7.8%
1,592
548
27.0%
589
598
591
1,422
1.44
1.42
3.42
415.2
0.995
0.74
0.74
(i) Second Preferred Share Series A were redeemed in the third quarter of 2015.
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2017 Annual Report - Financial Review Loblaw Companies Limited 11
Management’s Discussion and Analysis
Revenue Revenue was $46,702 million in 2017, an increase of $317 million compared to 2016. Food retail same-store sales growth was
0.6% (2016 – 1.1%) and excluding gas bar operations was 0.3% (2016 – 1.5%). Drug retail same-store sales growth was 3.0% (2016 –
4.0%). The unfavourable impact of the timing of New Year’s Day was nominal on Food and Drug retail same-store sales growth.
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 operations was 1.5% (2015 – 3.5%(4)). Drug retail same-store sales growth was 4.0% (2015 – 4.3%). The
favourable impact of an extra selling day on Food and Drug retail same-store growth, due to the timing of New Year’s day, was nominal.
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 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. This trend continued until the third quarter of 2017 where deflation in food prices returned to inflation. Retail segment
sales over the past three years were also impacted by the consolidation of franchisees, the changes in the price of fuel sold at the
Company’s gas bars, the impact of drug reform, the Company’s store closure plan announced in 2015 and completed in 2016 and the
disposition of gas bar operations in the third quarter of 2017.
The Company’s Financial Services segment sales have continued to grow mainly driven by growth in the credit card portfolio.
The Company’s Choice Properties segment net of consolidation and eliminations has continued to grow mainly driven by additional
revenue generated from tenant openings in newly developed leasable space, acquisition of new properties, and an increase in base rent
from existing properties.
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 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 net earnings available to common shareholders of the Company and 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 2017 and 2016;
•
•
•
•
•
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;
improvements in the performance of the Choice Properties segment net of consolidation and eliminations;
the favourable impact of the repurchase of common shares for cancellation; and
the impact of certain adjusting items, including:
the gain on disposition of gas bar operations;
the change in the fair value adjustment to the Trust Unit Liability;
asset impairments, net of recoveries;
the wind-down of PC Financial banking services;
the remeasurement of deferred tax balances;
statutory corporate income tax rate changes;
the accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient Labour Agreements;
the impairment on Drug retail ancillary assets held for sale;
the Loblaw Card Program;
restructuring and other related costs; and
the PC Optimum Program, including the revaluation of the existing points liability and the impairment of certain IT assets.
•
partially offset by the disposition of gas bar operations.
The consolidation of franchises does not significantly impact net earnings available to common shareholders of the Company as the
related earnings are largely attributable to non-controlling interests.
12 2017 Annual Report - Financial Review Loblaw Companies Limited
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2018-03-09 3:49 AM
Total Assets and Long Term Financial Liabilities
(millions of Canadian dollars)
Total Assets
Total Long Term Debt
Trust Unit Liability
Long term financial liabilities
As at
December 30, 2017
35,106
$
As at
December 31, 2016
34,436
$
$
$
11,177
972
12,149
$
$
10,870
959
11,829
As at
January 2, 2016
34,357
11,011
821
11,832
$
$
$
In 2017, total assets of $35,106 million increased by 1.9% compared to 2016. The increase in total assets was primarily driven by an
increase in cash and cash equivalents and short term investments as a result of the sale of gas bar operations. Long term financial
liabilities of $12,149 million increased by 2.7% compared to 2016 primarily driven by the drawings on the Choice Properties’ Credit
Facilities and the Eagle debt issuance partially offset by the repayment of the Choice Properties Series 6 senior unsecured debentures.
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 Trust Unit Liability is recognized at fair value on the consolidated balance sheets and fluctuates due to issuances and changes in the
fair value of Choice Properties’ Trust Units (“Units”). As at December 30, 2017, 72,800,965 Units were held by unitholders other than the
Company (December 31, 2016 – 71,068,828, January 2, 2016 – 69,453,817) and the Company held an 82.4% (December 31, 2016 –
82.7%, January 2, 2016 – 83.0%) effective ownership interest in Choice Properties.
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 and apparel and other general merchandise and provides the PC Optimum
program. 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. Prior to July 17, 2017, the Retail segment also
included gas bar operations;
•
•
The Financial Services segment provides credit card services, the PC Optimum program, insurance brokerage services, deposit
taking services and telecommunication services. As a result of the wind-down of PC Financial banking services, the Financial
Services segment no longer offers personal banking services; and
The Choice Properties segment owns, manages and develops well located 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 30, 2017 and December 31, 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
2017
(52 weeks)
45,634
2,248
12,820
28.1%
3,836
8.4%
1,534
$
$
$
$
$
$
2016
(52 weeks)
45,384
1,902
12,262
27.0%
3,631
8.0%
1,512
$
$
$ Change
250
$
% Change
0.6%
346
558
205
22
18.2%
4.6%
5.6%
1.5%
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2017 Annual Report - Financial Review Loblaw Companies Limited 13
Management’s Discussion and Analysis
For the years ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Food retail
Drug retail
Pharmacy
Front Store
2017
(52 weeks)
Same-store
sales
0.6%
3.0%
3.1%
2.9%
Sales
$
33,055
12,579
5,959
6,620
2016
(52 weeks)
Same-store
sales
1.1%
4.0%
2.9%
5.0%
Sales
$
33,175
12,209
5,730
6,479
Sales, operating income, adjusted gross profit(2), adjusted gross profit percentage(2), adjusted EBITDA(2) and adjusted EBITDA margin(2)
include the impacts of the consolidation of franchises and disposition of gas bar operations.
The impact of the disposition of gas bar operations of $718 million; partially offset by
Sales Retail segment sales were $45,634 million in 2017, an increase of $250 million, or 0.6%, compared to 2016. Excluding the
consolidation of franchises, Retail segment sales decreased by $97 million or 0.2%, primarily driven by the following factors:
•
•
Food retail same-store sales growth was 0.3% (2016 – 1.5%) for 2017, after excluding gas bar operations. Including gas bar
operations, Food retail same-store sales growth was 0.6% (2016 – 1.1%). The unfavourable impact of the timing of New Year’s Day
was nominal on Food and Drug retail same-store sales growth.
Sales growth in food was modest;
Sales in pharmacy were flat; and
The Company’s Food retail average annual internal food price index declined and was marginally higher than (2016 – slightly
lower than) the average annual national food price deflation of 1.0% (2016 – inflation of 1.0%), 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.
• Drug retail same-store sales growth was 3.0% (2016 – 4.0%).
Pharmacy same-store sales growth was 3.1% (2016 – 2.9%). The number of prescriptions dispensed increased by 4.3%
(2016 – 3.8%). On a same-store basis, the number of prescriptions dispensed increased by 3.8% (2016 – 3.5%) and
year-over-year, the average prescription value decreased by 0.8% (2016 – decreased by 0.5%).
Front store same-store sales growth was 2.9% (2016 – 5.0%).
•
22 food and drug stores were opened and 19 food and drug stores were closed in the last 12 months, resulting in a net increase in
Retail square footage of 0.1 million square feet, or 0.1%.
Operating Income Operating income was $2,248 million in 2017, an increase of $346 million compared to 2016. The increase in operating
income was driven by improvements in underlying operating performance of $172 million and the favourable year-over-year net impact of
adjusting items totaling $174 million, as described below:
•
the improvements in underlying operating performance of $172 million were driven by an increase in adjusted gross profit(2) partially
offset by an increase in SG&A. The improvements in underlying operating performance also included the positive contribution from
the consolidation of franchises, partially offset by the unfavourable impact of the disposition of gas bar operations; and
•
the favourable year-over-year net impact of adjusting items totaling $174 million was primarily due to the following:
the gain on disposition of gas bar operations of $501 million; and
the year-over-year favourable impact of asset impairments, net of recoveries, of $82 million; partially offset by
the unfavourable impact of charges related to the announcement of the PC Optimum Program, including the revaluation of the
existing points liability and the impairment of certain IT assets, of $211 million;
the year-over-year unfavourable impact of restructuring and other related costs of $119 million; and
the unfavourable impact of the Loblaw Card Program of $107 million.
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Adjusted Gross Profit(2) Adjusted gross profit(2) was $12,820 million in 2017, an increase of $558 million compared to 2016. Adjusted
gross profit percentage(2) of 28.1% increased by 110 basis points compared to 2016. Excluding the consolidation of franchises, adjusted
gross profit(2) increased by $186 million. Adjusted gross profit percentage(2), excluding the consolidation of franchises, was 26.9%, an
increase of 50 basis points compared to 2016. The increase in adjusted gross profit percentage(2) was mainly driven by the favourable
impact from the disposition of gas bar operations of approximately 30 basis points and higher Drug retail margins primarily driven by front
store margins. Food retail margins were stable.
Adjusted EBITDA(2) Adjusted EBITDA(2) was $3,836 million in 2017, an increase of $205 million, compared to 2016 and included the
favourable impact of the consolidation of franchises of $46 million as well as the unfavourable impact of the disposition of gas bar
operations of approximately $40 million. The increase in adjusted EBITDA(2) of $205 million was driven by an increase in adjusted gross
profit(2) as described above, partially offset by an increase in SG&A of $353 million. SG&A as a percentage of sales was 19.7%, an
increase of 70 basis points compared to 2016. Excluding the consolidation of franchises, SG&A increased $27 million. SG&A as a
percentage of sales, excluding the consolidation of franchises, was 18.5%, an unfavourable increase of 10 basis points compared to 2016,
driven by the following factors:
•
•
•
Depreciation and Amortization Depreciation and amortization was $1,534 million in 2017, an increase of $22 million compared to 2016,
primarily driven by the consolidation of franchises and an increase in IT assets, partially offset by the impact of the change in estimated
useful life of certain equipment and fixtures in the second quarter of 2016. Included in depreciation and amortization is the amortization of
intangibles assets related to the acquisition of Shoppers Drug Mart of $524 million (2016 – $535 million).
the unfavourable impact from the disposition of gas bar operations of approximately 20 basis points; partially offset by
the favourable impact of foreign exchange.
lower store support costs; and
Other Retail Business Matters
Competition Bureau Investigation On December 19, 2017, the Company and George Weston Limited (“Weston”) announced actions
taken to address their role in an industry-wide price-fixing arrangement involving certain packaged bread products. The arrangement
involved the coordination of retail and wholesale prices of certain packaged bread products over a period extending from late 2001 to
March 2015. Under the arrangement, the participants regularly increased prices on a coordinated basis.
Class action lawsuits have been commenced against the Company and Weston as well as a number of other major grocery retailers and
another bread wholesaler. It is too early to predict the outcome of such legal proceedings. Neither the Company nor Weston believes that
the ultimate resolution of such legal proceedings will have a material adverse impact on its financial condition or prospects. The Company’s
cash balances far exceed any realistic damages scenario and therefore it does not anticipate any impacts on its dividend, dividend policy
or share buyback plan.
The Company has not recorded any amounts related to the potential civil liability associated with the class action lawsuits in the fourth
quarter of 2017 on the basis that a reliable estimate of the liability cannot be determined at this time. The Company will continue to assess
whether a provision for civil liability associated with the class action lawsuits can be reliably estimated and will record an amount in the
period that a reliable estimate of liability can be determined or the matter is ultimately resolved.
As part of its response to this issue, the Company has announced the Loblaw Card Program pursuant to which the Company is offering a
$25 Loblaw Card to eligible customers. The Loblaw Card can be used to purchase items sold in Loblaw grocery stores across Canada.
The Company has recorded a charge of $107 million in relation to the Loblaw Card Program in the fourth quarter of 2017. The Company
expects that Loblaw Cards issued to customers will be an offset against civil liability. The charge recorded for the Loblaw Card Program
should not be viewed as an estimate of damages.
As a result of admission of participation in the arrangement and cooperation in the Competition Bureau’s investigation, the Company and
Weston will not face criminal charges or penalties.
PC Optimum Program In the fourth quarter of 2017, the Company announced plans to bring together the Shoppers Optimum and
PC Plus reward programs to create one program, PC Optimum. As a result, the Company recorded a charge of $189 million, related to the
revaluation of the existing liability for outstanding points to reflect a higher anticipated redemption rate under the new program, and
$22 million, related to the impairment of certain IT assets that support the existing loyalty programs in the fourth quarter of 2017.
Subsequent to the fourth quarter of 2017, the Company successfully launched the PC Optimum program.
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2017 Annual Report - Financial Review Loblaw Companies Limited 15
Management’s Discussion and Analysis
Restructuring and other related costs In the fourth quarter of 2017, the Company eliminated approximately 500 corporate and store-
support positions and finalized a plan that will result in the closure of 22 unprofitable retail locations across a range of banners and formats.
The Company expects to record charges of approximately $135 million related to this restructuring, of which $123 million was recorded in
the fourth quarter of 2017. The charges included $109 million for severance and lease related costs, $7 million for asset impairments and
$7 million related to other costs. The Company expects to realize approximately $85 million in annualized savings related to these plans.
The Company expects that the store closures will be substantially complete by the end of the first quarter of 2018.
In addition, the Company recorded $20 million in severance and other related charges and $3 million for asset impairments as a result of
other restructuring plans approved in the fourth quarter of 2017 and a charge of $19 million related to an adjustment of onerous contract
provisions related to previously announced restructuring plans.
Gas Bar Network On July 17, 2017, the Company sold its gas bar operations, for proceeds of approximately $540 million, to Brookfield
Business Partners L.P. (“Brookfield”).The Company recorded a pre-tax gain on sale of $501 million (post-tax gain of $432 million), net of
related costs, in the third quarter of 2017. As a result of the transaction, Brookfield has become a strategic partner to the Company and will
offer the Company’s PC Optimum program at the gas bars. In addition, the gas bars operate at certain properties that are either owned by
the Company or leased by the Company from Choice Properties or third-party landlords. As a result of the transaction, Brookfield leases or
sub-leases these properties from the Company. In 2016, the gas bar operations sold approximately 1,700 million litres of gas and
contributed approximately $1,500 million to sales. After taking into account the earnings associated with the gas bar operations and the
ongoing commitment of the Company to fund certain loyalty program costs, the expected annual impact will be a reduction in adjusted
EBITDA(2) of approximately $80 million, based on 2016 information. The Company expects to use the proceeds from the sale for general
corporate activities.
In 2017, the impact of the disposition of gas bar operations was $718 million on Retail sales and approximately $40 million on Retail
adjusted EBITDA(2). The Company expects in 2018 that the impact of the disposition of gas bar operations on Retail sales and Retail
adjusted EBITDA(2) will approximate that experienced in 2017.
Consolidation of Franchises The Company has more than 500 franchise food retail stores in its network. As at the end of the fourth
quarter of 2017, 310 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 provides the total impact of the consolidation of franchises included in the consolidated results of the
Company.
For the periods ended December 30, 2017 and December 31, 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 (loss)
Net income attributable to non-controlling interests
2017
(12 weeks)
273
2016
(12 weeks)
165
2017
(52 weeks)
200
2016
(52 weeks)
85
$
$
37
310
186
202
27
11
16
14
$
35
200
99
107
27
6
21
28
$
110
310
710
733
66
43
23
24
115
200
363
361
20
21
(1)
7
Operating income (loss) included in the table above does not significantly impact net earnings available to common shareholders of the
Company as the related income (loss) is largely attributable to non-controlling interests.
The Company expects that the estimated annual impact in 2018 of new and current consolidated franchises will be revenue of
approximately $1,000 million, adjusted EBITDA(2) of approximately $100 million, depreciation and amortization of approximately $60 million
and net earnings attributable to non-controlling interests of approximately $25 million.
16 2017 Annual Report - Financial Review Loblaw Companies Limited
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6.2 Financial Services Segment
For the years ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Earnings before income taxes
2017
(52 weeks)
956
153
$
2016
(52 weeks)
911
124
$
$ Change
45
$
% Change
4.9%
29
23.4%
(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
December 30, 2017
2,908
$
As at
December 31, 2016
2,769
$
3,100
47
13.2%
3.7%
2,926
52
13.5%
4.3%
$ Change
139
$
% Change
5.0 %
174
(5)
5.9 %
(9.6)%
Revenue Revenue was $956 million in 2017, an increase of $45 million, compared to 2016, primarily driven by:
•
•
higher interest and net interchange income attributable to the growth in the credit card portfolio; and
higher sales attributable to The Mobile Shop.
Earnings before income taxes earnings before income taxes was $153 million in 2017, an increase of $29 million compared to 2016,
primarily driven by:
•
recognition of income of $24 million, net of certain costs incurred, relating to President’s Choice Bank’s (“PC Bank”) agreement to end
its business relationship with a major Canadian chartered bank, which represented the personal banking services offered under the
President's Choice Financial® brand;
•
•
•
•
•
•
revenue growth, as described above;
lower credit losses due to the strong credit performance of the portfolio; and
lower marketing and acquisition costs; partially offset by
higher operating costs and costs associated with the loyalty program;
higher interest expense, primarily due to the Eagle debt issuance in the fourth quarter of 2017, as a result of growth in the credit card
portfolio; and
higher IT costs.
Credit Card Receivables As at December 30, 2017, credit card receivables were $3,100 million, an increase of $174 million compared to
December 31, 2016. This increase was primarily driven by growth in the average customer balance and active customer base as a result
of continued investments in customer acquisition, marketing and product initiatives. As at December 30, 2017, the allowance for credit card
receivables was $47 million, a decrease of $5 million compared to December 31, 2016 due to the strong credit performance of the
portfolio.
Other Financial Services Business Matters
Wind-down of PC Financial banking services In the third quarter of 2017, PC Bank entered into an agreement to end its business
relationship with a major Canadian chartered bank, which represented the personal banking services offered under the President's Choice
Financial® brand. As a result of this agreement, PC Bank will receive a payment of approximately $43 million, net of certain costs incurred,
$24 million of which was recognized in 2017 including $17 million recognized in the fourth quarter of 2017. The remaining amounts will be
recognized in the first and second quarter of 2018.
PC Bank will continue to operate the PC Mastercard® Program and customers will earn PC Optimum points. PC Bank remains committed
to providing payment products to its customers and continues to strengthen its credit card services and loyalty programs.
2017 Annual Report - Financial Review Loblaw Companies Limited 17
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Management’s Discussion and Analysis
6.3 Choice Properties Segment
For the years ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Net interest expense and other financing charges(i)
Net income (loss)(ii)
Funds from operations(2)
2017
(52 weeks)
830
$
2016
(52 weeks)
784
$
$ Change
46
$
% Change
5.9 %
351
405
443
900
(223)
410
(549)
628
33
(61.0)%
281.6 %
8.0 %
(i) Net interest expense and other financing charges includes a fair value adjustment on Class B Limited Partnership units.
(ii) 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.
an increase in base rent and operating cost recoveries from existing properties;
Revenue Revenue was $830 million in 2017, an increase of $46 million compared to 2016 and included $718 million (2016 –
$694 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 2016 and 2017.
Net Interest Expense and Other Financing Charges Net interest expense and other financing charges were $351 million in 2017, a
decrease of $549 million compared to 2016, primarily driven by:
•
•
lower interest expense due to the repayment of the Series 6 senior unsecured debentures in the first quarter of 2017; partially offset
by
the change in the fair value adjustment on Class B Limited Partnership units; and
•
•
an increase in interest expense due to higher distributions on Class B Limited Partnership units and higher drawings on credit
facilities; and
a prior year gain on settlement of bond forwards.
Net income (loss) Net income was $405 million in 2017, an increase of $628 million compared to 2016, primarily driven by:
•
•
•
•
the change in fair value adjustment on Class B Limited Partnership units;
the change in fair value adjustment on investment properties;
an increase in net operating income from existing properties; and
additional net operating income generated from acquisitions and tenant openings in newly developed leasable space.
Funds from Operations(2) Funds from Operations(2) were $443 million in 2017, an increase of $33 million compared to 2016 primarily
driven by higher contributions from property operations and lower interest expense due to the repayment of the Series 6 senior unsecured
debentures in the first quarter of 2017, partially offset by an increase in interest expense due to higher drawings on credit facilities and a
prior year gain on settlement of bond forwards.
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Other Matters
Acquisition of Investment Properties During 2017, Choice Properties acquired seven investment properties from third-party vendors for
an aggregate purchase price of approximately $64 million, excluding acquisition costs, which was settled by an assumption of a $7 million
mortgage, with the remainder in cash. Of the seven investment properties acquired during 2017, two investment properties were acquired
from third-party vendors, in the fourth quarter of 2017, for an aggregate purchase price of approximately $18 million, excluding acquisition
costs. Also, in the fourth quarter of 2017, Choice Properties acquired five investment properties from the Company for an aggregate
purchase price of approximately $62 million, excluding acquisition costs, for consideration of $47 million in cash and issuance of 1,092,052
Class B Limited Partnership units.
Choice Properties’ Agreement to Acquire Canadian Real Estate Investment Trust On February 15, 2018, Choice Properties entered
into an agreement to acquire all of the assets and assume all of the liabilities, including long-term debt and all residual liabilities of
Canadian Real Estate Investment Trust ("CREIT"). CREIT will then redeem all of its outstanding units for $22.50 in cash plus 2.4904
Choice Properties units per CREIT unit, on a fully prorated basis. Using the Choice Properties closing unit price on February 14,
2018 of $12.49, this represents $53.61 per CREIT unit. The maximum amount of cash to be paid by Choice Properties will be
approximately $1.65 billion and approximately 183 million units will be issued, based on the fully diluted number of CREIT units
outstanding.
Choice Properties will finance the cash portion of the transaction with committed credit facilities totaling $3.6 billion. These committed
facilities consist of an $850 million bridge facility that Choice Properties intends to refinance through the issuance of senior unsecured
debentures and a $1.25 billion term loan. The term loan is structured in tranches maturing in 3, 4 and 5 years. Choice Properties will
consider hedging the term loan to manage floating interest rate exposure. Choice Properties has also arranged a new $1.5
billion committed revolving credit facility, that will replace its and CREIT's existing credit facilities ensuring that Choice Properties will have
maximum flexibility to support ongoing growth prospects, including acquisitions and development.
The Company, Choice Properties' controlling unitholder, has entered into a voting agreement in support of the transaction. To facilitate
Choice Properties' financing for the transaction, the Company has agreed to convert all of its outstanding Class C Limited Partnership units
of Choice Properties Limited Partnership with a face value of $925 million into Class B LP units of Choice Properties Limited Partnership
on closing. Following the transaction, Loblaw will own approximately 62% of Choice Properties.
The transaction is anticipated to close in the second quarter of 2018. The transaction will require the approval of at least 66 2/3% of the
votes cast by unitholders of CREIT at a special meeting expected to take place in April 2018. In addition to CREIT unitholder approval and
court approvals, the transaction is subject to compliance with the Competition Act and certain other closing conditions customary in
transactions of this nature. There can be no assurance that any such approvals will be obtained or that the Company will be able to
successfully consummate the proposed transaction as currently contemplated or at all.
7. Liquidity and Capital Resources
7.1 Cash Flows
Major Cash Flow Components
For the years ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Cash and cash equivalents, beginning of period
2017
(52 weeks)
1,314
$
2016
(52 weeks)
1,018
$
$ Change
296
$
% Change
29.1 %
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Effect of foreign currency exchange rate changes on cash and cash equivalents
3,209
(1,034)
(1,685)
(6)
3,519
(1,437)
(1,782)
(4)
Cash and cash equivalents, end of period
$
1,798
$
1,314
$
(310)
403
97
(2)
484
(8.8)%
28.0 %
5.4 %
(50.0)%
36.8 %
Cash Flows from Operating Activities Cash flows from operating activities were $3,209 million in 2017, a decrease of $310 million
compared to 2016. The decrease was primarily due to an increase in income taxes paid, partially offset by higher cash earnings.
Cash Flows used in Investing Activities Cash flows used in investing activities were $1,034 million in 2017, a decrease of $403 million
compared to 2016. The decrease in cash flows used in investing activities was primarily driven by the proceeds from disposition of gas bar
operations and the acquisition of QHR Corporation in 2016, partially offset by the increase in short term investments and higher capital
investments.
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Management’s Discussion and Analysis
Capital Investments and Store Activity
As at or for the years ended December 30, 2017 and December 31, 2016
Capital investments (millions of Canadian dollars)
Corporate square footage (in millions)
Franchise square footage (in millions)
Associate-owned drug store square footage (in millions)
Total retail square footage (in millions)
Number of corporate stores
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
2017
(52 weeks)
1,259
$
2016
(52 weeks)
1,224
$
% Change
2.9 %
35.6
16.3
18.4
70.3
559
534
1,334
2,427
72%
48%
1%
63,700
30,500
13,800
35.7
16.3
18.2
70.2
565
533
1,326
2,424
72%
47%
1%
63,200
30,600
13,700
(0.3)%
— %
1.1 %
0.1 %
(1.1)%
0.2 %
0.6 %
0.1 %
0.8 %
(0.3)%
0.7 %
Cash Flows used in Financing Activities Cash flows used in financing activities were $1,685 million in 2017, a decrease of $97 million
compared to 2016. The decrease in cash used in financing activities was primarily driven by lower net repayments of long term debt and
timing of dividends paid, partially offset by higher repurchases of common shares and the change in short term debt.
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 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Cash flows from operating activities
Less:
Capital investments
Interest paid
Free cash flow(2)
2017
(52 weeks)
3,209
1,259
471
1,479
$
$
$
$
2016
(52 weeks)
3,519
1,224
474
$ Change
% Change
$
(310)
(8.8)%
35
(3)
2.9 %
(0.6)%
1,821
$
(342)
(18.8)%
Free cash flow(2) was $1,479 million in 2017, a decrease of $342 million compared to 2016. The decrease in free cash flow(2) was primarily
driven by lower cash flows from operating activities, as described above.
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.
PC Bank expects to obtain long term financing for the growth of its credit card portfolio through the issuance of Eagle notes and
Guaranteed Investment Certificates (“GICs”).
Choice Properties expects to obtain long term financing for the acquisition of properties primarily through the issuance of unsecured
debentures and equity.
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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 segment:
(millions of Canadian dollars)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Certain other liabilities
Total debt
As at
December 30, 2017
Choice
Properties
Total
Retail
Financial
Services
$
110
$
— $
— $
—
392
5,622
41
640
593
1,159
—
—
650
2,761
—
110
640
1,635
9,542
41
As at
December 31, 2016
Choice
Properties
Total
Retail
Financial
Services
$
115
$
— $
— $
—
56
6,019
31
665
142
1,436
—
115
665
400
—
202
3,015
10,470
—
31
$
6,165
$
2,392
$
3,411 $ 11,968
$
6,221
$
2,243
$
3,217 $ 11,681
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(2)
As at
As at
December 30, 2017
December 31, 2016
1.6x
1.7x
The Retail debt to retail adjusted EBITDA(2) ratio as at December 30, 2017 decreased compared to December 31, 2016 primarily as a
result of growth in adjusted EBITDA(2).
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”).
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.
Covenants and Regulatory Requirements The Company and Choice Properties are required to comply with certain financial covenants
for various debt instruments. As at December 30, 2017 and throughout the year, the Company and Choice Properties were in compliance
with their respective covenants. As at December 30, 2017 and throughout the year, PC Bank and Choice Properties have met all
applicable regulatory requirements.
Short Form Base Shelf Prospectus During 2017, the Company filed a Short Form Base Shelf Prospectus, which allows for the potential
issuance of up to $2 billion of unsecured debentures and/or preferred shares subject to the availability of funding in the capital markets.
During 2017, Eagle filed a Short Form Base Shelf Prospectus, which allows for the potential issuance of up to $1 billion of notes over a
25-month period.
Subsequent to the end of 2017, Choice Properties filed a Short Form Base Shelf Prospectus, which allows for the potential issuance of up
to $2 billion of Units and debt securities, or any combination thereof, over a 25-month period. Under this prospectus, Choice Properties
issued $650 million of senior unsecured debentures.
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2017 Annual Report - Financial Review Loblaw Companies Limited 21
Management’s Discussion and Analysis
7.3 Components of Total Debt
Debentures and Medium Term Notes The following table summarizes the debentures and MTNs issued in 2017 and 2016:
(millions of Canadian dollars except where otherwise indicated)
Interest Rate
Maturity Date
Choice Properties Series senior unsecured debentures
– Series G
– Series H
Total Debentures and Medium Term Notes issued
3.20%
5.27%
March 7, 2023
March 7, 2046
Principal
Amount 2017
Principal
Amount 2016
$
$
—
—
—
$
$
250
100
350
Subsequent to the end of 2017, Choice Properties issued two series of senior unsecured debentures: $300 million Series I senior
unsecured debentures due March 21, 2022, which bear interest at a rate of 3.01% per annum; and $350 million Series J senior unsecured
debentures due January 10, 2025, which bear interest at a rate of 3.55% per annum.
The following table summarizes the debentures and MTNs repaid in 2017 and 2016:
(millions of Canadian dollars except where otherwise indicated)
Interest Rate
Maturity Date
Loblaw Companies Limited Notes
Shoppers Drug Mart Notes
Choice Properties senior unsecured debentures – Series 6
Choice Properties senior unsecured debentures – Series 5
Total Debentures and Medium Term Notes repaid
7.10%
2.01%
3.00%
3.00%
June 1, 2016
May 24, 2016
April 20, 2017(i)
April 20, 2016(ii)
Principal
Amount 2017
Principal
Amount 2016
$
$
—
—
200
—
200
$
$
300
225
—
300
825
(i) Choice Properties Series 6 unsecured debentures was redeemed on January 23, 2017.
(ii) Choice Properties Series 5 unsecured debentures was redeemed on March 7, 2016.
Subsequent to the end of 2017, Choice Properties issued an early redemption notice for its $400 million Series A 3.55% senior unsecured
debentures, which were redeemed on February 12, 2018 with an original maturity date of July 5, 2018.
Committed Credit Facilities The components of the committed lines of credit as at December 30, 2017, and December 31, 2016 were as
follows:
(millions of Canadian dollars)
Loblaw’s Committed Credit Facility
Choice Properties Committed Syndicated Credit Facility
Choice Properties Committed Bi-lateral Credit Facility
Total Committed Lines of Credit
Maturity Date
June 10, 2021
July 5, 2022(i)
December 21, 2018
As at December 30, 2017
As at December 31, 2016
Available
Credit
$
1,000
$
500
250
$
1,750
$
Drawn
—
311
250
561
Available
Credit
$
1,000
$
500
250
$
1,750
$
Drawn
—
172
—
172
(i) Choice Properties Committed Syndicated Credit Facility was extended for an additional year from July 5, 2021 to July 5, 2022.
Subsequent to the end of 2017, Choice Properties repaid and cancelled the Committed Bi-lateral Credit Facility.
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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.
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 30, 2017
As at
December 31, 2016
$
$
900
640
1,540
$
$
650
665
1,315
During 2017, Eagle filed a Short Form Base Shelf Prospectus, which allows for the potential issuance of up to $1 billion of notes over a
25-month period. Under this base shelf prospectus, Eagle issued $250 million of senior and subordinated term notes with a maturity date
of October 17, 2022 at a weighted average interest rate of 2.71%. In connection with this issuance, $200 million of bond forward
agreements were settled, resulting in a realized fair value gain of $6 million, in Other Comprehensive Income, and a net effective interest
rate of 2.26% on the Eagle notes issued.
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 $62 million (December 31, 2016 – $71 million), which represented approximately 10% (2016 – 11%) of the
securitized credit card receivables amount. As at December 30, 2017, the aggregate gross potential liability under these arrangements for
Eagle was $36 million (December 31, 2016 – $36 million), which represented approximately 9% (2016 – 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 30, 2017 and throughout
2017.
The undrawn commitments on facilities available from the Other Independent Securitization Trusts as at December 30, 2017, were
$160 million (December 31, 2016 – $210 million).
Independent Funding Trusts As at December 30, 2017, the independent funding trusts had drawn $551 million (December 31, 2016 –
$587 million) from the revolving committed credit facility that is the source of funding to the independent funding trusts. 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 30, 2017, the Company has agreed to provide a credit enhancement of $64 million (December 31, 2016 – $64 million) for the
benefit of the independent funding trusts representing not less than 10% (2016 – 10%) of the principal amount of loans outstanding.
Guaranteed Investment Certificates The following table summarizes PC Bank’s GICs activity, before commissions, in 2017 and 2016:
(millions of Canadian dollars)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
2017
928
76
(152)
852
$
$
2016
809
239
(120)
928
$
$
As at December 30, 2017, $193 million in GICs were recorded as long term debt due within one year (December 31, 2016 – $142 million).
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2017 Annual Report - Financial Review Loblaw Companies Limited 23
Management’s Discussion and Analysis
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 30, 2017, the Company’s maximum obligation in respect of such guarantees was $580 million (December 31, 2016 –
$580 million) with an aggregate amount of $509 million (December 31, 2016 – $488 million) in available lines of credit allocated to the
Associates by the various banks. As at December 30, 2017, Associates had drawn an aggregate amount of $110 million
(December 31, 2016 – $115 million) against these available lines of credit. Any amounts drawn by the Associates are included in bank
indebtedness on the Company’s consolidated balance sheets. As recourse in the event that any payments are made under the
guarantees, the Company holds a first-ranking security interest on all assets of Associates, subject to certain prior-ranking statutory claims.
7.4 Financial Condition
Adjusted Return on Equity(2) and Adjusted Return on Capital(2)
Adjusted return on equity(2)
Adjusted return on capital(2)
As at
December 30, 2017
14.1%
As at
December 31, 2016
12.9%
9.7%
8.8%
Adjusted return on equity(2) and adjusted return on capital(2) as at December 30, 2017 increased compared to December 31, 2016,
primarily due to improvements in underlying operating performance and common share repurchases. Adjusted return on capital(2) was also
positively impacted by an increase in cash and cash equivalents and short term investments as a result of the disposition of gas bar
operations.
7.5 Credit Ratings
The following table sets out the current credit ratings of the Company:
Dominion Bond Rating Service
Standard & Poor’s
Credit Ratings (Canadian Standards)
Credit Rating
Issuer rating
Medium term notes
Other notes and debentures
Second Preferred Shares, Series B
BBB
BBB
BBB
Pfd-3
Trend
Stable
Stable
Stable
Stable
Credit Rating
BBB
BBB
BBB
P-3 (high)
Outlook
Stable
n/a
n/a
n/a
Subsequent to the fourth quarter of 2017 and after the announcement that Choice Properties has entered into an agreement to acquire the
assets and assume the liabilities of CREIT, DBRS reaffirmed the ratings of the Company and changed the trend from Positive to Stable.
The following table sets out the current credit ratings of Choice Properties:
Credit Ratings (Canadian Standards)
Credit Rating
Issuer rating
Senior unsecured debentures
BBB
BBB
Trend
Stable
Stable
Credit Rating
BBB
BBB
Outlook
Stable
n/a
Dominion Bond Rating Service
Standard & Poor’s
Subsequent to the fourth quarter of 2017 and after the announcement that Choice Properties has entered into an agreement to acquire the
assets and assume the liabilities of CREIT, DBRS and S&P reaffirmed the ratings of Choice Properties. DBRS changed the trend from
Positive to Stable.
7.6 Share Capital
First Preferred Shares (authorized – 1.0 million shares) There were no First Preferred Shares outstanding as at December 30, 2017
and December 31, 2016.
Second Preferred Share Capital (authorized – unlimited) The Company has outstanding 9.0 million 5.30% non–voting Second
Preferred Shares, Series B, with a face value of $225 million, which were issued for net proceeds of $221 million. These preferred shares
are presented as a component of equity on the consolidated balance sheets.
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Common Shares (authorized – unlimited) Common shares issued are fully paid and have no par value. The activity in the common
shares issued and outstanding during the periods was as follows:
(millions of Canadian dollars except where otherwise indicated)
Number of
Common
Shares
2017
Common
Share
Capital
Number of
Common
Shares
2016
Common
Share
Capital
Issued and outstanding, beginning of period
400,829,870
$
7,713
409,985,226
$
7,861
Issued for settlement of stock options
Purchased and cancelled(i)
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
1,019,610
(15,555,539)
48
(301)
1,131,944
(10,287,300)
386,293,941
$
7,460
400,829,870
$
(1,105,620) $
(686,000)
1,010,682
(780,938) $
(21)
(13)
19
(15)
(643,452) $
(1,250,000)
787,832
(1,105,620) $
50
(198)
7,713
(10)
(24)
13
(21)
Issued and outstanding, net of shares held in trust, end of period
385,513,003
$
7,445
399,724,250
$
7,692
Weighted average outstanding, net of shares held in trust
393,764,159
405,058,645
(i) Includes 22,012 shares held in escrow that were transferred and cancelled in a private transaction and are excluded from the Company’s Normal Course Issuer Bid.
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 (“Board”) which takes into account the Company’s financial results, capital requirements, available cash flow, future
prospects of the Company’s business and other factors considered relevant from time to time. Over the long term, it is the Company’s
intention to increase the amount of the dividend while retaining appropriate free cash flow to finance future growth. In the second quarters
of 2017 and 2016, the Board raised the quarterly dividend by $0.01 to $0.27 and $0.26 per common share, respectively.
The following table summarizes the Company’s cash dividends declared for the periods as indicated:
Dividends declared per share ($):
Common Share
Second Preferred Share, Series B
2017(i)
1.07
1.325
$
$
2016
1.03
1.325
$
$
(i) The fourth quarter dividends for 2017 of $0.27 per share declared on common shares were payable on December 30, 2017 and subsequently paid on January 2, 2018.
The fourth quarter dividends for 2017 of $0.33125 per share declared on Second Preferred Shares, Series B were payable on December 31, 2017 and subsequently
paid on January 2, 2018.
(millions of Canadian dollars)
Dividends declared:
Common Share
Second Preferred Share, Series B
Total dividends declared
2017
421
12
433
$
$
2016
416
12
428
$
$
Subsequent to the end of the year, the Board declared a quarterly dividend of $0.27 per common share, payable on April 1, 2018 to
shareholders of record on March 15, 2018 and a dividend on the Second Preferred Shares, Series B of $0.33125 per share payable on
March 31, 2018 to shareholders of record on March 15, 2018. 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.
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2017 Annual Report - Financial Review Loblaw Companies Limited 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
2017
(52 weeks)
15,533,527
2016
(52 weeks)
10,287,300
1,091
$
790
301
708
510
198
686,000
1,250,000
$
48
35
13
90
66
24
$
$
In 2017, the Company renewed its NCIB to purchase on the Toronto Stock Exchange (“TSX”) or through alternative trading systems up to
21,016,472 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. As of
December 30, 2017, the Company has purchased 12,830,034 common shares under its current NCIB.
Subsequent to the end of 2017, the Company entered into an automatic share purchase plan (“ASPP”) with a broker in order to facilitate
repurchases of the Company’s common shares under its current NCIB. Under the Company’s ASPP, the Company’s broker may purchase
common shares at times when the Company ordinarily would not be active in the market.
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 $763 million as at December 30, 2017 (December 31, 2016 – $683 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® International Incorporated (“MasterCard®”) for accepting
PC Bank as a card member and licensee of MasterCard®. As at December 30, 2017, the guarantee on behalf of PC Bank to MasterCard®
was USD $190 million (December 31, 2016 – USD $190 million).
Glenhuron Bank Limited Surety Bond In connection with the CRA’s reassessment of the Company on certain income earned by
Glenhuron, the Company arranged for a surety bond of $149 million (2016 – $141 million) to the Ministry of Finance in order to dispute the
reassessments.
Cash Collateralization As at December 30, 2017, the Company had agreements to cash collateralize certain of its uncommitted credit
facilities up to an amount of $102 million (December 31, 2016 – $103 million), of which $3 million (December 31, 2016 – $4 million) was
deposited with major financial institutions and classified as security deposits, which is included in other assets.
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7.8 Contractual Obligations
The following illustrates certain of the Company’s significant contractual obligations and discusses other obligations as at
December 30, 2017:
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
2018
2,815
$
2019
2,509
$
$
Payments due by year
2020
1,690
2021
959
$
$
381
687
143
59
—
646
—
58
—
575
—
34
—
505
—
11
2022
1,213
Thereafter
6,728
$
Total
$ 15,914
—
426
—
11
—
1,859
—
—
381
4,698
143
173
$
4,085
$
3,213
$
2,299
$ 1,475
$
1,650
$
8,587
$ 21,309
(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 30, 2017.
(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 Derivative Instruments
The Company uses derivative instruments to offset certain of its financial risks. 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 sheets and the net realized and unrealized gains
(losses) before income taxes related to the Company’s financial derivative instruments designated as cash flow hedges:
(millions of Canadian dollars)
Derivatives designated as cash flow hedges(i)
Foreign Exchange Forwards
Bond Forwards(ii)
Total derivatives designated as cash flow hedges
December 30, 2017
(52 weeks)
Gain/(loss)
recorded in
operating
income
Gain/(loss)
recorded in
OCI
Net Asset/
(Liability)
Fair value
December 31, 2016
(52 weeks)
Gain/(loss)
recorded in
operating
income
Gain/(loss)
recorded in
OCI
Net Asset/
(Liability)
Fair value
$
$
(1) $
(3) $
—
(1) $
6
3
$
1
—
1
$
$
2
—
2
$
$
(1) $
—
(1) $
2
—
2
(i)
Includes interest rate swap agreements with a notional value of $100 million (2016 – $200 million). During 2017, a nominal unrealized fair value loss (2016 – nominal
unrealized fair value gain) was recorded in OCI relating to these agreements.
(ii) As a result of the issuance of Eagle notes, bond forward agreements with a notional value of $200 million were settled in 2017.
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2017 Annual Report - Financial Review Loblaw Companies Limited 27
Management’s Discussion and Analysis
The following is a summary of the fair values recognized in the consolidated balance sheets and the net realized and unrealized gains
(losses) before income taxes related to the Company’s financial derivative instruments not designated in a formal hedging relationship:
(millions of Canadian dollars)
Derivatives not designated in a formal
hedging relationship
Foreign Exchange and Other Forwards
Bond Forwards(i)
Other Non-Financial Derivatives
Total derivatives not designated in a formal
hedging relationship
December 30, 2017
(52 weeks)
Gain/(loss)
recorded in
operating
income
Gain/(loss)
recorded in
OCI
Net Asset/
(Liability)
Fair value
$
(10) $
— $
(23)
$
—
3
—
—
—
—
Net Asset/
(Liability)
Fair value
9
—
7
December 31, 2016
(52 weeks)
Gain/(loss)
recorded in
operating
income
Gain/(loss)
recorded in
OCI
$
— $
(8)
—
—
$
(7) $
— $
(23)
$
16
$
— $
3
8
3
(i) Realized fair value gain of $3 million related to Choice Properties bond forward agreements settled in the first quarter of 2016 and recorded in net interest expense and
other financing charges.
9. Quarterly Results of Operations
9.1 Results by Quarter
Under an accounting convention common in the retail industry, the Company follows a 52-week reporting cycle which periodically
necessitates a fiscal year of 53 weeks. Fiscal years 2017 and 2016 were 52 weeks. The next 53 week year will occur in 2020. The
52-week reporting cycle is divided into four quarters of 12 weeks each except for the third quarter, which is 16 weeks in duration.
The following is a summary of selected consolidated financial information derived from the Company’s unaudited interim period condensed
consolidated financial statements for each of the eight most recently completed quarters:
Summary of Consolidated Quarterly Results
(millions of Canadian dollars except where
otherwise indicated)
Revenue
Net earnings available to
common shareholders of
the Company
Adjusted net earnings available
to common shareholders of
the Company(2)
Net earnings per common
share:
Basic ($)
Diluted ($)
Adjusted diluted net earnings per
common share(2) ($)
Average national food price
(deflation) inflation (as
measured by CPI)
Food retail same-store sales
(decline) growth
Drug retail same-store sales
growth
2017
2016
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)
$ 10,401
$ 11,079
$ 14,192
$ 11,030
$ 46,702
$ 10,381
$ 10,731
$ 14,143
$ 11,130
$ 46,385
230
358
883
19
1,490
193
158
419
201
971
364
445
549
441
1,799
338
412
512
393
1,655
$
$
$
0.58
0.57
0.90
$
$
$
0.90
0.89
1.11
$
$
$
2.25
2.24
1.39
$
$
$
0.05
0.05
1.13
$
$
$
3.78
3.75
4.53
$
$
$
0.47
0.47
0.82
$
$
$
0.39
0.39
1.01
$
$
$
1.04
1.03
1.26
$
$
$
0.50
0.50
0.97
$
$
$
2.40
2.37
4.05
(3.9)%
(1.4)%
0.3%
1.0%
(1.0)%
4.3%
1.8%
0.2%
(2.3)%
1.0%
(1.2)%
1.2 %
1.4%
0.5%
0.6 %
2.0%
0.4%
0.8%
1.1 %
1.1%
0.9 %
3.7 %
3.3%
3.6%
3.0 %
6.3%
4.0%
2.8%
3.4 %
4.0%
28 2017 Annual Report - Financial Review Loblaw Companies Limited
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2018-03-09 3:49 AM
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:
•
•
• macro-economic conditions impacting food and drug retail prices;
•
the changes in the price of fuel sold at the Company’s gas bars;
•
•
•
the disposition of gas bar operations in the third quarter of 2017;
consolidation of franchises; and
changes in net retail square footage. Over the past eight quarters, net retail square footage increased by 0.4 million square feet to
70.3 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.
the timing of holidays;
the disposition of gas bar operations in the third quarter of 2017;
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:
•
•
•
• Shoppers Drug Mart acquisition-related net synergies;
•
•
•
•
the impact of the Company’s store closure plan announced in 2015 and completed in the first half of 2016;
the impact of certain adjusting items, as set out in Section 17 “Non-GAAP Financial Measures”, including:
the favourable impact of the repurchase of common shares for cancellation; and
improvements in underlying operating performance of the Company;
the gain on disposition of gas bar operations;
the wind-down of PC Financial banking services;
the remeasurement of deferred tax balances;
the PC Optimum Program;
restructuring and other related charges;
the Loblaw Card Program;
asset impairments, net of recoveries; and
the change in fair value adjustment to Trust Unit Liability.
The consolidation of franchises does not significantly impact net earnings available to common shareholders of the Company as the
related earnings are largely attributable to non-controlling interests.
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2017 Annual Report - Financial Review Loblaw Companies Limited 29
Management’s Discussion and Analysis
9.2 Fourth Quarter Results
The following is a summary of selected consolidated unaudited financial information for the fourth quarter of 2017:
For the periods ended December 30, 2017 and December 31, 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)
Income taxes
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 ($)
Dividends declared per Second Preferred Share, Series B ($)
2017
(12 weeks)
11,030
140
1,013
9.2%
372
118
130
(14)
174
27.5%
22
19
441
0.05
1.13
390.5
1,086
(748)
(50)
0.27
0.33125
$
$
$
$
$
$
$
$
$
2016
(12 weeks)
11,130
449
956
8.6%
365
128
130
89
161
27.5%
204
201
393
0.50
0.97
405.6
861
(676)
(185)
$
$
$
$
$
$
$
0.26
$
0.33125
$
$
$
$
$
$
$
$
$
$ Change
(100)
% Change
(0.9)%
(309)
57
7
(10)
—
(103)
13
(182)
(182)
48
(0.45)
0.16
225
(72)
135
0.01
(68.8)%
6.0 %
1.9 %
(7.8)%
— %
(115.7)%
8.1 %
(89.2)%
(90.5)%
12.2 %
(90.0)%
16.5 %
26.1 %
10.7 %
(73.0)%
3.8 %
30 2017 Annual Report - Financial Review Loblaw Companies Limited
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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 2017 were $19 million ($0.05 per common share), a decrease of
$182 million ($0.45 per common share) compared to the fourth quarter of 2016. The decrease in net earnings available to common
shareholders of the Company included improvements in underlying operating performance of $48 million, which were more than offset by
the unfavourable year-over-year net impact of adjusting items totaling $230 million, as described below:
•
improvements in underlying operating performance of $48 million ($0.12 per common share), were primarily due to the Retail segment
(excluding the impact of the consolidation of franchises), driven by an increase in adjusted gross profit(2) partially offset by an increase
in SG&A.
•
•
the unfavourable year-over-year net impact of adjusting items totaling $230 million ($0.61 per common share) was primarily due to the
following:
the unfavourable impact of charges related to the announcement of the PC Optimum Program, including the revaluation of the
existing points liability and the impairment of certain IT assets, of $154 million ($0.39 per common share);
the year-over-year unfavourable impact of restructuring and other related costs of $123 million ($0.31 per common share); and
the unfavourable impact of the Loblaw Card Program of $79 million ($0.20 per common share); partially offset by
the year-over-year favourable impact of asset impairments, net of recoveries, of $53 million ($0.12 per common share);
the favourable impact of the remeasurement of deferred tax balances of $17 million ($0.04 per common share);
the year-over-year favourable impact of pension annuities and buy-outs in the prior year of $15 million ($0.04 per common
share); and
the favourable impact of income earned, net of certain costs incurred, from the wind-down of PC Financial banking services of
$13 million ($0.03 per common share).
the increase in diluted net earnings per common share also included the favourable impact of the repurchase of common shares
($0.04 per common share).
Adjusted net earnings available to common shareholders of the Company(2) in the fourth quarter of 2017 were $441 million ($1.13 per
common share), an increase of $48 million ($0.16 per common share or 16.5%), compared to the fourth quarter of 2016, due to the
improvements in underlying operating performance and the favourable impact of the repurchase of common shares, as described above.
Normalized for the disposition of gas bar operations, adjusted diluted net earnings per common share(2) increased by approximately 20.0%.
Revenue
For the periods ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Revenue
2017
(12 weeks)
10,718
$
2016
(12 weeks)
10,845
$
$ Change
(127)
$
% Change
(1.2)%
281
211
(180)
261
198
(174)
7.7 %
6.6 %
20
13
(6)
$
11,030
$
11,130
$
(100)
(0.9)%
Revenue was $11,030 million in the fourth quarter of 2017, a decrease of $100 million, or 0.9%, compared to the fourth quarter of 2016,
primarily driven by a decrease in Retail segment sales of $127 million. Excluding the consolidation of franchises, Retail segment sales
decreased by $214 million, or 2.0%. The decrease was primarily due to the impact of the disposition of gas bar operations of $350 million,
partially offset by positive same-store sales growth and a net increase in Retail square footage.
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2017 Annual Report - Financial Review Loblaw Companies Limited 31
Management’s Discussion and Analysis
Operating Income Operating income was $140 million in the fourth quarter of 2017, a decrease of $309 million compared to the fourth
quarter of 2016. The decrease in operating income included improvements in underlying operating performance of $47 million, which were
more than offset by the unfavourable year-over-year net impact of adjusting items totaling $356 million, as described below:
•
improvements in underlying operating performance of $47 million were primarily due to the Retail segment, including the unfavourable
year-over-year contribution from the consolidation of franchises in the quarter and the unfavourable impact of the disposition of gas
bar operations; and
•
the unfavourable year-over-year net impact of adjusting items totaling $356 million was primarily due to the following:
the unfavourable impact of charges related to the announcement of the PC Optimum Program, including the revaluation of the
existing points liability and the impairment of certain IT assets, of $211 million;
the year-over-year unfavourable impact of restructuring and other related costs of $163 million; and
the unfavourable impact of the Loblaw Card Program of $107 million; partially offset by
the year-over-year favourable impact of asset impairments, net of recoveries, of $77 million;
the year-over-year favourable impact of pension annuities and buy-outs in the prior year of $21 million; and
the favourable impact of income earned, net of certain costs incurred, from the wind-down of PC Financial banking services of
$17 million.
Adjusted EBITDA(2)
For the periods ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Choice Properties
Consolidation and Eliminations
Adjusted EBITDA(2)
2017
(12 weeks)
936
2016
(12 weeks)
889
$
$ Change
47
$
% Change
5.3 %
60
152
(135)
56
245
(234)
1,013
$
956
$
4
(93)
99
57
7.1 %
(38.0)%
6.0 %
$
$
Adjusted EBITDA(2) was $1,013 million in the fourth quarter of 2017, an increase of $57 million compared to the fourth quarter of 2016. The
increase in adjusted EBITDA(2) in the fourth quarter of 2017 was primarily due to improvements in the Retail segment, including no impact
for the consolidation of franchises in the quarter and the unfavourable impact of the disposition of gas bar operations.
Depreciation and Amortization Depreciation and amortization was $372 million in the fourth quarter of 2017, an increase of $7 million
compared to the fourth quarter of 2016, primarily driven by the consolidation of franchises and an increase in IT assets. Included in
depreciation and amortization is the amortization of intangible assets related to the acquisition of Shoppers Drug Mart of $121 million (2016
– $124 million).
32 2017 Annual Report - Financial Review Loblaw Companies Limited
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Net Interest Expense and Other Financing Charges
For the periods ended December 30, 2017 and December 31, 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)
2017
(12 weeks)
118
12
130
$
$
$
$
2016
(12 weeks)
128
$ Change
(10)
$
% Change
(7.8)%
2
130
$
10
—
500.0 %
— %
Net interest expense and other financing charges were $118 million in the fourth quarter of 2017, a decrease of $10 million compared to
the fourth quarter of 2016. 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 $10 million. Adjusted net interest expense and other financing charges(2)
were flat compared to the fourth quarter of 2016 and included:
•
lower interest expense in the Choice Properties segment due to the repayment of the Series 6 senior unsecured debentures in the
first quarter of 2017, partially offset by an increase in interest expense due to higher drawings on credit facilities; offset by
•
an increase in interest expense in the Financial Services segment due the Eagle debt issuance in the fourth quarter of 2017.
Income Taxes
For the periods ended December 30, 2017 and December 31, 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
Remeasurement of deferred tax balances
Adjusted income taxes(2)
Effective tax rate
Adjusted income tax rate(2)
$
$
2017
(12 weeks)
(14)
171
17
174
(63.6)%
27.5 %
$
$
2016
(12 weeks)
89
$ Change
(103)
$
% Change
(115.7)%
99
17
13
8.1 %
72
—
161
$
27.7%
27.5%
The effective tax rate in the fourth quarter of 2017 was (63.6)% compared to 27.7% in the fourth quarter of 2016. The decrease in the
effective tax rate was primarily attributable to an increase in certain non-taxable items, a decrease in the non-deductible fair value
adjustment to the Trust Unit Liability and a deferred tax recovery resulting from the remeasurement of certain deferred tax balances
partially offset by an increase in certain other non-deductible items.
The adjusted income tax rate(2) in the fourth quarter of 2017 was 27.5%, flat compared to the fourth quarter of 2016.
In the fourth quarter of 2017, the Company recorded a deferred tax recovery of $17 million resulting from a change in the applicable
provincial income tax rate used to measure certain deferred tax balances caused by a change in the location of certain business activities.
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2017 Annual Report - Financial Review Loblaw Companies Limited 33
Management’s Discussion and Analysis
Cash Flow
For the periods ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Cash and cash equivalents, beginning of period
2017
(12 weeks)
1,510
$
2016
(12 weeks)
1,312
$
$ Change
198
$
% Change
15.1 %
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Effect of foreign currency exchange rate changes on cash and cash
equivalents
1,086
(748)
(50)
—
861
(676)
(185)
2
225
(72)
135
26.1 %
(10.7)%
73.0 %
(2)
(100.0)%
Cash and cash equivalents, end of period
$
1,798
$
1,314
$
484
36.8 %
a favourable change in non-cash working capital driven by an increase in trade payables and other liabilities; and
Cash Flows from Operating Activities Cash flows from operating activities in the fourth quarter of 2017 were $1,086 million, an increase
of $225 million compared to the fourth quarter of 2016, primarily due to:
•
•
•
higher cash earnings; partially offset by
an increase in income taxes paid.
Cash Flows used in Investing Activities Cash flows used in investing activities in the fourth quarter of 2017 were $748 million, an
increase of $72 million compared to the fourth quarter of 2016. The increase in cash flows used in investing activities was primarily driven
by an increase in short term investments and capital investments, partially offset by the acquisition of QHR Corporation in 2016.
Cash Flows used in Financing Activities Cash flows used in financing activities in the fourth quarter of 2017 were $50 million, a
decrease of $135 million compared to the fourth quarter of 2016. The decrease in cash used in financing activities was primarily driven by
higher net issuances of debt and timing of dividends paid, partially offset by the change in short term debt.
Capital Investments In the fourth quarter of 2017, the Company invested $487 million (2016 – $470 million) in fixed asset purchases and
intangible asset additions.
For the periods ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Cash flows from operating activities
Less:
Capital investments
Interest paid
Free cash flow
2017
(12 weeks)
1,086
487
84
515
$
$
2016
(12 weeks)
861
470
78
313
$
$
$
$
$ Change
% Change
225
17
6
202
26.1%
3.6%
7.7%
64.5%
Free cash flow(2) was $515 million in the fourth quarter of 2017, an increase of $202 million compared to the fourth quarter of 2016,
primarily driven by higher cash flows from operating activities as described above.
34 2017 Annual Report - Financial Review Loblaw Companies Limited
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Retail Segment Fourth Quarter Results of Operations
For the periods ended December 30, 2017 and December 31, 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 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Food retail
Drug retail
Pharmacy
Front Store
$
$
$
$
2017
(12 weeks)
10,718
56
3,095
28.9%
936
8.7%
362
2016
(12 weeks)
10,845
392
2,945
27.2%
889
8.2%
355
$
$
$
$ Change
(127)
$
% Change
(1.2)%
(336)
150
(85.7)%
5.1 %
47
7
5.3 %
2.0 %
2017
(12 weeks)
Same-store
sales
0.5%
$
3.6%
3.9%
3.5%
2016
(12 weeks)
Same-store
sales
1.1%
3.4%
2.5%
4.1%
Sales
7,789
3,056
1,361
1,695
Sales
7,546
3,172
1,419
1,753
Sales, operating income, adjusted gross profit(2), adjusted gross profit percentage(2), adjusted EBITDA(2) and adjusted EBITDA margin(2)
include the impacts of the consolidation of franchises and disposition of gas bar operations.
Sales Retail segment sales in the fourth quarter of 2017 were $10,718 million, a decrease of $127 million, or 1.2%, compared to the fourth
quarter of 2016. Excluding the consolidation of franchises, Retail segment sales decreased by $214 million, or 2.0%, primarily driven by
the following factors:
•
•
Food retail same-store sales growth was 0.5% (2016 – 1.1%) for the quarter, after excluding gas bar operations.
The impact of the disposition of gas bar operations of $350 million; partially offset by
Sales growth in food was modest;
Sales in pharmacy were flat; and
The Company’s Food retail average quarterly internal food price index was marginally higher than (2016 – slightly lower
than) the average quarterly national food price inflation of 1.0% (2016 – deflation of 2.3%), 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.
• Drug retail same-store sales growth was 3.6% (2016 – 3.4%).
Pharmacy same-store sales growth was 3.9% (2016 – 2.5%). The number of prescriptions dispensed increased by 4.5%
(2016 – 5.0%). On a same-store basis, the number of prescriptions dispensed increased by 4.3% (2016 – 4.5%) and
year-over-year, the average prescription value decreased by 0.1% (2016 – decreased by 2.0%).
Front store same-store sales growth of 3.5% (2016 – 4.1%).
•
22 food and drug stores were opened and 19 food and drug stores were closed in the last 12 months, resulting in a net increase in
Retail square footage of 0.1 million square feet, or 0.1%.
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2017 Annual Report - Financial Review Loblaw Companies Limited 35
Management’s Discussion and Analysis
Operating Income Operating income in the fourth quarter of 2017 was $56 million, a decrease of $336 million compared to the fourth
quarter of 2016. The decrease in operating income included improvements in underlying operating performance of $37 million, which were
more than offset by the unfavourable year-over-year net impact of adjusting items totaling $373 million, as described below:
•
the improvements in underlying operating performance of $37 million were driven by an increase in adjusted gross profit(2) partially
offset by an increase in SG&A. The improvements in underlying operating performance also included the unfavourable year-over-year
contribution from the consolidation of franchises in the quarter and the unfavourable impact of the disposition of gas bar operations;
and
•
the unfavourable year-over-year net impact of adjusting items totaling $373 million was primarily due to the following:
the unfavourable impact of charges related to the announcement of the PC Optimum Program, including the revaluation of the
existing points liability and the impairment of certain IT assets, of $211 million;
the year-over-year unfavourable impact of restructuring and other related costs of $163 million; and
the unfavourable impact of the Loblaw Card Program of $107 million; partially offset by
the year-over-year favourable impact of asset impairments, net of recoveries, of $77 million; and
the year-over-year favourable impact of pension annuities and buy-outs in the prior year of $21 million.
Adjusted Gross Profit(2) Adjusted gross profit(2) in the fourth quarter of 2017 was $3,095 million, an increase of $150 million compared to
the fourth quarter of 2016. Adjusted gross profit percentage(2) of 28.9% increased by 170 basis points compared to the fourth quarter of
2016. Excluding the consolidation of franchises, adjusted gross profit(2) increased by $55 million. Adjusted gross profit percentage(2),
excluding the consolidation of franchises, was 27.5%, an increase of 110 basis points compared to the fourth quarter of 2016. The increase
in adjusted gross profit percentage(2) was due to the favourable impact from the disposition of gas bar operations of approximately 70 basis
points and higher Drug retail margins primarily driven by front store margins. Food retail margins were stable.
Adjusted EBITDA(2) Adjusted EBITDA(2) in the fourth quarter of 2017 was $936 million, an increase of $47 million, compared to the fourth
quarter of 2016 and included no impact for the consolidation of franchises and the unfavourable impact of the disposition of gas bar
operations of approximately $20 million. The increase in adjusted EBITDA(2) of $47 million was driven by an increase in adjusted gross
profit(2) as described above, partially offset by an increase in SG&A of $103 million. SG&A as a percentage of sales was 20.1%, an
increase of 110 basis points compared to the fourth quarter of 2016. Excluding the consolidation of franchises, SG&A increased $8 million.
SG&A as a percentage of sales, excluding the consolidation of franchises, was 18.8%, an unfavourable increase of 40 basis points
compared to the fourth quarter of 2016 mainly driven by the unfavourable impact from the disposition of gas bar operations of
approximately 50 basis points as store and store support costs were relatively flat as a percentage of sales.
Depreciation and Amortization Depreciation and amortization in the fourth quarter of 2017 was $362 million, an increase of $7 million
compared to the fourth quarter of 2016 primarily driven by the consolidation of franchises and an increase in IT assets. Included in
depreciation and amortization is the amortization of intangible assets related to the acquisition of Shoppers Drug Mart of $121 million (2016
– $124 million).
Other Retail Business Matters
For details see Section 6.1 “Retail Segment”, of this MD&A.
36 2017 Annual Report - Financial Review Loblaw Companies Limited
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Financial Services Segment Fourth Quarter Results of Operations
For the periods ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Earnings before income taxes
2017
(12 weeks)
281
59
$
2016
(12 weeks)
261
$
$ Change
20
$
% Change
7.7%
39
20
51.3%
(millions of Canadian dollars except where otherwise indicated)
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card receivables
Annualized credit loss rate on average quarterly gross credit card
receivables
As at
December 30, 2017
2,908
$
As at
December 31, 2016
2,769
$
3,100
47
13.2%
3.7%
2,926
52
13.5%
4.3%
$ Change
139
$
% Change
5.0 %
174
(5)
5.9 %
(9.6)%
Revenue Revenue in the fourth quarter of 2017 was $281 million, an increase of $20 million compared to the fourth quarter of 2016,
primarily driven by:
•
•
higher interest and net interchange income attributable to the 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 2017 were $59 million, an increase of $20 million
compared to the fourth quarter of 2016, primarily driven by:
•
recognition of income of $17 million, net of certain costs incurred, relating to PC Bank’s agreement to end its business relationship
with a major Canadian chartered bank, which represented the personal banking services offered under the President's Choice
Financial® brand;
•
•
•
•
•
•
revenue growth, as described above;
lower credit losses due to the strong credit performance of the portfolio; and
lower marketing and acquisition costs; partially offset by
higher operating costs and costs associated with the loyalty program;
higher IT costs; and
higher interest expense, primarily due to the Eagle debt issuance in the fourth quarter of 2017, as a result of growth in the credit card
portfolio.
Credit Card Receivables As at December 30, 2017, credit card receivables were $3,100 million, an increase of $174 million compared to
December 31, 2016. This increase was primarily driven by growth in the average customer balance and active customer base as a result
of continued investments in customer acquisition, marketing and product initiatives. As at December 30, 2017, the allowance for credit card
receivables was $47 million, a decrease of $5 million compared to December 31, 2016 due to the strong credit performance of the
portfolio.
Other Financial Services Business Matters
For details see Section 6.2 “Financial Services Segment”, of this MD&A.
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2017 Annual Report - Financial Review Loblaw Companies Limited 37
Management’s Discussion and Analysis
Choice Properties Segment Fourth Quarter Results of Operations
For the periods ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Net interest expense and other financing charges(i)
Net income(ii)
Funds from operations(2)
2017
(12 weeks)
211
$
2016
(12 weeks)
198
$
$ Change
13
$
% Change
6.6 %
116
36
117
(11)
256
103
127
1,154.5 %
(220)
14
(85.9)%
13.6 %
(i) Net interest expense and other financing charges includes a fair value adjustment on Class B Limited Partnership units.
(ii) 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 2017 was $211 million, an increase of $13 million compared to the fourth quarter of 2016 and
included $180 million (2016 – $174 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
an increase in base rent and operating cost recoveries from existing properties;
revenue from properties acquired in 2016 and 2017.
Net Interest Expense and Other Financing Charges Net interest expense and other financing charges in the fourth quarter of 2017 were
$116 million compared to income of $11 million in the fourth quarter of 2016, an increase of $127 million. The increase was primarily driven
by:
•
•
an increase in interest expense due to higher distributions on Class B Limited Partnership units and higher drawings on credit
facilities; partially offset by
the change in the fair value adjustment on Class B Limited Partnership units;
•
lower interest expense due to the repayment of the Series 6 senior unsecured debentures in the first quarter of 2017.
Net income Net income in the fourth quarter of 2017 was $36 million, a decrease of $220 million compared to the fourth quarter of 2016.
The decrease was primarily driven by:
•
•
•
•
the change in fair value adjustment on Class B Limited Partnership units; and
the change in fair value adjustment on investment properties; partially offset by
an increase in net operating income from existing properties; and
additional net operating income generated from acquisitions and tenant openings in newly developed leasable space.
Funds from Operations(2) Funds from Operations(2) in the fourth quarter of 2017 were $117 million, an increase of $14 million compared
to the fourth quarter of 2016, primarily driven by higher contributions from property operations and lower interest expense due to the
repayment of the Series 6 senior unsecured debentures in the first quarter of 2017, partially offset by an increase in interest expense due
to higher drawings on credit facilities.
Other Matters
For details see Section 6.3 “Choice Properties Segment”, of this MD&A.
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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 30, 2017.
11. Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in
accordance with IFRS.
As required by NI 52-109, the Chairman, as CEO, and the CFO have caused the effectiveness of the internal controls over financial
reporting to be evaluated using the framework established in ‘Internal Control - Integrated Framework (COSO Framework)’ published by
The Committee of Sponsoring Organizations of the Treadway Commission (COSO), 2013. Based on that evaluation, they have concluded
that the design and operation of the Company’s internal controls over financial reporting were effective as at December 30, 2017.
In designing such controls, it should be recognized that due to inherent limitations, any control, 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 2017 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 risks 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 the 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.
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2017 Annual Report - Financial Review Loblaw Companies Limited 39
Management’s Discussion and Analysis
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 and on the Company’s financial performance.
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.
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 30, 2017, which is hereby
incorporated by reference:
Healthcare Reform
Loyalty Program
Competitive Environment
Regulatory Compliance
Cyber Security and Data Breaches
Product Safety and Public Health
Electronic Commerce and Disruptive Technologies
Governance and Change Management
IT Systems Implementations and Data Management
Legal Proceedings
Healthcare Reform The Company is reliant on prescription drug sales for a 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.
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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.
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 Program The Company’s loyalty program is a valuable offering to customers and provides a key differentiating marketing tool for
the business. The marketing, promotional and other business activities related to combining the Company’s loyalty programs must be well
managed and coordinated to preserve positive customer perception. Any failure to successfully combine the loyalty programs and manage
it thereafter may negatively impact the Company’s reputation or 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.
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2017 Annual Report - Financial Review Loblaw Companies Limited 41
Management’s Discussion and Analysis
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.
Electronic Commerce and Disruptive Technologies 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, certain websites and customer offerings that are integrated with the Company’s loyalty program, reliable data, 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.
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.
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.
The Company also depends on relevant and reliable information to operate its business. As the volume of data being generated and
reported continues to increase across the Company, data accuracy, quality and governance are required for effective decision making.
Failure by the Company to leverage data, including customer data, in a timely manner may adversely affect the Company’s ability to
execute its strategy and therefore its financial performance.
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 and those offering e-Commerce retail platforms.
The Company’s inability to effectively predict market activity, leverage customer preferences and spending patterns and respond timely to
trends, 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 failure to effectively respond to customer trends may adversely impact the Company’s relationship with its
customers. 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.
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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 applicable to the Company’s
business, including tax laws, minimum wage 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.
On December 19, 2017, the Company and Weston announced actions taken to address their role in an industry-wide price-fixing
arrangement involving certain packaged bread products. The arrangement involved the coordination of retail and wholesale prices of
certain packaged bread products over a period extending from late 2001 to March 2015. Under the arrangement, the participants regularly
increased prices on a coordinated basis. Please refer to the “Legal Proceedings” risk on page 44 of this MD&A.
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.
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 the Company, could be materially adversely different in certain respects, which could in turn
materially adversely affect the trading price of the Units.
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.
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Management’s Discussion and Analysis
Governance and Change Management Significant initiatives in support of the Company’s strategic priorities are underway, including the
execution of IT initiatives, cost management efforts, and other ongoing organizational changes. The success of these initiatives is
dependent on effective leadership and realizing intended benefits. Ineffective change management could result in a lack of integrated
processes and procedures, unclear accountabilities and decision-making rights, decreased colleague engagement, ineffective
communication and training or a lack of requisite knowledge. Any of the foregoing could disrupt operations, increase the risk of customer
dissatisfaction, adversely affect the Company’s reputation or financial performance or adversely affect the ability of the Company to
implement and achieve its long term strategic objectives.
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 between 2015 and 2017, are for the 2000 to 2012 taxation years and total $406 million including interest and penalties. The
Company believes it is likely that the CRA will issue reassessments for the 2013 taxation year 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 and
2012 taxation years. The Tax Court of Canada trial is scheduled to commence in the second quarter of 2018.
On December 19, 2017, the Company and Weston announced actions taken to address their role in an industry-wide price-fixing
arrangement involving certain packaged bread products. The arrangement involved the coordination of retail and wholesale prices of
certain packaged bread products over a period extending from late 2001 to March 2015. Under the arrangement, the participants regularly
increased prices on a coordinated basis.
Class action lawsuits have been commenced against the Company and Weston as well as a number of other major grocery retailers and
another bread wholesaler. It is too early to predict the outcome of such legal proceedings. Neither the Company nor Weston believes that
the ultimate resolution of such legal proceedings will have a material adverse impact on its financial condition or prospects. The Company’s
cash balances far exceed any realistic damages scenario and therefore it does not anticipate any impacts on its dividend, dividend policy
or share buyback plan.
As part of its response to this issue, the Company has announced the Loblaw Card Program pursuant to which the Company is offering a
$25 Loblaw Card to eligible customers. The Loblaw Card can be used to purchase items sold in Loblaw grocery stores across Canada.
The Company has recorded a charge of $107 million in relation to the Loblaw Card Program in the fourth quarter of 2017. The Company
expects that Loblaw Cards issued to customers will be an offset against civil liability. The charge recorded for the Loblaw Card Program
should not be viewed as an estimate of damages.
As a result of admission of participation in the arrangement and cooperation in the Competition Bureau’s investigation, the Company and
Weston will not face criminal charges or penalties.
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12.2 Financial Risks and Risk Management
The Company is exposed to a number of financial risks, including those associated with financial instruments, which have the potential to
affect its operating and financial performance. The Company uses over-the-counter derivative instruments to offset certain of these risks.
Policies and guidelines prohibit the use of any derivative instrument for trading or speculative purposes. The fair value of derivative
instruments is subject to changing market conditions which could 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 facilities, 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 and
derivative instruments in the form of exchange traded futures contracts and forward contracts to minimize cost volatility related to
commodities.
Foreign Currency Exchange Rates The Company is exposed to foreign currency exchange rate variability, primarily on its USD
denominated 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. The Company is also exposed to fluctuations in the prices of USD denominated purchases as a result of changes in USD
exchange rates. During 2017 and 2016, 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.
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.
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Management’s Discussion and Analysis
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 sheets as they are redeemable for cash at the
option of the holder. The liability is recorded at fair value at each reporting period based on the market price of Units. The change in the fair
value of the liability negatively impacts net earnings when the Unit price increases and positively impacts net earnings when the Unit price
declines.
Interest Rate Risk The Company is exposed to interest rate risk from fluctuations in interest rates on its floating rate debt and from the
refinancing of existing financial instruments. The Company manages interest rate risk by monitoring the respective mix of fixed and floating
rate debt and by taking action as necessary to maintain an appropriate balance considering current market conditions, with the objective of
maintaining the majority of its debt at fixed interest rates.
13. Related Party Transactions
The Company’s controlling shareholder is Weston, which owns, directly and indirectly, 187,815,136 of the Company’s common shares,
representing approximately 48.6% 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 63.0% of Weston’s outstanding common shares. Mr. Weston also
beneficially owns 5,096,189 of the Company’s common shares, representing approximately 1.0% 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 sold to a subsidiary of Weston
Inventory purchases from a related party(i)
Operating Income
Cost sharing agreements with Parent(ii)
Net administrative services provided by Parent(iii)
Choice Properties’ distributions to Parent(iv)
Lease of office space from a subsidiary of Wittington
Lease of office space to a subsidiary of Wittington
Transaction Value
2017
(52 weeks)
2016
(52 weeks)
$
$
652
$
$
2
28
35
23
18
4
2
654
—
28
35
21
16
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 30, 2017 was $6 million (December 31, 2016 – $5 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 2017, Choice Properties issued
1,359,193 Units (2016 – 1,265,160 Units) to Weston under its DRIP at a weighted average price of $13.17 (2016 – $12.63) per Unit.
The net balances due to Weston are comprised as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
46 2017 Annual Report - Financial Review Loblaw Companies Limited
As at
December 30, 2017
48
$
As at
December 31, 2016
44
$
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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 30, 2017, 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.
Operating Lease Choice Properties entered into a ten-year lease for office space with GWL’s parent company that commenced in 2014.
Lease payments will total $3 million over the term of the lease. Effective January 1, 2018, Choice Properties entered into a lease for
additional office space, with a subsidiary of GWL, with a term effective until the end of the existing lease in 2024. Over the term of the
lease, lease payments will total $1 million.
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.
Key Management Personnel The Company’s key management personnel are comprised of the Board and certain members of the
executive team of the Company, as well as both the Board and certain members of the executive team of Weston and Wittington to the
extent that they have the authority and responsibility for planning, directing and controlling the day-to-day activities of the Company.
Compensation of Key Management Personnel Annual compensation of key management personnel that is directly attributable to the
Company was as follows:
(millions of Canadian dollars)
Salaries, director fees and other short term employee benefits
Equity-based compensation
Total compensation
14. Critical Accounting Estimates and Judgments
2017
(52 weeks)
6
9
15
$
$
2016
(52 weeks)
4
6
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.
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Management’s Discussion and Analysis
14.3 Impairment of Non-Financial Assets (Goodwill, Intangible Assets, Fixed Assets and Investment Properties)
Judgments Made in Relation to Accounting Policies Applied Management is required to use judgment in determining the grouping of
assets to identify their cash generating units (“CGUs”) for the purposes of testing fixed assets for impairment. Judgment is further required
to determine appropriate groupings of CGUs, for the level at which goodwill and intangible assets are tested for impairment. The Company
has determined that each retail 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.
14.4 Impairment of 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 award points earned by loyalty program members at
the time of award. The Company determines fair value using estimates such as retail value per point on redemption and breakage (the
amount of points that will never be redeemed). Prior to the launch of the PC Optimum program, the estimated fair value per point for the
PC points and PC Plus programs was determined based on the program reward schedule and was $1 for every 1,000 points. For the
Shoppers Optimum program, the estimated fair value per point was determined based on the expected weighted average redemption
levels for future redemptions, including special redemption events. Each program had its own breakage rate and the rates were reviewed
on an ongoing basis and were estimated utilizing each program's historical redemption activity and anticipated earn and redeem behaviour
of members. As at year end 2017, as a result of the Company’s plan to create one loyalty program, PC Optimum, the Company revalued
its existing loyalty award liabilities to account for a combined anticipated redemption rate.
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 and the timing and reversal of temporary differences.
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.
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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.
14.8 Provisions
Judgments made in Relation to Accounting Policies Applied and Key Sources of Estimation The recording of provisions requires
management to make certain judgments regarding whether 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 if a reliable estimate of the amount of the obligation can be made.
The Company has recorded provisions primarily in respect of restructuring, environmental and decommissioning liabilities, onerous lease
arrangements, legal claims and the Loblaw Card Program. The Company reviews the merits, risks and uncertainties of each provision,
based on current information, and the amount expected to be required to settle the obligation. Provisions are reviewed on an ongoing basis
and are adjusted accordingly when new facts and events become known to the Company.
15. Accounting Standards
15.1 Accounting Standards Implemented
Statement of Cash Flows The Company implemented the amendments to International Accounting Standard (“IAS”) 7, “Statement of
Cash Flows”, in the first quarter of 2017 and has provided disclosures on changes in liabilities arising from certain financing activities,
including both changes arising from cash and non-cash flows changes, in the notes to the annual audited consolidated financial
statements.
15.2 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 International Accounting Standards Board (“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. The Company’s fiscal year ended on December 30, 2017, therefore the corresponding effective
date for IFRS 15 is December 31, 2017. The Company intends to adopt the standard on December 31, 2017 by applying the requirements
of the standard retrospectively with the cumulative effects of initial application recorded in opening retained earnings on January 1, 2017
and with the restatement of comparative periods. IFRS 15 permits the use of exemptions and practical expedients. The Company intends
to apply the practical expedient which does not require restatement for contracts that began and were completed within the same annual
reporting period before December 30, 2017 or are completed on January 1, 2017.
The Company has completed the assessment of significant agreements and contracts with customers and has determined the preliminary
expected impacts of the adoption of IFRS 15 on its consolidated financial statements.
The implementation of IFRS 15 will impact the allocation of revenue that is deferred in relation to the Company’s customer loyalty award
programs. Revenue is currently allocated to the customer loyalty awards using the residual fair value method. Under this method, a portion
of the consideration equaling the fair value of the points is allocated to the loyalty awards and deferred until the points are ultimately
redeemed. The residual consideration is allocated to the goods and services sold and recognized as revenue. Under IFRS 15,
consideration will be allocated between the loyalty awards and the goods and services on which the awards were earned, based on their
relative stand-alone selling prices. Using this relative fair value approach, the amount allocated to the loyalty points will be, on average,
lower than the amounts allocated under the residual value method. As a result, the Company expects the adoption of the standard to result
in a decrease in the amount recognized as deferred revenue in other liabilities, an increase in income taxes payable, with a corresponding
increase in retained earnings of approximately $30 million, net of income taxes as at January 1, 2017.
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, including on its franchise arrangements with non-consolidated stores.
The Company continues to assess the impact of the disclosure requirements under IFRS 15 on the Company’s consolidated financial
statements.
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Management’s Discussion and Analysis
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. IFRS 9 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. The Company intends to adopt the new requirements for classification and measurement, impairment and general
hedging on December 31, 2017 by applying the requirements for classification and measurement, including impairment, retrospectively
with the cumulative effects of initial application recorded in opening retained earnings as at December 31, 2017 with no restatement of
comparative periods.
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. The Company will adopt the new classification requirements under IFRS 9 and it does not expect
significant changes in measurement as a result of the new requirements.
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’s ECL model will change the valuation of its Financial Services segment credit losses on credit card receivables. The
Company, through PC Bank, currently assesses for impairment using the incurred loss model when objective evidence indicates that there
has been a deterioration of credit quality subsequent to the initial recognition of the receivable, and the loss can be reliably measured. The
adoption of IFRS 9 will have a significant impact on the Financial Services segment’s impairment methodology.
IFRS 9 outlines a three-stage approach to recognizing ECL which is intended to reflect the deterioration in credit quality of a financial
instrument. The Company, through PC Bank, will apply the three-stage approach on assessing the impairment on credit card receivables.
• Stage 1 is comprised of all financial instruments that have not deteriorated significantly in credit quality since initial recognition or that
have low credit risk at the reporting date. PC Bank will be required to recognize impairment for Stage 1 financial instruments based on
the expected losses over the expected life of the instrument arising from loss events that could occur during the 12 months following
the reporting date.
• Stage 2 is comprised of all financial instruments that have deteriorated significantly in credit quality since initial recognition but that do
not have objective evidence of a credit loss event. For Stage 2 financial instruments the impairment is recognized based on the
expected losses over the expected life of the instrument arising from loss events that could occur over the expected life. PC Bank is
required to recognize a lifetime ECL for Stage 2 financial instruments.
• Stage 3 is comprised of all financial instruments that have objective evidence of impairment at the reporting date. PC Bank is required
to recognize impairment based on a lifetime ECL for Stage 3 financial instruments.
As a result of the change in valuation, the Company expects the adoption of IFRS 9 to result in a decrease in credit card receivables,
increase in deferred income tax asset, with a corresponding decrease in retained earnings of up to approximately $90 million, net of
income taxes, as at December 31, 2017. PC Bank continues to revise, refine and validate the impairment model and related process
controls, and assess the impact on the Company’s consolidated financial statements.
The Company does not expect the ECL impairment model applied under IFRS 9 to have a material impact 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 expects that the types of hedge accounting relationships that the Company currently designates will be capable of meeting the
requirements of IFRS 9 once the Company completes certain planned changes to its internal documentation and monitoring processes to
meet the requirements of IFRS 9.
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IFRS 16 In 2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”), replacing IAS 17, “Leases” (“IAS 17”) 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 does not intend to early adopt IFRS 16.
The Company intends to adopt the standard on December 30, 2018 by applying the requirements of the standard retrospectively with the
cumulative effects of initial application recorded in opening retained earnings as at December 30, 2018 using a modified retrospective
approach with no restatement of the comparative period. IFRS 16 permits the use of exemptions and practical expedients. The Company
intends to measure the cumulative effect of initial application by applying the use of hindsight in the determination of the lease term if the
contract contains options to extend or terminate a lease. In addition, the Company also intends to apply the following exemptions and
practical expedients:
•
the application of IFRS 16 to only those contracts that were previously identified as leases under IAS 17 and IFRIC 4, “Determining
whether an Arrangement contains a Lease”;
•
•
the exclusion of short term leases and leases for which the underlying asset is of low dollar value from the application of IFRS 16; and
the application of a single discount rate to a portfolio of leases with similar characteristics.
The Company has performed a preliminary assessment of the potential impacts of the adoption of IFRS 16 on the Company’s consolidated
financial statements. The adoption of IFRS 16 will result in an increase in fixed assets, long term debt, and deferred income taxes, and a
decrease in opening retained earnings as a result of the recognition of right-of-use assets and associated lease liabilities. On an ongoing
basis there will be a decrease in rent expense and an increase in depreciation and amortization and net interest expense and other
financing charges. The Company expects to disclose quantitative financial impacts before the adoption of IFRS 16.
16. Outlook(3)
Loblaw is focused on its strategic framework, delivering best in food and health and beauty, using data driven insights underpinned by
process and efficiency excellence. This framework is supported by the Company’s financial plan of maintaining a stable trading
environment that targets positive same-store sales and stable gross margin, creating efficiencies to deliver operating leverage, investing
for the future and returning capital to shareholders.
Headwinds from minimum wage increases and healthcare reform will negatively impact the Company’s financial performance in 2018. In
addition to the previously announced incremental impact of minimum wage increases of approximately $190 million, the Company now
expects that the announced healthcare reform will have an additional impact of approximately $250 million on operating income. This
compares to the average impact of healthcare reform of approximately $70 million to $80 million per year over the past three years.
In 2018, on a full-year comparative basis, normalized for the disposition of the gas bar business, the Company expects to:
•
•
deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive market;
deliver essentially flat adjusted net earnings growth with positive adjusted earnings per share growth based on our share buyback
program;
•
•
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.
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2017 Annual Report - Financial Review Loblaw Companies Limited 51
Management’s Discussion and Analysis
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: 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.
Retail Segment Gross Profit, Retail Segment Adjusted Gross Profit and Retail Segment Adjusted Gross Profit Percentage The
following tables reconcile adjusted gross profit by segment to gross profit by segment, which is reconciled to revenue and cost of
merchandise inventories sold measures as reported in the consolidated statements of earnings for the periods ended as indicated. 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 30, 2017
and December 31, 2016
(millions of Canadian dollars)
Revenue
Cost of Merchandise
Inventories Sold
Gross Profit
Add (deduct) impact of the
following:
Restructuring and other
related costs
Charges related to retail
locations in Fort
McMurray, net of
recoveries
2017
(12 weeks)
2016
(12 weeks)
Retail
Financial
Services
Choice
Properties
Consolidation
& Eliminations
Total
Retail
Financial
Services
Choice
Properties
Consolidation
& Eliminations
Total
$ 10,718 $
281 $
211
$
(180) $ 11,030
$ 10,845 $
261 $
198
$
(174) $ 11,130
7,625
32
—
—
7,657
7,896
27
—
—
7,923
$ 3,093 $
249 $
211
$
(180) $ 3,373
$ 2,949 $
234 $
198
$
(174) $ 3,207
2
—
—
—
2
—
—
—
—
—
—
—
—
—
—
(4)
—
—
—
(4)
Adjusted Gross Profit
$ 3,095 $
249 $
211
$
(180) $ 3,375
$ 2,945 $
234 $
198
$
(174) $ 3,203
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For the periods ended December 30, 2017
and December 31, 2016
(millions of Canadian dollars)
Revenue
Cost of Merchandise
Inventories Sold
Gross Profit
Add impact of the following:
Restructuring and other
related costs
Net impairment (impairment
reversals) related to Drug
retail ancillary assets
Charges related to retail
locations in Fort
McMurray, net of
recoveries
2017
(52 weeks)
2016
(52 weeks)
Retail
Financial
Services
Choice
Properties
Consolidation
& Eliminations
Total
Retail
Financial
Services
Choice
Properties
Consolidation
& Eliminations
Total
$ 45,634 $
956 $
830
$
(718) $ 46,702
$ 45,384 $
911 $
784
$
(694) $ 46,385
32,816
97
—
— 32,913
33,130
83
—
— 33,213
$ 12,818 $
859 $
830
$
(718) $ 13,789
$ 12,254 $
828 $
784
$
(694) $ 13,172
2
—
—
—
—
—
—
—
2
—
—
—
—
—
—
3
4
1
—
—
—
—
—
—
—
—
—
3
4
1
Adjusted Gross Profit
$ 12,820 $
859 $
830
$
(718) $ 13,791
$ 12,262 $
828 $
784
$
(694) $ 13,180
Restructuring and other related costs The Company continuously evaluates strategic and cost reduction initiatives related to its store
infrastructure, distribution networks and administrative infrastructure with the objective of ensuring a low cost operating structure.
Restructuring activities related to these initiatives are ongoing. In the fourth quarter of 2017, the Company recognized charges associated
with restructuring and other related costs as set out in Section 6.1 “Other Retail Business Matters”.
Net impairment (impairment reversals) related to 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 finalized the sale of a portion of these assets.
In the second quarter of 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.
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 inventory
losses, site clean-up and other restoration costs. As at the end of 2016, the Company received partial proceeds of $10 million from the
insurance claim.
LCL_Q4 2017_RTS.PDF 55
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2017 Annual Report - Financial Review Loblaw Companies Limited 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 net earnings attributable to shareholders of the Company as reported in
the consolidated statements of earnings for the periods ended as indicated. 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.
2017
(12 weeks)
2016
(12 weeks)
Retail
Financial
Services
Choice
Properties
Consolidation
& Eliminations
Consolidated
Retail
Financial
Services
Choice
Properties
Consolidation
& Eliminations Consolidated
$
22
$
204
14
118
(14)
28
128
89
$
56
$
74
$
152
$
(142) $
140
$ 392
$
52
$
245
$
(240)
$
449
For the periods ended December 30, 2017
and December 31, 2016
(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:
PC Optimum Program
$ 211
$ — $
— $
— $
211
$ — $ — $
— $
— $
Restructuring and other
related costs
Amortization of intangible
assets acquired with
Shoppers Drug Mart
Loblaw Card Program
Asset impairments, net of
recoveries
Pension annuities and buy-
outs
Charges related to retail
locations in Fort McMurray,
net of recoveries
Certain prior period items
Fair value adjustment on fuel
and foreign currency
contracts
Prior year land transfer tax
assessment (recovery)
Wind-down of PC Financial
banking services
Adjusting Items
Adjusted operating income
Depreciation and amortization
Less: Amortization of intangible
assets acquired with Shoppers
Drug Mart
Adjusted EBITDA
165
121
107
53
—
—
(4)
(5)
(9)
—
$
$
$ 639
$ 695
362
—
—
—
—
—
—
—
—
—
(17)
(17)
57
3
(121)
$ 936
$
—
60
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
— $
— $
152
$
(142) $
—
—
7
—
121
107
53
—
—
(4)
(5)
(9)
(17)
622
762
372
165
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
124
—
130
21
(5)
—
(6)
—
—
$ 266
$ — $
— $
— $
$ 658
$
355
(121)
(124)
$
245
$
(240)
$
—
—
6
—
52
4
—
56
$
152
$
(135) $ 1,013
$ 889
$
$
245
$
(234)
$
956
—
2
124
—
130
21
(5)
—
(6)
—
—
266
715
365
(124)
54 2017 Annual Report - Financial Review Loblaw Companies Limited
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2018-03-09 3:49 AM
For the periods ended December 30, 2017
and December 31, 2016
(millions of Canadian dollars)
Net earnings attributable to
shareholders of the Company
Add 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
PC Optimum Program
Restructuring and other
related costs
Loblaw Card Program
Asset impairments, net of
recoveries
Fair value adjustment on fuel
and foreign currency
contracts
Pension annuities and buy-
outs
Charges related to retail
locations in Fort McMurray,
net of recoveries
Net impairment (impairment
reversals) related to Drug
retail ancillary assets
Certain prior period items
Prior year land transfer tax
assessment (recovery)
Wind-down of PC Financial
banking services
Gain on disposition of gas bar
operations
Adjusting Items
Adjusted operating income
Depreciation and amortization
Less: Amortization of intangible
assets acquired with Shoppers
Drug Mart
2017
(52 weeks)
2016
(52 weeks)
Retail
Financial
Services
Choice
Properties
Consolidation
& Eliminations
Consolidated
Retail
Financial
Services
Choice
Properties
Consolidation
& Eliminations Consolidated
$ 1,502
24
525
443
$
983
7
653
449
$2,248
$
209
$
756
$
(719) $ 2,494
$ 1,902
$
175
$
677
$
(662)
$ 2,092
$ 524
$ — $
— $
— $
211
165
107
53
20
12
—
—
(4)
(9)
—
(501)
$ 578
$2,826
1,534
$
$
—
—
—
—
—
—
—
—
—
—
(24)
—
(24)
185
10
$
$
(524)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
524
211
165
107
53
20
12
—
—
(4)
(9)
(24)
(501)
$ 535
$ — $
— $
— $
—
46
—
135
5
23
2
(4)
—
10
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
535
—
46
—
135
5
23
2
(4)
—
10
—
—
752
— $
— $
554
$ 752
$ — $
— $
— $
756
$
(719) $ 3,048
$ 2,654
$
175
$
677
$
(662)
$ 2,844
1
—
23
1,568
1,512
—
(524)
(535)
13
—
1
—
17
1,543
—
(535)
Adjusted EBITDA
$3,836
$
195
$
757
$
(696) $ 4,092
$ 3,631
$
188
$
678
$
(645)
$ 3,852
LCL_Q4 2017_RTS.PDF 57
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2017 Annual Report - Financial Review Loblaw Companies Limited 55
Management’s Discussion and Analysis
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.
PC Optimum Program In the fourth quarter of 2017, the Company announced plans to bring together the Shoppers Optimum and
PC Plus reward programs to create one program, PC Optimum. As a result, the Company recorded a charge of $189 million, related to the
revaluation of the existing liability for outstanding points to reflect a higher anticipated redemption rate under the new program, and
$22 million, related to the impairment of certain IT assets that support the existing loyalty programs in the fourth quarter of 2017.
Loblaw Card Program In the fourth quarter of 2017, the Company and Weston acknowledged their involvement in an industry wide price-
fixing arrangement. In connection with the arrangement, the Company is offering customers a $25 Loblaw Card, which can be used to
purchase items sold in Loblaw grocery stores across Canada. The Company has recorded a charge of $107 million associated with the
Loblaw Card Program.
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.
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.
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.
Certain prior period items In the fourth quarter of 2017, Management identified excess impairment that was recorded against the
Company’s Franchise Loans Receivable balance on the consolidated balance sheets and recorded a gain to correct this prior period error.
Management determined that the impact of this item on the Company’s previously issued annual and interim financial statements and the
current period financial statements was not material. This gain was partially offset by certain charges associated with a prior period
regulatory matter recorded in the fourth quarter of 2017.
Prior year land transfer tax assessment (recovery) In the fourth quarter of 2017, the Company recorded a recovery of $9 million in
SG&A in the Retail segment related to a partial recovery of a prior year land transfer tax assessment.
Wind-down of PC Financial banking services In the third quarter of 2017, PC Bank entered into an agreement to end its business
relationship with a major Canadian chartered bank which represented the personal banking services offered under the President's Choice
Financial brand. As a result of this agreement, PC Bank will receive payments of approximately $43 million, net of related costs, which will
be recognized between the third quarter of 2017 and the second quarter of 2018.
Gain on disposition of gas bar operations On July 17, 2017, the Company sold its gas bar operations, for proceeds of approximately
$540 million. The Company recorded a pre-tax gain on sale of $501 million (post-tax gain of $432 million), net of related costs, in the third
quarter of 2017.
56 2017 Annual Report - Financial Review Loblaw Companies Limited
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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 as reported in the consolidated statements of earnings for the
periods ended as indicated. The Company believes that adjusted net interest expense and other financing charges is useful in assessing
the Company’s underlying financial performance and in making decisions regarding the financial operations of the business.
For the periods ended December 30, 2017 and December 31, 2016
(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
Adjusted net interest expense and other financing charges
2017
(12 weeks)
118
12
130
$
$
2016
(12 weeks)
128
2
130
$
$
2017
(52 weeks)
525
10
535
$
$
2016
(52 weeks)
653
(118)
535
$
$
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 sheets as they are
redeemable for cash at the option of the holder, subject to certain restrictions. This liability is recorded at fair value at each reporting date
based on the market price of Units at the end of each period. An increase (decrease) in the market price of Units results in a charge
(reduction) to net interest expense and other financing charges.
Adjusted Income Taxes and Adjusted Income Tax Rate The following table reconciles adjusted income taxes to income taxes as
reported in the consolidated statements of earnings for the periods ended as indicated. The Company believes that adjusted income taxes
is useful in assessing the Company’s underlying operating performance and in making decisions regarding the ongoing operations of its
business.
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.
For the periods ended December 30, 2017 and December 31, 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)
Remeasurement of deferred tax balances
Statutory corporate income tax rate change
Adjusted income taxes
Effective tax rate
Adjusted income tax rate
$
$
$
$
2017
(12 weeks)
762
130
632
(14)
171
17
—
174
(63.6)%
27.5 %
$
$
$
$
2016
(12 weeks)
715
130
585
89
72
—
—
161
27.7%
27.5%
$
$
$
$
2017
(52 weeks)
3,048
535
2,513
443
218
17
—
678
22.5%
27.0%
$
$
$
$
2016
(52 weeks)
2,844
535
2,309
449
189
—
(3)
635
31.2%
27.5%
(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.
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2017 Annual Report - Financial Review Loblaw Companies Limited 57
Management’s Discussion and Analysis
Remeasurement of deferred tax balances In the fourth quarter of 2017, the Company recorded a deferred tax recovery of $17 million
resulting from a change in the applicable provincial income tax rate used to measure certain deferred tax balances caused by a change in
the location of certain business activities.
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 related to the remeasurement of deferred
tax liabilities.
Adjusted Net Earnings Available to Common Shareholders and Adjusted Diluted Net Earnings Per Common Share The following
table reconciles adjusted net earnings available to common shareholders of the Company and adjusted net earnings attributable to
shareholders of the Company to net earnings attributable to shareholders of the Company and then to net earnings available to common
shareholders of the Company for the periods ended as indicated. The Company believes that 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.
For the periods ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Net earnings attributable to shareholders of the Company
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
Prescribed dividends on preferred shares in share capital
Adjusted net earnings available to common shareholders of the
Company
Diluted weighted average common shares outstanding (millions)
2017
(12 weeks)
22
(3)
19
22
422
444
(3)
441
390.5
$
$
$
$
$
2016
(12 weeks)
204
(3)
201
204
192
396
(3)
393
405.6
$
$
$
$
$
2017
(52 weeks)
1,502
(12)
1,490
1,502
309
1,811
(12)
1,799
397.3
$
$
$
$
$
2016
(52 weeks)
983
(12)
971
983
684
1,667
(12)
1,655
409.1
$
$
$
$
$
58 2017 Annual Report - Financial Review Loblaw Companies Limited
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2018-03-09 3:49 AM
The following table reconciles adjusted net earnings available to common shareholders of the Company and adjusted diluted net earnings
per common share to net earnings available to common shareholders of the Company and diluted net earnings per common share for the
periods ended as indicated.
For the periods ended December 30, 2017 and
December 31, 2016
(millions of Canadian dollars/Canadian dollars)
2017
(12 weeks)
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders
of the
Company
2016
(12 weeks)
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders
of the
Company
2017
(52 weeks)
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders
of the
Company
2016
(52 weeks)
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders
of the
Company
As reported
Add (deduct) impact of the following:
Amortization of intangible assets acquired
with Shoppers Drug Mart
$
$
PC Optimum Program
Restructuring and other related costs
Loblaw Card Program
Asset impairments, net of recoveries
Fair value adjustment on fuel and foreign
currency contracts
Pension annuities and buy-outs
Charges related to retail locations in Fort
McMurray, net of recoveries
Statutory corporate income tax rate change
Net impairment (impairment reversals) related
to Drug retail ancillary assets
Prior year land transfer tax assessment
(recovery)
Fair value adjustment to the Trust Unit
Liability(i)
Certain prior period items
Remeasurement of deferred tax balances
Wind-down of PC Financial banking services
Gain on disposition of gas bar operations
Adjusting items
Adjusted
19 $
0.05
89 $
154
126
79
40
(4)
—
—
—
—
0.23
0.39
0.32
0.20
0.10
(0.01)
—
—
—
—
(7)
(0.02)
(12)
(13)
(17)
(13)
—
$
$
422 $
441 $
(0.03)
(0.03)
(0.04)
(0.03)
—
1.08
1.13
$
$
201 $
0.50
90 $
0.22
$
$
—
3
—
93
(4)
15
(3)
—
—
—
(2)
—
—
—
—
—
0.01
—
0.22
(0.01)
0.04
(0.01)
—
—
—
—
—
—
—
—
$
$
192 $
393 $
0.47
0.97
$
$
1,490 $
3.75
384 $
154
126
79
40
14
9
—
—
—
0.97
0.39
0.32
0.20
0.10
0.04
0.02
—
—
—
$
$
971 $
2.37
395 $
0.97
—
44
—
97
4
17
2
3
—
0.11
—
0.24
0.01
0.04
—
0.01
(3)
(0.01)
(7)
(0.02)
7
0.02
(10)
(13)
(17)
(18)
(432)
309 $
1,799 $
(0.03)
(0.03)
(0.04)
(0.05)
(1.09)
0.78
4.53
118
0.29
—
—
—
—
—
—
—
—
$
$
684 $
1,655 $
1.68
4.05
(i) Gains or losses related to the fair value adjustment to the Trust Unit Liability are not subject to tax.
Free Cash Flow The following table reconciles free cash flow to cash flows from operating activities as reported in the consolidated
statements of cash flows for the periods ended as indicated. The Company believes that free cash flow is the appropriate measure in
assessing the Company’s cash available for additional financing and investing activities.
For the periods ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars)
Cash flows from operating activities
Less:
Capital investments
Interest paid
Free cash flow
2017
(12 weeks)
1,086
487
84
515
$
$
2016
(12 weeks)
861
470
78
313
$
$
2017
(52 weeks)
3,209
1,259
471
1,479
$
$
2016
(52 weeks)
3,519
1,224
474
1,821
$
$
2017 Annual Report - Financial Review Loblaw Companies Limited 59
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2018-03-09 3:49 AM
Management’s Discussion and Analysis
Retail Debt to Retail Adjusted EBITDA, Adjusted Return on Equity and Adjusted Return on Capital The Company uses the following
metrics to measure its leverage and profitability. The definitions of these ratios are presented below.
• Retail Debt to Retail Adjusted EBITDA Retail segment total debt divided by Retail segment adjusted EBITDA.
• Adjusted Return on Equity Adjusted net earnings available to common shareholders of the Company divided by average total
equity attributable to common shareholders of the Company.
• Adjusted Return on Capital Tax-effected adjusted operating income divided by average capital where capital is defined as total
debt, plus equity attributable to shareholders of the Company, less cash and cash equivalents, and short term investments.
Choice Properties’ Funds from Operations In the first quarter of 2017, Choice Properties discontinued the use of Adjusted Funds from
Operations as a non-GAAP earnings metric. Choice Properties continues the use of Funds from Operations as one of its non-GAAP
earnings metrics. Choice Properties calculates Funds from Operations in accordance with the Real Property Association of Canada’s
White Paper on Funds from Operations and Adjusted Funds from Operations for IFRS issued in February 2017.
The following table reconciles Choice Properties’ Funds from Operations to net income (loss) for the periods ended as indicated. Choice
Properties considers Funds from Operations to be a useful measure of operating performance as it adjusts for items included in net income
(or net loss) that do not arise from operating activities or do not necessarily provide an accurate depiction of the Trust’s performance.
For the periods ended December 30, 2017 and December 31, 2016
(millions of Canadian dollars)
Net income (loss)
Add (deduct) impact of the following:
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
Net income attributable to non-controlling interests
Amortization of tenant improvement allowances
Internal expenses for leasing
Funds from Operations
18. Additional Information
2017
(12 weeks)
36
$
2016
(12 weeks)
256
$
2017
(52 weeks)
405
$
2016
(52 weeks)
(223)
$
19
3
1
—
59
(1)
—
—
(107)
(102)
(1)
—
56
—
—
1
(38)
(160)
1
1
232
(1)
1
2
530
(109)
4
(14)
219
—
—
3
$
117
$
103
$
443
$
410
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 21, 2018
Toronto, Canada
MD&A Endnotes
For financial definitions and ratios refer to the Glossary of Terms on page 127 of the Company’s 2017 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”.
2015 comparative Food retail same-store growth also excludes the negative impact of a change in distribution model by tobacco supplier, which had no impact in the
current period.
60 2017 Annual Report - Financial Review Loblaw Companies Limited
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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 and Short Term Investments
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 and Disposition
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
Note 21.
Long Term Debt
Note 22. Other Liabilities
Note 23.
Note 24. Capital Management
Note 25.
Note 26.
Note 27.
Note 28.
Note 29.
Note 30.
Note 31. Contingent Liabilities
Note 32.
Financial Guarantees
Note 33. Related Party Transactions
Note 34.
Note 35.
Post-Employment and Other Long Term Employee Benefits
Equity-Based Compensation
Employee Costs
Leases
Financial Instruments
Financial Risk Management
Segment Information
Subsequent Events
Share Capital
Three Year Summary
Glossary of Terms
62
63
64
65
66
67
68
69
69
69
80
82
84
85
85
87
87
88
88
89
89
90
92
93
95
96
96
97
98
101
102
103
105
110
113
114
115
117
119
120
121
122
124
125
127
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2017 Annual Report - Financial Review Loblaw Companies Limited 61
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 21, 2018
[signed]
Galen G. Weston
Chairman and Chief Executive Officer
[signed]
Darren Myers
Chief Financial Officer
62 2017 Annual Report - Financial Review Loblaw Companies Limited
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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 30, 2017 and December 31, 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 30, 2017 and December 31, 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 21, 2018
Chartered Professional Accountants, Licensed Public Accountants
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2017 Annual Report - Financial Review Loblaw Companies Limited 63
Consolidated Statements of Earnings
For the years ended December 30, 2017 and December 31, 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
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
46,702
32,913
11,295
2,494
525
1,969
443
1,526
1,502
24
1,526
3.78
3.75
393.8
397.3
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
64 2017 Annual Report - Financial Review Loblaw Companies Limited
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Consolidated Statements of Comprehensive Income
For the years ended December 30, 2017 and December 31, 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 gain (loss) on cash flow hedges (note 29)
Items that will not be reclassified to profit or loss:
Net defined benefit plan actuarial gains (losses) (note 25)
Other comprehensive income (loss)
Total Comprehensive Income
Attributable to:
Shareholders of the Company
Non-Controlling Interests
Total Comprehensive Income
See accompanying notes to the consolidated financial statements.
2017
1,526
3
2
(19)
(14)
1,512
1,488
24
1,512
$
$
$
$
$
$
2016
990
11
(1)
33
43
1,033
1,026
7
1,033
$
$
$
$
$
$
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2017 Annual Report - Financial Review Loblaw Companies Limited 65
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
Balance at December 31, 2016
$ 7,692 $
221 $ 7,913 $ 4,944 $
112 $
Net earnings
$
— $
— $
Other comprehensive income (loss)
—
—
—
—
1,502 $
(19)
Total Comprehensive Income (Loss) $
— $
— $
— $ 1,483 $
Common shares purchased and
cancelled (note 23)
Net effect of equity-based
compensation (notes 23 and 26)
Shares purchased and held in trust
(note 23)
Shares released from trust (notes 23
and 26)
Dividends declared per common
share – $1.07 (note 23)
Dividends declared per preferred
share – $1.325 (note 23)
Net distribution to non-controlling
interests
(301)
48
(13)
19
—
—
—
—
—
—
—
(301)
(790)
48
(23)
(13)
(35)
19
52
——
(421)
——
(12)
——
—
—
—
—
— $
—
— $
—
(2)
—
—
33 $
— $
3
3 $
— $
—$
2
2$
33 $
26 $
13,028
— $
5
5 $
24 $
1,526
—
(14)
24 $
1,512
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(10)
14 $
(1,091)
23
(48)
71
(421)
(12)
(10)
24
40 $
13,052
Balance at December 30, 2017
$ 7,445 $
221 $ 7,666 $ 5,198 $
110 $
$ (247) $
— $ (247) $
254 $
(2) $
3 $
36 $
2$
2 $
5 $
38 $
(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
Balance at January 2, 2016
$ 7,851 $
221 $ 8,072 $ 4,914 $
102 $
Net earnings
$
— $
— $
— $
983 $
Other comprehensive income (loss)
—
—
—
33
— $
—
22 $
— $
11
1 $
—$
(1)
23 $
13 $
13,124
— $
10
7 $
—
990
43
Total Comprehensive Income (Loss) $
— $
— $
— $ 1,016 $
— $
11 $
(1) $
10 $
7 $
1,033
Common shares purchased and
cancelled (note 23)
Net effect of equity-based
compensation (notes 23 and 26)
Shares purchased and held in trust
(note 23)
Shares released from trust (notes 23
and 26)
Dividends declared per common
share – $1.03 (note 23)
Dividends declared per preferred
share – $1.325 (note 23)
Net contribution from non-controlling
interests
(198)
50
(24)
13
—
—
—
—
—
—
—
(198)
(510)
50
(19)
(24)
(66)
13
37
—
10
—
—
——
(416)
——
(12)
——
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2016
$ 7,692 $
221 $ 7,913 $ 4,944 $
112 $
$ (159) $
— $ (159) $
30 $
10 $
11 $
33 $
(1) $
— $
10 $
33 $
See accompanying notes to the consolidated financial statements.
—
—
—
—
—
—
6
13 $
(708)
41
(90)
50
(416)
(12)
6
(96)
26 $
13,028
66 2017 Annual Report - Financial Review Loblaw Companies Limited
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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 29)
Other Assets (note 18)
Total Assets
Liabilities
Current Liabilities
Bank indebtedness (note 32)
Trade payables and other liabilities
Provisions (note 20)
Income taxes payable
Short term debt (note 11)
Long term debt due within one year (note 21)
Associate interest
Total Current Liabilities
Provisions (note 20)
Long Term Debt (note 21)
Trust Unit Liability (note 29)
Deferred Income Tax Liabilities (note 7)
Other Liabilities (note 22)
Total Liabilities
Equity
Share Capital (note 23)
Retained Earnings
Contributed Surplus (note 26)
Accumulated Other Comprehensive Income
Total Equity Attributable to Shareholders of the Company
Non-Controlling Interests
Total Equity
Total Liabilities and Equity
Contingent Liabilities (note 31). Subsequent Events (note 35).
See accompanying notes to the consolidated financial statements.
As at
December 30, 2017
As at
December 31, 2016
$
$
$
$
$
$
$
$
$
$
1,798
546
1,188
3,100
4,438
224
33
11,327
10,669
235
8,251
3,922
134
166
402
35,106
110
5,646
283
117
640
1,635
263
8,694
169
9,542
972
1,977
700
22,054
7,666
5,198
110
38
13,012
40
13,052
35,106
$
$
$
$
$
$
$
$
$
$
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
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2017 Annual Report - Financial Review Loblaw Companies Limited 67
Consolidated Statements of Cash Flows
For the years ended December 30, 2017 and December 31, 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 disposition of gas bar operations (note 13)
Change in provisions (note 20)
PC Optimum program (note 19)
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 (note 16)
Acquisition of QHR Corporation, net of cash acquired
Cash assumed on initial consolidation of franchises (note 5)
Change in short term investments (note 9)
Proceeds from disposal of assets
Proceeds from disposition of gas bar operations (note 13)
Other
Cash Flows used in Investing Activities
Financing Activities
Change in bank indebtedness
Change in short term debt (note 11)
Long Term Debt (note 21)
Issued
Retired
Interest paid
Dividends paid on common and preferred shares
Common Share Capital
Issued (note 26)
Purchased and held in trust (note 23)
Purchased and cancelled (note 23)
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
See accompanying notes to the consolidated financial statements.
68 2017 Annual Report - Financial Review Loblaw Companies Limited
2017
2016
$
1,526
$
990
443
525
1,568
97
(501)
233
189
4,080
132
(174)
(866)
17
20
3,209
(979)
(280)
—
26
(305)
17
540
(53)
(1,034)
(5)
(25)
686
(450)
(471)
(327)
41
(48)
(1,091)
5
(1,685)
(6)
484
1,314
1,798
$
$
$
$
$
$
$
$
$
449
653
1,543
139
—
(39)
—
3,735
173
(136)
(329)
9
67
3,519
(896)
(328)
(153)
42
(177)
62
—
13
(1,437)
(28)
115
815
(1,049)
(474)
(425)
42
(90)
(708)
20
(1,782)
(4)
296
1,018
1,314
$
$
$
$
$
$
$
$
$
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Notes to the Consolidated Financial Statements
For the years ended December 30, 2017 and December 31, 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, credit card services, insurance
brokerage services, gift cards and telecommunication 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 48.6% 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 34). As at
December 30, 2017, Loblaw held an effective interest in Choice Properties of approximately 82.4%.
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 21, 2018.
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 25;
•
•
liabilities for cash-settled equity-based compensation arrangements as described in note 26; and
certain financial instruments as described in note 29.
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 30, 2017 and December 31, 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.
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Notes to the Consolidated Financial Statements
Loblaw consolidates the Shoppers Drug Mart Corporation (“Shoppers Drug Mart”) licensees (“Associates”) as well as the franchisees of its
food retail stores that are subject to a new, simplified franchise agreement (“Franchise Agreement”). An Associate is a pharmacist-owner of
a corporation that is licensed to operate a retail drug store at a specific location using Shoppers Drug Mart 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.
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.
70 2017 Annual Report - Financial Review Loblaw Companies Limited
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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.
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 recorded 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.
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Notes to the Consolidated Financial Statements
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.
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.
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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.
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.
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2017 Annual Report - Financial Review Loblaw Companies Limited 73
Notes to the Consolidated Financial Statements
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. Amortization expense for intangible assets is
recognized in selling, general and administrative expenses (“SG&A”).
Indefinite life intangible assets are measured at cost less any accumulated impairment losses. These intangible assets are tested for
impairment on an annual basis or more frequently if there are indicators that intangible assets may be impaired as described in the
Impairment of Non-Financial Assets policy.
Impairment of Non-Financial Assets At each balance sheet date, the Company reviews the carrying amounts of its non-financial assets,
other than inventories and deferred tax assets, to determine whether there is any indication of impairment. If any such indication exists, the
asset is then tested for impairment by comparing its recoverable amount to its carrying value. Goodwill and indefinite life intangible assets
are tested for impairment at least annually.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generate cash inflows from
continuing use that are largely independent of cash inflows of other assets or groups of assets. This grouping is referred to as a cash
generating unit (“CGU”). The Company has determined that each location is a separate CGU for purposes of impairment testing.
Corporate assets, which include head office facilities and distribution centers, do not generate separate cash inflows. Corporate assets are
tested for impairment at the minimum grouping of CGUs to which the corporate assets can be reasonably and consistently allocated.
Goodwill arising from a business combination is tested for impairment at the minimum grouping of CGUs that are expected to benefit from
the synergies of the combination.
The recoverable amount of a CGU or CGU grouping is the higher of its value in use and its fair value less costs to sell. Value in use is
based on the estimated future cash flows from the CGU or CGU grouping, discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money and the risks specific to the CGU or CGU 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 and reversals are recognized in SG&A.
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 drawn by the Company’s Associates.
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.
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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.
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.
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Notes to the Consolidated Financial Statements
Valuation Process The determination of the fair value of financial instruments is performed by the Company’s treasury and financial
reporting departments on a quarterly basis. There was no change in the valuation techniques applied to financial instruments during the
current year. The following table describes the valuation techniques used in the determination of the fair values of financial instruments:
Type
Valuation Approach
Cash and cash equivalents, short term investments,
security deposits, accounts receivable, credit card
receivables, bank indebtedness, trade payables and
other liabilities and short term debt
Franchise loans receivable
Derivatives
Long term debt, Trust Unit Liability 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.
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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.
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.
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2017 Annual Report - Financial Review Loblaw Companies Limited 77
Notes to the Consolidated Financial Statements
Equity-Settled Equity-Based Compensation Plans Stock options, Restricted Share Units (“RSUs”), Performance Share Units (“PSUs”),
Director Deferred Share Units (“DSUs”) and Executive Deferred Share Units (“EDSUs”) issued by the Company are settled in common
shares and are accounted for as equity-settled awards.
Stock options 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. Dividends paid may be reinvested in RSUs and PSUs and are treated as capital transactions.
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.
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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.
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 a 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 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.
Accounting Standards Implemented
Statement of Cash Flows The Company implemented the amendments to International Accounting Standard (“IAS”) 7, “Statement of
Cash Flows”, in the first quarter of 2017 and has provided disclosures on changes in liabilities arising from certain financing activities,
including both changes arising from cash and non-cash flows changes, in the notes to the consolidated financial statements.
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2017 Annual Report - Financial Review Loblaw Companies Limited 79
Notes to the Consolidated Financial Statements
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 retail 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.
Impairment of 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.
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Customer Loyalty Awards Programs
Key Sources of Estimation The Company defers revenue equal to the fair value of award points earned by loyalty program members at
the time of award. The Company determines fair value using estimates such as retail value per point on redemption and breakage (the
amount of points that will never be redeemed). Prior to the launch of the PC Optimum program, the estimated fair value per point for the
PC points and PC Plus programs was determined based on the program reward schedule and was $1 for every 1,000 points. For the
Shoppers Optimum program, the estimated fair value per point was determined based on the expected weighted average redemption
levels for future redemptions, including special redemption events. Each program had its own breakage rate and the rates were reviewed
on an ongoing basis and were estimated utilizing each program's historical redemption activity and anticipated earn and redeem behaviour
of members. As at year end 2017, as a result of the Company’s plan to create one loyalty program, PC Optimum, the Company revalued
its existing loyalty award liabilities to account for a combined anticipated redemption rate.
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 and the timing and reversal of temporary differences.
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.
Provisions
Judgments made in Relation to Accounting Policies Applied and Key Sources of Estimation The recording of provisions requires
management to make certain judgments regarding whether 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 if a reliable estimate of the amount of the obligation can be made.
The Company has recorded provisions primarily in respect of restructuring, environmental and decommissioning liabilities, onerous lease
arrangements, legal claims and the Loblaw Card Program. The Company reviews the merits, risks and uncertainties of each provision,
based on current information, and the amount expected to be required to settle the obligation. Provisions are reviewed on an ongoing basis
and are adjusted accordingly when new facts and events become known to the Company.
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2017 Annual Report - Financial Review Loblaw Companies Limited 81
Notes to the Consolidated Financial Statements
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. The
Company’s fiscal year ended on December 30, 2017, therefore the corresponding effective date for IFRS 15 is December 31, 2017. The
Company intends to adopt the standard on December 31, 2017 by applying the requirements of the standard retrospectively with the
cumulative effects of initial application recorded in opening retained earnings on January 1, 2017 and with the restatement of comparative
periods. IFRS 15 permits the use of exemptions and practical expedients. The Company intends to apply the practical expedient which
does not require restatement for contracts that began and were completed within the same annual reporting period before December 30,
2017 or are completed on January 1, 2017.
The Company has completed the assessment of significant agreements and contracts with customers and has determined the preliminary
expected impacts of the adoption of IFRS 15 on its consolidated financial statements.
The implementation of IFRS 15 will impact the allocation of revenue that is deferred in relation to the Company’s customer loyalty award
programs. Revenue is currently allocated to the customer loyalty awards using the residual fair value method. Under this method, a portion
of the consideration equaling the fair value of the points is allocated to the loyalty awards and deferred until the points are ultimately
redeemed. The residual consideration is allocated to the goods and services sold and recognized as revenue. Under IFRS 15,
consideration will be allocated between the loyalty awards and the goods and services on which the awards were earned, based on their
relative stand-alone selling prices. Using this relative fair value approach, the amount allocated to the loyalty points will be, on average,
lower than the amounts allocated under the residual value method. As a result, the Company expects the adoption of the standard to result
in a decrease in the amount recognized as deferred revenue in other liabilities, an increase in income taxes payable, with a corresponding
increase in retained earnings of approximately $30 million, net of income taxes as at January 1, 2017.
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, including on its franchise arrangements with non-consolidated stores.
The Company continues to assess the impact of the disclosure requirements under IFRS 15 on the Company’s consolidated financial
statements.
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. IFRS 9 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. The Company intends to adopt the new requirements for classification and measurement, impairment and general
hedging on December 31, 2017 by applying the requirements for classification and measurement, including impairment, retrospectively
with the cumulative effects of initial application recorded in opening retained earnings as at December 31, 2017 with no restatement of
comparative periods.
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. The Company will adopt the new classification requirements under IFRS 9 and it does not expect
significant changes in measurement as a result of the new requirements.
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’s ECL model will change the valuation of its Financial Services segment credit losses on credit card receivables. The
Company, through PC Bank, currently assesses for impairment using the incurred loss model when objective evidence indicates that there
has been a deterioration of credit quality subsequent to the initial recognition of the receivable, and the loss can be reliably measured. The
adoption of IFRS 9 will have a significant impact on the Financial Services segment’s impairment methodology.
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IFRS 9 outlines a three-stage approach to recognizing ECL which is intended to reflect the deterioration in credit quality of a financial
instrument. The Company, through PC Bank, will apply the three-stage approach on assessing the impairment on credit card receivables.
• Stage 1 is comprised of all financial instruments that have not deteriorated significantly in credit quality since initial recognition or that
have low credit risk at the reporting date. PC Bank will be required to recognize impairment for Stage 1 financial instruments based on
the expected losses over the expected life of the instrument arising from loss events that could occur during the 12 months following
the reporting date.
• Stage 2 is comprised of all financial instruments that have deteriorated significantly in credit quality since initial recognition but that do
not have objective evidence of a credit loss event. For Stage 2 financial instruments the impairment is recognized based on the
expected losses over the expected life of the instrument arising from loss events that could occur over the expected life. PC Bank is
required to recognize a lifetime ECL for Stage 2 financial instruments.
• Stage 3 is comprised of all financial instruments that have objective evidence of impairment at the reporting date. PC Bank is required
to recognize impairment based on a lifetime ECL for Stage 3 financial instruments.
As a result of the change in valuation, the Company expects the adoption of IFRS 9 to result in a decrease in credit card receivables,
increase in deferred income tax asset, with a corresponding decrease in retained earnings of up to approximately $90 million, net of
income taxes, as at December 31, 2017. PC Bank continues to revise, refine and validate the impairment model and related process
controls, and assess the impact on the Company’s consolidated financial statements.
The Company does not expect the ECL impairment model applied under IFRS 9 to have a material impact 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 expects that the types of hedge accounting relationships that the Company currently designates will be capable of meeting the
requirements of IFRS 9 once the Company completes certain planned changes to its internal documentation and monitoring processes to
meet the requirements of IFRS 9.
IFRS 16 In 2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”), replacing IAS 17, “Leases” (“IAS 17”) 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 does not intend to early adopt IFRS 16.
The Company intends to adopt the standard on December 30, 2018 by applying the requirements of the standard retrospectively with the
cumulative effects of initial application recorded in opening retained earnings as at December 30, 2018 using a modified retrospective
approach with no restatement of the comparative period. IFRS 16 permits the use of exemptions and practical expedients. The Company
intends to measure the cumulative effect of initial application by applying the use of hindsight in the determination of the lease term if the
contract contains options to extend or terminate a lease. In addition, the Company also intends to apply the following exemptions and
practical expedients:
•
the application of IFRS 16 to only those contracts that were previously identified as leases under IAS 17 and IFRIC 4, “Determining
whether an Arrangement contains a Lease”;
•
•
the exclusion of short term leases and leases for which the underlying asset is of low dollar value from the application of IFRS 16; and
the application of a single discount rate to a portfolio of leases with similar characteristics.
The Company has performed a preliminary assessment of the potential impacts of the adoption of IFRS 16 on the Company’s consolidated
financial statements. The adoption of IFRS 16 will result in an increase in fixed assets, long term debt, and deferred income taxes, and a
decrease in opening retained earnings as a result of the recognition of right-of-use assets and associated lease liabilities. On an ongoing
basis there will be a decrease in rent expense and an increase in depreciation and amortization and net interest expense and other
financing charges. The Company expects to disclose quantitative financial impacts before the adoption of IFRS 16.
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Notes to the Consolidated Financial Statements
Note 5. Business Acquisitions
Consolidation of Franchises The Company accounts for the consolidation of existing franchises as business acquisitions and
consolidates its franchises as of the date the franchisee enters into a Franchise Agreement with the Company. The assets acquired and
liabilities assumed through the consolidation are 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 are 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:
(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
2017
26
73
81
(43)
(132)
(5)
—
$
$
2016
42
72
76
(67)
(107)
(16)
—
$
$
(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.
Acquisition of QHR Corporation In 2017, the Company finalized the purchase price allocation related to the acquisition of QHR
Corporation (“QHR”) in 2016. The Company acquired all issued and outstanding shares of QHR for total cash consideration of $167
million. The final purchase price allocation was 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.
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Note 6. Net Interest Expense and Other Financing Charges
The components of net interest expense and other financing charges were as follows:
(millions of Canadian dollars)
Interest expense and other financing charges:
Long term debt
Borrowings related to credit card receivables
Trust Unit distributions
Post-employment and other long term employee benefits (note 25)
Independent funding trusts
Bank indebtedness
Capitalized interest
Interest income:
Accretion income
Short term interest income
Derivative financial instruments(i)
Fair value adjustment to the Trust Unit Liability (note 29)
Net interest expense and other financing charges
2017
$
451
$
30
53
9
16
6
(2)
563
(10)
(18)
—
(28)
(10)
525
$
$
$
$
$
$
$
$
$
$
(i) 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 29).
Note 7. Income Taxes
Income taxes recognized in the consolidated statement of earnings were as follows:
(millions of Canadian dollars)
Current income taxes:
Current period
Adjustment in respect of prior periods
Deferred income taxes:
Origination and reversal of temporary differences
Effect of change in income tax rates
Adjustment in respect of prior periods
Income taxes
Income tax (recoveries) expense recognized in Other Comprehensive Income was as follows:
(millions of Canadian dollars)
Net defined benefit plan actuarial (losses) gains (note 25)
Total income tax (recoveries) expense recognized in Other Comprehensive Income
2017
638
15
653
(189)
(15)
(6)
(210)
443
2017
(7)
(7)
$
$
$
$
$
$
$
$
$
$
2016
459
27
49
11
15
6
(4)
563
(15)
(10)
(3)
(28)
118
653
2016
563
5
568
(131)
3
9
(119)
449
2016
12
12
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2017 Annual Report - Financial Review Loblaw Companies Limited 85
Notes to the Consolidated Financial Statements
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 income tax rate changes on deferred income tax balances
Adjustments in respect of prior periods
2017
26.7%
—
(3.9)
(0.1)
(0.8)
0.6
2016
27.0%
0.3
0.4
2.2
0.2
1.1
Effective income tax rate applicable to earnings before income taxes
22.5%
31.2%
Unrecognized deferred tax assets Deferred income tax assets were not recognized on the consolidated balance sheets in respect of the
following items:
(millions of Canadian dollars)
Deductible temporary differences
Income tax losses
Unrecognized deferred tax assets
2017
27
142
169
$
$
2016
48
92
140
$
$
The income tax losses expire in the years 2028 to 2037. 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:
As at
December 30, 2017
57
$
As at
December 31, 2016
56
$
377
(507)
(1,908)
53
29
21
35
282
(489)
(2,056)
55
34
24
34
$
$
(1,843)
$
(2,060)
134
(1,977)
(1,843)
$
130
(2,190)
(2,060)
(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 2037)
Capital loss carryforwards
Other
Net deferred income tax liabilities
Recorded on the consolidated balance sheets as follows:
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax liabilities
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Notes to the Consolidated Financial Statements
Note 8. Basic and Diluted Net Earnings per Common Share
(millions of Canadian dollars except where otherwise indicated)
Net earnings attributable to shareholders of the Company
Dividends on Preferred Shares in Equity (note 23)
Net earnings available to common shareholders
Weighted average common shares outstanding (in millions) (note 23)
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 ($)
Diluted net earnings per common share ($)
2017
1,502
(12)
1,490
393.8
2.9
0.6
397.3
3.78
3.75
$
$
$
$
2016
983
(12)
971
405.1
3.6
0.4
409.1
2.40
2.37
$
$
$
$
In 2017, 2,559,716 (2016 – 1,271,998) potentially dilutive instruments were excluded from the computation of diluted net earnings per
common share as they were anti-dilutive.
Note 9. Cash and Cash Equivalents and Short Term Investments
The components of cash and cash equivalents and short term investments were as follows:
Cash and Cash Equivalents
(millions of Canadian dollars)
Cash
Cash equivalents:
Government treasury bills
Bankers’ acceptances
Corporate commercial paper
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
As at
December 30, 2017
516
$
As at
December 31, 2016
553
$
232
649
401
$
1,798
$
199
386
176
1,314
As at
December 30, 2017
40
$
As at
December 31, 2016
24
$
295
209
2
$
546
$
175
40
2
241
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Notes to the Consolidated Financial Statements
Note 10. Accounts Receivable
The following is an aging of the Company’s accounts receivable:
(millions of Canadian dollars)
As at
December 30, 2017
As at
December 31, 2016
0-90
days
91-180
days
> 180
days
Total
0-90
days
91-180
days
> 180
days
Total
Accounts receivable
$ 1,091 $
42 $
55 $
1,188
$ 1,004 $
42 $
76 $
1,122
The following are continuities of the Company’s allowances for uncollectable accounts receivable:
(millions of Canadian dollars)
Allowances, beginning of year
Net write-off
Allowances, end of year
2017
(71)
19
(52)
$
$
2016
(102)
31
(71)
$
$
Credit risk associated with accounts receivable is discussed in note 30.
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® (note 21)
Securitized to Other Independent Securitization Trusts
As at
December 30, 2017
3,147
$
As at
December 31, 2016
2,978
$
$
$
(47)
3,100
900
640
$
$
(52)
2,926
650
665
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 Company has arranged letters of credit on behalf of PC Bank for the benefit of the independent securitization trusts (see note 32).
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 2017, with their respective maturity dates extended to 2019 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 30, 2017 were
$160 million (December 31, 2016 – $210 million).
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 30, 2017 and throughout
2017.
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The following is an aging of the Company’s gross credit card receivables:
(millions of Canadian dollars)
As at
December 30, 2017
As at
December 31, 2016
Current
1-90 days
past due
> 90 days
past due
Total
Current
1-90 days
past due
> 90 days
past due
Total
Gross credit card receivables
$
2,951
$
169
$
27
$
3,147
$
2,791
$
156
$
31
$
2,978
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
2017
(52)
(104)
(22)
131
(47)
$
$
2016
(54)
(120)
(19)
141
(52)
$
$
The allowances for credit card receivables recorded in credit card receivables on the consolidated balance sheets 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 30, 2017, the Company recorded an inventory provision of $39 million (December 31, 2016 –
$29 million) 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 2017 and 2016.
Note 13. Assets Held for Sale and Disposition
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 2017, the Company recorded a $1 million gain
(2016 – $5 million gain) from the sale of these assets. Impairment charges of $2 million were recognized on these properties during 2017
(2016 – nil).
In 2017, the Company sold its gas bar operations, for proceeds of approximately $540 million, to Brookfield Business Partners L.P.
(“Brookfield”). The Company recorded a pre-tax gain on sale of $501 million (post-tax gain of $432 million), net of related costs, in SG&A.
As a result of the transaction, Brookfield has become a strategic partner to the Company and will offer the Company’s PC Optimum
program at the gas bars. In addition, the gas bars operate at certain properties that are either owned by the Company or leased by the
Company from Choice Properties or third-party landlords. As a result of the transaction, Brookfield leases or sub-leases these properties
from the Company.
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2017 Annual Report - Financial Review Loblaw Companies Limited 89
Notes to the Consolidated Financial Statements
Note 14. Fixed Assets
The following are continuities of the cost and the accumulated depreciation of fixed assets for the years ended December 30, 2017 and
December 31, 2016:
2017
Buildings and
Building
Improvements
Equipment
and Fixtures
Leasehold
Improvements
Finance
Leases - Land,
Buildings,
Equipment
and Fixtures
Assets Under
Construction
Total
(millions of Canadian dollars)
Land
Cost
Balance, beginning of year
$
1,912
$
7,921
$
6,634
$
1,950
$
919
$
Additions
Business acquisitions (note 5)
Disposals
Net transfer to assets held for
sale
Net transfer from investment
properties (note 15)
Transfer from assets under
construction
Balance, end of year
Accumulated depreciation
Balance, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Net transfer to assets held for
sale
Net transfer from investment
properties (note 15)
Balance, end of year
Carrying amount as at:
December 30, 2017
$
$
$
$
21
—
(2)
—
1
43
1,975
$
50
—
(1)
(93)
5
269
8,151
— $
2,970
—
1
—
—
—
1
2
1,973
$
$
204
17
(8)
(1)
(25)
2
3,159
4,992
$
$
$
$
226
81
(35)
(49)
—
233
7,090
5,024
373
18
(2)
(34)
(46)
—
5,333
1,757
$
$
$
$
96
1
(14)
(3)
—
24
2,054
896
161
21
(2)
(13)
(1)
—
$
$
15
—
—
—
2
—
936
409
64
18
—
—
—
—
$
$
1,062
992
$
$
491
445
$
$
530
557
—
—
—
—
(569)
518
8
—
—
—
—
—
—
8
510
$
19,866
965
82
(52)
(145)
8
—
20,724
9,307
802
75
(12)
(48)
(72)
3
10,055
10,669
$
$
$
$
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2016
Buildings and
Building
Improvements
Land
Equipment
and Fixtures
Leasehold
Improvements
Finance
Leases - Land,
Buildings,
Equipment
and Fixtures
Assets Under
Construction
Total
(millions of Canadian dollars)
Cost
Balance, beginning of year
$ 1,866
$
7,697
$
6,297
$
1,852
$
883
$
Additions
Business acquisitions (note 5)
Disposals
Net transfer to investment
properties (note 15)
Transfer from assets under
construction
7
—
—
(27)
66
Balance, end of year
$ 1,912
Accumulated depreciation
Balance, beginning of year
$
Depreciation
Impairment losses
Reversal of impairment losses
43
—
(1)
(77)
259
7,921
2,801
198
21
(10)
(1)
(39)
$
$
3
—
—
(3)
—
—
Disposals
Net transfer to investment
properties (note 15)
Balance, end of year
Carrying amount as at:
December 31, 2016
$
— $
2,970
$ 1,912
$
4,951
194
76
(160)
—
227
6,634
4,794
363
43
(15)
(161)
—
5,024
1,610
$
$
$
$
77
2
(28)
—
47
1,950
745
160
16
—
(25)
—
896
1,054
$
$
$
$
$
$
$
$
35
1
—
—
—
919
338
67
4
—
—
—
409
510
$
$
$
$
576
571
$
$
— $
(10) $
19,171
927
79
(199)
(8) $
(112)
(599) $
—
530
10
—
—
—
(2)
—
8
522
$
$
$
$
19,866
8,691
788
84
(28)
(189)
(39)
9,307
10,559
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 30, 2017, the net carrying amount of leased land and buildings was $424 million
(December 31, 2016 – $468 million), and the net carrying amount of leased equipment and fixtures was $21 million (December 31, 2016 –
$42 million).
Assets under Construction The cost of additions to properties under construction for the year ended December 30, 2017 was
$557 million (December 31, 2016 – $571 million). Included in this amount are capitalized borrowing costs of $2 million (2016 – $4 million),
with a weighted average capitalization rate of 3.5% (2016 – 3.6%).
Security and Assets Pledged As at December 30, 2017, fixed assets with a carrying amount of $187 million (December 31, 2016 –
$243 million) were encumbered by mortgages of $81 million (December 31, 2016 – $78 million).
Fixed Asset Commitments As at December 30, 2017, the Company had entered into commitments of $143 million (December 31, 2016 –
$119 million) for the construction, expansion and renovation of buildings and the purchase of real property.
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Notes to the Consolidated Financial Statements
Impairment Losses and Reversals For the year ended December 30, 2017, the Company recorded $60 million (2016 – $41 million) of
impairment losses on fixed assets in respect of 21 CGUs (2016 – 24 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 29% (2016 – 21%) of impaired CGUs
had carrying values which were $11 million (2016 – $14 million) greater than their fair value less costs to sell. The remaining 71% (2016 –
79%) of impaired CGUs had carrying values which were $48 million (2016 – $27 million) greater than their value in use.
For the year ended December 30, 2017, the Company recorded $12 million (2016 – $13 million) of impairment reversals on fixed assets in
respect of seven CGUs (2016 – six CGUs) in the retail operating segment. Impairment reversals are recorded where the recoverable
amount of the retail location exceeds its carrying amount. Approximately 57% (2016 – all) of CGUs with impairment reversals had fair value
less costs to sell which were $6 million (2016 – $13 million) greater than their carrying values. The remaining 43% (2016 – nil) of CGUs
with impairment reversals had value in use which were $5 million (2016 – nil) greater than carrying values.
When determining the value in use of a retail location, the Company develops a discounted cash flow model for each CGU. The duration of
the cash flow projections for individual CGUs varies based on the remaining useful life of the significant assets within the CGU. Sales
forecasts for cash flows are based on actual operating results, operating budgets, and long term growth rates that were consistent with
industry averages, all of which are consistent with strategic plans presented to the Company’s Board. The estimate of the value in use of
the relevant CGUs was determined using a pre-tax discount rate of 8.0% to 8.5% at December 30, 2017 (December 31, 2016 – 8.0% to
8.5%).
In 2017, the Company recorded $7 million of impairment losses on its fixed assets relating to the announced closures of approximately 22
unprofitable retail locations across a range of banners and formats and $3 million related to other restructuring plans.
Additional impairment losses of $5 million (2016 – $13 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 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 in fixed assets.
Note 15. Investment Properties
The following are continuities of the cost and the accumulated depreciation of investment properties for the years ended December 30,
2017 and December 31, 2016:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Additions
Disposals
Net transfer (to) from fixed assets (note 14)
Net transfer from (to) assets held for sale
Balance, end of year
Accumulated depreciation
Balance, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Net transfer (to) from fixed assets (note 14)
Net transfer from (to) assets held for sale
Balance, end of year
Carrying amount
Fair value
$
$
$
$
$
2017
2016
$
$
$
$
$
324
32
(13)
(8)
3
338
106
3
2
(1)
(6)
(3)
2
103
235
276
236
2
(19)
112
(7)
324
76
2
2
—
(9)
39
(4)
106
218
261
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During 2017, the Company recognized in operating income $11 million (2016 – $6 million) of rental income and incurred direct operating
costs of $10 million (2016 – $2 million) related to its investment properties. In addition, the Company recognized direct operating costs of
$2 million (2016 – $11 million) related to its investment properties for which no rental income was earned.
For disclosure purposes, the Company calculates the fair value of investment properties. 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 buyer and a 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 30, 2017, the pre-tax discount rates used in the valuations for investment properties ranged
from 7.50% to 9.50% (December 31, 2016 – 7.75% to 9.50%) and the terminal capitalization rates ranged from 6.75% to 8.75%
(December 31, 2016 – 6.75% to 8.75%).
Note 16. Intangible Assets
The following are continuities of the cost and the accumulated amortization of intangible assets for the years ended December 30, 2017
and December 31, 2016:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Additions
Business acquisitions
Balance, end of year
Accumulated amortization
Balance, beginning of year
Amortization
Impairment losses
Balance, end of year
Carrying amount as at:
December 30, 2017
Definite Life
Internally
Generated
Intangible
Assets
Indefinite Life
Intangible
Assets
3,475
$
10
—
3,485
$
— $
—
—
— $
20
—
—
20
20
—
—
20
$
$
$
$
$
$
$
$
$
2017
Other Definite
Life Intangible
Assets
Software
Total
2,172
$
5,976
$
11,643
262
—
2,434
1,300
245
29
1,574
8
27
6,011
1,578
525
2
2,105
3,906
$
$
$
$
280
27
11,950
2,898
770
31
3,699
8,251
$
$
$
$
3,485
$
— $
860
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Notes to the Consolidated Financial Statements
(millions of Canadian dollars)
Cost
Balance, beginning of year
Additions
Business acquisitions
Disposal
Balance, end of year
Accumulated amortization
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)
2,172
1,070
229
(2)
3
1,300
10
74
(3)
5,976
974
532
(1)
73
1,578
4,398
$
$
$
$
328
92
(5)
11,643
2,064
761
(3)
76
2,898
8,745
$
$
$
$
3,475
$
— $
872
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
2017 (2016 – nil). The Company recorded impairment losses of $29 million, which included $22 million related to the impairment of certain
IT assets that support the existing loyalty programs as a result of the PC Optimum program (see note 19).
Other Definite Life Intangible Assets Other definite life intangible assets primarily consist of prescription files, the Shoppers Optimum
loyalty program and customer relationships.
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 $73 million relating to a customer relationship intangible asset for an ancillary healthcare business.
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Note 17. Goodwill
The following is a continuity of the cost and the accumulated amortization of goodwill for the years ended December 30, 2017 and
December 31, 2016:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Business acquisitions
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
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
2017
4,889
27
4,916
994
—
994
3,922
$
$
$
$
$
2016
4,769
120
4,889
989
5
994
3,895
$
$
$
$
$
As at
December 30, 2017
2,952
$
As at
December 31, 2016
2,925
$
375
459
129
7
375
459
129
7
$
3,922
$
3,895
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% (December 31, 2016 – 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 30, 2017, the after-tax discount rate used in the recoverable amount calculations was 7.0% (December 31, 2016 – 7.0%). The
pre-tax discount rate was 9.6% (December 31, 2016 – 9.6%).
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% (December 31, 2016 – 2.0%). The
budgeted EBITDA(1) growth was based on the Company’s three year strategic plan approved by the Board.
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Notes to the Consolidated Financial Statements
Note 18. Other Assets
The components of other assets were as follows:
(millions of Canadian dollars)
Sundry investments and other receivables
Accrued benefit plan asset (note 25)
Interests in joint ventures
Other
Other assets
As at
As at
December 30, 2017
December 31, 2016
$
$
56
147
19
180
402
$
$
79
192
5
176
452
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 was as follows:
(millions of Canadian dollars)
Loyalty liability
As at
December 30, 2017
413
$
As at
December 31, 2016
229
$
In 2017, the Company announced plans to bring together the Shoppers Optimum and PC Plus loyalty programs to create one program,
PC Optimum. As a result, the Company recorded a charge of $189 million, related to the revaluation of the existing Shoppers Optimum
liability for outstanding points to reflect a higher anticipated redemption rate under the new program. In addition, the Company recorded
charges of $22 million, related to the impairment of certain IT assets that support the existing loyalty programs (see note 16). Subsequent
to the end of 2017, the Company launched the PC Optimum program.
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Note 20. Provisions
Provisions consist primarily of amounts recorded in respect of restructuring, self-insurance, environmental and decommissioning liabilities,
onerous lease arrangements, legal claims and the Loblaw Card Program. The following is a continuity of provisions for the years ended
December 30, 2017 and December 31, 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 sheets as follows:
Current portion of provisions
Non-current portion of provisions
Total provisions
$
$
2017
219
354
(93)
(28)
452
$
$
2016
258
123
(141)
(21)
219
As at
December 30, 2017
As at
December 31, 2016
$
$
283
169
452
$
$
99
120
219
Competition Bureau Investigation On December 19, 2017, the Company and Weston announced actions taken to address their role in
an industry-wide price-fixing arrangement involving certain packaged bread products. The arrangement involved the coordination of retail
and wholesale prices of certain packaged bread products over a period extending from late 2001 to March 2015. Under the arrangement,
the participants regularly increased prices on a coordinated basis. In connection with the arrangement, the Company has announced the
Loblaw Card Program pursuant to which the Company is offering a $25 Loblaw Card to eligible customers. The Loblaw Card can be used
to purchase items sold in Loblaw grocery stores across Canada. The Company recorded a charge of $107 million in relation to the Loblaw
Card Program in 2017 (see note 31).
Restructuring and other related costs In 2017, the Company eliminated approximately 500 corporate and store-support positions and
finalized a plan that will result in the closure of 22 unprofitable retail locations across a range of banners and formats. The Company
expects to record charges of approximately $135 million related to this restructuring, of which $123 million was recorded in the fourth
quarter of 2017. The charges included $109 million for severance and lease related costs, $7 million for asset impairments and $7 million
related to other costs. The Company expects that the store closures will be substantially complete by the end of the first quarter of 2018.
In addition, the Company recorded $20 million in severance and other related charges and $3 million for asset impairments as a result of
other restructuring plans approved in the fourth quarter of 2017 and a charge of $19 million related to an adjustment of onerous contract
provisions related to previously announced restructuring plans.
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Notes to the Consolidated Financial Statements
Note 21. Long Term Debt
The components of long term debt were as follows:
(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
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
2.36%, 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 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
2.47% – 5.49%, due 2018 – 2029 (note 14)
Guaranteed Investment Certificates
0.85% – 3.25%, due 2018 – 2021
Independent Securitization Trust
2.91%, due 2018
2.23%, due 2020
2.71%, due 2022
Independent Funding Trusts
Finance Lease Obligations
Choice Properties Credit Facilities
Transaction costs and other
Total long term debt
Less amount due within one year
Long Term Debt
As at
December 30, 2017
As at
December 31, 2016
$
$
$
$
250
48
800
350
800
100
200
175
151
(19)
200
200
200
200
200
300
200
150
55
275
400
200
250
200
250
200
250
100
—
200
300
200
300
81
852
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
400
250
250
551
568
561
(21)
11,177
1,635
9,542
$
$
400
250
—
587
607
172
(23)
10,870
400
10,470
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Significant long term debt transactions are described below.
Debentures and Medium Term Notes The following table summarizes the debentures and Medium Term Notes (“MTNs”) issued in 2017
and 2016:
(millions of Canadian dollars except where otherwise indicated)
Interest Rate
Maturity Date
Choice Properties Series senior unsecured debentures
– Series G
– Series H
Total Debentures and Medium Term Notes issued
3.20%
5.27%
March 7, 2023
March 7, 2046
Principal
Amount 2017
Principal
Amount 2016
$
$
— $
—
— $
250
100
350
Subsequent to the end of 2017, Choice Properties issued two series of senior unsecured debentures: $300 million Series I senior unsecured
debentures due March 21, 2022, which bear interest at a rate of 3.01% per annum; and $350 million Series J senior unsecured debentures
due January 10, 2025, which bear interest at a rate of 3.55% per annum.
The following table summarizes the debentures and MTNs repaid in 2017 and 2016:
(millions of Canadian dollars except where otherwise indicated)
Interest Rate
Maturity Date
Loblaw Companies Limited Notes
Shoppers Drug Mart Notes
Choice Properties senior unsecured debentures – Series 6
Choice Properties senior unsecured debentures – Series 5
Total Debentures and Medium Term Notes repaid
7.10%
2.01%
3.00%
3.00%
June 1, 2016
May 24, 2016
April 20, 2017(i)
April 20, 2016(ii)
Principal
Amount 2017
Principal
Amount 2016
$
$
— $
—
200
—
200
$
300
225
—
300
825
(i) Choice Properties Series 6 unsecured debentures was redeemed on January 23, 2017.
(ii) Choice Properties Series 5 unsecured debentures was redeemed on March 7, 2016.
Subsequent to the end of 2017, Choice Properties issued an early redemption notice for its $400 million Series A 3.55% senior unsecured
debentures, which were redeemed on February 12, 2018 with an original maturity date of July 5, 2018.
Guaranteed Investment Certificates The following table summarizes PC Bank’s Guaranteed Investment Certificates (“GICs”) activity,
before commissions, in 2017 and 2016:
(millions of Canadian dollars)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
2017
928
76
(152)
852
$
$
$
$
2016
809
239
(120)
928
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 30, 2017 (see note 32).
In 2017, Eagle issued $250 million of senior and subordinated term notes with a maturity date of October 17, 2022 at a weighted average
interest rate of 2.71%. In connection with this issuance, $200 million of bond forward agreements were settled, resulting in a realized fair
value gain of $6 million, in Other Comprehensive Income, and a net effective interest rate of 2.26% on the Eagle notes issued.
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2017 Annual Report - Financial Review Loblaw Companies Limited 99
Notes to the Consolidated Financial Statements
Independent Funding Trusts As at December 30, 2017, the independent funding trusts had drawn $551 million (December 31, 2016 –
$587 million) from the revolving committed credit facility that is the source of funding to the independent funding trusts.
Committed Credit Facilities The components of the committed lines of credit as at December 30, 2017 and December 31, 2016 were as
follows:
(millions of Canadian dollars)
Loblaw’s Committed Credit Facility
Choice Properties Committed Syndicated Credit Facility
Choice Properties Committed Bi-lateral Credit Facility
Total Committed Lines of Credit
As at December 30, 2017
As at December 31, 2016
Maturity Date
Available
Drawn
Available
Drawn
June 10, 2021
July 5, 2022(i)
December 21, 2018
$
1,000
$
— $
1,000
$
500
250
$
1,750
$
311
250
561
500
250
$
1,750
$
—
172
—
172
(i) Choice Properties Committed Syndicated Credit Facility was extended for an additional year from July 5, 2021 to July 5, 2022.
Subsequent to the end of 2017, Choice Properties repaid and cancelled the Committed Bi-lateral Credit Facility.
These facilities contain certain financial covenants (see note 24).
Long Term Debt due Within One Year The following table summarizes long term debt due within one year:
(millions of Canadian dollars)
Choice Properties Notes
Shoppers Drug Mart Notes
Guaranteed Investment Certificates
Independent Securitization Trust
Finance Lease Obligations
Long term debt secured by mortgage
Choice Properties Credit Facility
Long term debt due within one year
As at
December 30, 2017
400
$
As at
December 31, 2016
200
$
275
193
400
44
73
$
250
1,635
$
—
142
—
53
5
—
400
Schedule of Repayments The schedule of repayments of long term debt, based on maturity, is as follows:
(millions of Canadian dollars)
2018
2019
2020
2021
2022
Thereafter
Total Long Term Debt (excludes transaction costs and effect of coupon repurchases)
$
See note 29 for the fair value of long term debt.
As at
December 30, 2017
1,635
$
2,150
1,380
658
930
4,464
11,217
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Reconciliation of Long Term Debt The following table reconciles the changes in cash flows from financing activities for long term debt:
(millions of Canadian dollars)
Total Long Term Debt, beginning of period
Long Term Debt issuances(i)
Long Term Debt repayments(ii)
Total cash flow from Long Term Debt Financing Activities
Finance Lease additions
Other non-cash changes
Total non-cash Long Term Debt activities
Total Long Term Debt, end of period
$
$
$
$
$
$
2017
10,870
686
(450)
236
16
55
71
11,177
Includes net issuances from Choice Properties’ credit facilities and the Independent Funding Trust, which are revolving debt instruments.
(i)
(ii) Includes repayments on Finance Lease Obligations of $94 million.
Note 22. Other Liabilities
The components of other liabilities were as follows:
(millions of Canadian dollars)
Net defined benefit plan obligation (note 25)
Other long term employee benefit obligation
Deferred lease obligation
Fair value of acquired leases
Equity-based compensation liability (note 26)
Other
Other liabilities
As at
December 30, 2017
325
$
As at
December 31, 2016
327
$
108
140
65
4
58
$
700
$
108
119
77
4
92
727
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2017 Annual Report - Financial Review Loblaw Companies Limited 101
Notes to the Consolidated Financial Statements
Note 23. Share Capital
First Preferred Shares (authorized – 1.0 million shares) There were no First Preferred Shares outstanding as at December 30, 2017
and December 31, 2016.
Second Preferred Share Capital (authorized – unlimited) The Company has outstanding 9.0 million 5.30% non–voting Second
Preferred Shares, Series B, with a face value of $225 million, which were issued for net proceeds of $221 million. These preferred shares
are presented as a component of equity on the consolidated balance sheets.
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 30, 2017
(52 weeks)
December 31, 2016
(52 weeks)
Number of
Common
Shares
Common
Share
Capital
Number of
Common
Shares
Common
Share
Capital
Issued and outstanding, beginning of period
400,829,870
$
7,713
409,985,226
$
7,861
Issued for settlement of stock options
Purchased and cancelled(i)
Issued and outstanding, end of period
Shares held in trust, beginning of period
Purchased for future settlement of RSUs and PSUs
Released for settlement of RSUs and PSUs (note 26)
Shares held in trust, end of period
Issued and outstanding, net of shares held in trust, end of period
Weighted average outstanding, net of shares held in trust (note 8)
1,019,610
(15,555,539)
386,293,941
(1,105,620)
(686,000)
1,010,682
(780,938)
385,513,003
393,764,159
$
$
$
$
48
(301)
7,460
(21)
(13)
19
(15)
1,131,944
(10,287,300)
400,829,870
(643,452)
(1,250,000)
787,832
(1,105,620)
7,445
399,724,250
405,058,645
$
$
$
$
50
(198)
7,713
(10)
(24)
13
(21)
7,692
(i) Includes 22,012 shares held in escrow that were transferred and cancelled in a private transaction and are excluded from the Company’s Normal Course Issuer Bid.
Dividends The declaration and payment of dividends on the Company’s common shares and the amount thereof are at the discretion of
the Board, which takes into account the Company’s financial results, capital requirements, available cash flow, future prospects of the
Company’s business and other factors considered relevant from time to time. Over 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 quarters of 2017 and 2016,
the Board raised the quarterly dividend by $0.01 to $0.27 and $0.26 per common share, respectively.
The following table summarizes the Company’s cash dividends declared for the periods as indicated:
Dividends declared per share ($):
Common Share
Second Preferred Share, Series B
2017(i)
1.07
1.325
$
$
2016
1.03
1.325
$
$
(i) The fourth quarter dividends for 2017 of $0.27 per share declared on common shares were payable on December 30, 2017 and subsequently paid on January 2, 2018.
The fourth quarter dividends for 2017 of $0.33125 per share declared on Second Preferred Shares, Series B were payable on December 31, 2017 and subsequently
paid on January 2, 2018.
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(millions of Canadian dollars)
Dividends declared:
Common Share
Second Preferred Share, Series B (note 8)
Total dividends declared
2017
421
12
433
$
$
2016
416
12
428
$
$
Subsequent to the end of the year, the Board declared a quarterly dividend of $0.27 per common share, payable on April 1, 2018 to
shareholders of record on March 15, 2018 and a dividend on the Second Preferred Shares, Series B of $0.33125 per share payable on
March 31, 2018 to shareholders of record on March 15, 2018.
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
$
$
2017
2016
15,533,527
10,287,300
1,091
$
790
301
708
510
198
686,000
1,250,000
$
48
35
13
90
66
24
In 2017, the Company renewed its NCIB to purchase on the TSX or through alternative trading systems up to 21,016,472 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. As of December 30, 2017, the
Company has purchased 12,830,034 common shares under its current NCIB.
Subsequent to the end of 2017, the Company entered into an automatic share purchase plan (“ASPP”) with a broker in order to facilitate
repurchases of the Company’s common shares under its current NCIB. Under the Company’s ASPP, the Company’s broker may purchase
common shares at times when the Company ordinarily would not be active in the market.
Note 24. Capital Management
ensuring sufficient liquidity is available to support its financial obligations and to execute its operating and strategic plans;
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
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.
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2017 Annual Report - Financial Review Loblaw Companies Limited 103
Notes to the Consolidated Financial Statements
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 30, 2017
110
$
As at
December 31, 2016
115
$
640
1,635
9,542
41
11,968
13,012
24,980
$
$
665
400
10,470
31
11,681
13,002
24,683
$
$
Short Form Base Shelf Prospectus Filings During 2017, the Company filed a Short Form Base Shelf Prospectus, which allows for the
potential issuance of up to $2 billion of unsecured debentures and/or preferred shares subject to the availability of funding in the capital
markets.
During 2017, Eagle filed a Short Form Base Shelf Prospectus, which allows for the potential issuance of up to $1 billion of notes over a
25-month period.
Subsequent to the end of 2017, Choice Properties filed a Short Form Base Shelf Prospectus, which allows for the potential issuance of up
to $2 billion of Units and debt securities, or any combination thereof, over a 25-month period. Under this prospectus, Choice Properties
issued $650 million of senior unsecured debentures (see note 21).
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 30, 2017 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 30, 2017 and throughout the year, Choice Properties was in compliance with the covenants under these
agreements.
The Company is subject to externally imposed capital requirements from the Office of the Superintendent of Financial Institutions (“OSFI”),
the primary regulator of PC Bank. PC Bank’s capital management objectives are to maintain a consistently strong capital position while
considering the economic risks generated by its credit card receivables portfolio and to meet all regulatory capital requirements as defined
by OSFI. PC Bank uses Basel III as its regulatory capital management framework, which includes a common equity Tier 1 capital ratio of
4.5%, a Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%. 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 2017 and throughout the year, PC Bank has met all applicable regulatory requirements.
104 2017 Annual Report - Financial Review Loblaw Companies Limited
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Note 25. 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 oversees the Company’s pension plans. The Pension Committee is responsible for assisting the
Board in fulfilling its general oversight responsibilities for the plans. The Pension 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 2018 to its defined benefit and defined contribution plans and the MEPPs in which it
participates as well as benefit payments to the beneficiaries of the supplemental unfunded defined benefit pension plans, other defined
benefit plans and other long term employee benefit plans.
Other Long Term Employee Benefits
The Company offers other long term employee benefit plans that include long term disability benefits and continuation of health care and
dental benefits while on disability.
Defined Benefit Pension Plans and Other Defined Benefit Plans
Information on the Company’s defined benefit pension plans and other defined benefit plans, in aggregate, is summarized as follows:
(millions of Canadian dollars)
Present value of funded obligations
Present value of unfunded obligations
Total present value of defined benefit obligation
Fair value of plan assets
Total funded status of (obligations) surpluses
Assets not recognized due to asset ceiling
Total net defined benefit plan (obligations) surpluses
Recorded on the consolidated balance sheets as follows:
Other Assets (note 18)
Other Liabilities (note 22)
2017
Defined
Benefit
Pension
Plans
(1,780) $
(145)
(1,925) $
1,916
(9) $
(15)
(24) $
Other
Defined
Benefit
Plans
—
(154)
(154)
—
(154)
—
(154)
147
$
(171) $
—
(154)
$
$
$
$
$
$
$
$
$
$
$
$
2016
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)
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2017 Annual Report - Financial Review Loblaw Companies Limited 105
Notes to the Consolidated Financial Statements
The following are the continuities of the fair value of plan assets and the present value of the defined benefit plan obligations:
(millions of Canadian dollars)
Changes in the fair value of plan assets
Fair value, beginning of year
Employer contributions
Employee contributions
Benefits paid
Interest income
Actuarial gains in other comprehensive income
Settlements(i)
Other
Defined
Benefit
Pension
Plans
2017
Other
Defined
Benefit
Plans
Defined
Benefit
Pension
Plans
2016
Other
Defined
Benefit
Plans
Total
Total
$
1,947
$
— $
1,947
$
2,167
$
— $
2,167
55
3
(75)
77
142
(229)
(4)
—
—
—
—
—
—
—
55
3
(75)
77
142
(229)
(4)
29
3
(94)
86
11
(251)
(4)
—
—
—
—
—
—
—
29
3
(94)
86
11
(251)
(4)
Fair value, end of year
$
1,916
$
— $
1,916
$
1,947
$
— $
1,947
Changes in the present value of the defined benefit
plan obligations
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Employee contributions
Actuarial losses (gains) in other comprehensive
(loss) income
Settlements(i)
Balance, end of year
$
1,904
$
171
$
2,075
$
2,124
$
161
$
2,285
57
77
(82)
3
183
(217)
6
6
(6)
—
(23)
—
63
83
(88)
3
160
(217)
61
87
(101)
3
(42)
(228)
5
7
(7)
—
5
—
66
94
(108)
3
(37)
(228)
$
1,925
$
154
$
2,079
$
1,904
$
171
$
2,075
(i) Settlements relate to annuity purchases and pension buy-outs.
In 2017, the Company completed several annuity purchases with respect to former employees. In 2016, the Company also 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
$229 million (2016 – $251 million) from the impacted plans’ assets to settle $217 million (2016 – $228 million) of pension obligations and
recorded settlement charges of $12 million (2016 – $23 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.
For 2017, the actual return on plan assets was $219 million (2016 – $97 million).
The net defined benefit obligation can be allocated to the plans’ participants as follows:
• Active plan participants 55% (2016 – 48%);
• Deferred plan participants 10% (2016 – 9%); and
• Retirees 35% (2016 – 43%).
During 2018, the Company expects to contribute approximately $56 million (2017 – contributed $55 million) to its registered defined benefit
pension plans. The actual amount paid may vary from the estimate based on actuarial valuations being completed, investment
performance, volatility in discount rates, regulatory requirements and other factors.
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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
2017
Other
Defined
Benefit
Plans
$
$
57
—
12
4
73
$
$
6
6
—
—
12
$
$
Defined
Benefit
Pension
Plans
61
1
23
4
89
$
$
2016
Other
Defined
Benefit
Plans
5
7
—
—
12
Total
63
6
12
4
85
$
$
$
Total
66
8
23
4
$
101
(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.
The actuarial losses (gains) 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) from change in demographic
assumptions
Actuarial losses (gains) from change in financial
assumptions
Change in liability arising from asset ceiling
Total net actuarial losses (gains) recognized in other
comprehensive income (loss) before income taxes
Income tax (recoveries) expenses on actuarial
losses (gains) (note 7)
Actuarial losses (gains) net of income tax
(recoveries) expenses
Defined
Benefit
Pension
Plans
2017
Other
Defined
Benefit
Plans
Defined
Benefit
Pension
Plans
2016
Other
Defined
Benefit
Plans
Total
$
(142) $
— $
(142)
$
(11) $
— $
19
—
164
8
(28)
—
5
—
(9)
—
169
8
(9)
(1)
(32)
3
—
—
5
—
Total
(11)
(9)
(1)
(27)
3
$
$
49
$
(23) $
26
$
(50) $
5
$
(45)
(13)
6
(7)
13
(1)
12
36
$
(17) $
19
$
(37) $
4
$
(33)
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 losses (gains) recognized in the year
before income taxes
Cumulative amount, end of year
$
$
Defined
Benefit
Pension
Plans
2017
Other
Defined
Benefit
Plans
(30) $
(56) $
Total
(86)
26
(23)
49
19
$
(79) $
(60)
2016
Other
Defined
Benefit
Plans
$
(61) $
Defined
Benefit
Pension
Plans
20
(50)
5
(30) $
(56) $
$
$
Total
(41)
(45)
(86)
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2017 Annual Report - Financial Review Loblaw Companies Limited 107
Notes to the Consolidated Financial Statements
Composition of Plan Assets The defined benefit pension plan assets are held in trust and consisted of the following asset categories:
(millions of Canadian dollars, except where otherwise indicated)
Equity securities
2017
2016
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
$
$
$
$
$
79
713
792
439
131
404
10
984
117
23
$
$
$
$
4%
37%
41%
23%
7%
21%
1%
52%
6%
1%
87
770
857
437
134
386
14
971
108
11
4%
40%
44%
22%
7%
20%
1%
50%
5%
1%
1,916
100%
$
1,947
100%
(i) Both government and corporate securities may be included within the same fixed income pooled fund.
As at December 30, 2017 and December 31, 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)
2017
2016
Defined Benefit
Pension Plans
Other Defined
Benefit Plans
Defined Benefit
Pension Plans
Other Defined
Benefit Plans
3.50%
3.00%
CPM-RPP2014 Pub/
Priv Generational
3.50%
n/a
CPM-RPP2014 Pub/
Priv Generational
4.00%
3.00%
CPM-RPP2014 Pub/
Priv Generational
3.75%
n/a
CPM-RPP2014 Pub/
Priv Generational
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
n/a – not applicable
(i) Public or private sector mortality table is used depending on the prominent demographics of each plan.
The weighted average duration of the defined benefit obligation as at December 30, 2017 is 17.7 years (December 31, 2016 – 17.7 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 2018 and thereafter.
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Sensitivity of Key Actuarial Assumptions The following table outlines the key assumptions for 2017 (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
Net Defined
Benefit
Plan Cost(i)
Defined Benefit
Plan
Obligations
Net Defined
Benefit
Plan Cost(i)
3.50%
4.00%
3.50%
3.75%
$
$
(314)
377
$
$
n/a
n/a
(29)
28
n/a
n/a
$
$
$
$
(20)
25
4.50%
16
(13)
$
$
$
$
—
—
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 2017, the Company recognized an expense of $66 million (2016 – $65 million) in operating income, which represents the
contributions made in connection with MEPPs. During 2018, 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 54,000 (2016 – 53,000) employees as members. Included in the 2017 expense described above are
contributions of $65 million (2016 – $65 million) to CCWIPP.
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 27)
Net interest expense and other financing charges (note 6)
Net post-employment and other long term employee benefit costs
2017
85
22
66
173
28
201
192
9
201
$
$
$
$
$
2016
101
22
65
188
23
211
200
11
211
$
$
$
$
$
Includes settlement charges of $12 million (2016 – $23 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 (2016 – $3 million) of net interest expense and other financing charges.
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Notes to the Consolidated Financial Statements
Note 26. Equity-Based Compensation
The Company’s equity-based compensation expense, which includes Loblaw Stock Option, RSU, PSU, DSU, EDSU plans, and the unit-
based compensation plans of Choice Properties, was $57 million during 2017 (2016 – $63 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, were recorded on the consolidated balance sheets as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
Other liabilities (note 22)
Contributed surplus
As at
December 30, 2017
As at
December 31, 2016
$
$
11
4
110
10
4
112
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
up to 28,137,162 common shares.
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 – $77.81
2017
2016
Options (number
of shares)
Weighted
Average Exercise
Price / Share
Options (number
of shares)
Weighted
Average Exercise
Price / Share
7,322,358
1,584,407
$
$
(1,019,610) $
(399,381) $
7,487,774
3,847,491
$
$
48.93
70.02
39.98
64.74
53.77
43.57
7,411,405
1,285,649
$
$
(1,131,944) $
(242,752) $
7,322,358
3,384,188
$
$
43.77
68.97
37.16
52.77
48.93
40.33
2017 Outstanding Options
2017 Exercisable Options
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise
Price/Share
1.1
2.1
5.2
$
$
$
$
34.97
43.03
67.58
53.77
Number of
Options
Outstanding
1,527,978
2,187,451
3,772,345
7,487,774
Number of
Exercisable
Options
1,527,978
1,617,683
701,830
3,847,491
Weighted
Average
Exercise
Price/Share
$
$
$
$
34.97
42.30
65.24
43.57
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During 2017, the Company issued common shares on the exercise of stock options with a weighted average market share price of $70.98
(2016 – $70.19). The Company received cash consideration of $41 million (2016 – $42 million) related to the exercise of these options.
The fair value of stock options granted during 2017 was $15 million (2016 – $13 million). The assumptions used to measure the fair value
of options granted during 2017 and 2016 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
2017
1.5%
2016
1.5%
16.0% – 18.2%
17.7% – 19.0%
0.9% – 1.7%
0.6% – 1.1%
3.8 – 6.3 years
3.8 – 6.3 years
Estimated forfeiture rates are incorporated into the measurement of stock option plan expense. The forfeiture rate applied as at
December 30, 2017 was 10.0% (December 31, 2016 – 10.0%).
Restricted Share Unit Plan The following is a summary of the Company’s RSU plan activity:
(Number of awards)
RSUs, beginning of year
Granted
Reinvested
Settled
Forfeited
RSUs, end of year
The fair value of RSUs granted during 2017 was $24 million (2016 – $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
Reinvested
Settled
Forfeited
PSUs, end of year
2017
858,106
337,846
4,418
(323,894)
(51,771)
824,705
2017
965,863
404,150
3,152
(687,007)
(54,630)
631,528
2016
887,792
283,962
—
(295,403)
(18,245)
858,106
2016
1,100,356
373,844
—
(492,929)
(15,408)
965,863
The fair value of PSUs granted during 2017 was $16 million (2016 – $14 million).
Settlement of Awards from Shares Held in Trust During 2017, the Company settled RSUs and PSUs totaling 1,010,901 (2016 –
788,332), of which 1,010,682 (2016 – 787,832) were settled through the trusts established for settlement of each of the RSU and PSU
plans (see note 23). The settlements resulted in a $19 million (2016 – $13 million) increase to share capital and a net increase of
$29 million (2016 – $18 million) to retained earnings.
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2017 Annual Report - Financial Review Loblaw Companies Limited 111
Notes to the Consolidated Financial Statements
Director Deferred Share Unit Plan The following is a summary of the Company’s DSU plan activity:
(Number of awards)
DSUs outstanding, beginning of year
Granted
Reinvested
Settled
DSUs outstanding, end of year
The fair value of DSUs granted during 2017 was $2 million (2016 – $2 million).
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
2017
188,202
29,289
3,181
—
220,672
2017
35,559
16,558
686
(5,509)
47,294
2016
183,722
27,784
2,773
(26,077)
188,202
2016
24,023
15,383
434
(4,281)
35,559
The fair value of EDSUs granted during 2017 was $1 million (2016 – $1 million).
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. The following is a summary of Choice Properties’ Unit Option plan activity:
Outstanding Unit Options, beginning of year
Granted
Exercised
Forfeited
Outstanding Unit Options, end of year
Unit Options exercisable, end of year
2017
Weighted
average exercise
price/unit
11.25
14.20
10.24
—
11.56
10.99
Number of
awards
3,990,231
451,000
$
$
(37,374) $
— $
4,403,857
2,308,008
$
$
Number of
awards
3,499,656
655,266
$
$
(65,318) $
(99,373) $
3,990,231
1,764,241
$
$
2016
Weighted average
exercise price/unit
The assumptions used to measure the fair value of the Unit Options under the Black-Scholes model were as follows:
11.05
12.38
11.21
11.76
11.25
10.95
2016
5.3%
2017
5.5%
10.0% – 16.9%
16.3% – 19.2%
0.01% – 1.9%
0.5% – 1.1%
0.1 – 4.8 years
0.5 – 4.7 years
Expected average distribution yield
Expected average Unit price volatility
Average risk-free interest rate
Expected average life of options
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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
2017
264,691
160,361
17,517
(83,398)
(17)
359,154
RUs vest over a period of three years. There were no RUs vested as at December 30, 2017 (December 31, 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
2017
39,696
36,099
3,817
—
79,612
PUs vest over a period of three years. There were no PUs vested as at December 30, 2017 (December 31, 2016 – nil).
Trustee Deferred Unit Plan The following is a summary of Choice Properties’ DU plan activity:
(Number of awards)
Outstanding DUs, beginning of year
Granted
Reinvested
Outstanding DUs, end of year
2017
218,992
51,865
12,847
283,704
All DUs vest when issued, however, they cannot be settled while Trustees are members of the Board.
2016
267,721
93,561
15,927
(106,370)
(6,148)
264,691
2016
—
39,772
1,678
(1,754)
39,696
2016
158,778
50,844
9,370
218,992
Note 27. 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 25)
Other long term employee benefits (note 25)
Equity-based compensation
Capitalized to fixed assets
Total employee costs
$
2017
5,402
167
25
55
(46)
2016
5,176
180
20
60
(42)
5,603
$
5,394
$
$
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2017 Annual Report - Financial Review Loblaw Companies Limited 113
Notes to the Consolidated Financial Statements
Note 28. 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
December 30, 2017
December 31, 2016
As at
As at
(millions of Canadian dollars)
Operating lease payments
Sub-lease income
Net operating lease payments
2018
687
(53)
634
$
$
2019
646
(43)
603
$
$
2020
575
(31)
544
$
$
2021
505
(28)
477
$
$
2022
Thereafter
426
(26)
400
$
$
1,859
(92)
1,767
$
$
$
$
Total
4,698
(273)
4,425
$
$
Total
5,112
(244)
4,868
During 2017, the Company recorded $685 million (2016 – $679 million) as an expense included in the statement of earnings in respect of
operating leases. In addition, contingent rent recognized as an expense in respect of operating leases totaled $1 million (2016 – $2 million)
and sub-lease income earned totaled $52 million (2016 – $48 million), which is recognized in operating income. Contingent rent recognized
as income in respect of sub-leased operating leases in 2017 was $3 million (2016 – $4 million).
Operating Leases – As Lessor Future minimum lease payments to be received by the Company relating to properties that are leased to
third parties are as follows:
(millions of Canadian dollars)
2018
2019
2020
2021
2022
Thereafter
Net operating lease income
$
125
$
103
$
89
$
75
$
69
$
219
$
Total
680
$
Total
726
Payments to be received by year
December 30, 2017
December 31, 2016
As at
As at
As at December 30, 2017, the Company leased certain owned land and buildings with a cost of $2,974 million (December 31, 2016 –
$2,721 million) and related accumulated depreciation of $796 million (December 31, 2016 – $759 million). For the year ended
December 30, 2017, rental income was $131 million (2016 – $138 million) and contingent rent was $2 million (2016 – $4 million), both of
which were recognized in operating income.
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Finance Leases – As Lessee Future minimum lease payments relating to the Company’s finance leases are as follows:
Payments due by year
December 30, 2017
December 31, 2016
As at
As at
(millions of Canadian dollars)
2018
2019
2020
2021
2022
Thereafter
Finance lease payments
Less future finance charges
Present value of minimum
lease payments
$
$
71
$
64
$
59
$
57
$
57
$
(27)
(24)
(23)
(25)
(24)
606
(223)
44
$
40
$
36
$
32
$
33
$
383
$
$
Total
914
(346)
568
$
$
Total
989
(382)
607
During 2017, contingent rent recognized by the Company as an expense in respect of finance leases was $1 million (2016 – $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:
(millions of Canadian dollars)
2018
2019
2020
2021
2022
Thereafter
Sub-lease income
$
14
$
13
$
11
$
7
$
6
$
8
$
Total
59
$
Total
77
Payments to be received by year
December 30, 2017
December 31, 2016
As at
As at
During 2017, the sub-lease income earned under finance leases was $15 million (2016 – $15 million).
Note 29. 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
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 30, 2017
Total
Level 3
As at
December 31, 2016
Total
Level 3
Level 1
Level 2
Level 1
Level 2
$
748
$ 1,050
$ — $ 1,798
$ 752
$
40
—
20
3
506
—
3
—
—
166
23
2
546
166
46
5
24
—
23
7
562
217
—
2
11
$ — $ 1,314
—
233
42
—
241
233
67
18
— 12,103
— 12,103
— 11,864
— 11,864
972
—
—
—
—
11
—
18
—
972
18
11
959
—
—
—
—
—
—
22
2
959
22
2
(i) Certain other assets and certain other liabilities are included in the consolidated balance sheets in Other Assets and Other Liabilities, respectively.
There were no transfers between levels of the fair value hierarchy during the years presented.
During 2017, the Company recognized a loss of $6 million (2016 – loss of $5 million) in operating income on financial instruments
designated as fair value through profit or loss. In addition, during 2017, a net loss of $9 million (2016 – net loss of $110 million) was
recorded in earnings before income taxes related to financial instruments required to be classified as fair value through profit or loss.
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Notes to the Consolidated Financial Statements
Franchise Loans Receivable and Franchise Investments The value of Loblaw franchise loans receivable of $166 million (December 31,
2016 – $233 million) was recorded in the consolidated balance sheet. In 2017, the Company recorded a gain of $8 million (2016 – $1
million loss) in operating income related to these loans receivable.
The value of Loblaw franchise investments of $20 million (December 31, 2016 – $39 million) was recorded in other assets. During 2017,
the Company recorded a gain of $2 million (2016 – $4 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 2017, a gain of $4 million (2016 – gain of $5 million) was recorded in operating income related to these derivatives. In addition, a
corresponding asset of $2 million was included in prepaid expenses and other assets as at December 30, 2017 (December 31, 2016 –
$2 million liability included in trade payable and other liabilities). As at December 30, 2017, a 1% increase in foreign currency exchange
rates would result in a $1 million gain in fair value and a 1% decrease in foreign currency exchange rates would result in a $2 million loss in
fair value.
Trust Unit Liability During 2017, the Company recorded a fair value gain of $10 million (2016 – loss of $118 million) in net interest
expense and other financing charges related to Choice Properties’ Trust Units (see note 6).
As at December 30, 2017, 72,800,965 Units were held by unitholders other than the Company (December 31, 2016 – 71,068,828). During
2017, Choice Properties issued 1,732,137 units (2016 – 1,615,011), to eligible unitholders under its distribution reinvestment plan at an
average price of $13.18 (2016 – $12.65).
Securities Investments PC Bank holds investments which are considered part of the liquid securities required to be held to meet its LCR.
As at December 30, 2017, the fair value of available for sale investments of $20 million (December 31, 2016 – $23 million) was included in
other assets. During 2017, PC Bank recorded a nominal unrealized fair value loss (2016 – nominal loss) in other comprehensive income
related to these investments.
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 sheets 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
Bond Forwards(ii)
Total derivatives designated as cash flow hedges
Derivatives not designated in a formal hedging relationship
Foreign Exchange and Other Forwards
Other Non-Financial Derivatives
Total derivatives not designated in a formal hedging relationship
Total derivatives
December 30, 2017
Gain/(loss)
recorded in
operating
income
Gain/(loss)
recorded in
OCI
Net Asset/
(Liability)
Fair value
$
$
$
$
$
(1) $
—
(1) $
(10) $
3
(7) $
(8) $
(3) $
6
3
$
— $
—
— $
3
$
1
—
1
(23)
—
(23)
(22)
(i)
Includes interest rate swap agreements with a notional value of $100 million. During 2017, a nominal unrealized fair value loss was recorded in OCI relating to these
agreements.
(ii) As a result of the issuance of Eagle notes, bond forward agreements with a notional value of $200 million were settled in 2017 (see note 21).
116 2017 Annual Report - Financial Review Loblaw Companies Limited
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(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 and Other Forwards
Bond Forwards(ii)
Other Non-Financial Derivatives
Total derivatives not designated in a formal hedging relationship
Total derivatives
December 31, 2016
Gain/(loss)
recorded in
operating
income
Gain/(loss)
recorded in
OCI
Net Asset/
(Liability)
Fair value
$
$
$
$
$
2
2
9
—
7
16
18
$
$
$
$
$
(1) $
(1) $
2
2
— $
(8)
—
—
— $
(1) $
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).
Note 30. Financial Risk Management
As a result of holding and issuing financial instruments, the Company is exposed to liquidity, credit 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 30, 2017:
2018
2019
2020
2021
2022
Thereafter
Total(i)
Derivative Financial Liabilities
Foreign exchange forward contracts
$
381
$
— $
— $
— $
— $
— $
381
Non-Derivative Financial Liabilities
Bank Indebtedness
Short term debt(ii)
Long term debt including interest payments(iii)
Other liabilities
110
640
—
—
—
—
2,062
2,507
1,687
3
2
3
—
—
956
3
—
—
1,213
—
—
—
110
640
6,728
15,153
—
11
$
3,196
$
2,509
$
1,690
$
959
$
1,213
$
6,728
$ 16,295
(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 30, 2017.
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2017 Annual Report - Financial Review Loblaw Companies Limited 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 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 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 $2 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 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. The Company is also exposed to fluctuations in the prices of USD denominated purchases as a result of changes in USD
exchange rates. During 2017 and 2016, 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 and
derivative instruments in the form of exchange traded futures contracts and forward contracts to minimize cost volatility related to
commodities. The Company estimates that based on the outstanding derivative contracts held by the Company as at December 30, 2017,
a 10% decrease in relevant energy prices, with all other variables held constant, would result in a loss of $2 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 sheets as they are redeemable for cash at the
option of the holder. The liability is recorded at fair value at each reporting period based on the market price of Units. The change in the fair
value of the liability negatively impacts net earnings when the Unit price increases and positively impacts net earnings when the Unit price
declines. A one dollar increase in the market value of Units, with all other variables held constant, would result in a $73 million increase to
net interest expense and other financing charges.
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Note 31. 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 these events could lead to reassessments.
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, financial condition or
performance in future periods. It is not currently possible to predict the outcome of the Company’s legal actions and proceedings with
certainty. 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:
On August 26, 2015, the Company was served with a proposed class action, which was commenced in the Ontario Superior Court of
Justice against the Company and certain subsidiaries, Weston and others in connection with the collapse of the Rana Plaza complex in
Dhaka, Bangladesh in 2013. The claim seeks approximately $2 billion in damages. The Company believes this proceeding is without merit
and is vigorously defending it. The Company does not currently have any significant accruals or provisions for this matter recorded in the
consolidated financial statements.
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 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 believes this claim is without merit and is vigorously defending it. The Company does not currently have any significant accruals
or provisions for this matter recorded in the consolidated financial statements.
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 between 2015 and 2017, are for the 2000 to 2012 taxation years and total
$406 million including interest and penalties. The Company believes the reassessments are without merit and is vigorously defending
them. The Company believes it is likely that the CRA will issue reassessments for the 2013 taxation year 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 and 2012 taxation years. The Tax Court of Canada trial is scheduled to commence in the second quarter of 2018. The Company does
not currently have any significant accruals or provisions for this matter recorded in the consolidated financial statements.
On December 19, 2017, the Company and Weston announced actions taken to address their role in an industry-wide price-fixing
arrangement involving certain packaged bread products. The arrangement involved the coordination of retail and wholesale prices of
certain packaged bread products over a period extending from late 2001 to March 2015. Under the arrangement, the participants regularly
increased prices on a coordinated basis.
Class action lawsuits have been commenced against the Company and Weston as well as a number of other major grocery retailers and
another bread wholesaler. It is too early to predict the outcome of such legal proceedings. Neither the Company nor Weston believes that
the ultimate resolution of such legal proceedings will have a material adverse impact on its financial condition or prospects. The Company’s
cash balances far exceed any realistic damages scenario and therefore it does not anticipate any impacts on its dividend, dividend policy
or share buyback plan.
The Company has not recorded any amounts related to the potential civil liability associated with the class action lawsuits in the fourth
quarter of 2017 on the basis that a reliable estimate of the liability cannot be determined at this time. The Company will continue to assess
whether a provision for civil liability associated with the class action lawsuits can be reliably estimated and will record an amount in the
period that a reliable estimate of liability can be determined or the matter is ultimately resolved.
As part of its response to this issue, the Company has announced the Loblaw Card Program pursuant to which the Company is offering a
$25 Loblaw Card to eligible customers. The Loblaw Card can be used to purchase items sold in Loblaw grocery stores across Canada.
The Company has recorded a charge of $107 million in relation to the Loblaw Card Program in the fourth quarter of 2017. The Company
expects that Loblaw Cards issued to customers will be an offset against civil liability. The charge recorded for the Loblaw Card Program
should not be viewed as an estimate of damages.
As a result of admission of participation in the arrangement and cooperation in the Competition Bureau’s investigation, the Company and
Weston will not face criminal charges or penalties.
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Notes to the Consolidated Financial Statements
Indemnification Provisions The Company from time to time enters into agreements in the normal course of its business, such as service
and outsourcing arrangements, lease agreements in connection with business or asset acquisitions or dispositions, and other types of
commercial agreements. These agreements by their nature may provide for indemnification of counterparties. These indemnification
provisions may be in connection with breaches of representations and warranties or in respect of future claims for certain liabilities,
including liabilities related to tax and environmental matters. The terms of these indemnification provisions vary in duration and may extend
for an unlimited period of time. In addition, the terms of these indemnification provisions vary in amount and certain indemnification
provisions do not provide for a maximum potential indemnification amount. Indemnity amounts are dependent on the outcome of future
contingent events, the nature and likelihood of which cannot be determined at this time. As a result, the Company is unable to reasonably
estimate its total maximum potential liability in respect of indemnification provisions. Historically, the Company has not made any significant
payments in connection with these indemnification provisions.
Note 32. 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 $342 million as at December 30, 2017
(December 31, 2016 – $329 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 30, 2017, the Company’s maximum obligation in respect of such guarantees was $580 million (December 31, 2016 –
$580 million) with an aggregate amount of $509 million (December 31, 2016 – $488 million) in available lines of credit allocated to the
Associates by the various banks. As at December 30, 2017, Associates had drawn an aggregate amount of $110 million
(December 31, 2016 – $115 million) against these available lines of credit. Any amounts drawn by the Associates are included in bank
indebtedness on the Company’s consolidated balance sheets. 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 21). As at December 30, 2017 the Company has agreed to provide a credit enhancement of $64 million
(December 31, 2016 – $64 million) in the form of a standby letter of credit for the benefit of the independent funding trusts representing not
less than 10% (2016 – 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 $15 million (December 31, 2016 – $16 million). Additionally, the Company has guaranteed lease obligations of
a third party distributor in the amount of $3 million (December 31, 2016 – $6 million).
Glenhuron Bank Limited Surety Bond In connection with the CRA’s reassessment of the Company on certain income earned by
Glenhuron (see note 31), the Company arranged for a surety bond of $149 million (2016 – $141 million) to the Ministry of Finance in order
to dispute the reassessments.
Cash Collateralization As at December 30, 2017, the Company had agreements to cash collateralize certain of its uncommitted credit
facilities up to an amount of $102 million (December 31, 2016 – $103 million), of which $3 million (December 31, 2016 – $4 million) was
deposited with major financial institutions and classified as security deposits, which is included in other assets.
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 30, 2017, the guarantee on
behalf of PC Bank to MasterCard® was USD $190 million (December 31, 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 $76 million (December 31, 2016 – $11 million).
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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 $62 million (December 31, 2016 – $71 million), which represented approximately 10% (2016 – 11%) of the
securitized credit card receivables amount (see note 11). As at December 30, 2017, the aggregate gross potential liability under these
arrangements for Eagle was $36 million (December 31, 2016 – $36 million), which represented approximately 9% (2016 – 9%) of the
outstanding Eagle notes issued prior to 2015 (see note 21).
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 30, 2017, the aggregate gross potential liability related
to these letters of credit totaled $33 million (December 31, 2016 – $31 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.
Note 33. 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 48.6% 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 63.0% of Weston’s outstanding common shares. Mr. Weston also beneficially owns 5,096,189 of the
Company’s common shares, representing approximately 1.0% 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 sold to a subsidiary of Weston
Inventory purchases from a related party(i)
Operating Income
Cost sharing agreements with Parent(ii)
Net administrative services provided by Parent(iii)
Choice Properties distributions to Parent(iv)
Lease of office space from a subsidiary of Wittington
Lease of office space to a subsidiary of Wittington
$
$
Transaction Value
$
$
2017
652
2
28
35
23
18
4
2
2016
654
—
28
35
21
16
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 30, 2017 was $6 million (December 31, 2016 – $5 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 2017, Choice Properties issued
1,359,193 Units (2016 – 1,265,160 Units) to Weston under its DRIP at a weighted average price of $13.17 (2016 – $12.63) per Unit.
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2017 Annual Report - Financial Review Loblaw Companies Limited 121
Notes to the Consolidated Financial Statements
The net balances due to Weston are comprised as follows:
(millions of Canadian dollars)
Trade payables and other liabilities
As at
December 30, 2017
As at
December 31, 2016
$
48
$
44
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 30, 2017, 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).
Operating Lease Choice Properties entered into a ten-year lease for office space with GWL’s parent company that commenced in 2014.
Lease payments will total $3 million over the term of the lease. Effective January 1, 2018, Choice Properties entered into a lease for
additional office space, with a subsidiary of GWL, with a term effective until the end of the existing lease in 2024. Over the term of the
lease, lease payments will total $1 million.
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 25.
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.
Key Management Personnel The Company’s key management personnel are comprised of the Board and certain members of the
executive team of the Company, as well as both the Board and certain members of the executive team of Weston and Wittington to the
extent that they have the authority and responsibility for planning, directing and controlling the day-to-day activities of the Company.
Compensation of Key Management Personnel Annual compensation of key management personnel that is directly attributable to the
Company was as follows:
(millions of Canadian dollars)
Salaries, director fees and other short term employee benefits
Equity-based compensation
Total compensation
Note 34. Segment Information
$
$
2017
6
9
15
$
$
2016
4
6
10
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 and apparel and other general merchandise and provides the PC Optimum
program. 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. Prior to July 17, 2017, the Retail segment also
included gas bar operations;
•
•
The Financial Services segment provides credit card services, the PC Optimum program, insurance brokerage services, deposit
taking services and telecommunication services. As a result of the wind-down of PC Financial banking services, the Financial
Services segment no longer offers personal banking services; and
The Choice Properties segment owns, manages and develops well located 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.
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Information for each reportable operating segment is included below:
December 30, 2017
(52 weeks)
December 31, 2016
(52 weeks)
Financial
Services
Choice
Properties
Consolidation &
Eliminations(i)
Total
Retail
Financial
Services
Choice
Properties
Consolidation &
Eliminations(i)
Total
(millions of Canadian dollars)
Revenue(ii)
Operating Income
Retail
$ 45,634
$ 2,248
Net interest expense and other
financing charges
318
Earnings before Income
Taxes
Operating Income
Depreciation and Amortization
Adjusting items(iii)
Less: amortization of intangible
assets acquired with
Shoppers Drug Mart
Adjusted EBITDA(iii)
Depreciation and
Amortization(iv)
$
$
$
$
$
$
$
$
956
209
56
153
209
10
(24)
$
$
$
$
830
756
351
405
756
1
—
(718) $ 46,702
$ 45,384
(719) $ 2,494
$ 1,902
(200)
525
332
(519) $ 1,969
$ 1,570
(719) $ 2,494
$ 1,902
23
—
1,568
554
1,512
752
$
$
$
$
$
$
$
$
911
175
51
124
175
13
—
$ 1,930
$ 2,248
1,534
578
784
677
900
$
$
(694) $ 46,385
(662) $ 2,092
(630)
653
(223) $
(32) $ 1,439
677
$
(662) $ 2,092
1
—
—
17
—
1,543
752
—
(535)
(524)
—
—
—
(524)
(535)
—
$ 3,836
$
195
$
757
$
(696) $ 4,092
$ 3,631
$
188
$
678
$
(645) $ 3,852
1,010
10
1
23
1,044
977
13
1
17
1,008
Adjusted Operating Income
$ 2,826
$
185
$
756
$
(719) $ 3,048
$ 2,654
$
175
$
677
$
(662) $ 2,844
(i)
Consolidation and Eliminations includes the following items:
• Revenue includes the elimination of $529 million (2016 – $520 million) of rental revenue, $183 million (2016 – $174 million) of cost recovery, and $6 million (2016 -
nil) of lease surrender which includes $1 million (2016 - nil) attributable to non-controlling interest, recognized by Choice Properties generated from the Retail
Segment.
• Adjusted operating income includes the elimination of the $529 million (2016 – $520 million) of rental revenue described above; lease surrender revenue of $5
million (2016 - nil) excluding the impact of above described non-controlling interest; the elimination of a $160 million gain (2016 – $109 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 $1 million loss (2016 – $14 million gain) recognized by Choice Properties related to the fair value adjustments on
investment properties in the joint venture; the recognition of $1 million gain (2016 - nil) on disposal of asset, which are classified as Fixed Assets or Investment
Properties by the Company and measured at cost; the recognition of $23 million (2016 – $17 million) of depreciation expense for certain investment properties
recorded by Choice Properties; and the elimination of intercompany charges of $4 million (2016 – $2 million).
• Net interest expense and other financing charges includes the elimination of $282 million (2016 – $267 million) of interest expense included in Choice Properties
related to debt owing to the Company and a $38 million fair value gain (2016 – loss of $530 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 $54 million (2016 –
$49 million), which excludes distributions paid to the Company and a $10 million fair value gain (2016 – loss of $118 million) on the Company’s Trust Unit Liability.
Included in Financial Services revenue is $393 million (2016 – $383 million) of interest income.
(ii)
(iii) Certain items are excluded from operating income to derive adjusted EBITDA(2). Adjusted EBITDA(2) is used internally by management when analyzing segment
underlying performance.
(iv) Depreciation and amortization for the calculation of adjusted EBITDA(2) excludes $524 million (2016 – $535 million) of amortization of intangible assets acquired with
Shoppers Drug Mart.
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2017 Annual Report - Financial Review Loblaw Companies Limited 123
Notes to the Consolidated Financial Statements
(millions of Canadian dollars)
Total Assets
Retail
Financial Services
Choice Properties
Consolidation and Eliminations(i)
Total
As at
December 30, 2017
As at
December 31, 2016
$
$
30,192
$
3,837
9,924
(8,847)
35,106
$
30,055
3,531
9,435
(8,585)
34,436
(i) 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
Choice Properties
Consolidation and Eliminations(i)
Total
$
2017
985
41
274
(41)
1,259
$
2016
985
11
377
(149)
1,224
$
$
(i) Consolidation and Eliminations includes the elimination of certain investment properties held by Choice Properties from the Retail segment.
Note 35. Subsequent Events
On February 15, 2018, Choice Properties entered into an agreement to acquire all of the assets and assume all of the liabilities, including
long-term debt and all residual liabilities of Canadian Real Estate Investment Trust ("CREIT"). CREIT will then redeem all of its outstanding
units for $22.50 in cash plus 2.4904 Choice Properties units per CREIT unit, on a fully prorated basis. Using the Choice Properties closing
unit price on February 14, 2018 of $12.49, this represents $53.61 per CREIT unit. The maximum amount of cash to be paid by Choice
Properties will be approximately $1.65 billion and approximately 183 million units will be issued, based on the fully diluted number of
CREIT units outstanding.
Choice Properties will finance the cash portion of the transaction with committed credit facilities totaling $3.6 billion. These committed
facilities consist of an $850 million bridge facility that Choice Properties intends to refinance through the issuance of senior unsecured
debentures and a $1.25 billion term loan. The term loan is structured in tranches maturing in 3, 4 and 5 years. Choice Properties will
consider hedging the term loan to manage floating interest rate exposure. Choice Properties has also arranged a new $1.5
billion committed revolving credit facility, that will replace its and CREIT's existing credit facilities ensuring that Choice Properties will have
maximum flexibility to support ongoing growth prospects, including acquisitions and development.
The Company, Choice Properties' controlling unitholder, has entered into a voting agreement in support of the transaction. To facilitate
Choice Properties' financing for the transaction, the Company has agreed to convert all of its outstanding Class C Limited Partnership units
of Choice Properties Limited Partnership with a face value of $925 million into Class B LP units of Choice Properties Limited Partnership
on closing. Following the transaction, Loblaw will own approximately 62% of Choice Properties.
The transaction is anticipated to close in the second quarter of 2018. The transaction will require the approval of at least 66 2/3% of the
votes cast by unitholders of CREIT at a special meeting expected to take place in April 2018. In addition to CREIT unitholder approval and
court approvals, the transaction is subject to compliance with the Competition Act and certain other closing conditions customary in
transactions of this nature.
124 2017 Annual Report - Financial Review Loblaw Companies Limited
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Three Year Summary(1)
For the years ended December 30, 2017 and December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
Consolidated Results of Operations
Revenue
Revenue growth
Revenue growth excluding 53rd week in 2014
Operating Income
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Adjusted net earnings available to common shareholders of the Company(2)
Consolidated Per Common Share ($)
Diluted net earnings
Adjusted diluted net earnings(2)
Dividends
Dividends declared per common share ($)
Consolidated Financial Position and Cash Flows
Cash and cash equivalents and short term investments
Cash flows from operating activities
Capital investments
Free cash flow(2)
Financial Measures
Retail debt to retail adjusted EBITDA(2)
Adjusted return on equity(2)
Adjusted return on capital(2)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
46,702
0.7%
0.7%
2,494
4,092
8.8%
525
535
1,526
1,502
1,490
1,799
3.75
4.53
1.07
2,344
3,209
1,259
1,479
1.6x
14.1%
9.7%
2016
2015
$
$
$
$
$
$
$
46,385
2.2%
2.2%
2,092
3,852
8.3%
653
535
990
983
971
1,655
2.37
4.05
1.03
1,555
3,519
1,224
1,821
1.7x
12.9%
8.8%
45,394
6.5%
8.5%
1,601
3,549
7.8%
644
548
589
598
591
1,422
1.42
3.42
0.995
1,082
3,079
1,241
1,347
2.0x
11.1%
7.6%
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2017 Annual Report - Financial Review Loblaw Companies Limited 125
Three Year Summary(1)
For the years ended December 30, 2017 and December 31, 2016 and January 2, 2016
(millions of Canadian dollars except where otherwise indicated)
2017
2016
2015
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
Revenue
Earnings before income taxes
Financial Services Operating Measures and Statistics
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card receivables
Annualized credit loss rate on average quarterly gross credit card receivables
Choice Properties Results of Operations and Measures
Revenue
Net interest expense and other financing charges
Net Income (loss)
Funds from operations(2)
$
$
$
$
$
$
$
$
$
$
$
$
45,634
2,248
12,820
28.1%
3,836
8.4%
1,534
0.6%
3.0%
3.1%
2.9%
70.3
559
534
1,334
956
153
2,908
3,100
47
13.2%
3.7%
830
351
405
443
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)
410
$
$
$
$
$
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 )
389
Financial Results and Financial Summary Endnotes
For financial definitions and ratios refer to the Glossary of Terms on page 127 of the Company’s 2017 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
most directly comparable GAAP measures.
126 2017 Annual Report - Financial Review Loblaw Companies Limited
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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 expense 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 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’ net income (loss) 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 30, 2017 and December 31, 2016 both contained 52 weeks.
2017 Annual Report - Financial Review Loblaw Companies Limited 127
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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
At year-end 2017, W. Galen Weston, directly and indirectly, including
through his controlling interest in Weston, owns approximately 48.6% of
the Company’s common shares.
Registrar and Transfer Agent
Computershare Investor Services Inc.
100 University Avenue
Toronto, Canada M5J 2Y1
At year-end 2017, there were 386,293,941 common shares issued and
outstanding.
The average daily trading volume of the Company’s common shares for
2017 was 551,588.
Toll free: 1-800-564-6253 (Canada and U.S.)
Fax (514) 982-7635
Toll free fax: 1-888-453-0330
International direct dial: (514) 982-7555
Preferred Shares
At year-end 2017, 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 2017 was 2,434.
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 2018 Annual Meeting of Shareholders of Loblaw Companies Limited
will be held on Thursday, May 3, 2018 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 2018 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
2018 are:
Record Date
March 15
June 15
September 15
December 15
Payment Date
April 1
July 1
October 1
December 30
Record Date
March 15
June 15
September 15
December 15
Payment Date
March 31
June 30
September 30
December 31
This report was printed in Canada on recycled paper.
Ce rapport est disponible en français.
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LOBLAW.CA
SHOPPERSDRUGMART.CA
PHARMAPRIX.CA
PRESIDENTSCHOICE.CA
PC.CA
JOEFRESH.COM
PCFINANCIAL.CA
CHOICEREIT.CA
BEAUTYBOUTIQUE.CA
WELLWISE.CA
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LCL_Q4 2017_RTS.PDF 132
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Environmental Savings Summary
By using 2,273 kg of paper manufactured with 30%
post-consumer recycled fibre for the Annual Report
and 2,579 kg of paper manufactured with 100%
post-consumer recycled waste fibre for the Financial
Review, Loblaw Companies Limited reduced its
environmental footprint by:
12,701 kg
37 million BTUs
Wood Use:
Total Energy:
Greenhouse Gases: 3,255 kg of CO2 equivalent
Wastewater Flow: 147,256 L
Solid Waste:
1,182 kg
Environmental impact savings estimates were made using the
Environmental Defense Paper Calculator, www.papercalculator.org.
Amounts calculated are approximate based on industry averages.
LOBLAW.CA
SHOPPERSDRUGMART.CA
PHARMAPRIX.CA
PRESIDENTSCHOICE.CA
PC.CA
JOEFRESH.COM
PCFINANCIAL.CA
CHOICEREIT.CA
BEAUTYBOUTIQUE.CA
WELLWISE.CA
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2017 ANNUAL REPORT